Vtech Holdings Ltd

HKEX:303

Earnings Call Transcript 2022-Q2

[Grace Pang, executive]

Good afternoon, ladies and gentlemen. Welcome to our webcast. Today, Vtech Holdings Limited is announcing its results for the 6 months ended 30th of September 2021.

Let me introduce our management. Mr. King Pang, Executive Director and Group President; Mr. Allan Wong, Chairman and Group CEO of Vtech Holdings; Mr. Andy Leung, Executive Director and CEO of Contract Manufacturing Services; and Ms. Shereen Tong, Group Chief Financial Officer. First of all, Ms. Tong will present the group financial performance. Next, Mr. Leung will review the group's operations. Mr. Pang will then give the management outlook for the coming year. We will finish our presentation with a Q&A session.

Now may I invite Ms. Tong to open today's presentation. Ms. Tong, please?

[Ka Hung Tong, executive]

Thank you, Grace. Good afternoon, ladies and gentlemen, and all viewers online. First of all, I would like to share with you the financial highlights of the group for the 6 months ended 30th of September 2021 compared with the same period of the last year. As you see from the slide, the revenue of the group reduced by 0.8% to USD 1,114.8 million. The decrease in revenue was driven by the lower sales in Europe, Asia Pacific and other regions, which offset the increase in revenue in North America.

The gross profit of the group reduced by 14.6% to USD 304.9 million, and our gross profit margin also reduced from 31.8% to 27.4%. The reduction in gross profit and gross profit margin was mainly due to the higher material prices, especially electronic components and plastic materials as well as adjusted increase in freight costs arising from the container shortages. As for the direct labor cost and manufacturing overheads, they were also higher than the same period of last year, which were mainly due to the appreciation of renminbi and the unstable supply of materials impacting the productivity gain. A change in product mix also contribute to the decline in gross profit margin.

Our operating profit reduced by 36.3% or USD 90.8 million, and our operating profit margin also reduced from 12.7% to 8.1%. The decline in both operating profit and operating profit margins was mainly due to the decrease in gross profit and gross profit margin, which offset the reduction in total operating expenses. Operating profit in the first half of the current financial year also include government subsidy of USD 0.2 million in response to COVID-19 as compared with an amount of USD 4 million in the same period of the last year. Other net income also include a fair value gain of USD 0.2 million on an investment in your company, which has a shareholding in a listed entity that design and distribute integrated circuit products,as compared with a fair value loss of USD 1.1 million in the same period of the last year.

Our profit attributable to shareholders reduced by 37.8% to USD 76.9 million, and our net profit margin also reduced from 11% to 6.9%. As a result, our basic earnings per share reduced by 37.8% to USD 0.305 and our Board of Directors has declared an interim dividend per share of USD 0.17.

Turning to the revenue by region, North America remained the largest market of the group, accounting for 44.6% of the group's revenue. Our sales in North America increased by 1% to USD 497.9 million. The increase in revenue was mainly due to the higher sales of our telecom products and contract manufacturing services, which offset the lower sales of our electronic learning products. Our sales to European market reduced by 0.3% to USD 485.8 million. It was mainly due to the lower sales of the electronic learning products and telecom products, which offset the higher sales of our contract manufacturing services.

In Asia Pacific region, the revenue group reduced by 8.6% to USD 119 million. The reduction in revenue was mainly due to the lower sales of all our 3 product lines.

Other Regions include Latin America, Middle East and Africa. The group revenue in Other Regions reduced by 6.9% to USD 12.1 million. The decline in sales in Other Regions was mainly due to the lower sales of all our 3 product lines.

The group's stop balance as of 30 of September 2021, increased from USD 436.1 million to USD 599.4 million, an increase of 37.4% compared with the same period of the last year. The stock turnover days also increased from 120 days to 141 days compared with the same period of the last year. The highest stock level was mainly due to the stock up of raw materials in view of the unstable material supply as well as the deferral of shipments to the customers due to the shortage of containers from shipping carriers.

The group's trade debtors balance as of 30th of September 2021, reduced USD 521.7 million to USD 507.9 million. Our trade debtors turnover days, however, increased from 60 days to 66 days. The increase in trade debtors turnover days was mainly due to the change in customer mix compared with the same period of the last year.

