CEO Conversation XXXIX: Hebert Chan, Chairman and CEO of Kwong Lung Enterprise Co., Ltd (8916 TT)
Successful transformation into a high-end functional outerwear manufacturer
In the past, people thought of Kwong Lung primarily as a manufacturer of down. After Mr. Hebert Chan took over as chairman in 2013, he actively promoted the production of functional outerwear, a high-profit margin product. "I wanted Kwong Lung to become a world-class manufacturer of outdoor functional clothing, bringing warmth to the world," this has been the vision of Chairman Chan. "After 10 years of hard work, Kwong Lung can finally reap the rewards from its investments in outdoor functional clothing."
In the past year, the achievements of Kwong Lung’s strategic transformation became apparent. In the first three quarters of 2022, sales from functional clothing accounted for 56% of revenue, driving the gross margin to 16.9% and the operating margin to 9.6%. This is much higher than the five-year average of 14.1% and 5.0% from 2017 to 2021. For the first time, sales from functional clothing at Kwong Lung accounted for more than 50% of revenue.
So far, Kwong Lung’s strategic transformation has achieved great results, but Hebert is not complacent. His goal is for the functional clothing business to account for more than 70% of revenue by 2026. The growth of outdoor functional clothing will further drive the increase in Kwong Long's gross margin, operating margin, and net margin. As a result, the growth rate of future profits is expected to exceed the growth rate of revenue. This will also contribute to a steady cash dividend payout.
Adopting management technology to establish a flexible production model
People often compare Kwong Lung’s business model with competing clothing factories. Why is Kwong Lung willing to produce small orders with complicated design patterns? How is this cost-effective? Hebert proudly shared with us, "Our competitive advantage is to use technology to perform complex tasks. I introduced technology management methods to Kwong Lung, methods that I have learned from working in the tech industry. In the past 10 years, the garment industry has been vertically integrated. Everyone wants to find the largest customers and manufacture the simplest styles. However, we entered the garment industry relatively late, so we can only use technology to manufacture niche products.
This might sound a little abstract, so let me give a few simple examples. Our clients are mainly small and medium-sized high-end outdoor brands. These client brands often place a lot of small orders with complicated designs. When we offer them samples, our clients will ask us to provide information on sizes, which can have up to 20-30 variations for a single sample. It is too time-consuming for our employees to do this manually, so we adopted Robot Process Automation (RPA) to speed up the process. This helps save a lot of manpower. Another example is our Global Marker Center. Since there are many different design patterns in a single order, we ask our experienced pattern makers to upload their designs onto the Global Marker Center, so that novice pattern makers do not have to start from scratch. From implementing this process, we have accumulated tens of thousands of pattern designs on our Global Marker Center. It is through these technology management methods that we have constructed a flexible production model. "
"In addition to the optimization of these processes, we also introduced the Toyota-style U-shaped production line design. According to internal data analysis, we only need to produce 1,600-1,800 pieces of a product to achieve economies of scale. In the past, small orders with complex design patterns are manufactured by skilled garment factories in China or Hong Kong. However, these garment factories only agree to produce these types of orders if the client brand places an additional, bulk order with simpler designs and agrees to pay a higher overall quotation. For example, if the client brand outsources production of simple-design products to Bangladesh, they will only need to pay US$30 per piece, but garment factories in China and Hong Kong might ask for USD $35. We charge our clients differently. With our flexible production model, we can still offer a quotation at USD $30 per piece for bulk orders and separate the quotation for orders with complex design patterns, which helps increase client brand dependency on our company."
"Because of our flexibility, Kwong Lung is the best choice for well-known local outdoor brands in Europe and the United States, especially when they are concerned with high inventory levels and a decline in end market demand. These client brands are used to placing orders for both bulk orders of simple design products and small orders of complex design products. Most garment factories only accept bulk orders with simple design patterns, but we are willing to produce both. As a result, client brands are more inclined to ask us to produce all their products. Our production flexibility brings us many client brands, and thus we are not affected by the sales of any single client brand. Thus, we are confident in our continued growth in the coming years."
"In recent years, many client brands are accelerating the development of the DTC (Direct-to-Customer) sales channels. If client brands are selling directly to customers, they would need to pay more attention to the uniqueness and technicality of their products in order to attract consumer interest. Such products are most likely to be limited editions and constitute only a relatively small order, yet these types of product orders must also meet high-performance standards; These are orders perfectly suited to be placed with Kwong Lung. By accepting these orders, we also promote to clients our expertise in manufacturing outdoor clothing."
