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Material changes are explained below:
Group revenue increased by approximately RMB124.8 million, or approximately 17.1% from approximately RMB728.0 million for the six months ended 30 June 2016 (“1H2016”) to approximately RMB852.8 million for the six months ended 30 June 2017 (“1H2017” or the “Reporting Period”).
Revenue generated from RF coaxial cable decreased by approximately RMB79.6 million or approximately 16.0% from approximately RMB496.2 million during 1H2016 to approximately RMB416.6 million during 1H2017.
Revenue generated from telecommunication equipment and accessories increased by approximately RMB40.9 million or approximately 21.9% from approximately RMB187.0 million during 1H2016 to approximately RMB227.9 million during 1H2017.
As the antennas has met the quantitative threshold for determining reportable segments during 1H2017, therefore antennas has been separately classified as a reportable segment for 1H2017. Revenue generated from antennas during 1H2017 was approximately RMB154.1 million and the revenue of antennas during 1H2016 included in the other segment was approximately RMB29.4 million.
Revenue generated in this segment increased by approximately RMB9.5 million or approximately 21.2% from approximately RMB44.8 million during 1H2016 to approximately RMB54.3 million during 1H2017, of which the increase was mainly attributable to the substantial increase in sales of leaky cables of approximately RMB40.0 million during 1H2017 (there was no revenue from such item during 1H2016) as offset by the reclassification of antennas as a reportable segment in 1H2017, the sales of leaky cables was approximately RMB29.4 million in 1H2016.
The Group achieved an overall gross profit margin of approximately 21.5% during 1H2017 compared to approximately 20.0% during 1H2016, representing an increase of 1.5 percentage points year-on-year. The higher gross profit margin for accessories in 1H2017 of 32.6% as compared with that of 28.2% for 1H2016 has lifted the overall gross profit margin of the Group. The moderate decrease in copper prices and the Group’s process efficiencies during 1H2017 had generally brought gross profit margin higher. The Group will continue to monitor production efficiencies to ensure optimal raw materials and labour utilisation, stringent selection of suppliers in tender biddings to keep costs to a minimum, coupled with efficient use of various resources to keep up with price pressure resulting from keen competition.
Other operating income increased by approximately RMB2.2 million or approximately 23.9% from approximately RMB9.2 million during 1H2016 to approximately RMB11.4 million during 1H2017 due to the combined effects of (i) higher government grants awarded; (ii) decrease in interest income earned; and (iii) a net foreign exchange losses recorded as compared with a net foreign exchange gains in 1H2016 during the Reporting Period.
Selling and distribution expenses increased slightly by approximately RMB1.4 million or approximately 2.8% from approximately RMB50.2 million during 1H2016 to approximately RMB51.6 million during 1H2017. The increase was mainly due to the increase in salary expenses for marketing personnel and activities undertaken during the Reporting Period as a result of the Group’s increased effort to push the products of antenna and leaky cables during the Reporting Period.
Administrative expenses increased by approximately RMB12.4 million or approximately 69.3% from approximately RMB17.9 million during 1H2016 to approximately RMB30.3 million during 1H2017. The increase was mainly attributable to (i) the increase in staff costs of approximately RMB7.0 million year-on-year; (ii) decrease in the reversal of allowance for doubtful trade receivables of approximately RMB4.2 million; and (iii) increase in the allowance for inventory obsolescence of approximately RMB1.4 million.
Other operating expenses increased by approximately RMB5.6 million or approximately 22.2% from approximately RMB25.2 million during 1H2016 to approximately RMB30.8 million during 1H2017. The increase was due to higher research and development expenses incurred from continued customer requests for new and current product specifications during the Reporting Period.
During 1H2016, the Group acquired a 24% equity interest in Mianyang Xintong Industrial Co., Ltd. (formerly known as Mianyang City Siemax Industrial Co., Ltd.) (“Mianyang Xintong”), a limited liability company established in the People’s Republic of China (the “PRC”). Due to poor operating results of Mianyang Xintong, the Group’s proportionate share of losses recognised during 1H2017 was approximately RMB1,485,000.
