RemeGen Co., Ltd. — Annual Report 2006

Mar 28, 2007

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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 2006

RESULTS

The board (the “Board”) of directors (“Directors”) of Huali Holdings (Group) Limited (the “Company”) is pleased to present the audited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the year ended 31 December 2006 prepared in accordance with the Hong Kong Financial Reporting Standards, together with the comparative figures for the year ended 31 December 2005.

Audited financial information of the Group for the year ended 31 December 2006 prepared in accordance with the Hong Kong Financial Reporting Standards are as follows:

Consolidated income statement for the year ended 31 December 2006

(Expressed in Renminbi)

Note Turnover 4 Cost of sales Gross profit Other revenue Other net loss Distribution costs Administrative expenses Other operating expenses Profit from operations Finance costs 6	2006 RMB’000 695,503 (608,381) 87,122 22,544 (3,394) (32,562) (30,125) (756) 42,829 (3,552)	2005 (restated) (Note 2(c)) RMB’000 662,243 (583,646) 78,597 21,519 (1,424) (30,340) (19,297) (761) 48,294 (2,480)

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Profit before taxation 6 Income tax 7 Profit for the year 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: 8 Final dividend proposed after the balance sheet date Earnings per share 9 Basic Diluted Consolidated balance sheet at 31 December 2006 (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 10 Cash and cash equivalents	39,277 (5,970) 33,307 32,999 308 33,307 12,675 RMB0.16 RMB0.16 2006 RMB’000 179,884 20,438 24,937 20,010 2,878 248,147 ------------- 63,775 135,858 172,160 371,793 -------------	45,814 (5,440) 40,374 40,089 285 40,374 16,224 RMB0.25 RMB0.25 2005 (restated) (Note 2(c)) RMB’000 183,006 9,506 24,937 20,589 2,360 240,398 ------------- 73,181 143,124 97,951 314,256 -------------

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Current liabilities Trade and other payables 11 Bank loans Current taxation Net current assets Total assets less current liabilities Non-current liabilities Bank loans NET ASSETS CAPITAL AND RESERVES Share capital Reserves Total equity attributable to equity shareholders of the Company Minority interests TOTAL EQUITY	207,009 43,664 4,882 255,555 ------------- 116,238 ------------- 364,385 ------------- 26,524 ------------- 337,861 20,800 315,362 336,162 1,699 337,861	186,562 38,474 3,970
		229,006 -------------
		85,250 -------------
		325,648 ------------- – -------------
		325,648
		20,800 303,157
		323,957 1,691
		325,648

Notes:

1. Review of Annual Results

The Audit Committee of the Company has reviewed the financial results for the year ended 31 December 2006.

The figures in respect of the preliminary announcement of the Group’s results for the year ended 31 December 2006 have been compared by the Company’s auditors, KPMG, Certified Public Accountants, 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.

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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 since 1 January 2005, rather than from 29 July 2005. The results of the Group for the year ended 31 December 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 since 1 January 2005. 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.

(c) Acquisition of Grand Signal Limited

On 20 January 2006, the Group acquired 100% interest in Grand Signal Limited (“Grand Signal”) from its intermediate holding company, Overseas Chinese Town (HK) Company Limited (“OCT(HK)”), at a cash consideration of HK$8,457,000 (RMB8,796,000 equivalent) (hereinafter referred to as the “Acquisition”). Grand Signal is an investment holding company and its sole subsidiary, Anhui Huali Packaging Company Limited (“Anhui Huali”) (formerly known as Anhui Huali Industrial Products Manufacturing Company Limited), engages in the manufacture and sale of paper boxes and products in the People’s Republic of China (the “PRC”).

Anhui Huali was established on 9 June 2004 with a capital injection of HK$9,000,000 (RMB9,387,000 equivalent) made by OCT(HK) via Grand Signal on 23 August 2005.

