2002/2003 First Quarterly Report
BUSINESS REVIEW
During the first quarter of the financial year 2002/2003, the global economy remained difficult, but the market started showing signs of stabilisation. Given the Group’s established foundations and operating philosophy, the Group achieved a growth in turnover of 44.6% for the three months ended 31st July 2002 and reached HK$115,364,000 (2001: HK$79,770,000). The rise in turnover shows that the market is returning to stability, and that the demand for electronic components is gradually picking up. However, the competition was still very fierce during the period. Electronic components suppliers in general faced substantial pressure on product prices, which still remained at an extremely unreasonable level. This has pushed down the Group’s gross profit margin from 32.6% for the first quarter of last year to 18.0% for the first quarter of the current year. The Group’s profit attributable to shareholders saw an inevitable, and prominent, decrease from HK$5,747,000 for the first quarter of last year to HK$3,199,000 for the first quarter of the current year. Under the current difficult electronic components market, which is in a knockout stage, the Group was still able to keep profitable and out-perform many other market players.
Coils Manufacturing Segment
For the three months ended 31st July 2002, the Group’s core business segment, coils manufacturing, accounted for 82.4% (2001: 81.6%) of the Group’s turnover, and reached HK$95,059,000 (2001: HK$65,106,000), up 46.0% from the corresponding period in the previous year. However, the Group’s bid to raise the coils manufacturing segment’s productivity through the additions of property, plant and equipment last year has driven up the segment’s depreciation from HK$10,480,000 for the first quarter of last year by 36.0% to HK$14,249,000 for the first quarter of the current year. Due to the substantial price cuts by 10% to 20% starting from the third quarter of the previous year and the increase in depreciation, the coils manufacturing segment suffered a decline in gross profit margin from 34.8% for the first quarter of last year to 19.1% for the first quarter of the current year. Profit from operations fell 23.4% from HK$11,225,000 for the first quarter of last year to HK$8,598,000 for the first quarter of the current year. Nevertheless, discounting the impact of product price cuts, the Group’s coils manufacturing segment actually has achieved an outstanding growth in terms of both production output and sales volume, thanks to the Group’s persistent effort in expanding the coils manufacturing segment. Equipped with its strong coils production capability, the Group is well positioned to capture the business opportunities due to emerge once the market fully recovers.
For the first quarter of the current year, the Group recorded a 83.1% growth in turnover to the market in Mainland China, accounting for 7.3% (2001: 5.8%) of the Group’s turnover. There is no doubt that there are enormous potentials for business growth in Mainland China. In view of this, the Group has taken an aggressive approach to strategic investments in Mainland China during the first quarter of the current year, by preparing the establishment of new subsidiaries in major developed cities, such as Chongqing, Qingdao, Kunshan and Zhuhai. These strategic investments not only rounded out its comprehensive sales network, but also enabled the Group to stay closer to customers, understand their product requirements better and respond more promptly to their needs. The climb in the Group’s business in Mainland China was simply a reflection that the Group was on the right track in developing its business in the country.
The Group is also committed to developing the market in Europe, with the active exploration of new and valued customers. Given that the Group’s electronic components were competitive in respect of electromagnetic compatibility (“EMC”), the Group widely received favourable responses from the demanding European manufacturers. During the first quarter of the current year, the Group received steadily growing orders from a leading mobile phone manufacturer in Europe for a major component in its mobile phone chargers, contributing to the 40.7% growth in turnover to the European market, which accounted for 4.0% (2001: 4.2%) of the Group’s turnover. This has laid a firm foundation for the Group’s further penetration in the European market.
To strengthen its sales force even further, the Group capitalised on the rich experience and improving cost competitiveness of Hong Kong’s sales and marketing pool during the first quarter of the current year. The Group has expanded the sales and marketing team of CEC-Coils Hong Kong Co., Limited, making the Group’s internal specialisation more rational.
