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Revenue – Continuing operations
The Group's sales revenue from continuing operations had increased by 13.8% from HK$2,069.9 million for the six months ended September 30, 2016 ("1H FY2017") to HK$2,354.8 million for the six months ended September 30, 2017 ("1H FY2018").
The Group's long-term strategy of developing the network and engineering services for Automotive and Industrial applications, enabled it to capture the strong and continuous steady demand in Automotive, premium Home Appliance and various energy saving applications. All these segments achieved robust two-digit growth during the period under review.
Turnover by Market Segment Analysis
This segment remained the Group's largest revenue generator in 1H FY2018 contributing sales of HK$604.4 million. The modest growth of 3.1% as compared to the same period last year reflected the softening demand for smartphones in China following the rapid expansion in 2016.
The Group's strategy in this segment is to partner with its strong suppliers so as to maintain a competitive position to fight for more market share. Despite facing conditions of unstable demand and downward price pressures, the Group will further improve its efficiency in the supply chain and closely monitor its inventories to maintain a healthy situation.
This segment achieved revenue of HK$567.4 million in 1H FY2018, with a strong growth of 33.0% as compared to the same period last year. In addition to the reclassification of customers, the growth in revenue was mainly attributable to the success of the Group's long-term investment in developing the network and engineering resources in this application segment, which enabled it to capture the strong demand in the expansion of energy saving applications. This further strengthens its confidence in positioning itself as a dedicated engineering solution distributor and investing resources in this application segment continuously.
Revenue from this segment was HK$300.3 million in 1H FY2018, an increase of 16.0% as compared to the same period last year as the segment continued to enjoy the growth momentum from 2016. With rising demand for higher energy saving standards as well as better and more user-friendly features and functions in premium home appliances, the potential for high quality and advanced functioned electronics components is substantial. The Group is confident of its strategy to provide value-added services and application solutions and will continue to develop more new applications and source new suppliers to take advantage of the growth momentum in this segment.
The revenue of this segment was HK$232.8 million in 1H FY2018, a 13.8% drop as compared to the same period last year. The change was mainly due to the reclassification of customers who had changed the nature of their businesses.
The Group expects the business in this segment to remain challenging as the supply chain becomes more direct and transparent with little room for middlemen. The Group's partners also need to transform to be more specialised in certain applications or provide specific value-added services to survive in the market. The Group will continue to work with major suppliers and dealers to secure market share and provide flexible strategies to respond to changing market conditions.
Revenue from this segment increased 24.4% to HK$230.3 million in 1H FY2018 as compared to the same period last year. Automotive application has been recognized as a very important area for many electronics components manufacturers that all invest a lot of resources to develop new products and new solutions in the areas of higher safety standard and more features to facilitate the migration to autonomous driving. The potential will further magnify in the new generation of cars, which requires more energy saving electronics and the required supporting infrastructure. The Group is confident of its position in the market and will further strengthen its capabilities in networks building and advanced engineering solution services to secure more business.
This segment registered a 52.7% increase in revenue in 1H FY2018 as compared to the same period last year to HK$140.8 million. The growth was partially due to the reclassification of customers, and the Group's customers were also able to secure some projects from their end customers in the export market. The Group will continue to provide efficient and effective support and back-up engineering services to its key customers to support them in winning more projects from their end customers.
Audio and Video
Revenue from this segment was HK$140.5 million in 1H FY2018, an increase of 7.4% as compared to the same period last year as the Group continued its focus on high-end audio and portable audio products. Although the scale of the segment has shrunk, the Group had identified more new requirements and applications that needed better and more feature components. The Group's sales, marketing and engineering teams will keep on looking for new applications and source for new products to broaden its offerings and maintain the business in this segment.
Revenue from this segment continued its decline in 1H FY2018, falling 1.3% as compared to the same period last year to HK$61.1 million. In response to market conditions, the Group has shifted its focus from consumer application to commercial application, which required more technical know-how and better quality components, which leverages its value-added services and professional solutions.
Despite the instability in customer demand, revenue from this segment rose 32.1% in 1H FY2018 as compared to the same period last year to HK$77.2 million. The increase was mainly attributable to the Group securing a tablet project during the period. The Group continues to believe in the potential of health care, security and renewable energy applications and will continue to keep a close watch on these areas.
Profit Margin Continuing operations
The Group's gross profit margin increased from 7.4% in 1H FY2017 to 8.4% in 1H FY2018. The improvement of the Group's gross profit margin was due to its emphasis on providing better support services and solutions for its high value-added products in order to secure higher margins.
Distribution Costs Continuing operations
Distribution costs increased HK$4.8 million, or 22.1%, from HK$21.7 million in 1H FY2017 to HK$26.5 million in 1H FY2018. The increase was mainly due to higher sales incentive expense in line with the increase in sales and gross profit.
