Half-yearly Report

24 September 2014 WALCOM GROUP LIMITED ("Walcom" or "the Company") Interim results for the six months ended 30 June 2014 The Company's today announces its interim results for the six months ended 30 June 2014. These results are also available from the Company's website at http://www.walcomgroup.com/ Further enquiries: Walcom Group Limited +852 2494 0133 Francis Chi (Chief Executive Officer) Albert Wong (Chief Financial Officer) Sanlam Securities UK Limited +44 20 7628 2200 Virginia Bull CHAIRMAN'S STATEMENT Introduction Continuing the downturn in the Chinese pig farming industry from late 2013, the Company experienced an unusually long weak animal feed market during the first six months of 2014. The Company's revenue dropped by 22 per cent. compared with the same period last year. With the aggregate effect of escalating production costs and operating expenses, the Company incurred a loss per share for the period. This loss was increased by 57 per cent. for the period to HK$4.98 cents (June 2013: loss HK$3.18 cents). Results for the Period The Company generated revenues of HK$16.8 million during the period (June 2013: HK$21.5 million) and gross profits of HK$10.0 million (June 2013: HK$13.5 million), representing decreases of 22 per cent. and 26 per cent. respectively compared with the same period last year. In addition, the gross profit margin for the period reduced from 63 per cent. in the same period last year to 60 per cent. during this financial period. This decrease is mainly due to a higher unit production cost as a result of a decrease in the production volume, and a drop in sales in Thailand, where profit margins are higher than in other regions. The Company increased its net loss by 105 per cent. to HK$3.5 million (June 2013: loss of HK$1.7 million) and incurred a loss of HK$3.1 million at an EBITDA level, an increase of 418 per cent. over the same period last year (June 2013: HK$0.6 million). Review of Activities and Market In the six months to 30 June 2014, sales in the PRC and overseas dropped by 28 per cent. and 9 per cent. to HK$10.7 million (June 2013: HK$14.9 million) and HK$6.1 million (June 2013: HK$6.6 million) respectively. During the financial period, the pig farming industry in the PRC market has declined owing to an unusually long slump in the pig farm gate price since late 2013. This situation has improved slightly in August this year. As a result, the animal feed market has weakened whilst pig farms cut down the feed consumption. This in turn affected the sales of the Company's products. The overseas market was weakened mainly due to a decrease in sales in the Thai market, although the Korean market had picked up during the period under review. Sales in Thailand have been affected by the political instability in the country. They decreased by 22 per cent. to HK$5.0 million (June 2013: 6.4 million) during the period. As the portfolio of customers is increasing, the market opportunity will be improved when the political situation becomes stable. Sales in Korea performed extremely well during the period and increased by 500 per cent. to HK$1.0 million (June 2013: 0.17 million). Outlook The unfavourable market conditions faced by the Company in the past few years remained in the first six months of 2014; in particular, slower growth in the Chinese economy, the slow recovery in the United States and the major European economies, and higher production costs and operating expense has all had an effect. In addition to the weak animal feed markets, all these factors make the trading conditions difficult for the Company. However, the Company's portfolio of customers, both in the PRC and overseas, is improving despite these unfavourable conditions. The Directors believe that the full year results for the year 2014 will be more optimistic as the animal feed markets in the PRC and Thailand are expected to pick up in the remaining months of the