Pacific Online Limited - Annual Report 2019

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PACIFIC ONLINE LIMITED 太平洋網絡有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 543)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2019

The board of directors (the “Board”) of Pacific Online Limited (the “Company”) is pleased to announce the audited consolidated results of the Company and its subsidiaries (collectively the “Group”) for the year ended 31 December 2019, together with the comparative figures for the year ended 31 December 2018, as follows:

– 1 –

CONSOLIDATED INCOME STATEMENT

Note
Revenue
3
Cost of revenue
4
Gross profit
Selling and marketing costs
4
Administrative expenses
4
Product development expenses
4
Net impairment losses on financial assets
Other income
5
Operating profit
Finance income
Finance cost
Finance income — net
6
Share of net losses of an associate accounted
for using the equity method
Profit before income tax
Income tax expense
7
Profit for the year
Attributable to:
— Equity holders of the Company
— Non-controlling interests
Earnings per share for profit attributable to
equity holders of the Company for the year
— Basic and diluted (RMB)
8

Year ended 31 December
2019
2018
RMB’000
RMB’000
990,823
1,022,699
(383,546)
(441,576)
607,277
581,123
(257,662)
(268,282)
(67,663)
(76,531)
(77,768)
(74,251)
(32,457)
(20,671)
9,694
11,774
181,421
153,162
7,164
10,419
(461)
—
6,703
10,419
(356)
(2,324)
187,768
161,257
(33,088)
(27,944)
154,680
133,313
153,124
132,747
1,556
566
154,680
133,313
13.62 cents
11.81 cents

– 2 –

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Profit for the year Items that will not be reclassified to profit or loss Changes in value of investment in equity fund Other comprehensive income for the year, net of tax Total comprehensive income for the year Attributable to: — Equity holders of the Company — Non-controlling interests	Year ended 31 December 2019 2018 RMB’000 RMB’000 154,680 133,313 7,244 9,088 7,244 9,088 161,924 142,401 160,368 141,835 1,556 566 161,924 142,401	Year ended 31 December 2019 2018 RMB’000 RMB’000 154,680 133,313 7,244 9,088 7,244 9,088 161,924 142,401 160,368 141,835 1,556 566 161,924 142,401
		9,088
		142,401
		141,835 566
		142,401

– 3 –

CONSOLIDATED BALANCE SHEET

Note ASSETS Non-current assets Right-of-use assets Lease prepayment Property and equipment Investment property Intangible assets Deferred income tax assets Investment in an associate Investment in equity fund 11 Current assets Trade and other receivables and prepayments 10 Short-term bank deposits with original terms of over three months Cash and cash equivalents Total assets EQUITY Equity attributable to equity holders of the Company Ordinary shares Reserves Non-controlling interests Total equity	As at 31 December 2019 2018 RMB’000 RMB’000 15,774 — — 15,696 173,383 180,976 43,282 44,471 9,477 8,893 50,489 53,022 — 1,387 52,876 45,632 345,281 350,077 644,472 601,891 2,100 50,750 425,942 408,191 1,072,514 1,060,832 1,417,795 1,410,909 10,491 10,491 991,931 984,176 1,002,422 994,667 3,622 2,066 1,006,044 996,733	As at 31 December 2019 2018 RMB’000 RMB’000 15,774 — — 15,696 173,383 180,976 43,282 44,471 9,477 8,893 50,489 53,022 — 1,387 52,876 45,632 345,281 350,077 644,472 601,891 2,100 50,750 425,942 408,191 1,072,514 1,060,832 1,417,795 1,410,909 10,491 10,491 991,931 984,176 1,002,422 994,667 3,622 2,066 1,006,044 996,733
		350,077
		601,891 50,750 408,191
		1,060,832
		1,410,909
		10,491 984,176
		994,667 2,066
		996,733

– 4 –

Note LIABILITIES Non-current liabilities Lease liabilities Current liabilities Accruals and other payables 12 Contract liabilities Current income tax liabilities Lease liabilities Total liabilities Total equity and liabilities	As at 31 December 2019 2018 RMB’000 RMB’000 14 — 316,384 303,208 45,956 49,941 49,004 61,027 393 — 411,737 414,176 411,751 414,176 1,417,795 1,410,909	As at 31 December 2019 2018 RMB’000 RMB’000 14 — 316,384 303,208 45,956 49,941 49,004 61,027 393 — 411,737 414,176 411,751 414,176 1,417,795 1,410,909
		303,208 49,941 61,027 —
		414,176
		414,176
		1,410,909

