Market Overview
In 2023, the business environment for apparel original equipment manufacturers (OEMs) was full of challenges. The main headwinds in the market were high inventory of brand customers, leading to a significant slowdown in their overall procurement, and relatively weak consumer spending because of high inflation.
The high inventory problem was the result of aggressive order placing by brand customers owing to positive sales forecasts after the end of pandemic and the reopening of countries around the world in 2022. To avoid supply shortages caused by logistics delays, brand customers generally placed orders at a faster rate than actual sales growth. However, with the weaker-than-expected post-pandemic economic rebound in 2023, most brands struggled with rising inventories and a significant hike in the inventory-to-sales ratio. Despite the positive sales figures in 2023, our brand customers adopted a high inventory adjustment strategy and significantly decreased their procurement to streamline inventories.
High inflation, especially in developed countries, squeezed personal consumption spending on discretionary consumer goods, and end consumers tended to select lower-priced alternatives for apparel. Demand from the USA saw the most significant drop. According to data from the International Trade Administration of the USA Department of Commerce, the amount of apparel imported by the USA decreased by 24% year on year.
From the positive perspective, however, both influences were mitigated in the second half of 2023. First, the pace of procurement gradually returned to normal, as most brand customers drove the inventory-to-sales ratio back to a healthy range after launching broad-based promotions. And second, personal incomes increased, and the overall economy became more resilient, which prevented a further decline in consumption.
Business Review
Owing to the external environment factors mentioned above, the Group’s performance basically stabilised in the second half of the year after the drop in the first half. The Group captured solid demand growth in the Chinese market, and sales to Asia Pacific region outperformed all other regions.
The Group’s revenue for the year ended 31 December 2023 was US$2,177 million (2022: US$2,491 million).
In contrast to the headwinds in the apparel market, the Sweater segment delivered solid growth during the year. The record-breaking performance of the Sweater segment was attributable to an improved product mix and growing demand from sports brand customers. Transforming from top to bottom products, such as skirts and pants, and from traditional sweaters to performance sweaters suitable for sports, the Sweater segment was on the diversification expansion track. Leveraging the synergy of the Group’s sportswear development, the Sweater segment also broadened its customer base, driving further growth in sales.
Proactive cost control and automation advances led to an increase in the Group’s gross margin despite lower sales. The gross margin rose to 19.2% (2022: 18.6%).
With wider application of automated equipment, the Group made sustainable improvements in production through increased employee efficiency and streamlined production processes through re-layout of factory. Also, the Sportswear and outdoor apparel segment, which was a key development focus of the Group, benefited from a steep learning curve and achieved decent margin improvement. The Group continued to promote strategic partnerships and started to develop a vertical integration business model with its sports brand customers.
Benefiting from efforts to streamline the cost structure, the Group’s net profit margin increased at the same time, rising to 7.5% (2022: 7.0%). Net profit for the year was US$164 million (2022: US$173 million).
As the Group had anticipated a temporary downturn in market demand in 2023, it scaled down investment related to capacity growth of garment production while maintaining sufficient investment in vertical integration development. The Group actively pursued the innovation and upgrade of two fabric factories it acquired, one in Vietnam and one in Bangladesh. Capital expenditure for the year ended 31 December 2023 was lower at US$69 million.
The Group’s strong core competitiveness allowed it to effectively withstand market turbulence. The Group maintained stable cash flow and had record high net cash of US$543 million at the end of the year under review. The Group decided to increase the dividend payout ratio, continuing to uphold the practice of sharing its operation results with shareholders. The Group has resolved to propose a final dividend of HK13.0 cents per ordinary share (2022: 11.8 cents). Together with the interim dividend declared and paid, the total dividend per ordinary share for the year ended 31 December 2023 will amount to HK18.0 cents (2022: 16.8 cents), representing a distribution of 40% of the Group’s net profit for the year ended 31 December 2023 (2022: 35%).
The Group completed its third Global 5-Year Sustainability Targets in 2022 and initiated a new chapter in 2023, titled the Crystal Sustainability Vision 2030 (“CSV2030”), which refers to the United Nations Sustainable Development Goals and takes into account stakeholder concerns and industry traits. Building on the 16-year sustainability foundation, CSV2030 aims to address significant issues related to the apparel industry that have a greater impact on our environment, people and communities. The Group and all its factories have been making a concerted effort to follow the net zero roadmap. The Group plans to implement about 180 short- and long-term conservation measures related to improving energy efficiency. In 2023, the Group installed 4.2 MW of solar photovoltaic (“PV”) capacity, bringing its total PV capacity to 12MW, triple that in 2021.
The Group’s sustainability efforts continued to gain notable recognition in various sustainable domains. The Group won the Distinction Award in the Hong Kong Management Association’s Hong Kong Sustainability Award 2023 and received the Grand Award in Excellence in Social Positive Impact in the Hong Kong ESG Reporting Awards 2023, along with commendations for the Best ESG-Mid-cap, the Excellence in Environmental Positive Impact, and the Carbon Neutral Award.
Outlook and Prospects
Entering the first quarter of 2024, the market continued the positive recovery that started in the second half of 2023. With all segments recording higher shipments year on year, the Group has greater confidence in improving performance in 2024. On the back of a stable macroeconomic environment, the Group’s order demand is expected to achieve double-digit growth.
From a market perspective, brand customers are more active in building new product series after going through the destocking phase. The Group is committed to leveraging its comprehensive product line and co-creation business model, especially its advantages in printing technology and expertise in women’s wear, to seize the opportunity of a market rebound and increase its market penetration.
The Group’s production efficiency is expected to continue to improve. The Group will continue to focus on upgrading and implementing automation to provide more flexibility to meet its customers’ orders with more challenging requirements and thus further accelerating the gain of market share. Successful models and experience will be shared among the Group’s production hubs in different countries to create sustainable optimisation of production.
The vertically integrated model is also expected to boost the Group’s development. With the success of onboarding synthetic fabric products with brand customers, cotton-based fabric products are going through the certification process. Since cost and timely delivery are core concerns for customers, the Group will continue to increase its fabric output and increase the proportion of garments supplied with fabrics from its own mills. The maturity of its own fabric mills and the close cooperation between its fabric and garment factories will greatly facilitate the expansion of the Group’s business in lifestyle wear and sportswear.
The Group’s capital expenditure is expected to be higher than that in 2023 due to vertical integration expansion, continued automation upgrades and digital transformation. Considering the Group’s resilient long-term financial position and growing net cash position, the Board is actively planning to further increase the dividend payout ratio, sharing the growth results of the Group with its valued shareholders.