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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| China New Energy Limited | LSE:CNEL | London | Ordinary Share | JE00B3RWLF12 | ORD 0.025P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 7.50 | 7.00 | 15.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMCNEL
RNS Number : 6693J
China New Energy Ltd
30 June 2017
30 June 2017
China New Energy Limited
("CNE" or "the Company")
Final Results for the Year Ended 31 December 2016
The Board of CNE (AIM:CNEL), the AIM quoted engineering and technology solutions provider to the bioenergy sector, presents its final results for the year ended 31 December 2016.
The full version of the report and accounts for the year ended 31 December 2016 is available from the Company's website www.chinanewenergy.co.uk and notification of posting of the accounts is being sent to all shareholders. Notice of the Company's AGM will be sent separately.
Mr. Yu commented, "We are very pleased to report that CNE has returned to profitability. We attribute this to the implementation of our strategy to diversify our product range and sales geographies and to the change of biofuel policy in China to favour domestic ethanol production. CNE has a strong order book and we look forward to continued and sustained growth".
For further information, please visit www.chinanewenergy.co.uk or contact:
Hot Features
Premium
China New Energy Limited www.chinanewenergy.co.uk
Richard Bennett rbennett@zkty.com.cn Tel: +44
7966 388374
Nick Brooks nick.brooks@hotmail.co.uk Tel: +44
7920 060218
Ivy Xu xuhj@zkty.com.cn Tel: +86
20 8705 9371
Cairn Financial Advisers Tel: +44
LLP (Nomad) 20 7213 0880
Jo Turner / Sandy Jamieson
Daniel Stewart and Co Tel: +44
20 7776 6550
David Lawman / Daphne
Zhang
CHAIRMAN'S STATEMENT
Financial Review
For the year ended 31 December 2016, the Group's total revenue was RMB78.6 million (c. GBP9.2million), an increase of 27.4% from RMB 61.7 million (c. GBP6.4million).
We are pleased to report that CNE has returned to profitability and that the business outlook is for continued and sustained growth.
The return to profitability is a direct result of our decision to diversify into new technologies and markets such as our contract with BioNeutra North America Inc for a isomaltooligosaccharide production line (RMB 11.2m), and contracts in China with existing customers such as the anhydrous ethanol EPC contract with Jilin Buoda alcohol group (RMB17 million), the implementation of our Shandong Hongda super grade alcohol project (RMB10.7) and several other small and medium-sized projects.
The gross profit for the year was RMB27 million (c. GBP3.2 million) up 252% from a gross profit of RMB7.7 million (c. GBP0.8 million).
For the year 2016, the company recorded a profit of RMB 3.6million (c. GBP0.4 million) reversing the previous net loss of RMB25.6 million (c. GBP2.7 million).
Sales Pipeline
We enter 2017 with a strong order book of RMB 292.7 million (c. GBP26.6 million) which we attribute to the implementation of a strategy to focus on international markets, the diversification of our products, and to renewed growth in the Chinese market that is driven by China's revised ethanol policy. The latter is the consequence of a relaxation of Chinese legislation to restrict the use of corn as a feedstock for ethanol production, which had been in place since 2006, and the resultant increase in corn-based ethanol projects in northern China. Notable contracts include:
Company Territory Value RMB Value c. GBP Supercare Group Ghana 84.16 m 9.8 m COFCO China 92.11 m 10.8 m YinshanHongzhan Industry Co., Ltd China 23.49 m 2.8 m Inner Mongolia Liniu Biochemical Co., Ltd China 13.5 m 1.6 m Jilin Boda Biochemical Co. Ltd China 76.04 m 8.9 m Heilongjiang WeiketeBiotechnology Co., Ltd China 1.8 m 0.2m
Products and Services
The Group principally provides EPC (Equipment, Procurement and Construction) services and VAS (Value Added Services) to ethanol and biobutanol producers. The EPC team primarily design and build commercial-scale biorefineries that convert feedstock into ethanol for both the biofuel and edible alcohol markets, whilst the VAS team provide services and technology to optimise the ethanol production at existing biorefineries.
CNE is a market leader in China at designing and building biorefineries that convert agricultural feedstock such as corn, cassava and sugarcane into ethanol for the fuel and food sectors. We have completed significantly more than 150 projects in China and around the world.
The market is now evolving as our customers in China and other developed nations seek to broaden the range of feedstocks to include non-food materials such as corn stover and municipal waste in 2(nd) Generation biorefineries. As a market leader in ethanol process technologies CNE is actively exploring the array of 2G technologies which are nearing commercialisation in order to extend the Company's solutions to respond to this important market trend.
Group Strategy and Business Development
The Group's strategy remains to:
1) Sell EPC contracts to develop biorefinery projects. The Company is focusing on fuel and food projects in emerging countries in Africa, Eastern Europe and Asia and exploring emergent 2(nd) Generation projects in China and other mature markets. The Board believes that focusing on both food grade and fuel grade ethanol provides an effective hedge against varying policies around the world towards biofuel implementation.
2) Sell VAS and maintenance services to existing and new customers. In particular, the board sees opportunities to sell energy efficiency technology to reduce operating costs for customers.
3) Maintain our cost leadership position in the industry through relentless focus on operational efficiency in order to support project developers competing in a (relatively) low crude oil price environment.
4) Where appropriate, explore acquiring equity interest in selected biorefinery projects. The board seeks to broaden from EPC contracts where income can be uneven, and develop operating businesses with consistent recurring income.
The business development team shall continue to focus on both domestic and international markets opportunities.
We had announced that we secured two contracts in Hungary. Up till now, the developer is still looking for finance and preparing for construction, so it remains uncertain whether these projects will proceed.
We also continue to make progress on our sales pipeline of EPC contracts, particular in South East Asia and Sub-Saharan Africa. CNE completed the construction of UBE's cassava-to-ethanol biorefinery in Thailand. Since then, UBE signed a MOU for the second project with CNE, however due to the present low oil price the project has not yet been initiated.
In Sub-Saharan Africa, CNE entered into a development partnership with Sunbird Bioenergy Africa ("Sunbird"). During the period, CNE reviewed Sunbird's project pipeline for the region and met with key stakeholders in Sierra Leone, Zambia and Zimbabwe. Sunbird continues to make progress with their projects and has now commenced operations in Sierra Leone, and has been awarded an investment license by the Zambian Development Agency for US$150 million to develop a cassava plantation and build a cassava to ethanol biorefinery in Luapula province. CNE is optimistic about tendering for the ethanol distillery and associated plant in due course, but is not currently considering investing in the projects. In addition CNE won a contract with Supercare Group in Ghana to build and install a food grade ethanol plant.
Outlook
In general, I am optimistic about the Group's prospects in 2017 and beyond. The change of ethanol policy in China and our focus on international markets and new products has resulted in our strongest order book and sales pipeline for several years. Consequently, I believe the outlook is sustained growth and continued profitability.
On behalf of the Board, I would like to extend my appreciation to our valued shareholders, supportive business partners and associates, insightful management and dedicated staff for all their contribution and commitment towards the Company. I would also like to thank the Board of Directors for their invaluable counsel in steering the Group through this exciting time.
Yu Weijun
Chairman
DIRECTOR'S REPORT
The Directors present their report, together with the audited financial statements for China New Energy Limited ('the Company') and its subsidiary undertakings (together 'the Group') for the year ended 31 December 2016.
Principal activities
The principal activity of the Company is an investment holding.
The Group's principal activity is providing turnkey technology solutions to manufacturers of ethanol, edible alcohol and acetic acid from a range of bio-resources including corn, sugarcane, cassava and other bio- resources.
Business review
The Group recorded an increase of 27.4% in revenue to RMB 78.6 million for the financial year 2016 ('FY2016'), reflecting the increased volume of contracts signed and executed. The total value of contracts secured in FY2016 was RMB 60.6 million (c. GBP7.1 million) and we are pleased to see this growth continue into the early part of 2017, showing a renewed activity level in the international ethanol markets.
Our contracts' gross profit also increased significantly to RMB27 million (c. GBP3.2 million) in FY2016 compared to a gross profit of RMB7.7 million (c. GBP0.8 million) in FY2015, with a higher gross profit margin compared to previous years.
A provision of bad debts in this year is RMB2.7 million (c. GBP0.32 million) and a contingent liability of RMB 10 million (c. GBP1.17 million), compared to a provision of RMB 9.0 million (c. GBP0.93 million) in FY2015.
We are delighted to be able to report a return to profit this year of RMB 3.6 million (c. GBP0.4 million), compared to a loss of RMB 25.6 million (c. GBP2.7 million) in FY2015, and a strong start to FY 2017 gives the Board belief that the company performance is on an upward trajectory with a good sales pipeline.
Risks and uncertainties
There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historic results. The Board monitors risks on an ongoing basis and implements appropriate procedures and processes to try and mitigate the adverse consequences of such risks.
The business faces three principal risks. Firstly, the Group needs to expand, retain and improve its current position in the industry. Future growth will be both organic and through potential acquisitions. There are a number of uncertainties relating to future acquisitions and there can be no guarantee that the Group will be able to expand as envisaged.
The Board of Directors meets regularly to review the future of the Group and potential areas for growth.
Secondly, the Group may need to raise additional capital to fund its future expansion. There can be no assurance that the Group will be able to obtain such funding.
The Board of Directors actively monitors its capital to ensure that the Group operates as a going concern and maintains sufficient flexibility to process planned wishes. This process considers the variety of capital and the sources from which it would be found.
Thirdly, the Group's operating subsidiaries' functional currency is Chinese Yuan ("RMB"), the fluctuations in RMB could have an adverse effect on the Group's business and operating results. The exchange rate used for 2016 is GBP1: RMB 8.54 (2015:GBP1: RMB 9.62).
Group's financial risk management objectives, policies and strategies are set out in Note 29. In addition, the risk profile and financial instruments of the Group are set out in Note 29 and 30.
Financial Review
For the year ended 31 December 2016, the Group's total revenue was RMB78.6 million (c. GBP9.2million), an increase of 27.4% from RMB 61.7 million (c. GBP6.4million).
We are pleased to report that CNE has returned to profitability and that the business outlook is for continued and sustained growth.
The return to profitability is a direct result of our decision to diversify into new technologies and markets such as our contract with BioNeutra North America Inc for a isomaltooligosaccharide production line (RMB 11.2m), and contracts in China with existing customers such as the anhydrous ethanol EPC contract with Jilin Buoda alcohol group (RMB17 million), the implementation of our Shandong Hongda super grade alcohol project (RMB10.7) and several other small and medium-sized projects.
The gross profit for the year was RMB27 million (c. GBP3.2 million) up 252% from a gross profit of RMB7.7 million (c. GBP0.8 million).
For the year 2016, the company recorded a profit of RMB 3.6million (c. GBP0.4 million) reversing the previous net loss of RMB25.6 million (c. GBP2.7 million).
Sales Pipeline
We enter 2017 with a strong order book of RMB 292.7 million (c. GBP26.6 million) which we attribute to the implementation of a strategy to focus on international markets, the diversification of our products, and to renewed growth in the Chinese market that is driven by China's revised ethanol policy. The latter is the consequence of a relaxation of Chinese legislation to restrict the use of corn as a feedstock for ethanol production, which had been in place since 2006, and the resultant increase in corn-based ethanol projects in northern China. Notable contracts include:
Company Territory Value Value
RMB c. GBP
84.16
Supercare Group Ghana m 9.8 m
92.11
COFCO China m 10.8 m
YinshanHongzhan Industry 23.49
Co., Ltd China m 2.8 m
Inner Mongolia Liniu
Biochemical Co., Ltd China 13.5 m 1.6 m
Jilin Boda Biochemical 76.04
Co. Ltd China m 8.9 m
Heilongjiang WeiketeBiotechnology
Co., Ltd China 1.8 m 0.2m
Products and Services
The Group principally provides EPC (Equipment, Procurement and Construction) services and VAS (Value Added Services) to ethanol and biobutanol producers. The EPC team primarily design and build commercial-scale biorefineries that convert feedstock into ethanol for both the biofuel and edible alcohol markets, whilst the VAS team provide services and technology to optimise the ethanol production at existing biorefineries.
