Final Results
1 May 2008
Walcom Group Limited
("Walcom" or the "Group" or the "Company")
Preliminary Results for the year ended 31 December 2007
I am delighted to present the annual results for the year ended 31 December
2007.
Overview of Results
Turnover and gross profit in the year under review showed a considerable
improvement compared with the previous year. Consequently, the loss before tax
was significantly reduced despite exceptionally bad weather conditions in China
towards the end of the financial year.
The results are summarised as follows:
Change 2007 2006
% HK$'000 HK$'000
Turnover 30 18,454 14,168
Gross profit 28 11,966 9,374
Operating loss (52) (5,639) (11,744)
Net finance income/(expense) (102) 367 (18,433)
Share of profits of associates (5) 507 533
Loss before tax (84) (4,764) (29,643)
Net asset value per share (HK$) (18) 0.33 0.40
Outlook
The Directors believe that the world is facing a food shortage crisis as well
as the threat of avian influenza, which creates considerable opportunities for
our business:
* As we mentioned in our last annual results, the world is facing an
increasing demand for energy and one of the solutions adopted is the
production of ethanol fuel from corn, which creates an additional demand
for corn. This in turn has lead to a shortage of corn, as well as other
grain products, due to, amongst other things, droughts in several producing
countries, which has created a food shortage crisis for humans in certain
countries, which has subsequently driven the prices of grain to record
levels. Since corn is a major energy source in feedstuffs, the high price
of corn has had a strong impact on the cost structure of the animal feed
industry. After the analysis of data derived from various sophisticated
computer simulation models, some feed companies have started to use the
Company's products to reformulate their own production mixes in order to
boost the efficiency of energy utilization. This has resulted in a
reduction in the level of corn consumption while maintaining the same
energy utilization and hence has lead to a reduction in manufacturing
costs. The Directors believe this will become the global trend in the feed
industry.
* Avian influenza continues to be a major threat to the world's population.
The Company's immunity enhancing products are expected to play a much more
important role in animal husbandry. In the period under review, other
unknown viruses have hit the swine population severely in Asia. Results of
field trials on our products in certain highly infected areas were very
satisfactory and this should create demand for our products.
Recent Developments
* In 2007 our sales in the Philippines increased 170% as we have been selling
into big feed mills through our distributor in that country. The Directors
are confident that this market segment will grow rapidly in 2008.
* On 25 January 2008, the Group acquired a further equity interest in our
Thailand associate, since when the latter has became a member of the Group.
The development of our prawn product, "Aquanin plus", in Thailand is
progressing well. This product improves feed conversion ratios and weight
gains and decreases mortality rates in prawns. The Directors believe that
this product will make a significant contribution to the Group's sales in
2008.
* The Group has recently set up a representative office in Vietnam and
started to explore this market in view of the huge demand for swine and
prawn feedstuffs.
Patents
At the end of 2007 the Group had been granted 19 patents in respect of:
* its core Cysteamine technology in China, Hong Kong, North Korea, New
Zealand, Ukraine, Russia and South Africa;
* poultry feed in the UK, North Korea, Taiwan, Hong Kong and Russia;
* dairy cow feed in New Zealand, the UK and Hong Kong;
* antibodies to adipose tissues in the UK; and
* fish feed in the UK and Hong Kong.
The Directors expect further patents to be granted in the future in line with
the policy of the Group to pursue wide patent coverage in places where the
Board believes there will be significant demands for the Group's products.
Borrowings
A bank loan of HK$1,160,000 was arranged to finance the relocation of our
Shanghai factory due to the expiry of the lease of the old factory. The new
factory is now in operation and has a production capacity of 100 tons per month
which is an increase of 60 tons over the previous capacity.
Dividend
The directors do not recommend any dividend payment for the year ended 31
December 2007.
Annual General Meeting
The Annual General Meeting will be held at the offices of the Company's
solicitors, Richards Butler in Hong Kong at 2:30pm on Thursday 29 May 2008.
On behalf of the Board, I would like to express our sincere gratitude to the
management team and staff, business partners, customers, professional advisers
and shareholders for their great support over the years. There are big
challenges ahead but the Directors are confident that the Group can achieve
success in its business and we look forward to the future with confidence.
