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FINANCIAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2009
Financials Archive
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Profit and Loss
Balance Sheet
(I) PERFORMANCE REVIEW
(A) Revenue
A breakdown of the Group's revenue for FY2009 and FY2008 are summarised as follows:
Overall
The Group's revenue for the year ended 31 December 2009 decreased by RMB64.8 million or 16.8%, from RMB386.7 million in FY2008 to RMB321.9 million in FY2009. Revenue decreased from RMB121.2 miillion in 4Q2008 to RMB81.7 miillion in 4Q2009. The lower revenue was mainly attributable to the decrease in revenue from the Water Purification Treatment and Consultancy and Others segment.
Water Purification Treatment
Revenue from the Water Purification Treatment segment decreased from RMB285.7 million in FY2008 to RMB223.9 million in FY2009 and decreased from RMB83.4 million in 4Q2008 to RMB55.3 million in 4Q2009. The decrease was mainly due to lower contribution from power plant purification Engineering, Procurement and Commissioning ("EPC") projects as there were fewer ongoing or completed projects in FY2009 due to intense competition. This was partially offset by contribution from the Group's subsidiaries, Lv Liang Xinya and Wuhan Huangpi, which commenced operations in 3rd Quarter of FY2008.
Wastewater Treatment
Revenue from the Wastewater Treatment segment increased from RMB70.2 million in FY2008 to RMB81.1 million in FY2009. This is contributed by the revenue of the Group's subsidiary, Huangshi Kaidi, which commenced its testing phase in June 2009. The decreased from RMB30.0 million in 4Q2008 to RMB23.6 million in 4Q2009 is mainly due to the decrease in contributions from power plant purification Engineering, Procurement and Commissioning ("EPC") projects as no new projects were taken up since 1Q2009. This is partially offset by increase in contributions from the operations of the Group's subsidiary, Huangshi Kaidi, as mentioned earlier.
Consultancy and Others
Revenue from Others segment decreased from RMB30.7 million in FY2008 to RMB16.9 million in FY2009. It decreased from RMB7.9 million in 4Q2008 to RMB2.8 million in 4Q2009. The decrease was mainly due to completion of a few consultancy projects and contribution from adhoc consultancy projects by the Group in FY2009.
(B) Gross Profit/Gross Profit Margin
A breakdown of the Group's gross profit margins for FY2009 and FY2008 are summarised as follows:
Overall
The Group's overall gross profit margin increased from 14.9% to 16.8%, which remained relatively stable. An increase from -10.4% for 4Q2008 to 7.3% for 4Q2009 is due to the increase in gross profit margin for the Wastewater Treatment and Consultancy and Others segments partially offset by the decrease in gross profit margin for the Water Purification Treatment segment.
Water Purification Treatment
Gross profit margin for the Water Purification Treatment segment increased from 10.5% in FY2008 to 12.8% in FY2009. This was due mainly to (i) higher average gross profit margin for the Group's water purification EPC projects in FY2009, in particular the EPC work that the Group has been contracted to handle in connection with one of its BOT projects, Wuhan Huangpi, as compared to EPC projects undertaken in FY2008; and (ii) higher gross profit margin of the Group's subsidiaries, Tianmen Kaidi and Lv Liang Xinya, for FY2009 as compared to FY2008. The gross profit margin for this segment decreased from 16.9% in 4Q2008 to -5.6% in 4Q2009. The negative margin in 4Q2009 was resulted from provision for foreseeable losses on a power plant water purification project.
Wastewater Treatment
Gross profit margin for the Wastewater Treatment segment increased from 7.3% in FY2008 to 11.0% in FY2009. It increased from 5.9% in 4Q2008 to 20.3% in 4Q2009. This is contributed by the gross profit margin of Huangshi Kaidi, which commenced its testing phase in June 2009.
Consultancy and Others
Gross profit margin for Consultancy and Others segment increased from 73.6% in FY2008 to 96.7% in FY2009. It increased from 116.0% in 4Q2008 to 151.4% in 4Q2009. This is due mainly to contributions from the management and operations services rendered to an associate fo the Group, which yields a higher margin compared to other projects.
