Group financial performance
Against the background of slowing global trade and the stand-off between the USA and the PRC during 2018, revenue growth of the Group continued satisfactorily as a result of the positive market share gains by our key customers. The Group's revenue increased by 14.6% to US$2,496 million (2017: US$2,178 million) while gross profit increased by 6.2% to US$470 million (2017: US$442 million) reflecting the increased costs. Consequently, the rate of gross margin for the year ended 31 December 2018 was 18.8% (2017: 20.3%).
Two factors contributed in large part to the decrease in gross margin. One was the appreciation in the RMB, which started at the beginning of 2018 and led to a sharp increase in our operating costs in the PRC, in the first half of the year. This impact was most significant in our Denim business where production capacity was mostly concentrated in the PRC at that time. The second factor was the shortage of labour in the PRC that caused the Group to accelerate the pace and scale of the expansion of our overseas' production capacity in the second half of the year. The Group experienced higher than previously budgeted increases in the costs of this additional capacity, resulting from the inevitable sub-optimal efficiency and greater costs of training new, initially inexperienced workers at these new facilities. The gross margins of the product categories in which the Group expanded overseas' capacity more rapidly than originally planned, such as those of the Denim, Intimate and Sportswear and outdoor apparel business, were adversely impacted by these start-up costs. Net profit remained flat at US$149 million (2017: US$149 million), with a net margin of 6.0% (2017: 6.8%).
The Board has recommended to pay the Shareholders a final dividend of HK8.4 cents per ordinary share for the year ended 31 December 2018. Taken together with the interim dividend of HK4 cents per ordinary share, the total dividend for the year amounts to HK12.4 cents per ordinary share representing a distribution of 30% of the Group's net profit for the year ended 31 December 2018.
Diversified product portfolio
Crystal International is unique in terms of its wide product portfolio. The Group has five product categories, namely Lifestyle wear, Denim, Intimate, Sportswear and outdoor apparel, and Sweater. This portfolio of diversified product categories is unusual amongst apparel manufacturers, globally. The range of product offerings, allows the Group to serve our branded customers more effectively, by providing them with a one-stop solution to support their business development needs while also providing the Group the potential to grow its business by recognising and achieving cross-selling opportunities. By taking advantage of these opportunities, we expand our sales beyond the single product category into multiple categories, to the benefit of our key customers and their brands. This situation gives the Group the potential over the longer term to benefit from both strong gains in market share and to be positioned uniquely as a competitive market leader during the period as the industry continues to consolidate.
For the year ended 31 December 2018, the revenue contribution from each product category was as follows:
Lifestyle wear continued to be the largest contributor of revenue, both in terms of magnitude and growth rate, growing 19.2% in 2018 and was the major product category contributing to the overall 14.6% growth in the Group's revenue. This indicates the resilience of our overall revenue growth that is one of the significant advantages derived from our multi-category product portfolio.
Diversified production base - the importance of Vietnam
The Group has many years' experience operating scalable production facilities in various international locations. Since the Group ventured into Vietnam in 2003, we have become one of the largest international corporations there, in terms of export volume, for apparel. This position is a combination of early mover advantage and long years of trade and operating experience. The Group has a multi-country manufacturing platform, one of the key components of our ability to attract and retain customers, since we are well positioned to support our customers' expansion plans and their various growth strategies in diversified markets.
The Group's multi-country manufacturing platform spans five countries, namely Vietnam, the PRC, Cambodia, Bangladesh and Sri Lanka. Vietnam is now the largest production base for the Group. Overall, 66% of our production capacity was outside the PRC, in terms of revenue contribution, for the year ended 31 December 2018 (2017: 61%). The share of revenue by region was as follows:
Accelerated expansion in Southeast Asian countries - to provide benefits in the longer term
The Group believes Southeast Asia is the most suitable location for our capacity expansion strategy. This expansion has enabled the Group to meet the increasing demands from our customers during 2018. Our production capacity in Southeast Asia has allowed us to benefit from the lower costs of operations, in terms of labour supply, skillsets and wage levels of local workers as well as taxation benefits, foreign exchange fluctuations and the like. Therefore, the Group accelerated its planned expansion in terms of both the construction and the scale of the projects in Southeast Asia, during the second half of 2018. The Group realised the accelerated migration would result in margin pressure across our major product categories in 2018, due to our having to incur additional start-up costs in the new production facilities in the near term. The efficiency of the new production facilities are expected to improve steadily and benefit the Group in the longer term.
Future prospects and outlook
The Group plans to continue expanding its production capacity, in strategic locations in Southeast Asia. The Group believes this is a sensible strategic direction that will lay a solid foundation for the future growth of our business. In contrast, the increasing costs of operating in the PRC, caused by the shortage of labour, wage increases and currency fluctuations, with further uncertainties arising from the prolonged trade disputes and negotiations between the USA and the PRC. These uncertainties are expected to continue and result in increased demand from our branded customers, enabling us to seek further alternative overseas production capacity.
The fulfilment of our branded customers' demand is a key objective for the Group in 2019. Therefore, the Group will review its production strategies and processes to place even greater emphasis on production planning and the reallocation of customers' orders. Our customers welcome these initiatives since they will strengthen our ability to support their growing demand and enable us to respond more effectively to changes in their global sourcing strategies, in the longer term. Currently, the Group has six projects providing overseas expansion, with four being located in Vietnam, one in Bangladesh and one in Cambodia.
The further improvement of operating efficiencies continues to be one of the Group's key strategic objectives. Yet, the Group realises that business growth will be hindered, shorter term, in achieving that objective, by the reallocation of customers' orders. This reallocation is also anticipated to result in other associated costs being incurred in the near term.
In addition to nurturing business growth opportunities, and maintaining our position as a leader in the market, the Group will revise our cost structure through cost engineering and seeking to use automation to enhance our efficiency and effectiveness throughout our operations.
Awards and recognitions
Being an industry leader in product quality management, the Group is committed to providing our customers with high quality and reliability. This general approach is recognised by key customers. Listed below are samples of some of the recognition and awards that we have received from our major business partners and industry organizations in 2018:
|UNIQLO Co. Ltd.||Year 2018 UNIQLO Quality Supplier Award|
|H&M||The Best Flash Speedy Supplier
Best Customer Perceived Quality
Best Sustainability Performance
|WWF Hong Kong||Denim Factory in the PRC
Platinum Label -
Low Carbon Manufacturing Programme (LCMP)
|Ministry of Planning and Investment in Vietnam||Certificates of merit to collectives and individuals who have excellent achievements that contribute to Vietnam's development of foreign investment during the past 30 years|
|Vietnam Association for Conservation of Nature
|Certificate of merit to outstanding organisations and individuals in environmental protection work|
This recognition by way of awards contributes to our determination to ensure full compliance of our products and service with the most stringent benchmarks and specifications of our key customers. It also contributes towards the Group being able to benefit from consolidating our list of suppliers as we comply with tightening regulations and the increasing requirements relating to corporate sustainability, in the fast-changing apparel industry.