Sinopec Engineering Group Co Ltd. — Annual Report 2004

Oct 25, 2004

UNIVERSE INTERNATIONAL HOLDINGS LIMITED 寰宇國際控股有限公司 [*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 1046)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30TH JUNE 2004

RESULTS

The Board of Directors of Universe International Holdings Limited (the “Company”) hereby announces the audited consolidated results of the Company and its subsidiaries (collectively the “Group”) for the year ended 30th June 2004, together with comparative figures for the year ended 30th June 2003 as follows:

Note Turnover 2 Cost of sales Gross profit Other revenue Other operating income Selling expenses Administrative expenses Other operating expenses Operating loss 3 Finance costs Share of loss of an associated company Loss before taxation Taxation 4 Loss attributable to shareholders Dividends 5 Basic loss per share (HK cents) 6 Fully diluted loss per share (HK cents) 6	2004 HK$’000 227,605 (222,016) 5,589 226 7,320 (4,573) (23,517) (8,008) (22,963) (675) (6) (23,644) 4,126 (19,518) — (1.32) N/A	(Restated) 2003 HK$’000 251,246 (211,616) 39,630 824 2,672 (5,241) (29,183) (41,691) (32,989) (1,123) — (34,112) 5,802 (28,310) — (2.63) N/A

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Notes:

1. Change of accounting policy

In the current year, the Group adopted the revised Statement of Standard Accounting Practice (“SSAP”) 12 “Income Taxes” issued by the Hong Kong Institute of Certified Public Accountants (the “ HKICPA”) which is effective for accounting periods commencing on or after 1st January 2003.

In prior year, deferred taxation was accounted for at the current taxation rate in respect of timing differences between profit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or an asset was expected to be payable or recoverable in the foreseeable future. The adoption of the revised SSAP 12 represents a change in accounting policy, which has been applied retrospectively so that the comparatives presented have been restated to conform to the changed policy.

This change of accounting policy has resulted in an increase in deferred tax assets and deferred tax liabilities at 30th June 2003 by HK$3,904,000 and HK$2,749,000, respectively. The loss for the year ended 30th June 2003 has been reduced by HK$1,146,000.

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2. Turnover and segment information

The Group is principally engaged in the distribution of films in various videogram formats, licensing and sublicensing of film rights, film exhibition, leasing of investment properties and machineries for replication of optical discs.

An analysis of the Group’s turnover and loss attributable to shareholders for the year by business segments is as follows:

Turnover External sales Inter-segment sales Segment results before impairment losses Impairment losses of film rights Segment results Other revenue Operating loss Finance costs Share of loss of an associated company Loss before taxation Taxation Loss attributable to shareholders	Year ended 30th June 2004	Year ended 30th June 2004		Group HK$’000 227,605 — 227,605 (18,567) (4,622) (23,189) 226 (22,963) (675) (23,638) (6) (23,644) 4,126 (19,518)
	Leasing of investment Licensing, properties and sub-licensing of machineries for film rights and replication of Sale of goods film exhibition optical discs HK$’000 HK$’000 HK$’000 124,821 96,556 4,850 — 52,561 — 124,821 149,117 4,850 5,376 (17,150) (7,090) (1,195) (3,427) — 4,181 (20,577) (7,090)	Others HK$’000 1,378 386 1,764 297 — 297	Elimination HK$’000 — (52,947) (52,947) — — —

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Year ended 30th June 2003

Leasing of investment Licensing, properties and Sale of goods sub-licensing of machineries for and replication film rights and replication of of optical discs film exhibition optical discs HK$’000 HK$’000 HK$’000 (Note) Turnover External sales 190,916 50,535 8,750 Inter-segment sales — 54,774 — 190,916 105,309 8,750 Segment results before impairment losses 1,922 2,524 (1,244) Impairment losses of film rights (23,580) (13,524) — Segment results (21,658) (11,000) (1,244) Other revenue Operating loss Finance costs Loss before taxation Taxation Loss attributable to shareholders	Others HK$’000 1,045 23 1,068 89 — 89	Elimination HK$’000 — (54,797) (54,797) — — —	(Restated) Group HK$’000 251,246 — 251,246 3,291 (37,104) (33,813) 824 (32,989) (1,123) (34,112) 5,802 (28,310)

