Financials
Profit and Loss
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PERFORMANCE REVIEW
(A) Revenue
A breakdown of the Group's revenue for 1st Qtr 2008 and 1st Qtr 2007 is summarised as follows:
Overall
The Group's revenue for the first quarter ended 31 March 2008 (''1st Qtr 2008'') rose RMB18.3 million or 45%, from RMB40.6 million in first quarter ended 31 March 2007 (''1st Qtr 2007'') to RMB58.9 million in 1st Qtr 2008. The higher revenue was achieved on the back of higher contributions from all segments, and in particular, the Wastewater segment which recorded a surge in revenue of 523%..
Water Purification
Sales from the Water Purification Treatment segment increased by RMB6.0 million or 16.5%, from RMB36.4 million in 1st Qtr 2007 to RMB42.4 million in 1st Qtr 2008, as more traditional power plant water purification projects with higher value were carried out in 1st Qtr 2008 as compared to 1st Qtr 2007. Sales in 1st Qtr 2008 include contributions from our notable third nuclear power plant desalination project (i.e. Hongyan River Project which is worth RMB59 million) secured during 1st Qtr 2008. In addition, there is an increased contribution from the Group's municipal tap water business as the Group's venture into the tap water industry gains momentum.
Wastewater
The Group's Wastewater Treatment segment has also recorded a surge in revenue, from RMB0.4 million in 1st Qtr 2007 to RMB2.5 million in 1st Qtr 2008. This is attributed largely to contributions from the Group's wholly-owned subsidiary, Wuhan Xincheng Wastewater Treatment Co., Ltd (''Wuhan Xincheng''), which was acquired on 11 May 2007. In addition, sales from the Wastewater Treatment segment in 1st Qtr 2008 was boosted by increased contributions from Engineering, Procurement and Commissioning (''EPC'') sales on one of the Group's Build-Operate-Transfer (''BOT'') wastewater projects. In contrast, there were minimal contributions from such EPC sales on BOT projects in 1st Qtr 2007.
Consultancy and Others
Sales from the Consultancy and Others segment increased RMB10.2 million or 265%, from RMB3.8 million in 1st Qtr 2007 to RMB14.0 million in 1st Qtr 2008, mainly due to increased contributions from high-margin consultancy projects and management of water treatment plant. With our long track record and solid technical expertise, Asia Water is seeing an increase in demand for our consultancy services for the design and implementation of traditional power plant water purification systems, as well as large-scale municipal water treatment system although such projects are typically expected to be ad hoc in nature.
(B) Gross Profit/Gross Profit Margin
A breakdown of the Group's gross profit and gross profit margins for 1st Qtr 2008 and 1st Qtr 2007 is summarised as follows:
Overall
Group's gross profit margin has overall improved by 20.7%, from 9.4% in 1st Qtr 2007 to 30.1% in 1st Qtr 2008 as the Group continues to centralize its procurement function with its enlarged operations. Overall gross profit margin in 1st Qtr 2008 has also improved over the full year FY2007 overall gross profit margin of 25.4% achieved in FY2007. In 1st Qtr 2008, the Group also benefited from the increase in gross profit margin for the Wastewater Treatment and Water Purification segments.
Water Purification
Gross profit margin from the Water Purification Treatment segment has increased from 1.0% in 1st Qtr 2007 to 8.5% in 1st Qtr 2008. Comparing to 1st Qtr 2008, gross profit margin in 1st Qtr 2007 was lower due mainly to:
(i) Initial high estimated total cost for certain projects
In accordance with Financial Reporting Standard 11 – Construction Contracts (“FRS 11''), the Group recognizes contract revenue to the extent of contract costs incurred where it is probable those costs will be recoverable and based on the percentage of completion method. The stage of completion is measured by reference to the contract costs incurred to date to the estimated total costs for the contract.
