Second 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 second quarter ended 30 June 2017 ("2Q2017") as compared to that of the second quarter ended 30 June 2016 ("2Q2016")*Based on actual financial performance WITH financial effects of Convertible Bonds*
The Group's revenue decreased by approximately RMB 16.7 million or 4.3% from RMB 392.6 million in 2Q2016 to RMB 375.9 million in 2Q2017. This was attributed to an aggregate decrease of RMB 46.3 million from the EPC Integrated Solutions segment. The decrease was offset by an aggregate increase of RMB 29.6 million from Environmental Equipment Manufacturing (EEM) segment.
Gross profit decreased by approximately RMB 17.7 million or 17.3% from RMB 102.4 million in 2Q2016 to RMB 84.7 million in 2Q2017. Gross profit margin decreased from 26.1% for 2Q2016 to 22.5% for 2Q2017 mainly due to increased competition and higher raw material price in the EEM segment.
Profit before Income Tax
Profit before tax decreased by RMB 19.1 million from RMB 54.2 million in 2Q2016 to RMB 35.1 million in 2Q2017. The decrease was mainly attributable to the following factors:
- Decrease in gross profit of RMB 17.7 million;
- Increase in administrative expenses of RMB 8.5 million arising mainly due to higher foreign exchange loss of RMB 5.2 million from USD depreciation between 31 March 2017 and 30 June 2017and increase in business development expenses in line with the expansion of the Group's Green Investment segment;
- Increase in finance costs of RMB 23.3 million due to amortized interest expense for Convertible Bonds.
- Increase in fair value gain on Convertible Bonds of RMB 29.6 million between 31 March 2017 and 30 June 2017
Income Tax Expense
Excluding the non-tax deductible effect of the Convertible Bonds, the effective tax rate for 2Q2017 would have been 20.3%.
Effective income tax rates for 2Q2016 was 16.8%.
Profit for the Financial Period
In respect of the above, the Group's net profit attributable to the shareholders decreased by RMB 8.5 million or 20.9% from RMB 40.5 million in 2Q2016 to RMB 32.0 million in 2Q2017.
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 1,127.7 million or 66.3% from RMB 1,699.9 million as at 31 December 2016 to RMB 2,827.6 million as at 30 June 2017 mainly due:
- Increase in cash and cash equivalents of RMB 825.7 million, primarily due to the issuance of Convertible Bonds.
- Increase in trade receivables of RMB 94.9 million arising mainly from increase in trade receivables of RMB 97.1 million which was offset against the decrease in notes receivables with recourse of RMB 2.7 million.
Approximately 40.8% and 5.2% of the trade receivables at 31 December 2016 and 30 June 2017 respectively were collected as at 31 July 2017. Most of the trade receivables are due from customers that are state-owned enterprises, listed companies or multinational corporations. Overall, the Group's customers are credit-worthy but payments remain slow due to tightening credit in China.
- Increase in pledged bank deposits of RMB 23.3 million as more collaterals were required for the credit facilities granted.
- Increase in other receivables, deposits and prepayments of RMB 140.4 million resulting from increased advance payment for purchases to fulfil the orders on hand and taxes deductible arising from the construction of "BOT, BOO, TOT" projects.
- Increase in inventories of RMB 43.1 million primarily due to an aggregate increase in finished goods and raw materials and consumables of RMB 37.9 million for project use.
The Group's total non-current assets increased by RMB 222.9 million or 20.6% from RMB 1,083.3 million as at 31 December 2016 to RMB 1,306.2 million as at 30 June 2017 mainly due to:
Increase in other receivables, deposits and prepayments of RMB 14.8 million resulting from prepayments made to subcontractors for work done for the "BOT, BOO, TOT" projects on hand as at 30 June 2017;
- Increase in intangible assets of RMB 196.3 million due to service concession arrangements relating to "BOT, BOO, TOT" projects on hand which construction work has commenced during the FY2016.