Eddie K.M. Chan
Chairman
1 May 2008
Consolidated Income Statement
For the year ended 31 December 2007
Note 2007 2006
HK$ HK$
Turnover 18,453,608 14,168,404
Cost of sales (6,487,430) (4,794,781)
Gross profit 11,966,178 9,373,623
Other income 788,166 1,658,591
Research and development expenses (1,207,926) (1,277,809)
Selling and distribution expenses (5,590,529) (5,492,121)
General and administrative expenses (11,594,555) (16,005,909)
Loss from operations (5,638,666) (11,743,625)
Net finance income/(expense) 367,286 (18,432,698)
Share of profits of associates 507,362 533,592
Loss before income tax (4,764,018) (29,642,731)
Income tax 2 - -
Loss attributable to equity shareholders of (4,764,018) (29,642,731)
the Company
Loss per share - basic, HK cents 3 (7.34) (55.65)
- diluted, HK cents (7.34) (20.99)
Consolidated Balance Sheet
As at 31 December 2007
Notes 2007 2006
HK$ HK$
Assets
Non-current assets
Property, plant and equipment 1,243,656 1,005,773
Patents 6,967,172 5,563,252
Interests in associates 718,078 582,571
8,928,906 7,151,596
Current assets
Inventories 1,551,916 606,528
Trade and other receivables 2,424,421 2,777,336
Amounts due from associates 3,552,714 3,556,606
Cash and cash equivalents 4 9,144,259 19,205,028
16,673,310 26,145,498
Total assets 25,602,216 33,297,094
Equity and liabilities
Equity
Share capital 649,109 649,109
Reserves 20,796,592 25,227,790
21,445,701 25,876,899
Current liabilities
Trade and other payables 1,898,530 6,919,405
Bank overdrafts 1,097,985 500,790
2,996,515 7,420,195
Non current liabilities
Bank borrowings 1,160,000 -
Total equity and liabilities 25,602,216 33,297,094
Consolidated statement of changes in equity
For the year ended 31 December 2007
2007 2006
HK$ HK$
Total equity at 1 January 25,876,899 (8,892,559)
Net income recognised directly in equity:
Exchange differences on translation of the 332,820 89,430
financial statements of foreign
subsidiaries
Net loss for the year (4,764,018) (29,642,731)
Total recognised income and expense for the (4,431,198) (29,553,301)
year and attributable to equity
shareholders of the Company
Movements in equity arising from capital
transactions:
Issue of share capital - 648,661
Share premium - 63,674,098
- 64,322,759
Total equity at 31 December 21,445,701 25,876,899
Consolidated cash flow statement
For the year ended 31 December 2007
Notes 2007 2006
HK$ HK$
Operating activities
Loss before income tax (4,764,018) (29,642,731)
Adjustments for:
- Amortisation of patents 398,519 308,916
- Interest received (372,490) (49,385)
- Depreciation 354,968 409,614
- Foreign exchange gain, net 261,730 56,114
- Interest paid 5,204 18,482,083
- Loss on disposal of property, plant and 5,995 256
equipment
- Impairment loss on trade receivables 143,042 -
- Share of profits of associates (507,362) (533,592)
Operating loss before changes in working (4,474,412) (10,968,725)
capital
(Increase) in inventories (945,388) (47,082)
Decrease/(increase) in trade and other 209,873 (1,486,709)
receivables
Increase in amounts due from associates - (181,536) (2,111,585)
trade related
(Decrease)/increase in trade and other (5,020,875) 2,590,520
payables
Cash used in operations (10,412,338) (12,023,581)
Interest paid (5,204) (555,058)
Net cash used in operating activities (10,417,542) (12,578,639)
Investing activities
Payment of patents (1,802,439) (944,782)
Payment for the purchases of property, plant (534,855) (157,365)
and equipment
Proceeds from sales of property, plant and 1,300 -
equipment
Dividends received from an associate 371,855 -
Accounts due from associates - non-trade 185,428 (443,536)
related
Interest received 372,490 49,385
Net cash used in investing activities (1,406,221) (1,496,298)
Financing activities
Proceeds from issue of shares - 22,065,444
Proceeds from issue of convertible loan notes - 12,870,000
Proceeds from new bank borrowings 1,160,000 -
Repayments of accounts due to related - (1,632,142)
companies
Repayments of amounts due to directors - (954,363)
Net cash generated from financing activities 1,160,000 32,348,939
Net (decrease)/increase in cash and cash (10,663,763) 18,274,002
equivalents
Cash and cash equivalents at the beginning of 18,704,238 430,236
the year
Effect of foreign exchange rate changes, net 5,799 -
Cash and cash equivalents at the end of the 4 8,046,274 18,704,238
year
Notes to the Financial Statements
1. Publication of non-statutory accounts
The financial information set out in this preliminary announcement does not
constitute statutory accounts.
The financial information for the period ended 31 December 2007 has been
extracted from the Company's financial statements to that date which have
received an unqualified auditors' report.
2 Income tax
(a) Taxation for the company
No provision for taxation has been made for the company as it is exempt from
taxation in the British Virgin Islands.
At 31 December 2007, no deferred tax assets/liabilities have been recognised by
the company as it does not have any temporary difference between the accounting
and the tax bases of assets and liabilities.
(b) Taxation for the group
(i) Taxation on overseas profits has been calculated on the estimated
assessable profit for the year at the rate of taxation prevailing in the
countries in which the group companies operate.
The provision for Hong Kong profits tax is calculated at 17.5% (2006: 17.5%) of
the estimated assessable profits for the year. However, no provision for Hong
Kong profits tax has been made (2006: HK$nil) as the group did not have
assessable profit subject to Hong Kong profits tax for the year.
