WALG.L Regulatory News (WALG)

Walcom Group Ltd - Final Results

PR Newswire

London, May 8

9 May 2018

WALCOM GROUP LIMITED

(“Walcom” or “the Company”)

Final results for the year ended 31 December 2017

CHAIRMAN’S STATEMENT

On behalf of the board of directors (the “Board”) of Walcom Group Limited (the “Company”), I am pleased to present the final results of the Company and its subsidiaries (together referred to as the “Group”) for the year ended 31 December 2017.

Results

In line with China’s slowing economy and the continued poor performance of the domestic pig farming industry, the Group’s sales in China recorded a small decrease during 2017. With the aggregated effect of greater competition in the market and escalating costs in raw materials, a loss attributable to the Company’s shareholders of HK$4.34 million (2016: profit HK$1.26 million) was incurred for the year under review. Further, the high volatility in the exchange rate of Renminbi against Hong Kong Dollar has resulted in an accounting exchange loss of HK$2.2 million (2016: profit HK$2.1 million) in foreign currency translations, which is the major cause of the set back in the Group’s 2017 annual results.

Turnover (2017: HK$44.5 million; 2016: HK$46.5 million) and gross profit (2017: HK$24.3 million; 2016: HK$27.3 million) for the year decreased by approximately four per cent. and 11 per cent. respectively. The Group reported a net loss of HK$3.94 million for the year under review as compared with a net profit of HK$1.42 million in 2016. EBITDA also recorded a loss of HK$3.16 million in 2017 (2016: profit HK$3.38 million).

A summary of the results for the period under review is set out below:

Operation and market review

As a result of the weak consumer market in China during 2017, the demand for pork and meat products remained low, which continued to drive the farmgate pig prices down. Accordingly, the pig farms and feedmills, both of which are highly cost sensitive, reduced the use of feed additive products in their feedstuffs during the period. This led to reduced demand for feed additive products, including the Group’s products. In line with these weak market conditions, the Group’s sales in the PRC decreased by two per cent. to HK$25.8 million during 2017 when compared with the HK$26.4 million in 2016.

Sales in Thailand increased by two per cent. to HK$16.9 million in 2017 (2016: HK$16.6 million), representing approximately 38 per cent. (2016: 36 per cent.) of the Group’s total sales. Although the economy in Thailand has still not recovered fully from the change of government regime in 2014, it has shown slow improvement. The increase in sales in Thailand can be attributed to an increase in consumption of the Group’s products by existing customers.

Sales in Korea decreased by 47 per cent. to HK$1.8 million in 2017 (2016: HK$3.4 million), representing approximately four per cent. (2016: seven per cent.) of the Group’s total sales. The Group’s distributor in Korea lost a major customer during 2017 which caused the decline in the Group’s sales in the country.

The Group’s financial statements are reported in Hong Kong Dollars (“HKD”). During the period under review, the average monthly exchange rate of HKD currency appreciated approximately one per cent. against China’s Renminbi (“RMB”). As approximately 58 per cent. of the Group’s sales were transacted in RMB, the appreciation of the HKD has had a negative exchange impact on the Group’s 2017 revenue. As mentioned above, during the years 2016 and 2017, the RMB exchange rate has been highly volatile against the HKD and this has caused an accounting exchange loss of HK$2.2 million in 2017, comparing to an accounting exchange profit of HK$2.1 million in 2016, in translating assets and liabilities within the Group.

Recent Developments

As mentioned in my statement in the 2017 half-yearly report, the Group has focused on increasing sales penetration of existing big customers which have low usage of the Group’s products and also those integrated meat producing companies whose businesses include feed milling, pig farming, pig slaughtering and pork product production. Enhanced by other sales tactics, this sales strategy has successfully gained some sales traction during the year, although more time is needed for it to become fruitful.

Patents

At the end of 2017 the Group held 36 granted patents in respect of:

Most of the patents for which the Group has applied in recent years have been granted. The Directors believe that there is wide patent coverage in jurisdictions where there are significant demands for the Group’s products. Some patents, which the management believes have a lower chance of commercialisation, were dropped during the year.

