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Half Year Financial Statements And Dividend Announcement for the Six Months Ended 31 December 2016

Financials Archive

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Half Year Financial Statements And Dividend Announcement for the Six Months Ended 31 December 2016

Group Statement of Profit or Loss and Other Comprehensive Income for the six months ended 31 December 2016

Balance Sheet

Review of Performance

Profit and Loss

Revenue

Consolidated revenue of the Group for the six months ended 31 December 2016 decreased by HK$318.7 million or 25.2% to HK$943.5 million from HK$1,262.2 million for the corresponding period last year.

Revenue from our Components Distribution (“CD”) segment decreased by HK$18.8 million or 4.1%, from HK$460.4 million for the six months ended 31 December 2015 to HK$441.6 million for the six months ended 31 December 2016. The decrease was mostly due to slow down in demand for certain electronic components for smart phones and postponement of certain industrial materials and instrumentation related infrastructure projects during the period under review.

Revenue from our Information Technology Infrastructure (“IT Infrastructure”) segment increased by HK$19.4 million or 4.3%, from HK$451.7 million for the six months ended 31 December 2015 to HK$471.1 million for the six months ended 31 December 2016. The increase was mostly due to demand for network security products and enterprise software and hardware products that remained strong during the period under review.

Revenue from our Consumer Electronics Products (“CEP”) segment decreased by HK$319.3 million or 91.2%, from HK$350.1 million for the six months ended 31 December 2015 to HK$30.8 million for the six months ended 31 December 2016. In view of the increase in the number of Apple flagship stores in Hong Kong which negatively impacted our retail stores' business during the year ended 30 June 2016, the Group's retail arm, KCF A Store Limited, had been disposed off on 30 June 2016. As a result, revenue from our CEP segment decreased substantially during the period under review.

Gross profit

Gross profit for the six months ended 31 December 2016 and 2015 remained at approximately HK$86.6 million. However, gross profit margin increased by 2.3% from 6.9% for the six months ended 31 December 2015 to 9.2% for the six months ended 31 December 2016. The increase was mainly due to the disposal of the low margin retail arm on 30 June 2016.

Other income and gains, net

The net other income and gains for the six months ended 31 December 2016 and 2015 remained stable at approximately HK$2.0 million.

Selling and distribution costs

Selling and distribution costs decreased by approximately HK$2.6 million or 8.0% from HK$32.1 million for the six months ended 31 December 2015 to HK$29.5 million for the six months ended 31 December 2016. The decrease was mainly attributed to (1) decrease in rent and rates of HK$3.7 million due to no retail shop rental during the period under review; and (2) decrease in bank charge of HK$0.6 million due to decrease in revenue and offset by increase in salary, bonus and commission totally HK$1.9 million.

Administrative expenses

Administrative expenses increased by approximately HK$2.1 million or 4.7%, from HK$44.6 million for the six months ended 31 December 2015 to HK$46.7 million for the six months ended 31 December 2016. The increase was mainly due to increase in depreciation charge of HK$3.8 million as a result of the acquisition of an office building in Singapore towards the end of last financial year and offset by (1) decrease in rent and rates of HK$0.7 million due to no retail arm office rental during the period under review; (2) decrease in secretarial and accounting fee of HK$0.4 million after the disposal of KCF A Store Limited; (3) decrease in recruitment fee of HK$0.3 million; and (4) decrease in other PRC local government levy of $0.3 million as a result of reduced revenue in the PRC.

Other expenses, net

Net other expenses decreased by approximately HK$1.8 million or 35.1%, from HK$5.0 million for the six months ended 31 December 2015 to HK$3.2 million for the six months ended 31 December 2016. The change was mainly due to (1) a decrease in bad debt of HK$1.5 million; and (2) decrease in fair value losses on derivative financial instruments of HK$0.3 million.

Finance costs

Finance costs increased by approximately HK$0.1 million or 9.7%, from HK$1.1 million for the six months ended 31 December 2015 to HK$1.2 million for the six months ended 31 December 2016. The increase was mostly due to the increase in cashing bills receivable to banks in the PRC for financing operations in the PRC.

