Yue Yuen reported revenues grew 8.4 percent in the first quarter but earnings slumped 20.9 percent.

The Group recorded revenue of US$2,479.4 million in the three months ended March 31, 2019, representing an increase of 8.4 percent compared to revenue of US$2,287.4 million recorded in the same period in 2018. Profit attributable to owners of the company decreased by 20.9 percent to US$75.5 million, compared to US$95.4 million recorded in the same period in 2018. It was mainly due to a reduction in the share of results from associates and joint ventures, as well as higher finance costs during the period.

During the period, a non-recurring profit totaling US$6.2 million was recognized, which included a gain of US$5.9 million due to fair value changes on financial assets at fair value through profit or loss (“FVTPL”). Excluding all items of non-recurring in nature, the recurring profit attributable to owners of the company amounted to US$69.2 million, representing a decrease of 23.7 percent compared to the same period in 2018.

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Revenue

Total revenue attributable to footwear manufacturing activity (including athletic shoes, casual/outdoor shoes and sports sandals) during the period increased by 6.4 percent to US$1,283.8 million, whereas the volume of shoes produced increased by 6.7 percent to 81.7 million pairs and the average selling price remained stable at US$15.72 per pair, as compared with the same period of last year. As a result, the Group’s revenue with respect to the manufacturing business (including footwear, as well as soles, components and others) during the period was US$1,395.3 million, representing an increase of 5.0 percent

During the period, the revenue attributable to Pou Sheng, the Group’s retail subsidiary, increased by 13.7 percent to US$976.1 million, compared to US$858.5 million in the same period of last year. In RMB terms (Pou Sheng’s reporting currency), revenue during the first three months in 2019 increased by 19.9 percent to RMB6,597.0 million, compared to RMB5,502.9 million in the same period of last year.

Gross Profit

During the period, the Group’s gross profit increased by 8.2 percent to US$624.7 million. This increase was mostly attributed to the strong growth momentum for sportswear sales globally, with Pou Sheng also contributing to the higher revenue growth thanks to the healthy sporting goods market in China. The gross profit of the manufacturing business increased by 2.3 percent to US$253.7 million whilst the gross profit margin contracted by 0.5 percentage points to 18.2 percent as compared to the same period in 2018. The decrease in the gross profit margin for the manufacturing business was primarily due to fluctuating order patterns resulting from changing consumer demand, as well as challenges arising from the investments in manufacturing optimization for sustainable growth, including higher levels of automation and the debut of SAP ERP implementation, which resulted in temporary inefficiencies at some of its production facilities. Additionally, given the uncertainties in the global trade environment, we have and will further adjust production allocation by country in response to the changing sourcing strategies of some brand customers. These measures will require some time and resources to reach best operational efficiency.

The gross profit margin for the Group excluding Pou Sheng (i.e. the manufacturing business and TCHC Group) during the period was 19.6 percent.

Selling & Distribution Expenses and Administrative Expenses

The Group’s total selling and distribution expenses during the period amounted to US$313.9 million (2018: US$288.4 million), equivalent to approximately 12.7 percent (2018: 12.6 percent) of revenue, remaining stable. Administrative expenses for the period were US$158.9 million (2018: US$143.9 million), equivalent to approximately 6.4 percent (2018: 6.3 percent) of revenue.

Non-recurring Profit

During the period, the Group recorded a non-recurring profit of US$6.2 million, which included a gain of US$5.9 million due to fair value changes on financial assets at FVTPL and a gain of US$0.3 million on the deemed disposal of an associate. In the same period of 2018, the Group recorded a non-recurring profit of US$4.7 million, which included a one-off gain of US$4.3 million on the disposal of an associate and a fair value gain of US$0.2 million on financial assets at FVTPL.

Share of Results from Associates and Joint Ventures (“Share of A& JV”)

During the period, the share of results from associates and joint ventures was a combined profit of US$4.7 million, compared to a combined profit of US$15.3 million recorded in the same period of last year.

Disposal of the Texas Clothing Holding Corp.

The Board announced that on May 7, 2019, the Group entered into an agreement with an independent third party to dispose all of its interest in the Texas Clothing Holding Corp. and its subsidiaries (TCHC Group). The maximum total amount which may be received by the Group from the transaction will not exceed approximately US$150.0 million. Immediately after the closing of the disposal, TCHC Group will cease to be a subsidiary of the company and its financial results will no longer be consolidated into the Group’s financial statements.

Based on the audited accounts, revenue of the TCHC Group was US$395.0 million for the year, approximately 4.1 percent of the Group’s consolidated revenue for the year ended December 31, 2018. The net profit after taxation for the TCHC Group was US$17.1 million, approximately 5.0 percent of the Group’s net profit for the year ended December 31, 2018.

The disposal is a part of the company’s efforts to remain focused on its core business. The Group is expected to recognize a gain, net of transaction expenses, of approximately US$3.0 million from the disposal based on the estimated financial information of TCHC Group on the closing date. Up to the closing date, the estimated net proceeds arising from the disposal is approximately US$106.0 million, which will be used for the general working capital of the Group.