China Ceramics Co.,
Ltd. (“the Company” or “China Ceramics”) and its subsidiaries (together, “the Group”) manufacture
and sell ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings. The
Group has operation primarily in the People’s Republic of China (“PRC”).
The Company is an exempt
corporation incorporated and domiciled in the British Virgin Islands with its shares listed on the NASDAQ Global Market. The address
of its registered office is c/o Harneys Corporate Services Limited of Tortola, British Virgin Islands. The head office of the Company
is located at Junbing Industrial Zone, Jinjiang City, Fujian Province, the People’s Republic of China (“PRC”).
China Ceramics and
its subsidiaries’ corporate structure as of June 30, 2017 is as follows:
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
The accompanying unaudited
condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”)
34 Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”). They
do not include all of the information required in annual financial statements in accordance with International Financial Reporting
Standards (“IFRS”), and should be read in conjunction with the audited consolidated financial statements and related
footnotes on Form 20-F for the year ended December 31, 2016 as filed with the Securities and Exchange Commission. The accompanying
unaudited condensed consolidated interim financial statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair statement of the results for the interim periods presented. Results for the six months ended
June 30, 2017 are not necessarily indicative of the results expected for the full fiscal year or for any future period.
These interim financial
statements have been prepared in accordance with the same accounting policies adopted in the 2016 annual financial statements,
except for the accounting policy changes that are expected to be reflected in the 2017 annual financial statements. Details of
any changes in accounting policies are set out in note 3.
The preparation of
interim financial statements in conformity with IAS 34 requires management to make judgments, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual
results may differ from these estimates.
These interim financial
statements contain condensed consolidated financial statements and selected explanatory notes. The notes include an explanation
of events and transactions that are significant to an understanding of the changes in financial position and performance of the
Group since the 2016 annual financial statements.
The IASB has
issued the following amendments to IFRSs that are first effective for the current accounting period of the Company:
None of these developments
have had a material effect on how the Group’s results and financial position for the current or prior periods have been prepared
or presented. The Group has not applied any new standard or interpretation that is not yet effective for the current accounting
period.
The preparation
of interim financial statements in conformity with IAS 34 requires management to make judgments, estimates and assumptions that
affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis.
Actual results may differ from these estimates.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
Revenue comprises the
fair value of the consideration received or receivable for the sale of goods. An analysis of the Company’s revenue and other
income is as follows:
The Company identifies
operating segments and prepares segment information based on the regular internal financial information reported to the Chief Executive
Officer and executive directors, who are the Company’s chief operating decision maker, for their decisions about the allocation
of resources to the Company’s business components and for their review of the performance of those components.
The Company operates
principally in the manufacturing and sale of medium to high-end ceramic tiles. The Chief Executive Officer and executive directors
regularly review the Company’s business as one business segment.
The business of the
Company is engaged entirely in the PRC. The Chief Executive Officer and executive directors regularly review the Company’s
business as one geographical segment.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
For the six months
ended June 30, 2017, cost of inventories recognized as expense included staff costs of RMB 13.1 million (2016: RMB 18.0 million),
depreciation and amortization expense of RMB 6.6 million (2016: RMB 18.3 million), operating lease charges of RMB 7.0 million (2016:
RMB 7.0 million) and write down of inventories of RMB 0 million (2016: RMB 1.4 million), which amounts are also included in the
respective total amounts disclosed separately for each of these types of expenses.
The subsidiary in Hong
Kong is subject to tax charged on Hong Kong sourced income with a statutory tax rate of 16.5% for the six months ended June 30,
2017 and 2016. No Hong Kong profits tax has been provided as the Company has no assessable profit arising in Hong Kong for the
six months ended June 30, 2017 and 2016.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
The subsidiaries in
the PRC are subject to the enterprise income tax in accordance with “PRC Enterprise Income Tax Law” (“EIT Law”),
and the applicable income tax rate for the six months ended June 30, 2017 is 25%.
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income (loss) attributable to holders of ordinary shares (RMB’000):
|
|
|
(5,829
|
)
|
|
|
29,495
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding used in computing basic and diluted (loss)/earnings per share
|
|
|
2,819,619
|
|
|
|
2,714,898
|
|
Weighted average number of ordinary shares outstanding used in computing diluted earnings per share
|
|
|
2,998,191
|
|
|
|
3,007,284
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic (RMB)
|
|
|
(2.07
|
)
|
|
|
10.86
|
|
Loss per share - diluted (RMB)
|
|
|
(2.07
|
)
|
|
|
9.81
|
|
Warrants to purchase
common stock are not included in the diluted loss per share calculations when their effect is antidilutive. For the six months
ended June 30, 2017 and 2016, about of potential common stock related to outstanding stock options were excluded from the calculation
of diluted net loss per share as such shares are antidilutive when there is a loss.
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31,2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Raw materials
|
|
|
21,957
|
|
|
|
21,909
|
|
Work in progress
|
|
|
5,657
|
|
|
|
5,657
|
|
Finished goods
|
|
|
167,628
|
|
|
|
185,176
|
|
|
|
|
195,242
|
|
|
|
212,742
|
|
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The analysis of the
amount of inventories recognized as an expense and included in profit or loss is as follows:
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Carrying amount of inventories sold
|
|
|
343,533
|
|
|
|
287,952
|
|
Write down of inventories (included in cost of sales)
|
|
|
—
|
|
|
|
1,400
|
|
|
|
|
343,533
|
|
|
|
289,352
|
|
|
|
As of
|
|
|
|
June 20, 2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade receivables
|
|
|
587,091
|
|
|
|
553,542
|
|
Less: provision for impairment
|
|
|
(23,940
|
)
|
|
|
-
|
|
|
|
|
563,151
|
|
|
|
553,542
|
|
The Company’s
trade receivables are denominated in Renminbi and non-interest bearing. In 2011, the credit period granted to distributors was
generally for a period within 90 days. Since the end of 2012, the Company had extended the collection period to 150 days to address
funding pressures of its distributors. Other customers were granted a credit period of 90 days in the years ended December 31,
2013, and extended to 120 days in the year ended December 2015 and 2016 and after.
