Walcom Group Ltd - Final Results

A summary of the results for the period under review is set out below:

Operation and market review

As a result of a prolonged period of slumping farmgate pig prices, which caused numerous mid-sized pig farms to close down during 2014 and 2015, China’s pig population remained low in 2016.  Although the farmgate pig prices reached a relatively high level in 2016, the pig population did not recover to its previous level.  Accordingly, this had an adverse effect on demand for feedstuff.

Notwithstanding these unfavourable market conditions, the Company’s sales in the PRC improved by three per cent. to HK$26.4 million during 2016 when compared with the HK$25.7 million in 2015.

Sales in Thailand increased by three per cent. to HK$16.6 million in 2016 (2015: HK$16.1 million), representing approximately 36 per cent. (2015: 37 per cent.) of the Company’s total sales. The economy in Thailand has still not recovered fully from the change of government regime in 2014. The improvement in sales in Thailand was attributable to both increased consumption of the Company’s products by existing customers and from new customers from other member-countries of the Association of Southeast Asian Nations Economic Community (“AEC”).

Sales in Korea increased by 79 per cent. to HK$3.4 million in 2016 (2015: HK$1.9 million), representing approximately seven per cent. (2015: four per cent.) of the Company’s total sales. Following substantial sales and marketing efforts over the past two years, the Company’s products have gained recognition in Korea and the Board anticipates potential for further growth in this market.

The Group’s financial statements are reported in Hong Kong Dollars (“HKD”). During the period under review, the HKD currency appreciated approximately seven per cent. against China’s Renminbi (“RMB”). As approximately 57 per cent. of the Group’s sales was transacted in RMB, the appreciation of the HKD had an adverse exchange impact on the Group’s 2016 revenue. A similar adverse effect from exchange rate occurs in translating the Group’s net assets, including cash and cash equivalents, in Walcom’s PRC subsidiary into the HKD. This resulted in a decrease in the Group’s net asset value as reported in HKD as at the 2016 year end.

During the year, the Company’s Thai subsidiary acquired a piece of land in Thailand using internal resources, which caused a decrease in the Group’s cash level and an increase in its non-current assets.

Recent Developments

Professor Hong Xun Yang, the Company’s executive director responsible for sales and marketing in China, retired in February 2017.  In succession to Prof. Yang’s retirement, the Company appointed Mr. Paitoon Buddhinunta-opas, who is also the general manager of the Group’s subsidiary in Thailand, as the Company’s group sales director.  Mr. Paitoon has substantial experience in sales and marketing and is also knowledgeable about the Company’s products. In view of his successful record in Thailand. the Board believes that Mr. Paitoon will lead the Company’s sales to a new level.

In November 2016, the Company completed the acquisition of a plot of land in Thailand, which the Board intends to use to develop a feed manufacturing plant in the future. In view of the anticipated growth in sales of the Company’s products in the AEC in the coming years, the Directors are optimistic that the building of a manufacturing plant in Thailand, an AEC member-country, should benefit the Group’s trading terms due to the region’s trade treaties.

Patents

At the end of 2016 the Group held 47 granted patents in respect of:

• its core Cysteamine technology in China, North Korea, New Zealand, Ukraine, Russia, South Africa, Australia, India, South Korea and Vietnam;
• poultry feed in the UK, North Korea, Taiwan, Russia, China, Australia, Philippines and Thailand;
• dairy cow feed in New Zealand, the UK, Europe, Mexico, India, China, Russia, Australia and Malaysia;
• fish feed in the UK, Indonesia, Russia, China, Thailand, Philippines, Vietnam and Taiwan; and
• shellfish feed in Europe, Vietnam, Indonesia, Malaysia, Taiwan, Philippines and China.

Most of the patents for which the Company has applied in recent years have been granted. The Directors believe that there is wide patent coverage in jurisdictions where there is significant demands for the Company’s products.

Debt

As at the year end, the Group had a short-term bank loan of HK$2.2 million, which was used to finance the Group’s general working capital. Depending on the future sales development, the Company may need further bank financing for working capital purpose.

Dividend

The Directors do not recommend any dividend payment for the year ended 31 December 2016.

Annual General Meeting

Walcom’s annual general meeting (the “Annual General Meeting”) will be held at the offices of the Company’s solicitors, Reeds Smith Richards Butler, in Hong Kong at 2:30 pm on Wednesday 14 June 2017.  A notice of AGM will be sent to Walcom’s shareholders, along with the 2016 annual report and financial statements, during the second week of May 2017.

Outlook

During the past two years, the PRC government has adopted a policy of slower economic growth. This policy is expected to continue over the country’s period of structural transformation in the coming years.  The Board believes 2017 will be another challenging year for the Company. With the possibility of further tightening of monetary policy in the United States and the adverse impact of Brexit, the Board anticipates a volatile global economic outlook for 2017. The implementation of stricter environmental controls and regulations in China has caused a significant increase in the raw material costs, and hence the production costs, of the Company’s products. The increased production costs and operating expenses combined has an adverse impact on the Company’s gross profit margin. However, with the improving results in the Thai, Southeast Asian and Korean markets, together with the new leadership from the Company’s new group sales director, the Directors believe that the Company has the potential to achieve better results in 2017.

On behalf of the Board, I would like to express our gratitude to Prof. Hong Xun Yang, who served the Company as an executive director, Chief Technical Officer and Chief Operating Officer (PRC) before his retirement in February 2017. We would like to thank him for his contributions during his term of service and wish him well in his retirement.

I would also like to express our sincere thanks to the management team and staff, professional advisers and shareholders for their continued support and contributions during the year.