Debt

As at the year end, the Group had a short-term bank loan of HK$2.4 million and two short-term loans amounting to an aggregate of HK$0.5 million from minority shareholders of its subsidiary in Thailand, both of which were used to finance the Group’s general working capital. In addition, as announced on 14 February 2018, the Group has negotiated and agreed a new secured three-year RMB 2 million revolving credit facility via its wholly owned subsidiary Shanghai Walcom Bio-Chem Co., Ltd. The funds will be used to finance the Group’s general working capital.

Dividend

The Directors do not recommend any dividend payment for the year ended 31 December 2017.

Annual General Meeting

The Company’s annual general meeting (the “AGM”) will be held at the offices of the Company’s solicitors, Reeds Smith Richards Butler, in Hong Kong at 2:30 pm on Thursday 14 June 2018. A notice of the AGM will be sent to the Company’s shareholders, along with the 2017 annual report and financial statements, during the third week of May 2018.

Outlook

A new term of the PRC government, which is basically a continuation of the leadership from the last administration, has started in 2018. Therefore it is highly likely that the policy of structural transformation in the country’s economy, which was brought forward from the previous administration, will continue in the coming years. In line with the last few years, this policy of economic structural transformation is expected to cause slower growth in the Chinese economy for the foreseeable future. The trade war between the governments of China and the United States of America has been escalating and the outcome has yet to be confirmed. In addition, the expected interest rate hikes in the United States of America this year has added uncertainty to the global economy. With all these factors in mind, the Board believes 2018 will be another challenging year for the Group as the Board anticipates a volatile global economic outlook for the year. Although the increase in the raw material costs and the production costs of the Group’s products have become less significant than 2017, they nevertheless will still have an adverse impact on the Group’s gross profit margin this year.

On behalf of the Board, I would like to express our sincere thanks to the management team and staff, professional advisers and shareholders for their continued support and contributions during the year.

Frankie Y. L. Wong

Chairman

9 May 2018

Further enquiries:

Consolidated statement of profit or loss

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

Consolidated balance sheet as at 31 December 2017

(Expressed in Hong Kong dollars)

Consolidated statement of changes in equity

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

Consolidated statement of cash flows

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

Notes to the consolidated financial statements

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

1 Publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory accounts.

The financial information for the year ended 31 December 2017 has been extracted from the Company’s financial statements to that date, which have received an unqualified auditors’ report.

2 Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). These consolidated financial statements also comply with the applicable disclosure provisions of the AIM Rules for Companies of the London Stock Exchange. The financial statements have been prepared on a historical cost basis.

3 Revenue

The principal activities of the Group are manufacturing and sale of chemical feed additive products.

Revenue represents the sales value of goods supplied to customers less returns, discounts, value added tax and sales taxes. 

4 Other income

Note: During the years ended 31 December 2017 and 2016, the Group received grants from local government bodies in the PRC, which aimed at the technology development of the Group.

5 Net finance expense

6 (Loss) / profit before income tax

(Loss) / profit before income tax is stated after charging the following items:-

(a) Staff costs (including directors’ emoluments)

(b) Other items

7 Income tax (credit) / expense

(a) Taxation for the Company

No provision for profits tax has been made for the Company as it is exempted from taxation in the British Virgin Islands.

No deferred taxation has been provided as the Company has no material unprovided deferred tax assets or liabilities which are expected to be crystallised in the foreseeable future (2016: Nil).

(b) Taxation for the Group

(i) Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rate of taxation prevailing in the countries in which the Group companies operate. The income tax expense stated in consolidated statement of profit or loss and other comprehensive income represented the corporate income tax and foreign enterprise income tax arisen from the business of subsidiaries operating in Thailand and Shanghai respectively.

Hong Kong Profits Tax is calculated at 16.5% (2016: 16.5%) of the estimated assessable profit for the year. However, no provision for Hong Kong profits tax has been made (2016: Nil) as the Group’s assessable profit subject to Hong Kong profits tax for the year is fully set-off by tax loss brought forward from last year.

Provision for foreign enterprise income tax (“FEIT”) in the People’s Republic of China (“PRC”) has been made at 25% (2016: 25%) as Shanghai Walcom Bio-Chem Co., Ltd. (“Shanghai Walcom”), a wholly owned subsidiary operating in Shanghai, has assessable profits for the year.

Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai Walcom is not granted tax relief whereby the applicable income tax rate was 25% for the years 2016 and 2017.

Thailand Corporate Income Tax is calculated at 20% (2016: 20%) of the net profit for the year.

