Final Results
9 May 2011
WALCOM GROUP LIMITED
("Walcom" or "the Company")
Final results for the year ended 31 December 2010
CHAIRMAN'S STATEMENT
I am pleased to announce the final results for the year ended 31 December 2010.
Results
The world-wide economy has continued to be challenging during 2010. The Company
has worked hard to strengthen its sales channels with some success. Turnover
and gross profit levels for the year under review increased by 29 per cent.
(2010: HK$32.9 million; 2009: 25.5 million) and 35 per cent. (2010: HK$20.0
million; 2009: 14.8 million) respectively compared to the previous year. For
the first time in the Company's history, a net profit of HK$0.4 million (2009:
Loss of HK$4.5 million) was achieved for the year and EBITDA increased from a
loss of HK$1.5 million in 2009 to a profit of HK$2.7 million for the period.
A summary of the results for the period are set out below:
Year ended Year ended Change
31 December 31 December per cent.
2010 2009
HK$'000 HK$'000
Turnover 32,861 25,529 29
Gross profit 20,067 14,832 35
Operating profit / (loss) 1,294 (4,287) n/a
EBITDA 2,673 (1,495) n/a
Net finance expense (86) (67) 28
Profit / (loss) for the year 399 (4,508) n/a
Loss per share, basic & diluted (HK$)* (0.003) (0.07) (96)
Net asset value per share (HK$) 0.22 0.21 5
* after taking away the minority interests in overseas subsidiaries, there is a
loss attributable to the shareholders of the Company.
Operation and market review
As set out in last year's annual report, the board considered that the
escalating costs of agricultural products represented an opportunity for the
Company. In order to capitalise on the opportunity, the Company launched a new
sales initiative, the `Alpha' project, in August 2009 and sales have
significantly improved since the launch and as sales have gained traction. The
`Alpha' project was designed to promote the energy saving efficacy in
feedstuffs of the Company's products and aimed to reduce the unit cost of
feedstuffs through an improvement in the utilisation efficiency of feedstuffs,
thereby increasing margins for feed mills. With this new sales pipeline, the
Company has gained more customers in the feed mill market as well as sizable
pig farms. The recurring revenue from these customers has been encouraging as
the `Alpha' branded products help them reduce costs and increase their feed
utilisation at the same time.
With the implementation of the `Alpha' project, the Company has marketed
directly to potential customers, unlike the historical sales approach, in which
exhibitions and seminars were arranged for introduction of the Company's
products to the market. With the shift in marketing strategy, the Company has
been able to analyse the needs of individual customers allowing for a tailored
response which has led to increased sales.
Sales in Thailand increased in 2010 as the country's political situation
stabilised. Sales in the Philippines have not improved due to its continuing
economic situation. The Directors expect sales in this market will remain
constant for the coming year.
Trials in the Company's product for improving milk production in cows have been
successful and the product will be launched in 2011.
Recent Developments
The Company's Vietnamese office was closed in November 2010 as the board felt
that it was no longer necessary. The Company plans to appoint sales
distributors in Vietnam after product registrations have been obtained.
In March 2011 in China it was found that ractopamine, a beta agonist, has been
used to feed pigs on an industrial scale. The drug was used in order to produce
lean pork but it is illegal in China and Europe. A campaign is being run by the
Chinese Government in an attempt to eliminate the use of ractopamine. As one of
the Company's products has a similar effect in producing lean pork, the
Directors are hopeful that the actions taken by the Chinese Government will
have a positive impact in the sales of the product in the near future.
There is a substantial market in the north-eastern part of China for the
Company's concentrated feed products, as this is where corn is produced on a
large scale, thus reducing the price to the local community. Pig farmers mix
the locally purchased corn with the concentrate feed, which contains all the
necessary nutrients except for carbohydrate. Trials for the `Alpha' product
which can be used in the concentrate feeds are in progress and it represents a
substantial business opportunity for the Company if the trials are successful.
Patents
At the end of 2010 the Group had been granted 48 patents in respect of:
* its core Cysteamine technology in China, Hong Kong, North Korea, New
Zealand, Ukraine, Russia, South Africa, Australia, India and South Korea;
* poultry feed in the UK, North Korea, Taiwan, Hong Kong, Russia, China and
Australia;
* dairy cow feed in New Zealand, the UK, Hong Kong, Europe, Mexico, India,
China, Russia, Australia and Malaysia;
* antibodies to adipose tissues in the UK and Europe;
* fish feed in the UK, Hong Kong, Indonesia, Russia, China, Thailand,
Philippines, Vietnam and Taiwan; and
* shellfish feed in Europe, Vietnam, Indonesia and Malaysia.
