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Financial Statements Announcement for the Year Ended 31 December 2017

Financials Archive

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Income Statement

Profit & Loss 2017

Consolidated Statement Of Financial Position

As at 31 December

Balance Sheet 2017

Review of the Performance

Year-on-year performance — 12 months ended 31 December 2017

Revenue

The Group’s revenue for the financial year ended 31 December 2017 (“FY2017” or the “Reporting Period”) increased by approximately RMB101.2 million, or approximately 6.6% from approximately RMB1,532.2 million in the previous financial year ended 31 December 2016 (“FY2016”) to approximately RMB1,633.3 million in FY2017.

RF Coaxial Cables

Revenue generated from the segment of RF Coaxial Cables decreased by approximately RMB98.0 million or approximately 9.3% from approximately RMB1,050.6 million in FY2016 to approximately RMB952.6 million in FY2017.

Included in the segment revenue of RF Coaxial Cables are the revenue from leaky cables of approximately RMB93.7 million for FY2017, representing an increase of approximately RMB37.5 million or 66.6% from approximately RMB56.2 million in FY2016. Leaky cables are a special coaxial cables commonly used for the tunnels and underground mobile communication in mass transit railways and thus normally have higher gross profit margins than other RF Coaxial Cables products.

Telecommunication equipment and accessories

Revenue generated from the segment of telecommunication equipment and accessories increased by approximately RMB65.4 million or approximately 17.4% from approximately RMB376.3 million in FY2016 to approximately RMB441.7 million in FY2017.

Antennas

Antennas has been separately classified as a reportable segment for FY2017, as it has met the quantitative threshold for determining reportable segments during FY2017. Revenue generated from antennas during FY2017 was approximately RMB205.5 million and the revenue of antennas during FY2016 included in the other segment was approximately RMB76.7 million, representing an increase of approximately 167.9%.

Others (HTRC and antennas testing services)

Revenue generated in this segment increased by approximately RMB5.0 million or approximately 17.5% from approximately RMB28.6 million during FY2016 (after excluding the revenue from Antennas of approximately RMB76.7 million as included in the others segment) to approximately RMB33.6 million during FY2017, of which the increase was mainly attributable to the increase in sales of HTRC during FY2017.

Gross profit margin

The Group achieved an overall gross profit margin of approximately 21.2% during FY2017 compared to approximately 20.7% during FY2016, representing an increase of 0.5 percentage point year-on-year. The higher than average gross profit margin for the product line of leaky cables in FY2017 of 24.3% has lifted the overall gross profit margin of the Group. Despite facing intense market competition, gross profit margin of RF Coaxial Cables has managed to increase by 1.7 percentage point from FY2016’s 15.5% to 17.2% in FY2017. 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 income

Other income decreased by approximately RMB3.2 million or approximately 12.5% from approximately RMB25.8 million in FY2016 to approximately RMB22.6 million in FY2017. The decrease primarily arose from the following factors:

(i) decrease in interest income earned;
(ii) decrease in rental income earned from the lease of the Group’s testing facilities;
(iii) increase in government grants received; and
(iv) the change from net foreign exchange gains in FY2016 to net foreign exchange losses in FY2017.

Selling and distribution expenses

Selling and distribution expenses decreased by approximately RMB7.1 million or approximately 6.6% from approximately RMB108.3 million in FY2016 to approximately RMB101.2 million in FY2017 due to the decrease in salary expenses as a result of the decrease in headcount of the Group and tightened marketing efforts during FY2017.

Administrative expenses

Administrative expenses increased by approximately RMB4.9 million or approximately 9.2% from approximately RMB53.1 million in FY2016 to approximately RMB58.0 million in FY2017. This is due to:

(i) a general increase in salary costs during the Reporting Period;
(ii) a general increase in office administration expenses; and
(iii) a reversal of allowance for doubtful trade receivables in FY2017 instead of the additional allowance for doubtful trade receivables in FY2016.

Other operating expenses

Other operating expenses increased by approximately RMB13.4 million or approximately 25.1% from approximately RMB53.3 million in FY2016 to approximately RMB66.7 million in FY2017. The increase is due to the moderate increase in research and development (“R&D”) expenses incurred from continuing R&D activities undertaken for the modifications and improvements to the Group’s products and the net foreign exchange losses of approximately RMB10.1 million incurred in FY2017.

Share of losses of an associate

During the FY2016, Jiangsu Hengxin Technology Co., Ltd. (“Hengxin (Jiangsu)”), a wholly-owned subsidiary of the Company, acquired 24% equity interest in Mianyang Xintong Industrial Co., Ltd.* (綿陽鑫通實業有限公司, “Mianyang Xintong”). The amount of approximately RMB8.2 million represents the Group’s proportionate share of the losses incurred by Mianyang Xintong (after tax) recognised during FY2017.