CNE is a market leader in China at designing and building biorefineries that convert agricultural feedstock such as corn, cassava and sugarcane into ethanol for the fuel and food sectors. We have completed significantly more than 150 projects in China and around the world.
The market is now evolving as our customers in China and other developed nations seek to broaden the range of feedstocks to include non-food materials such as corn stover and municipal waste in 2(nd) Generation biorefineries. As a market leader in ethanol process technologies CNE is actively exploring the array of 2G technologies which are nearing commercialisation in order to extend the Company's solutions to respond to this important market trend.
Group Strategy and Business Development
The Group's strategy remains to:
1) Sell EPC contracts to develop biorefinery projects. The Company is focusing on fuel and food projects in emerging countries in Africa, Eastern Europe and Asia and exploring emergent 2(nd) Generation projects in China and other mature markets. The Board believes that focusing on both food grade and fuel grade ethanol provides an effective hedge against varying policies around the world towards biofuel implementation.
2) Sell VAS and maintenance services to existing and new customers. In particular, the board sees opportunities to sell energy efficiency technology to reduce operating costs for customers.
3) Maintain our cost leadership position in the industry through relentless focus on operational efficiency in order to support project developers competing in a (relatively) low crude oil price environment.
4) Where appropriate, explore acquiring equity interest in selected biorefinery projects. The board seeks to broaden from EPC contracts where income can be uneven, and develop operating businesses with consistent recurring income.
The business development team shall continue to focus on both domestic and international markets opportunities.
We had announced that we secured two contracts in Hungary. Up till now, the developer is still looking for finance and preparing for construction, so it remains uncertain whether these projects will proceed.
We also continue to make progress on our sales pipeline of EPC contracts, particular in South East Asia and Sub-Saharan Africa. CNE completed the construction of UBE's cassava-to-ethanol biorefinery in Thailand. Since then, UBE signed a MOU for the second project with CNE, however due to the present low oil price the project has not yet been initiated.
In Sub-Saharan Africa, CNE entered into a development partnership with Sunbird Bioenergy Africa ("Sunbird"). During the period, CNE reviewed Sunbird's project pipeline for the region and met with key stakeholders in Sierra Leone, Zambia and Zimbabwe. Sunbird continues to make progress with their projects and has now commenced operations in Sierra Leone, and has been awarded an investment license by the Zambian Development Agency for US$150 million to develop a cassava plantation and build a cassava to ethanol biorefinery in Luapula province. CNE is optimistic about tendering for the ethanol distillery and associated plant in due course, but is not currently considering investing in the projects. In addition CNE won a contract with Supercare Group in Ghana to build and install a food grade ethanol plant.
Outlook
In general, I am optimistic about the Group's prospects in 2017 and beyond. The change of ethanol policy in China and our focus on international markets and new products has resulted in our strongest order book and sales pipeline for several years. Consequently, I believe the outlook is sustained growth and continued profitability.
On behalf of the Board, I would like to extend my appreciation to our valued shareholders, supportive business partners and associates, insightful management and dedicated staff for all their contribution and commitment towards the Company. I would also like to thank the Board of Directors for their invaluable counsel in steering the Group through this exciting time.
Yu Weijun
Chairman
30 June 2017
The Directors present their report, together with the audited financial statements for China New Energy Limited ('the Company') and its subsidiary undertakings (together 'the Group') for the year ended 31 December 2016.
Principal activities
The principal activity of the Company is an investment holding.
The Group's principal activity is providing turnkey technology solutions to manufacturers of ethanol, edible alcohol and acetic acid from a range of bio-resources including corn, sugarcane, cassava and other bio- resources.
Business review
The Group recorded an increase of 27.4% in revenue to RMB 78.6 million for the financial year 2016 ('FY2016'), reflecting the increased volume of contracts signed and executed. The total value of contracts secured in FY2016 was RMB 60.6 million (c. GBP7.1 million) and we are pleased to see this growth continue into the early part of 2017, showing a renewed activity level in the international ethanol markets.
Our contracts' gross profit also increased significantly to RMB27 million (c. GBP3.2 million) in FY2016 compared to a gross profit of RMB7.7 million (c. GBP0.8 million) in FY2015, with a higher gross profit margin compared to previous years.
A provision of bad debts in this year is RMB2.7 million (c. GBP0.32 million) and a contingent liability of RMB 10 million (c. GBP1.17 million), compared to a provision of RMB 9.0 million (c. GBP0.93 million) in FY2015.
We are delighted to be able to report a return to profit this year of RMB 3.6 million (c. GBP0.4 million), compared to a loss of RMB 25.6 million (c. GBP2.7 million) in FY2015, and a strong start to FY 2017 gives the Board belief that the company performance is on an upward trajectory with a good sales pipeline.
Risks and uncertainties
There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historic results. The Board monitors risks on an ongoing basis and implements appropriate procedures and processes to try and mitigate the adverse consequences of such risks.
The business faces three principal risks. Firstly, the Group needs to expand, retain and improve its current position in the industry. Future growth will be both organic and through potential acquisitions. There are a number of uncertainties relating to future acquisitions and there can be no guarantee that the Group will be able to expand as envisaged.
The Board of Directors meets regularly to review the future of the Group and potential areas for growth.
Secondly, the Group may need to raise additional capital to fund its future expansion. There can be no assurance that the Group will be able to obtain such funding.
The Board of Directors actively monitors its capital to ensure that the Group operates as a going concern and maintains sufficient flexibility to process planned wishes. This process considers the variety of capital and the sources from which it would be found.
Thirdly, the Group's operating subsidiaries' functional currency is Chinese Yuan ("RMB"), the fluctuations in RMB could have an adverse effect on the Group's business and operating results. The exchange rate used for 2016 is GBP1: RMB 8.54 (2015:GBP1: RMB 9.62).
Group's financial risk management objectives, policies and strategies are set out in Note 29. In addition, the risk profile and financial instruments of the Group are set out in Note 29 and 30.
Results and dividends
The financial results of the Group are set out on page 12.
The directors do not recommend a dividend payment for the year.
Directors' interests
The following directors have held office during the period under review and their interests as at 31 December 2016, all of which are beneficial unless otherwise stated, whether direct or indirect, of the Directors and their families in the issued share capital of the Company and options over ordinary shares which had been granted, are as follows:
Number of % of issued
Name of Directors shares share capital
Yu Weijun * 90,932,440 20.46%
Tang Zhaoxing ** 48,000,000 10.80%
Richard Bennett - -
Nicholas Brooks*** 105,000 0.02%
* Held through Leader Vision Investments Limited and Tewin Capital Holding Limited
** Held through W B Nominees Limited
*** Held through HSBC Client Holdings Nominee (UK) Limited
In accordance with Article 22.2 of the Articles of Association of the Company, all directors shall not remain in office for longer than 2 years since their last election or re-election without submitting themselves for re-election. The directors will retire by rotation, for which one third of directors who have been in the office longest shall retire by rotation.
Directors' remuneration
2016 2015
RMB'000 RMB'000
Yu Weijun 548 487
Tang Zhaoxing 548 487
Richard Bennett 180 192
Nicholas Brooks (appointed 37 -
28 Oct 2016)
Total 1,313 1,166
======== ========
Employment policies
The Group pursues a policy of equal opportunities to all employees and potential employees. The Group has continued its policy of giving fair consideration to applications for employment made by disabled persons bearing in mind the requirements for skills and aptitude for the job. In the areas of planned employee training and career development, the Group strives to ensure that disabled employees receive equal treatment, including opportunities for promotion. Every effort is made to ensure that continuing employment and opportunities are also provided for employees who become disabled. It is the Group's policy to take the views of employees into account in making decisions, and wherever possible to encourage the involvement of employees in the Group's performance.
Payments to suppliers
The Group's policy for the year ended 31 December 2016 is to settle the terms of payment with suppliers when agreeing the terms of the business transactions:
-- To ensure that suppliers are aware of the terms of payments by the inclusion of the relevant terms in contracts; and
-- To pay in accordance with the Company's contractual and other legal obligations.
The number of days of trade purchases outstanding for the Group as at 31 December 2016 was 252 days (2015: 265 days).
Substantial shareholders
The Group had been notified of the following beneficial interest of 3% or more in its shares as at 8(th) June 2017
Number of % of issued
Name of shareholders shares share capital
Leader Vision Investments
Limited (Yu Weijun) 64,000,000 13.03%
Best Full Investments
Limited (Liang Hongtao) 48,000,000 9.77%
Vidacos Nominees Limited
(Tang Zhaoxing) 48,000,000 9.77%
Mr Lv Jingbin 46,808,809 9.53%
Jet-Air (HK) Limited 44,652,107 9.09%
Lynchwood Nominees Limited 38,125,140 7.76%
W B Nominees Limited
* 26,967,440 5.49%
Barclayshare Nominees
Limited 20,788,272 4.23%
* Held 26,932,440 shares for Mr Yu Weijun, aggregated % of issued share capital is 18.51%
Going concern
The financial statements have been prepared assuming the Group will continue as a going concern.
During the year ended 31 December 2016, the Group made a profit of RMB3.6million, including a provision on a court case of RMB10million (Note 14), research and development expense of RMB1.2million (Note 21). At the year-end date, the Group had net assets of RMB4.5million (2015: net liabilities of RMB5.7million), of which RMB13.9million (2015: RMB19.4million) was cash in bank (Note 11), including a restricted cash of RMB11.2m (2015: RMB8.1million).
At 30 April 2017, the Group has a cash balance of RMB 13.6 million, this has included a restricted cash of RMB11.2million.
The Directors consider that the Group has adequate resources, especially with sufficient cash in bank and proceeds of GBP702,132 arose from new shares issuance in February 2017, to continue in operational existence for at least the next twelve months from the date of approval of these financial statements.
The Group's existing business made operating profits to the year end 31 December 2016. Due to the uncertainty of the industry and economic slowdown in P.R. China, together with working capital risks, the Directors consider 2017 is still a very hard year, but will be improved. The Group is continuing to evaluate new funding options. Currently operations are partially relying on project payments in advance from customers and delaying payments to suppliers, which gives uncertainty in the future going concern. This is because there can be no guarantee that required funds are going to be raised and flexibility on receipts and payments are going to be continued. Consequently, a material uncertainty exists that may cast doubt on the Group's ability to continue to operate as planned and to be able to meet its commitments and discharge its liabilities in the normal course of business for a period not less than twelve months for the date of this report.
The financial statements do not include the adjustments that would result if the Group was unable to continue in operation.
Events after the reporting period
The Group has raised GBP702,132 by way of a subscription for in new ordinary shares at a price of 1.5p per share from funds managed by an institutional fund manager. The Group has issued 46,808,809 new shares represents 9.53% of the enlarged issued share capital (note 34).
