Imposition of anti-dumping duties would cut profit margins as earnings come in below forecasts, say analysts Profit margins at Yue Yuen Industrial (Holdings), the world's largest contract manufacturer of sports and casual shoes, risk being eroded by weakening pricing power and European Union anti-dumping tariffs, according to analysts. Credit Suisse First Boston analyst Gabriel Chan said that if the EU imposed anti-dumping duties, 7 per cent of Yue Yuen's sales would be affected. 'It would have an important impact on Yue Yuen, as most of the shoes affected are casual shoes with higher profit margins than sports shoes,' Mr Chan said. The EU is to decide by April 7 whether to impose anti-dumping tariffs on factories making shoes with leather uppers in China and Vietnam, including most of Yue Yuen's production facilities. Yue Yuen said rising oil prices, wages, utility costs and yuan appreciation had cut its gross profit margin by 0.82 percentage point to 23.05 per cent in the year to September. However, Mr Chan said that Yue Yuen was paying the price for higher oil prices, which had not been absorbed by its customers. 'The key reason is Yue Yuen is losing pricing power. Its customers, international sports brands like Nike and Reebok, had their margins increased despite higher oil prices,' Mr Chan said. 'The brands never bore the burden of oil price rises. Yue Yuen will continue to lose pricing power because there is a lot of competition among contract manufacturers. If oil prices fall, competitors will cut prices, which will put pressure on Yue Yuen.' In the past financial year, the company's turnover rose 15.9 per cent to US$3.15 billion. Net profit was below analysts' expectations, rising 2.2 per cent to US$310.12 million. Excluding a one-off contribution of US$26.2 million from disposal of securities, net profit rose 11.9 per cent. Yue Yuen's net profit was below the median forecast of US$315.5 million by 12 analysts surveyed by Thomson Financial, but its turnover was above Thomson's forecast of US$3.15 billion. 'Yue Yuen's top line is growing strongly, but its bottom line was affected by raw material costs, oil prices and wage costs,' said Mohan Singh, the head of Hong Kong research at BNP Paribas Peregrine. Yue Yuen expressed optimism over sales growth this year, with its turnover growing 16.7 per cent to US$869 million in the first quarter to December. Yue Yuen was gaining market share at the expense of smaller manufacturers that were less able to absorb rising costs, said Mr Singh.