. Based on our insights into the prospects of the apparel and textile industry, we entered into the textile industry in the 1980s. According to Frost & Sullivan, there has been an increasing trend in the popularity of stretchable denim garments and hence, stretchable denim fabric has a relatively higher profit margin. We believe that we are well-positioned and have the competitive strength to further our business in the stretchable denim fabric market.

. In view of the anticipated industry growth, our expanding clientele, increasing demand for our stretchable denim fabrics and rising quality standards of customers, we plan to procure slasher dyeing, weaving, finishing (desizing and shrinking), ozone bleaching and washing machines in order to increase our production capacity and enhance our product development capability. Please see ‘‘Production — Our machinery purchase plan’’ in this section for further details. Our Directors believe that the above machinery will further our capability in developing and producing denim fabrics of even greater aesthetics and functionality which drives our business by obtaining more orders from existing customers and attracting new apparel brands to procure denim fabrics in the future.

We believe the foregoing anticipated industry growth and our continuous efforts in business development, in particular clientele expansion, will sustain our business growth on one hand and reduce the proportion of revenue from certain apparel brands to our revenue on the other hand.

# Business relationship among our Group, apparel brands and garment manufacturers

The following diagram illustrates the typical business relationship among our Group, apparel brands and garment manufacturers:

# Principal contractual terms and credit terms

During the Track Record Period, we generally entered into individual sales orders and did not enter into long-term contracts with our garment manufacturer customers.

The terms typically included in these sales orders are product specifications, unit price, volume, delivery schedule and payment terms which are agreed between our Group and apparel brands. Garment manufacturers must procure denim fabrics from designated suppliers and in accordance with purchase

terms as instructed by the apparel brands. Payments are usually made by cash or letters of credit. We granted credit periods of up to 60 days to customers who have long business relationship with us and good payment record.

# Delivery arrangement

The finished products are generally delivered to garment manufacturers on the basis of FOB. However, we sometimes deliver on the basis of CIF or CNF to certain overseas garment manufacturers.

We generally engage third party logistic service providers for the delivery of our denim fabrics to our customers in both overseas and PRC sales. For FY2015, FY2016 and FY2017, our delivery and export related expenses amounted to HK\$4.4 million, HK\$6.0 million and HK\$7.6 million, respectively.

During the Track Record Period and up to the Latest Practicable Date, we did not experience any material disruption to our delivery arrangements and we did not suffer any material loss or pay any compensation as a result of delays in deliveries to our customers.

# Product return and warranty

We carry out internal quality control assessments to ensure that the finished products comply with the specifications or quality standards of the apparel brands. Apparel brands may also designate their quality control examiners to assess the quality of our finished products. If the results of either one of the assessments fail to meet the pre-determined specifications or quality standards, we may arrange replacement for the returned products on a case-by-case basis.

Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, our Group (i) did not receive any material complaints or claims from our customers in relation to the quality of our denim fabrics; and (ii) did not have any material sales return or product recall.

# QUALITY CONTROL

We place great emphasis on quality standards and are committed to manufacturing excellent quality denim fabrics. As at the Latest Practicable Date, there were 58 employees in our quality control team, of which two were based in Hong Kong and 56 were based in the PRC.

We have implemented and put in place the following internal quality control guidelines and measures throughout our production process from use of qualified suppliers, subcontracting to packaging:

# Use of qualified suppliers

Our suppliers are selected based on, among other things, price and payment terms, product and service quality, operation scale, and geographical proximity to our production facilities.

A qualified supplier list for our principal raw materials approved by our executive Directors is maintained by our procurement team and all principal raw materials must be purchased from our qualified suppliers. We closely monitor the performance of our suppliers from time to time. Besides, we