Mainland Headwear Holdings Limited, a major Chinese manufacturer of headwear that holds the Lids license for Asia, reported sales rose 23 percent to HK$360.5 million ($46 mm) in the six months ended June 30.


The Group managed to offset the impact of rising costs to some extent by reducing the cost of its Manufacturing Business and increasing prices. Still, overall gross profit margin during the period dropped 420 basis poins to 25.5%.


The company said it had to boost its provision for doubtful debts by HK$21.3 million ($2.7 mm) after two major customers were unable to make timely payments. Consequently, the profit attributable to shareholders of the Group decreased from HK$10.3 million ($1.3 mm) in the corresponding period last year to HK$744,000 in the review period. Excluding the provisions, the profit attributable to shareholders of the Group would be HK$22.1 million during the period.


Manufacturing Business
The recovery of the overall economy fuelled a stronger demand for the Group’s products. This has led to a year-on-year increase of 22% in turnover of the Group’s Manufacturing Business, its main income stream, to HK$291.4 million ($37.4 mm), accounting for 79.0% of the Group’s total turnover. The Group also faced challenges including rising raw material prices and the temporary manpower shortage leading to a reduction in gross profit margin to approximately 20%. Besides, as two major customers were unable to timely settle their payments during the period, in accordance with the Group’s prudent financial policy, a provision for bad and doubtful debts of approximately HK$21.3 million was recognised.

 

Therefore, the operating profit of the Manufacturing Business dropped 60% from HK$24.7 million in the corresponding period last year to HK$10.0 million.


 

Retail Business
With the continued improvement in consumer sentiment in the PRC, turnover of the Group’s Retail Business grew by 11% year-on-year to HK$54.8 million ($7 mm). However, due to the rise of the JPY exchange rate as well as the increase of staff costs during the period, the Retail Business recorded an operating loss of HK$5.2 million, or flat with last year’s comparable results.


 

Driven by the healthy growth of the PRC economy, market demand for high-end premium consumer products has been rising. Turnover from the Sanrio operations increased by 8% to HK$41.4 million.


 

However, the continuous rise in the exchange rate of the JPY placed pressure on the operating costs of the Sanrio business, leading to an operating loss of HK$2.6 million compared to an operating loss of HK$2.6 million a year earlier.


 

As for LIDS business, the opening of “NOP” store and the “New Era” brand store boosted the turnover of the business by 27% to HK$13.3 million. However, because of the continuously climbing staff costs in Hong Kong and the PRC, and as the first half year is traditionally the slow season, an operating loss of HK$1.8 million was recorded, compared to an operating loss of HK$1.4 million a year earlier.

As at June 31, the Group had 48 self-owned Sanrio stores and 59 franchise stores in operation. The Group also had 30 LIDS self-owned stores, of which 24 were in the PRC and 6 were in Hong Kong. In addition, the Group operated 13 LIDS franchise stores in the PRC, and three own-brand “NOP” stores and one “New Era” retail store in Hong Kong.


 

Trading Business
The Group committed efforts to strengthening the sales team of its Trading Business and expanding its customer base during the period, thus the turnover rose by 60% to HK$22.9 million. The Trading Business has also reported an encouraging performance and achieved a turnaround with an operating profit of HK$2.1 million compared to an operating loss of HK$1.4 million a year ago.


 

Prospects
To boost the growth of the Manufacturing Business, the Group completed the acquisition of Million Soung Limited on Aug. 19 and indirectly owns 85% equity interest in H3 Sportgear, a major customer of Mainland Headwear. The acquisition will make H3 Sportgear the Group’s distribution trading arm in the USA, currently its largest market, enabling direct sales to major retailers there. Besides, Mainland Headwear can establish its own licensed product mix through this acquisition to attract higher margin licensed headwear business, while H3 Sportgear’s network can also ease entry into the accessories market in the USA. With a better product mix, this acquisition is set to create stronger synergies for the Group. In fact, soon after the Group announced the acquisition, one of the largest retailers in the US contacted H3 Sportgear for a supply arrangement.


 

Thus, the Group has strong confidence in the prospects for its business in the US. For the Sanrio Business, the Group will open an online trading platform in the second half of the year and will devote more resources to improving operational efficiency and to enhance sales performance of its existing stores. On the other hand, the Group will continue to increase the number of its self-owned stores in first-tier cities and that of franchisees in second- and third-tier cities within mainland China to further expand its sales network and market share. For the LIDS business, the Group will open more “NOP” retail stores in the second half of the year. At the same time, the Group will diversify its brand mix to meet the demand for different headwear in the market.


 

In its Trading Business, the Group’s efforts in strengthening the sales team in Europe have gained a satisfactory result. The sales team has just reached an agreement with a leading soccer team in the English Premier League on the distribution rights of headwear products in Europe for the team. The Trading Business team is striving to gain the distribution rights of headwear products for more renowned teams in the English Premier League, and expand its customer base to create more synergies in operations within the Group.

“We expect new orders can sustain strong growth momentum for the rest of the Year,” said Mr Ngan Hei Keung, Chairman of Mainland Headwear. “To meet the order demands of customers, we plan to further expand our production scale in other regions. Since the prices of some materials such as cotton have been decreasing from the second quarter of 2011, we believe the material cost pressure would be relieved during the second half of the year. Thus, we remain confident that the Manufacturing Business will continue to develop steadily.”


Looking ahead, the Group remains optimistic yet prudent in formulating its strategy, striving to achieve steady and healthy growth of its business with an aim to bring long-term and sustainable returns to our shareholders”