2007 annual results corporate presentation
TRANSCRIPT
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1 April 2008
2007 Annual ResultsCorporate Presentation
Stock Code: 3818.HK
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Content
Financial Review
Accomplishments
Business Review
Future Plans & Strategies
Open Forum
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Accomplishments1. Robust revenue growth
Sales grew by 99.2% year-on-year to RMB1,711.0 million
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3. High profitability Impressive gross and net margins (included one-off interest income of RMB44 million) of 58.5% and 42.9% respectively Profit attributable to equity holders surged by 139.4% to RMB733.6 millionBasic earnings per share rose by 123.8% to RMB15.89 cents
4. Strong cash inflows Net cash generated from operating activities in 2007 amounted to RMB656 million, which accounted for 89.5% of the net profit for the year
In view of the above, the Company proposed payment of a final dividend of RMB 1.09 cent per share
2. Substantial sales network expansionNumber of Kappa brand retail outlets reached 1,945, a net increase of 807 outlets or 71% growth
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Achievements
Awarded the “Distinguished CEO
of the Year 2007” by Capital CEO Magazine
Successfullylisted on
The Stock Exchangeof Hong Kong
Limitedon 10 Oct, 2007
Ranked No. 1in Forbes
“China Best SMEs2008” Ranking
2008
2007
Became a constituent stock
of Heng SengComposite Indexand Heng SengFreefloat Index
2008
2007
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Financial Review
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Financial Highlights
2007(RMB ’000)
2006(RMB ’000)
Change(%)
Sales 1,711,023 858,921 +99.2%
Gross profit 1,000,573 535,561 +86.8%
Operating profit 724,721 385,608 +87.9%
Net cash generated from operating activities 656,354 347,906 +88.7%
Profit attributable to equity holders * 733,568 306,459 +139.4%
(RMB cents) (RMB cents)
Basic earnings per share 15.89 7.10 +123.8%
Diluted earnings per share 15.82 7.07 +123.8%
Final dividend per share 1.09 -- n.a.
For the year ended 31 December
*Included one-off interest income of RMB44,742,000. If the one-off income is excluded, the operating profit will be RMB688,826,000, with an increase of 124.8%
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Sales Breakdown – by Business Segment
Internationalsourcing
and Rukka2.3%
Kappa97.7%
Kappa is our primary businessKappa is our primary business
2006 Revenue 2007 Revenue
Internationalsourcing and
Rukka3.9%
Kappa96.1%
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Sales Breakdown – by Products
Rapid growth across 3 product categoriesFootwear sales achieved highest growth
RMB million
652.1
1,227.0171.1
403.0
35.7
81.0
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2006 2007
Remarks: Comparative figures for 2006 are shown in brackets
For the yearended
31 Dec 2007
4.7%(4.2%)
23.6%(19.9%)
71.7%(75.9%)
FootwearAccessories
ApparelFootwearApparel Accessories
1,711.0
858.9
+88.2%
+135.5%
+126.5%
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Unit ASP Growth
Apparel FootwearRMB RMB
131
150
0
50
100
150
200
2006 2007
+ 14.5%
Launch of more high-end apparel products drove unit ASP growth and strengthened the high-end positioning of Kappa in the PRC’s sportswear market
134
164
0
50
100
150
200
2006 2007
+ 22.4%
More high-end products were launched and sold at a higher unit ASP
Enhanced the R&D and product quality of footwear, to improve the product mix
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Volume Growth
Apparel FootwearUnit ‘000 Unit ‘000
4,968
8,176
0
2,000
4,000
6,000
8,000
10,000
2006 2007
+ 64.6%
Strong product demand drove high volume growth
Stronger R&D capabilities to launch products which meet market needs
1,277
2,461
0
500
1,000
1,500
2,000
2,500
3,000
2006 2007
+ 92.7%
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Gross Margin by Products
Gross margin adjustment in line with development strategies:1. Overall
Newly implemented a target-driven discount policy providing higher discounts to distributors who could better achieve the sales and performance targets set by the GroupIncreased proportion of footwear product sales to optimize the product mix. As footwear products has a lower gross margin, there was a slight decrease in the overall gross margin
2. Footwear productsEnhanced material used and craftsmanship in footwear products to provide customers with products of higher quality
2007(%)
2006(%)
Change(%)
Apparel 61.0% 64.5% - 3.5%
Footwear 50.7% 55.6% - 4.9%
Accessories 58.8% 55.8% + 3.0%
Overall 58.5% 62.4% - 3.9%
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Gross Margin by Business Segment
2007(%)
2006(%)
Change(%)
Kappa 59.9% 63.4% - 3.5%
International sourcing & Rukka 22.5% 19.4% 3.1%
Overall 58.5% 62.4% - 3.9%
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Operating Expenses
Able to spend relatively less in advertising & marketing:Leveraged on global promotionUnique market positioning: Fashion + SportsHighly effective entertainment-oriented marketing strategies and promotional activitiesEncouraged better shop renovation and promotion through target-driven sales policy
Increased investment in design and product development
2007 2006 Change
Advertising & marketing(as a % of sales)
6.5% 8.1% - 1.6%
Employee salary and benefit (as a % of sales) 3.5% 3.0% +0.5%
