14 Aug 08 - INTERVIEW-Sofa maker Man Wah expands amid strong exports, China sales (XFN-ASIA) - Despite weakness in some overseas markets, leather sofa maker Man Wah Holdings Ltd is expecting strong sales as it pushes ahead with an aggressive expansion plan. The Singapore-listed company said over the weekend that its net profit for its first fiscal quarter rose 65.3 pct year-on-year to 62.6 mln hkd on revenue growth of 40.7 pct to 474.9 mln. Sales to the US grew 104.6 pct year-on-year to 261.7 mln hkd, while sales in China were up 47.8 pct at 74.5 mln for the three months to the nd of June. The Hong Kong-based company, which has its production in south China\'s Guangdong province, said its robust profit growth and solid sales were aided by enhanced output as well as better margins for sales to the US, its top market. \"We were not surprised by our results. We had good orders coming from the US, and domestic sales from China. The only thing - sales coming from the European market are softer,\" said CFO Francis Lee. In an interview with XFN-Asia, he said that the company attributed most of its recent strong performance to capacity increases. \"We are very much capacity-driven, so we believe that the execution of Phase II of our expansion plan will give us a boost as far as driving up sales for the coming years, because without capacity, we can\'t meet market demand. So that is very much a reason for the quarterly expansion that we just had.\" The company has three leather sofa production plants and one foam factory, employing about 1,500 people. With the completion of its Phase II plant in the Huizhou Daya Bay industrial zone in December 2007, annual production capacity nearly tripled to 500,000 sofa sets to meet the growing demand. \"So the capacity increase in our plants is the major component in giving us good growth, as well as hopefully for the next quarter and the next one to two years,\" Lee added. But spring boarding growth by expanding facilities had its limitations, and the firm is also keeping its eyes open for attractive acquisition targets. \"There are some limits to just focusing on organic growth. We are constantly looking at opportunities for good M&As. We believe that we have good brand recognition, so we may buy another brand or two. In China, we can extend our network and business in the market faster.\" Man Wah is also trying to cut out the middle man in its furniture set sales to the US. \"In the US, now we mostly sell directly to top 100 furniture retailers rather than to wholesalers. We now sell more to retailers in the US who have their own stores. So we have better negotiating positions with them with no middle men compared with wholesalers whose motivation is all about getting the lowest prices for products.\" He said this is helping its margins. \"It\'s easier for us to raise prices, because if you raise prices for wholesalers, they will probably go elsewhere. For the retailers who sell our products in their many stores, they will likely stay with us knowing the relationship that we have established, and that is a strong point as far as price negotiations are concerned.\" He said that Man Wah is still bucking the trend and boosting sales to the US during an economic slowdown, and suggested the company still has room for growth. \"It\'s a huge market and our market share in the US is only about 0.2 pct. And although there is a general slowdown in the US economy, we are still getting brisk sales from our buyers, who are generally big, and some are weathering nicely against the slowdown.\" Leather and foam, two major components of its sofas, have both seen price hikes. Man Wah buys its leather from Italy, South America and China. For the most part, however, it has been able to pass along the costs, at least in the US. \"Leather prices saw a big spike in 2006 but have tapered off since then and stabilized, only inching up slightly recently. Also, rising oil prices have had inflationary pressure on foam prices, which comprise about 18 pct of the cost of our leather sofas,\" Lee said. \"Costs have gone up, but generally we have been able to move our prices too.\" Despite its heavy reliance on the US market, the company is also keenly interested in the big market on its doorstep. It plans to have 300 \"Cheers\" sofa set retailing outlets in China by early next year. It now has a network of 230 Cheers specialty stores selling its products. \"We are cautiously optimistic going forward. Short term, we are more upbeat on US exports than we are to the EU,\" he said. \"We also still believe the Chinese consumption story is valid. For the next few years, we believe the growth in China will help us grow overall, and grow our domestic dominance,\" Lee said.