– 5 –

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

		Attributable to equity holders	Attributable to equity holders	Attributable to equity holders
			of the Company		Non-
		Ordinary			controlling	Total
		shares	Reserves	Subtotal	interests	equity
	Note	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Balance at 1 January 2018		10,491	969,918	980,409	—	980,409
Comprehensive income
Profit for the year		—	132,747	132,747	566	133,313
Other comprehensive income		—	9,088	9,088	—	9,088
Total comprehensive income		—	141,835	141,835	566	142,401
Transactions with shareholders
Cash dividends relating to 2017	9	—	(127,577)	(127,577)	—	(127,577)
Capital injection from non-controlling
shareholders		—	—	—	1,500	1,500
Balance at 31 December 2018		10,491	984,176	994,667	2,066	996,733
Comprehensive income
Profit for the year		—	153,124	153,124	1,556	154,680
Other comprehensive income		—	7,244	7,244	—	7,244
Total comprehensive income		—	160,368	160,368	1,556	161,924
Transactions with shareholders
Cash dividends relating to 2018	9	—	(153,133)	(153,133)	—	(153,133)
Share Award Scheme
— value of employee services		—	520	520	—	520
Balance at 31 December 2019		10,491	991,931	1,002,422	3,622	1,006,044

– 6 –

CONSOLIDATED STATEMENT OF CASH FLOWS

Note
Cash flows from operating activities
Cash generated from operations
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Placement of short-term bank deposits with
original terms of over three months
Receipt from maturity of short-term bank deposits
with original terms of over three months
Interest received
Purchase of property and equipment
Disposals of property and equipment
Purchase of intangible assets
Dividends received
Net cash generated from/(used in) investing
activities
Cash flows from financing activities
Cash dividends paid
9
Lease payments
Capital injection from non-controlling shareholders
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange (losses)/gains on cash and cash
equivalents
Cash and cash equivalents at end of year

Year ended 31 December
2019
2018
RMB’000
RMB’000
165,111
173,643
(42,578)
(40,227)
122,533
133,416
(4,350)
(53,200)
53,000
4,969
7,164
7,728
(7,158)
(5,881)
545
602
(738)
(123)
729
696
49,192
(45,209)
(153,133)
(127,577)
(407)
—
—
1,500
(153,540)
(126,077)
18,185
(37,870)
408,191
442,561
(434)
3,500
425,942
408,191

– 7 –

NOTES:

1. GENERAL INFORMATION

The Company was incorporated on 27 August 2007 as an exempted company with limited liability under the Company Law, Cap.22, (Law 3 of 1961, as combined and revised) of the Cayman Islands. The address of its registered office is P.O. Box 10008, Willow House, Cricket Square, Grand Cayman KY1-1001, Cayman Islands.

The Group is principally engaged in the provision of internet advertising services in the People’s Republic of China (the “PRC”).

The Company has its shares listed on The Stock Exchange of Hong Kong Limited since 18 December 2007.

These consolidated financial statements are presented in Renminbi (“RMB”), unless otherwise stated.

These consolidated financial statements have been approved for issue by the board of directors (the “Board”) of the Company on 30 March 2020.

2. BASIS OF PREPARATION

(i) Compliance with Hong Kong Financial Reporting Standards (“HKFRSs”) and Hong Kong Companies Ordinance (Cap. 622)

The consolidated financial statements of the Group have been prepared in accordance with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance (Cap. 622).

(ii) Historical cost convention

The consolidated financial statements have been prepared under the historical cost convention, except for investment in equity fund, which is measured at fair value.

(iii) New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2019:

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

– 8 –

The Group had to change its accounting policies as a result of adopting HKFRS 16. The Group elected to apply the simplified transition approach and has not restated comparatives for the 2018 reporting period. This is disclosed in Note 2(v). The other amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.

(iv) New standards, amendments to standards and interpretations not yet adopted

The following new standards, amendments to standards and interpretations have been published that are not mandatory for 31 December 2019 reporting period and have not been early adopted by the Group:

		Effective for annual
		periods beginning
		on or after
Amendments to HKAS 1	Definition of material	1 January 2020
and HKAS 8
Amendments to HKFRS 3	Definition of a business	1 January 2020
HKFRS 17	Insurance contracts	1 January 2023
Amendments to HKFRS 10	Sale or contribution of assets	To be determined
and HKAS 28	between an investor and its
	associate or joint venture
Conceptual Framework for	Revised conceptual framework	1 January 2020
Financial Reporting 2018	for financial reporting

None of these is expected to be relevant or have material impact to the consolidated financial statements of the Group.

(v) Changes in accounting policies

This note explains the impact of the adoption of HKFRS 16 Leases on the group’s financial statements.

