Brainhole Technology Limited — Annual Report 2019

Apr 28, 2020

BRAINHOLE TECHNOLOGY LIMITED 腦洞科技有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 2203)

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Annual Report 2019

Contents

Corporate Profile	2
Corporate Information	3
Chairman’s Statement	4
Management Discussion and Analysis	6
Biographical Details of Directors and Senior Management	16
Directors’ Report	19
Corporate Governance Report	29
Environmental, Social and Governance Report	40
Independent Auditor’s Report	57
Consolidated Statement of Profit or Loss and Other Comprehensive Income	63
Consolidated Statement of Financial Position	64
Consolidated Statement of Changes in Equity	66
Consolidated Statement of Cash Flows	67
Notes to the Consolidated Financial Statements	69
Financial Summary of the Group	152
Definitions	153

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 1

Corporate Profile

The Group is principally engaged in the assembly, packaging and sales of self-manufactured discrete semiconductors with a primary focus on applications for smart consumer electronic devices, and trading of semiconductors sourced from third-party suppliers. The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 10 September 2014 and its shares are listed on the Main Board.

The Group’s self-manufactured products are mainly used in consumer and industrial portable electronics such as mobile phones, display monitors, LED televisions, portable electronic equipment and power supplies manufactured by its customers who are mainly OEM/ODM manufacturers for well-known consumer electronic brands mainly in Korea and the PRC.

The Group’s strong reputation for its reliability and ability to provide high-quality products, value-added solution kits services and engineering solutions services, as well as comprehensive customer service has been a key contributor to its growth. With technologically advanced production lines and strong technology expertise, the Group is able to offer customisable products which enable it to satisfy multiple end-market product requirements and the diverse specifications of its customers, which in turn contribute to its continued success.

To diversify the Group’s business portfolio and broaden the source of income of the Group, the Group proactively expanded the business to smart living sector, by completing the acquisition of Guangzhou Weaving in September 2019, which is principally engaged in broadband infrastructure construction and the provision of integrated solution for smart domain application (including smart home, smart campus and smart communities) in PRC. Its smart domain solution includes hardware for security and identification purposes, software for residence management, energy saving and community services. As smart living has become increasingly popular, the Group believes that the acquisition can further enhance shareholders’ equity.

In light of the further development of the business of the Group and with a view to providing the Company with a more appropriate corporate identity and strategic direction, the Company announced on 11 January 2019 its proposal to change the English name of the Company from “Top Dynamic International Holdings Limited” to “Brainhole Technology Limited” and to change the dual foreign name in Chinese of the Company from “泰邦集團國際控股有限公司” to “腦洞科技有限公司”. On 20 February 2019, the shareholders of the Company approved in an extraordinary general meeting the aforesaid name change and the name change was registered at the Cayman Islands on 21 February 2019.

2 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Corporate Information

BOARD OF DIRECTORS Executive Directors

Mr. Zhang Liang Johnson (Chairman) Mr. Tong Wen-hsin (appointed as executive director with effect from 16 September 2019 and as chief executive officer with effect from 23 April 2020) Ms. Wan Duo

Independent Non-Executive Directors

Mr. Xu Liang Mr. Chen Johnson Xi Ms. Zhang Yibo

COMPANY SECRETARY

Mr. Kwong Lun Kei Victor (appointed on 1 April 2020) Mr. Lui Wing Yat Christopher (resigned on 1 April 2020)

AUTHORISED REPRESENTATIVES

Ms. Wan Duo Mr. Kwong Lun Kei Victor (appointed on 1 April 2020) Mr. Lui Wing Yat Christopher (resigned on 1 April 2020)

AUDIT COMMITTEE

Mr. Xu Liang (Chairperson) Mr. Chen Johnson Xi Ms. Zhang Yibo

REMUNERATION COMMITTEE

Mr. Chen Johnson Xi (Chairperson) Mr. Xu Liang Ms. Zhang Yibo Ms. Wan Duo

NOMINATION COMMITTEE

Ms. Zhang Yibo (Chairperson) Mr. Xu Liang Mr. Chen Johnson Xi Ms. Wan Duo

AUDITOR

SHINEWING (HK) CPA Limited Certified Public Accountants 43rd Floor, Lee Garden One 33 Hysan Avenue Causeway Bay Hong Kong

PRINCIPAL BANKERS

DBS Bank (Hong Kong) Limited China Construction Bank Dah Sing Bank

REGISTERED OFFICE

Cricket Square Hutchins Drive PO Box 2681 Grand Cayman KY1-1111 Cayman Islands

PRINCIPAL PLACE OF BUSINESS IN HONG KONG

Office A, 31st Floor Billion Plaza II 10 Cheung Yue Street Cheung Sha Wan Kowloon Hong Kong

HONG KONG LEGAL ADVISER

Michael Li & Co. 19/F., Prosperity Tower No. 39 Queen’s Road Central Central Hong Kong

SHARE REGISTRAR AND TRANSFER OFFICES

Principal share registrar

Conyers Trust Company (Cayman) Limited Cricket Square Hutchins Drive PO Box 2681 Grand Cayman KY1-1111 Cayman Islands

Hong Kong branch share registrar Tricor Investor Services Limited Level 54 Hopewell Centre 183 Queen’s Road East Hong Kong

STOCK CODE

2203

WEBSITE OF THE COMPANY

www.brainholetechnology.com

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 3

Chairman’s Statement

On behalf of the Board, I am pleased to present the audited financial results of the Group for the year ended 31 December 2019.

BUSINESS OVERVIEW

Overall, the Group has been faced with challenges in 2019 and the momentum of its growth has significantly affected in 2019. Due to the global trade dispute and the tariff battle between China and the United States, most of the Group’s customers of semiconductors took a conservative approach in planning their business, and have slowed down their new order placing during the Period.

Moreover, the Group’s production line of self-manufactured semiconductors continued to face the rapid technological changes and evolving industry standards. Certain types of self-manufactured semiconductors no longer meet the new technological standard required by customers. Accordingly, provision for impairment loss of plant and equipment and inventory were made during the Period. On the other hand, increasing labour cost driven by the labour shortage for the factory in the PRC and the additional costs incurred for new quality assurance system to cope with customers’ new technological requirements on semiconductors also put downward pressure to the operating performance during the Period.

To diversify the Group’s business portfolio, the Group proactively expanded the business to smart living sector during the Period, by completing the acquisition of Guangzhou Weaving, which is principally engaged in broadband infrastructure construction and the provision of integrated solution for smart domain application (including smart home, smart campus and smart communities) in PRC. Its smart domain solution includes hardware for security and identification purposes, software for residence management, energy saving and community services. As smart living has become increasingly popular, the Group believes that the acquisition can further enhance shareholders’ equity.

The Group’s two principal operating subsidiaries, namely Dongguan Jia Jun Electronic Technology Company Limited and Guangzhou Weaving continued to enjoy the status of High and New-Technology Enterprise and are entitled to a reduced PRC Enterprise Income Tax rate at 15%.

BUSINESS OUTLOOK

Despite the trade tensions having been slightly eased upon the signing of Phase-One trade deal between the United States and China, there are still uncertain factors in between. In addition, the recent outbreak of the coronavirus disease put new downward pressure to the global economy. The Group’s production of semiconductors had also been temporarily suspended after the Chinese New Year. There is still no clue when the coronavirus disease will be under control and it is expected that part of the customer orders of semiconductors would be affected due to the slower economic activity, especially for customers in the PRC and Korea. Although the Group’s production and operation have been resumed, the financial impact of the coronavirus disease to the Group has to be further observed.

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Chairman’s Statement

On the other hand, under the China’s state policies, technological innovation and development are highly encouraged and supported. At present, China maintains a leading position in 5G network technology in the world, and the full implementation of 5G network in commercial and civilian applications has already been commenced in 2020. It is foreseeable that artificial intelligence, Internet of Things, cloud computing and big data processing will be benefited continuously from the PRC government’s dedicated support in its development. The technological innovation will speed up and further stimulate the growth and development of technological application in the smart living sector. In view of these, the Group will capitalise the fast-growing demand of technological application in the smart living sector.

In the future, Guangzhou Weaving is dedicated to be a hardware solution integrator for smart domain application. Hence, we will keep searching for other acquisition or investment targets, primarily focusing on areas of smart living related technology and electronic parts for artificial intelligence and Internet of Things, which could have potential business synergy with Guangzhou Weaving and semiconductor business.

In supporting all these business expansion and development plans, we welcome Mr. Tong Wen-hsin to join our Board and management team, who possesses extensive experience in the investment banking, finance and information technology fields as well as general management.

Looking forward, the Group is vigorous to explore other possible business opportunities, which includes developing smart campus in the PRC, an all-in-one technological innovation industrial parks, that supports and pilots application of innovative solutions, drive new technology development and enhance collaboration of high technology companies. By leveraging the management team’s expertise and network in the field of mobile telecommunication, networking and smart city, and our well-established relationship with telecom carriers and property developers (such as Seedland and R&F Properties), we aim to assist local government to build up the smart campus from scratch, including building the innovation centers, inserting necessary infrastructure and technological support. We believe, with the supportive preferential policies from local government, the smart campus can act as an incubator to attract talents and enterprises from nationwide and worldwide to start their research and development and production line of smart technologies within the parks. We can enjoy the synergy created together with the incubatees, the property developers and the local government.

APPRECIATION

On behalf of the Board, I would like to express our gratitude to our staff for their hard work and the support of the Group from all our Shareholders and stakeholders.

Zhang Liang Johnson

Chairman

Hong Kong, 31 March 2020

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 5

Management Discussion and Analysis

BUSINESS REVIEW

The Group is principally engaged in the assembly, packaging and sales of its self-manufactured discrete semiconductors and trading of semiconductors sourced from third-party suppliers.

Due to the global trade dispute and the tariff battle between China and the United States, most of the Group’s customers of semiconductors took a conservative approach in planning their business, and have slowed down their placing of new order during the Period. As a result, the Group’s turnover from manufacturing and trading of semiconductors for the Period dropped by approximately 19.8% as compared to the previous financial year.

During the Period, the turnover from manufacturing business of semiconductors has recorded a decrease of approximately 18.3% as compared to the previous financial year. In addition to its manufacturing business, the Group continues to operate its trading business during the Period, primarily to supplement its sales of self-manufactured products. The Group acts as a solution kits integrator and is engaged in trading of semiconductors that its customers specifically require. These semiconductors, however, are not manufactured by the Group. The product mix required by customers varies from time to time. During the Period, global trade dispute and the tariff battle also hit the trading operations and the turnover from trading of semiconductors dropped by approximately 22.5% as compared to the previous financial year.

During the Period, the Group continued its ongoing efforts in research and development (“R&D”) and innovations. Regarding the semiconductors business, the Group registered 33 patent rights in the PRC in respect of its process innovation and product innovation in 2019. The Group’s principal operating subsidiaries continued to enjoy the status of High and New-Technology Enterprise and is entitled to a reduced PRC Enterprise Income Tax rate at 15%.

The number of the Group’s customers of semiconductors increased from 160 as at 31 December 2018 to 169 as at 31 December 2019.

During the Period, the Group completed the acquisition of Guangzhou Weaving, which is principally engaged in broadband infrastructure construction and the provision of integrated solution for smart domain application (including smart home, smart campus and smart communities) in PRC. Its smart domain solution includes hardware for security and identification purposes, software for residence management, energy saving and community services. As smart living has become increasingly popular, the Group believes that the expansion of business to smart living sector can enhance Shareholders’ equity and diversify the Group’s risk portfolio.

FINANCIAL REVIEW

Turnover

For the year ended 31 December 2019, the Group recorded turnover of approximately HK$346.7 million, as compared to the turnover of approximately HK$388.7 million for the year ended 31 December 2018. The decrease in turnover was approximately HK$42.0 million or 10.8% when compared to the previous year. It was primarily attributable to the decrease in the sales of semiconductors business as a result of the slowdown of customers’ order due to the global trade dispute and tariff battle.

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Management Discussion and Analysis

The slowdown of customers order hit both the manufacturing and trading business of semiconductors. During the Period, the Group recorded a turnover of approximately HK$183.5 million from sales of its selfmanufactured semiconductors, representing a decrease of approximately HK$41.1 million or 18.3% as compared to that of approximately HK$224.7 million for the year ended 31 December 2018. The production volume of the Group’s self-manufactured semiconductors witnessed an overall decrease during the Period when compared to the previous financial year.

The Group’s trading of semiconductors primarily complements sales of self-manufactured semiconductors when it provides solution kits services to its customers. During the Period, the Group’s turnover derived from its trading of semiconductors amounted to approximately HK$95.8 million, representing a decrease of approximately HK$27.8 million or 22.5% as compared to that of approximately HK$123.6 million for the year ended 31 December 2018.

The operating results of Guangzhou Weaving Group was consolidated to the Group since 27 April 2018 when the common control by Mr. Zhang firstly existed. Therefore, the decrease in turnover was partially offset with the increase in turnover brought from Guangzhou Weaving Group, which contributed approximately HK$67.3 million to the Group’s turnover during the Period, compared to the turnover of approximately HK$40.4 million for the period from 27 April 2018 to 31 December 2018.

Gross Profit and Gross Profit Margin

The Group’s gross profit amounted to approximately HK$61.0 million for the Period, representing a decrease of approximately HK$43.1 million or 41.4% from approximately HK$104.1 million for the year ended 31 December 2018. It was mainly attributable to the decrease in turnover and gross profit margin of semiconductors business, which led to the gross profit of semiconductors business decreased from approximately HK$90.8 million for the year ended 31 December 2018 to approximately HK$38.3 million for the Period.

However, Guangzhou Weaving contributed gross profit of approximately HK$22.7 million for the Period, while recorded gross profit of approximately HK$13.3 million for the period from 27 April 2018 to 31 December 2018.

The Group’s overall gross profit margin for the Period was approximately 17.6%, representing a decrease of approximately 9.2 percentage points as compared with gross profit margin of approximately 26.8% for the year ended 31 December 2018. Such decrease was primarily due to the decrease of gross profit margin of semiconductor business, which decreased from approximately 26.1% for the year ended 31 December 2018 to approximately 13.7% for the Period. This was mainly attributable to (i) the increase in labour costs driven by the labour shortage for the manufacture of semiconductors in Dongguan, Guangdong, the PRC; and (ii) the additional costs incurred for new quality assurance system to cope with customers’ new technological standard and requirements on semiconductors.

The gross profit margin of Guangzhou Weaving Group’s business remained relatively stable at approximately 33.7% and 32.9% respectively for the Period and the period from 27 April 2018 to 31 December 2018.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 7

Management Discussion and Analysis

Selling and Distribution Costs

The Group’s selling and distribution costs for the Period was approximately HK$11.2 million, representing a decrease of approximately HK$2.5 million or 17.9% from approximately HK$13.7 million for the year ended 31 December 2018. The amount mainly represented the selling and distribution costs of semiconductors business and such decrease was in line with the change of turnover of semiconductors during the Period as discussed above.

Administrative Expenses

The Group’s administrative expenses for the Period was approximately HK$72.2 million, representing an increase of approximately HK$21.5 million or 42.4% over that of approximately HK$50.7 million for the year ended 31 December 2018.

The increase was primarily attributable to, among others, (i) additional costs incurred for the improvement of engineering and quality management for semiconductor business; (ii) increase in staff-related expenses during the Period; and (iii) expenses incurred by the Company in relation to the acquisition of Guangzhou Weaving which took place during the Period.

Impairment loss on plant and equipment and inventories

In September 2019, the Group received complaints from a few customers about certain types of semiconductors (the “Specific Types of Semiconductors”) manufactured by a wholly-owned subsidiary of the Group, Dongguan Jia Jun Electronic Technology Company Limited (“Dongguan Jia Jun”) and stated that they would refuse to accept the Specific Types of Semiconductors in the future if the technical standard of semiconductors have not yet improved. Dongguan Jia Jun, therefore, discussed with the relevant customers about the reason for the complaints of the Specific Types of Semiconductors and commenced its internal review procedure.

After due investigation and review by the R&D department of Dongguan Jia Jun in November 2019, it was concluded that the electrical defective parts per million (“DPPM”) level of the Specific Types of Semiconductors was unsatisfactory according to the customers’ technical standard for the production of electronic devices with more advanced technological functions, and the Specific Machineries were unable to manufacture semiconductors that can meet such technical standard of DPPM required by customers.

The Group has been producing the Specific Types of Semiconductors to fulfil the continuous order demand from its customers. It is a flowing process of production of Specific Types of Semiconductors by the Group and the application of the Specific Types of Semiconductors by the customers into the production of various electronic devices. In some circumstances and as requested by the customers, the Specific Types of Semiconductors would be delivered within a short lead time after receiving the customers’ orders.

The Specific Types of Semiconductors delivered to the customers were not defective products. The failure of Specific Types of Semiconductors to meet the DPPM standard during the production process of customers, was only due to the fact that the customers applied the Specific Types of Semiconductors to produce electronic devices with more advanced technological functions and such Specific Types of Semiconductors were no longer up to the technical standard of current market. From the customers’ perspective, the use of Specific Types of Semiconductors, which could not meet the technical standard of DPPM, would result in quality issue during the manufacturing process of the electronic devices with more advanced technological functions.

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Management Discussion and Analysis

As a result, the customers stated that they would not accept the Specific Types of Semiconductors in the future and requested semiconductors with higher technical standard to maintain the DPPM standard during the production process of electronic devices with more advanced technological functions.

In this regard, the Company would like to emphasis that there was no return of Specific Types of Semiconductors which has been delivered to the customers. There were only complaints from a few customers and requested the Group to deliver semiconductors with better technical standard in the future.

In order to establish and maintain long-term and good relationship with its customers, the Group has communicated with customers that the Group will supply the semiconductors that can meet the DPPM standard in the future.

In fact, the Group generated revenue from the sale of the Specific Types of Semiconductors manufactured by the Specific Machineries since 2013. From 2013 to 2019, the Group had also incurred additional capital expenditure to increase the production capacity of the Specific Machineries, so as to fulfil the increasing demand from customers for the Specific Types of Semiconductors. During these years, the Specific Types of Semiconductors manufactured had been accepted by customers and met the customer’s technical standard of DPPM for the production process of electronic devices.

However, the semiconductor industry and its downstream industries are characterised by rapid technological changes and evolving industry standards. During these years, the Group’s R&D department had put effort to improve the quality in order to meet the continuous increasing technological standard required by its customers.

Hence, the failure of Specific Types of Semiconductors manufactured by the Specific Machineries to meet the customers’ technical standard for the production process of electronic devices with more advanced technological functions, was neither due to the fault of the Company nor the relevant suppliers of the Specific Machineries. There is no breach of warranty or compensation in respect of the Specific Machineries by the relevant suppliers.

In December 2019, the Group had further conducted an analysis for the cost-effectiveness of modification and enhancement of the Specific Machineries. It was found that the additional costs of modifying the Specific Machineries go beyond the benefits for the fulfilment of customers’ technological requirements. Moreover, the Group does not have the expertise nor sufficient place to re-equip or re-assemble the Specific Machineries. The Group can only outsource the re-equip or re-assemble of the Specific Machineries, which involves monetary cost and time cost. This is less cost efficient compared with the sale of Specific Machineries and acquisition of new machineries to produce semiconductors that can meet the customers’ technical standard. As a result, the Specific Machineries remained idle.

Future economic benefit of the Specific Machineries that can bring to the Group would likely to be adversely affected. The Group regarded this condition as an indication that the Specific Machineries may be impaired. In view of these, in December 2019, the Group has engaged an independent qualified professional valuer, Valtech Valuation Advisory Limited (“Valtech”), to evaluate the recoverable amounts of the Specific Machineries, which were based on the fair value less costs of disposal. Valtech has appropriate qualifications and has recent experience in the valuation of similar machineries in the relevant industries.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 9

Management Discussion and Analysis

In determining the fair value less costs of disposal, the market approach is mainly adopted by Valtech which considers prices recently paid for similar assets in an active market, with adjustments made to the indicated market prices to reflect condition and utility of the appraised assets relative to the market comparative, as well as quotations from second hand traders. Valtech has assumed that the equipment is capable to be used in its present existing state and in normal working condition and has come to the conclusion that the fair value less costs of disposal of the Specific Machineries was approximately HK$15.3 million. As a result, impairment loss of approximately HK$22.5 million was recorded. For more details of the impairment loss, please refer to the note 16 and note 40 to the consolidated financial statements of this report.

In order to assess the fairness and reasonableness of the impairments, the directors have considered the fair value with reference to the second hand market price quotation and Valtech’s valuation report for the Impaired PPE, and are of the view that the conclusion of the fair value of Impaired PPE of approximately HK$15.3 million is fair and reasonable.

On the other hand, the Specific Types of Semiconductors manufactured by the Specific Machineries were tailor-made based on the customers’ specifications, It requires lots of time and manpower to check and select the Specific Types of Semiconductors for testing and modification one by one, which are tiny in size (e.g. 1.0mm x 0.6mm x 0.38mm). From the economic perspective, it is not possible to modify and it is more cost efficient to manufacture a new batch of semiconductors. Therefore, the possibility of reselling them to the market is remote. The net realizable values of the respective inventories including finished goods and raw materials are anticipated to be minimal as at 31 December 2019. As a result, these inventories with carrying amount of approximately HK$10.3 million were fully impaired.

In conclusion, the impairment of inventories and plant and equipment was mainly due to technological advancement of electronic devices, the Specific Machineries can no longer produce semiconductors up to the technical standard required by current market. As a result, the Specific Machineries and Specific Types of Semiconductors became obsolete.

All these circumstances were not anticipated by the Group at the time of acquisition of the Specific Machineries, most of which were already made by the Group for two to six years ago.

The Company’s plan on the Specific Machineries

The Specific Machineries, mainly comprising of aluminum wire bonding machine, automatic dispensing machine, cutting machine, die bonding machine, high-speed die bonding machine, high-speed wire bonding machine, encapsulate molding machine, forming machine, laser label printing machine, laser marking machine, sorting machine, test handler, testing system and other production machinery, were acquired by the Group from over 20 suppliers, which were all third parties independent of and not connected with the Company and its connected persons (as defined in the Listing Rules), on arm’s length basis. Most of the Specific Machineries had been purchased by the Group for two to six years and the transaction amount ranged from approximately HK$20,000 to HK$8 million.

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Management Discussion and Analysis

The management believes that the Specific Machineries still have re-sale value in the second hand market for some manufacturers/recyclers of machinery and equipment, which have the ability to re-equip or re-assembly the Specific Machineries with relatively lower cost. Hence, the Group will seek for the opportunities to sell the Specific Machineries to these manufacturers/recyclers or other interested parties in the second hand market. In view of these, the Specific Machineries are classified as “Non-current asset classified as held for sale” in the consolidated statement of financial position as at 31 December 2019. However, the management expects that this plan of disposal is unlikely to constitute a notifiable transaction under Chapter 14 of the Listing Rules as the Specific Machineries will be sold in different tranches to different manufacturers and the Company will comply with the relevant requirements under Chapter 14 of the Listing Rules in respect of the disposal of the Specific Machineries where necessary.

Income Tax Expense

The Group’s income tax credit for the Period was approximately HK$4.7 million, as compared to income tax expense of approximately HK$3.9 million for the year ended 31 December 2018. Such decrease of income tax expense was primarily attributable to decrease in operating profits from semiconductors business due to the factors discussed above and the deferred tax impact arising from the impairment loss on trade receivables, plant and equipment and inventories.

(Loss) Profit for the Period

As a result of the foregoing, the Group’s net loss for the Period was approximately HK$49.9 million, when compared to the net profit of approximately HK$38.1 million for the year ended 31 December 2018.

LIQUIDITY AND FINANCIAL RESOURCES AND CAPITAL STRUCTURE

During the Period, the operations of the Group were primarily funded by internally generated cash flows.

The Group’s outstanding capital commitments as at 31 December 2019 amounted to approximately HK$6.0 million (2018: HK$28.9 million). Such commitments primarily related to the broadband infrastructure construction and purchase of equipment and machinery to meet the demand of the market and quality control improvements in the production plant. Such outstanding commitments are expected to be funded by the Group’s internally generated funds.

As at 31 December 2019, the Group had no outstanding bank borrowings.

Please refer to note 24 to the consolidated financial statements in this report for the ageing analysis in respect of the trade payables of the Group as at 31 December 2019 and 2018.

The Group’s gearing ratio as at 31 December 2019 and 2018, which were calculated by dividing its total bank borrowings by its total equity as at those dates, were both nil due to the absence of bank borrowings as at those dates.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 11

Management Discussion and Analysis

The Group adopts conservative treasury policies in cash and financial management. To achieve better risk control and minimise the cost of funds, the Group’s treasury activities are centralised with all bank deposits denominated either in HK$, US$ or RMB. The Group’s liquidity and financing requirements are reviewed regularly. The Group will continue to maintain a prudent capital structure when considering financing for new investments.

CHARGES ON GROUP ASSETS

As at 31 December 2019, the Group did not have any asset pledged while as at 31 December 2018, asset of approximately HK$5.1 million was pledged to a bank to secure short-term bank facilities granted to the Group.

SIGNIFICANT INVESTMENTS/MATERIAL ACQUISITIONS AND DISPOSALS

On 5 March 2019 (after trading hours of the Stock Exchange), Brainhole Technology Investments Limited (“Purchaser”), a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of the Company, Guangzhou Chong Dong, a company established in the PRC and wholly beneficially owned by Mr. Zhang, the chairman and an executive Director and Guangzhou Weaving, a company established in the PRC entered into an agreement (the “Agreement”), pursuant to which, among other things, the Purchaser conditionally agreed to acquire and Guangzhou Chong Dong conditionally agreed to sell the entire equity interest of the Guangzhou Weaving at the consideration of RMB68 million (subject to adjustments).

On 20 August 2019, an extraordinary general meeting of the Company was held during which the independent Shareholders approved the Agreement and the transaction contemplated thereunder. Completion of the transaction took place on 12 September 2019 and Guangzhou Weaving and its subsidiary have become indirect wholly-owned subsidiaries of the Company.

Other than the above, the Group has not made any significant investments or material acquisitions and disposals of subsidiaries during the Period.

PROFIT GUARANTEE

Pursuant to the Agreement, Guangzhou Chong Dong has irrevocably warranted and guaranteed to the Purchaser that the aggregate consolidated net profit after tax as shown in the audited reports of the Guangzhou Weaving Group for the two years ended 31 December 2019 (the “Aggregate Guaranteed Profit”) shall not be less than RMB10 million. For further details of the profit guarantee, please refer to the circular of the Company dated 30 July 2019.

According to the audited consolidated financial statements of the Guangzhou Weaving Group for the financial years ended 31 December 2018 and 31 December 2019, which was prepared in accordance with the accounting principles generally accepted in the PRC, the aggregate consolidated net profit after tax of the Guangzhou Weaving Group for the two years ended 31 December 2019 amounted to approximately RMB6,786,000 and was less than the Aggregate Guaranteed Profit.

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Management Discussion and Analysis

As a result, the consideration for the acquisition of Guangzhou Weaving pursuant to the Agreement was adjusted downward pursuant to the terms of the Agreement and the adjusted consideration is approximately RMB46,145,000. For more details of the adjusted consideration, please refer to the announcement of the Company dated 20 April 2020.

The Company has agreed the payment date to settle the adjusted consideration with the Vendor on or before 31 December 2020. It is expected that the Company will settle the adjusted consideration by both its internal resources and external financing either from independent third party(ies) or from the Vendor (by itself or through its related parties) by way of unsecured interest-free loan(s) to the Group.

CONTINGENT LIABILITIES

As at 31 December 2019, the Group did not have any significant contingent liabilities (2018: Nil).

EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES

The Group is exposed to foreign currency risks as several of its subsidiaries have foreign currency sales and purchases. For the years ended 31 December 2019 and 2018, approximately 48% and 66%, respectively, of the Group’s sales were denominated in currencies other than the functional currency of the relevant group entities making the sale, and approximately 85% and 65%, respectively, of purchases were denominated in the relevant group entities’ functional currency.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities as at 31 December 2019 and 2018 are as follows:

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Assets Liabilities
As at 31 December As at 31 December
2019 2018 2019 2018
HK$’000 HK$’000 HK$’000 HK$’000
United States dollars 47,563 74,994 4,998 6,123
Renminbi 2,277 7,155 74 90
49,840 82,149 5,072 6,213
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The Group currently does not have a foreign currency hedging policy. However, the Directors continuously monitor the related foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 13

Management Discussion and Analysis

HUMAN RESOURCES

As at 31 December 2019, the Group had a workforce of 486 full-time employees (including the three executive Directors but excluding the three independent non-executive Directors) of whom approximately 96.5% were employed in the PRC and approximately 3.5% in Hong Kong. The Group’s staff costs (including Directors’ emoluments) for the years ended 31 December 2019 and 2018 amounted to approximately HK$58.9 million and HK$48.7 million, respectively. The Group’s employees in Hong Kong are required to participate in the Mandatory Provident Fund scheme under which it is required to contribute a fixed percentage of the employees’ payroll costs (up to a maximum of HK$1,500 per month) to the scheme. For the Group’s employees in the PRC, the Group makes contributions to various government sponsored employee benefit funds, including housing provident fund, basic pension insurance fund, basic medical insurance, unemployment insurance, maternity insurance and work related injury insurance funds in accordance with applicable PRC laws and regulations.

