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The Group recorded attributable profit of HK$6.7 million for the six months ended September 30, 2018 (1H FY2019) compared to HK$60.2 million for the six months ended September 30, 2017 (1H FY2018) mainly due to an exchange loss of HK$34.0 million in the current period while there was an exchange gain of HK$10.0 million in the same period last year. Excluding the exchange difference, the attributable profit of the core business would have been HK$40.7 million in 1H FY2019 as compared to HK$50.2 million in 1H FY2018. The decrease in attributable profit of the core business was mainly due to increases in staff cost, rental expenses for warehouse and finance costs in 1H FY2019.
The Group's sales revenue had decreased by 8.5% from HK$2,354.8 million in 1H FY2018 to HK$2,154.8 million in 1H FY2019.
The sales of the Group had a good start in the beginning of the fiscal year continuing the strong demand and momentum of the market from last year. However, since June 2018, the escalating US-China trade tension has had a negative impact on the confidence of consumers and manufacturers, and the overall supply chain of electronic industry. Both consumer and business sentiments have become conservative with tightening controls in a bid to lower the inventory risks. Our customers had started to slow down placing long-term orders and push out short-term orders to trim down the buffer levels in their inventories. Moreover, the depreciation of the Chinese Renminbi ("RMB") further reduced the buying power of domestic customers in China.
In line with the bearish environment, the Group's sales declined across almost all its business segments. Some segments, in particular Industrial, Home Appliance and Electronic Manufacturing Services ("EMS"), were directly impacted by the US-China trade tensions, which had a direct effect on export orders. The remaining segments were indirectly impacted by the resulting decline in consumer confidence in the China domestic market.
Turnover by Market Segment Analysis
The Industrial segment achieved revenue of HK$555.8 million in 1H FY2019, a drop of 2.0% as compared to the same period last year. This segment covers a wide range of applications including switched mode power supply, LCD module, meter and energy saving products. The strong demand, which we enjoyed last year, had continued at the beginning of this year before being affected by the US-China trade tensions and resulting in weaker sales revenue. The Group will monitor the conditions closely and will continue to commit strong engineering and sales resources to this segment due to its long term potential.
The Telecommunications segment was the Group's second largest revenue generator in 1H FY2019 contributing sales of HK$466.6 million. There was a significant drop of 22.8% as compared to the same period last year. The weakening of smartphone market was due to the saturation of the 4G market even as consumers held back their purchases in anticipation of the launch of the 5G telecommunication products. This situation is the same as that of the previous migration from 3G to 4G.
Although the Group's customer base in this segment does not depend on the export to US market, consumer confidence has been affected by the current trade tensions and led to declining demand in this segment. The Group's strategy is to keep the efficiency in the supply chain and monitor the inventory status to avoid any unexpected risks.
Revenue from the Home Appliance segment was HK$306.2 million in 1H FY2019, representing an increase of 2.0% as compared to the same period last year. The export market of this segment was affected by the trade tensions, however demand from the domestic China market for new products with new features enabled the Group to maintain sales at a similar level as last year.
Revenue from the Automotive segment increased by 2.6% to HK$236.2 million in 1H FY2019 as compared to the same period last year. This segment is also hit by the US-China trade tensions. Recent statistics shows worsening automotive sales and production in China1. Despite the slowdown, the Group's rapid development of new applications and the further electrification of automotive enabled the Group to maintain revenues at a similar level as last year.
This segment remains a key area of focus for the Group in the long term. During the current slowdown, the Group plans to further strengthen its capabilities in engineering solutions and networks to capture future opportunities.
The revenue from this segment was HK$198.8 million in 1H FY2019, a 14.6% drop as compared to the same period last year. This segment has traditionally been the fastest to react to market changes. With the current conditions, the dealers have become cautious and stopped stocking up on inventory and participating in sales programmes. The rapid depreciation in RMB had also further damaged the business in this segment.
Audio and Video
Revenue from the Audio and Video segment was HK$156.7 million in 1H FY2019, an increase of 11.5% as compared to the same period last year. This segment had became more stable after the Group had put more focus on the high-end audio and portable audio products. The Group had secured a project in 2018 with an end user in Europe that led to strong demand at the start of the year but sales has since weakened with the rising tensions between the US and China. The Group will carefully monitor each project in this segment to make sure that the credit position and inventory levels are healthy.
