Yue Yuen Industrial (Holdings) Ltd. recorded revenue of $10,105.4 million in 2019, representing an increase of 4.2 percent, compared with the previous year. Profit attributable to owners of the company declined by 2.1 percent to $300.5 million, as compared to $307.1 million recorded for the previous year.

Basic earnings per share decreased by 1.1 percent to 18.64 US cents compared with 18.84 US cents for the previous year. Excluding all items of non-recurring nature, the recurring profit for the year ended December 31, 2019 declined by 13.3 percent to $282.3 million, compared to a recurring profit of $325.7 million for the previous year. For the year ended December 31, 2019, the Group recognized a non-recurring profit of $18.3 million, as compared with a non-recurring loss of $18.5 million for the previous year.

Revenue
In the year ended December 31, 2019, the revenue attributed to footwear manufacturing activity (including athletic shoes, casual/outdoor shoes and sports sandals) increased by 3.1 percent to $5,557.9 million, compared with the previous year, whereas the volume of shoes shipped slightly decreased by 1.1 percent to 322.4 million pairs and the average selling price per pair increased by 4.3 percent to $17.24 per pair, as compared with the previous year primarily due to the Group’s efforts to optimize customer and product portfolios.

The Group’s total revenue with respect to the manufacturing business (including footwear, as well as soles, components and others) was $6,000.6 million in 2019, representing an increase of 2.0 percent as compared to the previous year.

In the year ended December 31, 2019, the revenue attributable to Pou Sheng, the Group’s retail subsidiary, increased by 14.9 percent to $3,933.0 million, compared to $3,421.7 million in the previous year. In RMB terms (Pou Sheng’s reporting currency), revenue increased by 19.9 percent to RMB27,189.8 million, compared to RMB22,677.4 million in the previous year. As of December 31, 2019, Pou Sheng had 5,883 directly operated retail outlets and 3,950 stores operated by sub-distributors in China.

Gross Profit
In the year ended December 31, 2019, the Group’s gross profit increased by 2.7 percent to $2,513.1 million. This increase was mostly attributed to Pou Sheng, contributing to the higher revenue growth thanks to improved sell-through and the robust sporting goods market in China.

The gross profit margin of the Group’s manufacturing business contracted by 1.0 percentage points to 18.5 percent as compared to that in the previous year. The decrease in the gross profit margin for the manufacturing business was primarily due to a combination of increased product complexity resulting from the current ‘retro fashion’ trend, growing demand for flexible production set-up such as dual-sourcing from different countries, as well as shifting production facilities among countries. It also related to the Group’s investments in manufacturing optimization for its sustainable growth (including higher levels of automation and SAP ERP system implementation), which resulted in temporary low efficiencies at some of its production facilities.

Pou Sheng’s gross profit margin during the year under review expanded to 34.1 percent, compared to 33.5 percent in the previous year, which was attributed to the improvement in product and channel mix, sell-through and discounts.

Selling and Distribution Expenses and Administrative Expenses
The Group’s total selling and distribution expenses for 2019 amounted to $1,222.1 million (2018: $1,160.1 million), equivalent to approximately 12.1 percent (2018: 12.0 percent) of revenue. Administrative expenses for 2019 amounted to $682.7 million (2018: $658.3 million), equivalent to approximately 6.8 percent (2018: 6.8 percent) of revenue, remaining stable.

Non-recurring Profit
For the year ended December 31, 2019, the Group recognized a non-recurring profit of $18.3 million, which included a net gain of $18.6 million from the disposal of Texas Clothing Holding Corp. and together with its subsidiaries (the “TCHC Group”) and a net gain of $8.4 million due to fair value changes on financial assets at fair value through profit or loss (“FVTPL”). By contrast, for the year ended December 31, 2018, the company recognized a non-recurring loss of $18.5 million, which included a net loss of $23.4 million due to fair value changes on financial assets at FVTPL that were partly offset by one-off gains arising from the disposal of associates and subsidiaries.

Significant Investments and Material Acquisitions/Disposals
In 2019, the share of results from associates and joint ventures was a combined profit of $52.0 million, compared to a combined profit of $39.5 million in the corresponding period of last year. During the year under review, the Group disposed of its entire interest in TCHC Group. The disposal is part of the company’s efforts to focus on its core business.

Prospects
Heading into 2020, the Group’s manufacturing and retail businesses are facing a more diverse range of challenges. In addition to existing uncertainties already impacting the manufacturing business, particularly shifting international trade policies and rapidly changing consumer trends, the recent novel coronavirus (COVID-19) pandemic around the globe has significantly impacted the Group’s operations and will negatively impact its revenue and results in the first half of 2020.

In China, the government’s response to the pandemic resulted in the temporary shutdown of the Group’s production facilities in China for several weeks following the Lunar New Year holiday. As of the reporting date, most of the Group’s facilities have resumed production. In other countries, the Group’s operations ranging from its production sites to its supply chain in China and other countries have also been adversely affected. It will take a period of time for the Group’s production bases to return to normal levels.

For the retail business, the COVID-19 pandemic caused Pou Sheng to temporarily close most of its retail stores in China during the key Lunar New Year shopping season and throughout most of February. Given that the revenue of Pou Sheng is mainly derived from the sales of sportswear in brick-and-mortar retail stores, it is expected that the temporary store closures will have a significant impact on its revenue and results for the first half of 2020.

Other than this, the Group will continue to adjust its production according to market seasonality as well as diversified capacity allocation among different countries, which will, in the short term affect its operating efficiency. It is critical that the Group continues to demonstrate flexibility as one of its core competencies as changing consumer trends result in shorter lead times, increased seasonality, and higher product complexity.

The Group will continue to accelerate the pace of capacity migration to cost-competitive regions as it responds to the addition of a 7.5 percent tariff (recently lowered from the original level of 15 percent) by the US on footwear exported from China, the uncertain global environment and increasing demand for flexibility. This includes shifting capacity from China to Southeast Asia, as well as shifting production facilitates between Southeast Asian countries, while being mindful of the labor supply situation in the countries where the Group operates, especially in Vietnam. The Group is actively monitoring the macroeconomic and geopolitical situation.

The Group will continue to leverage on its core strengths and competitive edges to overcome these short-term challenges and safeguard its sustainable and steady growth. This includes investing in and implementing ERP data management systems such as SAP to improve the efficiency of the Group’s business processes.

The Group will continue to enhance its product development and innovation capabilities and explore other value-added and margin-accretive opportunities for vertical integration to tap new markets, creating longterm synergies for its businesses.

Aside from the current short-term challenges, the Group remains optimistic about the long-term growth prospects for sportswear retailing, given increasing health awareness, higher sports participation rates and the growth of the ‘athleisure’ trend in the Greater China region. Pou Sheng’s omnichannel strategy, which has been extended to include sports services content, will also continue to benefit from the Chinese government’s supportive policies. It will continue to invest in upgrading its store formats, opening new concept mega stores and integrating digital and physical channels and inventories to reinforce the consumer experience and stimulate higher-margin sales, while also addressing dynamic consumer shopping habits.

Lu Chin Chu, chairman, commented, “The short and long-term challenges we are facing means it is even more important for us to position ourselves as an indispensable strategic supplier and partner to global brands. Continued investment in innovation, digitalization, process re-engineering and automation is essential. This investment in our capability ensures that we can remain our irreplaceable merit in the market while deepening our valued relationships with major sporting brands around the world.”

Photo courtesy Yue Yuen