Note: Replication of optical discs ceased to operate since 1st December 2002

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An analysis of the Group’s turnover and segment results for the year by geographical segment is as follows:

Hong Kong and Macau Asia (other than Hong Kong and Macau) North America Australia and New Zealand Eastern and Northern Europe Other revenue Operating loss	Turnover Year ended 30th June 2004 2003 HK$’000 HK$’000 177,825 235,005 48,321 14,686 1,303 1,365 153 112 3 78 227,605 251,246	Segment results Year ended 30th June 2004 2003 HK$’000 HK$’000 (27,124) (35,981) 3,016 1,912 899 209 19 14 1 33 (23,189) (33,813) 226 824 (22,963) (32,989)

3. Operating loss

Operating loss is stated after charging the following:

	Year ended 30th June	Year ended 30th June
	2004	2003
	HK$’000	HK$’000
Amortisation of film rights	135,345	123,972
Impairment losses of film rights	4,622	37,104
Cost of inventories sold	37,820	65,761
Staff costs	20,030	27,064
Depreciation on owned fixed assets	19,326	14,740
Depreciation on fixed assets held under finance leases	160	9,681

4. Taxation

Hong Kong profits tax Deferred taxation	Year ended 30th June 2004 2003 HK$’000 HK$’000 (11) 150 4,137 5,652 4,126 5,802	Year ended 30th June 2004 2003 HK$’000 HK$’000 (11) 150 4,137 5,652 4,126 5,802
		5,802

Hong Kong profits tax and deferred taxation has been provided at the rate of 17.5% (2003: 17.5%) on the estimated assessable profit of the Group for the year. Deferred taxation mainly represented the net temporary differences in respect of accelerated depreciation allowances and tax losses.

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5. Dividends

The directors do not recommend the payment of a final dividend for the year ended 30th June 2004 (2003: Nil).

6. Loss per share

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of HK$19,518,000 (2003: HK$28,310,000) and the weighted average number of 1,477,349,894 ordinary shares in issue (2003:1,074,815,452 ordinary shares (adjusted to reflect the rights issue in September 2003)) during the year, as adjusted to reflect the rights issue during the year.

The diluted loss per share for the year ended 30th June 2004 has not been presented as there was no dilutive potential ordinary shares outstanding during the year. The diluted loss per share for the year ended 30th June 2003 was not presented because the effect of the assumed conversion of all dilutive potential ordinary shares outstanding during the year ended 30th June 2003 was anti-dilutive.

OVERALL REVIEW

The operating environment in the local markets for the businesses of video distribution and film exhibition during the year under review remained difficult. In view of this, the Group has continued to focus on market and business diversifications while implementing stringent cost control measures. Notwithstanding the rebound of the local retail sectors, driven by rising tourist arrivals along with the relaxation of restrictions on the entry of mainland tourists into Hong Kong, there has not been apparent improvement in the film entertainment industry.

OPERATING RESULTS

For the year ended 30th June 2004, the Group’s consolidated turnover was approximately HK$227.6 million, representing a decrease of 9.4% over the comparative period last year. Notwithstanding, loss attributable to shareholders for 2003/2004 of approximately HK$19.5 million represents an improvement over the loss of approximately HK$28.3 million in the previous year.

BUSINESS REVIEW

Video distribution

The video distribution segment recorded a decline in turnover of 33.0%, representing a decrease from last year’s HK$186.2 million to the current year’s HK$124.8 million. This segment contributed 54.8% (2003: 74.1%) of the Group’s consolidated turnover.

In view of stagnant local video distribution market, the Group continued with its geographical diversification strategy by allocating more financial resource to production of its own films, where it will own world-wide rights. Consequent to such strategy, the number of title for video distribution in local market was declined, which resulted in a decrease in turnover from this segment. Apart from the reduction of number of video title released, as a result of the keen competition and weak sentiment within the industry, the Group had maintained its competitive pricing policy, which inevitably impacted on gross margins. As a result, gross profit of this segment declined to HK$22.8 million by HK$11.5 million, compared with the same period last year.