Statement of directors' responsibilities
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors confirm that they have complied with the above requirements in preparing the financial statements.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group to enable them to ensure that the financial statements comply with the Companies (Jersey) Law, 1991. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Statement of disclosure to auditors
The directors have confirmed that:
-- so far as each director is aware, there is no relevant audit information of which the Company's auditors is unaware; and
-- each director has taken all the necessary steps he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
Auditors
In accordance with Article 109 of the Companies (Jersey) Law 1991, a resolution proposing that UHY Hacker Young LLP be re-appointed for the forthcoming year will be put to the Annual General Meeting.
By order of the Board
Yu Weijun
Director
CORPORATE GOVERNANCE STATEMENT
Principles of Corporate Governance
As a Group listed on AIM, the Group is not governed by the UK Code of Corporate Governance adopted by the London Stock Exchange ('the Code'), but is required to operate principles of good governance and best practice. Accordingly, the directors are committed to the Code and believe that an effective system of corporate governance supports the enhancement of shareholder value. These principles have been in place since the Group's listing on 23 May 2011.
The directors acknowledge the importance of the Code and intend to apply its principles so far as is practicable taking into account the Group's size and stage of development. However, the directors considered to update their FPP according to current business situation, also identified a few risk areas and are trying to make improvements.
The Group has two non-executive directors.
The directors have established an Audit Committee (the "Audit Committee"), a Remuneration Committee (the "Remuneration Committee") and an AIM Rules Compliance Committee (the "AIM Rules Compliance Committee") with formally delegated duties and responsibilities to operate.
Audit Committee
The Audit Committee, which comprises of Richard Bennett as Chairman, as well as Yu Weijun, determines and examines any matters relating to the financial affairs of the Group including the terms of engagement of the Group's auditors and, in consultation with the auditors, the scope of the audit. The Audit Committee receives and reviews reports from the management and the external auditor of the Group relating to the annual and interim accounts and the accounting and internal control systems of the Group. In addition, it considers the financial performance, position and prospects of the Group and ensures they are properly monitored and reported on.
Remuneration Committee
The Remuneration Committee, which comprises Yu Weijun and Richard Bennett, with Yu Weijun acting as Chairman, is responsible for making recommendations to the Board on the Group's framework of executive remuneration and its cost. The Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors and senior employees, including performance related bonus schemes, pension rights, option schemes and compensation payments.
The Board
The Board is responsible to shareholders for the proper management of the Group. The Non-Executive Director has a particular responsibility to ensure that the strategies proposed by the Executive Directors are fully considered. The Board has a formal schedule of matters reserved to it and has discussions on a frequent basis since its listing on the AIM Market. The Board is responsible for overall strategy, reviewing management accounts, approval of major capital expenditure projects and consideration of significant financing matters.
Directors
During the year, the Board comprised the Chairman, Yu Weijun, the Chief Executive Officer, Tang Zhaoxing, and London based Non-Executive Directors, Richard Bennett and Nicholas Brooks.
The directors comply with Rule 21 of the AIM Rules relating to directors' dealings and take all reasonable steps to ensure compliance by the Group's applicable employees. The Group has adopted and operates a share dealing code for directors, and employees in accordance with the AIM Rules.
Internal controls
The directors are responsible for the Group's system of internal controls and reviewing its effectiveness. The Board has designed the Group's system of internal controls in order to provide the directors with reasonable assurance that its assets are safeguarded, that transactions are authorised and properly recorded and that material errors and irregularities are either prevented or would be detected within a timely period. However, no system of internal controls can eliminate the risk of failure to achieve business objectives or provide absolute assurance against material misstatement or loss.
The key elements of the control systems in operation are:
-- The Board meets regularly with a formal schedule of matters reserved to it for decision.
-- It has put in place an organisational structure with clear lines of responsibility defined and with appropriate delegation of authority.
-- Established procedures for the planning, approval and monitoring of capital expenditure and information systems for monitoring the Group's financial performance against approved budgets and forecasts.
-- Departmental heads are required annually to undertake a full assessment process to identify and quantify the risks that face their businesses and functions and assess the adequacy of the prevention, monitoring and modification practices in place for those risks.
-- Significant risks and associated controls and monitoring procedures are reported regularly to the Board to enable the Directors to review the effectiveness of the system of internal controls.
Relations with shareholders
The Board attaches great importance to maintain a good relationship with shareholders. The Board regards the annual general meeting as a good opportunity to communicate directly with investors who are encouraged to make inquiries to officers of the Group.
INDEPENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF CHINA NEW ENERGY LIMITED
We have audited the financial statements of China New Energy Limited for the year ended 31 December 2016, which comprise the consolidated and Group statement of comprehensive income, the consolidated and Group statement of financial position, the consolidated and Group statement of cash flows, the consolidated and Group statement of changes in equity, and related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union (together, "IFRSs").
This report is made solely to the Group's members, as a body. Our audit work has been undertaken so that we might state to the Group's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group and the Group's members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Statement of responsibilities of those charged with governance, set out on page 7 and 8, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/auditscopeukprivate
Opinion of financial statements
In our opinion:
-- the financial statements give a true and fair view of the state of the Group's and of the parent Group's affairs as at 31 December 2016 and of the Group's loss and parent Group's loss for the year then ended;
-- the financial statements have been properly prepared in accordance with IFRS as adopted by the European Union; and
-- the financial statements have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991.
Emphasis of matter - Going concern
In forming our opinion on the financial statements, which is unqualified as described above, we have considered the adequacy of the disclosure made in directors' report, note 2.2 and note 30 to the financial statements concerning the Group's ability to continue as a going concern. The Group made a net profit of RMB3.6million during the year ended 31 December 2016. The Group has a cash balance of RMB13.9 million at year end with a restricted cash of RMB11.2million, currently operations are partially relying on project payments in advance from customers and delaying payments to suppliers. These conditions, along with other matters explained in note 2.2 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group's and Group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion:
-- proper accounting records have not been kept, or proper returns adequate for our audit have not been received from branches not visited by us; or
-- the financial statements are not in agreement with the accounting records and returns; or -- we have not received any information or explanation that was necessary for our audit.
Julie Wilson
(Senior Statutory Auditor)
For and on behalf of
UHY Hacker Young LLP
Quadrant House
4 Thomas More Square
London E1W 1YW
The maintenance and integrity of the China New Energy Limited website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website; and legislation governing the preparation and dissemination of financial statements may differ from one jurisdiction to another.
CONSOLIDATED AND GROUP STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2016
Group Company
Note As at 31 December As at 31 December
--------------------- ---------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Non-current assets
Property, plant
and equipment 5 4,774 5,887 - -
Intangible assets 6 14,541 12,150 - -
Investment in
subsidiary 7 - - 8,851 11,948
Investment - - - -
---------- --------- ---------- ---------
19,315 18,037 8,851 11,948
---------- --------- ---------- ---------
Current assets
Inventories 8 3,438 9,938 - -
Due from customers
for construction
contracts 9 35,713 30,240 - -
Trade and other
receivables 10 73,217 43,152 3,717 5,895
Cash and cash
equivalents 11 13,854 19,426 1,808 2,806
---------- --------- ---------- ---------
126,222 102,756 5,525 8,701
---------- --------- ---------- ---------
Current liabilities
Trade and other
payables 13 91,976 83,510 6,867 11,760
Due to customers
for construction
contracts 9 30,215 27,566 - -
Provision for
liabilities 14 10,000 6,680
Income tax payable 8,776 8,776
140,967 126,532 6,867 11,760
---------- --------- ---------- ---------
Net current assets/(liabilities) (14,745) (23,776) (1,342) (3,059)
========== ========= ========== =========
Non-current liabilities
Deferred tax
liabilities - - - -
---------- --------- ---------- ---------
- - - -
---------- --------- ---------- ---------
Net assets/(liabilities) 4,570 (5,739) 7,509 8,889
========== ========= ========== =========
Equity
Share capital 15 1,441 1,357 1,441 1,357
Share premium 15 62,905 56,696 62,905 56,696
Combination reserve 16 (33,156) (33,156) - -
Statutory reserve 17 12,328 12,328 - -
Warrant reserve 18 - 1,673 - 1,673
Accumulated losses (63,039) (68,323) (49,157) (44,095)
Foreign currency
translation reserve 19 24,091 23,686 (7,680) (6,742)
---------- --------- ---------- ---------
4,570 (5,739) 7,509 8,889
========== ========= ========== =========
The notes on pages 16 to 52 form part of these financial statements.
The financial statements were approved and authorised for issue by the board and were signed on its behalf on 30 June 2017.
Yu Weijun
Director
CONSOLIDATED AND GROUP STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2016
Group Company
Year ended Year ended
Note 31 December 31 December
-------------------- -------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Revenue 32 78,584 61,669 - -
Cost of sales (51,586) (54,002) - -
--------- --------- -------- ---------
Gross profit/(loss) 26,998 7,667 - -
Selling and distribution
expenses (4,868) (5,754) - -
Administrative
expenses (7,576) (11,091) (2,309) (1,984)
Other income 20 3,204 2,473 - 17
Other expenses 21 (9,696) (9,450) - -
Interest income 55 53 2
Finance costs 22 (1,549) (944) (917) 30
Provision - due
from customers 9 - (262) - -
Provision - trade
receivables 10 (966) (8,724) - -
Provision - Other
receivables 10 (1,749) 9 (1,665)
Impairment loss
on investment - - (1,846) (24,976)
Impairment loss
on PPE - - - -
Impairment on
inventories 23 (242) (400) - -
(Loss)/profit
before tax 3,611 (26,423) (6,735) (26,913)
Income tax expense 25 - 10 - -
Deferred tax expense 25 - 815 - -
--------- --------- -------- ---------
(Loss)/profit
for the year attributable
to owners of the
Group 3,611 (25,598) (6,735) (26,913)
========= ========= ======== =========
Other comprehensive
income
Items that may
be reclassified
subsequently to
profit or loss
Exchange difference:
On translating
foreign operations 405 50 (938) (190)
On cancellation
of EBT - - - -
--------- --------- -------- ---------
Other comprehensive
income for the
year 405 50 (938) (190)
--------- --------- -------- ---------
Total comprehensive
income for the
year attributable
to owners of the
Group 4,106 (25,548) (7,673) (27,103)
========= ========= ======== =========
Profit / (Loss)
per share (RMB)
Basic 26 0.009 (0.065)
Diluted 26 0.009 (0.065) Profit / (Loss) per share (Pence) Basic 0.097 (0.675) Diluted 0.097 (0.675)
Exchange rate GBP1: RMB8.9844 (2015: GBP1: RMB9.6309)
The notes on pages 16 to 52 form part of these financial statements.
All amounts are derived from continuing operations.
