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 year ended 31-03-2019 amounted to HKD 94.09 million. Basic loss per share was HKD 0.2027. No dividend declared. Turnover amounted to HKD 965.9 million, a decrease of 3.2% over the same period last year, gross profit margin down 3.2% to 18.7%. (Announcement Date: 28 Jun 2019)
Business Review - For the year ended March 31, 2019
Sales to US and Canada
Sales to the North American countries constituted 49.0% of the Group’s total revenue for the year, amounted to HK$473.5 million representing a year-on-year decrease of 9.1%. Sales to the US alone softened and decreased by 11.8% in the year to HK$317.6 million.
U.S economy started to cool approaching the end of 2018 on the back of a deteriorating economic confidence and a less robust private consumption due to multiple headwinds. According to the US Bureau of Economic Analysis, the real GDP growth of the US recorded a 2.6% annualized rate in the fourth quarter of 2018 which marked a significant slowdown from the middle of the year.
Ever since the Sino-US trade relations became intense in 2018, we have witnessed Vietnam garment exports to the US on the rise. Brought on by years of operating and manufacturing experience, our Vietnam production subsidiary has developed into a competitive manufacturing hub which has become a regional one-stop shop for our customers ranging from material sourcing to logistics and delivery of final products offering a flexible outsourcing alternative to China.
As a result, the demand for manufacturing orders in Vietnam especially from our existing US customers continued to increase steadily in this fiscal year. Production orders originated in Vietnam accounted for an increase of 21.2% in sales dollar amount compared with the last financial year. We managed to safeguard production orders from our existing US customers which would otherwise have been lost due to our customers’ concern over the possible escalating tariffs in the foreseeable future. We have expanded a few more production lines to cope with the increasing purchase orders and we expect overseas orders to increase steadily. The flexible production capacity in our Vietnam production hub allows the group to respond without delay sudden increase in customer orders. It also effectively offsets the loss of overseas customers due to the US-China trade war while mitigating the adverse impact on production costs brought by the wage increase and tighter environmental regulations in China.
Economic growth for Canada eased to 1.8% for the year of 2018, with consumption slowing in response to smaller increase in housing wealth, and both employment and exports moderating as the US growth declined. The Group’s sales to Canada during the year amounted to HK$155.9 million, representing a year-on-year decrease of 2.9%. Nevertheless, Canada remains the third single largest market of the Group.
Sales to Asia
The Group recorded a growth in sales to Asia to reach HK$461.1 million, representing a yearon- year increment of 3.0%. Sales to China remained the largest constituent for sales to Asia accounting for sales revenue of approximately HK$442.7 million, a year-on-year increase of almost 4% and consistently representing over 95% of the total sales to Asia.
In China, the first half of 2018 was marked by notable growth in the consumption market. However, a slowdown was evident in the middle of the year following central government’s regulatory campaigns to curb debt risks and even more so since July when the US government has officially imposed tariffs on goods from China and started the wrestling trade war. Despite the challenging business environments, the mainland China market continued to generate largest revenue contributions to the Group and we expect it to remain so in the near future.
The most imminent difficulties facing fashion and apparel operations in China continued to be rising wages, decreasing population of skilled workforce, tightening government and environmental legislations as well as fluctuations in Renminbi. The Group has been actively responding by constant reviewing of cost structure and timely consolidating and streamlining of organization structures and operations to maintain cost efficiency and effectiveness in order to stay competitive in a difficult environment.
The fast-changing taste of consumers especially from the younger generation has given rise to the flourishing of domestic local brands who are seeking high quality and reliable manufacturers who can respond quickly to their order. Our steadfast efforts to maintain our core competitiveness has allowed our production plants to stay agile and nimble and react swiftly to different and changing orders from our local customers.
Our retailing business was operating under a regime of slowing economic growth and a fiercely competitive market. Business environment took a turn for the worse in the latter half of 2018 following the initial round of tariffs imposed on China by the United States which triggered the lingering trade war. Adding to the challenge is a new group of customers who has a new mode of consumption and without brand loyalty.
Amid all the difficulties in the year ended 2018, the revenue contributed by our retailing business amounted to HK$308.3 million, representing a decrease of 11.0% as compared to the last fiscal year. Such decrease in sales was a direct result of the closing down of non-performing retail stores and the fiercely competitive price pressure.
The retailing business recorded an operating loss of HK$24.6 million (2018: operating profit of HK$1.1 million) which reflected the combined effect of a thinning margin caused by the decrease in sales and increase in discounts against the backdrop of weak consumer sentiment, unseasonal weather and severe competition in online sales platform.
Sales revenue from the retailing business remained driven by e-commerce and online sales which accounted for over half of the total sales of brand business, however, increasing competition from competing websites meant that increased sales could only come along with bigger sacrifice in margins.
