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Management Discussion and Analysis

(extracted from Annual Report 2023)

BUSINESS OVERVIEW

Our Group's humble beginning can be traced back to 1993 when HongPeng Footwear was founded in Jinjiang City, Fujian Province, China to carry out manufacturing of sports shoes. Our Group promptly recognised that it is important to create a proprietary brand to help differentiate ourselves from other industry players, and to move up the value chain. Accordingly, our Group's proprietary brand name - 'XiDeLang' was created.

To facilitate the management process, HongPeng Fujian was established in 1996 to focus on design, manufacturing and marketing of sports shoes as well as design and marketing of sports apparel, accessories and equipment under 'XiDeLang' brand; whilst HongPeng Footwear concentrates on manufacturing of sports shoes for external customers where the products are primarily for distribution in overseas markets.

ODM Segment

• Objective:

  To become the reliable, trusted production partner for international brand names.

• Targeted Customer:

  International brand names, where products are primarily for distribution in overseas markets.

• Distribution Channel:

  Foreign trading / export companies and intermediaries based in China.

• Focus and business strategies:

  1. Production and design capability and capacity

     Our Group has continued to build on the production capability and capacity throughout the years. Relocation to our Group's present headquarter and production centre (with a builtup area of over 110,000 square meters) in 2013 has enabled us to expand our production capacity and to centralise the sports shoes manufacturing operations at single location, thereby allowing us greater flexibility and efficiency in accommodating the changes in market demands.

     The relocation to our Group's present headquarter and production centre, which comes with wider production floor, has enabled us to install additional production lines to enhance our production and design capability as well as to expand our production capacity.

     The enhanced production and design capability and increased production capacity are part of the key components which our Group leverages on to secure new ODM production orders, and enhance customers' confidence for recurring orders.

     In order to optimise the production efficiency following the cessation of Own-Branding Segment, the manufacturing activities of ODM Segment have been transferred and consolidated into HongPeng Fujian.

  2. Supply-chain management and quality control

     Our Group practices stringent checks and controls to uphold our quality commitment to the ODM customers. Raw materials to be used for the production are inspected to ensure adherence to the agreed specifications. Checks and controls are carried out at various stages of the production to ensure prompt detection of any defects and deviations from the agreed specifications. Finished products have to undergo various testing and inspection for quality assurance prior to delivery.

     Over the years, we have strengthened our in-house research and product development team. This enables us better integration and control for the entire production flow, as all key aspects (conceptual design, raw material procurement, costing, production process and production time) are considered and ascertained early at design stage.

     Our Group maintains a close relationship with the raw material suppliers to ensure that the incoming supplies are of good quality with prompt delivery. All the supplies are sourced domestically, with majority of the suppliers located within the neighbouring areas. The close proximity allows us better communication with our suppliers, where any issues concerning the supplies can be resolved expediently.

Own-Branding Segment

• Objective:

  To become one of preferred domestic brands for trendy casual sportswear in China.

• Targeted Customer:

  End-consumers, mass market in China.

• Distribution Channel:

  Primarily through the authorised distributors who are responsible to coordinate and manage the retail outlets across various cities in China. In view of the rapid growth of e-commerce trend in recent years, our Group has also embarked on online-to-offline marketing strategy after communication and coordination with the authorised distributors. Products are listed on third-party China-based online marketplaces to generate additional market awareness, with the ultimate aim to attract consumers to the physical retail outlets which are positioned as the "experience store".

• Focus and business strategies:

  In view of the intensified market challenges and adverse impact of COVID on the operations of the authorised distributors, our Group has resolved to cease the operations of Own-Branding Segment during the financial year ended 30 June 2022.

PERFORMANCE REVIEW

Revenue and Profitability

Our Group recorded total revenue of approximately RMB451.3 million for the FYE 2023, as compared to RMB443.9 million for the FYE 2022, representing a growth of 1.7%.

Our Group's strategic realignment to focus on ODM segment has proved to be beneficial, with higher sales recorded from the ODM segment for the FYE 2023; increased by approximately 11.7% during the FYE 2023 as compared to FYE 2022. This was primarily backed by recovery of market activities post COVID-19 pandemic.

For the FYE 2023, no sales were recorded from the Own-Branding Segment as our Group had resolved to cease the supply of Own-Branding Segment during the FYE 2022 to mitigate our credit risk exposure after taking into consideration the prevailing market uncertainties and the financial distress faced by our authorised distributors whose operations have been materially and adversely impacted by the COVID-19 pandemic.

Our Group recorded GP of approximately RMB42.5 million for the FYE 2023, as compared to RMB45.1 million for the FYE 2022. GP margin for the FYE 2023 stood at 9.4% (FYE 2022: 10.2%); primarily due to overall increase in production costs post COVID-19 pandemic, which was partially mitigated by overall increase in average unit selling price.