CONSOLIDATED AND GROUP STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Own
shares Foreign
& currency
Share Combination Statutory Warrant Accumulated translation
Group Share capital premium reserve reserve reserve losses reserve Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balance at 31
December 2014 1,325 54,925 (33,156) 12,328 1,673 (38,895) 23,636 21,836
================== ======= =========== ========= ======= =========== =========== ========
Loss for the
year - - - - - (25,598) - (25,598)
Other
comprehensive
income - - - - - - 50 50
Correction of
prior period
error - - - - - (3,830) - (3,830)
----------- --------- ------- ----------- ----------- --------
Total
comprehensive
income for the
year - - - - - (29,428) 50 (29,378)
----------- --------- ------- ----------- ----------- --------
Issue of
shares, net of
share issue
cost 32 1,771 - - - - - 1,803
Balance at 31
December 2015 1,357 56,696 (33,156) 12,328 1,673 (68,323) 23,686 (5,739)
================== ======= =========== ========= ======= =========== =========== ========
Profit for
the year - - - - - 3,611 - 3,611
Other
comprehensive
income - - - - - - 405 405
Transfer
warrant
reserve - - - - (1,673) 1,673 - -
Total
comprehensive
income for the
year - - - - (1,673) 5,284 405 4,016
----------- --------- ------- ----------- ----------- --------
Issue of
shares, net of
share issue
cost 84 6,209 - - - - - 6,293
- - - - -
Balance at 31
December 2016 1,441 62,905 (33,156) 12,328 - (63,039) 24,091 4,570
================== ======= =========== ========= ======= =========== =========== ========
Foreign
currency
Share Warrant Accumulated translation
Company capital Share premium reserve losses reserve Total
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balance at 31
December 2014 1,325 54,925 1,673 (17,182) (6,552) 34,189
============ ============= ============ ============ ============ ========
Profit for the
year - - - (26,913) - (26,913)
Other
comprehensive
income - - - - (190) (190)
------------ ------------- ------------ ------------ ------------ --------
Total
comprehensive
income for the
year - - - (26,913) (190) (27,103)
Issue of
shares, net of
share issue
cost 32 1,771 - - - 1,803
Redemption of
convertible
bonds - - - -
------------ ------------- ------------ ------------ ------------ --------
Balance at 31
December 2015 1,357 56,696 1,673 (44,095) (6,742) 8,889
============ ============= ============ ============ ============ ========
Loss for the
year - - - (6,735) - (6,735)
Other
comprehensive
income - - - - (938) (938)
Transfer
warrant
reserve - - (1,673) 1,673 - - --
Total
comprehensive
income for the
year - - - (5,062) (938) (7,673)
Issue of
shares, net of
share issue
cost 84 6,209 - - - 6,293
Balance at 31
December 2016 1,441 62,905 - (49,157) (7,680) 7,509
============ ============= ============ ============ ============ ========
CONSOLIDATED AND GROUP STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2016
Group
As at 31 Company
December As at 31 December
2016 2015 2016 2015
Operating activities RMB'000 RMB'000 RMB'000 RMB'000
(Loss)/profit before
tax 3,611 (26,423) (6,735) (26,913)
Adjustments for:
Depreciation and amortisation 5,6 2,565 2,409 - -
Bad debt provision (net) - 8,977 - -
Net loss/(gain) on disposal
of PPE 23 1,548 104 - -
Net loss/(gain) on disposal
of intangible assets 23 (2,359) -
Interest income (55) (53) (2) (2)
Interest expenses 22 537 535 - -
Impairment adjustment
on PPE 23 (366) - - -
Impairment of inventories 23 242 400 - -
Impairment of investment - - 1,846 24,976
Exchange difference 405 28 313 27
--------- --------- --------- ----------
Operating cash flows
before movements in
working capital 6,128 (14,023) (4,578) (1,912)
Decrease/(increase)
in inventories 6,258 1,502 - -
Decrease/(increase)
in due from customers
for construction contract (5,473) 7,835 - -
Decrease/(increase)
in trade and other receivables (27,065) 5,538 2,178 (2,264)
Increase/(decrease)
in trade and other payables 8,466 8,931 (4,893) 680
Increase/(decrease)
in due to customers
for construction contract 2,649 13,526 - -
Increase/(decrease)
in provision 3,320 (8,977) - -
--------- --------- --------- ----------
Cash generated in operations (5,717) 14,332 (7,293) (3,496)
Income tax refund - 10 - -
--------- --------- --------- ----------
Net cash generated from
operating activities (5,717) 14,342 (7,293) (3,496)
--------- --------- --------- ----------
Investing activities
Purchase of property,
plant and equipment (1,965) (181) - -
Expenditure on intangible
assets (3,701)
--------- --------- --------- ----------
Net cash used in investing
activities (5,666) (4,512) - -
========= ========= ========= ==========
Financing activities
Proceeds from borrowings - - - -
Repayment of borrowings - (6,600) - -
Proceeds from issuance
of shares 6,293 1,803 6,293 1,803
Interest received 55 53 2 2
Interest paid (537) (535) - -
Net cash from financing
activities 5,811 (5,279) 6,295 1,805
======== ======== ====== ========
Net (decrease)/increase
in cash and cash equivalents (5,572) 4,551 (998) (1,691)
Cash and cash equivalents
at beginning of year 19,426 14,875 2,806 4,497
Effect of exchange rate
changes - - - -
-------- -------- ------ --------
Cash and cash equivalents
at end of year 13,854 19,426 1,808 2,806
======== ======== ====== ========
Included in cash and cash equivalents, RMB11.2 million has been frozen under a court order (Note 11).
NOTES TO THE FINANCIAL STATEMENTS
1. General information
The Group (or "CNE") with registration number 93306 was incorporated in Jersey on 2 May 2006 as an investment holding Group. The Group is domiciled in Jersey with its registered office at Queensway House, Hilgrove Street, St Helier, Jersey JE1 1ES.
The principal activities of its main subsidiary, Guangdong Zhongke Tianyuan New Energy Science and Technology Co Ltd. ("ZKTY") are engaged in turnkey technology solutions to manufacturers of ethanol, edible alcohol and acetic acid from a range of bio-resources including corn, sugarcane, cassava and other bio-resources.
The principal place of business is located at No 4, Nengyuan Road, Wushan, Tianhe District, Guangzhou, People's Republic of China ("PRC").
The information contained in this announcement has been extracted from the Company's Report and Accounts for the financial year to 31 December 2016 and, as such, references to notes and page numbers may have changed. Shareholders should read the full report and accounts which can be found on the Company's website.
2. Summary of significant accounting policies 2.1. Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS") issued by the International Accounting Standards Board ("IASB"), including related Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC").
The consolidated financial statements incorporate the financial information of the Group and the Group. The subsidiaries are entities (including special purposes entities) over which the Group has the power to govern the financial operating policies, generally accompanied by a shareholding giving rise to the majority of the voting rights, as to obtain benefits from their activities.
The individual financial statements of each Group entity are measured and presented in the currency of the primary economic environment in which the entity operates (its functional currency). The consolidated financial statements of the Group are presented in Chinese Renminbi ("RMB"), which is the presentation currency for the consolidated and Group financial statements. The functional currency of the Group is British pound sterling ("GBP"). As the Group mainly operates in the PRC, RMB is used as the presentation currency of the Group. All financial information presented in RMB has been recorded to the nearest thousand.
The Group has adopted all relevant standards effective for accounting periods beginning on or after 1 January 2016.
As at end of the reporting year, the Group has not adopted the following standard as it is either not effective or not applicable to the Group's business.
Standards, amendments and interpretations (not yet endorsed by EU at 6 April 2017)
- IFRS 9 Financial Instruments (July 2014) - EU effective date 1 January 2018;
- IFRS 15 Revenue from Contracts with Customers (May 2014) including amendments to IFRS 15 EU effective date 1 January 2018;
- IFRS 14 Regulatory Deferral Accounts (January 2014); - IFRS 16 Leases (January 2016);
- Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (September 2014);
- Amendments to IAS 12: Recognition of Deferred Tax assets for Unrealised Losses (January 2016);
- Amendments to IAS 7: Disclosure Initiative (January 2016); - Classifications to IFRS 15: Revenue from Contracts with Customers (April 2016);
- Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions (June 2016);
- Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (September 2016);
- Annual Improvements to IFRS Standards 2014-2016 Cycle (December 2016);
- IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (December 2016);
- Amendments to IAS 40: Transfers of Investment Property (December 2016).
The group has not applied the above new and revised IFRSs that have been issued but are not yet effective. The directors anticipate that there's no potential impact of the application of the above.
2.2 Going concern
The financial statements have been prepared assuming the Group will continue as a going concern.
The Group's existing business made operating profits to the year end 31 December 2016.
Due to the uncertainty of the industry and economic slowdown in P.R. China, together with working capital risks, the Directors consider 2017 is still a very hard year, but will be improved. The Group is continuing to evaluate new funding options. Currently operations are partially relying on project payments in advance from customers and delaying payments to suppliers, which gives uncertainty in the future going concern. This is because there can be no guarantee that required funds are going to be raised and flexibility on receipts and payments are going to be continued. Consequently, a material uncertainty exists that may cast doubt on the Group's ability to continue to operate as planned and to be able to meet its commitments and discharge its liabilities in the normal course of business for a period not less than twelve months for the date of this report.
However, the Directors consider that the Group has adequate resources, especially with sufficient cash in bank and proceeds of GBP702,132 arose from new shares issuance in February 2017, to continue in operational existence for at least the next twelve months from the date of approval of these financial statements. The Group has a cash balance of RMB13.6 million at 30 April 2017, including a restricted cash of RMB11.2 million.
The financial statements do not include the adjustments that would result if the Group was unable to continue in operation.
2.3 Basis of consolidation
The subsidiaries are consolidated from the date on which control is transferred to the Group up to the effective date on which control ceases, as appropriate.
Intra-Group balances and transactions and any unrealised income and expenses arising from intra-Group transactions are eliminated on consolidation. Unrealised gains arising from transactions with associates and joint ventures are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no impairment.
The financial statements of the subsidiary companies are prepared for the same reporting period as that of the Group, using consistent accounting policies. Where necessary, the accounting policies of the subsidiaries are changed to ensure consistency with the policies adopted by other members of the Group.
2.4 Business combinations
2.4.1 Business combinations involving entities not under common control
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal Groups) that are classified as held-for-sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at the lower of cost and fair value less costs to sell.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised.
When the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired exceeds the cost of the business combination, and if, after reassessment, the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired remains higher than the cost of the business combination, the excess is recognised immediately in the statement of profit or loss.
The interest of minority shareholders in the acquiree is measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
2.4.2 Business combinations involving entities under common control
A business combination involving entities under common control is a business combination in which all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. For such common control business combinations, the merger accounting principles are used to include the assets, liabilities, results, equity changes and cash flows of the combining entities in the combined financial statements.
In applying merger accounting principles, financial statement items of the combining entities or businesses for the reporting period in which the common control combination occurs, and for any comparative periods disclosed, are included in the combined financial statements of the combined entity as if the combination had occurred from the date when the coming entities or businesses first came under the control of the controlling party or parties.
A single uniform set of accounting policies is adopted by the combined entity. Therefore, the combined entity recognises the assets, liabilities and equity of the combining entities or businesses at the carrying amounts in the combined financial statements of the controlling party or parties prior to the common control combination. The carrying amounts are included as if such combined entity's accounting policies and applying those policies to all periods presented. There is no recognition of any goodwill or excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combination. The effects of all transactions between the combining entities or businesses, whether occurring before or after the combination, are eliminated in preparing the combined financial statements of the combined entity.
The combination reserve represents the differences between the nominal amount of the share capital of the combining entities at the date on which it was acquired by the Group and the nominal amount of the share capital issued as consideration for the acquisition.
In determining the appropriate accounting treatment for the acquisition of ZKTY on 10th August 2006, the directors concluded that this transaction fell outside the scope of IFRS 3.
However, the transaction described above represents a combination of entities under common control.
In accordance with IAS 8 "Accounting Policies, changes in accounting estimates and errors", in developing an appropriate accounting policy, the directors considered the pronouncements of other standard setting bodies that applied at the time, specifically looking to accounting principles generally accepted in the United Kingdom ("UK GAAP") for guidance (FRS 6 - Acquisitions and mergers) which did not conflict with IFRS and reflect the economic substance of the transaction as a Group reconstruction.
Under that standard the assets and liabilities of both entities are recorded at book value, not fair value (although adjustments are made to achieve uniform accounting policies); intangible assets and contingent liabilities are recognised only to the extent that they were recognised by the legal acquiree in accordance with applicable IFRS, no goodwill is recognised, and any comparative amounts, if applicable, are restated as if the combination had taken place at the beginning of the earliest accounting period present.
