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Fourth Quarter and Full Year Results Announcement for the Period Ended 31 December 2017

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 4QFY17 decreased slightly by 1.6% from RMB 537.5 million in 4QFY16 to RMB 528.9 million in 4QFY17 due mainly to the decrease in sales volume of our corn refining segment partially offset by the increase in selling prices of our corn refining products. The revenue for FY17 increased by 6.1% year-on-year (“y-o-y”) from RMB 1.9 billion to RMB 2.0 billion, this was mainly due to the increase in sales volume of our corn refining segment, which was partially offset by the decrease in the average selling price. The strict environmental regulation has resulted in the weak demand and stiff competition in the corn sweetener industry.

    For 4QFY17, sales volume for our corn refining segment decreased by 1.3% from 271K (“K”=1,000) tonnes to 268K tonnes period-on-period (“p-o-p”). This p-o-p decrease was mainly attributable to the decrease in the sales volume of corn starch by 100.0%. For FY17, sales volume for our corn refining segment increased from 944K tonnes to 1,042K tonnes or by about 10.4% 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 8.8% and 15.5% respectively, partially offset by the decrease in the sales volume of corn starch of about 9.5%.

    For 4QFY17, the weighted average selling price of the Group’s corn refining products increased by 2.5% p-o-p. This increase was attributable to the increase in price of corn sweeteners of about 6.4%, partially offset by the decrease in price of by-products by 16.6%. For FY17, the weighted average selling price of the Group’s cornrefining products decreased by 0.9% y-o-y. This decrease was attributable to the decreases in prices of corn sweeteners, corn starch and by-products of about 0.6%, 1.0% and 3.5% respectively.

    The Group’s export revenue in FY17 decreased by 1.8% as compared to FY16. The export revenue as a percentage of total revenue decreased from 3.4% in FY16 to 3.1% in FY17.

    Gross profit and gross profit margin

    For 4QFY17, gross profit decreased by 2.7% p-o-p to RMB 64.7 million, and the gross profit margin decreased from 12.4% in 4QFY16 to 12.2%. Group revenue decreased by 1.6%, while the cost of sales for the corresponding period decreased by 1.4%. These were due mainly to the increase in corn price of about 1.1% p-o-p.

    Gross profit for FY17 decreased by 1.5% y-o-y to RMB 209.1 million. Group revenue increased by 6.1% y-o-y, while the cost of sales increased by 7.0%. Gross profit margin decreased from 11.1% in FY16 to 10.3% in FY17. This was mainly due to the decrease in selling price of our corn refining segment y-o-y.

    The Group has stopped the production of animal feed products since 1QFY16.

    The Group’s others segment including our Hongzhou subsidiary made a gross profit of RMB 2.3 million in FY17 compared with RMB 1.3 million in FY16.

    Other operating income

    Other operating income decreased by RMB 7.2 million from RMB 103.7 million in FY16 to RMB 96.5 million in FY17, due largely to the decrease in government grant and subsidies, which was partially offset by the reversal of impairment of property, plant and equipment of our Shandong subsidiary in May 2017 and the increase in insurance claim compensation for the losses incurred due to a fire at our Liaoning subsidiary.

    Operating expenses

    - Selling and distribution expenses

    Selling and distribution expenses increased by 28.6% or RMB 29.2 million from RMB 102.2 million in FY16 to RMB 131.5 million in FY17. This was mainly attributable to the increase in transportation costs.

    - Administrative expenses

    The Group’s administrative expenses increased by 1.4% from RMB 107.6 million in FY16 to RMB 109.1 million in FY17. This was mainly due to the increase in staff costs (including salary, social insurance payment and other welfare), partially offset by the decrease in depreciation charge and other manufacturing overheads charged to operating expenses as a result of production halts of certain products, and the decrease in allowance for doubtful trade receivables.

    - Other operating expenses

    Other operating expenses increased by RMB 8.8 million from RMB 36.9 million in FY16 to RMB 45.6 million in FY17. This was due mainly to the losses of about RMB 7.3 million resulting from a fire at our Liaoning subsidiary and the impairment of property, plant and equipment of our Sichuan subsidiary of about RMB 34.0 million, which was partially offset by the decrease in the loss on disposal of plant and equipment of about RMB 25.2 million and the decrease in the relocation expenses of about RMB 6.2 million both mainly resulting from the relocation of our Shandong subsidiary completed by end of FY16.

    Finance costs

    The Group’s finance costs increased by 3.5% from RMB 50.5 million in FY16 to RMB 52.3 million in FY17 mainly attributable to the increase in interest costs.

    Income tax expense

    The decrease in income tax expense was due to the decrease in net profit generated from our Shaanxi 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 FY17 was higher than the statutory tax rate.