Our Group recorded net loss of approximately RMB23.5 million for the FYE 2023 (FYE 2022: net loss of approximately RMB141.0 million), mainly attributable to overall decrease in operating expenses as a result of:

1. non-recurrence of bad debts written off in relation to balances owing from our authorised distributors, which were one-off expenses accounted for in preceding year after taking into consideration the financial distress faced by our authorised distributors as they experienced adverse impact and disruption to their operations caused by the ongoing COVID-19 pandemic; and

2. reversal of property taxes over-provided in prior year, which was partially offset by land use taxes under-provided in prior year.

Financial Position

(1) Formula: (Cash and cash equivalents + Receivables) / Current liabilities

(2) Formula: Total liabilities / Shareholders' equity

Our Group's financial position as of 30 June 2023 remained relatively healthy and stable.

Liquidity

(1) Formula: Inventories / Cost of sales x 365 days

(2) Formula: Trade receivables / Revenue x 365 days

(3) Formula: Trade payables / Cost of sales x 365 days

Our Group's net working capital turnover days for the FYE 2023 stood at 40 days, remained relatively consistent with preceding financial year.

Capital Requirements, Structure & Resources

As of 30 June 2023, our Group had sufficient cash reserves to fund the existing capital expenditure requirements, to settle the existing indebtedness and to carry out our day-to-day business operations. Although there is no immediate shortage in capital resources, our Group may, from time to time, assess the need for additional fund-raising to meet future capital expenditure requirements while ensuring that our Group's financial and liquidity position remains healthy.

Dividend Policy

The Board has established a dividend policy to distribute up to 20% of the Company's profit after tax as dividend payment to our shareholders. The dividend payment will be made after taking into consideration, inter alia, cash availability, return on equity and the projected level of capital expenditures; always bearing in mind the importance of long-term value creation for our shareholders. The declaration of interim dividends and the recommendation of any final dividends are subject to the discretion of the Board, whilst any final dividend proposed is subject to our shareholders' approval.

In view of the economic uncertainties and the prevailing market challenges, no dividend was proposed by our Group during the FYE 2023 in order to preserve liquidity. This will give our Group's better positioning in handling future challenges and to tap into new opportunities.

TREND & RISK FACTORS

Known Trend

The key factor/trend affecting our Group's performance for the recent years, as well as the financial year under review, is the intensifying market competition for the footwear and apparels market; which was further complicated due to the COVID-19 pandemic. Our Group had taken the following initiatives to mitigate the impact arising from the intensifying market competition:

1. Stepped up the efforts in securing additional ODM production orders, to diversify the revenue base of our Group;

2. Enhanced the sports shoes production capability and capacity of the Group, so that our Group is more flexible in accommodating to the changes in market demands; and

3. Adopted prudent cost control initiatives as well as introduced suitable initiatives to promote customer loyalty and long-term business relationship.

Principal Risk Factors

The principal risk factors faced by our Group's operations remained largely consistent with prior years, comprising the following:

Kindly refer to Statement on Risk Management and Internal Control contained in this Annual Report for further details on the key risk management processes that have been put in place by our Group to mitigate the impact of the abovementioned principal risk factors.

PROSPECTS

The unresolved geopolitical tensions, coupled with the aftermath of COVID-19 pandemic, continue to cast shadows over the global economy and create uncertainties over market activities. The industry outlook for the near term is anticipated to experience higher degree of volatility. Consumers are expected to remain prudent on spending, while market competitions are expected to intensify with industry players remain conservative in terms of operations and expansion.

Our Group will continue to closely monitor the development and is committed to take proactive and practical actions to safeguard the interests of our Group and our shareholders and stakeholders. Our Group is of the view that the demands for the sportswear within the domestic China market and global markets will recover gradually in the mid and long-term, upon stabilisation of the geopolitical situation and global economy.

Our Group will step-up our marketing efforts to secure new customers in order to enhance our revenue base and improve our Group's future financial performance. Our Group will continue to put in efforts to sustain the financial stability of the Group and mitigate the adverse impact to the financial performance of the Group due to the external factors beyond the control of the Group.

Barring any unforeseen circumstances and subject to the stabilisation of the geopolitical situation and global economy, our Group is cautiously optimistic that the financial performance for the financial year ending 30 June 2024 will gradually improve.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements with respect to the financial condition, results of operations and business of our Group. Wordings such as "expects", "estimates", "anticipates", "intends", "plans", "believes", "potential", and variations of these wordings and similar expressions are intended to identify forward-looking statements. These forward-looking statements represent our Group's expectations or beliefs concerning future events and involve inherent risks and uncertainties. Forward-looking statements speak only as of the date they are made, and one should not assume that they have been revised or updated in the light of new information or future events. Accordingly, undue reliance should not be placed on them. Readers should be cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. Trends and factors that are expected to affect our Group's results of operations are disclosed in the above sections.