Both entities had the same management as well as majority shareholders, illustrating common control.
On this basis the directors decided that it was appropriate to reflect the combination using merger accounting principles as a Group reconstruction under FRS 6 - acquisitions and mergers in order to give a true and fair view.
2.5 Investment in associates
The Group's investment in associates is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Under the equity method, the investment in the associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group's share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.
The statement of consolidated profit or loss reflects the share of the results of operations of the associate unless immaterial to the Group. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The share of profit of associates is shown on the face of the consolidated statement of profit or loss. This is the profit attributable to equity holders of the associate and therefore is profit after tax and non-controlling interests in the subsidiaries of the associates.
The financial statements of the associate are prepared for the same reporting period as the parent Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group's investment in its associates. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated statement of profit or loss.
Upon loss of significant influence over the associate, the Group measures and recognises any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in the consolidated statement of profit or loss.
2.6 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. The cost of property, plant and equipment includes its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Dismantlement, removal or restoration costs are included as part of the cost of property, plant and equipment if the obligation for dismantlement, removal or restoration is incurred as a consequence of acquiring or using the property, plant and equipment.
Depreciation of property, plant and equipment is calculated using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows:
Plant and machinery 5 - 10
years
Motor vehicles 5 - 10
years
Office equipment 3 - 5 years
Buildings and leasehold
improvement 20 years
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.
The estimated useful lives, residual values and depreciation methods are reviewed, and adjusted as appropriate, at the end of each financial year.
The gain or loss arising on disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of profit or loss.
Fully depreciated plant and equipment are retained in the financial statements until they are no longer in use.
2.7 Intangible assets
Computer software
Acquired computer software licenses are initially capitalised at cost which includes the purchase price (net of any discounts and rebates) and other directly attributable costs of preparing the software for its intended use. Direct expenditure which enhances or extends the performance of computer software beyond its specifications and which can be reliably measured is added to the original cost of the software. Costs associated with maintaining computer software are recognised as an expense as incurred.
Computer software licenses are subsequently carried at cost less accumulated amortisation and accumulated impairment losses. These costs are amortised to the statement of profit or loss using the straight-line method over their estimated useful lives of 3 -10 years.
Land use rights
Land use rights are capitalised and stated at cost less accumulated amortisation and impairment losses. Amortisation is provided on a straight line basis over the term of the rights, 50 years.
Patent rights
Patent rights acquired are initially recognised at cost less accumulated amortisation and accumulated impairment losses. These costs are amortised to the statement of profit or loss within administrative expenses using the straight-line method over 10-20 years. Internally generated patent rights are normally transferred from intangible assets once the patent is granted, and amortised on a straight-line basis over their estimated useful lives.
Internally generated intangible assets - research and development expenditure
Research expenditure is recognised as an expense as incurred.
Costs incurred on development projects are recognised as internally generated intangible assets only if all of the following conditions are met by the Group:
- the technical feasibility of completing the intangible assets so that it will be available for use or sales;
- its intention to complete the intangible asset and use or sell it; - its ability to use or sell the intangible assets; - it is probable that the intangible asset created will generate future economic benefits;
- the availability of adequate technical financial and other resources to complete the development and use or sell the intangible assets; and
- its ability to measure reliably the expenditure attributable to the intangible assets during its development.
Internally generated intangible assets are amortised on a straight-line basis over their estimated useful lives, from the date the intangible is ready for use. Amortisation charge is recognised in the statement of profit or loss within administrative expenses.
2.8 Impairment of tangible and intangible assets excluding goodwill
At the end of each financial year, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.
The recoverable amount of an asset or cash-generating unit is the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the statement of profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or the cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in the statement of profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
2.9 Income tax
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are not taxable or tax deductible in the current period. The Group's liability for current tax is calculated using tax rates (and tax laws) that have been enacted or substantively enacted in countries where the Group and its subsidiaries operate by the end of the financial year.
Deferred tax is recognised using the liability method for all temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and their tax bases. Deferred tax is not recognised for the temporary differences arising from the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction which is not a business combination and that affects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the end of the reporting period.
The measurement of deferred tax is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, at the end of the reporting period.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at the end of each reporting period and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
2.10 Financial instruments
Financial assets and financial liabilities are recognised on the Group's consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial instrument and allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) throughout the expected life of the financial instrument, (or where appropriate, a shorter period), to the net carrying amount of the financial instrument. Income and expenditure are recognised on an effective interest basis for debt instruments other than those financial instruments recognised at fair value through the statement of profit or loss.
Financial assets
Financial assets within the scope of IAS 39 are classified as either:
(i) financial assets at fair value through profit or loss ("FVTPL")
(ii) loans and receivables
(iii) held-to-maturity investments
(iv) available-for-sale financial assets
The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition and re-evaluates this classification at every reporting date.
All standard purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase the asset. Regular way purchases and sales are purchases or sales of financial assets that require delivery of the financial assets within the period generally established by regulation or convention of the market place concerned.
Financial assets are derecognised when the rights to receive cash flow from the financial assets have expired or have been transferred and the Group have transferred substantially all risks and rewards of ownership.
Financial assets at fair value through profit and loss ("FVTPL")
Financial assets are classified in this category if they are acquired for the purpose of selling in the short term. Gains or losses on investments held for trading are recognised in the statement of profit or loss.
Loans and receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in active market are classified as loans and receivables. Loans and receivables are measured at amortised cost, using the effective interest method less impairment. Interest is recognised by applying the effective interest method, except for short-term receivables when the recognition of interest would be immaterial.
Available-for- sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables, held to maturity investments or financial assets at fair value through profit and loss. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the statement of profit or loss.
The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the closure of business on the statement of financial position date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm's length market transactions, reference to the current market value, discounted cash flow analysis and option pricing models.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the investment have been affected.
For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis that share similar credit risk characteristics.
For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.
The carrying amount of the financial assets is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.
When available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period.
For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases which can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
In respect of available-for-sale equity securities, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income and accumulated under fair value adjustment reserve. In respect of available-for-sale debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition.
Derecognition of financial assets
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds receivables.
Financial liabilities and equity instruments
Classification as debt or equity
Financial liabilities and equity instruments issued by Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments are recorded at the proceeds received, net of direct issue costs.
Financial liabilities
Financial liabilities are classified as either financial liabilities or other financial liabilities at fair value through profit or loss other financial liabilities.
Financial liabilities are classified as fair value through profit or loss if the financial liability is either held for trading or it is designated as such upon initial recognition.
Other financial liabilities
Trade and other payables are initially measured at fair value, net of transaction costs, and are subsequently measured at amortised cost, where applicable, using the effective interest method, with interest expense recognised on an effective yield basis.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.
2.11 Inventories
Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
2.12 Contract to construct specialised equipment ("Construction contracts")
When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period ("percentage-of-completion method"). When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that are likely to be recoverable. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
Contract revenue comprises the initial amount of revenue agreed in the contract and variations in the contract work and claims that can be measured reliably. A variation or a claim is recognised as contract revenue when it is probable that the customer will approve the variation, or negotiations have reached an advanced stage such that it is probable that the customer will accept the claim.
The stage of completion is measured by reference to the contract costs incurred to date compared to the estimated total costs for the contract. Costs incurred during the financial year in connection with future activity on a contract are excluded from costs incurred to date when determining the stage of completion of a contract. Such costs are shown as construction contract work-in-progress at the end of the reporting period unless it is not probable that such contract costs are recoverable from the customers, in which case, such costs are recognised as an expense immediately.
At the end of the reporting period, the aggregated costs incurred plus recognised profit (less recognised loss) on each contract is compared against the progress billings. Where costs incurred plus the recognised profits (less recognised losses) exceed progress billings, the balance is presented as due from customers on construction contracts. Where progress billings exceed costs incurred plus recognised profits (less recognised losses), the balance is presented as due to customers on construction contracts.
2.13 Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments which are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value.
2.14 Leases
Operating Leases
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability and released to the profit or loss as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
2.15 Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the financial year, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Changes in the estimated timing or amount of the expenditure or discount rate are recognised in comprehensive income statement when the changes arise.
2.16 Retirement benefit costs
Defined contribution plans are post-employment benefit plans under which the Group pays fixed contributions into separate entities such as the social security plan in the PRC on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid.
Contributions to defined contribution plans are recognised as an expense in the profit or loss in the same financial year as the employment that gives rise to the contributions.
2.17 Compound financial instruments
Compound financial instruments issued by the Group comprise convertible bonds that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair values.
The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.
Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
2.18 Revenue recognition
Revenue from construction contracts
The Group's policy for recognition of revenue from construction contracts (EPC and VAS) is described in note 2.12 above and Note 32.
Interest income
Interest income is accrued on a time basis, by reference to the principal outstanding and at the applicable effective interest rate.
Income from sale of scrap materials
Income from sale of scrap materials is recognised upon the transfer of significant risks and rewards of ownership of the goods to customers, which generally coincides with delivery and acceptance of the goods sold.
2.19 Foreign currencies
In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency are recorded at the rate of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising from the settlement of monetary items, and on the translation of monetary items, are included in profit or loss for the reporting year. Exchange difference arising on the translation of non-monetary items carried at fair value are included in profit or loss for the reporting period except for the differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. Exchange differences arising from such non-monetary items are also recognised directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations (including comparatives) are expressed in Renminbi using exchange rates prevailing at the end of the reporting period. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group's translation reserve. Such translation differences are recognised in profit or loss in the period in which the foreign operation is disposed of.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities (including monetary items that, in substance, form part of the net investment in foreign entities), are taken to the foreign currency translation reserve.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.
2.20 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors and the chief executive officer who make strategic decisions.
3. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are described in note 2, management made judgements, estimates and assumptions about the carrying amounts of assets and liabilities that were not readily apparent from other sources. The estimates and associated assumptions were based on historical experience and other factors that were considered to be reasonable under the circumstances. Actual results may differ from these estimates.
These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
3.1 Critical judgements in applying the entity's accounting policies
The following are the critical judgements, apart from those involving estimations (see below) that management has made in the process of applying the Group's accounting policies and which have the significant effect on the amounts recognised in the financial statements.
Impairment of financial assets
The Group follows the guidance of IAS 39 - Financial Instruments: Recognition and Measurement, in determining whether a financial asset is impaired. This determination requires significant judgement, the Group evaluates, among other factors, the duration and extent to which the fair value of a financial asset is less than its cost and the financial health of and near-term business outlook for the financial asset, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.
Deferred tax assets
Deferred tax assets are recognised to the extent that it is probable that the taxable profit will be available against which the deferred tax asset recognised can be utilised. Management's judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future tax planning strategies.
Impairment of construction in progress
Provision for impairment on construction in progress is made when the construction project is suspended for a long period; the construction project is technically and physically obsolete and its economic benefits to the Group is uncertain; or other evidences can prove the existence of the decline in value of construction project. An impairment loss is recognised individually for the shortfall of the recoverable amount of construction in progress below its carrying amount. The carrying amounts of the Group's construction in progress at the reporting period are disclosed in Note 9.
3.2 Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the financial year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Allowance for trade and other receivables
Management reviews its loans and receivables for objective evidence of impairment at least quarterly. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy, and default or significant delay in payments are considered objective evidence that a receivable is impaired. In determining this, management makes judgement as to whether there is observable data indicating that there has been a significant change in the payment ability of the debtor, or whether there have been significant changes with adverse effect in the technological, market, economic or legal environment in which the debtor operates in.
