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Financials
For the 3 months ended 31 March 2008
Profit & Loss
Balance Sheet
Click here for the complete Full Year 2007 Financials
Review of Performance
Review
Revenue for the first quarter of 2008 (“1Q08”) increased by 29.8% year-on-year to approximately HK$491.2 million. 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. Sales of fashion leather products, which began in the second quarter of 2007, added to this year-on-year increase. Revenue in the previous fourth quarter of 2007 was higher at HK$499.7 million as 1Q08 was a shorter-than-normal operating period due to the Chinese New Year.
Gross Profit
Gross profit for the year increased by 28.1% to approximately HK$182.8 million due mainly to new revenue streams from long fibre and microfibre leather products mentioned above. Gross margins remained comparable at 37.2% (1Q2007: 37.7%).
Selling And Distribution Expenses
Selling and distribution expenses increased by 81.5% 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 beyond the Fujian province 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 And Other Operating Income
Administrative expenses increased by 72.4% due mainly to an increase in net foreign exchange losses from higher USD and HKD bank balances, the introduction of land utilisation tax in 2008 for the Xiamen plant, and a general increase in other items including depreciation, insurance and staff-related expenses. A higher average bank balance resulted in a higher interest income for the quarter while financial expenses remained comparable year-on-year.
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.
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. 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.
Profit After Income Tax
Net earnings grew by 26.2% to HK$134.0 million on the back of increases in long fibre and microfibre leather contributions. Year-on-year net margins slipped to 27.3% from 28.1% due mainly to higher distribution and administrative expenses for the quarter.
Review Of Financial Position
Cash position is comparable to FY2007 year-end level. Current ratio decreased to 4.4 times (2007: 5.2 times) as sales activities in March picked up relative to December 2007, which consumed inventories onhand and increased the trade payables balance.
Trade receivables increased by approximately 27.9% as sales activities began to pick up towards the end of the quarter. Average debtors’ turnover remained comparable at 48 days (2007: 48 days). Inventories decreased by approximately 39.3% from previous year-end level as production days were shortened due to a plant-wide shut down for the festive season in February 2008. Average inventory turnover remained comparable at 19 days (2007: 22 days).
Machinery purchased during the quarter (including deposits paid) accounted for most of the increase seen in non-current assets.
Trade payables rose as sales activities picked up towards the end of the quarter. Average creditor days remained comparable at 33 days (2007: 32 days). Income tax payable increased due to back payments of income tax at quarter-end after a clarification with tax authorities regarding the revised tax rate. The overall decrease in bank loans arose from repayments during the quarter.
Overall net tangible assets increased by 8.5% to approximately HK$2.5 billion (2007: HK$2.3 billion).
Commentary
A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting period and the next 12 months.
Expansion plans for 2008 are on track – all new capacity additions are expected to complete by the first quarter of 2009. The first phase of expansion is expected to begin trial production by the end of June 2008, comprising a new 10,000 tonnes-per-annum long fibre facility and a 6 million metres-per-annum microfibre leather facility.
The Group anticipates microfibre leather revenue to increase in 2008, with new contributions expected from the interior furnishing/decoration and car upholstery segments. Accreditation of the microfibre leather materials is underway and the Group is continuing its marketing efforts in the domestic automotive and fashion apparel industries.
Average raw material costs were relatively stable for the first quarter of 2008 and at this point showed no clear signs of appreciating in the short to medium term. Barring unforeseen circumstances, the Group expects to see continued growth in 2008.