Interim Results

23 Sep 2008 07:00



ET-CHINA.COM INTERNATIONAL HOLDINGS LIMITED

("Et-china", "the Group" or "the Company")

Interim results for the six months ended 30 June 2008

Et-china, a leading travel services group in the fast growing region of South China, announces its un-audited interim results for the six months ended 30 June 2008.

Highlights:

*figures in Sterling are for illustrative purposes only, all translated using the RMB exchange rate of 13.7RMB = £1

Matthew Ng, President and Chief Executive Officer, commented: 

"I believe we have performed well in the face of a large number of external adverse factors beyond our control which created the most challenging operational environment for the travel industry in China since the SARS outbreak in 2003. Despite this, underlying revenue increased by 21% in the half year. 

"The new funds raised in May have since then enabled us to significantly uplift our marketing efforts and we are already seeing our revenues rise correspondingly as a direct result, although it will be 2009 before we see a material impact. 

"The potential of the Chinese travel sector remains significant and our strategically important position in the South region of China leaves us well placed to capitalise in any sector consolidation."

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Chairman's Statement

Results

I am pleased to report that the Group has made good progress in developing its business in the six months to 30 June 2008 despite a large number of external adverse factors beyond the Group's control which together have created the most challenging operational environment for the travel industry in China since the SARS outbreak in 2003.

As stated at the time of the full year results, travel activity around the Chinese New Year, which is traditionally a high point in the year, was seriously affected by some of the worst cold weather conditions China has seen in years. Intensified security surrounding the Beijing Olympic Games, which caused serious delays at airports, and some political unrest timed to coincide with the Games, affected many domestic travelers while May's tragic earthquake in Sichuan Province and the serious flooding in several areas in June inevitably caused further disruption and deterred people from leisure and business travel. 

Against this exceptional background we still achieved an underlying growth in revenue of around 21% with reasonable growth coming from GZL, which is one of the largest travel package holiday providers in South China providing tour packages through its 160 high street stores and its 24x7 call centre. Both our package tour and FIT businesses were affected by the issues outlined above yet the business still progressed in the six months.

Although the results for the interim period fell short of our original expectations because of these exceptionally challenging conditions, I believe that the Group with its above average levels of growth has demonstrated its inherent strengths in the period and achieved a satisfactory performance.

Stated revenue for the six months to 30 June 2008 rose sharply to RMB 776.7 million (£56.7 million) from RMB 242.7 million (£17.7 million) in the same period of 2007 although this only included a two months contribution from GZL, the tour operating business which was acquired in April 2007. On a normalized basis, Group revenue has grown by 21%. Gross operating profit was RMB 85.2 million (£6.2million) (2007: RMB 22.9 million (£1.7 million)), up by 35% on a normalized basis. The loss before tax was RMB 19.9 million (£1.5million) (2007: RMB 19.0 million (£1.4 million)). 

Within GZL, the strongest growth in revenue came from Outbound Tours which achieved a 33.4% rise in revenue to RMB 424.5million (2007: RMB 318.3million). These figures reflect the ever-increasing appetite for overseas travel amongst Chinese nationals which is being driven by a growing amount of paid leave amongst employees and the authorities actively encouraging their citizens to travel.

Turning to our e-business division, Et-china revenues increased 41% to RMB 27.1million (2007:RMB19.2million) an indication of the robustness of our business model as customers continued to travel to business conferences despite the adverse weather and natural disasters over the period.

A significant milestone was achieved towards the end of the period in June, when the Group announced that it had entered into a partnership with ICBC, China's largest corporate bank, to provide a dedicated travel services e-booking and payment platform to both ICBC's individual and corporate customers. 

The platform was rolled out nationally in July, significantly raising awareness of the Et-china brand across China and giving the Group access to ICBC's 2.7 million corporate customers, 3 million premium account holders and 170 million individual customers nationwide.

Funding

In May 2008, the Group raised £5.5 million of new funds through the issue of Zero Coupon Convertible Bonds to three investors; Och-Ziff, Ellerston Capital and LFG Group. This fresh funding was put in place to expand our FIT marketing as well as to pursue potential strategic acquisitions.

Increased marketing spending was immediately initiated with an investment of RMB4 million (£290,000) in May alone, an amount that matched marketing spend for the whole of 2007. We have refined our strategy to include more on-line as opposed to print marketing and we are already seeing the benefits in increased activity and higher revenue. This should accelerate in the second half of the year but the material revenue impact will not be felt until 2009.  

At the 30 June 2008 the Group held cash and cash equivalents of RMB 233.9 million (£17.1million) (2007: RMB 127.9 million (£9.3million)).

Outlook

Although the exceptional conditions which prevailed in the first half resulted in revenue growth falling below our original targets, I believe the Group has performed well in those challenging months and now, with the successful closing of the Beijing Olympics, the management team is looking forward to capitalising on the pent up demand for travel both within and outside of China which should have a positive impact across all our activities.

The fundamental drivers for growth in the Chinese travel market remain very strong. In recent months the Government has continued to award more countries with Approved Destination Status, including Taiwan, USA and Israel all of which, we believe, should prove to be popular destinations for group travel and frequent independent travelers. The Government is well prepared to meet the requirements of their projected growth in travel, having set in place an extensive infrastructure programme, including the building of 14 new airports by 2020. In addition to these factors, Chinese businesses are increasingly introducing paid leave for their employees which we expect to increase the appetite for travel amongst Chinese citizens.

Within the overall Chinese travel market, South China is a particularly strong area of potential growth and this is where Et-china holds its strategically important market position. The issues which affected the whole industry in the first half have certainly increased the consolidation potential within the sector and we believe Et-china is in an excellent position to play a key role in driving any sector consolidation.