As indicated in Note 2 (iii) above, the Group has adopted HKFRS 16 from 1 January 2019, applied the simplified transition approach and has not restated comparatives for the 2018 reporting period, as permitted under the specific transition provision in the standard. Right-ofuse assets were measured at the amount of the lease liabilities on adoption. There was no impact to the opening retained earnings. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

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 Leases. 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.

– 9 –

(a) Practical expedients applied

In applying HKFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

applying a single discount rate to a portfolio of leases with reasonably similar characteristics
relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review — there were no onerous contracts as at 1 January 2019
accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases
excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and
using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made by applying HKAS 17 and Interpretation 4 Determining whether an Arrangement contains a Lease.

(b) Measurement of lease liabilities

Operating lease commitments disclosed as at 31 December 2018 Discounted using the lessee’s incremental borrowing rate at the date of initial application Less: short-term leases and low-value leases recognised on a straight-line basis as expense Lease liability recognised as at 1 January 2019 Of which are: Current lease liabilities Non-current lease liabilities	2019 RMB’000 1,514 1,497 (1,273) 224 224 — 224

– 10 –

(c) Measurement of right-of-use assets

Under the simplified transition approach, the associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of prepaid or accrued lease payments relating to that lease recognised in the consolidated balance sheet as at 31 December 2018, if any. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The lease prepayment (land used rights) was reclassified to right-of-use assets as of 31 December 2019 and 1 January 2019.

The recognised right-of-use assets mainly relate to properties and land used rights.

(d) Adjustments recognised in the balance sheet on 1 January 2019

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

	31 December
	2018		1 January
	As originally	Impact of	2019
Consolidated balance sheet (extract)	Presented	HKFRS 16	Restated
	RMB’000	RMB’000	RMB’000
Right-of-use assets	—	15,920	15,920
Lease liabilities	—	224	224
Lease prepayment	15,696	(15,696)	—

(e) Lessor accounting

The Group did not need to make any adjustments to the accounting for assets held as lessor under operating leases as a result of the adoption of HKFRS 16.

3. SEGMENT INFORMATION

The chief operating decision-makers have been identified as the executive directors who make strategic decisions.

The Group is principally engaged in the provision of advertising services for different commodities. The chief operating decision-makers review the Group’s internal reports in order to assess performance and allocate resources. Management has determined the operating segments based on these internal reports.

The chief operating decision-makers consider the advertising business from the perspective of the different internet portals which it operates. As all revenues of the Group are generated from customers in the PRC, they are not further evaluated on a geographic basis.

– 11 –

The chief operating decision-makers assess the performance of the operating segments based on revenues generated. The reportable operating segments are grouped into PCauto, PConline and others. The Company currently does not allocate cost of revenue, operating costs or assets to its segments, as its chief operating decision-makers do not use this information to allocate resources to or evaluate the performance of the operating segments. Therefore, the Company does not report a measure of profit or total assets for each reportable segment.

Revenues of other segments relate to those generated from other portals, including baby and home products and other services.

There were no inter-segment sales for the year ended 31 December 2019 (2018: same). The revenue from external parties reported to the chief operating decision-makers is measured in a manner consistent with that in the consolidated income statement.

	PCauto	PConline	Others	Total
	RMB’000	RMB’000	RMB’000	RMB’000
For the year ended 31 December 2019
Timing of revenue recognition
— Over time	727,401	127,852	76,566	931,819
— At a point in time	48,882	4,915	5,207	59,004
Revenue	776,283	132,767	81,773	990,823
For the year ended 31 December 2018
Timing of revenue recognition
— Over time	701,943	145,460	93,825	941,228
— At a point in time	51,586	4,947	24,938	81,471
Revenue	753,529	150,407	118,763	1,022,699

Though the Company is domiciled in the Cayman Islands, for the year ended 31 December 2019, all revenues of the Group were derived from external customers and they were all generated from the PRC (2018: same).

As at 31 December 2019, other than club membership included in the intangible assets and investment in equity fund, majority of other non-current assets of the Group were located in the PRC (31 December 2018: same).

For the year ended 31 December 2019, there was no revenue derived from a single external customer accounting for ten percent or more of the Group’s revenues (2018: same).

The Group does not disclose information about remaining unsatisfied performance obligations year as permitted under the practical expedient in accordance with HKFRS 15 as their original expected duration is less than one year.

