Mainland Headwear Holdings Limited, the new parent of San Diego Hat Company that also manufactures headwear for some of the largest U.S. brands and operates Lids and New Era stores in Asia, reported revenue for the year ended 31 December 2013 increased by 20.3 percent to HK$922.6 million ($119 million). Gross profit margin increased slightly by 0.1 percentage point to 26.4 percent of sales.

The Group also announced its intention to scale down the operations of its factory in Panyu, Guangdong Province, China in July 2013 to cut production costs. As a result, the Group has made a provision of approximately HK$13.7 million for the plant, equipment, inventories and costs owing to scale down the factory. All these factors contributed to a profit attributable to shareholders of HK$7.4 million ($950,000). The Board of Directors has recommended the payment of a final dividend of 1 HK cent per share for the year ended 31 December 2013. Together with the interim dividend of 1 HK cent per share already paid, total dividend for the year will be 2 HK cents (2012: 4 HK cents) per share.

Mr. Ngan Hei Keung, Chairman of Mainland Headwear, said, “During the year under review, riding on our strength and brand reputation established over the years, the Group has maintained a solid cooperative relationship with our current customers, including New Era, and has succeeded in expanding our customer base. The management has stepped up efforts to develop our Bangladesh factory Unimas, to enhance the production capacities. The Trading Business has also made significant progress. The acquisition of SDHC is an important step for the Group toward the establishment and operation of its own brand. This initiative does not only create greater synergies with the Group’s Manufacturing Business, but also enables Mainland Headwear to consolidate the midstream and downstream in the industry chain, and mark another milestone in the course of its development.”

Manufacturing Business
Revenue from the Manufacturing Business grew by 11.9 percent year-on-year to HK$670.1 million ($86.4 million), accounting for 67.5 percent of the Group’s total revenue. To fill its rising volume of orders received, the Group has outsourced some production processes to other factories during the year, which has incurred additional costs for the Group. The outsourcing together with the impact of increasing material costs have led to the decline of gross profit of this segment by 6.3 percent. Despite completing the acquisition of the Unimas factory in Bangladesh during the year, the production scale of the factory is yet to be fully realised, as the factory is in an initial stage of operation. Moreover, as a result of scaling down its Panyu factory in the first half of the year, the Group had to make a provision of HK$13.7 million for the plant, equipment inventories and the related costs, reducing the operating profit of the Manufacturing Business to HK$30.3 million ($3.9 million), a 39.6 percent decline.

Trading Business
Revenue from the Trading Business surged by 101.7 percent to HK$191.5 million ($24.7 million), attributable to new income streams from Trading Business for the Group during the year. However, the Group has invested substantial resources in product development and marketing for SDHC. The Trading Business recorded a loss attributable to shareholders of HK$4.2 million ($536,000) versus a prior-year profit. During the year, the Group has signed up more English Premier League (“EPL”) soccer clubs for the headwear distribution right in Europe. The Group has also further diversified its brand development. The Group acquired SDHC, a leading high-end designer, importer and marketer of women’s hats in the US in late 2012 and has devoted substantial resources to research and development of products and the development of online sales tools, in hope of enriching its product mix.

Retail Business
The Group has proactively adjusted its product sales strategy and pushed forward cost control measures to maintain profit. Consequently, revenue of the Retail Business increased by 2.2 percent year-on-year to HK$129.8 million (16.7 million) and gross profit margin rose by 7.7 percentage points to 61.3 percent of sales. Operating loss improved 77.9 percent to HK$5.8 million ($745,000).

The introduction of the online sales platform for the Sanrio business last year has driven the revenue of this business segment to HK$96.0 million ($12.4 million). The Group has managed to narrow the operating loss significantly by 93.3 percent to HK$1.2 million ($154,000) thanks to the stringent cost control measures. Revenue of the Headwear Sales Business rose by 8.5 percent from to HK$33.7 million ($4.3 million) during the year. The Group was able to narrow the operating loss of this segment to HK$4.6 million ($591,000), attributable to its close monitoring of sales performances of all retail stores and its flexible adjustment of operational strategies.

Prospects
For the Manufacturing Business, the Group plans to emphasize on the development of the Bangladesh factory in order to reduce its reliance on PRC production plants; thereby alleviating the problem of labor shortage and rising labor costs in the PRC. The Group will increase the number of staff at the Bangladesh factory from the current 1,000 to 2,000 staff by the end of 2014. By then, at which time the production capacity of the Bangladesh factory is expected to be similar to that of the Shenzhen plant. In addition, after the scaling down the operation of the Panyu factory in the first half of this year, the Group will rent out the plant site in a bid to broaden its income stream.
 
The Group believes that European and U.S. markets still have enormous development potential and therefore will divert more resources to the Trading Business and hopes to generate more powerful synergies with the Manufacturing Business. H3 Sportgear has made a significant contribution by securing more orders from the famous retailers in the US, which has helped the Group’s products enter the U.S. department store market. The sales team in Europe, DPI, will also strive to secure more licenses for distribution rights of headwear from EPL soccer clubs, and develop other business in “football and children’s headwear”. The performance of SDHC has met the Group’s expectations. On top of exploring development opportunities in European and US markets, it will also strive to develop emerging markets in Asia with an aim to expand the Group’s customer base.

Regarding the Retail Business, the Group will retain its hybrid operation model with self-owned and franchise stores in the development of the Sanrio operation. Faced with the intense competition in the PRC’s retail market, the Group will enrich its product mix by introducing products with higher quality, and in particular, will increase the direct import of fine products from Japan. In the Headwear Sales Business, the Group has determined to follow the strategy of gradually changing “LIDS” retail stores to “NOP” retail stores, owing to the remarkable performance of “NOP” retail store and its popularity among customers.

Mr. Ngan concluded, “With the management’s strategic planning in different business segments, we believe these measures can lay a solid foundation for the Group’s sustainable development. Although we expect a series of intractable challenges in the PRC will persist, most notably the labour shortage and rising salaries and rentals, we will adopt a variety of measures to reduce cost pressures, expand sales networks and diversify business development. We are confident in the future development of Mainland Headwear.”