In 1st Qtr 2007, contract revenues for certain projects were recognised based on relatively higher initial estimated total costs, leading to a correspondingly lower contract revenues being recognised. In the second half of FY2007, estimated total costs for these projects were revised downward to reflect the lower actual costs incurred, which were achieved through ongoing improvements in the design and implementation of the projects. This has led to relatively greater amount of contract revenue being recognised towards the end of FY2007, resulting in an overall gross profit margin of 18.9% for the year ended 31 December 2007.
(ii) Lower tap water tariff in 1st Qtr 2007
In the second half of FY2007, there was an upward revision in tap water tariff for one of the Group's subsidiaries. Hence, revenue contribution from our tap water business is relatively higher in 1st Qtr 2008 (i.e. after tariff revision), compared to 1st Qtr 2007 (i.e. before tariff revision).
Overall, gross profit margin for our Water Purification segment in 1st Qtr 2008 was lower compared to FY2007 gross profit margin of 18.9%, as a result of (i) increased competition in the traditional power plant water purification industry and (ii) increase in costs associated with rising material prices.
Wastewater
Gross profit margin from the Wastewater Treatment segment increased from 13.6% in 1st Qtr 2007 to 48.4% in 1st Qtr 2008, due mainly to contributions from the management and operations of a wastewater treatment plant (namely Wuhan Xincheng), which yields higher margins. Wuhan Xincheng was acquired by the Group in May 2007.
Consultancy and Others
Gross profit margin for Consultancy and Others segment remained relatively unchanged at a high margin of 88.2% in 1st Qtr 2008 compared to 88.8% in 1st Qtr 2007.
(C) Other Income/Expense
Other income of RMB120,000 in 1st Qtr 2007 comprised mainly of income earned from installation of water meters and repair and maintenance work. Net other expense of RMB44,000 in 1st Qtr 2008 relates mainly to additional repair costs incurred in connection with water meters installation works performed in FY2007.
Selling and distribution expenses increased by approximately 63.5% from RMB1.7 million in 1st Qtr 2007 to RMB2.8 million in 1st Qtr 2008, due mainly to higher staff costs and selling and distribution related expenses incurred by 8 new subsidiary companies incorporated or acquired after 1st Qtr 2007.
(D) Selling and Distribution Expenses & Administrative Expenses
Administrative expenses increased by approximately 225% from RMB3.2 million in 1st Qtr 2007 to RMB10.4 million in 1st Qtr 2008, due mainly to (i) stock option expenses of RMB3.1 million recorded (ii) increase in allowance for doubtful debts provided and (iii) an increase in expenses contributed by 8 new subsidiary companies incorporated and/or acquired after 1st Qtr 2007.
(E) Financial Expenses/Income
Financial expenses increased from RMB3.8 million in 1st Qtr 2007 to RMB14.2 million in 1st Qtr 2008, due mainly to:
- interest expenses recognised in connection with the draw down of Series 1 Bonds of USD30 million draw down on 13 December 2007;
- an increase in short-term borrowings to facilitate working capital requirements; and
- an increase in project loans being drawn down by certain subsidiaries subsequent to 1st Qtr 2007, with the commencement of projects.
Financial income increased by 22.8%, from RMB1.7 million in 1st Qtr 2007 to RMB2.0 million in 1st Qtr 2008, due mainly to financial income on construction services of a wastewater treatment plant, Wuhan Xincheng (acquired by the Group in May 2007) in connection with the adoption of INT FRS 112 Service Concession Agreements ("INT FRS 112").
(F) Non-cash fair value gain - Derivative instrument
This represents the non-cash fair value gain recognised in connection to the mark-to-market treatment of the conversion option, arising in conjunction with the draw down of Series 1 Junior Bonds in December 2007. Hence, there was no such gain/loss recognised in 1st Qtr 2007.
