ApparelApparel Production in Georgia

7/27/2019 ApparelApparel Production in Georgia

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Greenfield Investment

Apparel Production in

Georgia

Transaction Services

Opportunity

18January 2012

Strictly Privateand Confidential

See important notice onthe next page


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Important Notice

Partnership Fund (PF).

The attention of recipients of this document is drawn to the comments inthe letter to PF in the document. We emphasize that the information in

the Report is, in general, as at December 2011 or earlier and thus is out ofdate.

Provision of this document to recipients, other than PF, is intended onlyfor information purposes and it does not represent any form of

PwCApparel Production in Georgia Greenfield Invest ment Opportunity

investment advice or recommendation by PwC to any such recipient orany other person. PwC accepts no duty of care (whether in contract, tort

(including negligence) or otherwise) to any person other than PF.

03 October 2012


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18 January 2012

JSC Partnership Fund15, Tamar Mepe Avenue,Tbilisi 0112 ,

Dear Sirs,

In accordance with our contract with you dated 22 October 2011 (the Contract), we provide you with the report on the Apparelindustry (the Report).

The Report has been prepared solely for you and the project purposes referred to on the next page. You may not make copies ofthis report available to other parties except as described in the Contract, and subject to the conditions described therein. We willnot accept any duty of care (whether in contract, tort (including negligence) or otherwise) to any person other than you.

We draw your attention to important comments regarding the scope and process of our work, set out immediately following thisletter.

Under certain circumstances, PwC may receive a success fee if it finds investors for the project.

If ou re uire additional clarification on an of the matters included in our re ort lease do not hesitate to contact Yuri Dolidze.

Daneil CappellettiPartnerT: +420 251151 250F: +420 251 156 [email protected]

Altaf TapiaPartnerT: +995 32 2508 (061/561)F: +995 32 250 80 [email protected]

Yuri DolidzeDirectorT: +995 32 250 80 62F: +995 32 250 80 60

[email protected]

Yours faithfully,

PricewaterhouseCoopers Central Asia and Caucasus B.V. Georgia Branch; Address: #7 Bambis Rigi Street, Business Center Mantashevi,Tbilisi0105, Georgia, T: +995 (32) 250 80 50, F:+995 (32) 250 80 60, www.pwc.com/ge


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Scope and Process

Scope Process

Scope of our work The scope of our service is an independent conceptual study of the potential Greenfield projects in the Apparelindustry having the following business model Contract manufacturing of clothes from fabric. A description ofthe sco e is rovided in A endix 2 which has been extracted from the Contract.

Access t o information The Report is based on publicly available information, PwC search engines, other secondary data, industryspecialists and knowledge of the industry gathered and/or used during its preparation as part of the analytical

work.

Basis of our work We have not carried out anything in the nature of an audit, due diligence, valuation, nor, except where otherwisestated, have we subjected the financial or other information contained in this report to checking or verification

procedures. Accordingly, we assume no responsibility and make no representations with respect to the accuracyor completeness of the information in this report, except where otherwise stated. Our work did not involve specialengineering, technical or legal qualification.

Important notice As described in the Contract, this Report is intended to be used, among other supporting materials, by us and PFin discussions with various third parties such as, without limitations, fund providers or other third partiesrelevant for the purposes of the project (Potential recipient). Provision of Report to Potential recipients isintended only for information purposes and it does not represent an investment advice or recommendation to itsemployees or advisers. Therefore, items of possible interest to any Potential recipients may not have beenspecifically addressed for the purposes of the Report.

Any Potential recipient shall comply with applicable copyright and other third party licensing requirementsrelating to his use of this Report. Any Potential recipient is also required to ensure that any notice or disclaimerand any copyright notice included in the Report are incorporated on any copy thereof. If any Potential recipientincludes any part of the Report in his own reports or any other documents, he/she shall ensure that the relevantpart of the Report is included accurately and not misrepresented in any way and any such report or documentshall incorporate any notice or disclaimer and any copyright notice included in the Report.

For the above reasons, this report m ay not have identified all maters t hat might be of concern to you.


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JSC Partnership Fund ("Fund") is an investment fund established by the Government of Georgia. The Fund has over $1,5 billion worth ofasse s un er managemen

The Fund has two main products: Insurance and Investment.Insurance is mostly applied in energy sector through guaranteeing the off take agreement liabilitiesInvestment is usually made in SPVs though preferred equity of sub-debt

The Fund is aiming to be concentrated on four main sectors: Energy, Agriculture, Manufacturing and Real Estate.Current portfolioconsists of Transport, Oil & Gas and Energy assets.