year. Eddie K M Chan Chairman 24 September 2014 WALCOM GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE SIX MONTHS ENDED 30 JUNE 2014 Note Unaudited Unaudited Audited six months six months year ended ended ended 30 June 2014 30 June 2013 31 December 2013 HK$ HK$ HK$ Revenue 3 16,753,820 21,499,898 48,621,608 Cost of sales (6,735,341) (8,027,980) (17,869,133) Gross profit 10,018,479 13,471,918 30,752,475 Other income 4 20,557 19,590 327,506 Research and development (771,360) (819,412) (1,298,237) expenses Selling and distribution (5,748,635) (5,143,730) (12,114,993) expenses General and administrative (6,958,016) (8,667,359) (15,134,308) expenses (Loss) / profit from 5 (3,438,975) (1,138,993) 2,532,443 operations Net finance expenses 6 (29,686) (34,889) (30,612) (Loss) / profit before income (3,468,661) (1,173,882) 2,501,831 tax Income tax expense 7 (20,864) (526,482) (1,638,901) (Loss) / profit for the period (3,489,525) (1,700,364) 862,930 / year (Loss) / profit attributable to: Owners of the Company (3,429,897) (2,187,134) (114,899) Non-controlling interests (59,628) 486,770 977,829 (Loss) / profit for the period (3,489,525) (1,700,364) 862,930 / year Loss per share - basic, HK 8 (4.98) (3.18) (0.17) cents - diluted, HK cents (4.98) (3.18) (0.17) UNAUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 JUNE 2014 Note Unaudited Unaudited Audited six months six months year ended ended ended 30 June 2014 30 June 2013 31 December 2013 HK$ HK$ HK$ (Loss) / profit for the period (3,489,525) (1,700,364) 862,930 / year Other comprehensive income Exchange difference on translation of financial statements of (277,288) 434,206 577,371 overseas subsidiaries Total comprehensive (loss) / income for the period / year (3,766,813) (1,266,158) 1,440,301 Total comprehensive (loss) / income attributable to: Owners of the Company (3,728,093) (1,717,700) 622,646 Non-controlling interests (38,720) 451,542 817,655 Total comprehensive (loss) / income for the period/year (3,766,813) (1,266,158) 1,440,301 UNAUDITED CONSOLIDATED BALANCE SHEET AT 30 JUNE 2014 Note Unaudited Unaudited Audited 30 June 201 30 June 201 4 3 31 December 2013 HK$ HK$ HK$ ASSETS NON-CURRENT ASSETS Property, plant and equipment 2,006,869 2,316,211 2,171,788 Patents 2,520,948 2,842,405 2,655,975 Goodwill - - - 4,527,817 5,158,616 4,827,763 CURRENT ASSETS Inventories 2,038,576 2,703,695 1,652,877 Trade and other receivables 10 6,316,821 7,529,722 5,776,820 Cash and cash equivalents 11 12,540,165 10,566,479 18,535,663 20,895,562 20,799,896 25,965,360 TOTAL ASSETS 25,423,379 25,958,512 30,793,123 EQUITY AND LIABILITIES EQUITY Share capital 12 688,344 688,344 688,344 Reserves 15,476,589 16,864,336 19,204,682 TOTAL EQUITY ATTRIBUTABLE TO 16,164,933 17,552,680 19,893,026 OWNERS OF THE COMPANY Non-controlling interests 1,839,229 2,147,848 1,877,949 TOTAL EQUITY 18,004,162 19,700,528 21,770,975 CURRENT LIABILITIES Trade and other payables 13 4,879,593 5,743,447 5,641,215 Tax payables 20,098 514,537 837,051 Bank borrowings 14 2,519,526 - 2,543,882 7,419,217 6,257,984 9,022,148 TOTAL LIABILITIES 7,419,217 6,257,984 9,022,148 TOTAL EQUITY AND LIABILITIES 25,423,379 25,958,512 30,793,123 NET CURRENT ASSETS 13,476,345 14,541,912 16,943,212 TOTAL ASSETS 18,004,162 19,700,528 21,770,975 LESS CURRENT LIABILITIES WALCOM GROUP LIMITED UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2014 Share-based Non- Share Share Merger compensation Exchange Surplus Accumulated controlling Total capital premium reserve reserve reserve reserve losses Total interests equity HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ At 1 Jan- uary 688,344 95,298,644 23,852,469 2,455,408 2,187,379 1,931,761 (107,261,852) 19,152,153 1,696,306 20,848,459 2013 Comprehensive loss Loss for the - - - - - - (2,187,134) (2,187,134) 486,770 (1,700,364) period Other comprehensive income Exchange differ- ence on trans- lation of finan- cial - - - - 469,434 - - 469,434 (35,228) 434,206 statements of overseas subsidiaries Total - - - - 469,434 - (2,187,134) (1,717,700) 451,542 1,266,158 compre- hensive loss for the period Recog- nition of equity settled share- based - - - 118,227 - - - 118,227 - 118,227 payments At 30 June 688,344 95,298,644 23,852,469 2,573,635 2,656,813 1,931,761 (109,448,986) 17,552,680 2,147,848 19,700,528 2013 At 1 Jan- uary 688,344 95,298,644 23,852,469 1,591,595 2,924,924 2,525,302 (106,988,252) 19,893,026 1,877,949 21,770,975 2014 Comprehensive loss Loss for the - - - - - - (3,429,897) (3,429,897) (59,628) (3,489,525) period Other comprehensive income Exchange differ- ence on trans- lation of finan- cial - - - - (298,196) - - (298,196) 20,908 (277,288) statements of overseas subsidiaries Total - - - - (298,196) - (3,429,897) (3,728,093) (38,720) (3,766,813) compre- hensive loss for the period Recog- nition of equity- settled share- based - - - - - - - - - - payments At 30 June 688,344 95,298,644 23,852,469 1,591,595 2,626,728 2,525,302 (110,418,149) 16,164,933 1,839,229 18,004,162 2014 UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2014 Note Unaudited Unaudited Audited six months six months year ended ended ended 30 June 201 30 June 201 31 December 4 3 2013 HK$ HK$ HK$ Cash flow from operating activities (Loss) / profit before income tax (3,468,661) (1,173,882) 2,501,831 Amortisation of patents 135,027 141,940 277,524 Bad debts written off - - 508,758 Interest received (62,065) (52,547) (112,204) Depreciation 173,037 174,147 355,301 Foreign exchange (gain) / loss, (206,935) 295,581 699,677 net Interest paid 91,751 87,436 142,816 (Gain) / loss on disposal of - (12,603) (8,392) property, plant and equipment Patents written off - 113,351 164,197 Inventories written off - - 42,840 Share-based compensation - 118,227 118,227 Operating profit before working capital changes (3,337,846) (308,350) 4,690,575 Increase in inventories (385,699) (1,285,031) (277,053) (Increase) / decrease in trade (540,001) 2,056,672 3,193,866 and other receivables Decrease in trade and other (761,622) (714,478) (816,710) payables Net cash (used in) / generated (5,025,168) (251,187) 6,790,678 from operations Corporate income tax paid (837,817) (1,015,441) (1,698,396) Interest paid (91,751) (87,437) (142,816) Net cash (used in) / generated (5,954,736) (1,354,065) 4,949,466 from operating activities Cash flow from investing activities Purchase of property, plant and (7,942) (676,923) (762,411) equipment Proceeds from sales of property, - 43,735 42,388 plant and equipment Interest received 62,065 52,547 112,204 Net cash generated from / (used 54,123 (580,641) (607,819) in) investing activities Cash flow from financing activities Repayment of bank borrowings - (2,466,395) (2,466,395) Dividend paid to minority - - (636,012) interests Proceeds from new bank borrowings - - 2,543,882 Net cash used in financing - (2,466,395) (558,525) activities Net (decrease) / increase in cash (5,900,613) (4,401,101) 3,783,122 and cash equivalents Cash and cash equivalents at the 18,535,663 14,831,853 14,831,853 beginning of the period / year Exchange (loss) / gain on cash (94,885) 135,727 (79,312) and cash equivalents Cash and cash equivalents at the 11 12,540,165 10,566,479 18,535,663 end of the period / year NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30 JUNE 2014 (1) BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The unaudited consolidated financial statements have been prepared under the historical cost convention. The same accounting policies, presentation and methods of computation are followed in these unaudited consolidated financial statements as were applied in the preparation of the group's financial statements for the year ended 31 December 2013. (2) SEGMENT REPORTING (a) Primary reporting format - Geographical Segment The group's operations are mainly located in Hong Kong, PRC, Thailand. The group's sales revenue by geographical