No. 387 Dongming Road
(Name, Telephone, E-mail and/or Facsimile number
and Address of Company Contact Person)
Securities registered or
to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g)
of the Act. None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act. None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Note - Checking the box will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x
No ¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company that prepares its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S. C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ¨
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
This Annual Report contains many statements that
are “forward-looking” and uses forward-looking terminology such as “anticipate,” “believe,” “expect,”
“estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,”
“will,” negatives of such terms or other similar statements. You should not place undue reliance on any forward-looking statement
due to its inherent risk and uncertainties, both general and specific. Although we believe the assumptions on which the forward-looking
statements are based are reasonable and within the bounds of our knowledge of our business and operations as of the date of this annual
report, any or all of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions
could also be incorrect. The forward-looking statements in this Annual Report include, without limitation, statements relating to:
The forward-looking statements included in this
Annual Report are subject to risks, uncertainties and assumptions about our businesses and business environments. These statements reflect
our current views with respect to future events and are not a guarantee of our future performance. Actual results of our operations may
differ materially from information contained in the forward-looking statements as a result of risk factors some of which are described
under “Risk Factors” and elsewhere in this Annual Report. Risks, uncertainties and assumptions include, among other things:
These risks, uncertainties and assumptions are
not exhaustive. Other sections of this Annual Report include additional factors which could adversely impact our business and financial
performance. The forward-looking statements contained in this Annual Report speak only as of the date of this annual report or, if obtained
from third-party studies or reports, the date of the corresponding study or report, and are expressly qualified in their entirety by the
cautionary statements in this Annual Report. Since we operate in an emerging and evolving environment and new risk factors and uncertainties
emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required
by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect
events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.
This annual report on Form 20-F includes our audited
consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018.
Our ordinary shares are listed on the Nasdaq Capital
Market, or NASDAQ, under the symbol “FFHL”.
PART I
Item 1. Identity of Directors, Senior Management
and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected financial data.
The following selected financial data should be
read in conjunction with Item 5 - the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the Financial Statements and Notes thereto included elsewhere in this Annual Report.
The following selected historical statement of
income data for the years ended December 31, 2020, 2019 and 2018 and the selected historical balance sheet data as of December 31, 2020
and 2019 have been derived from the Company’s audited consolidated financial statements included in this Annual Report on Form 20-F
beginning on page F-1. The following selected historical statement of income data for the years ended December 31, 2017 and 2016, and
the selected historical balance sheet data as of December 31, 2018, 2017 and 2016 have been derived from the Company’s audited financial
statements not included in this Annual Report. The audited financial statements are prepared and presented in accordance with United States
generally accepted accounting principles, or U.S. GAAP.
Certain factors that affect the comparability
of the information set forth in the following table are described in the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the Financial Statements and related notes thereto included elsewhere in this Annual Report.
|
|
For the year ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
|
RMB
|
|
US$
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
336,755
|
|
51,610
|
|
335,620
|
|
333,522
|
|
290,706
|
|
253,926
|
|
Gross (loss) profit
|
|
136,699
|
|
20,950
|
|
83,610
|
|
54,688
|
|
27,100
|
|
17,736
|
|
Operating income (loss)
|
|
21,400
|
|
3,280
|
|
23,095
|
|
(11,268
|
)
|
(33,934
|
)
|
(42,239
|
)
|
Interest expense
|
|
(8,490
|
)
|
(1,301
|
)
|
(8,892
|
)
|
(9,766
|
)
|
(9,453
|
)
|
(7,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
13,495
|
|
2,069
|
|
13,688
|
|
(18,554
|
)
|
(45,195
|
)
|
(49,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to the Company
|
|
19,610
|
|
3,006
|
|
11,363
|
|
(22,172
|
)
|
(46,003
|
)
|
(54,483
|
)
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
6.00
|
|
0.92
|
|
3.48
|
|
(6.79
|
)
|
(14.09
|
)
|
(16.68
|
)
|
Diluted
|
|
6.00
|
|
0.92
|
|
3.48
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|
(6.79
|
)
|
(14.09
|
)
|
(16.68
|
)
|
Weighted average number ordinary shares, Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
Diluted
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
3,265,837
|
|
|
|
For the year ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
RMB
|
|
US$
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
113,423
|
|
17,383
|
|
60,871
|
|
8,908
|
|
12,963
|
|
13,343
|
|
Accounts and bills receivable, net
|
|
32,393
|
|
4,964
|
|
26,960
|
|
22,627
|
|
20,123
|
|
29,453
|
|
Inventories
|
|
25,436
|
|
3,898
|
|
23,584
|
|
24,675
|
|
24,578
|
|
25,153
|
|
Total current assets
|
|
317,080
|
|
48,594
|
|
145,516
|
|
102,167
|
|
120,755
|
|
155,101
|
|
Property, plant and equipment, net
|
|
111,308
|
|
17,059
|
|
302,642
|
|
331,168
|
|
371,058
|
|
410,654
|
|
Total assets
|
|
445,656
|
|
68,299
|
|
465,971
|
|
454,682
|
|
517,480
|
|
593,437
|
|
Short-term bank loans
|
|
65,000
|
|
9,962
|
|
65,000
|
|
64,950
|
|
50,000
|
|
60,000
|
|
Total current liabilities
|
|
215,998
|
|
33,103
|
|
255,487
|
|
255,323
|
|
293,688
|
|
325,229
|
|
Total shareholders’ equity
|
|
227,804
|
|
34,912
|
|
208,194
|
|
196,831
|
|
221,029
|
|
265,211
|
|
Shandong Fuwei was entitled to preferential tax
treatment at an EIT rate of 15% for the years ended December 31, 2011, 2012 and 2013 due to its status as a High-and-New Tech Enterprise
since December 2009. In 2014, Shandong Fuwei failed to be designated as such and it became subject to a standard enterprise income
tax at a rate of 25% in 2014 and 2015. In 2016, Shandong Fuwei was designated again as a High-and-New Tech Enterprise and as a result,
it was entitled to preferential tax treatment at an EIT rate of 15% for the years ended on December 31, 2016, 2017 and 2018. In 2019,
Shandong Fuwei was designated again as a High-and-New Tech Enterprise and as a result, it was entitled to preferential tax treatment at
an EIT rate of 15% for the years ended December 31, 2019, 2020 and will be entitled to preferential tax treatment at an EIT rate of 15%
for the year ending on December 31, 2021.
Exchange Rate Information
On July 21, 2005 the Chinese government changed
its policy of pegging the value of the Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a conversion of Renminbi
into United States dollars at an exchange rate of US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to fluctuate within
a band against a basket of certain foreign currencies. On December 31, 2020, this change in policy resulted in an approximately 19.5%
appreciation in the value of the Renminbi against the U.S. dollar compared to 2005. The Company generates its revenue in the PRC in Renminbi
and its overseas sales and U.S. dollars cash deposits are subject to foreign currency translations which will impact net income (loss).
B. Capitalization and indebtedness.
Not applicable.
C. Reasons for the offer and use of proceeds.
Not applicable.
D. Risk factors.
The following matters and other additional risks
not presently known to us or that we deem immaterial, may have a material adverse effect on our business, financial condition, liquidity,
results of operations or prospects or otherwise. Reference to a cautionary statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially
from those in such forward-looking statement or statements.
|
(a)
|
Risks Associated with Our Business
|
Our business may be adversely affected by the exchange rate fluctuation
of RMB against the U.S. dollar and trade protection measures in place by several countries against exports of BOPET films from China.
Our business operation may be adversely affected
due to appreciation of RMB against the U.S. dollar, and more stringent trade protection measures in place such as antidumping investigations
conducted by several countries against exports of BOPET films originated from China.
A sharp fluctuation in the demand for raw materials may have
a negative impact on our operations if we are unable to pass on all increases in cost of raw materials to our customers on a timely basis.
The total cost of raw materials made up approximately
70.0%, 74.3%, and 72.6% of our production cost in 2020, 2019 and 2018, respectively. The main raw materials used in our production of
BOPET film are polyethylene terephthalate (or PET) resin and additives, which respectively made up approximately 78.4% and 21.6% of our
total cost of raw materials in the past three years on average.
The prices of PET resin and additives are, to
a certain extent, affected by the price movement of crude oil. Currently the PET resin is mainly used as a raw material in China’s
textile industry. Therefore, the market prices of PET resin will fluctuate due to changes in supply and demand conditions in that industry.
Any sudden shortage of supply or significant increase in demand of PET resin and additives may result in higher market prices and thereby
increase our cost of sales.
In 2021, it is expected that there will not be
a significant capacity expansion within China. The oversupply plus price fluctuations of raw materials may continuously have an adverse
impact on the results of our operations. Currently, we have no hedging transactions in place with respect to PET resin or any other petroleum
product.
Rising Competition caused by soaring capacity of BOPET films
may materially affect our operations and financial conditions.
We operate in a highly competitive and rapidly
evolving field, and new developments are expected to continue at a rapid pace. Competitors may succeed by expanding their capacity or
succeed in developing products that are more efficient, easier to use or less expensive than those which have been or are being developed
by us or that would render our technology and products obsolete and non-competitive. Any of these actions by our competitors could adversely
affect our sales.
In addition, several companies are developing
similar and substitute products to address the same packaging field that we are targeting. These competitors may have greater financial
and technical resources, productivity, marketing capabilities and facilities, cost-efficiency and human resources, or they may have a
better quality of products, service, and shorter lead time. The competition from these competitors may adversely affect our business.
An increase in competition could result in slow
increase in demand, selling price reductions or loss of our market share, which could have an adverse material impact on our operations
and financial condition, or result in losses to the Company.
The existing manufacturers and new entrants have
been expanding their production capacity of the BOPET films since the second half of 2010, which have resulted in substantial increase
in production of BOPET films from 2011 to 2020. This will have an adverse impact on our sales and operation. In the event that we are
unable to compete successfully or retain effective control over the pricing of our products, our profit margins might decrease.
In addition, China has gradually lowered import
tariffs after its entry into the World Trade Organization in December 2001. Aiming at the huge market for high value-added films in China,
manufacturers from developed countries, including Japan and South Korea started investing in China and some of these facilities had been
put into production. This may lead to increased competition from foreign companies in our industry, some of which are significantly larger
and financially stronger than us. If we fail to compete effectively with these companies in the future, our current business and future
growth potential would be adversely affected.
We may be subject to inventory risks that would negatively impact
our operating results.
The possible price decline of our inventory may
adversely affect the Company’s operation. The fluctuation of the market prices of our raw material inventory and end product inventory
will also adversely affect the value of our inventory.
A significant portion of our revenue is derived from the flexible
packaging industry and electronics industry in the PRC; our revenue might be adversely impacted if the flexible packaging industry and
electronics industry are adversely affected.
A significant portion of our revenue is currently
derived from the production and sale of BOPET films. Our BOPET films are mainly used in the flexible packaging industry for consumer products
such as tobacco packaging, alcoholic beverages, food, cosmetics, PCB industry, and so on. The demand for our BOPET films is therefore
affected by the demand for flexible packaging and electronics industry.
Since the second half of 2011, supply significantly
outweighs demand in China. If such situation continues in the future, such as the continued slowdown of the market demand or the increase
of the demand continues to be less than that of the supply, it could continue to have an adverse impact on our financial condition and
operation of our business.
We rely on key managerial and technical
personnel and failure to attract or retain such personnel may compromise our ability to perform our strategies and then to develop new
products and to effectively carry on our research and development and other efforts.
Our success to date has been largely attributable
to the contributions of key management and experienced personnel, with whom we have entered into service agreements. The loss of their
services might impede the implementation of our strategies and development objectives and might damage the close business relationship
we currently enjoy with some of our major customers. Our continued success is dependent, to a large extent, on our ability to attract
or retain the services of these key personnel. Our future success will also depend on our continued ability to attract and retain highly
motivated and qualified personnel. The rapid growth of the economy in China has caused intense competition to attract and retain qualified
personnel. Considering the deficiency in the legal environment in China, we cannot assure you that we will be able to retain our key personnel
or that we will be able to attract, train or retain qualified personnel in the future.
If our R & D team cannot effectively develop
new products, or promote the market process, or we are unable to afford to continue to maintain this team or are not able
to hire eligible and talented personnel, our ability to conduct research and development, and our operation results and market competitiveness
may be adversely affected.
Marketability of any of our new products is uncertain and low
acceptance levels of any of our new products will adversely affect our revenue and profitability.
The development of our products is based on complex
technology and requires significant time and expertise in order to meet industry standards and customers’ specifications. Although
we have developed some products that meet customers’ requirements in the past, there is no assurance that any of our research and
development efforts will necessarily lead to any new or enhanced products or generate expected market share to justify commercialization.
We must continually improve our current products and develop competitive new products to address the requirements of our customers. If
our new products are unable to gain market acceptance, we would not be able to generate future revenue from our investment in research
and development. In such event, we would be unable to increase our market share and achieve and sustain profitability. Our failure to
further refine our technology and develop and introduce new products attractive to the market could cause our products to become uncompetitive
or obsolete, which could reduce our market share and cause our sales to decline.
The new production line has been sold by
the way of open bidding and we have entered into an agreement to also sell the trial production line . In the event the
successful bidder does not finish the dismantling and moving of the new production line and trial production line or repair the damage
of the plant building caused by the process of dismantling and moving the new production line and trial production line, respectively,
this may have an adverse impact on our business operation and we may not be able to reduce our losses.
The total investment in our new production
line (“Dornier Production Line”) was approximately US$51 million.
Since installation, the Dornier Production Line has
not attained sufficient purchase orders and the probability for this production line to be put into continuous production in the
near future was deemed low. As a result, upon board approval, the Dornier Production Line was sold by way of open bidding at a price
of RMB138.0 million (or approximately US$21.15 million) to Huizhou Yidu Yuzheng Digital Technology Co. LTD. (“Huizhou Yidu
Yuzheng”) according to publicly available information. We have entered into Purchase Agreements with Huizhou Yidu Yuzheng on
January 16, 2021 and January 18, 2021 for the sale of the Dornier production line and the trial production line, which was made by
Mitsubishi for R & D, pursuant to which the dismantling and moving of both the Dornier production line and the trial production
line should be completed by the end of May, 2021. In the event Huizhou Yidu Yuzheng is unable to finish dismantling and moving the
Dornier production line and the trial production line by May or the plant building is damaged as a result of dismantling and moving
process and we are unable to repair these damages, our operation could be adversely effected. And we may not be able to reduce our
losses.
The circumstances under which we acquired ownership of our main
productive assets may jeopardize our ability to continue as an operating business.
On September 24, 2004, the People’s Court
of Weifang declared Shandong Neo-Luck bankrupt due to its financial difficulties. Shandong Neo-Luck pledged its main assets for the operation
of the DMT production line to Weifang Commercial Bank before its bankruptcy.
The pledged DMT production line was auctioned
on October 22, 2004 by the Shandong Neo-Luck Clearance Committee. DMT subsequently sought monetary damages from Shandong Neo-Luck for
approximately US$1.25 million plus interest relating to a claim of partial non-payment for the DMT production line by way of application
of the ICC arbitration and the hearing was held in Geneva in November 2007. Fuwei Shandong joined these discussions later as an interested
party and in order to support a resolution of the pending dispute and to achieve resolution of certain outstanding service and spare part
issues. All parties entered into a Settlement Agreement in March 2008 and the arbitration was withdrawn by the ICC. Under the Service
Agreement entered into in connection with the Settlement Agreement, Shandong Fuwei would pay an amount of US$180,000 in two installments
with respect to service and spare parts. The Company made its first payment in April 2008. As of December 31, 2020, Shandong Fuwei had
paid US$135,000 and still has US$45,000 left unpaid.
Under the Settlement Agreement, the Neoluck Group
was obligated to pay an amount equal to US$900,000 in RMB by delivery of a bank draft to DMT. In April 2008, the Neoluck Group had not
performed its obligation under the Settlement Agreement, and, the Neoluck Group and DMT entered into a Supplemental Agreement pursuant
to which the Neoluck Group would pay the amount owed to DMT in two installments. The Neoluck Group paid the first installment equal to
US$450,000 in April 2008. As agreed between Neoluck Group and DMT, the remaining US$450,000 was to be paid in installments by the end
of December 2008. As of December 31, 2020, Neoluck Group had paid US$320,000 and still had US$130,000 outstanding to DMT.
Substantially all of our operating assets were
acquired through two auction proceedings under relevant PRC law. We acquired the Brückner production line in 2003 as a result of
a foreclosure proceeding enforcing an effective court judgment and the DMT production in 2004 as a result of a commercial auction from
a consigner who obtained such assets through a bankruptcy proceeding. In the opinion of our PRC counsel, Concord & Partners, these
proceedings are both valid under Chinese auction and bankruptcy law based on certain factual assumptions. Our PRC counsel’s opinion
solely relates to the legal procedure of the auctions and is based upon certain factual assumptions, our written representations and written
reports of the auction company and other related parties. There can be no assurance that relevant authorities or creditors of the predecessor
owner of these assets will not challenge the effectiveness of these asset transfers based upon the facts and circumstances of these transfers,
despite the existence of independent appraisals, and other facts and circumstances of the auctions that cannot be verified by our PRC
counsel. Taking into consideration the facts known by our PRC counsel related to the auction of the Brückner production line and
the significant difference in the price paid for the DMT production line at the two bankruptcy auctions involved in our purchase of that
asset and, assuming the representations and reports received by our PRC counsel are true and correct in all material respects, our PRC
counsel is of the opinion that the auctions of the Brückner and DMT production lines were valid under PRC law and the possibility
of the creditors of Shandong Neo-Luck successfully exercising recourse or claiming repayment with respect to our assets purchased in the
bankruptcy proceeding should be remote. However, should any such challenge be brought in China (or elsewhere) and prevail, we may incur
substantial liabilities and be required to pay substantial damages as a result of acquiring these assets and this could materially affect
our ability to continue our operation.
We have, in the past, experienced and may, from time to time,
experience negative working capital. We also face risks associated with debt financing (including exposure to variation in interest rates).
As of December 31, 2020, we have pledged part
of our property, plant and lease prepayments as security for indebtedness of a credit line amounting to RMB95.0 million (US$13.6 million)
granted by Bank of Weifang. In the event that we default on all expired indebtedness, our lenders could foreclose on our assets. In the
event that our assets are foreclosed upon, we will not be able to continue to operate our business.
Our obligations under our existing loans
have been mainly met through the cash flow from our operations and our financing activities. We are subject to risks normally
associated with debt financing, including the risk of significant increases in interest rates and the risk that our cash flow will
be insufficient to meet required payment of principal and interest. We may also underestimate our capital requirements and other
expenditures or overestimate our future cash flows. In such event, we may consider additional bank loans, issuing bonds, or other
forms of financing to satisfy our capital requirements. If any of the aforesaid events occur and we are unable for any reason to
raise additional capital, debt or other financing to meet our working capital requirements, our business, operating results,
liquidity and financial position will be adversely affected. In addition, if we do not obtain financing or have negative
working capital, there is a possibility that we may not be able to perform our contracts with our suppliers as a result of our
inability to pay them back. The foregoing factors may have an adverse effect on our operation.
We may lose our competitive advantage and
our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property.
As of December 31, 2020, we have received 23 patents
from the PRC authorities. All these patents are related to our products and production processes. We may not be able to successfully obtain
the approvals of the PRC authorities for the pending patent applications. In addition to the patents, proprietary techniques including
processes, ingredients and technologies are important to our business as they enable us to maintain our competitive advantage over our
competitors. Furthermore, third parties may assert claims to our proprietary processes, ingredients and technologies.
Our ability to compete in our markets and to achieve
future revenue growth will depend, in significant measure, on our ability to protect our proprietary technology and operate without infringing
upon the intellectual property rights of others. The legal regime in China for the protection of intellectual property rights is still
at its early stage of development. Intellectual property protection became a national effort in China in 1979 when China adopted its first
statute on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated
related regulations, such as the Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated
Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area,
such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning
the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended
many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws
and regulations promulgated and other efforts made by China over the years with a view to tighten up its regulation and protection of
intellectual property rights, the enforcement of such laws and regulations in China has not achieved the level in developed countries.
Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and
complexities between compliant technological innovation and non-compliant infringement.
We rely on trade secrets and registered patents
and trademarks to protect our intellectual property. We have also entered into confidentiality agreements with our management and employees
relating to our confidential proprietary information. However, the protection of our intellectual properties may be compromised as a result
of:
● departure of any of our management member(s) or employee(s) in possession of our confidential proprietary information;
● breach by such resigned management member(s) or employee(s) of his or her confidentiality and non-disclosure undertaking to us;
● expiration of the protection period of our registered patents or trademarks;
● infringement by others of our proprietary technology and intellectual property rights; or
● refusal by relevant regulatory authorities to approve our patent or trademark applications.
Any of these events or occurrences may reduce
or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. There is no assurance
that the measures that we have put into place to protect our intellectual property rights will be sufficient. As the number of patents,
trademarks, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality
of the products in the market further overlaps, we believe that business entities in our industry may face more frequent infringement
claims. Litigation to enforce our intellectual property rights could result in substantial costs and may not be successful. If we are
not able to successfully defend our intellectual property rights, we might lose the rights to technology that we need to conduct and develop
our business. This may seriously harm our business, operating results and financial condition, and enable our competitors to use our intellectual
property to compete against us.
Furthermore, if third parties claim that our products
infringe their patents or other intellectual property rights, we might be required to devote substantial resources to defend against such
claims. If we fail to defend against such infringement claims, we may be required to pay damages, modify our products or suspend the production
and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.
We may incur capital expenditures in the
future in connection with our growth plans and therefore may require additional financing.
To expand our business, we will need to increase
our products mix and capacity, which will require substantial capital expenditures. Such expenditures are likely to be incurred in advance
of any increase in sales. We cannot assure you that our revenue will increase after such capital expenditures are incurred. Any failure
to increase our revenue after incurring capital expenditures to expand production capacity will reduce our profitability.
In addition, we may need to obtain additional
debt or equity financing to fund our capital expenditures. Additional equity financing may result in dilution to existing shareholders.
Additional debt financing may be required which, if obtained, may:
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limit our ability to pay dividends or require us to seek consents for the payment of dividends;
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increase our vulnerability to general adverse economic and industry conditions;
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limit our ability to pursue our growth plan;
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require us to dedicate a substantial portion of our cash flow from operations to payment for our debt, thereby reducing availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and our industry; and/or
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not assure that we will be able to obtain the additional financing on terms that are acceptable to us, if at all.
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A disruption in the supply of utilities, or fire or other calamity
at our manufacturing plant would disrupt production of our products and adversely affect our sales.
Our BOPET films are manufactured solely at our
production facilities located in Weifang City in the PRC. Any disruption in the supply of utilities, in particular, electricity, water
or gas supply or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect
our production of BOPET film and, as a result, we could incur substantial loss of equipment and properties.
While we maintain insurance policies covering
losses in respect of damage to our properties, machinery and inventories of raw materials and products, we cannot assure you that our
insurance would be sufficient to cover all of our potential losses.
We have limited experience in operating
outside mainland China, and failure to achieve our overseas expansion strategy may have an adverse effect on our business growth in the
future.
Our future growth depends, to a considerable extent,
on our ability to develop both the domestic and overseas markets. We are currently exploring new business opportunities outside mainland
China for our BOPET film products. Our primary overseas customers are from Europe, Asia and North America. However, we have limited experience
in operating outside mainland China, and limited experience with foreign regulatory environments and market practices. As a result, we
cannot guarantee that we will be able to penetrate any overseas market. Failure in the development of overseas market may have an adverse
effect on our business growth in the future.
We have encountered anti-dumping investigations
in South Korea and the United States and other trade protection measures, and our overseas expansion strategy in our future business growth
may be adversely affected.
Since 2007, the manufacturers in China, India
and other countries have encountered anti-dumping investigations conducted by South Korea and the United States.
The Korean Trading Committee (KTC) announced the
final results for anti-dumping investigations for enterprises in China and India on August 27, 2008. We finally received the anti-dumping
duties (ADD) rate of 5.67% which is much lower than the average rate of 23.60% for other enterprises in China. On June 22, 2011, Ministry
of Strategy and Finance of Republic of Korea initiated a sunset review concerning the continued imposition of an anti-dumping duty on
imports of the BOPET Films originating from China and India. The rate for Shandong Fuwei, the subsidiary of Fuwei Films was set at 11.72%,
higher than one of its counterparts at 5.87%. Punitive duties of 25.32% will be imposed on the PET films manufactured by six Chinese firms.
The rate for the remaining Chinese manufacturers was set at 23.61%. The anti-dumping duties imposed on the Company’s exported biaxially
oriented polyethylene-terephthalate (BOPET) films to South Korea will be extended for three more years beginning on May 25, 2012.
On January 15, 2015, the Ministry of Strategy
and Finance of Republic of Korea initiated a sunset review concerning the continued imposition of an anti-dumping duty on imports of Polyethylene
Terephthalate originating from China and India. Eight Chinese exporters, including Fuwei Films, are required to participate in this review.
On January 13, 2016, the Ministry of Strategy and Finance announced that the rate for Shandong Fuwei, the subsidiary of Fuwei Films, was
set at 12.92% and it will be extended for three more years beginning on January 13, 2016. On September 12, 2018, the Ministry of Strategy
and Finance of Republic of Korea initiated a sunset review concerning the continued imposition of an anti-dumping duty on imports of Polyethylene
Terephthalate originating from China and India. Eight Chinese exporters, including Fuwei Films, are required to participate in this review.
On September 11, 2019, the Ministry of Strategy and Finance announced that the rate for Shandong Fuwei, the subsidiary of Fuwei Films,
was set at 36.98% and it will be extended for three more years beginning on September 12, 2019.
The US Department of Commerce conducted an anti-dumping
investigation in October 2007 covering exporters in China, Brazil, Thailand and the United Arab Emirates. A total of 41 exporters
in China were under investigation. In October 2008, the anti-dumping judgments were announced. Although we received
the lowest ADD rate of 3.49% among five exporters that received a duty, our export to the United States, to a certain extent, was still
adversely affected by paying the ADD.