Capacitors Manufacturing Segment
For the three months ended 31st July 2002, the capacitors manufacturing segment attained a turnover of HK$8,803,000, with a 85.2% growth from the HK$4,754,000 in the corresponding quarter last year, accounting for 7.6% (2001: 6.0%) of the Group’s turnover. However, owing to the climbing production costs, distribution and selling expenses as well as general and administrative expenses, the gross profit margin decreased to 12.9% (2001: 35.2%). The segment also suffered a 57.3% drop in profit from operations to HK$549,000 (2001: HK$1,286,000). The growth in turnover of the capacitors manufacturing segment indicated that there are still rooms for further development in the capacitors market. CEC-ECAP Limited will keep implementing controls on its operating costs in order to strive for more satisfactory results in the future.
Power Supply Devices Manufacturing Segment
The turnover of the power supply devices manufacturing segment for the three months ended 31st July 2002 was recorded at HK$1,698,000 (2001: Nil), accounting for 1.5% of the Group’s turnover, with a gross profit margin of 32.7%. The segment achieved a profit from operations of HK$4,000. The turnover for the three months ended 31st July 2002 represented a 144.3% growth from that for the three months ended 30th April 2002. As the product series of CEC-Electric Co., Limited (“CEC-Electric”) are broad and the products are widely applied in telecommunication and information technology equipment, office automation equipment, home electrical appliances, toys, audio and visual products, etc., CEC-Electric’s turnover is expected to keep growing steadily.
Electronic Components Trading Segment
The electronic components trading segment recorded a turnover of HK$9,804,000 (2001: HK$9,910,000) for the three months ended 31st July 2002, down slightly by 1.1% from the corresponding quarter last year. The segment accounted for 8.5% (2001: 12.4%) of the Group’s turnover. Owing to the increasingly keen competition facing the electronic components trading segment, it suffered a fall in gross profit margin from 16.9% in the first quarter of the previous year to 9.9% in the first quarter of the current year. The segment also incurred a loss from operations of HK$367,000 in the first quarter of the current year, compared to a profit from operations of HK$397,000 in the first quarter of the previous year. With the deterioration in operating results of the electronic components trading segment and the poor prospects, the Group will reallocate its resources in its future development and concentrate more on developing its core business instead. Starting from October 2002, the Group will cease its trading of semiconductors and kit set of consumer electronic products, but will continue its trading of Samsung passive components only.
Broadening the Source of Revenue
CEC-Technology Limited (“CEC-Technology”), one of the Group’s subsidiaries, is the Group’s information technology and communication management center. The center’s main responsibility is to manage the Group’s website “www.0759.com”, e-mail system, and to develop the internet version of the enterprise resource planning system. Recently, many enterprises in Mainland China have started to automate their internal management systems. The Group believes that CEC-Technology’s software development can also be beneficial to those rapidly developing enterprises in Mainland China, by helping them to streamline their financial and general operations management efficiency.
Recognising the development of CEC-Technology, on 14th May 2002, the Company entered into a conditional agreement with an independent third party for the acquisition of the entire issued share capital of, and the benefit of a loan advanced to, Good Signal Holdings Limited (“Good Signal”) by the Company or through its nominated wholly-owned subsidiary for an aggregate consideration of HK$8,320,000. The consideration for the acquisition, which was completed on 4th June 2002, was satisfied by the issue of 32,000,000 new shares in the Company. Upon completion of the acquisition, the Group indirectly holds 12.5% of the registered capital of 上海圖王科技有限公司 (Shanghai Signking Science & Technology Co., Ltd. (for identification purpose)) (“Shanghai Signking”). Shanghai Signking is principally engaged in software development, sale of software products and system integration. The customers of Shanghai Signking mainly include local government entities and local private enterprises. The Group believes that the acquisition will be conducive to CEC-Technology’s further development in the computer software business by taking advantage of the synergy between CEC-Technology and Shanghai Signking, and the possible commercialisation of the software products developed by CEC-Technology.
