Presented By: Richie Jue

Christy Fung Harry Lee

Tiffany Tang

Can HFIC Drive Breakthrough? IN FASHION APPAREL INDUSTRY

Working Capital Management & Cash Flow Assessment

Identify Core Competence & Industry Trend

Customer and Suppliers Relationship

Can we reach the financial target of 20%?

Analyze the issue on chairman viewpoint & provide solutions

Section 2 Section 4 Section 3

Section 1

Industry trend

(PEST Analysis)

Value Configuration

(Ansoff Matrix)

Core Competence

Cost Structure Financial Position Revenue Streams

Ratio Analysis Cash Flow Budget

Recommended

Strategies

Distribution

Channel

Supplier

Relationship

Customer

Relationship

Corporate Appraisal

Financial Analysis

Customer & Supplier Relationship Offer

(SWOT Analysis) (Value Chain Analysis)

Section 2 Section 3

Section 1

Working Capital Management & Cash Flow Maintenance Through Ratio Analysis & Budgeted Cash Flow Statement

Financial Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

Currentratio

Quick ratio Cash cycle

72% Increase in Cash Cycle!

0% 10% 20% 30%

Days inventory

Days receivable

Days payable

0%

10%

20%

30%

40%

50%

60%

70%

Increase in Days Receivable

& Days Inventory!

20% 10% & Aging Of Receivables Increase!

Working Capital Ratio

Financial Analysis Profitability Ratio

56% Decrease on EPS!

20% Decrease on Working

Capital Turnover!

15% Decrease on ROA!

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

Profit Margin Return onAsset

Return onEquity

EPS Asset TrunoverRatio

AccountReceivable

Rtio

InventoryTurnover Ratio

WorkingCapital

Trunover Ratio

Financial Analysis Cash Flow Ratio

0

0.2

0.4

0.6

0.8

1

1.2

Dividend Coverage

Current Liability

coverage

Total Liability

coverage

N ot Enough

to pay Dividend & Cover Liability

C ash Shortage

is inevitable unless dividend payout ratio can be decrease

Financial Analysis of year 2013

Projected Cash Flows from year 2013-2015 (All figures are in HK$ millions)

2012 2013

Cash flows from opearating activities

Profit before tax 2,751 (1,010)

Depreciation 816 933

Impairment of property, plant and equipment 580 592

Loss on disposal of property, plant and equipment 22 20

Increase in inventory (280) (309)

Effect of changes in foreign exchange rates (84) 30

Other cash flows from operating activities 48 417

3,853 673

Taxation paid (HK and overseas) (1,026) (179)

2,827 494

Cash flows from investing activities

Purchases of property, plant and equipment (1,707) (1,853)

Other cash flows from investing activities 107 110

(1,600) (1,742)

Cash flows from financing activities

Dividends paid (2,695) -

Interest paid (28) (28)

Proceeds from bank loans 2,375 -

(348) (28)

Net change in cash and cash equivalents 879 (1,277)

Cash and cash equivalents at the beginning of the year 4,461 5,170

Effect of changes in foreign exchange rates (170) (196)

Cash and cash equivalents at the end of the year 5,170 3,697

Lowering Profitability may

contribute to less cash

inflow from operating

activities

Less Cash on Hand

Cash Flow Strategies

• Adjust dividend payout ratio to 40% • Offer 50 ％ Strip Stock Option • Halve Bank loans in 2013 and 2014

Working Capital - Receivable Strategies

• Use early settlement discount on receivables • Factoring on wholesale’s receivables

Working Capital – Inventory Strategies

• Establish ERP (Enterprise Resource Planning) and AMT (Advanced Manufacturing Technology)

• Alliance with core suppliers

Identify Core Competence & Industry Trend Through SWOT/ Value Chain/ PEST Analysis & Ansoff Martix

Corporate Appraisal to Identify Core Competence

Firm Infrastructure

Human Resource Management: Matrix organization structure emphasizing on product management

Technology development: “e-shops” for online selling in several countries

Procurement: Just-in-time system of purchasing and production

Inbound

Logistic: most

are outsourced to supplies

Outbound

Logistic: retail

and wholesale

stores; “e-shops”

Operations:

Top designer

add huge

designing

value on products

Marketing and sales:

advertising campaigns;

collaborating with top

fashion models; advertising

in premium and high

circulation magazines and media.