Where there is objective evidence of impairment, management makes judgement as to whether impairment in value should be recorded in the profit or loss. In determining this, management uses estimates based on historical loss experience for assets with similar credit risk characteristics. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between the estimated loss and actual loss experience.
The allowance policy for doubtful debts of the Group is based on the ageing analysis, management's ongoing evaluation of the recoverability of the outstanding receivables, and engineering and project briefing. Due to the nature of the business and current economic situation, the debtors' days are normally a few months or even longer. Therefore, a considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the assessment of the creditworthiness and the past collection history of each customer. If the financial conditions of these customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The carrying amounts of the Group's trade and other receivables including impairment are disclosed in Note 10. The current market conditions indicate that there is material uncertainty regarding the recoverability of trade receivables.
Construction contracts
Where the outcome of a construction contract can be estimated reliably, the Group recognises revenue and costs by reference to the stage of completion of the contract. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent it is probable that contract costs incurred will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
The Group's accounting approach reflects a sound judgement as potential losses on contract are being considered and reflected with its probability immediately upon occurrence while contract revenue which cannot be estimated reliably is realised only after confirmed by written agreement. The carrying amounts of the Group's construction contracts due from (to) customers at the end of the reporting period are disclosed in note 9 including allowance for impairment. There is material uncertainty to fully recover costs of each contract.
Impairment of intangible assets
Determining whether intangible assets are impaired requires an estimation of the value in use of the cash-generating units ("CGU") to which intangible assets have been allocated. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value. No impairment loss was recognised during the financial year. The carrying amount of the intangible assets at the end of the reporting period is RMB14.5million (2015: RMB12.2million).
Depreciation of property, plant and equipment
The Group depreciates the property, plant and equipment, using the straight-line method, over their estimated useful lives after taking into account of their estimated residual values. The estimated useful life reflects management's estimate of the period that the Group intends to derive future economic benefits from the use of the Group's property, plant and equipment. The residual value reflects management's estimated amount that the Group would currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, as if the asset were already of the age and in the condition expected at the end of its useful life. Changes in the expected level of usage and technological developments could affect the economics, useful lives and the residual values of these assets which could then consequentially impact future depreciation charges. The carrying amounts of the Group's property, plant and equipment at the period end is RMB4.8 million (2015: RMB5.9 million) after an impairment loss of Nil recognised in the period.
Net realisable value of inventories
Net realisable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These estimates are based on the current market condition and the historical experience of manufacturing and selling products of similar nature. It could change significantly as a result of changes in customer demand and competitor actions in response to severe industry cycle. Management reassesses these estimates at each period end. The carrying amount of the Group's inventories at the year- end is RMB3.4 million (2015: RMB9.9 million) after inventories written down of RMB0.2 million (2015: RMB0.4 million).
Impairment of investment
The Group follows the guidance of IAS 36 to determine when the investment is impaired. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the investment is less than its cost and the recoverable amounts, including factors such as market conditions, changes in business, operational strategies and significant changes expected to take place in the near future.
The directors are of the opinion that the Group's interest in the investee will not generate profit and cash flows in the near future accordingly impairment provision is required against the carrying value on the investment. The carrying amounts of the Group's investment are disclosed in Note 7.
4. Comparative figures and reclassification
Certain reclassifications have been made to the prior year's financial statements to enhance comparability with the current year's results.
5. Property, plant and equipment - Group
Plant and Motor Office equipment Buildings Total
machinery vehicles &Leasehold
improvements
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Cost
At 1 January
2015 4,226 8,865 672 6,247 20,010
Additions 16 - 165 - 181
Disposals (1,044) (1,000) (39) - (2,083)
At 31 December
2015 3,198 7,865 798 6,247 18,108
---------- --------- ---------------- ------------- -------
Additions 29 1,900 36 - 1,965
Impairment adjustment 366 366
Disposals - (1,740) - - (1,740)
---------- --------- ---------------- ------------- -------
At 31 December
2016 3,227 8,391 834 6,247 18,699
========== ========= ================ ============= =======
Accumulated depreciation
At 1 January
2015 2,464 5,649 442 3,555 12,110
Charge for the
year 695 1,237 127 31 2,090
On disposals (992) (950) (37) - (1,979)
At 31 December
2015 2,167 5,936 532 3,586 12,221
---------- --------- ---------------- ------------- -------
Charge for the
year 636 1,157 72 31 1,896
On disposals - (192) - - (192)
---------- --------- ---------------- ------------- -------
At 31 December
2016 2,803 6,901 604 3,617 13,925
========== ========= ================ ============= =======
Carrying value
At 31 December
2016 424 1,490 230 2,630 4,774
At 31 December
2015 1,031 1,929 266 2,661 5,887
6. Intangible assets - Group
Land
Computer Technology use Development
software Patent knowhow rights cost Total
RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Cost
As at 1
January
2015 60 1,283 - 3,613 4,208 9,164
Additions - 132 - - 4,199 4,331
Disposals - - - - - -
Transfer - 1,493 - - (1,493) -
As at 31
December
2015 60 2,908 - 3,613 6,914 13,495
------------------ ---------------------- ------------------ ------------------ ------------------ ----------------------
Additions - - - - 3,701 3,701
Disposals - (722) - - - (722)
Transfer - 4,750 - - (4,750) -
As at 31
December
2016 60 6,936 - 3,613 5,865 16,474
================== ====================== ================== ================== ================== ======================
Accumulated
amortisation
As at 1
January
2015 45 305 - 676 - 1,026
Charge for
the period 6 230 - 83 - 319
On disposals - - - - - -
As at 31
December
2015 51 535 - 759 - 1,345
------------------ ---------------------- ------------------ ------------------ ------------------ ----------------------
Charge for
the period 6 580 - 83 - 669
On disposals - (81) - - - (81)
As at 31
December
2016 57 1,034 - 842 - 1,933
================== ====================== ================== ================== ================== ======================
Carrying
value
At 31
December
2016 3 5,902 - 2,771 5,865 14,541
At 31
December
2015 9 2,373 - 2,854 6,914 12,150
The Group obtained the right to occupy the land at Continental High & New Technology Industry Development Zone, Boluo, Guangdong Province, PRC through its subsidiary undertaking Boluo (Note 7).
The land use rights were acquired in July 2000 for a period of 50 years. On 12 Oct 2010 Boluo was acquired by ZKTY (Note 7) and the land use rights were revalued to reflect to the market value. The revaluation amount at date of acquisition was treated as "deemed cost". The remaining period of amortisation of the land use rights is approximate 35 years.
The Group undertakes development projects to improve and upgrade its technology and engineering solutions in the field of bioethanol production. Once the certificate has been obtained, the development costs incurred will be transferred to patent.
The intangible assets are tested for impairment as part of the cash generating unit to which it belongs, and no indication in request for an impairment of the intangible assets.
Amortisation of intangible assets is included in the profit or loss within administrative expenses.
7. Investment in subsidiary - Company
RMB'000
Cost
At 1 January 2015 53,856
Exchange differences (353)
--------
At 31 December 2015 53,503
Exchange differences (6,012)
--------
At 31 December 2016 47,491
========
Accumulated impairment losses
At 1 January 2015 16,715
Impairment 25,114
Exchange differences (274)
--------
At 31 December 2015 41,555
Exchange differences (4,761)
Impairment 1,846
--------
At 31 December 2016 38,640
========
Carrying amount
At 31 December 2016 8,851
At 31 December 2015 11,948
The details of the subsidiary are as follows:
Effective equity
Name / place interest held
of incorporation Principal activity by the Group
As at 31 December
Intermedia parent
Group 2016 2015
------------------ -------
Guangdong
Zhongke Tianyuan
New Energy
Science and
Technology Provision of engineering,
Co Ltd ("ZKTY") procurement and
/ PRC construction services
Subsidiary to ethanol producers 100% 100%
Fabrication and
manufacture of
Guangdong equipment in accordance
Boluo Jiuneng with project requirements
High Technology and designs of
Engineering ZKTY and provision
Co Ltd ("Boluo") of services to
/ PRC ZKTY 100% 100%
8. Inventories
Group
As at 31 December
2016 2015
RMB'000 RMB'000
Raw materials 2,404 4,559
Work-in-progress 1,034 5,379
---------- ---------
3,438 9,938
========== =========
9. Due from (to) customers for construction contracts
Group
As at 31 December
----------------------
2016 2015
RMB'000 RMB'000
Aggregate costs incurred plus
profits less
recognised losses to date 396,622 349,172
Less: progress billings (379,830) (328,791)
----------- ---------
16,792 20,381
Advance from customers - (6,413)
Allowance for impairment (11,294) (11,294)
5,498 2,674
=========== =========
Presented as:
Due from customers for construction
contracts 35,713 30,240
Due to customers for construction
contracts (30,215) (27,566)
----------- ---------
5,498 2,674
=========== =========
Movements in allowance for impairment on amount due from customers for construction contracts are as follows:
Group
As at 31 December
---------------------
2016 2015
RMB'000 RMB'000
At beginning of the year 11,294 11,032
Allowance for impairment - 262
At end of the year 11,294 11,294
========== =========
10. Trade and other receivables
Group Company
As at 31 December As at 31 December
------------------------------------------------ ---------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Current
Trade receivables 129,276 105,242 - -
Allowance for impairment (79,510) (78,544) - -
49,766 26,698 - -
Other receivables
Others receivables 9,768 7,791 **85 2,264
Allowance for impairment - (2,262) - -
Advance to suppliers 7,063 6,195 - -
Allowance for impairment (4,246) (3,728) - -
-------- -------- ---------- ---------
12,585 7,996 85 2,264
Due from Group undertakings - - 3,631 3,631
Due from related
parties *10,595 8,019 - -
Notes receivables 100 400 - -
Prepayments 171 39 - -
-------- -------- ---------- ---------
23,451 16,454 3,716 5,895
73,217 43,152 3,716 5,895
======== ======== ========== =========
Non-current
Trade receivables - 3,523 - -
Discount on trade
receivables - - - -
Allowance for impairment - (3,523) - -
-------- -------- ---------- ---------
- - - -
The carrying amounts of trade and other receivables approximate their fair values.
* The amounts due from related parties are non-trade, unsecured, non-interest bearing and repayable on demand.
** This RMB85K is a legal fee paid in Feb 2016 and due from Addax Bioenergy (SL) Limited. The majority shareholder (75.1%) of Addax Bioenergy (SL) Limited is Grey Reach Investment Limited, which Richard Bennett is one of the four directors, appointed in July 2016.
Movements in allowance for doubtful debts in trade receivables are as follows:
Group
As at 31 December
---------------------
2016 2015
RMB'000 RMB'000
At beginning of the year 78,544 72,886
Allowance during the year 966 5,658
At end of the year 79,510 78,544
Movements in allowance for doubtful debts in advance to suppliers and other receivables are as follows:
Group
As at 31 December
---------------------
2016 2015
RMB'000 RMB'000
At beginning of the year 5,990 5,999
Allowance during the year 1,749 842
Reversal during the year (3,493) (851)
At end of the year 4,246 5,990
The Group's trade receivables that are past due but not impaired are as follows:
As at 31 December
--------------------
2016 2015
RMB'000 RMB'000
Less than 30 days 3,362 6,780
31-60 days 5,656 382
60-1 year 28,162 13,500
1-2 years 10,343 5,000
Over 2 years 2,243 1,036
49,766 26,698
11. Cash and cash equivalents
Group Company
As at 31 December As at 31 December
---------------------------------- ----------------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Cash at bank
and on hand 13,854 19,426 1,808 2,806
Within the cash and cash equivalents, RMB11.2 million (2015: RMB8.1 million) has been frozen under a court order.