An aging analysis of
the Company's trade receivables, based on the invoice date, is as follows:
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within 90 days
|
|
|
263,151
|
|
|
|
236,251
|
|
Between 3 and 6 months
|
|
|
130.496
|
|
|
|
268,577
|
|
More than 6 months
|
|
|
169,504
|
|
|
|
48,714
|
|
|
|
|
563,151
|
|
|
|
553,542
|
|
An aging analysis of
trade receivables that were neither past due nor impaired or past due but not impaired, is as follows:
|
|
|
|
|
Past due but not impaired
|
|
|
|
|
|
|
|
|
|
Neither past due nor
impaired
|
|
|
Less than
30 days
|
|
|
31 to 120 days
|
|
|
Over 120
days
|
|
|
Sub-total
|
|
|
Total
|
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
June 30, 2017
|
|
|
393,647
|
|
|
|
72,464
|
|
|
|
97,040
|
|
|
|
-
|
|
|
|
169,504
|
|
|
|
563,151
|
|
December 31, 2016
|
|
|
504,828
|
|
|
|
39,289
|
|
|
|
9,425
|
|
|
|
-
|
|
|
|
48,714
|
|
|
|
553,542
|
|
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Receivables that were
neither past due nor impaired relate to a large number of customers for whom there was no recent history of default. All amounts
are short-term. The Company does not hold any collateral over these receivables.
The net carrying value
of trade receivables is considered a reasonable approximation of fair value.
As of June 30, 2017,
the Company is exposed to certain credit risks as 9% and 31% of the total trade receivables were due from the Company’s largest
and five largest customers, respectively.
As of December 31,
2016, the Company is exposed to certain credit risks as 8% and 26% of the total trade receivables were due from the Company's largest
and the five largest customers, respectively.
|
|
As of
|
|
|
|
June 30,2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
90,976
|
|
|
|
84,257
|
|
Trade payables are
denominated in Renminbi, non-interest bearing and generally settled within 120-day terms. All of the trade payables are expected
to be settled within one year. The carrying value of trade payables is considered to be a reasonable approximation of fair value.
|
12.
|
ACCRUED
LIABILITIES AND OTHER PAYABLES
|
|
|
As of
|
|
|
|
June 30,2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Deposits received from distributors
|
|
|
17,200
|
|
|
|
18,600
|
|
VAT payables
|
|
|
1,331
|
|
|
|
1,054
|
|
Accrued salary
|
|
|
5,610
|
|
|
|
5,493
|
|
Accrued rent, electricity and water
|
|
|
5,110
|
|
|
|
4,848
|
|
Accrued other taxes
|
|
|
1,940
|
|
|
|
2,303
|
|
Others
|
|
|
2,481
|
|
|
|
5,342
|
|
|
|
|
33,672
|
|
|
|
37,640
|
|
Deposits received represent
deposits from the Company’s distributors. The Company usually requests a deposit from RMB400,000 to RMB1,000,000 from new
distributors upon signing a distributorship agreement as security for the performance of their obligations under the distributorship
agreement.
Accrued liabilities
consist mainly of accrued rental, wages and utility expenses.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The carrying value
of accrued liabilities and other payables is considered to be a reasonable approximation of fair value.
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Number
|
|
|
US$
|
|
|
Number
|
|
|
US$
|
|
|
|
of shares
|
|
|
‘000
|
|
|
of shares
|
|
|
‘000
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000
|
|
|
|
400
|
|
|
|
50,000,000
|
|
|
|
400
|
|
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31,2016
|
|
|
|
Number
|
|
|
RMB
|
|
|
Number
|
|
|
RMB
|
|
|
|
of shares
|
|
|
‘000
|
|
|
of shares
|
|
|
‘000
|
|
Outstanding and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2017
|
|
|
2,820,939
|
|
|
|
151
|
|
|
|
2,565,136
|
|
|
|
137
|
|
Issuance of new shares
|
|
|
369,626
|
|
|
|
20
|
|
|
|
255,803
|
|
|
|
14
|
|
At June 30, 2017
|
|
|
3,190,565
|
|
|
|
171
|
|
|
|
2,820,939
|
|
|
|
151
|
|
On April
3, 2017, the Company, pursuant to a securities purchase agreement, between the Company and an institutional accredited investor,
completed a registered offering of US$631,579 principal amount of its 5% original issue discount convertible promissory note due
January 3, 2018 for the purchase price of US$600,000.
At its option, the
holder of the Note may convert the Note into the right to acquire shares of the Company at any time prior to the Maturity Date
at the conversion price which is equal to 85% of the volume weighed average price (VWAP) per share over the five (5) trading day
period prior to each conversion of the Note, subject to $1.00 per share floor price and other conversion limitations to ensure
compliance with the Nasdaq Stock Exchange and other applicable laws, rules and regulations.
Right after the issuance
of the convertible promissory note, from April 4, 2017 through May 23, 2017, the investors converted this note into 369,626 common
shares at the conversion price ranging from US$1.1828 – US$1.9355 per share.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
14.
|
RELATED PARTY TRANSACTIONS
|
Apart
from those discussed elsewhere in these financial statements, the following are significant related party transactions entered
into between the Company and its related parties at agreed rate:
|
|
For the six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Service fees paid to Stuart Management Co.
|
|
|
41
|
|
|
|
81
|
|
|
|
2017
|
|
|
2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Amounts owed to related parties
|
|
|
36,005
|
|
|
|
35,626
|
|
Service fees accrued to Stuart Management Co.
|
|
|
7
|
|
|
|
7
|
|
|
|
|
36,012
|
|
|
|
35,633
|
|
Pursuant to an administrative
services agreement dated as of December 1, 2009 between the Company and Stuart Management Co., an affiliate of Paul K. Kelly, an
ex-director who resigned on Nov 27, 2013, the Company paid US$ 6,000 (equivalent to RMB 41,218) during the six months ended June
30, 2017 plus out-of-pocket expenses to Stuart Management Co. for administrative services. The initial one-year term began on December
1, 2009, and the agreement automatically renews for successive one-year terms unless either party notifies the other of its intent
not to renew. During the term of the agreement, Stuart Management Co. will provide the Company with general administrative services,
including acting as the Company’s administrative agent in the United States and the British Virgin Islands, and allow the
Company to utilize certain of its office space for meetings. The agreement was renewed to reduce the amount to US$4,900 (equivalent
to RMB 30,000) a month in December 2013. The amount was further reduced to US$1,000 (equivalent to RMB 6,000) a month commencing
October 2014.
The Company owed Stuart
Management Co. US$ 1,000 (equivalent to RMB 7,000) and US$ 1,000 (equivalent to RMB 7,000) as of June 3, 2017 and December 31,
2016, respectively.
