GARMENT manufacturing is viewed by some as a sunset industry that sees razor-thin margin and is losing its competitive advantage, but that’s not quite the case for Prolexus Bhd, whose major clients include international brands such as Nike, Under Armour and Asics.

The sports apparel manufacturer is optimistic about its prospects and foresees good earnings growth moving forward after it achieved record-high revenue and net profit in the financial year ended July 31, 2014 (FY2014).

“We are a growth company and we grow every year. If you look at the last four to five years, you can see the trend — it is nicely upwards. We do not foresee any disruption to that,” Prolexus executive chairman Ahmad Mustapha Ghazali tells The Edge.

According to him, Prolexus (fundamental: 2.5; valuation: 1.8) has a happy problem — it does not have enough capacity to cope with the brisk sales. The company, which is operating near to maximum capacity, plans to expand its workforce of 1,000 sewing operators by 40% to 1,400 for its Malaysian operations this year.

“As far as orders are concerned, we are quite confident that our major customers will give us the orders. That is not the issue. Our customers have shared with us their plans to grow their brands rapidly and have asked for us to be ready,” he says.

“The question is whether we have the capacity to take on more work. If we want more orders, we must meet the delivery schedule, which can be quite tight in most cases. For us to grow, we need manpower.”

Prolexus has set a target to sustain its revenue growth at 10% and sales orders growth at 23%. Mustapha says this will be supported by the increase in sales orders from major customers and international brands.

“Our growth is in tandem with the growth of our major customers. They have been growing quite aggressively in the last few years. Since we are one of their suppliers, we have to grow with them, otherwise, we will lose our market share.”

A 40% increase in the company’s workforce will increase its production capacity to close to one million pieces of garments a month from its factory in Malaysia, which could potentially earn an additional RM80 million for the company’s top line.

For FY2014, Prolexus’ net profit grew 21% to RM20.8 million from RM17.16 million the year before. Its revenue increased 25% to RM294.1 million from RM235.5 million in FY2013. The company’s earnings have also been growing consistently since FY2009 after being in the red for six years between FY2003 and FY2008 (see chart).

As Prolexus’ revenue and profit grew, its share price has soared. In 2014, the company saw its share price rise 57.6% from 75.5 sen at the beginning of the year to close at RM1.19 on Dec 31, 2014, against a lacklustre broader market.

During the same period, Prolexus had a balance sheet that many of its peers would envy. As at July 31, 2014, the company’s net cash position stood at RM33.04 million, 19% more than the RM27.72 million seen in the previous year.

Prolexus’ largest shareholder is its managing director Lau Mong Ying, who has a 6.83% direct stake and a 10.33% indirect stake by virtue of his interest in JE Holdings Sdn Bhd. Narspa Holdings Sdn Bhd, in which Mustapha has interest, holds a 6.56% stake in the company.

Besides manufacturing, Prolexus is involved in the apparel retail business and has its own brands under Be Elementz and Bixiz Kids. Mustapha says there are plans to grow this segment but the company is still “discussing which direction” the business should go in the future.

“The logical approach is that since we are good at what we are producing for the major global brands, there is motivation for us to ask whether we can produce something for ourselves for the local market.

“We are thinking of doing online retail in China but that idea is still at the initial stage (of planning) and we are still discussing it,” he says.

Prolexus also has a controlling stake in an outdoor advertising firm, which Mustapha describes as a “profitable outfit” that is slowly growing.

Beyond Malaysian shores, the company is doubling the size of its operations in China this year to boost the segment’s revenue contribution from 30% to 50% within the next five years. At full operation and with expanded capacity, it would add some RM90 million to Prolexus’ total revenue.

“We reckon that the Chinese operations in the future will be as big as, or bigger than, the Malaysian operations. That is our intention,” Mustapha says.

“Wetarget to spend (a total of) RM8 million on this expansion. We are constructing a building within our own premises (in China) and this will be converted into offices and production floors.”

According to Mustapha, China is a preferred location for the expansion of Prolexus’ business due to the lower operational costs, availability of workforce as well as tax incentives provided by the Chinese government to foreign direct investors.

He adds that with these plans, Prolexus is hoping to improve the 8% to 9% profit margin — a “standard” for the industry — it is currently enjoying through better economies of scale and higher efficiency.

Prolexus’ expansion plans, however, do not just stop at its existing operations. Mustapha says the company is “actively looking” to set up production factories in the Asean region to take advantage of the Asean Economic Community, which will start this year.

“We are looking at countries like Cambodia and Vietnam, and maybe Myanmar for our factory operations.

“If we were to grow, we have to look at the region and the potential markets where there are factors such as availability of labour, lower costs and benefits for cross-border business in terms of taxes,” Mustapha says.

This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.

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