On January 23, 2010, the US Department of Commerce
(“USDOC”) began a first round annual review of Chinese BOPET exporters. Fuwei received the lowest anti-dumping duty (ADD)
rate of 30.91% in this administrative review conducted by the USDOC, while the ADD rate of other four Chinese companies reviewed by the
USDOC was more than 36.93%. In accordance with relevant laws and regulations in the US, the ADD rate of final results will retroactively
apply to those US companies which imported Chinese-exported BOPET films, including Fuwei Films USA, LLC, during the period of first review,
so these US importers are obligated to pay a supplementary antidumping duty at this ADD rate. In March 2011, we submitted comments to
the USDOC regarding perceived ministerial errors made in calculating the ADD applicable to us. As a result of a Court challenge brought
by Fuwei, in January 2013, the USDOC found that Fuwei did not dump goods in the United States market for the period from November 6, 2008
to October 31, 2009. The USDOC, after recalculating the rate, found that the level of dumping was “de minimis.” A rate which
is de minimis is treated by the USDOC as a finding of zero. The final results of the second round annual review were announced in March
2012, according to which, an ADD rate of 8.48% was imposed on Fuwei Films which was slightly higher than the lowest antidumping duty rate
of 8.42% of all the Chinese exporters being reviewed.
On December 30, 2011, USDOC commenced its third
routine annual review of BOPET films originated from China. In order to gain an opportunity to continue exporting to the United States,
Fuwei Films, although not a mandatory respondent, actively responded to the review to the extent permitted by law and will continue to
seek the low rate which should properly apply to its exports to the United States. In June 2013, the final results of the third round
of annual review were issued and an ADD rate of 12.80% was imposed on Fuwei Films. The preliminary results of the fourth round annual
of review were announced in December 2013, according to which, an ADD rate of 31.77% was imposed on Fuwei Films. In June 2014, the final
results of the fourth round of annual review were announced and Fuwei Films was imposed on an ADD rate of 31.24%. There was no export
to the United States for the year of 2014. The preliminary results of the fifth round of annual review were announced in December 2014,
which determined that Fuwei Films did not have any reviewable transactions during the fifth round of annual review and no rate was assigned
to it. On December 23, 2014, the USDOC initiated the sixth round annual review. In February 2015, Fuwei Films filed a No Shipment Certification
with USDOC as the Company had no export to U.S. during the sixth round of annual review. The domestic industry has withdrawn the request
for the seventh round annual review for the years 2015 and 2016 and as a result, the administrative review with respect to Fuwei will
be rescinded and no changes will be made to the deposit rate.
In addition, if other countries or regions, such
as the European Union, take trade protection measures against China's BOPET film or downstream industries, our business may be adversely
affected.
Changes in Applicable PRC Taxes may adversely
affect the Company.
On October 18, 2010, the State Council issued
a notice that the city maintenance and construction tax as well as educational surcharges shall be extended from Chinese companies to
foreign-funded enterprises and citizens. Beginning December 1, 2010, Interim Regulations on City Maintenance and Construction Tax of the
People’s Republic of China and Decision of the State Council on Amending the Interim Provisions on the Collection of Educational
Surcharges shall be applicable to foreign-funded enterprises, foreign enterprises and foreign citizens, which mean they will no longer
be exempt from such taxes. In accordance with the regulations, since December 1, 2010, our subsidiary - Shandong Fuwei - became a taxpayer
of city maintenance and construction tax as well as educational surcharges which shall be based on value-added tax, the consumption tax
and business tax which currently stands at 12%. In July 2011, according to the new rules promulgated by the local government in China,
Shandong Fuwei shall contribute to a fund for local water conservation projects since July 1, 2011 which is based on the actual value-added
tax, consumption tax and business tax with a rate of 1%. The rate of local water conservation projects fund has been adjusted to 0.5%
since June 1, 2017. In August 2014, the local government promulgated a new regulation that adjusted the standard of urban land use tax,
according to which the tax amount for Shandong Fuwei increased from RMB8 per square meter to RMB14 per square meter commencing July 1,
2014. In addition, the tax amount was further adjusted from RMB14 per square meter to RMB13 per square meter effective December 2016.
Effective January 1, 2019, the tax amount was adjusted from RMB13 per square meter to RMB11.2 per square meter and High-and-New Tech Enterprise
could pay only 50%. As Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to pay RMB5.6 per
square. If the Chinese government changes its tax policies or adds new types of taxes in the future, our business may be adversely affected.
China’s actions to save energy and reduce emissions may
adversely affect our business, by subjecting us to significant new costs and restrictions on our operations.
Recently the Chinese government has tightened
its control over energy saving and emission reduction. The Chinese government intends to reduce energy consumption for gross domestic
products and water consumption for industrial added value. Certain of our manufacturing plants that use significant amounts of energy,
including electricity and gas, are likely to be affected by this plan. Therefore, our operation might be influenced by the energy saving
and emission reduction measures of the Chinese government. Regulations for restricting greenhouse gas emission may increase the prices
of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require
us to purchase allowances to offset our emissions or result in an overall increase in our costs of raw materials, any of which could increase
costs and negatively affect our business operations or financial results.
The current labor law changes in the PRC
may have an adverse impact on our business and profitability.
The Company is of the view that the amended Labor
Law of the People’s Republic of China (the “PRC”), which took effect on January 1, 2008 and contains certain heightened
requirements with respect to employment law, does not constitute a material risk to the Company. The amended Labor Law contains new provisions
which protect the interests of the employees, including provisions which stipulate that an employer shall enter into labor contracts with
its employees and pay social welfare insurance which may increase our human resources costs. In addition, the amended Labor Law also states
that upon expiry of the labor contract, under some circumstances, an employer shall compensate an employee of the employer who does not
renew the labor contract, which may increase our operating expenses. However, to the best of the Company’s knowledge, Shandong Fuwei
constantly abides by the Labor Law of PRC, as amended, and therefore we does not believe the labor law provisions and any changes will
have any material impact on its business or profitability. However, the Labor Law changes in the PRC in the future may have an adverse
impact on our business and profitability.
Our primary source of funds for dividends and other distributions
from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to
pay dividends or make other distributions to our shareholders are negatively affected by those restrictions and uncertainties.
We are a holding company established in the Cayman
Islands and conduct our core business operations through our principal operating subsidiary, Shandong Fuwei, in China. As a result, our
profits available for distribution to our shareholders are dependent on the profits available for distribution from Shandong Fuwei. If
Shandong Fuwei incurs debt on its own behalf, the debt instruments may restrict its ability to pay dividends or make other distributions,
which in turn would limit our ability to pay dividends of our ordinary shares. Under the current PRC laws, because we are incorporated
in the Cayman Islands, our PRC subsidiary, Shandong Fuwei, is regarded as a wholly foreign-owned enterprise in China. For dividends paid
by foreign invested enterprises, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC
accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination
under U.S. GAAP in significant respects, such as the use of different principles for recognition of revenues and expenses. In addition,
distribution of additional equity interests by our PRC subsidiary, Shandong Fuwei, to us (which is credited as fully paid through capitalizing
its undistributed profits) requires additional approval of the PRC government. Under the PRC laws, Shandong Fuwei, a wholly foreign-owned
enterprise, is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves
are not distributable as cash dividends. As a result, our primary internal source of funds of dividend payments from Shandong Fuwei is
subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay
dividends to our shareholders. Moreover, any allotment of funds from us to Shandong Fuwei, either as a shareholder loan or as an increase
in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds
between us and Shandong Fuwei could restrict our ability to act in response to changing market conditions.
Investor confidence and the market price of our shares may be
adversely impacted if we are unable to issue an unqualified opinion on the adequacy of our internal controls over our financial reporting
beginning as of December 31, 2020 as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.
As a public company, we are required by section
404 of the Sarbanes-Oxley Act 2002 to include a report by management on our internal controls over financial reporting that contains our
management’s assessment of the effectiveness of our internal controls in our annual report on Form 20-F. Based on our evaluation,
our principal executive officer and principal financial officer previously concluded as of December 31, 2010, our internal controls over
financial reporting were effective as of such date. However, in connection with the review of our Annual Report on Form 20-F by the Securities
and Exchange Commission (“SEC”) and subsequent reconsideration of the conclusion regarding effectiveness originally expressed
therein, our principal executive officer and principal financial officer have now revised their conclusions and believe that as of the
Evaluation Date, our internal controls over financial reporting were ineffective as of December 31, 2010 and that such internal controls
exhibited a “material weakness,” or a deficiency, or combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. The material weaknesses identified resulted from inadequate technical accounting staff with knowledge of
and experience with US generally accepted accounting principles, pursuant to which we prepare our consolidated financial statements, to
support stand-alone external financial reporting under public company or SEC requirements. The report of management contained in this
Annual Report on Form 20-F also reflects the determination of the reviewing officers that as of December 31, 2011, 2012, 2013, 2014, 2015,
2016, 2017, 2018, 2019 and 2020, we continued to have a material weakness in our internal controls over financial reporting.
We have developed and implemented a remedial
plan to address the deficiencies in the areas of personnel with knowledge of and experience with US generally accepted accounting
principles, including recruiting a full-time reporting employee with U.S. GAAP experience and conducting training in U.S. GAAP
principles for all the financial reporting staff of the Company. However, additional measures may be necessary, and the measures we
expect to take to improve our internal controls may not be sufficient to address the issues identified, to ensure that our internal
controls are effective or to ensure that such material weakness or other material weaknesses would not result in a material
misstatement of our annual or interim financial statements. In addition, other material weaknesses or significant deficiencies may
be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to
record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms
of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common
stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and
penalties, and generally materially and adversely impact our business and financial condition.
There may be a change of business, management
and ownership control of our shares if the transaction contemplated by the Securities Purchase Agreement is completed.
On March 31, 2021, we announced that the Company
has entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Enesoon New Energy Limited (“Enesoon”),
a British Virgin Islands company directly and indirectly holding subsidiaries in China primarily engaged in green thermal energy storage
businesses, and Enesoon’s shareholders. The Purchase Agreement will result in the issuance by the Company of 111,111,111 new ordinary
shares in exchange for all outstanding shares of Enesoon. As a result of this transaction, the former shareholders of Enesoon will beneficially
own in the aggregate approximately 97.1% of the Company’s outstanding shares.
The closing of the transaction contemplated under
the Purchase Agreement is subject to various closing conditions, including approval of the issuance of Consideration Shares by the shareholders
of the Company, receipt of NASDAQ approval, receipt by the Company of a satisfactory fairness opinion or valuation and other customary
conditions.
Although there is no assurance or guarantee that the transaction will
close, in the event the transactions are completed, there will be a change of business, management and ownership control of the Company.
Upon closing, the new controlling shareholder will have substantial influence over the Company and its interests may not be aligned with
the interests of our shareholders and as the controlling shareholder, it may take actions that are not in the best interests of our other
shareholders.
(b) Risks
Relating to Business Operations in China
Changes in China’s political and economic policies and
conditions could cause a substantial decline in the demand for our products and services.
Currently, we derive substantially most of our
revenues from mainland China. We anticipate that mainland China will continue to be our primary production and sales base in the near
future. In addition, currently, substantially all of our assets are located in China and most of our services are performed
in China. In 2020, 2019 and 2018, sales to our customers in the PRC accounted for approximately 92.0%, 85.8%, and 86.4%, respectively,
of our total revenue. Accordingly, any significant slowdown in the PRC economy or decline in demand for our products from our customers
in the PRC will have an adverse effect on our business, financial condition and results of our operations. Furthermore, any unfavorable
changes in the social and political conditions of the PRC may also adversely affect our business and operations.
Since the adoption of the “open door policy”
in 1978 and the “socialist market economy” in 1992, the PRC government has been reforming and is expected to continue to reform
its economic and political systems. Any changes in the political and economic policy of the PRC government may lead to changes in the
laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and
export restrictions, which may in turn adversely affect our financial performance. While the current policy of the PRC government seems
to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance
that such a policy will continue to prevail in the future. We cannot make any assurances that our operations would not be adversely affected
should there be any policy changes.
The financial policies, such as bank reserve ratio
and deposit and loan interest rates, are subject to adjustment in accordance with the economic development. These policy changes may adversely
affect our business.
A Chinese entity has substantial influence
over our company and its interest may not be aligned with the interests of other holders of our ordinary shares.
Shanghai Meicheng Enterprise Management Co.,
Ltd., (“Shanghai Meicheng”), beneficially owns approximately 52.90% of our outstanding share capital through a transfer of
shares from Shandong SNTON Group Co., Ltd. (the “SNTON Group”) to Shanghai Meicheng on June 23, 2020. We received a notification
on July 2, 2020 from Shanghai Meicheng with respect to an ownership transfer from Shandong SNTON to Shanghai Meicheng. It was noted that
SNTON Group transferred its equity in Hongkong Ruishang to Shanghai Meicheng on June 23, 2020, due to SNTON Group’s asset reorganization.
As a result of this transfer, Shanghai Meicheng now indirectly owns the shares through Hongkong Ruishang. Shanghai Meicheng has substantial
influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets,
election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change
in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and might reduce the price of our ordinary shares. Alternatively, our controlling shareholder may cause a merger, consolidation
or change of control transaction even if it is opposed by other shareholders.
Our ordinary shares may be delisted under
the Holding Foreign Companies Accountable Act if the US Public Company Accounting Oversight Board (PCAOB) is unable to inspect auditors
who are located in China. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect
the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits
of such inspections.
On December 18, 2020, the Holding Foreign Companies
Accountable Act, or the HFCA Act, was enacted. The HFCA Act requires the SEC to prohibit securities of any foreign companies from being
listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot
be inspected by the PCAOB for three consecutive years, beginning in 2021. On March 24, 2021, the SEC adopted interim final amendments
to implement the HFCA Act. A registrant will not be required to comply with the amendments until the SEC has identified it as having a
non-inspection year. As of the date of this annual report, the SEC is seeking public comment on this identification process. Our independent
registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable
to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are currently not inspected by the
PCAOB. We are not required to comply with the amendments until the SEC has identified us as having a “non-inspection” year
under a process to be subsequently established by the SEC. If we are identified by the SEC as a registrant that will have to comply with
the interim final amendments, we will be subject to additional submission and disclosure requirements. For example, the amendments will
require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a
governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding
the audit arrangements of, and governmental influence on, such a registrant. The SEC is seeking public comment on these submission and
disclosure requirements and plans to separately address implementation of the trading prohibitions in the HFCA Act in the future.
There could be additional regulations or legislation
that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's Working Group
on Financial Markets issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to
the then President of the United States, or the PWG Report. The PWG Report contained recommendations to address the lack of PCAOB inspection
access. Some of these recommendations were implemented in the HFCA Act. However, some of the recommendations were more stringent than
the HFCA Act. For example, the PWG report recommended that the transition period before a company would be delisted would end on January
1, 2022.
Whether the PCAOB will be able to conduct inspections
of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our
control. If we are unable to meet the PCAOB inspection requirement in time, we could be subject to additional submission and disclosure
requirements, delisted from the Nasdaq Capital Market and our ordinary shares will not be permitted for trading “over-the-counter”
either. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair
your ability to sell or purchase our ordinary shares when you wish to do so, and the ongoing risk and uncertainty associated with delisting
would have a negative impact on the price of our ordinary shares. Also, such a delisting would significantly affect our ability to raise
capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.
The PCAOB’s inability to conduct inspections
in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm.
As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB
to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public
accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the
PCAOB inspections, which could cause investors and potential investors in our ordinary shares to lose confidence in our audit procedures
and reported financial information and the quality of our financial statements.
In May 2013, the PCAOB announced that it
had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes
a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by
the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with
the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and
audit Chinese companies that trade on U.S. exchanges.
The discontinuation of any preferential tax treatments or other
incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of
operations.
Our subsidiary, Shandong Fuwei, was converted
into a wholly foreign owned enterprise in January 2005 and could enjoy certain special or preferential tax treatments regarding enterprise
income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises”
at that time. Accordingly, at that time, it was entitled to tax concessions whereby the profit for the first two financial years beginning
with the first profit-making year (after setting off tax losses carried forward from prior years) was exempt from income tax in the PRC
and the profit for each of the subsequent three financial years was taxed at 50% of the prevailing tax rates set by the relevant tax authorities.
Shandong Fuwei was designated as a High-and-New Tech Enterprise in December 2008 and was recertified in October 2011 and enjoys a favorable
enterprise income tax rate of 15%. If there are any future changes in PRC tax laws, rules and regulations or Shandong Fuwei will not be
designated as a High-and-New Tech Enterprise, Shandong Fuwei will no longer enjoy the preferential tax treatment. In December
2014, Shandong Fuwei failed to be designated as a High-and-New Tech Enterprise. As a result, Shandong Fuwei is now subject to a 25% standard
enterprise income tax rate since from 2014. In 2016, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result,
it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017 and 2018. In 2019, Shandong
Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment at an EIT rate of
15% for the years ended December 31, 2019, 2020 and 2021.
In accordance with a notice issued by the PRC
government in October, 2010, since December 1, 2010, Shandong Fuwei, our subsidiary, will become a taxpayer of city maintenance and construction
tax as well as educational surcharges which shall be based on value-added tax, the consumption tax and business tax which currently stand
at 12%. In July 2011, according to the new rules promulgated by the local government in China, Shandong Fuwei shall contribute to a fund
for local water conservation projects since July 1, 2011 which is based on the actual value-added tax, consumption tax and business tax
with a rate of 1%. The rate of local water conservation projects fund has been adjusted to 0.5% since June 1, 2017. The policy changes
may have an adverse impact on our net profit.
We are subject to environmental laws and regulations in the PRC.
We are subject to environmental laws and regulations
in the PRC. Any failure by us to comply fully with such laws and regulations will result in us being subject to penalties and fines or
being required to pay damages. Any change in the regulations may require us to acquire equipment or incur additional capital expenditure
or costs in order to comply with such regulations. Our profits will be adversely affected if we are unable to pass on such additional
costs to our customers.
In recent years, there have been many newly-built
residential buildings in close proximity to our factory. In March 2014 and November 2015, due to the noise caused by our production, Shandong
Fuwei was fined RMB10,000 and RMB20,000, respectively, and was required to rectify and reform within a definite time. The complaints from
nearby residents about the noise caused by our production may require us to take measures to lower noise, which will lead to additional
cost to us. In the event that we are forced to suspend our production to take improvement measures, our operations and earnings may be
adversely affected.
Changes in foreign exchange regulations in China may affect our
ability to pay dividends in foreign currencies.
We currently receive most of our operating revenues
in Renminbi. Currently, Renminbi is not a freely convertible currency and the restrictions on currency exchanges in China may limit our
ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividends or other payments in
U.S. dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, the PRC government
has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade- and service-related
foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations
in China, our PRC subsidiary, Shandong Fuwei, is able to pay dividends in foreign currencies, without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its
discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our Renminbi-denominated
earnings into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in foreign currency without prior
approval from SAFE. In addition, conversion of Renminbi for most capital account items, including direct investments, is still subject
to government approval in China and companies are required to open and maintain separate foreign exchange accounts for capital account
items. This restriction may limit our ability to invest earnings of Shandong Fuwei.
Fluctuation in the value of Renminbi could adversely affect our
overseas sales and import of raw materials and the value of, and dividends payable on, our shares in foreign currency terms.
The value of Renminbi is subject to various
factors and depends to a large extent on China’s domestic and international economic, financial and political developments, as
well as the currency’s supply and demand in the local market. From 1994, the conversion of Renminbi into foreign currencies,
including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central
bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial
markets. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was revalued in
July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy,
Renminbi is permitted to fluctuate within a band against a basket of foreign currencies. This change in policy resulted initially in
an approximately 2.0% appreciation in the value of Renminbi against the U.S. dollar. The Chinese government may adopt a
substantially more liberalized currency policy, which could result in a further and more significant fluctuation
in the value of Renminbi against the U.S. dollar. Since our income and profits are denominated in Renminbi, fluctuation in the value
of Renminbi could adversely affect our overseas sales and import of raw materials and further negatively affect our revenue and net
income. Any appreciation of Renminbi would increase the value of, and any dividends payable on, our shares in foreign currency
terms. Conversely, any depreciation of Renminbi would decrease the value of, and any dividends payable on, our shares in foreign
currency terms.
The uncertain legal environment in China could limit the legal
protections available to you.
The PRC legal system is a civil law system based
on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance
on economic and business practices in China and to regulate foreign investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned
enterprise and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable
to wholly foreign-owned enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing
with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation
of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business
and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume
of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations and legal requirements
involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you.
For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’
derivative actions. Moreover, the enforceability of contracts in China, especially with the government, is relatively uncertain. If counterparties
repudiated our contracts or defaulted on their obligations, we may not have adequate remedies. Such uncertainties or inability to
enforce our contracts could materially and adversely affect our revenues and earnings.
Outbreak of viruses such as SARS, H1N1,
Coronavirus, now named as COVID-19 or other epidemics could materially and adversely affect our overall operations and results of operations.
From March to July 2003, mainland China, Hong
Kong, Taiwan and some other areas in Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as severe acute
respiratory syndrome, or SARS. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H1N1 avian flu, could
potentially disrupt our operations to the extent that any one of our employees is suspected of having the infection or that any of our
facilities is identified as a possible source of spreading the virus or disease. We may be required to quarantine employees who are suspected
of having an infection. We may also be required to disinfect our facilities and therefore suffer a suspension of production of indefinite
duration. Any quarantine or suspension of production at any of our facilities will adversely affect our overall operations. In addition,
any such outbreak will likely restrict the level of economic activities in the affected areas, which could lead to a substantial decrease
in our revenues accompanied by an increase in our costs.
We face business disruption and related
risks resulting from the novel coronavirus 2019 (COVID-19) pandemic, which could have a material adverse effect on our business and results
of operations.
The spread of COVID-19 across the world resulted
in the Director General of the World Health Organization declaring the outbreak of COVID-19 as a global pandemic in March 2020. The continued
global spread of the COVID-19 pandemic - including the recent discovery of variant strains of the virus - and the responses thereto are
complex and rapidly evolving, and the extent to which the pandemic impacts our business, financial condition and results of operations,
including the duration and magnitude of such impacts, will depend on numerous evolving factors that we may not be able to accurately predict
or assess. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future
pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this Annual Report
on Form 20-F, which in turn could materially adversely affect our business, financial condition and results of operations. There may be
other adverse consequences to our business, financial condition and results of operations from the spread of COVID-19 that we have not
considered or have not become apparent. As a result, we cannot assure you that if COVID-19 continues to spread, it would not have a further
adverse impact on our business, financial condition and results of operations.
Regulations relating to offshore investment
activities by PRC residents may limit our ability to acquire PRC companies and adversely affect our business and prospects.
The Chinese State Administration of Foreign
Exchange (“SAFE”) has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign
Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment through Offshore Special Purpose Vehicles,
or Circular 75, effective on November 1, 2005 and its implementation rules. These regulations require PRC residents and PRC
corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment
activities. These regulations are applicable to our shareholders who are PRC corporate entities and may be applicable to any
offshore acquisitions that we make in the future. Under these foreign exchange regulations, PRC residents who make, or have prior to
the implementation of these foreign exchange regulations made, direct or indirect investments in offshore special purpose vehicles,
or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC corporate entities who
is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with
respect to that SPV, to reflect any material change.
Circular of the State Administration of Foreign
Exchange on Printing and Distributing on the Operating Rules for the Administration of Foreign Exchange with Respect to the Financing
and Round-tripping Investment of Domestic Residents via Overseas Special Purpose Companies (“Circular 19”) was promulgated
by SAFE on May 20, 2011 and came into effect on July 1, 2011. Circular 19 further clarifies the administration principles of Circular
75 and the relevant issues in its application and simplifies operating procedures. To a certain extent, Circular 19 will benefit the offshore
investment and round-tripping investment.
Provisions on the Merger and Acquisition of Domestic
Enterprises by Foreign Investors (Revised in 2009) (“Circular 6”) was promulgated by Ministry of Commerce and came into effect
on June 22, 2009. According to Circular 6, where a domestic company sets up a company with special purpose abroad, it shall apply to the
Ministry of Commerce for going through the examination and approval formalities. When merging or acquiring related domestic companies
in the name of the companies in foreign countries legally established or controlled by them, the domestic companies, enterprises or natural
persons shall report to the Ministry of Commerce for approval.
Item 4. Information on the Company
Overview
We were formed as a Cayman Islands corporation
in August 2004 under the name “Neo-Luck Plastic Holdings Co., Ltd.” and changed our name to “Fuwei Films (Holdings)
Co., Ltd.” in April 2005. Our corporate headquarters, principal place of business, production and ancillary facilities occupy an
area of approximately 74,251 square meters at No. 387 Dongming Road, Weifang Shandong 261061, People’s Republic of China. Our agent
for service in the United States is CT Corporation System located at 111 Eighth Avenue, NY, NY 10011.
We develop, manufacture and distribute high quality
plastic film using the biaxially- oriented stretch technique, otherwise known as BOPET film (biaxially-oriented polyethylene terephthalate).
The film is light-weight, non-toxic, odorless, transparent, glossy, temperature and moisture-resistant, making it suitable for many forms
of flexible packaging, printing, laminating, aluminum-plating and other applications. In addition, it retains high dielectric strength
and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. Our BOPET film is widely
used in consumer based packaging (such as food, pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as printing
plates and microfilms), electronics and electrical industries (such as PCB products, capacitors and motor insulation), as well as in magnetic
products (such as audio and video tapes). We market our products under our brand name of “Fuwei Films”. Our main products
are as below:
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Dry film is generally used in circuit boards (PCB & FPC)
production, and sometimes used for nameplate and crafts etching;
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Chemically
treated film used to enhance properties including barrier resistance,
persistence;
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Stamping
foil base film and transfer base films used for packaging of luxury items of cigarettes and alcohol to increase the aesthetic presentation
of the item and improving environmental performance;
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Printing base film used in printing and lamination;
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Metallized film or aluminum plating base film used for vacuum
aluminum plating for flexible plastic lamination;
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High-gloss film used for aesthetically enhanced packaging purposes;
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Heat-sealable film used for construction, printing and making
heat sealable bags;
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Laser holographic base film used as anti-counterfeit film for
food, medicine, cosmetics, cigarettes and alcohol packaging; and
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Heat shrinkable film is widely used for special-shaped packaging
for beverage and cosmetics.