Design and product development(as a % of cost of sales)
4.3% 2.5% +1.8%
Total operating expenses(as a % of sales)
17.3% 18.6% -1.3%
For the year ended 31 December
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Key Working Capital Efficiency Indicators
2007 2006 Change(days)
Inventory turnover days 49 70 -21
Accounts receivable turnover days 24 27 -3
Accounts payable turnover days 75 89 -14
Working capital days -2 8 -10
Improvements attributable to:Effective supply chain management
Increased number of trade fairs from 2 times to 4 times each year
Effective credit control policy
As at 31 December
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Strong Financial Position
2007(RMB ’000)
2006(RMB ’000)
Cash & cash equivalents 5,311,060 274,749
Net cash generated from operating activities 656,354 347,906
Current ratio 18.4 times 2.1 times
Net asset value 5,901,831 307,504
Current assets 5,815,342 506,096
Current liabilities 315,218 237,832
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Dividend Policy
Recommended a final dividend of RMB 1.09 cents per share, totally RMB 61,881,000, of approximately 37% of the Group’s net profits available for distribution for the period from 10 October (the Listing Date) to 31 December 2007
25% normal payout + additional 12% distribution represents partial one-off interest income from IPO over-subscription monies of which the Company would like to share with its shareholders
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Business Review
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Business Review
Effective marketing strategy
Innovative product design and development
Distribution and retail network expansion
Comprehensive supply chain management
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Effective Marketing Strategies
Consistentstore
design
Targeted mediaadvertising
Globalpromotion ofKappa brand
Co-branding
Sponsorshipon a
selective basis
FashionFashion++
SportsSports
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Effective Marketing Strategies1
Sponsorship of:China Open Tennis Championship
Hong Kong Table-tennis Team and the PRC 49er Sailing Team, both teams will participate in 2008 Olympic Games
A delegation wearing Kappa brand products delivering Fuwa, the mascots for the 2008 Olympic Games
Electronic Sports World Cup
Tibet mountaineer team for climbing Mt. Everest
Co-sponsorship of AS Roma, the top Italian soccer team
Sportsoriented
Reinforced Kappa’sbrand positionEnhanced Kappa’sbrand recognitionin domestic market
AS Roma
Hong Kong Table-tennis team
China Open Tennis Championship
The mascots for the 2008 Olympic Games, Fuwa
Tibet mountaineer team
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Effective Marketing Strategies1
Fashion oriented
Launched co-branding events with other well-known brandsRealized synergies with brands with similar philosophyConsistent store design to create an active, fashionable and pleasant shopping experience
Co-branding with Pepsi Coke & 7-UpKappa and Peugeot Citroen co-branding eventSponsorship of dancing competition hosted by MTV
AdvertisementCo-branding with Pepsi CokeCo-branding with Peugeot Citroen
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Effective Marketing Strategies1
Charity oriented
Participated in “I want to go to school” campaign organized by the China National Road and the China Youth Development FoundationParticipated in the “Life Line Express” event
“I want to go to school”
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Innovative Design &Development Capabilities2
Talented, innovative and professional product development team with passion
Comprising of designers and merchandisers from the PRC, Korea and Italy etc
Establishment of Korea design centre
Establishment of Taichang design centre in the PRC
Design teamDesign team Merchandising teamMerchandising team&
Further inspired fashion sense and innovative ideas
Ascertained the fashion trends and market needs
Sports fashion brand with distinct designSports fashion brand with distinct design
Internationalrenownedpartners
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Extensive Distribution & Retail Network3
Flagship store
Operating with distributors and open flagship outlets in prime shopping areas of 1st-tier cities in the PRC
2 flagship stores opened in Harbin and Hangzhou
Plann to open more than 10 flagship stores by the end of 2008
“Primary distributor” policy
41 distributors who directly or indirectly operate 1,945 Kappa outlets of the prime locations in the PRC and Macau
Typically appointed only one primary distributor in one defined geographical area to motivate distributors and enhance loyalty
Renovation of retail outlets, including expansion of retail outlets areas and enhance the shop image
Provided training for the front-line sales
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Extensive Distribution & Retail Network
Opportunities in No. of retail outlets
2007 2006 Net increase Net increase (%)
Kappa Brand 1,945 1,138 807
5 27
8341,143
71
Rukka Brand 32 540
Total 1,977 73
Aggressive network expansion to capture the fastAggressive network expansion to capture the fast--growing market in Chinagrowing market in China
Overall network expansion
1,977
1,143
0
500
1,000
1,500
2,000
2,500
2006 2007
Growth: +73%
<25 retail outlets
>25 & <50 retail outlets
>50 & <100 retail outlets
>100 retail outlets
Fujian(74)
