Chans bullish after sale of YGM
TROUBLES at YGM International, controlled by the family of Mr Chan Sui-kau, belie strong performances and expansion plans for stable mates YGM Trading and Yangtzekiang Garment Manufacturing Co.
News that YGM's Ohio-based women's fashion retail chain, Madison's of Columbus, had filed for Chapter 11 protection from creditors dragged the low-profile group built by Mr Chan and now managed by his four sons into the limelight in June last year.
At the time YGM said a cash-raising exercise was a considered option for rescuing the debt-laden chain which it bought for $42.9 million in 1990 as the planned first stage in setting up a larger US network selling YGM-made brand name clothes.
It was a surprise announcement that sent its already subdued share price skidding by about 25 per cent to settle at around 26.5 cents. It languished there for five months until rumours of a takeover offer by a third party, possibly a China concern seeking a back-door Hongkong listing, fuelled a spectacular rise to 92 cents on December 16.
Trading in YGM (spun off from Yangtzekiang and listed in 1988) was suspended from December 17 until January 11, when it announced a reorganisation and the intention of new owner Wedlake to take a slimmed down group off the Chans' hands.
''We feel it's a deal that's good for minority shareholders,'' said Mr Samuel Chan Wing-sun, deputy managing director of YGM, of a transaction where a Chan family vehicle known as Sevenoaks will shoulder the company's US$8 million outstanding debts andkeep YGM's operations in Malaysia and Singapore and investments in other parts of the family group.
''A rights issue might not have been supported by the minorities; YGM International has not been making money for two years; and the bank [the Hongkong and Shanghai Bank's US arm] wasn't likely to allow us to pay a dividend while we owed them money,'' said Mr Samuel Chan. ''Wedlake offers us all the chance to cash out.'' The Chans blamed long-running weakness in the US economy for Madison's ongoing woes, a sustained downturn which, joked YGM managing director Peter Chan Wing-fui, ''caught everyone - especially [US President] George Bush - by surprise.'' Wedlake, a private group controlled by Mr Tang Sung-ching and Mr Tse Muk-choi, will retain YGM's US distribution of Sahara Club men's and boy's wear and Bosa shirts, shares in a French importing and wholesaling operation, and a Seattle industrial park.
Wedlake will make a general offer of 84 cents a share to minority shareholders and pay the Chans $61 million to remove YGM's debts.
The Chans said they had no intention of injecting assets rescued from YGM into their other listed companies. Those assets include the Singapore wholesaling and distribution operation and its 40 per cent stake in Malaysian-listed Yangtzekiang Berhad, which is expecting improved fortunes after the closure of an expensive Singapore manufacturing facility and the start of operations at a new factory in Malaysia.
After divesting YGM, the remainder of the Chans' garment making and trading, printing and property holding businesses looks set to book record profits this year. The group can also concentrate on expansion closer to home.
''We're on the way to a very good year,'' said Mr Samuel Chan, managing director of YGM Trading, which was also spun off from Yangtzekiang in 1987 and listed on its own on the stock exchange in 1988.
''Our main activities are retailing in Hongkong, Taiwan and China, just about the only three markets booming in the world right now.'' In the last fiscal year ended March, YGM Trading (24.5 per cent owned by Yangtzekiang) earned 73 per cent of its $54 million in operating profits from garment sales. Eighty per cent of operating profits was earned in Hongkong last year, but future earnings breakdowns should show a strong expansion in Taiwan and China.
In the six months to September, YGM Trading reported a profit after tax and extraordinaries of $44 million, nearly tripling the figure a year earlier. Based on the profit trend of last year, where 22 per cent of profits was earned in the first half, YGM Trading could be looking at a $195 million profit after taxes and extraordinaries.
''We've made substantial investments in Taiwan and Hongkong and the profits are now being seen,'' said Mr Peter Chan, who is also vice-chairman of YGM Trading.
''We are only beginning our expansion into China's retail market so there's no profit coming from those operations right now.'' YGM Trading distributes and retails a broad range of menswear including Valentino, Daniel Hechter, Michel Rene, Passo, Hang Ten, Arnold Palmer and Pierre Cardin. It is a collection of Western brand names the Chans predict will attract a strong following throughout China.
''We're approaching the China market on a brand-by-brand basis and will go into both wholesaling and running our own boutiques,'' said Mr Samuel Chan.
''As everyone knows it's a big market and not an easy market,'' said Mr Peter Chan. ''There are currency and distribution problems but there's good money for us to be made in China.'' The decision to shift Hongkong suit manufacturing operations to factories in Guangdong and better performance in the company's printing businesses led by Dah Hua Printing - last year printing earned only five per cent of company operating profits on 13per cent of turnover - should boost the profit picture in coming years.
''Performance in printing is better than last year,'' said Mr Samuel Chan. ''But the future of printing is in China. We're investigating how to best invest in printing in China.'' YGM Trading has a few property holdings and has thus far shied away from a strong development role in the territory. However, it is involved in a joint venture with the Dongguan government in Guangdong to build a 700,000 sq ft industrial park and covets a role in developing retail space in prime locations.
Mr Peter Chan said: ''We're looking at a number of sites mainly in Guangzhou, Shenzhen and Shanghai for retail; we're not interested in fringe areas.'' The future appears positive but less ebullient for parent Yangtzekiang through which the Chans seek to expand their trading activities and to service their markets by contracting out an increasing percentage of their orders.
While Yangtzekiang is facing lower margins on its manufacturing output from Hongkong and Macau facilities, and reported last year that profits from its Hongkong Knitters had slipped, it is having more work done by contractors it supervises in low-cost countries such as Indonesia, Bangladesh, Egypt and Mauritius.
The company, 24.5 per cent owned by YGM Trading, said it was also seeing early good returns from a Sri Lankan factory it had built in a joint venture with YGM's Singapore operation.
Yangtzekiang expects wholly owned subsidiary Hongkong Knitters' performance to improve after its move to China, but it is cautious about the prospects of business recovery in the US, a major market for its exports, and says the European market - western Europe accounts for more than half of the company's business - is ''very weak'', and the vulnerability of currences there ''a concern''.
''Indications are that US sales after Thanksgiving were good and were strong through Christmas and afterwards,'' said Yangtzekiang's managing director, Mr Chan Wing-kee. ''But the European market is very weak and the weak currencies against the Hongkong dollar are a concern.'' Yangtzekiang's interim profits after tax and extraordinaries were up 51 per cent for the six months to September last year to $30.8 million on a five per cent rise in turnover. Much of the increase in profits came from a $10 million share from associatedcompanies.
Is a similar increase on last year's full profit of $45.7 million on the cards for the year to March? ''For the whole year we should have quite a significant increase in profits over last year,'' said Mr Chan Wing-kee, who predicted the two remaining group companies would be freer to concentrate on expansion in China after ''sorting out YGM'' over the next two months.