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Fourth Quarter and Full Year Results Announcement for the Period Ended 31 December 2018

Financials Archive

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Profit & Loss
Profit & Loss

Review of Performance
  1. Comprehensive Income Statement

    Comprehensive Income Statement


    The Group’s revenue for 4QFY18 increased by 6.0% from RMB 528.9 million in 4QFY17 to RMB 560.4 million in 4QFY18 mainly due to the increase in selling prices of our corn refining products. The revenue for FY18 increased by 9.1 % year-on-year (“y-o-y”) from RMB 2.0 billion to RMB 2.2 billion. This was mainly due to both increases in sales volume and the average selling price of our corn refining segment.

    For 4QFY18, sales volume for our corn refining segment increased by 1.6% from 268K (“K”=1,000) tonnes to 272K tonnes period-on-period (“p-o-p”). This p-o-p increase was mainly attributable to the increase in the sales volume of by-products by 10.4%. For FY18, sales volume for our corn refining segment increased from 1,042K tonnes to 1,073K tonnes or by about 2.9% y-o-y. This y-o-y increase was mainly attributable to the increases in the sales volumes of corn sweeteners and by-products of about 0.7% and 10.1% respectively, partially offset by the decrease in the sales volume of corn starch of 100.0%.

    For 4QFY18, the weighted average selling price of the Group’s corn refining products increased by 4.3% p-o-p. This increase was attributable to the increase in price of corn sweeteners by about 3.7% and the increase in price of by-products by 13.5%. For FY18, the weighted average selling price of the Group’s corn refining products increased by 6.0% y-o-y. This increase was attributable to the increases in prices of corn sweeteners and by-products by about 7.9% and 0.9% respectively.

    The Group’s export revenue in FY18 increased by 20.0% as compared to FY17. The export revenue as a percentage of total revenue in FY18 increased slightly to 3.4% from 3.1% in FY17. The sales to the export market were still poor because of our uncompetitive pricing due to our higher production cost.

    Gross profit and gross profit margin

    For 4QFY18, gross profit decreased by 18.3% p-o-p to RMB 52.8 million, and the gross profit margin decreased from 12.2% in 4QFY17 to 9.4%. Group revenue increased by 6.0%, while the cost of sales for the corresponding period increased by 9.4%. These were due mainly to the increase in corn price of about 13.3% p-o-p.

    For the similar reason, gross profit margin decreased from 10.3% in FY17 to 9.7% in FY18. Gross profit for FY18 increased by 3.3% y-o-y to RMB 216.0 million. Group revenue increased by 9.1% y-o-y, while the cost of sales increased by 9.7%. These were mainly due to the increase in corn price of about 10.3%, partially offset by the increase in selling price of our corn refining segment y-o-y.

    The Group’s others segment including our Hongzhou subsidiary made a gross profit of RMB 2.1 million in FY18 compared with RMB 2.3 million in FY17.

    Other operating income

    Other operating income decreased by RMB 75.0 million from RMB 102.8 million in FY17 to RMB 27.8 million in FY18, due mainly to the reversal of impairment of property, plant and equipment of our Shandong subsidiary in May 2017 and the insurance claim compensation for the losses incurred from a fire at our Liaoning subsidiary recognized in FY17.

    Operating expenses

    - Selling and distribution expenses

    Selling and distribution expenses decreased by 5.5% or RMB 7.2 million from RMB 131.5 million in FY17 to RMB 124.2 million in FY18. This was mainly attributable to the decreases in transportation costs, staff costs and travel expenses.

    - Administrative expenses

    The Group’s administrative expenses increased by 4.1% from RMB 109.1 million in FY17 to RMB 113.6 million in FY18. This was mainly due to the increase in allowance for doubtful trade receivables and the increase in staff costs (including salary, social insurance payment and other welfare), partially offset by the reclassification of certain depreciation charge and other manufacturing overheads to operating expenses as a result of production halts of certain products.

    - Other operating expenses

    Other operating expenses decreased by RMB 4.6 million from RMB 51.9 million in FY17 to RMB 47.3 million in FY18. This was due mainly to the losses of about RMB 7.3 million resulting from a fire at our Liaoning subsidiary in FY17 and the decrease in the loss on disposal of plant and equipment of about RMB 6.8 million which were partially offset by the increase in impairment of property, plant and equipment of about RMB 7.1 million and the increase in employee compensation for work-related injury.

    Finance costs

    The Group’s finance costs decreased by 15.8% from RMB 52.3 million in FY17 to RMB 44.0 million in FY18 mainly attributable to the decrease in interest costs arising from decrease in bank loans.

    Income tax expense

    The increase in income tax expense was due to the increase in net profit generated from our Shaanxi subsidiary and Shandong subsidiary. In addition, certain loss-making subsidiaries did not recognise deferred tax assets due to the uncertainty of their future taxable profits. Therefore, the effective tax rate in FY18 was higher than the statutory tax rate.

    Total comprehensive income

    The Group’s total comprehensive loss increased by 170.1% from RMB 33.5 million in FY17 to RMB 90.5 million in FY18. This was mainly due to the decrease in other operating income, partially offset by the increase in gross profit, and the decreases in operating expenses and finance costs.