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 demand for the Group's products.
Debt
As at the year end, the Group's had a short term bank loan of HK$1.7 million
and a mortgage of approximately HK$0.2 million. The bank loan was used to
finance the Group's general working capital and the mortgage is the remaining
portion of a loan entered into in 2009 for the purpose of acquiring office
premises in Bangkok, Thailand.
Dividend
The Directors do not recommend any dividend payment for the year ended 31
December 2010.
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 Friday 10 June 2011.
Outlook
In 2010, the Company achieved a net profit of HK$0.4 million and a positive
EBITDA level for the first time in its history. The Company is facing inflated
production costs and operating expenses which, in addition to the expected
slower growth in China in the year ahead will continue to make trading
difficult, however, the Directors are hopeful that the traction the Company's
sales have gained during 2010 will continue in the current year and that the
Group will make a net profit in 2011.
Sadly, our fellow director Dr Royston Frederick Drucker, passed away in October
2010. On behalf of the Board, I would like to express our thanks for his
contribution to the Company over the last few years. I would also like to
express my sincere thanks to the management team and staff, professional
advisers and shareholders for their continued support during the year.
Eddie K.M. Chan
Chairman
9 May 2011
Further enquiries:
Walcom Group Limited +852 2494 0133
Francis Chi (Chief Executive Officer)
Albert Wong (Chief Financial Officer)
Merchant Securities Limited +44 20 7628 2200
Lindsay Mair/Virginia Bull
Consolidated statement of comprehensive income
For the year ended 31 December 2010
(Expressed in Hong Kong dollars)
Note 2010 2009
HK$ HK$
Revenue 32,860,894 25,529,170
Cost of sales (12,793,665) (10,697,432)
Gross profit 20,067,229 14,831,738
Other income 203,642 248,932
Research and development expenses (1,463,030) (1,527,831)
Selling and distribution expenses (8,186,502) (7,292,260)
General and administrative expenses (9,327,110) (10,547,393)
Profit / (loss) from operations 1,294,229 (4,286,814)
Net finance expense (85,552) (66,888)
Profit / (loss) before income tax 2 1,208,677 (4,353,702)
Income tax expense 3 (809,988) (154,389)
Profit / (loss) for the year 398,689 (4,508,091)
Other comprehensive income
Exchange difference on translation of 678,442 158,112
financial statements of overseas subsidiaries
Total comprehensive income / (loss) for the 1,077,131 (4,349,979)
year
Profit / (loss) attributable to:
Owners of the Company (191,884) (4,745,297)
Non-controlling interests 590,573 237,206
Profit / (loss) for the year 398,689 (4,508,091)
Total comprehensive income / (loss)
attributable to:
Owners of the Company 390,249 (4,616,212)
Non-controlling interests 686,882 266,233
Total comprehensive income / (loss) for the 1,077,131 (4,349,979)
year
Loss per share - basic, HK cents 5 (0.28) (6.89)
- diluted, HK cents (0.28) (6.89)
Consolidated balance sheet as at 31 December 2010
(Expressed in Hong Kong dollars)
Note 2010 2009
HK$ HK$
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 2,698,958 2,898,144
Patents 4,726,361 4,844,916
Goodwill 127,857 127,857
Investment in associate - -
7,553,176 7,870,917
CURRENT ASSETS
Inventories 872,349 1,247,319
Trade and other receivables 6,221,733 4,309,726
Amounts due from associates 1,632,934 1,861,701
Tax recoverable 415,540 143,524
Cash and cash equivalents 6 6,285,006 3,872,520
15,427,562 11,434,790
TOTAL ASSETS 22,980,738 19,305,707
EQUITY
Share capital 688,344 688,344
Reserves 14,436,087 13,668,470
Total equity attributable to OWNERs of the 15,124,431 14,356,814
Company
Non-controlling interests 1,042,541 642,101
TOTAL EQUITY 16,166,972 14,998,915
NON-CURRENT LIABILITIES
Bank borrowings 7 - 634,711
CURRENT LIABILITIES
Trade and other payables 4,109,048 3,444,441
Tax payables 771,860 97,115
Bank borrowings 7 1,932,858 130,525
6,813,766 3,672,081
TOTAL LIABILITIES 6,813,766 4,306,792
TOTAL EQUITY AND LIABILITIES 22,980,738 19,305,707
NET CURRENT ASSETS 8,613,796 7,762,709
TOTAL ASSETS LESS CURRENT LIABILITIES 16,166,972 15,633,626
Balance sheet as at 31 December 2010
(Expressed in Hong Kong dollars)
Note 2010 2009
HK$ HK$
ASSETS
NON-CURRENT ASSETS
Investments in subsidiaries 384 384
CURRENT ASSETS
Amounts due from subsidiaries - 991,951
Other receivables 22,530 1,011
Cash and cash equivalents 6 24,131 23,933
46,661 1,016,895