Objective of the Fund is to maximize risk-adjusted return.

Fund's ultimate shareholder is the Government of Georgia.

www.PartnershipFund.ge

PwC 5


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PageOverview

Table of Contents

1 Project Idea 7

2 Findings and recommendations 9

3 Industry overview 11

3.1 Apparel industry in Georgia 18

4 Competitive edge of Georgia 20

4.1 Market regulation 26

5 Business development options 28

5.1 Business case 29

5.2 Sales and marketing strategy 31

5.3 Organizational chart and staffing 33

5.4 Financial projections 35

6 Global apparel 38

Appendices

1 Glossary 44

2 Terms of reference 46


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Section 1

Project idea


7


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Partnership Fund is inviting strategic investors to co-invest in a USD 9.5 mil.Greenfield project aiming at full service apparel manufacturing plantdevelopment

Section 1 Project idea

Business Case Investment Case Analysed

T e g o a USD 44 n. appare manu actur ng n ustry un ergoessignificant changes. An increasing number of customers demandingquality products at reasonable prices with shorter lead times and valueadded services.

The study encompasses the establishment of a Greenfield full serviceapparel manufacturing plant in western Georgia with an annualproduction capacity of six mil. pieces of wide variety of designed

garments manufactured for global wholesalers and retailers undertheir private labels.

The business is aiming to leverage Georgias unique position in termsof:

1. Availability of affordable and qualified workforce

2. Location - proximity to markets and sourcing destinations withdevelo ed infrastructure and trans ortation s stem

T e nvestment requ rement stan s at USD 9.5 m . F nanc ngstructure considered is as follows:

1. TheInvestors contributionof USD 2.4 mil. in common equity

2. Partnership Funds matching contributionof USD 2.4 mil. inpreferred equity

3. Debt of USD 4.7 mil. acquired with the assistance of Partnership

Fund (if needed)

30% of investment is allocated to the production facility development.the remaining 70% covers initial working capital requirements .

PwC

3. Liberal business environment and preferential terms of access tokey regional markets

4. Government support

5. Availability of competitively priced inputs (energy, water, etc.)

... to enjoy shorter lead times, competitive quality and lower cost baseadvantage for western markets compared to major Asian sourcingdestinations.

Investment Return Indicators (USD mil.)

Common Equity Holder NPV 3.1

Project NPV 7.2

Project IRR 25%

Payback Period 5 Yrs.

Discounted Payback Period 7 Yrs.

8Apparel Production in Georgia Greenfield Invest ment Opportunity


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Section 2

Findings and recommendations


9


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Recommendations

Section 2 Findings and recommendations

Business Viability Findings Pg.

Market Viability Global USD 448 bn. apparel manufacturing industry is expected to grow ca. 3% in 2011 and medium termforecasts are favourable too. The industry undergoes significant changes, such as: strengthening pressure on

cost of production and lead times. Georgias location, availability and costs of quality workforce and energycreates opportunities for international players to gain competitive edge over Asian counterparts and supplywestern markets, namely Europe. In addition, most west ern markets impose smaller regulation and tariffs toapparel imports from Georgia compared to imports from most Asian countries.

8-18, 30-32, 34

Technical Viability Organized apparel manufacturing in Georgia dates back to the beginning of 20th century. A number ofinternational and local apparel companies with diversified customer portfolio are already operating inGeorgia

As all of key raw materials (fabric, buttons, threads, labels, zippers) can only be sourced from outside ofGeorgia, because there is no local production, the total cost of sourcing possesses some challenge to thebusiness to be competitive on a global marketplace

The manufacturing facility can be developed using used equipments (from closed factories in Europe forexample) that could bring investment requirement down to 50%

13, 15-16,22, 24, 33

Business Model Viability Full service apparel contract manufacturing that accesses markets through intermediaries is a welldeveloped and established business model in the industry globally

10

Economic and FinancialModel Viability

The project has a positive NPV of USD 10,4 mil. over 10 years span . The investment yields a 39% IRR (forthe common equity investor). Investment payback period is 4 years.

25-26

PwC

Recommendations Key to attracting investors is development of a business environment that brings significant competitive advantages compared to competing destinations

- E.g. Georgia should consider reaching preferential trading terms on apparel with US (largest apparel market) as enjoyed by Mexico and several central and southAmerican countries, and with Japan (3rd largest importer of apparel) as enjoyed e.g. by Indonesia.

