BEIJING - Li Rucheng, Chairman of Ningbo-based Youngor (SH.600177), known as "the Warren Buffet of China", is a big investor in the garment industry. He announced in late January 2008 that Youngor had finished its acquisition of Xin Ma Apparel International Limited (Xin Ma), held by the US apparel giant Kellwood Company, and Smart Apparel Group Limited (Smart), held by Kellwood Asia Limited. 

With tens of billions of Renminbi in hand, Youngor has made a remarkable move-it made a US$120 million transaction, the largest investment to date made by a Chinese garment maker on an overseas acquisition. 30% came from Youngor's pocket, while the remaining 70% came from the Export-Import Bank of China at an annual interest rate of 6%.

The acquisitions have given Youngor confidence that it will become "one of the most powerful clothing enterprises in the world". Li wants to enter the European and US markets with the aim of shortening its journey to become a world-class brand.

The Birth of the World's Largest Menswear Maker

Youngor has become the No.1 menswear maker in the world though its acquisitions. The company now has 430,000 employees, and is able to produce 80 million pieces of clothing each year.

The acquisition of Smart, a top shirt producer in Far East, moved the company into retail and distribution as well as three new areas of business. One is producing men's shirts, T-shirts, pants and other clothing for global brands as an OEM and ODM. Another arm obtains licenses to design, produce, and sell men's shirts for well-known brands. And the third aspect is to design, produce, and sell its own clothing (C.E.O.). Smart's biggest source of revenue is currently from North America. Xin Ma, meanwhile, runs a highly efficient logistics and distribution system for Smart.

The acquisitions have pushed Kellwood to integrate all related business with Xin Ma. This has given Youngor Xin Ma's 14 production bases in Sri Lanka, the Philippines, and some regions in China; the ODM business for 20-plus global brands like Polo and Calvin Klein; the licenses for five brands including Nautica and PerryEllis; an excellent team with decades of experience in management and design of international brands; a complete distribution network that covers hundreds of department stores in the US; and a powerful logistic system that guarantees products going to those sales points smoothly, delivering goods to stores in real time to allow zero-stock retailing.

Youngor's acquisitions differ slightly from other high profile dealings like the TCL takeover of Thomson and Lenovo's buyout of IBM's PC business. The company, for one, bought a strong, profitable company with cash-as one of the top 3 garment manufacturers in Hong Kong, Xin Ma has an annual sales income of US$500 million. Youngor expects immediate net earnings of US$12 million. The profit is based on the OEM backlog held by Xin Ma, because order prices are 20%-30% higher than the orders received by Youngor itself.

"The net return on assets in the first year would be more than 10% in this view," says Zhang Bin, a garment industry analyst with Sinolink Securities Co., Ltd. The acquisition of Xin Ma was an unusually good deal, especially when considering recent overseas purchases made by Chinese companies.

Youngor's care in investigating its acquisition targets informed the company's decision to buy. The company established a joint venture with Smart as early as in 2004 to produce shirts as an OEM; its products were exported to the US through Hong Kong. In 2006, Youngor collected 7% of its sales income from Xin Ma Group for selling raw materials and products.

In 2005, women's clothing specialist Kellwood wanted to sell its men's wear segment, Xin Ma. Li Rucheng bid for it with US$160 million, roughly the same value as its net assets. But the estimate USB gave for Xin Ma hit US$320 million, which Youngor thought was too high, stalling the deal midflight.

Xin Ma's profit began to fall in 2006 because the competition became fiercer in the American middle and upper-end clothing markets. Xin Ma wasn't getting the support it needed from Kellwood, the looming US recession triggered by the subprime mortgage crisis discouraged consumption. Kellwood wanted to sell its men's clothing business again. This time Youngor was satisfied with the low acquisition price.

But industry insiders doubted that the acquisition was a step in the right direction. Adding to the skepticism was slight rise in Youngor's share prices experienced after the acquisition.