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The sales revenue of Willas-Array Electronics (Holdings) Limited (the "Company") and its subsidiaries (collectively the "Group") from continuing operations had increased by 6.8% from HK$3,635.6 million for the year ended March 31, 2016 ("FY2016") to HK$3,883.1 million for the year ended March 31, 2017 ("FY2017").
Overall growth was mainly driven by the strong demand in energy saving and premium Home Appliance and Automotive applications. The double-digit growth in these two segments was a result of the Group's investment in providing professional engineering resources and services to its customers so as to capture the opportunities available in these segments. This strategy paid off particularly well for the Automotive segment which generated a 32.4% surge in revenue.
During FY2017, the Group performed a reclassification of some customers to better reflect the change in the nature of their businesses. This affects mainly the figures in its Dealer, Industrial and Electronic Manufacturing Services ("EMS") segments.
This segment remained the Group's largest revenue generator in FY2017 contributing sales of HK$1,041.9 million. The 8.6% increase in sales achieved in FY2017 was smaller than the growth achieved in FY2016, which was a year of rapid expansion in the China's 4G market.
The maturity of the market is expected to lead to a slowdown in the demand for 4G handsets, which may in turn cause an imbalance of supply and demand and greater price competition. The Group is currently reviewing its inventory status to better match market conditions and also improving its efficiency so as to maintain its market share in this segment.
Revenue from this segment was HK$859.5 million in FY2017, an increase of 11.4% year-on-year ("YOY"). Although the growth was partly due to the reclassification of customers, it was also a result of stronger demand from energy saving applications and transportation, communication and power-related infrastructure. The Group believes China's "One Belt, One Road" strategy offers tremendous opportunities for this segment.
To capitalize on the potential growth of this segment, the Group has positioned itself as a dedicated engineering solutions distributor. It has established a strong network of key customers and suppliers in the China market and also developed various applications for their specific needs. It believes this strategy can generate stable returns from this segment and support the healthy growth of the Group.
Revenue from this segment was HK$506.2 million in FY2017, an increase of 15.6% YOY. The double-digit growth was a result of solid demand in both the export and domestic markets for premium home appliance and inverter applications in energy saving products.
This segment continued to benefit from the rising trend for high quality home appliance with more sophisticated and environmentally friendly features. Such appliances require electronics components with more advanced solutions. The Group continues to strengthen its capability in this segment in order to capture the potential opportunity and also introduce more new suppliers to expand its product offering.
Revenue from this segment was HK$433.4 million in FY2017, an increase of 32.4% YOY. In recent years, the Automotive segment has become one of the highest growth segments in the Group's business portfolio. This was the result of its commitment and investment to build up its capabilities in this segment. The Group is optimistic that it can capitalize on the opportunities available to it as the sector continues to have higher requirements for more advanced features and higher safety standards. The Group continues to team up with its major suppliers to secure a leading position in the market and also attract potential new suppliers to enrich the product offering. The healthy growth in this segment can support the long-term growth of the Group.
This segment achieved revenue of HK$376.4 million in FY2017, a decrease of 20% YOY. The change was mainly due to the reclassification of customers who had changed the nature of their business.
However in the traditional trading segment, the market is getting more transparent and there is less room for traders to achieve growth. The Group continues its close partnerships with major suppliers and partner dealers to secure more market share from its competitors. It is offering aggressive package deals and continuing to monitor the changing market conditions and adjusting its strategy accordingly.
Audio and Video
Revenue from this segment was HK$236.8 million in FY2017, a decrease of 3.2% YOY. The Group's key customers in this segment have already migrated from traditional audio to portable audio and professional audio. The total business volume is getting stable and the Group can also foresee more new requirements for electronic componentry in this segment. It intends to maintain adequate resources in order to cooperate with existing and new suppliers to identify these new opportunities.
This segment registered a YOY growth of 6.4% in revenue to HK$201.3 million in FY2017. The growth was mainly due to the reclassification of customers, however the actual performance in this segment was flat. The Group expects the business of this segment to remain challenging because of keen competition. It intends to try its best to provide efficient and effective support and back-up engineering services to its key customers through improving the supply chain. Moreover, it consciously monitors order trends and rolling forecasts to minimize its risk in purchase and the possibility of carrying obsolete stock.