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Since our establishment, a significant portion
of our revenues has been derived from the sales of BOPET film, particularly our printing film, stamping film, transfer film and chemical
pretreated film, high-gloss film, heat sealable film, dry film, and heat shrinkable film and so on.
We operate three production lines and have had
one trial production line as of December 31, 2020. The first line is a Brückner 6.3 m (in width) production line with an annual design
capacity of 13,000 metric tons of BOPET film. The second line is a DMT production line which is three-layer co-extruded with 6.7 m (in
width), and has an annual design capacity of 16,100 metric tons of BOPET film. We also have a Mitsubishi trial production line which has
an annual design capacity of 1,500 metric tons. The new production line has been put into trial operation at the end of January 2013.
The commissioning of this production line was delayed due to the former major shareholders’ ownership transfer in early 2011. This
production line will manufacture high-performance electric insulation film, base film for solar backsheet and TFT-LCD optical film with
an annual design capacity of 23,000 metric tons and thickness between 38 and 250µm. As of September 2013, our third production line
had been approved. A sample diffusion film (a type of TFT-LCD optical film) was preliminarily accepted by four customers after being delivered
to these four customers for testing. We are supplying small batches of products according to one of the four customer’s purchase
order. In addition, a sample base film for solar backsheets has been delivered to a customer for initial testing. We received initial
feedback from this customer and we are improving according to the feedback. It could not satisfy the requirements of continued operation
for the third production line due to lack of purchase orders. The third production line has not been started up ever since April 2015.
On December 20, 2020, the Company sold its third production line by the way of the open bidding. The successful bidder was Huizhou Yidu
Yuzheng Digital Technology Co. LTD. (“Huizhou Yidu Yuzheng”). On January 16, 2021, the Company entered into Purchase Agreements
with Huizhou Yidu Yuzheng as per which the third production line and the trial production line which was made by Mitsubishi for R &
D will be finished dismantling and moving at the end of May, 2021.
Our top five customers in the year ended December
31, 2020 were Hunan Wujo Hi-Tech Materials Co., Ltd., Hunan Hori New Materials Co., Ltd., Kolon Electronic Materials Co., Ltd., Zhuhai
Ruiming Technology Co., Ltd., and Eternal Photo Electronic Materials (Guangzhou) Co., Ltd., None of our customers accounted for more than
10% of our total revenues in any such year. We sell most of our BOPET film products to customers in the coastal region of China. In addition,
we expect to continue to expand our product portfolio to exploit opportunities in different market sectors, such as electronics industries.
In 2020, 2019 and 2018, our sales to our overseas customers constituted approximately8.0%, 14.2%, and 13.6% of our total revenue, respectively.
Competitive Strengths
We believe that our competitive strengths have
enabled us over the years to meet the needs of our customers and become a leading provider of BOPET film products in China. We also believe
that our strengths will continue to help us grow in the BOPET film industry in both China and internationally. Our principal strengths
include the following:
We have the capability
to expand our product range and markets by introducing new products required by customers.
We believe that our experience in the industry
and personnel will enable us to continue to provide new BOPET film products required by customers, and we have already developed a series
of new products. Our R&D team comprises of 6 full-time research personnel in total.
We have an established brand name and are recognized for our
product quality in the PRC.
Our products are marketed under our brand name,
“Fuwei Films”. We believe that this brand name is well known in the BOPET film market in the PRC and, although our selling
prices sometimes exceed those of our competitors, our products have achieved significant market acceptance because of its high quality
and our superior customer service. In January 2011, Fuwei Films was recognized as “Shandong Famous Brand”. In January, 2014,
Fuwei Films was awarded once more as “Shandong Famous Brand” for an additional five years after being reviewed.
We manufacture high quality products that can be customized for
our clients.
We implement and enforce stringent quality controls
on our production process and products. As part of our production process, we formulate different blends of PET resins and additives to
produce film with specific properties for our customers based on their requirements. In addition, we have developed a special production
process and we believe using these formulas will produce products that will meet our customers’ requirements in quality.
We have an experienced management team
with extensive industry experience.
Our management team has extensive management experience
and most of them have many years of experience in the R&D, manufacturing and marketing of BOPET films.
We can continually renovate or update our production lines according
to the market trends and our R & D facilities are advanced in the PRC.
Our first production line was German made and
manufactured by Brückner and the second was made by DMT in France. We continually renovate or update these production lines according
to the market trends to enable these lines to produce competitive and premium products.
Awards and Certifications
Our subsidiary, Shandong Fuwei, has received the
following awards and certificates, each of which, we believe, is an indication of
our achievements, the quality of our products
and makes us more attractive to our potential customers and therefore a more competitive company both in the local and international markets:
Date
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Award/Certificate
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Issuing Authority
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September 2004(1)
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ISO 9001:2000 Certificate
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China Certification Center for Quality Mark
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July 2006(2)
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ISO 14001 Certificate
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SGS
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December 2007 (3)
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Key High-Tech Enterprise of the National Torch Program
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Ministry of Science and Technology
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December 2008 (4)
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High-and-New Tech Enterprise
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Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, and Shandong Province Financial Bureau
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May 2009
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“Advanced Enterprise of Chinese plastic industry”
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China Plastic and Packaging Association
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August 2009
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Technological Innovation Award
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Shandong Province enterprise technological innovation promotion association
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June 2010(5)
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A-Category taxpayer
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The National Taxation Bureau and the Local Taxation Bureau of Shandong Province
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October 2010 (6)
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Shandong Engineering Technology Research Center
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Department of Science & Technology of Shandong Province
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January 2011 (7), (8)
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Award for Cooperative and Innovative Manufacturing, Study and Research of SME
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SME Productivity Promotion Center of Shandong Province
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January 2011
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First Award of Private SME Innovation of Shandong Province
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SME Innovative Committee of Technological Promotion of Shandong Province
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January 2011
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Award of Tax Contribution of the Year of 2010
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Weifang Municipal Finance Bureau
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January 2011 (9)
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“Fuwei Films” was awarded as Famous Shandong Brand
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Shandong Provincial Quality Supervision Bureau
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February 2011 (10)
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Scientific Innovative Enterprise of Shandong Province
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Department of Science & Technology of Shandong Province
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October 2011
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Creditable Private Enterprise of Weifang 2011
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Weifang SME Advocacy Office
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October 2011(3)
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Key High-Tech Enterprise of the National Torch Program
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Ministry of Science and Technology
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October 2011(4)
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High-and-New Tech Enterprise
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Shandong Department of Science and Technology, National and Local Taxation
Bureau of Shandong Province, and Shandong Province Financial Bureau
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December 2011
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Award for Enhanced Productivity
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SME Productivity Promotion Center of Shandong Province
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December 2011(11)
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Famous Brand
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SME Productivity Promotion Center of Shandong Province
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February 2012(11)
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Outstanding Brand of Plastic Packaging Industry in China in 2011 and
2012
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China Packaging Federation
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June 2012(12)
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OHSAS 18001:2007 Occupational Health and Safety Management Systems
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SGS
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December 2012
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Reliable Enterprise of Weifang
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Weifang Administration for Industry & Commerce
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December 2012
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Best Employer of Weifang
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Weifang Enterprise Confederation
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March 2013(11)
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Private Economy Famous Brand of Shandong Province
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Private Economy Brand Promotion Center of Shandong Province, SME Productivity
Promotion Center of Shandong Province
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March 2013
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Award for Enhanced Productivity in 2012
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SME Technology Innovation Promotion Association of Shandong Province, SME Productivity Promotion Center of Shandong Province
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March 2013(7), (8)
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Award for Cooperative and Innovative Manufacturing, Study and Research
of SME for the Year of 2012
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SME Technology Innovation Promotion Association of Shandong Province,
SME Productivity Promotion Center of Shandong Province
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March 2013
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First Award of Private SME Innovation of Shandong Province for the
Year of 2012
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SME Technology Innovation Promotion Association of Shandong Province,
SME Productivity Promotion Center of Shandong Province
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April 2013
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2012 Human Resources and Social Security Credibility Demonstration
Enterprise
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Weifang Municipal Human Resources and Social Security Bureau
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May 2013(5)
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AA-Category taxpaye
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The National Taxation Bureau and the Local Taxation Bureau of Shandong
Province
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July 2013(11)
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the Most Competitive Brand in the Market of Shandong Province
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Shandong Province Economic and Information Technology Committee
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August 2013(13)
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The Third Award of Patent for BOPET and Manufacturing in Weifang City
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Weifang Municipal Government
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October 2013
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The Most Significant Innovation Awarded for Dry Film Resist
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Weifang Enterprises Confederation, Weifang Enterprisers Association.
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January 2014(9)
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“Fuwei Films” was awarded as Famous Shandong Brand
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Shandong Provincial Quality Supervision Bureau
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January
2014(14)
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Five -Star Enterprise in Statistical Work
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Shandong Provincial Bureau of Statistics
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January
2015(15)
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Advanced Work Unit in Making National Standard for BOPET Film
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China Packaging Federation
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May 2015
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One of the Top Ten Outstanding
Enterprises in 2014 for All products in Shandong
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Shandong Provincial Plastic Association
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December 2015
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Famous Trademark in Shandong Province
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Shandong Provincial Administration for Industry & Commerce
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December 2016(16)
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High-and-New Tech Enterprise
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Shandong Department of Science and Technology, National and Local Taxation
Bureau of Shandong Province, and Shandong Province Financial Bureau
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March 2017
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Permission Certificate of Radiation Safety
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Environmental Protection Bureau
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March 2017
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Grade A Unit of Labor Secured and Law-abiding Integrity for the year
2016
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Weifang Labor and Social Security Supervision Office
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April 2018
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Grade A Unit of Labor Secured and Law-abiding Integrity for the year
2017
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Weifang Labor and Social Security Supervision Office
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December 2019
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High-and-New Tech Enterprise
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Shandong Department of Science and Technology, National and Local Taxation
Bureau of Shandong Province, and Shandong Province Financial Bureau
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September 2020(17)
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The hidden champion in Weifang City
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Weifang Bureau of Industry and Information Technology
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(1)
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ISO 9000 certification has become an international reference for quality management requirements in business-to-business
dealings. This certification enables us to compete on many more markets around the world and provides our customers with assurances about
our quality, safety and reliability.
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(2)
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After strict examination and approval by SGS, Fuwei Films (Shandong) Co., Ltd. has successfully passed
the ISO14001 Environmental Administration System in July 2006.
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(3)
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Fuwei Films (Shandong) Co., Ltd. was awarded as Key High-Tech Enterprise of the National Torch Program
in December 2007 and October 2011. This title is recertified every two years.
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(4)
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In December 2008 and October 2011, Fuwei Films was awarded as High-and-New Tech Enterprises by Shandong
Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Finance
Bureau.
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(5)
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The A-Category is the top of the four ratings for corporate taxpayers in China. Candidates eligible for
the category are reviewed and designated by the authorities every two years.
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(6)
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This center is mainly engaged in the research and development of polyester new materials and high-tech
products. Currently, it has made more than ten R&D achievements and plays a positive leading
role in the development of BOPET industry.
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(7)
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Fuwei Films starts technological cooperation with Chinese colleges and hires South Korean experts to research
and develop new products, techniques and process.
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(8)
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Fuwei Films has already developed and applied more than ten kinds of new products, including laser anti-counterfeit
film, chemical pretreated film, heat-sealable film, dry film and heat shrinkable film. All these have been widely used in production.
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(9)
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The brand of “Fuwei Films” has been honored as famous brand resulting in visibility, credibility,
reputation and continued growth.
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(10)
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Under the fierce competition, Fuwei Films is encouraged by the government to develop new products.
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(11)
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All these awards show that our established brand name “Fuwei Films” are recognized for our
product quality in the PRC.
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(12)
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OHSAS 18001 is an internationally recognized assessment specification for occupational health and safety
management systems. OHSAS promotes a safe and healthy working environment by providing a framework that allows organizations to reduce
the potential for accidents and improve overall performance. We believe this distinction will not only insure a safe environment for our
workers, it will also be attractive to global companies looking for BOPET suppliers in China.
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(13)
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We have been focusing on R&D as a key differentiator to enable us a competitive advantage in the market.
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(14)
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The statistical work refers to the collecting, sorting and analyzing work of social economic phenomenon.
It is a kind of social investigation activities.
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(15)
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Fuwei participates in and plays an active role in making National Standard of BOPET film.
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(16)
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Shandong Fuwei was designated as a High-and-New Tech Enterprise in 2016 and as a result, it is entitled
to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017 and 2018. Shandong Fuwei was designated
again as a High-and-New Tech Enterprise in 2019 and as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for
the years ended December 31, 2019, 2020 and 2021.
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(17)
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This reward is required to have an annual operating income of more than 20 million yuan, with an average
growth rate of more than 10% in the last three years, and the proportion of R&D investment in the operating income of more than 2.6%.The
company has been engaged in the professional industry for more than four years, with stable customers and a core technology research and
development team. The technical level of enterprise subdivided products has reached the leading level of similar products at home and
abroad. The enterprise has its own brand, which has been included in the priority scope of national and provincial quality, trademark,
famous brand and other awards.
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Business Prospects
In 2020, the condition of oversupply over demand in China’s BOPET
market improved and our purchase orders increased. Anti-dumping measures taken by USA and South Korea and COVID-19 have caused the decrease
of the orders from international markets.
Business Development Strategies
As a primary part of our business strategy, we
will speed up the R&D of high value-added products. We believe that we have the ability to increase our sales and expand our markets.
We will continue to improve our products by developing new functions and applications of the BOPET films and enhancing our products mix.
Meanwhile, we will continue to secure opportunities to develop new domestic and overseas customers, especially the Japanese market. We
believe that expanding the overseas business is a key part of our business strategy.
Our future plans include: Expansion into
overseas markets
We believe that the overseas markets hold significant
potential for future growth. We believe that our venture into the overseas markets which began in 2004 has been successful. We have identified
Europe, Asia and North America as our primary overseas markets.
Our overseas sales were affected by the anti-dumping
investigations conducted by South Korea and the United States against BOPET manufacturers originated from China, India and other countries
and the fluctuation of Renminbi. However, we still believe there is a great potential in overseas BOPET market. Therefore, we will continue
to carry out marketing in the overseas market, especially the Japanese market, to attract new clients and sell our specialty films.
Investment in research and development
As one of our key strategies, we continue to invest
substantially in R&D. We also intend to expand our R&D team by hiring more senior research personnel from both China and foreign
countries. We attach great importance to intellectual property. To date, 23 patents have been granted by National Intellectual Property
Administration, PRC.
Our Products and Services
We are principally engaged in the manufacture
and distribution of BOPET film.
BOPET is a high-quality plastic film manufactured
using the biaxially-oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical
properties of the plastic film such as its tensile strength, resistance to impact, resistance to tearing and malleability. The high dimensional
stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film
is light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable
for many forms of flexible packaging, printing, laminating, aluminum-plating and other processes. In addition, it retains high dielectric
strength even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer co-extruded structure
enables us to develop high-quality BOPET products.
BOPET film has been widely used in the flexible
packaging (such as food, pharmaceutical, cosmetics, cigarettes, alcohol), imaging (such as printing plates and microfilms), and electronics
and electrical (such as PCB products, capacitors and motor insulation). Due to its unique qualities, it has become a popular choice as
a flexible packaging material in these industries in recent years.
We market our products under our brand name “Fuwei
Films”. Our operations are based primarily in Shandong Province, PRC, where we manufacture our products for sale to customers engaged
in flexible packaging businesses and electronics industry in the PRC, in particular the coastal region. We also export our products to
end-users and distributors mainly in Europe, Asia and North America.
Our BOPET film is mainly used in the flexible packaging industry for
consumer products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. Our products may
be sub-divided into five main categories constituting the following percentages of our total revenue for each of the twelve months ended
2020, 2019 and 2018:
Category
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Stamping and transfer film
|
|
|
28.3
|
%
|
|
|
34.8
|
%
|
|
|
38.9
|
%
|
Printing film
|
|
|
6.5
|
%
|
|
|
10.1
|
%
|
|
|
9.2
|
%
|
Metallized film
|
|
|
1.2
|
%
|
|
|
1.6
|
%
|
|
|
1.3
|
%
|
Specialty film
|
|
|
60.8
|
%
|
|
|
48.4
|
%
|
|
|
44.6
|
%
|
Base film for other applications
|
|
|
3.2
|
%
|
|
|
5.1
|
%
|
|
|
6.0
|
%
|
The above categorizes BOPET base film products by application.
Stamping and transfer film
This is a type of film that displays
excellent thermal stability and tensile strength and is used in metallized film and laser stamping foil and transfer.
Printing film
This is a high transparency film that
is corona treated on one side to provide excellent adhesion to ink. This is primarily used in printing and lamination.
Metallized film
This is a type of aluminum plating
base film that displays good thermal stability and tensile strength and provides good adhesion between film and aluminum layer. This is
applied to flexible plastic lamination.
Specialty film
We mainly produce the following types
of specialty film:
|
·
|
Dry film: Generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching;
|
|
·
|
Chemically
treated film used to enhance properties including barrier resistance,
printing properties and electrostatic resistance;
|
|
·
|
Heat-sealable film: Film with a three-layer structure. The heat-sealable film is primarily used in construction, printing and making
heat sealable bags;
|
|
·
|
High-gloss film: Film with high levels of reflection approaching a mirror-like surface, used for aesthetically enhanced packaging
purposes and;
|
|
·
|
Heat shrinkable film is widely used for special-shaped packaging
for beverage and cosmetics.
|
Base film for other applications
Base films for other application are
ordinary commodity polyester films with applications other than for the usages mentioned above.
Production
BOPET film is manufactured from polyethylene terephthalate
(PET) resin. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to
3.0 to 3.6 times its original length, and then horizontally from 3.0 to 3.6 times its width, before being heat set and finally wound into
reels. The orientation process (stretching during the application of heat) gives the film its mechanical strength, barrier and optical
properties (clarity and gloss). The main steps of our manufacturing process involve:
Dosing and Mixing
PET resin is dosed and mixed with relevant additives
to give it its desired characteristics. In the case of producing three-layer co-extruded BOPET film, the materials are dosed and mixed
separately for each of the core and outer layers.
Extrusion/Co-extrusion
The mixed material is melted and plasticized to
achieve the required homogenous state with the requisite characteristics and then it is filtered and transported to the die unit. Our
DMT production line has one main extruder and two auxiliary extruders to allow us to produce multiple-layer co-extruded BOPET film.
Die Casting
The respective mixed materials are extruded from
the die unit which produces a flat layered cast sheet and casted on the chill roll which is cooled by the pinning system.
Machine Direction Orientation (vertical
stretching)
The cast sheet is then heated and stretched by
machine direction before annealing the cast sheet, which is a process of heat-setting so as to control the shrinkage of the sheet after
the vertical stretching.
Transversal Direction Orientation (horizontal
stretching)
After the machine direction stretching, the cast
sheet is horizontally stretched before annealing again.
Pull Roll Station
The stretched sheet is trimmed and measured for
thickness. For the production of base film for printing, the surface is treated by corona treatment. Corona treatment is the process which
enables the BOPET film to become receptive to printing. At the pull roll station, continuous feedback on the thickness of the BOPET film
is also relayed back to the die unit which therefore ensures consistency in the thickness of the BOPET film.
Winder
The final BOPET film is then wound up into metal
rolls in the mill roll by the winder.
Slitter
The wound BOPET film is then unwound from the
metal rolls, divided to the requisite width and length, and wound again into paper or plastic core for delivery to customers.
Inventory Management
Our warehousing facilities are located in the
Shandong Province, PRC. Our warehouses are guarded by security personnel and loss of our inventory is covered under our insurance policies.
As of December 31, 2020, our total inventories amounted to approximately RMB25.4 million and our raw materials, work-in-progress, finished
goods and spare parts (including consumables) made up approximately 42.6%, 3.1%, 39.9% and 14.4% of our inventories, respectively.
To ensure an accurate inventory record and to
monitor our inventory aging, we conduct monthly stock counts. We usually maintain raw materials which can be used for one or two weeks
of production. Typically, we start manufacturing such goods upon our receipt of orders from our customers.
Our inventory turnover periods (in days) for 2020,
2019 and 2018 were 44.7, 34.9 and 32.2, respectively. Inventory turnover is calculated as 365 days times inventory at period/year end
date divided by cost of sales in respect of the financial period/year.
In 2020, there were no provisions for inventory
obsolescence and inventory write-off. As of December 31, 2020, we accrued RMB7.9 million for inventory falling price reserves.
Manufacturing Facilities and Utilization Rates
As of December 31, 2020, the following production lines are in
operation:
Production Line
|
|
Design Capacity
|
|
Estimated Remaining Life Span
|
Brückner Production Line
|
|
13,000 tons per annum
|
|
Approximately 1 years
|
DMT Production Line
Dornier Production Line
|
|
16,100 tons per annum
23,000 tons per annum
|
|
Approximately 2 years
Approximately 8 years
|
Trial Production Line
|
|
1,500 tons per annum
|
|
Approximately 0 years
|
The design capacity as given by the manufacturer
is determined based on the assumption of the production of a specific mix of BOPET films of varying thicknesses. Our Brückner, DMT
and Dornier production lines and the trial production line have been in use since 2003, 2004, 2013 and 2009, respectively. The production
lines are depreciated on the straight-line method over their respective estimated useful lives.
Our approximate annual production volumes and
the average annual utilization rates for our facilities for 2020, 2019 and 2018, based on our estimated operational production capacities
were as follows.
|
|
Approximate Annual Production Volume
(tons)
|
|
|
Average Annual Utilization Rate
|
|
Production Line
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Brückner Production Line
|
|
|
11,877
|
|
|
|
11,559
|
|
|
|
11,775
|
|
|
|
91.4
|
%
|
|
|
88.9
|
%
|
|
|
90.6
|
%
|
DMT Production Line
|
|
|
13,942
|
|
|
|
14,286
|
|
|
|
13,862
|
|
|
|
86.6
|
%
|
|
|
88.7
|
%
|
|
|
86.1
|
%
|
Dornier Production Line(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Trial Production Line(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
(1)
|
The Dornier Production Line has not been able to continue its production since April 2015 due to lack
of purchase orders and as a result, on December 20, 2020, we sold the Dornier Production Line by the way of the open bidding to a successful
bidder, Huizhou Yidu Yuzheng Digital Technology Co. LTD. (“Huizhou Yidu Yuzheng”). Subsequently, we entered into a Purchase
Agreement dated January 16, 2021 with Huizhou Yidu Yuzheng pursuant to which we agreed that the dismantling and moving of the Dornier
Production Line by Huizhou Yidu Yuzheng shall be completed by the end of May, 2021.
|
|
(2)
|
We entered into a Purchase Agreement dated January 18, 2021 with Huizhou Yidu Yuzheng pursuant to which
Huizhou Yidu Yuzheng agreed to complete the dismantling and moving process of the Trial Production Line, which was made by Mitsubishi
for R & D, by the end of May, 2021.
|
There are currently no regulatory requirements
that may materially affect the utilization rates of our property, plant and equipment. However, certain of the fixed assets relating to
our production lines have been mortgaged in respect of certain of our bank loans as described under “Properties” for further
details.
Quality Control
The quality and reliability of our products are
essential for our continued success. We adopt strict measures for quality control in the entire production process of all our products,
from the purchase and selection of raw materials, to each stage of the manufacturing processes and to the final inspection of end products.
Our quality control procedures were certified for ISO 9001:2000 compliance in September 2004 and the review of it is conducted every three
years.
As of December 31, 2020, our product inspection
and quality control department comprised of 17 employees. We have one manager, 13 quality inspectors, 2 procurement inspector and 1 after-sale
personnel. Members of our quality control departments have had relevant training in the area of quality control in accordance with ISO
9001:2000 procedures. Our product inspection and quality control department ensure that our production process, raw materials and end
products are of the quality to our customers’ satisfaction.
Raw Materials
We adopt and adhere to a set of quality inspection
procedures and internal controls for the procurement, selection and quality checks of raw materials. Different types of checks are utilized
for different categories of raw materials. Our suppliers are also required to meet our internal qualification criteria such as the quality
and pricing of their suppliers, their ability to meet our requirements and timely delivery. We conduct batch inspections for raw materials
delivered to us before they are accepted and stored in our warehouses. Defective materials are returned to our suppliers for necessary
corrective action to ensure that no defected materials are used for production.
Production Process
We have established standard operational procedures
and implementation rules for each stage of the production process to ensure that our products comply with and adhere to our stringent
quality control standards and that our productivity is optimized. We only permit employees who have undergone and completed the relevant
training to work on our production lines. At each stage of the production process, our inspectors check and ensure that our production
process complies with our quality standards, while our quality control department monitors and ensures that our products-in-process and
final products comply with our internal and international standards of quality control by carrying out random sampling of the products.
Finished Products
To ensure that our products fulfill our quality
criteria established by our product inspection and quality control department, our products undergo final quality inspection upon production,
labeling and packaging. Our product inspection and quality control department continues to monitor and ensure that our products are properly
handled and stored in our warehouses. Prior to delivery to our customers, our products are inspected one final time to ensure that they
are in good condition and not damaged.
Maintenance
Our maintenance engineers regularly maintain and
repair our machinery and equipment to ensure that they are in good working order and functioning properly. We also conduct periodic maintenance
of all our machinery on a rotation basis. On an average basis, we replace our filter disks every 20-30 days and this replacement process
takes about six to eight hours during which we will conduct routine maintenance. And each year we will conduct one comprehensive maintenance
project for each production line which will cost five to ten days varying according to different maintenance projects. We believe that due
to our stringent maintenance policies, our equipment is still in good condition. Our average downtime for 2020 (primarily for maintenance)
was 6.0% of our overall production time.
