By: Steve Toloken
June 26, 2013
Hong Kong plastic toy maker Lung Cheong International Holdings Ltd. is hoping that building another factory in Indonesia and pulling manufacturing away from increasingly expensive Chinese factories can help it boost profitability in a weak global market.
The company, which sold its China factories in 2011 and moved production to its campus in Serang, Indonesia, said in a July 25 report to the Hong Kong Stock Exchange that it has started construction of another factory that will double its capacity there.
The expansion in Indonesia will help it reduce reliance on mainland China and the rapidly rising labor costs there, the company said, as it searches for other acquisitions and new lines of business.
“The group’s production base in Indonesia currently enjoys favorable advantages over [China] with plentiful supply of labor,” it said. “The group looks forward to optimistic growth in our Indonesian plant…. Management remains confident in the group’s ability to seize this unique opportunity to consolidate its market position amid the exit of weaker players.”
It told the Hong Kong stock market it would spend HK$75 million (US$$9.66 million) on the new Indonesian factory and other upgrades, and said the new plant would be finished late this year or early 2014.
Still, it specifically cautioned that it needs to focus on making the Indonesian operations more efficient, suggesting that for the country’s lower-cost benefits, challenges remain. It noted that wages are also rising in Indonesia.
As part of a broader diversification strategy, Lung Cheong sold 25 percent of itself earlier this year to an investment company owned by Chinese appliance giant Haier Group for HK$278 million (US$35.9 million), and said it hoped to tap into Haier’s expertise in brand building and distribution. It had previously announced the Haier investment.
In a late May filing to the Hong Kong exchange, it disclosed that it plans to use HK$150 million (US$19.33 million) for additional acquisitions and HK$60 million (US$7.73 million) for acquiring new product lines in unspecified “high technology” industries.
“The directors are concerned that the global toy industry will continue to face challenges in the future which would adversely affect the group’s financial performance,” it said. “The directors will actively conduct [a] strategic review of the group’s direction and seek possible acquisition opportunities which can complement the Group’s existing business and the future strategic direction.”
It said its export-dependent toy business has been hurt by slackness in major markets in North America and Europe, which accounts for more than 80 percent of revenues, and said most of its sales in the year ending March 31 were for less complex, lower-priced toys.
“The group has continued its efforts into developing relationships with customers which had strong electronic and plastic toy lines targeted at the lower-priced segment,” it said. “Fewer sales of premium priced items were mainly due to economic uncertainties affecting consumers worldwide.”
The company makes toy race cars, electronic and plastic toys and consumer electronics, and it generates more than half its sales from its own-branded products, including toys under the “Kid Galaxy” name.
Besides the Indonesian factory, it said it has a marketing and toy design office in the United States.
For the year ending March 31, the company said sales were HK$209 million (US$26.9 million), a sharp drop from HK$420 million (US$54.1 million) in its 2011-2012 year. In the same period, profit fell from HK$78 million (US$10.1 million) in the 2011/2012 year to HK$2 million (US$257,000) in the most recent fiscal year.
But the earlier year figures included revenues from assets that were subsequently sold off, and the earlier year profit of HK$78 million came from a one-time gain from selling factories in China, making it hard to directly compare the two years’ financials.