◆ Austerity policy in EU ◆ Regulations encourage green fashions

◆ Tariff Exemption on product

from southeast Asia countries

◆ Slow economic recovery in EU

◆ Exchange risk from Euro ◆ Economic growth in PRC

◆ Increasing supply cost in PRC

◆ Purchasing culture in PRC: desire for exotic brand

◆ Mcfashion request: Lower price/

more choices & new pattern ◆ Acceptance of green fashion

◆ Resistance on increasing price among EU customers

◆ Board band penetration facilitates online sales ◆ New material (MODAL) facilitate production of green fashion

Corporate Appraisal to Identify Industry Trend

Corporate Appraisal to Identify Industry Trend

Europe

China

Southeast Asia

• Austerity policy continue in EU

• Depreciating Euro (Exchange risk)

• Psychological Acceptance of Green Fashion

• Robust Economic growth • Rising middle-class desire for

exotic lifestyle • Inflation push up suppliers’

price • Competition from Glamour

Fashion

• Tax Exemption from EU countries

• Lower material and labor costs

Corporate Appraisal Six Future Trends

Europe EU market is less attractive than ever before

China

Southeast Asia Cost-saving to

relocate manufacture to Southeast Asia

Chinese market is regarded as high growth region

Green Product Global Fashion trend towards Green Fashion

Online Sales Online shopping becomes a torrent worldwide

Fast Fashion Customers request Lower price; fast goods and more choices

Consolidation (consolidate

souring of goods & supplies)

Developing new product

ranges for existing markets

(denim, swimsuit, sunglass etc.)

Rapid expand business in

the PRC (Establishment of a

new brand for lower price

fashion; alliance with a local

partner)

Rapid expand business in

the PRC (Use existing

product ranges to capture

potential new market shares)

Expansion in Europe

existing product ranges

Corporate Appraisal by adopting Ansoff Matrix

Consolidation Strategy based on improving efficiency and reducing cost

Benefits ★★★★☆ Risks ★☆☆☆☆

• Lower cost • Improve inventory level

• Risk from less suppliers ( Toyota Recall crisis)

High Return & Low Risk

Suitability – Fits with external rising supply price and poor working capital

Acceptability – Yes

Feasibility – distilling existing suppliers

Expansion in Europe with the company’s existing product ranges

Benefits ★★☆☆☆ Risks ★★★☆☆

• Better customer service increase sales

• E-shop sales growth in EU

• Stagnating & Saturated EU market • Considerable amount of

investment

Low Return & Medium Risk

Suitability – Cash flow shortage need to be addressed for expansion strategy

Acceptability – No

Developing new product ranges for existing markets

Benefits ★★★☆☆ Risks ★★☆☆☆

• “Grasp” green fashion trend • New product (denim) help HFIC

catch up with others (Guess, CK.) • Potential product ranges are

crucial for new customers

• R&D investment on customers’ preference

• Existing EU market is not attractive

Medium to High Return & Low Risk

Suitability – Fits with corporate values and ethics (green fashion)

Acceptability – Yes

Feasibility – Additional resources like new design panels are needed

Rapid expand business in the PRC

Benefits ★★★★★ Risks ★★★☆☆

• Global brand equity caters PRC customers’ exotic brand request & purchasing culture

• Hugh potential sales growth in PRC

• Considerable investment on distribution establishment

• Competition from Glamour

Fashions Limited

High Return & Medium Risk

Suitability – Fits with external opportunity: future growth in PRC

Acceptability – Yes

Feasibility – Time and resources are required for new brand establishment

Corporate Appraisal get a comprehensive picture

1) Global reputation 2) Top designers 3) Successful Advertising 4) International recognition of social

and ethical practices

1) Poor working capital management with problematic cash flow

2) High risk of irrecoverable accounts receivable from wholesalers

3) Heavy reliance on declining Europe market

1) Higher Supply Cost in PRC 2) Bad Debt risk from wholesalers 3) Currency exchange rate risk Of Euro 4) Competition from Glamour

Fashions Limited

1) Potential growth market in PRC 2) No market leader in PRC market 3) Future revenue growth and

trend on online sales

Risk Control Strategies

• Invoice EU wholesalers in US$ (solve exchange risk) • Shift sales from wholesales to “e-shops” (avoid heavy reliance on EU market) • Transfer PRC suppliers to Southeast Asia (cushion PRC increasing supply cost) • Reduce suppliers & introduce TQM system (to be cost-saving)

Product Develop Strategies

• Green Fashion ranges development • New Fashion Product ranges development (swimsuit, denim, underwear etc.)

