The principal activities are the manufacture and sale of garments. Business is principally located in the United States of America, Canada, Asia and Europe and others.
The Group's loss attributable to shareholders for the 6 months ended 30-09-2019 amounted to HKD 30.49 million. Basic loss per share was HKD 0.0657. No dividend declared. Turnover amounted to HKD 394.8 million, a decrease of 20.5% over the same period last year, gross profit margin up 4.0% to 21.3%. (Announcement Date: 28 Nov 2019)
Business Review - For the six months ended September 30, 2019
Trade growth experienced a dramatic slowdown since the second half of 2018 due to increasing protectionism and the slump in global demand. Compared with last corresponding period, we have seen even more uncertainties in the global economy. Economic outlook was clouded by the escalating trade war between the United States (“US”) and China, a disorderly Brexit and geopolitical tensions in the Middle East. These escalating global issues have created an increasingly volatile playing field and have led to a more fragile global economy. We have started to see slowdown in growth in all the major developed economies, including the US and China which are our major markets.
The whole fashion and apparel industry is operating under a set of circumstances no more favorable than that of last year as global trade is roiled by increasing uncertainties and geo-political tensions. While the threat of tariffs on apparel kept escalating, our OEM customers supplying apparel to the US market have reacted by either cancelling or postponing their sourcing orders from China in an effort to reduce their dependence on China as their primary supply chain ecosystem.
During period of economic downturns, we became even more proactive to ongoing cost and cash flow control, not only to stay survival but to regain competitiveness in the market place. We continued to adjust our business models and take effective measures and determined actions to streamline our loss-making distribution networks and manufacturing operations.
In view of the escalating trade war between the US and China which was not expected to end any time soon, we further strengthened the consolidation of production capacities in China to target for better cost savings and effectiveness in the long term. In the second quarter of the period under review, we commenced to merge Dongguan production facilities and workforces into our Zhongshan production plant. We have paved away for a smooth integration and consolidation of our manufacturing facilities in China without disruption to our production schedule. Severance and redundancy payments arising from such strategic consolidation were mostly reflected in the results of the interim period under review.
For our China retail business, there was a decrease of about 30 unprofitable or non-performing retail shops either under self-management or operating as franchise or cooperative partnership during the 6 months’ period under review. These initiatives prevented future losses of the non-performing units and reduced our cost base. In the current period, we achieved substantial costs savings which outpaced and offset the effects of decline in revenue. Over time, we aim to transform ourselves into a leaner and more agile platform to face the upcoming challenges and embark on faster growth.
During the period under review, our Vietnam manufacturing operation continued to grow and improve in terms of production output and results as planned. Besides our sophisticated channels for raw materials essential for production and efficient logistics networks interlinking the whole supply chain established in previous years, we set up a new sourcing office in Vietnam in the period for both apparel and accessory products business. We have a team of seasoned local management who has adapted to our company culture and mindsets. We are making an effort to further expand our production facility in Vietnam, and we believe a solid manufacturing base in Vietnam will buttress the foundation for our continued success and longevity of our core business.
Sales to North America
Sales to North America decreased by 8.4% to HK$229.6 million, and accounted for 58.2% of the Group’s total revenue, with the sales to the US market alone accounted for 64.5% of sales in this segment.
The US Bureau of Economic Analysis reported the real GDP growth of the US was 2.0% and 1.9% respectively in the second and third quarter of 2019, both readings were well below this year’s first quarter GDP figure of 3.1%. The successive decrease in the real GDP over the consecutive quarters of the year suggested that the economy was slowing after the growth spurts over the past few years. Business confidence remained skeptical because plenty of the uncertainties remained especially the unforeseen outcome of the trade war which posed the highest downside risk to spending, political uncertainties and a gloomy outlook on global demand growth. Against this backdrop, the Group’s sales to the US during the period was negatively affected and decreased notably by 14.6% to HK$148.2 million. On the other hand, Canada registered a stronger than expected GDP growth rate of 3.7% in the second quarter. Unemployment and inflation remained low, together with a lower mortgage interest rate and a stabilized housing market, all were supportive for economic growth and better consumption confidence. Accordingly, the Group’s sales to Canada during the period recorded a modest growth of 5.6% which amounted to HK$81.4 million.
Sales to Asia
Sales to Asia decreased significantly by 33.3% to HK$151.2 million, and accounted for 38.3% of the Group’s total revenue. The decrease in sales to Asia was mainly attributable to the 32.3% decrease in sales to the China market, which alone contributed a sales amount of HK$147.4 million.
Chinese economy began to suffer as trade war prolonged. According to the National Bureau of Statistics of China, national GDP expanded at 6.2 % in the second quarter and 6.0% in the third quarter of the year respectively, both figures marked the three-decade low. The International Monetary Fund (the “IMF”) predicted the GDP growth of China would even slow to 5.8% in 2020, falling short of official target. The weak economic prospect has negatively affected domestic consumption appetite.
Meanwhile, the government official figures have shown a broad-based slowdown was taking place in China. Chinese exports shrank 3.2 per cent in September from a year ago, while its imports tumbled by an even larger percentage, underscoring domestic weakness. The political tensions with the US and economic uncertainties have ruined business confidence and there was a notable slowdown in the manufacturing sector and fixed asset investment.
China Retailing Business
Our retailing business in China continued to operate on a platform of e-commerce and physical retail stores in order to extend the reach of our brand both online and offline, with our online sales mainly conducted in collaboration with major online marketplaces such as Tmall, JD.com and VIP. com.