The Group generally recruits employees from the open market. It actively pursues a strategy to recruit, develop and retain talented employees by (i) providing them with training programs on a regular basis to keep them abreast of their knowledge in the products it distributes, technology development and market conditions of the electronics industry, broadband infrastructure industry and smart domain industry; (ii) aligning employees’ compensation and incentives with their performance; and (iii) providing them with a clear career path with opportunities for additional responsibilities and promotions.

ENVIRONMENTAL MATTERS

While the Group is subject to the PRC environmental laws and regulations including the Environment Protection Law of the PRC, which govern a broad range of environmental matters, including air pollution, noise emissions, discharge of waste water and waste residues, the Directors believe that the Group’s production process does not generate environmental hazards which would pose a significant adverse effect on the environment and that the environmental protection measures undertaken by the Group are adequate to comply with all applicable current local and national PRC regulations.

During the Period and to the best of the Directors’ knowledge, the Group had not received any complaints from its customers or any other parties in respect of any environmental protection issues, and had not experienced any material environmental incidents arising from its manufacturing activities. During the Period, no administrative sanctions or penalties were imposed on the Group for the violation of environmental laws or regulations which had a material adverse impact on its operations.

Please also refer to the Environmental, Social and Governance Report in this report.

DIVIDENDS

The Board does not recommend the payment of a final dividend for the Period (2018: Nil).

14 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Management Discussion and Analysis

BUSINESS PROSPECT

Despite the trade tensions having been slightly eased upon the signing of Phase-One trade deal between the United States and China, there are still uncertain factors in between. In addition, the recent outbreak of the coronavirus disease put new downward pressure to the global economy. The Group’s production of semiconductors had also been temporarily suspended after the Chinese New Year. There is still no clue when the coronavirus disease will be under control and it is expected that part of the customer orders of semiconductors would be affected due to the slower economic activity, especially for customers in the PRC and Korea. Although the Group’s production and operation have been resumed, the financial impact of the coronavirus disease to the Group has to be further observed.

The semiconductor industry is characterized by rapid technological changes and evolving industry standards and an effective quality assurance system is critical to the success of the Group. The Group intends to continue its research and development to strengthen its production process and quality control.

On the other hand, upon the completion of the acquisition of Guangzhou Weaving during the Period, the Group proactively expanded its business to smart living sector. Guangzhou Weaving is principally engaged in broadband construction infrastructure and the provision of integrated solutions for smart domain application in the PRC, which include smart home, smart campus and smart communities. Under the China’s state policies, technological innovation and development are highly encouraged and supported. At present, China maintains a leading position in 5G network technology in the world, and the full implementation of 5G network in commercial and civilian applications has already been commenced in 2020. It is foreseeable that artificial intelligence, Internet of Things, cloud computing and big data processing will be benefited continuously from the PRC government’s dedicated support in its development. The technological innovation will speed up and further stimulate the growth and development of technological application in the smart living sector. In view of these, the Group will capitalise the fast-growing demand of technological application in the smart living sector.

In the future, Guangzhou Weaving is dedicated to be a hardware solution integrator for smart domain application. Hence, the Group will keep searching for other acquisition or investment targets, primarily focusing on areas of smart living related technology and electronic parts for artificial intelligence and Internet of Things, which could have potential business synergy with Guangzhou Weaving and semiconductor business.

Looking forward, the Group is vigorous to explore other possible business opportunities, and one of the potential opportunities is to develop smart campus in the PRC, an all-in-one technological innovation industrial parks, that supports and pilots application of innovative solutions, drive new technology development and enhance collaboration of high technology companies. The Group possesses strong management team with high technology expertise and network in the field of mobile telecommunication, networking and smart city. Leveraging on its well-established relationship with telecom carriers and property developers (such as Seedland and R&F Properties), the Group aims to assist local government to build up the smart campus from scratch, including building the innovation centers, inserting necessary infrastructure and technological support. We believe, with the supportive preferential policies from local government, the smart campus can act as an incubator to attract talents and enterprises from nationwide and worldwide to start their research and development and production line of smart technologies within the parks. The Group can enjoy the synergy created together with the incubatees, the property developers and the local government.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 15

Biographical Details of Directors and Senior Management

EXECUTIVE DIRECTORS

Mr. Zhang Liang Johnson

Mr. Zhang Liang Johnson (“Mr. Zhang”), aged 38, is the Chairman of the Company and has been appointed as an executive Director with effect from 19 May 2018. He is the sole shareholder of Yoho Bravo Limited, the controlling shareholder of the Company. He is an entrepreneur in various industries, including real estate, energy and film and television etc. Mr. Zhang has more than 7 years of experience in the energy sector. Mr. Zhang is the controlling shareholder and an executive director of Kinetic Mines and Energy Limited (stock code: 1277), the issued shares of which are listed on the Main Board of the Stock Exchange. He is also the controlling shareholder, an executive director and the chairman of Transmit Entertainment Limited (stock code: 1326), the issued shares of which are listed on the Main Board of the Stock Exchange. He is a director of Seedland Construction Holdings Limited, a company incorporated in Hong Kong on 15 July 2008 with limited liability which, through its subsidiaries, principally engaged in real estate business. Mr. Zhang has also made other financial investments in the technology and manufacturing sectors involving three-dimensional (3D) printing, virtual reality applications and artificial intelligence.

Mr. Tong Wen-hsin

Mr. Tong Wen-hsin (“Mr. Tong”), aged 54, has been appointed as an executive Director and acting chief executive officer with effect from 16 September 2019 and was re-designated from acting chief executive officer to chief executive officer with effect from 23 April 2020. He has over 28 years of experience in the investment banking, finance and information technology fields as well as general management experience. Since November 2018, Mr. Tong has been acting as a director of Microlife Corporation (“Microlife”) and its related holding companies. Microlife, based in Taiwan, is a leading consumer medical device company globally. From July 2004, he had worked in FIH Mobile Limited (“FIH”), a company incorporated in the Cayman Islands with limited liability, the issued shares of which are listed on the Main Board of the Stock Exchange (stock code: 2038), as director of investments and investor relations before getting appointed as an executive director of FIH on 26 July 2012 and the chairman of the board of directors of FIH on 1 January 2013. He held these positions until 31 December 2016. From 2000 to 2004, he worked at ABN AMRO Rothschild, in which he served as a director of the equity capital markets department, and was responsible for capital raising and underwriting of various equity and equity-linked issues of Asian corporate clients. From 1995 to 2000, he worked in the equity capital markets department of Jardine Fleming and Robert Fleming in Hong Kong and London, after working in the marketing and sales departments of International Business Machines Corporation in Taiwan from 1990 to 1993. He obtained a Master of Business Administration (MBA) degree from London Business School, United Kingdom in 1995.

Ms. Wan Duo

Ms. Wan Duo (“Ms. Wan”), aged 31, has been appointed as an executive Director with effect from 19 May 2018. She holds a master’s degree in education from Harvard University and a bachelor’s degree in literature from Renmin University of China. She is experienced in corporate finance, mergers and acquisitions, investment management and corporate governance with a focus on financial and technology investments and management gained from financial and insurance institutions in Singapore and China. Ms. Wan is currently working in the Seedland group of China responsible for its strategic investments.

16 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Biographical Details of Directors and Senior Management

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. Xu Liang

Mr. Xu Liang (“Mr. Xu”), aged 44, has been appointed as an independent non-executive Director with effect from 9 June 2018. He holds a bachelor’s degree in English and a bachelor’s degree in corporate management from Tsinghua University and a master’s degree in business administration from Harvard University. He has experience in financial management of listed companies, including China Digital TV Holding Co., Ltd., which was a New York Stock Exchange-listed company (then stock code: NYSE:STV). He is also the chairman of Fintalk China（新財知社）and an independent director of Thunder Software Technology Co., Ltd., the A shares of which are listed and traded on the Shenzhen Stock Exchange (stock code: 300496.SZ).

Mr. Chen Johnson Xi

Mr. Chen Johnson Xi (“Mr. Chen”), aged 37, has been appointed as an independent non-executive Director with effect from 9 June 2018. He is a seasoned investor and entrepreneur having worked on numerous venture capital, private equity, IPOs and M&A transactions globally. He is currently the chief executive officer of an Asian based asset management company with businesses in financial services, telecommunications, media, technology (TMT), retail and high technology. Mr. Chen has held senior leadership roles at PwC Strategy& (Formerly Booz & Company), KPMG M&A Advisory and Accenture. He holds a Bachelor’s degree in Information Systems and Post Graduate Certificate of Applied Commerce from The University of Melbourne.

Ms. Zhang Yibo

Ms. Zhang Yibo (“Ms. Zhang”), aged 38, has been appointed as an independent non-executive Director with effect from 9 June 2018. She graduated with a bachelor’s degree in economics from Nankai University in 2003 and a master’s degree in business administration from The Hong Kong University of Science and Technology. She has experience in asset management, management of listed companies and their investment in Hong Kong and China. From October 2012 to February 2013, she was a director of Bingo Group Holdings Limited (stock code: 8220.HK) which is principally engaged in (among other things) movie production, licensing, crossover marketing and provision of interactive contents. Ms. Zhang is currently the chief operation officer and a responsible officer of Alphawise Asset Management Limited and a licensed officer under the SFO, registered to conduct Type 9 (asset management) regulated activity under the SFO.

SENIOR MANAGEMENT

Mr. Liu Yi

Mr. Liu Yi (“Mr. Liu”), aged 45, is the chief executive officer of Guangzhou Weaving Communications Telecommunications Technology Limited*（廣州織網通訊科技有限公司）. Mr. Liu joined the Group in September 2019. Mr. Liu has over 18 years of experience in relation to product R&D and operation management in mobile communication, new energy and smart city fields. Mr. Liu graduated from Nanjing University in July 2002 with a master’s degree in computer application. From 2002 to 2017, he served as the general manager for product lines in Huawei Technologies Co., Ltd. which is the world’s leading provider of ICT (information and communications) infrastructure and intelligent terminals, and was responsible for product R&D and operation management in mobile communication value-added services. From 2017 to 2019, he served as the vice general manager of business division in Envision Group, which is the world’s leading company specializing in digital energy technology and intelligent wind turbine products, and was responsible for the innovation and incubation of the group’s products and solutions in new fields.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 17

Biographical Details of Directors and Senior Management

Mr. Chan Chun Sing

Mr. Chan Chun Sing (“Mr. Chan”), aged 36, joined the Group in October 2019 as our financial controller. Mr. Chan is primarily responsible for the Group’s overall financial strategies, and daily management of the Group’s financial and accounting function. Mr. Chan has over 14 years of experience in accounting, auditing and financial management. Prior to joining the Group, Mr. Chan worked in an international accounting firm from September 2005 to September 2010. From September 2010 to March 2015, he served as accounting manager of China Lumena New Material Corp. (stock code: 67). From May 2015 to January 2016, he served as the vice director of finance department of Hong Kong Huafa Investment Holdings Limited, a subsidiary of a state-owned enterprise in Zhuhai. From February 2016 to September 2019, he was the executive director, chief financial officer and company secretary of Grand Brilliance Group Holdings Limited (stock code: 8372), and was responsible for overseeing the group’s accounting, financial and company secretarial functions.

Mr. Chan graduated from the University of Hong Kong in 2005 with a bachelor’s degree in Business Administration majoring in Accounting and Finance. He is a member of the Hong Kong Institute of Certified Public Accountants and the Hong Kong Institute of Chartered Secretaries.

COMPANY SECRETARY

Mr. Kwong Lun Kei Victor

Mr. Kwong Lun Kei Victor (“Mr. Kwong”), aged 38, is a practising solicitor and was admitted as a solicitor in Hong Kong in 2010. He obtained his Bachelor of Laws and Bachelor of Commerce from University of New South Wales, Australia in 2007. He has over ten (10) years of experience in corporate finance and primarily advises on listings of companies on the Stock Exchange, mergers and acquisitions, regulatory compliance and other commercial law matters.

18 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Directors’ Report

The Directors submit their report together with the audited consolidated financial statements for the Period.

PRINCIPAL ACTIVITIES

The principal activity of the Company is investment holding. The Group is principally engaged in the assembly, packaging and sales of its self-manufactured discrete semiconductors and trading of semiconductors sourced from third-party suppliers. Pursuant to the acquisition transaction as fully explained in note 2 to the consolidated financial statements, the Group has acquired the entire equity interest of Guangzhou Weaving on 12 September 2019. Guangzhou Weaving Group is principally engaged in broadband infrastructure construction and the provision of integrated solution for smart domain application (including smart home, smart campus and smart communities) in PRC.

RESULTS OF THE GROUP

The Group’s results for the Period and the state of affairs of the Company and the Group as at 31 December 2019 are set out in the audited consolidated financial statements on pages 63 to 151 of this report.

BUSINESS REVIEW

A business review in respect of the Group’s performance during the Period and the material factors underlying its results and financial position, principal risks and uncertainties facing the Group are set out in the section headed “Management Discussion and Analysis” in this report. Please also refer to the section headed “Chairman’s Statement’ in this report for discussions on the Group’s business outlook and the section headed “Environmental, Social and Governance Report” for the Group’s environmental policies and performance during the Period. Such review and discussion form parts of this Directors’ Report.

SUMMARY OF FINANCIAL INFORMATION

A summary of the published results and the assets and liabilities of the Group for the last five years is set out on page 152 of this report.

SHARE CAPITAL AND ISSUE OF SECURITIES DURING THE PERIOD

Details of movements in the share capital of the Company are set out in note 29 to the consolidated financial statements. No member of the Group had issued any shares, debentures, convertible securities, options, warrants or similar rights during the Period.

DIVIDENDS AND DIVIDEND POLICY

The Board does not recommend payment of any final dividend for the Period. During the Period, no interim dividend was paid or declared.

The Board has discretion to declare and distribute dividends to Shareholders subject to the provisions of the constitutional documents of the Company, and applicable laws and regulations. In considering whether to recommend or declare dividends, the Board will also take into account a number of factors including but not limited to financial results, cash flow situation, business conditions and strategies, future operations and earnings, capital requirements and expenditure plans, interests of shareholders, any restrictions on payment of dividends and any other factors that the Board may consider relevant.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 19

Directors’ Report

RESERVES

As at 31 December 2019, the total reserves available for distribution, taking into account accumulated losses, to Shareholders by the Company amounted to approximately HK$56.1 million (2018: HK$68.4 million). Details of movements in the reserves of the Company during the Period are set out in the Consolidated Statement of Changes in Equity and note 30 to the consolidated financial statements.

PROPERTY, PLANT AND EQUIPMENT

Details of movements in the plant and equipment of the Group during the Period are set out in note 16 to the consolidated financial statements. The Group did not have any investment property as at 31 December 2019.

PRE-EMPTIVE RIGHTS

There are no provisions for pre-emptive rights under the Articles and there is no restriction against such rights under the laws of the Cayman Islands which would oblige the Company to offer new shares on a pro-rata basis to existing Shareholders.

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the Period.

SHARE OPTION SCHEME

The Company adopted a share option scheme on 23 September 2015 whose terms are consistent with the provisions under Chapter 17 of the Listing Rules (the “Scheme”).

The Scheme is valid and effective for a period of 10 years from 9 October 2015 and its purpose is to reward eligible participants who have contributed or will contribute to the Group and to encourage eligible participants to work towards enhancing the value of the Company and its Shares for the benefits of the Company and its Shareholders as a whole, and to maintain or attract business relationships with participants whose contributions are or may be beneficial to the growth of the Group.

Eligible participants of the Scheme include (i) any Directors (including executive Directors, non-executive Directors and independent non-executive Directors) and employees of any member of the Group; and (ii) any advisers, consultants, distributors, contractors, suppliers, agents, customers, business partners, joint venture business partners, promoters, service providers of any member of the Group, whom the Board considers, in its sole discretion, to have contributed or will contribute to the Group.

The total number of Shares available for issue under the Scheme is 80,000,000 Shares, representing 10% of the total number of Shares in issue. The total number of Shares to be issued upon exercise of the share options granted to each eligible participant under the Scheme in any 12-month period must not exceed 1% of the total number of Shares then in issue, unless approved by Shareholders in general meeting pursuant to the requirements under the Listing Rules. The number of Shares to be issued in respect of which options may be granted to a substantial Shareholder or an independent non-executive Director or any of their respective close associates (within the meaning of the Listing Rules) representing in aggregate over 0.1% of the total number of the Shares on the date of such grant and with an aggregate value in excess of HK$5,000,000 must be approved by Shareholders in general meeting.

20 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Directors’ Report

SHARE OPTION SCHEME (Continued)

An offer of a grant of share options under the Scheme may be accepted within five business days from the date on which the offer is made with a cash consideration of HK$1.00 payable to the Company. The period for the exercise of a share option is determined by the Board in its sole discretion, but such period shall not be more than 10 years from the date of grant of the option.

Under the Scheme, the subscription price payable upon exercise of any options granted is determined by the Board but in any event it shall be at least the highest of: (i) the closing price of the Shares as stated in the Stock Exchange’s daily quotation sheets on the date on which the option is offered to a participant; (ii) the average of the closing prices of the Shares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the date of offer of the option; and (iii) the nominal value of the Shares.

No share option has been granted since the adoption of the Scheme and there was no share option outstanding as at 31 December 2019.

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Brief biographical details of Directors and senior management of the Company as at the date of this report are set out in the section headed “Biographical Details of Directors and Senior Management” in this report.

LIST OF DIRECTORS

The Directors during the Period and up to the date of this report are:

Executive Directors

Mr. Zhang Liang Johnson (Chairman) Ms. Wan Duo

Mr. Tong Wen-hsin (appointed as executive director and

acting chief executive officer with effect from 16 September 2019)

Independent Non-Executive Directors

Mr. Xu Liang

Mr. Chen Johnson Xi Ms. Zhang Yibo

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 21

Directors’ Report

DIRECTOR’S SERVICE CONTRACTS

There are no service contracts for any of the Directors who are nominated for re-election at the forthcoming annual general meeting of the Company to be held in 2020 which are not determinable by the Group within one year without payment of compensation (other than statutory compensation).

INDEMNITY OF DIRECTORS

The Directors are indemnified against actions, costs, charges, losses, damages and expenses incurred in discharge of their duties subject to the provisions of the articles of association of the Company (the “Articles”) and other applicable legislation. The Company has taken out Directors’ and officers’ liabilities insurance for such purposes for the Period.

EMOLUMENTS OF DIRECTORS, SENIOR MANAGEMENT AND THE FIVE HIGHEST PAID INDIVIDUALS

Details of the emoluments of Directors and the five highest paid individuals in the Group are set out in note 15 to the consolidated financial statements.

The emoluments paid or payable to the senior management of the Group who are not Directors were within the following bands:

==> picture [486 x 50] intentionally omitted <==

----- Start of picture text -----

2019 2018
No. of No. of
employees employees
----- End of picture text -----

Nil to HK$1,000,000	–	–
HK$1,000,001 to HK$1,500,000	3	5
HK$1,500,001 to HK$2,000,000	–	–
HK$2,000,001 to HK$2,500,000	1	–
Above HK$2,500,000	1	–
	5	5

EMOLUMENT POLICY

The Directors and senior management receive compensation in the form of salaries, benefits in kind and discretionary bonuses relating to the performance of the Company. The Company also reimburses them for expenses which are necessarily and reasonably incurred for providing services to the Group or executing their functions in relation to the Group’s operations. The Company reviews and determines the remuneration and compensation package of its Directors and senior management, by reference to, among other things, market level of salaries paid by comparable companies, the respective responsibilities of its Directors and senior management and the performance of the Company. The Directors and employees of the Group may also receive options which may be granted under the Scheme. However, no option was so granted during the Period.

22 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Directors’ Report

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SECURITIES

As at 31 December 2019, the interests and short positions of the Directors and chief executives of the Company in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept by the Company under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code were as follows:

Long positions in the Shares

Name of Director	Nature of interest	Number of ordinary shares held (Note 1)	Approximate shareholding percentage in the issued share capital of the Company (%)
Mr. Zhang Liang Johnson	Interest in a controlled	599,658,000 Shares (L)	74.96
	corporation (Note 2)

Notes:

• (1) The letter “L” denotes the person’s long position in such Shares.

• (2) Mr. Zhang Liang Johnson, an executive Director, was interested in 599,658,000 Shares, representing approximately 74.96% of the Company’s issued share capital as at 31 December 2019, through Yoho Bravo Limited which is whollyowned by him.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 23

Directors’ Report

SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND SHORT POSITIONS IN SECURITIES

As at 31 December 2019, the interests and short positions of substantial Shareholders and other persons (other than Directors or chief executives of the Company) in the Shares or the underlying Shares as recorded in the register required to be kept by the Company under Section 336 of the SFO were as follows:

Long positions in the Shares

Name	of Shareholder	Nature of interest	Number of ordinary shares held (Note 1)	Approximate shareholding percentage in the issued share capital of the Company (%)
Yoho	Bravo Limited (Note 2)	Beneficial interest	599,658,000 Shares (L)	74.96
Notes:
(1)	The letter “L” denotes the	person’s long position in such Shares.

• (2) Mr. Zhang Liang, Johnson, an executive Director, was interested in 599,658,000 Shares, representing approximately 74.96% of the Company’s issued share capital as at 31 December 2019, through Yoho Bravo Limited which is whollyowned by him. China Galaxy International Finance (Hong Kong) Co., Limited and its holding companies have a security interest in the said 599,658,000 Shares as at 31 December 2019.

Save as disclosed above, as at 31 December 2019, the Company had not been notified by any person (other than Directors or chief executive of the Company) who had an interest or short position in the Shares or underlying Shares as recorded in the register required to be kept by the Company under Section 336 of the SFO.

24 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Directors’ Report

PLEDGE OF SHARES BY CONTROLLING SHAREHOLDER

Yoho Bravo Limited, the controlling shareholder of the Company (as defined under the Listing Rules) has charged 599,658,000 Shares, representing approximately 74.96% of the issued share capital of the Company, in favour of China Galaxy International Securities (Hong Kong) Co., Limited as a security of a loan provided by China Galaxy International Securities (Hong Kong) Co., Limited to Yoho Bravo Limited in connection with a general offer made by Yoho Bravo Limited to acquire Shares.

COMPETING INTERESTS

None of the Directors or controlling shareholders of the Company and their respective close associates (as defined in the Listing Rules) has any interest in a business which competed or might compete with the business of the Group or has any other conflict of interest with the Group during the Period.

MANAGEMENT CONTRACTS

No contract concerning the management and administration of the whole or any substantial part of the business of the Company (not being a contract of service with any Director or any person engaged in the fulltime employment of the Company) was entered into or was subsisting during the Period.

TRANSACTION, ARRANGEMENT OR CONTRACT OF SIGNIFICANCE TO THE BUSINESS OF THE GROUP

Save as disclosed in the paragraphs headed “Related party transaction” and “Continuing connected transactions” in this Directors’ report, (i) no transaction, arrangement or contract of significance in relation to the Group’s business to which the Company or its subsidiaries was a party and in which a Director or an entity connected with a Director (within the meaning of section 486 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong)) had a material interest, whether directly or indirectly, subsisted at the end of the Period or at any time during the Period; and (ii) no contracts of significance (including those in relation to provision of services) between members of the Group and the controlling shareholder of the Company or any of its subsidiaries subsisted at the end of the Period or at any time during the Period.

ARRANGEMENT TO ACQUIRE SHARES AND DEBENTURES

At no time during the Period was the Company, its immediate holding company or any of its subsidiaries or fellow subsidiaries, a party to any arrangements to enable the Directors to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

EQUITY-LINKED AGREEMENTS

Save for the Scheme the particulars of which are disclosed in this report, the Company has not entered into any equity-linked agreement ((as defined in section 6 of the Companies (Directors’ Report) Regulation (Chapter 622D of the Laws of Hong Kong) during the Period.

COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS

During the Period, the Group was not aware of any incidence of non-compliance with the relevant laws and regulations that have a significant impact on the Group’s business and operations.

TAX RELIEF

The Company is not aware of any relief from taxation available to Shareholders by reason of their holdings of the Shares.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 25

Directors’ Report

RELATIONSHIP WITH STAKEHOLDERS

The Group recognises that employees, customers and business partners are keys to its sustainable development. The Group is committed to establishing a close and caring relationship with its employees, providing quality services to its customers and enhancing cooperation with its business partners.

The Group strives to provide a safe workplace to its employees. It also provides competitive remuneration and benefits, as well as training programs so that staff can keep abreast with developments in the market. Employees are also provided with clear career path with opportunities for additional responsibilities and promotions based on their merits and performance.

The Group believes that product quality is the key to maintaining a good customer relationship. To achieve this goal, the Group has a set of established quality assurance standards to meet its customers’ requirements, and each shipment of finished products is checked and sub-standard products will be reworked and retested prior to delivery to customers.

The Group is also dedicated to maintaining good relationship with suppliers as long-term business partners to ensure stability of the Group’s business.

MAJOR CUSTOMERS AND SUPPLIERS

The Group’s five largest customers collectively accounted for approximately 34.1% (2018: 32.2%) of its total turnover for the Period and its largest customer accounted for approximately 9.3% (2018: 9.9%) of its total turnover for the Period.

The Group’s five largest suppliers collectively accounted for approximately 52.9% (2018: 56.1%) of its total purchases for the Period and its largest supplier accounted for approximately 23.5% (2018: 14.9%) of its total purchases for the Period.

None of the Directors and their respective close associates (within the meaning of the Listing Rules) or any holder of Shares who, to the knowledge of the Directors, owns more than 5% of the issued Shares has any interest in any of the five largest customers or five largest suppliers of the Group during the Period.

RELATED PARTY TRANSACTION

Significant related party transactions entered into by the Group during the Period are set out in note 35 to the consolidated financial statements.

Other than provision of broadband infrastructure construction services to the related parties, which constituted continuing connected transactions, the Directors consider that these significant related party transactions disclosed in note 35 to the consolidated financial statements did not fall under the definition of “connected transactions” or “continuing connected transactions” (as the case may be) in Chapter 14A of the Listing Rules which are required to comply with any of the reporting, announcement or independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

26 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Directors’ Report

CONTINUING CONNECTED TRANSACTIONS

During the Period, the Group had entered into the following continuing connected transactions:

On 13 June 2019, Guangzhou Weaving entered into the construction services framework agreement (the “Construction Services Framework Agreement”) with Guangzhou Seedland Real Estate Development Co., Ltd. (“Seedland”), pursuant to which Guangzhou Weaving provided Seedland with certain communication construction services, including but not limited to broadband infrastructure construction services for residential properties and projects, integrated solutions for smart community projects covering both hardware for security and identification purposes and software for residence management and community services, and Guangzhou Weaving received construction service fees in return.

Mr. Zhang Liang Johnson, the chairman of the Board and an executive Director, is interested in the entire issued share capital of Seedland and Seedland is a connected person of the Company under Chapter 14A of the Listing Rules. Given that Guangzhou Weaving is an indirect wholly-owned subsidiary of the Company upon completion of the acquisition of Guangzhou Weaving in September 2019, the Construction Services Framework Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

As the applicable percentage ratios in respect of the transactions under the Construction Services Framework Agreement exceed 0.1% but are less than 5%, the Construction Services Framework Agreement is only subject to reporting, annual review and announcement requirements but are exempt from the circular and independent shareholders’ approval requirement under Chapter 14A of the Listing Rules.

During the Period, the aggregate construction service fees received by Guangzhou Weaving from Seedland pursuant to the Construction Services Framework Agreement amounted to approximately HK$11.7 million.

The independent non-executive Directors have reviewed the continuing connected transactions as set out above and have confirmed that these continuing connected transactions were entered into (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms or better; and (iii) on terms that are fair and reasonable and in the interests of the Shareholders as a whole according to the Construction Services Framework Agreement.

SHINEWING (HK) CPA Limited, the Company’s auditors, were engaged to report on the Group’s continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” and with reference to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants. In the opinion of the Directors, sufficient access was given to SHINEWING (HK) CPA Limited to the records of the Group for the purpose of reporting on the continuing connected transactions. SHINEWING (HK) CPA Limited has issued its unqualified letter containing its findings and conclusions in respect of the continuing connected transactions disclosed above by the Group in accordance with Rule 14A.56 of the Listing Rules. A copy of the auditors’ letter has been provided by the Company to the Stock Exchange.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 27

Directors’ Report

ANNUAL CONFIRMATION OF INDEPENDENCE

The Company has received from each independent non-executive Director the annual confirmation of his/her independence, and the Company considers them to be independent in light of the guidelines set out in Rule 3.13 of the Listing Rules.

