Sinopec Engineering Group Co Ltd. — Interim / Quarterly Report 2004

Mar 25, 2004

UNIVERSE INTERNATIONAL HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

INTERIM RESULTS ANNOUNCEMENT

FOR THE SIX MONTHS ENDED 31ST DECEMBER 2003

The Board of Directors of Universe International Holdings Limited (the “Company”) announces the unaudited condensed consolidated results of the Company and its subsidiaries (the “Group”) for the six months ended 31st December 2003, together with comparative figures for the corresponding period in the previous year, as follows:—

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

		Unaudited
		For the six months ended
		31st December
		2003	2002
			(Restated)
	Note	HK$’000	HK$’000
Turnover	2	120,800	158,444
Cost of sales		(106,791)	(134,615)
Gross profit		14,009	23,829
Other revenue		63	291
Other operating income		5,858	958
Selling expenses		(1,711)	(2,328)
Administrative expenses		(11,902)	(15,154)
Other operating expenses		(604)	(1,765)
Operating profit	3	5,713	5,831
Finance costs		(361)	(603)
Profit before taxation		5,352	5,228
Taxation	4	(970)	(3,012)
Profit attributable to shareholders		4,382	2,216
Basic earnings per share_(HK cents)_	5	0.33	0.21
Fully diluted earnings per share_(HK cents)_	5	N/A	N/A

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Notes:

1. Basis of preparation and principal accounting policies

These unaudited consolidated condensed financial statements are prepared in accordance with Hong Kong Statement of Standard Accounting Practice (“SSAP”) 25, “Interim Financial Reporting” issued by the Hong Kong Society of Accountants (“HKSA”).

These condensed financial statements should be read in conjunction with the 2003 annual financial statements.

The accounting policies and methods of computation used in the preparation of these condensed accounts are consistent with those used in the annual accounts for the year ended 30th June 2003 except that the Group has changed certain of its accounting policies following its adoption of SSAP12 (revised) “Income Tax” issued by the HKSA which is effective for accounting periods commencing on or after 1st January 2003.

In accordance with SSAP12 (revised) “Income Tax”, deferred taxation is now provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred taxation is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

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 SSAP 12 (revised) 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.

The opening retained earnings at 1st July 2002 and 2003 have been reduced by HK$2,968,000 and HK$3,289,000 respectively, which represent the unprovided net deferred tax liabilities. This change has resulted in an increase in deferred tax assets and deferred tax liabilities at 30th June 2003 by HK$6,338,000 and HK$9,627,000 respectively. The profit for the six months ended 31st December 2002 has been reduced by HK$1,915,000.

2. Segment information

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

The Group is organised into three segments:

• Distribution of films in various videogram formats

• Licensing, sub-licensing of film rights and film exhibition

• Leasing of investment property and machineries for replication of optical discs

The Group’s inter-segment transactions mainly consist of licensing of film rights, which are transferred at cost.

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An analysis of the Group’s turnover and results for the period by business segments is as follows:—

6 months ended 31st December 2003 Leasing of investment Licensing, property and sub-licensing of machineries Sale of film rights and for replication goods film exhibition of optical discs Elimination HK$’000 HK$’000 HK$’000 HK$’000 Turnover External sales 68,622 45,668 6,510 — Inter-segment sales — 44,660 — (44,660) 68,622 90,328 6,510 (44,660) Segment results 4,487 659 504 Other revenue Finance costs Profit before taxation Taxation Profit attributable to shareholders 6 months ended 31st December 2002 Leasing of investment Sale of Licensing, property and goods and sub-licensing of machineries replication of film rights and for replication optical discs film exhibition of optical discs Elimination HK$’000 HK$’000 HK$’000 HK$’000 Turnover External sales 117,963 39,139 1,342 — Inter-segment sales — 10,178 — (10,178) 117,963 49,317 1,342 (10,178) Segment results 3,758 1,813 (31) Other revenue Finance costs Profit before taxation Taxation Profit attributable to shareholders

Group HK$’000 120,800 — 120,800 5,650 63 (361) 5,352 (970) 4,382 Group HK$’000 158,444 — 158,444 5,540 291 (603) 5,228 (3,012) 2,216

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Distribution of films in various videogram formats and leasing of investment property and machineries for replication of optical discs are solely operated in Hong Kong and Macau, while the Group operates its licensing, sub-licensing of films rights and film exhibition in four main geographical areas.