– 12 –

4. EXPENSES BY NATURE

Expenses included in cost of revenue, selling and marketing costs, administrative expenses and product development expenses are analysed as follows:

Employee benefit expenses Service commission to advertising agencies Advertising expenses Outsourcing production cost Other taxes and surcharge Technology service fees Bandwidth and server custody fees Travelling and entertainment expenses Depreciation and amortisation expenses — Depreciation of property and equipment — Amortisation of intangible assets — Amortisation of right-of-use assets Conference and office expenses Expenses related to short term leases Impairment charge of investment in an associate Auditors’ remuneration — Audit services — Non-audit services Professional fees Other expenses Total cost of revenue, selling and marketing costs, administrative expenses and product development expenses	2019 RMB’000 284,014 152,704 134,487 86,205 29,529 25,990 17,889 14,304 14,206 154 709 5,827 3,623 1,031 3,670 515 1,453 10,329 786,639	2018 RMB’000 275,990 167,586 146,454 120,711 38,588 26,234 18,687 16,890 14,719 56 324 7,291 3,895 8,390 3,596 540 1,627 9,062
		860,640

Product development expenses are mainly included in employee benefit expenses and depreciation of property and equipment and amortisation of intangible assets. No product development expenses were capitalised for the year ended 31 December 2019 (2018: same).

5. OTHER INCOME

Government grants (i) Rental income — net Dividend income on investment in equity fund	2019 RMB’000 6,151 2,814 729 9,694	2018 RMB’000 9,219 1,859 696
		11,774

(i) There are no unfulfilled conditions or other contingencies attaching to these grants.

– 13 –

6. FINANCE INCOME — NET

Finance income — Interest income — Net foreign exchange gains Finance cost — Interest expense on lease liabilities — Net foreign exchange losses Finance income — net 7. INCOME TAX EXPENSE PRC current tax Deferred taxation	2019 RMB’000 7,164 — 7,164 (27) (434) (461) 6,703 2019 RMB’000 30,555 2,533 33,088	2018 RMB’000 6,919 3,500 10,419 — — — 10,419 2018 RMB’000 33,781 (5,837) 27,944

The Company, which is a Cayman Islands corporation, is not subject to any profits tax. The subsidiaries of the Group incorporated in Hong Kong were not subject to Hong Kong profits tax as they had no assessable income arising in or derived from Hong Kong during the year ended 31 December 2019 (2018: same).

Current taxation primarily represented the provision for PRC Corporate Income Tax (“CIT”) for subsidiaries operating in the PRC. These subsidiaries are subject to CIT on their taxable income as reported in their respective statutory financial statements adjusted in accordance with the relevant tax laws and regulations in the PRC.

– 14 –

Pursuant to the PRC Corporate Income Tax Law (“CIT Law”), the CIT rate for domestic enterprises and foreign invested enterprises is 25%. In addition, the CIT Law provides for, among others, a preferential tax rate of 15% for enterprises qualified as High and New Technology Enterprises (“HNTE”). Guangzhou Pacific Computer Information Consulting Co., Ltd. (廣州太平洋電腦信息諮詢有限公司, “GZP Computer”) and Guangdong Pacific Internet Information Service Co., Ltd. (廣東太平洋互聯網信息服務有限公司, “GDP Internet”), the principal operating subsidiaries of the Company, successfully renewed the certificate of HNTE in 2017. Therefore, the applicable income tax rate is 15% for the three years from 2017 to 2019. Guangzhou Yurui Information Technology Co., Ltd. (廣州裕睿信息科技有限公司, “GZ Yurui”), a PRC operating subsidiary of the Company, was formally designated as HNTE in 2019 and the applicable income tax rate is 15% for the three years from 2019 to 2021. Assuming that there is no change to the relevant laws and regulations, the directors consider that these three subsidiaries will be granted the preferential tax treatment through an application of renewal, and accordingly, tax rate of 15% has been applied when considering the deferred income tax. All the other PRC entities of the Group are subject to CIT at a rate of 25% in accordance with CIT Law.

According to CIT Law, a withholding income tax of 10% will be levied on the immediate holding companies outside the PRC when their PRC subsidiaries declare dividends out of profits earned after 1 January 2008. A lower 5% withholding income tax rate may be applied when the immediate holding companies of the PRC subsidiaries are established in Hong Kong and fulfil requirements under the tax treaty agreements between the relevant authorities of the PRC and Hong Kong. Hence, the Group used 5% as its withholding tax rate for certain Hong Kong intermediate holding companies which are expected to fulfill the aforesaid conditions.