PUBLIC FLOAT

Based on information that is publicly available to the Company and within the knowledge of the Directors, as at the date of this report, the Company has maintained a sufficient public float of not less than 25% of the issued Shares as required under the Listing Rules.

CHARITABLE DONATIONS

The Group made charitable donations of HK$80,000 (2018: HK$100,000) in total during the Period.

EVENTS AFTER THE REPORTING PERIOD

The outbreak of Coronavirus Disease 2019 (“COVID-19”) in early 2020 has brought additional uncertainties in the Group’s operating environment. The outbreak of COVID-19 has materially and adversely impacted the sales, some debtors’ repayment abilities and turnover of inventory. The management will closely monitor the situation and continue to assess the impact of the outbreak of COVID-19.

As the extent to which the COVID-19 outbreak will continue is uncertain, it is not practicable to estimate or quantify the financial impact that may have on the Group’s financial position and performance as at the date when the consolidated financial statements are authorised to issue.

Save as disclosed above, there is no material event undertaken by the Company or by the Group subsequent to 31 December 2019 and up to the date of this report.

AUDITOR

The consolidated financial statements of the Group for the year ended 31 December 2019 have been audited by SHINEWING (HK) CPA Limited and have been reviewed by the audit committee of the Company.

A resolution for the re-appointment of SHINEWING (HK) CPA Limited as the auditor of the Company will be proposed at the forthcoming annual general meeting of the Company.

On behalf of the Board of Brainhole Technology Limited

Zhang Liang Johnson

Chairman

Hong Kong, 31 March 2020

28 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Corporate Governance Report

CORPORATE GOVERNANCE PRACTICES

The Company is committed to achieving high standards of corporate governance. The Directors believe that sound and reasonable corporate governance practices are essential for the continued growth of the Group and for safeguarding and maximising Shareholders’ interests.

The Company has complied with the code provisions set out in the CG Code during the Period.

SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted the Model Code on terms no less exacting than the required standard of dealings set out in Appendix 10 of the Listing Rules.

On 8 February 2019 and 11 February 2019, which was within the black-out period in respect of the Company’s annual results for the year ended 31 December 2018, the spouse of Mr. Chen Johnson Xi, an independent non-executive Director, acquired 150,000 Shares at an average share price of HK$0.81 per share and then disposed of 150,000 Shares at an average share price of HK$0.76 per share on the respective dates (collectively, the “Dealings”). The Dealings were inadvertently made by the spouse of Mr. Chen Johnson Xi during the black-out period and after the incident, Mr. Chen Johnson Xi has attended related professional training in order to ensure that similar incident will not reoccur in the future. Save as disclosed above and having made specific enquiry of all Directors, all Directors confirmed that they had complied with the required standard of dealings and the code of conduct regarding securities transactions by Directors adopted by the Company throughout the Period.

BOARD OF DIRECTORS

Board Composition and Responsibilities

The Board composition of the Company during the Period are set out as follows:–

Executive Directors

Mr. Zhang Liang Johnson (Chairman)

Mr. Tong Wen-hsin (appointed as executive director with effect from 16 September 2019 and as chief executive officer with effect from 23 April 2020) Ms. Wan Duo

Independent Non-Executive Directors

Mr. Xu Liang Mr. Chen Johnson Xi Ms. Zhang Yibo

Details of background and qualifications of all existing Directors as at the date of this report are set out in the section headed “Biographical Details of Directors and Senior Management”in this report.

The overall management of the Company’s business is vested in the Board which assumes the responsibility for leadership and control of the Company and is collectively responsible for promoting the success of the Company by directing and supervising its affairs. The Board delegates the authority and responsibility for implementing day-to-day operations, business strategies and management of the Group’s business to the executive Directors and senior management of the Group.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 29

Corporate Governance Report

BOARD OF DIRECTORS (Continued)

Mr. Zhang Liang Johnson was designated as the chairman of the Board with effect from 11 January 2019. He was responsible for leading the Board in establishing and monitoring implementation of business strategies. Mr. Tong Wen-hsin was appointed as acting chief executive officer of the Group with effect from 16 September 2019 and was re-designated from acting chief executive officer to chief executive officer with effect from 23 April 2020. He was responsible for managing the overall business operations of the Group.

Significant matters of the Group are required to be approved by the Board, including:

• (i) formulating corporate development planning;

• (ii) formulating the Company’s operational and management strategies;

• (iii) approving financial statements;

• (iv) approving notifiable transactions and connected transactions undertaken by any member of the Group as may be required under the Listing Rules;

• (v) approving the risk management and internal control systems of the Group; and

• (vi) distribution of any dividend.

Appointment and Re-election of Directors

Each of the independent non-executive Directors entered into a letter of appointment with the Company for a term of one year. Each appointment is renewable automatically for successive term of one year each commencing after the expiry of the then current term and is terminable by either party by three months’ prior notice. Each of the executive Directors entered into a service contract with the Company for a specific term which is terminable by either party by two or three months prior notice. None of the Directors proposed for re-election at the forthcoming annual general meeting has a service contract/letter of appointment with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. We have also taken out Directors’ and officers’ liabilities insurance for such purposes for the Period.

The Articles have specified that any Director appointed during the year to fill a casual vacancy are subject to re-election by Shareholders at the first general meeting after appointments and any Director appointed by the Board as an addition to the existing Board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election. Each Director shall be subject to retirement by rotation at least once every three years pursuant to the Articles.

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Corporate Governance Report

BOARD OF DIRECTORS (Continued)

Directors’ Training

During the Period, the Directors received from the Company from time to time the updates on laws, rules and regulations which may be relevant to their roles, duties and functions as directors of a listed company. All Directors have been updated with the latest developments regarding the Listing Rules and other applicable legal and regulatory requirements to ensure compliance and enhance their awareness of good corporate governance practices. In addition, continuing briefings and professional development to the Directors will be arranged whenever necessary. Particulars of participation by the Directors are set out as follows:

==> picture [477 x 50] intentionally omitted <==

----- Start of picture text -----

Attending training
course(s)/reading
materials
----- End of picture text -----

Executive Directors
Mr. Zhang Liang Johnson	✓
Mr. Tong Wen-hsin (appointed as executive director with
effect from 16 September 2019 and as chief executive officer with
effect from 23 April 2020)	✓
Ms. Wan Duo	✓
Independent Non-executive Directors
Mr. Xu Liang	✓
Mr. Chen Johnson Xi	✓
Ms. Zhang Yibo	✓

BOARD COMMITTEES

In order to assist the Board in discharging its duties in a more efficient manner, the Board has established, with written terms of reference, three Board committees, namely audit committee, nomination committee and remuneration committee, to oversee particular aspects of the Company’s affairs. The Board committees are provided with sufficient resources to discharge their duties. The written terms of reference for each Board committee are in compliance with the Listing Rules and they are posted on the websites of the Stock Exchange and the Company.

Audit Committee

The Company established an audit committee on 23 September 2015. Written terms of reference in compliance with Rule 3.22 of the Listing Rules and code provision C.3.3 of the CG Code have been adopted. The primary duties of the audit committee are mainly to make recommendation to the Board on the appointment, reappointment and removal of external auditor, monitor the integrity of the financial statements, annual reports and interim reports, and review significant financial reporting judgements contained in them, and oversee financial reporting system, risk management and internal control systems of the Group. As of 31 December 2019, the audit committee of the Company consists of three members, namely Mr. Xu Liang, Mr. Chen Johnson Xi and Ms. Zhang Yibo. Mr. Xu Liang, who has appropriate professional qualifications and experience in accounting matters, is the chairperson of the audit committee.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 31

Corporate Governance Report

BOARD COMMITTEES (Continued)

Audit Committee (Continued)

The audit committee held 2 meetings during the Period. The key work done by the committee during the Period included:–

• reviewing the annual and interim results of the Group and recommending the same to the Board for approval; and

• reviewing and assessing the adequacy and effectiveness of the risk management and internal control systems of the Group.

There was no disagreement between the Board and the audit committee regarding the appointment of external auditor.

Nomination Committee

The Company established a nomination committee on 23 September 2015. Written terms of reference in compliance with code provision A.5.2 of the CG Code have been adopted. The primary duties of the nomination committee are to review the structure, size, composition and diversity of the Board and make recommendations to the Board on the selection of individuals nominated for directorships, appointment or reappointment of Directors and succession planning for Directors. As of 31 December 2019, the nomination committee of the Company consists of four members, namely Ms. Zhang Yibo, Mr. Xu Liang, Mr. Chen Johnson Xi and Ms. Wan Duo. Ms. Zhang Yibo is the chairperson of the nomination committee.

During the Period, the nomination committee held 2 meetings. The key work done by the committee during the Period included:

• reviewing and confirming the independence of the Company’s independent non-executive Directors; and

• reviewing the structure and composition of the Board, as well as policy of nomination of Directors in light of, among other things, the diversity criteria set out in the Company’s Board diversity policy.

Remuneration Committee

The Company established a remuneration committee on 23 September 2015 in compliance with Rule 3.25 of the Listing Rules. Written terms of reference in compliance with Rule 3.26 of the Listing Rules and code provision B.1.2 of the CG Code have been adopted. The primary duties of the remuneration committee are mainly to make recommendation to the Board on the overall remuneration policy and structure relating to all Directors and senior management of the Group, review remuneration proposals of the management with reference to the Board’s corporate goals and objectives, and ensure that none of the Directors or any of his/ her associates is involved in deciding his/her own remuneration. As of 31 December 2019, the remuneration committee of the Company consists of four members, namely Mr. Chen Johnson Xi, Mr. Xu Liang, Ms. Zhang Yibo and Ms. Wan Duo. Mr. Chen Johnson Xi is the chairperson of the remuneration committee.

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BOARD COMMITTEES (Continued)

Remuneration Committee (Continued)

The remuneration committee is authorised by the Board to determine, subject to approval by the Board, the remuneration payable to executive Directors and members of senior management, the emolument policies and the basis for determining such emoluments. No Director or any of his/her associates was involved in deciding his/her own remuneration.

During the Period, the remuneration committee held 2 meeting. The key work done by the committee during the Period included:

• reviewing the policy for the remuneration and assessing performance of executive Directors; and

• reviewing the remuneration payable to executive Directors.

Corporate Governance Functions

The Board is responsible for performing the corporate governance duties set out in code provision D.3.1 of the CG Code, namely:

• (i) to develop and review the Company’s policies and practices on corporate governance;

• (ii) to review and monitor the training and continuous professional development of Directors and senior management;

• (iii) to review and monitor the Company’s policies and practices on compliance with legal and regulatory requirements;

• (iv) to develop, review and monitor the code of conduct and compliance manual (including in relation to securities trading) applicable to employees and Directors; and

• (v) to review the Company’s compliance with the CG Code and disclosure in the corporate governance report in the Company’s annual report.

The Board held 5 meetings during the Period, at which the Board reviewed the Company’s policies and practice on corporate governance and legal and regulatory compliance, training and continuous professional development participations of the Directors, as well as the Company’s compliance with the CG Code.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 33

Corporate Governance Report

BOARD MEETINGS AND ATTENDANCE RECORD OF DIRECTORS

Code provision A.1.1 of the CG Code states that at least four regular Board meetings should be held each year at approximately quarterly intervals with active participation of a majority of Directors, either in person or through other electronic means of communication.

During the Period, the Board held 5 meetings, and 3 Shareholders’ meeting were held (being the annual general meeting of the Company held on 5 June 2019 and the extraordinary general meetings of the Company held on 20 February 2019 and 20 August 2019). The Directors’ attendance records in respect of meetings held during the Period are shown as follows:

==> picture [477 x 76] intentionally omitted <==

----- Start of picture text -----

Attendance Record of
Meetings held during the Period (Note)
Annual Extraordinary
Audit Nomination Remuneration General General
Name of Director Board Committee Committee Committee Meeting Meeting
----- End of picture text -----

Number of total meetings	5	2	2	2	1	2
Mr. Zhang Liang Johnson	0/5	N/A	N/A	N/A	0/1	0/2
Mr. Tong Wen-hsin
(appointment with effect from
16 September 2019)	N/A	N/A	N/A	N/A	N/A	N/A
Ms. Wan Duo	5/5	N/A	2/2	2/2	1/1	2/2
Mr. Xu Liang	4/5	1/2	2/2	2/2	0/1	0/2
Mr. Chen Johnson Xi	5/5	2/2	2/2	2/2	1/1	1/2
Ms. Zhang Yibo	5/5	2/2	2/2	2/2	1/1	0/2

Note: The attendance record shown above related to those meetings of the board/committee held during the Directors’ respective tenure during the Period.

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AUDITOR’S REMUNERATION

The fees in respect of audit and non-audit services provided by the external services providers, SHINEWING (HK) CPA Limited (for audit services) and SHINEWING (HK) CPA Limited and its affiliated companies (for nonaudit services) to the Group for the year ended 31 December 2019 amounted to approximately HK$836,000 and HK$206,000 respectively. The non-audit services included primarily services in connection with reporting of continuing connected transactions, taxation, risk management and internal control consultancy and environment, social and governance consultancy.

COMPANY SECRETARY

Mr. Lui Wing Yat Christopher, held the position of the Company’s company secretary until 31 March 2020, has undertaken not less than 15 hours of relevant professional training to update his skills and knowledge, during the Period.

DIRECTORS’ AND AUDITOR’S RESPONSIBILITY FOR ACCOUNTS

The Directors acknowledge their responsibility for the preparation of the consolidated financial statements of the Group for the Period, which give a true and fair view of the financial position and performance of the Group on a going concern basis.

Statements of Directors’ responsibilities, for preparing the consolidated financial statements of the Group and external auditor’s reporting responsibilities are set out in the Independent Auditors’ Report in this report.

RISK MANAGEMENT AND INTERNAL CONTROL

The management has the responsibility to maintain appropriate and effective risk management and internal control systems, and the Board has the responsibility to review and monitor the effectiveness of the Group’s risk management and internal control systems at least annually covering material controls, including financial, operational and compliance controls, to ensure that the systems in place are adequate and effective. The Group adopts a risk management system which manages the risk associated with its business and operations. The system comprises the following phases:

• Identification: Identify ownership of risks, business objectives and risks that could affect the achievement of objectives.

• Evaluation: Analyse the likelihood and impact of risks and evaluate the risk portfolio accordingly.

• Management: Consider the risk responses, ensure effective communication to the Board and on-going monitor the residual risks.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 35

Corporate Governance Report

RISK MANAGEMENT AND INTERNAL CONTROL (Continued)

The Company has in place an internal control system which is compatible with The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013 framework. The COSO framework enables the Group to achieve objectives regarding effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. The five key components of the COSO framework are shown as follows:

• Control Environment: A set of standards, processes and structures that provide the basis for carrying out internal control across the Group.

• Risk Assessment: A dynamic and iterative process for identifying and analysing risks to achieve the Group’s objectives, forming a basis for determining how risks should be managed.

• Control Activities: Action established by policies and procedures to help ensure that management directives to mitigate risks to the achievement of objectives are carried out.

• Information and Communication: Internal and external communication to provide the Group with the information needed to carry out day-to-day controls.

• Monitoring: Ongoing and separate evaluations to ascertain whether each component of internal control is present and functioning.

The Group’s risk management and internal control systems are, however, designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Group has conducted an annual review on whether there is a need for an internal audit department. Given the Group’s relatively simple corporate and operation structure, as opposed to diverting resources to establish a separate internal audit department, the Board, supported by the audit committee, is directly responsible for risk management and internal control systems of the Group and for reviewing its effectiveness.

During the Period, the Company engaged an external independent consultant with professional staff in possession of relevant expertise to conduct an independent review of the risk management and internal control systems of the Group semi-annually in order to maintain high standards of corporate governance. The review plan has been approved by the Board and its audit committee. The Board and its audit committee had also reviewed the resources, staff qualifications and experience and training programs of the external independent consultant and considered they are adequate and sufficient.

With respect to procedures and internal controls for the handling and dissemination of inside information, the Company is aware of the relevant obligations under the SFO and the Listing Rules.

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RISK MANAGEMENT AND INTERNAL CONTROL (Continued)

In order to enhance the Group’s system of handling inside information, and to ensure the truthfulness, accuracy, completeness and timeliness of its public disclosures, the Group also adopts and implements an inside information policy and procedures. Certain reasonable measures have been taken from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the Group, which include:

• The access of information is restricted to a limited number of employees on a need-to-know basis. Employees who are in possession of inside information are fully conversant with their obligations to preserve confidentiality.

• Confidentiality covenants will be in place when the Group enters into significant negotiations.

In addition, all employees are required to strictly adhere to the rules and regulations regarding the management of inside information, including that all employees who, because of his/her office or employment, is likely to be in possession of inside information in relation to the Company, are required to comply with the Model Code.

The Board and its audit committee had reviewed the adequacy and effectiveness of the Group’s risk management and internal control systems semi-annually. Several areas have been considered during such reviews, which include but are not limited to (i) the changes in the nature and extent of significant risks since the last annual review, and the Group’s ability to respond to changes in its business and the external environment; and (ii) the scope and quality of management’s ongoing monitoring of risks and of the internal control systems. The Board and its audit committee were not aware of any material internal control defects, and considered such systems effective and adequate throughout the Period.

SHAREHOLDERS’ RIGHTS

The general meetings of the Company provide a forum for the Shareholders to exchange views directly with the Board. Subject to provisions of the applicable laws in the Cayman Islands and rules and regulations of the Stock Exchange, the Articles require that an annual general meeting of the Company is held each year and at the venue as determined by the Board. Each general meeting, other than an annual general meeting, is called an extraordinary general meeting.

According to the Articles, any one or more holders of Shares holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the secretary of the Company, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition. The notice of requisition must be deposited at the registered office of the Company.

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Corporate Governance Report

SHAREHOLDERS’ RIGHTS (Continued)

Subject to the provisions of the Articles, eligible Shareholders who wish to move a resolution at any extraordinary general meeting of the Company may, by means of requisition, convene an extraordinary general meeting following the procedures set out above.

Shareholders may direct enquiries about their shareholdings to the Company’s share registrars. To the extent the requisite information of the Company is publicly available, Shareholders and the investing community may at any time make enquiry in respect of the Company in writing at the Company’s office in Hong Kong by post, facsimile or email via the numbers and email addresses available on the Company’s website at www. brainholetechnology.com.

NOMINATION POLICY

The Board has approved and adopted the nomination policy which sets out the principles guiding the Nomination Committee to identify and evaluate a candidate for nomination to the Board for appointment or to the Shareholders of the Company for election as a Director of the Company. The policy contains a number of factors to which the Nomination Committee has to adhere when considering nominations. These factors include the candidate’s skills and experience, diversity perspectives set out in the Board Diversity Policy, the candidate’s time commitment and integrity, and the independence criteria under Rule 3.13 of the Listing Rules if the candidate is proposed to be appointed as an independent non-executive Director. The policy also lays down the following nomination procedures: the Nomination Committee (a) will take appropriate measures to identify and evaluate a candidate; (b) may consider a candidate recommended or offered for nomination by a Shareholder of the Company; and (c) will, on making the recommendation, submit the candidate’s personal profile to the Board for consideration.

BOARD DIVERSITY POLICY

The Board has approved and adopted the board diversity policy which sets out the approach to achieve diversity in the Company’s board of directors.

With a view to achieving a sustainable and balanced development, the Company sees increasing diversity at the Board level as an essential element in supporting the attainment of its strategic objectives and its sustainable development. In designing the Board’s composition, Board diversity has been considered from a number of aspects, including but not limited to gender, age, cultural and educational background, professional experience, skills, knowledge and length of service.

All Board appointments will be based on meritocracy, and candidates will be considered against objective criteria, having due regard for the benefits of diversity on the Board. The ultimate decision will be based on merit and contribution that the selected candidates may bring to the Board.

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DIVIDEND POLICY

The Board has approved and adopted a dividend policy (the “Dividend Policy”) in compliance with code provision E.1.5 of the CG Code. It is the policy of the Board that, in recommending or declaring dividends, the Company shall maintain adequate cash reserves for meeting its working capital requirements and future growth as well as its Shareholders value.

The Board shall also take into account the following factors of the Group when considering the declaration and payment of dividends:

• The actual and expected financial performance of the Company and each of the members of the Group;

• the capital and debt level of the Group;

• the general market conditions;

• the business conditions and strategies of the Group;

• the expected working capital requirements, capital expenditure requirements and future development plans of the Group;

• retained earnings and distributable reserves of the Company and each of the members of the Group;

• the liquidity position of the Group;

• any restrictions on dividend payouts imposed by any of the Group’s lenders;

• the statutory and regulatory restrictions which the Group is subject to from time to time;

• interests of Shareholders; and

• any other relevant factors that the Board may deem appropriate.

The payment of dividend by the Company is also subject to any restrictions under the applicable laws, rule and regulations and the Articles of the Company. The Board will from time to time review the Dividend Policy and may exercise at its absolute and sole discretion to update, amend and/or modify the Dividend Policy at any time as the Board deems fit and necessary. There is no assurance that dividends will be paid in any particular amount for any specific reporting period.

INVESTOR RELATIONS

The Company establishes different communication channels with investors to update them with the latest business development and financial performance including the publication of interim and annual reports, the publish and posting of notices, announcements and circulars on the website of the Stock Exchange and the Company website in order to maintain a high level of transparency.

CONSTITUTIONAL DOCUMENTS

Pursuant to Rule 13.90 of the Listing Rules, the Company has published its memorandum of association and the Articles on the respective websites of the Stock Exchange and the Company. No amendments were made to the constitutional documents of the Company during the Period.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 39

Environmental, Social and Governance Report

ABOUT THIS REPORT

Introduction

This Environmental, Social and Governance (“ESG”) Report summarizes and reports on the sustainable development practice carried out by Brainhole Technology Limited (the “Company”) and its subsidiaries (collectively known as the “Group” or “We”) covering the period from 1 January 2019 to 31 December 2019 (the “Year”). The ESG Report covers various works on sustainable development and the ESG performance of the Group.

Reporting Scope

The ESG Report sets out the overall environment and social policies of the Group when conducting business in the People’s Republic of China (the “PRC” or “China”). The Group is principally engaged in the assembly, packaging and sales of self-manufactured discrete semiconductors with a primary focus on applications for smart consumer electronic devices, and trading of semiconductors sourced from third-party suppliers. The Group completed the acquisition of Guangzhou Weaving on 12 September 2019, which mainly engaged in broadband infrastructure construction and the provision of integrated solution for smart domain application (including smart home, smart campus and smart communities). During the Year, the key performance indicators of the Group were mainly are the disclosure of (i) the office of Top Dynamic Enterprises Limited (“TD Enterprises”) located in Cheung Sha Wan, Hong Kong (“Cheung Sha Wan Office”), (ii) The plants, offices and dormitories of Dongguan Jia Jun Electronic Technology Company Limited (“Dongguan Jia Jun”), and (iii) the performance of Guangzhou Weaving since the completion of acquisition. Details about the corporate governance, please refer to the Corporate Governance Report on page 29 to 39.

Reporting Standards

This ESG Report is prepared and disclosed by the Group in accordance with the Environmental, Social and Governance Reporting Guide as set out in Appendix 27 of Rules Governing the Listing of Securities issued by the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and in compliance with the “comply or explain” provisions thereof.

Comments and Feedback

Details about the ESG performance of the Group, please visit our official website (www.brainholetechnology. com) and annual reports. We value your opinions on this Report. Please feel free to email us at info@brainholetechnology.com if you have any advice or suggestion.

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Environmental, Social and Governance Report

SUSTAINABLE DEVELOPMENT OVERVIEW AND MANAGEMENT OBJECTIVES OF THE GROUP

The Group believes its success is founded upon the principles and concepts of sustainability. Therefore, we are committed to providing high-quality products, value-added solution kits services and engineering solutions services for customers, whilst at the same time striving to preserve the environment and support the communities through its social responsibility practices. The Group aims to develop the world-leading scientific and technological research achievements as a supplier of world-leading high-tech products and smart solutions. While serving and enhancing the daily life and community life, we are also committed to improving and enhancing the sustainable development of the environment and society. To this end, the Group has established several management systems in response to different business operation demands to guarantee that all the operation stations can meet the relevant local and international standards. We actively manage business in an environmentally and socially responsible manner and continue to develop and provide high-quality products and services in line with national policies on green and sustainable development, in order to make contributions to the environmental protection.

ESG Management

The Group is committed to the implementation of corporate goals and visions as well as the active fulfillment of social responsibilities to benefit all stakeholders. We have developed ESG management approach to contribute to society and protect the environment under the principle of sustainable development. For the sake of effective implementation of sustainable development strategy, the Board of the Group took the responsibility of ESG management by virtue of monitoring the formulation and reporting of the ESG strategy of the Group as well as assessing and identifying the ESG risks of the Group as applicable to ensure the effectiveness of the ESG risks management and internal control system so as to enhance the ESG performance of the Group.

Stakeholders Communication

The Group believed that the stakeholder engagement and continuous support was important for the longterm development of the Group. The Group communicated with the stakeholders under the expectation of improving the Group’s sustainable development strategy and implementing its sustainable development goals. Therefore, we adopted a variety of communication methods to allow stakeholders from different areas and levels to express their opinions and suggestions, and we also responded to stakeholders’ expectations and concerns in different channels to improve our ESG performance and the future development strategy.

The Group had engaged independent third party consultants for the preparation of the ESG Report for the Year to assist the collection the opinion of the internal stakeholders regarding to ESG issues. This would help the Group to conduct the importance assessment effectively and comprehensively in the future, and the results will be referred while enhancing the internal management of the Group. The Group will increase the engagement of different stakeholders to collect their valuable and constructive opinions and suggestions on the development of the Group in the future.

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SUSTAINABLE DEVELOPMENT OVERVIEW AND MANAGEMENT OBJECTIVES OF THE GROUP (Continued)

Stakeholders Communication (Continued)

==> picture [479 x 22] intentionally omitted <==

----- Start of picture text -----

Stakeholder Requirement and Expectation Communication and Response
----- End of picture text -----

Governments and	•	Compliance with national laws	•	Examination and inspection
regulatory bodies		and regulations
	•	Tax payment in time
	•	Safety production
Shareholders	•	Operating in accordance	•	General meeting
		with laws	•	Company announcement
	•	Enhance company value	•	E-mail, telephone and company
	•	Transparent information and		website
		efficient communication
Partners	•	Operation with integrity	•	Review and evaluation meeting
	•	Equal rivalry	•	Business communication
	•	Performance of contracts
Customers	•	High-quality products and services	•	Customer opinion investigation
	•	Performance of contracts	•	Customer communication meetings
		Operation with integrity
Environment	•	Energy saving and emission	•	Communication with local environmental
		reduction		department
	•	Conservation of ecosystem	•	Investigation and examination
Employees	•	Protection of rights	•	Employee meetings
	•	Occupational health and safety	•	Employee mailbox
	•	Remunerations and benefits	•	Training and workshop
	•	Career development	•	Employee activities
Society and the public	•	Participation in charity	•	Company website
	•	Transparent and available	•	Company announcement
		information

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ENVIRONMENT PROTECTION

As the Group’s manufacturing and operating facilities are mainly based in the PRC, the Group complies with local relevant environmental laws and regulations including but not limited to Environmental Protection Law of the People’s Republic of China（中華人民共和國環境保護法）, Law of the People’s Republic of China on the Prevention and Control of Atmospheric Pollution（中華人民共和國大氣污染防治法）, Law of the People’s Republic of China on Prevention and Control of Water Pollution（中華人民共和國水污染防治法）and Law of the People’s Republic of China on Prevention of Environmental Pollution Caused by Solid Waste（中華人民 共和國固體廢物污染環境防治法）. At the same time, the Group is committed to identifying and controlling the potential risks which have significant impact on the environment during the process of operation, so as to minimise the impact on the environment arising from the Group’s business operations. Dongguan Jia Jun developed specific environmental management programs, regularly reviewed the key operation processes of each department and identified the environmental risks possibly involved in the operation. Implemented control measures on any identified significant risks, as well as provided suitable training to staff when and as appropriate, in order to effectively implement measures to reduce the environmental impact of such risks. Top Dynamic Enterprises has also obtained ISO14001:2015 environment management system certification.

During the Year, the Group had not received any complaints from its customers or any other parties in respect of any environmental protection issues, and had not experienced any material environmental incidents arising from its manufacturing activities. At the same time, no material administrative sanctions or penalties were imposed upon the Group for the violation of environment-related laws and regulations which had an adverse impact on its operations.

