Indicate by check mark whether the registrant files or will
file annual reports under cover of Form 20-F or Form 40-F.
Indicate by check mark if the registrant is submitting the Form
6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form
6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
Indicate by check mark whether the registrant by furnishing
the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934.
If “Yes” is marked, indicate below the file number
assigned to the registrant in connection with Rule 12g3-2(b): 82-________.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
CHINA CERAMICS CO. LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2019
(UNAUDITED)
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 operations 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 Capital 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, 2019 is as follows:
2.
|
BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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, 2018 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, 2019 are not necessarily
indicative of the results expected for the full fiscal year or for any future period.
These interim financial statements are presented in
RMB, unless otherwise stated. They were approved for issue by the Audit Committee of the Board of Directors and the Board of
Directors on September 25, 2019.
These interim financial statements have been prepared
in accordance with the same accounting policies adopted in the 2018 annual financial statements, except for those that relate to
new standards or interpretations effective for the first time for periods beginning on or after January 1, 2019. This is the first
set of the Company’s financial statements in which IFRS 16 have been adopted. Details of any changes in accounting policies
are set out in note 3.
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 2018 annual financial
statements.
3.
|
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
|
The IASB has issued the following IFRSs that are first
effective for the current accounting period of the Company:
The Company adopted IFRS 16 Leases retrospectively
from January 1, 2019. In accordance with the transitional provision under IFRS 16, the Company applied the simplified transition
approach, and all right-of-use assets were measured at the amount of the lease liabilities on adoption (adjusted for any prepaid
or accrued lease expenses). Comparative figures for the 2018 financial year have not been restated.
On adoption of IFRS 16, the Company recognized lease
liabilities in relation to leases which had previously been classified as “operating leases” under the principles of
IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s
incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the
lease liabilities on January 1, 2019 was 5.75%.
|
|
RMB’000
|
|
Operating lease commitments disclosed as at December 31, 2018
|
|
|
19,695
|
|
Discounted using weighted average incremental borrowing rate of 5.75%
|
|
|
15,496
|
|
Lease liabilities recognized as at January 1, 2019
|
|
|
19,380
|
|
All right-of-use assets were measured at the amount
equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized
in the consolidated statement of financial position as at December 31, 2018. The impact on transition is summarized as below:
|
|
January 1, 2019
|
|
|
|
RMB’000
|
|
Right-of-use assets
|
|
|
17,266
|
|
Lease liability
|
|
|
(19,380
|
)
|
Retained earnings
|
|
|
2,114
|
|
4.
|
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
|
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.
5.
|
REVENUE AND OTHER INCOME
|
|
a)
|
An analysis of the Company’s revenue and other income is as follows:
|
|
|
For the six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Revenue
|
|
|
|
|
|
|
|
|
Sale of goods
|
|
|
177,431
|
|
|
|
355,630
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
46
|
|
|
|
-
|
|
Rental income
|
|
|
7,075
|
|
|
|
7,088
|
|
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 makers, 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.
|
|
For the six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Finance costs
|
|
|
|
|
|
|
|
|
Interest expense on lease liability
|
|
|
157
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of inventories recognized as an expense
|
|
|
161,130
|
|
|
|
309,183
|
|
Depreciation of fixed assets
|
|
|
6
|
|
|
|
5,753
|
|
Amortization of land use rights
|
|
|
-
|
|
|
|
54
|
|
Operating lease charges
|
|
|
-
|
|
|
|
6,951
|
|
Depreciation charge of right-of-use assets (lease)
|
|
|
6,094
|
|
|
|
-
|
|
Research and development costs
|
|
|
6,532
|
|
|
|
550
|
|
Staff costs (including key management personnel remuneration)
|
|
|
17,114
|
|
|
|
27,680
|
|
For the six months ended June 30, 2019, the cost of
inventories recognized as expense included staff costs of RMB 12.7 million (for the six months ended June 30, 2018, this figure
was RMB 22.1 million), depreciation and amortization expense (including depreciation charge of right-of-use assets) of RMB
6.1 million (for the six months ended June 30, 2018, this figure was RMB 4.2 million), operating lease charges of RMB nil (for
the six months ended June 30, 2018, this figure was RMB 7.0 million), which amounts are also included in the respective total amounts
disclosed separately for each of these types of expenses.
|
|
For the six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Current Tax:
|
|
|
|
|
|
|
|
|
PRC Income Tax Expense
|
|
|
27
|
|
|
|
-
|
|
Deferred tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
27
|
|
|
|
-
|
|
British Virgin Islands Profits Tax
The Company has not been subject to any taxation in
this jurisdiction for the six months ended June 30, 2019 and 2018.
Hong Kong Profits Tax
The subsidiaries in Hong Kong are subject to tax charged
on Hong Kong sourced income with a statutory tax rate of 16.5% for the six months ended June 30, 2019 and June 30, 2018. 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,
2019 and June 30, 2018.
