Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
SITOY GROUP
HKEx Stock Code : 01023 
 
Corporate Profile
The principal activities of the Group are design, research, development, manufacturing, sales and retailing of handbags, small leather goods and travel goods.

Business Review - For the year ended June 30, 2012

Manufacturing Business

For the year ended 30 June 2012, the Group manufactured and sold a total of 15.5 million units of handbags, small leather goods and travel goods to its high-end and luxury brand customers. Benefiting from the continued expansion in the retail business of the high-end and luxury brand customers, orders for our products have grown stably, among which the sales volume and sales revenue increased by 26.1% and 33.4% respectively.

During the year under review, amidst global economic uncertainty, our brand customers became more stringent when identifying suppliers and sourcing products. Leveraging on our quality services and long-term track record, as well as high level craftsmanship, production technology and timely delivery of goods, the Group continued to win the loyalty and trust from our customers, establishing an even closer cooperation relationship. Ushering in opportunities under a challenging business environment, the Group has achieved an increase in orders from existing customers as well as adding several new renowned international brand customers, opening up new sources of revenue.

With the fierce competition in the global luxury-branded handbags industry, luxury brands target different consumers' tastes and market trends and keep launching new products. The Group possesses a wealth of experience and craftsmanship in the production of high-end leather goods, which enable us to meet the higher requirements of our customers as they developed further. During the year, we produced a wider variety of products with enhancement, and shared with our customers the fruits of the global development of high-end luxury brands.

In recent years, the rising costs of labor and raw materials are the common challenges faced by manufacturers in China. The Group has a stronger bargaining power leveraging on its goodwill, rich experience, leading craftsmanship, production technology in the industry. We have been using the margins-plus-cost pricing model and have effectively shifted the rising costs burden to customers during the year. The gross profit margin of our manufacturing business remained stable at 22.0%, representing a slight decrease of 0.2% over the previous year. In addition, the Group has actively controlled operation costs and operational efficiency by various strategies, which include improving the working environment of employees as well as focusing on retaining talents, in order to reduce cost incurred by staff turnover.

Retail business

With years of experience in the high-end luxury brand industry and the advantage of having our own production platform, we started selling TUSCAN'S branded handbag and small leather goods products through our own retail stores in the PRC and Hong Kong since 2011.

This fiscal year 2012 marked the start of our retail business, in which we have achieved encouraging results. For the year ended 30 June 2012, revenue generated from the retail business was HK$14.4 million; revenue from the second half was 174.1% more than the first half of the year. As at the end of the reporting period, the Group owned and operated 22 retail stores, among which 6 were stand-alone retail stores and 16 were department store concession counters. Our retail stores spanned across Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong, Chongqing, Chengdu, Wuhan and Yangzhou, with those in the Southwest regions recorded more remarkable performance.

As the Group's retail business is still in its ramp up period, we proactively conducted market study during the year to deepen our understanding on the market and consumers of fashion handbags and leather goods. We have also focused on building up a reliable sales team and structure as well as the selection and training of talents, in order to lay a solid foundation for the long-term development of TUSCAN'S brand.

During the year under review, we concentrated in establishing the retail network for TUSCAN'S brand in the second- and third-tier cities in the Southwest region. In order to achieve better cost effectiveness in a shorter period, department store concession counters were mainly opened up. We have also established a sales office in the Southwest region to develop a core team specifically for the market, in order to manage the local sales network in a more effective manner.

We adhered to the strategy of precise selection of retail points that match with the image and pricing of the TUSCAN'S brand. By successfully entering in a number of prestigious and large shopping malls and department stores last year, including Miramar Shopping Centre in Hong Kong, Yaohan in Shanghai and Pacific Department Store in Chongqing, we were able to enhance TUSCAN'S the brand image and reputation among consumers in these regions.

Through making good use of our own production platform and support from our strong Creative Center and Research and Development Center (¡§R&D Center¡¨), we provide customers with fast moving product styles to increase the number of customers' visits and store traffic. Approximately 100 different designs and styles of handbags and small leather goods are generated each six-month season and four to six different designs and styles of handbags and small leather goods are introduced each month.

Given the growing demand for quality fashion handbags and small leather goods in the PRC and Hong Kong, the Group expects that the sales volume and revenue from the retail business will increase continuously.