Mr. Huang Jia Dong, the founder
and Chairman of Hengda and the Chief Executive Officer and one of the directors of the Company, and a holder of approximately 31.06 %
equity interests of the Company as of May 15, 2017 and Mr. Wong Kung Tok, formerly one of the Company’s significant shareholders,
provide working capital loans to the Company from time to time during the normal course of its business. These loans amounted to
RMB 34,876,000 and RMB 34,469,000 as of June 30, 2017 and December 31, 2016, respectively. These loans are interest free,
unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law. In July 2014, an entity affiliated with Mr. Huang
assumed RMB20.7 million in loans due from the Company to Mr. Wong and then forgave those loans.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
(a)
|
Operating
lease commitments
|
The Company leases
production factories, warehouses and employees’ hostel from unrelated parties under non-cancellable operating lease arrangements.
The leases have varying terms and the total future minimum lease payments of the Company under non-cancellable operating leases
are payable as follows:
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within one year
|
|
|
13,902
|
|
|
|
13,902
|
|
After one year and within five years
|
|
|
26,646
|
|
|
|
33,596
|
|
|
|
|
40,548
|
|
|
|
47,498
|
|
The leases typically
run for an initial period of three to five years, with an option to renew the lease when all terms are renegotiated. Lease payments
are usually increased every five years to reflect market rentals. None of the leases includes contingent rentals.
The Company had the
following other commitments:
|
|
As of
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Advertising expenditure contracted but not provided for in the financial statements
|
|
|
-
|
|
|
|
3,830
|
|
On June 6, 2014, a putative class
action complaint (the “Pollock Complaint”) was filed in the United States District Court for the Southern District
of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of
the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants,
and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies
under the Exchange Act. The complaint is captioned Robert Pollock, Individually and On Behalf Of All Others Similarly Situated
v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng,
Shen Cheng Liang, Jianwei Liu, And China Ceramics Co., Ltd. (Case No. 14-cv-4100).
On June 16, 2014, a putative
class action complaint (the “Artinoff Complaint”) was filed in the United States District Court for the Southern District
of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of
the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants,
and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies
under the Exchange Act. The complaint is captioned Roger Artinoff, Individually and On Behalf Of All Others Similarly Situated
v. China Ceramics Co. Ltd., Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William
L. Stulginsky And Su Wei Feng. (Case No. 14-cv-4312).
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
On July 2, 2014, a putative class
action complaint (the “Finlayson Complaint”) was filed in the United States District Court for the Southern District
of New York against us and various current and former directors and officers asserting claims for violations of Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, and claims for violations of Section 20(a) of the
Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Richard
Finlayson, Individually and On Behalf Of All Others Similarly Situated v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei
Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng, Shen Cheng Liang, Jianwei Liu, and China Ceramics Co.,
Ltd. (Case No. 14-cv-4997).
On February 6, 2015, the Company and the individual defendants reached an agreement in principle
to settle the class action litigation brought against the Company in consideration of the payment by the Company of $850,000, consisting
of $310,000 payable in cash and $540,000 to be issued in the Company’s common shares. On January 6, 2016, the United States
District Court for the Southern District of New York (the “Court”) held a final hearing to consider approval of the
settlement, and on April 22, 2016, it issued a final order approving the settlement and ordering that the parties file a stipulation
voluntarily dismissing the action on or before May 23, 2016 or, in the alternative, to file a joint letter by the same deadline
stating the reasons for the delay in filing such a stipulation. On April 22, 2016, the United States District Court for the Southern
District of New York issued a final order approving the settlement. The Company remitted $310,000 in cash and issued 554,415 common
shares in full satisfaction of the terms of the settlement. The case was closed on August 2, 2016.
Private
Placement of Unregistered Equity Securities of the Company
On July 18, 2017, the Company
completed a USD$ 861,000 private placement of its ordinary shares pursuant to subscription agreements with certain accredited investors
at the price of $1.36 per share, the closing price of the Company’s securities on July 17, 2017. The Company agreed to register
the shares sold in the Offering for resale no later than 270 days after the closing of the Offering. All respective purchasers
in the Offering were “accredited investors” (as such term is defined in Rule 501(a) of Regulation D under the Securities
Act ), and the Company sold the securities in the Offering in reliance upon an exemption from registration contained in Section
4(2) and Rule 506 under the Securities Act. There were no discounts or brokerage fees associated with this Offering. The net proceeds
of the Offering is to be used for working capital and general corporate purposes.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a British Virgin Islands limited
liability company whose predecessor, CHAC, was incorporated in Delaware on June 22, 2007 and was organized as a “blank check”
company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling,
through contractual arrangements, an operating business that had its principal operations in Asia, with a focus on potential acquisition
target in China.
Pursuant to the terms of a merger and stock
purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British
Virgin Islands subsidiary, and, immediately thereafter, as part of the same integrated transaction, China Ceramics acquired all
of the outstanding securities of Success Winner.
China Ceramics, through its operating subsidiaries,
is a leading PRC-based manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential
and commercial buildings. The ceramic tiles, sold under the “HD” or “Hengda”, “HDL” or “Hengdeli”,
“TOERTO” and “WULIQIAO” brands, are available in over two thousand styles, colors and size combinations.
Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed tiles, (iii) glazed porcelain tiles, (iv)
rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling products, accounting for over 65.9% and 64.8%
of our total revenue in the six months ended June 30, 2017 and 2016, respectively.
Combined, these facilities currently provide
an aggregate annual maximum production capacity of approximately 62 million square meters. However, in March 2016, the Company
entered into an eight-year contract to lease out one of the production lines from its Hengdali facility. The production line has
the capacity to produce approximately 10 million square meters of ceramic tiles annually. The term of the contract is from March
1, 2016 to February 29, 2024. The Company believes that it is prudent to generate income from its unused production capacity from
a third party rather than let it remain idle. Therefore, for the term of the eight-year lease, the Company may only produce up
to 20 million square meters of ceramic tiles from its Hengdali facility, and its maximum annual production capacity has been effectively
reduced from 72 million square meters of ceramic tiles to 62 million square meters of ceramic tiles.
Due to currently challenging economic conditions,
in fiscal 2016, we utilized production facilities capable of producing 29 million square meters. We currently have twelve production
lines, nine of which are currently in use, with each production line optimized to manufacture specific size ranges to maximize
efficiency and output.
Basis of Presentation
The following discussion
and analysis of our financial condition and results of operations is based on the selected financial information as of and for
the six months ended June 30, 2017 and has been prepared based on the consolidated financial statements of China Ceramics
Co., Ltd. and its subsidiaries. The consolidated financial statements of China Ceramics Co., Ltd. and its subsidiaries have been
prepared in accordance with IFRS as issued by the International Accounting Standards Board, or “IASB.” The consolidated
financial statements have been prepared on the historical cost basis, except for derivative financial instruments that have been
measured at fair value.