PRC Income Tax
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, 2019 and June 30, 2018 is 25%.
|
|
For the six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Loss attributable to holders of ordinary shares (RMB’000):
|
|
|
(193,176
|
)
|
|
|
(71,906
|
)
|
Weighted average number of ordinary shares outstanding used in computing basic and diluted earnings per share*
|
|
|
5,993,605
|
|
|
|
4,172,926
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic (RMB)
|
|
|
(32.23
|
)
|
|
|
(17.23
|
)
|
Loss per share - diluted (RMB)
|
|
|
(32.23
|
)
|
|
|
(17.23
|
)
|
|
*
|
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, 2019 and June 30, 2018, 425,521 and 178,572 shares, respectively, of potential common stock related to outstanding stock warrants 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, 2019
|
|
|
December 31,
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Raw materials
|
|
|
7,424
|
|
|
|
15,738
|
|
Work in progress
|
|
|
1,526
|
|
|
|
1,526
|
|
Finished goods
|
|
|
82,569
|
|
|
|
110,082
|
|
|
|
|
91,519
|
|
|
|
127,346
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Carrying amount of inventories sold
|
|
|
161,130
|
|
|
|
309,183
|
|
Write down of inventories (included in cost of sales)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
161,130
|
|
|
|
309,183
|
|
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade receivables
|
|
|
699,508
|
|
|
|
650,963
|
|
Less: provision for impairment
|
|
|
(620,708
|
)
|
|
|
(426,849
|
)
|
|
|
|
78,800
|
|
|
|
224,114
|
|
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 year ended December 31, 2013, and extended to 120 days in the year
ended December 31, 2015 and thereafter.
An aging analysis of the Company's trade receivables,
based on the invoice date, is as follows:
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within 90 days
|
|
|
29,692
|
|
|
|
57,785
|
|
Between 3 and 6 months
|
|
|
18,452
|
|
|
|
69,037
|
|
More than 6 months
|
|
|
30,656
|
|
|
|
97,292
|
|
|
|
|
78,800
|
|
|
|
224,114
|
|
As of June 30, 2019, the Company is exposed to certain
credit risks as 13% and 42% of the total trade receivables were due from the Company’s largest and five largest customers,
respectively.
As of December 31, 2018, the Company is exposed to
certain credit risks as 11% and 38% of the total trade receivables were due from the Company's largest and the five largest customers,
respectively.
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
41,699
|
|
|
|
24,329
|
|
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, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Deposits received from distributors
|
|
|
16,200
|
|
|
|
16,200
|
|
Accrued salary
|
|
|
3,511
|
|
|
|
2,331
|
|
Accrued rent, electricity and water
|
|
|
3,171
|
|
|
|
2,500
|
|
Accrued other taxes
|
|
|
1,317
|
|
|
|
1,541
|
|
Others
|
|
|
3,534
|
|
|
|
3,322
|
|
|
|
|
27,733
|
|
|
|
25,894
|
|
The Company usually requests a deposit from RMB 400,000
to RMB 1,000,000 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.
The carrying value of accrued liabilities and other
payables is considered to be a reasonable approximation of fair value.
|
(a)
|
Amounts recognized in the consolidated statement of financial position
|
Except recognition of lease liabilities, the carrying
amounts of right-of-use assets for lease are as below:
|
|
RMB’000
|
|
Net book amount at January 1, 2019
|
|
|
17,266
|
|
Net book amount at June 30, 2019
|
|
|
11,172
|
|
(b) Amounts recognized in the consolidated
income statement
The consolidated income statement shows
the following amounts relating to leases:
|
|
Six months ended June 30, 2019
|
|
Depreciation charge of right-of-use assets
|
|
|
6,094
|
|
Interest expense
|
|
|
157
|
|
The total cash outflow in financing activities for
leases during the six months ended June 30, 2019 was RMB 13,902,000.
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Number
|
|
|
US$
|
|
|
Number
|
|
|
US$
|
|
|
|
of shares
|
|
|
’000
|
|
|
of shares
|
|
|
’000
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$ 0.008 each
|
|
|
51,000,000
|
|
|
|
400
|
|
|
|
51,000,000
|
|
|
|
400
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
’000
|
|
|
|
|
|
|
|
Outstanding and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2019
|
|
|
5,678,703
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
Issuance of new shares – warrants exercised
|
|
|
333,420
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Issuance of new shares – share-based compensation
|
|
|
35,863
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
At June 30, 2019
|
|
|
6,047,986
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
On April 3, 2017, the Company, pursuant to a
securities purchase agreement, between the Company and an institutional accredited investor, completed a registered offering of
US$ 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 US$ 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.
On July 18, 2017, the Company completed a private
placement and generated proceeds of US$ 861,595 by issuing 633,526 shares at US$ 1.36 per share. There was no discounts or brokerage
fees associated with this offering. The net proceeds of the offering were used for working capital and general corporate purposes.
From August to December 2017, the Company issued aggregate
of 27,394 shares to its Chief Financial Officer as stock compensation expense. The fair value of 27,394 shares was RMB 294,000.
On April 19, 2018, the Company entered into a
securities purchase agreement with certain individual investors relating to a registered direct offering, issuance and sale
of an aggregate of 770,299 of its shares, at a purchase price of US$1.56 per share. The net proceeds to the Company from the
offering were RMB 7,952,000 (US$ 1.2 million). The offering closed on April 23, 2018. Proceeds from the offering were used for working capital and general corporate purposes. There were no discounts or brokerage fees associated with this
offering.
On November 29, 2018, the Company
announced and on December 4, 2018, the Company closed a public offering of its common shares (and common stock warrants) with net
proceeds of RMB 7,332,000 (US$ 1.07 million). The gross proceeds were RMB 8,732,000 (US$ 1.27 million) and related commission and
legal expenses were RMB 1,400,000 (US$ 203,600). The Company used the net proceeds from the offering to fund inventory, distribution
expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital purposes.
