Fashion retailer Giordano International says first-half net profit grew 16 per cent to $127.7 million, but sales fell 3.49 per cent as a result of probes into its factories by mainland authorities. Executive director Terry Ng Sze-yuen said yesterday sales in Hong Kong were expected to fall again in the second half because of a drop-off in mainland tourists and rainy weather during the handover. In the first half, production at the company's five mainland factories underwent a restructuring, causing some customers to terminate orders. The restructuring was prompted by production disruptions late last year when mainland authorities looked into the factories in Guangdong province. This gave rise to $93 million in penalty charges for alleged breaches of customs rules, of which $85 million is still outstanding pending appeal and $8 million has been seized by mainland authorities. Executive director Jimmy Chan Kui-tim said less than 50 per cent of the charges were owed by a factory formerly owned by founding shareholder Jimmy Lai Chee-ying. Mr Lai's criticism of the Chinese Government in 1994 triggered a mass closure of Giordano stores in Beijing and Shanghai, where 11 remain unopened. 'The performance of our manufacturing division was not going well in the first half, in which knitwear operations were the worst as sales fell 50 per cent,' Mr Chan said. He denied the company was preparing to move its production base out of China due to political pressure. Instead, it was planning a new factory in Guangdong to replace an old one in the same province, he said. Manufacturing generated 9.64 per cent of the group's $1.67 billion sales, while the balance was contributed by retail and distribution. Operating profit rose only 5.41 per cent to $130.1 million after charging for restructuring cost of the factories. An interim dividend of five cents was recommended, up from 4.5 cents. Net profit growth was helped by contributions from South Korea and the Middle East, whereas Hong Kong and China remained flat. Mr Chan said the manufacturing division in China would soon return to normal, but denied Giordano was discussing a share sale to mainland parties such as China Resources (Holdings).