The tax on the Group’s profit before income tax differs from the theoretical amount that would arise using the statutory tax rate applicable to profits of all the consolidated PRC entities as follows:

Profit before income tax expense Tax calculated at the statutory tax rate of 25% (2018: 25%) Tax effects of — Tax concessions available to certain PRC subsidiaries (a) — Income not subject to tax — Expenses not deductible for tax purposes (b) — Unrecognised tax losses — Additional deduction on product development expenses Withholding tax on the earnings to be remitted by PRC subsidiaries Income tax expense	2019 RMB’000 187,768 46,942 (23,857) (908) 4,730 6,447 (9,266) 9,000 33,088	2018 RMB’000 161,257 40,314 (19,439) (2,167) 5,228 4,670 (7,962) 7,300 27,944

(a) It represented the preferential tax treatments relating to HNTE enjoyed by certain PRC subsidiaries of the Group.

(b) Expenses not deductible for tax purposes mainly included expenses incurred by the Company and subsidiaries incorporated in Hong Kong.

– 15 –

8. EARNINGS PER SHARE

(a) Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year (excluding the ordinary shares purchased by the Group and held for the Share Award Scheme.

Profit attributable to equity holders of the Company (RMB’000) Weighted average number of ordinary shares for basic earnings per share (thousand shares) Basic earnings per share (RMB)	2019 153,124 1,124,230 13.62 cents	2018 132,747 1,124,022
		11.81 cents

(b) Diluted

Diluted earnings per share equals to basic earnings per share as there were no potential diluted shares outstanding for the year ended 31 December 2019 (2018: same).

9. DIVIDENDS

A final dividend in respect of the year ended 31 December 2018 of RMB13.62 cents per ordinary share (final dividend in respect of the year ended 31 December 2017: RMB11.35 cents per ordinary share) was approved by the shareholders at the annual general meeting in May 2019. Such final dividend for 2018 totalling RMB153,133,000 was paid in 2019, which has already excluded the dividend related to the ordinary shares held for the Share Award Scheme of RMB1,325,000 (final dividend for 2017 excluding the dividend related to the ordinary shares held for the Share Award Scheme of RMB1,138,000: RMB127,577,000).

The directors recommended the payment of a final dividend of RMB10.80 cents per ordinary share in cash for the year ended 31 December 2019, totalling RMB122,478,000 based on the ordinary shares in issue as of 31 December 2019. Such final dividend is to be approved by the shareholders at the annual general meeting of the Company to be held in May 2020. These consolidated financial statements do not reflect this dividend payable.

– 16 –

10. TRADE AND OTHER RECEIVABLES AND PREPAYMENTS

Trade receivables, net of impairment provision (a) Other receivables (b) Prepayments Notes receivable	At 31 December 2019 2018 RMB’000 RMB’000 622,965 579,687 19,308 18,633 1,730 3,571 469 — 644,472 601,891	At 31 December 2019 2018 RMB’000 RMB’000 622,965 579,687 19,308 18,633 1,730 3,571 469 — 644,472 601,891
		601,891

As of 31 December 2019, trade and other receivables were all denominated in RMB (31 December 2018: same).

(a) Trade receivables, net of impairment provision

Credit terms granted by the Group are generally within a period of three months to one year. The ageing analysis of the trade receivables (net of impairment provision of RMB108,427,000 (31 December 2018: RMB78,763,000)) is as follows:

Current to 6 months 6 months to 1 year 1 year to 2 years Above 2 years	At 31 December 2019 2018 RMB’000 RMB’000 347,183 379,809 203,797 131,813 60,985 57,065 11,000 11,000 622,965 579,687	At 31 December 2019 2018 RMB’000 RMB’000 347,183 379,809 203,797 131,813 60,985 57,065 11,000 11,000 622,965 579,687
		579,687

As at 31 December 2019, trade receivables of RMB104,641,000 (31 December 2018: RMB97,784,000) were past due but not impaired. These related to a number of independent customers and debtors for whom there was no recent history of default and has good financial position. The ageing analysis of these trade receivables was as follows:

Current to 6 months 6 months to 1 year 1 year to 2 years Above 2 years	At 31 December 2019 2018 RMB’000 RMB’000 5,296 7,816 27,360 21,903 60,985 57,065 11,000 11,000 104,641 97,784	At 31 December 2019 2018 RMB’000 RMB’000 5,296 7,816 27,360 21,903 60,985 57,065 11,000 11,000 104,641 97,784
		97,784

– 17 –

(b) Other receivables

Input value added tax deductible Advance to employees Rental receivable Others	At 31 December 2019 2018 RMB’000 RMB’000 8,998 7,140 4,424 3,837 1,190 1,567 4,696 6,089 19,308 18,633	At 31 December 2019 2018 RMB’000 RMB’000 8,998 7,140 4,424 3,837 1,190 1,567 4,696 6,089 19,308 18,633
		18,633

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. The Group does not hold any collateral as security.