Changes in Financial Resources and Gearing
As at 31st July 2002, the Group’s total borrowings, which were mainly denominated in Hong Kong dollars and partly in United States dollars and Japanese yen, amounted to HK$308,644,000 (as at 30th April 2002: HK$300,089,000), of which HK$140,555,000 (as at 30th April 2002: HK$151,709,000) was non-current and will be repayable within a period of more than one year but not exceeding five years. Interest expense was levied on Hong Kong dollar prime or Hong Kong Interbank Offered Rate (“HIBOR”) basis with competitive margins. Owing to the decreasing trend in interest rates over the previous financial year, the Group encountered a 71.5% fall in interest income, which amounted to HK$125,000 in the three months ended 31st July 2002 (2001: HK$438,000). On the other hand, interest expense declined by 26.8% to HK$4,953,000 (2001: HK$6,769,000). Total cash and bank deposits and investment, denominated mainly in Hong Kong dollars, United States dollars, Renminbi and New Taiwan dollars, were HK$52,919,000 (as at 30th April 2002: HK$52,804,000). The net gearing ratio (total borrowings less total cash and bank deposits and investment over net tangible assets less proposed final dividends) was 0.84:1 (as at 30th April 2002: 0.85:1), complying with the financial covenants as agreed between the Group and its major bank. Besides, the net gearing ratio calculated in accordance with the 3-year transferable term loan and revolving credit facility agreement entered into between the Company and a group of banks on 31st January 2002 was 0.99:1 (as at 30th April 2002: 0.99:1), which also complied with the relevant financial covenants.
As at 31st July 2002, the current ratio was 0.87:1 (as at 30th April 2002: 0.85:1). Contingent liabilities were HK$35,190,000 (as at 30th April 2002: HK$36,823,000), represented mainly by factoring of trade receivables with recourse of HK$35,190,000 (as at 30th April 2002: HK$36,618,000). The Group’s authorised and contracted capital commitments for acquisition of machinery and equipment were HK$6,837,000 (as at 30th April 2002: HK$270,000).
As at 31st July 2002, the Group’s aggregate banking facilities expanded to HK$432,872,000 (as at 30th April 2002: HK$391,747,000), of which HK$102,528,000 (as at 30th April 2002: HK$68,786,000) remained unutilised. The banking facilities were secured by mortgages over certain of the Group’s land and buildings, pledges of bank deposits, investment, inventories and machinery, as well as corporate guarantees provided by the Company and certain of its subsidiaries. The Group is required to comply with certain restrictive financial covenants imposed by the banks. The financial covenants include, among other things, the maintenance of the following specific financial ratios: (1) the net gearing ratio, defined by the relevant bank as total borrowings plus contingent liabilities less total cash and bank deposits and investment over net tangible assets less proposed final dividends, shall not exceed 0.85:1; and (2) the amount of capital expenditures, as defined by the relevant banks, for the year ended 30th April 2002 shall not exceed HK$70,000,000. The Group did not fulfill these two financial covenants as at 30th April 2002, but obtained waivers from the relevant banks in respect of such non-compliance during the three months ended 31st July 2002. The continuing financial support the Group has been enjoying from its principal banks speaks volume of the Group’s prospects.
FUTURE PLANS AND PROSPECTS
To conclude, the Group will continue to focus on its core business segment, the coils manufacturing, further enhancing its product competitiveness and establishing a more extensive sales network, all with a view to consolidating the Group’s business even further.
Starting from the previous financial year, the Group has been active in building a more extensive sales network in Mainland China. With the establishment of new representative offices and subsidiaries in Chongqing, Qingdao, Kunshan and Zhuhai, and their coordination with the original sales and marketing arms in Zhongshan, Dongguan, Xiamen and Shanghai, the Group succeeded in achieving outstanding business growth in Mainland China during the first quarter of the current year. Building on this success, the Group will remain committed to this strategy. The Group also recognises that customers from different areas may have different product requirements. Therefore, the Group is planning the set up of new production facilities in cities like Zhuhai, Kunshan and Qingdao, etc., for the manufacturing of coils and ferrite materials, the core components. This will not only propel the Group’s production capabilities and shorten lead-time, but also enable the Group to stay closer to local customers, allowing the Group to respond more quickly to customer needs with the most updated market intelligence, provide the best customer services and drive the Group’s sales.
In the meantime, the Group will keep paying extra attention to the development of the European market, broadening its customer base and establishing a sound customer network, in order to speed up the pace of business development in Europe. All these were aimed at fighting for better returns to our shareholders.