Fountain Set (Holdings) Ltd, a global leader in the manufacture of circular knitted fabrics, has published its final results for the sixteen months ended 31 December 2012*, which show a loss of HK$324.2 million.

In the 2012 financial year, the group’s revenue was approximately HK$9,167.1 million, whilst its core business, production and sales of dyed fabrics, sewing threads and yarns, generated revenue of HK$7,977.1 million, which accounted for 87.0% of group total revenue.

Revenue from production and sales of garments was HK$1,190.0 million, which accounted for 13.0% of group total revenue and a loss attributable to owners of the company amounted to approximately HK$324.2 million. Gross profit margin for the period under review was 8.6% and basic loss per share was HK33.5 cents with the board has resolving not to pay any final dividend for the period under review. Capital expenditure was approximately HK$ 99,396,000 and estimated capital expenditure for financial year 2013 is approximately HK$160,000,000.

Adverse economic conditions

The company said that FY2012 was one of the more difficult years for the textile and apparel industry and the group, with the adverse economic environment in North America and Europe caused by factors including high unemployment rate and concerns over default of European debts continuing, resulting in weak demand for textile products and further deterioration in the demand for textile and apparel products.

At the same time, Fountain Set said, some large scale local brands and retailers in China had experienced an ‘over-inventory situation’ which negatively affected the demand for the textile products.

“During the period under review, there was unusually high price premium of Chinese cotton over that of the rest of the world which mainly as a result of the purchase of domestically produced cotton by the Chinese government at a guaranteed minimum price. Coupled with the surging labour cost, high energy cost and RMB appreciation, each operator of the industry value chain has experienced one of the toughest operating environments in the past decade,” the company commented.

Disposals

 During the period under review, the group disposed of its textile machinery business at the aggregate consideration of RMB90 million and also ceased its cotton spinning business. “The scale-back actions of our non-core businesses are in-line with our strategic business plan to reallocate our resources to the group’s principal businesses, to realize its investment in China, reduce gearing and increase the liquidity of the group,” Fountain Set said.

With respect to the disposal of its textile machinery business, the group recorded a gain from the disposal of approximately HK$43.1 million. For the disposal of the cotton spinning business, it made a loss of approximately HK$8.3 million. The net proceeds from these two disposals were used for loan repayment and general working capital of the group.

Outlook

Mr Victor HA Kam On, Vice-Chairman and Chief Executive Officer of Fountain Set, said: “The Group is committed to continue investing in infrastructure, machinery and information systems according to the operating needs and future development plans. With several fabric mills and garment factories within the group, regular infrastructure maintenance and machinery upgrades are necessary to ensure continuous improvement in operations. The group has been configuring SAP as our enterprise resources planning systems and the target implementation date is early 2014. It is expected that the overall operational efficiency and productivity will be highly improved.”

Apart from continuously satisfying the needs of its existing customers, the group will carry on the development of new working relationships with brands and retailers in emerging markets such as Russia and Eastern Europe.

The group is also committed to enhancing its research and development, product quality as well as technical expertise. “We will actively explore new materials and technologies in fabric production and continue developing higher added-value products for our customers. Fountain Set seeks to continue enhancing our operating efficiency including fuel and water consumption saving as well as cost structure while increasing speed-to-market at the same time,” the company said. “Without adding extra production capacity, we will continue to invest in new equipment and machines to enhance our production capabilities and level of automation. In addition, the Group is committed to corporate social responsibility and upholding environmental protection measures.”

Fountain Set remains cautious of the global macro-economic environment in 2013. Nevertheless, the board and the management believe that the group’s strategies and the major initiatives are rational and on the right tracks and therefore maintain a relatively optimistic outlook for the longer term. Going forward, the group is committing to enhancing its operational efficiency through a series of proactive measures to achieve sustainable and financially stable corporate development.

* With effect from 10 August 2012, the financial year end of Fountain Set was changed from 31 August to 31 December. This annual report accounts for financial results of the group from September 2011 to December 2012, with a total of 16 months instead of the usual 12 months.