Frankie Y. L. Wong

Chairman

4 May 2017

Further enquiries:

Consolidated statement of profit or loss

For the year ended 31 December 2016

(Expressed in Hong Kong dollars)

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December 2016

(Expressed in Hong Kong dollars)

Consolidated balance sheet as at 31 December 2016

(Expressed in Hong Kong dollars)

Consolidated statement of changes in equity

For the year ended 31 December 2016

(Expressed in Hong Kong dollars)

Consolidated statement of cash flows

For the year ended 31 December 2016

(Expressed in Hong Kong dollars)

Notes to the consolidated financial statements

For the year ended 31 December 2016

(Expressed in Hong Kong dollars)

1      Publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory accounts.

The financial information for the year ended 31 December 2016 has been extracted from the Company’s financial statements to that date, which have received an unqualified auditors’ report.

2      Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”). These consolidated financial statements also comply with the applicable disclosure provisions of the AIM Rules for Companies of the London Stock Exchange. They have been prepared under the historical cost convention.

The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies.

       Interest rate risk

The Group’s interest rate risk arises from bank borrowings, bank overdrafts and deposits. Borrowings and deposits issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings and deposits issued at fixed rates expose the Group to fair value interest-rate risk.

At the balance sheet date, if interest rates had been increased or decreased by 25 basis-point and all other variables were held constant, the Group’s profit before income tax for the year ended 31 December 2016 would increase or decrease by HK$17,184 (2015: HK$28,409).

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for financial instruments in existence at that date.  The 25 basis-point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date.  The analysis performed on the same basis for 2015.

3      Other income

Note: During the years ended 31 December 2016 and 2015, the Group received subsidies from local government bodies in the PRC, which aimed at the technology development of the Group.

4      Net finance expense

5      Profit before income tax

        Profit before income tax is stated after charging the following items:-

(a)  Staff costs (including directors’ emoluments)                                                                               

(b)    Other items

6      Income tax expense

(a)    Taxation for the Company

        No provision for profits tax has been made for the Company as it is exempted from taxation in the British Virgin Islands.

        No deferred taxation has been provided as the Company has no material unprovided deferred tax assets or liabilities which are expected to be crystallised in the foreseeable future (2015: Nil).

(b)    Taxation for the Group

(i)     Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rate of taxation prevailing in the countries in which the Group companies operate. The income tax expense stated in consolidated statement of profit or loss and other comprehensive income represented the corporate income tax and foreign enterprise income tax arisen from the business of subsidiaries operating in Thailand and Shanghai respectively.

        Hong Kong Profits Tax is calculated at 16.5% (2015: 16.5%) of the estimated assessable profit for the year. However, no provision for Hong Kong profits tax has been made (2015: Nil) as the Group’s assessable profit subject to Hong Kong profits tax for the year is fully set-off by tax loss brought forward from last year.

Provision for foreign enterprise income tax (“FEIT”) in the People’s Republic of China (“PRC”) has been made at 25% (2015: 25%) as Shanghai Walcom Bio-Chem Co., Ltd. (“Shanghai Walcom”), a wholly owned subsidiary operating in Shanghai, has assessable profits for the year.

Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai Walcom is not granted tax relief whereby the applicable income tax rate was 25% for the years 2015 and 2016.

Thailand Corporate Income Tax is calculated at 20% (2015: 20%) of the net profit for the year.

(ii)    A reconciliation between the Group’s income tax expense and the accounting profit, at the applicable tax rate, is set out below :-

(iii)   A deferred tax asset amounting to HK$7,904,395 (2015: HK$8,211,086) in respect of tax losses of a subsidiary incorporated in Hong Kong of approximately HK$47,905,000 (2015: HK$49,764,000) has not been recognised in the financial statements as it is not certain that future taxable profit will be available against which these losses can be utilised.

7      Profit attributable to shareholders

Profit attributable to owners of the Company for the year ended 31 December 2016 dealt with in the financial statements of the Company was approximately HK$55,000 (2015: Loss of HK$129,000).

8      Dividends

The Company does not recommend the payment of any dividend for the year ended 31 December 2016 (2015: Nil).

9      Earnings per share

       There is no difference between basic and diluted earnings per share. The basic and diluted earnings per share for the year ended 31 December 2016 are calculated by dividing the Group’s profit attributable to owners of the Group of HK$1,263,286 (2015: HK$335,472) by the weighted average number of 68,834,388 ordinary shares (2015: 68,834,388 ordinary shares). The computation of diluted earnings per share does not assume the exercise of the Company’s outstanding share options because the exercise price of the options is higher than the average market price for the years ended 31 December 2016 and 2015.

10    Segment reporting

(a)    Segment reporting

       Information reported to the Executive Directors of the Company, being the chief operating decision makers (“CODM”), for the purpose of resource allocation and assessment of segment performance focuses on type of goods delivered.

       The executive directors have identified that, the Group has only one reportable operating segment, which is the manufacture, distribution and sales of chemical feed additive products. Since this is the only reportable operating segment of the Group, no further operating segment analysis thereof is presented.

(b)    Geographical information

       The following table sets out information about the geographical location of (i) the group’s revenue from external customers and (ii) the group’s fixed assets, intangible assets, goodwill and other current and non-current assets. The geographical location of customers is based on the location at which the services were provided or the goods delivered. The geographical location of the assets is allocated based on the operations of the segment and the physical location of the asset.

       (i)       Sales revenue by geographical location of customers

                                                                                                                            2016              2015

                                                                                                                             HK$              HK$

                    PRC                                                                                       26,447,044    25,690,774

                    Taiwan                                                                                                   -         136,094

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