As of 30th of September, the group had a net cash balance of USD 25.8 million, including deposit and cash of USD 52.2 million and bank borrowings of USD 26.4 million, a decrease of 81.2% compared with the same period last year of USD 137.1 million. The reduction in net cash balance was mainly due to the decline in EBITDA, increase in working capital investment and a higher dividend payment compared with the same period of the last year. Nevertheless, the group's financial positions remain strong, and we have adequate liquidity to meet the current and future working capital requirements.

This is the end of my presentation. I will now hand over to Mr. Andy Leung to share with you -- our operations with you. Mr. Leung, please.

[Hon Kwong Leung, executive]

Thank you, Shereen. Good afternoon, everyone. Welcome to join us today. Our review of operation begins as usual. We will look at the cost pictures. The group gross profit margin in the first 6 months of the financial year 2022 was 27.4% as compared with 31.8% in the same period last year. The decline in gross profit margin was mainly due to higher material prices, especially on electronic components, plastic materials, as well as a drastic increase in freight costs arising from container shortages.

With appreciation of the RMB and the unstable supply of material impacting productivities, direct labor costs and manufacturing overheads were also higher than the same period last year. A change in product mix also contributed to the decrease in gross profit margin.

Looking at our 4 regions. Gross profit margin in North America increased by 1% to USD 497.9 million in the first 6 months of the financial year. Higher sales of telecom products and CMS offset lower sales of ELPs. North America remain Vtech's largest market, accounting for 44.6% of group revenue. Our ELP revenue in North America declined by 8.3% to $255 million as material shortages and supply chain issue led to production and shipment delays despite strong orders. This resulted in lower channel inventory and the delayed availability of some new products.

Both stand-alone and platform product experienced sales declines. During the first 9 months of the calendar year 2021, the group maintained its leadership as the #1 manufacturer of electronic learning toys from infancy through toddler and preschool in the U.S. In Canada, Vtech maintained the #1 manufacturer in the infant, toddler and preschool toys category.

Stand-alone products saw lower sales of both Vtech and LeapFrog brands. For Vtech, growth in KidiZoom camera, Switch & Go Dinos ranges was offset by a decline in Go! Go! Smart family of products, Go! Go! Cory Carson vehicles and playsets, preschool products and the Kidi line. Sales of infants and toddler products held steady. The stand-alone product category was expanded with the introduction of KidiZoom PrintCam and Marble Rush line, a new range of eco-friendly toys made from plant-based and reclaimed plastic saw 4 new vehicles added to Go! Go! Smart Wheels and the launch of Sort & Recycle Ride-On Truck.5.

For LeapFrog, sales of infants, toddler and preschool products were lower. The brand's offering was, however, expanded by the launch of exciting new products such as LeapFrog Adventures and On-the-Go Story Pal. They were joined by a new range of role-play toys, including Count-Along Basket & Scanner and Choppin' Fun Learning Pot, an interactive cooking pot that utilizes plant-based plastic. The brand also launched a line of eco-friendly toys made with 100% FSC-certified wood which we have kicked off with Touch & Learn Nature ABC Board and Interactive Wooden Animals Puzzle.

Platform products recorded sales decreases for both the Vtech and LeapFrog. At Vtech, higher sales of Touch & Learn Activity Desk were insufficient to offset lower sales of KidiBuzz and KidiZoom Smartwatches. As the new KidiBuzz 3 and KidiZoom Smartwatch DX3 did not reach retail shelves until September because of material supply and logistics delay. At LeapFrog, growth of Magic Adventures Globe was offset by declines in children's educational tablets and interactive reading system. To strengthen the reading product offering, the LeapStart range saw the addition of LeapStart Learning Success Bundle and LeapReader was expanded with the Learn-to-Read 10-Book Mega Pack.

Telecom product revenue in North America grew by 0.8% and to 131.3 million as higher sales of commercial phone and higher telecommunication products offset lower sales of residential phones. Commercial phone benefited from the gradual resumption of business activities. Snom branded VoIP phone and small to medium-sized business phones saw higher sales supported by increased order from value-added resellers. Sales of hotel phones also recovered. For headset, the sales increase came from an existing customer.