Emissions Management

The Group’s exhaust gas from production are mainly derived from the production of semiconductor products by Dongguan Jia Jun, while Guangzhou Weaving primarily operates in its office, thus no material exhaust gas were generated. Dongguan Jia Jun’s the exhaust gas from production included those from the process of sintering, injection molding and sonicleaning as well as shape cutting and lettering. Dongguan Jia Jun discharged its exhaust gas from the process of sintering, injection molding and sonicleaning after treatment, through exhaust funnel at high altitude, in compliance with the Emission Standard of Volatile Organic Compounds for Shoe-making Industry (DB44/817-2010) (《製鞋行業揮發性有機化合物排放標準》(DB44/8172010)) and Emission Limits of Air Pollutants (DB44/27-2001) (《大氣污染物排放限值》(DB44/27-2001)). As for the process of shape cutting and lettering, Dongguan Jia Jun strengthened the ventilation of machines in workshops or utilised the dust-removal device internally installed in the equipment for treatment before discharging exhaust gas, so as to reduce the impact on workers and surrounding environment. In addition, Dongguan Jia Jun always kept the ventilation system open in the workshops during production, periodically cleaned the ventilation machines and their blades and conducted regular maintenance on machines as well as equipment used for dust and smoke filtration, ensuring the normal operation of equipment. During the Year, the Group had not received any notification on the non-compliance in respect of discharging exhaust gas from production, while Dongguan Jia Jun has completed and passed the inspection on exhaust gas and ensured the compliance of exhaust gas discharge.

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ENVIRONMENT PROTECTION (Continued)

Emissions Management (Continued)

In addition to few exhaust gas from production, the use of vehicles by the Group was also attributable to the generation of exhaust gas. We recorded and monitored the fuel consumption on a continuing basis and periodically reviewed adherence to vehicle emission standards for vehicles, so as to maximise the efficiency of vehicles. Furthermore, we also regularly arranged inspection, repair and maintenance on the vehicles to maintain their efficiency, and tried to avoid the waste of fuel arising from vehicles with running engine.

The Group’s vehicle emissions are as follows:

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Vehicle Emissions Unit 2019 2018 [1]
Nitrogen oxides (NOx) kg 49.60 46.88
Sulphur oxides (SOx) kg 0.16 0.16
Particulate matters (PM) kg 4.66 4.33
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As an eco-friendly enterprise, in addition to managing and monitoring exhaust generation, the Group spares no effort to control greenhouse gas emissions during its production. The Group’s direct greenhouse gas emissions and energy indirect greenhouse gas emissions are produced from the consumption of vehicle fuels and purchased electricity, respectively, while other indirect greenhouse gas emissions come from methane generated by delivering waste paper to landfills, electricity consumed in government water supply and wastewater treatment and employees’ business travel. Among the above activities producing greenhouse gas emissions, the Group’s greenhouse gas emissions mainly come from purchased electricity. In order to reduce the carbon emissions in the Group’s operations, the Group has adopted a series of greenhouse gas emission reduction measures. In terms of production, in order to achieve the goal of saving electricity and reducing emissions, we eliminate obsolete instruments and use high-energy-saving electronic instruments and machines instead, and suspend the machines when not in use to reduce machine idling and improve production efficiency.

1 In 2018, the per capita vehicle emissions of Dongguan Jia Jun and the office in Cheung Sha Wan are as follows (calculated based on the intensity of average employee numbers of 363): NOx of 0.13kg/person, SOx of 0.0004kg/person and PM of 0.01kg/person.

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ENVIRONMENT PROTECTION (Continued)

Emissions Management (Continued)

The Group’s greenhouse gas emissions are as follows:

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Greenhouse Gas Emissions [2] Unit 2019 2018
Total greenhouse gas emissions tCO2e 3,969 3,528
Scope 1－direct greenhouse gas emissions tCO2e 28 28
－
Scope 2 energy indirect greenhouse
gas emissions [2] tCO2e 3,907 3,470 [3]
－
Scope 3 other indirect greenhouse
gas emissions tCO2e 34 30
Intensity of greenhouse gas emissions tCO2e/employee 8.20 9.61
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Wastewater Management

The water resources consumed by the Group include the water employed in cooling processes of Dongguan Jia Jun, which can be reused in the production process and therefore there is no wastewater emission and no large amount of water consumption involved. Save as aforesaid, the Group’s wastewater is mainly domestic sewage from the factory and quarters of Dongguan Jia Jun and the office in Cheung Sha Wan. As the Group understands that wastewater emissions have an impact on the ecological environment, the Group strictly prohibits direct emissions of wastewater in the production into domestic sewage pipelines. The domestic sewage of the Group shall only be discharged to the municipal wastewater pipeline after being treated by septic tanks and meeting the standards to ensure no negative impact of the Group’s operations on the environment. In addition, Dongguan Jia Jun regularly arranges the third-party testing agency to test domestic sewage and has completed and passed the domestic sewage testing for the Year to ensure compliance with local relevant water pollutant emission standards. During the Year, the Group did not receive any notice with respect to illegal discharge of sewage.

2 In 2018, the data of Scope 2－ energy indirect greenhouse gas emissions was calculated with reference to the Guidance for Compiling Provincial GHG Emission Inventory (Trial)（《省級溫室氣體清單編制指南（試行）》） ；In 2019, with reference to 2011–2012 Regional Power Grid Average Carbon Dioxide Emission Factors in China（《2011年和2012年中國 區域電網平均二氧化碳排放因子》）.

• 3 In 2018, the indirect greenhouse gas emissions from energy of the Group generated from the purchased electricity are as follows: the factory of Dongguan Jia Jun produced 3,451 tCO2e and the office and the factory dormitory of Dongguan Jia Jun and the office in Cheung Sha Wan produced 19 tCO2e in total.

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ENVIRONMENT PROTECTION (Continued)

Waste Management

In order to reduce the impact of solid waste on the environment, the Group has developed clear guidelines for employees to identify, collect, store and dispose of solid waste, and provided employees with knowledge training on waste classification to allow employees to correctly place waste in the appropriate collection container by category. When disposing of non-hazardous waste, employees should also properly classify recyclable waste, such as metal frames, paper plastic containers and glass bottles generated during production and operation, and delivery such waste to a qualified waste contractor for processing. For unrecyclable non-hazardous waste comprised of general garbage in dormitories and offices, it is cleaned daily by external cleaning staff. Through effective management and treatment of waste, the recovery rate of the Group’s non-hazardous waste reached 67%, which greatly reduced the impact of non-hazardous waste on environment. In addition, the hazardous waste generated by the Group includes the waste organic solvents produced in the ultrasonic cleaning of packaging products and the cleaning of delicate parts in taping and bonding machines by Dongguan Jia Jun, waste mineral oil generated during machine maintenance, and Waste batteries and ink cartridges generated in the operation of each office. After collecting hazardous waste, employees should clearly label the details of such hazardous waste, including its name, quantity and production location. Employees are also required to wear protective equipment when handling and processing hazardous waste to protect their safety.

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ENVIRONMENT PROTECTION (Continued)

Waste Management (Continued)

The non-hazardous waste and hazardous waste generated by the Group’s business operations were as follows:

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Waste Unit 2019 2018
Non-hazardous waste
Total non-hazardous waste tonnes 56 [4] 33 [5]
Intensity of non-hazardous waste tonnes/employee 0.12 0.09
Hazardous waste
Total hazardous waste kg 1,057 1,150 [6]
Intensity of hazardous waste kg/employee 2.18 3.13
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Improper disposal of hazardous waste will cause potential environmental problems. Therefore, Dongguan Jia Jun has engaged a licensed hazardous waste treatment service provider to properly handle hazardous waste in accordance with the Law of the People’s Republic of China on the Prevention and Control of Environmental Pollution by Solid Waste, so as to avoid second environmental pollution. During the Year, the total hazardous waste of Dongguan Jia Jun processed by a licensed service provider amounting to 1,060 kg (2018: 1,060 kg[7] ).

Use of Resources

The Group recognizes the importance of effective use of resources and has been committed to streamlining operations with a view to advocate and pursue environmental protection policies that optimize resource use and strive to save energy and reduce consumption. Through formulating, implementing and improving policies and procedures related to resource and energy management, the Group regulates and makes good use of resources in the production process, thereby avoiding waste of resources, reducing environmental pollution and improving production efficiency. We has actively promoted the importance of environmental protection to employees through training, so as to raise their awareness of environmental protection and practice the concepts of energy conservation and consumption reduction, waste reduction from source, effective use of resources and green office. We also monitor the use of resources such as the consumption of electricity, water, paper and packaging materials.

• 4 The Group estimates the amount of general wastes generated from the Year and includes them in the total amount of nonhazardous wastes generated.

• 5 In 2018, Dongguan Jia Jun has generated 17.7 tonnes of metallic frames, 14.7 tonnes of paper wastes and 1.0 tonnes of plastic and other wastes, excluding the amount of general wastes generated.

• 6 In 2018, Dongguan Jia Jun has generated 539.5 kg of organic solvent wastes, 520.0 kg of metal containers with organic solvents, 20.8 kg of waste cloth with organic solvents, 41.5 kg of mineral oil and 20.5 kg of depleted batteries with mercury content.

• 7 In 2018, the hazardous wastes handled by Dongguan Jia Jun through a licensed service provider include 480.0 kg of organic solvent wastes, 500.0 kg of metal containers with organic solvents, 20.0 kg of waste cloth with organic solvents, 40.0 kg of mineral oil and 20.0 kg of depleted batteries with mercury content.

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ENVIRONMENT PROTECTION (Continued)

Use of Resources (Continued)

Energy Conservation

The Group is committed to continually optimizing its operating processes to save energy, and therefore implements power saving measures in its offices. The Group regularly inspects and maintains power supply facilities, statistics the monthly power consumption of each work area, and the department heads implement energy-saving measures to effectively control power consumption. For example, we will give priority to LED lamps and light bulbs when selecting light tubes to improve energy efficiency; we divide different areas in the plant and office, and turn off air-conditioning, lighting and fans in some areas when no one is using them. We also regularly clean the air conditioners to improve their operating efficiency and reduce power waste. When using air conditioners, we maintain the indoor temperature at 24 to 25 degrees and ensure that the windows are closed to reduce waste of air conditioning. Fans are installed to increase indoor air flow, so as to reduce power consumption. We also encourage employees to save energy, avoid excessive use of lighting and airconditioning, and turn off lighting in corridors, staircases, meeting rooms and reception areas when there is sufficient light. In addition, we provide employees with energy-saving training and put energy-saving slogans next to the switches to remind them to save electricity.

The energy consumption of the Group is as follows:

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Energy Consumption Unit 2019 2018
Total energy consumption MWh 7,520 [8] 4,830 [9]
Intensity of energy consumption MWh/employee 15.54 13.16 [10]
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Water Conservation

In order to achieve resource conservation and reduce domestic sewage discharge, the Group clearly introduces water conservation methods to its employees, including the development of clear guidelines and regulations on water equipment, domestic water and production water in the Group. We regularly check water facilities to avoid wasting water resources due to damage to water facilities; employees are required to “use when they are used and close when not in use” in daily water use to avoid long flows of drinking water. In addition to the above measures, the Group also uses posters, promotional cards and training to promote water conservation among employees, so as to raise employees’ awareness of water conservation and develop the habit of consciously turning off water when not using it. As the water consumption and drainage of the Cheung Sha Wan Office and Guangzhou Weaving are under the full control of the building management company, water-related data cannot be collected.

• 8 In 2019, total energy consumption of the Group included purchased electricity and vehicle gasoline consumption.

• 9 In 2018, the details of the Group purchased electricity was as follow: the factory and office of Dongguan Jia Jun was 4,800 MWh, dormitory of Dongguan Jia Jun was 8.5 MWh, and the office of Cheung Sha Wan was 21 MWh. Other than the use of purchased electricity, the office of Dongguan Jia Jun and Cheung Sha Wan’s vehicle also consumed petrol of approximately 10,300 litters in total, which was not included in the total energy consumption.

• 10 In 2018, the intensity of purchased electricity was as follow: the factory and office of Dongguan Jia Jun was use 1.1 KWh per thousand products, dormitory of Dongguan Jia Jun was 44 KWh per capita, and the office of Cheung Sha Wan was monthly 156 KWh per capita.

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ENVIRONMENT PROTECTION (Continued)

Use of Resources (Continued)

Water Conservation (Continued)

The water consumption of Dongguan Jia Jun’s office and dormitory is as follows:

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Water Consumption Unit 2019 2018
Total water consumption tonnes 1,121 684
Water consumption intensity tonnes/dormitory resident 5.72 3.49
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Packing Materials

The Group’s packaging materials are mainly used in two ways, including the use of paper cardboard packaging with customised plastic inserts for its self-manufactured products and trading products sourced from third parties in batches, as well as the packaging of various intelligent system parts and optical fiber products. During the Year, Dongguan Jia Jun and Guangzhou Weaving recycled an aggregate of approximately 16.2 tonnes (2018: 15.3 tonnes) of paper-based and plastic packaging material wastes generated, which accounted for approximately 17.6% (2018: 27.0%) of the total packaging materials used by itself.

Consumption of packaging materials by Dongguan Jia Jun:

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Use of Packaging Materials Unit 2019 2018
Dongguan Jia Jun
Paper consumption tonnes 26 20
Paper intensity kg/thousand products units 0.009 0.007
Plastic consumption tonnes 66 37
Plastic intensity kg/thousand products units 0.023 0.010
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Consumption of packaging materials by Guangzhou Weaving during the Year:

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Use of Packaging Materials Unit 2019
Paper consumption kg 44
Paper intensity kg/million HKD revenue 0.66
Plastic consumption kg 3
Plastic intensity kg/million HKD revenue 0.04
Wood consumption kg 76
Wood intensity kg/million HKD revenue 1.13
Foam plastic consumption kg 17
Foam plastic intensity kg/million HKD revenue 0.25
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ENVIRONMENT PROTECTION (Continued)

Green Operations

While actively developing its business, the Group has not forgotten the importance of green operations and strongly advocated the concepts of reducing paper consumption, reducing waste at source, and conducting publicity and training. Therefore, we have adopted different measures to integrate environmental protection concepts into daily operations and build a comprehensive enterprise that takes into account economic, environmental and social aspects.

The Group attaches great importance to saving paper and reducing unnecessary waste. By encouraging the use of email systems to distribute information internally as much as possible, the Group reduces the use of fax and photocopying documents. To increase paper utilisation, we encourage double-sided copying and printing, and use recycled paper to print informal documents. Each department must apply for the amount of paper according to the monthly office requirements so that we can monitor the paper consumption and avoid excessive use. In addition, the heads of various departments will supervise and evaluate the use of paper in the office, and set goals for and measures to reduce paper consumption. The Group also trains its employees to increase their environmental awareness of saving paper, so as to develop the habit of saving paper. During the Year, a total of 3.5 tonnes (2018: 3.3 tonnes[11] ) of paper was used by the Group.

The sustainable development of the Group relies on the cooperation of employees in various departments, which enables the Group to reduce waste of resources and energy and allocate resources efficiently. The Group promotes the “3R” Program in its factories and offices, which means waste reduction at source, reuse and recycling, and is committed to reducing waste generation. We also encourage the use of environment-friendly alternative materials in the production process, optimisation of production processes and implementation of inventory control and management to reduce waste. The Group will recycle reusable materials as much as possible, and turn waste into materials.

In addition, although the noise generated by the Group’s production process has no significant impact on the surrounding environment, the Group is still committed to strict control of the noise generated. During the Year, Dongguan Jia Jun has commissioned a third-party testing agency to conduct noise testing to ensure compliance with relevant local and industry standards.

CORPORATE SOCIAL RESPONSIBILITY

Employment and Labour Practices

The Group always strives to build a harmonious workplace for employees with the purpose of enhancing sincere and interactive communication, supporting employees’ career development, and protecting the interests of employees. We strictly comply with laws and regulations related to employment, including but not limited to the Labor Law of the PRC, the Labor Contract Law of the PRC and Hong Kong Employment Ordinance. We provide equal opportunities and create a harmonious working environment, and guarantee that there is not discrimination against potential candidates or incumbent employees on account of their sex, religion, race, color, age, physical conditions or hobbies, etc. We strive to be a responsible employer and are committed to implementing better employment practices, and advocate ethics and human rights at the workplace.

11 In 2018, the paper consumption of Dongguan Jia Jun and Cheung Sha Wan Office was 3.1 tonnes and 0.2 tonnes, respectively.

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CORPORATE SOCIAL RESPONSIBILITY (Continued)

Employment and Labour Practices (Continued)

Practices on Recruitment Process

The Group is an equal opportunity employer and recruits employees from the open market. During the recruitment, the Group focuses on individual merits and suitability to the relevant job requirements of the applicants, and prohibits discrimination in any form. The Group has also formulated anti-discrimination procedures to prevent unfairness events, and provided complaint channels for employees to handle in a timely manner. The Group prohibits the employment of child labor as required by local labor laws, while applicants shall submit their identity certificate documents to the Group for verification age. During the Year, all employees of the Group were aged 18 or above. Before the formal entry of employees, the Group will enter an employment contract with employees, which explicitly specifies the terms such as working hours, remuneration, insurance and compensation of employees, so as to protect the freedom and interests of employees, and avoid forced labor.

The employee composition of the Group is as follows:

Employee number by gender

Employee number by age

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300 300
273
250 250 243
213
198 196 198
200 200
178 172
150 150
2019
100 100
2018
50 50
13
0 0 6
0 0
Male Female <18 18-30 31-50 >50
Gender Age
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Practices on Remuneration and Promotion

The Group offers competitive salary and benefits for employees to attract talents. The promotion or demotion of employees is conducted by the Group on basis of employees’ working competence, performance, experience and job vacancy. The Group establishes the remuneration management system and determines employees’ remuneration with reference to factors such as employees’ educational background, experience, job duties, professional skills and technical abilities, as well as the salary level for similar job positions in the industry. The Company also adopted a share option scheme on 23 September 2015, under which employees of the Group that are, based on management’s evaluation of their individual performance, eligible will be considered for granting share options as incentives. During the Year, the Group continued to adopt an opendoor communication policy and carried out an annual review with its employees on their performance, with an aim of giving an equal opportunity of promotion and clear career path for employees.

Interests and Benefits of Employees

In order to guarantee adequate rest for employees and realize the balance between work and life, employees are entitled to legally required paid holidays in addition to statutory holidays. By reviewing the working hours of the employees, we strive to prevent forced labour or overtime work in the business operations as soon as possible. The Group prohibits any immoral behavior such as violence or entanglement conducted by any employee towards another employee. Employees may make a complaint about the unfairness via the internal complaint mechanism, which can protect employees against any harassments.

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CORPORATE SOCIAL RESPONSIBILITY (Continued)

Employment and Labour Practices (Continued)

Interests and Benefits of Employees (Continued)

In addition, the Group, in accordance with the relevant legal requirements in the PRC and Hong Kong, also makes statutory pension scheme contributions for Hong Kong employees, and provides social insurance contributions, annual physical examinations, marriage and maternity allowances, housing allowance and external assignment allowance for employees in the PRC. Meanwhile, incumbent employees and their immediate family members are also entitled to medical reimbursement. In a bid to build a warm and harmonious working environment, the Group also organises leisure activities for employees such as birthday parties, sports days, tug of war, BBQ, etc. to allow them to gather outside of work for bonding and teambuilding.

Health and Safety

As a responsible employer, the Group strictly complies with laws and regulations related to occupational health and safety, including but not limited to the Law of the PRC on Work Safety（中華人民共和國安全 生產法）, the Law of the PRC on the Prevention and Control of Occupational Diseases（中華人民共和國 職業病防治法）and the Hong Kong Occupational Safety and Health Ordinance, in order to provide a safe working environment for incumbent employees. Dongguan Jia Jun has been accredited by ISO45001:2018 Occupational Health and Safety Management System. The Group will identify and control health and safety risks, in order to reduce workplace injuries. Besides, in response to emergencies, the Group has formulated a series of emergency plans and handling processes for fire, food poisoning, electric shock, typhoon and workplace injuries, in order to prevent, control and reduce occurrence of various safety accidents, minimise the damages caused by accidents, and protect the life and property safety of the Group and its employees. In addition, the Group provides clear working guidelines for employees, in order to tackle with potential accidents in production processes. In response to hazardous factors of different positions in production processes, the Group provides safety training for relevant staff in advance, including reminding employees of necessary safeguards and emergency measures for accidents, and ensuring all the employees are well acquainted with the internal work safety requirements and safe operation regulations, and proficient in safe operation skills. We maintain and inspect the production equipment and containers on a regular basis, with a view to reducing accidents.

The Group pays attention to potential occupational disease hazards in the working environment. According to the occupational hazards of different jobs, we provide corresponding personal protective equipment for our employees, such as filter gas mask, electrical insulated shoes and anti-acid overalls. Staffs must wear personal protective equipment strictly according to the regulations, and we will regularly check the performance of personal protective equipment to make sure that it is safe in use. In order to provide the safe workplace for staffs and enhance their awareness of safety and emergency, Dongguan Jia Jun has entrusted a third party organization to carry out the inspection of the working environment of the factory and hold the fire drill during the Year. During the Year, the total number of work-related injuries recorded by the Group was 1 (2018: nill[12] ).

12 In 2018, the total number of work-related injuries included Dongguan Jia Jun and Cheung Sha Wan Office.

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CORPORATE SOCIAL RESPONSIBILITY (Continued)

Health and Safety (Continued)

Other occupational health and safety measures adopted by the Group are as follows:

• Providing health checks to its PRC staff members as appropriate prior to commencement of employment;

• Streamlining production process on a continuous basis and reducing or eliminating the use of known hazardous substances in the Group’s manufacturing process to the extent practicable;

• Employing qualified contractors for regular inspection of fire safety equipment at the Group’s plants and quarters and office premises;

• Supervising and providing specific technical training to staff members who may come in contact with potentially hazardous substances;

• Prohibiting smoking at the workplace and factory quarters; and

• Regular cleaning of the water supply filters and daily garbage removal.

Vocational Training and Development

In order to promote the sustainable development and efficient operation of the Group, the Group firmly believes that employees are the key to business development and is therefore committed to nurturing talent. In addition to the relevant safety training, the Group provides internal and external training courses regularly for its current employees. The employees must pass the assessment after finishing the training to confirm their learning results and ensure that their professional knowledge and personal development have been improved. The Group introduced a mentorship program whereby senior staff members will supervise new employees, and provide on-job guidance, thus encouraging employees to self-study and learn skills of their work. The head of respective department will also help them to facilitate smooth integration into the Group’s operation process. In addition, the Group will invite experts and scholars to hold special seminars according to requirements of work, so as to enhance the academic skills of employees and improve work efficiency.

During the Year, training provided by our Group covers topics such as:–

• Job-related knowledge training: including production process, related knowledge and material use, etc.

• Product knowledge enhancement: to familiarise the Group’s staff with the features and precautions of its products

• Market updates: to provide staff members with latest technology development and market conditions of the industry

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CORPORATE SOCIAL RESPONSIBILITY (Continued)

Vocational Training and Development (Continued)

• Systems training: to explain the Group’s general administrative system, management system and the specific system of individual departments

• Occupational safety and health training: to introduce the knowledge of production safety and fire safety

• Management and communication techniques training: including personnel management and team building

During the Year, the Group has provided in aggregate approximately 10,978 hours (2018: 8,309 hours) of jobrelated vocational training on the above topics to its staff.

RESPONSIBLE OPERATING PRACTICES

Supply Chain Management

The Group continues to strive to improve the quality of its products and services, and to provide customers and the society with quality products and services by adhering to the principle of sustainable development. Support and co-operation of suppliers are essential to the Group’s business operations.

In selection of suppliers, we will take the product quality, delivery, production capacity, compliance and other factors as the evaluation criteria, and only suppliers who meet the criteria will be admitted as our qualified suppliers. Dongguan Jia Jun also sets clear requirements for the use and control of suppliers’ items such as products, components, raw materials, packaging materials, auxiliary materials for the purpose of environmental protection. In addition, in order to achieve resource conservation, Dongguan Jia Jun will require suppliers to provide environment-friendly products according to its business needs, such as minimising product composition in production and design. The Group also follows an ethical procurement policy and strives to source raw materials and traded goods from socially responsible suppliers. In this regard, the Group trains its staff in charge of supply chain management to, on practicable basis, ensure that the materials and products provided by selected suppliers are in compliance with laws and regulations, as well as such suppliers abiding by employment laws and regulations against slavery and human trafficking, so as to reduce social risks in the supply chain. Moreover, the environmental, health and safety performance of suppliers are taken into consideration in the selection of suppliers by the Group.

For the products provided by suppliers, we will conduct different analysis and inspection in accordance with the specifications and requirements of relevant raw materials or products to ensure compliance with the requirements of the laws and regulations and our quality requirements, and minimise the environmental risk in the supply chain. The Group will continue to monitor the quality of its products and materials purchased, and regularly review suppliers’ environmental and social responsibility practices through on-site inspections and visits. The management of the Group will also review the procurement process, and the Group may shift to other suppliers to purchase materials or products if deficiencies in a supplier’s environmental and social responsibility practices were identified and no improvement implemented as required.

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RESPONSIBLE OPERATING PRACTICES (Continued)

Superior Quality

The Group attaches great importance to providing customers with quality and safe products, and strictly complies with laws and regulations in relation to quality, including but not limited to the Product Quality Law of The People’s Republic of China and the Construction Law of The People’s Republic of China. As for the assembly, packaging and sales of self-manufactured discrete semiconductors, Dongguan Jia Jun has developed strict material specifications and implemented the Hazardous Substance Process Management System (IECQ QC080000:2017), on practicable basis, to ensure that hazardous substances are reduced or avoided in the production of products. Dongguan Jia Jun also regularly commissions thirdparty testing agencies to evaluate the products it produces, covering the entire product life cycle from the research and development to customer sales and disposal of product waste, to ensure product quality meets specifications, international standards and applicable legal standards. As for the construction of communication network and intelligent system business, Guangzhou Weaving adopts strict quality control in the whole process of projects, including random inspection of construction quality during the project inception, construction and completion, as well as the implementation of safety production and safety management objectives. Upon the completion of a project, Guangzhou Weaving also has a warranty period to ensure customers’ satisfaction. In addition, Dongguan Jia Jun and Guangzhou Weaving have been accredited by the ISO9001:2015 Quality Management System to ensure customers access to quality products and services. In course of business, the Group strictly prohibits the staff from deceiving consumers by any false or misleading marketing methods, and insists on good faith and advocates fair competition. The Group attaches great importance to the relationship between customers and the Group and appreciates comments from customers on our products or services. We will timely sort out, reply and follow up the feedbacks and complaints from customers and make improvement, in order to enhance the quality of our products, services and management.

Intellectual Property and Privacy Protection

The Group has always attached great importance to protecting intellectual property and customer privacy, and strictly abides by intellectual property-related laws and regulations, including but not limited to the Trademark Law of the People’s Republic of China, the Patent Law of the People’s Republic of China and the Copyright Law of the People’s Republic of China. In order to protect intellectual property of customers, the Group will only legitimately employ their patents, trademarks and technologies after granting their authorization. We also organize regular training related to intellectual property for our employees in a view to raise their awareness of intellectual property protection. In an attempt to protect privacy of customers, we not only enter confidentiality agreements with employees according to their positions, but also strengthen internal information management so as to prevent any forms of information leakage related to the confidential information of the Group or other commercial secrets. In addition, the Group will also enter into a confidentiality agreement with the cooperating companies, which prohibits both parties from disclosing trade secrets, technical secrets, specific product information, customer names, contact information, technology and data to protect the privacy of customers and the Group.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 55

Environmental, Social and Governance Report

RESPONSIBLE OPERATING PRACTICES (Continued)

Anti-corruption

Conducting business with integrity is one of the core values underlying the Group’s business operations and the Group believes an effective anti-corruption mechanism is the cornerstone for its sustainable and organic growth and strictly complies with anti-corruption related laws and regulations, including but not limited to the Criminal Law of the People’s Republic of China and the Prevention of Bribery Ordinance in Hong Kong. Adhering to the principle of “enhancing the awareness of integrity and zero tolerance for corruption”, the Group has circulated clear work ethics for employees which strictly prohibit bribery, extortion, fraud, money laundering and other wrongdoings such as gambling and personal loans with persons having business relationships with the Group, misappropriation of the Group’s assets, inappropriate charitable donation or sponsorship, unlawful solicitation of business or favourable treatment, provision or acceptance of unreasonable gifts, entertainments or other improper benefits, etc. The Group will provide anti-corruption training to employees in various departments to prevent corruption, bribery and fraud. The Group also requires its employees to declare any interests in the Group’s business partners, suppliers and advisers that may conflict with the Group’s business interests. Employees are required to comply strictly with applicable anti-corruption laws and there is a term under the Group’s standard employment contract that legal noncompliance will constitute a ground of termination of employment. At the same time, the Group requests its suppliers and business partners to abide by the relevant local anti-corruption laws and regulations.

During the Year, the Group has not received any complaint or notification from governmental authorities regarding non-compliance of the Group or its employees with anti-corruption laws referred to above.

