Third Quarter Results Financial Statement And Related Announcement
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Financial effects of Convertible Bonds consist of unrealised foreign exchange translation, amortised interest expenses (inclusive of interest charges) and fair value gain/(loss) of Convertible Bonds.
Review of Performance
The Group's performance for the third quarter ended 30 September 2017 ("3Q2017") as compared to that of the third quarter ended 30 September 2016 ("3Q2016")*Based on actual financial performance WITH financial effects of Convertible Bonds*
The Group's revenue increased by approximately RMB 33.7 million or 9.0% from RMB 373.5 million in 3Q2016 to RMB 407.2 million in 3Q2017. This was attributed to an aggregate increase of RMB 58.2 million from the Environmental Equipment Manufacturing (EEM) segment. The increase was offset by an aggregate decrease of RMB 24.5 million from EPC Integrated Solutions segment.
Gross profit decreased by approximately RMB 5.3 million or 5.7% from RMB 93.3 million in 3Q2016 to RMB 88.0 million in 3Q2017, mainly due to higher raw material price in the EEM segment.
Profit before Income Tax
Profit before tax increased by RMB 139.8 million or 377.7% from RMB 37.0 million in 3Q2016 to RMB 176.9 million in 3Q2017. The increase was mainly attributable to the following factors:
- Increase in fair value gain on Convertible Bonds of RMB 158.5 million between 30 June 2017 and 30 September 2017; and
- Increase in other operating income of RMB 7.2 million mainly due to an increase in government grant.
Income Tax Expense
Excluding the non-tax deductible effect of the Convertible Bonds, the effective tax rate for 3Q2017 would have been 15.7%.
Effective income tax rate for 3Q2016 was 19.6%.
Profit for the Financial Period
In respect of the above, the Group's net profit attributable to the shareholders increased by RMB 139.9 million or 450.5% from RMB 31.0 million in 3Q2016 to RMB 170.9 million in 3Q2017.
Review of the Group's Financial Position
*Based on the statement of financial position WITH financial effects of Convertible Bonds*
The Group's total current assets increased by RMB 1,211.8 million or 71.3% from RMB 1,699.9 million as at 31 December 2016 to RMB 2,911.7 million as at 30 September 2017 mainly due to:
- Increase in cash and cash equivalents of RMB 665.3 million, primarily due to the issuance of Convertible Bonds.
- Increase in trade receivables of RMB 175.9 million arising mainly from an aggregate increase in trade receivables and notes receivables with third parties of RMB 173.9 million.
Approximately 47.8% and 5.6% of the trade receivables at 31 December 2016 and 30 September 2017 respectively were collected as at 31 October 2017. Most of the trade receivables are due from customers that are state-owned enterprises, listed companies or multinational corporations. The Group's customers are credit-worthy but payments remain slow due to tightening credit in China.
- Increase in pledged bank deposits of RMB 16.0 million as more collaterals were required for the credit facilities granted.
- Increase in other receivables, deposits and prepayments of RMB 222.0 million resulting from increased advance payment for purchases to fulfil the orders on hand and input value-added taxes deductible arising from the construction of "BOT, BOO, TOT" projects.
- Increase in inventories of RMB 132.4 million primarily due to an aggregate increase in work-in-progress and raw materials and consumables of RMB 123.4 million for project use.
The Group's total non-current assets increased by RMB 276.3 million or 25.5% from RMB 1,083.3 million as at 31 December 2016 to RMB 1,359.6 million as at 30 September 2017 mainly due to:
- Increase in other receivables, deposits and prepayments of RMB 14.2 million resulting from prepayments made to subcontractors for work done for the "BOT, BOO, TOT" projects on hand as at 30 September 2017;
- Increase in intangible assets of RMB 235.7 million due to service concession arrangements relating to "BOT, BOO, TOT" projects on hand which construction work has commenced during the FY2016.
- Increase in property, plant and equipment of RMB 10.4 million mainly due to the expansion of business in Green Investment.
- Increase in available-for-sale investment of RMB 9.8 million, being an investment in an unquoted entity held by the Group's subsidiary.