Other telecom products were boosted by rising sales of baby monitors as the group secured additional placement in key retailers, expand its online presence and launched new models. In the first 6 months of the financial year 2022, Vtech baby monitors strengthened their position as the #1 brand in the U.S. and Canada. Sales of residential phone saw a decline as the market returned to normal following the lifting of lockdowns during which consumers have purchased more residential phones for home use.

During the period, Vtech maintained its leadership position in the U.S. residential phones market. CMS revenue in North America increased by 31.9% to $111.6 million as the lifting of COVID-19 restriction led to a surge in demand for certain type of professional audio equipment, industrial products, solid-state lighting and medical and health products. Sales of professional audio equipment used in the lecture theaters, music concerts and churches rose social distance measures were relaxed.

Industrial products benefited from the resumption of business activities, boosting order for printed circuit board assembly for coin and note recognition machines. Orders for industrial printers recovered as the market returned to normal. Sales of solid-state lighting rebounded as project-based demand resumed. For medical and health products, sales trended higher driven by increased order for hearing aids.

Let's now turn to Europe. Group revenue in Europe decreased by 0.3% to $485.5 million (sic) [ $485.8 million ] in the first 6 months of the financial year 2022 as higher sales of CMS were offset by lower revenue from ELP and telecommunication products.

Europe remained our second largest market, accounting for 43.6% of the group revenue. With lower sales of both stand-alone and platform products, ELP revenue in Europe fell by 4.1% to $151.1 million. Material shortages and logistic issues led to production and shipment delays. This resulted in lower inventory levels, delayed availability of some new products and delayed sales contributions. Geographically, sales increased in France, but decline in other key markets in the regions. In the first 9 months of calendar year 2021, VTech maintained the #1 infant and toddler toys manufacturer in France, the U.K., Germany and Benelux countries.

In stand-alone products, the LeapFrog achieved higher sales. Growth was led by infant, toddler and preschool products, augmented by the launch of LeapLand Adventures. For Vtech brand, higher sales of Switch & Go Dinos were offset by decline in other categories. In September, the new product line, Marble Rush, hit the shelves in all major European markets, adding incremental sales. During the first 6 months, Vtech expanded its award-winning KidiZoom camera offerings with the addition of KidiZoom Video Studio HD and KidiZoom PrintCam in key European markets. Initial sell-through of both products have been good.

For platform products, both the VTech and LeapFrog posted sales decline. The decrease came as material supply and logistic problem resulted in certain new product not reaching the shelves until after September, delaying their sales contributions. These included a new generation of the interactive reading system, LeapStart/Magibook and KidiZoom (sic) [ KidiCom ] Advance 3.0. Vtech branded children's educational tablets recorded higher sales. However, these were offset by lower revenue from KidiZoom Smartwatches, Touch & Learn Activity Desk and KidiCom Max. For LeapFrog sales of interactive reading system, a Magic Adventures Globe registered decline.

Revenue from telecom product in Europe decreased by 9.1% to $47.7 million as lower sales of residential phones offset growth in commercial phones and other telecommunication products. In Europe, the group sales -- residential phones in the region on an ODM basis, the shortage of semiconductors led to the shipment delays and a reduction in sales to customers.

Commercial phones and other telecommunication products benefited from resumption of business activity as COVID-19 restriction were eased, which led to rising sales of Snom-based business phones and a recovery in sales of hotel phones. CAT-iq handsets also registered a sales increase as order from an existing customer grew. Baby monitors, in contrast, experienced sales decline, mainly due to the shortage of semiconductors. Despite this, Vtech baby monitors made good inroads in the U.K. following the launch of a new product lineup. IAD saw the launch of a new product featuring Wi-Fi 6 in the first half of the financial year. Sales of this product category were down due to the shortage of semiconductors.

CMS revenue in Europe increased by 3.5% to $287 million as COVID-19 restriction eased. Sales of home appliances, IoT products, medical and health products, communication products and automotive-related product rose, offsetting decline in professional audio equipment and hearables.