CARE FOR COMMUNITY

Good community relations are the driving force for the positive development of an enterprise. Therefore, the Group attaches great importance to the relationship with the local community. While actively developing its business, the Group proactively participates in the co-building of community and cares for the disadvantaged groups in the society. TD Enterprises actively supports the program of “Recycling furniture, donating to the community “ under the Chu Kong Plan, helping those in need to build their homes. The Group will continue to promote social development and encourage employees to participate in charitable activities. During the Year, TD Enterprises donated HK$80,000 in total (2018: HK$100,000 in total) to a number of registered charitable organisations. Organisations receiving donations from the Company include Fu Hong Society, End Child Sexual Abuse Foundation and Chu Kong Plan.

At the same time, in order to maintain a clean environment in the community, the Group is committed to reducing pollutant emissions during the production process, practicing clean production, and protecting the health of the residents and people around the plant. During the Year, Dongguan Jia Jun was identified as an “Enterprise Practicing Clean Production in Dongguan” by the Industry and Information Technology Department of Dongguan. We will continue to practice clean production and strive to build a green community together.

56 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Independent Auditor’s Report

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TO THE MEMBERS OF BRAINHOLE TECHNOLOGY LIMITED

(Incorporated in the Cayman Islands with limited liability)

OPINION

We have audited the consolidated financial statements of Brainhole Technology Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 63 to 151, which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

BASIS FOR OPINION

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (the “Code”) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERS

Key audit matters are the matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follow:

• Provision of expected credit loss for trade receivables and contract assets; and

• Revenue recognition on broadband infrastructure construction services.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 57

Independent Auditor’s Report

KEY AUDIT MATTERS (Continued)

Provision of expected credit loss (the “ECL”) for trade receivables and contract assets

Refer to notes 21 and 22 to the consolidated financial statements and the accounting policies on pages 77 to 79 and 85 to 90.

The key audit matter

How the matter was addressed in our audit

As at 31 December 2019, the carrying amounts of the Group’s trade receivables and contract assets were approximately HK$101,340,000 (net of allowance for impairment loss of HK$2,061,000) and approximately HK$784,000 (net of allowance for impairment loss of HK$6,000) respectively.

We have identified provision of the ECL for trade receivables and contract assets as a key audit matter because the total carrying amount of trade receivables and contract assets are significant to the consolidated financial statements and the provision of ECL involves significant judgements and estimates.

Our audit procedures were designed to review the management estimation on ECL including the internal credit ratings determined by the management, the credit risk of the debtors and days past due as groupings of various debtors that have similar loss patterns and challenge the reasonableness and selection of forward-looking information used in the calculation of ECL.

We also reviewed the provision matrix based on the Group’s historical observed default rates that forwardlooking information are considered.

58 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Independent Auditor’s Report

KEY AUDIT MATTERS (Continued)

Revenue recognition on broadband infrastructure construction services

Refer to note 8 to the consolidated financial statements and the accounting policies on pages 76 to 79.

The key audit matter

How the matter was addressed in our audit

For the year ended 31 December 2019, revenue from broadband infrastructure construction services was approximately HK$36,672,000. The Group has recognised the revenue from broadband infrastructure construction services overtime by applying the output method with reference to the certificates issued by the customers. Significant judgements and estimates have been made by the management when measuring progress towards complete satisfaction of a performance obligation of contracts at the end of the reporting period.

We have identified the revenue recognition on broadband infrastructure construction services as a key audit matter in view of the measurement of the progress and outcome of contracts involved significant judgements and estimates, which may be subject to the management bias.

Our procedures were designed to review the management judgements and estimates used in the determination of the progress of contracts.

We have assessed the appropriateness of the revenue recognition policy adopted by the management. We reviewed the amount of revenue recognised through inspecting, on a sample basis, the progress towards complete satisfaction of a performance obligation of contracts or completion certificates issued by the customers. In addition, we also assessed the management judgements and estimates on the progress of contracts when progress certificate was not available by critically challenged their basis of estimation of the total contract revenue.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 59

Independent Auditor’s Report

OTHER INFORMATION

The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

RESPONSIBILITIES OF DIRECTORS OF THE COMPANY AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors of the Company determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors of the Company are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors of the Company either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion, solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

60 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Independent Auditor’s Report

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors of the Company.

• Conclude on the appropriateness of the Company’s directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 61

Independent Auditor’s Report

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Mr. Chui Yiu Cheong.

SHINEWING (HK) CPA Limited

Certified Public Accountants

Chui Yiu Cheong

Practising Certificate Number: P07219

Hong Kong 31 March 2020

62 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Consolidated Statement of Profit or Loss and Other Comprehensive Income

For the year ended 31 December 2019

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2019 2018
Notes HK$’000 HK$’000
(Restated)
Turnover 8 346,673 388,696
Cost of sales (285,686) (284,625)
Gross profit 60,987 104,071
Other income 9 1,294 2,281
Selling and distribution costs (11,222) (13,675)
Administrative expenses (72,164) (50,685)
Impairment loss on inventories 20 (10,274) –
Impairment loss on plant and equipment 16 (22,501) –
Finance costs 10 (728) –
(Loss) profit before tax (54,608) 41,992
Income tax credit (expense) 11 4,684 (3,914)
(Loss) profit for the year 12 (49,924) 38,078
Other comprehensive expense for the year
Item that may be reclassified subsequently to
profit or loss:
Exchange difference arising on translation of
foreign operations (4,250) (10,116)
Total comprehensive (expense) income for the year (54,174) 27,962
(Loss) profit for the year attributable to:
– Owners of the Company (49,938) 37,515
– Non-controlling interests 14 563
(49,924) 38,078
Total comprehensive (expense) income attributable to:
– Owners of the Company (54,188) 27,921
– Non-controlling interests 14 41
(54,174) 27,962
(Loss) earnings per share
– Basic and diluted (HK cents) 14 (6.24) 4.69
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 63

Consolidated Statement of Financial Position

As at 31 December 2019

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2019 2018
Notes HK$’000 HK$’000
(Restated)
Non-current assets
Plant and equipment 16 145,286 159,480
Right-of-use assets 17 4,526 –
Finance lease receivable 18 842 1,190
Intangible assets 19 2,515 2,089
Deferred tax assets 26 5,092 411
Prepayment for plant and equipment 20,547 22,683
178,808 185,853
Current assets
Inventories 20 30,847 43,867
Finance lease receivable 18 322 290
Trade and other receivables 21 117,586 116,212
Contract assets 22 784 2,672
Amounts due from related companies 25 7,360 1,343
Tax recoverable 3,037 2,839
Pledged deposit 23 – 5,127
Bank balances and cash 23 56,018 46,879
215,954 219,229
Non-current asset classified as held-for-sale 40 15,276 –
231,230 219,229
Current liabilities
Trade and other payables 24 91,505 73,362
Lease liabilities 17 2,535 –
Amount due to immediate holding company 25 – 1,100
Deferred income 27 300 226
Consideration payable 37 51,514 –
Tax payables – 585
Loan from immediate holding company 28 34,776 –
180,630 75,273
Net current assets 50,600 143,956
Total assets less current liabilities 229,408 329,809
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64 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Consolidated Statement of Financial Position

As at 31 December 2019

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2019 2018
Notes HK$’000 HK$’000
(Restated)
Non-current liabilities
Lease liabilities 17 2,311 –
Deferred tax liability 26 413 256
Deferred income 27 1,804 1,494
4,528 1,750
224,880 328,059
Capital and reserves
Share capital 29 8,000 8,000
Reserves 216,880 319,207
Capital and reserves attributable to owners
of the Company 224,880 327,207
Non-controlling interests – 852
224,880 328,059
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The consolidated financial statements on pages 63 to 151 were approved and authorised for issue by the board of directors on 31 March 2020 and are signed on its behalf by:

Mr. Zhang Liang Johnson

Director

Mr. Tong Wen-hsin Director

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 65

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019

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Attributable to owners of the Company
Non-
Share Share Statutory Capital Translation Merger Retained controlling Total
capital premium reserve reserve reserve reserve profits Total interests equity
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(note 29(a)) (note 29(b)(i)) (note 29(b)(ii)) (note 29(b)(iii))
At 1 January 2018 8,000 104,098 5,405 8 (1,087) – 133,358 249,782 – 249,782
Profit for the year – – – – – – 37,515 37,515 563 38,078
Other comprehensive expense for the year:
Exchange difference arising on translation of
– – – – – –
foreign operations (9,594) (9,594) (522) (10,116)
Total comprehensive (expense) income
for the year – – – – (9,594) – 37,515 27,921 41 27,962
Acquisition of entities under common control
(note 37) – – – – – 39,953 – 39,953 962 40,915
Capital injections from prior shareholder of
– – – – – – –
a subsidiary 9,400 9,400 9,400
Acquisition of additional interest in a subsidiary
from a non-controlling shareholder (note 37) – – – 151 – – – 151 (151) –
– – – – – – – –
Transfer to statutory reserve 1,636 (1,636)
At 31 December 2018 (restated) 8,000 104,098 7,041 9,559 (10,681) 39,953 169,237 327,207 852 328,059
At 31 December 2018 as originally stated 8,000 104,098 6,347 8 (8,017) – 167,059 277,495 – 277,495
Effect of adopting merger accounting for
common control combinations (note 37) – – 694 9,551 (2,664) 39,953 2,178 49,712 852 50,564
Effect of changes in accounting policies (note 3) – – – – 5 – (270) (265) – (265)
At 1 January 2019 (restated) 8,000 104,098 7,041 9,559 (10,676) 39,953 168,967 326,942 852 327,794
Loss for the year – – – – – – (49,938) (49,938) 14 (49,924)
Other comprehensive expense for the year:
Exchange difference arising on translation of
– – – – – – –
foreign operations (4,250) (4,250) (4,250)
Total comprehensive (expense) income
for the year – – – – (4,250) – (49,938) (54,188) 14 (54,174)
Acquisition of additional interest in a subsidiary
from non-controlling shareholders (note 37) – – – (23,473) – 24,339 – 866 (866) –
Deemed contribution from immediate
– – – – – – –
holding company (note 28) 2,774 2,774 2,774
Consideration for common control combination
– – – – – – –
(note 37) (51,514) (51,514) (51,514)
Transfer to statutory reserve – – 396 – – – (396) – – –
At 31 December 2019 8,000 104,098 7,437 (11,140) (14,926) 12,778 118,633 224,880 – 224,880
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66 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Consolidated Statement of Cash Flows

For the year ended 31 December 2019

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2019 2018
HK$’000 HK$’000
(Restated)
OPERATING ACTIVITIES
(Loss) profit before tax (54,608) 41,992
Adjustments for:
Amortisation of intangible assets 287 163
Amortisation of deferred income (252) (109)
Bank interest income (64) (67)
Depreciation of plant and equipment 26,060 19,584
–
Depreciation of right-of-use assets 3,157
Finance costs 728 –
Interest income on finance lease (175) (142)
Government grants (741) (1,705)
–
Gain on disposal of plant and equipment (87)
Impairment loss on trade receivables 1,345 302
Impairment loss on contract assets 5 –
–
Impairment loss on plant and equipment 22,501
–
Impairment loss on inventories 10,274
Write-off of plant and equipment 4 –
Operating cash flows before movements in working capital 8,521 59,931
Decrease (increase) in inventories 1,995 (7,128)
Increase in trade and other receivables (4,262) (694)
Decrease (increase) in contract assets 1,857 (2,544)
Increase in amounts due from related companies (6,155) (1,098)
Increase (decrease) in trade and other payables 16,540 (6,033)
Decrease in finance lease receivable 464 396
Cash generated from operations 18,960 42,830
Hong Kong profits tax paid (623) (9,826)
PRC enterprise income tax refund, net – 1,121
NET CASH FROM OPERATING ACTIVITIES 18,337 34,125
INVESTING ACTIVITIES
Acquisition of plant and equipment (26,060) (33,799)
Prepayment for plant and equipment (20,798) (19,554)
Settlement of payables for plant and equipment (1,605) (972)
Acquisition of intangible assets (767) (463)
–
Placement of pledged deposit (35)
–
Withdrawal of pledged deposit 5,127
Bank interest received 64 67
Net cash inflow from business combination under common control – 5,687
Proceeds from disposal of plant and equipment – 4,784
NET CASH USED IN INVESTING ACTIVITIES (44,039) (44,285)
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 67

Consolidated Statement of Cash Flows

For the year ended 31 December 2019

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2019 2018
HK$’000 HK$’000
(Restated)
FINANCING ACTIVITIES
(Repayment to) advance from the immediate holding company (1,100) 1,100
Government grants received 1,421 3,595
–
Capital injection from prior shareholder of a subsidiary (note 37) 9,400
–
Repayment of lease liabilities (3,246)
–
New loan from immediate holding company 37,550
Interest expenses paid (481) –
NET CASH FROM FINANCING ACTIVITIES 34,144 14,095
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,442 3,935
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 46,879 42,135
Effect of foreign exchange rate changes 697 809
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
REPRESENTED BY BANK BALANCES AND CASH 56,018 46,879
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• The balance was presented as “nil” as a result of rounding and is less than HK$1,000.

68 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

1. GENERAL INFORMATION

Brainhole Technology Limited was incorporated in the Cayman Islands on 10 September 2014 as an exempted company with limited liability under the Cayman Companies Law, Chapter 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and its shares had been listed on GEM of The Hong Kong Stock Exchange Limited (the “Stock Exchange”) since 9 October 2015 and subsequently transferred its listing to the Main Board of the Stock Exchange on 21 July 2017.

The address of the registered office of the Company is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, the Cayman Islands. The address of the principal place of business of the Company is Office A, 31st Floor, Billion Plaza II, 10 Cheung Yue Street, Cheung Sha Wan, Kowloon, Hong Kong. Its immediate holding company is Yoho Bravo Limited (“Yoho”), a company incorporated in the British Virgin Islands (the “BVI”) with limited liability and its ultimate controlling party is Mr. Zhang Liang Johnson (“Mr. Zhang”).

The Company is principally engaged in investment holding and the principal activities of its subsidiaries (together with the Company collectively referred to as the “Group”) are set out in note 36.

The consolidated financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the Company.

2. BASIS OF PREPARATION

Merger accounting for business combination involving entities under common control

On 5 March 2019, Brainhole Technology Investments Limited (“Brainhole HK”), an indirectly whollyowned subsidiary of the Company, has entered into a sale and purchase agreement with Guangzhou Chong Dong Technology Co., Ltd（廣州蟲洞科技有限公司）(“Guangzhou Chong Dong”), a company beneficially wholly-owned by Mr. Zhang, for the purchase of its entire interest of Guangzhou Weaving Communications Telecommunications Technology Limited（廣州織網通訊科技有限公司）(“Guangzhou Weaving”), for a consideration of RMB68,000,000 (equivalent to approximately HK$78,200,000), subject to profit guarantee adjustment as disclosed in note 37.

The acquisition was completed on 12 September 2019, and Guangzhou Weaving and its subsidiaries (collectively referred to as the “Guangzhou Weaving Group”) have become subsidiaries of the Group since then. As Guangzhou Weaving and the Company are ultimately controlled by Mr. Zhang, the acquisition of Guangzhou Weaving was regarded as business combination under common control.

The net assets of the combining entity or business are consolidated using the existing book values from the controlling party’s perspective. No amount is recognised in respect of goodwill or excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest. The adjustments to eliminate share/registered capital of the combining entity or business against the related investment costs have been made to merger reserve in the consolidated statement of changes in equity. The details of the restated balances have been disclosed in note 37.

• For identification purpose only.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 69

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

2. BASIS OF PREPARATION (Continued)

Merger accounting for business combination involving entities under common control

(Continued)

The consolidated statement of profit or loss and other comprehensive income, the consolidated statement of financial position, consolidated statement of changes in equity and the consolidated statement of cash flows for the prior periods have been restated to include the operating results of Guangzhou Weaving Group as if this acquisition had been completed on 27 April 2018, being the earliest date when the combining entities or businesses first came under the control of Mr. Zhang.

3. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRS(s)”)

In the current year, the Group has applied, for its first time, the following new and amendments to HKFRSs, which include HKFRSs, Hong Kong Accounting Standards (“HKAS”) and Hong Kong (International Financial Reporting Interpretations Committee) Interpretation (“HK(IFRIC)-Int”), issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

HKFRS 16	Leases
HK(IFRIC)-Int 23	Uncertainty over Income Tax Treatments
Amendments to HKFRS 9	Prepayment Features with Negative Compensation
Amendments to HKAS 19	Plan Amendment, Curtailment or Settlement
Amendments to HKAS 28	Long-term Interests in Associates and Joint Ventures
Amendments to HKFRSs	Annual Improvements to HKFRSs 2015 – 2017 Cycle

The adoption of HKFRS 16 resulted in changes in the Group’s accounting policies and adjustments to the amounts recognised in the consolidated financial statements as summarises below.

The application of other new and amendments to HKFRSs in the current year has had no material impact on the Group’s financial performance and position for the current and prior years and/or on the disclosures set out in these consolidated financial statements.

3.1 Impacts on adoption of HKFRS 16 Leases

HKFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating lease and finance lease and requiring the recognition of right-of-use asset and a lease liability for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged. Details of these new accounting policies are described in note 4. The Group has applied HKFRS 16 retrospectively with the cumulative effect of initial application as an adjustment to the opening balance of equity, where appropriate, at 1 January 2019. Accordingly, certain comparative information may not be comparable as comparative information was prepared under HKAS 17 Leases.

70 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

3. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRS(s)”) (Continued)

3.1 Impacts on adoption of HKFRS 16 Leases (Continued)

On transition to HKFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which arrangements are, or contain, leases. It applied HKFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under HKAS 17 and HK(IFRIC) Int-4 Determining whether an Arrangement contains a Lease were not reassessed. Therefore, the definition of a lease under HKFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.

The Group as lessee

On adoption of HKFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as “operating leases” under the principles of HKAS 17 (except for lease of low value assets and lease with remaining lease term of 12 months or less). These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was ranged from 2.4% to 4.75%.

The Group recognises right-of-use assets and measures them at either:

• (i) their carrying amount as if HKFRS 16 had been applied since the commencement date, discounted using the lessee’s incremental borrowing rate at the date of initial application – the Group applied this approach to its lease of factory; or

• (ii) an amount equal to the lease liabilities – the Group applied this approach to lease of offices.

The Group as lessor

The Group leases certain broadband infrastructures and software. The accounting policies applicable to the Group as lessor remain substantially unchanged from those under HKAS 17.

The following table summarises the impact of transition to HKFRS 16 at 1 January 2019. Line items that were not affected by the adjustments have not been included.

==> picture [430 x 155] intentionally omitted <==

----- Start of picture text -----

Carrying Carrying
amounts as amounts
restated at Impact on as restated
31 December adoption of at 1 January
2018 HKFRS 16 2019
Note HK$’000 HK$’000 HK$’000
–
Right-of-use assets (a) 6,535 6,535
Lease liabilities (a) – (6,805) (6,805)
Retained profits (a) 169,237 (270) 168,967
Translation reserve (10,681) 5 (10,676)
----- End of picture text -----

Note (a): As at 1 January 2019, right-of-use assets were measured at an amount equal to carrying amount as if HKFRS 16 had been applied since the commencement date of the lease. Any difference between the right-of-use assets and the lease liabilities was recognised as an adjustment to the opening balance of retained profits.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 71

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

3. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRS(s)”) (Continued)

• 3.1 Impacts on adoption of HKFRS 16 Leases (Continued)

The following table summarises the impact on transition to HKFRS 16 on retained profits and translation reserve at 1 January 2019:

==> picture [430 x 141] intentionally omitted <==

----- Start of picture text -----

Retained Translation
profits reserve
HK$’000 HK$’000
Balance at 31 December 2018 (Restated) 169,237 (10,681)
Total change as a result of adoption of
HKFRS 16 on 1 January 2019 (270) 5
Balance at 1 January 2019 (Restated) 168,967 (10,676)
----- End of picture text -----

Differences between operating lease commitments as at 31 December 2018, the date immediately preceding the date of initial application, discounted using the incremental borrowing rate, and the lease liabilities recognised as at 1 January 2019 are as follow:

==> picture [430 x 296] intentionally omitted <==

----- Start of picture text -----

HK$’000
Operating lease commitments previously disclosed as at 31 December 2018 3,807
Add: Leases from business combination under common control 3,778
Operating lease commitments as at 31 December 2018 (Restated) 7,585
Less: Short-term leases with remaining lease term ended on or
before 31 December 2019 (325)
7,260
Discounted using the incremental borrowing rates and lease liabilities
recognised at 1 January 2019 6,805
Analysed as
Non-current portion 4,560
Current portion 2,245
6,805
----- End of picture text -----

72 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

3. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRS(s)”) (Continued)

3.1 Impacts on adoption of HKFRS 16 Leases (Continued) Practical expedients applied

On the date of initial application of HKFRS 16, the Group has also used the following practical expedients permitted by the standard:

• the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and

• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

New and amendments to HKFRSs issued but not yet effective

The Group has not early applied the following new and amendments to HKFRSs that have been issued but are not yet effective:

HKFRS 17 Insurance Contracts[2] Amendments to HKFRS 10 Sale or Contribution of Assets between an Investor and and HKAS 28 its Associate or Joint Venture[3] Amendments to HKFRS 3 Definition of a Business[4] Amendments to HKAS 1 Definition of Material[1] and HKAS 8 Amendments to HKFRS 9, Interest Rate Benchmark Reform[1] HKAS 39 and HKFRS 7 Conceptual Framework for Revised Conceptual Framework for Financial Reporting[1] Financial Reporting 2018

• 1 Effective for annual periods beginning on or after 1 January 2020.

• 2 Effective for annual periods beginning on or after 1 January 2021.

• 3 Effective for annual periods beginning on or after a date to be determined.

• 4 Effective for business combinations and assets acquisitions for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 January 2020.

The directors of the Company anticipate that, the application of the new and amendments to HKFRSs will have no material impact on the results and the financial position of the Group.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 73

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, and by the Hong Kong Companies Ordinance.

The consolidated financial statements have been prepared on the historical cost basis, except for consideration payable at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. Details of fair value measurement are explained in the accounting policies set out below.

The principal accounting policies are set out below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. If a subsidiary prepares its financial statements using accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that subsidiary’s financial statements in preparing the consolidated financial statements to ensure conformity with the Group’s accounting policies.

Control is achieved where the Group has: (i) the power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use its power over the investee to affect the amount of the Group’s returns. When the Group has less than a majority of the voting rights of an investee, power over the investee may be obtained through: (i) a contractual arrangement with other vote holders; (ii) rights arising from other contractual arrangements; (iii) the Group’s voting rights and potential voting rights; or (iv) a combination of the above, based on all relevant facts and circumstances.

The Group reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

74 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of consolidation (Continued)

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary.

Income and expenses of a subsidiary are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income of subsidiaries are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the Group are eliminated in full on consolidation.

Business combinations

When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with the corresponding adjustments made against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured to fair value at each reporting date, and changes in fair value are recognised in profit or loss.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 75

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Merger accounting for business combination involving entities under common control

The consolidated financial statements include the financial statements items of the combining entities or businesses in which the common control combination occurs as if the combination had occurred from the date when the combining entities or businesses first came under the control of the controlling party.

The net assets of the combining entities or businesses are consolidated using the existing book values from the controlling party’s perspective. No amount is recognised as consideration for goodwill or excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest.

The consolidated statement of profit or loss and other comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where this is a shorter period, regardless of the date of the common control combination.

The comparative amounts in the consolidated financial statements are presented as if the entities or businesses had been combined at the end of the previous reporting period unless the combining entities or businesses first came under common control at a later date.

Non-current asset classified as held-for-sale

Non-current asset is classified as held-for-sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Such classification requires the asset or the disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset or disposal group and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current asset classified as held-for-sale are measured at the lower of their previous carrying amount and fair value less costs of disposal.

Revenue recognition

Revenue is recognised to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Group uses a 5-step approach to revenue recognition:

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.

76 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition (Continued)

The Group recognised revenue when (or as) a performance obligation is satisfied, i.e. when “control” of the goods or services underlying the particular performance obligation is transferred to customers.

A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.

Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:

• The customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs;

• The Group’s performance creates and enhances an asset that the customer controls as the asset is created and enhanced; or

• The Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct goods or services.

Revenue is measured based on the consideration specified in a contract with a customer, excludes discounts and sales related taxes.

Contract assets and contract liabilities

A contract asset represents the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer that is not yet unconditional. It is assessed for impairment in accordance with HKFRS 9 Financial Instruments. In contrast, a receivable represents the Group’s unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.

A contract liability represents the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration from the customer.

For a single contract with the customer, either a net contract asset or a net contract liability is presented. For multiple contracts, contract assets and contract liabilities of unrelated contracts are not presented on a net basis.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 77

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition (Continued)

The Group recognised revenue from the following major sources:

Sales of goods

Revenue from sale of goods (i.e. sales of electronic and electrical parts and components manufactured by the Group or sourced from third-party suppliers) is recognised at the point when the control of the goods is transferred to the customers (generally when goods are delivered).

Promotion of broadband and smart domain solution service

Commission income from promotion of broadband and income from provision of smart domain solution services are recognised at a point in time when the services are performed by the Group.

Broadband infrastructure construction services

The Group provides broadband infrastructure construction services under contract with customers. Under the terms of the contracts, the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Revenue from broadband infrastructure construction services is therefore recognised over time.

If at any time the costs to complete the contract are estimated to exceed the remaining amount of the consideration under the contract, then a provision is recognised in accordance with an onerous contract. An onerous contract exists when the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. Provisions for onerous contracts are measured at the present value of the lower of the expected cost of terminating the contract and the net cost of continuing with the contract.

The Group also generally agrees to a one to two years retention period for 5% of the contract value. This amount is included in contract assets until the end of the retention period as the Group’s entitlement to this final payment is conditional on the satisfaction of the service quality by the customers over a certain period as stipulated in the contracts.

78 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition (Continued)

Over time revenue recognition: measurement of progress towards complete satisfaction of a performance obligation (Output method)

The progress towards complete satisfaction of a performance obligation is measured based on output method, which is to recognise revenue on the basis of direct measurements of the value of the goods or services transferred to the customer to date relative to the remaining goods or services promised under the contract, that best depict the Group’s performance in transferring control of goods or services.

Leasing

Accounting policy applicable on or after 1 January 2019

Definition of a lease

Under HKFR 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Group as lessee

For contracts entered into or modified on or after the date of initial application, the Group assesses whether a contract is or contains a lease, at inception of the contract or modification date. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straightline basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

Lease liabilities

At the commencement date, the Group measures lease liability at the present value of the lease payments that are not paid at that date. The lease payments are discounted by using the interest rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise fixed lease payments.

The lease liability is presented as a separate line in the consolidated statement of financial position.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 79

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leasing (Continued)

• Accounting policy applicable on or after 1 January 2019 (Continued) The Group as lessee (Continued)

Lease liabilities (Continued)

Lease liability is remeasured (and with a corresponding adjustment to the related right-of-use asset) whenever:

• the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using revised discount rate.

• the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

Right-of-use assets

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date and any initial direct costs, less lease incentives received.

Right-of-use assets are subsequently measured at cost less accumulated depreciation and impairment losses. They are depreciated over the shorter period of lease term and useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The Group presents right-of-use assets as a separate line item on the consolidated statement of financial position.

The Group applies HKAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss.

The Group as lessor

The Group enters into lease agreements as a lessor with respect to its broadband infrastructures and software. Leases for which the Group is a lessor are classified as finance or operating leases. Whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, the contract is classified as a finance lease. All other leases are classified as operating leases.

When a contract includes both lease and non-lease components, the Group applies HKFRS 15 Revenue from Contracts with Customers to allocate the consideration under the contract to each component.

80 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leasing (Continued)

Accounting policy applicable on or after 1 January 2019 (Continued)

The Group as lessor (Continued)

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease and included in “Turnover” line item. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.

Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Accounting policy applicable prior to 1 January 2019

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Group as lessee

Operating lease payments are recognised as an expense on a straight-line basis over the lease term.

The Group as lessor

Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 81

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign currencies (Continued)

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operation are translated into the presentation currency of the Group (i.e. HK$) using exchange rates prevailing at the end of each reporting period. Income and expenses items are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity under the heading of translation reserve.

Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised in profit or loss on a systematic basis over the periods in which the Company recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets are recognised as deferred income in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

Retirement benefits costs

Payments to the state-managed retirement benefit scheme and the Mandatory Provident Fund Scheme (the “MPF Scheme”) are recognised as an expense when employees have rendered service entitling them to the contributions.

Short-term employee benefits

A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the period the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service.

Liabilities recognised in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.

82 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Taxation

Income tax (credit) 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 “(loss) profit before tax” as reported in the consolidated statement of profit or loss and other comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 83

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Taxation (Continued)

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority on either (i) the same taxable entity; or (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

For the purposes of measuring deferred tax for leasing transactions in which the Group recognises the right-of-use assets and the related lease liabilities, the Group first determines whether the tax deductions are attributable to the right-of-use assets or the lease liabilities.