In connection with
the offering, the Company issued 1,000,000 common shares at the price of US$ 1.27 per share, with each common share coupled
with a warrant (500,000 warrants in the aggregate) to purchase one common share. The common shares and the warrants were sold
as units, but were immediately separable and were issued separately. The warrants have an exercise price of US$ 1.27 per
share. The warrants were exercisable on or after the date of issuance and will terminate on the five-year anniversary of the
date of issuance.
In connection with the
offering, the Company executed a Placement Agency Agreement to pay the Placement Agent a cash placement fee equal to 8% of
the gross proceeds of the offering, plus road show, diligence, legal and other expenses incurred by the Placement Agent of
US$ 45,000. The Placement Agent also received five-year warrants to purchase up to 50,000 common shares, which such
Compensation Warrants will have substantially the same terms as the warrants sold in the offering, except that such
Compensation Warrants have an exercise price of US$ 1.5875 per share or 125% of the public offering price and will terminate
on the five year anniversary of the effective date of this offering.
The total fair value of the warrants granted to investors
and placement agent is RMB 4,955,000. The fair values of warrants granted were determined using a variation of the Black-Scholes
Option Pricing Model that takes into account factors specific to the share incentive plans, such as the vesting period. The following
principal assumptions were used in the valuation:
Grant date
|
|
|
December 4, 2018
|
|
Share price at date of grant
|
|
|
US$1.18
|
|
Exercise price at date of grant (investors and placement agent, respectively)
|
|
|
US$1.27 & US$1.5875
|
|
Volatility
|
|
|
168
|
%
|
Warrant life
|
|
|
5 years
|
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.63
|
%
|
Fair value at grant date
|
|
|
US$1.45
|
|
Following is a summary of the warrant activity
for the six months ended June 30, 2019:
|
|
|
Number of
Warrants
|
|
|
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Granted
|
|
|
|
500,000
|
|
|
$
|
1.30
|
|
|
|
5
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
|
500,000
|
|
|
|
1.30
|
|
|
|
4.93
|
|
Exercisable at December 31, 2018
|
|
|
|
500,000
|
|
|
|
1.30
|
|
|
|
4.93
|
|
Exercised
|
|
|
|
333,420
|
|
|
|
1.27
|
|
|
|
-
|
|
Outstanding at June 30, 2019
|
|
|
|
166,580
|
|
|
|
1.34
|
|
|
|
4.43
|
|
Exercisable at June 30, 2019
|
|
|
|
166,580
|
|
|
$
|
1.34
|
|
|
|
4.43
|
|
During the six months ended June 30, 2019, investors
exercised 333,420 warrants at US$ 1.27 per share for 332,420 shares of the Company’s comment stock. The Company received
US$ 423,443 from 333,420 warrants exercised.
From January to December 31, 2018, the Company issued
aggregate of 56,919 shares to its Chief Financial Officer as stock compensation expense. The fair value of 56,919 shares was RMB
619,000.
From January to June 30, 2019, the Company issued
aggregate of 35,863 shares to its Chief Financial Officer as stock compensation expense. The fair value of 35,863 shares was RMB
308,925.
15.
|
RELATED PARTY TRANSACTIONS
|
Apart from those discussed elsewhere in these condensed
consolidated financial statements, the following are significant related party transactions entered into between the Company and
its related parties at agreed rates:
|
|
For the six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Service fees paid to Stuart Management Co.
|
|
|
-
|
|
|
|
41
|
|
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Amounts owed to related parties
|
|
|
36,201
|
|
|
|
36,203
|
|
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 38,193) during the six months ended June 30, 2018 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 renewed 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. provided the Company with general administrative services, including acting as the
Company’s administrative agent in the United States and the British Virgin Islands, and allowed the Company to utilize certain
of its office space for meetings. The agreement was renewed and reduced 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
terminated service with Stuart Management starting from July 1, 2018.
Mr. Huang Jia Dong, the founder and Chairman of
Hengda and the former Chief Executive Officer and one of the directors of the Company, 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 35,057,000 and RMB 35,057,000 as of June 30, 2019 and December
31, 2018, respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are
brothers-in-law.
As of June 30, 2019 and December 31, 2018, the Company
had a loan of US$ 167,000 (equivalent to RMB 1,146,455) and US$ 167,000 (equivalent to RMB 1,146,000), respectively, payable to
Sound Treasure Limited, an affiliate of Mr. Huang Jia Dong and a shareholder of the Company. This loan is interest free, unsecured
and repayable on demand.
|
(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, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within one year
|
|
|
5,792
|
|
|
|
13,902
|
|
After one year and within five years
|
|
|
-
|
|
|
|
5,792
|
|
|
|
|
5,792
|
|
|
|
19,694
|
|
The leases typically run for an initial period of 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, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Advertising expenditure contracted but not provided for in the financial statements
|
|
|
-
|
|
|
|
-
|
|
The Company has evaluated all events that have occurred
subsequent to June 30, 2018 through the date that the consolidated financial statements were issued. Management has concluded that
no subsequent events required disclosure in these financial statements.
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 72.55% and 72.03% of
our total revenue for the six months ended June 30, 2019 and June 30, 2018, respectively.