11. INVESTMENT IN EQUITY FUND

At beginning of the year Changes in fair value At end of the year	2019 RMB’000 45,632 7,244 52,876	2018 RMB’000 36,544 9,088
		45,632

In June 2014, a subsidiary of the Group invested as a limited partner in an unlisted equity fund (the “Fund”) established and managed by an independent third party partner. The investment is denominated in USD with an initial cost of USD5,000,000. The Group does not have control or significant influence in the Fund. The directors classified the investment as financial assets at fair value through other comprehensive income (“FVOCI”). As at 31 December 2019, the Group held around 44% (31 December 2018: 48%) interests in the Fund.

The Fund invested in shares of listed companies and private companies which mainly engaged in Internet business. The fair value of investment in equity fund is based on the fair value of underlying investments held by the Fund, which are mainly influenced by the market price of the listed stocks and recent trading price of the shares of the unlisted entities invested by the Fund.

– 18 –

12. ACCRUALS AND OTHER PAYABLES

Accrued expenses (a) Salaries payable Other tax payable Other payables (b)	At 31 December 2019 2018 RMB’000 RMB’000 252,733 236,112 44,746 44,090 5,518 10,690 13,387 12,316 316,384 303,208	At 31 December 2019 2018 RMB’000 RMB’000 252,733 236,112 44,746 44,090 5,518 10,690 13,387 12,316 316,384 303,208
		303,208

(a) Accrued expenses of the Group mainly represented accrued service commission fees payable to advertising agencies and accrued advertising expenses.
(b) Other payables of the Group mainly represented deposits due to third parties.

13. SUBSEQUENT EVENT

Since early 2020, the epidemic of Coronavirus Disease 2019 (the “COVID-19 outbreak”) has spread across China and other countries. As a result, a series of precautionary and control measures have been and continued to be implemented. In light of the negative impact brought upon by the COVID-19 outbreak in short term, it has lead to decrease of contract amounts signed between the Group and its customers as a result of postponement of work resumption, as well as decrease in the fair value of investment in equity fund as a result of the fluctuation in the value of the shares in the listed and private companies after year end.

The Group is not yet able to quantify the aforesaid influence due to the COVID-19 outbreak. However, the Group will pay close attention to the development of the COVID-19 outbreak and its impact and will continue to perform relevant assessments and take proactive measures as appropriate.

– 19 –

MANAGEMENT DISCUSSION AND ANALYSIS

Business Review

For the whole of 2019, the Company’s revenue was RMB990.8 million, a decrease of 3.1% from last year. The profit attributable to equity holders was RMB153.1 million, a year-on-year increase of 15.4%. The Company’s continued organizational restructuring and cost optimization has also improved the company’s competitiveness and organizational efficiency.

PCauto has faced a number of challenges in the past year. The introduction of stricter nationwide emission standards from the “China V” to “China VI” standard in addition to already slowing sales in the auto industry in the second half of the year resulted in China’s overall car sales falling by 8.2% in 2019. This has resulted in a lower than anticipated growth rate in PCauto. PCauto’s “Cool Car Project”, through a collaboration with Alipay, has continued to develop new marketing products and develop the aftersales market collaborating with brands such as Bridgestone and Double Star. PCauto’s Auto Merchant+ strategy continues to remain unchanged and will continue to invest in and develop new products for both dealers and customers. Considering the unexpected Novel Coronavirus global epidemic, PCauto will seek to strengthen content innovation and development with upcoming products in the e-commerce, VR, and video content space.

In the latter half of 2019, the trade war tensions continued to seriously affect China’s private businesses, with electronics, chemical, textile, and building materials industries being the hardest hit, the impact of which has affected almost all consumers in the PConline, PClady, PChouse, and PCbaby categories. Despite the tensions, PConline has managed to establish itself in a leading position within the industry.

Through the continued restructuring and integration of the four websites outside of PCauto, we are better poised to identify new business opportunities and increase competitiveness. New channel marketing strategies, an enhanced commitment to identifying customer needs, and further development of our online-to-offline services will help to strengthen the Group’s competitive advantage.

Looking ahead towards 2020, the Company maintains a cautious view of the impact from the Novel Coronavirus pandemic (COVID-19) on revenue. We will continue to closely observe the global developments and monitor the impact it will have on our related industries. The Company has been proactive in ensuring that operational capabilities remain minimally affected during these times. This includes enhancing our ‘work-from-home’ procedures and capabilities and increasing adoption of digital collaborative tools. We have also implemented a number of precautionary measures at the Company to maintain a safe working environment that are in line with advisories by the authorities in addition to providing employees with up-to-date relevant information to reassure them during this time.