(b) Taxation for the Group (continued)

(ii) A reconciliation between the Group’s income tax (credit) / expense and the accounting (loss) / profit, at the applicable tax rate, is set out below:-

(iii) At 31 December 2017, the Group has unused tax losses of approximately HK$45,585,000 (2016: HK$47,905,000) available for offset against future profits. During the year, deferred tax asset of approximately HK$1,073,000 (2016: Nil) has been recognised in respect of such tax losses. No deferred tax asset has been recognised in respect of the remaining HK$34,085,000 due to the unpredictability of future profit streams. The unrecognised tax losses may be carried forward indefinitely.

8 Loss attributable to shareholders

Loss attributable to owners of the Company for the year ended 31 December 2017 dealt with in the financial statements of the Company was approximately HK$239,000 (2016: Profit of HK$55,000).

9 Dividends

The Company does not recommend the payment of any dividend for the year ended 31 December 2017 (2016: Nil).

10 (Losses) / earnings per share

There is no difference between basic and diluted (losses) / earnings per share. The basic and diluted losses per share for the year ended 31 December 2017 are calculated by dividing the Group’s loss attributable to owners of the Group of HK$4,341,039 (2016: profit of HK$1,263,286) by the weighted average number of 68,834,388 ordinary shares (2016: 68,834,388 ordinary shares). The computation of diluted (losses) / earnings per share does not assume the exercise of the Company’s outstanding share options because the exercise price of the options is higher than the average market price for the years ended 31 December 2017 and 2016.

11 Segment reporting

(a) Segment reporting

Information reported to the Executive Directors of the Company, being the chief operating decision makers (“CODM”), for the purpose of resource allocation and assessment of segment performance focuses on type of goods delivered.

The executive directors have identified that, the Group has only one reportable operating segment, which is the manufacture, distribution and sales of chemical feed additive products. Since this is the only reportable operating segment of the Group, no further operating segment analysis thereof is presented.

(b) Geographical information

The following table sets out information about the geographical location of (i) the group’s revenue from external customers and (ii) the group’s fixed assets, intangible assets, goodwill and other current and non-current assets. The geographical location of customers is based on the location at which the services were provided or the goods delivered. The geographical location of the assets is allocated based on the operations of the segment and the physical location of the asset.

(i) Sales revenue by geographical location of customers

(b) Geographical information (continued)

(ii) Segment assets by geographical location of the assets

(c) Information about major customers

The Group’s customer base is diversified and includes only three customers with whom transactions have exceeded 10% of the Group’s revenue.

12 Property, plant and equipment

On 18 July 2016, a subsidiary of the Group and the non-controlling interests (the “Joint Operators”) entered into an agreement pursuant of which the Joint Operators jointly purchased one piece of land in Samut Sakorn Province, which is located in the outskirt area of Bangkok, Thailand. The Group and the non-controlling interests hold 66.67% and 33.33% interests in the land respectively after completion of the purchase. The transaction constituted to a joint arrangement.

As at 31 December 2017, the carrying amount of HK$4,666,918 represented the Group’s interest of 66.67% in the land (2016: HK$3,496,822).

13 Patents

The remaining amortisation period of the patents ranged from 3 years to 10 years. The amortisation charge is included in selling and distribution expenses in the consolidated statement of profit or loss and other comprehensive income.

14 Goodwill

15 Investments in subsidiaries

(a) The amounts due from subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

(b) Listed below are the Group’s principal subsidiaries:

* The deferred shares, which are not held by the Group, carry practically no rights to dividends nor to receive notice of, nor attend or vote at any general meeting of the subsidiaries nor to participate in any distribution or winding up.

16 Inventories

The cost of inventories sold recognised as expenses and included in cost of sales amounted to HK$19,190,422 (2016: HK$17,675,779).

17 Trade and other receivables

All trade and other receivables are expected to be recovered within one year.

The movement in the provision of impairment for doubtful debts during the year, including both specific and collective loss components, is as follows:

At 31 December 2017, the Group’s trade receivables of HK$508,758 (2016: HK$508,758) have been outstanding for a certain period of time. The management assessed that only a portion of the receivables is expected to be recoverable. No further individual provision of impairment for doubtful debts was provided in the year ended 31 December 2017 (2016: Nil). 

The Group does not hold any collateral over these balances.