New Products
Through years of R&D endeavors, we have introduced
a variety of BOPET film products. The following are some of the new products for which commercial production has begun:
Product
|
|
Achievement
|
|
|
|
Chemical pretreated film
|
|
Our film is pretreated in-line and coated, which results in a strong adhesion to ink and aluminum.
|
|
|
|
Heat-sealable film
|
|
Heat-sealable film is a three layers co-extruded Biaxially oriented polyester film with an amorphous polyester heat seal layer. Available with corona treatment on the non-seal side to give improved adhesion to typical packaging inks and metallizing. Not only can it provide permanent seals to itself for package bag, but also to APET, CPET, PETG and others. Heat-sealable film can be aluminized, printed and composite with other films. It is applied to packaging for food, construction and other applications.
|
Heat sealable film for steel
|
|
To improve the heat-sealable strength between the film and steel and adjust the stretchable capability so as to be more suitable for steel’s heat sealing. Mainly used for protection and decoration of colorful armor plate for home appliances.
|
|
|
|
High-gloss film
|
|
By using special raw chips and process, provides very high gloss, uniform thickness, good mechanical properties, and surface smoothness. It can be used under -70~200°C for packaging food, cigarettes, alcohol and laser embossing, holographic anti-fake and metallic yarn and others.
|
|
|
|
DFR base film
|
|
Generally used in circuit boards (PCB & FPC) production, sometimes used for nameplate and crafts etching.
|
|
|
|
Heat shrinkable film
|
|
To change the heat shrinkage rate by enlarging
the draw ratio. It is mainly used for PET beverage bottle shrinkable tags. Heat shrinkable film uses PET structure which is the substitute
of PVC shrinkable tags, which is also in line with the requirements of environmental protection and recyclable.
|
|
|
|
Smooth heat sealable film
|
|
Excellent smoothness widely used in packaging
of mosquito-repellent incense.
|
|
|
|
Anti-static film
|
|
Featuring low static electricity with surface resistance below 1010Ω/sqm applied to printing and packaging which require films with excellent anti-static properties.
|
|
|
|
Reinforced coated printing film
|
|
Excellent adhesion to UV ink and UV gloss oil
suitable for high-end printing.
|
|
|
|
Metal-adhesion improved film
|
|
To improve the peel strength after metallized sealing. Mainly used for liquid packages.
|
|
|
|
Uvioresistant film
|
|
To prolong the time of yellowing resistance and
hence increase the film duration of use.
|
|
|
|
UvioresistantHeat-sealable film used for FRP
|
|
Increase duration of use of heat-sealable film
used for FRP
|
Our expenditure on research and development in
2020, 2019 and 2018 were as follows (in thousands):
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Research and Development Expenses
|
|
|
11,413
|
(1)
|
|
|
9,449 (2)
|
|
|
|
14,553 (3)
|
|
(1) & (2) & (3) In addition to the
above-mentioned expenses in 2020, 2019 and 2018 of RMB11,413, RMB9,449, and RMB14,553 , respectively, the R&D capital expenditure
was RMB300, zero and RMB892, respectively.
We view research and development as an essential
part of our business. We believe that higher investment in the equipment of our R&D center and in the development of new products
and upgrading of existing products will enhance our ability to compete.
Sales, Marketing and Key Customers
As of December 31, 2020, our sales department
comprised of 9 employees in the domestic sales division, 3 employees in the overseas sales division and 1 for sales support. Our
sales department is responsible for market penetration such as cultivating new customers and businesses, and market development such as
developing existing accounts through better service support and customer relationship. Our marketing department is responsible for market
research, development and promotion. Our management is actively involved in overseeing and supervising our sales and marketing activities
and often visits our clients together with the sales personnel. They have established and maintained close business relationship with
our key customers.
Customers and Markets
Over the past years, we have established good
working relationships with our customers in the flexible packaging industry. Our products are mainly used in the packaging of consumer
products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. In addition, we maintain
good relationship with major dry films customers in Mainland China.
The majority of our domestic customers are located
in the coastal region of the PRC. Our overseas customers are mostly based in Europe, Asia, North America and others. In 2020, sales from
our domestic and overseas customers constituted approximately 92.0% and 8.0% of our annual revenue respectively.
The following are our top five customers and their
respective percentages of contribution to our total revenue for each of the years ended December 31, 2020, 2019 and 2018:
|
|
Percentage of
Total Revenue (%)
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
Hunan Wujo Hi-Tech Materials Co., Ltd.
|
|
|
8.8
|
|
|
|
0.2
|
|
|
|
0.0
|
Hunan Hori New Materials Co., Ltd
|
|
|
6.1
|
|
|
|
5.3
|
|
|
|
5.6
|
Kolon Electronic Materials Co., Ltd.
|
|
|
5.2
|
|
|
|
3.6
|
|
|
|
4.5
|
Zhuhai Ruiming Technology Co., Ltd.
|
|
|
4.5
|
|
|
|
3.3
|
|
|
|
2.5
|
Eternal Photo Electronic Materials (Guangzhou) Co., Ltd.
|
|
|
4.5
|
|
|
|
5.1
|
|
|
|
5.9
|
None of our customers accounted for more than
10% of our total revenue in any of the previous three years.
None of our directors or principal shareholders
or any of their affiliates has any interest, direct or indirect, in any of our customers listed above.
Sales
Because of our broad range of product
offerings and customers, our sales and marketing efforts are generally specific to particular types of product, customer or
geographic region. Most of our products are sold by our own direct sales force. These salespeople, including our management,
maintain close relationships with our customers by paying visits to our customers from time to time to understand their needs, and
to obtain their feedback and suggestions. Our sales personnel provide technical support to our customers when required. We also
regularly invite our existing and potential customers to our manufacturing facilities for visits as we believe that such visits
enable our customers to better understand our production processes and operations and also enhance our customers’ confidence
in us.
We adopt a risk assessment model to our customer
credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment
history, creditworthiness and their financial position. We offer our domestic customers credit terms of up to 30 - 45 days. Our international
sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between 30 and 60 days.
We offer a basic salary and commission package
for our sales personnel. The scale for the commission payable is dependent on a number of factors such as sales targets completion, debt
collection and marketing cost allocation.
Customer Service
We place great emphasis on good, fast and effective
pre-sales and after-sales customer support services. As such, all our sales personnel have undergone stringent training and have sufficient
knowledge and understanding of our products. Our sales personnel are responsible for coordinating and providing after-sales services which
include following through with our customers’ orders, maintaining relationships with our customers, handling complaints effectively,
ensuring that our customers’ needs are met and understanding the future needs of our customers. Our quality department gives support
to our customer service, and is responsible for explaining questions related to our products usage from customers. If there are complaints
as to our product quality, they are responsible for receiving and settling complaints on our customers’ site.
We accept returned defective products from customers
or compensate our customers for the losses incurred from our defective products. For 2020, our losses due to returned products from our
customers were approximately 0.37% of our total sales.
Marketing
We have the following marketing channels:
|
·
|
we regularly attend trade fairs and exhibitions as we believe that they serve as a good platform for us
to exhibit our new products and expand our sales network. In addition, we participate in seminars, fairs and exhibitions to network with
our potential and existing customers and to obtain up-to-date information on new products, market trends and consumer demand;
|
|
·
|
referrals from existing customers as well as business associates to generate sales opportunities; and
|
|
·
|
promotion through our corporate website. Information on our products and services are also found on our corporate website which allows
us to reach out to potential domestic and overseas customers.
|
Our marketing personnel also conduct PRC domestic
and overseas market surveys and research. The statistics, findings and information obtained from such surveys and research are then passed
on to our management and production department for their analysis on the demand for and supply of our products, which allows them to make
adjustments to our production and sales targets as well as our marketing strategies.
Suppliers and Raw Materials
Suppliers
We purchase raw materials according to the relevant
technical specifications and production requirements. We select our suppliers based on the following considerations and/or methods:
|
·
|
the consistency of the quality of raw materials supplied and any relevant certifications;
|
|
·
|
our inspection of the supplier’s quality control system;
|
|
·
|
positive feedback from the supplier’s other customers;
|
|
·
|
pricing of raw materials;
|
|
·
|
timely delivery of raw materials;
|
|
·
|
the supplier’s financial position and viability;
|
|
·
|
the service provided by the supplier;
|
|
·
|
qualifying suppliers by sample testing and batch purchasing of their raw materials; and
|
|
·
|
annual evaluation and review of our suppliers.
|
The following are the suppliers that supplied
10% or more of our purchases of raw materials and supplies for each of the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
Percentage of total purchases (%)
|
|
Supplier
|
|
Item
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Sinopec Yizheng Chemical Fibre Company Limited
|
|
PET resin and Additives
|
|
|
48.1
|
|
|
|
58.3
|
|
|
|
43.3
|
|
Hefei Lucky Technology Industry Co., LTD. Jiangyin Branch
|
|
PET resin and Additives
|
|
|
6.2
|
|
|
|
10.3
|
|
|
|
0.1
|
|
PetroChina Co Ltd North China chemical sales branch
|
|
PET resin and Additives
|
|
|
-
|
|
|
|
-
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weifang Power Supply Company.
|
|
Electric power
|
|
|
10.4
|
|
|
|
8.3
|
|
|
|
8.4
|
|
We purchase the majority of our PET resin from
Sinopec Yizheng and Lucky Jiangyin as the quality of its supply of PET resin consistently meets our requirements. We currently have annual
supply agreements with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply us fixed quantities of PET resin monthly
at the prevailing market prices. Such supply agreements are renewable annually. We have not entered into any long-term supply contracts
with any other supplier. Our purchases of raw materials are on a cash basis. There are a number of suppliers of PET resin at home and
abroad that can consistently meet our quality and quantity requirements on a timely basis.
None of our directors or principal shareholders
or any of their affiliates has any interest, direct or indirect, in any of our major suppliers mentioned above.
Raw Materials
The main raw materials that we purchase from our suppliers are as follows:
|
|
Percentage of each category within main raw
material purchases (%)
|
|
|
|
|
Main Raw Material
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Country
|
|
PET resin
|
|
|
77.3
|
|
|
|
77.1
|
|
|
|
80.1
|
|
|
|
PRC
|
|
Additives
|
|
|
22.7
|
|
|
|
22.9
|
|
|
|
19.9
|
|
|
|
PRC
|
|
The market prices of PET resin and additives may
fluctuate due to changes in supply and demand conditions. Any sudden shortage of supply or significant increase in demand of PET resin
and additives may result in higher market prices and thereby increase our costs of sales. The prices of PET resin and additives are, to
a certain extent, affected by the price movement of crude oil. The average price for PET resin in 2020 decrease by 28.3% compared to that
in 2019.
As we are unable to predict the price movements
of such raw materials and to minimize the impact of such price fluctuations on our cost, we generally purchase such raw materials in quantities
sufficient for our production process for approximately one or two weeks. Based on orders from our customers, we may increase or reduce
the inventory of our raw materials.
Competition
We face intense competition in the PRC
plastic film industry. We believe that there are currently many plastic film manufacturers in the PRC and we expect further entrants
into this market in the future. Among the flexible packaging industries, in particular those involving packaging of processed food
and pharmaceutical products, the primary types of plastic films in the packaging products include BOPET, Biaxially oriented
polyester (BOPP); and Biaxially oriented polyamide (BOPA).
The following table gives a general comparison
of the key differences in the technical specifications and usage of the above types of plastic films.
Comparison of BOPP Film, BOPET Film and BOPA
Film(1)
Features
|
|
BOPP
|
|
BOPET
|
|
BOPA
|
Water vapor barrier
|
|
Excellent
|
|
Fair
|
|
Poor
|
|
|
|
|
|
|
|
Gas barrier properties
|
|
Poor
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Break down voltage
|
|
Poor
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Machine-ability
|
|
Fair
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Print-ability
|
|
Fair
|
|
Excellent
|
|
Fair
|
|
|
|
|
|
|
|
Suitability for Metallizing
|
|
Poor
|
|
Excellent
|
|
Fair
|
|
|
|
|
|
|
|
Density (gm/cc)
|
|
Low (0.91)
|
|
High (1.39)
|
|
Medium (1.15)
|
|
|
|
|
|
|
|
Tensile strength
|
|
Poor
|
|
Excellent
|
|
Excellent
|
(1)
|
This comparison is based on the book of Biaxially Oriented Plastics Film, edited by Yanping Yin and published
by China Chemical Press in August 1999. The Company did not notice updated technical specifications subsequently as of December 31,
2020.
|
We believe that we are one of the few BOPET film
manufacturers in the PRC with research and development capabilities.
We believe that the major competitive factors in our industry include:
|
·
|
research and development capability;
|
|
·
|
quality and reliability of products;
|
|
·
|
technical/manufacturing capability;
|
|
·
|
industrial reputation; and
|
|
·
|
production cost and sales prices.
|
We believe that our major competitors in BOPET manufacturing
are currently:
|
·
|
Dupont Hongji Films Foshan Co., Ltd.;
|
|
·
|
Yihua Toray Polyester Film Co., Ltd.; and
|
|
·
|
Shandong Fenghua Plastic Technology Co., Ltd.
|
We believe that we have established a good reputation
and management track record as a manufacturer of BOPET film and are able to offer quality products.
C. Organizational structure.
The following table set forth the details of our subsidiaries as at
the date of this Annual Report:
Name
|
|
Country of
Incorporation
|
|
Ownerships Interests
|
|
Direct Parent
|
|
|
|
|
|
|
|
Fuwei Films (Shandong) Co., Ltd.
|
|
Weifang Shandong, China
|
|
100% wholly owned by Direct Parent
|
|
Fuwei Films (BVI) Co., Ltd.
|
|
|
|
|
|
|
|
Fuwei Films (BVI) Co., Ltd.
|
|
British Virgin Islands
|
|
100% wholly owned by Direct Parent
|
|
Fuwei Films (Holdings) Co., Ltd.
|
|
|
|
|
|
|
|
D. Property, plant and equipment.
Our corporate headquarters and production and
ancillary facilities occupy an area of approximately 74,251 square meters in Weifang City, Shandong Province. The land at our facilities
is covered by land use rights held by us. The land use rights for the land upon which our buildings and facilities are located have terms
of 50 years, the earliest of which expires in November 2050. All of our research and development, manufacturing, warehousing and administrative
functions are conducted at our corporate headquarters. The total gross floor area of production and other facilities owned by us is approximately
46,196 square meters. We own all the buildings and facilities on the premises. Part of our land use rights, plant, office buildings have
been mortgaged to the banks in the PRC. As of December 31, 2020, the mortgaged floor area of facilities and land use right to the bank
is 46,196 square meters and 74,251 square meters, respectively. The total net value of mortgaged property is RMB47.5 million.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and
Prospects
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis
of our financial condition and results of operations in conjunction with our consolidated financial statements included in this Annual
Report beginning on page F-1. The consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion
and analysis contain forward-looking statements that involve risks and uncertainties.
Overview
We develop, manufacture and distribute high-quality
plastic film using the biaxially oriented stretch technique, otherwise known as BOPET film. Since the establishment of the Company, a
substantial portion of our revenues has been derived from the sales of BOPET film. We sell majority of our BOPET film products to domestic
customers in China with minority of them sold to Europe, Asia, North America and other overseas markets.
Our Corporate Structure and Operating History
The diagram below illustrates our corporate structure:
Shandong Fuwei, our PRC operating subsidiary,
was formed on January 28, 2003, as a Sino-foreign equity joint venture under the name Weifang Fuwei Plastic Co., Ltd. In July 2003, this
company began production of BOPET film, initially renting the necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET
film production in which Mr. Xiaoming Wang, our former executive officer, served as executive officer at the time.
Shandong Fuwei subsequently acquired these fixed
assets through two auction proceedings, the first in October of 2003 and the second in December 2004. At the first auction proceeding
in October 2003, Shandong Fuwei acquired assets related to the Brückner production line that it had been renting from Shandong Neo-Luck.
This line had been previously mortgaged by Shandong Neo-Luck to Bank of China, Weifang city branch as security for several loans extended
to Shandong Neo-Luck’s affiliates. When these loans went into default, Bank of China brought a series of legal actions in Weifang
Municipal People’s Court that resulted in the assets securing the loans being sold at a public auction. Following its successful
bid at an auction on October 9, 2003, Shandong Fuwei acquired the Brückner production line and facilities (with an appraised value
of approximately RMB169 million) for RMB156 million.
In November 2003, Shandong Fuwei’s shares
were sold to Shenghong Group Co., Ltd. (“Shenghong Group”) and Shandong Baorui for an aggregate consideration of RMB98.2 million.
Tongju Zhou, a former director of the Company, and Duo Wang each indirectly own 50% of Easebright Investments Limited (“Easebright”),
one of our principal shareholders, and are both officers and directors of Shandong Baorui. Jun Yin and Duo Wang own 17.5% and 4.6%, respectively,
of Shandong Baorui. In 2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore holding companies in the British Virgin
Islands and the Cayman Islands to acquire and hold these shares. In October 2004, Fuwei (BVI) entered into a sale and purchase agreement
with Shenghong Group and Shandong Baorui pursuant to which Fuwei (BVI) acquired the respective equity interest of Shenghong Group and
Shandong Baorui in Shandong Fuwei for an aggregate consideration of RMB91 million. Shandong Fuwei thereafter became a wholly-owned subsidiary
of Fuwei (BVI) and was converted into a wholly-foreign owned enterprise pursuant to PRC law.
As a result of its ongoing financial difficulties,
Shandong Neo-Luck was declared bankrupt by the Weifang Municipal People’s Court in the PRC on September 24, 2004. Prior to the bankruptcy,
Shandong Neo-Luck’s then major operating asset, the DMT production line, had been pledged by Shandong Neo-Luck to Weifang City Commercial
Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong Branch of Bank of China seized the production line by order of the Qingdao
Intermediate People’s Court and the Qingdao Southern District People’s Court while the Weifang Branch of Bank of Communications
did so through Weifang Intermediate People’s Court. As such, the effectiveness of the pledge in favor of Weifang City Commercial
Bank was under dispute. Subsequently, pursuant to the decision from Weifang Intermediate People’s Court, Weifang City Commercial
Bank ranked senior in terms of the right of claims.
The pledged DMT production line was put up for
public auction by the Shandong Neo-Luck Liquidation committee on October 22, 2004. In view of the above complexities, the auction was
deemed to be tremendously risky at that time, and therefore, our PRC operating subsidiary did not directly participate in the first auction,
which began with a bid price of approximately RMB53 million by reference to an independent valuation performed on a forced sale basis.
However, due to the potential tremendous risk involved, the auction had been withdrawn twice and the starting bid price had been further
reduced to approximately RMB34 million and was finally purchased by Beijing Baorui, a company indirectly controlled by Shandong Baorui.
When the DMT production line was put for public auction by Beijing Baorui three months later, our PRC operating subsidiary purchased it
for approximately RMB119 million, which was supported by an independent valuation performed on a going concern basis. We understood that
acquiring the DMT production line from Beijing Baorui through the first auction would be an effective way to minimize the risk associated
with the uncertainties arising from the bankruptcy of Shandong Neo-Luck. The price difference of approximately RMB85 million represented
a risk premium paid to Beijing Baorui, which bore the ultimate risks of recourse from creditors of Shandong Neo-Luck.
Subsequent to the auction for several years, the
PRC government conducted an investigation into the conduct of certain individuals in connection with such transactions. In March 2009,
Messrs. Yin, Wang and Zhou committed the crime of corruption by verdict of the Jinan Intermediate People’s Court in the city of
Jinan, Shandong Province. In November 2009, the Company became aware of the final verdict issued by the Supreme People's Court of Shandong
Province. The Supreme People’s Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial
verdict sentenced Mr. Yin to death, with a stay of execution for two years, and the other two defendants, Mr. Zhou and Mr. Wang,
each received life imprisonment. All of the personal property of the three individuals will be confiscated.
At the time of our initial public offering, we
had obtained an opinion of PRC counsel with respect to the validity of the auction proceedings under PRC law, although you should read
the description of the opinion and the subsequent development in March 2009 described under the title “Risk Factors — The
circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business”.
Certain of the assumptions relied upon in providing that opinion have been called into question by the verdict referred to above.
On May 9, 2011, we received a notification from
the Weifang State-owned Assets Operation Administration Company, a wholly-owned subsidiary of Weifang State-owned Asset Management and
Supervision Committee (the “Administration Company”) regarding the transfer of the ownership of controlling shareholders.
According to the notification, our former controlling
shareholders, Messrs. Jun Yin, Duo Wang and Tong Ju Zhou, had transferred their entire ownership in several intermediate
holding companies to the Administration Company, Ms. Qing Liu and Mr. Zhixin Han. As a result of the transfers, and based on the information
provided by the Administration Company, 52.90% of its outstanding ordinary shares are controlled indirectly by the Administration Company
and 12.54% of its outstanding ordinary shares are jointly controlled indirectly by Ms. Liu and Mr. Han.
We received a second notification dated May 17,
2011 (the “Second Notification”) from the Administration Company regarding the transfer of ownership of Fuwei stock previously
controlled by our major shareholders.
As discussed in the Second Notification, Ms. Qing
Liu and Mr. Zhixin Han transferred their entire ownership in the intermediate holding company, Easebright Investments Limited, to the
Administration Company. As a result of the transfer, and based on the information provided by the Administration Company, 65.45% of its
outstanding ordinary shares were controlled indirectly by the Administration Company and the sole director of each of the intermediate
holding companies, Mr. Zheng Min.
On August 14, 2013, we received the first notice
from our controlling shareholder, the Weifang State-owned Assets Operation Administration Company, a wholly-owned subsidiary of Weifang
State-owned Asset Management and Supervision Committee (collectively, the “Administration Company”) indicating that the Administration
Company had determined to place control over 6,912,503 (or 52.9%) of its outstanding ordinary shares up for sale at a public auction to
be held in China. Four public auctions were held in Jinan, Shandong Province, China. We learned that they failed due to a lack of bidders
registered for the auction. On March 25, 2014, the fifth public auction was held in Jinan, Shandong Province, China and we became aware
that the fifth public auction has resulted in the acceptance of a successful bid. Shandong SNTON Optical Materials Technology Co., Ltd.
(“Shandong SNTON”), the successful bidder in the fifth public auction of 6,912,503 (or 52.9%) of the Company’s outstanding
ordinary shares (the “Shares”) held on March 25, 2014, was entrusted by Hongkong Ruishang International Trade Co., Ltd., a
Hong Kong corporation, (“Hongkong Ruishang”) to handle all the formalities and procedure in connection with the public auction.
As a result of the entrusted arrangement, Hongkong Ruishang is the party controlling the Shares acquired in the fifth public auction.
According to publicly available information in the People’s Republic of China, Shandong SNTON is a wholly owned subsidiary of Shandong
SNTON Group Co., Ltd (“SNTON Group”). Mr. Xiusheng Wang, the chairman of the Board of Directors of SNTON Group, is also Hongkong
Ruishang’s chairman. This disclosure is based solely on information contained in a Schedule 13D amendment filed by Hongkong Ruishang
with the SEC on November 12, 2014.
On May 14, 2014, we announced that we received
a notification from Shandong Fuhua Investment Company Limited. (“Shandong Fuhua”) with respect to an entire ownership transfer
of our 12.54% outstanding ordinary shares from the Administration Company to Shandong Fuhua. The Administration Company originally held
these shares indirectly through an intermediate holding company, Easebright Investments Limited (“Easebright”). As a result
of this transfer, Shandong Fuhua indirectly owns 12.54% of the outstanding ordinary shares of the Company through Easebright. Mr. Jingang
Yang was appointed as the director of Easebright. This disclosure is based solely on information contained in a Schedule 13D filed by
Shandong Fuhua with the SEC on December 30, 2014. Fuwei was informed by Easebright that Mr. Qingxin Dong has been the director since 2018.
On December 5, 2016, we held an extraordinary
general meeting of shareholders pursuant to which a 1-for-4 reverse stock split of our authorized ordinary shares, accompanied by a corresponding
decrease in our issued and outstanding ordinary shares and an increase of the par value of each ordinary share from $0.129752 to US$0.519008
(the “Reverse Stock Split”), was approved by our shareholders of record. Our ordinary shares began to trade on the NASDAQ
Stock Market on the post-Reverse Stock Split basis under the symbol “FFHL” at the open of business on December 6, 2016.
On January 28, 2019, we entered into a
Securities Purchase Agreement (the “Purchase Agreement”) with Gold Glory Blockchain Inc. ("Gold Glory"), a
California-headquartered company focused on blockchain technology applications and digital asset services. The Purchase Agreement
would have resulted in the issuance by us of 9,500,000 new ordinary shares in exchange for all outstanding shares of Gold Glory. We
concurrently entered into a Share Transfer Agreement (the “Transfer Agreement”) with Hong Kong Ruishang International
Trade Co. Ltd. ("Ruishang"), the current majority owner of our equity shares. Pursuant to the Transfer Agreement, we
agreed to sell, assign and deliver all shares of Fuwei Films (BVI) Co. Ltd. ("Fuwei BVI"), a subsidiary directly owned by
us, plus cash consideration of USD3 million to Ruishang, in exchange for all 1,728,126 ordinary shares of the Company owned by
Ruishang, representing 52.9% of our outstanding shares. This transaction would have effectively transfer our existing business to
Ruishang, after which we will only own the shares of Gold Glory. We, subsequently, terminated the Purchase Agreement and transaction
contemplated thereby by providing a notice of termination to Gold Glory in March 2021 as Gold Glory failed to provide its audited
financial reports within the agreed period and as a result, the transaction could not be executed as originally planned.
On July 2, 2020, we received a notification from
Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”) with respect to an ownership transfer from
Shandong SNTON Group Co., Ltd. (the “SNTON Group”) to Shanghai Meicheng of our 52.9% controlling outstanding ordinary shares
(the “Shares”). It is noted that SNTON Group transferred its equity in Hongkong Ruishang to Shanghai Meicheng on June
23, 2020, due to SNTON Group’s asset reorganization. As a result of this transfer, Shanghai Meicheng now indirectly owns the Shares
through Hongkong Ruishang.
On March 31, 2021, we announced that the Company
has entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Enesoon New Energy Limited (“Enesoon”),
a British Virgin Islands company directly and indirectly holding subsidiaries in China primarily engaged in green thermal energy storage
businesses, and Enesoon’s shareholders. The Purchase Agreement will result in the issuance by the Company of 111,111,111 new ordinary
shares (“Consideration Shares”) in exchange for all outstanding shares of Enesoon. As a result of this transaction, the former
shareholders of Enesoon will beneficially own in the aggregate approximately 97.1% of the Company’s outstanding shares.