Outdoor functional clothing is the future trend
Chairman Chan believes that the market demand for outdoor functional apparel will continue to grow significantly as countries around the world ease COVID restrictions. According to the estimates of Euromonitor, a renowned market research organization, the five-year compound annual growth rate (CAGR) of global outdoor apparel will reach 6.4% by 2026, a sharp increase from the pre-COVID 3.7% growth rate from 2007 to 2019. In addition, the customer penetration rate of outdoor clothing is still low and the space for potential growth is quite huge. Kwong Lung is optimistic that outdoor clothing is the future trend. The increasing percentage of outdoor functional clothing as a proportion of the overall clothing industry will bring three benefits to Kwong Lung: 1) Reduce the impact of seasonal effects on revenue; 2. Improve the company's profitability; 3. Allow Kwong Lung to continue its development and production of products with high technical barriers to entry, which will enhance its competitive advantage.
Chairman Chan pointed out that Kwong Lung’s current market share in outdoor apparel manufacturing is only 1.7%, which is still low. However, Kwong Lung is deeply involved in the production of outdoor sportswear and has established partnerships with the world’s most promising outdoor clothing brands while also obtaining their recognition. As more and more client brands choose Kwong Lung to produce functional outerwear, Kwong Lung’s market share will continue to increase. According to the sensitivity analysis conducted, Kwong Lung’s revenue will multiply even if its market share increases by only 1%.
Kwong Lung's growth strategy
When we asked how Kwong Lung would continue its advancement, Chairman Chan expressed excitement, pointing to Kwong Lung’s past growth trajectory and future strategy, “Kwong Lung entered the garment market much later than many major manufacturers. By the time we started, many simple-design bulk orders have already been snatched away by other manufacturers, so I made the decision to pivot our production towards functional outerwear and ski wear, which has complicated designs and smaller order quantities. However, by providing one-stop services and expanding product categories, we have become the main ODM of major European and American ski and outdoor brands and have grown in scale together with them. The difference between our business model and that of many major industry players is that many large-scale manufacturers are vertically integrated, while we are horizontally integrated. By providing production for a variety of products including Gore-Tex jackets, down jackets, taping jackets, sleeping bags, etc., we can produce any product a customer needs, making it easier for us to receive orders. Just this year, we added five new ski and outdoor client brands to our customer portfolio."
"At this stage, Kwong Lung specializes in small-order production of functional outerwear with complex designs. In addition to our existing clients, we have attracted two new types of customers, one of which is a fast-growing, small-to-medium-sized brand. Their original manufacturer is unable to support their rapid growth in sales, so they decided to approach us. The other customer is a medium-to-large sized brand that wants to develop outdoor functional clothing. They are interested in Kwong Lung's capability of producing high-end functional clothing and want to place several orders with smaller quantities but higher design complexities.”
"If Kwong Long wants to continue its growth, we can't just take orders from small-to-medium-sized customers. Eventually, we will need to service client brands with bulk orders. We are already making several arrangements to pave the way for this development. We are planning to increase production capacity in Indonesia by establishing a joint venture with a local garment manufacturer. Our strategic partner in this joint venture was actually a competitor of Kwong Lung. A few years ago, while we competed over the same order, we discovered that they have a huge cost advantage, their quotation alone was 30% lower than ours. We also realized that most of their products have simple designs, and their factory mostly processes low-end, bulk orders from global tier-1 brand customers.”
“In the future, we plan to bring our functional specialties to the new factory in Indonesia, coupled with the increased production efficiency, this will give us a unique competitive advantage when competing with other manufacturers of large Tier 1 customers. Once we start accepting orders from Tier 1 clients, the number of orders will grow exponentially because the decisive factor in major client brand order placement is the quotation. Once a Tier 1 client is satisfied with the quotations, they will start placing large amounts of bulk orders. Order placement habits of big client brands differ greatly from those of small-to-medium-sized clients. Our board approved the investment proposal for the Indonesian production plant at the end of 2022 and there will be four phases to the investment project, resulting in a capacity of up to 38 production lines when completed. In the first phase, Kwong Lung will invest US$ 3.0 million to build 6 to 10 new production lines, which are expected to begin production in the fourth quarter of 2023.”
Chairman Chan has been fulfilling his vision for Kwong Lung by putting his ideas into practice, bringing warmth to the world with every piece of outdoor functional clothing. It took him ten years to successfully transform the company and in the next five years, he will further expand Kwong Lung’s ready-to-wear business, increasing the proportion of revenue from ready-made clothing to 70% by 2026. When people mention Kwong Lung in the future, the first thing that will come to mind would be their technical expertise in manufacturing high-end technical clothing.
If you would like to arrange a meeting with Kwong Lung’s Chairman Hebert Chan, please contact yvonnehuang@qtumic.com.
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