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Toh Han Shih

Luen Thai Holdings, a Hong Kong-listed garment manufacturer, said first-half profit slumped 50.9 per cent because of trade uncertainties and margin pressure on low-end products.

Net profit at the company dropped to US$6.15 million in the  first six months of the year from US$12.5 million a year ago, while turnover rose  2.9 per cent to US$275.31 million.

'The first few months of 2006 still brought some challenges not only to the company but the whole apparel industry, an upshot from the trade disputes between China and the US which were  settled only at the end of 2005,' said Luen Thai chief executive Henry Tan.

Luen Thai derived 66.3 per cent of its turnover from sales to the United States where its clients include Liz Claiborne and Polo Ralph Lauren.

China and the US signed an agreement in November last year which imposed quotas on various Chinese garments  up to 2008.

'We had to incur additional logistics and labour costs to meet production deadlines that caused our margins to adjust downwards,' said Mr Tan.

The increase in freight costs lifted Luen Thai's selling and distribution expenses by 76.5 per cent year on year or US$3.3 million in the first six months.

The profit drop was also due to the margin squeeze on basic casualwear products such as T-shirts, which accounted for 67.8 per cent of total sales, Mr Tan said. The firm is making more fashionable garments which fetch higher margins, he added.

Luen Thai's operating profit margin declined to 3.1 per cent in the first half from 5.6 per cent a year ago.

BNP Paribas Peregrine analyst Billy Wong expected flat to low single-digit growth in Luen Thai's sales for this year.

'We are revising down our 2006-2008 earnings estimates for Luen Thai because of lower sales anticipated and elevated operating costs,' wrote Mr Wong in a report. 'Core revenue growth will be affected by the declining sales performance of some of its key customers.'

Luen Thai's operating costs will remain high as it shifted some production from China to Saipan where labour costs are nine times higher than China, wrote Mr Wong.

Luen Thai's stock price rose 0.75 per cent to HK$1.34 yesterday from HK$1.33 on Wednesday.

The company announced its results around market closing time.



Luen Thai profit falls 51pc on trade uncertainties