The closing of the transactions contemplated under
the Purchase Agreement is subject to various closing conditions, including approval of the issuance of Consideration Shares by the shareholders
of the Company, receipt of NASDAQ approval, receipt by the Company of a satisfactory fairness opinion or valuation and other customary
conditions.
Our ordinary shares began to trade on the NASDAQ
Stock Market on the post-Reverse Stock Split basis under the symbol “FFHL” at the open of business on December 6, 2016. The
new CUSIP number for our ordinary shares post-Reverse Stock Split is G3704F 110. We would round up to the next full share of our ordinary
shares any fractional shares that result from the Reverse Stock Split.
Key Factors Affecting Our Results of Operation
The following are key factors that affect our financial condition and
results of operations and we believe them to be important to the understanding of our business:
Raw Material Prices
For the years ended 2020, 2019 and 2018, the total
cost of raw materials made up approximately 70.0%, 74.3%, and 72.6% of production cost, respectively. The primary raw materials used in
our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which made up approximately 77.3% and 22.7%,
respectively, of our total cost of raw materials in 2020. PET resin trades as a commodity and its market price is influenced significantly
by global energy prices, including the price of crude oil. In addition, PET resin is mainly used in textile industry and accordingly the
demand from that industry will also affect the price of PET resin.
Although we try to pass on all increases in our
raw material costs to our customers, we can only pass on a portion of the increase to our customers due to the increased supply than demand
in the market. We obtain a significant amount of the PET resin used at our facilities from two suppliers, who have agreed to supply us
fixed quantities of PET resin monthly at the prevailing market price. We have not engaged in any hedging transactions to limit our exposure
to fluctuations in the market prices of these raw materials or their components.
Prices of Our Products
Our BOPET film products generally fall into two
categories: commodity products and specialty products. The price of commodity products, such as printing films, stamping and transfer
films and metallized films, is typically driven by supply and demand conditions in the market. We have more control over pricing for our
specialty products, such as dry films.
As selling prices are generally higher for those
types of BOPET film products which require higher technical expertise, our revenue will be affected, to certain extent, by our product
mix. Our product mix is dependent on, among other things, our production facilities, R&D abilities and new product commercialization.
Demand for Our Products
We have been able to expand our product range
and markets by introducing new products required by customers. We believe that our technical expertise is important in introducing products
that are in demand.
Our BOPET film products are mostly sold to customers
in the flexible packaging industry for consumer products such as food, pharmaceutical products, cosmetics, tobacco, alcohol and beverage
and electronics industry such as the light-resistant dry film which is used in printed circuit board also significantly increased. In
the fiscal years ended December 31, 2020, 2019 and 2018, approximately 92.0%, 85.8% and 86.4%, respectively, of our total revenue was
derived from the PRC. The demand for our products is therefore, to a large extent, affected by the general economic conditions in the
PRC. A significant improvement in the economic environment in the PRC will likely improve consumer spending and increase the demand for
our products. However, the economic downturn of the PRC market will impact our customers’ demand and will decrease the demand for
our products.
Production Capacity and Utilization Rates
Our sales volume is limited by our operational
annual production capacity and this depends largely on supply and demand in the market. The Dornier Production Line has not been able
to continue its production since April 2015 due to lack of purchase orders which is the result of greater supply than demand in the market.
On December 20, 2020, we sold the Dornier Production Line by the way of the open bidding to a successful bidder, Huizhou Yidu Yuzheng
Digital Technology Co. LTD. (“Huizhou Yidu Yuzheng”). Subsequently, we entered into a Purchase Agreement dated January 16,
2021 with Huizhou Yidu Yuzheng pursuant to which we agreed that the dismantling and moving of the Dornier Production Line by Huizhou Yidu
Yuzheng shall be completed by the end of May, 2021. On January 18, 2021, we entered into Purchase Agreements with Huizhou Yidu Yuzheng
pursuant to which Huizhou Yidu Yuzheng agreed to complete the dismantling and moving process of the Trial Production Line, which was made
by Mitsubishi for R & D, by the end of May, 2021.
As we grow our business in the future, our ability
to fulfill more and larger orders will be dependent on our ability to increase our production capacity. As our business is capital-intensive,
our ability to expand our production capacity will depend on, inter alia, the availability of capital to meet our needs of expansion
or upgrading of production lines.
Competition
We believe that we are currently one of the few
producers of BOPET films in the PRC with research and development capability. Our past financial performance is attributable to our market
position in the industry. Over time, there may be new investors into our industry, and the current BOPET film manufacturers may expand
their production capacity. We believe that currently our major competitors in the BOPET manufacturing market in the PRC include Dupont
Hongji Films Foshan Co., Ltd., Yihua Toray Polyester Film Co., Ltd., and Shandong Fenghua Plastic Technology Co., Ltd.
Our ability to enhance existing products, introduce
new products to meet customers’ demand, deliver quality products to our customers and maintain our established industry reputation
will affect our competitiveness and market position.
Our ability to compete against new and existing
competitors to maintain or improve our market position and secure orders will affect our revenue and financial performance.
Description of Certain Statements of Income Line Items
Revenues
Revenue from the sale of our domestic BOPET film
products is recognized when significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognized if
there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods, or
when the amount of revenue and costs incurred or to be incurred in respect of the transaction cannot be measured reliably. In respect
of our overseas sales, we ship directly to the destinations of our overseas customers and our revenue is recognized at the time when we
receive customs clearance of our exports. Most of our overseas sales are conducted on a Cost, Insurance and Freight (or “CIF”)
basis, meaning that we pay the costs and freight necessary to get the products to the port of destination, and the risk of loss is transferred
from us to the buyer when the goods pass the ship’s rail at the port of destination. In addition, we have to procure marine insurance
against the buyer’s risk of loss of damage to the goods during the carriage. Most of our sales invoices are denominated in the Chinese
Yuan (Renminbi), although certain of our overseas sales are denominated in US dollars.
Cost of Goods Sold
Our cost of goods sold comprises mainly of materials
costs, energy expenses, factory overheads, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage
is as follows:
|
|
Year Ended December
31, 2020
|
|
|
Year Ended December
31, 2019
|
|
|
Year Ended December
31, 2018
|
|
Materials costs
|
|
|
70.0
|
%
|
|
|
74.3
|
%
|
|
|
72.6
|
%
|
Energy expense
|
|
|
11.2
|
%
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
Factory overhead
|
|
|
7.6
|
%
|
|
|
9.4
|
%
|
|
|
9.8
|
%
|
Packaging materials
|
|
|
5.0
|
%
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
Direct labor
|
|
|
6.2
|
%
|
|
|
3.4
|
%
|
|
|
4.5
|
%
|
Material Costs
As noted above, the raw materials used in our
BOPET film production are PET resin and additives, which made up approximately 77.3% and 22.7%, respectively of our total materials costs
in 2020.
Energy expense
Energy expense includes electricity, gas and water
costs, in which electricity is the main energy consumed.
Factory Overhead
Factory overhead comprises primarily of depreciation,
electricity and water charges, and repair and maintenance of our machinery and equipment, etc. In 2020, the depreciation expense and repair
and maintenance expenditure accounted for 45.8% and 28.4% of factory overhead, respectively.
Packaging Materials
Our packaging materials mainly comprise of, among
other things, packaging pallets and carton cores, used for the packaging of our BOPET film products for delivery to customers. Generally,
our unit cost of packaging materials does not fluctuate significantly and our total costs for packaging materials typically vary in line
with our sales volume.
Direct Labor
Direct labor cost includes salaries, wages, bonuses
and other payments to our employees in the PRC who are involved in the production of our products. The main factors affecting our direct
labor cost are CPI, the changes of any government policies or laws and the demand and supply of skilled labor.
Operating Expenses
Our operating expenses comprise of administrative expenses, distribution
expenses and other operating expense.
Our administrative expenses comprise mainly of
administrative staff salaries and related welfare costs, research and development expenses, depreciation charges of office equipment,
furniture and fixtures, amortization charges relating to land use rights, allowance for doubtful trade receivables, professional fees,
government duties and fees, insurance expenses, rental expenses, travel expenses, entertainment expenses, office expenses and miscellaneous
expenses.
Our distribution expenses comprise mainly of freight
costs, travel expenses, marketing and promotion expenses as well as salaries and commission paid to our sales and marketing personnel.
Other operating expenses comprise mainly of loss
on disposal of property, plant and equipment and miscellaneous expenses.
Finance Costs
Finance costs comprise mainly of interest expense
relating to our loans, capital lease obligations, exchange deficit and bank charge.
Income Tax Expense
For the period from January 28, 2003 to December
31, 2004, Shandong Fuwei was granted certain tax relief under which it was exempted from PRC income tax. As of January 2005, Shandong
Fuwei has been a wholly foreign-owned enterprise under the laws of the PRC. Accordingly, Shandong Fuwei is entitled to tax concessions
whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried
forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed
at 50% of the prevailing tax rates set by the relevant tax authorities.
On March 16, 2007, the National People’s
Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law took effect on January 1,
2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises and foreign-invested enterprises generally became subject
to a unified enterprise income tax rate of 25%, except that enterprises incorporated prior to March 16, 2007 may continue to enjoy existing
preferential tax treatments until January 1, 2013. In addition, certain qualifying “High Technology Enterprises” may still
benefit from a preferential tax rate of 15% under the New Tax Law if they meet the definition of “Government Advocated
High Technology Enterprise” to be set forth in the more detailed implementing rules when they become adopted. Shandong Fuwei was
designated as a High-and-New Tech Enterprise in December 2008 and will retain its status as a high-tech enterprise for three years commencing
from 2011 enjoying a favorable corporate tax rate of 15% during the term from January 1, 2011 to December 31, 2013 pursuant to Enterprise
Income Tax Law. In December 2014, Shandong Fuwei failed to be designated as a High Technology Enterprise and it became subject to a standard
enterprise income tax at a rate of 25% in 2014 and 2015. In 2016, Shandong Fuwei was designated as a High-and-New Tech Enterprise and
as a result, it is entitled to preferential tax treatment at an EIT rate of 15% for the years ended December 31, 2016, 2017 and 2018.
In 2019, Shandong Fuwei was designated as a High-and-New Tech Enterprise and as a result, it is entitled to preferential tax treatment
at an EIT rate of 15% for the years ended December 31, 2019, 2020 and 2021.
Inflation
According to the National Bureau of Statistics
of China, the change in the consumer price index in China was 2.5%, 2.9% and 2.1% in 2020, 2019 and 2018, respectively.
Critical Accounting Policies
The SEC defines critical accounting policies as
those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that
require significant judgments and estimates. We prepare our financial statements in accordance with the U.S. GAAP, which requires us to
make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent assets and liabilities
on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting
period. We continue to evaluate these estimates and assumptions based on the most recently available information, our own historical experience
and various other assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting
policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical
to an understanding of our financial statements as their application assists management in making their business decisions.
Goodwill Impairment Goodwill represents
the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses
acquired. Goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment
may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when
the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined
using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the
DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations
and costs to produce. Management considers historical experience and all available information at the time the fair values of its
reporting units are estimated.
Collectability of Accounts Receivable
Our management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed
on all customers requiring credit over a certain amount. Generally, we offer our customers in the PRC credit terms of up to 30-45 days.
Our international sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between
30 and 60 days.
We offer different credit terms to our customers
based on criteria such as working relationship, payment history, creditworthiness and their financial position. All credit terms are to
be approved by our finance department, in consultation with our sales and marketing department. For extension of larger credit limits,
approvals have to be sought from our credit committee which is made up of members from our finance department, sales department and CFO.
Our finance department and sales department review our outstanding debt account on a monthly basis and follow up with customers when payments
are due. We do not impose interest charges on overdue account receivable.
As of December 31, 2020, our largest trade debtor
was Hunan Wujo Hi-Tech Materials Co., Ltd., a company based in China. The balance of trade receivables from Hunan Hori New Materials Co.,
Ltd. was RMB3.9 million.
We make specific allowance for doubtful trade
receivables when our management takes the view (taking into account the aging of trade receivables and in consultation with our sales
department) that we will not be able to collect the amounts due. Our customers pay by installments, creating long accounts receivable
cycles. We provide for an allowance for doubtful accounts based on our best estimate of the amount of losses that could result from the
inability or intention of our existing customers not to make the required payments. We generally review the allowance by taking into account
factors such as historical experience, age of the accounts receivable balances and economic conditions.
Specific write-off of trade receivables is made
when the outstanding trade receivables have been due for more than two years.
The analysis of the allowance for doubtful amounts for 2020, 2019 and
2018 is as follows (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Balance at beginning of year
|
|
|
833
|
|
|
|
127
|
|
|
|
1,847
|
|
|
|
2,467
|
|
Bad debt expense (recovery)
|
|
|
(348
|
)
|
|
|
(53
|
)
|
|
|
(1,014
|
)
|
|
|
(620
|
)
|
Write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
485
|
|
|
|
74
|
|
|
|
833
|
|
|
|
1,847
|
|
Impairment of Long-lived Assets
The Company recognizes an impairment loss when
circumstances indicate that the carrying value of long-lived assets with finite lives may not be recoverable. Management’s policy
in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at an asset
group level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses
assumptions, which are predominately identified from the Company’s strategic long-range plans, in determining the impairment amount.
In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset group with the estimated
future cash flows expected to result from the use of the assets. If the carrying amount of the asset group exceeds the estimated expected
undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset group
with their estimated fair value. We estimate the fair value of assets based on market prices (i.e., the amount for which the asset could
be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the asset
group using discounted expected future cash flows at the Company’s weighted-average cost of capital. Management believes its policy
is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly
different results. Considering the indivisibility of land and plant and the commonality of equipment, staff and technology, we take fixed
assets and intangible assets as the group of assets.
Results of Operations
The following discussion of our results of operations
is based upon our audited consolidated financial statements beginning on page F-1 of this Annual Report.
The table below sets forth certain line items from our Statement of
Income as a percentage of revenues:
|
|
For the year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(% of Total Revenue)
|
|
Gross profit
|
|
|
40.6
|
|
|
|
24.9
|
|
|
|
16.4
|
|
Operating expenses
|
|
|
34.2
|
|
|
|
18.0
|
|
|
|
19.8
|
|
Other expense
|
|
|
(2.3
|
)
|
|
|
(2.8
|
)
|
|
|
(2.2
|
)
|
Income tax benefit (loss)
|
|
|
1.8
|
|
|
|
(0.7
|
)
|
|
|
(1.1
|
)
|
Net income (loss)
|
|
|
5.8
|
|
|
|
3.4
|
|
|
|
(6.6
|
)
|
Fiscal year ended 2020 compared to fiscal year ended 2019
Revenues
Our revenue can be analyzed as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Stamping and transfer film
|
|
|
95,459
|
|
|
|
14,629
|
|
|
|
28.3
|
%
|
|
|
116,681
|
|
|
|
34.8
|
%
|
Printing film
|
|
|
21,968
|
|
|
|
3,367
|
|
|
|
6.5
|
%
|
|
|
33,877
|
|
|
|
10.1
|
%
|
Metallized film
|
|
|
3,927
|
|
|
|
602
|
|
|
|
1.2
|
%
|
|
|
5,493
|
|
|
|
1.6
|
%
|
Specialty film
|
|
|
204,686
|
|
|
|
31,370
|
|
|
|
60.8
|
%
|
|
|
162,432
|
|
|
|
48.4
|
%
|
Base film for other applications
|
|
|
10,715
|
|
|
|
1,642
|
|
|
|
3.2
|
%
|
|
|
17,137
|
|
|
|
5.1
|
%
|
|
|
|
336,755
|
|
|
|
51,610
|
|
|
|
100
|
%
|
|
|
335,620
|
|
|
|
100
|
%
|
During the fiscal year ended December 31, 2020,
net revenues were RMB336.8 million (US$51.6 million), compared to RMB335.6 million in 2019, representing an increase of RMB1.2 million
or 0.4%. The decrease in average sales price caused a decrease of RMB0.5 million, which was more than offset by an increase of RMB1.7
million that resulted from the increase in sales volume.
In 2020, sales of
specialty films were RMB204.7 million (US$31.4 million) or 60.8% of our total revenues as compared to RMB162.4 million or 48.4% in 2019,
which was an increase of RMB42.3 million, or 26.0% higher than 2019. The increase of sales volume led to an increase of RMB49.2 million,
which was offset in part by a decrease of RMB6.9 million that resulted from the decline in average sales price.
Overseas sales were RMB27.0 million (US$4.1 million)
or 8.0% of total revenues, compared with RMB47.6 million or 14.2% of total revenues in 2019. The increase of average sales price caused
an increase of RMB0.6 million and the decrease of sales volume caused a decrease of RMB21.2 million.
The following is a breakdown of domestic versus
overseas sales for the years ended December 31, 2020 and 2019 (amounts in thousands):
|
|
For the year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales in China
|
|
|
309,801
|
|
|
|
47,479
|
|
|
|
92.0
|
%
|
|
|
288,066
|
|
|
|
85.8
|
%
|
Sales in other countries
|
|
|
26,954
|
|
|
|
4,131
|
|
|
|
8.0
|
%
|
|
|
47,554
|
|
|
|
14.2
|
%
|
|
|
|
336,755
|
|
|
|
51,610
|
|
|
|
100.0
|
%
|
|
|
335,620
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Cost of goods sold during 2020 totaled RMB200.1
million (US$30.7 million) as compared to RMB252.0 million in the prior year. This was RMB51.9 million or 20.6% lower than 2019. The decline
in unit cost of goods sold caused a decrease of RMB53.2 million and the increase of sales volume led to an increase of RMB1.3 million.
The decrease of cost of goods was mainly due to the price decrease of raw materials.
Gross Profit
Our gross profit for the year ended December 31,
2020 was RMB136.7 million (US$21.0 million), compared to RMB 83.6 million in 2019. Our average unit sales price decreased by 0.2% compared
to last year. The unit sales cost decreased by 21.0% due to the price decrease of main raw materials. Consequently, the decrease in cost
of goods sold per unit in product exceeded that of sales price during 2020 compared with 2019, which contributed to the increase in our
gross profit. Our gross margin was 40.6% for the year of 2020, as compared to a gross margin of 24.9% in 2019. Gross margin increased
by 15.7 percentage points compared to the same period in 2019.
Operating Expenses
Our operating expenses during the year ended December
31, 2020 were RMB115.3 million, an increase of RMB54.8 million, or 90.6%, as compared to 2019. The increase was mainly due to the increased
loss on impairment of assets held for sale.
Other Expense
Total other expense is a combination of interest
income, interest expense and others income (expense). Total other expense during the year ended December 31, 2020 was RMB7.9 million (US$1.2
million), compared to total other expense of RMB9.4 million in 2019. This decrease was mainly attributed to the increased interest
income and decreased interest expense.
Income Tax Expense
Income tax profit during the year ended December
31, 2020 was RMB6.1 million (US$0.9 million) compared to income tax expense of RMB2.3 million during 2019, which was mainly attributable
to tax effect of changes in deferred tax during 2020. We did not recognize deferred tax assets for the loss of previous years after considering
the possibility of realizing the benefits under the conservatism principle.
Fiscal year ended 2019 compared to fiscal year ended 2018
Revenues
Our revenue can be analyzed as follows (in thousands):
|
|
For the year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Stamping and transfer film
|
|
|
116,681
|
|
|
|
16,760
|
|
|
|
34.8
|
%
|
|
|
129,548
|
|
|
|
38.9
|
%
|
Printing film
|
|
|
33,877
|
|
|
|
4,866
|
|
|
|
10.1
|
%
|
|
|
30,686
|
|
|
|
9.2
|
%
|
Metallized film
|
|
|
5,493
|
|
|
|
789
|
|
|
|
1.6
|
%
|
|
|
4,373
|
|
|
|
1.3
|
%
|
Specialty film
|
|
|
162,432
|
|
|
|
23,332
|
|
|
|
48.4
|
%
|
|
|
148,801
|
|
|
|
44.6
|
%
|
Base film for other applications
|
|
|
17,137
|
|
|
|
2,462
|
|
|
|
5.1
|
%
|
|
|
20,114
|
|
|
|
6.0
|
%
|
|
|
|
335,620
|
|
|
|
48,209
|
|
|
|
100
|
%
|
|
|
333,522
|
|
|
|
100
|
%
|
During the fiscal year ended December 31, 2019,
net revenues were RMB335.6 million (US$48.2 million), compared to RMB333.5 million in 2018, representing an increase of RMB2.1 million
or 0.6%. The decrease in average sales price caused a decrease of RMB0.8 million, which was more than offset by an increase of RMB2.9
million that resulted from the increase in sales volume.
In 2019, sales of
specialty films were RMB162.4 million (US$23.3 million) or 48.4% of our total revenues as compared to RMB148.8 million or 44.6% in 2018,
which was an increase of RMB13.6 million, or 9.1% higher than 2018. The increase of sales volume led to an increase of RMB14.3 million,
offset in part by the decline in average sales price which caused a decrease of RMB0.7 million.
Overseas sales were RMB47.6 million (US$6.8 million)
or 14.2% of total revenues, compared with RMB45.4 million or 13.6% of total revenues in 2018. The increase of average sales price caused
an increase of RMB0.6 million and the increase of sales volume caused an increase of RMB1.6 million.
The following is a breakdown of domestic versus
overseas sales for the periods ended December 31, 2019 and 2018 (amounts in thousands):
|
|
For
the year ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales
in China
|
|
|
288,066
|
|
|
|
41,378
|
|
|
|
85.8
|
%
|
|
|
288,128
|
|
|
|
86.4
|
%
|
Sales
in other countries
|
|
|
47,554
|
|
|
|
6,831
|
|
|
|
14.2
|
%
|
|
|
45,394
|
|
|
|
13.6
|
%
|
|
|
|
335,620
|
|
|
|
48,209
|
|
|
|
100.0
|
%
|
|
|
333,522
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Cost of goods sold during 2019 totaled RMB252.0
million (US$36.2 million) as compared to RMB278.8 million in the prior year. This was RMB26.8 million or 9.6% lower than 2018. The decline
in unit cost of goods sold caused a decrease of RMB29.2 million and the increase of sales volume led to an increase of RMB2.4 million.
The decrease of cost of goods was mainly due to the price decrease of raw materials.
Gross Profit
Our gross profit for the year ended December 31,
2019 was RMB83.6 million (US$12.0 million), compared to RMB 54.7 million (US$8.0 million) in 2018. Our average unit sales price decreased
by 0.2% compared to last year. The unit sales cost decreased by 10.4% due to the price decrease of main raw materials. Consequently, the
decrease in cost of goods sold per unit in product exceeded that sales price during 2019 compared with 2018, which contributed to the
increase in our gross profit. Our gross margin was 24.9% for the year of 2019, as compared to a gross margin of 16.4% in 2018. Gross margin
increased by 8.5 percentage points compared to the same period in 2018.
Operating Expenses
Our operating expenses during the year ended December
31, 2019 were RMB60.5 million, a decrease of RMB5.5 million, or 8.3%, as compared to 2018. The decrease was mainly due to the reduction
in expense of R&D.
Other Expense
Total other expense is a combination of interest
income, interest expense and others income (expense). Total other expense during the year ended December 31, 2019 was RMB9.4 million (US$1.4
million), compared to total other expense of RMB7.3 million in 2018. This increase was mainly attributed to the increased provision
for obsolete stocks.
Income Tax Expense
Income tax expense during the year ended December
31, 2019 was RMB2.3 million (US$0.3 million) compared to RMB3.6 million during 2018, which was mainly attributable to tax effect of changes
in deferred tax during 2019. We did not recognize deferred tax assets for the loss of previous years after considering the possibility
of realizing the benefits under the conservatism principle.
Liquidity and Capital Resources
Since inception, our sources of cash were mainly
from cash generated from our operations and borrowings from financial institutions and capital contributed by our shareholders.
Our capital expenditures in 2020 were primarily
financed through operating activities, short-term borrowings from financial institutions and related party. The interest rates of short-term
borrowings from financial institutions during the three-year period from 2018 to 2020 ranged from 5.22% to 6.5%, and these borrowings
may not be paid prior to maturity.
Since inception, we have utilized
significant amounts of secured short-term financing to fund our acquisition of Brückner, DMT and Dornier production lines and
working capital needs. As of December 31, 2020, we had borrowing of RMB65.0 million from Bank of Weifang.
Each of the related loan agreements contains provisions
regarding collateral, covenants prohibiting us from engaging in certain activities (including selling, mortgaging or otherwise disposing
of or encumbering all or substantially all of our assets or before any merger, acquisition, spin-off, or other transaction resulting in
a change in our corporate structure) without the lenders consent and acceleration (and setoff) provisions in the event of default in payment
or failure to comply with such covenants.
In April 2014, we obtained a loan for a total
amount of RMB105.0 million from Shandong SNTON Optical Materials Technology Co., Ltd. (the “Shandong SNTON”) to pay off certain
short-term loans due to Bank of Communications Co., Ltd. The interest shall be calculated at the benchmark rate, plus an additional 20%
of the said benchmark rate, for the loan of the same term announced by the People’s Bank of China. The interest must be paid quarterly
and settled in full at the end of the year. As of December 31, 2014, the principal of this loan and the interest have not been paid. In
March 2015, we entered into a supplemental agreement with Shandong SNTON pursuant to which the parties agreed that we will pay off the
principal of this loan plus interest upon availability of new loans from banks or other financial institutions.
On June 23, 2020, Shandong SNTON Group Co., Ltd.
(the “SNTON Group”) transferred its equity in Hongkong Ruishang International Trade Co., Ltd. (“Hongkong Ruishang”)
to Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”). SNTON Group previously held the Company’s
52.9% controlling outstanding ordinary shares (the “Shares”) indirectly through Hongkong Ruishang. As a result of this transfer,
there is no longer relationship between the Company and Shandong SNTON.
According to the credit of assignment agreement
between Shandong SNTON and Shandong Shengjia Industrial Park Operation and Management (“Shandong Shengjia”), Shandong SNTON
transferred its right of credit in the Company to Shandong Shengjia. Shandong Shengjia further transferred it to Shanghai Meicheng. Due
to the transfer, the related accounts payable to Shanghai Meicheng as of December 31, 2020 was RMB73.6 million (US$11.3 million) after
paying back part of the loan.
