Financials

Second Quarter and Half Year Financial Statements for the Period Ended 30 June 2010

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Profit and Loss

Balance Sheet

Review of Performance

Financial results of the Group

Revenue

Revenue for HY2010 increased by approximately 76.5% to approximately RM661.4 million compared to approximately RMB374.8 million in HY2009. This was mainly attributable to the increase in average selling prices of the Group's PU and microfiber synthetic leather products as well as higher volume sales of our products.

Our quantity sales for PU synthetic leather, microfibre synthetic leather and Pattern Moulding Paper (PMP) are approximately 5.1 million square metres, 2.1 million metres and 2.7 million metres respectively (2Q2009: 4.8 million, 1.6 million and 2.1 million metres).

PU synthetic leather, microfibre synthetic leather and PMP accounted for approximately RMB299.9 million, RMB262.3 million and RMB99.2 million (HY2009: RMB180.5 million, RMB133.5 million and RMB 60.8 million) or 45.3% , 39.7% and 15.0% (HY2009: 48.2%, 35.6% and 16.2%) respectively of total revenue for HY2010.

Approximately 34.7% (HY2009: 18.3%) of our sales were from PLA and the government sector.

Gross Profit Margin

The Group's gross profit margin has increased by approximately 20.2% from approximately (6.8%) in HY2009 to approximately 13.4% in HY2010. This was mainly due to increase in average selling prices of both PU and Microfibre products as a result of higher grade products sold in HY2010 compared to HY2009.

Our average selling prices for PU synthetic leather, microfiber synthetic leather and PMP are approximately RMB27.9/sqm (2Q2009: RMB21.3/sqm), RMB59.9/m (2Q2009:RMB48.6/m), and RMB18.4/m (2Q2009:RMB18.9/m).

Operating Expenses

Selling and distribution expenses decreased by approximately RMB12.7 million or 53.2% from approximately RMB23.9 million in HY2009 to approximately RMB11.2 million in HY2010 mainly due to the decrease in advertising expenses, travelling expenses and entertainment expenses by approximately RMB5.5 million, RMB2.8 million and RMB4.6 million respectively.

General and administrative expenses decreased by approximately RMB53.2 million or 49.7% from approximately RMB107.0 million in HY2009 to approximately RMB53.8 million in HY2010, mainly due to the decrease in research expenses of RMB51.0 million, entertainment expenses of RMB1.9 million, provision of obsolete inventories by RMB7.2 million and travelling expenses of RMB0.9 million which were offset by the increase in depreciation expenses of RMB7.1million.

Financial expense increased by approximately RMB2.1 million or 174.0% from approximately RMB1.2 million in HY2009 to approximately RMB3.3 million in HY2010. This was offset by the interest earned from bank balances, which has decreased from approximately RMB0.7 million in HY2009 to approximately RMB0.3 million in HY2010.

Income Tax

Income tax increased by approximately RMB1.2 million or 364.5% from approximately RMB0.3 million in HY2009 to approximately RMB1.5 million in HY2010. The increase was due to the tax incurred as a result of Yantai Golden Sun's profit in HY2010. [Yantai Golden Sun was loss making in HY2009)]. The tax rate for Yantai Golden Sun is 25%.

Net Profit/(loss)

As a result of the above, the company made a profit of approximately RMB19.2million (HY2009: Loss of RMB154.9 million).

Financial position of the Group

Non-Current Assets

As at 30 June 2010, non-current assets amounted to approximately RMB1,341.5 million which comprised property, plant and equipment and land use rights and trademark, 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 30 June 2010 decreased by approximately RMB51.2 million or 4.2% from approximately RMB1,207.4 million as at 31 December 2009 to RMB1,156.2 million as at 30 June 2010 mainly due to the additions of PU machineries of approximately RMB 7.4 million offset by depreciation expense of approximately RMB58.6 million.