For leasing transactions in which the tax deductions are attributable to the lease liabilities, the Group applies HKAS 12 Income Taxes requirements to right-of-use assets and lease liabilities separately. Temporary differences relating to right-of-use assets and lease liabilities are not recognised at initial recognition and over the lease terms due to application of the initial recognition exemption.

Current and deferred taxes are recognised in profit or loss. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Plant and equipment

Plant and equipment held for use in the production or supply of goods or for administrative purposes are stated in the consolidated statements of financial position at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is recognised so as to allocate the cost of items of plant and equipment, less their residual values over their estimated useful lives, using the straight-line method. The estimated useful lives and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Properties in the course of construction for production or supply are carried at cost, less any recognised impairment loss. Costs include professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Such properties are classified to the appropriate categories of plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

84 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible assets

Intangible assets acquired separately

Intangible assets with finite useful life that is acquired separately is carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

An intangible assets is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible assets are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss in the period when the asset is derecognised.

Inventories

Inventories are stated at the lower of cost and net realisable value. Costs of inventories are calculated using the first-in, first-out method. Net realisable value represented the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sales.

Cash and cash equivalents

Cash and short-term deposit in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposit with a maturity of three months or less.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposit, as defined above.

Investments in subsidiaries

Investments in subsidiaries are stated on the statement of financial position of the Company at cost less accumulated impairment loss.

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value, except for trade receivables arising from contracts with customers which are initially measured in accordance with HKFRS 15. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss (“FVTPL”)) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 85

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial assets

All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Financial assets are classified, at initial recognition, as subsequently measured at amortised cost.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them.

Financial assets at amortised cost (debt instruments)

The Group measures financial assets subsequently at amortised cost if both of the following conditions are met:

• the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

• the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment.

Amortised cost and effective interest method

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding ECL, through the expected life of the debt instrument, or, where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition.

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance.

86 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial assets (Continued)

Financial assets at amortised cost (debt instruments) (Continued)

Amortised cost and effective interest method (Continued)

Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset.

Interest income is recognised in profit or loss and is included in the “Other income” line item (note 9).

Impairment of financial assets

The Group recognises a loss allowance for ECL on investments in debt instruments that are measured at amortised cost and contract assets. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

The Group always recognises lifetime ECL for trade receivables, contract assets, finance lease receivable and amounts due from related companies. Except for individually significant or creditimpaired balances, the ECL on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate.

For all other financial instruments, the Group measures the loss allowance equal to 12-month ECL, unless when there has a significant increase in credit risk since initial recognition, the Group recognises lifetime ECL. The assessment of whether lifetime ECL should be recognised is based on significant increase in the likelihood or risk of a default occurring since initial recognition.

Significant increase in credit risk

In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 87

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial assets (Continued)

Impairment of financial assets (Continued)

Significant increase in credit risk (Continued)

In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition:

• an actual or expected significant deterioration in the financial instrument’s external (if available) or internal credit rating;

• significant deterioration in external market indicators of credit risk for a particular debtor, e.g. a significant increase in the credit spread, the credit default swap prices for the debtor, or the length of time or the extent to which the fair value of a financial asset has been less than its amortised cost;

• existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations;

• an actual or expected significant deterioration in the operating results of the debtor;

• significant increases in credit risk on other financial instruments of the same debtor;

• an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor’s ability to meet its debt obligations.

Irrespective of the outcome of the above assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise.

Despite the foregoing, the Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial instrument is determined to have low credit risk if i) the financial instrument has a low risk of default, ii) the borrower has a strong capacity to meet its contractual cash flow obligations in the near term, and iii) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group considers a financial asset to have low credit risk when the asset has external credit rating of ‘investment grade’ in accordance with the globally understood definition or if an external rating is not available, the asset has an internal rating of ‘performing’. Performing means that the counterparty has a strong financial position and there is no past due amounts.

88 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial assets (Continued) Impairment of financial assets (Continued)

Significant increase in credit risk (Continued)

The Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due.

Definition of default

The Group considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that receivables that meet either of the following criteria are generally not recoverable:

• when there is a breach of financial covenants by the debtor; or

• information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full.

The Group considers that default has occurred when a financial asset is more than 90 days past due unless the Group has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.

Credit-impaired financial assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:

• significant financial difficulty of the debtor;

• a breach of contract, such as a default or past due event; or

• it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation.

Write-off policy

The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade receivables, when the amounts are over two years past due, whichever occurs sooner. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 89

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial assets (Continued)

Impairment of financial assets (Continued)

Measurement and recognition of ECL

The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information. As for the exposure at default, for financial assets, this is represented by the assets’ gross carrying amount at the reporting date; for financial guarantee contracts, the exposure includes the amount drawn down as at the reporting date, together with any additional amounts expected to be drawn down in the future by default date determined based on historical trend, the Group’s understanding of the specific future financing needs of the debtors, and other relevant forward-looking information.

For financial assets, the ECL is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective interest rate. For a lease receivable, the cash flows used for determining the ECL is consistent with the cash flows used in measuring the lease receivable in accordance with HKFRS 16 (on or after 1 January 2019) or HKAS 17 (prior to 1 January 2019).

If the Group has measured the loss allowance for a financial instrument at an amount equal to lifetime ECL in the previous reporting period, but determines at the current reporting date that the conditions for lifetime ECL are no longer met, the Group measures the loss allowance at an amount equal to 12-month ECL at the current reporting date, except for assets for which simplified approach was used.

The Group recognises an impairment gain or loss in profit or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party.

On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.

90 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial liabilities and equity instruments

Classification as debt or equity

Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements 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 an entity after deducting all of its liabilities. Equity instruments issued by a group entity are recognised at the proceeds received, net of direct issue costs.

Financial liabilities

All financial liabilities are subsequently measured at amortised cost using the effective interest method or at FVTPL.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liabilities is 1) contingent consideration of an acquirer in a business combination to which HKFRS 3 Definition of a Business applies, 2) held for trading, or 3) it is designated as at FVTPL.

A financial liability is classified as held for trading if:

• it has been incurred principally for the purpose of repurchasing in the near term; or

• on initial recognition it is a part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or

• it is a derivative that is not designated and effective as a hedging instrument.

A financial liability other than a financial liability held for trading or contingent consideration of an acquirer in a business combination may be designated as at FVTPL upon initial recognition if:

• such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

• it forms part of a contract containing one or more embedded derivatives, and HKFRS 9 permits the entire combined contract to be designated as at FVTPL.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 91

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial instruments (Continued)

Financial liabilities and equity instruments (Continued)

Financial liabilities (Continued)

Financial liabilities at FVTPL (Continued)

Financial liabilities at FVTPL are stated at fair value with any gains or losses arising on changes in fair value recognised in profit or loss to the extent that they are not part of a designated hedging relationship. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liabilities and is included in the “finance costs” line item in profit or loss.

Financial liabilities subsequently measured at amortised cost

Financial liabilities that are not 1) contingent consideration of an acquirer in a business combination, 2) held-for-trading, or 3) designated as at FVTPL, are subsequently measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.

Impairment losses on tangible and intangible assets

At the end of the reporting period, the Group reviews the carrying amounts of its tangible and intangible assets with finite useful life 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.

When 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. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

92 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

4. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment losses on tangible and intangible assets (Continued)

Recoverable amount is the higher of fair value less costs of disposal and 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 for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or a cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or a cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or a 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 as income immediately in profit or loss.

Research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Fair value measurement

When measuring fair value for the purpose of impairment assessment, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Specifically, the Group categorised the fair value measurements into three levels, based on the characteristics of inputs, as follow:

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Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or
liabilities.
Level 2 – Valuation techniques for which the lowest level input that is significant to the fair
value measurement is directly or indirectly observable.
Level 3 – Valuation techniques for which the lowest level input that is significant to the fair
value measurement is unobservable.
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At the end of the reporting period, the Group determines whether transfer occur between levels of the fair value hierarchy for assets and liabilities which are measured at fair value on recurring basis by reviewing their respective fair value measurement.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 93

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

5. KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, which are described in note 4, the directors of the Company are required to make judgements, estimates and assumptions about the amounts of assets, liabilities, revenue and expenses reported and disclosures made in the consolidated financial statements. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an on-going 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.

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Revenue recognition on broadband infrastructure construction services

The Group recognises contract revenue over time using an output method. The revenue recognition on broadband infrastructure construction services is dependent on management’s judgements and estimation of the satisfaction of performance obligation, by reference to the progress certificate issued by the customers. Notwithstanding that the Group reviews and revises the judgements and estimates on contract progresses, the actual outcome of the contract in terms of its total revenue may be higher or lower than the estimates and this will affect the amount of revenue recognition.

Estimated useful lives and impairment assessment of plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation expenses recorded. Plant and equipment is evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group of assets based on value in use or fair value less cost of disposal. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written down to the recoverable amount and the amount of the write-down is charged against the consolidated statement of profit or loss and other comprehensive income. Where the actual future cash flows are less than expected, a material impairment loss may arise.

As at 31 December 2019, the carrying amount of plant and equipment was approximately HK$145,286,000 (2018: HK$159,480,000). Impairment loss of approximately HK$22,501,000 (2018: nil) has been recognised in profit or loss for the year ended 31 December 2019.

94 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

5. KEY SOURCES OF ESTIMATION UNCERTAINTY (Continued) Estimated allowance for inventories

The management of the Group reviews an ageing analysis at the end of each reporting period and makes allowance for obsolete and slow-moving items identified that are no longer suitable for sale or use. The Group makes allowance for inventories based on the assessment of the net realisable value. The management estimates the net realisable value for inventories based primarily on the latest invoice prices and current market conditions.

As at 31 December 2019, the carrying amount of inventories was approximately HK$30,847,000 (2018: HK$43,867,000). Impairment loss of approximately HK$10,274,000 (2018: nil) has been recognised in profit or loss for the year ended 31 December 2019.

Provision of ECL for trade receivables and contract assets

Except for individually significant or credit-impaired balances, the Group uses a provision matrix to calculate the ECL for trade receivables and contract assets. The provision rates are based on internal credit ratings, the credit risk of the debtors and days past due as groupings of various debtors that have similar loss patterns. The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to adjust the historical experience with forward-looking information. At every reporting date, the historical observed default rates are updated and changes in the forward-looking information are considered. Changes in these assumptions and estimates could materially affect the result of the assessment and it may be necessary to make additional impairment charge to the consolidated statement of profit or loss and other comprehensive income.

As at 31 December 2019, the carrying amount of trade receivables and contract assets were approximately HK$101,340,000 and HK$784,000 respectively (2018: HK$91,249,000 and HK$2,672,000 respectively), net of allowance of impairment loss of approximately HK$2,061,000 and HK$6,000 respectively (2018: HK$2,659,000 and HK$84,000 respectively).

6. CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year.

The capital structure of the Group consists of net debt, which include loan from immediate holding company and consideration payable, net of bank balances and cash and equity attributable to owners of the Company, comprising issued share capital and reserves.

The directors of the Company review the capital structure of the Group periodically. As part of this review, the directors of the Company consider the cost of capital and the risks associated with each class of capital. Based on recommendations of the directors of the Company, the Group will balance its overall capital structure through the payment of dividends and new share issues. The directors of the Company will also consider the raise of borrowings as second source of capital.

The directors of the Company also endeavour to ensure the steady and reliable cash flows from the normal business operation.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 95

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS

(a) Categories of financial instruments

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2019 2018
HK$’000 HK$’000
(Restated)
Financial assets
Financial assets at amortised cost 169,676 152,762
Financial liabilities
Financial liabilities at amortised cost 126,281 74,405
–
Consideration payable at FVTPL 51,514
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(b) Financial risk management objectives and policies

The Group’s major financial instruments include trade and other receivables, retention receivables included in contract assets, amounts due from related companies, pledged deposit, bank balances and cash, trade and other payables, amount due to immediate holding company, loan from immediate holding company, lease liabilities and consideration payable. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments included market risk (interest rate risk and currency risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management of the Group manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Market risk

(i) Interest rate risk

The Group is exposed to fair value interest rate risk in relation to fixed-rate loan from immediate holding company.

The Group is mainly exposed to cash flow interest rate risk in relation to variable-rate bank balances, and fair value interest rate risk in relation to fixed-rate pledged bank deposit and short-term bank deposit.

The Group currently does not have interest rate hedging policy. However, the directors of the Company closely monitor its exposure to future cash flow risk as a result of change on market interest rate and will consider hedging changes in market interest rates should the need arise.

96 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Market risk (Continued)

• (i) Interest rate risk (Continued)

• Sensitivity analysis

• No sensitivity analysis is presented as the Group’s exposure to interest rate is not significant.

(ii) Currency risk

Several subsidiaries of the Company have foreign currency sales and purchases, which expose the Group to foreign currency risk. Approximately 48% (2018: 66%) of the Group’s sales are denominated in currencies other than the functional currency of the group entity making the sales, whilst almost 85% (2018: 65%) of the Group’s purchases is denominated in the group entity’s respective functional currency.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows:

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Assets Liabilities
2019 2018 2019 2018
HK$’000 HK$’000 HK$’000 HK$’000
(Restated) (Restated)
United States dollars (“USD”) 47,563 74,994 4,998 6,123
Renminbi (“RMB”) 2,277 7,155 74 90
49,840 82,149 5,072 6,213
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The Group currently does not have a foreign currency hedging policy. However, the directors of the Company continuously monitor the related foreign exchange exposure and will consider hedging of significant foreign currency exposure should the need arise.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 97

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Market risk (Continued)

• (ii) Currency risk (Continued)

Sensitivity analysis

The Group is mainly exposed to fluctuation against foreign currencies USD and RMB.

The following table details the Group’s sensitivity to a 5% (2018: 5%) increase and decrease in functional currency of respective group entities against the relevant foreign currencies. 5% (2018: 5%) is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the end of the reporting period for a 5% (2018: 5%) change in foreign currency rates.

A positive number below indicates an increase in post-tax profit where the functional currency of respective group entities weakened 5% (2018: 5%) against the relevant foreign currencies. For a 5% (2018: 5%) strengthening of the functional currency of respective group entities against the relevant foreign currencies, there would be an equal and opposite impact on the post-tax profit and the balance would be negative.

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2019 2018
HK$’000 HK$’000
(Restated)
Effect on post-tax profit
USD 1,777 2,876
RMB 96 295
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98 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Credit risk

As at 31 December 2019 and 2018, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position.

The credit risk of our Group mainly arises from bank balances and cash, pledged deposit, trade and other receivables, amounts due from related companies, finance lease receivable and contract assets. The carrying amounts of these balances represent our Group’s maximum exposure to credit risk in relation to financial assets.

In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts.

For trade receivables, finance lease receivable, contract assets and amounts due from related companies, the Group has applied the simplified approach in HKFRS 9 to measure the loss allowance at lifetime ECL. The Group determines the ECL on an individual basis for customer with significant balances and/or collectively by using a provision matrix, estimated based on historical credit loss experience, as well as the general economic conditions of the industry in which the debtors operate. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

For other non-traded related receivables, the Group has assessed whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk, the Group will measure the loss allowance based on lifetime rather than 12-month ECL.

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 99

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Credit risk (Continued)

The Group considers the probability of default upon initial recognition of asset and whether there has been a significant increase in credit risk on an ongoing basis throughout the reporting period. To assess whether there is a significant increase in credit risk, the Group compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. It considers available reasonable and supportive forwarding-looking information. Especially the following indicators are incorporated:

• internal credit rating

• actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the borrower’s ability to meet its obligations

• actual or expected significant changes in the operating results of the borrower

The Group’s exposure to credit risk

In order to minimise credit risk, the Group has tasked its operation management to develop and maintain the Group’s credit risk grading to categorise exposures according to their degree of risk of default. The credit rating information is drawn from the Group’s own trading records to rate its customers and other debtors. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.

100 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

• (b) Financial risk management objectives and policies (Continued) Credit risk (Continued)

The Group’s exposure to credit risk (Continued)

The Group’s current credit risk grading framework comprises the following categories:

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Trade receivables/
finance lease
receivable/contract
assets/amounts
Internal due from related Other
credit rating Description companies financial assets
Low risk The counterparty has a low risk of Lifetime ECL 12-month ECL
default and does not have any past- – not credit impaired
due amounts
Medium risk Debtor frequently repays after due Lifetime ECL 12-month ECL
dates but usually settle after due – not credit impaired
date
High risk There have been significant increases Lifetime ECL Lifetime ECL
in credit risk since initial recognition – not credit impaired – not credit impaired
through information developed
internally or external resources
Loss There is evidence indicating the asset Lifetime ECL Lifetime ECL
is credit-impaired – credit impaired – not credit impaired
Write-off There is evidence indicating that the Amount is written off Amount is written off
debtor is in severe financial difficulty
and the Group has no realistic
prospect of recovery
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 101

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Credit risk (Continued)

The table below detail the credit quality of the Group’s financial assets as well as the Group’s maximum exposure to credit risk.

For the year ended 31 December 2019

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Gross Net
Internal 12-month or carrying Loss carrying
credit rating lifetime ECL amount allowance amount
HK$’000 HK$’000 HK$’000
Trade receivables Note Lifetime ECL (simplified
approach) 103,401 (2,061) 101,340
Finance lease receivable Note Lifetime ECL (simplified
–
approach) 1,164 1,164
Contract assets Note Lifetime ECL (simplified
approach) 790 (6) 784
Amounts due from related Note Lifetime ECL (simplified
–
companies approach) 3,037 3,037
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102 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

• (b) Financial risk management objectives and policies (Continued) Credit risk (Continued)

The table below detail the credit quality of the Group’s financial assets as well as the Group’s maximum exposure to credit risk. (Continued)

For the year ended 31 December 2018 (Restated)

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Gross Net
Internal 12-month or carrying Loss carrying
credit rating lifetime ECL amount allowance amount
HK$’000 HK$’000 HK$’000
Trade receivables Note Lifetime ECL (simplified
approach) 91,999 (750) 91,249
Loss Lifetime ECL – credit
–
impaired 1,909 (1,909)
Finance lease receivable Note Lifetime ECL (simplified
–
approach) 1,480 1,480
Contract assets Note Lifetime ECL (simplified
–
approach) 2,672 2,672
Loss Lifetime ECL – credit
impaired 84 (84) –
Amounts due from related Note Lifetime ECL (simplified
–
companies approach) 2,839 2,839
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Note: The Group has applied the simplified approach in HKFRS 9 to measure the loss allowance at lifetime ECL. The Group determines the ECL on these items by using a provision matrix, grouped by internal credit rating, the credit risk of the debtors and past due status.

The Group has concentration of credit risk as 13% (2018: 12%) of the total trade receivables as at 31 December 2019 was due from the Group’s largest customer and 41% (2018: 37%) of the total trade receivables as at 31 December 2019 was due from the Group’s five largest customers.

However, management considers the credit risk is under control since the management exercise due care in granting credits and reviews the recoverable amount of each balances at the end of each reporting period to ensure adequate impairment loss has been made for irrecoverable amount.

The Group’s concentration of credit risk by geographical locations is mainly in the Korea and PRC, which accounted for 4% and 62% respectively (2018: 25% and 49%) of the total trade receivables as at 31 December 2019.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 103

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

(b) Financial risk management objectives and policies (Continued) Liquidity risk

In the management of the liquidity risk, the Group regularly monitors current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash and current working capital to meet its liquidity requirements in the short and long term.

The Group is exposed to liquidity risk as at 31 December 2019 as the Group incurred loss of approximately HK$49,924,000 for the year ended 31 December 2019 and at 31 December 2019, the Group had a loan from immediate holding company at the carrying amount of approximately HK$34,776,000, which contained a repayment on demand clause. Nevertheless, the directors of the Company are of the opinion that the Group will have sufficient working capital to meet its financial obligations as and when they fall due for the next twelve months from the end of the reporting period taking into account the loan from immediate holding company of HK$34,776,000 not to demand for repayment until 1 January 2021.

The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The maturity dates for non-derivative financial liabilities are based on the agreed repayment dates.

The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curve at the end of the reporting period.

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On demand or Total
less than 1 to 2 3 to 5 undiscounted Carrying
1 year years years cash flows amount
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 31 December 2019
– –
Trade and other payables 91,505 91,505 91,505
Lease liabilities 2,647 1,653 786 5,086 4,846
Loan from immediate holding
–
company 34,776 2,774 37,550 34,776
– –
Consideration payable 51,514 51,514 51,514
180,442 4,427 786 185,655 182,641
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As at 31 December 2018, the Group’s remaining contractual maturities for its trade and other payables and amount due to immediate holding company, based on the undiscounted cash flows on the earliest date on which the Group can be required to pay, are within one year or repayable on demand.

104 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

7. FINANCIAL INSTRUMENTS (Continued)

• (b) Financial risk management objectives and policies (Continued) Liquidity risk (Continued)

As at 31 December 2019, loan from immediate holding company of HK$34,776,000 (2018: nil) that contain a repayment on demand clause are included in the “on demand or less than 1 year” time band in the above maturity analysis. Taking into account the Group’s financial position, the directors of the Company do not believe that it is probable that the immediate holding company will exercise their discretionary rights to demand immediate repayment. The directors of the Company believe that such borrowings will be repaid in accordance with the scheduled repayment date set out in the loan agreement. At that time, the principal and interest cash outflows will amount to HK$37,550,000 (2018: nil) and approximately HK$2,226,000 (2018: nil) respectively.

• (c) Fair values of financial instruments

The directors of the Company consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate to their fair values due to their short-term maturities.

8. TURNOVER AND SEGMENT INFORMATION

Information reported to the board of directors, being the chief operating decision maker (the “CODM”), for the purposes of resource allocation and assessment of segment performance focuses on types of goods delivered. No operating segments identified by the CODM have been aggregated in arriving at the reportable segments of the Group.

Specifically, the Group’s reportable and operating segments under HKFRS 8 Operating Segments are as follows:

• a) Manufacturing segment engages in selling of electronic and electrical parts and components manufactured by the Group.

• b) Trading segment engages in trading of electronic and electrical parts and components sourced from third-party suppliers.

• c) Broadband infrastructure and smart domain segment engages in the provision of broadband infrastructure construction services, promotion of broadband services, smart domain solution services and operating leases for broadband infrastructure.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the method used to distribute the products and/or the nature of production processes.

Despite that all of the Group’s products are of a similar nature, they are subject to dissimilar risks and returns. Accordingly, the Group’s operating activities are attributable to manufacturing, trading and broadband infrastructure and smart domain segments.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 105

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

8. TURNOVER AND SEGMENT INFORMATION (Continued)

Segment revenue represents revenue derived from the manufacturing and trading of electronic and electrical parts and components, and provision of broadband infrastructure construction services, promotion of broadband services, smart domain solution services and operating leases for broadband infrastructure. An analysis of the Group’s revenue for the year from continuing operations is as follows:

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2019 2018
HK$’000 HK$’000
(Restated)
Revenue from contracts with customers
within the scope of HKFRS 15
Manufacturing electronic goods 183,538 224,667
Trading of electronic goods 95,820 123,588
Broadband infrastructure and smart domain:
– Broadband infrastructure construction services 36,672 16,204
– Commission income 13,736 9,188
– Provision of smart domain solution services 15,845 14,381
345,611 388,028
Revenue from other sources
Broadband infrastructure and smart domain:
Rental income from broadband infrastructure
under operating lease
– Lease payments that are fixed at a rate 1,062 668
346,673 388,696
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Disaggregation of revenue from contracts with customers by timing of recognition

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2019 2018
HK$’000 HK$’000
(Restated)
Timing of revenue recognition
At a point in time 308,939 371,824
Over time 36,672 16,204
Total revenue from contracts with customers 345,611 388,028
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106 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

8. TURNOVER AND SEGMENT INFORMATION (Continued)

Transaction price allocated to the remaining performance obligations

The transaction price allocated to the performance obligation that are unsatisfied (or partially unsatisfied) as at 31 December 2019 and 2018 and the expected timing of recognition are, as follow:

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2019 2018
HK$’000 HK$’000
(Restated)
Within one year 18,606 9,020
More than one year 12,675 6,309
31,281 15,329
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The above amounts represent revenue expected to be recognised in the future from broadband infrastructure construction services.

Segment revenues and results

The following is an analysis of the Group’s revenue and results by reportable and operating segments:

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Broadband
infrastructure
Manufacturing Trading and smart domain Total
2019 2018 2019 2018 2019 2018 2019 2018
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Restated) (Restated) (Restated) (Restated)
Segment revenue 183,538 224,667 95,820 123,588 67,315 40,441 346,673 388,696
Segment (loss) profit (17,926) 64,788 11,656 13,730 3,276 3,193 (2,994) 81,711
Unallocated income 488 608
Unallocated expenses (52,102) (40,327)
(Loss) profit before tax (54,608) 41,992
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The accounting policies of the operating segments are the same as the Group’s accounting policies described in note 4. Segment (loss) profit represents the (loss) profit earned by each segment without allocation of certain administrative expenses, finance costs and certain other income. This is the measure reported to the CODM of the Group for the purposes of resource allocation and performance assessment.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 107

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

8. TURNOVER AND SEGMENT INFORMATION (Continued)

Segment assets and liabilities

The following is an analysis of the Group’s assets and liabilities by reportable and operating segments:

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2019 2018
HK$’000 HK$’000
(Restated)
Segment assets
Manufacturing 236,533 258,333
Trading 29,521 29,533
Broadband infrastructure and smart domain 83,941 67,861
Unallocated 60,043 49,355
Total assets 410,038 405,082
Segment liabilities
Manufacturing 37,855 35,530
Trading 20,519 14,108
Broadband infrastructure and smart domain 31,428 17,297
Unallocated 95,356 10,088
Total liabilities 185,158 77,023
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For the purposes of monitoring segment performance and allocating resources between segments:

• all assets are allocated to operating segments other than certain plant and equipment and rightof-use assets for administrative purpose, certain intangible assets, tax recoverable, certain other receivables and prepayments, pledged deposit and certain bank balances and cash as these assets are managed on a group basis; and

• all liabilities are allocated to operating segments other than certain other payables, tax payables, deferred tax liability, consideration payable and loan from immediate holding company.

108 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

8. TURNOVER AND SEGMENT INFORMATION (Continued) Other segment information

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Broadband
infrastructure
and smart
Manufacturing Trading domain Unallocated Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Amounts included in the measure of segments profit or segment assets
Year ended 31 December 2019
–
Depreciation of plant and equipment 21,954 1,015 3,091 26,060
Depreciation of right-of-use assets 864 – 1,392 901 3,157
– – –
Impairment loss on plant and equipment 22,501 22,501
– – –
Impairment loss on inventories 10,274 10,274
Impairment loss on trade receivables 551 306 488 – 1,345
Impairment loss on contract assets – – 5 – 5
Write-off of plant and equipment – – – 4 4
Write-off of trade receivables – – 1,900 – 1,900
Write-off of contract assets – – 82 – 82
Amortisation of intangible assets – – 287 – 287
Additions to non-current assets 39,193 – 13,143 1,313 53,649
Broadband
infrastructure
and smart
Manufacturing Trading domain Unallocated Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Amounts included in the measure of segments profit or segment assets
Year ended 31 December 2018 (Restated)
– – –
Gain on disposal of plant and equipment (87) (87)
Depreciation of plant and equipment 16,254 – 458 2,872 19,584
Amortisation of intangible assets – – 163 – 163
Impairment loss on trade receivables – – 302 – 302
Impairment loss on contract assets – – – * – –
Additions to non-current assets 51,527 – 3,518 129 55,174
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• The amount was presented as “nil” as a result of rounding and is less than HK$1,000.

Geographical information

Information about the Group’s revenue from external customers is presented based on the geographical location of customers. Information about the Group’s non-current assets is presented based on the geographical location of the assets.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 109

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

8. TURNOVER AND SEGMENT INFORMATION (Continued) Geographical information (Continued)

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Asia
The PRC (excluding
(excluding Korea, the PRC Europe
Hong Kong Hong Kong) and Hong Kong) Korea and other Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue from external customers
Year ended 31 December 2019 72,932 148,027 61,806 61,362 2,546 346,673
Year ended 31 December 2018
(Restated) 45,828 149,370 28,033 140,296 25,169 388,696
Non-current assets (note)
As at 31 December 2019 7,163 166,553 – – – 173,716
– – –
As at 31 December 2018 (Restated) 8,804 176,638 185,442
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Note: Non-current assets excluded deferred tax asset.

Information about major customers

There is no revenue from a customer of the corresponding year contributing over 10% of the total revenue of the Group for the years ended 31 December 2019 and 2018.

