Profit and Loss
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Review of Performance
(I) Performance Review (A) Revenue
A breakdown of the Group's revenue for FY2007 is summarised as follows:
The Group's revenue for the financial year ended 31 December 2007 ("FY2007") rose RMB14.6 million or 3.1%, from RMB471.8 million in FY2006 to RMB486.4 million in FY2007. The higher revenue was achieved on the back of higher contribution from the Consultancy and Others segment which recorded increase of 704.9%. Sales from the Water Purification Treatment segment increased by RMB54.2 million or 15.3%, from RMB353.1 million in FY2006 to RMB407.3 million in FY2007, as the Group's venture into the municipal tap water industry gains traction. In addition, revenue from our Water Purification Treatment segment in FY2007 was boosted by an increased contributions from Engineering, Procurement and Commissioning ("EPC") sales on our Build-Operate-Transfer ("BOT")/Build-Own-Operate ("BOO") portable water projects.
While the Group's Wastewater Treatment segment continues to gain new projects, the EPC projects completed in FY2007 were of a smaller scale compared to that in FY2006. The Group completed its 2 main wastewater projects - 'Wuhan Hanxi' and 'Wuhan New Economic Zone' in FY2006. Accordingly, the Wastewater Treatment segment recorded a drop of RMB93.6 million in revenue or 83.5% from RMB112 million in FY2006 to RMB18.5 million in FY2007.
Sales from the Consultancy and Others segment surged RMB53.9 million or 808.7%, from RMB6.7 million in FY2006 to RMB60.6 million in FY2007 due mainly to an increase in high-margin consultancy projects. 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 largescale municipal water treatment system.
(B) Gross Profit
A breakdown of the Group's gross profit and gross profit margins for FY2007 is summarised as follows:
Group's gross profit rose RMB13.7 million, from RMB109.8 million in FY2006 to RMB123.5 million in FY2007 while the overall gross margin improved by approximately 2 percentage points, from 23.3% in FY2006 to 25.4% over the same period. The margin improvement is largely due to increased contribution from the Group's higher margin Consultancy and Others segment which recorded an increase in margin contributions of RMB36.3 million, or 704.9%, from RMB5.1 million in FY2006 to RMB41.4 million in FY2007. Due to its enlarged operations, the Group also benefited from lower cost of water treatment equipment purchased as it was able to negotiate for lower prices through bulk purchases of equipment.
Gross profits from the Water Purification Treatment segment has stayed relatively unchanged. Gross margin was marginally lower as compared to FY2006 due mainly to increased contributions from our large scale municipal tap water projects, which yield relatively lower margins, as compared to the traditional power plant water purification projects and our BOT/BOO-related EPC projects.
Gross profits from the Wastewater Treatment segment declined as the projects completed in FY2007 were of a smaller scale compared to FY2006. Our 2 main wastewater projects (namely, Wuhan Hanxi and Wuhan New Economic Zone) were completed in FY2006. However, gross margin has improved by 13.2% due to the lower cost of water treatment equipment purchased and increased contributions from the management and operation of wastewater treatment plants, which yield higher margins.
Gross profits for our Consultancy and Others segment has increased from RMB5.1 million in FY2006 to RMB41.4 million in FY2007, or 704.9%, in line with higher sales recorded as highlighted in (A) above. Gross margin remains high at 68.3%, despite the slight fall as compared to FY2007.
(C) Other Income
Other income has decreased from RMB7.4 million in FY2006 to RMB4.8 million in FY2007. Other income in FY2006 was boosted by a RMB4.5 million government grant recognised in connection with a Research and Development project undertaken by the Group's subsidiary, which was completed in FY2006.
(D) Selling and Distribution Expenses & Administrative Expenses
Selling and distribution expenses have increased by approximately 33.6% from RMB9.1 million in FY2006 to RMB12.1 million in FY2007, due mainly to start-up costs and other related expenses from new subsidiary companies, which recorded higher staff costs and selling and distribution related expenses.
Administrative expenses have increased by approximately 85.8% from RMB24 million in FY2006 to RMB44.6 million in FY2007, due mainly to (i) stock option expenses of RMB5 million recorded (ii) an increase in expenses contributed by new subsidiary companies incorporated and/or acquired in FY2007 and (iii) an increase in general overhead costs as a result of the increase in the number of entities under the Group from 6 entities in FY2006 to 13 entities in FY2007.
In addition, administrative expenses in FY2006 was relatively lower due to a net foreign exchange gain of RMB4.4 million on the revaluation of a US$11.5 million loan, as a result of steep depreciation of US Dollars during FY2006. In FY2007, foreign exchange gain/loss recorded was lower at RMB1.5 million, due mainly to the full repayment of the US$11.5 million loan as at 31 December 2007.
(E) Negative Goodwill
The negative goodwill of RMB1 million in FY2007 and RMB12 million (provisionally determined) in FY2006 arise due to the acquisition of 2 water treatment plants in FY2006 and FY2007 respectively.
(F) Financial Expense / Income
Finance expenses have increased by 202.3% from RMB11.1 million in FY2006 to RMB33.4 million in FY2007, mainly due to:
- a non-cash item RMB7.3 million fair value loss on our derivative instrument arising, in conjunction with the draw down of Series 1 Junior Bonds as at 31 December 2007;
- an increase in short-term borrowings to facilitate working capital requirements; and
- an increase in project loans being drawn down by certain subsidiary companies in FY2007, with the commencement of projects.
Finance income has increased by 116.2%, from RMB4.6 million in FY2006 to RMB9.9 million in FY2007, due mainly to finance income recognised in connection with the adoption of INT FRS 112, as described in Item 5 above.