10

Management Model andExit Strategy Viability

Bringing in a strategic investor as considered by the Partnership Fund should enable unwindingestablishment and developing needed industry contacts rapidly

5

Apparel Production in Georgia Greenfield Invest ment Opportunity


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Section 3

Industry overview


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Global apparel manufacturing is forecast to generate revenue of USD 448.5 bn.in 2011, a 3% increase over 2010. Global production is concentrated in Asia

Apparel Manufacturing Turnover, 2011

Section 3 Industry overview

AsiaUSD 260,1 bn.

EuropeUSD 132,3 bn.

North America

USD 22,4 bn.

Africa & MiddleEast

PwC

Source: IBIS

South America

USD 22,4 bn.

, .

OceaniaUSD 2,2 bn.



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China is the main exporter in apparel industry accounting for 40% of the globalexport, USA being the leading importer. International trade in apparel isgrowing steadily at 2.5% CAGR (2007-2011). The forecast is that during next 6

years average growth rate will be 3,8 % annually

Top Exporters (USD mil.) Top Importers (USD mil.)


Global apparel trade in USD bn., 2007-2011

Source: Comtrade, PwC analysis

China 121,072 40%

Italy 18,505 6%

Turkey 12,382 4%

India 10,604 3%

France 9,221 3%

Indonesia 6,501 2%

Others 125,115 41%

USA 75,647 25%

Germany 32,693 11%

Japan 25,262 8%

United Kingdom 21,959 7%

France 20,357 7%

China, Hong Kong SAR 15,709 5%

Others 111,773 37%

PwC

268.8 278.7 282.3 296.1 303.4

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011

USD

bn.

Source: IBIS, PwC analysis

CAGR 2.5%

13Apparel Production in Georgia Greenfield Investm ent Opportunity


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The apparel industry consists of seven basic lines. Key segment at ca. 59% ofthe market is womens and girls wear

Primary apparelcategories: Product revenue split by customer group,2011


Manufacture of

Children'sand baby

clothes

Coats andwinter

clothes

LeisureSuits for

Workclothing and

ethnicclothes 37%

59%

Men's and boys' wear

Other apparel

Women's and girls'wear

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clothes

NightwearSportswear

women 5%

Source: IBIS



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Different market segments have different needs and success in marketplacedependent on businesses ability to adjust to changing needs effectively

Segmentation by Type

Perform manufacturing


aute outure

Dior, Chanel, Armani

Ready to Wear/Designer

Chanel, D&G, Prada, Gucci

Diffusion

D&G, CK, Emporio Armani, Versus, Hugo Boss

Bridge

Patricia Pepe,Lacoste,Ann Taylor,Max.&Co.,Brooks BrothersMass Market

Zara, H&M, GAP, Puma, Lotto, Marks & Spencer, Lebeck

D

egreeof

ou

tsourcing

High

Low

Market & Typical Order Size by Volume HighLow

w n own ac es anemployees

Contract some or all ofthe manufacturing

functions to other firms.

Full package program (FPP): source materials

High

PwC

Source: PwC Analysis

and develop patterns as well as makegarments. Greater f inancial responsibility.

Cut-make-trim (CMT) contactors: supplyoperators, machines, and thread and makegarments.

Specialty contractors: provide services such aspattern grading, cutting, embroidering, beltmaking, fabric pleating, or screen printing.

LowHigh

Orderdifficultylevel

Price Range

Large customers (like Zara, Gap, etc.)basically demand CMT services with

large orders and little value added

Smaller brands and retail chains areafter FPP services with smaller ordersand greater value added

Order Size (volume)



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The biggest share of value in apparel industry is captured by retailers (ca. 65%of retail value). Ca. 11% - is captured by apparel manufacturers


Apparel value chain

7%

11%

1% 2% 13%

65%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

supplier manufacturerAgent Transportation Wholesaler Retailer Total value

PwC

Prices LabourEnergy

R&D Marketing

Keys areas forcompetiveness

PriceQuality

PriceQuality

PriceOrders ScaleQuality

PriceTime Options

PriceQualityService

BrandPrice

Concentration Low Low Low Medium Medium Low




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Differentiation in apparel is limited. Apparel manufacturers have to competebased on costs. Cost of material accounts for majority of the total costs andcomprises on average 56 % of the apparel manufacturings costs


58%

18%14%

3% 3% 2% 2%

0%

10%

20%30%

40%

50%

60%

70%

Purchases Wages General & Other Rent Depretiation Interest Taxation

Global apparel industry typical cost structure, 2011

Source: IBIS

PwC

Purchases include materials such as fabrics, yarns, textiles, lace, buttons, zippers and so on.