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The Company will continue to focus on new product development, team integration and organizational restructuring to strengthen the effectiveness of operational efficiency and cost optimization during these uncertain times. Therefore, we remain cautious about the prospects of our Company.

Revenue

Revenue decreased 3.1% from RMB1,022.7 million for the year ended 31 December 2018 to RMB990.8 million for the year ended 31 December 2019.

Revenue for PCauto, the Group’s automobile portal, increased 3.0% from RMB753.5 million for the year ended 31 December 2018 to RMB776.3 million during the year ended 31 December 2019. The increase in revenue for PCauto was primarily due to increased spending from both auto manufacturers and dealership customers. As a percentage of revenue, PCauto accounted for 73.7% during the year ended 31 December 2018 and 78.3% during the year ended 31 December 2019.

Revenue for PConline, the Group’s IT and consumer electronics portal, decreased 11.7% from RMB150.4 million during the year ended 31 December 2018 to RMB132.8 million during the year ended 31 December 2019. The decrease was due to decline in demand from consumer electronics manufacturers. As a percentage of revenue, PConline accounted for 14.7% during the year ended 31 December 2018 and 13.4% during the year ended 31 December 2019.

Revenue from other operations, including PClady, PCbaby and PChouse portals, decreased by 31.1% from RMB118.8 million during the year ended 31 December 2018 to RMB81.8 million during the year ended 31 December 2019. The decrease was mainly due to the slowdown in advertising demand from these general consumer markets. As a percentage of revenue, revenue from other operations accounted for 11.6% during the year ended 31 December 2018 and 8.3% during the year ended 31 December 2019.

Cost of Revenue

Cost of revenue decreased 13.1% from RMB441.6 million during the year ended 31 December 2018 to RMB383.5 million during the year ended 31 December 2019. Gross profit margin was 56.8% during the year ended 31 December 2018 and 61.3% during the year ended 31 December 2019.

The decrease in cost of revenue was mainly due to decrease in commission to advertising agents, outsourcing production costs and taxes and surcharges.

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Selling and Marketing Costs

Selling and marketing costs decreased 4.0% from RMB268.3 million during the year ended 31 December 2018 to RMB257.7 million during the year ended 31 December 2019. The decrease in selling and marketing expenses was mainly due to the decrease in advertising expenses.

Administrative Expenses and Net Impairment losses on Financial Assets

Administrative expenses and net impairment losses on financial assets increased by 3.0% from RMB97.2 million during the year ended 31 December 2018 to RMB100.1 million during the year ended 31 December 2019, mainly due to increase in impair charge of receivables during the year.

Product Development Expenses

Product development expenses increased by 4.7% from RMB74.3 million during the year ended 31 December 2018 to RMB77.8 million during the year ended 31 December 2019. The increase was due to increase in personnel-related expenses in the Group’s research and development team.

Other Income

Other income was RMB9.7 million during the year ended 31 December 2019 and RMB11.8 million during the year ended 31 December 2018. The majority of other income is same as previous years from government grants during the year.

Finance Income — Net

Net finance income decreased 35.7% from RMB10.4 million during the year ended 31 December 2018 to RMB6.7 million during the year ended 31 December 2019. The decrease was mainly due to the losses in foreign exchange in 2019 and gains in foreign exchange in 2018.

Income Tax Expense

Income tax expenses increased 18.4% from RMB27.9 million during the year ended 31 December 2018 to RMB33.1 million during the year ended 31 December 2019.

Profit for the year Attributable to Equity Holders of the Company

Profit attributable to equity holders increased 15.4% from RMB132.7 million during the year ended 31 December 2018 to RMB153.1 million during the year ended 31 December 2019.

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Liquidity and Financial Resources

As of 31 December 2019, the Group had short-term deposits and cash totaling RMB428.0 million, compared with RMB458.9 million as of 31 December 2018.

In 2019, net cash generated from operating activities was RMB122.5 million, net cash generated from investing activities was RMB49.2 million, net cash used in financing activities was RMB153.5 million, with a net increase in cash and cash equivalents of RMB18.2 million for year 2019.

In 2018, net cash generated from operating activities was RMB133.4 million, net cash used in investing activities was RMB45.2 million, net cash used in financing activities was RMB126.1 million, with a net decrease in cash and cash equivalents of RMB37.9 million for year 2018.

The Company had no external debt as of 31 December 2018 and 31 December 2019.

