Walcom Group Ltd - Half-yearly results

19 September 2017

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR")

WALCOM GROUP LIMITED
(“Walcom” or “the Company”)

Half-yearly results for the six months ended 30 June 2017

Walcom is pleased to announce its interim results for the six months ended 30 June 2017. These results are also available from the Company’s website at www.walcomgroup.com.

Further enquiries:

Walcom Group Limited Francis Chi (Chief Executive Officer) Albert Wong (Chief Financial Officer)	[phone]
Allenby Capital Limited Virginia Bull	[phone]

CHAIRMAN’S STATEMENT

On behalf of the board of directors (the “Board”), I am pleased to present the Company’s half-yearly results for the six months ended 30 June 2017.

Introduction

The PRC economy maintained steady growth during the first six months of the year but the overall performance of the pig farming industry did not improve during the same period due to a decreasing pig farmgate price. The Company’s revenue decreased by 5 per cent. compared with the same period last year.  Due to the continuing increase in production costs and operating expenses, the Company incurred a loss per share for the period of HK$5.03 cents compared with a loss per share of HK$2.46 cents in the same period last year.

Results for the Period

The Company generated revenues of HK$19.6 million during the period (June 2016: HK$20.7 million) and gross profits of HK$11.0 million (June 2016: HK$11.7 million), representing a decrease of 5 per cent. and 6 per cent. respectively compared with the same period last year.  The gross profit margin remained approximately the same as last year at 56.4 per cent. (June 2016: 56.5 per cent.) despite the escalating production costs, particularly raw materials, labour and rental expenses.  Compared to 1 January 2017, as at 30 June 2017 the Hong Kong currency fell by approximately 3 per cent. against China’s Renminbi, which resulted in an accounting exchange loss of HK$0.90 million (June 2016: gain of HK$0.59 million) when translating the inter-company balances among the Group companies.  This was a significant contributor to the Company’s net loss increasing by 99 per cent. to HK$3.36 million (June 2016: HK$1.69 million) and the Company incurring a loss of HK$2.92 million at the EBITDA level, an increase of 159 per cent. over the same period last year (June 2016: HK$1.12 million).

Review of Activities and Market

Compared to the same period last year, the average exchange rate of Renminbi weakened against the Hong Kong Dollar by 4.8 per cent. during the period under review. This, in combination with the decrease in the quantity of sales in China, resulted in the sales turnover in the PRC decreasing by 8 per cent. to HK$10.8 million compared with the same period last year (June 2016: HK$11.8 million). Overseas sales remained relatively stable, decreasing only slightly by 1 per cent. to HK$8.7 million compared with same period last year (June 2016: HK$8.8 million).

The pig farmgate price in China dropped during the first six months of 2017 and, accordingly, the pig number has not increased to its previous level. As such, the demand for feedstuff remained weak.  The pig farming industry forecast estimated that the pig numbers will remain depressed during the second half of 2017 as the pig farmgate price is not expected to rise due to increasing competition from pork imported into China. This will affect the animal feed market which in turn will likely have an adverse effect on the operating results of the Company.

Earlier this year the Company strengthened its sales team by appointing Mr. Paitoon Buddhinunta-opas, the general manager of the Group’s subsidiary in Thailand, as the Company’s group sales director.  The new sales team is focused on increasing sales penetration into the Company’s existing larger customers which have low usage of the Company’s products and also those integrated meat producing companies whose businesses include feed milling, pig farming, pig slaughtering and pork product production. From the Company’s previous experience, these integrated companies are more responsive to the gross margin impact that the Company’s products can have, which increases the Company’s chances of gaining sales traction. By putting this concept in practice, the Board is delighted to report that the Company has successfully sold its products into one of the largest integrated meat producing companies in China since July this year.

The Company’s overall overseas sales were maintained at about the same level as last year. 

Sales in Thailand in terms of quantity and turnover both increased by 8 per cent. over the same period last year (June 2017: HK$7.9 million; June 2016: HK$7.3 million).

Due to poorer performance of the feed mills, the Korean market weakened during the period under review and sales decreased by 50 per cent. to HK$0.8 million (June 2016: HK$1.6 million).