The industry is labour intensive; labour costs account for an estimated 18% of revenue. This is down from approximately 19.0% in 2006.

General & Other costs include administrative and marketing costs.



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Section 3.1

Apparel industry in Georgia


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Organized apparel manufacturing in Georgia dates back to the beginning of20th century. Industry collapsed after the breakdown of Soviet Union in early1990s. Qualified personnel of that time is still available. Number of local andinternational apparel companies with diversified customer portfolio areoperating in Georgia

Section 3.1 Apparel industry in Georgia

Local apparel manufacturers in Georgia

NameParent

companyEstablished

Number of

employees

Revenue

(USD mil.)

BTM TextileATK Textile /

Turkey2006 600 6.1

Adjara TextileMilteks Tekstil

/ Turkey

2009 487 1.0

Georgian Textile - 2006 280 0.8

LTD Apparel

Manufacturing Factory- 2010 220 -

Mileri - 2011 170 1.8

163 small scale apparel manufacturers mainly servicing custom orders on localmarkets


KAKHETIIMERETI

KVEMOKARTLI

GURIA

MTSKHETA-

MTIANETI

RACHA-LECHKHUMI

AND

KVEMOSVANETI

SAMTSKHE-

JAVAKHETI

SAMEGRELO-

ZEMOSVANETISokhumi

ABKHAZI

A

ADJARA

Batumi

Ambrolauri

Akhaltsikhe

Georgia TskhinvaliBlack Sea

0 25 50 75 Kilometers

75 Miles50250

Senaki

Poti

Sarpi

Samtredia

Vale

Kartsakhi

SOUTH

OSSETIA

Tbilisi

Larsi

Sadakhlo

RedBridge

Lagodekhi

TelaviGoriZestapho

niKhashuri

Zugdidi

Kulevi Kutaisi

- Factory

PwC Source: GeoStat

Apparel Trade Data for Georgia (USD mil.), 2010

Country Import Export

Turkey 21,6 12,7

China 12,7 -

Italy 3,4 -

France 3,0 0

Germany 1,8 0,5

United Kingdom 0,5 -

Others 7,5 0,1

Total 50,5 13,3

0

50

100

1980 2006 2007 2008 2009 2010

Appare manu actur ng n Georg a, stor cdevelopment

Apparel Manufacturing in Million UnitsSource: Soviet Encyclopaedia, GeoStat, PwC analysis

CAGR (for 2006-2010)27,8%


19


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Section 4

Competitive edge of Georgia


20


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Fabric and other supplies constitute 56% of total costs. Proximity and access tomajor supply destinations (Turkey, Italy) gives the potential Georgianmanufacturers competitive edge

Section 4 Competitive edge of Georgia

Cotton price trend (USD cent per pound), 2006-2010

Average CIF Price of Fabric in InternationalTrade (USD/m), 2006-2010

0

2040

60

80

100

120

140

160

2006 2007 2008 2009 2010

Source: USDA, PwC analysis

Currently local manufacturers in Georgia are sourced from Turkey

-

24

6

8

10

12

14

16

2006 2007 2008 2009 2010

CAGR 4%CAGR 23,2%


As all of key raw materials (fabric, buttons, threads, labels, zippers) can only be sourced from outside of Georgia, because there is no localproduction, the total cost of sourcing possesses some challenge to the business to be competitive on a global marketplace

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Labour cost represents 17% of total production costs. We see a trend ofincreasing wages in main producing countries. The low cost yet educated labouravailability and high unemployment rate along with liberal labour legislation

and low level of unionization makes Georgia an attractive destination forapparel manufacturing


0 1,0002,0003,0004,0005,000

Morocco

Armenia

Uzbekistan

Georgia

China

Bangladesh

Ukraine

Belarus

AzerbaijanIndia

Turkey

Greece

Italy

France

Germany

United Kingdom

USA

Average monthly wages(USD)

0% 10% 20% 30% 40%

BelarusUzbekistan

ChinaBangladeshAzerbaijan

GermanyUnited Kingdom

ItalyArgentina

UkraineFrance

USAIndia

GreeceMorocco

IranTurkey

GeorgiaArmenia

Relative unemployment2010

0 % 2 0% 40 % 6 0% 80 %

Bangladesh

China

India

Turkey

Armenia

Azerbaijan

Georgia

Ukraine

Germany

Italy

France

UK

USA

% involved inTertiary Education

0% 50% 100%

Bangladesh

Morocco

India

Turkey

China

Chile

Greece

ItalyAzerbaijan

USA

United Kingdom

Germany

France

Armenia

Ukraine

Belarus

Georgia

Literacy rate 2010

PwC

The largest group of unemployed, ca. 50% is aged between 20-34 years

Salary levels differ across Georgian regions. The highest average salary is in Tbilisi (ca. 25% above the national average), in regions weanalysed as a potential location for the apparel factory an average salary level is 25-30% below country s average.