(G) Tax Expense
Tax expense increased from RMB0.2 million in 1st Qtr 2007 to RMB3.0 million in 1st Qtr 2008, leading to a higher effective tax rate of 25.9% in 1st Qtr 2008, compared to the effective tax rate of 21.5% in 1st Qtr 2007. The increase is due mainly to (1) non-offsetting of tax expenses from profitable subsidiaries against subsidiaries that recorded a loss for the same period (2) Wuhan Kaidi Water is entitled to tax concession in the form of a reduced tax rate of 15% (as compared to the statutory tax rate of 30%) as it is categorised as enterprises operating in a high-tech industry. However, the tax concession for Wuhan Kaidi Water has ended in FY2007, being its fifth profit-making year. Accordingly, Wuhan Kaidi Water's profits are subject to the revised tax rate of 18% in FY2008 and the tax rate will be gradually revised upwards to reach 25% in FY2012.
(II) BALANCE SHEET
(H) Property, plant and equipment
Property, plant and equipment remained relatively unchanged in 1st Qtr 2008 compared to FY2007.
(I) Intangible assets
Bulk of the intangible assets are recognised in respect of construction of water treatment plants by our subsidiaries (namely Tianmen Kaidi and Lv Liang Xinya) in accordance with INT FRS 112 and remained relatively unchanged in 1st Qtr 2008 compared to FY2007. INT FRS 112 requires the recognition of construction revenue and the corresponding financial receivables and/or intangible asset for public-to private service concession arrangements if:
- the party that grants the service arrangement (the "grantor") controls or regulates the nature of services the entity (the "operator") must provide with the infrastructure asset, the users and the pricing of the services; and
- the grantor controls, through ownership, beneficial entitlement or otherwise, any significant residual interest in the infrastructure asset at the end of the term of the arrangement.
When the Group receives a payment during the concession period, it will apportion such payment between (i) a repayment of the financial receivable (if any), which will be used to reduce the carrying amount of the financial receivable on its balance sheet, (ii)interest income, which will be recognised as finance income in its income statement and (iii) revenue from operating and maintaining the plants in its income statement.
(i) Recognition of financial receivables
The Group recognised a financial receivable if it has a contractual right under the concession arrangements to receive a fixed and determinable amount of payments during the concession period irrespective of the usage of the plants. The financial receivable is measured on initial recognition at its fair value.
Subsequent to initial recognition, the financial receivable is measured at amortised cost using the effective interest method.
(ii) Recognition of intangible assets
The Group has concession arrangements with the various governing bodies or agencies of the government of the People's Republic of China (the "grantors") to supply treated water from water treatment plants, and operate wastewater treatment plants. Under the concession arrangements, the Group will construct and/or operate the plants for concession periods of between 20 to 30 years and transfer the plants to the grantors at the end of the concession periods. Such concession arrangements fall within the scope of INT FRS 112.
The Group recognises an intangible asset if it does not have any contractual right under the concession agreements to receive a fixed and determinable amount of payments during the service concession period.
The intangible asset is recognised to the extent that the Group has a right to charge fees for the usage of the plants and is amortised over the concession period from commencement of the operations of the plants.
(J) Financial receivables
Financial receivables relate to receivables recognised in respect of services provided by our subsidiaries (namely Wuhan Xincheng and Taizhou Kaidi) in accordance with INT FRS 112 (please refer to Note (I) above) and remained relatively unchanged in 1st Qtr 2008 compared to FY2007.
(K) Investment in an associate
This represents our investment in an associated company, Wuhan Hanxi Waste Water Treatment Co. Ltd. ("Wuhan Hanxi") that was established in 2004 to build and operate a municipal wastewater treatment plant in Wuhan City, Hubei Province.
The Group has invested RMB43 million (or a 43% stake) in Wuhan Hanxi, which has a registered capital of RMB100 million.
As at 31 March 2008, net investment of RMB46.1 million is arrived after taking into account (i) elimination of inter-company transactions and (ii) the Group's share of profit and loss of Wuhan Hanxi in previous financial years as well as in 1st Qtr 2008.
(M) Inventories
Net inventories remained relatively unchanged.