This segment recorded a 15.8% decrease in revenue in 1H FY2019 as compared to the same period last year to HK$118.5 million. This was one of the key segments affected by the US-China trade tensions, partially because US buyers had shifted their EMS orders to other countries instead of China. The Group will monitor the change closely and put counter measures and adjust our strategy for this segment as appropriate.
Revenue from this segment continued its decline in 1H FY2019, falling 3.1% as compared to the same period last year to HK$59.2 million. Even with no trade tensions, the revenue of this segment has been shrinking, and the Group expects the current market conditions to accelerate the downward trend because of a drop in the number of orders from the US.
Because of the overall weakness in customer demand, revenue from this segment dropped 26.5% in 1H FY2019 as compared to the same period last year to HK$56.7 million particularly in the Toys and Health Care application, which was partially offset by sustained sales from the Security application. The Group will continue to seek more new opportunities in various applications to maintain a strong position in the China market.
Gross Profit Margin
The Group's gross profit margin increased from 8.4% in 1H FY2018 to 9.6% in 1H FY2019. This was attributed to the Group's investment in engineering resources and sales network to provide value-added services to customers in our key focus segments, such as Automotive, Industrial and Home Appliance, which led to better returns and improved margins.
Distribution costs decreased by HK$2.4 million, or 9.1%, from HK$26.5 million in 1H FY2018 to HK$24.1 million in 1H FY2019. The decrease was mainly due to lower sales incentive expense, which was in line with the decrease in sales revenue.
Administrative expenses increased by HK$14.4 million, or 14.3%, from HK$100.3 million in 1H FY2018 to HK$114.7 million in 1H FY2019. This was mainly due to (i) an increase in staff cost due to higher average headcount and (ii) premises and warehouse removal expenses due to extra rental expenses incurred for the new warehouse in Hong Kong for renovation and removal in the current period.
Other Gains and Losses
Other losses of HK$34.1 million in 1H FY2019 included an exchange loss of HK$34.0 million, mainly arising from the depreciation of RMB against the United States dollars (USD). Other gains of HK$13.1 million in 1H FY2018 included an exchange gain of HK$10.0 million, mainly arising from the appreciation of the RMB against the USD and a reversal of allowance for doubtful trade receivables of HK$3.0 million.
Finance costs increased by HK$7.9 million, or 56.8%, from HK$14.0 million in 1H FY2018 to HK$21.9 million in 1H FY2019. This was mainly attributable to an increase in trust receipt loans and the higher average interest rate for the current period. As at September 30, 2018, the interest rate of trust receipt loans was ranging from 3.35% to 4.80% (September 30, 2017: 2.23% to 3.45%) per annum.
1MIIT Ministry of Industry and Information Technology of the PRC
CAAM China Association of Automobile Manufacturers
LIQUIDITY AND FINANCIAL RESOURCES
As compared to the previous financial year ended March 31, 2018, trust receipt loans increased by HK$129.3 million. Trade and bills payables decreased from HK$397.5 million as at March 31, 2018 to HK$346.0 million as at September 30, 2018. The increase in trust receipt loans was mainly due to the increase in inventories during the period under review. Trade and bills receivables increased by HK$47.7 million when compared to those as at March 31, 2018, due to an increase in sales revenue towards the end of the period under review and the debtors turnover days slightly increased from 2.6 months to 2.8 months.
As at September 30, 2018, the Group's current ratio (current assets/current liabilities) was 1.26 (March 31, 2018: 1.31).
Inventories increased from HK$691.0 million as at March 31, 2018 to HK$791.1 million as at September 30, 2018. The inventory turnover days increased from 1.7 months to 2.3 months.
As at September 30, 2018, the Group had a working capital of HK$432.0 million, which included a cash balance of HK$296.2 million, compared to a working capital of HK$470.9 million, which included a cash balance of HK$327.1 million as at March 31, 2018. The decrease in cash by HK$30.9 million was primarily attributable to the net effect of cash outflows of HK$194.2 million in operating activities and HK$20.6 million in investing activities and inflow of HK$189.2 million generated from financing activities. The Group's cash balance was mainly denominated in USD, RMB and Hong Kong dollars (HKD).
Cash outflow in operating activities was mainly attributable to an increase in trade receivables due to increased sales revenue towards the end of the period and an increase in inventories.
