Nichole Chan

Glorious Sun Enterprises is among that select group of Hong Kong-listed garment manufacturing stocks on a bull run in recent months as big Western brands turn to outsourcing in low-cost Asia.

Glorious Sun turns out clothes for the likes of DKNY, The Gap and JC Penney from its factories on the mainland, Bangladesh, Cambodia, the Philippines and Indonesia.

But last week Glorious Sun demonstrated again it was capable of doing far more than just the grunt work of the fashion world when it tied up a joint venture deal with Quiksilver to distribute the California-based sports and swimwear giant's products on the mainland.

Both companies are confident the partnership will bring tremendous benefits.

'China is increasingly linked to the global youth culture,' said Quiksilver chairman Robert McKnight.

'While the development of the board-riding culture is still in its infancy in this [Chinese teenage and young adults] market, indoor snow parks and skate shops are beginning to show up in a number of high-profile locations.'

It was not just the management which was upbeat on the new alliance.

Investors drove the two stocks up to 12-month highs. Glorious Sun leapt to HK$2.05 on Friday while Quiksilver, which is listed on the New York Stock Exchange, hit US$30.54 on Monday.

Glorious Sun's shareholders may be figuring they can access higher profits through back-door exposure to Quiksilver's brand name by paying only one hundredth of Quiksilver's present share price.

Quiksilver, founded in Australia in 1970, has thrived in recent years with the popularity of so-called extreme sports including surfing, snowboarding and skateboarding in the US, Australia and Japan. Its designs focus on the teenage market and it has seen 16 per cent revenue growth in each of the past three years.

Glorious Sun and Quiksilver will invest a combined HK$200 million into the joint venture, which will manage the wholesale distribution of Quiksilver's products in Shanghai, Beijing and Hong Kong.

The new venture aims to position Quiksilver as the leading action sports brand in China. The initial plan is to open five to 10 stores in Shanghai by late this year or early next year, BNP Paribas Peregrine said.

The venture will leverage on Glorious Sun's distribution and marketing expertise from running its JeansWest casual wear brand, which has 565 retail outlets on the mainland and 196 in Australia.

Quiksilver is already doing well elsewhere in the region and may be hoping to repeat this success with Glorious Sun in China. This month, Quiksilver reported financial first-quarter earnings of US$6.6 million, more than double last year's equivalent period, primarily on the back of higher margins from its Asia-Pacific retail stores after it bought out the shops in Australia and Japan from licensees.

With young Chinese becoming more affluent and fashion-conscious, Glorious Sun may also have found another key driver for strong income growth via the alliance with Quiksilver.

However, Tung Tai Securities associate director Kenny Tang Sing-hing, said: 'The new venture will not [find it] easy to enter the sports and clothing market in China due to intense competition.'

Quiksilver's clothing products would compete head-to-head with Hong Kong-based retailers including Texwinca's Baleno, Bossini and Giordano. Baleno has roughly 1,000 stores in China, Bossini 175 and Giordano about 500.

As with its peers, Quiksilver will also face competition from low-priced copycat brands.

Glorious Sun's earnings are not likely to see an impact this year and BNP Paribas Peregrine analyst Mohan Singh said: 'The venture will incur start-up costs in 2004 with [it] turning to profitability beyond that.'

Aside from the Quiksilver venture, Glorious Sun - 32.6 per cent owned by founder and Hong Kong businessman Charles Yeung Chun-kam - is expected to continue growing earnings from existing garment manufacturing and retailing operations.

A Thomson First Call analyst poll has found a consensus earnings of 18 HK cents per share this year and 21 cents per share next year, against 15 cents last year.