The Company’s combined facilities
currently provide an aggregate annual maximum production capacity of approximately 56.5 million square meters (excluding 10 million
square meters that is leased out) as of June 30, 2019. 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 28.8 million square meters of ceramic tiles from its Hengdali
facility. In 2017, Hengda retired two old furnaces; in July of 2018, Hengda retired two more old furnaces, which caused Hengda’s
annual maximum production capacity to be reduced to approximately 27.7 million, and total effective annual production capacity
to 56.5 million ceramic tiles for both Hengda and Hengdali at June 30, 2019.
Due to currently challenging economic
conditions, for the six months ended June 30, 2019, we utilized production facilities capable of producing 6.0 million square
meters ceramic tiles, as compared with the six months ended June 30, 2018, when we utilized production facilities capable of
producing 12.2 million square meters, During the six months ended June 30, 2019, we had 12 production lines available for
production and utilized five production lines during the peak season. As of June 30, 2019, we had twelve production lines
available for production, seven of which were in use as of June 30, 2019. When in operation, each production line is
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, 2019 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, 2019 and June 30, 2018, respectively:
RMB(‘000)
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
177,431
|
|
|
|
355,630
|
|
Cost of sales
|
|
|
(162,119
|
)
|
|
|
(310,785
|
)
|
Gross profit
|
|
|
15,312
|
|
|
|
44,845
|
|
Other income
|
|
|
7,121
|
|
|
|
7,088
|
|
Other expenses
|
|
|
(9
|
)
|
|
|
(1,293
|
)
|
Selling and distribution expenses
|
|
|
(5,672
|
)
|
|
|
(5,692
|
)
|
Administrative expenses
|
|
|
(15,885
|
)
|
|
|
(10,474
|
)
|
Bad debt expense
|
|
|
(193,859
|
)
|
|
|
(106,380
|
)
|
Finance costs
|
|
|
(157
|
)
|
|
|
-
|
|
Loss before taxation
|
|
|
(193,149
|
)
|
|
|
(71,906
|
)
|
Income tax expenses
|
|
|
(27
|
)
|
|
|
-
|
|
Loss attributable to shareholders
|
|
|
(193,176
|
)
|
|
|
(71,906
|
)
|
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 2017, we increased the pricing of our ceramic tile products by an average of 20%. Although we
increased our average selling price twice with 10% product raises in 2017, we were not able to return to the price levels achieved
prior to 2016. In April of 2018, we increased the pricing of our ceramic tile products by an average of 5%, but the sales did not
improve as we expected, but decreased sharply due to a slowdown of the real estate industry. Therefore, we decreased the pricing
of our ceramic tile products by an average of 10% in July 2018 to respond to the difficult market conditions. However, the 10%
price decrease in July 2018 did not offset the fall in our sales volume due to deteriorating market conditions that persisted through
the second half of 2018, and we do not believe that further price decreases would have had a beneficial effect upon sales volume.
Accordingly, we did not implement any price adjustments for our ceramic tile products in the first half of 2019. Revenue decreased
by 50.11% for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, mainly due to the 47.68% decrease
in sales volume resulting from the continued slowdown of China’s economy, especially in the manufacturing sector and the
real estate industry.
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 16.67% and 24.37% of our cost of sales for the six months ended June 30, 2019 and June 30,
2018, 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 19.72% and 29.64% of our cost of sales for the six months ended June 30, 2019 and
June 30, 2018, respectively. A number of dyes are used in ceramic tiles, and the prices of different dyes have experienced fluctuations
over the past few years.
Coal is another key material for making
ceramic tiles during the firing stage. Coal accounted for approximately 5.39% and 6.11% of our cost of sales for the six months
ended June 30, 2019 and June 30, 2018, respectively. We have long-term relationships with our coal suppliers. The price of coal
has experienced fluctuations over the past few years. In 2019, the Company’s Hengda facility used natural gas instead of
coal for manufacturing ceramic tiles, and natural gas accounted for approximately 5.54% of our cost of sales.
Other income and other expenses. Other
income consists of interest income, foreign exchange gain/loss, gain on disposal of equipment 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 our 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, depreciation. We expect
administrative expenses to remain constant as compared to the prior year.
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 for the six months
ended June 30, 2019 and June 30, 2018 is 25%.
Results of Operations
Six Months Ended June 30, 2019 Compared to the Six Months
Ended June 30, 2018
Revenue. The
following table sets forth the breakdown of revenue, by product categories, for the six months ended June 30, 2019 and June
30, 2018:
Revenue RMB (000)
|
|
2019
|
|
|
Percentage
|
|
|
2018
|
|
|
Percentage
|
|
Porcelain
|
|
|
128,735
|
|
|
|
72.55
|
%
|
|
|
256,164
|
|
|
|
72.03
|
%
|
Glazed Porcelain
|
|
|
2,565
|
|
|
|
1.45
|
%
|
|
|
7,950
|
|
|
|
2.24
|
%
|
Glazed
|
|
|
3,078
|
|
|
|
1.73
|
%
|
|
|
6,761
|
|
|
|
1.90
|
%
|
Rustic
|
|
|
25,724
|
|
|
|
14.50
|
%
|
|
|
30,877
|
|
|
|
8.68
|
%
|
Polished Glazed
|
|
|
17,329
|
|
|
|
9.77
|
%
|
|
|
53,878
|
|
|
|
15.15
|
%
|
Total
|
|
|
177,431
|
|
|
|
100.0
|
%
|
|
|
355,630
|
|
|
|
100.0
|
%
|
Revenue was to RMB 177.43 million (US$ 26.2 million) for the six months ended June 30, 2019, compared
to RMB 355.63 million for the six months ended June 30, 2018, representing a decrease of RMB 178.20 million, or 50.11%, The
decrease in revenue was primarily due to the decrease in sales volume of 47.68% and a decrease in average selling price of 4.63%.
