Texwinca Holdings Ltd, the Hong Kong-based clothing manufacturer, is playing catch up with its more famous HK counterpart, Giordano International Ltd. Through its Baleno chain of low-priced casual-clothing stores, it is trying to follow in the footsteps of Giordano and become a brand-name retailer.

Texwinca, with a market capitalisation of HK$2.58bn ($330.8m), has a long way to go to catch up. But for investors, it may be a better deal than Giordano. It is growing faster (with earnings growth estimated around 40 per cent in the year ended March 31, 2001), trades at a lower price/earnings ratio and pays more dividends. Another good sign is company directors have been buying the shares.

The bulk Of Texwinca's sales come from knitted fabric such as fleece, knits, and lycra. In the last fiscal year for which results are available, ended March 31 2000, fabric accounted for half of all sales, and three-quarters of operating profit.

But investors are more interested in Texwinca's growing retail business, which it launched in 1996 and has become the company's fastest-growing division. In the year ended March 2000, sales reached HK$1bn and it is estimated that the figure should double by March 2002.

The company estimates that sales in China this year will grow by 25 per cent to HK$1.47bn. It has almost double the stores in China that Giordano has, and two-thirds more sales revenue. However, analysts predict that Giordano sales in China will grow by 33 per cent this year, faster than Baleno's 25 per cent growth rate there. And overall, with 920 stores around Asia, Giordano still has a bigger regional presence. "We do not have any single competitor competing with us on a regional basis," says Terry Ng, executive director of Giordano.

As the Baleno chain grows, it is at very little cost to Texwinca. Again following the Giordano pattern, the company operates only about one-third of its stores directly. The rest are franchises, "which is a cheap way for them to have their brand name build up," says Ms Ficheux, an analyst from Comgest. Texwinca has about HK$200m cash on hand, and debt representing about eight per cent of equity.

The company owns 54 per cent of the Baleno chain, and is trying to buy the rest from two individual shareholders, who happen to be former Giordano employees. If that happens, Texwinca "could be generating 40 per cent of their earnings from retailing, rather than 10 per cent now," says Alan Wong, an analyst at Indosuez. "That's the most exciting part of the business." Eventually, Mr. Wong says, a stake in Baleno would be spun off and publicly listed.

If Texwinca does manage to increase its stake in Baleno, analysts say investors will start to think of it as a retailer, rather than a manufacturer. In that case, its price/earnings ratio, which is about right for a manufacturer, is grossly undervalued by retail standards.

And unlike competitors, Texwinca's retail operations benefit from having an in-house fabric-manufacturing base: Baleno has quick, easy access to the exact fabrics needed. Another synergy is that over half of what Baleno sells comes directly from Texwinca's 50 per cent-owned garment factory, Megawell.