As the Group, Grand Signal and Anhui Huali (the “Acquired Group”) have been under the common control of OCT(HK), the Acquisition is reflected in the consolidated financial statements using the principles of merger accounting under AG 5. Accordingly, the assets and liabilities of the Acquired Group have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the Acquisition have been restated to include the result of operations and assets and liabilities of the Acquired Group on a combined basis. The consideration paid by the Group for the Acquisition has been accounted for as an equity transaction in the consolidated statement of changes in equity for the year ended 31 December 2006.

3. Changes in accounting policies

The Hong Kong Institute of Certified Public Accountants has issued certain new and revised Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations, that are first effective or available for early adoption for the current accounting period of the Group. The adoption of these new and revised HKFRSs did not result in significant changes to the Group’s accounting policies applied in these financial statements for the periods presented.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

4. 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.

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5. Segment reporting

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

6. 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 Equity-settled share-based payment expenses (c) Other items: Amortisation of lease prepayments# Depreciation of property, plant and equipment# Impairment losses on trade and other receivables Auditors’ remuneration – audit services – tax services Operating lease charges in respect of land and properties# Exchange loss Cost of inventories#	2006 RMB’000 3,552 51,847 3,579 4,558 59,984 579 26,714 516 1,770 – 7,749 3,400 608,548	2005 (restated) RMB’000 2,480
		47,092 2,903 –
		49,995
		579 26,102 961 1,565 26 6,409 1,576 583,255

Cost of inventories included RMB68,122,000 (2005: RMB62,510,000) 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 6(b) and 6(c) for each of these types of expenses.

7. Income tax in the consolidated income statement

Taxation in the consolidated income statement represents:

Current tax – Provision for PRC income tax Provision for the year Over-provision in respect of prior years Deferred tax Origination and reversal of temporary differences	2006 RMB’000 6,488 – 6,488 ------------- (518) ------------- 5,970	2005 RMB’000 6,349 (61)
		6,288 ------------- (848) -------------
		5,440

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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% (2005: 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 (2005: Nil).

No provision for Hong Kong Profits Tax has been made as the Group did not have any assessable profits subject to Hong Kong Profits Tax during the year (2005: Nil).

8. Dividends

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

Final dividend proposed after the balance sheet date of HK$6.40 cents per share (equivalent RMB6.337 cents per share) (2005: HK$7.8 cents per share (equivalent RMB8.112 cents per share))	2006 RMB’000 12,675	2005 RMB’000 16,224

Final dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.

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

Special dividend in respect of the previous financial year, approved and paid during 2005 Final dividend in respect of the previous financial year, approved and paid during the year, of HK$7.8 cents per share (equivalent to RMB8.112 cents per share) (2005: Nil)	2006 RMB’000 – 16,224 16,224	2005 RMB’000 50,057 –
		50,057

Special dividend of RMB50,057,000 was declared by the Company on 2 September 2005 to the then shareholders in respect of the profit of the Group generated prior to the Reorganisation. It was distributed from the contributed surplus account of the Company.

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9. Earnings per share

(a) Basic earnings per share

The calculation of basic earnings per share is based on the profit attributable to equity shareholders of the Company of RMB32,999,000 (2005 (restated): RMB40,089,000) and the weighted average of 200,000,000 (2005: 158,219,178) ordinary shares in issue during the year, calculated as follows:

Weighted average number of ordinary shares

Ordinary shares issued at 1 January Issuance of new shares Capitalisation issue Effect of issuance of shares for placing and public offering Weighted average number of shares at 31 December	2006 No. of shares 200,000,000 – – – 200,000,000	2005 No. of shares – 10,000 149,990,000 8,219,178
		158,219,178

(b) Diluted earnings per share

The calculation of diluted earnings per share is based on the profit attributable to equity shareholders of the Company of RMB32,999,000 (2005 (restated): RMB40,089,000) and the weighted average of 208,252,699 (2005: 158,219,178) ordinary shares (diluted), calculated as follows:

Weighted average number of ordinary shares (diluted)

Weighted average number of ordinary shares at 31 December Effect of deemed issue of shares under the Company’s share option scheme for nil consideration Weighted average number of ordinary shares (diluted) at 31 December	2006 200,000,000 8,252,699
	208,252,699

There were no dilutive potential ordinary shares in issue during the year ended 31 December 2005.

