Financial Performance

Revenue for the year ended 31 December 2009 (“FY 2009”) increased by approximately RMB31.9 million (22.8%) from RMB139.6 million for the year ended 31 December 2008 (“FY 2008”) to RMB171.5 million in FY 2009. This was mainly due to successful efforts by our subsidiaries to enhance market share and increase sales volume, as well as strong demand for our core product, Pre-stressed High Strength Concrete (“PHC”) piles, in the second half of 2009 (“2H 2009”). Also, our PHC pile factory in Sanya city achieved a higher and more consistent level of production in FY 2009 compared to FY 2008. Consequently, total sales volume for the Group, including direct sales of PHC piles and piles sold under construction contracts, increased by approximately 65%.

The quantum of increase in revenue is partially reduced by significant decreases in sale prices resulting from steep competition during FY 2009. Also, there were no export sales in FY 2009 compared to export sales of RMB 16.8 million to a customer in Singapore in FY 2008, as the Group concentrated its efforts on maintaining and enhancing share of its local market in Hainan Province (“Hainan”) in the People’s Republic of China (“PRC”).

The Group’s gross profit margin declined significantly from 4.9% in FY 2008 to 0.9% in FY 2009. This was mainly due to significant decreases in sale prices resulting mainly from steep competition from PHC piles suppliers from Guangdong Province, near to Hainan, during FY 2009, especially in 2H 2009. In order to maintain and increase our market share, the Group had to compete aggressively on sale prices.

In addition, due to the increase in sales volume in FY 2009, we relied more on leased machines for our piling services, compared to FY 2008, since our own machines were fully utilised. Operating lease expenses related to the leasing of piling machines increased by approximately RMB4.4 million (68.7%) from RMB6.4 million in FY 2008 to RMB10.8 million in FY 2009. The leasing of machines reduced the gross margins of our construction contracts.

Overall, gross profit decreased by approximately RMB5.3 million (77.5%) from RMB6.8 million in FY 2008 to RMB1.5 million in FY 2009 in spite of an increase in revenue.

Loss before taxation widened by RMB9.6 million (47.8%) from loss before taxation of RMB20.0 million last year to approximately RMB29.6 million in FY 2009, mainly due to the decrease in gross profit. Other operating income consists mainly of write-back of provision for doubtful debts, interest income and rental income. There was no write-back of allowance for doubtful debts in FY 2009 compared to a write-back of RMB0.2 million last year.

Interest income decreased from RMB90,000 in FY 2008 to RMB11,000 in FY 2009 due mainly to the Group having lower average cash balances in bank fixed deposits and lower interest rates during FY 2009, a decrease of about RMB79,000 (87.8%).

Rental income consists mainly of income from leasing of equipment and factory space owned by our subsidiary, Hainan Pearl River Pile Co., Ltd. (“HPRP”), to a third party. Selling and distribution expenses increased by approximately RMB0.2 million (18.9%) from approximately RMB1.3 million in FY 2008 to RMB1.5 million in FY 2009. This was due mainly to a one-off advertising expense of RMB0.2 million incurred in the first half of 2009 (“1H 2009”).

General and administrative (“G&A”) expenses decreased by approximately RMB0.7 million (5.7%) from RMB13.1 million in FY 2008 to approximately RMB12.4 million in FY 2009. The decrease was mainly due to the temporary cessation of production of aerated concrete (“ACC”) bricks by our factory in Sanya city operated under our subsidiary, Hainan Huadi Building Material Co., Ltd. (“HHBM”), since September 2008. Following the temporary cessation, the number of managerial and support staff employed for the operations of HHBM has been substantially reduced in FY 2009. However, plans are in place to resume production of our ACC bricks factory in the year 2010.

Other operating expenses increased by RMB4.3 million (35.1%) from RMB12.3 million in FY 2008 to RMB16.6 million in FY 2009. This increase was due mainly to one-off impairment losses during FY 2009 of RMB5.0 million related to factory building and plant and machinery of our ACC factory which has ceased production since September 2008. In addition, there is an increase of RMB0.3 million (21.9%) in write-down of inventories from about RMB1.6 million in FY 2008 to RMB1.9 million in FY 2009. The Group had to write-down some of its inventories as prevailing selling prices fell below average cost of inventories amidst competitive market conditions in 2H 2009. Also, unallocated factory overheads, related to our temporarily dormant ACC bricks factory, consisting mainly of depreciation of factory building, plant and machinery, amounted to approximately RMB1.6 million,Unallocated factory overheads were significantly lower, appro ximately RMB0.2 million, in FY 2008 as the ACC factory ceased production only in September 2008.

These increases were partially offset by a decrease of RMB1.2 million (14.2%) in total bad debts written-off and allowance for doubtful debts from RMB8.5 million in FY 2008 to RMB7.3 million in FY 2009 as economic conditions improved in FY 2009 compared to the second half of 2008 (“2H 2008”). However, economic conditions remained undesirable in FY 2009 and collection of outstanding debts remained challenging. In addition, loss on disposal of plant and machinery and exchange losses decreased by RMB0.6 million (51.1%) and RMB0.6 million (97.7%) respectively. Reduction in exchange losses was due to Singapore Dollars strengthening against Chinese Renminbi in 2H 2009.

Finance costs increased by RMB0.2 million (20.7%) from RMB0.9 million in FY 2008 to RMB1.1 million in FY 2009 due to the increase in the amount of interest bearing loans.

 

 
Our factory in Sanya is expected to further increase its annual production volume in 2010.

We expect to resume production of aerated concrete (“ACC”) in 2010.

ACC is a strong, lightweight and heat resistant material with the ability to retain heat.

 
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Ms Li Zhangjiang De Malca
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Mr Cui Zhongwei
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Mr Li Baogang
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Mr Toh Hai Joo
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Mr Tan Huay Pin
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