Letter To Shareholders
Dear Valued Shareholders,
On behalf of the Board of Directors, I am pleased to present the report for Asia Water Technology ("Asia Water") for the financial year ended 31 December 2007 ("FY2007").
FY2007 represents a transitional period for Asia Water as we executed several major strategic initiatives with a view to securing greater growth in the years ahead.
We have completed a major fund raising exercise, which will strengthen our capital structure and enable us to secure more projects in a rapidly growing industry. At the same time, we have significantly expanded our scale of operations and are in the midst of a corporate restructuring exercise to create a more defined corporate structure with the flexibility to match our rapid expansion.
Although these initiatives have resulted in higher expenses which have affected our FY2007 performance, we believe that these short-term sacrifices are necessary in order to reap greater benefits in the long run.
Financial Overview
We achieved another year of top-line growth as our revenue grew 3.1% to RMB486.4 million from RMB471.8 million a year ago. We also improved our gross profit margins to 25.4% from 23.3% as we secured more higher-margin consultancy service projects and derive greater cost savings from the bulk purchasing of water purification and treatment equipment.We are particularly pleased with the emergence of our consultancy services segment as a viable earnings driver. Although such projects are secured on an ad-hoc basis, we are able to recognise revenue almost immediately upon completion of such projects. These projects also offer very good profit margins, which will help to complement our growth strategy as we pursue more Build-Operate-Transfer ("BOT")/Build-Own-Operate ("BOO") projects so as to build up a stable recurring income base.
Our net profit attributable to shareholders declined 30.5% to RMB53.3 million from RMB76.8 million in FY2006 mainly due to expenses related to our fund-raising exercise and the execution of our expansion strategies in FY2007. Our FY2006 net profit was also higher due to several one-time gains, including a net foreign exchange gain of RMB4.4 million on the steep depreciation of the US Dollar, a RMB4.3 million government research grant and a RMB12 million negative goodwill recognised on the acquisition of a subsidiary company in FY2006.
Despite the fall in profitability, the Board of Directors believe in rewarding shareholders for their support of the company and has proposed a first and final dividend of 1 Singapore cent for FY2007, similar to the dividend paid in FY2006. The dividend payout represented approximately 20% of our FY2007 earnings.
Operations Review
In 2007, we continued to focus on enlarging our project portfolio – maintaining a fine balance between securing high-margin EPC and consultancy contracts while pursuing more BOT/BOO/TOT projects to build a more balanced revenue structure.We secured 54 new projects with a total contract value of approximately RMB 416 million in FY2007, which will continue to be recognised over the next 2 years and have a positive impact to our FY2008 and FY2009 earnings. These new projects, net of contract values fulfilled in FY2007, ensured our continued growth as our remaining order book reaches approximately RMB 380 million as at 1 January 2008.
In January 2008, the Group secured its third mandate to provide water treatment services to a nuclear power plant, utilising a saltwater desalination treatment system, which is the first in the PRC. This project will enhance our reputation in the water purification industry, strengthening our position to secure more contract wins for traditional and nuclear power plants water purification and treatment projects in the future. In addition, it will further showcase the scalability of our core technologies and provide a platform to penetrate into the lucrative seawater desalination industry.
US$60 million Bond Issue to Institutional Investors
On 8 August 2007, we secured a US$60 million bond issue to various institutional investors, which is structured to be drawn down over two series. The two series of bond issue are subject to relevant approvals, including approval from our shareholders at a general meeting. In November 2007, shareholders' approval to issue first series of the bond issue was obtained.We have since drawn down net proceeds of US$25.4 million (gross proceeds of US$30 million) from the first series, which was used to fully repay an outstanding credit facility (US$3.9 million); investment in a new wastewater treatment project in the Dongxihu district (US$9.6 million) in January 2008; internal restructuring efforts (US$4.7 million) and the balance of US$7.2 million to be utilised for future investments in water projects, internal restructuring and working capital requirements.
The Group will seek relevant approval, including shareholders' approval, for the second series of the bond issue, which will raise gross proceeds of up to US$30 million when fully issued.
Our successful fundraising exercise demonstrated the trust and confidence the international investment community has in the company. With their support and the bond proceeds, we are now in a stronger financial position to fund our pipeline of existing projects and pursue future opportunities in the water purification and treatment industry.