The decrease in sales resulted from the continued slowdown of China’s economy as China’s GDP growth rate decreased
to 6.3% in the first half of 2019, the lowest point since 1990; both the manufacturing sector and the real estate industry were
affected by the weaker economy.
Porcelain tiles. Revenue from
the sales of porcelain tiles decreased 49.75%, from RMB 256.16 million for the six months ended June 30, 2018 to RMB 128.73 million
(US$ 18.98 million) for the six months ended June 30, 2019. The decrease was primarily attributable to a decrease in our sales
volume for the first six months of 2019 as compared to the same period of 2018. 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 decreased 67.74%, from approximately RMB 7.95 million for the six months ended June 30, 2018 to RMB
2.56 million (US$ 0.38 million) for the six months ended June 30, 2019.
Glazed tiles. Revenue from glazed
tiles decreased 54.47%, from RMB 6.76 million for the six months ended June 30, 2018 to RMB 3.08 million (US$ 0.45 million) for
the six months ended June 30, 2019.
Rustic tiles. Revenue from rustic
tiles decreased 16.69%, from RMB 30.88 million for the six months ended June 30, 2018 to RMB 25.72 million (US$ 3.79 million) for
the six months ended June 30, 2019.
Polished glazed tiles. Revenue
from polished glazed tiles decreased 67.84%, from RMB 53.88 million for the six months ended June 30, 2018 to RMB 17.33 million
(US$ 2.56 million) for the six months ended June 30, 2019. 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, 2019 and 2018:
Cost of sales RMB (‘000)
|
|
2019
|
|
|
Percentage
|
|
|
2018
|
|
|
Percentage
|
|
Porcelain
|
|
|
117,703
|
|
|
|
72.60
|
%
|
|
|
223,745
|
|
|
|
71.99
|
%
|
Glazed Porcelain
|
|
|
2,693
|
|
|
|
1.66
|
%
|
|
|
7,922
|
|
|
|
2.55
|
%
|
Glazed
|
|
|
2,712
|
|
|
|
1.67
|
%
|
|
|
6,266
|
|
|
|
2.02
|
%
|
Rustic
|
|
|
22,626
|
|
|
|
13.96
|
%
|
|
|
25,809
|
|
|
|
8.30
|
%
|
Polished Glazed
|
|
|
16,385
|
|
|
|
10.11
|
%
|
|
|
47,043
|
|
|
|
15.14
|
%
|
Total
|
|
|
162,119
|
|
|
|
100.00
|
%
|
|
|
310,785
|
|
|
|
100.00
|
%
|
Cost of sales was RMB 162.12 million (US$
23.90 million) for the six months ended June 30, 2019 compared to RMB 310.79 million for the six months ended June 30, 2018, representing
a decrease of RMB 148.67 million, or 47.84%. The decrease in cost of sales was primarily due to decreased sales and production.
Gross profit. 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,
2019 and June 30, 2018:
|
|
2019
|
|
|
2018
|
|
RMB (‘000)
|
|
Gross
Profit (Loss)
|
|
|
Profit (Loss)
Margin
|
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
Porcelain
|
|
|
11,032
|
|
|
|
8.57
|
%
|
|
|
32,419
|
|
|
|
12.66
|
%
|
Glazed Porcelain
|
|
|
(128
|
)
|
|
|
(4.99
|
)%
|
|
|
29
|
|
|
|
0.37
|
%
|
Glazed
|
|
|
366
|
|
|
|
11.89
|
%
|
|
|
495
|
|
|
|
7.32
|
%
|
Rustic
|
|
|
3,098
|
|
|
|
12.04
|
%
|
|
|
5,068
|
|
|
|
16.41
|
%
|
Polished Glazed
|
|
|
944
|
|
|
|
5.45
|
%
|
|
|
6,834
|
|
|
|
12.68
|
%
|
All products
|
|
|
15,312
|
|
|
|
8.63
|
%
|
|
|
44,845
|
|
|
|
12.61
|
%
|
Gross profit was RMB 15.31 million (US$ 2.26 million) for the six months ended June 30, 2019, as compared
to a gross profit of RMB 44.85 million for the six months ended June 30, 2018, a decrease of RMB 29.54 million.
Other income. Other income for
the six months ended June 30, 2019 was RMB 7.12 million (US$1.05 million), as compared to RMB 7.09 million for the same period
of 2018. For both 2019 and 2018, other income was mainly the leasing income from leasing out one of the production lines from our
Hengdali facility pursuant to an eight-year lease contract.
Selling and distribution expenses. Selling
and distribution expenses were RMB 5.67 million (US$ 0.84 million) for the six months ended June 30, 2019, compared to RMB 5.69
million for the six months ended June 30, 2018, representing a decrease of RMB 21,000, or 0.36%.