location of customers are analysed as follows: Unaudited Unaudited Audited six months six months year ended ended ended 30 June 201 30 June 201 31 December 4 3 2013 HK$ HK$ HK$ PRC 10,682,919 14,852,920 32,645,259 Thailand 4,981,397 6,415,474 15,607,565 Others 1,089,504 231,504 368,784 16,753,820 21,499,898 48,621,608 (b) Secondary reporting format - Business Segment The Group is principally engaged in the manufacture, distribution and sale of chemical feed and additive products. All of the group's products are of a similar nature and subject to similar risk and returns. Accordingly, the group's activities are attributable to a single business segment and no business segment analysis is presented. (c) Segment assets by geographical location of assets Unaudited Unaudited Audited six months six months year ended ended ended 30 June 30 June 31 December 2014 2013 2013 HK$ HK$ HK$ PRC 15,951,260 14,920,728 19,227,186 Thailand 5,339,232 7,062,212 7,987,858 Hong Kong 1,611,939 1,133,167 1,414,752 Others 2,520,948 2,842,405 2,163,327 25,423,379 25,958,512 30,793,123 (3) REVENUE Revenue represents the sales value of goods supplied to the customers less returns, discounts, value added tax and sales taxes. (4) OTHER INCOME Unaudited Unaudited Audited six months six months year ended ended ended 30 June 30 June 2013 31 December 2014 2013 HK$ HK$ HK$ Government subsidy - - 284,915 Sundry income 20,557 19,590 42,591 20,557 19,590 327,506 (5) OPERATING (LOSS) / PROFIT Operating (loss) / profit is stated after charging the following items:- Unaudited Unaudited Audited six months six months year ended ended ended 30 June 30 June 2013 31 December 2014 2013 HK$ HK$ HK$ Amortisation of patents 135,027 141,940 277,524 Auditor's remuneration 160,000 155,000 288,407 Cost of inventories 6,392,200 7,745,254 17,157,736 Depreciation 173,037 114,216 236,910 (Gain) / loss on disposal of - (12,603) - property, plant and equipment Rental charges under operating 386,657 397,902 857,894 leases in respect of land and buildings Staff costs (including directors' emoluments) - wages and salaries 5,993,319 6,391,246 11,504,604 - contributions to retirement 415,222 424,084 849,510 benefits - share-based compensation - 118,227 118,227 - other staff benefits 1,419,026 1,347,684 2,976,576 (6) NET FINANCE COST Unaudited Unaudited Audited six months six months year ended ended ended 30 June 201 31 December 30 June 201 3 2013 4 HK$ HK$ HK$ Bank interest income 62,065 52,547 112,204 Interest expense on bank loans (91,751) (87,436) (142,816) (29,686) (34,889) (30,612) (7) INCOME TAX EXPENSE No provision for Hong Kong Profits Tax has been made (June 2013: HK$nil; 2013: HK$nil) as the group companies did not have assessable profit subject to Hong Kong profits tax purposes for the period/year. Taxation on overseas profits has been calculated on the estimated assessable profit for the period/year at the rate of taxation prevailing in the countries in which the group companies operate. The overseas income tax provided for the six months ended 30 June 2014 is HK$20,864 (June 2013: HK$526,482; 2013: HK$1,638,901). (8) (LOSS) / EARNINGS PER SHARE The calculation of the basic loss per share for the six months ended 30 June 2014, is based on the loss attributable to ordinary equity shareholders of the company of HK$3,429,897 (June 2013: HK$2,187,134; 2013: loss of HK$114,899) during the period and the weighted average number of 68,834,388 ordinary shares (June 2013: 68,834,388; 2013: 68,834,388) in issue during the period/year. No diluted loss per share is to be reported for the period/year. (9) DIVIDENDS No payment of dividend was recommended for the first six months of 2014 (June 2013: HK$ nil; 2013: HK$nil). (10) TRADE AND OTHER RECEIVABLES Unaudited Unaudited Audited 30 June 30 June 2013 31 December 2014 2013 HK$ HK$ HK$ Trade receivables 5,961,942 6,507,779 5,502,500 Less: provision for (741,562) (387,346) (743,813) impairment loss 