The business combination
on November 20, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in the former owner
of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition, we had
no operating business. Accordingly, the acquisition does not constitute a business combination for accounting purposes and is accounted
for as a capital transaction. That is, the transaction is in substance a reverse recapitalization, equivalent to the issuance of
equity interests by Success Winner for the net monetary assets of China Ceramics accompanied by a recapitalization. The consolidated
financial statements are a continuation of the financial statements of Success Winner. The assets and liabilities of China Ceramics
are recognized at their carrying amounts at the date of acquisition with a corresponding credit to the consolidated equity and
no goodwill or other intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition
represents the equity balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined
as described above. However, the equity structure presented in the consolidated financial statements (number and values of equity
instruments issued) reflects the equity structure of the legal parent, China Ceramics. Costs directly attributable to the transaction
have been debited to equity to the extent of net monetary assets received.
Results of Operations
The following table sets forth our financial
results for the six months ended June 30, 2017 and 2016, respectively:
RMB(‘000)
|
|
2016
|
|
|
2017
|
|
Revenue
|
|
|
340,629
|
|
|
|
336,450
|
|
Cost of sales
|
|
|
(290,395
|
)
|
|
|
(343,859
|
)
|
Gross profit (loss)
|
|
|
50,234
|
|
|
|
(7,409
|
)
|
Other income
|
|
|
8,202
|
|
|
|
7,130
|
|
Other expenses
|
|
|
(4,438
|
)
|
|
|
(1,757
|
)
|
Selling and distribution expenses
|
|
|
(7,017
|
)
|
|
|
(5,835
|
)
|
Administrative expenses
|
|
|
(11,767
|
)
|
|
|
(9,227
|
)
|
Finance costs
|
|
|
(735
|
)
|
|
|
(217
|
)
|
Income (loss) before taxation
|
|
|
34,479
|
|
|
|
(17,315
|
)
|
Income tax (expenses)/credit
|
|
|
(4,984
|
)
|
|
|
11,276
|
|
Loss attributable to shareholders
|
|
|
29,495
|
|
|
|
(6,039
|
)
|
Description of Selected
Income Statement Items
Revenue
. We generate revenue
from the sales of ceramic tiles, including porcelain tiles, glazed porcelain tiles, glazed tiles, rustic tiles and polished glazed
tiles, net of rebates and discounts. For the past three fiscal years, the second and third calendar quarters have been the peak
season of the property developing industry, and, therefore, our quarterly sales are usually highest from May to September compared
to the rest of the year. Conversely, our sales were lower between the months of January to March. This is because property developing
activities tend to be low due to the effects of cold weather and the PRC Spring Festival. Beginning on July 1, 2016, we reduced
the selling price of certain of our slow-moving products by 10% with the goal of turning some of this inventory into cash. Beginning
on October 1, 2016, in order to generate sales and move inventory, we instituted a 20% reduction in price of our slow-moving products.
However, in the first quarter of 2017, we increased our average selling price by 5%. The revenue slightly decreased by 1.23% in
the six months ended June 30, 2017 as compared to same period of 2016. This was mainly due to the 24.4% decrease in average selling
price; our average sales volume during the same period in 2017 increased by 30.6% mainly as a result of discounted selling prices.
The decrease in revenue in six months ended June 30, 2017 as compared to the same period of 2016 was primarily due to continued
challenging market conditions prevailing in the PRC economy and an overall decline in business activity in China.
Cost of sales
. Cost
of sales consists of costs directly attributable to production, including the cost of clay, color materials, glaze materials, coal,
salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.
The most significant factors
that directly or indirectly affect our cost of sales are as follows:
|
·
|
Availability and price of clay;
|
|
·
|
Availability and price of coal; and
|
|
·
|
Availability and price of dyes; and
|
Clay is a key material for making ceramic
tiles, and accounted for approximately 24.6% and 24.3% of our cost of sales in the six months ended June 30, 2017 and 2016,
respectively. Fujian and Jiangxi Provinces, where our production facilities are located, are the largest clay resources areas in
China and clay supply is stable and sufficient for our production and planned production.
Dyes are another key
material for making ceramic tiles, and accounted for approximately 27.8% and 26.8% of our cost of sales in the six months ended
June 30, 2017 and 2016, respectively. A number of dyes are used in ceramic tiles, and the prices of different dyes have experienced
fluctuations in the past few years.
Other income and other
expenses
. Other income consists of interest income, foreign exchange gain/loss, and rental income by leasing out
one of its production lines. Other expenses primarily consist of the loss on disposal of equipment and the depreciation by leasing
out one of its production lines.
Selling and distribution
expenses
. Selling and distribution expenses consist of payroll, traveling expenses, transportation and advertising
expenses incurred by our selling and distribution team.
Administrative expenses
. Administrative
expenses consist primarily of employee remuneration, payroll taxes and benefits, general office expenses, bad debt provision of
trade receivable and depreciation. We expect administrative expenses to continue to increase in absolute amounts. We also incur
additional expenses related to costs of compliance with securities laws and other regulations, including audit and legal fees and
investor relations expenses.
Finance Costs
. Finance
costs consist of interest expense on bank loans. During the six months ended June 30, 2017, the finance costs mainly consisted
of the interest expense that we paid on a convertible note.
Income taxes
. Our
subsidiaries in the PRC are subject to the PRC Enterprise Income Tax Law, and the applicable income tax rate pursuant to such law
in the years ended December 31, 2015, 2016 and 2017 is 25%.
Results of Operations
Six months ended June
30, 2017 compared to six months ended June 30, 2016
Revenue
. The
following table sets forth the breakdown of revenue, by product categories, for six months ended June 30, 2017 and 2016:
|
|
June 30
|
|
Revenue RMB (000)
|
|
2016
|
|
|
Percentage
|
|
|
2017
|
|
|
Percentage
|
|
Porcelain
|
|
|
211,384
|
|
|
|
62.06
|
%
|
|
|
221,908
|
|
|
|
65.96
|
%
|
Glazed Porcelain
|
|
|
13,681
|
|
|
|
4.02
|
%
|
|
|
13,794
|
|
|
|
4.10
|
%
|
Glazed
|
|
|
15,572
|
|
|
|
4.57
|
%
|
|
|
15,843
|
|
|
|
4.71
|
%
|
Rustic
|
|
|
37,739
|
|
|
|
11.08
|
%
|
|
|
33,527
|
|
|
|
9.96
|
%
|
Polished Glazed
|
|
|
62,253
|
|
|
|
18.28
|
%
|
|
|
51,378
|
|
|
|
15.27
|
%
|
Total
|
|
|
340,629
|
|
|
|
100.00
|
%
|
|
|
336,450
|
|
|
|
100.00
|
%
|
Revenue decreased by RMB
4.2 million, or 1.2%, to RMB 336.5 million ($49.0 million) in the six months ended June 30, 2017, from RMB 340.6 million for the
six months ended June 30, 2016. The year-over-year decrease in revenue was primarily driven by 24.4% decrease in average selling
price despite our average sales volume increased by 30.6% (mostly for the lower price products).
