Hong Kong listed knitted fabric manufacturer Fountain Set (Holdings) Ltd is selling a 34% stake in its business to China's state-owned cotton trader Chinatex Corp for HKD511.3m (US$65.8m).Fountain Set, which makes and supplies knitted fabric, garments and textile machinery, raw yarns, dyed yarns and sewing threads, says the move will help it expand its sales to the domestic market in mainland China.

It also intends to use at least 60% of the proceeds from the purchase to repay bank loans.

Chinatex not only has an extensive network and expertise in the raw material supply chain, but also has knowledge of the local market for textile products in China.

Its textile business includes cotton, wool, yarns and fabrics, home furnishing textiles and garments. The company has its own cotton plantation, cotton ginning and spinning mills, knitwear and woven garment manufacturing bases, which are located in the PRC and overseas.

In its last annual report, Fountain Set warned of slowing demand for its products in North America and Europe, as well as a "challenging" environment caused by falling prices for knitted fabrics coupled with higher prices it had paid to buy raw material stocks when market costs were higher.

Under the deal, Fountain Set will issue - and sell to Chinatex - 409m new shares at the price of HK$1.25 each. The arrangement will make Chinatex the largest stakeholder in the firm with a 34% share, while the founding Ha Chung-fong family will see its share fall to 28.56% from 43.28%.

Chairman Ha Chung Fong will become honorary chairman, while managing director Victor Ha Kam On will be vice chairman and chief executive.