TOTAL ASSETS 47,045 1,017,279
EQUITY
CAPITAL AND RESERVES
Share capital 688,344 688,344
Reserves (1,215,179) 13,975
(Capital deficiency) / total equity (526,835) 702,319
CURRENT LIABILITIES
Other payables 573,880 314,960
TOTAL EQUITY AND LIABILITIES 47,045 1,017,279
NET CURRENT (LIABILITIES) / ASSETS (527,219) 701,935
TOTAL ASSETS LESS CURRENT LIABILITIES (526,835) 702,319
Consolidated statement of changes in equity
For the year ended 31 December 2010
(Expressed in Hong Kong dollars)
Share Share Merger Share-based Exchange Accumulated Total Non- Total
capital Premium reserve compensation reserve losses HK$ controlling equity
HK$ HK$ HK$ reserve HK$ HK$ interests HK$
HK$ HK$
(Note 23 (Note 23 (Note 23
(b)(i)) (b)(ii)) (b)(iii))
At 1 January 688,344 95,298,644 23,852,469 500,473 706,951 (102,654,285) 18,392,596 375,868 18,768,464
2009
Comprehensive
loss
Loss for the - - - - - (4,745,297) (4,745,297) 237,206 (4,508,091)
year
Other
comprehensive
income
Exchange - - - - 129,085 - 129,085 29,027 158,112
difference on
translation of
financial
statements of
overseas
subsidiaries
Total - - - - 129,085 (4,745,297) (4,616,212) 266,233 (4,349,979)
comprehensive
loss for the
year
Recognition of - - - 580,430 - - 580,430 - 580,430
equity-settled
share-based
payments
At 31 December 688,344 95,298,644 23,852,469 1,080,903 836,036 (107,399,582) 14,356,814 642,101 14,998,915
2009
At 1 January 688,344 95,298,644 23,852,469 1,080,903 836,036 (107,399,582) 14,356,814 642,101 14,998,915
2010
Comprehensive
loss
Loss for the - - - - - (191,884) (191,884) 590,573 398,689
year
Other
comprehensive
income
Exchange - - - - 582,133 - 582,133 96,309 678,442
difference on
translation of
financial
statements of
overseas
subsidiaries
Total - - - - 582,133 (191,884) 390,249 686,882 1,077,131
comprehensive
income for the
year
Recognition of - - - 377,368 - - 377,368 - 377,368
equity-settled
share-based
payments
Lapse of share - - - (79,090) - 79,090 - - -
options
Dividends to - - - - - - - (286,442) (286,442)
non-controlling
interests
At 31 December 688,344 95,298,644 23,852,469 1,379,181 1,418,169 (107,512,376) 15,124,431 1,042,541 16,166,972
2010
Consolidated statement of cash flows
For the year ended 31 December 2010
(Expressed in Hong Kong dollars)
Note 2010 2009
HK$ HK$
Cash flow from operating activities
Profit / (loss) before income tax 1,208,677 (4,353,702)
Amortisation of patents 2(b) 358,632 398,277
Interest received (8,712) (26,238)
Depreciation 2(b) 628,091 602,691
Foreign exchange loss, net 174,278 104,497
Interest paid 94,264 93,126
Loss on disposal of property, plant and 2(b) 14,599 494,016
equipment
Patent written off 2(b) - 716,417
Inventories written off 2(b) 17,804 137,187
Share-based compensation 2(a) 377,368 580,430
Operating profit / (loss) before working 2,865,001 (1,253,299)
capital changes
Decrease in inventories 357,166 36,041
Increase in trade and other receivables (2,184,023) (341,682)
Decrease in amount due from associate - trade 200,850 358,800
related
Increase in trade and other payables 664,607 401,518
Net cash generated from / (used) in operations 1,903,601 (798,622)
Corporate income tax paid (135,243 (6,655)
Interest paid (94,264) (93,126)
Net cash generated from / (used) in operating 1,674,094 (898,403)
activities
Cash flow from investing activities
Payment for patents (240,077) (401,492)
Purchases of property, plant and equipment (259,026) (1,367,556)
Proceeds from sales of property, plant and - 24,806
equipment
Amounts due from associate - non-trade related 27,917 8,833
Interest received 8,712 26,238
Net cash used in investing activities (462,474) (1,709,171)
Cash flow from financing activities
Decrease in restricted balance of cash and cash - 3,000,000
equivalents
Dividends paid to minority interests (286,442) -
Repayment of bank borrowings (595,217) (1,252,516)
Proceeds from new bank borrowings 1,762,839 857,752
Net cash generated from financing activities 881,180 2,605,236
Net increase / (decrease) in cash and cash 2,092,800 (2,338)
equivalents
Cash and cash equivalents at the beginning of 3,872,520 3,826,940
the year
Exchange gains on cash and cash equivalents 319,686 47,918
Cash and cash equivalents at the end of the 6 6,285,006 3,872,520
year
Notes to the consolidated financial statements
For the year ended 31 December 2010
(Expressed in Hong Kong dollars)
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 2010 has been
extracted from the Company's financial statements to that date which have
received an unqualified auditors' report.
