TURNOVER
The Group achieved record turnover for the year ended 30th September, 1997. Turnover was US$1,414 million compared to US$543 million for the previous year, representing a growth of 160%. The rapid business growth was mainly due to strong demand from our customers as well as the effect of acquisition of the remaining 55% of Pou Yuen Industrial (Holdings) Limited ("Pou Yuen") which was completed in September 1996.
Compared to the unaudited pro forma consolidation for the year ended 30th September, 1996 on the assumption that Pou Yuen had been acquired by the Group on 1st October, 1995, the Group’s turnover increased by 38% from US$1,023 million to US$1,414 million.
Total production of shoes for the year ended 30th September, 1997 reached a record of 74.3 million pairs, representing a growth of 31% as compared with 56.8 million pairs of last year’s pro forma consolidated total production.
In 1997, the Group significantly expanded its production capacity for casual shoes. For the year ended 30th September, 1997, the Group produced 10.2 million pairs of casual and outdoor shoes, being 14% of the total production of shoes in the Group during the year and a growth of 65% against the same categories last year.
As a result of expansion of production capacity in all of its production bases, the Group added 37 production lines during the year. As at the end of September 1997, the Group had 160 production lines located in China, Indonesia and Vietnam.
The Group will continue to aim at increasing its market share in the industry with both existing and new customers as well as by development of product categories, especially casual and specialty sports shoes.
PROFIT
For the year ended 30th September, 1997, the Group’s profit attributable to shareholders increased by 60% from US$99 million to US$158 million. Besides the continued growth of the Group’s business, the significant increase in profit was partly due to the acquisition of the remaining 55% of Pou Yuen in September 1996.
Earnings per share increased by 20% from 19.7 US cents to 23.6 US cents. This reflects the synergy of the above acquisition as well as the healthy growth of the business. Return on equity for this year was 30%.
Compared to last year’s unaudited pro forma results on the assumption that Pou Yuen had been wholly acquired by the Group on 1st October, 1995, the Group’s profit attributable to shareholders increased by 32% as from US$120 million to US$158 million.
In the process of expanding production, the Group has taken necessary measures for cost control and operational efficiency. Therefore, the Group has been able to maintain a reasonable and steady profitability through its sizeable operations and effective management.
FINANCING ACTIVITIES & LIQUIDITY
In June 1997, the Group raised a US$210 million 5-year syndicated bank debt, consisting of a term loan portion equivalent to US$140 million and a US$70 million revolving loan. The loan was mainly used for the expansion of the Group’s production capacities as well as the refinancing of some existing bank debts. As of 30th September, 1997, the US$140 million term loan portion was fully drawn and the revolving loan remained undrawn. In order to minimize the Group’s currency risk exposure and obtain more favourable terms, the non-US dollars term loan portion was swapped into US dollars liabilities under a separate swap arrangement at the time when the syndicated loan was completed. Thus, effectively, the debt was wholly a US dollars loan with competitive interest rates in US dollars.
As of 30th September, 1997, the net debt of the Group was US$263 million, compared to US$168 million as of 30th September, 1996. The increase in net debt was primarily due to the new loans raised to finance the Group’s expansion in production facilities. Despite the increase in bank borrowings, the net debt to equity ratio increased only moderately from 41% as of 30th September, 1996 to 50% as of 30th September, 1997, owing to the satisfactory profit growth for the year. The interest coverage ratio of the Group’s profit before interest, tax, depreciation and amortization (EBITDA) to total net interest expense was 15.7 times.
As long term funds were raised to finance capital expenditure, the Group’s liquidity position remained satisfactory with current ratio as of 30th September, 1997 at 1.16. Despite the substantial increase in turnover last year, inventory level increased much less than the growth in turnover. The inventory in days was significantly reduced to around 51 days (based on turnover figures), reflecting increase in availability of materials supplied from various factories locating near the Group’s production sites. The faster inventory turnover also contributed positively to the cashflow of the Group. Overall speaking, the financial position of the Group remains healthy.
IMPACT OF ASIAN CURRENCY TURMOIL
The recent Asian currencies turmoil has had minimal impact on the Group’s financial performance and operations. The Group’s revenues are mostly transacted in US dollars, same is true for its machinery and material purchases. To a much lesser extent some operating expenses are transacted in other currencies including Hong Kong dollars and Chinese Renminbi. The Group’s bank borrowings are mainly in US dollars, adhering to the Group’s principle to match its revenues with borrowings to minimize currency exposure.
As the functional currency of the Group’s operations is US dollars, the Group has accordingly, starting from the financial year ended 30th September, 1997, changed its reporting currency to US dollars. This change will more accurately and fairly reflect the economic substance of the Group’s financial position and performance.
Whilst the Group operates from several manufacturing bases in Asia, the effect of the recent currency turmoil in the region upon the Group was very limited. The majority of the Group’s production lines are located in China where the currency has maintained its value. As for our operations in Indonesia, they were little affected by the devaluation of the Rupiah because all our revenues were transacted in US dollars.
CAPITAL EXPENDITURE
During the year, the Group incurred significant capital expenditure in a total amount of approximately US$277 million for land acquisition, construction of buildings, plant and machinery and other fixed assets. The purposes of the capital investment are for expanding the Group’s production facilities and improving the working environment as well as providing additional staff accommodation, canteen, recreational and health centers. Major investment was made in China and Vietnam, where several new plant sites and buildings were acquired and constructed during the year. The investment for the initial stage of new sites is normally higher and more intensive. It is estimated that capital expenditure in the coming years will gradually reduce. The directors are of the opinion that this investment is for the long term benefit of the Group and it will position the Group well for future growth.
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