Outlook

It is believed that the structural transformation of the Chinese economy which resulted in a slower growth in the economy over the past three years will continue for the foreseeable future.  However, with the promotion of the “internet plus” concept, the Chinese economy has shown recovery in some sectors especially the service industry.  This will have a positive impact on the consumer market, the advantage of which will in turn be passed on to the Company’s sales in the PRC market.  With the Company’s new sales team, the Directors are confident that this will result in improved sales in the second half of the year which will have positive effect in the overall performance of the Company in the year 2017.

Frankie Y. L. Wong
Chairman
19 September 2017

UNAUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE SIX MONTHS ENDED 30 JUNE 2017

	Note		Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
			HK$		HK$		HK$
Revenue	3		19,560,955		20,693,043		46,469,041
Cost of sales			(8,534,341)		(8,994,822)		(19,147,412)
Gross profit			11,026,614		11,698,221		27,321,629
Other income	4		15,842		13,173		275,269
Research and development expenses			(328,530)		(804,635)		(1,565,262)
Selling and distribution expenses			(5,435,032)		(5,496,572)		(11,346,594)
General and administrative expenses			(8,474,239)		(6,825,912)		(11,874,526)
(Loss) / profit from operations	5		(3,195,345)		(1,415,725)		2,810,516
Net finance expenses	6		(56,290)		(31,507)		(70,342)
(Loss) / profit before income tax			(3,251,635)		(1,447,232)		2,740,174
Income tax expense	7		(112,609)		(240,916)		(1,316,475)
(Loss) / profit for the period / year			(3,364,244)		(1,688,148)		1,423,699
(Loss) / profit attributable to:
Owners of the Company			(3,458,992)		(1,690,571)		1,263,286
Non-controlling interests			94,748		2,423		160,413
(Loss) / profit for the period / year			(3,364,244)		(1,688,148)		1,423,699
(Loss) / profit per share – basic, HK cents	8		(5.03)		(2.46)		1.84
– diluted, HK cents			(5.03)		(2.46)		1.84

UNAUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30 JUNE 2017

	Note		Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
			HK$		HK$		HK$
(Loss) / profit for the period / year			(3,364,244)		(1,688,148)		1,423,699
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries			1,571,508		(669,340)		(2,603,259)
Total comprehensive loss
for the period / year			(1,792,736)		(2,357,488)		(1,179,560)
Total comprehensive loss
attributable to:
Owners of the Company			(2,027,469)		(2,419,944)		(1,356,994)
Non-controlling interests			234,733		62,456		(177,434)
Total comprehensive loss
for the period / year			(1,792,736)		(2,357,488)		(1,179,560)

UNAUDITED CONSOLIDATED BALANCE SHEET
AT 30 JUNE 2017

	Note		Unaudited 30 June 2017		Unaudited 30 June 2016		Audited 31 December 2016
			HK$		HK$		HK$
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment			5,821,135		1,383,334		4,832,774
Patents			1,681,327		1,946,865		1,814,096
Goodwill			-		-		-
			7,502,462		3,330,199		6,646,870
CURRENT ASSETS
Inventories			2,890,996		1,759,975		1,380,728
Trade and other receivables	10		9,279,392		7,475,382		9,028,156
Cash and cash equivalents Restricted cash	11 11		4,397,076 111,768		11,428,764 106,794		9,012,203 105,210
			16,679,232		20,770,915		19,526,297
TOTAL ASSETS			24,181,694		24,101,114		26,173,167
EQUITY AND LIABILITIES
EQUITY
Share capital	12		688,344		688,344		688,344
Reserves			13,155,690		14,120,209		15,183,159
TOTAL EQUITY ATTRIBUTABLE TO   OWNERS OF THE COMPANY			13,844,034		14,808,553		15,871,503
Non-controlling interests			2,498,762		2,149,051		2,264,029
TOTAL EQUITY			16,342,796		16,957,604		18,135,532
CURRENT LIABILITIES
Trade and other payables	13		5,133,569		4,561,715		4,744,113
Tax payables			400,916		241,793		1,057,636
Bank borrowings	14		2,304,413		2,340,002		2,235,886
			7,838,898		7,143,510		8,037,635
TOTAL LIABILITIES			7,838,898		7,143,510		8,037,635
TOTAL EQUITY AND LIABILITIES			24,181,694		24,101,114		26,173,167
NET CURRENT ASSETS			8,840,334		13,627,405		11,488,662
TOTAL ASSETS   LESS CURRENT LIABILITIES			16,342,796		16,957,604		18,135,532

