Fabric mill on hold as sales slump at Fountain Set

3 June 2009, Hong Kong - Fountain Set (Holdings) Limited, one of the largest manufacturers of circular knitted fabrics in the world, has announced its unaudited consolidated interim results for the six months ended 28th February, 2009. The Group’s revenue was approximately HK$2,488,319,000, a decrease of 19.1% over the same period last year. The company also announced that because of weakness in demand and uncertainty in market outlook, the completion of its planned Yancheng fabric mill has been delayed.

Unaudited loss attributable to shareholders amounted to approximately HK$166,158,000. Net loss margin for the period under review was 6.7%, a decrease of 6.3 percentage point over the same period last year or an increase of 3.8 percentage point if excluding last year’s cost in relation to the reduction of production capacity of Dongguan Fuan Textiles Limited, one of the Group’s non wholly-owned subsidiaries. Basic loss per share was HK20.9 cents, compared to basic loss per share HK50.3 cents (HK11.1 cents if excluding last year’s cost in relation to the reduction of production capacity) for the first half of financial year 2008. The Board has resolved not to pay any interim dividend for the period under review (2008: HK1.0 cent per share).

The Group said that during the first half of financial year 2009, the world economy was still challenging due to the worsening of the US sub-prime mortgage crisis towards the end of calendar year 2008 which has adversely affected the economic climate and consumer markets, especially those in the US and Europe. During the period under review, many brands and retailers in the US and Europe were aggressively reducing their inventories, thus the order volume for knitted fabrics of the Group has been negatively impacted. The overall operating environment of the period under review remained difficult given the weak global economy and high operating costs.

The decrease in the Group’s revenue compared to the same period last year was due mainly to the reduction in capacity in Dongguan Fuan. Moreover, the weaker economy has led to reduced buying budgets and tougher price negotiations by customers, resulting in lower average selling prices for the Group. Despite a decline in commodity prices such as cotton and coal during the first half of the current financial year, the Group could not benefit significantly until the full replenishment of lower cost inventory. Similarly, the relief from increase in textile and apparel export related VAT rebate by the Chinese government from 13% to 14% on 1st November, 2008 and from 14% to 15% on 1st February, 2009 will only be fully reflected in the second half of this financial year. At the same time, the reduction in capacity also brought down the economies of scale for the Group resulting in lower operating margin.

For the period under review, due to a weaker economy as well as the reduction in capacity due to the reduction of capacity in Dongguan, revenue from the production and sales of dyed fabrics, sewing threads and yarns was approximately HK$2,086,687,000, a decrease of 24.0% as compared with the same period last year, and accounted for 83.9% of the Group’s total revenue. For the first half of financial year 2009, revenue from the production and sales of garments reached approximately HK$401,632,000, an increase of 22.8% as compared with the same period last year, and accounted for 16.1% of the Group’s total revenue.

Looking forward to the second half of the Group’s financial year of 2009, Mr HA Chung Fong, Chairman and Managing Director of the Group, said, “it is expected that the aftermath of the global financial turmoil will continue to adversely affect the retail consumer spending in the US and Europe. As a result, the demand for textile and apparel products is anticipated to remain sluggish. Our foreign customers have continuously expressed concerns over the near term outlook of the retail business, which may result in continuation of conservative placements of fabric and garment orders.”

“For the fabric business, following consolidation of fabric supply chain by some of our key customers and our implementation of more aggressive sales strategies, cost control and streamlining measures, the Group has already seen some improvements in sales volume and business performance in the initial months of the second half of the current financial year. The Group currently possesses a total of approximately 23 million pounds of monthly fabric dyeing capacity.

Because of weakness in demand and uncertainty in market outlook, the completion of the Yancheng fabric mill has been delayed. The Group will monitor closely the market conditions and its clients order plan before commissioning the Yancheng fabric mill. Meanwhile, the Group’s plant in Jiangyin, Jiangsu Province, remains the largest fabric production site within the Group and is expected to represent about half of the Group’s total capacity. This phased plan of balancing the distribution of capacity between the Pearl River Delta and the Yangtze River Delta of the PRC will enable the Group to strategically diversify its geographical risk and lessen the impact of rising costs of producing in Southern part of the PRC in the long term. Regarding the garment business, despite increase in sales during the period under review, the market for garment export remains volatile and highly competitive. Under such market conditions, the Group expects possibilities of weakening in the performance of garment business in the second half of this financial year.” Mr Ha added.

“The Group has continued to implement stringent cost-controlling measures to reduce our overall operating costs. The number of employees of the Group has been reduced from 18,200 as of 31st August, 2008 to the 16,500 as of 28th February, 2009. Given the current assessment of the market environment, the Group maintains an extremely cautious view on the Group’s overall performance for the whole financial year.” concluded Mr Ha.

About Fountain Set

Fountain Set (Holdings) Limited and its subsidiaries are recognized in the industry as one of the world’s largest circular knitted fabric manufacturers and has long been a driving force in the global market through its vertically integrated operations in spinning, knitting, dyeing, printing and finishing. The Group’s product range also includes dyed yarns, sewing threads and garments. As a major fabric supplier to garment manufacturers in over 40 countries that supply to internationally renowned retail brands, Fountain Set’s worldwide sales reached HK$6.1 billion (US$782 million) in the financial year 2008.

Headquartered in Hong Kong and listed on The Stock Exchange of Hong Kong Limited, Fountain Set (Holdings) Limited has production facilities in the PRC, Sri Lanka and Indonesia, with marketing and representative offices in 6 countries and a global staff force of approximately 16,500.