Income tax expense

Income tax expense rate decreased to 37.0% (31 December 2015: 40.8%) during the period under review but was still relatively high as tax losses in certain subsidiaries could not qualified for capitalising, and therefore did not reduce consolidated income tax expense.

Net Profit

Net profit attributable to owners of the Company decreased by HK$0.4 million or 8.0%, from HK$5.6 million for the six months ended 31 December 2015 to HK$5.2 million for the six months ended 31 December 2016. Profit after tax increased by 45.0% as a result of improved gross profit margins, overall reduction in expenses and a small decrease in the income tax rate as described above.

Statement of Financial Position

Non-current assets

Non-current assets comprised goodwill of HK$2.1 million; investment properties, office equipment, leasehold land and buildings and motor vehicles totaling HK$459.0 million; investment in an associate of HK$1.7 million; prepayment for office renovation of HK$0.6 million; a factored trade receivable of HK$1.9 million; a trade receivable of HK$9.1 million; financial asset at fair value through profit or loss of HK$2.4 million and deferred tax assets of HK$2.7 million. At 31 December 2016, non-current assets amounted to HK$479.5 million, representing approximately 43.3% of the total assets. There was a decrease in non-current assets amounted to approximately HK$29.1 million which is mainly due to (1) depreciation of property, plant and equipment; and (2) certain factored trade receivables fell into current portion during the period under review.

Current assets

As at 31 December 2016, current assets amounted to approximately HK$627.8 million, a decrease of HK$59.3 million compared to the immediately preceding financial year end as at 30 June 2016. The decrease was mainly due to (1) decrease in inventories by HK$58.1 million as a result of delivery of in stock inventories during the period under review; (2) decrease in trade and bills receivables by HK$11.6 million; (3) decrease in prepayments, deposits and other receivables by HK$15.5 million; and offset by increase in cash and cash equivalents by HK$26.2 million.

Current liabilities

As at 31 December 2016, current liabilities amounted to approximately HK$385.5 million, a decrease of HK$59.0 million compared to the immediately preceding financial year end as at 30 June 2016. The decrease was mainly due to (1) decrease in trade and bills payables by HK$28.4 million; (2) decrease in income tax payable by HK$5.0 million; (3) decrease in interest-bearing bank and other borrowings by HK$45.8 million and offset by increase in other payables and accruals by HK$20.2 million as a result of cash receipt in advance from certain customers in order to reduce credit risk.

Non-current liabilities

Non-current liabilities amounted to HK$70.7 million, representing 15.5% of our total liabilities as at 31 December 2016. The amount mainly comprised of deferred tax liabilities. Deferred tax liabilities are recognised as a result of temporary differences between the carrying amounts and tax bases of our land and buildings and investment properties.

Liquidity and cash flow

As at 31 December 2016, cash and cash equivalents amounted to approximately HK$60.3 million. Total interest bearing loans and borrowings as at 31 December 2016 were HK$96.3 million and the gearing ratio, which is defined as total borrowings and finance leases payables to shareholders' funds, is 0.15 times (30 June 2016: 0.21 times).

Commentary

As the global market for smart phones has flattened out during the period under review, it is not expected to change the demand for electronic components for smart phones in the near future. The Company however continues to explore opportunities in expanding the distribution of electronic components. On infrastructure projects, there were delays in in some projects during the period under review. However, it is anticipated that those postponed projects will be rolling out gradually in the months to come.

The unprecedented internet connectivity of mobile and optical fibre networks has led to numerous security challenges. Data security has always been a hot topic globally as security threats continue to involve ahead of the most advanced defenses. We therefore foresee demand for our network security products, both advanced and entry level software as well as hardware, will remain strong.

During the period under review, there was huge drop in revenue in the CEP segment which was in line with our expectation. We have successfully secured distributorships for a few new prestige consumer electronics products since the disposal of KCF A Store Limited and will continue to negotiate for more distributorships. However, it is not expected that this segment will be able to return to the previous levels of revenue and profit in the near future.

We anticipate that the fluctuating Renminbi exchange rate against Hong Kong dollar as well as uncertainties with regard to new international trade policies may impact on the Group's bottom line going forward.