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 JUNE 2017

							Share-based										Non-
	Share		Share		Merger		compensation		Exchange		Surplus		Accumulated				controlling		Total
	capital		premium		reserve		reserve		reserve		reserve		losses		Total		interests		equity
	HK$		HK$		HK$		HK$		HK$		HK$		HK$		HK$		HK$		HK$
At 1 January 2016	688,344		95,298,644		23,852,469		1,568,769		225,525		3,263,694		(107,668,948)		17,228,497		2,086,595		19,315,092
Comprehensive loss
Loss for the period	-		-		-		-		-		-		(1,690,571)		(1,690,571)		2,423		(1,688,148)
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries	-		-		-		-		(729,373)		-		-		(729,373)		60,033		(669,340)
Total comprehensive loss for the period	-		-		-		-		(729,373)		-		(1,690,571)		(2,419,944)		62,456		(2,357,488)
Lapse of share option	-		-		-		-		-		-		-		-		-		-
At 30 June 2016	688,344		95,298,644		23,852,469		1,568,769		(503,848)		3,263,694		(109,359,519)		14,808,553		2,149,051		16,957,604
At 1 January 2017	688,344		95,298,644		23,852,469		1,568,769		(2,394,755)		3,602,327		(106,744,295)		15,871,503		2,264,029		18,135,532
Comprehensive loss
Loss for the period	-		-		-		-		-		-		(3,458,992)		(3,458,992)		94,748		(3,364,244)
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries	-		-		-		-		1,431,523		-		-		1,431,523		139,985		1,571,508
Total comprehensive loss for the period	-		-		-		-		1,431,523		-		(3,458,992)		(2,027,469)		234,733		(1,792,736)
Lapse of share options	-		-		-		(684,771)		-		-		684,771		-		-		-
At 30 June 2017	688,344		95,298,644		23,852,469		883,998		(963,232)		3,602,327		(109,518,516)		13,844,034		2,498,762		16,342,796

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2017

	Note		Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended  31 December 2016
			HK$		HK$		HK$
Cash flow from operating activities
(Loss) / profit before income tax			(3,251,635)		(1,447,232)		2,740,174
Amortisation of patents			132,769		132,769		265,538
Depreciation			144,293		151,229		288,704
Foreign exchange loss / (gain), net			968,688		(685,765)		(2,083,712)
Interest received			(8,861)		(36,618)		(63,460)
Interest paid			65,151		68,125		133,802
(Gain) / loss on disposal of property, plant and equipment			(23)		3,419		11,317
Operating (loss)/ profit before
working capital changes			(1,949,618)		(1,814,073)		1,292,363
(Increase) / decrease in inventories			(1,510,268)		487,909		867,156
(Increase) / decrease in trade and other receivables			(251,236)		328,909		(1,209,281)
Increase / (decrease) in trade and other payables			389,456		(393,204)		(210,806)
Net cash (used in) / generated from operations			(3,321,666)		(1,390,459)		658,432
Corporate income tax paid			(769,329)		(768,579)		(961,878)
Interest paid			(65,151)		(68,125)		(133,802)
Net cash used in operating activities			(4,156,146)		(2,227,163)		(437,248)
Cash flow from investing activities
Purchase of property, plant and equipment			(816,090)		(9,768)		(3,649,857)
Proceeds from disposal of fixed assets			23		-		-
Interest received			8,861		36,618		63,460
Net cash (used in)/ generated from investing activities			(807,206)		26,850		(3,586,397)
Cash flow from financing activities
Repayment of bank borrowings			-		-		(2,387,205)
Proceeds from new bank borrowings			-		-		2,235,886
Increase in restricted bank balance			(4,974)		(2,981)		(1,397)
Net cash used in financing activities			(4,974)		(2,981)		(152,716)
Net decrease in cash and cash equivalents			(4,968,326)		(2,203,294)		(4,176,361)
Cash and cash equivalents at the beginning of the period / year			9,012,203		13,670,351		13,670,351
Exchange profit/(loss) on cash and cash equivalents			353,199		(38,293)		(481,787)
Cash and cash equivalents at the end of the period / year	11		4,397,076		11,428,764		9,012,203

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 30 JUNE 2017

(1)     BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited consolidated financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting.

