Dear Shareholders,

Toy manufacturers in China have endured a very difficult operational environment for the past five years. As crude oil price started to climb in 2003, peaking in 2008, raw material costs soared to new heights as well. In addition, cost of labour in coastal regions of China rose continuously, compounded by the implementation of the New Labour Contract Laws in the country. A further aggravating matter was the appreciation of the Renminbi Yuan. As a result, manufacturers have borne the heaviest cost burden the toy industry has faced in its recent past. The difficult environment consequently led to acceleration in the consolidation process, expelling weaker players. As the largest plush stuffed toy manufacturer in the world, Dream International Limited (the “company”) and its subsidiaries (collectively the “group”), showed great resilience amid adversity, overcoming challenges and managing to deliver encouraging business performance during the year under review.

As early as 2004, the management foresaw impending changes to the operational environment and took decisive action. Stringent cost management became a key objective, leading to the closure of plants in coastal regions of Mainland China and their relocation to inland China and Vietnam to enjoy better allocation of resources, lower labour costs and greater economies of scale. We also streamlined the business structure and workforce to cap expenses and improve overall efficiency. To broaden our income stream and raise profitability, we explored new opportunities, such as a licensing business, all the while adjusting our customer base and product mix.

Through our conscientious efforts during the past years, the group was able to quickly recover from the downturn. By restructuring our business and enhancing the group’s competitive advantages, we were able to capitalise on operational conditions that started to improve in the second half of 2008. In 2009, despite consumption sentiment in traditional toy markets having been adversely affected by the economic downturn, the group’s turnover only slipped marginally by 5.2% to HK$994.1 million. Moreover, benefiting from effective cost control measures, gross margin improved by 7.5 percentage points to 25.3. We are very pleased to announce that the group recorded a full-year operating profit of HK$89.1 million and profit attributable to equity holders of HK$74.6 million, a significant turnaround from the loss incurred last year, thus underscoring the effectiveness of our restructuring measures.

To share the group’s success with shareholders and express our gratitude for their loyal support, the Board of Directors proposed the resumption of dividend payments this year.

Looking ahead, the unemployment rate of developed economies such as the US and Europe are expected to remain high, hence, consumer sentiment in these traditional markets will take time to recover. In addition, labour costs in Mainland China and raw material prices are expected to climb, and the Renminbi Yuan is under pressure to appreciate as well. For the group, all of these factors represent both challenges and opportunities.

Difficult market conditions always pose far greater risk for smaller toy manufacturers compared to well-established ones, consequently driving out weaker players from the industry. Possessing a broad customer base, healthy financial position, strong research and development capability, solid product portfolio and worldwide reputation for quality, the company is well poised to capture greater market share. With all of our plants located in inland China and Vietnam, the group is less vulnerable to rising labour costs and labour shortages. By also having strong bargaining power with suppliers, we can secure favourable prices when sourcing raw materials. All of these attributes translate into competitive advantages for the group.

In the coming year, our focus will be placed more toward business development. Apart from traditional toy customers, we have started to work with international consumer brands to design and manufacture toys for their promotional campaigns, gaining highly positive responses as a result. We will be leveraging our popular steel and plastic products to expand our customer base to reach higher-end department stores as well as expedite our penetration into the China market. To back up our expansion plan, we will ramp up production in Vietnam, which includes constructing a new plant for manufacturing plush stuffed toys. We will also keep a close eye on emerging opportunities, as we always do, aiming to maximise returns for our shareholders.

Appreciation

On behalf of the board, I would like to take this opportunity to thank the management team and staff for their dedication and contribution, which have led to encouraging results for the group during the year. I would also like to extend my gratitude to our shareholders, business partners and customers for their trust and unwavering support.

Kyoo Yoon Choi
Chairman
23 April 2010