KLN Logistics Group Limited — Interim / Quarterly Report 2004

Dec 9, 2003

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(Incorporated in Hong Kong under the Companies Ordinance)

ANNOUNCEMENT OF RESULTS FOR THE SIX MONTHS ENDED 30TH SEPTEMBER, 2003

RESULTS

The Board of Directors of Vitasoy International Holdings Limited (the “Company”) is pleased to announce that the unaudited consolidated results of the Company and its subsidiaries (the “Group”) for the six months ended 30th September, 2003 are as follows:

FINANCIAL HIGHLIGHTS

	Six months ended	Six months ended
	30th September,
	2003	2002	Change
Results	(Unaudited)	(Unaudited)	%
Turnover_(HK$ million)_	1,143	1,158	-1.3
Gross Profit_(HK$ million)_	652	652	–
EBITDA_(HK$ million)_	125	156	-19.9
EBIT_(HK$ million)_	70	102	-31.4
Profit Attributable to
Shareholders_(HK$ million)_	54	80	-32.5
Basic Earnings per Share
(HK cents)	5.5	8.2	-32.9
Interim Dividend per Share
(HK cents)	2.8	2.8	–

HIGHLIGHTS OF GROUP RESULTS

• The Group’s turnover for the first six months of fiscal 2003/2004 was HK$1,143 million, a marginal drop of 1.3% from the same period last year (2002/2003 interim: HK$1,158 million). Notwithstanding certain decline in the first quarter of fiscal 2003/2004 due mainly to the outbreak of Severe Acute Respiratory Syndrome (SARS) in Hong Kong that impacted the retail sector, sales recovered in the second quarter. This clearly demonstrates the Group’s strength in managing the volatility arising from the crisis.

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In both Mainland China and Australia & New Zealand, healthy sales growth was achieved. In North America, sales declined due to consumers’ lower preference for Aseptic Soymilk and Unseasoned Tofu.

• The Group’s gross profit for the interim period was HK$652 million. The gross profit margin increased to 57.0% of sales (2002/2003 interim: 56.3%) as a result of improvements in our supply capability and effective cost cutting.

• Marketing, selling and distribution expenses were HK$453 million, compared to HK$419 million for the same period in fiscal 2002/2003. Administrative expenses increased slightly to HK$79 million, from HK$78 million last year. Other operating expenses were HK$56 million, compared to HK$59 million for the 2002/2003 interim period. Total operating expenses amounted to 51.4% of sales (2002/2003 interim: 48.0%).

• To sustain sales performance, we continued to invest in advertising and promotion to strengthen our brands and develop our major markets. To ensure that the Hong Kong business was back on track immediately after SARS and to counteract fierce price competition, we stepped up our marketing effort and extended our product lines, thereby gaining market share. Compared to the same period last year, an additional HK$31 million was incurred by the Group in marketing and promotional campaigns, especially in the Hong Kong and Australian markets. The increment was also partly due to the deferment of HK$15 million budgeted for interim 2002/2003 to the second half fiscal 2002/2003, as disclosed in the 2002/2003 interim report.

• The Group’s profit attributable to shareholders for the period under review was HK$54 million, compared to HK$80 million for the same period in fiscal 2002/2003.

• In view of the Group’s strong balance sheet, the Board of Directors has declared an interim dividend of HK2.8 cents per share (2002/2003 interim: HK2.8 cents per share), payable on 9th January, 2004.

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CONSOLIDATED INCOME STATEMENT – UNAUDITED For the six months ended 30th September, 2003 (Expressed in Hong Kong dollars)

Note Turnover 3 Cost of sales Gross profit Other revenue Marketing, selling and distribution expenses Administrative expenses Other operating expenses Profit from operations 3 Finance costs 4 Write back of provision for compensation for traffic accident 5 Profit on disposal of an associate 6 Share of loss of an associate Profit from ordinary activities before taxation 4 Taxation 7 Profit from ordinary activities after taxation Minority interests Profit attributable to shareholders Dividend – interim declared 8 Earnings per share 9 Basic Diluted