Labour legislation is one of the most liberal in the region

Level of unionization is low

The average number of workers in one establishment worldwide is 60-70 employee.

The average salary globally in this industry is USD 700. In Georgia this would be 450 less, USD 250.

Source: Wordlbank; ICIA, PwC Analysis


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Georgia has a stable and secured energy supply which is cost competitive


0.12Cost of electricity USD/kwh, 2010

2.6Cost of natural gas USD/m3, 2010

0.00

0.02

0.04

0.06

0.08

0.10

TK CN IN RU AZ AM KZ GE PK US EG0.0

0.2

0.40.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

.

TK IN GE CN AM PK RU US AZ KZ EG

Cost of electricity is USD 0.5 (per kwh) cheaper in Georgia compared to Turkey.

1 2

1

Source: World bank; PwC analysis


Cost of natural gas is USD 2.52 (m3), while in Georgia it is only 1.13.2

23


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Transportation costs account


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Georgias location enables it to reach over 260 mil. people in medium incomecountries in two days period

Number of Customers Reached


72,921,5 7,6

74,8

150

200

250

300

350

400

450

500

IRRO

BG

TR

UK

64,5FR

60,8

82,3

DE

PwC 25

4,5 3,1 8,8 5,1

15,9

46,0

-

50

100

- 4h 8h 13h 20h 25h 30h 35h 35h 40h 24d 25d 28d

GE ARAZ KZTM




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Section 4.1

Market regulation


26


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Assistance Regulations

Industry regulations vary greatly among countries. Georgia possessesadvantage of zero tariffs and duties to the European markets compared to most

Asian counterparts

Section 4.1 Market regulation

Quotas Practices vary by countries. Mostly no quotas or safeguards since 2009

Subsidies In most Asian countries governments subsidize the industry either byproviding cheap financing or export support.

Special Regulation and Quality Control Certificate of OriginISO9001GMP

Company specific requirements

Average Import Duties and Tariffs Applicable to Apparel, 2011

Exporter

Georgia Turkey China India Indonesia

PwC

Importer

France 0,00% 0,00% 11,79% 9,43% 9,43%

Germany 0,00% 0,00% 11,79% 9,43% 9,43%Japan 9,60% 9,60% 9,60% 9,60% 0,00%

UK 0,00% 0,00% 11,79% 9,43% 9,43%

USA 14,26% 14,26% 14,26% 14,26% 14,26%

Source: ITC, PwC Analysis

27



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Section 5

Business development options


28


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Section 5.1

Business case


29


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We specified the case for a greenfield full service apparel manufacturing plantoffering wide variety of designed garments manufactured for globalwholesalers and retailers under their private labels

Section 5.1 Business case

Key characteristics Layout design

Installed capacity 1250 pcs/h

Land plot m2 4,000

Buildings

Three story building with 2,000 m2 base

Total area (m2) 6,000

Sampling & Pattern Making & Cutting 700

Area for sewing 3,700

Office Area 600Packaging & Quality Control 400

Storage 300

Infrastructure

Road Connection

Local road with connection to arterials or freewaysRailway Connection

Optional

Ifloor

II/IIIfloor

PwC 24Apparel Production in Georgia Greenfield Investm ent Opportunity

Note: Layout is not to scale;

30

Location

Poti area has the following favourable characteristics:

Availability of labour

Developed infrastructure (roads, sea port, Internationalairport[under construction], railway)