(C) Finance income/Finance expenses
Finance income relates mainly to that recognised on construction services of the Group's wastewater treatment plants, Wuhan Xincheng, Taizhou Kaidi and Huangshi Kaidi, in connection with the adoption of INT FRS 112 Service Concession Agreements (“INT FRS 112”). The amount increased from RMB15.3 million in FY2008 to RMB23.2 million in FY2009, due mainly to (i) the recognition of finance income by Taizhou Kaidi, which commenced operations in 3rd Quarter of FY2008, and Huangshi Kaidi, which commenced operations in 4th Quarter of FY2009; and (ii) interest income derived from loans extended to the Group's associated company, Wuhan Hanxi, during the year. A decrease from 8.6 million in 4Q2008 to RMB7.2 million in 4Q2009, due mainly to lower recognition of finance income by Taizhou Kaidi in 4Q2009 as compared to 4Q2008. This is partially offset by the recognition of finance income by Huangshi Kaidi.
Finance expenses increased from RMB65.6 million in FY2008 to RMB145.4 million in FY2009. This was mainly due to the increase in the amortised interest expenses, thereby increasing the Series 1 Senior Bonds' and Junior Bonds' (collectively “Series 1 Bonds”) carrying values, which are recorded at amortised costs to the amount payable to the Bondholder, in view of the Receiver appointed over the assets of the Company. A decrease in finance expenses from RMB12.8 million in 4Q2008 to RMB9.3 million in 4Q2009 is mainly due to no more amortised interest expenses for the Series 1 Bonds for 4Q2009.
(D) Non-cash fair value gain - Derivative instrument
This represents the non-cash fair value gain of RMB7.3 million (FY2008: RMB35.6 million) recognised in connection to the mark-to-market treatment of the conversion option as at 31 December 2009, arising from the draw down of Series 1 Junior Bonds on December 2007 (refer to Note (T)).
(E) Other income
Other income comprised mainly of income earned from installation of water meters, repair and maintenance work and recognition of government grant received by the Group's subsidiary, Kaidi Water Services, Taizhou Kaidi and Tianmen Kaidi. The increase in other income from RMB7.7 million in FY2008 to RMB8.4 million in FY2009 was mainly due to increase in income earned from installation of water meters and repair and maintenance work by one of the Group's subsidiaries, Wuhan Huangpi. The decrease in other income from RMB5.8 million in 4Q2008 to RMB4.3 million in 4Q2008 was mainly due to no tax refund for reinvestment of dividends in 4Q2009 compared to the corresponding period.
(F) Marketing and distribution expenses
Marketing and distribution expenses declined by 5.5% to RMB11.7 million from FY2008 to FY2009, in line with lower sales. The increase in marketing and distribution expenses from RMB2.4 million in 4Q2008 to RMB4.1million in 4Q2009 is mainly due to two new EPC contracts and a new water plant of the Group's subsidiaries, Kaidi Technology and Wuhan Huangpi respectively in FY2009.
(G) Doubtful debts (expenses)/write-back
Allowance for doubtful debts of RMB26.0 million was made in FY2009 as compared to a write-back of RMB2.2 million in FY2008. For 4Q2009, the allowance for doubtful debts is RMB1.5 million as comapred to RMB8.6 million in 4Q2008. The allowance in FY2009 was made mainly for customers who now face financial difficulties as a result of worsened market conditions in FY2009.
(H) Administrative expenses
Administrative expenses increased by approximately 16.4% from RMB45.5 million in FY2008 to RMB52.9 million in FY2009. This is due mainly to (i) professional fees incurred during debt restructuring, and (ii) the commencement of operations of the Group's subsidiaries, Lv Liang Xinya and Wuhan Huangpi in 3rd Quarter of FY2008. The increase in administrative expenses from RMB17.0 million in 4Q2008 to RMB22.5 million in 4Q2009 is mainly due to two new EPC contracts and a new water plant of the Group's subsidiaries, Kaidi Technology and Wuhan Huangpi respectively.
(I) Non-cash goodwill impairment loss/Non-cash intangible assets impairment loss
Non-cash goodwill impairment loss represents the impairment of goodwill on acquisition of interests in the Group's subsidiary, Wuhan Kaidi Water Services Co., Ltd. ("Wuhan Kaidi Water") from minority shareholder in 1st half of FY2006. Moving forward, the Group plans to transfer Wuhan Kaidi Water's future business activities to its three wholly-owned subsidiaries (namely Wuhand Kaidi Engineering, Wuhan Kaidi Technology and Wuhan Kaidi Management & Operation), incorporated based on their respective areas of expertise in FY2007. The impairment in FY2009 and FY2008 were charged to better reflect the recoverable amount of the cash generating units as the Group expected uptake of projects to slow down in view of the challenging market conditions.