Administrative expenses. Administrative
expenses were RMB 15.89 million (US$ 2.34 million) for the six months ended June 30, 2019, compared to RMB 10.47 million for the
six months ended June 30, 2018, representing an increase of RMB 5.41 million, or 51.66%. The increase in administrative expenses
was primarily due to increased research and development expenses of RMB 6.38 million. which was partly offset by an RMB 0.37 million
decrease in legal expenses and an RMB 0.52 million decrease in payroll expenses.
Bad debt expense. Bad debt expense
was RMB 193.86 million (US$ 28.58 million) for the six months ended June 30, 2019, compared to RMB 106.38 million for the six months
ended June 30, 2018, with the increase due to a rise in the provision for uncollectible debt associated with our customers.
We recognize a loss allowance for expected credit loss on our financial assets, primarily on trade receivables, which are subject
to impairment under IFRS 9, Financial Instruments, first effective for the current accounting period. We believe that we have
undertaken appropriate measures to resolve the bad debt expense. We will continue to review each of our customers for credit quality
as well as assiduously test their accounts receivables balances in each upcoming fiscal period.
Finance costs. Finance
costs were RMB 157,000 (US$ 0.02 million) for the six months ended June 30, 2019, compared to nil for the six months ended June
30, 2018. The increase was mainly due to the interest expense on lease liabilities. We adopted IFRS 16 during the six months
ended June 30, 2019, and recognized lease liabilities in relation to leases which had previously been classified as “operating
leases”. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s
incremental borrowing rate as of January 1, 2019. The difference between the actual payment and lease liabilities was the interest
expense.
Other expenses. Other
expenses were RMB 9,000 (US$ 1,330) for the six months ended June 30, 2019, as compared to RMB 1.29 million for the six months
ended June 30, 2018, representing a decrease of RMB 1.29 million or 99.30%. The decreased other expenses were mainly due to decreased
depreciation expense resulting from the fixed asset impairment that occurred in the six months ended December 31, 2018.
Loss before taxation. Loss
before taxation was RMB 193.15 million (US$ 28.47 million) for the six months ended June 30, 2019, as compared to a loss before
taxation of RMB 71.91 million for the six months ended June 30, 2018. The increase in loss before taxation was mainly due to increased
bad debt expense, increased administrative expenses and decreased gross profit for the six months ended June 30, 2019.
Income taxes. We
incurred an income tax expense of RMB 27,000 (US$ 4,000) for the six months ended June 30, 2019 compared to an income tax expense
of RMB nil for the six months ended June 30, 2018. Our PRC statutory enterprise income tax rate was 25% for the six months ended
June 30, 2019 and June 30, 2018.
Loss attributable to shareholders. Loss
attributable to shareholders was RMB 193.18 million (US$ 28.48 million) for the six months ended June 30, 2019, as compared to
a loss attributable to shareholders of RMB 71.91 million for six months ended June 30, 2018. The increase in net loss attributable
to shareholders in 2019 was for the reasons described above.
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, 2019 and 2018:
RMB (‘000)
|
|
2019
|
|
|
2018
|
|
Net cash generated from / (used in) operating activities
|
|
|
9,756
|
|
|
|
(3,839
|
)
|
Net cash generated from investing activities
|
|
|
1,719
|
|
|
|
-
|
|
Net cash (used in) / generated from financing activities
|
|
|
(10,995
|
)
|
|
|
7,952
|
|
Net cash flow
|
|
|
480
|
|
|
|
4,113
|
|
Cash and cash equivalents at beginning of period
|
|
|
9,016
|
|
|
|
2,328
|
|
Effect of foreign exchange rate differences
|
|
|
(51
|
)
|
|
|
(399
|
)
|
Cash and cash equivalents at end of period
|
|
|
9,445
|
|
|
|
6,042
|
|
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.
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.
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 US$ 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.
Private Placement of Unregistered Equity Securities of the
Company
On July 18, 2017, the Company completed
a US$ 861,000 private placement of its ordinary shares pursuant to subscription agreements (the “Subscription Agreements”)
with certain accredited investors (the “Offering”) at the price of US$ 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 were used for working capital and
general corporate purpose. On April 16, 2018, the Company filed a registration statement on Form F-3 to register its shares sold
in the Offering for resale.
Registered Direct Offering of the Company’s
Equity Securities
On April 19, 2018, the Company entered into a securities purchase agreement (the “Agreement”)
with certain individual investors relating to a registered direct offering, issuance and sale (the “Offering”) of an
aggregate of 770,299 of its shares (the “Shares”), at a purchase price of $1.56 per share, the closing price of the
Company’s equity securities as reported on Nasdaq on the same date. The Shares were offered pursuant to the Company’s
previously filed and effective Registration Statement on Form F-3 that was filed with the Securities and Exchange Commission on
August 21, 2015, subsequently amended, and declared effective October 15, 2015 (File No. 333-206516). The Company filed a prospectus
supplement related to the Offering dated April 19, 2018. The gross proceeds to the Company from the Offering, before deducting
the Company’s estimated offering expenses, were approximately US$ 1.2 million. The Offering closed on April 23, 2018. Proceeds
from the Offering were used for working capital and general corporate purposes. There were no discounts or brokerage fees associated
with this Offering.