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Film exhibition, film licensing and film sub-licensing

During the year under review, the turnover derived from film exhibition, film licensing and sub-licensing increased by 91.1% to HK$96.6 million compared with HK$50.5 million in the previous period. This segment contributed 42.4% (2003: 20.1%) of the Group’s consolidated turnover.

Notwithstanding the above, with continual contraction in the film exhibition business of Chinese language films in the local market, the result of this business was severely impacted. During the year under review, the Group recorded a segmental loss of HK$23.5 million (2003: loss of HK$4.7 million) in the film exhibition business.

Despite the disappointing results of the film exhibition business in the local market, the Group’s continued investments in film production was rewarded during the year under review. The segmental turnover and profit of the film licensing and sub-licensing increased by 79.9% and 28.6% respectively. We are pleased to see that the contribution of overseas markets as a percentage of the Group’s turnover has been increasing and this encouraging result further reinforces the management’s continuing efforts of expanding the Group’s distribution networks abroad. During the year under review, the turnover generated from overseas market increased from HK$16.2 million to HK$49.8 million, contributing 21.9% (2003: 6.5%) of the Group’s consolidated turnover. Benefiting from the strategy of investments in film production, the Group has reduced its reliance on the local market and the management believes such geographical diversification is beneficial to the long term development of the Group.

Another positive development is the introduction of new markets for film exhibition of co-produced films in the PRC. Such films, which are co-produced by the Group and partners in the PRC, have recorded encouraging box-office takings in the PRC. Such source of income was previously unavailable. The film “Heroic Duo”, one of our coproduced films, had been awarded the Best Co-production Film（優秀對外合拍片獎）at the 10th Ornamental Column Awards Presentation Ceremony（中國電影華表獎頒獎典禮）in the PRC.

Production of television series and artiste management

The first television series produced by the Group, entitled “Kung-fu Soccer”, is expected to be released in the first half of financial year 2004/2005. Response from customers has been encouraging and its release is expected to contribute positively to the Group.

As a content provider, the Group also places great emphasis on the development of the artiste management division. The management believes that this step toward vertical integration not only benefits the Group through production cost saving, but also provides new sources of income and strengthens the Group’s competitive advantage in the industry. During the year under review, the Board is pleased that Mr. Lo Ka Leung joined the Group as one of our artistes and the Group will continue to identify potential new artistes in the future. As this division is still in development phase, the contribution to the Group was not significant.

OUTLOOK

The Directors are optimistic with the potential of the PRC market. The Closer Economic Partnership Arrangement (CEPA) is expected to result in relaxation of regulations governing the film industry in the PRC and will in turn provide the Group with wider access to the PRC market. The Group expects that turnover from the PRC will continue to be one of the major sources of income in the long run. In view of this, the Group will continue to look for opportunities of joint productions with PRC partners to cater to PRC audiences.

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Apart from seeking partners in the PRC, the Group will also seek strategic film production partners in various other regions. During the year under review, the Group has engaged a production company in Thailand to produce two films, namely “Leave Me Alone” starring Ekin Cheng and Charlene Choi and “Abnormal Beauty” starring 2R and Anson Leung. The Group intends to leverage on such co-operation, not only to add new elements into the films, but also to explore potential markets in these regions. A film, namely “Recycle” starring Li Sinje which is co-invested by the Group and a partner in Thailand will commence shooting at the end of 2004.

In view of the encouraging feedback on “Kung-fu Soccer” from our customers and the expected strong demand for good quality television series, the Group will allocate more resources towards the production of television series in the future.

Looking ahead, we believe that the Group’s expertise and competitive advantages will equip us to meet with the challenges and to take advantage of the vast opportunities in the coming years.

LIQUIDITY AND FINANCIAL POSITION

As at 30th June 2004, the Group had cash balances of HK$87.3 million and unutilised banking facilities amounted to approximately HK$65.0 million while the corresponding figures in the last year were HK$43.4 million and HK$65.0 million respectively.

As at 30th June 2004, the Group had total assets of approximately HK$347.0 million, representing an increase of HK$55.0 million over that of 30th June 2003. Such increase was mainly due to the issue of new shares by the way of rights issue and the placing during the year.