Non-cash intangible assets impairment loss represents the impairment of intangible assets relating to the BOT treatment plants of the Group's subsidiary, Tianmen Kaidi and Tianmen Xinnong. The impairment in FY2009 was charged to better reflect the recoverable amount of the cash generating units in view of the challenging market conditions and financial burden of the households.
(J) Tax expense
Tax expense increased by approximately RMB8.9 million as a result of (i) the reversal of 1st Half of FY2008 tax expenses recorded by one of the Group's subsidiaries, Wuhan Kaidi Engineering, in 3rd Quarter 2008 when it obtained full exemption from taxation for the first two years and a 50% relief from the tax rate of 25% for the next three years thereafter, and (ii) the increase in non-offsetting of tax expenses from profitable subsidiaries against subsidiaries that recorded a loss for the same period.
(II) BALANCE SHEET(K) Property, plant and equipment/Investment property
Property, plant and equipment decreased from RMB51.1 million in FY2008 to RMB45.5 million in FY2009, due mainly to depreciation charged during the year.
(L) Intangible assets/land use rights
The bulk of the intangible assets are recognised in respect of construction of water treatment plants by the Group's subsidiaries (namely Tianmen Kaidi, LvLiang Xinya, Tianmen Xinnong and Wuhan Huangpi) in accordance with INT FRS 112. The balance increased from RMB476.9 million in FY2008 to RMB478.4 million in FY2009 as a result of additions during the year partially offset by (i) impairment loss of RMB23 million (refer to Note (I)), and (ii) amortisation expenses charged during the year. 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:
a) 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
b) 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 PRC government (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 50 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.
(M) Financial receivables
Financial receivables relate to receivables recognised in relation to services provided by the Group's subsidiaries (namely Wuhan Xincheng, Taizhou Kaidi and Huangshi Kaidi) in accordance with INT FRS 112 (please refer to Note (L)(i) above). The amount increased from RMB221.3 million in FY2008 to RMB292.4 million in FY2009, due mainly to additions from the Group's subsidiary, Huangshi Kaidi. This is partially offset by the payment received in relation to the receivables previously recognised by the Group's subsidiaries, Wuhan Xincheng and Taizhou Kaidi.
(N) Investment in an associate
This represents our investment in an associated company, Wuhan Hanxi Waste Water Treatment Co. Ltd. (“Wuhan Hanxi”), 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 December 2009, net investment of RMB41.9 million is arrived at after taking into account of (i) elimination of inter-company transactions and (ii) the Group's share of profits and losses of the associated company in previous and current financial years.
(O) Work-in-progress, net ("WIP")/Trade receivables
Net WIP increased by RMB58.8 million due mainly to construction works performed on projects for which billing milestones have not been reached as at 31 December 2009.
Trade receivables decreased from RMB112.0 million in FY2008 to RMB64.8 million in FY2009 due mainly to cash collections and allowance for doubtful debts (please refer to Note (G)) provided for during the year. The Group will continue to undertake proactive measures to monitor and to accelerate the collection of its outstanding trade receivables.
(P) Other receivables, prepayments and other current assets
Other receivables, prepayments and other current assets decreased from RMB213.7 million in FY2008 to RMB141.7 million in FY2009. The decrease is mainly due to the decrease in staff advances and prepayments made to suppliers during the year.
(Q) Cash and bank balances
Cash and bank balances decreased by RMB39.2 million, due mainly to (i) payments made to suppliers and creditors; (ii) additions to intangible assets and property, plant and equipment during the year; and (iii) repayment of loans and borrowings and related interest incurred. This was partially offset by (i) collections of loan receivables from employees and (ii) draw down of loans. Restricted cash balance as at 31 December 2009 was RMB33.2 million (FY2008: RMB 32.9 million).
(R) Trade payables
Trade payables decreased from RMB285.3 million in FY2008 to RMB180.1 million in FY2009, due mainly to repayments made during the year.
(S) Other payables and accruals
Other payables and accruals increased from RMB125.7 million in FY2008 to RMB204.0 million in FY2009, mainly due to increase in customer advances and deferred capital grant received from the government.
(T) Bills payable/Interest-bearing loans and borrowings
Total Group borrowings increased from RMB636.4 million in FY2008 to RMB779.4 million in FY2009. The increase was due mainly to (i) draw down of loans; and (ii) increase in amortised of interest expense, thereby increasing the Series 1 Bonds' carrying values, which are recorded at amortised costs, to the amount payable to the Bondholder in view of the demand put forth by the Bondholders This is partially offset by repayments of loans during the year.