Administrative Expenses Continuing operations
Administrative expenses increased HK$3.1 million, or 3.2%, from HK$97.2 million in 1H FY2017 to HK$100.3 million in 1H FY2018. This was mainly due to an increase in staff cost as a result of a higher average headcount as compared to the same period last year.
Other Gains and Losses Continuing operations
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 Chinese renminbi (RMB) against the United States dollar (USD) and a reversal of allowance for doubtful trade receivables of HK$3.0 million. Other losses of HK$5.1 million in 1H FY2017 included an exchange loss of HK$5.3 million, mainly arising from the depreciation of RMB against USD.
Finance Costs Continuing operations
Finance costs increased by HK$2.4 million, or 20.0%, from HK$11.6 million in 1H FY2017 to HK$14.0 million in 1H FY2018. This was mainly attributable to an increase in trust receipt loans to cope with the increased purchasing activities for the current period.
LIQUIDITY AND FINANCIAL RESOURCES
As compared to the previous financial year ended March 31, 2017, trust receipt loans increased by HK$101.1 million. Trade and bills payables increased from HK$418.6 million as at March 31, 2017 to HK$501.1 million as at September 30, 2017. Both increases were due to the increase in purchasing activities during the period under review. Trade and bills receivables increased by HK$282.0 million when compared to those as at March 31, 2017 due to an increase in sales revenue towards the end of the period under review. The debtors turnover days remained at 2.4 months.
As at September 30, 2017, the Group's current ratio (current assets/current liabilities) was 1.25 (March 31, 2017: 1.27).
Inventories decreased from HK$591.7 million as at March 31, 2017 to HK$579.2 million as at September 30, 2017. The inventory turnover days decreased from 2.0 months to 1.6 months.
As at September 30, 2017, the Group had a working capital of HK$408.6 million, which included a cash balance of HK$388.0 million, compared to a working capital of HK$363.0 million, which included a cash balance of HK$331.3 million as at March 31, 2017. The increase in cash by HK$56.7 million was attributable to the net effect of cash inflow of HK$156.2 million from financing activities and cash outflows of HK$100.6 million in operating activities and HK$1.0 million in investing activities.
Cash inflow from financing activities was attributable to the net effect of increases in trust receipt loans and bank borrowings as a result of increased purchasing activities and the dividend payment to shareholders.
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 under review and a slight increase in average credit period as a result of more sales attributable from customers with a longer credit period.
Borrowing and Banking Facilities
As at September 30, 2017, bank borrowings of HK$190.0 million (March 31, 2017: HK$190.0 million) were unsecured and repayable in quarterly or half yearly installments ending in the financial year of 2018.
Unsecured bank borrowings bore interest at a weighted average effective rate of 3.25% per annum for fixed rate borrowings and 2.53% per annum for variable rate borrowings as at September 30, 2017.
As at September 30, 2017, trust receipt loans were unsecured and repayable within one year and bore an effective interest rate of 2.23% to 3.45% per annum. As at September 30, 2017, the Group had unutilised banking facilities of HK$313.8 million (March 31, 2017: HK$330.0 million).
The aggregate amount of the Group's borrowings and debt securities are as follows:
Amount repayable in one year or less, or on demand
Amount repayable after one year
As at September 30, 2017, trade receivables amounted to HK$120.9 million (March 31, 2017: HK$24.2 million), which were transferred to banks by discounting those 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 amounted to HK$96.6 million (March 31, 2017: HK$19.4 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, Hong Kong dollars (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, 2017 was 108.1% (March 31, 2017: 94.5%). 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$668.6 million to HK$769.6 million to finance the increased purchasing activities.
The Company had given corporate guarantees (unsecured) to its banks in respect of banking facilities granted to its subsidiaries. As at September 30, 2017, the aggregate banking facilities granted to the subsidiaries were HK$1,283.3 million (March 31, 2017: HK$1,190.3 million), of which HK$972.7 million (March 31, 2017: HK$863.7 million) was utilised and guaranteed by the Company.
As at September 30, 2017, 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$338.1 million (March 31, 2017: HK$327.1 million).
STRATEGY AND PROSPECTS
China's economy has bottomed out in the first half year of 2017 and has recorded better-than-expected gross domestic product growth of 6.9% on the back of a strong manufacturing sector and healthy domestic consumption. It is expected to grow at similar momentum in the second half of 2017. The Group will focus on growth industries such as the automotive and home appliances segments, which are expected to have an increasing percentage of electronic content in tandem with the rising trend for automation and smart features.
The Group will continue to be prudent in managing its operations while maintaining its cautious stance in managing costs and sustaining a healthy liquidity position in order to support long-term growth. In view of its performance in 1H FY2018, the Group is cautiously optimistic about its performance in the year ending March 31, 2018.