10. Trade and other receivables

	The Group
	2006	2005
		(restated)
	RMB’000	RMB’000
Trade receivables	105,467	108,979
Bills receivable	26,513	30,202
Prepayment, deposits and other receivables	3,878	3,943
	135,858	143,124

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.

All of the trade and other receivables, net of impairment losses for bad and doubtful debts, are expected to be recovered within one year.

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Included in trade and other receivables are trade and bills receivables (net of impairment losses for bad and doubtful 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	The Group 2006 2005 RMB’000 RMB’000 127,807 125,717 4,115 13,224 58 240 131,980 139,181	The Group 2006 2005 RMB’000 RMB’000 127,807 125,717 4,115 13,224 58 240 131,980 139,181
		139,181

11. Trade and other payables

Trade payables Bills payable Other payables Amount due to a related party	The Group 2006 2005 (restated) RMB’000 RMB’000 71,244 58,251 99,258 85,693 36,415 29,500 92 13,118 207,009 186,562	The Group 2006 2005 (restated) RMB’000 RMB’000 71,244 58,251 99,258 85,693 36,415 29,500 92 13,118 207,009 186,562
		186,562

All of the trade and other payables are expected to be settled within one year.

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	The Group 2006 2005 RMB’000 RMB’000 124,374 142,798 45,934 937 194 209 170,502 143,944	The Group 2006 2005 RMB’000 RMB’000 124,374 142,798 45,934 937 194 209 170,502 143,944
		143,944

FINAL DIVIDEND AND CLOSURE OF REGISTER

The Board has recommended the payment of a final dividend of HK$6.4 cents per share for the year ended 31 December 2006. Subject to the approval of the shareholders in the annual general meeting of the Company to be held on 26 April 2007 or any adjourned meeting, the above dividend is expected to be paid on 7 June 2007.

The transfer books and Register of Members of the Company will be closed from 24 April 2007 to 26 April 2007, both days inclusive. During such period, no share transfers will be effected. In order to qualify for the proposed final dividend and attending the annual general meeting, all transfer documents, accompanied by the relevant share certificates, must be lodged with the Company’s branch share registrars in Hong Kong, Computershare Hong Kong Investor Services Limited whose share registration public offices are located at Shops 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on 23 April 2007.

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MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

The Group faced many challenges in the year of 2006. Since raw material prices, energy prices, labour costs and interest rates have been rising continuously on different extents, the competition in the industry has been increasingly intensive. Paper packaging companies have been facing the difficulties of higher cost and lower gross profit margin. However, under the joint efforts of the staff, the Group still managed to achieve a business growth through enhancing the internal management, building a new factory and expanding the market, which laid a solid foundation for the Group’s long term development.

The Group has focused on producing middle to high grade paperboard and cartons and other packaging products, with the clientele being mainly medium and large sized enterprises. In the previous year, the Group offered customers a more comprehensive range of higher quality products and services, through enhancing the quality of products and expanding product range. Meanwhile, the Group puts great efforts on market exploration, and strengthened market sales. During the reporting period, the Group’s customer base continued to expand, with a growth in the number of customers to about 650, representing a 9% increase over the same period of last year.

In the past year, the Group implemented a number of measures in order to strengthen the internal management, control the cost and enhance the market competitiveness. To cope with the increase in raw material prices, the Group established a unified purchasing network by capitalising on its branding edge, so as to centralise the purchase of raw materials and major equipment for its subsidiaries. By enlarging the scale of purchase, the Group enhanced its bargaining power in order to control the cost more effectively. In light of the rising electricity price, the Group saved costs by using electricity during off-peak period with lower charges than the peak hours. Meanwhile, the Group continued to strengthen the management on accounts receivable and inventory in order to lower the cost. The Company phased in an Enterprise Resources Planning (“ERP”) system at its subsidiaries, in order to provide reference materials and analysis tools for the management’s strategic decision.