Porcelain tiles
. Revenue from the
sales of porcelain tiles increased 5%, from RMB 211.4 million for the six months ended June 30, 2016 to RMB 221.9 million ($32.3
million) for the six months ended June 30, 2017. The increase was primarily attributable to increase in our sales volume in 2017
as compared to 2016. Porcelain tiles for exterior walls are still our most popular product and have the largest market potential
of all of our tiles. We expect porcelain tiles to continue to be our key product for the foreseeable future.
Glazed porcelain tiles.
Revenue
from glazed porcelain tiles increased 1%, from approximately RMB13.6 million for the six months ended June 30, 2016 to RMB13.8
million ($2.0 million) for the six months ended June 30, 2017.
Glazed tiles
. Revenue
from glazed tiles increased 2%, from RMB15.6 million for the six months ended June 30, 2016 to RMB 15.8 million ($2.3 million)
for the six months ended June 30, 2017.
Rustic tiles.
Revenue
from rustic tiles decreased 11%, from RMB 37.8 million for the six months ended June 30, 2016 to RMB 33.5 million ($4.8 million)
for the six months ended June 30, 2017, which was mainly due to a 13.0% decrease in selling price in six months ended June 30,
2017 as compared to same period of 2016.
Polished glazed tiles.
Revenue
from polished glazed tiles decreased 17%, from RMB 62.3 million for the six months ended June 30, 2016 to RMB 51.4 million ($7.5million)
for the year six months ended June 30, 2017, mainly due to a 18.3 % decrease in selling price despite 1.1% increase in sales volume
in 2017 as compared to the same period of 2016. We began selling polished glazed tiles in the second quarter of 2011. We believe
that this product represents both a functional and cost-effective replacement for actual marble or stone materials used in a decorative
fashion inside homes. The polished glazed tiles are larger than our other tiles and we believe that demand for this series will
increase in the future.
Cost of sales.
The
following table sets forth the breakdown of cost of sales, by product segment, for the six months ended June 30, 2017 and 2016:
Cost of sales RMB (‘000)
|
|
2016
|
|
|
Percentage
|
|
|
2017
|
|
|
Percentage
|
|
Porcelain
|
|
|
178,206
|
|
|
|
61.37
|
%
|
|
|
227,516
|
|
|
|
66.17
|
%
|
Glazed Porcelain
|
|
|
13,938
|
|
|
|
4.80
|
%
|
|
|
16,485
|
|
|
|
4.79
|
%
|
Glazed
|
|
|
14,288
|
|
|
|
4.92
|
%
|
|
|
17,404
|
|
|
|
5.06
|
%
|
Rustic
|
|
|
32,989
|
|
|
|
11.36
|
%
|
|
|
33,909
|
|
|
|
9.86
|
%
|
Polished Glazed
|
|
|
50,974
|
|
|
|
17.55
|
%
|
|
|
48,545
|
|
|
|
14.12
|
%
|
Total
|
|
|
290,395
|
|
|
|
100.00
|
%
|
|
|
343,859
|
|
|
|
100.00
|
%
|
Cost of sales was RMB 343.9 million ($51.8
million) for the six months ended June 30, 2017 compared to RMB 290.4 million for the six months ended June 30, 2016, representing
an increase of RMB 53.5 million, or 18.4%. The increase in cost of sales was primarily due to a 30.6% increase in our sales volume
in the six months ended June 30, 2017 as compared to the same period of 2016.
Gross profit (loss).
The following
table breaks down of our gross profit (loss) and gross profit (loss) margin by product segment for the six months ended June 30,
2017 and 2016:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
RMB (‘000)
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
|
Gross
Loss
|
|
|
Loss
Margin
|
|
Porcelain
|
|
|
33,178
|
|
|
|
15.70
|
%
|
|
|
(5,608
|
)
|
|
|
(2.53
|
)%
|
Glazed Porcelain
|
|
|
(257
|
)
|
|
|
(1.88
|
)%
|
|
|
(2,691
|
)
|
|
|
(19.51
|
)%
|
Glazed
|
|
|
1,284
|
|
|
|
8.25
|
%
|
|
|
(1,561
|
)
|
|
|
(9.85
|
)%
|
Rustic
|
|
|
4,750
|
|
|
|
12.59
|
%
|
|
|
(382
|
)
|
|
|
(1.14
|
)%
|
Polished Glazed
|
|
|
11,279
|
|
|
|
18.12
|
%
|
|
|
2,833
|
|
|
|
5.51
|
%
|
All products
|
|
|
50,234
|
|
|
|
14.75
|
%
|
|
|
(7,409
|
)
|
|
|
(2.20
|
)%
|
Our gross profit (loss)
decreased 114.7% or RMB 57.6 million for the six months ended June 30, 2017, from RMB 50.2 million gross profit for the six months
ended June 30, 2016 to RMB 7.4 million ($1.1 million) gross loss for the same period of 2017.
Administrative expenses.
Administrative
expenses were RMB 9.2 million ($1.3 million) for the six months ended June 30, 2017, compared to RMB 11.8 million for the six months
ended June 30, 2016, representing a decrease of RMB 2.5 million, or 21.6%.
Finance costs.
Finance
costs decreased 70.5% or RMB 0.5 million, from RMB 0.7 million for the six months ended June 30, 2016 to RMB 0.2 million ($31,590)
for the six months ended June 30, 2017. The decrease mainly due to the decrease in interest expense.
Other expenses.
Other
expenses decreased 60.4% or RMB 2.7 million, from RMB 4.4 million for the six months ended June 30, 2016 to RMB1.8 million ($0.26
million) for the six months ended June 30, 2017. In the six months ended June 30, 2017, loss on disposal of property, plant and
equipment was RMB 43,000.
Income (loss) before
taxation.
Loss before taxation increased 150.2% or RMB 51.8 million, from RMB 34.5 million income for the six months ended
June 30, 2016 to RMB 17.3 million ($2.5 million) loss for the six months ended June 30, 2017. The increase in loss before taxation
was mainly due to increased gross loss for the six months ended June 30, 2017.
Income taxes.
We
incurred an income tax credit of RMB 11.3 million ($1.6 million) for the six months ended June 30, 2017 compared to an income tax
expense of RMB 4.9 million for the six months ended June 30, 2016, representing an increase in tax credit of RMB 16.3 million.