110 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

9. OTHER INCOME

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2019 2018
HK$’000 HK$’000
(Restated)
Government grants (note) 741 1,705
Exchange gains, net – 134
Bank interest income 64 67
Interest income on finance lease 175 142
Gain on disposal of plant and equipment – 87
Amortisation of deferred income (note 27) 252 109
Sundry income 62 37
1,294 2,281
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Note: Government grants were received from local government authorities of which the Group fulfilled all conditions attached to the subsidies and recognised as other income upon receipts during the years ended 31 December 2019 and 2018.

10. FINANCE COSTS

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2019 2018
HK$’000 HK$’000
Interest on:
Lease liabilities 247 –
Loan from immediate holding company (note 28) 481 –
728 –
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 111

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

11. INCOME TAX (CREDIT) EXPENSE

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2019 2018
HK$’000 HK$’000
(Restated)
Current tax:
–
Hong Kong 6,075
The PRC 307 1,104
307 7,179
Under (over) provision in prior years:
Hong Kong 80 –
The PRC (462) (3,033)
(382) (3,033)
Deferred tax (note 26) (4,609) (232)
(4,684) 3,914
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• (a) Pursuant to the rules and regulations of the British Virgin Islands and the Cayman Islands, the Group is not subject to any income tax in these jurisdictions for both years.

• (b) On 21 March 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered profits tax rates regime. The Bill was signed into law on 28 March 2018 and was gazetted on the following day. Under the two-tiered profits tax rates regime, the first HK$2,000,000 of profits of qualifying corporation will be taxed at 8.25%, and profits above HK$2,000,000 will be taxed at 16.5%. For the year ended 31 December 2018, Hong Kong profits tax of the qualified entity of the Group is calculated in accordance with the two-tiered profits tax rates regime. The profits of other Group entities in Hong Kong not qualifying for the two-tiered profits tax rates regime will continue to be taxed at the flat rate of 16.5%.

For the year ended 31 December 2019, no provision for Hong Kong Profits Tax has been provided as there is no assessable profit arised.

• (c) Under the Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”) and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is 25% from 1 January 2008 onwards.

For the years ended 31 December 2019 and 2018, the PRC subsidiaries, Dongguan Jia Jun Electronic Technology Company Limited (“Dongguan Jia Jun”) and Guangzhou Weaving, were recognised by the PRC government as “High and New Technology Enterprise” and were eligible to a preferential tax rate of 15%.

112 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

11. INCOME TAX (CREDIT) EXPENSE (Continued)

The income tax (credit) expense for the year can be reconciled to the (loss) profit before tax per the consolidated statement of profit or loss and other comprehensive income as follows:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
(Loss) profit before tax (54,608) 41,992
Tax at the domestic income tax rate of 16.5% (9,010) 6,929
Effect of different tax rate of subsidiaries operating in
other jurisdiction 535 (64)
Tax effect of expenses not deductible for tax purpose 2,890 1,741
Tax effect of income not taxable for tax purpose (70) (88)
Tax effect of temporary differences not recognised 320 53
Tax effect of super deduction on research and
development expense (1,403) (1,493)
–
Effect of two tiered profits tax rates regime (165)
Tax effect of tax losses not recognised 2,454 34
–
Utilisation of tax losses previously not recognised (18)
Over provision in respect of prior years (382) (3,033)
Income tax (credit) expense for the year (4,684) 3,914
----- End of picture text -----

Details of the deferred tax are set out in note 26.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 113

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

12. (LOSS) PROFIT FOR THE YEAR

• (Loss) profit for the year has been arrived at after charging:

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2019 2018
HK$’000 HK$’000
(Restated)
Emoluments of the directors of the Company and
chief executive (note 15)
Salaries and allowances 1,730 1,833
Retirement benefits scheme contributions 6 16
Other staff costs:
Salaries and allowances 51,448 42,182
Retirement benefits scheme contributions 5,720 4,621
Total staff costs 58,904 48,652
Auditor’s remuneration 836 750
Amount of inventories recognised as expenses 285,686 284,625
Amortisation of intangible assets 287 163
Depreciation of plant and equipment 26,060 19,584
–
Depreciation of right-of-use assets 3,157
Research and development costs (note (i)) 11,334 12,062
Impairment loss on trade receivables 1,345 302
Impairment loss on contract assets 5 –
Write-off of plant and equipment 4 –
Operating lease rentals in respect of rented premises 325 2,166
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• The amount was presented as “nil” as a result of rounding and is less than HK$1,000.

Note:

(i) Included in research and development costs was staff cost of approximately HK$4,827,000 (2018: HK$5,095,000) which has been included in staff costs disclosure above.

13. DIVIDEND

No dividend was paid or proposed during the year ended 31 December 2019, nor has any dividend been proposed since the end of the reporting period (2018: nil).

114 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

14. (LOSS) EARNINGS PER SHARE

The calculation of the basic and diluted (loss) earnings per share attributable to owners of the Company is based on the following data:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
(Loss) earnings
(Loss) profit for the purpose of basic and diluted (loss)
earnings per share (49,938) 37,515
2019 2018
’000 ’000
Number of shares
Weighted average number of ordinary shares
for the purpose of basic and diluted (loss) earnings per share 800,000 800,000
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Diluted (loss) earnings per share is the same as basic (loss) earnings per share as there were no dilutive potential ordinary shares outstanding during the years ended 31 December 2019 and 2018.

15. EMOLUMENTS OF DIRECTORS, CHIEF EXECUTIVE AND EMPLOYEES

The emoluments paid or payable to each of the six (2018: ten) directors, which include the chief executive of the Group, were as follows:

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Executive directors Independent non-executive directors
Ms. Wan Mr. Tong Mr. Chen Mr. Xu Ms. Zhang
For the year ended Mr. Zhang [2] Duo [3] Wen-Hsin [1] Johnson Xi [5] Liang [5] Yibo [5] Total
31 December 2019 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Emoluments paid or receivable in
respect of a person’s services as a
director, whether of the Company and
its subsidiary undertakings
Fees – 480 – 180 180 180 1,020
Emoluments paid or receivable in
respect of director’s other services
in connection with the management
of the affairs of the Company and its
subsidiary undertakings (note (i))
Other emoluments
– Salaries and allowances – – 710 – – – 710
– Retirement benefits scheme
contributions – – 6 – – – 6
– 480 716 180 180 180 1,736
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 115

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

15. EMOLUMENTS OF DIRECTORS, CHIEF EXECUTIVE AND EMPLOYEES (Continued)

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Executive directors Independent non-executive directors
Mr. Chow Mr. Chow Ms. Wan Ms. Chan Ms. Man Oi Ms. Wong Mr. Chen Mr. Xu Ms. Zhang
For the year ended Hin Kok [4] Hin Keong [4] Mr. Zhang [2] Duo [3] Mei Po [4] Yuk Yvonne [4] Sau Ying [4] Johnson Xi [5] Liang [5] Yibo [5] Total
31 December 2018 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Emoluments paid or receivable in
respect of a person’s services
as a director, whether of the
Company and its subsidiary
undertakings
Fees – – – 298 53 53 53 101 101 101 760
Emoluments paid or receivable
in respect of director’s other
services in connection with the
management of the affairs of
the Company and its subsidiary
undertakings (note (i))
Other emoluments
– Salaries and allowances 546 527 – – – – – – – – 1,073
– Retirement benefits
scheme contributions 8 8 – – – – – – – – 16
554 535 – 298 53 53 53 101 101 101 1,849
----- End of picture text -----

1. Appointed on 16 September 2019 2. Appointed as executive director on 19 May 2018 and as chairman on 11 January 2019 3. Appointed on 19 May 2018

2. Resigned on 9 June 2018 5. Appointed on 9 June 2018

Mr. Tong Wen-hsin was appointed as the chief executive of the Company on 16 September 2019 and his emoluments disclosed above include those for services rendered by his as the chief executive.

Mr. Chow Hin Kok was the chief executive of the Company until 9 June 2018 and his emoluments disclosed above includes those for services rendered by him as the chief executive.

Note:

• (i) The emoluments represent the salaries paid to the directors of the Company in respect of their services in connection with management of the affairs of the Group.

116 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

15. EMOLUMENTS OF DIRECTORS, CHIEF EXECUTIVE AND EMPLOYEES (Continued)

Of the five individuals with the highest emoluments in the Group, nil (2018: nil) were directors of the Company including the chief executive of the Company whose emoluments are set out above. The emoluments of the remaining five (2018: five) individuals were as follows:

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2019 2018
HK$’000 HK$’000
(Restated)
Salaries and allowances 9,038 5,929
Retirement benefits scheme contributions 109 96
9,147 6,025
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Their emoluments were within the following bands:

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----- Start of picture text -----

2019 2018
(Restated)
Number of employees
– –
Nil to HK$1,000,000
HK$1,000,001 to HK$1,500,000 3 5
– –
HK$1,500,001 to HK$2,000,000
HK$2,000,001 to HK$2,500,000 1 –
Above HK$2,500,000 1 –
5 5
----- End of picture text -----

No emoluments were paid by the Group to any of the directors of the Company (including the chief executive) or the five highest paid individuals as an inducement to join or upon joining the Group, or as compensation for loss of office for the years ended 31 December 2019 and 2018.

During the year ended 31 December 2019, the director, Mr. Zhang waived his salaries of HK$480,000 (2018: HK$298,000). Except for Mr. Zhang, no other directors of the Company (including the chief executive) or the five highest paid individuals waived or agreed to waive any emoluments for both the years ended 31 December 2019 and 2018.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 117

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

16. PLANT AND EQUIPMENT

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----- Start of picture text -----

Broadband
Furniture, infrastructure
Leasehold Plant and fixtures and and network Construction
improvements machinery equipment equipment in progress Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
COST
– –
At 1 January 2018 4,567 157,230 5,737 167,534
Acquired on business combination
under common control – – 260 8,769 12,987 22,016
Additions 3,102 31,238 203 11 2,908 37,462
– – – –
Disposals (6,909) (6,909)
Transfer – – 100 2,345 (2,445) –
Exchange realignment (221) (7,197) (132) (744) (980) (9,274)
At 31 December 2018 (Restated)
and 1 January 2019 7,448 174,362 6,168 10,381 12,470 210,829
Additions 5,746 39,713 226 6 8,176 53,867
Write-off – – (69) – – (69)
Transfer – – – 12,635 (12,635) –
Reclassified as held for sale – (56,413) – – – (56,413)
Exchange realignment (266) (5,138) (54) (453) (194) (6,105)
At 31 December 2019 12,928 152,524 6,271 22,569 7,817 202,109
ACCUMULATED DEPRECIATION
AND IMPAIRMENT
– –
At 1 January 2018 2,749 28,891 4,413 36,053
Charge for the year 879 17,669 620 416 – 19,584
– – – –
Eliminated on disposals (2,212) (2,212)
–
Exchange realignment (112) (1,854) (82) (28) (2,076)
At 31 December 2018 (Restated)
and 1 January 2019 3,516 42,494 4,951 388 – 51,349
Charge for the year 2,478 22,140 537 905 – 26,060
Eliminated on write-off – – (65) – – (65)
Impairment loss recognised in
– – – –
profit or loss 22,501 22,501
Reclassified as held for sale – (41,137) – – – (41,137)
–
Exchange realignment (100) (1,714) (42) (29) (1,885)
At 31 December 2019 5,894 44,284 5,381 1,264 – 56,823
CARRYING VALUES
At 31 December 2019 7,034 108,240 890 21,305 7,817 145,286
At 31 December 2018 (Restated) 3,932 131,868 1,217 9,993 12,470 159,480
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118 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

16. PLANT AND EQUIPMENT (Continued)

The above items of plant and equipment are depreciated on a straight-line basis at the following rates per annum:

Leasehold improvements	33% or over the lease term, whichever is shorter
Plant and machinery	10% – 33%
Furniture, fixtures and equipment	33%
Broadband infrastructure and
network equipment	15 years

During the year, certain machineries cannot properly function to produce quality products. Directors of the Company conducted a review of impairment of these machineries by reference to a valuation performed by independent valuer. An impairment loss of HK$22,501,000 (2018: nil) was recognised in profit or loss for the year ended 31 December 2019. The recoverable amount of these machineries was based on fair value less costs of disposal. The fair value measurement of these machineries is categorised within level 2 of the fair value hierarchy. As at year ended 31 December 2019, the carrying amount of these machineries of approximately HK$15,276,000 has been classified as non-current asset held for sale as the directors of the Company has committed a plan to dispose these machineries and actively communicated with buyers.

The valuation carried out on 31 December 2019 was performed by Valtech Valuation Advisory Limited (“Valtech”), an independent qualified professional valuer not connected with the Group. Valtech has appropriate qualifications and has recent experience in the valuation of similar machineries in the relevant industries.

Rental income of approximately HK$1,062,000 (2018:HK$668,000) relating to the lease of broadband infrastructure and network equipment with carrying amount of HK$21,305,000 (2018: HK$9,993,000) for the year ended 31 December 2019 are included in “Turnover”.

17. LEASES

(i) Right-of-use assets

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Buildings
HK$’000
As at 1 January 2019
Carrying amount (note 3) 6,535
For the year ended 31 December 2019
Addition 1,151
Depreciation for the year (3,157)
Exchange realignment (3)
(2,009)
As at 31 December 2019
Carrying amount 4,526
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 119

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

17. LEASES (Continued)

(i) Right-of-use assets (Continued)

The Group has lease arrangements for buildings. The lease terms are generally ranged from two to five years.

Additions to the right-of-use assets for the year ended 31 December 2019 amounted to approximately HK$1,151,000, due to new leases of buildings.

(ii) Lease liabilities

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31/12/2019 1/1/2019
HK$’000 HK$’000
Non-current 2,311 4,560
Current 2,535 2,245
4,846 6,805
Amounts payable under lease liabilities
31/12/2019
HK$’000
Within one year 2,535
After 1 year but within 2 years 1,563
After 2 years but within 5 years 748
4,846
Less: Amount due for settlement within 12 months
(shown under current liabilities) (2,535)
Amount due for settlement after 12 months 2,311
(iii) Amount recognised in profit or loss
Year ended
31/12/2019
HK$’000
Interest expense on lease liabilities 247
Expense relating to short-term leases 325
(iv) Others
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During the year ended 31 December 2019, the total cash outflow for leases amount to HK$3,571,000.

120 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

18. FINANCE LEASE RECEIVABLE

Software of the Group is leased out under finance lease. Interest rate inherent in the lease is fixed at the contract date over the lease terms.

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2019 2018
HK$’000 HK$’000
(Restated)
Non-current 842 1,190
Current 322 290
1,164 1,480
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All leases are denominated in RMB. The Group entered into finance leasing arrangement as a lessor for software to its customer. The average term of finance lease entered into was 5 years. Generally, this lease contract do not include extension or early termination options.

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31/12/2019
HK$’000
Amounts receivable under finance lease
Within 1 year 455
After 1 year but within 2 years 480
After 2 years but within 3 years 480
Undiscounted lease payments and gross investment in lease 1,415
Less: unearned finance income (251)
Present value of minimum lease payment receivable 1,164
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The following table presents the amounts included in profit or loss.

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----- Start of picture text -----

31/12/2019
HK$’000
Finance income on finance lease 175
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The Group’s finance lease arrangements do not include variable payments.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 121

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

18. FINANCE LEASE RECEIVABLE (Continued) Disclosure required by HKAS 17

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Present value of
Minimum lease minimum lease
payments payments
31/12/2018 31/12/2018
HK$’000 HK$’000
(Restated) (Restated)
Finance lease receivable comprise:
Within 1 year 465 290
After 1 year but within 2 years 465 330
After 2 years but within 5 years 982 860
1,912 1,480
Less: unearned finance income (432) N/A
Present value of minimum lease payment receivable 1,480 1,480
Less: amounts due for receivables within one year shown
under current assets (290)
Amounts due for receivables after one year 1,190
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As at 31 December 2018, effective interest rate of the above finance lease is at 13% per annum.

As at 31 December 2019 and 2018, finance lease receivable is secured over the software leased. The Group is not permitted to sell or repledge the collateral in the absence of default by the lessee.

The directors of the Company estimate the loss allowance on finance lease receivable at the end of the reporting period at an amount equal to lifetime ECL. None of the finance lease receivable at the end of the reporting period is past due, and taking into account the historical default experience and the future prospects of the industries in which the lessee operate, the directors of the Company consider that no finance lease receivable is impaired.

There has been no change in the estimation techniques or significant assumptions made during the current reporting period in assessing the loss allowance for finance lease receivable.

122 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

19. INTANGIBLE ASSETS

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Backlog
Trademark contracts Software Total
HK$’000 HK$’000 HK$’000 HK$’000
COST
– –
At 1 January 2018 2,600 2,600
Acquired on business combination
under common control – 363 1,568 1,931
Addition – – 463 463
Exchange realignment – (19) (135) (154)
As at 31 December 2018 (Restated)
and 1 January 2019 2,600 344 1,896 4,840
Addition – – 767 767
Exchange realignment – (9) (56) (65)
As at 31 December 2019 2,600 335 2,607 5,542
ACCUMULATED AMORTISATION
– –
At 1 January 2018 2,600 2,600
Provided for the year – 114 49 163
Exchange realignment – (6) (6) (12)
As at 31 December 2018 (Restated)
and 1 January 2019 2,600 108 43 2,751
Provided for the year – 166 121 287
Exchange realignment – (7) (4) (11)
As at 31 December 2019 2,600 267 160 3,027
CARRYING VALUES
At 31 December 2019 – 68 2,447 2,515
At 31 December 2018 (Restated) – 236 1,853 2,089
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 123

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

19. INTANGIBLE ASSET (Continued)

The above items of intangible assets have finite useful life. Such intangible assets are amortised on a straight-line basis over the following periods:

Trademark Software Backlog contracts

1.5 years 10 years over the contract terms

20. INVENTORIES

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2019 2018
HK$’000 HK$’000
(Restated)
Raw materials 15,623 20,675
Finished goods 15,224 23,192
30,847 43,867
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As at 31 December 2019, the impairment loss on inventories of approximately HK$10,274,000 (2018: nil) has been recognised in the consolidated statement of profit or loss and other comprehensive income.

21. TRADE AND OTHER RECEIVABLES

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2019 2018
HK$’000 HK$’000
(Restated)
Receivables at amortised cost comprise:
Trade receivables 103,401 93,908
Less: allowance for impairment loss (2,061) (2,659)
101,340 91,249
Deposits and other receivables 4,611 8,092
Prepayments 11,635 16,871
Total trade and other receivables 117,586 116,212
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124 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

21. TRADE AND OTHER RECEIVABLES (Continued)

As at 31 December 2019, the gross amount of trade receivables arising from contracts with customers and operating leases amounted to approximately HK$101,289,000 (2018: HK$91,226,000) and HK$51,000 (2018: HK$23,000) respectively.

The Group does not hold any collateral over its trade and other receivables.

The Group allows a credit period of 0 to 90 days to its customers for manufacturing and trading segments. For customers for broadband infrastructure and smart domain segment, the Group does not have a standardised and universal credit period granted to its customers, and the credit period of individual customer is considered on a case-by-case basis and stipulated in the project contract, as appropriate.

The following is an aged analysis of trade receivables, net of allowance for impairment, presented based on the date of delivery/invoice date, which approximates the respective revenue recognition dates, at the end of the reporting period.

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2019 2018
HK$’000 HK$’000
(Restated)
0 to 30 days 85,210 80,940
31 to 90 days 7,062 6,170
91 to 365 days 3,148 2,962
Over 365 days 5,920 1,177
101,340 91,249
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The Group measures the loss allowance for trade receivables at an amount equal to lifetime ECL. The ECL on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date.

There has been no change in the estimation techniques or significant assumptions made during the current reporting period.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 125

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

21. TRADE AND OTHER RECEIVABLES (Continued)

The lifetime ECL for trade receivables in relation to its manufacturing and trading operations based on internal credit rating for its customers collectively that are not individually significant as follows:

As at 31 December 2019

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Weighted
average Gross
expected carrying Loss
loss rate amount allowance
% HK$’000 HK$’000
Manufacturing and trading
Debtors with low credit risk 0.47 35,064 163
Debtors with medium credit risk 1.72 39,845 685
74,909 848
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As at 31 December 2018

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Weighted
average Gross
expected carrying Loss
loss rate amount allowance
% HK$’000 HK$’000
Manufacturing and trading
Debtors with low credit risk – 49,067 –
Debtors with medium credit risk – 20,434 –
–
69,501
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126 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

21. TRADE AND OTHER RECEIVABLES (Continued))

The lifetime ECL for trade receivables in relation to its broadband infrastructure and smart domain operations is assessed individually or based on the ageing of customers collectively that are not individually significant as follows:

As at 31 December 2019

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Weighted
average Gross
expected carrying Loss
loss rate amount allowance
% HK$’000 HK$’000
Broadband infrastructure and
smart domain
Current to 1 month past due 1.60 17,154 273
1 to 3 months past due 3.85 1,384 54
More than 3 months but less than
12 months past due 5.68 3,338 190
Over 12 months past due 10.52 6,616 696
28,492 1,213
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As at 31 December 2018 (Restated)

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Weighted
average Gross
expected carrying Loss
loss rate amount allowance
% HK$’000 HK$’000
Broadband infrastructure and
smart domain
Current to 1 month past due 1.60 11,625 186
1 to 3 months past due 3.85 6,417 247
More than 3 months but less than
12 months past due 5.68 3,140 178
Over 12 months past due 10.52 1,316 139
22,498 750
Default receivables (Note) 100 1,909 1,909
24,407 2,659
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Note: As at 31 December 2018, debtors who were credit-impaired with gross carrying amount of approximately HK$1,909,000 were assessed individually.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 127

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

21. TRADE AND OTHER RECEIVABLES (Continued))

The movement in the allowance for impairment of trade receivables is set out below:

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Lifetime ECL – Lifetime ECL –
credit impaired not credit impaired Total
2019 2018 2019 2018 2019 2018
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Restated) (Restated) (Restated)
At 1 January 1,900 – 759 – 2,659 –
In subsidiaries from business under common control – 2,061 – 459 – 2,520
Impairment loss recognised – – 1,345 302 1,345 302
Amount written off as uncollectible (1,900) – – – (1,900) –
–
Exchange realignment (161) (43) (2) (43) (163)
At 31 December – 1,900 2,061 759 2,061 2,659
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The Group writes off trade receivable when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or when the trade receivables are over 2 years past due, whichever occurs earlier. As at 31 December 2019, trade receivables of approximately HK$1,900,000 (2018: nil) was written off.

22. CONTRACT ASSETS

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2019 2018
HK$’000 HK$’000
(Restated)
Retention receivables of broadband infrastructure
construction services 353 156
Unbilled revenue of broadband infrastructure
construction services (note) 437 2,600
790 2,756
Less: allowance for impairment loss (6) (84)
Total contract assets 784 2,672
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Note: Unbilled revenue included in contract assets represents the Group’s right to receive consideration for work completed but not yet billed because the rights are conditional upon the satisfaction by the customers on the construction work completed by the Group and the work is pending for the certification by the customers. The contract assets are transferred to trade receivables when the rights become unconditional, which is typically at the time the Group obtains the certification of the completed construction work from the customers.

The Group classifies these contract assets, net of allowance for impairment loss, under current assets because the Group expects to realise them in its normal operating cycle.

128 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

22. CONTRACT ASSETS (Continued)

The recovery or settlement for contract assets pursuant to the terms of contracts is as follows:

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2019 2018
HK$’000 HK$’000
(Restated)
Within one year 784 2,672
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The Group measures the loss allowance for contract assets equal to lifetime ECL. The ECL on contract assets are assessed on an individual basis for customers with significant balance and collectively using a provision matrix by reference to past default experience of the debtor, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date.

As at 31 December 2019, approximately HK$6,000 (2018: HK$84,000) was recognised as lifetime ECL for contract assets.

The movement in the allowance for impairment of contract assets is set out below:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
At the beginning of the year 84 –
In subsidiaries from business under common control - 88
Impairment loss recognised 5 –
Amount written off as uncollectible (82) –
Exchange realignment (1) (4)
At the end of the year 6 84
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• The balance was presented as “nil” as a result of rounding and is less than HK$1,000.

The significant decrease in contract assets in 2019 is the result of decrease in number of uncompleted broadband infrastructure construction services at the end of the year.

The Group writes off contract assets when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or when the trade receivables are over 2 years past due, whichever occurs earlier. As at 31 December 2019, contract assets of approximately HK$82,000 (2018: nil) was written off.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 129

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

23. PLEDGED DEPOSIT AND BANK BALANCES AND CASH

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2019 2018
HK$’000 HK$’000
(Restated)
–
Pledged deposit 5,127
Bank balances and cash 56,018 46,879
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The pledged deposit was pledged to a bank to secure short-term banking facilities of approximately HK$5,000,000 granted to the Group with fixed interest rate of 0.90% per annum and was therefore classified as current asset as at 31 December 2018.

Cash at banks carried interest at floating rates based on daily bank deposit rates for the years ended 31 December 2019 and 2018.

24. TRADE AND OTHER PAYABLES

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2019 2018
HK$’000 HK$’000
(Restated)
Trade payables 70,238 54,142
Payables for acquisition of plant and equipment 5,129 1,605
Contract liabilities (Note) – 57
Accruals of costs for contract works 314 2,028
Accrued staff costs 3,259 2,611
Accruals and other payables 12,565 12,919
91,505 73,362
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No accrued directors’ emoluments included in the Group’s accruals and other payables as at 31 December 2019 (2018: HK$601,000).

130 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

24. TRADE AND OTHER PAYABLES (Continued)

The following is an aged analysis of trade payables presented based on the invoice date at the end of the reporting period.

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2019 2018
HK$’000 HK$’000
(Restated)
Within 3 months 65,191 51,316
4 to 6 months 3,472 2,075
7 to 12 months 982 713
Over 1 year 593 38
70,238 54,142
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The credit period on purchases of goods ranged from 30 to 120 days. The Group has financial risk management policies in place to ensure that all payables are settled within the credit timeframe.

• Note: Contract liabilities include advance received in respect of sales of goods. Revenue recognised during the year ended 31 December 2019 that was included in the contract liabilities at the beginning of the year is HK$57,000 (2018: nil). There was no revenue recognised in the current year that related to performance obligations that were satisfied in a prior year.

25. AMOUNTS DUE FROM RELATED COMPANIES / AMOUNT DUE TO IMMEDIATE HOLDING COMPANY

Amounts due from related companies

As at 31 December 2019 and 2018, the balance is trade nature with credit period of 30 days. All of the related companies are beneficially owned by Mr. Zhang.

The Group measures the loss allowance for amounts due from related companies at an amount equal to lifetime ECL. The management considered that there is no significant ECL associated with the amounts due from related companies taking into account there is no recent history of default and financial strength of the related companies. As there is no significant increase in credit risk since initial recognition, no loss allowance is recognised.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 131

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

25. AMOUNTS DUE FROM RELATED COMPANIES / AMOUNT DUE TO IMMEDIATE HOLDING COMPANY (Continued)

Amounts due from related companies (Continued)

The following is an aged analysis of presented based on the date of invoice date, which approximates the respective revenue recognition dates, at the end of the reporting period.

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2019 2018
HK$’000 HK$’000
(Restated)
0 to 30 days 3,115 1,072
31 to 90 days 3,245 49
91 to 365 days 880 60
Over 365 days 120 162
7,360 1,343
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Amount due to immediate holding company

The amount was unsecured, interest-free and repayable on demand.

26. DEFERRED INCOME TAX

The analysis of deferred income tax assets (liability) is as follows:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Deferred income tax assets 5,092 411
Deferred income tax liability (413) (256)
4,679 155
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132 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

26. DEFERRED INCOME TAX (Continued)

The following is the deferred tax assets (liability) of the Group recognised and movements thereon during both years:

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Impairment Impairment Impairment Accelerated
loss on loss on plant loss on trade tax
inventories and equipment receivables depreciation Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
– – –
At 1 January 2018 (70) (70)
Credit (charge) to profit or loss – – 425 (193) 232
Exchange realignment – – (14) 7 (7)
At 31 December 2018 (Restated) and 1 January
2019 – – 411 (256) 155
Credit (charge) to profit or loss 1,541 3,375 (142) (165) 4,609
Exchange realignment (27) (60) (6) 8 (85)
At 31 December 2019 1,514 3,315 263 (413) 4,679
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The Group did not recognise deferred income tax assets of approximately HK$3,009,000 (2018: HK$253,000) in respect of (i) deductible temporary differences of approximately HK$3,057,000 (2018: HK$1,118,000); (ii) un-utilised tax losses amounting to approximately HK$10,869,000 (2018: nil) that can be carried forward indefinitely; and (iii) un-used tax losses amounting to approximately HK$306,000 (2018: HK$415,000) will expire in 2022 and approximately HK$4,004,000 (2018: nil) will expire in 2023.

