KUALA LUMPUR: China-based sports shoemaker XiDeLang Holdings Ltd, which saw its earnings reduced by half in the financial year ended December 2014 (FY14) due to challenging market conditions — is looking at acquiring companies this year to complement its existing operations.

XiDeLang has shortlisted three potential candidates and is in the final stages of negotiations with them. It believes the merger and acquisition (M&A) route will boost its production capacity and help it develop its own e-commerce platform to reach a wider market.

"We have been in talks with several established sports apparel manufacturers in China since early this year," XiDeLang managing director and chief executive officer Ding Peng Peng told The Edge Financial Daily in an interview last week. 

"Should the deal materialise, we will have added capacity, which will increase our revenue.

“For example, we will focus on sports shoes manufacturing while the other companies will focus on sports apparel manufacturing," he said. 

XiDeLang is a cash-rich company, which allows it to embark on the M&A exercise. As at March 31, 2015, it had  net cash of 517.91 million yuan (approximately RM317.96 million).

Currently, the Bursa Malaysia-listed group has six production lines which are running at a utilisation rate of about 80% to 90%, with an annual production of five million pieces of shoes. This will leap to 10 million pieces per year upon the commencement of four new production lines by year end. 

Ding said the increased production capacity allows the company greater flexibility to adjust to market developments, positioning it well to capitalise on both future growth in demand for its  own-brand products as well as the original design manufacturing segment. 

"At the same time, it also provides us greater production efficiency in terms of shorter lead time, thereby allowing a lower inventory level to be maintained by distributors and retailers and mitigating the risk of excessive and slow-moving inventory at the retail level," he said. 

"But we must accept that we will reach our limit on organic growth one day. As such, we must turn to acquisitions when organic growth stalls," Ding said.

XiDeLang previously announced that it had established collaborations with international brands like Zara, Disney, Brooks, Sketchers and Pull&Bear since last year and the company now expects to secure more orders from them.  

To stay competitive, Ding said the company is willing to compromise its gross profit margin, which declined to 24.67% in 2014 from 29.89% in 2011.

"We want to grab a bigger market share by offering competitive pricing. We don't mind slashing our gross profit margin to expand our market share, as long as our revenue grows. It is fine if our net profit growth stays flat," Ding said. 

With the expansion plans in the pipeline, XiDeLang is optimistic that it will maintain its forecast to achieve double-digit growth in revenue for FY15.

Meanwhile, Ding noted that the Internet has changed spending habits as consumers switch from physical stores to online shopping. 

"We recognise that the Internet is an important instrument for us to extend our customer reach," he said, adding that this has prompted the group to develop its own e-commerce platform to link customers, suppliers and authorised distributors. 

“We don’t have an e-commerce centre yet, but we plan to further improve our online business, which is currently contributing less than 2% of total revenue," said Ding. 

"By doing this, we hope our product will reach out to a wider consumer base in China and other regions," he said. 

For now, Ding said, the company is relying on existing external e-commerce platforms to sell its products. 

"We have collaborated with several popular websites such as Tmall to promote our own products," he said. 

XiDeLang’s (fundamental: 1.3; valuation: 1.5) counter, which was trading at 10 sen about two months ago on May 14, has risen 60% to close at 16 sen last Friday, for a market capitalisation of RM204.9 million.

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This article first appeared in The Edge Financial Daily, on July 13, 2015.