Home appliances saw demand recover to pre-pandemic levels. IoT products were boosted by the resumption of smart meter installations. Medical and health products grew from increasing order for health and beauty products and hearing aids. Communication products benefited from higher order for Wi-Fi routers. Sales of automotive-related products were supported by increasing orders for smart electric vehicle chargers. Although demand for hearables remained strong, sales were negatively affected by the material shortages, which also reduced sales of professional audio equipment for home use.

Next, Asia Pacific. Group revenue in Asia Pacific decreased by 8.6% to $119 million in the first 6 months of the financial year 2022 with lower sales of ELPs, telecom products and CMS. The region represented 10.7% of group revenue. Revenue from ELPs in Asia Pacific fell by 3% to $39.2 million, mainly due to lower sales in Australia and Mainland China. In Australia, sales of both Vtech and LeapFrog products were lower. This was due to the closure of retail stores as a result of lockdowns as well as to material shortages and shipment delays. Despite this, in the first 9 months of the calendar year 2021, Vtech maintained its #1 -- maintained its position as the #1 manufacturer in infant and toddler toys category in Australia.

In Mainland China, growth was seen in off-line channel, boosted by the launch of a new range of infant and preschool products as well as the new line of Switch & Go Dinos based on a popular animation series called Mini Force. However, this was offset by a decline in online sales.

Telecom products revenue in Asia Pacific decreased by 15.8% to $13.3 million as lower sales in Japan and Hong Kong offset growth in Australia. In Japan, sales were lower as order for residential phones from an existing customer declined. In Hong Kong, lower sales of IAD resulted in an overall decrease.Vtech nonetheless launched a new generation of home gateway in Hong Kong, and we see good market feedback. In Australia, higher sales of baby monitors contributed to growth in the country, offsetting a decline in residential phones.

CMS revenue in Asia Pacific decreased by 10.1% in to $66.5 million as lower sales of professional audio equipment offset increases in medical and health products. The professional audio category was affected by the lower sales of DJ equipment as production at the group factory in Malaysia was impacted by the COVID-19 Movement Control Order in the country. In contrast, sales of medical and health products rebounded. Order for diagnostic ultrasound systems and hearing aids increased as hospital began to rebalance budget away from COVID-19 related equipment. The resumption of business activity boosted orders for hearing aids.

Finally, group revenue in Other Regions, comprising Latin America, the Middle East and Africa fell by 6.9% to $12.1 million in the first 6 months of the financial year. The decrease was due to the lower sales of all 3 product lines. Other Regions accounted for 1.1% of the group revenue. ELPs revenue in Other region declined by 1.7% to $5.8 million. Higher sales in Latin America were offset by lower sales in Middle East and Africa.

Telecom product revenue in Other Regions decreased by 10.1% to $6.2 million. The decline was due to sales decreases in Middle East, which offset increases in Latin America and Africa. CMS and Other revenue was $0.1 million in the first 6 months of the financial year as compared to $0.2 million in the corresponding period of the last financial year.

Thank you. This concludes my presentation. I will like to hand over to King for the outlook.

[King Fai Pang, executive]

Thank you, Andy. Greetings, everyone. All the group's 3 businesses continue to enjoy robust order book, indicating strong demand for our products Looking ahead to the second half, as channel inventory, especially new product availability, continues to improve, we expect sales of both ELPs and telecommunication products to pick up. CMS revenue, however, is forecast to decline year-on-year due to global material shortages. Overall, the group expects lower full year revenue compared with the previous financial year. The group's gross profit margin for the full financial year 2022 is forecast to improve over the first half, due mainly to product mix. When compared to the previous full financial year, however, full financial year 2022 gross profit margin is expected to decline.

To combat material supply and logistic issues, which seems unlikely to abate in the short run, we have been implementing a number of measures. We have continued to reengineer products to lower cost and utilize alternative components. We are signing long-term contracts with material suppliers to secure a stable supply and are increasing our stock of critical components. We are sourcing alternative shipping carriers to secure containers. Furthermore, we're advancing production of goods to allow for increased shipment and transportation time.

