Luggage maker Samsonite International SA expects China to overtake the U.S. as its biggest single market in as little as two years, as the growth of China's middle class fuels leisure and business travel.
The company's China sales came to US$144.3 million in 2011, well behind the U.S. total of US$359.2 million. But Samsonite, which listed its shares in Hong Kong in June the same year, has been ramping up investment in Asia—already the company's biggest revenue contributor—and seeks to raise its profile among China's growing ranks of wealthy consumers.
Sales in Asia rose 42% last year, far outpacing other regions and underscoring the potential in the region's developing economies, Chairman and Chief Executive Tim Parker said during an interview Thursday. He pointed particularly to China, where sales increased 63%.
"There is a growing affluent middle-class consumer in China who is getting on a plane, getting on a train and getting in a car," Parker said. "Travellers are really beginning to take off and that's what underpins our business." In 2012 Samsonite expected Asia sales growth of about 20%, outpacing developed markets such as the U.S. and Europe.
For Samsonite, with 78% of its production in China, there is also a downside to a wealthier China: Wages are rising, which could create cost headwinds, Parker said. Higher labour costs in coastal production hubs—such as the Pearl River Delta in southern China—already have led some companies to shift manufacturing to less-developed areas and even other countries. An appreciating Chinese yuan would compound the effect, Parker said.
"The interplay between increased labour costs and an appreciating currency will undoubtedly make China more expensive," he said. But though he expects "some diffusion of manufacturing," he added that he believes China will remain "the centre of production for our products for quite a long time to come." Samsonite makes some products in Vietnam and Thailand, and has a factory in Bangladesh as well.
Samsonite posted a 30% rise in underlying net income for 2011, driven by strength in Asia, though sales growth exceeded 20% in other regions too, the company said. Net profit, though, fell 76% to US$86.75 million amid non-recurring costs and non-cash items.
Parker said Samsonite is seeking acquisitions to help underpin growth and will focus mainly on acquiring Western names. Its main brands now are Samsonite and American Tourister luggage, although it has expanded into other business and casual products.
The company had net cash totaling US$126.2 million at the end of 2011, up from $27.2 million a year earlier. Samsonite raised US$225.3 million in its Hong Kong initial public offering of stock last June.
"I'd be disappointed if we don't find some good opportunities at some point this year," Parker said, adding that he expects to expand the company's portfolio one brand at a time."
In spite of strong sales growth, Samsonite's shares have consistently traded below the IPO price of 14.50 Hong Kong dollars (US$1.90). They gained 1.2% Thursday to close at HK$14.12.
"My own personal view as a shareholder and a manager is that the shares are significantly undervalued," Parker said. But, he added, "the market will catch up."