On November 29, 2018, the Company announced
and on December 4, 2018, the Company closed a public offering of its common shares (and common stock warrants) with net proceeds
of RMB 7,332,000 (US$ 1.07 million). The gross proceeds were RMB 8,732,000 (US$ 1.27 million) and related commission and legal
expense was RMB 1,400,000 (US $203,600). The Company intends to use the net proceeds from the offering to fund inventory, distribution
expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital purposes.
In connection with the offering, the Company
issued 1,000,000 common shares at the price of US$ 1.27 per share, with each common share coupled with a warrant (500,000 warrants
in the aggregate) to purchase one common share. The common shares and the warrants were sold as units, but are immediately separable
and will be issued separately. The warrants have an exercise price of US$ 1.27 per share. The warrants will be exercisable on or
after the date of issuance and will terminate on the five-year anniversary of the date of issuance.
In connection with the offering, the Company
executed a Placement Agency Agreement, to pay the Placement Agent a cash placement fee equal to 8% of the gross proceeds of the
offering, plus road show, diligence, legal and other expenses incurred by the Placement Agent of US$ 45,000. The Placement Agent
also receive five-year warrants to purchase up to 50,000 common shares, which such Compensation Warrants will have substantially
the same terms as the warrants sold in the offering, except that such Compensation Warrants will have an exercise price of US$
1.5875 per share or 125% of the public offering price and will terminate on the five year anniversary of the effective date of
this offering.
Cash flows from operating activities.
Our net cash provided by operating
activities was RMB 9.76 million (US$ 1.44 million) for the six months ended June 30, 2019, an increase of RMB 13.60 million as
compared to a cash outflow of RMB 3.84 million for the six months ended June 30, 2018. The increase of cash inflow was mainly due
to an increase in cash inflow from inventory of RMB 27.9 million and a decrease in cash outflow on trade receivables of RMB 19.98
million, both of which were partly offset by an increase in operating cash outflow before working capital of RMB 33.30 million.
Cash flows from investing activities.
Net cash generated from investing activities
for the six months ended June 30, 2019 was RMB 1.72 million (US$ 0.25 million), compared to nil for the six months ended June 30,
2018. The increase of cash inflow was mainly due to decrease in restricted cash.
Cash flows from financing activities.
Net cash used in financing activities was
RMB 11.00 million (US$ 1.62 million) for the six months ended June 30, 2019, compared to a cash inflow of RMB 7.95 million for
the six months ended June 30, 2018, primarily due to a decrease in the issuance of share capital of RMB 5.05 million and a payment
for lease liabilities of RMB 13.90 million for the six months ended June 30, 2019.
Cash and bank balances were RMB 9.45 million
(US$ 1.39 million) as of June 30, 2019, as compared to RMB 6.04 million as of June 30, 2018.
As of June 30, 2019, 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, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Inventories (RMB’000)
|
|
|
91,519
|
|
|
|
183,741
|
|
Inventory turnover (days) (1)
|
|
|
122
|
|
|
|
109
|
|
(1)
|
The average inventory turnover is computed based on the formula: (simple average opening and closing inventories balance in a financial year / cost of sales) × 181 days.
|
There was no write-down of inventory for the six months ended
June 30, 2019 and June 30, 2018.
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 products 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 six months ended June 30,
2019 and June 30, 2018, we recorded RMB 193.86 million (US$ 28.58 million) and RMB 106.38 million, respectively, for 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 a Top 500 Brand award, 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, 2019 and June 30, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Trade receivables (RMB’000)
|
|
|
78,800
|
|
|
|
479,389
|
|
Trade receivables turnover (days) (1)
|
|
|
134
|
|
|
|
221
|
|
(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 fiscal 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, 2019 and June 30, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Trade payables (RMB’000)
|
|
|
41,699
|
|
|
|
81,878
|
|
Trade payables turnover (days) (1)
|
|
|
32
|
|
|
|
50
|
|
(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 facial year / purchases) × 181 days.
|
Capital Expenditures
Our capital expenditures primarily consist
of expenditures on property, plant and equipment.
There were no capital expenditures for the
six months ended June 30, 2019.
Contractual Obligations
Our contractual obligations consist mainly
of debt obligations, operating lease obligations and other purchase obligations and commitments, and will be paid off with our
cash flow from operations. The following table sets forth a breakdown of our contractual obligations (including both interest and
principal cash flows) as of June 30, 2019:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Short-term debt obligations (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating purchase obligations (2)
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other obligations (3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Amounts represent principal and interest cash payments over the life of the bank loans, including anticipated interest payments that are not recorded in the financial statements.
|
(2)
|
We lease plant buildings, production factories, warehouses and employees’ hostel from non-related parties under non-cancellable operating lease arrangements.
|
(3)
|
Includes advertising and insurance expenditure contracted but not provided for in the financial statements.
|
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 2017, and 1.5% in 2018 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.”
FINANCIAL RISK MANAGEMENT
We are exposed to financial risks arising
from our operations and the use of financial instruments. The key financial risks included credit risk, liquidity risk, interest
rate risk, foreign currency risk and market price risk.
We do not hold or issue derivative financial
instruments for trading purposes or to hedge against fluctuations, if any, in interest rates and foreign exchange rates.
Credit risk refers to the risk that a counterparty
will default on its contractual obligations resulting in financial loss us. Our exposure to credit risk arises primarily from bank
balances and trade receivables. For trade receivables, we adopt the policy of dealing only with customers of appropriate credit
history to mitigate credit risk. For other financial assets, we adopt the policy of dealing only with high credit quality counterparties.