Revenue from this segment decreased by 0.4% YOY to HK$122.7 million in FY2017. LED lighting has already become widely used in various industrial and consumer applications. There are more and more new components and new solutions coming out and the market remains very competitive. Oversupply and price erosion are still the key issues in this segment but the sizeable volume of this market is worth paying attention to. The Group continues to monitor the trends and allocate adequate resources to capture all possible opportunities. At the same time, the credit positions of its customers and the buffer inventory are other major concerns.
Revenue from this segment decreased by 6.4% YOY to HK$104.9 million in FY2017. Although certain businesses in this segment are unstable, the Group believes that some of them have the potential to become star segments in the future. Thus, the Group has to monitor such segments closely to avoid missing any good opportunities in the market.
Profit Margin – Continuing operations
The slowing of China's GDP growth rate in 2015 continued in 2016 and this led to downward pressure on prices and a squeeze on the Group's gross profit margin to 8.16% in FY2017 from 8.65% in FY2016.
Distribution costs – Continuing operations
Distribution costs increased by HK$4.3 million, or 9.3%, from HK$46.2 million in FY2016 to HK$50.5 million in FY2017. The increase was mainly due to more sales rebate and entertainment activities to boost sales.
Administrative expenses – Continuing operations
Administrative expenses decreased by HK$6.0 million, or 3.0%, from HK$196.4 million in FY2016 to HK$190.4 million in FY2017 mainly due to a decrease in staff cost as a result of a fall in average headcount as compared with FY2016.
Other gains and losses – Continuing operations
Other losses of HK$7.2 million in FY2017 included an exchange loss of HK$14.2 million, mainly arising from the depreciation of the Chinese renminbi ("RMB") against the United States dollar ("USD") offset by a reversal of allowance for doubtful trade receivables of HK$7.7 million. Other losses of HK$5.7 million in FY2016 included an exchange loss of HK$14.3 million, mainly arising from the depreciation of RMB against USD offset by a reversal of allowance for doubtful trade receivables of HK$8.5 million.
Finance costs – Continuing operations
Finance costs increased by HK$3.7 million, or 17.8%, from HK$20.8 million in FY2016 to HK$24.5 million in FY2017. This was mainly attributable to an increase in trust receipt loans and the higher interest rate during the year.
Share of loss of associates/Impairment loss on interests in associates – Continuing operations
Share of loss of the Company's associated company, GW Electronics Company Limited ("GW Electronics") in FY2016 was mainly due to the provision of doubtful debts for debtors of memory products.
Following the termination of its authorised distributorship agreement with an electronic components manufacturer in September 2015, GW Electronics downsized its operation to an optimum level to serve its remaining product lines and customers. As a result, an impairment loss of HK$70.1 million was made in FY2016.
Loss from discontinued operations
Loss from discontinued operations increased from a loss of HK$0.1 million in FY2016 to a loss of HK$1.8 million in FY2017, which was mainly due to the drop in sales revenue.
Compared to the previous year ended March 31, 2016, trust receipt loans increased by HK$79.1 million. Trade and bills payables increased from HK$366.1 million as at March 31, 2016 to HK$418.6 million as at March 31, 2017. Both increases were due to the increase in purchasing activity during the year. Trade and bills receivables increased by HK$185.1 million when compared to those as at March 31, 2016 due to an increase in sales revenue towards the end of the year under review. The debtors turnover days increased from 1.9 months to 2.4 months.
As at March 31, 2017, the Group's current ratio (current assets/current liabilities) was 1.27 (March 31, 2016: 1.25).
Inventories increased from HK$535.5 million as at March 31, 2016 to HK$591.7 million as at March 31, 2017. The inventory turnover days remained at 2.0 months.
As at March 31, 2017, the Group had a working capital of HK$363.0 million, which included a cash balance of HK$331.3 million, compared to a working capital of HK$320.6 million, which included a cash balance of HK$482.6 million as at March 31, 2016. The decrease in cash by HK$151.3 million was attributable to the cash outflow of HK$141.3 million in operating activities, HK$2.3 million in investing activities and HK$4.9 million in financing activities.
Cash outflow in operating activities was mainly attributable to an increase in trade receivables due to increased sales revenue and a slight increase in average credit period as a result of more sales attributable from customers with a longer credit period.