Six months ended 30th September, 2003 2002 $’000 $’000 1,142,660 1,157,727 (491,041) (505,460) 651,619 652,267 8,935 8,959 (453,487) (419,092) (79,244) (78,113) (56,169) (59,200) 71,654 104,821 (4,169) (5,169) 1,464 – – 2,485 – (273) 68,949 101,864 (19,116) (21,286) 49,833 80,578 3,990 (1,059) 53,823 79,519 27,581 27,275 5.5 cents 8.2 cents 5.4 cents 8.1 cents

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Notes:

(Expressed in Hong Kong dollars)

1. Adoption of new accounting standard in Hong Kong A revised Statement of Standard Accounting Practice (“SSAP”) 12 “Income taxes” issued by the Hong Kong Society of Accountants, which became effective for accounting periods commencing on or after 1st January, 2003, was adopted for the preparation of the Group’s interim financial report for the six months ended 30th September, 2003.

Under the revised SSAP 12, deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases respectively. Deferred tax assets also arise from unused tax losses and unused tax credits. Deferred tax liabilities are generally provided in full on all taxable temporary differences while deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised.

This change in accounting policy does not have a material impact on the Group’s results and net assets for the current or prior periods, therefore the opening balances have not been restated.

2. Turnover

The principal activities of the Group are the manufacture and distribution of food and beverages. Turnover represents the gross sales value less returns, to third parties.

3. Segmental information

The analysis of the asset-based geographical location of the operations of the Group during the period is as follows:

Hong Kong North America Mainland China Australia and New Zealand Unallocated	Six Group 2003 $’000 599,161 218,471 276,567 48,461 1,142,660 – 1,142,660	months ended 30th September, Turnover Profit from operations 2002 2003 2002 $’000 $’000 $’000 616,882 82,097 94,606 233,992 (18,246) (12,886) 271,532 28,282 36,010 35,321 (3,663) 2,192 1,157,727 88,470 119,922 – (16,816) (15,101) 1,157,727 71,654 104,821

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Asset-based segment reporting is in line with the Group’s internal management information reporting system. No business segment analysis of the Group’s turnover and trading results is presented as all the Group’s turnover and trading results are generated from the manufacture and distribution of food and beverages.

Turnover by the location of customers is as follows:

	Six months ended	Six months ended	Six months ended
	30th September,
	2003		2002
	$’000		$’000
	Hong Kong 714,515		728,994
	North America 250,087		265,587
	Mainland China 92,428		89,043
	Australia and New Zealand 51,793		38,976
	Others 33,837		35,127
	1,142,660		1,157,727
4.	Profit from ordinary activities before taxation
	Profit from ordinary activities before taxation is arrived at after
	(crediting)/charging:
	Six months ended
	30th September,
	2003		2002
	$’000		$’000
	Interest income (3,603)		(2,855)
	Finance charges on obligations under
	finance leases 135		220
	Interest on borrowings 4,034		4,949
	Depreciation 55,236		53,983
	Cost of inventories 535,407		545,153

5. Write back of provision for compensation for traffic accident This represents the write back of overprovision for compensation for traffic accident relating to one of the Company’s subsidiaries, Vitasoy USA Inc., which occurred in 2000. At 31st March, 2003, the Group had established a provision of $2,342,000 for three injury claims. During the period, two injury claims were settled and the provision for claims amounting to $101,000 was utilised. At 30th September, 2003, a provision of $777,000 was maintained for the remaining injury claim.

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6. Profit on disposal of an associate

The equity interest in Sodexho (Hong Kong) Limited, our associate, was sold in August 2002 for a consideration of $14,000,000, giving rise to a gain on disposal of $2,485,000.

7. Taxation

Provision for Hong Kong Profits Tax for the period Provision for overseas taxation Deferred taxation Share of associate’s taxation	Six months ended 30th September, 2003 2002 $’000 $’000 18,338 19,808 786 1,387 (8) 112 19,116 21,307 – (21) 19,116 21,286

The provision for Hong Kong profits tax is calculated at 17.5% (2002: 16%) of the estimated assessable profits for the period. Taxation for subsidiaries outside Hong Kong is similarly charged at the appropriate current rates of taxation ruling in the relevant countries.