The Group’s gearing ratio as at 30th June 2004 was approximately 6.8% (30th June 2003: 13.5% (restated)), which was calculated on the basis of the Group’s long term bank borrowings of approximately HK$18.9 million (of which HK$6.6 million, HK$6.3 million and HK$6.0 million are payable within one year, in the second year and in the third to fifth year, respectively) and on the shareholders fund of approximately HK$278.4 million. The significant reduction was mainly due to the new shares issued during the year.

Finance costs had been reduced by 39.9%, mainly due to a drop in interest expenses as a result of the Group’s reduced borrowings and lowered interest rates.

In light of the fact that most of the Group’s transactions were denominated in Hong Kong Dollars and US Dollars, the management considered that the exposure to fluctuation of currency exchange rates is limited and no financial instruments for hedging purposes was used by the Group.

THE PLEDGE OF GROUP ASSETS

As at 30th June 2004, all properties and certain bank balances of the Group with aggregate carrying value of approximately HK$65.8 million (2003: HK$78.8 million) were pledged to secure banking facilities utilised by subsidiaries.

EMPLOYEES AND REMUNERATION POLICIES

As at 30th June 2004, the Group employed 120 staffs (2003: 116). Remuneration is reviewed annually and certain staffs are entitled to commission. In addition to the basic salaries, staff benefits included discretionary bonus, medical insurance scheme and mandatory provident fund.

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SHARE OPTION SCHEME

Pursuant to resolutions passed in the annual general meeting held on 26th November 2003, the Company has adopted a new share option scheme (the “New Scheme”) and terminated the old share option scheme in compliance with Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) (the “Listing Rules”).

There was no share options granted under the New Scheme for the period from 26th November 2003 to 30th June 2004.

USE OF NET PROCEEDS FROM RIGHTS ISSUE AND PLACEMENT OF SHARES

In September 2003, the Group raised net proceeds (after expenses) of approximately HK$37.7 million from a rights issue. The whole net proceeds was applied for the film production and the acquisition of films right for the year under review.

In December 2003, the Group raised net proceeds (after expenses) of approximately HK$36.6 million by placing 190,000,000 shares. As stated in the announcement dated 17th November 2003, the Group intends to use the net proceed to finance the proposed setting up of a Sino-foreign equity joint venture enterprise to invest in and operate cinema business in the PRC (the “Proposed Transaction”), there was no material cost incurred for the Proposed Transaction as at 30th June 2004. The feasibility study of the Proposed Transaction is being conducted. In view of the ever-changing PRC market, the Group will assess this Proposed Transaction by a more pragmatic and prudent approach.

AUDIT COMMITTEE

The written terms of reference which describe the authority and duties of the Audit Committee were prepared and adopted with reference to “A Guide for the Formation of An Audit Committee” published by HKICPA.

The Audit Committee provides an important link between the Board of the Directors and the Group’s auditors in matters coming within the scope of the Group’s audit. It also reviews the effectiveness of the external audit, internal controls and risk evaluation. The Audit Committee comprises three Independent Non-executive Directors, namely Messrs. Ng Kwok Tung, Chiu Shin Koi and Ma Ting Hung. Two meetings were held during the current financial year.

COMPLIANCE WITH THE CODE OF BEST PRACTICE OF THE LISTING RULES

The Company was in compliance with the Code of Best Practice as set out in Appendix 14 to the Listing Rules throughout the year.

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

The Company has not redeemed any of its shares during the year. Neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities during the year.

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DETAILED RESULTS ANNOUNCEMENT

A detailed results announcement containing all the information required by paragraphs 45(1) to 45(3) of Appendix 16 to the Listing Rules will be subsequently published on the Stock Exchange’s website (http://www.hkex.com.hk).

By Order of the Board Lam Shiu Ming, Daneil Chairman and Managing Director

Hong Kong, 21st October 2004

As at the date of this announcement, the Board comprises Mr. Lam Shiu Ming, Daneil, Ms. Chiu Suet Ying and Mr. Yeung Kim Piu as Executive Directors and Messrs. Ng Kwok Tung, Chiu Shin Koi and Ma Ting Hung as Independent Non-executive Directors.

• For identification purpose only

Please also refer to the published version of this announcement in the China Daily.

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