The unaudited consolidated financial statements have been prepared under the historical cost convention. The same accounting policies, presentation and methods of computation are followed in these unaudited consolidated financial statements as were applied in the preparation of the group’s financial statements for the year ended 31 December 2016.

(2)     SEGMENT REPORTING

(a)          Primary reporting format - Geographical Segment

The group’s operations are mainly located in Hong Kong, PRC, Thailand. The group’s sales revenue by geographical location of customers are analysed as follows:

	Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
PRC	10,821,546		11,824,924		26,447,044
Thailand	7,894,388		7,289,399		16,643,536
Others	845,021		1,578,720		3,378,461
	19,560,955		20,693,043		46,469,041

(b)          Secondary reporting format - Business Segment

The Group is principally engaged in the manufacture, distribution and sale of chemical feed and additive products. All of the group’s products are of a similar nature and subject to similar risk and returns. Accordingly, the group’s activities are attributable to a single business segment and no business segment analysis is presented.

          (c)  Segment assets by geographical location of assets

	Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
PRC	13,854,608		14,446,142		14,882,387
Thailand	8,039,316		3,454,609		8,287,443
Hong Kong	606,442		4,253,498		1,499,263
Others	1,681,328		1,946,865		1,504,074
	24,181,694		24,101,114		26,173,167

(3)     REVENUE

Revenue represents the sales value of goods supplied to the customers less returns, discounts, value added tax and sales taxes.

(4)     OTHER INCOME

	Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
Government subsidy	-		-		248,841
Gain on disposal of property, plant and
equipment	23		-		-
Sundry income	15,819		13,173		26,428
	15,842		13,173		275,269

(5)     OPERATING (LOSS) / PROFIT

Operating (loss) / profit is stated after charging the following items:-

	Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
Amortisation of patents	132,769		132,769		265,538
Auditor’s remuneration	182,040		180,879		312,226
Cost of inventories	8,139,119		8,426,009		17,675,779
Depreciation	96,012		107,795		210,131
Loss on disposal of property, plant and equipment	-		3,419		11,317
Rental charges under operating leases  in respect of land and buildings	410,733		442,955		878,599
Staff costs  (including directors’ emoluments)
- wages and salaries	5,549,091		5,664,518		10,275,948
- contributions to retirement benefits	419,466		425,378		839,484
- other staff benefits	1,527,712		1,684,273		3,545,683

(6)     NET FINANCE (EXPENSES)/ INCOME

	Unaudited six months ended  30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
Bank interest income	8,861		36,618		63,460
Interest expense on bank loans	(65,151)		(68,125)		(133,802)
	(56,290)		(31,507)		(70,342)

(7)     INCOME TAX EXPENSE

No provision for Hong Kong Profits Tax has been made (June 2016: HK$nil; 2016: HK$nil) as the group’s assessable profit subject to Hong Kong profits tax for the period is fully set-off by tax loss brought forward from last year.

Taxation on overseas profits has been calculated on the estimated assessable profit for the period/year at the rate of taxation prevailing in the countries in which the group companies operate. The overseas income tax provided for the six months ended 30 June 2017 is HK$112,609 (June 2016: HK$240,916; 2016: HK$1,316,475).

(8)     LOSS PER SHARE

The calculation of the basic loss per share for the six months ended 30 June 2017, is based on the loss attributable to ordinary equity shareholders of the company of HK$3,458,992 (June 2016: HK$1,690,571; 2016: Profit HK$1,263,286) during the period and the weighted average number of 68,834,388 ordinary shares (June 2016: 68,834,388; 2016: 68,834,388) in issue during the period/year. No diluted loss per share is to be reported for the period/year.

(9)     DIVIDENDS

No payment of dividend was recommended for the first six months of 2017 (June 2016: HK$ nil; 2016: HK$nil).