8. Dividends

(a) Dividend attributable to the interim period

	Six months ended	Six months ended	Six months ended
	30th September,
	2003		2002
	$’000		$’000
Interim dividend declared after
the interim period end
of 2.8 cents per share
(2002: 2.8 cents per share)	27,581		27,275
The interim dividend declared after the interim period end has
not been recognised as a liability at	the interim		period end
date.

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• (b) Dividends attributable to the previous financial year, approved and paid during the interim period

Final dividend in respect of the previous financial year, approved and paid during the interim period, of 5.7 cents per share (2002: 5.1 cents per share) Special dividend in respect of the previous financial year, approved and paid during the interim period, of 5.0 cents per share (2002: Nil)	Six months ended 30th September, 2003 2002 $’000 $’000 56,100 49,679 49,211 – 105,311 49,679	Six months ended 30th September, 2003 2002 $’000 $’000 56,100 49,679 49,211 – 105,311 49,679
		49,679

9. Earnings per share (a) Basic earnings per share

The calculation of basic earnings per share is based on the profit attributable to shareholders of $53,823,000 (2002: $79,519,000) and the weighted average number of 981,598,000 ordinary shares (2002: 973,656,000 ordinary shares) in issue during the period.

(b) Diluted earnings per share

The calculation of diluted earnings per share is based on the profit attributable to shareholders of $53,823,000 (2002: $79,519,000) and the weighted average number of 989,504,000 ordinary shares (2002: 978,682,000 ordinary shares) after adjusting for the effects of all dilutive potential ordinary shares.

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(c) Reconciliation

Weighted average number of ordinary shares used in calculating basic earnings per share Deemed issue of ordinary shares for no consideration arising from share options Weighted average number of ordinary shares used in calculating diluted earnings per share Reserves Increase in share premium account arising from issue of shares on exercise of share options Decrease in capital reserve arising from transfer to retained profits Increase/(decrease) in exchange reserve arising from translation of financial statements of foreign subsidiaries Increase in legal reserve arising from transfer from retained profits

Six months ended 30th September, 2003 2002 Number of Number of shares shares ’000 ’000 981,598 973,656 7,906 5,026 989,504 978,682 Six months ended 30th September, 2003 2002 $’000 $’000 6,523 1,371 (2,043) (2,043) 80 (1,692) 772 –

10. Reserves

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INTERIM DIVIDEND

The Board has declared an interim dividend of HK2.8 cents per share for the year ending 31st March, 2004 (2003: HK2.8 cents per share), to shareholders whose names appear on the Register of Members at the close of business on Monday, 29th December, 2003. Dividend warrants will be sent to shareholders on or about Friday, 9th January, 2004.

CLOSURE OF REGISTER OF MEMBERS

The Register of Members of the Company will be closed from 30th to 31st December, 2003, both days inclusive, during which period no transfers of shares will be effected. To determine entitlement to the interim dividend, all transfers accompanied by the relevant share certificates must be lodged with the Company’s Share Registrars, Computershare Hong Kong Investor Services Limited of 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration not later than 4:00 p.m. on Monday, 29th December, 2003.

MANAGEMENT DISCUSSION AND ANALYSIS BUSINESS REVIEW

Hong Kong

• (1) Hong Kong Domestic Market

• Market sentiment in the first six months of 2003/2004 was adversely affected by the unfavourable economic conditions in Hong Kong due to SARS, rising unemployment and other negative factors. Sales in the first quarter were severely affected as schools suspended classes and many people avoided outdoor activities where drinks would normally be consumed. We, therefore, postponed many of our advertising programmes until consumer confidence improved in June 2003.

Despite a double-digit decline in sales in the first quarter of fiscal year 2003/2004 brought about by the market volatility arising from the SARS outbreak, the Company managed to recover and sales rebounded strongly in the second quarter of fiscal 2003/2004. The segment profit for the interim period of fiscal 2003/2004 was HK$82 million, compared with HK$95 million for the same period last year. With most of the fixed overhead unrecoverable during

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the SARS period, our tuck shop business declined substantially in profitability. Meanwhile, we had also increased our spending in advertising campaigns as well as rebates and discounts in order to stimulate sales immediately after SARS and to counteract fierce price competition. We undertook a number of advertising campaigns successfully to reinforce our market leadership and launch new products. As a result, we continued to grow in terms of market share.