(U) Derivative financial instrument
This derivative financial instrument in FY2008 arose in connection with the issue of Series 1 Junior Bonds and was recognised in accordance with "FRS 39 - Financial Instruments: Recognition and Measurement", under which the derivative component of the bonds is required to be recorded at fair value at each reporting period 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 FY2008 and FY2009, the fair value of the derivative instrument reduced from RMB7.3 million to nil in view of receiver having been appointed and the Supplemental Agreement entered on 4 December 3009.
(V) Net current liabilities
As at 31 December 2009, the net current liabilities of RMB317.3 million is due mainly to the reclassification of the Series 1 Bonds from non-current liabilities to current liabilities in view of the appointment of the Receiver over the assets of the Company and the utilisation of short term credit facilities, such as revolving short term bank loans and bills (ie. current liabilities) to bridge the financing needs relating to the construction of certain subsidiaries' Build-Operate-Transfer ("BOT")/Build-Own-Operate ("BOO") water infrastructure, which are classified as non-current assets. The Group has short term borrowings of revolving nature and bills payable to banks amounting to RMB49.5 million and RMB33.2 million respectively as at 31 December 2009. In addition, government grants of RMB62.5 million received in advance for uncompleted BOT projects has been included in other payables (ie. current liabilities).
CommentaryReceivership & Debt Restructuring
On 4 December 2009, the Company executed the following agreements:
i) a supplemental agreement (the "Triumph Supplemental Agreement") with Triumph Power Limited ("Triumph");
ii) a settlement agreement the "Settlement Agreement") with Lucky Six Limited, DBS Nominees Private) Limited and Indopark Holdings Limited (collectively, the "Bondholders") and CLSA Mezzanine Management Limited (the "Agent"); and
iii) a supplemental agreement (the "Litebay Supplemental Agreement") with Litebay Pte. Ltd. ("Litebay").
The Triumph Supplemental Agreement was executed in relation to the proposed subscription by Triumph of:
i) not less than 1,663,991,562 new ordinary shares (the "Shares") and up to 1,860,910,521 new Shares (the "Subscription Shares") to be issued by the Company;
ii) all Rights Shares, the provisional allotments of which are not taken up by the entitled shareholders for any reason whatsoever under the proposed non-renounceable rights issue by the Company, on the basis of one (1) Rights Shares for every two (2) existing Shares held by the shareholders of the Company (the "Rights Issue"); and
iii) US$4.5 million in principal amount of convertible bonds (the "Bonds 2012").
Triumph undertakes with the Company to enter into an escrow agreement with the Company, the Bondholders and Ferrier Hodgson Pte. Ltd. ("Escrow Agent") of which the salient terms are: (a) Triumph undertakes to pay a maximum sum of US$13 million to the Escrow Agent ("Subscription Consideration") upon written confirmation by Triumph to the Agent of the satisfaction of all the obligations of Triumph under the Triumph Supplemental Agreement and the Company having obtaining the in-principle agreement of the SGX-ST to the resumption of trading of the Company's shares; (b) the Bondholders undertake to ensure the termination of the Receiver at the same time the Subscription Consideration is paid by Triumph to the Escrow Agent; and (c) the Escrow Agent undertakes to release the Subscription Consideration to the Agent for the benefit of the Bondholders on the Share Subscription Completion Date, and in the event completion of the Share Subscription does not take place for whatever reason, to refund the Subscription Consideration to the Subscriber.
The Settlement Agreement with the Bondholders and the Agent sets out the principal terms and conditions for the restructuring of the Company's obligations under the Bond Subsciption Agreement dated 8 August 2008.
The Litebay Supplemental Agreement confirms Litebay's agreement to subscribe to an aggregate of 196,918,959 shares in the Company on the same terms and conditions as set out in the subscription agreement made between the Company and Litebay dated 25 June 2009.
For details on the above, please refer to the Company announcement no. 00123 dated 7 December 2009.
Upon completion of the Proposed Triumph Subscription, the Proposed Litebay Subscription and the Rights Issue, the percentage of the Shares that are held in public hands may fall below 10% and in such event, trading in the shares on the SGX-ST is likely to be suspended until the free float requirements under the Listing Manual are met. As such, the Company has applied for an extension of three months from the date of lifting of suspension to comply with Catalist Rule 724. SGX-ST has on 9 February 2010 advised that is does not have any objection to the application.