Tianjin(48)
TaiwanGuangxi
(31)
Guizhou(26)
Hunan(58)
Jiangxi(40)
Anhui(68)
Sichuan(120)
Shandong(88)
Hebei(78)Shanxi
(42)
Gansu(7)
Ningxia(2)
Inner Mongolia(19)
Jilin(64)
Qinghai(1)
Xinjiang(11)
Tibet(2)
Hainan(9)
Shaanxi(33)
Chongqing(53)
Macau(4)
Guangdong(142)
Beijing (75)
Yunnan(36)
Liaoning (137)
Jiangsu(197)
Zhejiang(162)
Shanghai(70)
Hubei(113)
Henan(65)
Heilongjiang(89)
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Comprehensive Supply Chain Management
Brand Positioning
Outsourcing
Brand OwnerSupplymanagement
DistributionmanagementER
P-SA
P System
DR
P System
DistributionDistributionnetworknetwork
Outsourcing
SupplySupplychainchain
Wholesaling
MarketingMarketing
R & DR & D
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Adopt the asset-light business model90 manufacturers selectively engaged to process and manufacture in 2007, while distribution was outsourced to 44 distributors and and consignees Distribution centres in Beijing and Jiangsu Province with approx. 12,169 sq. m. and 5,722 sq.m. respectively to shorten the time of distribution and expedite response timeNewly installed ERP-SAP system linked to a DRP system enhanced exchange of information among departments and strengthened distribution network management
Roll-to-rollproduction
Supply Marketfeedback
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Future Plans &Strategies
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Future Strategies
Retail network
expansion
Brand building
Multi-brandstrategy
Enhance internal
operation
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Brand Building
FashionFashion++
SportsSports
Enhance product design and development capabilities through establishment of overseas design and development centresFurther cooperate with well-recognized international design and development institutesContinue to sponsor selective sports and fashion activitiesActively participate in publicity activities for the 2008 Beijing Olympic Games Explore new co-branding with Pepsi, Peugeot Citroen and other famous brandsEstablish flagship outlets in prime shopping locations in 1st-tier cities
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Retail Network ExpansionFocus on prime shopping areas and 1st-tier cities, high potential 2nd- and 3rd-tier cities in North Eastern and South Eastern regions in the PRC
Set up retail joint ventures with key distributors
More than 10 flagship stores by end of 2008
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Enhance Internal Operation
Enhance ERP-SAP system to further integrate operations with manufacturers, distributors and retail networks
Set up the 3rd distribution centre in Guangdong province to enhance the responsiveness in southeast and southern area
Provide comprehensive trainingprogrammes to enhance theprofessional and managementskills of employees
Through international M&A tointroduce professionals andenhance the internationalstandard of the management
Plan to establish new operatingheadquarters in Beijing tocater to its future growth
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Multi-brand strategies
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Experienced
management
Strongfinancialresources
Achievesynergy
from multi-brand
strategy
Launch the Robe Di Kappa (“RDK”) brand under the Kappa brand umbrella in 2H 2008
Explore more opportunities for acquisition of international brands to have ownership or long-term operation rights in the PRC or regional market
To achieve synergy from the Group’s multi-brand strategy
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Brand Acquisition
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Overview of the transaction
Entered into a letter of intent (“LOI”) with Orix Corporation for the acquisition of Phenix Co., Ltd. (‘’Phenix”)
Brand Acquisition
About Phenix
Operation commenced in 1952, Phenix is a renowned sporting apparel company with core operations in design, development and salesPossession of PHENIX brand, with the largest market share of skiing sportswear in Japan One of the three Kappa brand owners in the world, possession of Kappa brand in Japan Excellent design and R&D capabilities
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Brand AcquisitionBenefits to China Dongxiang
In line with the Group’s long term strategy – international and regional multi-branding
Strengthen design and R&D capabilities to drive the development
Enhance brand image, product design and management
Replicate its success in brand management, operation and cost control to enhance the business performance of Phenixand Kappa in Japan
Tap opportunities in the high quality skiing and outdoor sportswear segment in the PRC market
Enhance the human resources structure through introduction of experienced management
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To become the leading multi-brand sportswear enterprise in the PRC
Vision
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VisionVisionTo become ChinaTo become China’’s most excellent s most excellent
sportswear brand management sportswear brand management company company
MissionMissionTo provide more choices and To provide more choices and
create higher value to create higher value to sportswear consumers on sportswear consumers on
the basis of our multithe basis of our multi--brand brand strategystrategy
Vision and Mission
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Open Forum