-3x Short China Regulatory News (CHNS)

28 Apr 2009 07:00



Final Results 

Preliminary Results 

China Shoto plc

("China Shoto" or "the Group") 

Preliminary Results 

China Shoto plc (AIM: CHNS), a leading Chinese producer of industrial batteries and power supply systems, announces its preliminary results for the year ended 31 December 2008.

Highlights 

Cao Guifa, Chairman, commented: "Despite the global financial crisis continuing to worsen with international market demand continuing to shrink and the trend towards strong global deflation all of which bring uncertainties for the Group's business, I am confident that investments after the issue of 3G licences will bring new development opportunities for the Group." 

"As China's largest producer of back up batteries and a China Environment Friendly Enterprise, the Group intends to, ultimately, become a worldwide green energy solution provider. To that end, a new type of green energy storage product with high technology content is being developed."

Chairman's Statement 

2008 was a turbulent year for the Chinese economy with the snow disaster in Southern China, Wenchuan, the 12 May Earthquake, sharp turbulent fluctuations in the international market price of raw material and energy, and the fast appreciation in RMB. As a consequence, Chinese economic policy has changed from the initial anti-inflation actions to steps required to sustain economic growth by the end of the year. Under such economic conditions, the Group, as the largest Chinese producer of back up batteries, has delivered excellent results which greatly exceeded market expectations, with revenue increasing by 70% to £183.08 million (2007: £107.50 million), net assets per share increasing 74% to £2.25 (2007: £1.29), diluted earnings per share increasing by 76% to 43.14p (2007: 24.45p). These excellent results fully reflect the effectiveness of the Group's annual operation strategy, market exploration orientation and risk control countermeasures.

Results and dividend 

Revenue increased by 70% in 2008 to £183.08 million (2007: £107.50 million).

Operating profit increased by 66% to £14.17 million (2007: £8.53 million).

Net profit for the financial year attributable to equity holders of the parent increased by 79% to £10.07 million (2007: £5.62 million).

In the light of the strong overall performance of the business, the Board is pleased to recommend a final dividend of 3.5 pence per share. Following an interim dividend of 1.5 pence per share this brings the full year dividend for 2008 to 5 pence per share, which is in line with its stated dividend policy. The Dividend will be paid on 30 June 2009 to members on the register at the close of business on 19 June 2009. The ordinary shares will be marked ex-dividend on 17 June 2009.

Cash flow 

Against the background of a global financial crisis, the Group has substantially improved its cash flow through further strengthening its cash flow management and business risk controls. Net cash flows from operating activities in 2008 were £38.57 million (2007: outflow £3.11million). 

Business progress 

Revenues from the back up battery business grew by 111% to £164.79 million (2007: £78.02 million).

Foreign sales increased by 329% to £29.71 million (2007: £6.92 million).

Directorate change 

There has been no change to the Board of Directors in during the year ended 31st December 2008 and up to the date of signing of the annual report.

Social responsibility

The Group has undertaken to operate to the highest ethical standards, and to contribute towards environmentally sustainable development through the appropriate use of recyclable resources. The Group has continued to work towards the development of green energy storage products and energy saving and emission reduction programmes as a responsibility to give back to society, to reward society and to promote social development.

The Group is dedicated to delivering attractive returns to our shareholders, and the return on year end capital employed in 2008 reached 19.1%. We seek to maintain trust and keep harmonious relationships with partners such as customers and suppliers, to effect a win-win situation for everybody.

Environmental standards

The Group passed the certification of ISO14001 environment management system and GB/T18001 vocation health and safety management, and its products passed CE Verification, UL Verification and EU RoHS test.

Outlook 

Despite the global financial crisis continuing to worsen with international market demand continuing to shrink and the trend towards strong global deflation all of which might bring uncertainties for the Group's international business, I am confident that investments after the issue of 3G licences in China will bring new development opportunities for the Group. 

As China's largest producer of back up batteries and a China Environment Friendly Enterprise, the Group intends to, ultimately, become a worldwide green energy solution provider. To that end, a new type of green energy storage product with high technology content is being developed.