(10)   TRADE AND OTHER RECEIVABLES

	Unaudited  30 June 2017		Unaudited  30 June 2016		Audited 31 December 2016
	HK$		HK$		HK$
Trade receivables	8,275,752		6,880,895		8,019,256
Less: provision for impairment loss	(508,758)		(508,758)		(508,758)
	7,766,994		6,372,137		7,510,498
Other receivables	524,206		229,745		280,487
Prepayments and deposits	988,192		873,500		1,237,171
	9,279,392		7,475,382		9,028,156

(a)          All trade and other receivables, are expected to be recovered within one year.

(b)          Impairment of trade receivables

The movement in the provision of impairment for doubtful debts during the period/year, including both specific and collective loss components, is as follows:

	Unaudited  six months ended 30 June 2017		Unaudited  six months ended 30 June 2016		Audited  year ended 31 December 2016
	HK$		HK$		HK$
At 1 January	508,758		508,758		508,758
Written off	-		-		-
Exchange difference	-		-		-
At 30 June/31 December	508,758		508,758		508,758

At 30 June 2017, the Group’s trade receivables of HK$508,758 (June 2016: HK$508,758, 2016: HK$508,758) have been outstanding for a certain period of time. The management assessed that only a portion of the receivables is expected to be recoverable.  Consequently, specific allowance for doubtful debts was recognised for the individually impaired receivables. 

The Group does not hold any collateral over these balances.

(11)   CASH AND CASH EQUIVALENTS

	Unaudited  30 June 2017				Unaudited  30 June 2016				Audited 31 December 2016
	HK$				HK$				HK$
Cash at bank and on hand	4,508,844			11,535,558				9,117,413
Less: Cash at bank - restricted	(111,768)			(106,794)				(105,210)
Cash and cash equivalents in the cash flow statement	4,397,076			11,428,764				9,012,203

(12)   SHARE CAPITAL

	Unaudited  30 June 2017		Unaudited  30 June 2016		Audited  31 December 2016
	HK$		HK$		HK$
Authorised
150,000,000 (June 2016: 150,000,000 and Dec 2016: 150,000,000) ordinary shares of HK$0.01 each	1,500,000		1,500,000		1,500,000
Issued and fully paid
68,834,388 (June 2016: 68,834,388 and       Dec 2016: 68,834,388) ordinary       shares of HK$0.01 each	688,344		688,344		688,344

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All ordinary shares rank equally with regard to the Company’s residual assets.

(13)   TRADE AND OTHER PAYABLES

	Unaudited  30 June 2017		Unaudited  30 June 2016		Audited 31 December 2016
	HK$		HK$		HK$
Trade payables	1,478,806		1,416,707		1,318,966
Other payables and accrued expenses	3,654,763		3,145,008		3,425,147
	5,133,569		4,561,715		4,744,113

All of the trade and other payables are expected to be settled within one year.

(14)  BANK BORROWINGS

		Unaudited  30 June 2017		Unaudited  30 June 2016		Audited  31 December 2016
		HK$		HK$		HK$
Current
Bank borrowings, unsecured	(a)	2,304,413		2,340,002		2,235,886

1. The effective interest rate per annum for bank borrowings at balance sheet date is at 5.7% (June 2016: 7.8%, 2016: 5.7%) per annum.

 (15)    RECONCILIATION OF (LOSS) / PROFIT BEFORE INCOME TAX TO EBITDA

	Unaudited six months ended 30 June 2017		Unaudited six months ended 30 June 2016		Audited year ended 31 December 2016
	HK$		HK$		HK$
(Loss) / profit before income tax	(3,251,635)		(1,447,232)		2,740,174
Depreciation	144,293		151,229		288,704
Amortisation of patents	132,769		132,769		265,538
Interest income	(8,861)		(36,618)		(63,460)
Interest expenses	65,151		68,125		133,802
(Gain) / loss on disposal of property, plant and equipment	(23)		3,419		11,317
EBITDA	(2,918,306)		(1,128,308)		3,376,075

EBITDA is defined herein as earnings before depreciation, amortization, interest and tax, plus specific charges which are considered non-recurring in nature. Specific charges include impairment loss in value and gain/loss in disposal of non-current assets, and amortization of fair value of share-based compensation. EBITDA is not a recognised term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.

(16)     COPIES OF THE HALF YEARLY REPORT

Copies of the half-yearly report will be available shortly from the Company’s website www.walcomgroup.com .

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