The credit line amounting to RMB95.0 million (US$13.6
million) was granted by Bank of Weifang. The term is from July 2018 to July 2021. It was secured by a pledge of plant and land use right.
The credit line was used to purchase raw materials. As of December 31, 2020, the amount of credit line granted by Bank of Weifang was
all used.
We believe that, after taking into consideration
our present and future banking facilities, borrowing from related party, existing cash and the expected cash flows to be generated from
our operations, we have adequate sources of liquidity to meet our short-term obligations and our working capital.
A summary of our cash flows for 2020, 2019 and
2018 is as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
RMB
|
|
Net cash provided by (used in) operating activities
|
|
|
117,536
|
|
|
|
18,014
|
|
|
|
54,366
|
|
|
|
25,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(11,257
|
)
|
|
|
(1,725
|
)
|
|
|
(12,559
|
)
|
|
|
(4,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(71,726
|
)
|
|
|
(10,993
|
)
|
|
|
(2,344
|
)
|
|
|
(41,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
|
|
|
(1
|
)
|
|
|
829
|
|
|
|
-
|
|
|
|
(2,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalent
|
|
|
34,552
|
|
|
|
6,125
|
|
|
|
39,463
|
|
|
|
(22,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent, restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
86,371
|
|
|
|
12,407
|
|
|
|
46,908
|
|
|
|
69,464
|
|
At end of the year
|
|
|
120,923
|
|
|
|
18,532
|
|
|
|
86,371
|
|
|
|
46,908
|
|
Operating Activities
Net cash provided by operating activities was
RMB117.5 million for the year ended December 31, 2020.
Net cash provided by operating activities was
RMB54.4 million for the year ended December 31, 2019.
Net cash provided by operating activities was
RMB25.4 million for the year ended December 31, 2018.
Investing Activities
Net cash used in investing activities was RMB11.3
million in 2020, mainly attributable to the increased expenditure of purchasing fixed assets.
Net cash used in investing activities was RMB12.6
million in 2019, mainly attributable to the increased expenditure of purchasing fixed assets.
Net cash used in investing activities was RMB4.6
million in 2018, mainly attributable to the increased expenditure of purchasing fixed assets.
Financing Activities
Net cash used in financing activities was RMB71.7
million for the year ended December 31, 2020, which was mainly due to changes in the amount of notes payable and loans from related party.
Net cash used in financing activities was RMB2.3
million for the year ended December 31, 2019, which was mainly due to changes in the amount of notes payable and loans from related party.
Net cash used in financing activities was RMB41.3
million for the year ended December 31, 2018, which was mainly due to changes in the amount of notes payable.
Foreign Exchange Exposure
Translations
Our reporting currency is RMB. The functional
currency of our operating subsidiary in the PRC is RMB and our operating subsidiary also maintains its books and records in RMB. Accordingly,
we are not exposed to any material foreign currency translation effects.
Transactions
We are, to a certain extent, exposed to transaction
foreign currency exposure arising from our operations in the PRC.
We began conducting part of our sales in
foreign currency in 2004 with the commencement of our overseas sales business. During 2020, 2019 and 2018, approximately 92.0%,
85.8%, and 86.4%, respectively, of our revenue was denominated in RMB and the remainder was in US dollar. The proportion of raw
materials we purchased within the PRC during 2020, 2019 and 2018 were 100%, 100%, and 100.0%,
respectively. The remainder was purchased in US dollars.
Our foreign currency exchange risk arises mainly
from this mismatch between the currency of our sales, purchases and operating expenses. We may, therefore, be susceptible to foreign exchange
exposure.
In addition, we also maintain US dollar accounts
with financial institutions for our US dollar receipts and US dollar payments. We may also incur foreign exchange gains or losses when
we convert the US dollar balances into RMB.
Currently, we do not have a formal foreign currency
hedging policy as our foreign exchange gains and losses in 2020, 2019 and 2018 were insignificant. Our management believes that it is
more efficient for us to assess the hedging need of each transaction on a case-by-case basis. We will continue to monitor our foreign
exchange exposure in the future and will consider hedging any material foreign exchange exposure should such need arise.
Capital Expenditures and Contractual Commitments
Capital Expenditures
Our capital expenditures in 2020, 2019 and 2018 were as follows (in
thousands):
|
|
For the year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Buildings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Plant and equipment
|
|
|
9,965
|
|
|
|
8,149
|
|
|
|
5,103
|
|
Motor vehicles
|
|
|
830
|
|
|
|
310
|
|
|
|
56
|
|
Assets under construction
|
|
|
-
|
|
|
|
-
|
|
|
|
4,819
|
|
Others (computer and furniture fittings)
|
|
|
1,343
|
|
|
|
5,258
|
|
|
|
748
|
|
Total
|
|
|
12,138
|
|
|
|
13,717
|
|
|
|
10,726
|
|
The following table summarizes our contractual
commitments as of December 31, 2020 and the effects caused by those commitments that are expected to have on our liquidity and cash flow
in future periods:
Contractual Commitments
|
|
Total
|
|
|
Less than 1 Total Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More
than 5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(RMB in thousands)
|
|
Equipment Purchase Contract(i)
|
|
|
1,010
|
|
|
|
1,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due to related parties(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Interest(iii)
|
|
|
2,610
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Interest(iii)
|
|
|
4,225
|
|
|
|
4,225
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Notes payable
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(iv)
|
|
|
55
|
|
|
|
55
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
137,900
|
|
|
|
137,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
The purchase of equipment will be financed by the sale of our ordinary shares or by bank borrowings or
by funds generated from business operations.
|
|
(ii)
|
We have a secured short-term loan of RMB65.0 million as of December 31, 2020. Our obligations under
our existing loans have been mainly met through the cash flow from our operations and financing activities. In the past, cash flow
from operations has been sufficient to meet payment obligations and/or we have been able to extend our borrowings. In the event that
our cash flows are insufficient to satisfy these obligations,
we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements. December
31, 2020, our principal of loans from related parties was RMB50.0 million and the interest was RMB23.6 million.
|
|
(iii)
|
The interest expenses are estimated based on the interest rate of borrowings adopted by the People’s
Bank of China on December 31, 2020 plus an estimated risk premium on borrowing.
|
|
(iv)
|
The operating leases mainly relate to our rental of staff dorms. The term of these leases typically ranges
from 1 year to two years, and are renewable subject to renegotiation of terms upon expiration. We intend to finance these operating leases
from our cash flows from operations.
|
Off-Balance Sheet Arrangements and Contingent Liabilities
We do not have any off-balance sheet guarantees,
any outstanding derivative financial instruments, interest rate swap transactions or foreign currency forward contracts.
Inflation
According to the National Bureau of Statistics
of China, the change in the consumer price index in China was 2.5%, 2.9% and 2.1% in 2020, 2019 and 2018, respectively.
Recent Accounting Pronouncements
Disclosure
Framework
In August 2018, the FASB issued
ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"),
which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods
beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our
disclosures but do not currently believe that it will have a material impact.
Leases
In February
2016, the FASB issued ASU 2016-02,"Leases" to provide a new comprehensive model for lease accounting. Under this guidance, lessees
and lessors should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept
of operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim periods within those annual
periods beginning after December 15, 2018. Early adoption is permitted. We adopted the provision of ASU 2016-02.The
adoption of ASU 2016-02 did not have a material impact on our consolidated financial statements.
Financial
Instruments - Credit Losses
In June
2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial
asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The
amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either
collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit
loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is effective for the Company for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years.
In
February 2020, the FASB issued ASU 2020-02, “Financial Statements - Credit losses (Topic 326) and Leases (Topic 842) -
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Relating
to Accounting Standards Update No. 2016-02, Leases (Topic 842)” (“ASU 2020-02”), which provides guidance on the
measurement and requirements related to credit losses. The new guidance was effective upon issuance of this final accounting standards
update. The Company has adopted this standard and the adoption did not have a material impact on its condensed consolidated
financial statements or disclosures.
Other pronouncements issued by
the FASB or other authoritative accounting standards group with future effective dates are either not applicable or not significant to
the consolidated financial statements of the Company.
Research and Development, Patents and Licenses
We rely on copyright, patent, trademark and other
intellectual property law, nondisclosure agreement and technical know-how to protect our intellectual property and proprietary rights.
We enter into confidentiality and licensing agreements with the relevant employees. Our senior employees and employees who work in our
research and development department and other technical departments have signed agreements acknowledging that we own the rights to all
technology, inventions, trade secrets, works of authorship, developments and other processes generated in connection with their employment
with us or their use of our resources or relating to our business or our property and that they must assign any ownership rights that
they may claim in those works to us. As most of our business is currently conducted in mainland China, we have not taken any action outside
mainland China to protect our intellectual property.
As of the date of this Annual Report, we have
received 23 patents from the PRC authorities.
We currently sell our products in the PRC with
the registered trademark of “Fuwei Films”. Our ability to compete in our markets and to achieve future revenue growth will
depend, in significant part, on our ability to protect our proprietary technology and operate without infringing upon the intellectual
property rights of others. An infringement upon these rights may reduce or eliminate any competitive advantage we have developed, causing
us to lose sales or otherwise harm our business. We are not aware of any infringement or unauthorized use of our intellectual property
rights. We will take appropriate legal actions to protect our rights if there is any unauthorized use or infringement of our rights in
the future. To date, we have not been sued for infringement of intellectual property rights by any third party.
Trend Information
Since the second half of 2011, the international
capacity of BOPET films surged especially in countries such as India and China which attributed to more supply than demand and reduced
prices in the market. For the past few years, the status of supply over demand has been improved. We expect that in the next two to three
years, the global BOPET production capacity will continue to increase.
Other than as disclosed elsewhere in this Annual
Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect
on our net sales, profitability, liquidity or capital resources, or that caused the disclosed financial information to not necessarily
be indicative of future operating results or financial conditions.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The following table sets forth information regarding
our directors and executive officers as of the date of this Annual Report on Form 20-F:
Directors and Executive Officers
Name
|
|
Age
|
|
Position
|
Lei Yan (1)
|
|
40
|
|
Chairman, Director and Chief Executive Officer
|
Jingjing Cheng (2)
|
|
36
|
|
Chief Financial Officer and Director
|
|
|
|
|
|
Tee Chuang Khoo (3)(4)
|
|
75
|
|
Independent Director
|
|
|
|
|
|
Junying Liu (3)(4)(5)
|
|
68
|
|
Independent Director
|
|
|
|
|
|
Lihang Geng (3)(6)
Zhimei Liu
|
|
51
49
|
|
Independent Director
President of Shandong Fuwei
|
|
|
|
|
|
Yong Jiang
|
|
47
|
|
Board Secretary and Vice President of Shandong Fuwei
|
|
|
|
|
|
Yong Li
|
|
46
|
|
Vice President of Shandong Fuwei
|
|
|
|
|
|
|
(1)
|
Mr. Lei Yan was appointed to serve as the Company’s Chief Executive Officer and Chairman of the
Board of Directors effective July 21, 2020 to fill the vacancy caused by Mr. Zengyong Wang’s resignation as the Company’s
Chief Executive Officer and Chairman of the Board of Directors, effective July 20, 2020.
|
|
(2)
|
Ms. Jingjing Cheng was appointed to serve as the Company’s Chief Financial Officer and director
effective July 21, 2020 to fill the vacancy caused by Mr. Benjie Dong’s resignation as the Company’s Chief Financial Officer
and director effective July 20, 2020.
|
|
(3)
|
Member of the Audit Committee.
|
|
(4)
|
Member of the Compensation Committee.
|
|
(5)
|
Member of the Corporate Governance and Nominating Committee.
|
|
(6)
|
Mr. Lihang Geng was appointed to serve as a member of the Audit Committee, effective September 22, 2020
to fill the vacancy caused by Mr. Jianguo Zhang’s resignation as the Company’s director and as a member of the Audit Committee,
effective September 21, 2020
|
Mr. Lei Yan has been our Chief Executive Officer
and Chairman of the board since July 21, 2020. Mr. Yan has been the President of Shanghai Meicheng Enterprise Management Co., Ltd.,
since January 2020, where he is responsible for overall business management. Since April 2019, Mr. Yan has been the Director and President
of Shandong Shengjia Industrial Park Management Co., Ltd., where he oversees business management. He has been the Vice President of Shandong
Hualong Group Co., Ltd. since 2013, where he is in charge of business administration and market expansion. He was also the director of
marketing of Shandong Hualong from 2008 to 2013. From 2003 to 2008, he served as marketing manager, marketing salesman of the marketing
department for Shandong Hualong. Mr. Yan studied business administration for his Master course at Korea Daebul University in South Korea.
He studied Business Management at China University of Petroleum from 2008 to 2010 for his undergraduate course. In 2003, he graduated
from Hubei University of Economics where his major was Accounting Computerization.
Ms. Jingjing Cheng has been our Chief Financial
Officer and director since July 21, 2020. Ms. Cheng has been the Director and Chief Financial Officer of Shanghai Meicheng Enterprise
Management Co., Ltd. since January 2020, where she is responsible for finance management. Since April 2019, Ms. Cheng has been the Chief
Financial Officer and Vice President of Shandong Shengjia Industrial Park Management Co., Ltd., where she is responsible for finance management
and operation management. Previously, she was the Chief Financial Officer and Vice President of Beijing Baitetongchuang Marketing Plan
Co., Ltd., where she oversaw finance management. From March 2008 to March 2013, she served as an accountant in Shandong Hualong Group
Co., Ltd. Ms. Cheng was the assistant of President at Baosheng Clothes (Qingdao) Co., Ltd. from September 2005 to March 2008. Ms. Cheng
studied Human Resource Management at Tianjin University. From 2017 to 2020 for her undergraduate course. She studied Accounting Computerization
at Shandong Women’s University from 2002 to 2005.
Tee Chuang Khoo has been a director
of our Company since November 2007. Mr. Khoo was a Senior Partner in Management Consulting at DENEC Management Consulting Co., Ltd. (“DENCE”)
in Shanghai from October 2005 to October 2007. From November 2000 to September 2005, Mr. Khoo was a Senior Partner at Improve Management
Consulting Services in Malaysia where he was responsible for reducing manufacturing costs and process improvement. Mr. Khoo was an Executive
Director at JPK (M) Sdn Bhd, a Malaysian-listed company, from October 1998 to September 2000, where he assisted the Managing Director
with the entire operation of the company. From November 1996 to August 1998, he was the General Manager of Broadway Group’s (a Singapore-listed
company) product factories in Johor Baru, Malaysia, and in China. He also held managerial positions at the Malaysian conglomerate, The
Lion Group, and he was a Human Resources Manager at Metal Box Singapore Ltd, a Singapore-listed company owned by the British Metal Box
Group. Mr. Khoo received a Bachelor of Arts in Finance & Management from the University of Oregon (USA), a Masters in Business Administration
(MBA) from University of Southern California (USA) and a diploma in Accounting from the Association of International Accountants from
the United Kingdom.
Mr. Junying Liu has been a
director of our Company since December 31, 2016. Mr. Liu acted as counsel to China Lucky Group Corporation (“Lucky
Group”), a subsidiary of China Aerospace Science and Technology Corporation, a company mainly engaged in the research, design,
manufacture and launch of space systems (“ASTC”) from December 2013 to December 2015. He received the title of senior
research fellow in 2013 granted by ASTC. He was the General Manager of Hefei Lucky Science & Technology Industry Company where
he was responsible for the company’s daily operation and was the Vice Chief Engineer of Lucky Group from February 2007 to
November 2013 and retired from this position in 2013. Mr. Liu was the General Manager of both Lucky Group’s Films Business
Division and Baoding Lucky Films Co., Ltd. from February 1997 to January 2007. Mr. Liu received his positional title of Senior
Engineer in 1997. From February 1993 to January 1997, Mr. Liu was the President of the Film Base Factory of Lucky Group and was the
director of Administrative Department of Lucky Group from January 1991 to February 1993. He was the Vice Chairman of Association of
Science of Lucky Group from 1985 to 1991 and was a lab technician and an engineer at Lucky Group from 1980 to 1985. Mr. Liu
graduated and obtained his bachelor’s degree in Photosensitive Materials in 1980 from East China University of Science and
Technology.
Mr. Lihang Geng has been a director of our Company
since September 22, 2020. He has been the professor and doctoral supervisor of Civil, Commercial and Economic Law School in China University
of Political Science and Law since May 2017. From September 2011 to May 2017, he was the professor and doctoral supervisor of Law School
of Shandong University. Mr. Geng was the assistant president of the court, a member of Adjudication Committee and deputy bureau level
judge at Jinan Intermediate People's Court for the Double Thousand Plan of Committee of Political and Legislative Affairs from May 2014
to May 2015. From July 2004 to July 2011, Mr. Geng was the associate professor and master supervisor of law school in Central University
of Finance and Economics. He was a legal officer at law department of China National Technical Import and Export Corporation from July
1998 to July 2001. Mr. Geng is a member of Committee of Cases Study, Securities Law Society and
China Banking Law Society, all branches of China Law Society. From 2012 to 2018, he was the chairman, executive member of Shandong Civil
and Commercial Law Research Association and the deputy chairman, executive member of Shandong Economics Law Research Association. Mr.
Geng was a visiting scholar at Law School of Virginia University from September 2008 to September 2009. He studied at China University
of Political Science and Law for his Doctor of Law from September 2001 to July 2004. He received his master in law at China University
of Political Science and Law in 1998. He received his bachelor degree from School of Energy and Power of Xi`an Jiaotong University in
1992.
Ms. Zhimei Liu has been appointed
as the President of Fuwei Films (Shandong) Co., Ltd (“Fuwei Shandong”) by the Company since December 22, 2014, where she has
been responsible for the overall business management, day-to-day operations and other affairs designated by the board of directors of
Fuwei Shandong. From May 2012 to November 2014, Ms. Liu acted as the Director of Administration of Shandong SNTON Steel Cord Co., Ltd.
(“SNTON Steel Cord”), a subsidiary of Shandong SNTON Group Co., Ltd. where she was responsible for formulating and implementing
business strategies and operation. From December 2008 to April 2012, Ms. Liu was the Manager of Corporate Planning Department and the
Manager of Staff Training Center of SNTON Steel Cord as an Associate Senior Engineer. From April 2007 to November 2008, Ms. Liu served
as the Manager of Administration Department of SNTON Steel Cord where she was in charge of overall corporate project planning. From November
2005 to April 2007, Ms. Liu was the assistant manager of supplies department of SNTON Steel Cord where she was overseeing matters related
to raw materials, equipment and supplies with respect to production. Ms. Liu joined Shandong SNTON Group Co., Ltd. in 1996 as a technician,
office clerk, purchasing officer, sales person, and accountant in the subsidiary and branch company of Shandong SNTON Group Co., Ltd.
Ms. Liu studied Business Management in China University of Petroleum from 2007 to 2009.In 1994, Ms. Liu graduated from Shandong Vocational
College of Industry where her major was Computer Application.
Yong Jiang has been the Board Secretary
since April 2011. Since July 2014, Mr. Jiang is the vice president and in charge of the products sale of Fuwei Films (Shandong) Co., Ltd.
He is also assistant President of Fuwei Films (Shandong) Co., Ltd. since 2007. From 2003 to 2006, he served as assistant manager, deputy
manager and manager of the marketing department for Shandong Fuwei. In 1998, he joined Weifang Neoluck Plastic Co., Ltd. where he was
responsible for overseas sales and production planning. In December 2015, Mr. Jiang obtained his EMBA degree in Nankai University. In
1998, he received his bachelor’s degree in Information Management and Information System from Shandong University.
Yong Li has been the
vice president and in charge of production department and electrical & mechanical engineering department of Shandong Fuwei since
March 2020. He was assistant president and senior manager of electrical & mechanical engineering department for Shandong Fuwei from
2016 to February 2020. From 2003 to 2015, he served as the deputy manager, manager and senior manager of the electrical & mechanical
engineering department for Shandong Fuwei. In 1997, he joined Weifang Neoluck Plastic Co., Ltd. where he was responsible for electrical
& mechanical engineering and equipment management. In December 2011, Mr. Jiang obtained his graduate degree of engineering from Qingdao
University of Science and Technology. In 1997, he graduated from North China Institute of Aerospace Engineering (NCIAE) where his major
was testing technology and precision instruments.
None of our directors or officers is related
to each other. To the best of our knowledge and belief, there are no arrangements or understandings with any of our principal
shareholders, customers, suppliers, or any other person, pursuant to which any of our directors or executive officers were appointed.
The business address of our directors and executive
officers is No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, Postal Code: 261061.
Board Committees
Our Board of Directors has established an Audit
Committee, Compensation Committee and a Corporate Governance and Nominating Committee, and adopted charters for each of these committees.
We have appointed independent directors to each of our committees.
Nasdaq Rule 5605(b)(1) requires that the Board
be comprised of a majority of Independent Directors as such term is defined in Rule 5605(a)(2). The Company provided Nasdaq with a notice
on December 25, 2007 stating that as a “Controlled Company”, it is exempt from the requirements of Rule 5605(b)(1). Pursuant
to Rule 5615(c)(1), a “Controlled Company” is a Company of which more than 50% of the voting power for the election of directors
is held by an individual, a group or another company. As of December 31, 2016, Hongkong Ruishang International Trade Co. Ltd controlled
52.9% of the outstanding ordinary shares of Fuwei. As a result, Fuwei is considered to be a Controlled Company and relied upon
the exemption from December 25, 2007.
Audit Committee
Our Audit Committee currently consists of Tee
Chuang Khoo (chairman), Junying Liu and Lihang Geng. The Audit Committee will oversee our accounting and financial reporting processes
and the audits of our financial statements. The audit Committee is responsible for, among other things:
|
·
|
selecting
the independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
|
|
·
|
reviewing and approving
all proposed related-party transactions;
|
|
·
|
discussing the annual
audited financial statements with management and the independent auditors;
|
|
·
|
annually reviewing and
reassessing the adequacy of our audit committee charter;
|
|
·
|
meeting separately and
periodically with management and the independent auditors;
|
|
·
|
reviewing such other
matters that are specifically delegated to our audit committee by our board of directors
from time to time; and
|
|
·
|
reporting regularly
to the full board of directors.
|
Compensation Committee
Our Compensation Committee currently consists
of Tee Chuang Khoo and Junying Liu. The Compensation Committee is responsible for, among other things:
|
·
|
reviewing and determining
the compensation package for our senior executives;
|
|
·
|
reviewing
and making recommendations to our board with respect to the compensation of our directors;
|
|
·
|
reviewing and approving
officer and director indemnification and insurance matters;
|
|
·
|
reviewing and approving
any employee loan in an amount equal to or greater than RMB100,000; and
|
|
·
|
reviewing
periodically and approving any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
Corporate Governance and Nominating Committee
Mr. Junying Liu is the sole member of our Corporate
Governance and Nominating Committee. The Corporate Governance and Nominating Committee is responsible for, among other things:
|
·
|
identifying and recommending
to the board nominees for election or re-election to the board;
|
|
·
|
making appointments
to fill any vacancy on our board;
|
|
·
|
reviewing
annually with the board the current composition of the board in light of the characteristics
of independence, age, skills, experience and availability of service to us;
|
|
·
|
identifying
and recommending to the board any director to serve as a member of the board’s committees;
|
|
·
|
advising
the board periodically with respect to significant developments in the law and practice of
corporate governance as well as our compliance with applicable laws and regulations, and
making recommendations to the board on all matters of corporate governance and on any corrective
action to be taken; and
|
|
·
|
monitoring
compliance with our code of business conduct and ethics, including reviewing the adequacy
and effectiveness of our procedures to ensure proper compliance.
|
Duties of Directors
Under Cayman Islands laws, our directors have
a common law duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise
the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder
has the right to seek damages if a duty owed by our directors is breached. You should read “Information - Differences in Corporate
Law” for a more complete discussion of these matters.
B. Compensation
Compensation of Directors and Executive Officers
All directors receive reimbursements from us
for expenses which are necessary and reasonably incurred by them for providing services to us or in the performance of their duties.
Our directors who are also our employees receive compensation in the form of salaries, housing allowances, other allowances and benefits
in kind in their capacity as our employees. Our directors do not receive any compensation in their capacity as directors in addition
to their salaries and other remunerations as members of our management team. We pay their expenses related to attending board meetings.
The aggregate cash compensation and benefits
that we paid to our directors and executive officers, a group of 8 persons for the year ended December 31, 2020 was approximately
RMB1.5 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with the Company.
Employment and Service Agreements
Executive Officers
Mr. Lei Yan was appointed as the Chairman of
our Board and Shandong Fuwei in July 2020. Mr. Lei Yan has entered into Service Agreement with the Company. Mr. Yan is entitled to receive
an annual salary of RMB312,000
Ms. Zhimei Liu was appointed as the President
of Shandong Fuwei in December 2014. Ms. Zhimei Liu has entered into Service Agreement with Shandong Fuwei. Ms. Zhimei Liu was paid an
annual salary of RMB421,000 in 2020.
Ms. Jingjing Cheng has entered into Service Agreement
with Shanghai Meicheng and her salary is paid by Shanghai Meicheng.
We have also entered into Service Agreements
with our other executive officers. Mr. Yong Jiang renewed his service agreement with the Company in December 2011 with an unspecified
term. Effective July 2020, Mr. Yong Jiang was entitled to an annual salary of RMB386,000. The annual salary of Mr. Yong Jiang may be
adjusted at the discretion of our Compensation Committee. We may pay him discretionary management bonuses for any financial year, the
payment and the amount of which are subject to the approval of the Compensation Committee.
Mr. Yong Li has entered into a service agreement
with Shandong Fuwei with an unspecified term. Mr. Yong Li is entitled to an annual salary of RMB325,000.
We may only terminate the Service Agreement prior
to the expiry (except by mutual agreement and except as provided in the Service Agreement) upon the occurrence of certain events including,
without limitation, for cause, disability or personal bankruptcy. The term of service of each of our executive officers will be renewed
for successive periods of one year each after the expiration of the initial period. The Service Agreement may be terminated by not less
than three months’ notice in writing served by either party to the Service Agreements. We have the option to pay the executive
officer salary in lieu of any required period of notice of termination.