Under the EIT Law, withholding tax is imposed on dividends to be declared in respect of profits earned by the PRC subsidiaries from 1 January 2008 onwards. Deferred tax has not been provided for in the consolidated financial statements in respect of temporary differences associated with accumulated profits of the PRC subsidiaries amounting to approximately HK$27,986,000 (2018: HK$55,813,000) as the Group is able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

27. DEFERRED INCOME

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
Government grants
– Non-current 1,804 1,494
– Current 300 226
2,104 1,720
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 133

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

27. DEFERRED INCOME (Continued)

As at 31 December 2019, the Group received government grants of approximately HK$680,000 (2018: HK$1,890,000) for acquisition of some machineries which has been treated as deferred income and are amortised to profit or loss over the useful lives of the related machineries. This policy has resulted in a credit to profit or loss in the current period of approximately HK$252,000 (2018: HK$109,000). As at 31 December 2019, balances of approximately HK$2,104,000 (2018: HK$1,720,000) remain to be amortised.

28. LOAN FROM IMMEDIATE HOLDING COMPANY

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Due for repayment after 1 year but within 2 years and
amount shown under current liabilities 34,776 –
----- End of picture text -----

The principal loan amount of HK$37,550,000 is unsecured, bearing interest at a fixed rate of 2% (2018: nil) per annum and contain a repayment on demand clause. The effective interest rate of the loan from immediate holding company is 5.25% (2018: nil) per annum.

The directors of the Company assessed the fair value of the loan, taken into account an effective interest rate of 5.25% (2018: nil) per annum, and recognised an initial fair value adjustment of approximately HK$2,774,000 (2018: nil) to the outstanding carrying amount of the loan from immediate holding company and capital reserve as deemed contribution from immediate holding company of approximately HK$2,774,000.

Subsequent to the reporting period, immediate holding company agreed not to demand for the repayment until 1 January 2021.

As at the end of the reporting period, the Group has the following undrawn facilities granted by immediate holding company:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Fixed rate expiring beyond one year 450 4,020
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134 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

29. SHARE CAPITAL AND RESERVES

(a) Share capital

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Number of Share
shares capital
’000 HK$’000
Ordinary shares of HK$0.01 each
Authorised:
At 1 January 2018, 31 December 2018 and
31 December 2019 2,000,000 20,000
Issued and fully paid:
At 1 January 2018, 31 December 2018 and
31 December 2019 800,000 8,000
----- End of picture text -----

(b) Reserves

(i) PRC statutory reserve

PRC statutory reserves were established in accordance with the relevant PRC rules and regulations and the articles of association of Dongguan Jia Jun, Guangzhou Weaving and Hunan Huama Construction Engineering Co., Ltd.*（湖南華馬建設工程有限公司） (“Hunan Huama”). Appropriations to the reserves were determined by the respective board of directors of Dongguan Jia Jun, Guangzhou Weaving and Hunan Huama and can be used to offset accumulated losses and increase capital upon approval from the relevant government authorities.

(ii) Capital reserve

Capital reserve represents (i) the difference between the aggregate amount of issued and fully paid share capital of the subsidiaries acquired by the Company and the nominal amount of the shares issued by the Company as consideration; (ii) additional contributions made by the prior shareholders of the Company’s subsidiaries; (iii) difference between the carrying amounts of non-controlling interests acquired and the consideration paid for acquisition of addition interest in subsidiaries; and (iv) the loan from immediate holding company and capitalised as deemed contribution.

(iii) Merger reserve

Merger reserve arising from acquisition of the subsidiaries under common control being the difference between the consideration paid for the acquisition and the carrying amount of the net assets of the subsidiaries at the date when the Group and the acquired subsidiaries become under common control.

• For identification purpose only

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 135

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

30. INFORMATION ABOUT THE STATEMENT OF FINANCIAL POSITION OF THE COMPANY

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----- Start of picture text -----

2019 2018
Notes HK$’000 HK$’000
Non-current assets
Plant and equipment 26 –
Investments in subsidiaries 54,396 54,396
54,422 54,396
Current assets
Amounts due from subsidiaries (a) 79,619 79,613
Prepayments and other receivables 272 274
Bank balances and cash 22,582 13
102,473 79,900
Current liabilities
Other payables 831 2,423
–
Amount due to immediate holding company (a) 1,100
Amount due to a subsidiary (a) – * –
Loan from immediate holding company 28 34,776 –
35,607 3,523
Net current assets 66,866 76,377
Total assets less current liabilities 121,288 130,773
Capital and reserves
Share capital 29 8,000 8,000
Reserves (b) 113,288 122,773
121,288 130,773
----- End of picture text -----*

• The balance was presented as “nil” as a result of rounding and is less than HK$1,000.

136 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

30. INFORMATION ABOUT THE STATEMENT OF FINANCIAL POSITION OF THE COMPANY (Continued)

Notes:

(a) The amounts are unsecured, interest-free and repayable on demand.

(b) Movements in the Company’s reserves

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----- Start of picture text -----

Share Capital Accumulated
premium reserve losses Total
HK$’000 HK$’000 HK$’000 HK$’000
(Note)
At 1 January 2018 104,098 54,396 (29,300) 129,194
Loss and total comprehensive expense
– –
for the year (6,421) (6,421)
At 31 December 2018 and 1 January 2019 104,098 54,396 (35,721) 122,773
Loss and total comprehensive expense
– –
for the year (12,259) (12,259)
Deemed contribution from immediate
– –
holding company (note 28) 2,774 2,774
At 31 December 2019 104,098 57,170 (47,980) 113,288
----- End of picture text -----

Note: Capital reserve represents (i) the difference between the nominal value of the shares issued by the Company for the acquisition of equity interests of its subsidiaries and the net assets value of its subsidiaries at the date of acquisition; and (ii) the loan from immediate holding company and capitalised as deemed contribution.

31. RETIREMENT BENEFIT SCHEMES

The Group operates the MPF Scheme under the Hong Kong Mandatory Provident Fund Schemes Ordinance for its employees in Hong Kong. The MPF Scheme is a defined contribution retirement plan and the assets of the MPF Scheme are held separately from those of the Group in funds administered by independent trustee. Under the MPF Scheme, the Group and its employees makes monthly contributions to the MPF Scheme at 5% of the employee’s earnings capped at HK$1,500 per month to the MPF Scheme in both years.

The employees of the Group’s subsidiaries in the PRC are members of a state-managed retirement benefit scheme operated by the PRC government. The subsidiaries are required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.

The total cost charged to profit or loss of approximately HK$5,726,000 (2018: HK$4,637,000) represent contributions payable to these schemes by the Group during the year ended 31 December 2019. Contributions to the scheme vest immediately.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 137

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

32. SHARE-BASED PAYMENT TRANSACTIONS

Equity-settled share option scheme of the Company

The Company’s share option scheme (the “Scheme”), was adopted pursuant to a resolution passed on 23 September 2015 for the primary purpose of rewarding the directors of the Company and eligible employees, advisers, consultants, distributors, contractors, suppliers, agents, customers, business partners, joint venture business partners, promoters, service providers of any member of the Group whom board considers, in its sole discretion, have contributed or will contribute to the Group.

The total number of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of the Company (the “Shares”) in issue at any point in time, without prior approval from the Company’s shareholders. Besides, the limit on the number of Shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under any Schemes of our Company must not exceed such number of Shares as shall represent 30% of the total number of Shares in issue from time to time. No options may be granted if such grant will result in this 30% limit being exceeded. The number of Shares issued and to be issued in respect of which options granted and may be granted to any individual in any one year is not permitted to exceed 1% of the Shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to substantial shareholders or independent non-executive directors in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5,000,000 (or such other amount as shall be permissible under the Main Board Listing Rules from time to time) must be approved in advance by the shareholders.

Options may be exercised in accordance with the terms of the Scheme shall be a period of time to be notified by the Board to each option-holder, which the Board may in its absolute discretion determine, save that such period shall not be more than ten years from the offer date. The exercise price is determined by the directors of the Company, and will not be less than the higher of (i) the closing price of the Shares as stated in Stock Exchange’s daily quotations sheets on the date on which the option is offered to a participant (“Offer Date”); (ii) the average of the closing prices of the Shares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the Offer Date; and (iii) the nominal value of the Shares.

At 31 December 2019, no options had been granted or remained outstanding under the Scheme (2018: nil).

138 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

33. CAPITAL COMMITMENT

At the end of the reporting period, the Group has the following capital commitment in respect of the acquisition of plant and equipment:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Contracted for but not provided
in the consolidated financial statements 5,988 28,850
----- End of picture text -----

34. LEASE COMMITMENTS

The Group as lessee

At the end of the reporting period, the Group had commitment for future minimum lease payments under non-cancellable operating leases which fall due as follows:

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----- Start of picture text -----

31/12/2018
HK$’000
(Restated)
Within one year 2,767
In the second to fifth year inclusive 4,818
7,585
----- End of picture text -----

As at 31 December 2018, operating lease payments represent rental payable by the Group for certain of its office and production plant. Leases are negotiated for original terms of two to ten years and rentals are fixed over the lease terms of respective leases.

The Group is the lessee in respect of office and production plant which the leases were previously classified as operating leases under HKAS 17. From 1 January 2019 onwards, future lease payments are recognised as lease liabilities in the consolidated statement of financial position in accordance with the policies set out in note 4, and the details regarding the Group’s future lease payments are disclosed in note 17.

The Group as lessor

The Group leases out broadband infrastructure under operating leases. The leases typically run for an initial period of 2 to 5 years. Lease payments are usually increased every 3 years to reflect market rentals. None of the leases includes variable lease payments.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 139

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

34. LEASE COMMITMENTS (Continued)

The Group as lessor (Continued)

Undiscounted lease payments under non-cancellable operating leases in place at the reporting date will be receivable by the Group in future periods as follows:

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----- Start of picture text -----

2019
HK$’000
Within one year 761
After one year but within two years 653
After two years but within three years 246
1,660
----- End of picture text -----

As at 31 December 2018, the Group had contracted with tenants for the following future minimum lease payments:

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----- Start of picture text -----

2018
HK$’000
(Restated)
Within one year 1,231
In the second to fifth year inclusive 1,726
2,957
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140 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

35. RELATED PARTY DISCLOSURES

Save as disclosed elsewhere in the consolidated financial statements, the Group has the following transaction with its related parties.

(a) Related parties’ transactions

During the year, the Group entered into the following transactions with related parties:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Revenue from broadband infrastructure
construction services
遵義實地房地產開發有限公司 7,782 2,640
天津金河灣置業有限公司 384 –
無錫實地房地產開發有限公司 352 553
廣東譽豐地產發展有限公司 767 –
廣州豐實房地產開發有限公司 254 –
惠州市現代城房地產發展有限公司 519 –
–
武漢平安中信置業有限公司 1,455
三亞巨源旅業開發有限公司 112 –
深圳富茅房地產開發有限公司 42 –
----- End of picture text -----

The following balances were outstanding at the end of the reporting period:

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----- Start of picture text -----

2019 2018
HK$’000 HK$’000
(Restated)
Amounts due from related companies
遵義實地房地產開發有限公司 5,517 935
天津金河灣置業有限公司 407 –
無錫實地房地產開發有限公司 141 408
廣東譽豐地產發展有限公司 524 –
廣州豐實房地產開發有限公司 119 –
惠州市現代城房地產發展有限公司 436 –
武漢平安中信置業有限公司 171 –
深圳富茅房地產開發有限公司 45 –
----- End of picture text -----

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 141

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

35. RELATED PARTY DISCLOSURES (Continued)

(a) Related parties’ transactions (Continued)

During the years ended 31 December 2019 and 2018, the Group was granted the right to use two trademarks registered by a company jointly controlled by Mr. Chow Hin Keong and an independent third party at nil consideration. Mr. Chow Hin Keong was a shareholder and a director of the Company, who disposed all of his beneficial interest in the Company on 27 April 2018 and resigned as a director of the Company on 9 June 2018. Mr. Chow Hin Keong remained as a director of the Group’s principal operating subsidiaries.

As at 31 December 2019, the Group had a loan from immediate holding company of approximately HK$34,776,000 (2018: nil), which is unsecured, bearing interest at a fixed rate of 2% per annum and contain a repayable on demand clause, and had interest expenses of approximately HK$481,000 (2018: nil) to the immediate holding company. As of inception date, the difference in fair value against the principal amount of approximately HK$2,774,000 were recognised as a deemed contribution in “capital reserve”.

(b) Compensation of key management personnel

The directors of the Company considered that they are the only key management personnel of the Group for the years ended 31 December 2019 and 2018 and their emoluments are disclosed in note 15.

The emoluments of the directors of the Company are determined by the Board with reference to the performance of individuals and market trends.

(c) Facility from immediate holding company

The Company entered into a facility letter with Yoho (as lender), pursuant to which the Company can borrow from Yoho for long-term borrowing up to HK$38,000,000 with an interest rate of 2% per annum for 24 months from the withdrawal date for the year ended 31 December 2019 (2018: short-term borrowing amount to HK$4,020,000 with an interest rate of 5% per annum for 12 months from the withdrawal date). As at 31 December 2019, the Group has available unutilised facilities of HK$450,000 (2018: HK$4,020,000).

142 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

36. PARTICULARS OF SUBSIDIARIES OF THE COMPANY

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----- Start of picture text -----

Place/
country of Issued and fully
incorporation/ paid ordinary Attributable
registration/ share capital/ equity interest and voting power
Name of subsidiary operation registered capital held by the Company Principal activities
2019 2018
Directly held
Top Dynamic International (BVI) Ltd BVI USD1,000 100% 100% Investment holding
Tech Elite Investments Limited BVI USD1 100% 100% Investment holding
Indirectly held
Top Dynamic (BVI) Limited BVI USD100 100% 100% Investment holding
Top Dynamic Electronics Limited Hong Kong HK$1 100% 100% Trademark holding
Top Empire Management Limited Hong Kong HK$1 100% 100% Provision of management service
Top Dynamic Enterprises Limited Hong Kong HK$1 100% 100% Trading of electronic and electrical
parts and components
Dongguan Jia Jun PRC USD12,000,000 100% 100% Manufacturing and trading of electronic
(Notes (i) and (ii)) and electrical parts and components
Brainhole Technology Hong Kong HK$10,000 100% – Investment holding
Investments Limited [#]
Guangzhou Weaving * PRC RMB11,363,000 100% – Broadband infrastructure construction
(Notes (i), (ii), note 2 and note 37) and the provision of integrated
solution for smart domain (including
smart home, smart campus and
smart communities)
Hunan Huama * PRC RMB2,000,000 100% – Broadband infrastructure construction
(Notes (i), (ii), note 2 and note 37) and the provision of integrated
solution for smart domain (including
smart home, smart campus and
smart communities)
----- End of picture text -----

• Incorporated during the year ended 31 December 2019

• New subsidiaries acquired under common control during the year ended 31 December 2019

Notes:

• (i) Dongguan Jia Jun, Guangzhou Weaving and Hunan Huama are wholly-owned foreign enterprise established in the PRC.

• (ii) The English translation of the company name is for reference only. The official name of these companies are 東莞市 佳駿電子科技有限公司, 廣州織網通訊科技有限公司 and 湖南華馬建設工程有限公司 respectively.

None of the subsidiaries had issued any debt securities during both years or at the end of both years.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 143

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL

As mentioned in note 2, the acquisition of Guangzhou Weaving has been accounted for business combination under common control. Pursuant to the terms of the sale and purchase agreement for the acquisition of Guangzhou Weaving, Guangzhou Chong Dong has agreed to provide a profit guarantee to the Group in relation to the financial performance of Guangzhou Weaving Group for the years ended 31 December 2018 and 2019. If the audited consolidated net profit after tax attributable to owners of Guangzhou Weaving falls short of the guaranteed profit of RMB10,000,000 in aggregate for the years ended 31 December 2018 and 2019, the consideration should be adjusted based on the actual profit in agreed calculation formula.

The fair value of the consideration payable at the date of completion on 12 September 2019 was approximately RMB46,145,000, equivalent to approximately HK$51,514,000, which was determined by an independent valuer. As at 31 December 2019, the directors of the Company consider that the change in fair value of the consideration payable is insignificant.

The consolidated statement of financial position as at 31 December 2018, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows of the Group for the year ended 31 December 2018 have been restated to include the assets and liabilities and the operating results of Guangzhou Weaving Group as if this acquisition had been completed since 27 April 2018, which is the date when Guangzhou Weaving Group and the Company first came under the control of Mr. Zhang.

144 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

The summary of restated results of operations of the Group for the year ended 31 December 2018 and the financial position as at 31 December 2018 are set out below:

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----- Start of picture text -----

Guangzhou Inter-company
The Group Weaving Group eliminations The Group
HK$’000 HK$’000 HK$’000 HK$’000
(From (From
(as previously 27/4/2018 to 27/4/2018 to
reported) 31/12/2018) 31/12/2018) (Restated)
Results of operations for the year ended
31 December 2018
Turnover 348,255 40,441 – 388,696
Cost of sales (257,468) (27,157) – (284,625)
–
Gross profit 90,787 13,284 104,071
Other income 1,976 305 – 2,281
–
Selling and distribution costs (13,636) (39) (13,675)
–
Administrative expenses (40,329) (10,356) (50,685)
Profit before tax 38,798 3,194 – 41,992
Income tax (expense) credit (4,155) 241 – (3,914)
–
Profit for the year 34,643 3,435 38,078
Other comprehensive expense for the year
Item that may be reclassified subsequently to
profit or loss:
Exchange difference arising on translation of
foreign operations (6,930) (3,186) – (10,116)
Total comprehensive income for the year 27,713 249 – 27,962
----- End of picture text -----

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 145

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

The summary of restated results of operations of the Group for the year ended 31 December 2018 and the financial position as at 31 December 2018 are set out below: (Continued)

==> picture [458 x 365] intentionally omitted <==

----- Start of picture text -----

Guangzhou Inter-company
The Group Weaving Group eliminations The Group
HK$’000 HK$’000 HK$’000 HK$’000
(From (From
(as previously 27/4/2018 to 27/4/2018 to
reported) 31/12/2018) 31/12/2018) (Restated)
Results of operations for the year ended
31 December 2018 (Continued)
Profit for the year attributable to:
–
– Owners of the Company 34,643 2,872 37,515
– Non-controlling interests – 563 – 563
–
34,643 3,435 38,078
Total comprehensive income attributable to:
– Owners of the Company 27,713 208 – 27,921
– Non-controlling interests – 41 – 41
27,713 249 – 27,962
Earnings per share
– Basic and diluted (HK cents) 4.33 0.36 – 4.69
----- End of picture text -----

146 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

The summary of restated results of operations of the Group for the year ended 31 December 2018 and the financial position as at 31 December 2018 are set out below: (Continued)

==> picture [458 x 573] intentionally omitted <==

----- Start of picture text -----

Guangzhou Inter-company
The Group Weaving Group eliminations The Group
HK$’000 HK$’000 HK$’000 HK$’000
(as previously
reported) (Restated)
Financial position as at 31 December 2018
Non-current assets
–
Plant and equipment 136,587 22,893 159,480
Finance lease receivable – 1,190 – 1,190
– –
Intangible assets 2,089 2,089
Deferred tax assets – 411 – 411
– –
Prepayment for plant and equipment 22,683 22,683
–
159,270 26,583 185,853
Current assets
Inventories 43,458 409 – 43,867
Finance lease receivable – 290 – 290
Trade and other receivables 87,121 29,091 – 116,212
Contract assets – 2,672 – 2,672
– –
Amounts due from related companies 1,343 1,343
Tax recoverable 2,377 462 – 2,839
– –
Pledged deposit 5,127 5,127
Bank balance and cash 39,868 7,011 – 46,879
–
177,951 41,278 219,229
Current liabilities
–
Trade and other payables 56,861 16,501 73,362
– –
Amount due to immediate holding company 1,100 1,100
Deferred income 226 – – 226
Tax payables – 585 – 585
–
58,187 17,086 75,273
Net current assets 119,764 24,192 – 143,956
Total assets less current liabilities 279,034 50,775 – 329,809
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BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 147

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

The summary of restated results of operations of the Group for the year ended 31 December 2018 and the financial position as at 31 December 2018 are set out below: (Continued)

==> picture [458 x 381] intentionally omitted <==

----- Start of picture text -----

Guangzhou Inter-company
The Group Weaving Group eliminations The Group
HK$’000 HK$’000 HK$’000 HK$’000
(as previously
reported) (Restated)
Financial position as at 31 December 2018
(Continued)
Non-current liabilities
Deferred tax liability 45 211 – 256
Deferred income 1,494 – – 1,494
1,539 211 – 1,750
Net assets 277,495 50,564 – 328,059
Capital and reserves
Share capital 8,000 13,594 (13,594) 8,000
Reserves 269,495 36,118 13,594 319,207
Capital and reserves attributable to owners
–
of the Company 277,495 49,712 327,207
Non-controlling interests – 852 – 852
–
277,495 50,564 328,059
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148 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

The financial position of Guangzhou Weaving Group as at 27 April 2018 is set out below:

==> picture [459 x 588] intentionally omitted <==

----- Start of picture text -----

Guangzhou
Weaving Group
HK$’000
Financial position as at 27 April 2018
Non-current assets
Plant and equipment 22,016
Finance lease receivable 1,473
Intangible asset 1,931
25,420
Current assets
Inventories 297
Finance lease receivable 313
Trade and other receivables 25,034
Amounts due from related companies 292
Contract assets 222
Tax recoverable 955
Bank balance and cash 5,687
32,800
Current liability
Trade and other payables 17,305
Net current assets 15,495
Total assets less current liabilities 40,915
Capital and reserves
Share capital 13,594
Reserves 26,359
Capital and reserves attributable to owners of the Company 39,953
Non-controlling interests 962
40,915
----- End of picture text -----

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 149

Notes to the Consolidated Financial Statements For the year ended 31 December 2019

37. BUSINESS COMBINATION UNDER COMMON CONTROL (Continued)

On 16 October 2018, Guangzhou Chong Dong injected capital of approximately RMB8,206,000 (equivalent to approximately HK$9,400,000) at cash to Guangzhou Weaving. On 14 November 2018, Guangzhou Chong Dong acquired an additional 4.4% equity interest in Guangzhou Weaving without consideration, resulting in increase in its equity interest in Guangzhou Weaving to 88%. The carrying value of non-controlling interests acquired was approximately HK$151,000. Therefore, amount of approximately HK$151,000 was recognised in capital reserve.

On 7 January 2019, Guangzhou Chong Dong acquired an additional 6.67% equity interest in Guangzhou Weaving, at cash consideration of approximately RMB11,316,000 (equivalent to approximately HK$12,938,000), resulting in increase in its equity interest in Guangzhou Weaving to 94.67%. The carrying value of non-controlling interests acquired was approximately HK$476,000. Therefore, the difference of approximately HK$12,462,000 was recognised in capital reserve.

On 1 February 2019, Guangzhou Chong Dong further acquired an additional 5.33% equity interest in Guangzhou Weaving, at cash consideration of approximately RMB9,749,000 (equivalent to approximately HK$11,401,000), resulting in increase in its equity interest in Guangzhou Weaving to 100%. The carrying value of non-controlling interests acquired was approximately HK$390,000. Therefore, the difference of approximately HK$11,011,000 was recognised in capital reserve.

38. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES

The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the consolidated statement of cash flows as cash flows from financing activities.

==> picture [455 x 204] intentionally omitted <==

----- Start of picture text -----

Non-cash changes
Recognition
1 January Financing New lease Finance cost of deemed Exchange 31 December
2019 cash flows arrangements incurred contribution movement 2019
(Restated)
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Amount due to immediate
– – – – –
holding company 1,100 (1,100)
Lease liabilities 6,805 (3,246) 1,151 247 – (111) 4,846
Loan from immediate
– – – –
holding company 37,550 (2,774) 34,776
Interest payable – (481) – 481 – – –
7,905 32,723 1,151 728 (2,774) (111) 39,622
----- End of picture text -----

150 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Notes to the Consolidated Financial Statements

For the year ended 31 December 2019

38. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES (Continued)

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----- Start of picture text -----

1 January Financing 31 December
2018 cash flows 2018
HK$’000 HK$’000 HK$’000
Amount due to immediate holding company – 1,100 1,100
----- End of picture text -----

39. MAJOR NON-CASH TRANSACTION

During the year ended 31 December 2019, the Group entered into new arrangement in respect of buildings. Right-of-use assets and lease liabilities of approximately HK$1,151,000 were recognised at the commencement of the leases.

40. NON-CURRENT ASSET CLASSIFIED AS HELD-FOR-SALE

In December 2019, the management resolved to dispose certain machineries with carrying amount of approximately HK$15,276,000 under manufacturing segment, which are expected to be sold within twelve months from the end of the current reporting period and is therefore classified as non-current asset held-for-sale and presented separately in the consolidated statement of financial position.

41. EVENT AFTER REPORTING PERIOD

The outbreak of Coronavirus Disease 2019 (“COVID-19”) in early 2020 has brought additional uncertainties in the Group’s operating environment. The outbreak of COVID-19 has materially and adversely impacted the sales, some debtors’ repayment abilities and turnover of inventory. The management will closely monitor the situation and continue to assess the impact of the outbreak of COVID-19.

As the extent to which the COVID-19 outbreak will continue is uncertain, it is not practicable to estimate or quantify the financial impact that may have on the Group’s financial position and performance as at the date when the consolidated financial statements are authorised to issue.

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 151

Financial Summary of the Group

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For the year ended 31 December
2015 2016 2017 2018 2019
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Restated)
Results
Turnover 215,273 254,493 305,513 388,696 346,673
Profit (loss) before tax 37,688 57,886 57,789 41,992 (54,608)
Total comprehensive income
(expense) for the year 21,543 39,639 55,188 27,962 (54,174)
----- End of picture text -----

==> picture [486 x 135] intentionally omitted <==

----- Start of picture text -----

As at 31 December
2015 2016 2017 2018 2019
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Restated)
Assets and Liabilities
Total assets 209,641 258,977 317,258 405,082 410,038
Total liabilities 54,686 64,383 67,476 77,023 185,158
Total equity 154,955 194,594 249,782 328,059 224,880
----- End of picture text -----

Note:

The consolidated statement of profit or loss and other comprehensive income, the consolidated statement of financial position, consolidated statement of changes in equity and the consolidated statement of cash flows for the year ended 31 December 2018 have been restated to include the operating results of Guangzhou Weaving Group as if the acquisition of Guangzhou Weaving Group had been completed on 27 April 2018, being the earliest date when the combining entities or businesses first came under the control of Mr. Zhang. As Guangzhou Weaving and the Company are ultimately controlled by Mr. Zhang, the acquisition of Guangzhou Weaving was regarded as business combination under common control.

.

152 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019

Definitions

In this report, unless the context otherwise requires, the following expressions have the following meanings:

“Articles”

the articles of association of the Company adopted on 23 September 2015

“Board”

the board of Directors

“BVI”

the British Virgin Islands

• “CG Code”

the Corporate Governance Code as set out in Appendix 14 to the Listing Rules

• “close associate(s)”

has the meaning ascribed thereto under the Listing Rules

• “Company”

Brainhole Technology Limited 腦 洞科技有限公司, a company incorporated as an exempted company with limited liability in the Cayman Islands

“Director(s)”

the director(s) of the Company

• “Group”

the Company and its subsidiaries

• “Guangzhou Chong Dong”

Guangzhou Chong Dong Technology Co., Ltd.（廣州蟲洞科技 有限公司* ）, a company established in the PRC and is wholly beneficially owned by Mr. Zhang

• “Guangzhou Weaving”

Guangzhou Weaving Communications Telecommunications Technology Limited（廣州織網通訊科技有限公司* ）, a company established in the PRC with limited liability

• “Guangzhou Weaving Group”

Guangzhou Weaving and its subsidiary

• “HK$” or “HK dollar(s)” and “HK cents”

Hong Kong dollars and cents respectively, the lawful currency of Hong Kong

• “Hong Kong”

the Hong Kong Special Administrative Region of the PRC

• “Hong Kong Stock Exchange” or “Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Korea”

the Republic of Korea

BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019 153

Definitions

“Listing Rules”

the Rules Governing the Listing of Securities on the Stock Exchange, as amended, supplemented and/or otherwise modified from time to time as the context may require

“Main Board”

the Main Board of the Stock Exchange

“Model Code”

a code of conduct adopted by the Company regarding securities transactions by Directors and employees of the Group on terms no less exacting than the required standard of dealings set out in Appendix 10 to the Listing Rules

“Period”

the year ended 31 December 2019

“PRC”

the People’s Republic of China, save that, for the purpose of this report and unless the context otherwise requires, references in this report do not include Hong Kong, Macau Special Administrative Region of the People’s Republic of China and Taiwan

“Scheme”

the share option scheme adopted by the Company on 23 September 2015

“SFO”

Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

“Share(s)”

ordinary share(s) of HK$0.01 each in the share capital of the Company

“Shareholder(s)”

holder(s) of the Shares

“%”

per cent.

• The English translation of the company name is for reference only. The official name of this company is in Chinese.

154 BRAINHOLE TECHNOLOGY LIMITED ANNUAL REPORT 2019