Cao Guifa

Chairman

Chief Executive's Review 

The global financial crisis had its inevitable effects in China during 2008, exacerbated by natural disasters and sharp turbulent fluctuations in the international market price of raw materials and energy, and the rapid appreciation of the Renminbi. China Shoto, as a public listed company on AIM and the largest Chinese producer of back up batteries, has achieved excellent results which greatly exceeded market expectations. Revenues increased by 70% to £183.08 million (2007: £107.50 million), net profit (excluding minority interests) up 79% to £10.07 million (2007: £5.62 million) and foreign sales revenue increased by 329% to £29.71 million (2007: £6.92 million). These excellent results fully reflect the effectiveness of the Group's annual operational strategy, market exploration orientation and risk control measures.

Market overview

Business segments 

Back up battery 

Revenue from back up battery sales in 2008 reached £164.79 million accounting for 90% of the Group's total revenue (2007: £78.02 million and 73%).

PTB 

Sales revenue of PTBs in 2008 reached £18.29 million accounting for 10% of the total revenue (2007: £29.48 million and 27%).

Geographical segments

Domestic sales

Domestic sales revenue in 2008 rose to £153.37 million accounting for 84% of the Group revenue (2007: £106.39 million and 94%).

Foreign sales 

Foreign sales revenue in 2008 rose to £29.71 million accounting for 16% of the Group total (2007: £6.92 million and 6%).

Market Sectors

With the rapid development of China's domestic telecom industry during 2008, the revenue from the sales of back up batteries increased by 111% to £164.79 million (2007: £78.02 million). 

The Group shifted part of PTB production lines capacity so as to increase the output of back up battery to satisfy the fast development of the telecom industry. As a result, revenues from PTB decreased by 38% to £18.29 million in 2008 (2007: £29.48 million).

Key customers

Back up battery

Sales to five major telecommunication operators accounted for 71% of the total back up battery revenue and increasing by 83% to £117.36 million, compared with £64.22 million in 2007. Sales to China Telecom and China Netcom increased 335% and 193% respectively year on year. Sales to India Indus Tower accounted for 36% of the total foreign sales. 

PTB 

The key customers of the PTB business are Beijing Xinri, Shenzhen Shenling, and Tianjin Taifeng which are all important domestic manufacturers. They accounted for 47.30%, 6.67%, and 4.46% of total PTB sales respectively.

Sales and Marketing

Back up battery  

The Group successfully won the honour of "Best Global Partner of ZTE Telecommunication" 2008-2009. The Group further increased OEM sales to ZTE and Huawei while continuing to maintain its high market shares in the three key domestic telecom operators, and greatly enlarged its order book with Indus Tower, Bharti, Tata and other Indian main telecom operators.

Products successfully served in the construction of the main venues for the Olympic Games. The Group also participated in China Mobile base station construction at an elevation of 6500 meters to support the Olympic Holy Fire Torch Relay on Mount Everest.

PTB

In 2008, the Group continued to manage its program of working with the distributors of well-known electric bicycle manufacturers and appointed experienced sales agents in many regions.

Technical Support and Fairs 

The Group strengthened its communications with customers with improved technical support and perfect after-sale service. 

The Group voluntarily took part in rescue action at the serious natural disasters which resulted from heavy snow in the south of China and the 12 May Earthquake in Wenchuan, Sichuan Province, to support and serve telecommunication rush repairs in the disaster areas. The Group checked battery performance in Southern China key base stations to ensure safe power supply, and assisted with the telecommunication rescue work and base station rebuilding in the areas affected by the earthquake. 

The Group also presented at the China Sourcing Fair in Dubai, the 2008 China International Information & Telecom Fair, the 8th China International Battery Technology Exchange Fair, the International Battery Fair (Indian Hyderabad), and the 19th International Communications and Information Technology Exhibition & Conference (Singapore). 

Operating Overview 

Product

Quality Control

The Group manufactures batteries according to IEC and German DIN standards, and ensures the highest quality controls, using advanced manufacturing equipment and production processes. In addition, the Group passed the re-examination to retain its ISO9001 Quality Management System Authentication. The Group has also been rated as a First Class Export Product Enterprise in Jiangsu by the Jiangsu Entry-Exit Inspection and Quarantine Bureau of the People's Republic of China.

Manufacturing management

Product quality has been guaranteed by strict monitoring of manufacturing processes and detailed checks. Production capacity has also been increased through constant process improvement and filling up of production line vacancies.

Cost management

In 2008, the price of the main raw material, lead ingot, varied between RMB 7,969 Yuan per ton and RMB 19,201 Yuan per ton. The Group continued to maintain the price linkage scheme with telecom operators and OEM customers which effectively reduced its exposure to price fluctuations. Meanwhile, the Group lowered design costs through technology innovation, and reduced manufacturing costs through the implementation of measures to reduce waste and thereby use raw materials more effectively.