Looking at the 3 businesses. ELP revenue is forecast to increase slightly for the full financial year. Owing to shipment delays, some orders have been postponed from the first half of the financial year to the second half. With the entire range of new products now on retailer shelves and with improved overall channel inventory, sales in North America and Europe are gaining momentum. New contents for the award-winning Go! Go! Cory Carson animation series are being launched globally and will continue throughout autumn and winter. Subscriptions to LeapFrog Academy, however, have flattened since schools reopened.

In Asia Pacific, as lockdowns are lifted and retail stores resumed trading in Australia, sales are forecasted to rebound. Overall sales in Mainland China, however, are expected to report a full year decline.

Telecom products. With the slew of slated new product launches, sales of telecommunication products in the second half are expected to improve over the first half. This said, with no reprieve in sight on global material supply, full year revenue is hard to predict. Nevertheless, a good performance of baby monitors and recovery in commercial phones are expected to continue.

The baby monitor lineup strengthens. There's a full range of LeapFrog branded baby monitors with the baby care app is launched this month in North America. VHush a smart sleep training device with 100 bedtime stories and Bluetooth features will hit the shelf in the fourth quarter of the financial year. Our new feature-rich VTech work from home desktop cordless telephone will also be available in the U.S. in January 2022. Our work-from-anywhere product series, we start to ship globally in the fourth quarter of the financial year. It includes an all-in-one projector plus camera, a Bluetooth conference speaker, with audio recording function and the lineup of professional headsets. A new series of advanced Snom SIP desktop -- desksets and a multi-cell SIP DECT mobility system will be rolled out in Europe in the last quarter of this financial year.

CMS. The CMS revenue is expected to decline year-on-year. Despite solid order book and a large backlog, global material shortages make it difficult to repeat the strong second half performance of the previous financial year. To reduce the impact caused by shortages, we're recommending and working with customers and adopting alternative components. We are also providing much longer demand forecasts to material suppliers. As the COVID-19 surge in Malaysia eases, the production of DJ equipment is gradually returning to normal.

On avenues for growth, our New Product Introduction center in Shenzhen has proved successful in attracting new businesses from startups, thereby establishing a strong reputation in the Greater Bay Area of Southern China. In April 2021, we completed the acquisition of a facility in Tecate, Mexico. While it currently focuses on professional loudspeakers, once the COVID-19 situation allows, we will begin expanding the EMS capability to other product categories.

Thank you. This completes our presentation. We now look forward to answering your questions.

[Grace Pang, executive]

Thank you, King. [Operator Instructions] The first question comes from Christina Chen of HSBC.

[Christina Chen, analyst]

So I have several questions. The first one is that as we see that the net cash has actually decreased a lot, so I just want to check if management has any change on the dividend payout policy.

And second question is on -- actually, we have seen that the prices for some electric components, especially for the consumer electronics has seen signs of stabilize or even decline recently. So I'm not sure if you -- if management expects the pressure on price to be slightly eased in second half.

[Ka Hung Tong, executive]

So -- and as explained in my presentation, reduction in net cash balance was mainly due to the increase in working capital investment especially, increase in our stock balance due to the stock up of raw material in view of the unstable material supply. As for our dividend payout policy, as we say, even though our net profit reduced by 37.8% compared with the same period of the last year, but we still keep the dividend per share for the interim at USD 0.17. That means our dividend payout policies will not change in the full year if we have a net profit and we will keep the existing payout -- dividend payout ratio of around, say, 98% to 99% dividend payout ratio for the full year.

[Chi-Yun Wong, executive]

Yes. As to your second question, I think the component prices are still high. We don't -- we probably will not see a stabilization in the price of components and semiconductor components until at least the first quarter or even the second quarter next year.

[Grace Pang, executive]

Okay. Good. Our next question comes from [ Tsai Chi ] from [ Auckland ].