We continued to reinforce our market position as consumers’ supplier of choice by supplying high quality, great tasting and healthy products. Advertising campaigns on VITASOY Soya Bean Milk, VITA LIGHT Lemon Tea, VITA Pure Distilled Water, VITA CHA T DIN and VITA GOR YIN HAI Tea have been well-received by customers. With the successful launch of VITA LIGHT Lemon Tea, we have been able to gain further growth in the tea segment and enhance our market leadership position. Meanwhile, VITA PET (plastic bottled) Juice, VITA American Ginseng Fresh Green Tea, VITA GOR YIN HAI Pink Grapefruit Tea, VITA CHA T DIN Iced Peach Tea and VITA CHA T DIN Iced Lemon Tea have also been launched with good results.

The Group’s school tuck shop business, operated by wholly-owned subsidiary Vitaland Services Limited, continued to grow in market share with the number of tuck shops increasing to 256 by the end of September of 2003, an increase of 18% from 217 six months ago. Tuck shop sales fell by almost 50% in the first quarter of fiscal 2003/ 2004 due to school closure but rebounded strongly in September 2003. Vitaland’s wholly owned subsidiary, Hong Kong Gourmet Limited, has also been expanding its student meal box business steadily in the new school year starting September 2003.

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(2) Export Markets

• Although some of our ethnic distributors also came under the impact of SARS in the first quarter, our export sales remained stable as we continued to build our export business by introducing new products to existing distributors and expanding into new countries.

North America

For the six months to 30th September, 2003, the Group’s sales revenue in North America was down by 6% from the same period last year. This decrease was due primarily to lower Aseptic Soymilk sales in the club store channel and mainstream retail market. Refrigerated Soymilk, however, increased in revenue by a healthy 4%. We are glad to report that focused trade investments in the Boston area have resulted in increased market share in the Refrigerated Soymilk category. VITASOY Refrigerated Soymilk is now the No. 2 brand in the Boston market. Despite economic challenges and increased competition, our ethnic business was able to maintain sales volume at the same level as the previous year.

With the Aseptic Soymilk and Unseasoned Tofu categories continuing to contract, trade and marketing investments had to be increased in order to compete in a very tough market environment and an operating loss of HK$18 million was recorded (2002/2003 interim: HK$13 million). With a management team that has been in place for over a year and having regard to market analyses and research data, we have been more focused on penetrating the food service segment by launching new and innovative products. We also continued to improve our internal systems and cost efficiency. Cost reduction initiatives are underway in production, warehousing, distribution and purchasing.

It should be noted that the Group has been taking various initiatives to grow sales in the North American market, although the results of these are not yet fully reflected in this interim report. For example, by shifting our marketing investments to stimulate consumer off-takes, we hope to grow Tofu sales more effectively. To capitalise on the growing Seasoned Tofu Segment, we have also successfully developed

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the All-natural Marinated Tofu under the NASOYA brand, which was launched in October 2003. This innovative product appeals to health-conscious consumers who are eager to try tofu but unsure how to prepare it. They can now find this bite-sized organic tofu in both supermarkets and natural food stores. More initiatives for boosting sales are now in the pipeline, the results of which will start to be reflected in the second half of fiscal 2003/2004.

Mainland China

Consumer sentiments were at first dampened by the SARS outbreak. The soymilk industry in Mainland China experienced modest volume growth and continued to be under severe competition from dairy milk, which was heavily promoted at both the consumer and trade levels. Consequently the price differential between soymilk and dairy milk has been narrowing. Owing to fierce price competition on ready-to-drink products in PET plastic bottles and lower contribution from export sales to Hong Kong, the segment result for the period was HK$28 million (2002/2003 interim: HK$36 million).

