RemeGen Co., Ltd. — Annual Report 2005

Apr 10, 2006

Huali Holdings (Group) Limited 華力控股（集團）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 3366)

PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005

RESULTS

The Board of Directors (“Board”) of Huali Holdings (Group) Limited (the “Company”) is pleased to present the results of the Company and its subsidiaries (collectively, the “Group”) for the year ended 31 December 2005, together with the comparative figures for the year ended 31 December 2004.

Audited financial information of the Group for the year ended 31 December 2005 prepared in accordance with Hong Kong Financial Reporting Standards are as follows:

Consolidated income statement for the year ended 31 December 2005

(Expressed in Renminbi)

Note Turnover 3 Cost of sales Gross profit Other revenue Other net loss Distribution costs Administrative expenses Other operating expenses Profit from operations Finance costs 5 Profit before taxation 5 Income tax expense 6 Profit for the year	2005 RMB’000 662,243 (583,646) 78,597 21,519 (1,424) (30,340) (18,483) (761) 49,108 (2,480) 46,628 (5,440) 41,188	2004 RMB’000 605,533 (531,817) 73,716 16,493 (501) (31,980) (14,612) (1,399) 41,717 (3,633) 38,084 (5,942) 32,142

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Note Attributable to: Equity shareholders of the Company Minority interests Profit for the year Dividends payable to equity shareholders of the Company attributable to the year: 7 Special dividend declared during the year Special dividend proposed after the balance sheet date Final dividend proposed after the balance sheet date Basic earnings per share (RMB) 8	2005 RMB’000 40,903 285 41,188 — — 16,224 16,224 0.26	2004 RMB’000 28,651 3,491
		32,142
		20,356 50,057 —
		70,413
		0.19

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Consolidated balance sheet at 31 December 2005

(Expressed in Renminbi)

Note Non-current assets Property, plant and equipment Construction in progress Goodwill Lease prepayments Deferred tax assets Current assets Inventories Trade and other receivables 9 Pledged bank deposits Cash and cash equivalents Current liabilities Trade and other payables 10 Bank loans Current taxation Net current assets Total assets less current liabilities NET ASSETS	2005 RMB’000 182,658 89 24,937 17,881 2,360 227,925 ------------------- 73,181 142,519 — 95,283 310,983 ------------------- 179,389 38,474 3,970 221,833 ------------------- 89,150 ------------------- 317,075 317,075	2004 RMB’000 200,486 766 24,937 9,360 1,512
		237,061 ------------------- 68,939 183,174 4,091 59,595
		315,799 ------------------- 245,204 52,119 4,988
		302,311 -------------------
		13,488 -------------------
		250,549
		250,549

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Note 2005 RMB’000 CAPITAL AND RESERVES Share capital 20,800 Reserves 294,584 Total equity attributable to equity shareholders of the Company 315,384 Minority interests 1,691 TOTAL EQUITY 317,075 Consolidated cash flow statement for the year ended 31 December 2005 (Expressed in Renminbi) 2005 RMB’000 Cash generated from operations 100,606 Tax paid (9,786) Net cash generated form operating activities 90,820 Net cash used in investing activities (7,310) Net cash used in financing activities (46,864) Net increase in cash and cash equivalents 36,646 Cash and cash equivalents at 1 January 59,595 Effect of foreign exchange rate changes (958) Cash and cash equivalents at 31 December 95,283

2004 RMB’000 122,345 126,798 249,143 1,406 250,549 2004 RMB’000 70,442 (9,951) 60,491 (22,807) (23,782) 13,902 45,693 — 59,595

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Notes:

1 Review of annual results

The annual results for the year ended 31 December 2005 have been reviewed by the Audit Committee of the Company.

The figures in respect of the preliminary announcement of the Group’s results for the year ended 31 December 2005 have been compared by the Company’s auditors, KPMG, Certified Public Accountant, to the amounts set out in the Group’s audited financial statements for the year and the amounts were found to be in agreement. The work performed by KPMG in this respect was limited and did not constitute an audit, review or other assurance engagement and consequently no assurance has been expressed by the auditors on this announcement.

2 Company background and basis of presentation

(a) Reorganisation

The Company was incorporated in the Cayman Islands on 28 February 2005 as an exempted company with limited liability under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands.

Pursuant to a reorganisation (the “Reorganisation”) of the Company and its subsidiaries (the “Group”) which was completed on 29 July 2005 to rationalise the Group’s structure in preparation for the public listing of its shares on the Main Board of the Stock Exchange of Hong Kong Limited (the “Stock Exchange”), the Company became the holding company of the subsidiaries comprising the Group.