(G) Tax Expense
Tax expense increased from RMB7.4 million in FY2006 to RMB8.6 million in FY2007, leading to higher effective tax rate of 13.9% in FY2007. This is due to (1) non-setting of tax expenses from profitable subsidiaries against subsidiaries that recorded a loss for the same period (2) provision of tax expense for new subsidiaries incorporated in FY2007, as it is uncertain if tax exemption applied for will be granted. The Group's effective tax rate is expected to decrease once these subsidiaries are approved for tax exemption in FY2008. 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. Wuhan Kaidi Water is in its fourth and fifth profit-making years in FY2006 and FY2007 respectively. Accordingly, Wuhan Kaidi Water's profits for both FY2006 and FY2007 are subject to a reduced tax rate of 7.5%.
(II) Balance Sheet
(H) Property, plant and equipment
The increase in property, plant and equipment is due mainly to the purchase of an office building by a subsidiary company in the PRC.
(I) Intangible assets
Bulk of the intangible assets relate to intangible recognised in respect of services provided in accordance with INT FRS 112 as described in Item 5 above.
(J) Financial receivables
Financial receivables relate to receivables recognised in respect of services provided in accordance with INT FRS 112 as described in Item 5 above.
(K) Long-term investment
This represents 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.
(M) Associated Company
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 December 2007, net investment of RMB47.7 million is arrived after taking into account our share of profit and loss of associated company in previous financial years as well as in FY2007.
(N) Work-in-progress, net ("WIP") / Trade receivables
WIP decreased RMB104.7 million or 87.1%, due largely to relatively more progress billings being made in FY2007. Trade receivables increased by RMB70.3 million or 64.6% due mainly to more billings being made in FY2007 which were outstanding as at 31 December 2007. Credit risk remains low with the bulk of our trade receivables being current.
(O) Other receivables and prepayments
Other receivables and prepayments decreased RMB17.6 million from RMB181.2 million in FY2006 to RMB163.6 million in FY2007, due mainly to the full repayment of an RMB46.5 million loan extended to a third party in return for interest income and the associated interest income receivable in FY2007.
(P) Inventories
Net inventories rose RMB3.4 million from RMB2.9 million in FY2006 to RMB6.3 million in FY2007, due mainly to increased bulk purchases made in FY2007 in preparation for upcoming projects. Bulk purchase has resulted in lower of equipment being purchased, which is consistent with the higher level of Group's gross margin recorded in FY2007.
(Q) Cash and bank balances / Cash and cash equivalents
Cash and cash equivalents increased RMB156.2 million due mainly to (i) accumulation of profits, (ii) an increase in short-term borrowings to facilitate working capital requirements (iii) draw down of project loans by certain subsidiaries and (iv) the draw down of Series 1 Bonds on 13 December 2007. The cash proceeds from Series 1 Bonds were not fully deployed as at 31 December 2007.
(R) Trade payables
Trade payables remained relatively unchanged with a slight decrease of 4%.
(S) Other payables and accruals
The increase in other payables and accruals from RMB42.6 million in FY2006 to RMB68 million in FY2007, or 59.6% was mainly due to contribution from the new subsidiary companies incorporated or acquired in the financial year. This was in line with the increase in selling and distribution expense and administrative expense contributed by such new subsidiary companies incorporated and/or acquired in FY2007, as highlighted under 8(D) above.
(T) Group borrowings
Total Group borrowing was RMB588.2 million in FY2007, compared to RMB197.1 million in FY2006. The increase is due mainly to (i) project loans being drawn down by certain subsidiary companies in FY2007 (ii) an increase in short-term borrowings to facilitate working capital needs and (iii) the recent issue of the US$15 million Series 1 Senior Bond and US$15 million Series 1 Junior Bond on 13 December 2007 to fund the Group's investments in water project.
(U) Derivative Instrument
This derivative 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 marked-to-market treatment) with a corresponding fair value gain/loss to be recognised as Finance income/expense. The value of the derivative instrument is highly sensitive to the changes in the Company's share price between each reporting period.
Commentary
The Group expects the water industry in the PRC to remain strongly driven by the government's focus to improve the country's water treatment standards by the year 2010. The PRC government is investing up to RMB1 trillion (US$125.5 billion) over the next 5 years to build waste water treatment plants and to upgrade water distribution systems around the country. It is also looking at revising existing wastewater treatment fees to make it more attractive for private companies to invest in and manage water treatment facilities. Being an established player in the water treatment and purification industry, Asia Water is in a prime position to benefit from these new initiatives with its growing portfolio of Build-Operate-Transfer ("BOT")/Build-Own-Operate ("BOO") type wastewater and tap water projects.
While a growing and profitable market signifies increased competition, Asia Water remains confident that it is well poised to cement its foothold in the water treatment and purification industry in the PRC. Since HY2007 to date, Asia Water has invested in 3 additional BOT/BOO type projects (namely, Wuhan Huang-Pi, Tianmen Xinnong and Wuhan Dongxihu) which will reinforce its strong presence in the central PRC.
In addition, Asia Water has performed well in securing a position in the niche market of nuclear power plant water purification industry. In particular, it has recently secured an Engineering, Procurement and Comissioning ("EPC") contract for the PRC's first nuclear power plant to employ a saltwater desalination water purification system. The resulting benefits from this new project are twofold. The project will showcase the scalability of the Group's technologies and provide a platform to penetrate into the lucrative saltwater desalination industry. To date, this is the Group's third nuclear power plant project in the PRC and will enhance its reputation in the water purification industry, leading to more contract wins in the future.
For the year ended 31 December 2007, the Group has secured a total of 54 new EPC and BOT/BOO type projects with a total contract value of approximately RMB416 million. As at 31 December 2007, the Group's outstanding order book reaches approximately RMB380 million, which will be recognised over FY2008 and FY2009
The Group has also strengthened its capital structure with the successful 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