Despite the impact of SARS and the increasingly competitive environment, the Group achieved a healthy sales growth of 3.8% in Guangdong, due mainly to the successful launch of our high-fibred juice. By taking advantage of continued growth in southern China, we have been more active in distributing our products in Fujian, Hunan and Sichuan. Volume gains in these provinces in the first six months of fiscal 2003/2004 were satisfactory. However, the positive growth was partly offset by a marginal decline in sales of 2.5% in eastern China. The contractual packaging cooperation arrangement of our Shanghai Plant has been yielding better-than-expected results and has significantly improved the utilisation rate of the plant’s capacity. We will, therefore, continue to work towards entering into further similar cooperation with our partners.

Australia and New Zealand

The soymilk market in Australia continued to grow steadily. With the continued growth of Refrigerated Soymilk and the stronger AUD, the Group achieved a strong sales growth of 33.3% in the first half of fiscal 2003/2004. VITASOY remains the driver of growth in the Australian market by virtue of our

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LUSH Fruit-flavoured Soymilk products that have been highly popular since their launch in October 2002. To build on the growth momentum currently experienced and to expand our market share, we considered it important and necessary to invest more in advertising and promotion. Owing to an additional spending on advertising campaigns, the segment result was a loss of HK$4 million (2002/2003 interim profit: HK$2 million).

In the Aseptic Soymilk market, competition on price remained severe, with the market leader dictating the frequency and extent of price cuts. We have reduced the price of VITASOY Aseptic Soymilk so that it is now at a 15% premium over the market leader. We have also resumed advertising in magazines after a break of more than 12 months. In the Australian market, VITASOY has been growing at the fastest rate – for instance, at 12.5% during the second quarter of 2003 – whereas all the other market players’ sales were either flat or declining.

In New Zealand, there is only the Aseptic Soymilk market, which grew 11% in sales volume. VITASOY’s sales grew by 2.4%. The shortfall was primarily due to difficulties experienced with a major retailer who was consolidating his systems during the period. The problems have been solved and the latest figures are pointing to a return to growth at the market level.

GENERAL OUTLOOK

We are pleased to see positive signs that the Hong Kong economy is gradually improving, although there are still uncertainties in the immediate future. The retail environment in Hong Kong would probably remain somewhat difficult in the second half of fiscal 2003/2004 as deflationary pressure persists. For the beverage sector as a whole, competition in price would be strong, thus affecting profit margin in general. However, we expect to see success in our new advertising campaigns for VITASOY and VITA GOR YIN HAI Tea, increased market share, increased distribution of VITA Pure Distilled Water as well as good sales performance of new products such as VITA LIGHT Lemon Tea and VITA CHA T DIN Iced Tea PET (plastic bottle). All these will contribute to steady sales growth in the second half while helping us

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strive to maintain our profitability. We also expect our tuck shop business to make further progress and increase in market share because schools and parents are in favour of operators that can ensure high quality in hygiene and service for students. As always, we are committed to stringent hygiene standards and are well poised to capitalise on this demand.

North America remains a major market for the Group. Our focus in North America will be to create new products and new tastes and, at the same time, develop new business in the alternate and food service channels in order to boost our market share. Vitasoy USA began shipment of the All-natural Marinated Tofu in October 2003. Consumers’ response to this innovative new product has been very positive so far. We are hopeful that it will attract new users to the category and drive future sales growth. We also believe that future growth will continue to come from innovative new products that can stimulate sales in both the Aseptic Soymilk and Tofu categories. The shipment of new products and packaging developed for the food service channel will begin in 2004. Moving forward, other initiatives with select key natural foods customers will add incremental Tofu sales to the business. It will take some months to fully develop and see the results of these and other initiatives, but we are confident that they will contribute to both top-line and bottom-line growth.

In Mainland China, there is still immense potential for further growth. While we continue to reinforce our leadership in the soymilk market, we are also actively diversifying into other fast-growing product categories such as tea and juice drinks. Our strategy is to capture a bigger share of Mainland China’s beverage market by means of value-added and trendy products. We are also strengthening our leadership in key retail chains by gearing up the organisation for customer and outlet management. We are especially confident in the prospects of the south. However, intense competition in price may have impact on the Group’s margin for the remainder of the year. In short, we expect Mainland China to continue contributing to the Group’s sales and profits in the coming years.