The Company’s shares were listed on the Stock Exchange on 2 November 2005.

(b) Basis of presentation

The Group is regarded as a continuing entity resulting from the Reorganisation. In accordance with Accounting Guideline 5 (“AG 5”) “Merger Accounting for Common Control Combination” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), the consolidated financial statements have been prepared on the basis that the Company was the holding company of the Group for both years presented, rather than from 29 July 2005. The results of the Group for the years ended 31 December 2004 and 2005 include the results of the Company and its subsidiaries with effect from their respective dates of incorporation, whichever is a shorter period as if the current group structure had been in existence throughout the two years presented. Pursuant to AG 5, remaining goodwill of RMB24,937,000 arising on the original acquisition of the subsidiaries as recorded in the controlling party’s financial statements has been recognised in these financial statements. In the opinion of the directors, the consolidated financial statements prepared on this basis present fairly the results of operations and state of affairs of the Group as a whole.

3 Turnover

The principal activity of the Group is the manufacture and sale of paper boxes and products. Turnover represents the sales value of goods supplied to customers, net of value-added tax.

4 Segment information

The directors consider the Group operates within a single business and geographical segment. Accordingly, no segment information is provided.

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5 Profit before taxation

Profit before taxation is arrived at after charging:

(a) Finance costs: Interest on bank loans (b) Staff costs: Salaries, wages and other benefits Contributions to defined contribution retirement schemes (c) Other items: Amortisation of lease prepayments # Depreciation of property, plant and equipment # Impairment losses on trade and other receivables Bad debt written off Auditors’ remuneration - audit services - tax services Operating lease charges in respect of land and properties # Exchange loss Cost of inventories sold #	2005 RMB’000 2,480 46,948 2,892 49,840 437 26,005 961 — 1,565 26 6,409 1,576 583,646	2004 RMB’000 3,633
		41,589 3,505
		45,094
		332 33,438 479 519 340 — 5,757 644 531,817

Cost of inventories sold included RMB62,510,000 (2004: RMB67,650,000) relating to staff costs, depreciation and amortisation expenses and operating lease charges, amount of which is also included in the respective total amounts disclosed separately in notes 5(b) and 5(c) for each of these types of expenses.

6 Income tax expense

Taxation in the consolidated income statement represents:

Current tax – Provision for PRC income tax Provision for the year (Over)/under-provision in respect of prior years Deferred tax Origination and reversal of temporary differences	2005 RMB’000 6,349 (61) 6,288 ---------------- (848) ---------------- 5,440	2004 RMB’000 7,383 44
		7,427 ---------------- (1,485) ----------------
		5,942

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No provision for Hong Kong Profits Tax has been made as the Group did not earn any income subject to Hong Kong Profits Tax during the year (2004: Nil).

Pursuant to the income tax rules and regulations of the PRC, taxation for PRC subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant cities in the PRC, which range between 15% - 33% (2004: 15% - 33%). Certain subsidiaries are entitled to a tax concession period in which it is fully exempted from PRC income tax for 2 years starting from its first profit-making year, followed by a 50% reduction in the PRC income tax for the next 3 years.

Pursuant to the rules and regulations of the Cayman Islands and the British Virgin Islands, the Group is not subject to any income tax in the Cayman Islands and the British Virgin Islands during the year (2004: Nil).

7 Dividends

(a) Dividends payable to equity shareholders of the Company attributable to the year

Special dividend declared during the year Special dividend proposed after the balance sheet date Final dividend proposed after the balance sheet date of HK$7.8 cents per share (equivalent RMB 8.112 cents per share) (2004: Nil)	2005 RMB’000 — — 16,224 16,224	2004 RMB’000 20,356 50,057 —
		70,413

• (b) Dividends payable to equity shareholders of the Company attributable to the previous financial year, approved and paid during the year

	2005	2004
	RMB’000	RMB’000
Special dividend in respect of the previous
financial year, approved and paid during the year	50,057	—

8 Basic earnings per share

The calculation of basic earnings per share for the year ended 31 December 2005 is based on the profit attributable to equity shareholders of the Company of RMB 40,903,000 (2004: RMB 28,651,000) and the weighted average of 158,219,178 (2004: 150,000,000) shares in issue during the year. The weighted average number of shares in issue for the year ended 31 December 2004 represents the 150,000,000 shares in issue before the listing of the Company’s shares on the Stock Exchange, as if such shares have been outstanding for the above entire year.

There were no dilutive potential ordinary shares in issue during the year ended 31 December 2005 (2004: Nil).