Bank Borrowings

As of both 31 December 2019 and 31 December 2018, the Group did not have any bank borrowings and therefore, its gearing ratio, representing the ratio of total bank borrowings to shareholders’ equity, was nil for both years.

Material Acquisitions and Disposals

During the year ended 31 December 2019, the Group had no material acquisitions or disposals of subsidiaries and associates.

Charges on Assets

As at 31 December 2019, the Group had no bank deposits or other assets pledged to secure its banking facilities.

Foreign Exchange Risk

The Group’s operating activities were principally carried out in China with most of its transactions denominated and settled in Renminbi, and therefore the overall foreign currency risk was not considered to be significant.

OTHER INFORMATION

Employee and Remuneration Policies

As at 31 December 2019, the Group had 1,212 employees (2018: 1,331). The Group determines its staff’s remuneration based on factors such as qualifications and years of experience.

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Proposed Final Dividend

The Board has recommended the payment of a final cash dividend of RMB10.80 cents per ordinary share for the year ended 31 December 2019 (the “Proposed Final Dividend”), which compares with RMB13.62 cents for 2018. The final dividend is subject to the shareholders’ approval at the Company’s forthcoming annual general meeting to be held on Monday, 18 May 2020 (the “2020 AGM”). The Proposed Final Dividend will be paid in cash on Monday, 8 June 2020 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 27 May 2020.

Closure of Register of Members

For determining the entitlement to attend and vote at the 2020 AGM, the register of members of the Company will be closed from Wednesday, 13 May 2020 to Monday, 18 May 2020, both days inclusive, during which period no transfer of shares of the Company will be registered. In order to be eligible to attend and vote at the 2020 AGM, unregistered holders of shares of the Company should ensure that all share transfer documents accompanied by the relevant share certificates must be lodged with the Company’s branch share registrar in Hong Kong, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong, for registration not later than 4:30 p.m. on Tuesday, 12 May 2020.

For determining the entitlement to the Proposed Final Dividend, the register of members of the Company will also be closed from Monday, 25 May 2020 to Wednesday, 27 May 2020, both days inclusive, during which period no transfer of shares of the Company will be registered. In order to be eligible to receive the Proposed Final Dividend, unregistered holders of shares of the Company should ensure that all share transfer documents accompanied by the relevant share certificates must be lodged with the Company’s branch share registrar in Hong Kong, Tricor Investor Services Limited, at the above address, for registration not later than 4:30 p.m. on Friday, 22 May 2020.

Purchase, Sale or Redemption of the Company’s Listed Securities

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year ended 31 December 2019.

Audit Committee

The Audit Committee of the Company, which comprises the three independent nonexecutive directors of the Company, namely Mr. Tsui Yiu Wa, Alec (Chairman of the Audit Committee), Mr. Thaddeus Thomas Beczak and Mr. Lam Wai Hon, Ambrose, has reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management and internal control and financial reporting matters, including the review of the annual financial results of the Group for the year ended 31 December 2019.

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Scope of work of PricewaterhouseCoopers

The figures in respect of the announcement of the Group’s results for the year ended 31 December 2019 have been agreed by the Group’s auditor, PricewaterhouseCoopers, to the amounts set out in the Group’s audited consolidated financial statements for the year. The work performed by PricewaterhouseCoopers in this respect did not constitute an assurance engagement in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants and consequently no assurance has been expressed by PricewaterhouseCoopers on this announcement.

Corporate Governance

The Board is of the view that the Company has met the code provisions set out in the Corporate Governance Code as contained in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange during the year ended 31 December 2019, except that there is no separation of the role of chairman and chief executive as stipulated in the code provision A.2.1. Dr. Lam Wai Yan currently assumes the role of both the Chairman and the Chief Executive Officer of the Company. As Dr. Lam is a co-founder of the Group and has extensive experiences in the internet industry, the Board believes that this structure provides the Group with strong and consistent leadership and allows for more effective and efficient business planning and decisions as well as execution of long-term business strategies. As such, it is beneficial to the business prospects of the Group.

Appreciation

I would like to take this opportunity to express my sincerest gratitude on behalf of the Board to all of my employees and shareholders for their continuous effort and support.

On behalf of the Board Pacific Online Limited Lam Wai Yan Chairman

Hong Kong, 30 March 2020

As at the date of this announcement, the Board comprises 3 executive directors, namely, Dr. Lam Wai Yan, Mr. Ho Kam Wah and Mr. Wang Ta-Hsing; and 3 independent non-executive directors, namely, Mr. Tsui Yiu Wa, Alec, Mr. Thaddeus Thomas Beczak and Mr. Lam Wai Hon, Ambrose.

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