[Unknown Analyst]

[ Tsai Chi ] here. May I ask about how bad is the situation in terms of the delay that impacted the sales of ELP products? If there were no such delay, how much more should we be seeing? So -- and the second question is that on the baby monitor products, we -- I see that there are a few companies in the Canada and probably America, they are doing it. One of them is called Owlet, O-W-L-E-T. So they are doing this baby monitor product with prevention of SIDS product for infants. And if -- they have been doing extremely well. I don't know about their market shares, but since Vtech is very large player, probably the #1 player over there. So would you be able to come up with some similar products to counter that competitors, yes?

[Chi-Yun Wong, executive]

Can you repeat your first question? Your first question, [ Tsai ]? Yes. I think we...

[Unknown Analyst]

The first question is that if there were no delay in the container shipments, how -- roughly, how would our ELP revenue looks like? So I just want to know, it's not so much about the product salability, it's more about the shipment that direct the sales.

[Chi-Yun Wong, executive]

Yes. Okay. Let me give you a general answer. On all of our 3 product divisions, we have more orders than we can fulfill because due to shortage of components and then also shortage of containers to ship to our customers. So if we eliminate the bottleneck of container, certainly, our sales will go up. But as to -- hypothetically, if we don't have shortage in container, how much sales we can go up, we do not give numbers at this point in time. But I -- definitely, we have more orders than we can fulfill at this point.

As to your second question about baby monitors, one of our competitor you mentioned in Canada called Owlet. We are aware of those products and some of our competition is claiming a lot of features. And we are also coming up with products with similar features as many of our competitors. But I have to be warned also that some of our competitors are actually warned by the FDA not to claim those certain functions. Because according to the FDA, it's not legal to claim certain things unless you are approved by FDA. So we will be very careful in those claims in baby monitors.

[Grace Pang, executive]

Okay, good. Any more questions? The next question comes from [ Louis Kim ] of GCIC.

[Unknown Analyst]

On average, VTech would have to raise its prices by 16% in order to regain profitability of 2020. So are you prepared to execute such price increases? That's my first question.

The second question is I was surprised that sales in Go! Go! Cory Carson products declined despite the support of the Netflix series. Could you elaborate on this one?

And thirdly, I just want to double check that you say that toys are on time for Christmas. These are my 3 questions.

[Chi-Yun Wong, executive]

Well, [ Louis ], I wish we can raise price by 16%. Certainly, we have raised our price for our products, but not close to what you are suggesting. We wish we can, and probably, we shouldn't because some of the price increases are short term, we believe. So I think we can only raise the prices depending on competition, depending on how much the market can bear, and how much the price increase will affect our sales. So it's a fine balance in how much price we raised. So to answer your question, we did raise the price, but not quite close to what you have suggested.

Second question, and third question, I would leave it to King to answer.

[King Fai Pang, executive]

Louis, yes, we are quite disappointed numerically. The first half sales of Go! Go! Cory Carson toys were lower than last year. The main reason was because we lost brick-and-mortar store support -- well, we lost some brick-and-mortar store supports on this line. So at this point in time, we are selling a reduced number of stores and are mainly selling online. But we are working very hard to bump up marketing and with the winning of the Daytime Emmys and with new content, we are mounting a major comeback.

As on the third question, if I picked it up correctly, you are asking if the toys managed to make it on time for Christmas. At this point in time, the majority, the vast majority, almost all of them have. Obviously, they did not get on the shelves in the ideal time that we had wanted to earlier, but this time, at this point in time, they should be on the shelves. Retailers, they're also adjusting the delay availability of products, not just from Vtech, but across the toy aisle. And most of them, if not all, are pushing back their major promotions. So there are still lots of good deals and bargains to be had later this month and in December.

[Grace Pang, executive]

Okay, our next question comes from Eric Lau of Citi Research.

[Tak Hung Lau, analyst]

Chairman, thank you for the presentation. I have a couple of questions. Also the ASP inflation. So you mentioned you have raised ASP. Can we get more color when did you raise the ASP and what percentage you did raise by far? And are you going to raise the ASP further in the second half? If so, what is the degree then?