The Group completed two acquisitions during the year of 2006 (details of which had been set out in an announcement of the Company dated 27 January 2006), bringing the total number of whollyowned or having a controlling interest manufacturing subsidiaries to six.

Currently, the Group has established its sales network covering Pearl River Delta, Yangtze River Delta and North-east area. In 2006, the new factory in Anhui began operation successfully after construction of the plant and purchasing and testing of the production equipment, laying a solid foundation for the Group’s business expansion in 2007 and enhancing its competitive advantage in the industry.

FINANCIAL REVIEW

As at 31 December 2006, the Group’s total assets amounted to RMB620 million. Total equity amounted to RMB338 million, representing an increase of 3.8% over that as at 31 December 2005. The Group realized turnover of RMB696 million in 2006, representing an increase of 5.0% over the same period in 2005. Profits attributable to equity shareholders of the Company was RMB33 million, representing a decrease of 17.7% over 2005. The basic earnings per share for the year were RMB0.16, as compared to RMB0.25 for 2005.

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During the period under review, gross profit margin was approximately 12.5% (2005: approximately 11.9%). Net profit margin attributable to shareholders was approximately 4.7% (2005: approximately 6.1%). Profits attributable to equity shareholders decreased by 17.7% over 2005, mainly attributable to the fact that the Group has recognised the fair value of RMB4.56 million of the share options granted to the employees in 2006 as an expense.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

The total equity of the Group as at 31 December 2006 was RMB338 million (31 December 2005 (restated): RMB326 million). As at 31 December 2006, the Group had current assets of RMB372 million (31 December 2005 (restated): RMB314 million) and current liabilities of RMB256 million (31 December 2005 (restated): RMB229 million). The liquidity ratio was 1.45 as at 31 December 2006 as compared to 1.37 as at 31 December 2005. The Group generally finances its operations with internally generated cash flow and credit facilities provided by bankers. As at 31 December 2006, the Group had outstanding bank loans of RMB70.19 million of which RMB15 million were fixed-rate loans (31 December 2005: outstanding bank loans of RMB38.47 million of which RMB36.30 million were fixed-rate loans). Some of those bank loans were secured by corporate guarantees provided by certain subsidiaries of the Company. The Group’s gearing ratio (being the total borrowings including bills payable and bank loans divided by total assets) increased from approximately 22% as at 31 December 2005 to approximately 27% as at 31 December 2006.

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 2006. During the year ended 31 December 2006, the Group did not employ any financial instrument for hedging purposes.

SUBSEQUENT EVENTS

• (a) After the balance sheet date, the Directors proposed a final dividend. Further details are disclosed in note 8 above.

• (b) On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”) which will take effect on 1 January 2008. The details of the existing corporate income tax rate and preferential tax policies applicable to the Group are disclosed in note 7. From 1 January 2008, the income tax rate of the PRC subsidiaries of the Group is expected to gradually increase to the standard rate of 25% over a five-year transition period. However, the new tax law has not set out the details as to how the existing preferential tax rate will gradually increase to the standard rate of 25%. Consequently, the Group is not able to make an estimate of the expected financial effect of the new tax law on its deferred tax assets and liabilities. The expected financial effect of the new tax law, if any, will be reflected in the Group’s 2007 financial statements. The enactment of the new tax law is not expected to have any financial effect on the amounts accrued in the balance sheet in respect of current tax payable.

• (c) On 13 March 2007, the Company established an indirectly wholly owned subsidiary, Huizhou Huali Packaging Co., Ltd (“Huizhou Huali”) with a registered capital of HK$90,000,000.