Finance costs decreased by approximately RMB0.8 million or approximately 88.9% from approximately RMB0.9 million during 1H2016 to approximately RMB0.1 million during 1H2017. The decrease was due to the full settlement of short term loans during the Reporting Period.
Profit before tax increased by approximately RMB19.9 million or approximately 32.8% from approximately RMB60.6 million during 1H2016 to approximately RMB80.5 million during 1H2017. The increase was due to an increase in the level of sales and gross profit margin during the Reporting Period.
The Group’s wholly-owned subsidiary, Hengxin (Jiangsu), has been subject to an incentive tax rate of 15% as it has been awarded as a high-tech enterprise in the PRC since 2014 for a period of three years.
Income tax expense increased by approximately RMB1.9 million or approximately 18.8% from approximately RMB10.1 million during 1H2016 to approximately RMB12.0 million in 1H2017. The increase is in line with the increase in profit before tax during the Reporting Period.
In view of the above, net profit attributable to owners of the Company increased by approximately RMB18.1 million or approximately 35.8% from approximately RMB50.5 million in 1H2016, compared to approximately RMB68.6 million in 1H2017.
Material fluctuations of items in the statement of financial position are explained below:
Inventories (comprising raw materials, work-in-progress and finished goods) increased by approximately RMB34.8 million or approximately 20.4% from approximately RMB170.3 million as at 31 December 2016 to approximately RMB205.1 million as at 30 June 2017. The increase was mainly due to the increase in finished goods in transit, most of which were antennas line of products.
Other investments (current assets) increased by approximately RMB21.0 million or approximately 72.4% from approximately RMB29.0 million as at 31 December 2016 to approximately RMB50.0 million as at 30 June 2017. Other investments (current assets) as at 30 June 2017 represented the subscription of short term investment in a wealth management product with a duration of three months and annual yield of 4.23% commencing from 10 April 2017. Other investments (current assets) as at 31 December 2016, represented another wealth management product subscribed by the Group, was matured and redeemed in full during the Reporting Period. Please refer to the paragraph headed “(II) Discloseable Transaction during the Reporting Period” below.
Trade receivables increased by approximately RMB259.4 million or approximately 50.4% from approximately RMB515.0 million as at 31 December 2016 to approximately RMB774.4 million as at 30 June 2017.
Average trade receivables turnover days were 141 days as at 30 June 2017, compared to 128 days as at 31 December 2016.Nonetheless, most trade receivables balances were recent sales which were well within the average credit period given to our customers. As at 30 June 2017, approximately 83.6% of the trade receivables and bills receivable were within the credit period given as compared with that of approximately 88.7% as at 31 December 2016.
For amounts due more than six months and longer, these mainly pertain to final payment (upon project completion) owed by a number of PRC telecom operators. These outstanding balances relate to projects undertaken by these operators which have longer project completion dates than as initially anticipated. These operators have been the Group’s long-term customers and the Group has been receiving regular payments from them. In view of the Group’s long-standing dealings with them and the regular receipts it had obtained from these customers, the Group does not foresee any significant issue in the collection of these receivables.
The Group will continue to endeavour in its collection efforts on the outstanding balances.
Other receivables and prepayments (current assets) slightly decreased by approximately RMB2.8 million or approximately 3.6% from approximately RMB78.6 million as at 31 December 2016 to approximately RMB75.8 million as at 30 June 2017. The decrease was mainly due to the decrease in advance payment to suppliers for the purchase of raw materials.
Cash and bank balances decreased by approximately RMB265.2 million or approximately 47.9% from approximately RMB554.2 million as at 31 December 2016 to approximately RMB289.0 million as at 30 June 2017, mainly due to the increase in trade receivables and inventories and the repayment of short term loans and net increase in other investments during the Reporting Period.
Other receivables (non-current assets) amounting to approximately RMB20.4 million as at 30 June 2017 pertains to the non-current portion of the loan to the Group’s associate, Mianyang Xintong. During the Reporting Period, RMB2.5 million had been reclassified as other receivables (current assets).