The Group's total current liabilities increased by RMB 226.1 million or 15.4% from RMB 1,466.4 million as at 31 December 2016 to RMB 1,692.4 million as at 30 September 2017 mainly due to:
- Increase in trade payables of RMB 271.7 million as a result of the increase in customer advances of RMB 193.3 million and increase in notes payable to third parties of RMB 43.3 million respectively;
- Decrease in short term borrowings of RMB 31.0 million; and
- Decrease in other payables of RMB 13.5 million primarily due to a decrease in accruals for payroll of RMB 14.1 million;
The Group's total non-current liabilities increased by approximately RMB 1,133.9 million from RMB 173.1 million as at 31 December 2016 to RMB 1,307.0 million as at 30 September 2017 mainly due to:
- Increase of long term borrowings of approximately RMB 467.0 million, mainly caused by the borrowing received for BOT project; and
- Increase in issuance of Convertible Bonds of RMB 825.6 million in 1Q2017.
Review of the Group's cash flow statement for the third quarter ended 30 September 2017
*Based on the cash flow statement WITH financial effects of Convertible Bonds*
Net cash used in operating activities amounted to approximately RMB 43.2 million, primarily due to operating cash flows before movements in working capital of approximately RMB 30.2 million that were derived from:
- Higher working capital requirements due to the increase in trade receivables of RMB 79.6 million, increase in other receivables and prepayments of RMB 82.3 million and increase in inventories of RMB 89.3 million;
- Lower working capital requirements due to the increase in trade payables of RMB 187.1 million and increase in other payables of RMB 0.6 million.
- Interest and tax paid of RMB 12.8 million in aggregate.
Net cash used in investing activities amounted to RMB 106.9 million mainly due to an increase in expenditure on intangible assets of RMB 64.1 million and purchase of property, plant and equipment and subsidiary of RMB 17.9 million and RMB 26.3 million respectively.
Net cash used in financing activities amounted to RMB 10.3 million due to repayment of borrowings of RMB 55.5 million and payment of dividend of RMB 4.0 million which was offset by proceeds from new borrowings of RMB 42.0 million.
Commentary On Prospects
In 3Q2017, the Group achieved a 9.0% and 450.5% growth in revenue and net profit attributable to shareholders with financial effects of Convertible Bonds on a year-over year basis respectively. In the midst of economic reforms and restructuring, China achieved a 6.8 percent economic growth in the third quarter of 2017 which demonstrated stable and sustainable economic development.
In August 2017, the Ministry of Environmental Protection of the PRC and other government agencies issued the Action Plan for Comprehensive Control of Air Pollution for the year 2017 and 2018, reiterating Chinese Government's determination to tackle the air pollution issue. Initiatives including replacement and elimination of the small coal-fired boilers were rolled out to attain the annual target.
Furthermore, the Environmental Protection Tax Law will come into force in January 2018, creating positive impact in the environmental protection industry. Chinese government has been committed to enhance environmental supervision and law enforcement in the environmental protection industry. In the future, Chinese government is expected to accelerate its effort in haze treatment to achieve a sustainable and green economy. Looking ahead, there will be plenty of opportunities and potential to boost the Group's business.
With stable performance in the traditional business, the Group, by capitalizing on its strong technological advantages and high-quality customer base from new and recurring clients, has successfully secured a series of large supply contracts aggregating more than RMB629.5 million in EEM and EPC Integrated solution segments in the first nine months of 2017. Moreover, the Group acquired an aggregate of 80% of the equity interest in Shandong Yangguang Engineering Design Institute Co., Ltd in August, 2017 and has entered into a cooperative agreement with Xintai Zhengda Thermoelectric Co., Ltd. to acquire an aggregate of no less than 70% of the equity interest. The Group will remain focused on the expansion of Green Investments (GI) segment, and reinforce its strategic deployment in more regions. Looking ahead, the existing projects that the Group invested are expected to bring in additional stream of revenue and generate recurring income once commissioned and operational in 4Q2017 and beyond.
Leveraging on the market opportunities present in the environmental protection industry as a result of positive policies introduced by the government, the Group is well-poised to ride on the favourable trend. Moving forward, the Group will continuously strengthen its overall businesses in three segments of EEM, EPC and GI and strive to improve its brand recognition and increase its market presence in China and abroad. As a professional environmental service provider, the Group will continue to offer the best-in-class products and innovative solutions to its customers in diverse industries across the globe and contribute our efforts in the fight against air pollution.
As at 30 September 2017, the total orders on hand amounted to approximately RMB 1.7 billion. Barring any unforeseen circumstances and excluding the fair value change and related financial effects of the Convertible Bonds, Management expects the Group to remain profitable in FY2017.