The currency profiles of the Group's cash and cash equivalents at the end of the year are disclosed in Note 29.
12. Non-cash transactions
During the year, the Group entered into the following non-cash investing activities which are not reflected in the consolidated cash flow statements:
-- Proceeds (RMB980K) in respect of disposal of 3 cars had not been received in cash, to net off against accounts payables
-- Proceeds (RMB3,000K) in respect of disposal of a patent had not been received in cash, to pay off the amount due to related party, ZhongKeTianYuan Green Foods Co., Limited (Note 28).
13. Trade and other payables
Group Company
As at 31 December As at 31 December
--------------------- -----------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Trade payables 35,664 39,157 - -
Other payables
* Advance from customer 15,246 2,538 - -
* Other payables and accruals 15,270 24,682 277 427
* VAT payables 24,253 15,371 - -
* Due to Group undertakings - - 5,656 10,185
* Due to directors 1,543 1,762 934 1,148
91,976 83,510 6,867 11,760
========= ========== ========== =========
The carrying amounts of trade and other payables approximate their fair values.
14. Provision for liabilities
Group Company
As at 31 December As at 31 December
--------------------- -----------------------
2016 2015 2016 2015
RMB'000 RMB'000 RMB'000 RMB'000
Provisions for
court case 10,000 6,680 - -
========== ========= ========== =========
Movements in provisions are as follows:
Group
As at 31 December
---------------------
2016 2015
RMB'000 RMB'000
At beginning of the year 6,680 180
Settlement of the court case (4,290) -
Reversal of last year's over
provision (2,390) -
Allowance during the year 10,000 6,500
At end of the year 10,000 6,680
Current year's provision of RMB10million was provided for a customer, Tangshan Chenhong due to dispute on construction work quality based on contract. Last year's provision was fully settled and over provision has been reversed accordingly.
15. Share capital - Group
Number
of Share Capital Share premium
Shares GBP'000 RMB'000 GBP'000 RMB'000
As at 31 December
2013 348,962,101 1,214 49,118
============ ========= =========
Placing on 29
Sept 2014 44,652,107 11 111 584 5,807
As at 31 December
2014 393,614,208 1,325 54,925
Placing on 29
Dec 2015 13,333,333 3 32 197 1,886
Less: share issue
costs (12) (115)
============ ========= =========
As at 31 December
2015 406,947,541 1,357 56,696
============ ========= =========
Placing on 30
June 2016 37,500,000 9 84 741 6,610
Less: share issue
costs (45) (401)
============ ========= =========
As at 31 December
2016 444,447,541 1,441 62,905
============ ========= =========
On 29 September 2014, the Group placed 44,652,107 new ordinary shares of 0.025p each at a price of 1.332 pence per share, raising gross proceeds of GBP594,766 for the Group.
On 29 December2015, the Group placed 13,333,333 new ordinary shares of 0.025p each at a price of 1.5 pence per share, raising gross proceeds of GBP200,000 for the Group.
On 30 June 2016, the Group placed 37,500,000 new ordinary shares of 0.025p each at a price of 2.0 pence per share, raising gross proceeds of GBP750,000 for the Group.
The Group has one class of ordinary shares which carry rights to dividends.
16. Combination reserve
Combination reserve represents the differences between the nominal amount of share capital of the combining entities at the date on which it was acquired by the Group and the nominal amount of the share capital issued as consideration for the acquisition of ZKTY as described further in Note 2.4.2.
17. Statutory reserve (a) Statutory surplus reserve
According to the relevant PRC regulations and the Articles of Association of the subsidiary, it is required to transfer 10% of its profit after enterprise income tax to the statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The transfer to this reserve must be made before the distribution of dividends to equity owners. Statutory surplus reserve can be used to make good previous years' losses, if any, and may be converted into paid-in capital in proportion to the existing interests of equity owners, provided that the balance after such conversion is not less than 25% of the registered capital.
(b) Statutory public welfare fund
According to the relevant PRC regulations and the Articles of Association of the subsidiary, it is required to transfer 5% of its profit after income tax to the statutory public welfare fund. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to its employees.
18. Warrant reserve
On 23 May 2011, the Group issued 2,966,845 warrants for services provided to the Group. The fair value of the warrants was RMB1,673,000 which was calculated using the Black Scholes option pricing model.
On 23(rd) May 2016, the above warrants have expired and the reserve was transferred to profit and loss reserve.
Details of the warrants outstanding during the year are as follows:
2016 2015
------------------------- ------------------------
Average Average
exercise exercise
price price
in GBP Number in GBP Number
per share of shares per share of shares
GBP GBP
At beginning
of the year 0.07 2,966,845 0.07 2,966,845
Granted - - - -
Forfeited - - - -
Executed - - - -
Expired on 23
May 2016 0.07 (2,966,845) - -
----------- ------------ ----------- -----------
At end of year - - 0.07 2,966,845
=========== ============ =========== ===========
The estimated fair values were calculated using the Black-Scholes option pricing model. The model inputs were as follow:
Exercise price GBP0.07 Expected volatility 1% Expected dividend - yield Risk-free interest rate 6.65%
The expected volatility is based on the historical share prices to the management's best estimate. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restriction and behavioural considerations.
19. Foreign currency translation reserve
The foreign currency translation reserve represents exchange differences arising from the translation of the financial statements of foreign operations where functional currencies are different from that of the Group's presentation currency.
20. Other income
Group
Year ended 31
December
--------------------
2016 2015
RMB'000 RMB'000
Sale of scrap materials and
assets 600 42
Subsidy income 221 215
Sundry income 24 17
Gain on disposal of intangible
assets 2,359 -
Others - 2,199
3,204 2,473
======== ========
21. Other expenses
Group
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
Research and development expense 1,187 2,422
Costs of scrap materials 331 424
Loss on disposal of property,
plant and equipment 568 104
Reversal of overprovided provision
(Note 14) (2,390) -
Provision on court case (Note
14) 10,000 6,500
-------- --------
9,696 9,450
22. Finance costs
Group
Year ended 31
December
--------------------
2016 2015
RMB'000 RMB'000
Interest expenses 537 535
Foreign currency exchange loss 1,002 (28)
Bank charges 10 437
1,549 944
======== ========
23. (Loss)/profit before tax
Group
Year ended 31
December
---------------------
Loss before taxation is 2016 2015
arrived at after charging/(crediting): RMB'000 RMB'000
Inventory expense 5,298 8,240
Staff costs including directors
remuneration 8,574 10,155
Depreciation of property,
plant and equipment 1,896 2,090
Net loss/(gain) on disposal
of property, plant and equipment 1,548 104
Net loss/(gain) on disposal
of intangible assets (2,359) -
Amortisation of intangible
assets 669 319
Impairment of inventories 242 400
Impairment of investment - -
Impairment of PPE (366) -
Bad debts and other provisions
(Note 10) 2,715 8,977
Reversal of provisions (Note
10) (3,493) (851)
Operating lease 589 960
Auditors Remuneration:
Audit Services 287 300
Non audit services - -
24. Employee benefit expense
2016 2015
RMB'000 RMB'000
Wages and salaries 8,574 7,912
Social security costs 947 2,243
9,521 10,155
======== =========
Included in:
Cost of sales 1,590 1,726
Selling and distribution
expenses 2,666 2,598
Administrative expenses 2,914 2,609
Research and development
costs 1,404 979
8,574 7,912
======== =========
Number Number
Average number of employees 84 87
======== =========
25. Income tax (credit) / expense
Group
Year ended 31
December
-------------------
2016 2015
RMB'000 RMB'000
Current income tax - (10)
Deferred tax reversed - (815)
--------- --------
- (825)
The Group is regarded as resident for tax purposes in Jersey and on neither the basis that the Group is a financial services Group nor a utility Group for the purposes of the Income Tax (Jersey) Law 1961, as amended; the Group is subject to income tax in Jersey at a rate of zero per cent.
The operating subsidiaries are regarded as resident for the tax purposes in PRC and subject to national income tax rate at 25% (2015: 25%). The main operating subsidiary, ZKTY is not entitled to a reduction in tax rate at 15% due to its high technology enterprise status during the year. Therefore, the tax rate used for the reconciliation below is changed to 25% (2015: 15%).
Reconciliation at effective tax rate:
Group
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
Loss before tax 3,611 (26,423)
Income tax using PRC tax rate
of 25% (2015: 15%) 903 (3,963)
Tax effects of:
* Non-deductible expenses 280 287
* Zero tax rate 1,683 291
* Unrelieved tax losses carried forward 608 1,131
* Preferential tax rate - (457)
* Change in temporary difference (3,017) 2,721
* Other adjustment (131) -
* Deferred tax reversed - 815
* Tax losses utilised (326) -
-------- --------
- 825
Movements in deferred tax asset are as follows:
Group
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
At beginning of the year - 177
Reversal for the year - (177)
Deferred tax asset 3,957 -
At end of the year 3,957 -
It represents the maximum benefit from unutilised tax losses of ZKTY and Boluo, which can be carried forward to offset against future taxable profits. The deferred tax assets of RMB15.8 million (2015: RMB14.7 million) relating to the tax losses have not been recognised as it is not certain whether the potential taxation benefit will be realised in the foreseeable future. PRC tax losses can carry forward for max 5 years on the rolling basis, any earliest unutilised tax losses will be forfeited in the 6th year.
Movements in deferred tax liabilities are as follows:
Group
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
At beginning of the year - 992
Reversal for the year - (992)
At end of the year - -
Net deferred tax liabilities:
Group
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
At beginning of the year - 815
Reversal for the year - (815)
Deferred tax asset 3,957 -
-------- --------
At end of the year 3,957 -
26. Loss per share
The calculation of loss per share is based on Group's loss for the year and the weighted average number of shares in issue after adjusting for movement in own shares during the financial year. There is no potential dilutive share or share options outstanding and therefore, the diluted loss per share is the same as basic loss per share.
Weighted
average Loss
Profit number per
/(Loss) of shares share
2016 RMB'000 '000 RMB
Basic 3,611 412,591 0.009
Diluted 3,611 412,591 0.009
2015
Basic (25,598) 393,687 (0.065)
Diluted (25,598) 393,687 (0.065)
27. Operating lease commitments
At the end of the reporting period, the future aggregate minimum lease payments under non-cancellable operating leases contracted for but not recognised as liabilities, are as follows:
Group
Year ended 31 December
2016 2015
RMB'000 RMB'000
Within one year 455 472
After one year but before
five years 646 -
1,101 472
Operating lease payments represent rents payable by the Group for office premises and other operating facilities. Leases are negotiated for an average term of 6months to 3 years and rentals are fixed during the term of lease.
28. Significant related party transactions
a) Related parties are entities with common direct or indirect shareholders and/or directors. Parties are considered to be related if one party has the ability to control the other party in making financial and operating decisions.
Certain of the Group's transactions and arrangements are with related parties and the effect of these on the basis determined between the parties is reflected in these financial statements. The balances are unsecured, interest-free and repayable on demand unless otherwise stated.
At the end of reporting period, other than disclosures made in other notes of the financial statements, the Group has a non-trade receivable of RMB10,595,000 (2015: RMB8,019,000) and a non-trade receivable of RMB11,440 (2015: payable of RMB3,000,000, Note 12), due from Guangdong Zhongke Tianyuan Regeneration Energy Co., Ltd and Guangdong Tianyuan Green Food Co., Ltd (formerly known as Guangzhou Jizhihui Ecommerce Co., Ltd) respectively. Both companies are controlled by Mr Yu Weijun and Mr Tang Zhaoxing, whom are directors of the Group.
b) Key management personnel compensation is analysed as follows:
Year ended 31
December
------------------
2016 2015
RMB'000 RMB'000
Directors' remuneration
(short term employment benefits) 1,313 1,166
1,313 1,166
Breakdown of directors' remuneration is detailed in Directors' Report.