2. Profit / (loss) before income tax
Profit / (loss) before income tax is stated after charging the following items
:-
a. Staff costs (including directors' emoluments)
b.
2010 2009
HK$ HK$
Salaries, wages and commission 7,577,100 6,958,053
Contributions to defined contribution retirement plans 656,771 531,730
Share-based compensation 377,368 580,430
Other staff benefits 3,750,837 2,942,107
12,362,076 11,012,320
(b) Other items
2010 2009
HK$ HK$
Amortisation of patents 358,632 398,277
Auditor's remuneration 254,913 239,747
Cost of inventories sold# (note 18) 12,793,665 10,697,432
Depreciation 628,091 602,691
Exchange losses, net 174,278 104,497
Loss on disposal of property, plant and equipment 14,599 494,016
Inventories written off 17,804 31,511
Patents written off - 716,417
Rental charges under operating leases in respect of
land and buildings 463,718 964,465
#Cost of inventories sold includes HK$2,339,917 (2009: HK$2,220,869) relating
to staff costs, depreciation and amortisation expenses and operating lease
charges, of which amount is also included in the respective total amounts
disclosed separately above or in note 2(a).
3. Income tax expense
2010 2009
HK$ HK$
Current income tax
* Thailand corporate income tax 506,757 154,389
* Shanghai foreign enterprise income tax 303,231 -
809,988 154,389
(a) Taxation for the Company
No provision for profits tax has been made for the Company as it is exempted
from taxation in the British Virgin Islands.
No deferred taxation has been provided as the Company has no material
unprovided deferred tax assets or liabilities which are expected to be
crystallized in the foreseeable future (2009: HK$nil).
(b) Taxation for the Group
(i) Taxation on overseas profits has been calculated on the estimated
assessable profit for the year at the rate of taxation prevailing in the
countries in which the Group companies operate. The income tax expense stated
in consolidated statement of comprehensive income represented the corporate
income tax and foreign enterprise income tax arisen from the business of
subsidiaries operating in Thailand and Shanghai respectively.
Hong Kong Profits Tax is calculated at 16.5% (2009: 16.5%) of the estimated
assessable profit for the year. However, no provision for Hong Kong profits tax
has been made (2009: HK$nil) as the Group did not have assessable profit
subject to Hong Kong profits tax for the year.
Provision for foreign enterprise income tax ("FEIT") in the People's Republic
of China ("PRC") has been made at 11% (2009: HK$nil) as Shanghai Walcom
Bio-Chem Co., Ltd. ("Shanghai Walcom"), a wholly owned subsidiary operating in
Shanghai, has assessable profits for the year in excess of the agreed tax
losses brought forward.
Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai
Walcom is granted certain tax relief whereby it is exempted from FEIT for the
first two years and 50% reduction for the following three years commencing from
the first profitable year of operation after fully set off against the
accumulated losses brought forward.
On 16 March 2007, the National People's Congress approved the Corporate Income
Tax Law of the People's Republic of China ("the new tax law"), which will take
effect on 1 January 2008. Under the new tax law, the PRC income tax rate will
be gradually increased to a standard rate of 25% for all domestic and foreign
enterprises over the next five years with effective from 1 January 2008.