Research and Development 

In 2008, the Group increased its R&D capacity to reflect the market demands, and accelerated the pace of commercialization of its new products, and made good progress on R&D and new projects for the development of future products.

Patents Granted 

The Group now holds 115 patents, including 11 invention patents. 

Back up battery 

Gel Battery

The Group successfully developed 12V 110Ah and 12V 140Ah front-terminal gel batteries.

AGM Battery 

The 12V65Ah, 12V100Ah, 12V150Ah front-terminal AGM battery and series fifth 2VAGM VRLA battery have been successfully developed. 

Spiral Wound Battery

The 12V50Ah Spiral Wound Battery was successfully developed.

Power Type Battery 

The Group successfully developed the 12V25Ah battery for light motor bikes. 

Super Capacitor 

A newly developed solar energy storage super capacitor for street lamps was successfully applied to the solar energy powered lighting in the Beijing Olympic Village. 

Prospects 

The Group intends to become a recognized green energy solution provider. Its high quality products and excellent service record have been fully demonstrated in domestic and overseas markets.

Notwithstanding the global financial crisis, the Group believes that its current plans to intensify marketing both domestically and internationally will increase revenues. The plan is to improve supply capability for existing clients and widen the customer base. Additionally, scientific and technological input in new product development and outsourcing for some products provide assurance of longer term growth. 

The plans envisage a continuous improvement in finance and risk controls.

Success in the Group's performance will enable China Shoto to participate in the huge market opportunity provided by the PRC's Ministry of Industry and Information plan announced in January 2009 to invest within 3 years RMB 400 billion for 3G networks.

Yang Shanji 

Chief Executive 

Finance Director's Review 

Results 

The Board regard the following measures as key performance indicators: 

Sales revenue increased by 70% to £183.08 million (2007: £107.50 million).

Operating profit increased by 66% to £14.17 million (2007: £8.53 million).

Pre-tax profit increased by 61% to £11.55 million (2007: £7.16 million).

Net profit attributable to equity holders of the parent increased by 79% to £10.07 million (2007: £5.62 million).

Diluted earnings per share from continuing operations in 2008 increased by 76% to 43.14 p (2007: 24.45 p).

Income tax 

China Shoto plc 

China Shoto is a non-resident UK company, only subject to UK corporation tax for any activities undertaken in the UK.

The latest PRC taxation laws which came into effect on 1 January 2008 uniformly adjust the applicable income tax rate for both domestic capital and foreign capital enterprise to 25%. The Group and significant subsidiary undertakings are subject to income tax at the following tax rate: 

Jiangsu Shuangdeng Group Co., Ltd 

As a foreign enterprise, the Group enjoys a preferential policy of a five-year transition period between New and Old Enterprise income tax laws. The Group will be free of tax in 2008 and 2009, and a half-relief tax rate of 12.5% will be applied from 2010 to 2012, the full applicable income tax rate will be 25% from 2013.

Jiangsu Fuste Power Supply Co., Ltd 

In 2008，Jiangsu Fuste Power Supply enjoyed tax preference at a half-relief tax rate of 12.5%. From 2009, the full income tax rate of 25% will be applied.

Jiangsu Best Power Supply Co., Ltd 

Jiangsu Best Power Supply's applicable income tax rate is 12.5% for the years 2008 to 2010. After the preferential period, its applicable income tax rate will be 25%.

Jiangsu Shuangdeng Power Supply Co., Ltd

Jiangsu Shuangdeng Power Supply was recognised as a "National High Technology Enterprise" in 2008, so it enjoys tax preference for the years 2008 to 2010. Its applicable income tax rate will be 15%.

Nanjing Shuangdeng Science and Technology Development Academy Co., Ltd 

Since 2008 is the first profit-making year for the Academy, it is entitled to income tax exemption in 2008 and 2009 and a half relief of 12.5% tax rate will be imposed in 2010, 2011 and 2012. After the preferential period, the applicable income tax rate will be 25%.

Yangzhou Zhenghe Power Supply Co., Ltd 

Yangzhou Zhenghe Power Supply Co., Ltd was entitled to tax exemption in 2007 and 2008, and a half relief of 12.5% for the years 2009 to 2011. Its applicable income tax will be 25% from 2012.

