Financials

UNAUDITED RESULTS FOR THE FOURTH QUARTER AND TWELVE MONTHS ENDED 31 DECEMBER 2009

Note: Files are in Adobe (PDF) format.
Please download the free Adobe Acrobat Reader to view these documents.

Profit and Loss

Review of Performance

Financial results

Revenue

Revenue for FY2009 decreased by approximately 26.8% to approximately RMB961.3 million from approximately RMB1,314.1 million in FY2008. Revenue for 4Q2009 increased by approximately 21.6% from approximately RMB268.7 million in 4Q2008 to approximately RMB326.6 million. The increase in 4Q2009 was mainly due to increase in quantity of products sold.

Our quantity sales for products of PU synthetic leather ("PU"), Microfibre synthetic leather ("Microfbre") and Pattern Moulding Paper ("PMP") are approximately 6.0 million square metres, 2.3 million metres and 2.7 million metres respectively. (4Q2008: 3.6 million square metres, 1.0 million metres and 2.2 million metres)

Products of PU , Microfibre and PMP accounted for approximately RMB442.2 million, RMB363.5 million and RMB155.6 million (FY2008: RMB712.4 million, RMB526.4 million and RMB75.3 million) or 46.0%, 37.8% and 16.2% (FY2008: 54.2% ,40.1% and 5.7%) respectively of total revenue for FY2009.

Approximately 22.3% (FY2008: 16.8%) of our sales were from People's Liberation Army ("PLA") and the government sector.

By geographical segment, sales to the PRC customers decreased from approximately RMB1,223.0 million in FY2008 to RMB887.6 million in FY2009, representing a decrease of approximately 27.4%.

Gross Profit Margin

The Group's gross profit margin has decreased from approximately 42.4% in FY2008 to approximately (0.7%) in FY2009. The gross profit margin for 4Q2009 also decreased significantly by approximately 16.9 percentage points from approximately 29.0% in 4Q2008 to 12.1% in 4Q2009. The decrease in gross profit margin for 4Q2009 was mainly due to decrease in average selling prices of both PU and Microfibre products.

Our average selling price for products of PU, Microfiber and PMP are approximately RMB24.9/sqm (4Q2008:RMB38.6/sqm), RMB55.3/m (4Q2008:RMB92.1/m) and RMB18.2/m (4Q2008:RMB18.8/m) respectively.

Operating Expenses

Selling and distribution expenses increased by approximately RMB23.7 million or 115.4% from approximately RMB20.5 million in FY2008 to approximately RMB44.2 million in FY2009 mainly due to increase in advertising expenses by RMB5.8 million, entertainment expenses by RMB9.2 million and travelling expenses by RMB7.7 million. Under the tough business environment, our sales team increased their marketing efforts in order to secure more new customers.

General and administrative expenses increased by approximately RMB175.2 million or 495.8% from approximately RMB35.3 million in FY2008 to approximately RMB210.5 million in FY2009 mainly due to increase in research expenses of RMB135.2 million, allowances for obsolete inventories of RMB4.1 million, exchange gain of RMB10.2 million, entertainment expenses of RMB2.5 million, travelling expenses of RMB2.3 million and depreciation expenses of RMB14.6 million. For research expenses, approximately RMB46.5 million was spent on PU, RMB39.8 million was spent on Microfibre and RMB34.5 million was spent on PMP. For PU and Microfibre, more researches have been carried out to produce new products. For PMP, more researches have been carried out to create new patterns. In addition, approximately RMB46.0 million was paid for the research of products relating to protective armour for the PRC Armed Forces, where we are working together with a department of a government sector in the PRC to develop such new PU and Microfibre products.

Financial expenses remains almost unchanged and finance income decreased from RMB1.9 million in FY2008 to RMB1.2 million in FY2009 by RMB0.7 million or 35.1%. The decrease was mainly due to decrease in interest earned from bank balances.

Income Tax

Income tax decreased by approximately RMB119.5 million or 99.5% from approximately RMB120.1 million in FY2008 to approximately RMB0.6 million in FY2009. The decrease was due to the Group's PRC subsidiaries, Shandong Jinfeng, Shandong Xinlong and Yantai Golden Sun recorded net losses in FY2009.

Net Loss

As a result of the above, the Group recorded a net loss of approximately RMB262.5 million in FY2009 (FY2008: net profit of approximately RMB375.2 million).

Financial position

Non-Current Assets

As at 31 December 2009, non-current assets amounted to approximately RMB1,398.6 million which comprised property, plant and equipment, land use rights and trademark, non-current prepayments, and other receivables which relates to the non-current portion of finance lease receivable. Property, plant and equipment comprised mainly production buildings, office buildings, plant and machinery and construction-in-progress.

The carrying amount of property, plant and equipment as at 31 December 2009 increased by approximately RMB5.0 million or 0.4% from approximately RMB1,202.4 million as at 31 December 2008 to RMB1,207.4 million mainly due to the additions of non-woven machineries, Microfibre, PU and PMP machineries of approximately RMB113.0 million. The increase was offset by depreciation expense of approximately RMB107.8 million.

Current Assets

As at 31 December 2009, current assets amounted to approximately RMB603.8 million which include inventories, trade and other receivables, prepayments, bank deposits (pledged) and cash and cash equivalents of approximately RMB88.3 million, RMB291.5 million, RMB72.4 million, RMB38.0 million and RMB113.6 million respectively. Bank deposits (pledged) relate to bank deposits pledged to banks for banking facilities granted to the Group.

