Peak earnings rise 22%

Hong Kong-listed mainland sportswear maker Peak Sports said on Wednesday it will further beef up its production capacity in the next two years on the back of growing domestic consumer demand and protect its profit margin amid fierce competition as it reported a 22 percent rise in its first-half profits to June 30 of 423 million yuan ($67.6 million). 

The sportswear maker pledged to increase capacity of footwear by 2.7 million pairs to 15.7 million pairs by 2013 and that of apparel by 7 million pieces to 18.7 million pieces by 2012. The company will start constructing a new apparel plant in Shandong province next year with an investment amounting to 1 billion yuan. Peak now has two plants in Jiangxi and Fujian provinces. 

"We believe that sportswear industry is a sunrise industry in China. Its growth rate will double that of GDP growth rate in the future and our goal is to beat the industry average," said Xu Jingna, Peak chairman. 

Chief executive officer Xu Zhihua said that to increase self-owned assets is a strategy the company pursues as it will enhance bargaining power, guarantee delivery to distributors, and thus safeguard its gross profit margin. 

For the first six months of 2011, Peak's net profit rose 22.1 percent to 423 million yuan from 346 million yuan a year ago, boosted by higher sales volume and average selling prices. Turnover rose 24.7 percent to 2.25 billion yuan from a year ago. The gross profit margin climbed 2.2 percentage points to 39.9 percent in the first half compared with the same period a year ago. 

The result is in line with the expectations of Haymen Chiu, an analyst with Cinda International Holdings, who believes that Peak's strategy of taking hold of second-tier and third-tier cities, as well as efforts to boost brand awareness will benefit its profit margin in the future. 

Footwear, accounting for 45.2 percent of total turnover, generated 1.02 billion yuan in revenue, up 22.9 percent. Apparel, representing 52.9 percent of total turnover, raked in 1.19 billion yuan in revenue, up 26.8 percent. 

The average selling price of footwear rose 7 percent to 86.3 yuan and that of apparel went up 14 percent to 50 yuan, driven by rising costs and material input, and salaries. 

The company added 395 retail outlets on mainland in the first half this year, pushing up the total number to 7,619 on June 30. 

At June's sales fair in which buyers placed orders for the first quarter of 2012, Peak's order book registered 20.2 percent growth, stretching the figures seen at the previous two sales fairs. 

Same store sales growth, a key measure for retailers' business, was 12.7 percent in the first quarter and 12.2 percent in the second quarter respectively. 

Peak's net operating cash flow at the end of June 2011 declined 72 percent to 130.3 million yuan from 470.6 million yuan a year ago. 

Denis Tsoi, chief financial officer at Peak, explained that the sharp decline was a result of a rising inventory level due to bad weather in April and May, as well as a drop in accounts payable. 

UOB KayHian analyst Ken Lee visited several mainland cities in June to gain first-hand knowledge of the sportswear market. In his research note dated on July 6, Lee found deterioration of fundamentals of domestic sports wear companies, which can be reflected through rampant discounting, inventory pile-up and overcrowded stores. 

For Peak's products, Tsoi said that the discount offered by distributors at retail stores slid slightly from 20 percent off to 22 percent off on average, which is "at a controllable level".