Finance costs

Finance costs decreased by approximately RMB1.4 million or approximately 93.3% from approximately RMB1.5 million in FY2016 to approximately RMB0.1 million in FY2017 as the Group has repaid its interest bearing borrowings during the Reporting Period.

Profit before income tax

Profit before income tax increased by approximately RMB13.5 million or approximately 11.1% from approximately RMB121.5 million in FY2016 to approximately RMB135.0 million in FY2017.

Income tax expense

The Group’s main 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 2008. It had been awarded the same status for a further three years commencing 7 December 2017.

Income tax expense decreased by approximately RMB0.6 million or approximately 2.8% from approximately RMB21.6 million in FY2016 to approximately RMB21.0 million in FY2017, mainly due to the movement in deferred taxes during the Reporting Period.

Net profit

In view of the above, net profit attributable to equity holders of the Company increased approximately RMB14.3 million or approximately 14.3% from approximately RMB99.8 million in FY2016 compared to approximately RMB114.1 million in FY2017.

Statement of Financial Position

Material fluctuations of balance sheet items are explained below:

Pledged bank deposits

Pledged bank deposits increased by approximately RMB20.8 million or approximately 346.7% from approximately RMB6.0 million as at 31 December 2016 to approximately RMB26.8 million as at 31 December 2017, mainly due to the security deposits of approximately RMB15.8 million relating to the commodity future contracts entered for hedging the purchase of raw materials during the last quarter of FY2017.

Trade receivables

Trade receivables increased by approximately RMB190.1 million or approximately 36.9% from approximately RMB515.0 million as at 31 December 2016 to approximately RMB705.1 million as at 31 December 2017.

Average trade receivables turnover days were 139 days as at 31 December 2017 compared to 128 days as at 31 December 2016. The slight increase in trade receivables turnover by approximately 11 days was due to the increase of sales in December 2017 of approximately 13% compared to that of December 2016, hence increasing the turnover days. Although the collection of trade receivables from certain customers of the Group had been stretched longer as some adopted the payment by bank bills of exchange which had a longer period of maturity, the Group focused on other collections to mitigate the longer turnover effects by certain customers as mentioned above.

Nonetheless, most of the trade receivables balances were recent sales which were within the average credit period given to the Group’s customers. As at 31 December 2017, approximately 86.16% of the trade receivables and bills receivable were within the credit period given as compared with that of approximately 91.15% as at 31 December 2016.

For amounts due more than six months and longer, they mainly pertain to final payment (upon project completion) owed by the three main PRC telecom operators. These outstanding balances relate to projects undertaken by these operators which had longer project completion dates than as initially anticipated. These operators have been the Group’s long-time customers and the Group has been receiving regular payments from them. In addition, the majority of these outstanding balances pertain to one of the main telecom operators in the PRC. In view of the Group’s long-standing dealings with them and the regular receipts of payments from these customers, the Group does not foresee any 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)

Other receivables and prepayments (current assets) decreased by approximately RMB21.6 million or approximately 27.5% from approximately RMB78.6 million as at 31 December 2016 to approximately RMB57.0 million as at 31 December 2017. The decrease was mainly due to the decrease in advance payment to suppliers for the purchase of raw materials and offset by the increase in prepaid sales tax and value-added-tax and reclassification of current portion from non-current portion of the loan to the Group’s associate, Mianyang Xintong.

Inventories

Inventories (comprising raw materials, work-in-progress and finished goods) increased by approximately RMB41.7 million or approximately 24.5% from approximately RMB170.3 million as at 31 December 2016 to approximately RMB212.0 million as at 31 December 2017. The increase was mainly due to the increase in finished goods in transit, most of which were RF Coaxial Cables and Antennas.

Other investments (non-current and current assets)

Other investments (non-current assets) decreased by approximately RMB22.1 million or approximately 67.2% from approximately RMB32.9 million as at 31 December 2016 to approximately RMB10.8 million as at 31 December 2017. The decrease was mainly due to the downward revaluation of an equity investment held by the Group.

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 31 December 2017. Other investments (current assets) as at 31 December 2017 represented the subscription of short term investment in a wealth management product with a duration of six months and annual yield of 4.60% commencing from 31 July 2017. Other investments (current assets) as at 31 December 2016 represented another wealth management product subscribed by the Group which was matured and redeemed in full during the Reporting Period. Please refer to the paragraph headed “Discloseable Transaction during the Reporting Period” below.