Except for the payment in lieu of notice described
above, there are no provisions for benefits for termination of employment of our executive officers under the Service Agreements.
Share Option Plan
We plan to adopt a share option plan that is
a share incentive plan, the purpose of which is to recognize and acknowledge the contributions the eligible participants had or may have
made to our company. The share option plan will provide the eligible participants an opportunity to have a personal stake in our company
with the view to achieving the following objectives:
· motivate
the eligible participants to optimize their performance efficiency for the benefit of our company; and
· attract
and retain or otherwise maintain an on-going business relationship with the eligible participants whose contributions are or will be
beneficial to our long-term growth.
Indemnification
Cayman Islands law does not limit the extent
to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any
such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Pursuant to our memorandum and articles of association, our directors and officers,
as well as any liquidator or trustee for the time being acting in relation to our affairs, will be indemnified and secured harmless out
of our assets and profits from and against all actions, costs, charges, losses, damages and expenses that any of them or any of their
heirs, executors or administrators may incur or sustain by reason of any act done, concurred in or omitted in or about the execution
of their duties in their respective offices or trusts. Accordingly, none of these indemnified persons will be answerable for the acts,
receipts, neglects or defaults of each other; neither will they be answerable for joining in any receipts for the sake of conformity,
or for any bankers or other persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe custody,
or for insufficiency or deficiency of any security upon which any moneys of or belonging to us may be placed out or invested, or for
any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts. This indemnity will not,
however, extend to any fraud or dishonesty that may attach to any of said persons.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have
been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
C. Board practices
Our Articles provide that our board of directors
will consist of not less than two directors. At each annual general meeting, one-third of the directors (or, if their number is not a
multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation except that the chairman
of the board and/or the managing director of our company shall not be required to retire whilst holding such office nor be taken into
account in determining the number of directors to retire in each year. A director who is appointed by the board must retire at our next
annual general meeting of the shareholders following his or her appointment. A retiring director is eligible for re-election.
D. Employees
As of December 31, 2020, our total staff consisted of 208 employees.
We do not have any collective bargaining agreements
with our employees. We have never experienced any material labor disruptions and are unaware of any current efforts or plans to organize
employees. We believe we have good relationships with our employees.
Item 7. Major
Shareholders and Related Party Transactions
A. Major shareholders.
The following table sets forth information with
respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares, as of April 22,
2021, for:
|
·
|
each person known to
us to own beneficially more than 5% of our ordinary shares; and
|
|
·
|
each of our directors
and executive officers who beneficially own our ordinary shares.
|
Beneficial ownership includes voting or investment
power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named
in the table have or share the voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The
number of our ordinary shares used in calculating the percentage for each listed person includes any options exercisable by such person
within 60 days after the date of this Annual Report. Percentage of beneficial ownership is based on 3,265,837 ordinary shares outstanding
as of April 22, 2021.
|
|
Shares Beneficially Owned
|
|
|
|
Number
|
|
|
Percent
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lei Yan(1)
|
|
|
—
|
|
|
|
—
|
|
Jingjing Cheng (2)
|
|
|
—
|
|
|
|
—
|
|
Tee Chuang Khoo
|
|
|
—
|
|
|
|
—
|
|
Junying Liu
|
|
|
—
|
|
|
|
—
|
|
Lihang Geng
|
|
|
—
|
|
|
|
—
|
|
Yong Jiang
|
|
|
—
|
|
|
|
—
|
|
All directors and executive officers as a group (6 persons)
|
|
|
—
|
|
|
|
—
|
|
5% Shareholders:
|
|
|
|
|
|
|
|
|
Hongkong Ruishang International Trade Co., Ltd., Room 1401, 14 Floor, World
Commerce Centre, Harbour City, 7-11 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong
|
|
|
1,728,126
|
(3)
|
|
|
52.9
|
%
|
Shandong Fuhua Investment Company Limited, No.189 Dongfeng East Street, Weifang, Shandong,
People’s Republic of China.
|
|
|
409,375
|
(4)
|
|
|
12.54
|
%
|
(1) Mr. Lei Yan was appointed to serve as the
Company’s Chief Executive Officer and Chairman of the Board of Directors effective July 21, 2020 to fill the vacancy caused by
Mr. Zengyong Wang’s resignation as the Company’s Chief Executive Officer and Chairman of the Board of Directors, effective
July 20, 2020.
(2) Ms. Jingjing Cheng was appointed to serve
as the Company’s Chief Financial Officer and director effective July 21, 2020 to fill the vacancy caused by Mr. Benjie Dong’s
resignation as the Company’s Chief Financial Officer and director effective July 20, 2020.
(3) On June 23, 2020, Shandong SNTON Group Co.,
Ltd. (the “SNTON Group”) transferred its equity in Hongkong Ruishang International Trade Co., Ltd. (“Hongkong Ruishang”)
to Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”). SNTON Group previously held the Company’s
52.9% controlling outstanding ordinary shares (the “Shares”) indirectly through Hongkong Ruishang. This information was derived
from a Schedule 13D/A jointly filed by Apex Glory, Hongkong Ruishang, Shanghai Meicheng and Miaomiao Yan on July 6, 2020 with the SEC.
(4) Shandong Fuhua Investment Company Limited
(“Shandong Fuhua”) received ownership of the Company’s 409,375 ordinary shares (reflecting the Reverse Stock Split)
through an ownership transfer from the Administration Company. The Administration Company originally held these shares indirectly through
an intermediate holding company, Easebright Investments Limited (“Easebright”). As a result of this transfer, Shandong Fuhua
indirectly owns 409,375 ordinary shares of the Company through Easebright. Mr. Jingang Yang was a director of Easebright. This information
was derived from a Schedule 13D filed by Shandong Fuhua on December 30, 2014 with the SEC. Fuwei was informed by Easebright that Mr.
Qingxin Dong replaced Mr. Jingang Yang in 2018.
Except as disclosed below, there were no related
party transactions with major shareholders during the period commencing January 1, 2014 and ending December 31, 2020.
B. Related Party Transactions.
Our Related-Party Transaction Policies
We have conducted our related-party transactions
on normal commercial terms that we believe are fair and reasonable and in the interests of our shareholders as a whole. We believe that
the terms of our related-party transactions are comparable to the terms we could obtain from independent third parties. Our related-party
transactions are subject to the review and approval of the Audit Committee of our board of directors.
The transactions and balances with related parties are analyzed as
follows:
Due to related parties
In April 2014, we obtained a loan for a total
amount of RMB105.0 million from Shandong SNTON Optical Materials Technology Co., Ltd. (the “Shandong SNTON”) to pay off certain
short-term loans due to Bank of Communications Co., Ltd. The interest shall be calculated at the benchmark rate, plus an additional 20%
of the said benchmark rate, for the loan of the same term announced by the People’s Bank of China. The interest must be paid quarterly
and settled in full at the end of the year. As of December 31, 2014, the principal of this loan and the interest have not been paid.
In March 2015, we entered into a supplemental agreement with Shandong SNTON pursuant to which the parties agreed that we will pay off
the principal of this loan plus interest upon availability of new loans from banks or other financial institutions.
On June 23, 2020, Shandong SNTON Group Co., Ltd.
(the “SNTON Group”) transferred its equity in Hongkong Ruishang International Trade Co., Ltd. (“Hongkong Ruishang”)
to Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”). SNTON Group previously held the Company’s
52.9% controlling outstanding ordinary shares (the “Shares”) indirectly through Hongkong Ruishang. As a result of this transfer,
there is no longer any relationship between the Company and Shandong SNTON.
According to the credit of assignment agreement
between Shandong SNTON and Shandong Shengjia Industrial Park Operation and Management (“Shandong Shengjia”), Shandong SNTON
transferred its right of credit in the Company to Shandong Shengjia. Shandong Shengjia further transferred it to Shanghai Meicheng. Due
to the transfer, the related accounts payable to Shanghai Meicheng as of December 31, 2020 was RMB73.6 million (US$11.3 million) after
paying back part of the loan.
C. Interests of Experts and Counsel.
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial
Information.
Our consolidated financial statements are included herein under Item
18.
We have not paid any dividends on our ordinary
shares. The payment of dividends in the future, if any, is within the discretion of our Board of Directors and will depend upon our earnings,
capital requirements and financial condition and other relevant factors. We do not anticipate declaring or paying any dividends in the
foreseeable future.
Legal Proceedings.
From time to time, we may be subject to legal
actions and other claims arising in the ordinary course of business. Shandong Fuwei is currently a party to one legal proceeding in China.
On July 9, 2012, a client filed a lawsuit in
Beijing Daxing District People’s Court against Shandong Fuwei claiming RMB953,113 plus interest over disputes arising from a Procurement
Contract between the parties. Shandong Fuwei raised a jurisdictional objection upon filing its plea, and Beijing Daxing District People’s
Court overruled the objection. Shandong Fuwei filed an appeal against the judgment in the First Intermediate People’s Court of
Beijing. The appeal was dismissed on January 23, 2013. On May 15, 2013, Beijing Daxing District People’s Court heard the case and
adjourned the hearing due to the fact that plaintiff failed to provide sufficient evidence. On June 25, 2013, the case was heard in Beijing
Daxing District People’s Court again and it was further adjourned due to plaintiff’s failure to provide sufficient evidence.
The case was then scheduled to be heard on August 7, 2013. However, on the day prior to re-scheduled hearing, Shandong Fuwei was informed
by Beijing Daxing District People’s Court that the hearing was adjourned further for the same reason that plaintiff failed to provide
sufficient evidence. On April 21, 2014, the case was heard, and the plaintiff failed to provide sufficient evidence and the hearing was
further adjourned. On May 28, 2014, the case was heard and the plaintiff provided some evidence. On August 25, 2014, the case was heard
again. On November 5, 2014, the court accepted the withdrawal application from the plaintiff. On November 26, 2014, the plaintiff filed
a second lawsuit in Beijing Daxing District People’s Court against Shandong Fuwei over disputes arising from the Procurement Contract
between the parties claiming RMB618,230 plus interest as a result of non- payment. The case was heard on January 26, 2015, where the
two parties testified over the relevant evidence. The case was heard on March 3, 2015, October 26, 2015 and May 11, 2016. To date, the
case has not been decided.
B. Significant Changes.
No significant changes have occurred since the
date of the consolidated financial statements.
Item 9. The Offer and Listing.
A. Offer and listing details.
On December 5, 2016, we held an extraordinary
general meeting of shareholders (“EGM”) pursuant to which a 1-for-4 reverse stock split of our authorized ordinary shares,
accompanied by a corresponding decrease in our issued and outstanding ordinary shares and an increase of the par value of each ordinary
share from $0.129752 to US$0.519008 (the “Reverse Stock Split”), was approved by our shareholders of record.
As a result, we have authorized capital of 5,000,000
ordinary shares, par value US$0.519008 per share. As of April 22, 2021, 3,265,837 ordinary shares were issued and outstanding.
The annual high and low market prices of our
ordinary shares for the three most recent full financial years and subsequent period are as set forth below:
Ordinary Shares
|
|
(Year Ended)
|
|
|
High
|
|
|
Low
|
|
December
31, 2020
|
|
|
$
|
14.43
|
|
|
$
|
1.56
|
|
December
31, 2019
|
|
|
$
|
7.37
|
|
|
$
|
1.77
|
|
December
31, 2018
|
|
|
$
|
4.93
|
|
|
$
|
1.70
|
|
The high and low market prices of our ordinary
shares for each financial quarter over the two most recent full financial years and subsequent period are as set forth below:
Ordinary Shares
|
|
(Quarter Ended)
|
|
|
High
|
|
|
Low
|
|
March 31, 2019
|
|
|
$
|
3.24
|
|
|
$
|
1.95
|
|
June 30, 2019
|
|
|
$
|
3.10
|
|
|
$
|
1.77
|
|
September 30, 2019
|
|
|
$
|
7.37
|
|
|
$
|
1.77
|
|
December 31, 2019
|
|
|
$
|
4.35
|
|
|
$
|
2.46
|
|
March 31, 2020
|
|
|
$
|
3.58
|
|
|
$
|
1.56
|
|
June 30, 2020
|
|
|
$
|
10.49
|
|
|
$
|
1.73
|
|
September 30, 2020
|
|
|
$
|
6.49
|
|
|
$
|
3.43
|
|
December 31, 2020
|
|
|
$
|
14.43
|
|
|
$
|
3.52
|
|
For the most recent six months, the high
and low market prices of our ordinary shares are as set forth below:
Ordinary Shares
|
|
(Month Ended)
|
|
|
High
|
|
|
Low
|
|
November
30, 2020
|
|
|
$
|
4.19
|
|
|
$
|
7.19
|
|
December
31, 2020
|
|
|
$
|
5.50
|
|
|
$
|
14.43
|
|
January
31, 2021
|
|
|
$
|
12.22
|
|
|
$
|
8.05
|
|
February
28, 2021
|
|
|
$
|
17.12
|
|
|
$
|
9.08
|
|
March
31, 2021
|
|
|
$
|
12.22
|
|
|
$
|
8.51
|
|
April
20, 2021
|
|
|
$
|
11.45
|
|
|
$
|
9.50
|
|
B. Plan of Distribution.
Not applicable.
C. Markets.
Our ordinary shares were included for quotation
on the Nasdaq Global Market on December 18, 2006 under the symbol “FFHL”.
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue.
Not applicable.
Item 10. Additional Information.
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
We are a Cayman Islands company and our affairs
are governed by our memorandum and articles of association and the Companies Act, Cap.22 (Law 3 of 1961, as consolidated and revised)
of the Cayman Islands, or the Companies Act. We have filed copies of our complete Memorandum and Articles of Association as exhibits
to our Annual Report on Form 20-F for the year ended 2006 filed with the SEC on April 2, 2007.
As of the date of this Annual Report, our authorized
share capital consisted of 5,000,000 ordinary shares, par value US$0.519008 per share (reflecting the Reverse Stock Split). As of the
date of this Annual Report, 3,265,837ordinary shares (reflecting the Reverse Stock Split) were issued and outstanding, and no preference
shares were issued and outstanding.
Ordinary Shares
We were incorporated under the laws of the Cayman
Islands as an exempted company. A Cayman Islands exempted company:
|
·
|
is
a company that conducts its business outside the Cayman Islands;
|
|
·
|
is
exempted from certain requirements of the Companies Act, including the filing of any annual
return of its shareholders with the Registrar of Companies or the Immigration Board;
|
|
·
|
does
not have to make its register of shareholders open to inspection; and
|
|
·
|
may
obtain an undertaking against the imposition of any future taxation.
|
The following summarizes the terms and provisions
of our share capital, as well as the material applicable laws of the Cayman Islands. This summary is not complete, and you should read
our amended and restated memorandum and articles of association, filed as exhibits to this Annual Report.
The following discussion primarily concerns ordinary
shares and the rights of holders of ordinary shares.
Protection of Minority Shareholders
The Grand Court of the Cayman Islands may, on
the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our affairs and
report thereon in a manner as the Grand Court shall direct.
Any shareholder may petition the Grand Court
of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that we should
be wound up. Where any such petition has been presented by our shareholders, the Grand Court is permitted to make alternative order to
a winding-up order including orders regulating the conduct of our affairs in the future, requiring us to refrain from doing an act complained
of by the petitioner or for the purchase of our shares by us or another shareholder.
Claims against us by our shareholders must, as
a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders
as established by our amended and restated memorandum and articles of association.
The Cayman Islands courts ordinarily would be
expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative
actions in our name to challenge:
|
·
|
an act which is ultra
vires or illegal;
|
|
·
|
an act which constitutes
a fraud against the minority shareholder and the wrongdoers are themselves in control of
us; and
|
|
·
|
an irregularity in
the passing of a resolution which requires a qualified (or special) majority.
|
Pre-emption Rights
There are no pre-emption rights applicable to
the issue of new shares under either Cayman Islands law or our amended and restated memorandum and articles of association.
Modification of Rights
Except with respect to share capital (as described
below) alterations to our amended and restated memorandum and articles of association may only be made by special resolution of no less
than two-thirds of votes cast at a meeting of the shareholders.
Subject to the Companies Act, all or any of the
special rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that class) may
be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the
shares of that class.
The provisions of our amended and restated articles
of association relating to general meetings shall apply similarly to every such separate general meeting, but the quorum for the purposes
of any such separate general meeting or at its adjourned meeting shall be a person or persons together holding (or represented by proxy)
not less than one third in nominal value of the issued shares of that class. Every holder of shares of the class shall be entitled on
a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy
may demand a poll.
The special rights conferred upon the holders
of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares,
be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Alteration of Capital
We may from time to time by ordinary resolution:
|
·
|
increase our capital
by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
|
|
·
|
consolidate
and divide all or any of our share capital into shares of larger amount than our existing
shares;
|
|
·
|
cancel
any shares which at the date of the passing of the resolution have not been taken or agreed
to be taken by any person, and diminish the amount of our share capital by the amount of
the shares so cancelled subject to the provisions of the Companies Act;
|
|
·
|
sub-divide
our shares or any of them into shares of smaller amount than is fixed by our amended and
restated memorandum and articles of association, subject nevertheless to the Companies Act,
and so that the resolution whereby any share is subdivided may determine that, as between
the holders of the share resulting from such subdivision, one or more of the shares may have
any such preference or other special rights, or may have such deferred rights or be subject
to any such restrictions as compared with, the others as we have power to attach to unissued
or new shares; and
|
|
·
|
divide
shares into several classes and without prejudice to any special rights previously conferred
on the holders of existing shares, attach to the shares respectively as preferential, deferred,
qualified or special rights, privileges, conditions or such restrictions which, in the absence
of any such determination in a general meeting, may be determined by our directors.
|
We may, by special resolution, subject to any
confirmation or consent required by the Companies Act, reduce our share capital or any capital redemption reserve in any manner authorized
by law.
Transfer of Shares
Subject to any applicable restrictions set forth
in our amended and restated memorandum and articles of association, any of our shareholders may transfer all or any of his or her shares
by an instrument of transfer in the usual or common form or in any form prescribed by the NASDAQ Capital Market or in any other form
which our directors may approve. You should note that, under Cayman Islands law, a person whose name is entered on the register of members
will be deemed to be a member or shareholder of our company. We have designated American Stock Transfer and Trust Company as our share
registrar. Under Cayman Islands law, a share certificate constitutes admissible evidence as proof of title of its holder to the shares
specified on such certificate.
Our directors may decline to register any transfer
of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless:
|
·
|
the instrument of
transfer is lodged with us accompanied by the certificate for the shares to which it relates
and such other evidence as our directors may reasonably require to show the right of the
transferor to make the transfer;
|
|
·
|
the instrument of
transfer is in respect of only one class of shares;
|
|
·
|
the instrument of
transfer is properly stamped (in circumstances where stamping is required);
|
|
·
|
in the case of a transfer
to joint holders, the number of joint holders to whom the share is to be transferred does
not exceed four; and
|
|
·
|
a
fee of such maximum sum as the NASDAQ Global Market may at any time determine to be payable
or such lesser sum as our directors may from time to time require is paid to us in respect
thereof.
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If our directors refuse to register a transfer,
they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee
notice of such refusal.
The registration of transfers may, on notice
being given by advertisement in such one or more newspapers or by any other means in accordance with any requirements of the NASDAQ Capital
Market, be suspended and the register closed at such times and for such periods as our directors may from time to time determine; provided,
however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors
may determine.
Share Repurchase
We are empowered by the Companies Act and our
amended and restated memorandum and articles of association to purchase our own shares, subject to certain restrictions. Our directors
may only exercise this power on our behalf, subject to the Companies Law, our amended and restated memorandum and articles of association
and to any applicable requirements imposed from time to time by the U.S. Securities and Exchange Commission, the NASDAQ Capital Market,
or by any recognized stock exchange on which our securities are listed.
Dividends
Subject to the Companies Act, we may declare
dividends in any currency to be paid to our shareholders. Dividends may be declared and paid out of our profits, realized or unrealized,
or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare
and pay dividends out of the share premium account or any other fund or account which can be authorized for this purpose in accordance
with the Companies Act.
Except in so far as the rights attaching to,
or the terms of issue of, any share otherwise provides (1) all dividends shall be declared and paid according to the amounts paid up
on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this
purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the amounts paid upon the
shares during any portion or portions of the period in respect of which the dividend is paid.
Our directors may also pay any dividend that
is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our directors, justifies
such payment.
Our directors may deduct from any dividend or
other money payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of calls or
otherwise.
No dividend or other money payable by us on or
in respect of any share shall bear interest against us.
In respect of any dividend proposed to be paid
or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied wholly or in part in the form
of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled to elect to receive
such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment, or (2) the shareholders entitled to
such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part
of the dividend as our directors may think fit. We may also, on the recommendation of our directors, resolve in respect of any particular
dividend that, notwithstanding the foregoing, it may be satisfied wholly in the form of an allotment of shares credited as fully paid
up without offering any right of shareholders to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable in
cash to any shareholder may be paid by check or warrant sent by mail addressed to the shareholder at his registered address, or addressed
to such person and at such addresses as the shareholder may direct. Every check or warrant shall, unless the shareholder or joint shareholders
otherwise direct, be made payable to the order of the shareholder or, in the case of joint shareholders, to the order of the shareholder
whose name stands first on the register in respect of such shares, and shall be sent at their risk and payment of the check or warrant
by the bank on which it is drawn shall constitute a good discharge to us.
All dividends unclaimed by shareholders for one
year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company until
claimed. Any dividend unclaimed by shareholders after a period of six years from the date of declaration of such dividend may be forfeited
and, if so forfeited, shall revert to us.
Whenever our directors have resolved that a dividend
be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution of specific
assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or securities of any
other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they think expedient. In
particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or down, fix the value
for distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the
footing of the value so fixed in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient
to our directors, and appoint any person to sign any requisite instruments of transfer and other documents on behalf of a person entitled
to the dividend, which appointment shall be effective and binding on our shareholders.
Untraceable Shareholders
We are entitled to sell any shares of a shareholder who is untraceable,
provided that:
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all
checks or warrants in respect of dividends of such shares, not being less than three in number,
for any sums payable in cash to the holder of such shares have remained uncashed for a period
of twelve years prior to the publication of the advertisement and during the three months
referred to in the third bullet point below;
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we
have not during that time received any indication of the whereabouts or existence of the
shareholder or person entitled to such shares by death, bankruptcy or operation of law; and
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we
have caused an advertisement to be published in newspapers in the manner stipulated by our
amended and restated memorandum and articles of association, giving notice of our intention
to sell these shares, and a period of three months has elapsed since such advertisement and
the NASDAQ Global Market has been notified of such intention.
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The net proceeds of any such sale shall belong
to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.
Issuance of Additional Ordinary Shares or Preference Shares
Subject to the Companies Act and the rules of
the NASDAQ Capital Market and without prejudice to any special rights or restrictions for the time being attached to any shares or any
class of shares, our board of directors may issue additional ordinary shares from time to time as our board of directors determines, to
the extent of available authorized but unissued shares and establish from time to time one or more series of preference shares and to
determine, with respect to any series of preference shares, the terms and rights of that series, including:
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the designation of the series;
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the number of shares of the series;
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the dividend rights, conversion rights, voting rights; and
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the rights and terms of redemption and liquidation preferences.
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Subject to the foregoing, our board of directors
may issue series of preference shares without action by our shareholders to the extent authorized but unissued. Accordingly, the issuance
of preference shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preference shares
may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of preference shares may dilute
the voting power of holders of ordinary shares.
Subject to applicable regulatory requirements,
our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized but
unissued shares. The issuance of additional ordinary shares may be used as an anti-takeover device without further action on the part
of the shareholders. Such issuance may dilute the voting power of existing holders of ordinary shares.
Our ordinary shares are listed on the NASDAQ Capital
Market under the symbol “FFHL”.
Committees of Board of Directors
Pursuant to our amended and restated articles
of association, our board of directors, we have established an audit committee, a compensation committee and a corporate governance and
nominating committee.
Differences in Corporate Law
The Companies Act is modeled after similar laws
in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Act differs from laws applicable
to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions
of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States, such as in the State of
Delaware.
Duties and Directors
Under Cayman Islands law, at common law, members of a board of directors
owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers
and fulfill the duties of their office honestly. This duty has four essential elements:
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a duty to act in good faith in the best interests of the company;
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a duty not to personally profit from opportunities that arise from the office of director;
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a duty to avoid conflicts of interest; and
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a duty to exercise powers for the purpose for which such powers were intended.
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In general, the Companies Act imposes various
duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Act contains
provisions, which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual
is only liable if he knowingly is guilty of the default or knowingly and willfully authorizes or permits the default.
In comparison, under Delaware law, the business
and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are
charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests
of its shareholders. The duty of care requires that directors act in an informed and deliberative manner and inform themselves, prior
to making a business decision, of all material information reasonably available to them. The duty of care also requires that directors
exercise care in overseeing and investigating the conduct of the corporation’s employees. The duty of loyalty may be summarized
as the duty to act in good faith, not out of self-interest, and in a manner which the director reasonably believes to be in the best interests
of the shareholders.
Under Delaware law, a party challenging the propriety
of a decision of a board of directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the
“business judgment rule”. If the presumption is not rebutted, the business judgment rule protects the directors and their
decisions, and their business judgments will not be second guessed. Where, however, the presumption is rebutted, the directors bear the
burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’
conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction
resulting in a sale of control of the corporation.
Interested Directors
There are no provisions under the Companies Act
that require a director who is interested in a transaction entered into by a Cayman Islands company to disclose his interest. However,
under our amended and restated memorandum and articles of association, our directors are required to do so, and in the event that they
do not do so it may render such director liable to such company for any profit realized pursuant to such transaction.
In comparison, under Delaware law, such a transaction
would not be voidable if (a) the material facts as to such interested director’s relationship or interests are disclosed or are
known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors are less than a quorum, (b) such material facts are disclosed or are known to the shareholders
entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the shareholders, or (c) the
transaction is fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, a director could
be held liable for any transaction in which such director derived an improper personal benefit.