An analysis of the Group’s turnover and contribution to operating profit for the period by geographical segments is as follows:—

Geographical segment : Hong Kong and Macau Asia (other than Hong Kong and Macau) North America Others Other revenue Operating profit	Turnover 6 months ended 31st December 2003 2002 HK$’000 HK$’000 94,538 149,832 24,893 7,347 1,295 1,165 74 100 120,800 158,444	Operating profit 6 months ended 31st December 2003 2002 HK$’000 HK$’000 611 4,485 4,202 854 816 190 21 11 5,650 5,540 63 291 5,713 5,831	Operating profit 6 months ended 31st December 2003 2002 HK$’000 HK$’000 611 4,485 4,202 854 816 190 21 11 5,650 5,540 63 291 5,713 5,831
			5,540 291
			5,831

3. Operating profit

Operating profit is stated after crediting and charging the following:

Crediting Interest income Gain on disposal of fixed assets Charging Depreciation: — owned fixed assets — leased fixed assets Cost of inventories sold Write-off of film rights Amortisation of film rights Staff costs Loss on disposal of fixed assets	6 months ended 31st December 2003 2002 HK$’000 HK$’000 63 291 2,196 — 9,600 6,452 1,521 5,850 24,022 36,675 259 260 60,562 88,389 8,765 16,197 — 196	6 months ended 31st December 2003 2002 HK$’000 HK$’000 63 291 2,196 — 9,600 6,452 1,521 5,850 24,022 36,675 259 260 60,562 88,389 8,765 16,197 — 196
		6,452 5,850 36,675 260 88,389 16,197 196

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4. Taxation

Hong Kong profits tax has been provided at the rate of 17.5% on the estimated assessable profit for the year. In 2003, the government enacted a change in the profits tax rate from 16% to 17.5% for the fiscal year 2003/2004.

The amount of taxation charged to the consolidated profit and loss account represents:

Hong Kong profits taxation Deferred taxation relating to the origination and reversal of temporary differences Deferred taxation resulting from an increase in tax rate Taxation charge	6 months ended 31st December 2003 2002 (Restated) HK$’000 HK$’000 1,043 1,097 (73) 1,105 — 810 970 3,012	6 months ended 31st December 2003 2002 (Restated) HK$’000 HK$’000 1,043 1,097 (73) 1,105 — 810 970 3,012
		3,012

5. Earnings per share

The calculation of basic earnings per share is based on the profit for the period attributable to shareholders of HK$4,382,000 (2002: HK$2,216,000 (restated)) and the weighted average of 1,331,695,020 ordinary shares (2002: 1,074,815,452 ordinary shares, as restated) in issue during the period, as adjusted to reflect the rights issue during the period.

The diluted earnings per share for the period ended 31st December 2002 has not been calculated as there was no dilution effect after taking into account of all potential ordinary shares under the share option scheme.

The diluted earnings per share for the period ended 31st December 2003 has not been presented as there was no outstanding option as at 31st December 2003.

INTERIM DIVIDEND

The Board of Directors does not recommend the payment of an interim dividend in respect of the six months ended 31st December 2003 (2002: Nil).

REVIEW OF OPERATIONS

Overall Group results

The Group’s unaudited consolidated turnover for the six months ended 31st December 2003 was approximately HK$120.8 million, representing a decrease by about 23.8% over the same period last year. Nevertheless, profit attributable to shareholders was HK$4.4 million (2002: HK$2.2 million (restated)). Earnings per share for the period were 0.33 cents compared with 0.21 cents (restated) during the corresponding period in 2002.

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Video distribution

Turnover of video distribution declined substantially by 43.2% to HK$66.6 million compared with HK$117.3 million during the same period last year. The lower turnover of video distribution was the main reason for the Group’s low turnover in the six months ended 31st December 2003. Consequently, the contribution of video distribution to the Group’s total turnover decreased from 74.4% previously to about 55.1% in the six months ended 31st December 2003.

Despite signs of an upturn in Hong Kong economy in the second half of 2003, the local video distribution market has remained stagnant. With the keen competition and in order to maintain sales from video distribution, the Group continued to adopt an aggressive pricing policy. There was also increasing competition in terms of acquisition of film rights within the industry as there was a lack of supply of good quality films. In view of this, the Group has continued to increase investments in producing its own films, which it will own all rights, including video distribution rights.

Consequent to the above investment strategy, the number of titles which will be available for video distribution will likely decrease. This is due to the fact that the financial requirements to produce a film are normally higher than those to acquire video distribution rights. The advantage of producing its own film is that the Group will own all the rights in respect of such films, including film exhibition and licensing rights. This will in turn enhance the Group’s income from film exhibition and film licensing as discussed below.

Film exhibition, film licensing and sub-licensing

During the period under review, turnover derived from film exhibition, film licensing and sub-licensing increased by 16.8% to HK$45.7 million compared with HK$39.1 million in the previous period. The increase was attributable to the Group’s continued investments in film production and the release of several popular films such as “Heroic Duo” and “The Death Curse” during the period under review. The increased demand from the Southeast Asian markets as economic conditions improved also boosted sales.