Majority of the Group’s revenue are with credit terms ranging from 30 to 60 days. Ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows:

Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are considered fully recoverable. The Group does not hold any collateral over these balances.

(c) The carrying amounts of trade receivables are denominated in the following currencies:

18 Cash and bank balances

Included in the cash and cash equivalents of the Group, HK$1,420,165 (2016: HK$4,562,565) were denominated in RMB and kept in PRC. The remittance of these funds out of the PRC is subject to the foreign exchange control restrictions imposed by the PRC government.

As at 31 December 2017, HK$116,377 (2016: HK$105,210) denominated in THB in a saving bank account in Thailand has been pledged to a bank as security to obtain a facility under a forward exchange contract.

Included in cash and cash equivalents in the consolidated balance sheet are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

19 Trade and other payables

All of the trade and other payables are expected to be settled within one year.

The carrying amounts of trade payables are denominated in the following currencies:

20 Loans from non-controlling interests

At 31 December 2017, the loans from non-controlling interests were unsecured and repayable as follows:

On 28 November 2017, an indirectly held subsidiary of the Group situated in Thailand has obtained borrowings of HK$478,046 denominated in THB with maturity of 1 year. The borrowing was unsecured.

21 Bank borrowings

At 31 December 2017, the bank borrowings were unsecured and repayable as follows:

During the 2017 reporting period, the Group fully repaid a bank borrowing of HK$2,235,886 denominated in RMB, which was unsecured.

On 14 November 2017, an indirectly held subsidiary of the Group situated in the PRC has obtained a bank borrowing of HK$2,392,631 denominated in RMB with maturity of 1 year. The bank borrowing was unsecured.

22 Capital and reserves

(a) Share capital

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.

(b) Nature and purpose of reserves

Company

(i) Share premium

The application of the share premium account is governed by the Memorandum and Articles of the Association of the Company. In accordance with the Companies Law of the British Virgin Islands, the share premium account is distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. The share premium may also be distributed in the form of fully paid bonus shares.

(ii) Merger reserve

The merger reserve arose in the Group reorganisation before Admission to AIM. There was no movement during the year.

(iii) Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 2(u) to the report and accounts.

(iv) Surplus reserve

Surplus reserve of the Group currently comprises statutory surplus reserve. In accordance with the laws and regulations in the PRC, the PRC entities are required to appropriate 10% of their profit after tax, after offsetting any prior years’ losses, to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the PRC entities’ registered share capital, any further appropriation is optional. The statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by issuing new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the remaining balance of the statutory surplus reserve after such issue is not less than 25% of share capital.

(v) Capital reserve of the Company

The capital reserve comprises the followings:

(c) Distributability of reserves

Save as mentioned in note 22(b)(i), no reserves were available at 31 December 2016 and 2017 for cash distribution as the Company recorded accumulated losses for the year.

(d) Capital management

The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders, by pricing products and services commensurately with the level of risk and by securing access to finance at a reasonable cost.

The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes judgements to the capital structure in light of changes in economic conditions.

Consistent with industry practice, the Group monitors its capital structure using a gearing ratio, which is total debts divided by adjusted capital. Total debts represent total bank overdrafts and borrowings. Adjusted capital includes all components of shareholders’ equity less unrealised reserves.

In order to maintain or adjust the gearing ratio, the Group may issue new shares, return capital to shareholders, raise new debt financing or sell assets to reduce debt.

The gearing at 31 December 2017 and 2016 were 21% and 12% respectively, calculated as follows :

23 Deferred tax assets

The analysis of deferred tax assets is as follows:

The movement in deferred income tax assets is as follows:

24 Share option scheme

A share option scheme (the “scheme”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives and rewards to any director of any member of the Group who is in service with any such Company or any employee of any member of the Group (the “eligible directors and employees”).

The maximum number of shares in respect of which options or rights to subscribe for shares pursuant to the scheme when aggregated with number of shares in respect of which options or rights to subscribe for shares has been granted in previous years under the scheme and other share option or share incentive plan adopted by the Company shall not exceed 10% of the shares issued by the Company from time to time. An option share shall only be exercisable (a) after one year from date of grant, (b) before the expiry of the option period, (c) at a time permitted by the Model Code for Securities Transactions by Directors of Listed Issuers, and (d) if any performance conditions imposed pursuant to the scheme rules have been fulfilled or obtained.

