Facing the globally uncertain economic climate, Symphony Holdings Limited (“Symphony” or “Company”, together with its subsidiaries, “Group”) experienced another difficult year 2008 as expected. The revenue of the Group in 2008 was up by 10.9% to HKD2,050.6 million, in which HKD1,947.4 million and HKD99.0 million were contributed by contract manufacturing and branding business wholly-owned by the Company respectively. The remaining balance of HKD4.1 million was contributed by rental and other income. In addition to the significant adverse global financial effect, a material depreciation of the fair values of the Group’s properties and the written-off of goodwill of factories had offset the increase in revenue during the year. Accordingly, total loss for the year was HKD229.7 million.
Symphony’s contract manufacturing sector has continually over the past decade yielded positive contribution. Notwithstanding the fact that our major export markets in the United States and Europe continue to be hard hit by the global recession and the difficult operating environment, our manufacturing business recorded a 9.2% increase in sales in 2008. Rising raw material cost, the tightening of PRC labour and environmental legislations and the appreciation of Renminbi all leaded to a fall in the gross profit margin by 3.8% to 13.6%. To counteract the effect of rising operational cost in China, we relocated our production facilities to Vietnam where the weather and the labour supply are relatively more conducive to shoe manufacturing. Labour and utility costs are also more competitive in Vietnam. At the end of 2008, we had 9 production lines in Hai Phong and Tinh Hai Duong. The global economic downturn had wiped out a number of smaller scale PRC shoe manufacturers and we expect our manufacturing business will eventually benefit from this industry-wide capacity consolidation. To mitigate the effect of the fluctuation of raw material cost, the Company is taking steps to diversify our product variety so that we can cater for a wider range of customer base.
Our current brand portfolio includes Pony, Speedo, Berghaus, MANGO, Haggar and AEE Italy.
Pony is a US heritage brand with over 40-year history. While the retail market of the United States continued to be adversely affected by the global financial downturn, the US management of Pony intends to focus on performance-inspired lifestyle products, developing global licensing opportunities and exploring new design collaboration opportunities. Ongoing efforts are aimed at cutting administrative cost and identifying new licensees worldwide to generate additional royalty income. In order to weather the global financial crisis and to ensure business efficacy, Pony China has also undertaken reorganization and cost reduction schemes.
The sales of Speedo rocketed in 2008. The points of sale have expanded to 97 in mainland China and Taiwan with gross revenue up to RMB20.1 million. Apart from highly innovative swimwear Michael Phelps wore to win 8 gold medals at the Beijing Olympic, Speedo is adding other sports and leisure garments to its product line. We expect continued growth in sales this year and the number of directly managed and franchised stores will increase to 120 in 2009.
Berghaus is a top mountaineering and outdoor gears brand. Symphony was appointed the sole distributor and licensee for Berghaus in China for 18 years. We are launching Berghaus in mainland China this summer. Ten directly managed stores are planned initially to kick start in 2009.
Symphony became one of the franchisees of MANGO in China in 2008. MANGO is an internationally renowned women’s fashion originated in Spain. It is a brand widely recognized and is welcome in the PRC. As an initial step, the Group has set up its MANGO stores in Beijing and Shanghai at the end of 2008 and early 2009. Further shops are planned to open in strategic locations in China in this year.
Haggar, a respected brand of men’s apparel in the United States, in which Symphony has invested as a minority shareholder. In 2008, various reorganization and cost-cutting measures have been adopted in Haggar. Aggressive cuts in SG&A had been implemented and non-profitable business units had been closed
down. Efforts have been made to focus on core competence and streamline operations. It is in the process of turning around and is expected to generate positive EBITDA and improve profitability in 2009. Symphony’s share of loss in Haggar in 2008 amounted to HKD39.8 million. The arbitration claim for the termination of license by a former Canadian licensee had been settled during the year.
Symphony shared a minority interest in AEE Italy, a top ladies fashion footwear in China. It is poised to take strides in providing fashion minded female consumers with the latest fashion shoes and accessories at an affordable price. Notwithstanding the global financial turmoil, the gross profit margin of AEE Italy has slightly dropped during the year.
In early 2009, Symphony has partnered Toyota Tsusho Corporation, a member of the Toyota Motor Group, for the distribution and retailing of certain affordable luxury apparel and accessories brands originating from Japan, Europe and the United States. It is expected to open the first flagship store in Hong Kong this summer. China market and internet stores are also in the pipeline
In the midst of the worldwide financial crisis in 2008, we have slowed down the acquisition of land in China for the development of mega shopping malls and entertainment complexes to complement our brand retailing business. Symphony’s proven track record in brand building and continued experience in retail portfolio development provided a solid foundation for us to enter into the outlet mall industry in the PRC. We continue to closely monitor the progress of event before a final decision is made.
Meanwhile, Symphony is acutely aware of the continuing slowdown of the global economy and has taken appropriate measures to remain focused on our core manufacturing business to weather the raging trials facing the world, while devoting efforts and resources to turnaround the businesses. Symphony endeavours to reduce the operating cost and improve cost effectiveness of our branding business model. Based on our solid cash flow foundation and with our net cash position, the Company is financially sound to favour from any investment opportunities made available during this economic condition to provide synergistic value to its current operation. We remain cautiously optimistic that Symphony will ultimately benefit from new growth opportunities when the global economic recession has bottomed out.