[Chi-Yun Wong, executive]

It's not across the board raising the prices in a single percentage. The price increase is product dependent and also depending on competition and also different from telephones or toys. So it's a very complex calculation. So in general, I think we have raised the price, and also the timing is different. So in general, we raised prices between 5% to 10% depending on the product and depending on the timing. And we will continue to -- depending on the cost. If the cost continues to escalate, we will continue to raise the price. But also bear in mind that many of the price increases are not reflected even on the first half. So it's a -- there's a certain delay factor when we raise the price. It will be -- most of the prices, we will be raising on the new products. Then we can calculate the full price margins on the new products. So that is the situation we are seeing.

[Tak Hung Lau, analyst]

Okay. So my second question is, what is the sales impact because of the semi shortage during this first half?

[Chi-Yun Wong, executive]

As I said earlier, we have more orders than we can ship because of component shortages, essentially the semiconductors. I think we -- you can safely say that if there's no component shortages, we -- our sales will be higher. Now by how much, we don't have a figure. But anything from 5% to 15% is possible.

[Tak Hung Lau, analyst]

I see. And one more question is the gross margin down 4.4 percent point, can we have a color how much from material cost high from freight charge high and also the FX like renminbi shrink.

[Chi-Yun Wong, executive]

Yes. I think Shereen can have a -- give some colors on the reduction.

[Ka Hung Tong, executive]

For the reduction in GP margin of 4.4 percentage point, as we have explained earlier, it's mainly based -- that depends on the 4 factors. One is material prices increase. And then the second one is the freight cost. The third one is renminbi. And then the fourth one is the changing product mix. And then you can use this sequence to determine the top -- the degree of the increase in those, say, negative factors affecting our GP margin. That means the material pricing is the #1 factor. And the second factor is the freight cost. And the third factor is the renminbi and the 4 factor is change in product mix. In total, it's 4.4 percent points decrease in gross profit margin compared with last year.

[Tak Hung Lau, analyst]

For the largest one, material cost, can we say it probably attribute more or less maybe 2 percent point for the margin?

[Ka Hung Tong, executive]

Yes, close to, not exactly.

[Grace Pang, executive]

Our next question comes from [ Tsai Chi ] again.

[Unknown Analyst]

Great. [ Tsai Chi ] here. A couple of questions. Just on the working capital, I know this a big chunk of the increase actually go to the trade debtors. So number one, can you share with us anything changed in terms of the lead -- sorry, the credit period, and is there any difficulty in collections?

Second question is on your battery, smart battery, EV battery charger business. Can you share more insight with us on either the market size or I don't know you can share about the brand or roughly how that market work? Yes.

And third question is on your online sales in China. There is a decline on the online sales in China. It appears that China has been a -- roughly a very tough market for Vtech in the last couple of years. I notice there are a lot of toys are also on the China on another place. But how do you see Vtech being a very strong business and brand and platform in China? Is it possible to be -- replicate your success in America in China as well? Yes. These are the 3 questions.

[Ka Hung Tong, executive]

So regarding the credit period or the collections of accounts receivables. Actually, you will see our presentations, our trade debtors balance as of 30th of September 2021 actually was lower than the same period of last year by around 2.6%. And then our revenue reduction is just 0.8%. Even though the trade debtors turnover days increased a bit from 60 days to 66 days. But there's no problem with our debtor collection.

[Hon Kwong Leung, executive]

Regarding the EV chargers. According to the EMS business nature, I can't tell you much about the product as the customer have the full product ownership. However, I can tell you that it is the chargers to charge the battery of automotive within a short period of time safely.

[King Fai Pang, executive]

Okay. For -- if I pick it up, I think [ Tsai's ] question is not just online. You're right in pointing out, [ Tsai ], that we've encountered a fair amount of difficulties in the last 2 years, especially with our toys business in China. This said, we are very -- we are dead set on growing that business. And the opportunities are abundant. The Chinese market changes very quickly, and what we need to do is to be able to take the best advantage of our capability to bring our products that is high quality and bearing the good Vtech brand, and then also to operate very effectively, especially for online in pushing the more the products out to the channels. And this is what we are working very hard on. But we definitely see a lot of opportunities for growth in China.

[Grace Pang, executive]

Okay, good. I'm afraid that -- that's all we have the time for. This concludes our today's presentation. Thank you for joining us.

[Chi-Yun Wong, executive]

Thank you.