As at 31 December 2017, 1,830,000 ordinary shares options have been granted to directors and employees of the Company under the Share Option Scheme. During the year, 1,500,000 options were lapsed and no other options were exercised or cancelled.

(a) The terms and conditions of the grants that existed during the year are as follows, hereby all options are settled by physical delivery of shares:

(b) Fair value of share options

The fair value of the share options granted during the year ended 31 December 2010 have been valued by an independent qualified valuer using Binomial Option Pricing Model.

25 Share award plan

The Company’s share award plan (the “plan”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives or rewards to selected PRC employees and officers of the Group but excluding officers of the Company (the “eligible PRC officers”).

Prior to the Admission to AIM, 433,163 ordinary shares were transferred to Walcom China Staff Incentive Limited (the “trustee”) by certain of the then existing shareholders of the Company, to hold pursuant to the terms of the trust deed applicable to the plan. These shares are held on trust for the eligible PRC officers.

The plan shall be valid and effective for a term of ten years from the date of adoption and it shall be subject to the administration of a committee delegated from time to time by the board and the trustee in accordance with the provisions of the trust deed and plan rules. The term of the plan was extended for another ten years and the board of directors was empowered to terminate the plan before its expiry in accordance with the plan rules. There were 70,163 (2016: 70,163) ordinary shares held by the trustee at 31 December 2017.

26 Related party transactions

The management considered the ultimate controlling party since date of incorporation to 31 December 2017 was Mr. Francis Chi.

Balances with related parties are disclosed in the balance sheet and in note 15.

27 Commitments

(a) Capital commitments

Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:

(b) Operating lease commitments

The future aggregate minimum lease rental expenses in respect of the manufacturing plants and office premises under non-cancellable operating lease are payable in the following periods:

28 Reconciliations of liabilities arising from financing activities

29 Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities with the next financial year are discussed below.

(a) Patents

The carrying amount of patents representing mainly legal costs for application of patents in respect of the various uses of formulation of cysteamine in various regions is HK$468,463 (2016: HK$1,814,096). The Group carried an impairment test based on a variety of assumptions of the possibilities that the pending patents could be circumvented and concluded that no impairment was required. Should the pending patents be circumvented, for example by an alternative formulation of cysteamine, then an impairment might arise and could have significant effect on the carrying amount of the patents stated at the balance sheet date.

(b) Depreciation

The measurement determines the estimated useful lives and residual values for its property, plant and equipment. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives. The Group reviews annually the useful life of an asset and its residual value, if any. The depreciation expense for future periods is revised if there are significant changes from previous estimation.

(c) Impairments

In considering the impairment loss that may be required for certain property, plant and equipment, investments in subsidiaries of the Group, recoverable amount of the asset needs to be determined. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for these assets may not be readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to items such as level of turnover and amount of operating costs. The Group uses all readily available information in determining an amount that is reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of items such as turnover and operating costs.

Impairment losses for bad and doubtful debts are assessed and provided based on the directors’ regular review of ageing analysis and evaluation of collectability. A considerable level of judgement is exercised by the directors when assessing the credit worthiness and past collection history of each individual customer.

An increase or decrease in the above impairment loss would affect the net (loss) / profit in the year and in future years.

(d) Income taxes

Determining income tax provisions involves judgement on the future tax treatment of certain transactions and interpretation of tax rules. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation.

Deferred tax assets are recognised for tax losses not yet used and temporary deduction differences. As those deferred tax assets can only be recognised to the extent that it is probable that future profit will be available against which the unused tax credit can be utilised, management’s judgement is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered.

(e) Inventory provision

The Group performs regular reviews of the carrying amounts of inventories with reference to aged inventories analyses, projections of expected future saleability of goods and management experience and judgement. Based on this review, write-down of inventories will be made when the carrying amounts of inventories decline below their estimated net realisable value. Due to changes in customers’ performance, actual saleability of goods may be different from estimation and profit or loss could be affected by differences in this estimation.

30 Reconciliation of (loss) / profit before income tax to EBITDA

EBITDA is defined herein as earnings before depreciation, amortisation, interest and tax, plus specific charges which are considered non-recurring in nature. Specific charges include impairment loss in value and gain/loss in disposal of non-current assets, and amortization of fair value of share-based compensation. EBITDA is not a recognised term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.