- 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 96.9 million or 6.6% from RMB 1,466.4 million as at 31 December 2016 to RMB 1,563.3 million as at 30 June 2017 mainly due to:
- Increase in trade payables of RMB 131.6 million as a result of the increase in customer advances of RMB 74.2 million and increase in notes payable to third parties of RMB 43.3 million respectively;
- Decrease in short term borrowings of RMB 17.5 million; and
- Decrease in other payables of RMB 19.4 million primarily due to the decrease in accrued payroll costs of RMB 14.1 million.
The Group's total non-current liabilities increased by approximately RMB 1,294.0 million from RMB 173.1 million as at 31 December 2016 to RMB 1,467.1 million as at 30 June 2017 mainly due to:
- Increase of long term borrowings of approximately RMB 467 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 second quarter ended 30 June 2017
*Based on the cash flow statement WITH financial effects of Convertible Bonds*
Net cash generated from operating activities amounted to approximately RMB 90.7 million, primarily due to operating cash flows before movements in working capital of approximately RMB 33.7 million that were derived from:
- Higher working capital requirements due to the increase in trade receivables of RMB 157.9 million, increase in other receivables and prepayments of RMB 85.9 million and increase in inventories of RMB 7.8 million;
- Lower working capital requirements due to the increase in trade payables of RMB 302.7 million and increase in other payables of RMB 7.6 million.
- Interest and tax paid of RMB 5.2 million in aggregate.
Net cash used in investing activities amounted to RMB 285.4 million mainly due to an increase in expenditure on intangible assets of RMB 276.3 million.
Net cash generated from financing activities amounted to RMB 67.4 million due to cash inflow arising from the proceeds from new borrowings and pledged bank deposits of RMB 125.0 million and RMB 21.0 million respectively, which was offset by the repayment of borrowings of RMB 75.0 million.
Commentary On Prospects
In 2Q2017, the Group's revenue and net profit attributable to shareholders decreased by 4.3% and 20.9% respectively. Besides the weak recovery of world economy, China is in the midst of economic reforms and restructuring which pose challenges to the Group's business.
Amidst a challenging and uncertain economic environment, the Group successfully secured several big contracts by capitalizing on its strong technological advantages and high-quality customer base. In May 2017 and July 2017, the Group had collectively secured contracts worth RMB 270.7 million and RMB 182.2 million respectively from new and recurring clients.
Moving ahead, with consistent performance in the traditional EEM and EPC businesses, the Group has been actively involved in their green investments segment. As an update, the Group has begun trial production for the Hebei Changrun Project whereas Lianshui Project and Quanjiao Project are expected to commence trial production in 3Q2017. Subsequently, the Group strives to improve its market penetration in the centralised steam/electricity and clean energy industry by securing two more projects in Shantou Chaonan and Shandong Liutuan which are currently in the construction phase. Meanwhile, the Group has also entered into joint venture with Jining Mining Industry Sunpower Clean Energy Development Co., Ltd. for the purpose of conducting centralised steam and electricity and clean energy related projects.
In addition, on 11 August 2017, the Group had entered into a share transfer agreement to acquire 80% of the equity interest in Shandong Yangguang Engineering Design Institute Co., Ltd to create synergies for the Group's Green Investment segment. The Group is confident that it would secure more projects in the pipeline to achieve stable EPC income and long-term recurring income from the BOT/BOO/TOT projects, which will enhance the quality of the Group's earnings and shareholders' value.
In the 13th five-year plan, the Chinese government has reiterated and expanded the structural reform in the energy sector. In May 2017, the "Initiative Plan of Circular Development" was issued by National Development and Reform Commission ("NDRC") to support a green and low-carbon economy. With the conducive government policies and growing awareness of environmental concern, clean energy and environmental protection industry is forecasted to achieve higher growth in 2017.
As at 30 June 2017, the total orders on hand amounted to approximately RMB 1.45 billion. Barring any unforeseen circumstances and excluding the fair value change and related financial effects of the Convertible Bonds as detailed in "Financial Effects of Convertible Bonds", Management expects the Group to remain profitable in FY2017.