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On 19 March 2007, Huizhou Huali entered into a transfer agreement with an independent third party, Guangdong Yonghe Pharmaceuticals Development Limited to acquire the land use rights of a piece of land in Huiyang for the Group’s production expansion at a cash consideration of RMB64,460,000 which may be adjusted based on the actual site measurement as approved by the relevant planning bureau of the PRC. The purchase consideration will be satisfied by the net proceeds from the public offer and placing of shares in 2005 and internally generated funds.

PROSPECTS

Looking ahead in 2007, we expect the cost of raw materials will still be in an uptrend. As a result, the Group will continue to strengthen the internal management and the production flow control as well as fully implement the ERP system in all subsidiaries, so as to maintain stable production costs.

The Group will put greater effort on market exploration, increasing the market share of high valued-added products such as colour-printed materials and enhancing the capability of new product development. At the end of 2006, the factory in Shanghai has procured a large format offset colour printing press from Germany. The press will be put into operation in April 2007, helping the Group to expand its colour-printing business in Eastern China.

The Company will utilise its new factory to increase its sales income. With the new factory in Anhui successfully put into operation in 2006, a production line of paperboard in Anhui Huali will commence operation in April 2007.

The Group signed an agreement on 19 March 2007 to acquire the land use right of a piece of land located in Huizhou, Guangdong Province, on which a new factory is intended to be built for expanding the production capacity. The Group may also consider relocating the operation in Shenzhen to the new production base.

With a steady growth in the economy and increasing consumption power in China, the demand for environment-friendly and light corrugated paper packaging will continue to increase, which will create great potential for the development of the Group. Meanwhile, higher raw material prices and the increasingly intensive market competition have presented challenges to the Group. The management believes that, given the Group’s experience of over 20 years in the industry, its high quality products and services, its advantageous strategic planning as well as its expanding customer base, the Group will be in a favourable competitive position and endeavours to bring long-term and steady returns to the shareholders.

EMPLOYEES AND REMUNERATION POLICY

As at 31 December 2006, the Group employed approximately 1,800 full-time staff members. The basic remunerations of the employees are determined with reference to the industry’s remuneration benchmark, the employees’ experience 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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The Group has not experienced any significant problems with its employees or disruption to its operations due to labour disputes nor has it experienced any difficulty in the recruitment and retention of experienced staff. The Group maintains a good relationship with its employees. Most members of senior management have been working for the Group for more than 10 years.

The Group adopts a share option scheme at the time of initial public offering. As at the date of this announcement, the Company granted a total of 19,300,000 options under the scheme.

PURCHASE, SALE OR REDEMPTION OF SHARES

The Company has not purchased its own listed shares during the reporting period. During the period, the Company or any of its subsidiaries has also not purchased or sold any of the listed shares in the Company.

CORPORATE GOVERNANCE REPORT

The Company believes that good corporate governance can increase long-term shareholder value. Therefore, the Company is committed to implementing a high standard of corporate governance and emphasizes good communication with shareholders and investors with a view to continuously improving the Company’s transparency. This includes timely, comprehensive and accurate disclosure of information to safeguard the shareholders’ interest and to raise long-term shareholder value.

During the reporting period, the Company has complied with all the code provisions of the Code on Corporate Governance Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

AUDIT COMMITTEE

The audited financial statements of the Company for the year ended 31 December 2006 had been reviewed by the Audit Committee of the Company before they were presented to the Board for approval.

As at the date of this announcement, the Board comprises eight Directors, including four executive Directors namely Mr. Zheng Fan, Mr. Ni Zheng, Mr. Liu Danlin and Mr. Zhou Guangneng, one non-executive Director namely Ms. Xie Mei and three independent non-executive Directors namely Mr. Lee Kit Wah, Mr. Chen Xiangdong and Mr. Xiao Yongping.

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

Hong Kong, 27 March 2007

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

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