PRC Expansion Strategies

• Alliance with Glamour Fashion Limited • Set up PRC sales headquarter • Expand Retail instead of wholesale business in PRC

Core Competence Enhancement Strategies

• Make “Micro film” starred by foreign top models • Online Advertising for PRC market (Sina Weibo, Youku etc.) • Initiate High Fashion International Fashion Show

Analysis Relationships with customers & suppliers/ Analysis Distribution Channel

How do Customers see us? How should we Choose Suppliers?

Relationships Analysis

Customers do care

• Social Responsibility • Environmental

Responsibility • Ethical Practices • Shopping Experience

Suppliers we choose

• Same Objective? • Supplier’s Code of Ethics (not to be another Foxconn)

Long-term Beneficial Strategies

• Sponsor the third world countries by providing clothes (Nigeria, Ethiopia etc.)

• Initiate “One dollar” Charitable Activity annually • Develop Family Workshop in Southeast Asia (Potential Supplier) • Establish Code of Conducts for suppliers selection • Shop Decoration and Employee Retraining Project

Five Year Implementation Plan for our proposed strategies Can we achieve the financial target 20%?

Implementation Plan From 2013 to 2017

Cash Flow Strategies/Working Capital Strategies/ Risk Control Strategies

Product Development Strategies / PRC Expansion Strategies / Core Competence Enhancement Strategies

Charitable Donation, Sponsor Third World Countries with clothes, employee retraining project etc.

Projected Income Statement

In 2013, we can almost

reach the target

19%

?%

Projected Income statement (in HK$ millions)

2012 2013 2014

Turnover 31,050 32,603 34,232

Cost of goods sold (15,835) (15,043) (14,290)

Gross profit 15,215 17,559 18,838

Occupancy costs (3,625) (3,443) (3,270)

Advertising costs (674) (681) (688)

Other costs (7,410) (7,262) (7,117)

Operating profit before depreciation 3,506 6,174 7,764

Operating profit (befor depre.) to sales ratio 11%

Analyze the issue and provide relevant solutions Standing on Chairman’s viewpoint

Ethical Issue

Relationships of Interested Parties

Rules & Regulations Considerations

HKICPA Code of Ethics

Short-term Long-term solutions

Section 5

Ethical Issue

Kenneth Chan (Chairman)

Mary Leung (Manager of PL)

Jonathan Lu (Deputy Operation Director)

Chris Lee (Operation Director)

Jian Jiang (Officer of SEHK)

Manager in PL, who held HFIC’s shares

Intention to consult

Potential intention for higher position Close friend (bias)

Ethical Issue

Breach the fiduciary duty as a

director

Chris Lee Breach the

statutory duty to disclose

interest

Ethical Issue

Kenneth Chan

As a CPA, Kenneth Chan’s actions should comply with HKICPA Code of Ethics

Integrity: Expose Chris Lee? Take Legal Actions?

Objectivity: Should not consult Jian Jiang & Mary Leung

Confidentiality : Keep Jonathan Lu’s whistleblowing action secret

Professional Behavior: Take Listing Rule of HKEx into account

Additional Consideration: The real intention of whistleblower

Ethical Issue

1) Expose Chris Lee’s misconduct

to the board of directors.

2) Ask board of director to hold special

shareholders meeting to process a

formal dispute resolution.

Board of Director

3) Consult an independent professional

adviser Independent

Advisor

Kenneth

Chan

Ethical Issue

1) Improve Due Diligence Investigation System in management level.

2) Conduct the Declaration of Financial Interests System.

3) Consolidate safeguards in working environment under Code of Ethics.

Section 2 Section 4 Section 3

Section 1

Industry trend

(PEST Analysis)

Value Configuration

(Ansoff Matrix)

Core Competence

Cost Structure Financial Position Revenue Streams

Ratio Analysis Cash Flow Budget

Recommended

Strategies

Distribution

Channel

Supplier

Relationship

Customer

Relationship

Corporate Appraisal

Financial Analysis

Customer & Supplier Relationship Offer

(SWOT Analysis) (Value Chain Analysis)

Section 2 Section 3

Section 1

Financial Analysis

• Improve Working Capital Management

• Solve the problem of cash flow shortage

Corporate Appraisal

• Identify Core Competences • Find the Industry Trends • Identify the market to

explore

Relationship Analysis

• Enhance our Corporate Social Responsibility

• Establish Green Relationships with Suppliers and Customers

HFIC Will Fly High in the Future！ IN FASHION APPAREL INDUSTRY