  2. Statement of Financial Position

    (i) Current assets

    Current assets increased by RMB 24.3 million from RMB 602.3 million as at 31 December 2017 to RMB 626.7 million as at 31 December 2018, mainly due to the increase in inventories of RMB 46.5 million, the increase in trade receivables of RMB 2.5 million, and the increase in other receivables, deposits and prepayments of RMB 2.5 million, which were partially offset by the decrease in cash and cash equivalents of RMB 26.5 million. Trade receivable turnover days decreased slightly from 32 days in FY17 to 29 days in FY18. Inventory turnover days was higher at 39 days in FY18 as compared with 36 days for FY17.

    (ii) Non-current assets

    The decrease in non-current assets of RMB 95.3 million was mainly due to the depreciation of RMB 80.9 million, the impairment of property, plant and equipment of RMB 41.1 million in our Liaoning subsidiary, Sichuan subsidiary and amino acid subsidiary, and the disposal of plant and equipment of RMB 10.7 million, which were partially offset by the capital expenditure of RMB 37.4 million.

    (iii) Current liabilities

    Current liabilities increased by RMB 34.1 million from RMB 568.1 million as at 31 December 2017 to RMB 602.2 million as at 31 December 2018, mainly due to the increase in trade payables of RMB 57.6 million, the increase in other payables and accruals of RMB 2.1 million and the increase in amount owing to a Director of RMB 12.7 million, partially offset by the decrease in short-term interest-bearing loans and borrowings of RMB 40.0 million (as at 31 December 2018, the pledged cash deposits decreased by RMB 20.9 million to RMB 76.4 million as compared to 31 December 2017). Trade payable turnover days was higher at 50 days compared with 48 days for FY17.

    The Group’s debt equity ratio was 159.3 times as at 31 December 2018 compared with 8.46 times as at 31 December 2017, and the net debt equity ratio was 125.4 times as at 31 December 2018 (31 December 2017: 6.47 times). This was mainly due to the decrease of RMB 90.5 million or 94.9% in total equity resulting from the net loss in FY18, partially offset by the decrease of RMB 36.9 million or 4.6% in total bank loans and other borrowings.

    (iv) Non-current liabilities

    Non-current liabilities decreased by RMB 14.5 million, due to the decrease in long-term interest-bearing bank loans of RMB 37.8 million, the decrease in amount owing to a Director of RMB 9.9 million, and the decrease in deferred income of RMB 4.9 million (mainly due to the amortization of government grants), which were partially offset by the increase of RMB 38.0 million in amount owing to a related party due to an interest-free loan extended to the Group.

    (v) Shareholders' equity

    As at 31 December 2018, shareholders’ equity was lower than that as at 31 December 2017 mainly due to the net loss of RMB 90.5 million occurred in FY18.

  3. Cash Flows

    For FY18, the Group experienced net operating cash inflow of RMB 78.9 million. This comprised operating profit before changes in working capital of RMB 80.3 million adjusted for decrease in working capital of RMB 2.4 million and income taxes paid of RMB 3.8 million.

    The decrease in working capital was mainly the result of:

    i) an increase in trade payables of RMB 57.6 million
    ii) an increase in other payables and accruals of RMB 2.1 million, and
    iii) an increase in amount owing to related parties of RMB 1.2 million,

    which were offset by

    iv) an increase in inventory of RMB 47.6 million,
    v) an increase in trade receivables of RMB 7.0 million, and
    vi) an increase in other receivables, deposits and prepayments of RMB 3.9 million.

    Net cash used in investing activities amounted to RMB 24.7 million in FY18. This was mainly due to the upgrading and reconstruction of our production line in our Liaoning subsidiary, Shaanxi subsidiary and Sichuan subsidiary in order to meet the stricter environmental requirements implemented by the central government, and the purchase of packaging containers for our finished products. These cash outflows were partially mitigated by the cash inflows arising from proceeds from the disposal of plant and equipment of RMB 10.8 million and the interest income of RMB 1.8 million.

    Net cash used in financing activities was RMB 59.9 million, mainly due to the net decrease in total bank loans of RMB 77.8 million and payment of interest expense of RMB 43.8 million. These cash outflows were partially offset by the decrease in pledged cash deposits of RMB 20.9 million, and the increase in interest-free loans from a Director and a related party of RMB 2.8 million and RMB 38.0 million respectively.

Commentary

While domestic consumption continues to be the key driver and a pillar of growth, China’s economic growth in 2019 is forecasted to slow down to below 6.5% due to the US-China trade war and the threat of additional tariffs on Chinese products.

With the slowdown of China’s economy, the Group expects its operations to be affected. However, the Management is hopeful and plans to remain competitive through restructuring and implementing cost-cutting measures. Due to market consolidation and unfavorable market conditions in Sichuan, the Group will stop production at the Sichuan plant for at least a year before reassessing its business viability thereafter. To continue serving our customers, the Shaanxi and Shandong subsidiaries will supply the products to the Sichuan subsidiary during this period instead. The Group also expects attrition of excess manpower with the production halt. Overall, this rationalization is expected to yield positive results for the Group’s bottom line.

Looking forward, although the Group expects its raw corn material prices to remain stable at least in the short to medium term, the Management foresees increasing pressure on the prices of its corn sweeteners due to stiffer competition. The Group also expects higher capital investment for the upgrading of its plant and equipment so as to meet tighter regulations on air pollution control. Nonetheless, as the Chinese government continues to pump more liquidity into the economy, the Group expects to benefit from easing cash flow and lower borrowing costs.

On the whole, the Group remains cautiously optimistic of its business outlook for the year 2019.

Statement of Financial Position