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9 Trade and other receivables

Trade receivables Bills receivable Prepayment, deposits and other receivables Amount due from the intermediate holding company	2005 RMB’000 108,979 30,202 3,338 — 142,519	2004 RMB’000 124,877 33,983 4,304 20,010
		183,174

Included in trade and other receivables are trade and bills receivables (net of impairment losses for bad and doubled debts) with the following ageing analysis as of the balance sheet date:

Within 3 months Within 6 months but more than 3 months Within 12 months but more than 6 months Over 12 months	2005 RMB’000 125,717 13,224 240 — 139,181	2004 RMB’000 145,214 13,496 119 31
		158,860

Credit terms granted by the Group to customers are generally between one to three months. Subject to negotiation, extended credit terms are available for certain customers with good trading records.

10 Trade and other payables

Trade payables Bills payable Other payables Amount due to the intermediate holding company Amount due to a related party	2005 RMB’000 58,251 85,693 26,327 — 9,118 179,389	2004 RMB’000 58,760 94,676 29,935 22,674 39,159
		245,204

Included in trade and other payables are trade creditors and bills payable with the following ageing analysis as of the balance sheet date.

Within 3 months or on demand Over 3 months but less than 1 year Over 1 year	2005 RMB’000 142,798 937 209 143,944	2004 RMB’000 115,830 37,176 430
		153,436

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DIVIDENDS

The Board recommended the payment of a final dividend of HK7.8 cents per share for the year ended 31 December 2005 to shareholders of the Company. The dividend represented HK$15.6 million (approximately RMB16.2 million) in total. Subject to the approval of the shareholders in the forthcoming annual general meeting of the Company, the Company plans to pay the dividend on 8 June 2006 to shareholders whose names appear on the Register of Members of the Company on 9 May 2006.

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

The global economy achieved steady growth in 2005. Despite that, raw material prices, such as those of crude oil and raw paper, have been rising or maintained at high levels, leading to higher costs for the manufacturing industry. This has also presented a challenge to the management and operations of the Group. However, the Group managed to achieve considerable growth under the joint efforts of the staff, laying a solid foundation for the Group’s development.

In the past year, the Group has made strict controls over costs, arranged tenders on some product transportation and purchase of large equipment, strengthened management on accounts receivable and inventory and reduced expenditure. The Group saved costs by avoiding peak hours and using electricity during lower price time sections, thereby reducing costs. On the other hand, the Group put efforts in market exploration, and on the basis of consolidating the existing customers, strengthened market sales. During the reporting period, the Company’s customers continued to grow, with approximately 200 newly added customers. In addition, the Group accelerated in the site selection for Shenzhen new base so as to expand the Company’s production capacity to satisfy the tremendous market demands and to secure better profit return.

FINANCIAL REVIEW

As at 31 December 2005, the Group’s total assets was RMB540 million. Total equity amounted to RMB320 million, representing an increase of 26.6% over 2004. The Group realised sales income of RMB660 million in 2005, representing an increase of 9.4% over 2004. Profits attributable to shareholders were RMB40.90 million, representing an increase of 42.8% over 2004. The basic earnings per share for the year were RMB0.26, as compared to RMB0.19 for 2004.

During the period under review, turnover increased by 9.4% over 2004. Gross profit margin was approximately 11.9% (2004: approximately 12.2%). Net profit margin attributable to shareholders was approximately 6.2% (2004: approximately 4.7%). Profits attributable to shareholders increased by 42.8% over 2004, which was mainly attributable to the increase in sale of paperboards and cartons as a result of the full year operations of Zhongshan Huali Packaging Company Limited which started operation in April 2004. In 2005, Shanghai Huali Packaging Co., Ltd. became a wholly-owned subsidiary of the Group (acquired in October 2004) as a result of reorganisation and this greatly increased the Group’s profits attributable to shareholders.

POST BALANCE SHEET EVENTS

On 20 January 2006, the Group acquired 100% interest in Grand Signal Limited (“Grand Signal”) for a cash consideration of HK$8,457,000 from Overseas Chinese Town (HK) Company Limited. The principal activity of Grand Signal is investment holding and its wholly owned subsidiary, Anhui Huali Industrial Products Manufacturing Company Limited, owns a piece of land in Anhui, the PRC.

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On 20 January 2006, the Group acquired 10% interest in Shenzhen Huayou Packaging Company Limited (“Shenzhen Huayou”) for a cash consideration of RMB300,000 from Panyu Huali Youde Offset Printing & Packaging Company Limited. After the acquisition, Shenzhen Huayou became a wholly-owned subsidiary of the Company.