Earnings and Dividends

Diluted earnings per share increased 76% to 43.14p (2007: 24.45p). In light of the strong performance of the business, the Board recommends a final dividend for 2008 of 3.5 pence per share, which with the interim dividend of 1.5 pence per share, makes the dividend for whole year is 5 pence per share, which is in line with its stated dividend policy.

Shareholders' equity

Equity of the group attributable to shareholders of the parent increased by 75% to £52.52 million in 2008 (2007: £30.09 million). Retained earnings increased 62% to £15.82 million (2007: £9.73 million).

Cash flows

Facing a global financial crisis, we made and implemented a timely cash flow management plan to further enhance the receivables management, and we strictly controlled financial risks. Adequate cash flow ensures the normal run of the Group's manufacture and operation. Net cash flows from operating activities in 2008 were £38.57 million, the net cash flow being equivalent to 383% of net profit. 

Debtor days

The average debt days reduced from 69 days in 2007 to 57 days in 2008, an improvement of 17%.

Borrowing

In 2008 the Group entered into credit agreements with Jiangyan Branch of Industrial and Commercial Bank of China, Jiangyan Branch of Agricultural Bank of China, Jiangyan Branch of China Construction Bank, and Jiangyan Branch of Bank of China, Jiangyan Branch of Bank of Communications. At 31 December 2008, the Group's short term bank borrowing is RMB 324.5 million compared with RMB 339.5 million as at 31 December 2007 (at 31 December 2008 £32.85million and at 31 December 2007 £23.28 million).

Liquidity Risk 

Liquidity risk arises from the Group's management of working capital. 

The Group's policy as regards liquidity is to ensure sufficient cash resources are maintained to meet short-term liabilities. In 2008, the Group obtained a credit line of RMB 770 million from various financial institutions which was increased by RMB 263 million, compared with 2007. Liquidity risk was greatly reduced by increasing facilities from the banks.

Foreign exchange risk 

Approximately 16% of the Group's sales were denominated in USD in 2008. The Group's policy in regard to currency risk is to limit payment terms to immediate letters of credit or prepayment before transporting goods to clients, and exchange USD to RMB through banking instruments in time which effectively minimize the exchange fluctuation impact on the Group's results.

Foreign sales in 2008 were £29.71 million, increased 329%, compared with £6.92 million in 2007. At 31 December 2008, the year-end exchange rate between RMB and Pound Sterling had appreciated by 32% to 9.8798 (2007: 14.5807). The latest report of the National Development and Reform Commission and State information Center of PRC shows that appreciation range of RMB will be 1% to 2% in 2009. We review and control foreign currency transaction and settlement risk regularly and take exchange rate movement as part of the pricing policy aiming at possible changes.

Interest rate risk

There is no significant interest rate risk for the Group, and the main interest rate risk is the rate of return on short term cash deposit and bank borrowings.

Zhou Weigang

Finance Director

Consolidated income statement  

For the year ended 31 December 2008

Consolidated balance sheet 

As at 31 December 2008

Consolidated statement of changes in equity  

For the year ended 31 December 2008

Consolidated cash flow statements 

For the year ended 31 December 2008 

Notes to the financial statements

For the year ended 31 December 2008

1. Basis of preparation

The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 31 December 2008 or 2007. The financial information for the year ended 31 December 2007 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies.

The auditors reported on the statutory accounts 2007 and their report was unqualified and did not include references to any matters to which the auditors drew attention to by way of emphasis without qualifying their report and did not contain a statement under s237(2) or (3) Companies Act 1985.

The audit of the statutory accounts for the year ended 31 December 2008 is complete. The auditors reported on those accounts; their report was unqualified and did not include references to any matters to which the auditors drew attention to by way of emphasis without qualifying their report and did not contain a statement under s237(2) or (3) Companies Act 1985. These accounts will be delivered to the Registrar of Companies following the Group's annual general meeting.

The accounting policies applied in the preparation of this financial information are consistent with those that will be set out in the annual report for the year ended 31 December 2008. However, while the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. 

The Group plans to publish full financial statements that comply with IFRSs in middle May 2009.

2. Principles of consolidation

The consolidated financial statements comprise the financial statements of the China Shoto plc and its subsidiaries as at the balance sheet date. The financial statements of the subsidiaries are prepared for the same reporting date as the parent company. Consistent accounting policies are applied for like transactions and events in similar circumstances.