Free industrial zone

Proximity to TurkeyKAKHETIIMERETI

KVEMOKARTLI

GURIA

MTSKHETA-

MTIANETI

RACHA-LECHKHUMI AND

KVEMOSVANETI

SAMTSKHE-

JAVAKHETI

SAMEGRELO-

ZEMOSVANETI

ABKHAZIA

ADJARA

Georgia

Black Sea

0 25 50 7 5 Kilometres

75 Miles50250

Poti

SOUTH

OSSETIA

Tbilisi

MRN


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Section 5.2

Sales and marketing strategy


31


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Full service quality offerings at competitive prices and results-orientedmarketing efforts will build up critical mass of customer orders and develop

portfolio of loyal customers and partners

Section 5.2 Sales and marketing strategy

Key demand drivers in the apparel industry are: Service offering Promotion

Disposable income of inhabitants

Population size

Cultural factors

As the industry is highly commoditized it isextremely important to be competitive on keysuccess factors, namely:

Ability to meet customers requirement onquality & price & time

Good suppliers

Access to low cost resources

Effective quality control

Economies of scale

Capable of offering full range ofservices including design

Best positioned to offer shorterlead times. This is increasinglydemanded by customers

ISO 9001, GMP certified

Business needs to consider ownbrand development in the future.However it also increases the costsassociated with advertising andmaintaining brand equity

Apparel contract manufacturers arerarely engaged in promotionactivities through trade fairs orfashion shows. Key to new customeracquisitions in this industry arecontacts. Thus promotion activitiesfocused on agents and makingconnectionswith apparel industryplayers are vital, especially duringinitial phases of the businessdevelopment

Pricing Distribution

PwC

Economies of scope important to offer competitiveprices along with quality service to

build up customer base

At the initial phase of the projectpromotionalpricing with discountsshould be considered

reach markets throughintermediaries. Apparel buying

Agents play significant role in thevalue chain. At the initial stageapparel agents residing in Turkey

will be main targets for distributionarrangements.

32



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Section 5.3

Organisational chart and staffing


33


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The plant will offer employment opportunities to ca. 1,500 persons

Section 5.3 Organisational chart and staffing

GeneralDirector

Chief FinancialOfficer

Sales andMarketing

Director

ChiefOperation

Officer

Designers &Developers

ProductionLine Chiefs

AdministrativeProcurement

Director


White Collar 75

Blue Collar 1,411

Total 1,486

Salesman

Production line chiefs

Fashion designers

Technical designers

Pattern Makers

Seamstress

QA Staff

Others

Most of key personnel needs formal training orapprentice.Three weeks on-job training is sufficient for most oflow-skilled workers (Seamstress, etc.)Training for maintenance staff is delivered byequipment suppliers and included in the price

34


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Section 5.4

Financial projections


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Investment requirement at USD 9,5 mil. produces common equity holders IRRof 32%. The project has positive NPV of USD 7,2 mil. The investment payback

period is 5 years

Section 5.4 Financial projections

Investment requirements (USD mil.) Financials (USD mil.) Yr. 1 Yrs. 2 - 1 0

Equipment 1.0

Land 0.1

Buildings 1.5

Other 0.4

Working Capital 6.5

Total 9.5

Revenue 22.7 45.4

Operating Costs 22.8 42.6

Finance Costs 0.7 0.7

Net Profit (0.8) 1.7

EBITDA Margin % 1% 7%

EBITDA Margin (Global industry benchmark) 11%

Operating coststructure (USD mil.)

Amount % Investment returns indicators (USD mil.)


.

Auxiliary Materials 5.3 12%

Utilities 0.3 1%

Sales Commission 3.6 8%

Labour 4.1 10%

Fixed Costs 2.6 6%

Depreciation 0.3 1%

Total 42.6 100%

Common Equity Holder NPV 3.1

Project NPV 7.2

Common Equity Holder IRR 32%

Project IRR 25%

Payback Period 5 Yrs.

Discounted Payback Period 7 Yrs.

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Analysis of the international apparel markets shows favourable trends

Section 5.4 Financial projections

Selling price and variable cost estimates are based on the apparel manufacturing industrys typical figures in Georgia

All revenue and cost estimates are based on constant dollar approach

Capital investment estimates are for indicative purposes and might fluctuate as much as 20% or more depending on peculiarities of detailedtechnical desi n and characteristics of area considered for the facilit develo ment

Main assumptions

Operating period of the project is 10 years.

Salvage value discount factor from last year operating income is 25%

Business is assumed to achieve an optimal capacity utilization of 80% in the second year of operations, during the first year 40% of capacityutilization is considered

Labour salaries are USD 250 and above.

Discount rate of 14% considered by Partnership Fund was incorporated in the analysis. Sensitivity analysis to discount rate is provided

Analysis shows that ability to ensure costeffective sourcing of major raw materials(fabric, etc.) is vital for financialsustainability of the business.