Cash inflow generated from financing activities was attributable to the net effect of increases in trust receipt loans and bank borrowings as a result of the increase in inventories and the dividend payment to shareholders.
Borrowings and Banking Facilities
As at September 30, 2018, fixed-rate bank borrowings of HK$200.0 million (March 31, 2018: HK$170.0 million) were unsecured and repayable in quarterly or half-yearly installments ending in the financial year of 2019. The fixed-rate bank borrowings were denominated in HKD.
Unsecured fixed-rate bank borrowings bore interest at a weighted average effective rate of 4.33% per annum while variable-rate bank borrowings bore interest at a weighted average effective rate of 3.62% per annum as at September 30, 2018. The variable-rate bank borrowings were denominated in USD and HKD.
As at September 30, 2018, trust receipt loans were unsecured and repayable within one year and bore an interest rate of 3.35% to 4.80% per annum. As at September 30, 2018, the Group had unutilised banking facilities of HK$358.3 million (March 31, 2018: HK$457.6 million).
The aggregate amount of the Group's borrowings and debt securities were as follows:
Amount repayable in one year or less, or on demand
Amount repayable after one year
As at September 30, 2018, the Group's trade receivables amounted to HK$91.3 million (March 31, 2018: HK$76.5 million), which were transferred to banks by discounting those trade receivables on a full recourse basis. As the Group had not transferred the significant risks and rewards relating to these receivables, it continued to recognise the full carrying amount of the receivables and had recognised the cash received on the transfer as a secured borrowing amounting to HK$73.0 million (March 31, 2018: HK$61.3 million).
Foreign Exchange Risk Management
The Group operates in Hong Kong, the PRC and Taiwan. It incurred foreign currency risk mainly on sales and purchases that were denominated in currencies other than its functional currencies. Sales are mainly denominated in USD, RMB, HKD and Taiwan dollars (TWD) whereas purchases are mainly denominated in USD, Japanese yen (JPY), RMB and HKD. Therefore, the exposure in exchange rate risks mainly arises from fluctuations in foreign currencies against the functional currencies. Given the pegged exchange rate between HKD and USD, the exposure of entities that use HKD as their respective functional currency to the fluctuations in USD is minimal. However, exchange rate fluctuations between RMB and USD, RMB and JPY, HKD and JPY, or TWD and USD could affect the Group's performance and asset value. The Group has a foreign currency hedging policy to monitor and maintain its foreign exchange exposure at an acceptable level.
Net Gearing Ratio
The net gearing ratio as at September 30, 2018 was 144.1% (March 31, 2018: 101.9%). The net gearing ratio was derived by dividing net debts (representing interest-bearing bank borrowings, trust receipt loans and bills payables minus cash and cash equivalents and restricted bank deposits) by shareholders' equity at the end of a given period. The increase was mainly due to an increase in trust receipt loans from HK$818.4 million to HK$947.6 million to finance the increased inventories.
The Company had given corporate guarantees (unsecured) to its banks in respect of banking facilities granted to its subsidiaries. As at September 30, 2018, the aggregate banking facilities granted to the subsidiaries were HK$1,555.3 million (March 31, 2018: HK$1,455.8 million), of which HK$1,202.4 million (March 31, 2018: HK$1,002.1 million) was utilised and guaranteed by the Company.
As at September 30, 2018, the Company had also given guarantees to a supplier in relation to the subsidiaries' settlement of the respective payables. The aggregate amount payable to this supplier under guarantee was HK$201.3 million (March 31, 2018: HK$365.5 million).
STRATEGY AND PROSPECTS
The ongoing US-China trade tensions and the resulting implementation of tariffs are a threat to China's economy, and are expected to dent US growth. Worsening trade tensions and exchange of tariffs could cause significant economic cost to the global economy. The Group believes that the influence of these trade tensions has just started with no short term resolution in sight. Nevertheless the Group remains cautiously optimistic about the key focus segments we have identified, namely Automotive, Industrial and Home Appliance, and we will continue to focus our efforts and resources in these areas.
In view of the considerable downside risks and certain headwinds in the macro-environment, the Group has taken several measures in facing this challenging situation, including tightening its cost and expenses control, mitigating the credit risk of debtors and reducing its purchase activities to keep inventory at appropriate levels.