Market Overview
The global economy continued to recover moderately in 2024, with low- to mid-single-digit growth in the gross domestic product (GDP) of the major economies, according to the International Monetary Fund (IMF) and the World Bank. The business environment for apparel original equipment manufacturers (“OEMs”) rebounded resiliently, as most brand customers ended the destocking cycle and adjusted their inventory strategy, moving their procurement quantity in line with their sales growth. The high inventory concerns that had weakened the purchasing sentiment of brand customers were largely resolved during the period under review.
Brand customers raised their supply chain requirements as they resumed their procurement pace. They preferred to place smaller orders and request shorter lead times to avoid excess inventory and maintain flexibility in response to market feedback. This demanded faster responsiveness from OEM management and stronger execution from the production teams.
The sports and outdoor trend increased demand for and sales of functional, comfortable, and novel sportswear. Sweater and intimate products also benefited from trend, with the introduction of more sporty design elements. Denim demand recovered from the downturn caused by less preference for durable clothing during the pandemic. Both the return of the fashion appetite and the innovation of lightweight denim products for warmer weather boosted denim demand.
Business Review
As a leading garment manufacturer, the Group’s core competitiveness enabled it to seize the opportunity of the market rebound and deepen its strategic partnerships with brand customers. Leveraging its comprehensive product portfolio and global capacity layout, the Group achieved sales growth across all business segments and in all key regions, including Asia Pacific, North America, and Europe.
The Group’s revenue for the six months ended 30 June 2024 increased by 8.4% to US$1,094 million compared to the same period last year (six months ended 30 June 2023: US$1,009 million).
In addition to the improved market environment, cross-selling of products and the co-creation model contributed to the growth of its business.
– Cross-selling of products among brand customers: The Group has a comprehensive product mix and can deliver an integrated product portfolio to meet the needs of brand customers in different apparel fields. For example, the Group grew all five key categories with its largest brand customer and consistently increased sales of sweaters through orders from key sports brand customers.
– Co-creation business model: Throughout the product origination and execution process, the Group initiates product ideas for its customers, as well as transforms customer concepts into product designs, develops and sources raw materials, and innovates industrial processes to optimise production costs. For instance, the Group developed hot-selling pants with its largest brand customers through an advanced sweater knitting technique and co-created new graphic designs with a leading sportswear brand, which received encouraging feedback from the market. This enhanced the loyalty of its brand customers and supported the Group’s efforts to increase market share.
Moreover, the current growth has not fully revealed the Group’s potential. The Group faced a bottleneck in capacity expansion, mainly because of the difficulty in recruiting additional workers in the first quarter of the year. The Group responded promptly by optimising production planning and scheduling, and the replenishment rate accelerated significantly in the second quarter after substantial targeting efforts had been spent on recruitment. However, the worker shortage still affected production output and the delivery time of some orders, as training required a considerable amount of time, so there was a minimal contribution from the additional manpower in the first half of the year.
Owing to improved production efficiency, the gross profit grew faster than revenue. The gross profit for the six months ended 30 June 2024 increased by 10.8% to US$213 million (six months ended 30 June 2023: US$193 million), and the gross profit margin increased to 19.5% from 19.1% in the same period last year.
The Intimate segment and the Sportswear and outdoor apparel segment were the main drivers of the Group’s gross margin improvement. The Sportswear and outdoor apparel segment achieved continuous and resilient gross margin growth leveraging its more specialised sportswear manufacturing experience: evolving from sewing to bonding and providing high-quality seamless products. The Intimate segment’s gross margin increase benefited from the low base in the same period last year.
The net profit margin increased along with the improvement in the gross profit margin. The net profit margin improved from 7.3% to 7.7% year on year, resulting in a 13.6% increase in net profit for the six months ended 30 June 2024 to US$84 million (six months ended 30 June 2023: US$74 million).
The Group continued to invest in vertical development, automation upgrades, and sustainability. Digital transformation was another key investment focus, aimed at streamlining the Group’s cost structure through equipment optimisation and data analytics, enhancing our services and delivery through fast responsiveness and customer relationship management, and maximising our operational potential through artificial intelligence and production data accumulation. Capital expenditure for the six months ended 30 June 2024 was US$52 million (six months ended 30 June 2023: US$33 million).
With better visibility regarding future cash flow and a net cash position of US$538 million at 30 June 2024, the Board resolved to increase the payout ratio to 60% and declared an interim dividend of HK13.8 cents per ordinary share (six months ended 30 June 2023: HK5.0 cents).
Outlook and Prospects
The Group has full confidence in its business development in the second half of the year, coming mainly from the following:
– The Group largely resolved the manpower shortage that limited business expansion in the first half of the year. By implementing various measures to attract and retain talent, the Group hired 5,000 more employees in the late second quarter, increasing its total workforce to 70,000 at the end of the first half of the year. The Group will continue to increase manpower and ramp up capacity.
– The Group has additional chase orders on top of the original projections. Since brand customers shifted their procurement strategy to smaller orders, they are out of stock or have low inventory for some popular product series. There is a growing need for brand customers to place additional chase orders to meet market demand in sportswear, sweater, and lifestyle products.
– The Group will benefit from economies of scale as capacity increases in the second half of the year. The Group’s operational efficiency is expected to grow along with output, improving profit margins.
The Group believes that investing in digital transformation, automation, and vertical development will improve its competitive edge and create sustained returns. Capital expenditure in the second half of the year will therefore be higher than that in the first half of the year.
Given its satisfaction with its healthy balance sheet and confidence in future cash flow, the Group aims to share its operation results with all shareholders and improve shareholder returns.