AFTER more than a year of restructuring, VTech Holdings' loss-making computer division is set to bounce out of the red next year, the group's chairman Allan Wong Chi-yun says. The group, a recent darling of fund managers despite a declining share price, has scored consistent profits in its educational toys and telecoms divisions. But its sale of personal computers had suffered the crunch of sliding component prices worldwide leading to losses of more than HK$100 million in the year ending March 1996. Since then, the Hong Kong-listed group has been restructuring its computer division, with completion slated for the end of this fiscal year. A change of focus - out of personal computers, an area prone to the volatility of hard disk and memory chip prices - would soon pay off said Mr Wong, also the group's chief executive. 'We withdrew our computer operations from the US in 1995 and focused on motherboards instead which we sell in Asia and Europe,' he said. 'Next year, the computer division will return to profits. This year marks our crossover to profitability.' Analysts agree. Merrill Lynch, which last week gave VTech a 'buy' rating, said the move into the less price-sensitive area of motherboards and add-on cards would mean lower losses this year. 'We expect the division to make a loss of HK$53 million in full year to March 1997,' the company said in a recent report. For fund managers, that is just the latest in a long line of a good news for a company, the world's largest manufacturer of toy computers and a maker of telecoms equipment. Last month, the company said net profit rose 30 per cent in the six months to September 30 to US$26.8 million, even as sales - dragged down by a slump in the United States - slipped 2.7 per cent. To cater to what Mr Wong projects will be a 15 per cent annual growth in children's electronic games and an even higher 30 to 40 per cent growth in VTech's sale of 900 MHz cordless telephones, the company is planning to build a new plant in Dongguan, China. The plant, a joint venture with the Dongguan government with ample funding, will add a third more capacity by April and triple the output by 2004. 'Since September 30, 97 per cent of our warrants have been exercised, so we have an intake of US$22 million in cash,' Mr Wong said. 'We also retained about 60 per cent - or US$20 million - from last year's US$32 million in profits. That cash would be more than enough to finance our future growth.' So far, the group's cordless phones have been approved in China but it will be some time before the group markets its educational toys on the mainland. 'We are starting to come up with products for the Chinese market,' Mr Wong said. But he believed China needed another two to three years for its standard of living to rise before the average person could appreciate the company's products. For investors, however, the stock's 20 per cent plunge in the past two months at a time when the Hang Seng Index is consistently soaring is a warning sign. Since reaching a year's high of HK$16.90 on November 18 the share has been steadily dropping, closing on Friday at HK$12.65. Hastening the drop was news last month of falling sales in the US, the group's biggest market. Mr Wong said sales dropped because VTech's US clients had enough inventory from the previous year - although sales to Europe surged 29 per cent - and the restructuring of its computer operations slashed sales. The share drop, however, was a short-term phenomenon, fund managers who have been stacking up the stock, said. Norman Ho, assistant fund manager at Value Partners, counts VTech as one of its 'major holdings' because it designs its own products and does very little OEM (original equipment manufacturer) work for others. Instead, it has a team of 800 engineers, in Britain, Canada, Hong Kong and China, that come up with new products. 'People treat us as just another industrial company but it isn't really,' Mr Ho said. 'VTech's high-frequency telephones and infant toys, for instance, are mainly proprietary technology.' Analysts admit there are risks, primarily from larger competitors. The group estimates it has a 56 per cent market share in the US for its educational toys, five times that of its largest competitor Sega. 'Although VTech seems to be the leader in educational toys, it is still vulnerable should leading toy companies such as Mattel, Fisher-Price and Hasbro decide to enter this segment of the toy market,' Ellen Chor of Merrill Lynch said.