Cash outflow in financing activities was attributable to the net effect of repayment of advance from associates and an increase in trust receipt loans due to increased purchasing activities.
Borrowings and Banking Facilities
As at March 31, 2017, bank borrowings of HK$190.0 million (March 31, 2016: HK$202.0 million) were unsecured and repayable in quarterly or half yearly installments ending in the financial year of 2018.
Bank borrowings bore interest at a weighted average effective rate of 3.42% per annum for fixed rate borrowings and 2.41% per annum for variable rate borrowings as at March 31, 2017.
As at March 31, 2017, trust receipt loans were unsecured and repayable within one year and bore an effective interest rate of 2.38% to 3.20% per annum. As at March 31, 2017, the Group had unutilised banking facilities of HK$330.0 million (March 31, 2016: HK$488.8 million).
As at March 31, 2017, trade receivables amounted to HK$24.2 million (March 31, 2016: HK$61.0 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$19.4 million (March 31, 2016: HK$48.8 million).
Foreign Exchange Risk Management
The Group operates in Hong Kong, the People's Republic of China (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 the 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 March 31, 2017 was 94.5% (March 31, 2016: 65.7%). 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) by shareholders' equity at the end of a given period. The increase was mainly due to an increase in trust receipt loans from HK$589.5 million to HK$668.6 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 March 31, 2017, the aggregate banking facilities granted to the subsidiaries were HK$1,190.3 million (March 31, 2016: HK$1,289.9 million), of which HK$863.7 million (March 31, 2016: HK$804.2 million) was utilised and guaranteed by the Company.
As at March 31, 2017, the Company had also given guarantees to certain suppliers in relation to the subsidiaries' settlement of the respective payables. The aggregate amounts payable to these suppliers under guarantee were HK$327.1 million (March 31, 2016: HK$274.6 million).
During the year ended March 31, 2015, the Company had given corporate guarantees (unsecured) to its banks in respect of banking facilities granted to its associates. All of the financial guarantee contracts had been cancelled as at March 31, 2016 and no outstanding guarantees were given thereafter.
The Group expects market conditions to remain challenging in the year ahead in line with China's slowing economic growth. Although its industry is unlikely to experience exponential growth in the near term, the Group remains confident that it is still a viable business because of the diversity of uses for electronic componentry.
On November 4, 2016, the Group entered into a sale and purchase agreement to dispose of its entire interest in its wholly-owned subsidiary Noblehigh Enterprises Inc. and its subsidiaries (together defined as "NEI Group") to a third party for a cash consideration for HK$0.9 million (the "Disposal"). NEI Group's primary business is the design and trading of integrated circuits for the audio equipment market, which requires large upfront investments in research and development. The reason for the Disposal was that the Group can focus on core segments with more potential to grow.
Looking ahead, the Group will actively seek out new suppliers to enrich its product offering to customers, while at the same time implement more stringent cost control measures so as to maintain its competitiveness.
As at March 31, 2017, the Group had a workforce of 444 full-time employees (March 31, 2016: 477, of which 14 was from the discontinued operations), of which 34.7% worked in Hong Kong, 61.3% in the PRC and the remainder in Taiwan.
The Group actively pursues a strategy of recruiting, retaining and developing talented employees by (i) providing them with regular training programmes to ensure that they are kept abreast of the latest information pertaining to the products distributed by the Group, technological developments and market conditions of the electronics industry; (ii) aligning employees' compensation and incentives with their performance; and (iii) providing them with a clear career path with opportunities for taking on additional responsibilities and securing promotions.
While the Group's employees in Hong Kong and Taiwan are required to participate in the mandatory provident fund scheme and a defined contribution pension scheme respectively, the Group makes contributions to various government-sponsored employee-benefit funds, including social insurance fund, housing fund, basic pension insurance fund and unemployment, maternity and work-related insurance funds for its employees in the PRC in accordance with the applicable PRC laws and regulations.
Further, the remuneration committee of the Board reviews and determines the remuneration and compensation packages of the directors of the Company (the "Directors") and senior management of the Company by reference to the salaries paid by comparable companies, the time commitment and responsibilities of the Directors and the performance of the Group.