As we do not hold any collateral, the maximum
exposure to credit risk for each class of financial assets is the carrying amount of that class of financial assets presented on
the consolidated statements of financial position.
Cash and bank balances
Our bank deposits are placed with reputable
banks in the PRC, Hong Kong and the United States. The credit exposure of our cash and bank balances (including restricted cash)
as of June 30, 2019 and December 31, 2018 were RMB 9,445,000 and RMB 9,016,000, respectively.
Liquidity risk is the risk that we will
encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from
an inability to sell a financial asset quickly at close to its fair value.
Our exposure to liquidity risk arises primarily
from mismatches of the maturities of financial assets and liabilities. Our objective is to maintain a balance between continuity
of funding and flexibility through the use of stand-by credit facilities.
The table below summarizes the maturity
profile of the liabilities based on contractual undiscounted payments:
|
|
As of June 30, 2019
|
|
|
|
Within 1 year
|
|
|
More than 1
year but less
than 3 years
|
|
|
Total
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
41,699
|
|
|
|
-
|
|
|
|
41,699
|
|
Amounts owed to related parties
|
|
|
36,201
|
|
|
|
-
|
|
|
|
36,201
|
|
Interest-bearing bank borrowings(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
77,900
|
|
|
|
-
|
|
|
|
77,900
|
|
(1)
|
Includes contractual interest payments
|
We intend to ensure that there are adequate
funds to meet all its obligations in a timely and cost-effective manner. We intend to maintain a sufficient level of cash and cash
equivalents and have available an adequate amount of committed credit facilities from financial institutions to meet our liquidity
requirements in the short and longer term.
Interest rate risk is the risk that the
fair value or future cash flows of our financial instruments will fluctuate because of changes in market interest rates.
Our interest-bearing bank deposits and borrowings
were nil as of June 30, 2019.
|
(iv)
|
Foreign currency risk
|
Currency risk is the risk that the value
of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises when transactions are denominated
in foreign currencies.
Our operations are primarily conducted in
the PRC. All the sales and purchases transactions are denominated in RMB. As such, our operations are not exposed to exchange rate
fluctuation. However, this may change over time since the Company has recently announced plans to enter the Southeast Asia market.
As at June 30, 2019 and December 31, 2018,
nearly all of our monetary assets and monetary liabilities were denominated in RMB except certain bank balances and other payables
which were denominated in US dollars.
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.”
The condensed consolidated interim financial
statements have been prepared in accordance with the same accounting policies adopted in the 2018 annual financial statements,
except for those that relate to new standards or interpretations effective for the first time for periods beginning on or after
January 1, 2019. This is the first set of our financial statements in which IFRS 16 have been adopted. Details of any changes in
accounting policies are set out in Note 3 to our condensed consolidated interim financial statements.
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 June 30, 2019 and December 31, 2018,
the carrying amount of property, plant and equipment was approximately RMB 40,000 and RMB 46,000, respectively. An impairment loss
of approximately RMB 75,906,000 was recognized against the original carrying amount of property, plant and equipment in fiscal
2018. Determining whether property, plant and equipment are impaired requires an estimation of the recoverable amount of the property,
plant and equipment. Such an estimate 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 June 30, 2019 and December 31, 2018,
the carrying amount of investment property was nil. An impairment loss of approximately RMB 4,858,000 recognized against the original
carrying amount of investment property in fiscal 2018. Determining whether an investment property is impaired requires an estimate
of the recoverable amount of the investment property. Such an estimate 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 June 30, 2019 and December 31, 2018,
the carrying amount of land use rights was nil. An impairment loss of approximately RMB 4,257,000 was recognized against the original
carrying amount of land use rights in fiscal 2018. Determining whether land use rights are impaired requires an estimate of the
recoverable amount of the land use rights. Such an estimate was based on certain assumptions which are subject to uncertainty and
might materially differ from the actual results.
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 financial assets
The Company recognizes
a loss allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment under IFRS 9
(including trade and other receivables, amounts due from related parties, restricted cash, bank balances and cash). The amount
of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.
Lifetime ECL represents
the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast, 12-month
ECL (“12m ECL”) represents the portion of lifetime ECL that is expected to result from default events that are possible
within 12 months after the reporting date. Assessment are done based on the Company’s historical credit loss experience,
adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions
at the reporting date as well as the forecast of future conditions.
The Company applies
the IFRS 9 simplified approach to measure ECL which uses a lifetime ECL for all trade receivables. The ECL on these assets are
assessed individually for debtors with significant balances and/or collectively using a provision matrix with appropriate groupings.
For all other instruments,
the Company measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since
initial recognition, the Company recognizes lifetime ECL. The assessment of whether lifetime ECL should be recognized is based
on significant increases in the likelihood or risk of a default occurring since initial recognition.
The Company recognized
bad debts of RMB 193.9 million and RMB 106.4 million in the six months ended June 30, 2019 and June 30, 2018, respectively.
Net realizable value of inventories
Net realizable value of inventories is
management’s estimate of future selling price in the ordinary course of business, less estimated costs of completion and
selling expenses. These estimates are based on current market conditions and the historical experience of selling products of
a similar nature and 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 the assumptions as to these components.
Exhibits