As at 31 December 2005, the total number of shares available to be issued under the share option scheme was 20,000,000 shares. On 7 February 2006, the Company granted a total of 19,300,000 options under the share option scheme to the 17 senior management and key management of the Group, as an incentive for their continuous contributions to the Company.

PROSPECTS

Looking ahead in 2006, we expect the cost of raw materials will continue to remain high. As a result, the Group will persist in tightening up control over production process and internal monitoring as well as start centralising gradually the procurement of major equipment and raw materials for its subsidiaries. On the other hand, the Group will continue to enhance its corporate image and strengthen its market expansion as well as its capacity in new product development. We will also seek quality customers and capitalise on new production capacity to increase sales revenue. This year, we shall implement our stated strategy to cherish every opportunity, proactively expand our production scale and bring steady returns to shareholders.

EMPLOYEES AND REMUNERATION POLICY

As at 31 December 2005, the Group employs nearly 1,500 full-time staff members. The basic remunerations of the employees are determined with reference to the remuneration benchmark, the experience of the staff and their performance. Salaries of employees are maintained at a competitive level and are reviewed annually, with close reference to the relevant labour market and economic situation. Directors’ remuneration is determined based on a variety of factors such as market conditions and responsibilities assumed by each director. Apart from the basic remuneration and statutory benefits required by laws, the Group also provides discretionary bonuses based upon the Group’s results and the individual performance of the staff.

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CONTINGENT LIABILITIES

The Group has no contingent liabilities as at 31 December 2005.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

The total equity of the Group as at 31 December 2005 were RMB320 million (31 December 2004: RMB250 million). As at 31 December 2005, the Group had current assets of RMB310 million (31 December 2004: RMB320 million) and current liabilities of RMB220 million (31 December 2004: RMB300 million). The liquidity ratio was 1.4 as at 31 December 2005 as compared to 1 as at 31 December 2004. The Group generally finances its operations with internally generated cash flow and credit facilities provided by bankers. As at 31 December 2005, the Group had outstanding bank loans of RMB38.47 million of which RMB36.30 million were fixed-rate loans (31 December 2004: outstanding bank loans of RMB52.12 million of which RMB51.64 million were fixed-rate loans). These bank loans were secured by corporate guarantees provided by certain subsidiaries of the Company. Following the initial public offering and listing of the shares of the Company on the Stock Exchange on 2 November, 2005, the Group’s debt-to equity ratio (total borrowings including notes payable and bank loans over total assets) decreased from approximately 27% as at 31 December 2004 to approximately 23% as at 31 December 2005 as the financial position further enhanced.

The Group’s liquidity position remains stable and the Group possesses sufficient cash and available banking facilities to meet its commitments, working capital requirements and future investments for expansion. The Group’s transactions and monetary assets are principally denominated in Renminbi, Hong Kong dollars or United States dollars. The Group has not experienced any material difficulties or effects on its operations or liquidity as a result of fluctuations in currency exchange rates during the year ended 31 December 2005. During the year ended 31 December 2005, the Group did not employ any financial instrument for hedging purposes.

PURCHASE, SALE OR REDEMPTION OF SHARES

The Company has not purchased its own listed shares following its listing on the Stock Exchange on 2 November, 2005. The Company or any of its subsidiaries has not purchased or sold any of the listed shares in the Company during the same period.

CORPORATE GOVERNANCE

The Directors consider that the Company has been in compliance with the code provisions as set out in the Code on Corporate Governance Practices in Appendix 14 of the Rules Governing the Listing of Securities of The Hong Kong Stock Exchange Limited for the period from the listing of the Company on the Stock Exchange on 2 November 2005 to 31 December 2005.

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AUDIT COMMITTEE

For the year ended 31 December 2005, the Company’s annual results have been reviewed by the audit committee of the Company.

CLOSURE OF REGISTER

The share register of the Company will be closed from 9 May 2006 (Tuesday) to 11 May (Thursday) (both days inclusive), during which no transfer of shares will be registered. To be entitled to the final dividends, all transfers in the shares of the Company, together with the relevant share certificates and instruments of transfer, must be delivered to the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited at Shop Nos.1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong no later than 4:00 p.m. on Monday 8th May 2006.

As at the date of this announcement, the Board comprises seven directors, namely: Mr. Zheng Fan, Mr. Ni Zheng and Mr. Zhou Guangneng are executive directors; Ms. Xie Mei is a non-executive director; Mr. Lee Kit Wah, Mr. Chen Xiangdong and Mr. Xiao Yongping are independent non-executive directors.

By Order of the Board Huali Holdings (Group) Limited Zheng Fan Chairman

Hong Kong, 7 April 2006

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

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