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We also expect to see steady growth in the Australian and New Zealand market, which is growing in importance for the Group. Moving forward, we will continue building our brands to grow our market share and launching new products in both the Aseptic and Refrigerated formats. Several new products are being developed, the results of which will be reported in due course.

To conclude, the numbers for the second quarter of fiscal 2003/2004 are good indicators that steady growth would probably be sustained in the remainder of the year. As always, we are committed to increasing shareholder value in the long term and investing in our brands. We will continue to innovate and produce high quality and value-added products, thereby reinforcing our position as consumers’ supplier of choice. We will also continue to reduce costs, improve our efficiency and make use of the best investment opportunities available.

EMPLOYMENT, TRAINING & DEVELOPMENT

The Group continues to take a prudent approach in human resources planning. Our workforce increased by 1.9 % in the first half of fiscal 2003/2004. This is a relatively small increase, given the expansion of our catering services in Hong Kong. As at 30th September, 2003, the number of full-time employees was 2,332. Our policy is to maximise the utilisation of existing staff resources to achieve further productivity gains.

The Group recognises the importance of, and remains committed to, staff development, particularly in the current keenly competitive environment. During the period under review, a wide range of skill training and staff development programmes were launched in Hong Kong, Mainland China and North America with a view to improving job-related competencies and efficiency.

The Group is also fully committed to the safety and health of employees. The safety and health committees established in the Group’s various operations are responsible for constantly improving safety and health in the workplace by carrying out risk assessment of work sites regularly and by establishing policies and guidelines for improvement and taking corrective

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action where necessary. Regular and intensive training on safety and health is also provided for staff.

The Group’s remuneration policies and packages remain unchanged. Discretionary bonuses and other merit payments are based on the Group’s and individual performance and reflect value creation.

FINANCIAL REVIEW

With the generation of healthy cash flow, we are constantly assessing effective means for deploying our cash. After the payment of the special dividend in September 2003, the Group still maintained a healthy net cash position of HK$204 million (31st March, 2003: HK$244 million). Undrawn facilities available to the Group totalled HK$353 million.

The total bank borrowings as at 30th September, 2003 amounted to HK$189 million (31st March, 2003: HK$181 million). The maturity profile is spread over a period of five years, with HK$168 million repayable in the first year, HK$4 million in the second year and HK$17 million within the remaining three years. The amount of borrowings denominated in US Dollar, Renminbi and Australian Dollar were the equivalents of HK$26 million, HK$55 million and HK$108 million respectively. The gearing ratio (total borrowings/shareholders’ funds) was 15.7% (31st March, 2003: 14.5%).

With adequate funds and unused banking facilities, the Group’s liquidity position remains strong. Capital expenditure during the period amounted to HK$24 million (2002/2003 interim: HK$26 million), which was primarily funded by cash from operations. There are no material changes in contingent liabilities, charges on assets and exposure to fluctuations in interest and exchange rates.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s listed shares during the six months ended 30th September, 2003.

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AUDIT COMMITTEE

In compliance with the Code of Best Practice, the Company established an Audit Committee with written terms of reference in November 1998. The Committee comprises two Independent Non-executive Directors and one Non-executive Director.

The Audit Committee has reviewed the accounting principles and practices adopted by the Group and discussed auditing, internal control and financial reporting matters, including the review of the interim financial report, which has not been audited.

COMPLIANCE WITH CODE OF BEST PRACTICE

None of the Directors is aware of information that would reasonably indicate that the Company is not, or was not for any part of the accounting period for the six months ended 30th September, 2003, in compliance with the Code of Best Practice set out by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) in Appendix 14 of the Main Board Listing Rules.

PUBLICATION OF INTERIM RESULTS ON THE STOCK EXCHANGE’S WEBSITE

The detailed results containing all the information required by paragraph 46(1) to 46(6) of Appendix 16 of the Main Board Listing Rules will be published on the website of the Stock Exchange in due course.

By Order of the Board Winston Yau-lai LO Executive Chairman

Hong Kong, 9th December, 2003

This and other information about Vitasoy International Holdings Limited can be accessed via www.vitasoy.com.

Please also refer to the published version of this announcement in The Standard.

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