Texhong International Group Ltd. (2678.HK) is trying to convince investors that its shop is well-knitted, after the yarn-making giant issued its second profit warning in a little over six months. In its latest warning just last week, the company forecast a net loss of 300 million yuan ($42 million) for 2024, spinning it into the red after reporting a 200 million yuan profit in 2022.

The latest warning follows a similar one for the first half of 2023, when Texhong ultimately reported its revenue fell nearly 20% and it lost 740 million yuan in the six-month period. The falling revenue was notable because the volume of the company’s yarn sales, its main revenue source, actually rose 8.9% year-on-year to 349,000 metric tons for the period. That dichotomy highlights the dilemma Texhong and its peers now face, as yarn prices tumble due to weak global demand for textiles.

Texhong’s recent downturn reflects changing economics following its bold move to offshore production from its original China base, where cotton prices were relatively high due to domestic price supports, to Vietnam, where lack of such supports meant prices were considerably lower. The move made Texhong a textile superstar, minting a billionaire of founder Hong Tianzhu. But costs in Vietnam have risen substantially with the country’s own recent rise, a trend likely to accelerate as it emerges as a preferred location for global manufacturers looking to diversify beyond China.

Texhong blamed weak global demand for its shriveling revenue and drop into the red in the first half of 2023. But another issue for the company has been its penchant for non-stop investment, particularly in Vietnam. As recently as March 2020, Texhong had pledged to invest $500 million in the Southeast Asian country. At that point it employed 20,000 Vietnamese and supplied 43% of the yarn used for the country’s domestic textile production. Its revenue peaked in 2019, but its profit was already coming under pressure with a 25% decline that year.

As it ramped up its new investment, Texhong’s borrowing increased from 7.2 billion yuan to 8.5 billion yuan between 2021 and 2022, far faster than its cash holdings and accounts receivable that rose only slightly from 5.4 billion yuan to 5.5 billion yuan over that period. This means its debt was increasing faster than its ability to cover its short-term obligations. That was fine when everyone expected a post-pandemic rebound to boost global demand for textiles. But such a rebound never really happened, especially for Texhong’s main base of buyers in China.

As prices sagged, Vietnam’s export revenues for yarn fell by 11% between January and October 2023 to $3.7 billion, as some producers accepted prices below the cost of production to stay in business. But the pressure claimed at least two Vietnamese mills that were added to the International Cotton Association’s defaulter list. Vietnam’s export revenues from textiles were expected to fall by 5% to 6.3% for all of 2023, according to a Vietnam Textile & Apparel Association forecast in late October.

Costs have also soared in Vietnam, with both wages and rents rising as the country’s standards of living rise. The average daily rent for a factory in Haiphong, Vietnam, ranges from 1 yuan to 1.5 yuan per square meter, according to the manager at Tiansu Machinery and Technology in China’s Zhejiang province, almost identical to similar factories in Zhejiang with better infrastructure. Monthly salaries tripled between 2018 and 2021, to about 3,000 yuan, according to the same source.

Despite its woes, Texhong certainly isn’t alone in feeling the pain of weak demand for textiles. Its stock currently trades at a price-to-sales (P/S) ratio of 0.15, not far behind peers such as Weiqiao Textile Co. (2968.HK) at 0.23, Texwinca at 0.21, and Fountain Set (0420.HK), which is even lower at just 0.09. Such low ratios aren’t surprising for this kind of old-school sector. What’s more, the group is likely to come under further pressure until prices start to rebound and companies like Texhong can find a way back to profitability.