All inter-group balances, transactions, income, expenses, profits and losses resulting from inter-group transactions that are recognized as assets, are eliminated in full. 

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases.

Acquisitions of subsidiaries are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus cost directly attributable to the acquisition. Identified assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date.

Any excess of the cost of the business combination over the Group's interest in the net fair value of the identified assets, liabilities and contingent liabilities represents goodwill. The goodwill is accounted for in accordance with the accounting policy for goodwill stated below.

Minority interests represent the portion of profit or loss and net assets in subsidiaries not held by the Group. These are presented in the consolidated balance sheet within equity, separately from the parent shareholder's equity, and are separately disclosed in the consolidated income statement.

The acquisition of Leadstar Enterprises Limited by China Shoto plc on 30 November 2005 has been accounted for using the principles of reverse acquisition accounting, in accordance with IFRS 3 'Business Combinations', on the basis that the management, who are the former majority shareholders of Leadstar Enterprises Limited, retained effective control of the Group. The fair value of the assets of China Shoto plc at the date of the business combination were equivalent to the fair value of the Group and the fair value of the notional number of equity instruments which would have been issued by Leadstar Enterprises Limited to acquire China Shoto plc, and therefore no goodwill arose in respect of this transaction. 

Foreign currencies 

The functional currency of the subsidiary undertakings is Renminbi ("RMB"), and the financial statements of the subsidiary undertakings have been drawn up in RMB. As sales and purchases are denominated primarily in RMB and receipts from operations are usually retained in RMB, the directors are of the opinion that RMB reflects the economic substance of the underlying events and circumstances relevant to the Group. Monetary assets and liabilities maintained in currencies other than RMB are translated into the RMB at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are translated at rates ruling on the transaction dates. All resulting exchange differences are dealt with in the income statements.

The consolidated results are presented in Sterling reflecting the Group's UK quotation and investor base. Assets and liabilities are translated into sterling at the closing rate, and all income and expenses are translated at the average rate during the financial period, being an approximation for the actual rates at the date of the transactions. All resulting exchange differences are taken to the foreign currency translation reserve within equity.

3. Segment reports

Reporting format

The primary segment reporting format is determined to be business segments as the Group's risks and rates of return are affected predominantly by differences in the products and services produced. The operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The operating businesses are all located in the People's Republic of China, and therefore geographic information is provided only in respect of the destination of sales. 

Business segments

The Group is comprised of the following business segments:

The Power Type Batteries ('PTB') business segment is comprised of power-aided bicycle batteries.

The Back up Batteries business segment includes Value Regulated Lead Acid Batteries and Flooded and Gel Batteries.

The Turbine business segment includes the development and construction of new turbines and the refurbishment and reconstruction of existing turbines. 

Allocation basis and transfer pricing

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. 

Business segments 

The following tables present certain sales, profit, asset, liability and other information regarding the Group's business segments for the years ended 31 December 2008 and 2007.

Geographical segments

All export sales originate from the Back up Batteries segment.

4. Income tax

5. Dividends

China Shoto plc declared an annual dividend of 4.5p per ordinary share amounting to £1,050,000 on 22 April 2008 which was approved by the shareholders on 22 May 2008 and declared an interim dividend of 1.5p per ordinary share amounting to £350,000 on 18 September 2008. China Shoto plc declared a dividend of 3p per ordinary share amounting to £700,000 on 26 April 2007 and the dividend was approved by the shareholders on 12 June 2007. 

6. Earnings per share from continuing operations

Earnings for the purpose of basic and diluted earnings per share are the net profit for the financial year attributable to equity holders of the parent of £10,070,000 (2007: £5,618,000).

The profit from continuing operations for the financial year attributable to equity holders of the parent is as follows: 

The weighted average number of ordinary shares used in the calculation of earnings per share from continuing operations has been derived as follows:

1,480,000 share options have not been included in the calculation of diluted EPS in 2008 because the exercise price of share option is higher than Group average market price of ordinary shares and they are antidilutive. The existence of these share options could dilute the EPS in future.

7. Disposal of a subsidiary undertaking

The Group signed a contract to dispose of Beijing Full Three Dimension Engineering Co. Ltd (FTD) on 7 November 2007 which was a 51% owned subsidiary undertaking. The disposal consideration was fully settled in cash. The net assets of FTD as of the date of disposal were as follows: 

8. Share capital