No provision for foreign enterprise income tax ("FEIT") in the People's
Republic of China ("PRC") has been made (2006: HK$nil) as Shanghai Walcom
Bio-Chem Co., Ltd. ("Shanghai Walcom"), a wholly owned subsidiary company
operating in Shanghai, the PRC, has agreed tax losses brought forward in excess
of the assessable profits for the FEIT purposes for the year.
Pursuant to the income tax rules and regulations in the PRC, Shanghai Walcom is
granted certain tax relief whereby it is exempted from FEIT for two years
starting from the first profit-making year, followed by a 50% reduction for the
next three years.
On 16 March 2007, the National People's Congress approved the Corporate Income
Tax Law of the People's Republic of China ("the new tax law"), which will take
effect on 1 January 2008. Under the new tax law, the PRC income tax rate will
be gradually increased to a standard rate of 25% for all domestic and foreign
enterprises over the next five years with effective from 1 January 2008.
According to the Circular 39 passed by the State Council on 26 December 2007,
the tax exemption and reduction will be terminated latest by 2012. Accordingly,
Shanghai Walcom is exempt from PRC income tax for the years from 1 January 2008
to 31 December 2009, followed by a 50% reduction in the tax rate for the
remaining three years from 1 January 2010 to 31 December 2012. The applicable
income tax rate would be 11%, 12% and 12.5% for the year 2010, 2011 and 2012
respectively.
(ii) A reconciliation between the group's tax expense and the accounting loss,
at the current tax rate, is set out below:-
2007 2006
HK$ HK$
Loss before income tax (4,764,018) (29,642,731)
Share of profits of associated companies 507,362 533,592
(5,271,380) (30,176,323)
Notional tax credit on loss before income tax
calculated
at the rates applicable to profits in the (995,942) (5,318,662)
countries concerned
Tax effect of non-deductible expenses 759,514 4,865,256
Tax effect of non-taxable revenue (83,997) (36,900)
Tax effect of temporary differences 1,603 (12,492)
Tax effect of prior years' tax losses utilised (460,680) (198,228)
this year
Tax effect of unused tax losses not recognised 779,502 701,026
Actual tax expense - -
(iii) A deferred tax asset amounting to HK$8,465,000 (2006: HK$8,096,000) in
respect of tax losses of approximately HK$48,192,000 (2006: HK$46,021,000) has
not been recognised in the financial statements as it is not certain that
future taxable profit will be available against which these losses can be
utilised. Tax losses of approximately HK$1,130,000, HK$2,886,000 and
HK$2,248,000 will expire at the end of years 2008, 2009 and 2010 respectively.
Other tax losses do not expire under the current tax legislation. Other
temporary differences are not material.
3. Loss per share
(a) The calculation of the basic loss per share is based on the loss
attributable to ordinary equity shareholders of the company of HK$4,764,018
(2006: HK$29,642,731) and the weighted average number of 64,910,891 ordinary
shares (2006: 53,265,469) in issue during the year.
Weighted average number of ordinary shares
2007 2006
Issued ordinary shares at 1 January 64,910,891 44,851
Effect of capitalisation of share premium on 30 - 52,384,799
November 2006
Effect of conversion of convertible loan notes on - 700,452
30 November 2006
Effect of shares placed on the AIM on 21 December - 135,367
2006
Weighted average number of ordinary share at 31 64,910,891 53,265,469
December
(b) Diluted loss per share
The calculation of the diluted loss per share is based on the loss attributable
to ordinary equity shareholders of the company of HK$4,764,018 (2006:
HK$11,179,781) and the weighted average number of 64,910,891 ordinary shares
(2006: 53,265,469).
2007 2006
HK$ HK$
Loss for the year attributable to the shareholders 4,764,018 29,642,731
Interest expense on convertible loan notes - (18,462,950)
Loss attributable to ordinary shareholders 4,764,018 11,179,781
(diluted)
4. Cash and cash equivalents
2007 2006
HK$ HK$
Cash and cash equivalents in the balance sheet 9,144,259 19,205,028
Bank overdrafts (1,097,985) (500,790)
Cash and cash equivalents in the cash flow 8,046,274 18,704,238
statement
Included in cash and cash equivalents in the consolidated balance sheet are the
following amounts denominated in a currency other than the functional currency
of the entity to which they relate:
2007 2006
United States Dollars US $21,960 US$ 97,446
Pound Sterling GB £66,275 GB £
1,190,309
Euro EUR 297,548 EUR -
5. Copies of the Report and Accounts will be sent to shareholders shortly and
will be available from the principal place of business of the Company, Unit
613, 6/F West Wing Office Building, New World Centre, 20 Salisbury Road,
Tsimshatsui, Kowloon, Hong Kong and on the company's website
www.walcomgroup.com.
Enquiries:
Walcom Group Ltd +852 2494 0133
Francis Chi (Chief Executive Officer)
Albert Wong (Chief Financial Officer)
John East & Partners Limited +44 20 7628 2200
Jeffrey Coburn/Simon Clements