Current Assets

As at 30 June 2010, current assets amounted to approximately RMB659.6 million which included inventories, trade and other receivables, prepayments, bank deposits (pledged) and cash and cash equivalents of approximately RMB105.0 million, RMB316.4 million, RMB41.8 million, RMB10.0 million and RMB186.4 million respectively. Bank deposits (pledged) relate to bank deposits pledged to banks for banking facilities granted to the Group.

Current assets increased by approximately 9.2% to RMB659.6 million as at 30 June 2010 from RMB603.8 million in FY2009. The increase in current assets was mainly due to increase in inventories from approximately RMB88.3 million as at 31 December 2009 to approximately RMB105.0 million as at 30 June 2010. The increase in inventories, mainly finished goods, is in anticipation of more sales to be generated in 3Q2010. Trade and other receivables balance increased from approximately RMB291.4 million as at 31 December 2009 to approximately RMB316.4 million as at 30 June 2010, in line with the increase in revenue. Decrease in prepayment from RMB72.4 million to RMB41.8 million was mainly due to a decrease in prepayments made for advances to suppliers.

Average trade receivables turnover days improved from approximately 89 days in FY2009 to approximately 77 days in HY2010. With the improvement in the global economy, we have seen faster repayments by customers. Average inventory turnover days has decreased to approximately 30 days in HY2010 compared from approximately 34 days in FY2009. This decrease was due to more efficient inventory management.

Current Liabilities

As at 30 June 2010, current liabilities amounted to approximately RMB241.8 million 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 RMB27,2 million, RMB0.3 million, RMB14.3 million, RMB20.0 million, RMB159.0 million, RMB18.7 million and RMB2.3 million respectively.

Average trade and bills payables turnover days decreased to approximately 22 days in HY2010 from approximately 25 days in FY2009. The decrease in average trade and bills payable turnover days during the period was attributed to faster payment so as to stabilise the raw material cost.

Non-current Liabilities

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

Cash flows of the Group

Operating activities

Operating cash inflow before working capital changes for HY2010 amounted to approximately RMB82.8 million. This was mainly due to profit before tax of approximately RMB20.8 million with depreciation expense of approximately RMB58.6 million added back. Net cash generated from operating activities for HY2010 was mainly used to fund the increase in inventories of approximately RMB16.6 million, increase in trade and other receivables of approximately RMB24.5 million, bills payable of approximately RMB66.0 million, and decrease in other liabilities of approximately RMB0.5 million. This was partially offset by a decrease in prepayment of approximately RMB30.6 million, and an increase in trade and other payable of RMB8.2 million. Income taxes paid amounted to approximately RMB0.9 million and translation differences increased by RMB1.1 million. Overall, net cash generated from operating activities for HY2010 amounted to approximately RMB12.0 million.

Investing activities

Cash outflow from investing activities during HY2010 amounting to approximately RMB2.4 million mainly relates to the purchase of property, plant and equipment of RMB 2.7 million which were offset by the receipt of interest income of RMB0.3 million during the period.

Financing activities

During HY2010, net cash generated from financing activities amounted to approximately RMB63.2 million. This was mainly due to an increase in short term bank loans of RMB70.0 million and a decrease in bank deposit pledged of RMB28.0 million which was offset by interest expenses paid of approximately RMB3.3 million and repayment of short term loan of approximately RMB31.5 million.

Cash and cash equivalents increased by approximately RMB72.8 million in HY2010.

Commentary

With slight economic recovery in the global environment, the Group saw an improvement in financial performance in 1H2010. The outlook for the 2H2010 remains positive and we foresee that the average selling prices of our products will grow gradually in view of the current market and economic conditions.

However, the group may face challenges such as fluctuation of raw material costs in 2H2010. We are monitoring the trend of raw material prices and may pass the increase in cost to our customers, if necessary.

Barring unforeseen circumstances, the Board of directors expects the Group to remain profitable for FY2010.