Our PRC statutory enterprise income tax rate was 25% for the six months ended June 30, 2017 and 2016.
Income (Loss) attributable
to shareholders.
Income attributable to shareholders decreased approximately RMB 35.5 million or 120.5%, from RMB 29.5
million net income for the six months ended June 30, 2016 to RMB 6.0 million net loss (US$ 0.88 million) for the six months ended
June 30, 2017.
Liquidity and Capital
Resources
The following table presents
a summary of our cash flows and beginning and ending cash balances for the six months ended June 30, 2016 and 2017:
RMB(‘000)
|
|
2016
|
|
|
2017
|
|
Net cash (used in)/generated from operating activities
|
|
|
(7,631
|
)
|
|
|
1,572
|
|
Net cash generated from/(used in) investing activities
|
|
|
43,426
|
|
|
|
(5,486
|
)
|
Net cash (used in)/generated from financing activities
|
|
|
(31,433
|
)
|
|
|
3,956
|
|
Net cash flow
|
|
|
4,362
|
|
|
|
42
|
|
Cash and cash equivalents at beginning of year
|
|
|
514
|
|
|
|
110
|
|
Effect of foreign exchange rate differences
|
|
|
(1,552
|
)
|
|
|
15
|
|
Cash and cash equivalents at end of year
|
|
|
3,324
|
|
|
|
167
|
|
We have historically financed
our liquidity requirements mainly through operating cash flow, bank loans and issuance of new shares. We believe that we will generate
sufficient cash from operations to meet our needs for the next twelve months.
July 2017 Private Placement
On July 18, 2017, we completed a $861,000 private placement of our ordinary shares pursuant to subscription
agreements (the “Subscription Agreements”) with certain accredited investors (the “Offering”) at the price
of $1.36 per share, the closing price of our the Company’s securities on July 17, 2017. We agreed to register the shares
sold in the Offering for resale no later than 270 days after the closing of the Offering. All respective purchasers in the Offering
were “accredited investors” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act ), and
the Company sold the securities in the Offering in reliance upon an exemption from registration contained in Section 4(2) and Rule
506 under the Securities Act. There were no discounts or brokerage fees associated with this Offering. The net proceeds of the
Offering are to be used for working capital and general corporate purposes.
Cash flows from operating
activities.
Our net cash generated from (used in) operating
activities was RMB 1.6 million cash inflow ($0.2 million) for the six months ended June 30, 2017, an increase of RMB 9.0 million,
or 120.6%, from cash outflow of RMB 7.6 million for the same period in 2016. The increase of cash inflow was mainly due to a decreased
cash outflow of RMB 17.5 million ($2.6 million) in inventories in the six months ended June 30, 2017.
Cash flows from investing
activities
.
Net cash generated from
(used in) investing activities in the six months ended June 30, 2017 was cash outflow of RMB 5.5 million ($0.8 million), compared
to RMB 43.4 million of cash inflow in the same period of 2016. We had RMB 41.7 million cash inflow from restricted cash in the
six months ended June 30, 2016; while in the same period of 2017, we purchased fixed asset for RMB 5.6 million and received RMB
70,000 from disposal of two vehicles.
Cash flows from financing
activities.
Net cash generated from
(used in) financing activities was RMB 4.1 million ($0.6 million) cash inflow for the six months ended June 30, 2017 comparing
with cash outflow of RMB 31.4 million for the same period of 2016, primarily due to the decrease of net repayment of short-term
loan in 2017.
The major sources of our
liquidity for six months ended June 30, 2017 and 2016 were cash generated from operations.
Cash and bank balances
were RMB 167,000 ($ 0.02 million) as of June 30, 2017, as compared to RMB3.3 million as of June 30, 2016.
As of June 30, 2017, our
total outstanding bank loan amounts were nil.
In our opinion, our working
capital, including our cash, income and cash flows from operations, and short-term borrowings, is sufficient for our present requirements.
However, we may sell additional
equity or obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future acquisitions and
capital equipment expenditures. The sale of additional equity would result in further dilution to our shareholders. The incurrence
in indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.
We cannot provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Inventory Management
Our inventory is comprised
of raw materials, work in progress and finished goods. Raw materials are purchased from our suppliers located in Fujian, Guangdong
and Jiangxi Provinces and comprise mainly of clay, coal, colorings, and glazing materials.
We have sufficient raw
materials to support, on average, three weeks of production at any point in time. This helps to minimize any potential delays in
our production process which may arise due to insufficient raw materials. Our production of ceramic tiles is based on customers’
orders. In doing so, we minimize storage space and maintain a relatively low inventory level of finished products. Our inventory
turnover for the six months ended June 30, 2017 and 2016 are as follows:
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
Inventories (RMB’000)
|
|
|
271,819
|
|
|
|
195,242
|
|
Inventory turnover (days)
(1)
|
|
|
180
|
|
|
|
107
|
|
(1)
|
The average inventory turnover is computed based on the formula: (simple average opening and closing inventories balance in a half year / cost of sales) × 181 days.
|
Write down of inventory
for the six months ended June 30, 2017 and 2016 was RMB 0 and RMB 1.4 million, respectively, and was charged to cost of sales.
Credit Management
Credit terms to our
customers
We typically extend credit
terms of approximately 90 days to our customers. We will grant credit terms based on the reputation, creditworthiness, size of
orders, payment records and number of years we have done business with the customer. We do not have a goods return policy. Considering
the challenging market conditions in China’s real estate industry, we extended the collection period to 150 days to address
funding pressures of our distributors since the year ended December 31, 2012. Other customers were granted a credit period of 90
days in the years ended December 31, 2013 and 2012 and extended to 120 days in the year ended December 31, 2014. In the fourth
quarter of 2016, the Company accrued RMB 23.9 million ($ 3.5 million) as a provision for bad debt related to the amount of outstanding
trade receivables that did not conform with the Company’s credit policy.
Personnel from our sales
and marketing department typically conduct visits to new customers to evaluate their credit worthiness before entering into any
arrangements with them. In addition, as Hengda was awarded the top 500 brand, we increased the deposit required from new distributors
from RMB 0.4 million to RMB 1.0 million.