5,220,380 6,120,433 4,758,687 Other receivables - 544,196 120,533 Prepayments and deposits 1,096,441 865,093 897,600 6,316,821 7,529,722 5,776,820 (a) All trade and other receivables, are expected to be recovered within one year. (b) Impairment of trade receivables The movement in the provision of impairment for doubtful debts during the period/year, including both specific and collective loss components, is as follows: Unaudited Unaudited Audited six months six months year ended ended ended 31 December 2013 30 June 2014 30 June 2013 HK$ HK$ HK$ At 1 January 743,813 440,942 440,942 Impairment loss - - 508,758 recognised Written off - (44,758) (213,047) Exchange difference (2,251) (8,838) 7,160 At 30 June/31 741,562 387,346 743,813 December At 30 June 2014, the Group's trade receivables of HK$741,562 (June 2013: HK$387,346, 2013: HK$743,813) have been outstanding for a certain period of time. The management assessed that only a portion of the receivables is expected to be recoverable. Consequently, specific allowance for doubtful debts was recognised for the individually impaired receivables. The Group does not hold any collateral over these balances. (11) CASH AND CASH EQUIVALENTS Unaudited Unaudited Audited 30 June 2014 30 June 2013 31 December 2013 HK$ HK$ HK$ Cash at bank and on 12,540,165 10,566,479 18,535,663 hand Cash and cash 12,540,165 10,566,479 18,535,663 equivalents in the cash flow statement (12) SHARE CAPITAL Unaudited Unaudited Audited 30 June 201 30 June 201 31 December 4 3 2013 HK$ HK$ HK$ Authorised 150,000,000 (June 2013: 1,500,000 1,500,000 1,500,000 150,000,000 and Dec 2013: 150,000,000) ordinary shares of HK$0.01 each Issued and fully paid 68,834,388 (June 2013: 688,344 688,344 688,344 68,834,388 and Dec 2013: 68,834,388) ordinary shares of HK$0.01 each The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to the Company's residual assets. (13) TRADE AND OTHER PAYABLES Unaudited Unaudited Audited 30 June 2014 30 June 2013 31 December 2013 HK$ HK$ HK$ Trade payables 1,572,518 2,624,381 2,206,357 Other payables and accrued 3,307,075 3,119,066 3,434,858 expenses 4,879,593 5,743,447 5,641,215 All of the trade and other payables are expected to be settled within one year. (14) BANK BORROWINGS Unaudited Unaudited Audited 30 June 201 30 June 201 31 December 4 3 2013 HK$ HK$ HK$ Current Bank borrowings, unsecured (a) 2,519,526 - 2,543,882 a. The effective interest rate per annum for bank borrowings at balance sheet date is at 7.2% (June 2013: Nil, 2013: 7.2%) per annum. (15) RELATED PARTY TRANSACTIONS Unaudited Unaudited Audited six months six months year ended ended ended 31 December 30 June 201 30 June 2013 2013 4 HK$ HK$ HK$ Related companies Legal and professional fees 67,620 67,620 109,125 paid Spouse of a director 60,469 - 10,176 Staff quarter expenses (16) RECONCILIATION OF (LOSS) / PROFIT BEFORE INCOME TAX TO EBITDA Unaudited Unaudited Audited six months six months year ended ended ended 31 December 30 June 201 30 June 201 2013 4 3 HK$ HK$ HK$ (Loss) / profit before income (3,468,661) (1,173,882) 2,501,831 tax Depreciation 173,037 174,147 355,301 Amortisation of patents 135,027 141,940 277,524 Interest income (62,065) (52,547) (112,204) Interest expenses 91,751 87,436 142,816 Patents written off - 113,351 164,197 (Gain) / loss on disposal of - (12,603) (8,392) property, plant and equipment Bad debts written off - - 508,758 Share-based compensation - 118,227 118,227 EBITDA (3,130,911) (603,931) 3,948,058 EBITDA is defined herein as earnings before depreciation, amortization, interest and tax, plus specific charges which are considered non-recurring in nature. Specific charges include impairment loss in value and gain/loss in disposal of non-current assets, and amortization of fair value of share-based compensation. EBITDA is not a recognised term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.

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