Having raised fresh funds in May, the Group will continue to make a meaningful investment in marketing and this, together with the forging of additional marketing alliances, such as the one with ICBC, should position the FIT business to accelerate its growth although the benefits of the marketing campaign will not make a material impact until 2009. 

The Board has great confidence that the outlook for the Chinese travel sector remains highly attractive on any medium and long term view and the Group is particularly well positioned strategically to benefit from any corporate activity from consolidation.

Ian Smith 

Chairman

23 September 2008

Notes to the consolidated financial statements

1. Reporting entity and organisation

Et-china.com International Holdings Limited (the "Company") was incorporated and registered in Jersey Channel Islands on 29 May 2007 under the Companies' (Jersey) Law 1991 as a public no par value company limited by shares with the register number 97573. The address of the Company's registered office is 47 Esplanade, St Helier, Jersey, JE1 0BD Channel Islands. The consolidated financial statements of the Company as at and for the year ended 30 June 2008 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in associates and two joint ventures companies. The financial statements were approved by the Board of Directors on 22 September 2008.

The Group is principally engaged in the provision of travel related services including air-ticketing, train-ticketing, hotel reservation, provision of package tour services, conference services and other related services as well as property development in the People's Republic of China (the "PRC").

The Group conducted its operations in the PRC through contractual arrangements with the shareholders of Guangzhou Yite Information Services Limited, ET-China Investment and Consulting Limited, Guangdong Sanli Air Service Co. Limited, Guangzhou Yinhailang Air Service Co. Limited, and ET-China Travel Service Co., Limited ("the PRC Companies"). The Group has no direct ownership interest or voting rights in the PRC Companies. Instead, equity interests in the PRC Companies are held by individual shareholders.

The business operations together with related assets and liabilities of the PRC Companies are operated by the Group pursuant to certain contractual arrangements, effected from the date of incorporation/acquisition of the PRC Companies, which enable the Group to control the operating and financial policies and assume the residual risk of these entities.

Based on the legal advice of PRC counsellor, the contractual arrangements above give the Group the contractual entitlement to:

a) receive the economic benefit of;

b) control the voting rights over;

c) exercise all other rights over; and

d) to transfer at any time to another person or company entitled to hold such shares under PRC law 

Based on legal opinion that the contractual arrangements are effective in providing control, these PRC companies are accounted for as wholly-owned subsidiaries of the Company.

2. Basis of preparation 

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") promulgated by the International Accounting Standards Board ("IASB").

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following:

Functional and presentation currency

These consolidated financial statements are presented in Renminbi yuan ("RMB"), which is the functional currency of the group entities located in the PRC, rounded to the nearest thousand.

3. Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, and have been applied consistently by Group entities.

A. Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

B. Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.

C. Joint ventures

Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions.

D. Transactions eliminated on consolidation

Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

E. Property, plant and equipment

(1) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses.

Construction in progress represents software, IT servers, and is stated at cost less impairment losses.

Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

(2) Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of property, plant and equipment.

The estimated useful lives are as follows:

Depreciation methods, useful lives and residual values are reassessed at the reporting date.

The book value of the plant still adopts the fair market value as of 31 December 2007. 

F. Intangibles assets

(1) Goodwill

Goodwill (negative goodwill) arises on the acquisition of subsidiaries, associates and joint ventures.

Goodwill represents the excess of the cost of the acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. 

Goodwill is measured at cost less accumulated impairment losses. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment.

The book value of goodwill is still expressed in the fair value as of 31 December 2007.

(2) Amortisation

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use.  The estimated useful lives are as follows:

G. Investment properties

Investment properties are properties held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the supply of services or for administrative purposes. The Group has chosen the cost model to measure its investment properties.

Inventories, Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Cost is determined by apportionment of the total land and development costs, and an appropriate proportion of production overheads and borrowing costs. Net realisable value represents the estimated selling price in the ordinary course of business, less the estimated costs to be incurred in selling the properties.

The book value of investment property still adopts the fair market value as of 31 December 2007.

Other investment

Other investment of RMB 59.712 million refers to the pre-IPO investment in the department store GrandBuy calculated by the period-end closing unit price RBM 24.88, which takes the impairment into consideration. 

I. Revenue

(1) Commission for travel services

The Group receives commission from travel suppliers for air-ticketing, train-ticketing and hotel reservations through the Group's service network. Commissions from ticketing services are recognised once tickets are issued and delivered to customers. Commissions from hotel reservation services are recognised once hotel customers have completed their stay at the relevant hotel. The revenue recognised is stated before deducting commission payable to sub-agents as the Group acts in the capacity of a principal in these transactions. The commission payable to sub-agents are recognised as direct operating costs.

(2) Service income from package tours and conference 

The Group receives service fees from individual customers, corporate customers and travel agencies for package tour services and conference organisation. Service income from package tour services are recognised after the tours have returned and the services have been rendered. Service income from conference is recognised once the conference is completed. Revenue recognised is the gross amount of service fee net of any trade discounts, as the Group acts as principal in these transactions.

(3) Sale of properties 

Revenue arising from the sale of properties held for sale is recognised upon the signing of the sale and purchase agreement or the issue of a completion certificate by the relevant government authorities, whichever is later. Deposits and instalments received on properties sold prior to the date of revenue recognition are included in the balance sheet under other payables.

(4) Online ticket sales support

Revenue from online ticket sales support services is recognised upon performance of the services and is calculated by reference to the sales volume handled.

(5) Rental income 

Rental income is recognised in profit or loss on a straight-line basis over the term of the lease.

This is un-audited consolidated financial report produced by the management. To fully understand the company's business and its performance, ET-China.com International Holdings Limited suggest all readers refer to the 2007 annual report and its notes at the company website www.et-chinalimited.com