According to the Circular 39 passed by the State Council on 26 December 2007,
the tax exemption and reduction will be terminated latest by 2012. Accordingly,
Shanghai Walcom is exempted from PRC income tax for the years from 1 January
2008 to 31 December 2009, followed by a 50% reduction in the tax rate for the
remaining three years from 1 January 2010 to 31 December 2012. The applicable
income tax rate would be 11%, 12% and 12.5% for the year 2010, 2011 and 2012
respectively.
(ii) A reconciliation between the Group's income tax expense and the accounting
profit / (loss), at the applicable tax rate, is set out below :-
2010 2009
HK$ HK$
Profit / (loss) before income tax 1,208,677 (4,353,702)
Notional tax credit on profit / (loss) before income 199,430 (718,361)
tax, calculated at the rates applicable to profits in
the countries concerned
Tax effect of:
Different income tax rates in other countries (334,876) 41,940
Expenses not deductible for tax purpose 570,650 728,512
Income tax exemption - (321,241)
Non-taxable revenue (2) (13)
Temporary differences not recognized 1,291 (7,254)
Unused tax losses not recognized 373,495 430,806
Income tax charges 809,988 154,389
(iii) A deferred tax asset amounting to HK$8,313,840 (2009: HK$7,941,995) in
respect of tax losses of a subsidiary incorporated in Hong Kong of
approximately HK$50,387,000 (2009: HK$48,133,000) has not been recognised in
the financial statements as it is not certain that future taxable profit will
be available against which these losses can be utilised.
4. Dividends
The Company does not recommend the payment of any dividend for the year ended
31 December 2010 (2009: HK$Nil).
5. Loss per share
There is no difference between basic and diluted loss per share. The basic and
diluted loss per share for the year ended 31 December 2010 are calculated by
dividing the Group's loss attributable to owners of the Group of HK$191,884
(2009: loss of HK$4,745,297) by the weighted average number of 68,834,388
ordinary shares (2009: 68,834,388 ordinary shares).
6. Cash and cash equivalents
2010 2009
HK$ HK$
Cash and cash equivalents in the statement of cash 6,285,006 3,872,520
flows
Included in the cash and cash equivalents of the Group, HK$4,896,502 (2009:
HK$2,841,655) were denominated in RMB and kept in PRC. The remittance of these
funds out of the PRC is subject to the foreign exchange control restrictions
imposed by the PRC government.
Included in cash and cash equivalents in the consolidated balance sheet are the
following amounts denominated in a currency other than the functional currency
of the entity to which they relate:
2010 2009
United States dollars US$ 68,815 US$ 58,329
British Pound GB£ 1,254 GB£ 1,252
Thai Baht THB 2,605,229 THB 2,362,111
Vietnam Dong VND 107,973 VND 533,676
7. Bank borrowings
At 31 December 2010, the bank borrowings were secured and repayable as follows:
2010 2009
HK$ HK$
Non-current liabilities
Bank borrowings - long term portion, secured - 634,711
Current liabilities
Bank borrowings - short term portion, secured 1,932,858 130,525
Total borrowings 1,932,858 765,236
a. The maturity of borrowings is as follows:
2010 2009
HK$ HK$
Within 1 year or on demand 1,932,858 130,525
After 1 year but within 5 years - 634,711
1,932,858 765,236
b. The effective interest rate per annum for bank borrowings at balance sheet
date is 0.5% over Thailand mortgage reference rate and at one-year
benchmark deposits and loan interest rate promulgated by The People's Bank
of China plus certain basis points per annum respectively (2009: 0.5% over
Thailand mortgage reference rate).
The mortgage loan of HK$170,018 was secured by the property situated in
Thailand. At 31 December 2010, the net book value of the property included in
the property, plant and equipment was HK$1,044,868.
On 13 May 2010, an indirectly held subsidiary of the Group situated in PRC
("the subsidiary") has obtained a bank borrowing of HK$1,762,840 denominated in
RMB with maturity of 1 year. The bank borrowing was secured by the corporate
guarantee issued by an independent third party. For the grant of corporate
guarantee, the holding company of the subsidiary, which is also an indirectly
held subsidiary of the Group, has pledged its shareholding of the subsidiary to
the independent third party.
8. Copies of the Report and Accounts
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, Part D,
Mingtai Bldg, No 351 Guo Shai Jing Road, ZJ Hi-tech Park, Shanghai 201203, PRC,
and on the Company's website www.walcomgroup.com.