Appealing to the next generation of customers is challenging, the Group has partnered with digital retail giants and major online platforms such as Tmall, JD.com and VIP.com and participated actively in online shopping and marketing events. In November, the Group achieved remarkable sales records on Alibaba’s Single Day, so far the largest online shopping day.
China is the largest e-commerce market in the world and is projected to become the world’s largest cross-border e-commerce market by 2020, according to China Internet Watch. On the one hand, the growth and dynamism of China’s e-commerce markets has brought new and innovative ways for businesses to access the huge markets, but on the other hand, the large number of participants also heightened competition and price pressures among the existing players. Besides the traditional online B2C platforms, the explosive growth of online sales in 2018 was also brought about by online platforms displaying innovative business models. The flourishing of social media platforms focusing on internet celebrities and those premium and life style online retailers which sell premium products at an affordable price have served to escalate the intensity of competition to an even higher level.
Business for our self-operated retail shops was also impacted by the dampened consumer sentiment in the second half of the year. The Group decided to streamline the retail operation and close shops which were non-performing and unprofitable.
E-commerce operation park
As stated in the announcement for discloseable transaction made by the company on 30 January 2019 in relation to the disposal of a subsidiary (“the Disposal”), the Company entered into the sales and purchase agreement on the disposal of a wholly owned subsidiary which in turned owned 100% registered capital of Tungtex (Hangzhou) at a consideration of approximately HK$52.4 million. The principal asset of Tungtex (Hangzhou) is the Property which has been developed as an e-commerce operation park. As stated in the announcement, the net proceed from the Disposal would be used for general working capital of the Group and the Company also recommended the payment of a special dividend (the “Special Dividend”), which is subject to the completion, in the amount of approximately HK$5.1 million. Both the Disposal and the payment of the Special Dividend were completed as stated in the announcement of the Company made on 22 February 2019.
The Disposal enables the Company to streamline the business of the Group so that more resources can be allocated to the existing business of the Company and to seek for other potential business and expansion opportunities.
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 year ended March 31, 2019
Going forward, we are still surrounded by uncertainties and instabilities and a looming global economic slowdown threatened by the unpredictable US-China trade relation. The International Monetary Fund already projected slower global growth in 2019. The Group must still strive hard to meet the challenges and to adopt necessary changes for our future developments and long-term success.
Uncertainty about the direction of the economy has made our key customers in the US more cautious. The trade war with China remains a key downside risk.
With geographical presence in Vietnam, we are in a better position to retain and even capture new US customers who are reconsidering alternative sourcing options. The diversified sourcing has mitigated the risk of trade stand-off already escalated and turned uncertainty into opportunity of even a stronger supply chain. The Group will continue to expand and diversify its production and sourcing strategies by production facilities and by forging new strategic alliances in Vietnam or other low-costing sourcing countries.
In the meantime, we remain optimistic on the growth prospect in Vietnam especially after it has become the seventh country to ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which took effect in January 2019, following Japan, Canada, Australia, New Zealand, Mexico and Singapore, with customs duties on 95% of trade in goods due to be removed, including all textiles and apparel. This will allow Vietnam to access nearly 40% of the world apparel import market duty-free.
Being the second largest economic giant, China has responded to the economic slowdown by stepping up extensive fiscal stimulus and monetary easing policies. A salient feature is the focus on more long-term strategies to move the economies towards greater domestic consumption and services, as well as policies that can boost the quality of future growth. Despite the apparent moderation in consumption momentum due to a brewing trade war and the fluctuations of Renminbi, the Board believes long term opportunities will continue to unveil amid short term volatilities.
Our two manufacturing sites located in Zhongshan and Dongguan in China employ cost effective production facilities with extensive experiences serving reputable overseas customers and mainland China local fashion brand, and remain our strong foothold of production to grow the vast mainland China and Canada markets.
In the retail business, we are alert to changes in consumer taste, habits and behaviors and well connect with them, especially with the new generation of customers in popular online platforms. We will also engage more active participation in online promotion and offline marketing events. We think customers’ online shopping is a global phenomenon, but we want to be good at both, combining online with brick-and-mortar experience. Going forward, we will be dedicating more efforts into innovation and digital means to drive better outcomes.
Overall, the trade war is not expected to be resolved within a short period of time, the Group will remain observant of market conditions as well as government policies both at a local and international level. We continue to maintain a cautious stance and will timely adjust our strategic moves to rationalize our business and structure to mitigate possible economic risks and maximize opportunities. In the upcoming year and in the future, we will commit even further and stay focused and hardworking to reshape and prepare the Group to take on the challenge of this new era.
Source: Tungtex (Holdings) (00518) Annual Results Announcement