Property, plant and equipment

Property, plant and equipment decreased by approximately RMB6.4 million or approximately 4.4% from approximately RMB146.1 million as at 31 December 2016 to approximately RMB139.7 million as at 31 December 2017. The decrease was mainly due to normal charges of depreciation, which was slightly offset by additions during FY2017.

Other receivables (non-current assets)

Other receivables (non-current assets) amounting to approximately RMB17.4 million as at 31 December 2017 pertains to the non-current portion of the loan to the Group’s associate, Mianyang Xintong. During the Reporting Period, RMB9.18 million had been reclassified as other receivables (current assets).

Short-term loans

Short-term loans decreased to nil from approximately RMB27.0 million as at 31 December 2016 due to the full repayment of short-term loans during the Reporting Period.

Trade payables and other payables

Trade payables increased by approximately RMB21.2 million or approximately 17.9% from approximately RMB118.2 million as at 31 December 2016 to approximately RMB139.4 million as at 31 December 2017. This is in line with the increase in the inventory levels arising from the increase in the Group’s purchases of raw materials.

Other payables and accruals increased by approximately RMB18.6 million or approximately 26.4% from approximately RMB70.5 million as at 31 December 2016 to approximately RMB89.1 million as at 31 December 2017, due to the higher bonus accruals for FY2017.

Income tax payable

Income tax payable increased by approximately RMB6.5 million or approximately 118.2% from RMB5.5 million as at 31 December 2016 to approximately RMB12.0 million as at 31 December 2017. The increase mainly arose from the timing differences in the payment of income taxes.

Deferred income

Deferred income decreased by approximately RMB1.0 million or approximately 19.2% from approximately RMB5.2 million as at 31 December 2016 to approximately RMB4.2 million as at 31 December 2017. This relates to the 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 income.

Cash and bank balances

Cash and bank balances decreased by approximately RMB109.1 million or approximately 19.7% from approximately RMB554.2 million as at 31 December 2016 to approximately RMB445.1 million as at 31 December 2017. The decrease is mainly due to an increase in trade receivables and inventory levels, the repayment of short-term loans and net increase in other investments during the Reporting Period.

Commentary

During 2017, the general economy of China continued to grow at a moderate pace, while the industry value-add continued to hover at a low level. The global economy witnessed a slow recovery and the amount of investment in China’s telecommunications industry remained stable. At the same time, the process of structural divergence continued. Although the demand for fibre- related products far exceeded supply, the demand for coaxial cables continued to decline as a result of the significant adoption of optic fibre in replacement of copper-made cables.

Nonetheless, given that our new product lines of leaky cables, Antennas, HTRC and 4310 component products developed in earlier years have entered into positive development stage, the Company believes that it will replace the decline of the coaxial cable products. As the global trend of antennas continues to evolve into much smaller and intelligent systems with the pre-commercial trial of 5G antennas, the antenna demand is likely to grow, adding fresh impetus to the development of the Group.

In 2018, the Company will focus on strengthening its existing market position, step up product optimization and actively expand to overseas markets and its key customers. In preparation for the arrival of the 5G communication era. In respect of high temperature resistant cable and assembly product projects, we will make use of water-proof solutions and high temperature assembly solutions to cater for various harsh application environment of the IoT and facilitate the sales model of low loss cable and cable + assembly to boost the market share of this kind of products.

With regard to antenna project, while the development and mass production of the antenna series for mobile NB-IoT projects are completed, we will facilitate the development of base station antenna for future and overseas customers and conduct R&D of multi-modulation and standard antenna (TDD+FDD+19NB-IOT), multifrequency and ultra-wideband antenna, multi-beam antenna, small cell antenna and SARFT 700M low frequency antenna. For leaky cable market, in response to the development of unmanned underground railway, we will develop products such as leaky cable for unmanned operation and broadband leaky cable and conduct preresearch for products such as waveguide leaky cable and leaky cable for LTE low frequency. Extensive promotion will be arranged for the application of leaky cable online monitoring system in subway. R&D of antenna and related accessories and products will be further enhanced and the Company’s competitive edge in coaxial cable soldering will be fully utilised in the research and development for HFC wrinkles brass high temperature cable assembly. For high-end overseas customers, water-proof and peck-proof assembly products, high intermodulation, quick installation assembly products will be developed and launched to achieve differentiation of the Company’s products and high-end development.

In 2018, telecom operators in China are expected to continue to expand their 4G network construction, and on this basis the Company will not be materially affected during this period. Looking ahead, the Company will commence product transformation based on the technological requirements of 5G by developing and manufacturing a series of ultra-high-speed communications products. The transformation and development of the Company will come along with risks and opportunities.