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Unraveling the Changing Made-in-China Clothing Business

BEIJING (TheStreet) -- It's no secret that textile and garment manufacturers in recent years have been shifting production from China to countries with cheaper labor such as Vietnam.

What's less evident is that Chinese companies, including several that trade on China's stock exchanges, are still very much in control of key industry segments -- and deserve investor attention.

These include companies that, despite this foreign flight, help China stand tall as a manufacturing center for all kinds of basic clothing ingredients from silk to spandex, yarn to buttons.

Stock analysts lately have raised red flags about Chinese producers of finished garments. But they've encouraged investors to buy stock in companies on lower rungs of the industry ladder.

A standout is Huafon Spandex, whose stretchy products are found in sportswear, undergarments and leggings. The company, which trades on the Shenzhen Stock Exchange, reported a 37% jump in 2013 earnings from the previous year to 278 million yuan. Revenues also rose 37% to 2.3 billion yuan.

Huafon's parent Huafon Group is China's largest maker of polyurethane, a spandex ingredient. Buyers of the parent's chemical ingredients include shoe giants Adidas (ADDYY) and Nike (NKE - Get Report).

Based on expectations that Huafon Spandex's revenues will double in 2014, and that the cost of chemicals used to make spandex will continue a fall that started last year, Goldstone Securities recently rated the stock a "buy."

Tayho Advanced Materials is another Shenzhen-listed maker of spandex, most of which is made in China. Overseas rivals of the Chinese include the Invista division of privately held Koch Industries, which makes the Lycra brand of spandex, and the world's largest spandex maker Hyosung, which trades on the Korean Stock Exchange.

In a separate sign that China's textile sector is not throwing in the towel, the government in China's far west Xinjiang region recently unveiled plans to increase cotton farm subsidies and encourage textile manufacturers to build plants in 11 communities. The idea is to vertically integrate the sector from cotton growing to finished garments, and export goods to Europe by rail.

Xinjiang authorities hope to attract the kinds of companies that have been moving abroad, especially to Vietnam. China's state news agency Xinhua recently reported that 90% of first-quarter garment sector investment in Vietnam came from Chinese companies such as Yulun Textile, which is building a plant in northern Vietnam.

Vietnamese clothing and related goods exports rose nearly 22% in first quarter from same period 2012 to $4.5 billion, said Xinhua, quoting the Vietnamese General Statistics Office.

Indeed, garment-making in China is apparently running out of steam. Among 34 Chinese clothing manufacturers surveyed, Dongguan Securities recently found "most" posted "lower-than-expected" financial results for 2013.

Makers of home furnishing textiles and outdoor-leisure clothes did "relatively well" last year, the report said, but producers of high-end women's clothing, menswear and shoes were rated "poor."

"In general, the industry is still lacking opportunities," Dongguan's report said.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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