2000/2001 Third Quarterly Report
BUSINESS REVIEW
The Directors are pleased to announce that the Group has managed to sustain its trend of double-digit growth in turnover during the period. The turnover for the three months and nine months ended 31st January, 2001 was approximately HK$81,718,000 and HK$269,393,000 respectively, representing a robust growth of approximately 28% and 37% respectively from the corresponding periods in 2000. The growth, when compared to the same periods last year, reflects the Group’s success in upholding its position in the electronics market coupled with its timely expansion of production capacity in line with the demand of its customers.
Although the third quarter was a season marked with the normal pattern of industrial slowing and extended holidays around Christmas and Lunar New Year, the Group was engaged during the third quarter in accelerating the reinforcement of its business foundation, which the Group believes is a critical investment in its own future. This embraced efforts in strengthening the Group’s international marketing network and a substantial investment in the enrichment of its production facilities in Zhongshan, Guangdong Province, which was financed mainly with new long-term bank loans and finance leases of approximately HK$30,000,000 and HK$23,801,000 respectively during the third quarter. As a result, interest expense was up 113% from approximately HK$2,594,000 for the three months ended 31st January, 2000 to approximately HK$5,532,000 for the third quarter of the current financial year. Combined with the adverse impact on production cost resulting from the significant rise in petroleum price on a global basis, a temporary problem that the Group shared with the industry as a whole, the Group experienced a mild slowdown in the growth in profit performance during the third quarter. The profit attributable to shareholders for the three months ended 31st January, 2001 was approximately HK$6,529,000, down 19% from the comparable quarter last year. On a year-to-date basis, the Group achieved a moderate 7% growth in profit attributable to shareholders for the nine months ended 31st January, 2001 to approximately HK$34,040,000 as compared to the same period last year. Had the price of petroleum remained stable over both periods, the profit attributable to shareholders for the three quarters in the current financial year would have grown 21% year-over-year, to about HK$38,663,000. Apart from the factor of petroleum price, the 49% increase in depreciation from approximately HK$15,899,000 to HK$23,624,000 during the nine months ended 31st January, 2001 resulting from the Group’s dedicated investment in property, plant and equipment in a bid to power the further growth in future profitability also accounted for part of the temporary slight drop in gross profit margin from 34.5% to 32.4% for the nine months ended 31st January, 2001. On the other hand, in order to reinforce all levels of management, the Group has devoted a lot to the investment on human resources. For the nine months ended 31st January, 2001, human resources cost surged by approximately 75% and reached approximately HK$22,659,000. The net profit margin was correspondingly slightly down from 16.2% for the comparable period last year to 12.6% for the same period in the current year.
While the outcome is largely anticipated, the Group’s fundamental outlook, however, remains bright and encouraging in the remaining quarter of the financial year and beyond. This is mainly attributable to the Group’s long-established commitment to persistent improvement, which positions the Group well on its way to generate promising returns to its shareholders in the future. This is evidenced when we take a more in-depth review of the Group’s operations during the third quarter as follows:
Capturing the Market Opportunities
Thanks to the flourishing information technology era as the world entered into the new millennium, it remains clear that the dynamic growth in global demand for high-quality and miniaturised electronic components will be sustaining well into the future. With a vast amount of network deployment and upgrading throughout the world still ahead, the Group was implementing a number of expansion strategies in the current period to take full advantage of the strong demand cycle in the data networking, telecommunications and power conversion markets. The Group’s commitment to, as well as ability in, capturing the emerging business opportunities are evidenced by the substantial capital investment of more than HK$153,000,000 in the aggregate over the nine months ended 31st January, 2001. During the same period, the Group has been undertaking a large-scale investment in expanding its production infrastructure in Zhongshan. The construction of the new phase of factory blocks there was already completed during the third quarter of the financial year. Installation of new and fully automated production facilities for manganese-zinc series ferrite cores, line filters and electromagnetic interference (“EMI”) filters was underway as at 31st January, 2001. With this upgraded production environment, the Group will soon be fully prepared to elevate to a higher level of business endeavours.
Managing the Production Cost Structure
The Group believes that consistently strong earnings performance is attributable to continuous attention to production cost management. This strategy continued to be the Group’s game plan in the current period, as evidenced by the commencement of self-production of tubular ceramic capacitors, which are one of the key components of the Group’s products, near the end of the third quarter of the financial year, as well as the installation of a new power conversion station for its factory in Zhongshan, which will save the costs of raw materials and power generation respectively to a considerable extent and mitigate the adverse impact from the fluctuating petroleum market.
Broadening the Sales Network
During the third quarter, the Group equipped itself with an experienced sales and marketing arm for the trading of a wide range of electronic components. Capitalising on the strengthened marketing capabilities, the Group diversified the categories of non-mainstream products offered, built up stronger customer relationships and successfully gained the distribution right for various types of Samsung passive components such as chip capacitors, chip resistors, electrolytic capacitors and ceramic capacitors. Ongoing were the Group’s efforts in diversifying further its business in the marketing of multiple categories of innovative electronic devices, including audio noise reduction systems and integrated circuits, etc, which are expected to play an appreciable role in contributing to the Group’s turnover growth.
FUTURE PLANS AND PROSPECTS
Meeting the Future Challenges
With the impending accession of China to the World Trade Organization (“WTO”), economic globalisation will be an irresistible trend in the future. The development of a knowledge-based global economy as well as information and communication infrastructure to support demand for international trade and commerce applications will be gathering momentum at an amazing speed. The Group is not going to be insulated from both the opportunities and challenges rapidly emerging in the electronics industry arising from this trend. The Group will maintain its proactive approach to operations that will allow it to leverage the capabilities to achieve an even stronger market presence. As appreciable business volume for such miniaturised components as chip inductors, ceramic capacitors, toroidal transformers, line filters and EMI filters, etc., is expected to result from the dynamic information technology and telecommunications sectors, the Group’s dedication to strengthening its production infrastructure in Zhongshan for the manufacture of those components will eventually pay dividend in the near future to come.
Expanding the Product Line
The Group expects continued strength in the electronics market. In the coming financial year, the Group will pursue attractive opportunities to enrich its product line and better serve the strong electronics market by launching the production of miniature multi-layer chip inductors, which complement the existing series of wire-wound chip inductors by catering for the different self-resonant frequencies required in such electronic products as MP3 players, mobile phones, cable modems, broadband network equipment and computers, etc.
Focusing on Research and Development
With the continual high-tech advances in electronic applications throughout the world, the evolution of ferrite materials, being the core components of such electronic devices as inductors, line filters and EMI filters, etc, continues to play an indispensable role in sustaining those advances. The requirements for permeability and operating frequency of ferrite materials are becoming more and more demanding. The Group owed its dynamic growth in the past to its dedication in the research and development of ferrite powders and ferrite cores. In order to extend its technological and market strengths even further, the Group intends to intensify its efforts in the research and development of ferrite materials in the coming year. Capital expenditures amounting to approximately HK$25,000,000 will be devoted to the set-up of advanced research and development facilities. The investment is expected to enable the Group to keep pursuing its strategy of constant innovation, which will remain one of most important pillars of the Group’s success in the future.