Short-term loans decreased to nil from approximately RMB27.0 million as at 31 December 2016 mainly due to the full repayment of borrowings during the Reporting Period.
Trade payables increased by approximately RMB18.8 million or approximately 16.0% from approximately RMB118.2 million as at 31 December 2016 to approximately RMB137.0 million as at 30 June 2017.
Other payables decreased by approximately RMB10.9 million or approximately 15.4% from approximately RMB70.5 million as at 31 December 2016 to approximately RMB59.6 million as at 30 June 2017. The decrease was mainly due to the decrease in receipts in advance from customers and payments for accruals of bonus during the Reporting Period.
Income tax payable increased by approximately RMB0.8 million or approximately 14.1% from approximately RMB5.5 million as at 31 December 2016 to approximately RMB6.3 million as at 30 June 2017, mainly due to time differences in the payment of taxes in these periods.
Deferred income decreased by approximately RMB0.5 million or approximately 9.9% from approximately RMB5.2 million as at 31 December 2016 to approximately RMB4.7 million as at 30 June 2017. This relates to grants with conditions attached requiring certain milestones to be met. As some of these conditions had been met, some of the deferred income had been recognised as other operating income.
During 1H2017, the global economy witnessed a slow recovery amidst a decelerating rate of growth in global trade, while the domestic economy in China continued to experience a slowdown. On the telecommunications front, China underwent an unprecedented structural divergence. Whilst the demand for fibre-related communication products far exceeded supply, the demand for coaxial cables continued to decline given the significant adoption of optic fibre in replacement of copper-made cables.
Despite such conditions, revenue increased by approximately 17.1% in 1H2017 compared with the corresponding period last year, which was mainly attributable to the escalating industry competition in the market in which the Group traditionally operates in China, resulting in a more significant reduction in the bulk purchase prices of operators. In addition, copper prices have been consistently low, adversely affecting the sales revenue of the Group. Despite facing the abovementioned adverse business environment, during 1H2017 the Group has managed to boost its revenue from antennas, accessories and leaky cable by more than RMB205.7 million as compared with 1H2016. On overseas fronts, sales performance started to pick up after years of development. Overseas sales of the Group increased from approximately RMB87.7 million in 1H2016 to RMB127.0 million in 1H2017.
Against the backdrop of the above-mentioned adverse effects, the Group has strengthened its efforts in the development and marketing of new product offerings. Through strong technological and capital capabilities, and with strict and effective management supported by employees at all levels, the Group accelerated the development of new products with higher gross profit during 1H2017 as compared with 1H2016. Number of the successful antennas tenders increased over the corresponding period last year and a tender was secured in a recent 800M8 terminal base station antenna bidding exercise of a PRC telecom operator as the fourth highest bidder, with a tender amount of approximately RMB162.25 million. Shipment of high temperature resistant cables in 1H2017 increased by more than 120% compared with 1H2016, while leaky cables and tools generated approximately RMB80.88 million in 1H2017, representing a year-on-year growth of approximately 36.78%. As a result of these positive changes, the product offerings of the Group had gone through continuous optimisation, and net profit for the first half of 2017 improved over 1H2016.
Looking forward to the second half of the year, both the three major PRC telecom operators and the Group will face different challenges. The introduction of a new series of tariff reduction requirements has led to a significant shrinkage of investments of these operators. Meanwhile, China Unicom has commenced the trial of mixed ownership operation; equipment manufacturers are further promoting the improvement of general solutions; and there is increasing adoption of optic fibre to replace copper-made cables. At the same time, as China Mobile announced the upcoming prices for bidding exercise, the market demand and prices of RF coaxial cables are expected to continue to be sluggish, which poses mounting challenges to the Group.
Nonetheless, the Group is confident of our new product lines of leaky cables, antennas, high temperature resistant cables and 4310 component products developed in earlier years which have entered positive territory, which the Group believes would replace the gradual decline of our coaxial cable products. As antennas continues to evolve into much smaller, intelligent systems, and the pre-commercial trial of 5G antennas, the antenna demand is likely to grow, adding fresh impetus to the development of the Group.