Hutchison Harbour Ring (0715) - a unit of Hutchison Whampoa (0013) - even chose to discontinue its toy division altogether in October citing that it operated "in a very difficult business environment in the past years and this situation is expected to continue."

But Dream International (1126) executive managing director and chief financial officer Young M Lee has stayed bullish.

Lee said business started to rebound from June after facing losses since 2005. The soft-toy producer swung to a first- half net profit of HK$38.9 million this year, from a year-on-year loss of HK$51 million.

An internal revamp and focus on large buyers is helping to change the fortunes, Lee said.

The soft-toy industry is highly labor- intensive and the allure of low wages persuaded Dream, set up in South Korea in 1984, to move to Sri Lanka - its first offshore manufacturing base.

The Seoul Olympics of 1988 was a huge boost to toymakers. But political instability in Sri Lanka later drove the firm to set up a plant in Shenzhen in 1992.

"At the time everything in China was so competitive," Lee recalled. "We were able to operate our business with a lot of profits."

By 2000, the company was the largest soft-toy maker in Greater China and in 2002 it became the first South Korean company to list in Hong Kong.

By that time, it had 10 factories and more than 20,000 workers. But labor costs were surging.

"From 2004 onwards, labor costs rose more than 12-15 percent per annum," Lee said.

So in 2005, Dream set up a plant in Vietnam with 2,000 sewing machines. A year later the firm opened two factories in Anhui and Guangxi.

Further expansion in the mainland's interior is likely after the firm shut down a factory in eastern Taicang city last year.

"In Taicang, the minimum wage was around 1,150 yuan (HK$1,300) and in Anhui, the minimum wage is just 500 yuan per month," Lee explained.

However, labor is even cheaper in Vietnam, where the firm now has two plants.

"On average the cost in Vietnam is probably around 60 to 70 percent of our inland labor costs," he said.

But Vietnam has its own drawbacks, said Lee. It still lags far behind China on infrastructure. Factories sometimes cannot source materials locally and have to import them from the mainland.

Despite the focus on labor, Lee is keen to emphasize mechanization is not the way forward for the toy industry.

Dream does use computer-aided sewing machines for tasks requiring absolute uniformity. But most tasks are still done manually.

So, maintaining quality and labor costs have proved painful for many mainland toymakers.

The number of toymakers in Dongguan, Guangdong, for example shrank from more than 300 four years back to about 75 at present, Lee said.

Of course this is good news for Dream - it now has a higher chance of getting more orders as buyer numbers have remained relatively stable.

Also, being big and listed helps as the customer knows the firm "can't just run away from the job."

"Small operations can close in one night and flee without paying workers' wages," Lee said. "If that happens, customers' business will be affected because they would not get their products on time and lose sales."

In view of the economic downturn, Dream is also trying to reduce small orders.

Mass merchandisers such as Walmart and Target and specialty stores under Disney often place huge orders for a handful of toys, hence effectively bringing down per unit research costs.

Working with big partners also improves the synergy between Dream's soft toy segment and the smaller plastic and steel toy segment.

"We are providing more variety to the same customers, because normally customers not only buy plush toys, they buy some other toys," Lee explained.

But this has not yet been the case in the mainland where Dream-made bicycles, scooters and ride-ons have been well-received.

But it faces a tough climb convincing the 350 or so franchised hypermarkets in China to buy its soft toys.

The currently immature mainland market is costly to develop, Lee said. First-half mainland sales hit HK$14 million. The firm is aiming for an annual revenue 25 million yuan from the mainland.

While Dream specializes in mass production, it hopes to tap the lucrative premium plush hand-made toy segment.

"We have to try something new. [Doing the same thing] over and over does not give us any growth," Lee said.

He expects the premium plush-toy line to be research-based and supported by a few hundred workers.

Premium plush toys could fetch up to 10 times more than Dream's present product line, Lee said.

The plush toys may be added to the firm's Caltoy brand, under which it now sells interactive educational toys.

All toy lines sooner rather than later reach their maximum revenue potential.

"Once our profit is accumulated enough, we will probably look into some other business area," Lee said.