Voting Rights and Quorum Requirements
Under Cayman Islands law, the voting rights of
shareholders are regulated by the company’s articles of association and, in certain circumstances, the Companies Act. The articles
of association will govern matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve
any action or resolution at a meeting of the shareholders or board of directors. Under Cayman Islands law, certain matters must be approved
by a special resolution which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote or
such higher majority as is specified in the articles of association; otherwise, unless the articles of association otherwise provide,
the majority is usually a simple majority of votes cast.
In comparison, under Delaware law, unless otherwise
provided in the corporation’s certificate of incorporation, each shareholder is entitled to one vote for each share of stock held
by the shareholder. Unless otherwise provided in the corporation’s certificate of incorporation or bylaws, a majority of the shares
entitled to vote, present in person or represented by proxy, constitutes a quorum at a meeting of shareholders. In matters other than
the election of directors, with the exception of special voting requirements related to extraordinary transactions, the affirmative vote
of a majority of shares present in person or represented by proxy at the meeting and entitled to vote is required for shareholder action,
and the affirmative vote of a plurality of shares is required for the election of directors.
Mergers and Similar Arrangements
A merger of two or more constituent companies
under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization
by (a) a majority in number representing seventy-five percent (75%) in value of the shareholders voting together as one class and (b)
if the shares to be issued to each shareholder in the surviving company are to have the same rights and economic value as the shares held
in the constituent company, a special resolution of the shareholders voting together as one class.
A merger between a Cayman parent company and its
Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders. For this purpose, a subsidiary
is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating
security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient
shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The
exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the
merger or consolidation is void or unlawful.
There are statutory provisions that facilitate
the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each
class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three fourths in value
of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting,
or meetings convened for that purpose.
The convening of the meetings and subsequently
the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express
to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies
itself that:
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the company is not proposing to act illegally or ultra vires and the statutory provisions as to majority vote have been complied with;
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the shareholders have been fairly represented at the meeting in question;
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the arrangement is such as a businessman would reasonably approve; and
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act or that would amount
to a “fraud on the minority”.
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When a takeover offer is made and accepted by
holders of 90% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares
to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to
succeed unless there is evidence of fraud, bad faith or collusion.
Cayman Islands laws do not require that shareholders
approve sales of all or substantially all of a company’s assets as is commonly adopted by U.S. corporations.
If the arrangement and reconstruction are thus
approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value
of the shares.
Shareholders’ Suits
The Cayman Islands Grand Court Rules allow shareholders
to seek leave to bring derivative actions in the name of the Company against wrongdoers. In principle, we will normally be the proper
plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, who would in all
likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
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a company is acting or proposing to act illegally or beyond the scope of its authority;
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the act complained of, although not beyond the scope of its authority, could be effected duly if authorized
by more than a simple majority vote which has not been obtained; and
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those who control the company are perpetrating a “fraud on the minority.”
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Class actions and derivative actions generally
are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken
in accordance with applicable law. In such actions, the court generally has discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action.
Corporate Governance
Cayman Islands laws do not restrict transactions
with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve.
Under our amended and restated memorandum and articles of association, subject to any separate requirement for audit committee approval
under the applicable rules of the Nasdaq Stock Market, Inc. or unless disqualified by the chairman of the relevant board meeting, so long
as a director discloses the nature of his interest in any contract or arrangement which he is interested in, such a director may vote
in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at
such meeting.
Cayman Islands law does not limit the extent to
which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such
provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud
or the consequences of committing a crime. Our amended and restated memorandum and articles of association provide for the indemnification
of our directors, auditors and officers against all losses or liabilities incurred or sustained by him or her as a director, auditor or
officer of our company in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in
which he or she is acquitted provided that this indemnity may not extend to any matter in respect of any fraud or dishonesty which may
attach to any of these persons.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have
been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore
is unenforceable.
We are managed by our board of directors. Our
amended and restated memorandum and articles of association provide that the number of our directors shall not be less than two and there
shall be no maximum number of our directors unless our shareholders in the general meeting otherwise determine a maximum number. Currently
we have set our board of directors to have 5 directors. Any director on our board may be removed by way of an ordinary resolution of
shareholders. At each annual general meeting, one third of our directors for the time being (or, if their number is not a multiple of
three, the number nearest to but not greater than one-third) shall retire from office by rotation provided that the chairman of the Board
and/or the managing director of the Company shall not, whilst holding such office, be subject to retirement by rotation. Any vacancies
on our board of directors or additions to the existing board of directors can be filled by an ordinary resolution of our shareholders
or the affirmative vote of a majority of the remaining directors, although this may be less than a quorum where the number of remaining
directors falls below the minimum number fixed by our board of directors. Our directors are not required to hold any of our shares to
be qualified to serve on our board of directors.
Meetings of our board of directors may be convened
at any time deemed necessary by any one of our directors. Advance notice of a meeting is not required if each director entitled to attend
consents to the holding of such meeting.
A meeting of our board of directors at which a
quorum is present shall be competent to make lawful and binding decisions. At any meeting of our directors, each director is entitled
to one vote.
Questions arising at a meeting of our board of
directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting.
In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions
without a meeting by unanimous written consent.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have
been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore
is unenforceable.
Inspection of Corporate Records
Shareholders of a Cayman Islands company have
no general right under Cayman Islands law to inspect or obtain copies of a list of shareholders or other corporate records of the company.
However, these rights may be provided in the articles of association.
In comparison, under Delaware law, shareholders
of a Delaware corporation have the right during normal business hours to inspect for any proper purpose, and to obtain copies of list(s)
of shareholders and other books and records of the corporation and its subsidiaries, if any, to the extent the books and records of such
subsidiaries are available to the corporation.
Shareholder Proposals
The Companies Act does not provide shareholders
any right to bring business before a meeting or requisition a general meeting. However, these rights may be provided in the articles of
association.
Unless provided in the corporation’s certificate
of incorporation or bylaws, Delaware law does not include a provision restricting the manner in which shareholders may bring business
before a meeting.
Approval of Corporate Matters by Written Consent
The Companies Act allows a special resolution
to be passed in writing if signed by all the shareholders and authorized by the articles of association.
In comparison, Delaware law permits shareholders
to take action by written consent signed by the holders of outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting of shareholders.
Calling of Special Shareholders Meetings
The Companies Act does not have provisions governing
the proceedings of shareholders meetings that are usually provided in the articles of association.
In comparison, Delaware law permits the board
of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting
of shareholders.
Staggered Board of Directors
The Companies Act does not contain statutory provisions
that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles
of association.
In comparison, Delaware law permits corporations
to have a staggered board of directors.
Anti-takeover Provisions
Neither Cayman Islands nor Delaware law
prevents companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred, and removal of
directors only for cause and provisions that restrict the rights of shareholders to call meetings, act by written consent and submit
shareholder proposals.
C. Material Contracts.
In April 2014, we obtained a loan for a total
amount of RMB105.0 million from Shandong SNTON Optical Materials Technology Co., Ltd. (the “Shandong SNTON”) to pay off certain
short-term loans due to Bank of Communications Co., Ltd. The interest shall be calculated at the benchmark rate, plus an additional 20%
of the said benchmark rate, for the loan of the same term announced by the People’s Bank of China. The interest must be paid quarterly
and settled in full at the end of the year. As of December 31, 2014, the principal of this loan and the interest have not been paid. In
March 2015, we entered into a supplemental agreement with Shandong SNTON pursuant to which the parties agreed that we will pay off the
principal of this loan plus interest upon availability of new loans from banks or other financial institutions.
On June 23, 2020, Shandong SNTON Group Co., Ltd.
(the “SNTON Group”) transferred its equity in Hongkong Ruishang International Trade Co., Ltd. (“Hongkong Ruishang”)
to Shanghai Meicheng Enterprise Management Co., Ltd., (“Shanghai Meicheng”). SNTON Group previously held the Company’s
52.9% controlling outstanding ordinary shares (the “Shares”) indirectly through Hongkong Ruishang. As a result of this transfer,
there is no longer any relationship between the Company and Shandong SNTON.
According to the credit of assignment agreement
between Shandong SNTON and Shandong Shengjia Industrial Park Operation and Management (“Shandong Shengjia”), Shandong SNTON
transferred its right of credit in the Company to Shandong Shengjia. Shandong Shengjia further transferred it to Shanghai Meicheng. Due
to the transfer, the related accounts payable to Shanghai Meicheng as of December 31, 2020 was RMB73.6 million (US$11.3 million) after
paying back part of the loan.
We obtained three short-term loans from Bank of
Weifang in June 2020 and July 2020 for the total amount of RMB65.0 million (US$9.34 million). The principal amount of the above short-term
loans is repayable at the end of the loan period, and is secured by property, plant and equipment, and lease prepayments.
The credit line amounting to RMB95.0 million
(US$13.6 million) granted by Bank of Weifang was from July 2018 to July 2021. It was secured by a pledge of plant and land use right.
The credit line was used to purchase raw materials. As of December 31, 2020, the amount of credit line granted by Bank of Weifang was
all used.
D. Exchange Controls.
Chinese government imposes control over the convertibility
of RMB into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes a
daily exchange rate for RMB, or the PBOC Exchange Rate, based on the previous day’s dealings in the inter-bank foreign exchange
market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within
an authorized range above or below the PBOC Exchange Rate according to market conditions.
Pursuant to the Foreign Exchange Control Regulations
issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration
of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control,
or the Regulations, conversion of Renminbi into foreign exchange by foreign investment enterprises for current account items, including
the distribution of dividends and profits to foreign investors of joint ventures, is permissible upon the proper production of qualified
commercial vouchers or legal documents as required by the Regulations. Foreign investment enterprises are permitted to remit foreign exchange
from their foreign exchange bank account in China upon the proper production of, inter alia, the board resolutions declaring the distribution
of the dividend and payment of profits. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, security investment, is still subject to the approval of the State Administration of Foreign
Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and
added, among other things, an important provision, as Article 5 provides that the State shall not impose restrictions on recurring international
payments and transfers.
Under the Regulations, foreign investment enterprises
are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition,
foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from
SAFE.
Currently, foreign investment enterprises are
required to apply to SAFE for “foreign exchange registration certificates for foreign investment enterprises”. With such
foreign exchange registration certificates (which are granted to foreign investment enterprises, upon fulfilling specified conditions
and which are subject to review and renewal by SAFE on an annual basis) or with the foreign exchange sales notices from the SAFE (which
are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions at banks
authorized to conduct foreign exchange business to obtain foreign exchange for their needs.
E. Taxation.
United States Federal Income Taxation
General
The following is a summary of the material U.S.
federal income tax consequences of the acquisition, ownership, and disposition of our ordinary shares, based upon laws and relevant interpretations
thereof in effect as of the date of this Annual Report on Form 20-F, all of which are subject to change. This summary does not deal with
all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local or other
tax laws.
The discussion below of the U.S. federal income
tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is for U.S. federal income
tax purposes:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under
the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are
authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
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A beneficial owner of our ordinary shares that
is described above is referred to herein as a “U.S. Holder”. If a beneficial owner of our ordinary shares is not
described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes,
such owner will be considered a “Non-U.S. Holder”. The material U.S. federal income tax consequences applicable specifically
to Non-U.S. Holders of owning and disposing of our ordinary shares are described below under the heading “Non-U.S. Holders”.
This summary is based on the Internal Revenue
Code of 1986, as amended, or the Code, its legislative history, Treasury regulations promulgated thereunder, published rulings and court
decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive
basis.
This discussion does not address all aspects of
U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular,
this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning of Section 1221
of the Code, and does not address the potential application of the alternative minimum tax. In addition, this discussion does not address
the U.S. federal income tax consequences to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting rules
under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents of the United
States;
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persons that actually or constructively own 5% or more of our
voting shares;
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persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans
or otherwise as compensation;
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persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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controlled foreign corporations; or
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passive foreign investment companies.
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This discussion does not address any aspect of
U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed herein,
any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider the tax treatment
of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities. If a partnership (or other
entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ordinary shares, the U.S. federal
income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
This discussion also assumes that any distribution made (or deemed made) by us on our ordinary shares and any consideration received (or
deemed received) by a holder in consideration for the sale or other disposition of our ordinary shares will be in U.S. dollars.
We have not sought, and will not seek, a ruling
from the Internal Revenue Service , or the IRS or an opinion of counsel as to any U.S. federal income tax consequence described herein.
The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance
that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements
in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH
HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S.
TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject to the passive foreign investment company
or the PFIC rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of
any cash dividend paid on our ordinary shares. A cash distribution on our ordinary shares generally will be treated as a dividend
for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). Such dividend generally will not be eligible for the dividends-received deduction generally allowed
to domestic corporations in respect of dividends received from other domestic corporations. The portion of such distribution, if
any, in excess of such earnings and profits generally will constitute a return of capital that will be applied against and reduce (but
not below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally will be treated
as gain from the sale or other taxable disposition of such ordinary shares and will be treated as described under “Taxation
on the Disposition of Ordinary Shares” below.
With respect to non-corporate U.S. Holders, such
cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “-Taxation
on the Disposition of Ordinary Shares” below) provided that (a) our ordinary shares are readily tradable on an established securities
market in the United States or, in the event we are deemed to be a PRC “resident enterprise” under the relevant PRC tax laws,
we are eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People’s
Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC
Tax Treaty, (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable
year, and (c) certain holding period requirements are met. Under published IRS authority, shares are considered for purposes of clause
(a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges,
which presently include the NASDAQ Capital Market. Although our ordinary shares are currently listed and traded on the NASDAQ Capital
Market, U.S. Holders nonetheless should consult their own tax advisors regarding the availability of the lower rate for any cash dividends
paid in respect to our ordinary shares.
If a PRC income tax applies to any cash
dividends paid to a U.S. Holder on our ordinary shares, such tax may be treated as a foreign tax eligible for a deduction from such
holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability
(subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such dividends, a U.S. Holder
may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for
purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax
advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.
Taxation on the Disposition of Ordinary
Shares
Upon a sale or other taxable disposition of our
ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares.
The regular U.S. federal income tax rate on capital
gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term
capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 20%. Capital
gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for our ordinary shares exceeds
one year. The deductibility of capital losses is subject to various limitations.
If a PRC income tax applies to any gain from the
disposition of our ordinary shares by a U.S. Holder, such tax may be treated as a foreign tax eligible for a deduction from such holder’s
U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable
conditions and limitations). In addition, if such PRC tax applies to any gain, such U.S. Holder may be entitled to certain benefits under
the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements
of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC
tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be
a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross
income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively, a foreign
corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on
fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered
to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the composition (and estimated values)
of our assets and the nature of the income of us and our subsidiaries for our 2019 taxable year, we do not believe that we will be treated
as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status for our 2020 taxable year,
there can be no assurance in respect to our PFIC status for such taxable year. There also can be no assurance with respect to our
status as a PFIC for our current taxable year (2020) or any future taxable year. The determination of whether we are or have been a PFIC
is primarily factual, and there is little administrative or judicial authority on which to rely to make a determination of PFIC status.
Accordingly, the IRS or a court considering the matter may not agree with our analysis of whether we are or were a PFIC during any particular
year.
If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and, in the case of our ordinary
shares, the U.S. Holder did not make either a timely qualified electing fund, or QEF, election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) our ordinary shares, or a mark-to-market election, each as described below, such holder
generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of our ordinary shares; and
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any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S.
Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder
in respect of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s
holding period for the ordinary shares).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s
holding period for the ordinary shares;
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the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain
or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable
year in which we are qualified as a PFIC, will be taxed as
ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed
at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other
taxable year of the U.S. Holder.
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In general, if we are determined to be a PFIC,
a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF election (or
a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder generally will be required to include in income
its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current
basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends if
we qualified as a PFIC in that taxable year. However, a U.S. Holder may make a QEF election only if we agree to provide certain tax information
to such holder annually. At this time, we do not intend to provide U.S. Holders with such information as may be required to make a QEF
election effective.
Alternatively, if a U.S. Holder, at the close
of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election
in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first
taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) ordinary shares and for which we are determined
to be PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary shares as long as
such shares continue to be treated as marketable stock. Instead, in general, the U.S. Holder will include as ordinary income for each
year that we are treated as a PFIC the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year
over the adjusted tax basis in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess,
if any, of the adjusted tax basis of its ordinary shares over the fair market value of such shares at the end of its taxable year
(but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s
adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized
on a sale or other taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC will be treated as
ordinary income. Special tax rules may also apply if a U.S. Holder makes a mark-to-market election for a taxable year after the first
taxable year in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be PFIC.
The mark-to-market election is available only
for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, including
the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. While our ordinary shares currently are listed and traded on the NASDAQ Capital Market,
U.S. Holders nonetheless should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election
in respect to our ordinary shares under their particular circumstances.
If we are a PFIC and, at any time, have a foreign
subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares should be deemed to own a portion of the shares of such
lower-tier PFIC, and could incur liability for the deferred tax and interest charge described above if we receive a distribution
from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the
lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed
to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether
or not a market-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such
other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and mark-to-market
elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our
ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares under their
particular circumstances.
Additional Taxes
Under current law, U.S. Holders that are individuals,
estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, our ordinary shares, subject
to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on
their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder in respect
to our ordinary shares generally will not be subject to U.S. federal income tax, unless such dividends are effectively connected
with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax
treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).
In addition, a Non-U.S. Holder generally will
not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary shares unless
such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income
tax treaty is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition
and certain other conditions are met (in which case such gain from U.S. sources generally is subject to U.S. federal income tax at
a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States)
generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates applicable to a comparable
U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject
to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S federal
income tax purposes should apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder
(other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S.
Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain
information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any
gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS, and certain
holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our ordinary
shares.
Moreover, backup withholding of U.S. federal income
tax, at a rate of 24%, generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an exempt recipient)
and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient), in each case
who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate the
requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury,
on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather,
the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal
income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures
for obtaining an exemption from backup withholding in their particular circumstances.
Other Non-United States Taxation Treatment
The following discussion is a summary of certain
anticipated PRC and Cayman Islands tax consequences of an investment in our ordinary shares. The discussion does not deal with all possible
tax consequences relating to an investment in our ordinary shares and does not purport to deal with the tax consequences applicable to
all categories of investors, some of which (such as dealers in securities, insurance companies and tax-exempt entities) may be subject
to special rules. In particular, the discussion does not address the tax consequences under state, local and other national tax laws.
Accordingly, each prospective investor should consult its own tax advisor regarding the particular tax consequences to it of an investment
in our ordinary shares. The following discussion is based upon laws and relevant interpretations thereof in effect as of the date of this
Annual Report, all of which are subject to change.
China Taxation
There are significant uncertainties under the
new corporate income tax law of the PRC, or the New Tax Law, which became effective on January 1, 2008, regarding our PRC enterprise income
tax liabilities, such as a tax on any dividends paid to us by our PRC subsidiary. The New Tax Law also contains uncertainties regarding
possible PRC withholding tax on dividends we pay to our overseas shareholders and gains realized from the transfer of our shares by our
overseas shareholders.
We are a holding company incorporated in the Cayman Islands, which
indirectly holds, through Fuwei (BVI), our equity interest in Shandong Fuwei, our subsidiary and actual operating body in the PRC. Our
business operations are principally conducted through Shandong Fuwei.
Under the New Tax Law, enterprises established
under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered
to be PRC tax resident enterprises for tax purposes and subjected to the tax obligations of a PRC tax resident. If we or Fuwei
(BVI) is considered as a PRC tax resident enterprise under the New Tax Law, then our global income will be subject to PRC enterprise income
tax at the rate of 25%.
On April 22, 2009, the State Administration of
Taxation issued a Notice Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as PRC Resident
Enterprises Based on the De Facto Management Body Criteria (the “Tax Residency Notice”). Under the Tax Residency Notice, which
was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC resident enterprise and thus subject
to Enterprise Income Tax of 25% on its global income if it satisfies four conditions: (i) the company’s management team responsible
for daily operations are located in China, or the location where the management team carries out their responsibilities is in China; (ii)
finance and personnel decisions are made or need approval by institutions or people in China; (iii) the company’s major property,
accounting ledger, company seal and minutes of board meetings and shareholder meetings are kept in China; and (iv) at least half of the
members of the board of directors with voting rights or the management team habitually live in China.
Although the Tax Residency Notice applies only
to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals, the determining criteria
set forth in the Tax Residency Notice may reflect the State Administration of Taxation’s general position on how the “de facto
management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises or individuals. If we are deemed a PRC resident enterprise, we may be subject to the Enterprise Income
Tax at 25% on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries,
a 25% Enterprise Income Tax on our global income could significantly increase our tax burden and materially and adversely affect our cash
flow and profitability.
However, China-sourced income of foreign enterprises,
such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC tax.
Furthermore, the implementation rules of the New
Tax Law provide that (i) if the enterprise that distributes the dividends is domiciled in the PRC, or (ii) if gains are realized from
transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It
is not clear how “domicile” may be interpreted under the New Tax Law, and it may be interpreted as the jurisdiction where
the enterprise is a tax resident. Therefore, if we are considered as a PRC resident enterprise for PRC tax purposes, any dividends
we pay to our overseas shareholders as well as gains realized by such shareholders from the transfer of our shares may be regarded as
China-sourced income and, thus, may be subject to PRC tax.
If dividend payments from Shandong Fuwei and from
Fuwei (BVI) to us are subject to PRC withholding tax, our financial condition and results of operations and the amount of dividends available
to pay our shareholders may be adversely affected. Also, if dividends we pay to our overseas shareholders or gains realized by such
shareholders from the transfer of our shares are subject to PRC tax, it may materially and adversely affect your investment return and
the value of your investment in us. There is an income tax treaty in effect between the United States and China, so U.S. shareholders
may be entitled to certain benefits under such treaty.
Cayman Island Taxation
The Cayman Islands currently has no exchange control
restrictions. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation,
and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company
levied by the government of the Cayman Islands, save certain stamp duties which may be applicable, from time to time, on certain instruments
executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties.
Pursuant to section 6 of the Tax Concessions Law
(1999 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor in Cabinet:
(a) that
no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply
to the Company or its operations; and
(b) in
addition, that no tax is levied on profits, income, gains or appreciation or no tax which is in the nature of estate duty or inheritance
tax shall be payable by the Company:
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on or in respect of the shares, debentures or other obligations of the Company; or
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by way of withholding in whole or in part of any relevant payment as defined in section 6(3) of the Tax
Concession Law (1999 Revision).
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The undertaking is for a period of 20 years from
August 24, 2004.
F. Dividends and Paying Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required
to file reports and other information with the Securities and Exchange Commission. Specially, we are required to file annually a Form
20-F no later than six month after the close of each fiscal year, which is December 31. Copies of reports and other information, when
so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the
Securities and Exchange Commission at Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site at
www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic
filings with the SEC using its EDGAR system.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors
and principal shareholders are exempt from the reporting requirements pursuant to Section 16 of the Exchange Act.
Documents concerning the Company that are referred
to in this document may also be inspected at our office, which is at No. 387 Dongming Road, Weifang Shandong 261061, People’s Republic
of China.
I. Subsidiary Information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
Foreign exchange risk
We are exposed to the risk of foreign currency
exchange rate fluctuation. We have never used derivative instruments to hedge our exchange rate risks, do not plan to do so, and may not
be successful should we attempt to do so in the future. Nevertheless, we believe such risk is low as no foreign currency liabilities are
incurred and the principal operations are limited mainly to the market in China.
Our operating subsidiary, Shandong Fuwei’s,
functional currency is Renminbi while our functional currency is Hong Kong Dollars. Transactions in other currencies are recorded in Renminbi
at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are converted
into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations
as a component of current period earnings.
The China State Administration for Foreign Exchange,
under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation
governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under the Rules, once various
procedural requirements are met, Renminbi is convertible for current account transactions, including trade and services, but not for capital
account transactions, including direct investment, loan or investment in securities outside China, unless the prior approval of the State
Administration of Foreign Exchange of China is obtained. Although the Chinese government regulations now allow greater convertibility
of Renminbi for current account transactions, significant restrictions still remain. Currently, we are not involved in foreign exchange
transactions as all transactions are conducted in China are in Renminbi and all exporting business is completed in U.S. dollars.
The value of the Renminbi is subject to
changes in China’s central government policies and to international economic and political developments affecting supply and
demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of Renminbi into foreign currencies,
including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous
day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the
official exchange rate generally has been stable. The official exchange rate for the conversion of Renminbi into U.S. dollars
remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies,
including the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within a band against a basket of foreign
currencies.
We conduct substantially all of our operations
through Shandong Fuwei, and its financial performance and position are measured in terms of Renminbi. Any appreciation of the Renminbi
against the United States dollar would consequently have an adverse effect on our financial performance and asset values when measured
in terms of United States dollar. Our solutions are primarily procured, sold and delivered in China for Renminbi. The majority of our
revenues are denominated in Renminbi. Should the Renminbi appreciate against United States dollar, such appreciation could have a material
adverse effect on our profits and the foreign currency equivalent of such profits repatriated by the Chinese entities to us.
Interest rate risk
We are exposed to interest rate risk arising from
having short-term variable rate borrowings from time to time. Our future interest expense would fluctuate in line with any change in our
borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant
market risks is not material.
Inflation
According to the National Bureau of Statistics
of China, the change in Consumer Price Index in China was 2.5%, 2.9% and 2.1% in 2020, 2019 and 2018, respectively.
Credit and liquidity risks
We adopt a risk assessment model to our customer
credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment
history, creditworthiness and their financial position. All credit terms are approved by our finance department, in consultation with
our sales department. For extension of larger credit limits, approvals have to be sought from our credit committee which is made up of
members from our finance department, sales department and the CFO. Our finance department and sales department review our outstanding
debtor balances on a monthly basis and follow up with customers when payments are due. We believe that there would not material impact
risk to our operations in our credit and liquidity risk from sales and customers and other relevant market risks.
Item 12. Description of Securities Other than Equity Securities
A. Debt
Securities
Not applicable.
B. Warrants
and Rights
Not applicable.
C. Other
Securities
Not applicable.
D. American Depositary Shares
Not applicable.