Mainland Headwear H1 turnover was HK$255.1 million ($32.7 mm) representing a drop of 20% when compared with the same period last year. The decrease in turnover was mainly attributable to the Groups disposal of its subsidiary Drew Pearson Marketing Inc. in December 2006. Excluding the disposal of DPM, the turnover of the Group from continuing operations increased by about 17%. Profit attributable to shareholders was HK$27.6 million ($3.5 mm), a decline of 29% against the sale period last year, mainly due to the lower gross profit margin of the manufacturing business and the adjustment to gain on disposal of assets and liabilities of DPM. Earning per shares was 8.7 HK cents (First half of 2006: 12.3 HK cents).
The Board of Directors declared the payment of interim dividend of 3 HK cents per share for the six months ended 30 June 2007 (First half of 2006: 3 HK cents).
Mr. Ngan Hei Keung, Chairman of Mainland Headwear, said, “The operating environment for manufacturing business was challenging for the first half of 2007 due to the slowdown of the US market. We have implemented a series of measures to improve cost and operational efficiency to mitigate the impact. On the retail business front, with a well-established product development and sourcing team and a stable supply chain, the Group has expanded its own design product range, which warrants higher margin. Together with our successful expansion of retail network and stringent cost control, the gross profit margin of this segment rose to 58% during the period under review. Although the retail business was still in investment stage and had not brought in positive contribution, its performance improved significantly. We expect our investment in this segment will bear fruits in 2008.”
Manufacturing business remained the Groups major revenue contributor with turnover at HK$193,618,000, 8% lower than in the same period last year. The decrease in turnover was mainly due to the sluggish US market and the cancellation of first quarter buy by Walmart. Adversely affected by the lower production level of the Groups Shenzhen plant in the first quarter, the rise in labour cost and the under-utilization of Panyu Factory, the segments gross profit margin reduced from 31% to 26%.
During the review period, the Panyu Factory recorded a turnover of HK$20,168,000 with the operating loss narrowed to HK$5,317,000 from HK$7,391,000. The improvement was attributed to the implementation of various measures, including better control of material wastage and a piece rate reward system to workers, together with the reduction of administrative expenses of the factory by 30%. In addition, the operating loss of the factory for the past 12 months was HK$12,708,000, of which HK$9,360,000 (or US$1,200,000) will be deducted from the balance of the unpaid consideration as prescribed in the acquisition agreement.
As a leading headwear manufacturing and distribution licensee for the Beijing 2008 Olympic Games, the Group is poised to fully capitalize the influence of the event to achieve a notable sales turnover within the next 12 months. In addition, in March 2007, the Group obtained the worldwide exclusive manufacturing rights and distribution rights in Greater China and Japan for The Fédération Internationale de Football Association (“FIFA”) branded headwear between 2007 and 2014. It will further strengthen its manufacturing and distribution business.
Retail Business During the period under review, turnover of this segment has substantially increased by 44% to HK$46,328,000, accounting for about 18% of the Groups total turnover. The segments gross profit margin has improved from 52% to 58%, while the operating loss has significantly narrowed by about 50% from HK$6,773,000 to HK$3,355,000.
Sanrio operation reported encouraging performance with turnover soared 88% to HK$30,821,000 and same-store sales growth at 57%. Thanks to the expansion of own design products range with higher margins and a better control of samples and packing charges, the gross profit margin of the Sanrio operation has improved by 4%. Also, operating loss of the operation has narrowed to HK$1,427,000 after an interest payable of HK$639,000 on group borrowings effective from 1 April 2007.
In April 2007, the Group entered into a subscription agreement to increase its shareholdings in Futureview Investment Limited, a non wholly-owned subsidiary of the Group operating the Sanrio business, from 51% to 75% at a cash consideration of HK$5,000,000. Through this stake increase, the Group will be able to capture the potential growth of this business segment.
Turnover of the LIDS operation remained stable against the same period last year. Despite the higher operating cost in the Hong Kong market, operating loss was kept at the same level as last year due to the improved gross profit margin as the percentage of own design products with higher margins increased to about 26% of the sales mix during the review period. In the PRC, however, performance of shops improved. The Group will further expand LIDS operation in the PRC through franchise.
During the review period, the Group opened 2 additional self-owned Sanrio stores and 3 new franchised stores, bringing the total of self-owned stores and franchised stores to 43 and 33 respectively. For the LIDS stores the Group had a total of 33 self-owned LIDS stores, of which 25 were in the PRC and 8 were in Hong Kong. In addition, the Group had 16 franchised stores for LIDS in the PRC, of which 7 were opened during the period.
T rading Business Turnover of the trading business decreased by about 14% to HK$24,535,000 as a result of undesirable weather conditions in Europe. However, the implementation of better cost control measures leads to improvement of gross profit margin from 26% to 28% and brought the operating profit up by 15% to HK$4,100,000.
Prospect The operating environment for manufacturing business remains challenging in the second half of the year due to the uncertainty in the US economy and cost pressure on its gross profit margin. The Group will strive to enhance cost efficiency and maintain the segments gross profit margin level. In addition, the Group will continue its effort to expand customer base and explore high value markets for the Panyu Factory to improve its utilization rate.
To prepare for additional orders from Concept One for the next seven years as committed in the disposal of DPM, the Group is building a new factory adjacent to the existing Shenzhen factory. When in full operation, it will enhance the Groups overall production capacity by 40%.
For the retail business, the Group sees continuous strong growth in the Sanrio operation. The Group targets to accelerate the growth of this segment through franchising and expanding distribution network in the PRC. The Group has reached an agreement with a leading personal care chain store in the PRC to ride on the chain stores extensive network to distribute Sanrio products.
Supported by a dedicated product development team, the Group will continue to increase the proportion of its own design products to 50% of the sales mix in the second half of 2007 with a view to improving the gross profit margin. This will also facilitate the expansion into the 2nd and 3rd tier cities. The Group also opened the first two Sanrio jewelry accessories and watches specialty shops named “K Star” in Shanghai in July and August 2007. This higher margin business commands smaller store space and carrying costs. The Group expects that the business will expand rapidly through its franchising network in year 2008.
For the LIDS operation, the Group will continue to introduce own brand products to lift the profit margin as well as to add other fashion accessory items to meet the customer needs and boost sales. The Group will also continue to expand its franchise business in the PRC in the second half of the year.
On the trading business front, the Group will focus on capturing more opportunities of private label and brands business for large scale retailers to expand the Europe market. Looking ahead, Mr. Ngan concluded, “We are confident of a robust growth of the Groups retail business, in particular the Sanrio operation, in the second half year. We also expect the retail business to bring in more significant contribution in the future”.
