Mainland Headwear Holdings Ltd. reported that revenue increased 17.1 percent to HK$1.87 billion from HK$1.60 billion in 2021. Gross profit surged by 33.0 percent to HK$637.3 million, or 34.0 percent of sales, in 2022, compared to HK$479.2 million, or 29.9 percent of sales, in 2021.
Revenue from the U.S. market was HK$1.65 billion in 2022, up from HK$1.42 billion in 2021. Europe was a distant second place for revenue from external customers, generating HK$157.6 million in 2022 from HK$118.7 million in 2021. Revenue derived from the Group’s largest customer—a group of affiliated companies of a shareholder—amounted to HK$761.9 million, or 40.6 percent of the Group’s revenue from continuing operations, compared to HK$576.1 million, or 36.0 percent, in 2021. Those revenues were attributable to its Manufacturing Business.
Profit generated in its Manufacturing Business was partially offset by a loss for the year in the Trading Business, but profit attributable to shareholders still rallied 52.6 percent to HK$195.4 million from HK$128.1 million in 2021.
The Group said it remained in a healthy financial position with stable operating cash flow.
Mainland also held sufficient cash on hand and had unutilized banking facilities amounting to approximately HK$246.9 million and HK$579.5 million, respectively, at year-end.
“In 2022, geopolitical tensions, slowdown of economic growth in major markets such as the United States and Europe, plus central banks around the world attempting to curb inflation by raising interest rates added burdens on the economy recovering from the COVID-19 pandemic,” the company stated in its annual report summary. “Retailers becoming more cautious in procurement, coupled with rising production costs, and logistics and transportation in chaos from strikes at various ports made the business environment even worse. Nevertheless, capable of quick production and delivery, the Group’s Manufacturing business gave full play to its production technology advantages in the challenging operating environment and obtained a large number of quick-turn orders. As for the Trading business, it actively responded to market changes, strengthened its product portfolio and maintained resilience in operation. As such, the Group’s total sales volume continued to grow vigorously with both revenue and net profit reaching a new high.”
The Manufacturing Business segment saw revenue increase 33.6 percent to HK$1.13 billion versus HK$844.3 million in 2021. For the year, the share of revenue contribution from the Manufacturing Business to the Group’s total revenue increased to 60.2 percent from 52.8 percent in 2021.
The Manufacturing Business manufactures headwear for sale to its Trading Business as well as to external customers. The principal manufacturing facilities are located in Bangladesh and Shenzhen and China. Customers are mainly located in the U.S. and Europe.
The company said Bangladesh’s local currency, Taka, depreciated sharply during the year, and the segment’s cost of sales dropped. During the year, the Bangladesh factory also moved forward with its expansion plan involving the construction of new production facilities and the relocation of a warehouse. As for the factory in Shenzhen, it focused on the design, development and production of high-end products and supporting the Group in material procurement and production techniques.
Gross profit margin in the Manufacturing Business rose to 34.7 percent of sales, 5.9 percentage points more than that in 2021. The segment’s operating profit surged 77.0 percent to HK$309.8 million from HK$175.0 million in 2021.
As at 31 December 2022, the Bangladesh and Shenzhen factories had around 9,000 and 300 employees.
The Trading Business segment revenue for the year was HK$746.9 million in 2022, flattish to the 2021 level, accounting for 39.8 percent of the Group’s total revenue, compared to 47.2 percent of revenues in 2021.
The Trading Business is represented by the trading and distribution of headwear, apparel, small leather goods, bags, and accessories operating through Drew Pearson International (Europe) Ltd., which focuses on the Europe market, and H3 Sportgear, LLC, San Diego Hat Company and Aquarius, Ltd which focus on the U.S. market. The Group also engages in an e-commerce business focused mainly on the U.S. market.
The Group’s subsidiaries boast a comprehensive product portfolio of its own brands and licensed products. During the year, to seize post-pandemic opportunities in the European and American markets, the segment restructured its product portfolio to promote business development.
“Affected by frequent strikes in Europe and the United States and repeated logistics shutdowns at ports, a large number of containers with imported cargo were stranded at port and in warehouses,” the company explained in its annual report summary. “The Group had to time and again revise shipping routes to cope, which led to an increase in sales and management expenses of the business.”
The issues during the year resulted in an operating loss, including impairment of goodwill, of HK$59.1 million in 2022, compared to profit of HK$11.6 million in 2021. During the year, the Group made HK$22.5 million for the impairment of the goodwill of H3 Sportgear LLC.
“Looking ahead, with the Russian-Ukrainian conflict unresolved, inflation lingering on high in the European and American markets, the market is full of uncertainties,” the company summarized. “Despite that, as consumer spending has continued to grow and demand continues to be strong, retail companies have a good window to clear inventories built up from shipping halt last year. Retailers are expected to resume ordering in the middle of this year, which means sales are likely to steadily climb.”
Mainland said the pandemic and stagnant logistics have turned consumer goods buyers to quick-turn orders in smaller quantities and with short production cycles.
“They have been more inclined to work with manufacturers who afford high production flexibility, so they can purchase less at a time and lessen inventory,” Mainland continued. “As one of the few manufacturers capable of quick turnaround manufacturing in the headwear market, the Group is well poised to benefit from the strong demand in the quick-turn orders market.”
To meet customer demand, the Group said it would continue to optimize the deployment of production capacity and improve efficiency. In Bangladesh, the Group’s expansion plan, which includes building new production facilities and relocating warehouses, is almost completed with operations expected to start in the second quarter of this year. Having an additional 100 new embroidery machines and about 3,000 workers, the new factory when in operation will boost the Group’s production capacity by 20 percent.
In addition, the Group also plans to build a manufacturing base in Mexico to further bolster its production capacity for handling quick-turn orders, as well as explore new customer sources. In early March this year, the Group signed a collaboration agreement with the relevant local government in Mexico and related construction is about to begin and is expected to be completed by the end of this year, and production will take place afterward in stages. As the factory in Mexico will be in a free trade zone less than two kilometers from the U.S. border, the Group expects to be able to deliver orders to the U.S. much faster, saving much of the logistics costs and import duty, when the factory is in operation. The Group said it would have a more obvious advantage in handling quick-turn orders.
To tackle the operating challenges brought by soaring raw material prices and wages, the Group will continue to implement various cost control measures. While expanding its supply chain and localizing procurement to mitigate rising cost pressure and disperse supply risks, it will also introduce more automated and intelligent technologies to optimize work processes and staff deployment, and in turn, improve overall production efficiency.
For its Trading Business, efforts will be made to enrich its product offerings and operating the Group’s own brands and licensed products will be its focus. The Group believes after the business segment is restructured, it can better control sales and administrative costs, hence improving profitability and having a solid foundation for sustainable growth.
“Over the past 36 years, the Group has ridden out various economic cycles and challenges and become a market leader in the headwear manufacturing industry,” Mainland said. “With market leadership, a well-thought-out production layout, a balanced product portfolio and shrewd business sense, the Group remains confident of its ability to weather any harsh conditions and create long-term value for its customers and shareholders.”
Photo courtesy G3 Sports