A positive development for this business segment is the new market 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 seen encouraging box-office in the local PRC markets and such source of income was previously unavailable. Consequently, income from the PRC increased by about five times.

Despite the increase in turnover, result of this business segment declined to about HK$0.7 million due to substantial increase in marketing costs. These marketing costs, which are incurred initially at the launch of the films, were important in promoting the popularity of new films. The popularity of films at the box office will in turn impact on the subsequent revenue from video distribution and film licensing.

PROSPECTS

The Directors are optimistic with the immense potentials of the PRC market. The signing of the Closer Economic Partnership Arrangement (CEPA) is expected to relax the regulations governing the film industry in the PRC and will provide the Group with wider access to the PRC.

The Group plans to capitalise on the opportunities for exhibition of co-produced films in the PRC by increasing the production of these films with their PRC partners. In addition, a film co-produced by the Group and a partner in Thailand will commence shooting and the Group hopes to leverage on such effort to explore potential markets in various regions by co-operating with their local production companies. Apart from its own production, the Group will continue to source for good quality films for its video distribution business.

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The first television series entitled “Kung-fu Soccer” presented by the Group is expected to be released soon. Response from customers to this television series has been encouraging and its release is expected to contribute positively to the Group. To continue with this business diversification strategy, the Group has commenced on the planning of another television series production.

To further vertically integrate the Group’s business and with a view to enhance profitability, the Group has entered into a memorandum of understanding (the “MOU”) with 廣東省電影公司 (“GD Film”) in November 2003. The MOU relates to a proposal to set up a sino-foreign equity joint venture company (the “JV”) to invest in and operate cinemas in the PRC. The Group believes that the cinema industry in the PRC is booming, With GD Film’s extensive distribution network as well as its expertise and knowledge in operating cinemas in the PRC, the Group believes that the setting up of the JV will have a synergistic effects on the Group.

FINANCIAL RESOURCES/LIQUIDITY AND CAPITAL STRUCTURE

As at 31st December 2003, the Group had cash balances and unutilised banking facilities of approximately HK$82.2 million and HK$65.0 million respectively.

As at 31st December 2003, the Group had total assets of approximately HK$375.5 million, representing an increase of HK$81.0 million over that of 30th June 2003. Such increase was mainly due to the issue of new shares by the way of the right issue and the placing on 8th September 2003 and 1st December 2003 respectively.

The Group’s gearing ratio as at 31st December 2003 was approximately 7.8% (30th June 2003: 13.8% (restated)), which was calculated on the basis of the Group’s long term bank borrowings of approximately HK$22.9 million (of which HK$7.4 million, HK$6.6 million, HK$6.4 million and HK$2.5 million are repayable within one year, in the second year, in the third to fifth year and after the fifth year respectively) and on the shareholders fund of approximately HK$295.3 million. The significant reduction was mainly due to the new share issued during the period.

Finance costs have been reduced by 40.1%, 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 the exposure to exchange rate fluctuation is limited and no financial instruments for hedging purposes were used.

THE PLEDGE OF GROUP ASSETS

As at 31st December 2003, bank balances and certain fixed assets of the Group with aggregate carrying value of approximately HK$63.5 million (30th June 2003: HK$78.8 million) were pledged to secure banking facilities utilized by its subsidiaries.

EMPLOYEES AND REMUNERATION POLICIES

As at 31st December 2003, the Group employed 126 staffs (30th June 2003: 116). Remuneration is reviewed annually and certain staff members are entitled to commission. In addition to basic salaries, staff benefits include discretionary bonus, medical insurance scheme and mandatory provident fund.

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

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

USE OF NET PROCEEDS

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

In December 2003, the Group raised net proceed (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 sino-foreign equity joint venture company to invest in and operate cinema business in the PRC (the “Proposed Transaction”), there was no material cost had been incurred for the Proposed Transaction as at 31st December 2003. The Proposed Transaction is progressing where feasibility studies on, among other things, locations for operating the cinemas are being conducted.

AUDIT COMMITTEE

The Audit Committee has reviewed the accounting principles and practices adopted by the Group and discussed internal controls and financial reporting matters including a review of the unaudited condensed financial statements for the six months ended 31st December 2003 with the management.

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 of the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) throughout the period.

DETAILED INTERIM RESULTS ANNOUNCEMENT

A detailed interim results announcement containing all the information required by paragraphs 46(1) to 46(6) of Appendix 16 of the Listing Rules will be subsequently published on the Stock Exchange’s website (http:// www.hkex.com.hk) in due course.

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

Hong Kong, 25th March 2004

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

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