For the period under review, the revenue contributed by the retailing business in China amounted to HK$119.0 million, registering a decrease of about 16.9% as compared to the last corresponding period. The decrease in sales was mainly due to the lower turnover as a result of the restructure of the retailing business platforms, the net decrease of more than 60 retail shops either under self-management or operating as franchise or cooperative partnership as compared to the last corresponding period end, and the overall decline in consumer sentiment as the Chinese economy weakened.
The retailing business recorded an operating loss before tax of HK$3.9 million, representing a decrease of 67.3% compared to HK$11.9 million of the last corresponding period, thanks to our decisive actions to right size the physical retail platforms by closing down unprofitable or non-performing shops or shops operating in non-strategic locations with the wrong demographics, rationalization of cost structure, stringent procurement and inventory control, and high discipline in expense control. Meanwhile, we continued to use our physical shops to build better connection with our customers and sharpen our brand strength, and to optimize omnichannel strategy to drive online traffic to offline stores and give our customers a new shopping experience to regain competitiveness and profitability in the market.
Disposal of a property in Thailand subsequent to the year end As stated in the voluntary announcement made by the Company on 27 May 2019 in relation to the disposal of a property in Thailand, the Company entered into the sale and purchase agreement on the disposal of a factory premises in Thailand which was owned by Tung Thai Fashions Limited, a direct wholly-owned subsidiary of the Company with its operation already discontinued in 2016, at a cash consideration of Thai Baht 42 million (equivalent to approximately HK$10.8 million). The disposal and transfer of ownership of the property was completed on 26 June 2019.
Business Outlook - For the six months ended September 30, 2019
Recent economic data has already pointed to a visible slowdown in the global growth trajectory resulting in a weakening global demand growth. In July 2019, the International Monetary Fund (“IMF”) predicted rising tariffs and the ensuing escalation of trade tensions could reduce global economic growth by 0.5 percent by 2020. Meanwhile, it has slashed its global growth forecast for 2019 to 3 per cent – the weakest expansion since the global financial crisis a decade ago. In September 2019, The United Nations Conference on Trade and Development (UNCTAD) denoted the year 2019 would endure the weakest expansion in a decade and warned of a global recession in 2020 to be a clear and present danger.
While business outlook remains bleak and different sectors face distinct challenges and varying scales of uncertainty, central banks and governments across the world, without exception to China and the US, have actively responded to slowing global growth by necessary fiscal and monetary policies to support their economies.
Whereas slow growth aboard is very likely to take a toll in US export growth posing the biggest downside risk for the American economy. Recent economic data, however, pointed to a strong consumer consumption spending, a resilient job market and an unemployment rate which is still near a half-century low is keeping domestic demand afloat. We believe US market is still generating growth and remain key pillar of the Group’s business.
The Group’s existing manufacturing operations are situated in Vietnam and Zhongshan and are strategically aligned to our business growth strategy to serve our two largest markets and are well positioned to capture a wider global market.
Our Vietnam manufacturing operation will effectively and efficiently expand its production capacity for quality customer with higher profit margin. At present, we are expanding our production capacity by improving productivity and expansion of production lines. We have already invested in technology and automation to increase productivity and will continue to leverage technology to optimize process redesign and streamline production sequences to achieve cost efficiency and operational excellence. Our newly set up sourcing office will grow our exports from Vietnam and widen our scope of business to accessory products. In the meantime, we will continue to explore options of flexible production capabilities by means of outsourcing, joint venture and strategic cooperation or alliance in Vietnam or other South East Asian countries with cost advantage. In the medium to long term, we believe that our Vietnam manufacturing operation is well positioned to support the Group to grow our export sales to the respective member countries and regions under the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Despite the recent diplomatic development and effort of both the US and China to resolve the year-long trade war, there is still no concrete indication of a signing date of an interim “phase 1” agreement between the US and China. The consolidation and integration of production facilities in China into a single centralized production hub in Zhongshan will avoid any dangerous outcome of the trade war which may result in large scale idle facilities if majority of the US customers resort to alternative sourcing outside China. With a centralised and integrated manufacturing platform, we can better leverage on lean management control, automated processes and robotics to enhance productivity and counteract the rising labour costs to maximise efficiency. Besides cost efficiency, speed to market is equally critical to survival and winning in China. Proximity of manufacturing operations enables greater responsiveness at reduced supply chain costs to the local Chinese market which is fast-changing, dynamic and rapidly evolving.
In China, despite the historical low on the GDP indices, retail sales kept growing albeit at a slower rate. Even with the slowdown in economy, clothing market is still expected to be on a growing trend due to the rise of the millennials with higher disposable income, general improvement in living standards, population growth as well as the urbanization. Urbanization will be a mega-trend in China over the next few years and together with infrastructure development, rollout of 5G and the growth of smart cities, they are likely to fuel up growth and domestic demand.
There is no doubt how globalisation and digital technology will continue to shape the retail market in China and the behaviour of its consumers, brands must respond almost instantly to changing trends, realign the product mix and even disrupt their existing business models. Research indicates global online retail apparel market will continue its strong growth compared to traditional brick-and-mortar platforms, with key ecommerce platforms to capture most of the upsides. Our online sales strategy will remain in close partnership with mega online marketplace to leverage their huge market reputability and traffic to foster our market visibility. We will continue to participate in their major marketing and promotional activities at material times to drive sales and popularity, in addition to offering special product variety exclusively to online customers. At the same time, we will continue to refine our omnichannel channels and concentrate our management effort and resources on retail stores with profitable growth potential.
The uncertainties and challenges of the interim period will certainly carry over to the balance of the current fiscal year and 2020. We will continue to assess and navigate our path with caution, and with all the efforts we have built up in the past, we are confident we are already on the right course to a sustainable recovery.
Source: Tungtex (Holdings) (00518) Interim Results Announcement