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Financials
THIRD QUARTER FINANCIAL STATEMENTS AND DIVIDEND ANNOUNCEMENT FOR THE PERIOD ENDED 30 SEPTEMBER 2008
Profit & Loss
Balance Sheet
Click here for the complete Half Year 2008 Financials
Review of Operating Results
Revenue
Revenue for the first nine months in 2008 ("9M08") increased by 12.1% over the corresponding nine-month period in 2007 ("9M07") to approximately HK$1.5 billion. The new 10,000 tonnes-per-annum bi-component long fibre production line that began operations in June 2007 contributed to the increase in overall revenues for the Group. Revenue for the three months ended 30 September 2008 ("3Q08") remained comparable to the previous corresponding period ("3Q07") as effective output was largely similar.
Gross profit
Gross profit for 9M08 increased by 4.7% year-on-year to approximately HK$538.4 million due mainly to new revenue contributions from the additional long fibre capacity added in June 2007. Gross margins ended at 36.4% (9M07: 39.0%) as average selling prices for fibre products came under pressure in 2008 due to overall fibre market sentiments, coupled by elevated cost of sales in 3Q08 from the utilisation of higher-cost feedstock purchased at the end of June 2008. Fixed overheads increased in 3Q08 due mainly to new long fibre and microfibre leather production facilities installed at end June 2008. However these new facilities have yet to contribute meaningfully to group revenues. The increase in running costs in 3Q08 without additional revenues added to the decline in gross margin for 9M08.
Higher material costs and fixed overheads in 3Q08 (as mentioned above) increased total cost of sales for the quarter by 10.2% when compared to 3Q07. This contributed to the decrease in 3Q08 gross profit year-onyear.
Selling and distribution expenses
Selling and distribution expenses increased by 70.6% year-on-year as the Group boosted its advertising budget for microfibre leather products. Additional costs were also set aside for several new sales offices set up in major cities including Shanghai, Guangdong and Jiangsu to market the microfibre leather products. These are in addition to the overall increase in transportation costs and salaries as the Group expands its operations, product mix and customer base.
Administrative, financial, other operating income/expenses and other expenses
Administrative expenses increased by 31.7% year-on-year due mainly to the increase in bank and professional charges relating to a new loan facility obtained during the period, new amortised expenses for equity-settled share-based payments, and a general increase in other items including land use tax and employee related expenses.
The increase in other operating income for the nine-month period resulted mainly from a net exchange gain arising from currency rate fluctuations on inter-company payables denominated in foreign currencies. A higher average bank balance resulted in a higher interest income for the same period. Though the current period saw a higher average outstanding bank loans from a new draw down in April 2008, financial expenses was 22.0% lower year-on-year due largely to lower average interest rates for the current period. Other operating expenses relate to a loss on disposal and write-down of certain assets. Other operating expenses relate to a net foreign exchange loss in the three months ended September, and other expenses relate to donations made to an organisation benefiting earthquake victims in China.
Tax
The tax charge represents applicable PRC corporate income tax provided for the period.
Quanzhou Honglin Chemical Fibre Co., Ltd ("Quanzhou Honglin") is subject to the full income tax rate as its tax relief period had expired on 31 December 2003. With effect from 2008, Quanzhou Honglin is subject to income tax at a rate of 25% following changes to the state income tax rate under the new Law of the PRC on Enterprise Income Tax ("New Tax Law").
With effect from 2005, Xiamen Hongxin Specialised Fibre Co., Ltd. ("Xiamen Specialised") is exempted from income tax for the first two profitable financial years of operation and thereafter a 50% relief for the following three years. Under the New Tax Law, the full preferential tax rate of 15% applicable to Xiamen Specialised will be gradually increased to 25% over a 5-year transition period ending on 2012. Accordingly, the income of Xiamen Specialised is subject to tax in 2008 at a rate of 9% (50% relief from 18% tax rate).
Xiamen Hongxin Microfibre Materials Co., Ltd ("Xiamen Microfibre") has opted to pay full income taxes for 2006. With effect from 2007, Xiamen Microfibre will be exempted from income tax for two years and thereafter a 50% relief for the following three years, which falls within the transition period mentioned above. Accordingly, Xiamen Microfibre is not subject to income tax in 2008.
Beginning in 2008, the New Tax Law also provides that dividend paid by a PRC subsidiary to a foreign parent company may be subject to a withholding tax rate of 10%. However if dividend is paid by a PRC subsidiary to a Hong Kong resident company that owns more than 25% of that PRC subsidiary, the withholding tax rate may be reduced to 5%. In this respect, a provision for deferred tax based on approximately 5% of net profits has been made, as dividend will be paid from our PRC subsidiaries to our intermediate holding company, which is a Hong Kong resident company. There were no applicable deferred tax expenses in 2007.
Profit after income tax
Net earnings for 9M08 grew by 1.9% to approximately HK$405.9 million on the back of increases in long fibre contributions and foreign exchange gains, offset partially by increases in selling and administrative expenses due mainly to increased marketing activities, and a provision for deferred taxes that took effect in 2008. Yearon- year net margins ended at 27.4% (9M07: 30.2%).
Review of Financial Position
Cash balance increased marginally from approximately HK$1.0 billion to HK$1.2 billion due largely to an increase in operating profits and the proceeds from a new bank loan obtained during the period. The increase was partially offset by loan repayments, purchases of new equipment and higher working capital requirements that mainly resulted from longer credit terms granted to customers. Current ratio increased from 5.2 to 6.7 times.
Trade receivables increased by 23.7% to approximately HK$280.2 million as credit terms for customers of fibre products were relaxed from the second quarter onwards. Average debtors' turnover was comparable at 47 days (2007: 48 days) due to collections made towards the end of September 2008. Inventories increased by 19.1% to approximately HK$94.7 million due mainly to the stocking of more raw materials to support the increased product range in 2008, especially for microfibre leather products. Average inventory turnover remained comparable at 25 days (2007: 22 days).
Machinery purchased during the period (including deposits paid) accounted for most of the increase seen in non-current assets.
Trade payables decreased due mainly to a slowdown in purchasing activities towards the end of the period in anticipation of further decreases in raw material prices. Average creditors' turnover was 25 days (2007: 32 days). A new bank loan was raised during the period; periodic loan repayments were also made during the year. A provision for deferred taxes was made with effect from 2008. Please refer to above section on "Tax" for details.
Overall net tangible assets increased by 16.7% to approximately HK$2.7 billion (2007: HK$2.3 billion).
Commentary
All proposed capacity additions are expected to complete by the first half of 2009. Installation of the 100,000 tonnes-per-annum differential polyester chip production facilities are expected to be largely complete by end of 2008, and the 20,000 tonnes-per-annum low-melting-point short fibre plant is expected to begin trial production by the second quarter of 2009. Launch of the 20,000 tonnes-per-annum long fibre facilities will be strategically timed according to market conditions and the progress of new long fibre product developments.
The Group has begun testing new bi-component long fibre products in the market. When they enter commercial production these new products are expected to mitigate possible unfavourable impact on existing fibre businesses. The Group is also actively developing the microfibre leather segment in view to generate sustainable growth. Utilisation rate of existing leather facilities is expected to improve in the fourth quarter of 2008.
Barring unforeseen circumstances, the Group expects to see continued growth in 2008.