    Total comprehensive income

    The Group’s total comprehensive income decreased by 341.5% from a profit of RMB 13.9 million in FY16 to a net loss of RMB 33.5 million in FY17, this was mainly due to the decrease in other operating income and the increase in operating expenses

  2. Statement of Financial Position

    (i) Current assets

    Current assets decreased by RMB 177.2 million from RMB 779.5 million as at 31 December 2016 to RMB 602.3 million as at 31 December 2017, due mainly to the decrease in trade receivables of RMB 7.1 million, the decrease in other receivables, deposits and prepayments (including the amount owing by related parties) of RMB 72.8 million (due mainly to the full collection of the compensation for relocation of our Shandong subsidiary owed by the local government), and the decrease in cash and cash equivalents of RMB 110.9 million, which were partially offset by the increase in inventories of RMB 12.9 million. Trade receivable turnover days decreased slightly from 35 days in FY16 to 32 days in FY17. Inventory turnover days was lower at 36 days in FY17 as compared with 40 days for FY16.

    (ii) Non-current assets

    The decrease in non-current assets of RMB 17.6 million was mainly due to the depreciation of RMB 85.1 million and the disposal of plant and equipment of RMB 25.9 million, which were partially offset by the decrease in impairment of property, plant and equipment of RMB 33.4 million and the capital expenditure of RMB 60.0 million.

    (iii) Current liabilities

    Current liabilities decreased by RMB 102.6 million from RMB 670.7 million as at 31 December 2016 to RMB 568.1 million as at 31 December 2017, due mainly to the decrease in short-term interest-bearing loans and borrowings of RMB 110.0 million (as at 31 December 2017, the pledged cash deposits decreased by RMB 48.7 million to RMB 97.3 million as compared to 31 December 2016), and the decrease in other payables and accruals of RMB 4.9 million, partially offset by the increase in trade payables of RMB 13.2 million. Trade payable turnover days was higher at 48 days compared with 47 days for FY16.

    The Group’s debt equity ratio was 8.46 times as at 31 December 2017 compared with 7.20 times as at 31 December 2016, and the net debt equity ratio was 6.47 times as at 31 December 2017 (31 December 2016: 4.96 times). This was mainly due to the decrease of RMB 39.4 million or 29.2% in total equity resulting from the net loss in FY17 and the payment of dividend in May 2017, and the decrease of RMB 163.0 million or 16.8% in total interest-bearing loans and borrowings.

    (iv) Non-current liabilities

    Non-current liabilities decreased by RMB 52.8 million due mainly to the decrease of RMB 53.0 million in long-term interest-bearing loans.

    (v) Shareholders' equity

    As at 31 December 2017, shareholders’ equity was lower than that as at 31 December 2016 mainly due to the net loss of RMB 33.5 million in FY17 and payment of dividend of RMB 5.9 million in May 2017.

  3. Cash Flows

    For FY17, the Group experienced net operating cash inflow of RMB 135.7 million. This comprised operating profit before changes in working capital of RMB 64.2 million adjusted for decrease in working capital of RMB 73.2 million and income taxes paid of RMB 1.6 million.

    The decrease in working capital was mainly the result of:

    i) a decrease in trade receivables of RMB 5.2 million,
    ii) a decrease in other receivables, deposits and prepayments (including the amount owing by related parties) of RMB 72.8 million,
    iii) an increase in trade payables of RMB 13.2 million,

    which were offset by

    iv) an increase in inventory of RMB 13.3 million, and
    v) a decrease in other payables and accruals of RMB 4.9 million.

    Net cash used in investing activities amounted to RMB 25.5 million in FY17. This was mainly due to the construction of property, plant and equipment in our Shandong subsidiary; the upgrading and reconstruction of our production line in our Henan 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 25.9 million, proceeds from government grants for low-energy environmental protection equipment of RMB 6.1 million, and the interest income of RMB 2.5 million.

    Net cash used in financing activities was RMB 172.4 million, mainly due to the net decrease in total bank loans of RMB 172.9 million and payment of interest expense and dividend of RMB 52.3 million and RMB 5.9 million respectively. These cash outflows were partially offset by the decrease in pledged cash deposits of RMB 48.7 million, and the increase in interest-bearing loans from a Director of RMB 9.9 million.

Commentary

China’s economy in 2018

While China’s economy has been on an accelerated growth since 2010, the growth is expected to slow down in 2018. The government is poised to tackle domestic debt, poverty and pollution as key initiatives and the government is expecting more modest economic performance for 2018. On the whole, China’s economic growth is expected to be moderate in 2018.

On the domestic economy front, the government has pledged to tighten its financial risks control to prevent over-gearing by bank borrowers. Companies will face tightening of bank loans and this may be challenging for the Group with the possibility of banks lowering banking limits and/or increasing loan interest rates. Furthermore, as China is taking the lead in global climate controls, more stringent rules to curb the pollution of the environment is expected and this will add pressure on manufacturing companies such as the Group to invest in new equipment and/or upgrade their plants, equipment and facilities in order to meet the higher environmental standards and requirements. It is expected that more capital investments are needed and that will increase the Group’s overall operating cost of business.

In addition, the Group expects to face challenging domestic market conditions due to the unpredictable climate changes that may affect the supply of raw corn material and hence its prices in 2018. The shift in consumer behavior towards a healthier lifestyle of less sugar consumption is also expected to affect the Group.

In view of the uncertainty and the Chinese government’s open-door policy of re-structuring its economy to allow more imports of foreign goods, the management is cautious of the Group’s business outlook in 2018.

Statement of Financial Position