(N) Work-in-progress, net ("WIP") / Trade receivables
Net WIP increased RMB54.3 million or 210%, due largely to construction work performed on traditional power plant water purification projects during 1st Qtr 2008, for which billing milestones have not been reached as at 31 March 2008. Trade receivables remained relatively unchanged. Credit risk remains low with the bulk of our trade receivables being current.
(L) Other receivables, prepayments and other current assets
Other receivables and prepayments increased RMB13.3 million from RMB163.6 million in FY2007 to RMB176.9 million in 1st Qtr 2008, due mainly to an increase in staff loans extended to employees of the Group and an amount due from a third party for the sales of an available-for-sale investment.
(O) Available-for-sale investment
This represented our 15% investment in Linhuan Water Services Co., Ltd ("Linhuan"), which was incorporated to undertake a Build-Own-Operate ("BOO") water project in Huaibei City, Anhui Province in the PRC. The project has an aggregated investment value estimated to be around RMB960 million. During 1st Qtr 2008, the Group entered into a share transfer agreement to dispose the available-for-sale investment, Linhuan, for RMB15,000,000.
(P) Cash and bank balances / Cash and cash equivalents
Cash and cash equivalents decreased RMB60.9 million due mainly to greater utilisation and deployment of (i) Series 1 Bonds net cash proceeds and (ii) project loans drawn down by certain subsidiaries.
As at 31 December 2007, cash proceeds from Series 1 Bonds, which were drawn down on 13 December 2007, and certain project loans drawn down prior to 31 December 2007 were not fully deployed and utilized, leading to a relatively higher cash balance as at 31 December 2007.
(Q) Trade payables
Trade payables remained relatively unchanged with a slight decrease of 9.4% or RMB22.9 million, from RMB243.2 million in FY2007 to RMB220.3 million in 1st Qtr 2008.
(R) Other payables and accruals
Other payables and accruals remained relatively unchanged with a slight increase of RMB12.8 million, or 9.8%.
(S) Derivative financial instrument
This derivative financial instrument arises in connection with the issue of Series 1 Junior Bonds and was recognised in accordance with "FRS 39 - Financial Instruments: Recognition and Measurement". As such, the derivative instrument is required to be fair valued at each reporting period (i.e. quarterly) with a corresponding fair value gain/loss to be recognised as 'Non-cash fair value gain/loss - Derivative instrument' in the income statement. The value of the derivative instrument is highly sensitive to the changes in the Company's share price between each reporting period. Comparing 31 December 2007 and 31 March 2008, the fair value of the derivative instrument has reduced from RMB45.3 million to RMB26.7 million.
(T) Group's borrowings
Total Group borrowings were RMB497.8 million in 1st Qtr 2008, compared to RMB542.9 million in FY2007. The decrease is due mainly to repayment of certain short-term loans in 1st Qtr 2008, partially offset by (i) additional project loans being drawn down by certain subsidiary companies during 1st Qtr 2008 and (ii) the amortisation of interest expense, thereby gradually increasing the Series 1 Senior Bonds' and Junior Bonds' (collectively "Series 1 Bonds") carrying value to their principal values over their tenure period as they are recorded at amortised costs.
uccessful completion of Series 1 Bonds issue (comprising Senior Bonds of US$15 million and Junior Bonds of US$15 million). Proceeds from the bond issue will enable the Group to execute its strong pipeline of water projects and to fund new opportunities.Balance Sheet
* of which RMB130,914,000 has been reclassified as current liabilities due to breach of a covenant relating to Series 1 Senior and Junior Bonds. Waiver on the breach was obtained on 27 March 2008.
Bills payable to banks are secured by certain bank deposits placed with the issuing banks. The interest-bearing loans and borrowings are secured by (i) a concessionary agreement (ii) guarantees by a subsidiary company and an associated company (iii) mortgage on an office building and (iv) debentures on assets of the company and a subsidiary company, including our investment in a PRC subsidiary company.