IRR Selling Price Change

25% -20% -10% - 10% 20%

-20% -3% 38% 67% 94% 120%

-10% #NUM! 14% 46% 73% 98%

-aterial

hange

Sensitivities


10% #NUM! #NUM! -1% 34% 59%

20% #NUM! #NUM! #NUM! 13% 41%RawCost

IRR Selling Price

25% 9.5$ 10.0$ 10.5$ 11.0$ 11.5$

-20% 30% 44% 58% 72% 85%

-10% 27% 42% 56% 70% 83%

- 25% 40% 54% 68% 81%

10% 23% 38% 52% 66% 79%

20% 21% 36% 50% 64% 77%FixedCost

Change

37

-3000

2000

7000

12000

0% 10% 20% 30% 40%

NPVUSD000

Disc. RateBasecase @14% Disc.Rate


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Section 6

Global apparel


38


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Global Apparel Manufacturing industry has a low level of marketconcentration. None of the large global companies account for more than 1.0%of the industry revenue. However the level of industry concentration is

expected to increase in the future

Section 6 Global apparel

Selected potential customers

Name Symbol OriginPrincipal

MarketsTurnover USD Bn. Key Sourcing Destinations

AdidasFWB: ADS;OTC Markets Group: ADDYY

Germany Global 18.83India, Thailand, Turkey, China, Germany, Hong Kong,Indonesia, Mexico, Brazil, Pakistan, Taiwan

Chicos FAS NYSE:CHS USA USA 1.713

China, Vietnam, USA, Indonesia, India, Sri Lanka,

Philippines, Bangladesh

Christian Dior

CDI:FPEN Paris, CDIF:PZPLUSMkt GrpCHDRY:USOTC US,CDI:BQEquiductCHDRF:USOTC US,DIO:GRFrankfurtCDI:TQTurquoise, CDI:EBBATS

France Global 29.56 France, United States, Canada, and Japan

PwC

EuropeCDI:ROBucharest

Coco Chanel N/A France Global 2.398 Hong Kong, China

Dolce & Gabbana N/A Italy Global 0.987 Italy , China

GAP NYSE:GPS USA Global 14.664 United Kingdom, France, Ireland, Korea, Japan and China

Guess? NYSE: GES USA Global 1.19 USA, Mexico, Italy, Hong Kong

H&M HMb.ST Sweden Global 127China, Bangladesh, India, Indonesia, South Korea,Pakistan and Sri Lanka , Turkey, Italy, Portugal,Greece, Bulgaria, Poland, England



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Selected potential customers

Name Symbol OriginPrincipal

MarketsTurnover USD Bn.Key Sourcing Destinations

evi Strauss & Co JSE:LVISF USA Global 4.303Argentina, Canada, China, HongKong, India, Indonesia, Italy, Turkey, UnitedStates Vietnam


ike NYSE: NKE USA Global 19.014 China, Vietnam, USA, THAILAND.

olo Ralph Lauren NYSE: BKE USA Global 4.979Australia/New Zealand, Central America, Korea, Hong

Kong

uma SEFWB: PUM

Germany Global 3.79

Canada, the United States, Mexico, Brazil, the CzechRepublic, Poland, Italy, Greece, Syria, Spain, Jordan,Morocco, Tunisia, Turkey, Egypt, India, Bangladesh,Vietnam, Thailand, Taiwan, Malaysia, Indonesia,

Philippines, Singapore,rue Religion Brandeans

NASDAQ: TRLG USA Global 0,36 USA, Mexico, Asia, Italy

F Corporation NYSE: VFC USA Global 7.703Hong Kong, Poland and Turkey, China, Bangladesh,Vietnam, Indonesia, Thailand, Cambodia, the Philippines,Pakistan and India.

olcom NASDAQ:VLCM USA Global 0,3 China, Mexico

PwC

Source: Publicly available sources, PwC Analysis

ara

IDEXY:US - USA; ITX:SM -Spain; IDEXF:US - USA;ITX:EB - UK; ITX:IX - UK;ITX:LI - UK; ITX:NR -UK;ITX:S1 -UK; ITX:TQ -UK;ITXS:PZ -UK; IXD:GR -Germany; IXD:TH -Germany

Spain Global 8,1 Spain, Portugal, India, Turkey



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Apparel industry players are increasingly trying to do business in countrieswith cheap labour. The key for success will be to leverage Georgias productioncompetitive advantage to eat share from main competitors

We have studied the competition level in this industry. The fact is that As of 3rd quarter of 2011 the number of apparel manufacturing


the number of apparel manufacturers is increasing. However it is noteasy to find contractor with good combination of price, quality andtime delivery options. The last is becoming more and more importantevery year and Georgia has a good opportunity to use its location as oneof the main competitive advantages.

establishments worldwide is estimated around 148,726 owned byca. 132,791 enterprises.