Our average trade receivables’
turnover for the six months ended June 30, 2017 and 2016 are as follows:
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
Trade receivables (RMB’000)
|
|
|
626,760
|
|
|
|
563,151
|
|
Trade receivables turnover (days)
(1)
|
|
|
302
|
|
|
|
300
|
|
(1)
|
The average trade receivables’ turnover is computed based on the formula: (simple average opening and closing trade receivables balance, net of value-added tax in a half year / revenue) × 181 days.
|
Credit terms from our
suppliers
Our typical credit terms
from our major suppliers are from 1 to 4 months after the raw materials have been delivered. Our average trade payables’
turnover days for the six months ended June 30, 2017 and 2016 are as follows:
|
|
2016
|
|
|
2017
|
|
Trade payables (RMB’000)
|
|
|
130,192
|
|
|
|
90,976
|
|
Trade payables turnover (days)
(1)
|
|
|
108
|
|
|
|
43
|
|
(1)
|
The average trade payables’ turnover is computed based on the formula: (simple average opening and closing trade payables balance, net of value-added tax in a half year / purchases) × 181 days.
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Dividends
We paid a cash dividend
of $0.10 per share each on July 13, 2013 and January 14, 2014 to our shareholders, which totaled $4.1 million (equivalent to RMB
24.9 million gross, RMB 23.66 million net of 5% PRC withholding tax). In 2014, we paid a cash dividend of US$ 0.0125 per share
each on July 14, 2014 and January 14, 2015 to our shareholders, which totaled US$0.5 million (equivalent to RMB 3.2 million gross,
RMB 3.0 million net of 5% PRC withholding tax). We have not paid any dividends since January 2015.
Off-Balance Sheet
Arrangements
We do not have any outstanding
off-balance arrangements and have not entered into any transactions that are established for the purpose of facilitating off-balance
sheet arrangements.
Impact of Inflation
The general annual inflation
rate in China was approximately 2.0% in 2014, 1.44% in 2015, and 3.02% in 2016 according to the National Bureau of Statistics.
Our results of operations may be affected by inflation, particularly rising prices for energy, labor costs, raw materials and other
operating costs. See “Item 3. Key Information — Risk Factors — Risks relating to our business — If China’s
inflation increases or the prices of energy or raw materials increase, we may not be able to pass the resulting increased costs
to our customers and this may adversely affect our profitability or cause us to suffer operating losses.”
Critical Accounting Policies and Judgment
The preparation of the
condensed consolidated interim financial statements, which have been prepared in accordance with International Accounting Standard
(“IAS”) as issued by the International Accounting Standards Board (“IASB”), requires us to make estimates,
judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and judgments
are continually evaluated and are based on historical experiences and other factors, including expectations of future events that
are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different
assumptions or conditions.
See Note 2 to our condensed
consolidated interim financial statements, “Basis of Preparation and Summary of Significant Accounting Policies.” We
believe that the following paragraphs reflect the most critical accounting policies that currently affect our financial condition
and results of operations:
Inventories
Inventories are carried
at the lower of cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work in
progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is
the estimated selling price in the ordinary course of business less the estimated cost of completion and applicable selling expenses.
When inventories are sold,
the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized.
The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense
in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction
in the amount of inventories recognized as an expense in the period in which the reversal occurs.
Financial instruments
Recognition, initial
measurement and subsequent measurement
Financial assets and financial
liabilities are recognized when we become a party to the contractual provisions of the financial instrument and are measured initially
at fair value adjusted by transaction costs, except for those carried at fair value through profit or loss which are measured initially
at fair value. Subsequent measurement of financial assets and financial liabilities are described below.
Financial assets are derecognized
when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial
risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or expires.
Classification and
subsequent measurement of financial assets
For the purpose of subsequent
measurement, financial assets other than those designated and effective as hedging instruments are classified into the following
categories upon initial recognition:
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Financial assets at fair value through profit or loss (“FVTPL”)
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Held-to-maturity (“HTM”) investments
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Available-for-sale (“AFS”) financial assets
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All financial assets except
for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective
evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied
for each category of financial assets, which are described below.
All income and expenses
relating to financial assets are recognized in profit and loss.
Loans and receivables
Loans and receivables
are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially
recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue. After initial recognition,
these are subsequently measured at amortized cost using the effective interest method, less provision for impairment. Discounting
is omitted where the effect of discounting is immaterial. Our cash and trade receivables fall into this category of financial instruments.
Individually significant
receivables are considered for impairment when they are past due or when other objective evidence is received.
Financial assets at
FVTPL
Financial assets at FVTPL
include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL
upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective
as hedging instruments, for which the hedge accounting requirements apply.
Assets in this category
are measured at fair value with net changes in fair value presented in the statement of profit or loss. Transaction costs are expensed
as incurred. The fair values of financial assets in this category are determined by reference to active market transactions or
using a valuation technique where no active market exists.
HTM investments
HTM investments are non-derivative
financial assets with fixed or determinable payments and fixed maturity other than loans and receivables. Investments are classified
as HTM if we have the intention and ability to hold them until maturity.
HTM investments are measured
subsequently at amortized cost using the effective interest method. We do not have any financial assets classified as HTM.
AFS financial assets
AFS financial assets are
non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other
categories of financial assets. We do not have any financial assets classified as AFS.
After initial measurement,
AFS financial investments are subsequently measured at fair value with unrealized gains or losses recognized in other comprehensive
income and credited in the AFS reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized
in other operating income, or the investment is determined to be impaired. Interest is calculated using the effective interest
method and dividends are recognized in profit or loss within finance income.
Impairment of financial
assets
We assess, at each reporting
date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists
if one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’), has
an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty,
default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization
and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears
or economic conditions that correlate with defaults.
If any such evidence exists,
any impairment loss is determined and recognized as follows:
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For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate, where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.
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If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
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For available-for-sale securities which are stated at fair value, when a decline in the fair value has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. The amount of the cumulative loss that is recognized in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in profit or loss.
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Impairment losses recognized in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognized in other comprehensive income.
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Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade debtors included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When we are satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit or loss.
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Classification and
subsequent measurement of financial liabilities
Financial liabilities
Financial liabilities
are classified as FVTPL, or other financial liabilities, as appropriate upon initial recognition. A financial liability is derecognized
when the obligation under the liability is discharged, cancelled or expired.
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Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. Subsequent to the initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. Our other financial liabilities include trade payables and accrued liabilities.
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Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Financial liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments (including separated embedded derivatives) held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the consolidated statement of profit or loss. We do not have any financial liabilities classified as FVTPL.
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Derivative financial instruments
Initial recognition and subsequent
measurement
We use derivative financial
instruments, such as forward currency contracts, for investment purposes. Such derivative financial instruments are initially recognized
at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives
are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising
from changes in the fair value of derivatives are taken directly to profit or loss.
Leases
Financial leases refers
to the situation that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all
the risks and rewards of ownership of the leased asset.