Current assets decreased by approximately 20.5% to RMB603.8 million as at 31 December 2009 from approximately RMB759.5 million as at 31 December 2008. The decrease in current assets was mainly due to decrease in cash and bank balances from approximately RMB376.6 million as at 31 December 2008 to approximately RMB151.6 million as at 31 December 2009. Trade and other receivable balances increased from approximately RMB215.3 million as at 31 December 2008 to approximately RMB291.5 million as at 31 December 2009. The increase was mainly due to the increase in trade receivables by approximately RMB52.9 million and increase in net VAT receivable of approximately RMB25.3 million as a result of decrease in output VAT due to decrease in revenue.

Average trade receivables turnover days increased from 61 days in FY2008 to 89 days in FY2009. With the slowdown in the global economy, our customers slowed down in payment and some of them requested for longer credit periods. However, all trade receivables are aged within the credit periods, which ranged from 90 to 120 days. Average inventory turnover days decreased by 14 days from 48 days in FY2008 to 34 days in FY2009. The decrease was due to more efficient inventory management.

Current Liabilities

As at 31 December 2009, current liabilities amounted to approximately RMB261.3million which comprised trade and other payables, amount due to directors, other liabilities, bills payable to banks, short term bank loans, provisions and income tax payable of approximately RMB19.3 million, RMB0.3 million, RMB14.8 million, RMB86.0 million, RMB120.5 million, RMB18.7 million and RMB1.7 million respectively. The increase in bank loans by RMB75.5 million was to provide more internal funds for the company.

Average trade and bills payables turnover days increased by 10 days from 17 days in FY2008 to 27 days in FY2009. The increase in average trade and bills payable turnover days was due to longer credit period granted by trade suppliers, and bills payable facilities have been widely utilised in procuring of raw materials. Bills payable to banks enable us to secure favourable pricing for our raw materials and improve our cost competitiveness.

Non-current Liabilities

The non-current liabilities represent the provision for deferred tax liabilities in respect of post-2008 undistributed net profits of the Group's PRC subsidiaries of approximately RMB19.4 million.

Cash flows

Operating activities

Operating cashflows before working capital changes for 4Q2009 amounted to RMB26.2 million. This was mainly due to loss before tax of RMB4.9 million with depreciation expense of RMB29.5 million added back. Net cash generated from operating activities for 4Q2009 was mainly used to fund the decrease in trade and other payables and bills payable of RMB11.0 million, and the increase in trade and other receivables and prepayments of RMB54.5 million, which was partially offset by the decrease in inventories of RMB25.5 million and the increase in other liabilities of RMB2.4 million. Overall, net cash used in operating activities for 4Q2009 amounted to RMB12.5 million.

For FY2009, we used net cash of approximately RMB186.3 million from operating activities. This was contributed mainly by loss before tax of RMB261.9 million for the year with depreciation expense of RMB107.8 million and interest expense of RMB4.0 million added back. Inventories increased by RMB0.2 million, trade and other receivables by RMB72.5 million and prepayment decreased by RMB7.1 million. Trade and other payables decreased by RMB3.5 million, amount due to directors decreased by RMB15.5 million and bills payable increased by RMB62.0 million. Income tax paid amounted to RMB13.4 million.

Investing activities

For 4Q2009, cash outflow used in investing activities amounted to approximately RMB1.4 million. This is mainly related to net cash outflow for acquisition of property, plant and equipment and land use rights amounting to RMB1.8 million which is offset by receipts of interest income of RMB0.3 million in 4Q2009.

Cash outflow used in investing activities during FY2009 amounted to RMB110.1 million. This is mainly related to net cash outflow for acquisition of property, plant and equipment and land use rights amounting to RMB111.4 million, which was offset by the receipts of interest income of RMB1.2 million in FY2009.

Financing activities

During 4Q2009, net cash generated from financing activities amounted to RMB1.8 million. This was mainly due to a decrease in bank deposit pledged of RMB3.5 million which is partially offset by interest expense paid of RMB1.7 million.

For FY2009, net cash generated from financing activities amounted to approximately RMB50.5 million. This was mainly due to the proceeds from short term bank loans of RMB120.5 million which was offset by repayments of short term bank loans of RMB45.0 million, increase in pledged deposits of RMB21.0 million, and interest expenses paid of RMB4.0 million.

Cash and cash equivalents decreased by approximately RMB245.9 million during FY2009 and decreased by RMB12.2 million in 4Q2009.

Commentary

Update on PU and Microfibre Products

As mentioned in our 3Q2009 announcement, average selling prices (ASP) of PU and Microfibre products did improve in 4Q2009. The ASP of PU rose from RMB19.8/sq metre in 3Q2009 to RMB24.9/sq metre in 4Q2009 whilst the ASP of Microfibre increased from RMB43.7/metre to RMB55.3/metre in 4Q2009. Going forward, we expect this trend of ASP improvements to continue into 1Q2010.

Update on Pattern Moulding Paper (PMP) Production

With the gradual improvement in market conditions, we are cautiously optimistic that the sales of PMP will improve in FY2010 as more patterns are expected to be launched to the market.

Group Prospects for FY2010

With the global economic recovery gaining traction, we believe that the worst is over, and that the recovery will gain momentum into FY2010. As such, we hope to see further improvements in ASPs, particularly for our core PU and microfibre products. The Directors are cautiously optimistic that the Group's financial results in FY2010 will turn into a profit.

Balance Sheet

As at 31 December 2009