2001/2002 Third Quarterly Report
BUSINESS REVIEW
In the financial year 2001/2002, the global economy was rather slackened. The unending flow of negative news flooded the markets. As a result of the 11th September attack in the United States, the global business environment has worsened even further. Price bargaining among electronics manufacturers intensified, exerting considerable negative impact on the price of electronic products. Among all, the price of traditional electronic components dropped the most significantly. This has led to widespread falls in the profits of electronic components suppliers.
Nevertheless, with the Group’s implementation of effective and efficient cost control measures, overheads have been greatly cut whereas turnover was boosted. Meanwhile, its strong research and development capabilities enabled the Group to relieve the pressure arising from the substantial price drops in its products and raise its turnover. Thanks to these favourable factors, the Group was able to maintain its gross profit margin at a level of approximately 27.6%.
For the three months and nine months ended 31st January, 2002, the Group recorded a turnover of approximately HK$91,988,000 and HK$276,241,000, respectively, up slightly by approximately 12.6% and 2.5% as compared to the same period in the previous year. Profit attributable to shareholders was approximately HK$2,320,000 and HK$12,797,000 for the three-month period and nine-month period respectively. The results were considered satisfactory given the harsh operating environment.
Despite the poor market sentiment, the Group’s turnover showed signs of pick-up in January 2002 with a remarkable rebound. The Group, therefore, believes that the electronics industry is on its step to an economic recovery cycle, and business will improve steadily.
Effective Cost Control
Apart from the external economic influences, the Group’s internal cost control was also a crucial factor contributing to its results, particularly during such a difficult economic time. During the period under review, the Group has taken prompt actions to reduce costs and generate profit. Furthermore, the Group’s earlier investments in plant expansion as well as its commitment to research and development have started to bear fruit, broadening the variety of products offered and increasing the turnover. The negative impact brought by the fall in prices of electronic components was effectively alleviated.
Since certain of the Group’s raw materials, plant and machinery were imported from Japan, the depreciation of Japanese yen during the third quarter has correspondingly lowered the costs of raw materials, plant and machinery to the Group. This has contributed to further savings in the Group’s overheads.
Financial Position
The Group is committed to strengthening its financial position. The Group’s prospects and its confidence in the future business were reflected in the continuing financial support of the Group’s principal banks. On 31st January, 2002, the Company successfully entered into a 3-year transferable term loan and revolving credit facility agreement for an aggregate amount of HK$100,000,000 with a group of banks. The facility consists of a term loan for an aggregate amount of HK$60,000,000 to repay existing bank loans and other indebtedness of the Group, and a revolving credit facility for an aggregate amount of HK$40,000,000 as general working capital of the Group. The facility was subsequently fully drawn down in February 2002. This agreement benefited the Group with an improved debt profile and enriched operating capital, which will contribute to a healthier financial position for its future development.
According to the Group’s agreement with its major bank reached in the second quarter, the limit of consolidated net gearing ratio (total borrowings less total cash and bank deposits over net tangible assets) has been relaxed to 0.85:1. As at 31st January, 2002, the Group’s total borrowings amounted to approximately HK$288,779,000 (as at 30th April, 2001: HK$255,558,000) whereas total cash and bank deposits were approximately HK$52,410,000 (as at 30th April, 2001: HK$55,714,000). The consolidated net gearing ratio was approximately 0.80:1 (as at 30th April, 2001: 0.76:1), complying with the financial covenants as agreed between the Group and the major bank.
As at 31st January, 2002, the Group’s aggregate banking facilities expanded to approximately HK$412,173,000 (as at 30th April, 2001: HK$302,624,000), of which approximately HK$148,534,000 (as at 30th April, 2001: HK$65,727,000) remained unutilised.
FUTURE PLANS AND PROSPECTS
Proactive Market Exploration in Mainland China
China’s accession to the World Trade Organisation (“WTO”) was successfully completed in late 2001. It is widely believed that the membership in WTO will create a new outlook for China, especially with respect to business development. Given that the restrictions imposed on foreign investors will be relaxed gradually together with improvements in the mainland’s legal systems and infrastructure, foreign investments will mushroom in the coming future. With economic development being heavily based on technological advancement, the Group strongly believes that the demand for quality hi-tech electronic components from both national and foreign enterprises will climb up sharply, fostering the Group’s business prospects.
Currently, the market in Mainland China accounts for approximately 6% of the Group’s turnover. In view of the huge market potential in the mainland, the Group will take a more proactive approach in exploring this market to raise the proportion of its turnover generated from the mainland. To materialise this goal, the Group has been preparing actively for the establishment of more representative offices in developed and coastal cities in the mainland such as Qingdao, Hefei and Changzhou. The Group already established a representative office in Chongqing in November 2001, which reflected the Group’s strong determination to develop the market in Mainland China.
Right Product at the Right Time – Stepping Stone for Market Development in Europe
Hi-tech audio-visual (“AV”) and telecommunication products have been experiencing rapid development in Europe in recent years. The design and quality of these products have attracted abundant demand from around the globe. In view of the competitiveness of the market, European manufacturers are particularly demanding for quality and functionality in electronic components. The Group’s products, such as toroidal transformers, line filters and anti-electromagnetic interference filters are well equipped with electromagnetic compatibility (“EMC”), which effectively reduces interference in the transmission of signals in AV products and telecommunication products. The quality, value and competitiveness of products will thus be substantially enhanced. With the functions and designs of miniaturised EMC components manufactured by the Group, the needs of different electronics manufacturers will be well catered for. The Group is also committed to continuously upgrading its existing product line with innovative and new products. This will help the Group to further penetrate the European market with higher market share, paving the way for further development in Europe.
Conclusion
Despite the unfavourable factors in the environment, which has dragged the overall economy down, the Group will face future challenges with confidence by strengthening its own foundations, internal management and financial position to broaden revenue sources and minimise costs at the same time, in a bid to reward our shareholders with higher returns.