All other leases are treated
as operating leases. Where we have the right to use of assets held under operating leases, payments made under the leases are charged
to profit or loss on a straight line basis over the lease terms except where an alternative basis is more representative of the
time pattern of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an
integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period
in which they are incurred.
All of our leases are
operating leases for the years ended December 31, 2016, 2015 and 2014.
Revenue recognition
Revenue comprises the
fair value of the consideration received or receivable for the sale of goods, net of rebates and discounts. We paid rebates to
some distributors on their annual cash collections in 2012 and 2011. No such rebates were paid to distributors since year 2013.
Provided it is probable that the economic benefits will flow to us and the revenue and costs, if applicable, can be measured reliably,
revenue is recognized as follows:
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Sales of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing management involvement with the goods and we do not have the obligation to accept the return of the goods to us from the customer.
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Interest income is recognized on a time-proportion basis using the effective interest method.
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Impairment of non-financial
assets
Impairment testing is
made on our goodwill at each reporting date. Property, plant and equipment and land use rights are tested for impairment if there
is any indication that the assets may be impaired at the balance sheet date.
If any indication exists,
or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount.
Calculation of recoverable
amount
An asset’s recoverable
amount is the greater of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not
generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group
of assets that generates cash inflows independently (i.e. a cash-generating unit).
Recognition of impairment
losses
An impairment loss is
recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds
its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the
carrying amount of the other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced
below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).
Reversal of impairment
losses
In respect of assets other
than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable
amount. An impairment loss in respect of goodwill is not reversed.
A reversal of an impairment
loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in
prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognized.
Share-based employee
remuneration
We operate equity-settled
share-based remuneration plans for its employees. None of our plans feature any options for a cash settlement.
The fair value of share
options granted to employees is recognized as an employee cost with a corresponding increase in the share-based payment reserve
within equity. The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account the
terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally
entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into
account the probability that the options will vest.
During the vesting period,
the number of share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized in prior
years is charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for recognition
as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized as
an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based
payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of our
shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred
to the share premium account) or the option expires (when it is released directly to retained earnings).
Accounting for income
taxes
Income tax comprises current
tax and deferred tax.
Current tax and movements
in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized
in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive
income or directly in equity, respectively.
Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period,
and any adjustment to tax payable in respect of previous years.
Deferred tax is calculated
using the liability method on temporary differences at the reporting date between the carrying amounts of assets and liabilities
in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable temporary
differences. Deferred tax assets are recognized for all deductible temporary differences, tax losses available to be carried forward
as well as other unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary
differences, will be available against which the deductible temporary differences, unused tax losses and unused tax credits can
be utilized.
Deferred tax assets and
liabilities are not recognized if the temporary difference arises from goodwill or from initial recognition (other than in a business
combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred tax liabilities
are recognized for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except
where we are able to control the reversal of the temporary differences and it is probable that the temporary differences will not
reverse in the foreseeable future.
Deferred tax is calculated,
without discounting, at tax rates that are expected to apply in the period the liability is settled or the asset realized, based
on tax rate (and tax laws) that have been enacted or substantively enacted at the reporting date.
The carrying amount of
a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable
that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed
to the extent that it becomes probable that sufficient taxable profits will be available.
Additional income taxes
that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current tax assets and
current tax liabilities are presented in net if we have the legally enforceable right to set off the recognized amounts and the
following additional conditions are met:
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in the case of current tax assets and liabilities, we intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
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in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
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the same taxable entity; or
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different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to settle the liabilities and realize the assets simultaneously.
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Critical accounting estimates and assumptions
We make estimates and
assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.
The key sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have
a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year are discussed below:
Useful lives and impairment
assessment of property, plant and equipment
Property, plant and equipment
are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level
of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset
basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated
by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Useful lives and impairment
assessment of investment property
Investment properties
are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level
of annual depreciation expenses recorded. Investment properties are evaluated for possible impairment on a specific asset basis
or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated
by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Impairment loss recognized
in respect of property, plant and equipment
As of December 31, 2016,
the carrying amount of property, plant and equipment was approximately RMB 130,542,000 (2015: RMB409,855,000). An impairment loss
of approximately RMB209,919,000 recognized against the original carrying amount of property, plant and equipment. The impairment
loss recognized for the years ended December 31, 2015 was RMB405,125,000 and nil for year 2014. Determining whether property, plant
and equipment are impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such estimation
was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.
Impairment loss recognized
in respect of investment property
As of December 31, 2016,
the carrying amount of investment property was approximately RMB 6,791,000 (2015: NIL). An impairment loss of approximately RMB10,920,000
recognized against the original carrying amount of investment property. The impairment loss recognized for the years ended December
31, 2015 was nil and nil for year 2014. Determining whether investment property are impaired requires an estimation of the recoverable
amount of the investment property. Such estimation was based on certain assumptions, which are subject to uncertainty and might
materially differ from the actual results.
Impairment loss recognized
in respect of land use rights
As of December 31, 2016,
the carrying amount of land use rights was approximately RMB5,920,000 (2015: RMB15,809,000). An impairment loss of approximately
RMB9,520,000 was recognized against the original carrying amount of land use rights. The impairment loss recognized for the years
ended December 31, 2015 was RMB12,781,000 and nil for year 2014. Determining whether land use rights are impaired requires an estimation
of the recoverable amount of the land use rights. Such estimation was based on certain assumptions, which are subject to uncertainty
and might materially differ from the actual results.
Impairment of goodwill
Determining whether goodwill
is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value
in use calculation requires the Company to estimate the future cash flows expected to arise from the cash-generating unit and a
suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material
impairment loss may arise. No impairment was made on goodwill for the years ended December 31, 2016. The impairment made on goodwill
for the years ended December 31, 2015 and 2014 was RMB3,735,000 and zero.
Income tax
The Company has exposure
to income taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There are certain transactions
and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes
liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made.
Impairment of trade
receivables
The Company’s management
assesses the collectability of trade receivables. This estimate is based on the credit history of the Company’s customers
and the current market conditions. Management assesses the collectability of trade receivables at the balance sheet dates and makes
the provision, if any. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in
assessing the ultimate realization of these receivables, including the current creditworthiness, past collection history of each
customer and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact
the carrying value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed.
Net realizable value
of inventories
Net realizable value of
inventories is the management’s estimation of future selling price in the ordinary course of business, less estimated costs
of completion and selling expenses. These estimates are based on the current market condition and the historical experience of
selling products of a similar nature. It could change significantly as a result of various market factors.
Share-based payment
transaction
The Company measures the
cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which
they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation
model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate
inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions
about them.