Mainland Headwear Holdings Limited recorded a turnover of HK$319.5 million ($41.2 mm), representing an increase of 37% when compared with the corresponding period last year. Profit attributable to shareholders increased 8% to HK$38.9 million ($5.0 mm). Basic earnings per share amounted to 13.6 HK cents (1.8 cents), posting an increase of 8%.
Mr. Ngan Hei Keung, Chairman of Mainland Headwear, commenting on the results said, “The increase in turnover was attributable to the growth in sales across all segments of the manufacturing, trading and retail businesses. The growth in profit attributable to shareholders, which was relatively lower than that of turnover, was the result of an increase in the manufacturing labor cost derived from the Group’s efforts to retain and strengthen its skilled work-force. The impact was also fuelled by an upsurge in non-fabric raw material cost and an increase in outsourcing to meet the escalating sales demand in the manufacturing business.”
The Manufacturing Business
For the six months ended June 30, 2006, the Manufacturing Business achieved stable performance, with turnover increased by 22% to reach HK$209.7 million ($27.0 mm). However, gross profit margin decreased to slightly below 32%, which was due to the hike in non-fabric raw material costs, the rise in labor cost and the surge in minimum wages in Shenzhen. These additional expenses were compounded by an increase in the cost of subcontracting work, which was undertaken for orders in excess of production capacity with the aim of maintaining relationships with major customers. Further pressure on manufacturing costs was also brought forth by the appreciation of the RMB.
The Group actively took measures to offset some of the adverse factors that have negative impact on margins. To address the increasing production capacity requirement, during the period under review, the Group added an additional production line as planned. In addition, twenty digitized embroidery machines will be in operation in the second half of 2006, so as to reduce subcontracting costs and to enhance the Group’s production capacity.
The Group continued to expand its reach, and on June 30, 2006, acquired Kangol Headwear (Panyu) Limited, which manufactures about 85% of the headwear of Kangol, a top-tier fashion headwear brand. The management believes that the acquisition will not only enable the Group to extend its product offerings to fashion headwear that enjoys a higher gross profit margin, but also immediately alleviate pressure on the Group’s production capacity.
The Trading Business
During the period under review, turnover of the Trading Business significantly increased by 30% to HK$129.6 million ($16.7 mm). The impressive growth in turnover was attributable to the remarkable sales performance of the private label business, which accounted for 22% of the Trading Business. In addition, the turnover of the Europe market in the review period also improved significantly, compared to the same period in 2005, after the establishment of the UK subsidiary in March 2005. Meanwhile, the gross profit margin also recovered to slightly above 25%.
The Retail Business
For the six months ended June 30, 2006, turnover of the Retail Business increased substantially by about 2.7 times to HK$32.1 million ($4.1 mm), representing about 10% of the Group’s total turnover. The surge in turnover was attributable to the continued expansion of the LIDS and Sanrio operations. As the business is still in investment phase, the Retail Business incurred a loss of about HK$4,600,000 attributable to the shareholders of the Company for the period under review. However, the Group achieved promising improvements in shop level performance backed by encouraging shop-to-shop growth in most of the stores and lower overall shop rental to turnover ratio. The results clearly indicate that the Group’s retail operations are moving in the right direction towards growth and profitability.
As at June 30, 2006, the Group had opened a total of 31 self-owned LIDS stores, of which 8 were in Hong Kong and 23 were in the PRC. The Group had a total of 6 franchised LIDS stores in the PRC as at 30 June 2006. With the high shop rental cost in Hong Kong being a major challenge, the Group continued to take a conservative approach to develop the LIDS retail network in Hong Kong. Operations in the PRC continued to improve and most of the shops now make a positive contribution at shop level.
As for the Sanrio operation, the Group opened 35 self-owned Sanrio stores and had 10 franchised shops in the PRC as at 30 June 2006. Most of the self-owned stores generated positive contributions since opening. To enhance the gross profit margin so as to facilitate the expansion of the franchise operation and to improve the overall profitability of the Sanrio business, the Group continues to increase the sourcing of self-developed products locally and work directly with Sanrio licensed vendors to reinforce the cost competitiveness of its products.
In regard to the Kangol operation, the Group opened two Kangol stores in the PRC selling Kangol accessory products during the Period to test the market. While the market response has been satisfactory, due to the nature of the niche market in which it operates, the Group will take a conservative approach to opening new Kangol stores.
The Group is confident in the market outlook, in particular for 2007 with the anticipated sales of Olympics headwear. The acquisition of Panyu Factory has added to the production capacity of the Group. The Group also plans to further increase production capacity by 20% in 2007 through the addition of new production lines.
In order to further consolidate its leading position in the headwear industry, the Group is dedicated to extending its product range to fashion headwear. This will help to preserve a higher gross profit margin in the long run.
Regarding the Trading Business, the Group believes the current growth momentum in turnover will extend into the second half of 2006. However, the gross profit margin may come under pressure as private label business, which has a lower gross profit margin, is expected to increase in the second half of the year.
On the Retail Business front, the Group aims to increase the number of self-owned LIDS stores to 10 in Hong Kong and 26 in the PRC, and franchised stores in the PRC to 16 by the end of 2006. The Group also plans to expand its Sanrio network in the PRC to 40 self-owned stores and 40 franchised stores by the end of the year. In addition, the Group will extend the reach of Kangol stores by opening 2 more new stores, resulting in a total of 4 stores in operation by the end of 2006.
In light of the robust growth momentum of the Sanrio and LIDS operations, the Group expects these operations to achieve breakeven in late 2006 and in 2007, respectively. The Group is confident that the Retail Business will emerge as a key growth driver in the future.
Mr. Ngan concluded, “By leveraging on our clear business and market development strategies, we are committed to capturing new business opportunities and creating fruitful returns for our shareholders. We will continue to strive for a higher level of efficiency while meeting the demands of our customers and achieving long-term sustainable growth.”