Manufacturing facilities

For the year ended 30 June 2012, the Group's total production capacity was approximately 20.0 million units of handbags, small leather goods and travel goods, with a utilization rate of approximately 80% (for the year ended 30 June 2011: 16.1 million units and 76%). Compared with the previous fiscal year, the number of the Group's production lines increased from 191 to 215, which further improved the Group's production scale and efficiency and enabled us to better meet the ever-changing demands of our customers.

To cope with the increasing orders from our customers, the Group is now constructing the second expansion phase of the Yingde manufacturing facility. The construction of two buildings as part of the second expansion phase of the Yingde manufacturing facility was completed in November 2011. The Group is now in the process of planning and negotiating construction contracts with respect to the remaining buildings of the second expansion phase of the Yingde manufacturing facility. It is estimated that the total production capacity of the Group can be increased by 40% upon the completion of the construction in 2014. In addition, the Group upgraded its machinery and equipment during the year in order to enhance the operational efficiency.

These investments were partly funded by the proceeds of the initial public offering and partly from the internally generated funds of the Group.

Business Outlook - For the year ended June 30, 2012

Looking ahead, the Group expects that the spreading of the European debt crisis and the continued slowdown of the global economy will continuously weaken consumer confidence, and its impact on the luxury goods industry will gradually surface. As affected by the weakened export to Europe and the United States, China's GDP saw a year-on-year increase of only 7.6% in the second quarter. Albeit a far better GDP growth than other countries, domestic consumption has already slowed down in China, signaling a mild economic growth of the full year. The Group expect that the coming year will be challenging, and the Group remains conservatively optimistic about the industry prospects.

Facing the challenging operating environment, the Group will consolidate its market leading position leveraging on our existing advantages in the luxury handbags and small leather goods industry. We will actively strengthen our relationship with the existing brand customers through enhancing various value-added services. Meanwhile, the Group will actively introduce more international high-end and luxury brand to our product portfolio, and increase the proportion production of high-end products. More efforts will also be made to expand the manufacturing business into new segments such as travel goods and luxury bags and small leather goods for men, so as to diversify our revenue streams. In view of the uncertainties in the future operating environment, and with the objective to maximize production efficiency, the Group will make considerable adjustment on the investment for expansion of the production lines. In the coming year, the Group will reserve approximately HK$80 million for the second phase expansion of our manufacturing facility in Yingde, which will increase our total annual production capacity by about 10% to 22 million units by the end of 2013, approximately HK$25 million for the purchase of manufacturing facilities and upgrade of equipment and approximately HK$25 million for the expansion of the retail business in relation to TUSCAN'S brand.

Meanwhile, we have been taking steps to expand the footholds of our retail business. Through the expansion of sales network, TUSCAN'S brand has built a sound reputation in the Southwest markets. In addition to reinforcing the core management team in the Southwest region and increasing the point of sales, we also plan to set up more established TUSCAN'S brand image stores. As our retail business becomes mature, we will extend our footprints to new domestic markets based on our successful experience and operating model in the existing markets. Eastern China will be another key market of our retail business. The management is of the opinion that the higher consumption power in cities such as Nanjing and Hangzhou in Eastern China, and the chic and trendy style of the younger generation, are in line with the development of TUSCAN'S brand. We are actively studying an appropriate operating model and marketing strategies for the markets in the region, in order to extend the influence of TUSCAN'S brand in China's market.

Despite the adverse impact from the slowdown of economic growth around the world and China in short term, we still aim at opening a total of 100 stores in three years though we will adjust the pace of the opening subject to the market condition. We will focus on the expansion of quality retail network instead of the growth of the number of stores, in a bid to maintain an up-to-standard quality operation. We will actively identify other outstanding leather goods brands with growth potential and accelerate our business development through mergers and acquisitions whenever appropriate. With years of experience in the luxury branded handbag and small leather goods manufacturing business, Sitoy Group possesses the craftsmanship and capabilities in the production of various luxury branded handbag and small leather goods. The long-term development strategy of the Group is to strengthen our position as a leading outsourced manufacturer of luxury handbags and small leather goods, develop our own leather goods brand and strive to expand the retail business with own production and sound sales strategy.

Source: Sitoy Group Hold (01023) Annual Results Announcement
Chairman Yeung Michael Wah Keung Issued Capital (shares) 1,002M
Par Value HKD 0.1 Market Capitalisation (HKD) 3,265M
 
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