Hong Kong’s VTech hurt by strong US dollar

PUBLISHED : Tuesday, 17 May, 2016, 7:26pm
UPDATED : Tuesday, 17 May, 2016, 7:26pm

VTech Holdings, Hong Kong-based maker of high-tech learning products for toddlers, saw both net profit and revenue fall in the year to March 31 as the US dollar strengthened and labour costs in China rose.

Net profit fell 8.4 per cent year on year to US$181.4 million. Revenue dropped 1.2 per cent to US$1.86 billion while gross profit margin slid from 32.5 per cent to 31.4 per cent.

Basic earnings per share dropped to 72.2 US cents. The firm proposed only 25 US cents as final dividend, lowering the dividend payout ratio to 58.2 per cent from 98.9 per cent a year earlier, in order to fund the US$72 million acquisition of US-focused toy maker LeapFrog Enterprises in April.

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The management blamed the poor showing on the US dollar strength, as sales in Europe – which made up 42.9 per cent of total revenue and fell 2 per cent year on year in US dollar terms – rose in terms of regional currencies.

A data breach due to a cyber attack on VTech’s app store Learning Lodge in November added to the decline in sales and profitability, the firm said in a letter to shareholders.

“It is highly possible that strong US dollar will continue, putting further pressure on the company’s profitability,” said Rico Chan, analyst at E Capital in Hong Kong.

The firm cannot avoid the impact of rising labour costs in China, with its main production base in the city of Dongguan in Guangdong province, Chan added.

VTech’s labours costs rose as wages increased in China, even though it slashed its labour force by nearly a tenth because of automation, according to the company’s filing to the local bourse.

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Its management said it expects revenue to be higher in the next financial year despite a strong US dollar and slow economic growth in both the US and Europe, but added that it will be affected by LeapFrog, which is expected to record a profit loss.

Chairman Allan Wong said the acquisition paved the way for further growth in electronic learning products.

The company expects further sales growth in China and Australia, driven by online sales and the launch of new products such as “Touch & Learn Activity Desk” for children between two and five years. Sales in the Asia-Pacific region increased 9.7 per cent year on year to US$129 million for the latest financial year.