On 12 February 2010, the Receiver has been discharged. In addition, the suspension on the trading of the Company's securities was lifted on 17 February 2010.
With regard to the extension of three months to comply with Catalist Rule 724, in the event that the Public Float Requirement is not restored after the completion of the Rights Issue, the Company will seek to increase its public float to at least 10% prior to the deadline of 16 May 2010. In such event, the Company will ensure compliance with the Catalist Rules and will, if necessary, seek shareholders' approval accordingly.
On 18 February 2010, the Company has completed:
i) the Proposed Triumph Subscription and the issue of Bonds 2012 according to the terms of the Triumph Subscription Agreement;
ii) the Proposed Litebay Subscription according to the terms of the Litebay Subscription Agreement; and
iii) the issue of Repayment Bonds and repaid an aggregate sum of US$27.5 million in cash to the Bondholders as part payment of the aggregate outstanding amount according to the terms of the Settlement Agreement.
Accordingly, 1,663,991,562 Shares and 196,918,959 Shares (the "Subscription Shares") were issued and credited as fully paid to Triumph and Litebay respectively. The Subscription Shares were listed and quoted on the Official List of the Catalist with effect from 9.00 am, 19 February 2010.
Following the issue of the Subscription Shares, the total number of issued and paid-up ordinary shares of the Company has increased to 2,057,838,480 Shares.
The New Board, appointed on 23 September 2009, will continue to do all that is necessary and within their rights to ensure that the Company's and its shareholders' interests are properly protected. The Restructuring Exercise signals a major breakthrough in the Company's efforts to resolve its debt obligations. The New Board is confident that through prudent financial management, and backed by Triumph as a cornerstone investor, the Group will be placed on track to realising its value once again. The New Board is also in discussion to install executive members with the required expertise to the Board and will make announcements on this matter in due course.
Business Operations
Subsequent to its appointment, the New Board had visited the Group's PRC facilities to gain an assessment of the situation in Wuhan and to ensure that normal business operations are to be continued. Asia Water continues to provide critical municipal water treatment services through its eight operational plants. The other two water treatment plants currently under construction, Wuhan Dongxihu and Wuhan Huang Pi, are still targeted to begin operations by 1HY2010 and 4Q2012 respectively. As announced on 11 January 2010, the Group's subsidiary, Wuhan Kaidi Water Technology Co., Ltd was awarded two EPC contracts in October 2009.
In light of the primary concern over the appointment of receivership at the holding company level, bank notices or demands were issued to Wuhan Kaidi Services Co., Ltd ("Wuhan Kaidi"), Wuhan Huangshi Kaidi Water Services Ltd ("Wuhan Huangshi") and Wuhan Xincheng Waste Water Treatment Co. Ltd ("Wuhan Xincheng") from Bank of China (Wuhan Wuchang Branch), Huaxia Bank (Wuhan Donghu Branch), Hankou Bank Corporation (East Lake New-Tech Development Zone Branch) and Industrial and Commercial Bank of China. As at 28 January 2010, Huaxia Bank (Wuhan Donghu Branch) has unfrozen Wuhan Kaidi and Wuhan Huangshi's bank accounts and assets; Wuhan Kaidi has made repayments amounting to approximately RMB33.3 million to Hankou Bank Corporation (East Lake New-Tech Development Zone Branch) and full repayment of RMB30.0 million owed to Industrial and Commercial Bank of China.
With the restructuring of Asia Water's debt obligations gathering pace, and the Receivership removed, the New Board is confident that the Group will have continued access to sufficient bank facilities for financing its operations. Following this, the New Board hopes to inject stability into the Company's balance sheet over time through a more long-term-oriented capital structure. The Group also hopes to harness operational synergies through its new investors Triumph and Litebay.
Industry Outlook
Of the 4 trillion yuan Chinese economic stimulus package announced in 2008 nearly 40 percent is channelled towards spending in environmental and energy-efficient projects. Given the severe lack of new naturally occurring water resources that can be exploited, expanding the use of advanced wastewater reuse technologies will be key to the PRC's continued economic growth.
The New Board continues to hold great belief over the long-term prospects of the Group. With an aggregate water treatment capacity of 1 million tonnes a day, held in high-quality assets located across several key industrial cities of the PRC, Asia Water is poised to benefit from the growing demand for treated water as the PRC economy further develops.