Yue Yuen faces test of profit margins
The world's largest shoemaker is forecasting double-digit sales growth this year, but analysts say the key challenge facing Hong Kong-listed Yue Yuen Industrial (Holdings) is raising profit margins.
Yue Yuen's sales would rise 15 per cent year on year to US$750 million in the first quarter of this year and maintain double-digit growth for the rest of the fiscal year, managing director David Tsai said at the firm's annual general meeting yesterday.
However, Patricia Yeung, an analyst with SBI E2-Capital, is focused on a different figure.
'What we need to watch for is profit margins,' Ms Yeung said. 'Going by Yue Yuen's previous results, margin erosion is the killer.'
For the past financial year to September, Yue Yuen's net profit fell 1.59 per cent to US$303.33 million while turnover rose 8.4 per cent to US$2.72 billion.
Yue Yuen's profit margins are under continuing pressure from surging raw material costs. Prices for crude oil - from which about 40 per cent of its raw materials are derived - have again risen above US$50 per barrel.
Raw material costs account for almost 50 per cent of the price of the firm's shoes.
Some of Yue Yuen's customers had agreed to shoulder part of the raw material costs, Mr Tsai said, but analysts questioned whether Yue Yuen had the pricing power to protect itself.
'I doubt Yue Yuen can pass on 100 per cent of the new costs, as it wants to maintain relations with customers like Nike and Reebok,' Ms Yeung said.
Yue Yuen's bargaining power was significant, analysts said, noting the company supplied at least 20 per cent of the inventory for major sports-shoe brands such as Nike, Adidas and Reebok.
But there was a time lag for passing on costs, they said, noting it could take months for the firm to renegotiate contracts and ship products at new prices.
Mr Tsai said Yue Yuen planned to expand the number of its retail outlets on the mainland from 350 to 600 by the end of this year and 1,000 by 2008 for the Beijing Olympics.
The company aimed to double its retail and wholesale sales in the country during this financial year, he added. In the previous year, its mainland retail sales leapt 188 per cent to US$74.2 million.
However, the retail businesses were still peripheral to the company's core operations and could do little to offset problems in manufacturing, Ms Yeung said.