Our analysis indicate that average employment per establishment isca. 60-70 person.

Selected sizable apparel producers

Name Symbol Business Origin Key CustomersTurnover USD

bn.No. of Employees EBIT Margin ROE ROA

VFCorporation

NYSE: VFC Apparel USA

Wrangler, Lee JeansRiders, Rustler

Chic, 20X, MaverickRock & Republic at Kohl's

7,7 47,000 13.3% 14.8% 8.8%

PwC

Bosideng 3998:HK Apparel ChinaBosideng, Snow Flying,

Kangbo, BengenShuangyu and Shangyu

5,7 30,000 18.1% 16.4% 13.4%

BGTCorporation

BGT-R:TB Apparel ThailandBody Glove, People's

market0,026 - 10.5% 19.3% 10.5%

DevernoisSA

DEVR:FP Apparel FranceInnos, Corte Ingles,

Loeb0,056 - 3,6% 3,4% 2,5%

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Source: Publicly available sources, PwC Analysis



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Technological advancement in the Global Apparel Manufacturing industry isdeemed to be low. Much of production is very labour intensive as it comprisessewing and cutting machines that need to be operated by man


SamplingPatternMaking

FabricCutting

Input OutputFinal

QualityCheck

Packaging

Quality Control

PotentialSuppliers

Origin of Supplier Contact Information

Gerber USA www.gerbertechnology.com

Juki Japan www.juki.co.jp

Janome USA www.janome.com

Equipment Needed

Plotters

Stitch Machines

Cutters

PwC

The use of technology is increasing. For high productivity of the manufacturingprocess it is essential to use modern technologies. However, some functions aredifferent to automate and therefore will remain labour intensive in the near future.

Jinan China www.jqlaser.comEmbroidery Sewing Machines

Digitizers

Flat Lock Machines

Bar Tracking Machines



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The top three traders (the United States, Germany and China) represent 28% ofworld merchandise trade. Asia accounts for almost 30% of world merchandisetrade


PwC

USD 0-250 bn.

USD250-500 bn.

USD 500-1000 bn.

>USD 1000 bn.

Source: WTO



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Appendix 1

Glossary


44


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Glossary of terms and abbreviations

Term Definition

Appendix 1 Glossary

CAGR Compound annual growth rate

CNF Cost and Freight included

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amortisation

FOB Free on Board

GMP Good Manufacturing Practice quality management system in manufacturing

IRR Internal Rate of Return

PwC

ISO xxxxx Global quality management standards

NPV Net Present Value


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Terms of reference

Appendix 2


46


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Terms of reference

Appendix 2 Terms of reference

Objective of the assignment is to reveal business opportunities in manufacturing and agriculture fields identifiedby PF and to find investors for projects with high business potential.

The conceptual study, covers evaluation of the business opportunities identified by PF.

For each business field identified by PF conceptual study will include at least the following:

1. Executive Summary

2. Description of Products or Services

3. Evaluation of value chain of the product/service includingintermediate and final products.

4. Evaluation of local, regional and international markets for output,intermediate and final products including

a. Market size and historical growthb. Regulation and legal environmentc. Potential customers/contracts and customer concentrationd. Competition at local, regional and international level

5. Technology Considerations and investments, including evaluation ofpossible locations

6. Marketin Strate includin

b. Energyc. Other inputs9. Initial planning of the plant/asset (when applicable) including:

a. Manufacturing basic design layout plan/assetb. An initial plan of the production's array and the RFI definitions for theplant/process.c. Initial planning of the transportation's system and the distribution

chain.d. Defining critical raw materials and recommended purchasing costsagainstdestination prices.e. Defining necessary training programs for the operators.f. Produce the following documents:

i) Civil engineering RFI

a. Pricing andb. Distribution

7. Organization and Staffing8. Evaluation of supplies for the product or service including

a. Raw materials and suppliers of raw materials

iii) Erection RFIiv) Other required RFI

10. Financial Projections for short, medium and long term includinglocal, regional and international markets

11. Findings and Final Recommendations


Documents

ApparelApparel Production in Georgia