29. Financial risk management
The Group's activities expose it to credit risk, liquidity risk and market risk (including interest rate risk, currency risk and commodity price risk). The Group's overall risk management strategy seeks to minimise adverse effects from the volatility of financial markets on the Group's financial performance.
The Board of Directors is responsible for setting the objectives and underlying principles of financial risk management for the Group. The Group management then establishes the detailed policies such as risk identification and measurement, exposure limits and hedging strategies, in accordance with the objectives and underlying principles approved by the Board of Directors.
There has been no change to the Group's exposure to these financial risks or the manner in which it manages and measures the risk. Market risk exposures are measured using sensitivity analysis indicated below.
Credit risk
Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in a loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group performs on-going credit evaluation of its counterparties' financial condition. The Group does not hold any collateral as security over its customers. The Group's major classes of financial assets are cash and bank balances, trade and other receivables and notes receivable.
At the end of the reporting period, the Group's maximum exposure to credit risk is represented by the carrying amount of each class of financial assets recognised in the statements of financial position.
At the end of the reporting period, the cash and bank balances as detailed in Note 11 to the financial statements, are held in major financial institutions which are regulated and located in the PRC, which management believes are of high credit quality. The management does not expect any losses arising from non-performance by these counterparties.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date of the Group is as follows:
As at 31 December
--------------------
2016 2015
RMB'000 RMB'000
Cash and cash equivalents 13,854 19,426
Trade and other receivables 70,717 43,152
84,571 62,578
At the end of reporting period the Group's trade and other receivable was due from the related parties and third parties. There was significant concentration of credit risk in the Group's trade receivables as that accounted for 70.4% (2015: 61.9%) of the total trade and other receivables. The aggregate of the single customer's trade receivable is more than 10% were amounting to RMB22.0 million (2015: RMB13.1 million)
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables and amount due from customers for construction contracts. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The management judgments for this allowance are disclosed in Note 3.2.
The allowance for impairments in respect to trade receivables and amount due from customers for construction contracts are disclosed in Note 10 and Note 9 respectively.
The Group's historical experience in the collection of third parties trade receivable falls within the recorded allowances. Due to these factors, management believes that no additional credit risk beyond amounts provided for collection losses is inherent in the Group's receivables.
Currency risk
Currency risk arises from a change in foreign currency exchange rate, which is expected to have adverse effect on the Group in the current reporting year and in future years.
The Group and its subsidiary maintain their respective books and accounts in their functional currencies. As a result, the Group is subject to transaction and translation exposures resulting from currency exchange rate fluctuations. However, to minimise such foreign currency exposures, the Group uses natural hedges between sales receipts and purchases, and operating expenses disbursement. It is, and has been throughout the current and previous financial year the Group's policy that no derivatives shall be undertaken except for the use as hedging instruments where appropriate and cost-efficient. The Group does not apply hedge accounting.
The Group incurs foreign currency risk on sales, purchases and operating expenses that are denominated in currencies other than the respective functional currencies of Group entities.
The Group's currency exposure based on the information provided by key management is as follows:
At 31 December
2016 RMB'000 GBP'000 US$'000 EUR'000 Total
Financial assets
--------- -------- -------- -------- ---------
Trade and other
receivables 73,132 85 - - 73,217
Cash and bank balances 12,016 1,803 33 2 13,854
--------- -------- -------- -------- ---------
Financial liabilities
--------- -------- -------- -------- ---------
Trade and other
payables 100,765 1,211 - - 101,976
Net financial assets (15,617) 677 33 2 (14,905)
Less: Net financial
assets denominated
in the functional
currency (15,617) - - - (15,617)
-------------------------- --------- -------- -------- -------- ---------
Net currency exposure - 677 33 2 712
========================== ========= ======== ======== ======== =========
At 31 December
2015 RMB'000 GBP'000 US$'000 EUR'000 Total
Financial assets
--------- -------- -------- -------- ---------
Trade and other
receivables 40,888 481 - 1,783 43,152
Cash and bank balances 16,596 2,802 26 2 19,426
--------- -------- -------- -------- ---------
Financial liabilities
--------- -------- -------- -------- ---------
Trade and other
payables 88,616 1,574 - - 90,190
Net financial assets (31,132) 1,709 26 1,785 (27,612)
Less: Net financial
assets denominated
in the functional
currency (31,132) - - - (31,132)
-------------------------- --------- -------- -------- -------- ---------
Net currency exposure - 1,709 26 1,785 3,520
========================== ========= ======== ======== ======== =========
Sensitivity analysis
If the GBP sterling, US$ and EUR vary against the RMB by 10% with all other variables including tax rate being held constant, the effect on the net profit will be as follows:
Years ended 31 December
2016 2015
GBP against RMB RMB'000 RMB'000
- strengthen 392 155
- weaken (479) (190)
US$ against RMB
- strengthen 3 2
- weaken (4) (3)
EUR against RMB
- strengthen 0.18 162
- weaken (0.22) (198)
Interest rate risk
The Group has no significant interest-bearing liabilities and assets.
The Group monitors the interest rates on its interest bearing assets closely to ensure favourable rates are secured.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting financial obligations due to shortage of funds. The Group's exposure to liquidity risk arises primarily from mismatches of the maturities of financial assets and liabilities. The Group's objective is to maintain a balance between continuity of funding and flexibility through financial support of business partners and suppliers.
The Group's policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserve of cash to meet its liquidity requirements in the short and long term. At present, the Group is financed by advance payments from customers.
The table below summarises the maturity profile of the Group's financial liabilities at the reporting date based on contractual undiscounted payments:
Less than
one year Total
RMB'000 RMB'000
31 December 2016
Borrowing - -
Trade and other payables 101,976 101,976
101,976 101,977
31 December 2015
Borrowing - -
Trade and other payables 90,190 90,190
90,190 90,190
Commodity price risk
The Group has commodity price risk as steel is one of the main components of raw materials. Metals are traded commodities and their prices are subject to the fluctuations of the world commodity markets. Any significant increases in the prices for metals will have a material adverse impact on the financial position and results of operation. The Group's profitability will be adversely affected if the Group is unable to pass on any increase in raw material prices to its customers on a timely basis or find cheaper alternative sources of supply.
The Group monitors the material price fluctuation closely and constantly studies other ways to reduce material wastage in order to reduce the impact of material price risk.
30. Capital risk management
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
The capital structure of the Group consists of equity attributable to equity holders of the parent Group, comprising share capital, share premium, combined reserve, statutory reserve, warrant reserve, foreign currency translation reserve, and accumulated losses as disclosed in the statements of financial position.
The Group manages its capital structure by making necessary adjustments to it in response to the changes in economic conditions.
The Group's strategy was to maintain gearing ratio in between 80% and 100%. Gearing ratio is calculated as net debt divided by total of capital. Net debt is calculated as total debt (as shown in the statements of financial position) less cash and bank balances. Total capital is calculated as total equity plus net debt.
The gearing ratios as at the period end were as follows:
Year ended 31
December
-----------------------
2016 2015
RMB'000 RMB'000
Total debt 144,636 126,532
Less: Cash and bank balances (13,854) (19,426)
----------- ----------
Net debt 130,782 107,106
Total equity 4,570 (5,739)
Total capital 135,352 101,367
Gearing ratio 0.96 **
The ratio measured Group's capital structure at year end. Although Group's trading as going
concern, it heavily relies on debt recoverability. However, the Group has cash in bank of
RMB13.9million and RMB13.4million at year end and 31 March 2017 respectively, together with
a proceed of GBP702,132 from new share issuance in February 2017, the Directors consider that
the Group has adequate fund resources, to continue in operational existence for the foreseeable
future. The financial statements do not include the adjustments that would result if the Group
was unable to continue in operation.
**last year, the Group had net liabilities of RMB1.6 million (note 2.2), of which led to a
negative debt-to-equity ratio, means the Group's net worth was negative.
31. Fair value of financial instruments
The carrying amount of the financial assets and financial liabilities in the consolidated financial statements approximate their fair values due to the relative short term maturity of these financial instruments. The fair values of other classes of financial assets and liabilities are disclosed in the respective notes to the consolidated financial statements.
Fair value hierarchy
The Group's and the Group's financial instruments carried at fair value are analysed as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
Level 3: Inputs for the assets or liabilities that are not based on observable market date (unobservable inputs).
As at reporting date, the Group and the Group do not have any financial instruments classified as Level 1, Level 2 and Level 3.
32. Segment reporting
A business segment is a Group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments.
The Group's revenue breakdown by geographical location is determined based on its customers' country of incorporation. The Group's cost of sales and operating expenses are aggregated on a cumulative basis and are not attributable to specific geographical regions. Therefore, a breakdown of gross profit for the financial years by geographical regions is not shown.
Geographical segment Year ended 31 December
2016 2015
RMB'000 RMB'000
PRC 66,671 61,476
Canada 11,196 -
Myanmar 349 180
Thailand 335 -
Cambodia 33 -
Indonesia - 13
78,584 61,669
Business segment
The Group's assets, liabilities and capital expenditure are almost entirely attributable to a single business segment of provision of technology and engineering services to ethanol, ethanol downstream product and biobutanol producers. Therefore, the Group does not have separately reportable business segments under IFRS 8 Segmental Reporting. Nonetheless the Group's revenue and results can be classified into the following streams:
a. EPC of plants producing ethanol and ethanol downstream products ("EPC activities"); and
b. Value-added and other value added services ("VAS") services.
The Group provides EPC (Equipment, Procurement and Construction) and VAS (Value Added Service) services to ethanol and biobutanol producers. The EPC team primarily designs and builds commercial-scale biorefineries that convert feedstock into ethanol for both the biofuel and edible alcohol markets, whilst the VAS team provides services and technology to optimise the ethanol production at existing biorefineries.
EPC VAS Total
Revenue RMB'000 RMB'000 RMB'000
Year ended 31 December 2016 51,965 26,619 78,584
Year ended 31 December 2015 34,889 26,780 61,669
Results
Year ended 31 December 2016 22,032 4,966 26,998
Year ended 31 December 2015 5,467 2,200 7,667
Information about major customers
Included in revenue arising from the sales of project of approximate RMB55.6 million (2015: RMB33.1 million) which arose from sales to Group's 5 top largest customers.
33. Litigation and contingent liability
At year end, the Group has an ongoing legal case with a customer, Tangshan Chenhong Industry Co., Ltd ('TSCH') on quality dispute in relation to a project in 2012. The court first instance verdict in 2015 was in favour of TSCH. However, the Group has appealed subsequently, second trial has begun on 25 March 2016 and not yet concluded. As a result of this court case and appeal, the Group's cash in bank of RMB11.2million was frozen and continued to be frozen. The extent to which an outflow of funds probably required is dependent on the result of the dispute. Accordingly, the amount of RMB10million has been provided to the best estimate of the settlement of this case. (Note 14). TSCH is currently in the process of administration. Therefore, negotiation on settlement is possible to be carried out later.
34. Post balance sheet events
The Group has raised GBP702,132 (RMB6 million) by way of a subscription in 46,808,809 new ordinary shares at a price of 1.5p per share from an institutional fund. The proceeds have been received by the Group on 27(th) February 2017. These new shares represent 9.53% of the enlarged issued share capital.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEMEFUFWSEEM
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June 30, 2017 02:01 ET (06:01 GMT)
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