EX-99.5 2 a12-10835_2ex99d5.htm EX-99.5

Exhibit 99.5

 

ERA Mining Machinery Limited

Stock Code : 8043

Annual Report 2011

 



 

Contents

 

CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “EXCHANGE”)

 

GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

 

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM.

 

The principal means of information dissemination on GEM is publication on the internet website operated by the Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on GEM-listed issuers.

 

Contents

 

 

Pages

 

 

Corporate Information

3

 

 

Summary Financial Information

4

 

 

Chairman’s Statement

6

 

 

Management Discussion and Analysis

7

 

 

Directors and Senior Management

15

 

 

Directors’ Report

18

 

 

Corporate Governance Report

27

 

 

Independent Auditor’s Report

32

 



 

Consolidated Statement of Comprehensive Income

34

 

 

Consolidated Statement of Financial Position

35

 

 

Consolidated Statement of Changes in Equity

36

 

 

Consolidated Statement of Cash Flows

37

 

 

Notes to the Financial Statements

39

 

Corporate Information

 

EXECUTIVE DIRECTORS

 

Emory WILLIAMS (Chairman)

Phil Qiu JIN (Vice Chairman) (Note 1)

LI Rubo

WANG Fu

LEE Jong Dae

 

INDEPENDENT NON-EXECUTIVE DIRECTORS

 

DONG Xiangge

CHAN Sze Hon

David Marc BOULANGER

Christopher John PARKER (Note 1)

 

REGISTERED OFFICE

 

Cricket Square

Hutchins Drive

P.O. Box 2681

Grand Cayman KY1-1111

Cayman Islands

British West Indies

 

HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS IN HONG KONG

 

9th Floor, Shun Ho Tower

24-30 Ice House Street

 



 

Central

Hong Kong

 

HEAD OFFICE IN PRC

 

7 JinSuo Rd.

High and New Technology Industries Development Zone

Zhengzhou, Henan 450001

People’s Republic of China

 

COMPANY SECRETARY

 

LEUNG Ka Wo

 

COMPLIANCE OFFICER

 

LEE Jong Dae

 

AUDIT COMMITTEE

 

CHAN Sze Hon (Chairman of the Audit Committee)

DONG Xiangge

David Marc BOULANGER

 

REMUNERATION COMMITTEE

 

Emory WILLIAMS (Note 2)

(Chairman of the Remuneration Committee)

CHAN Sze Hon

David Marc BOULANGER (Note 3)

 

AUTHORISED REPRESENTATIVES

 

LEE Jong Dae

LEUNG Ka Wo

 

AUDITOR

 

RSM Nelson Wheeler

Certified Public Accountants

29th Floor, Caroline Centre

Lee Gardens Two

28 Yun Ping Road

 



 

Hong Kong

 

COMPLIANCE ADVISER

 

Partners Capital International Limited

 

LEGAL ADVISOR

 

Orrick, Herrington & Sutcliffe LLP

39th Floor, Gloucester Tower

The Landmark

15 Queen’s Road Central

Hong Kong

 

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE IN THE CAYMAN ISLANDS

 

Bank of Bermuda (Cayman) Limited

P.O. Box 513 GT

Strathvale House

North Church Street

George Town

Grand Cayman

Cayman Islands

British West Indies

 

BRANCH SHARE REGISTRAR AND TRANSFER OFFICE IN HONG KONG

 

Hong Kong Registrars Limited

Rooms 1712-1716, 17th Floor

Hopewell Centre

183 Queen’s Road East

Wan Chai

Hong Kong

 

STOCK CODE

 

8043

 

WEBSITE

 

www.eraholdings.com.hk

Notes:

 

1.             Re-designated as non-executive director on 3 January 2012.

 



 

2.             Mr. Emory WILLIAMS resigned as the Chairman of the Remuneration Committee on 30 March 2012 but remain as a member.

 

3.             Mr. David Marc BOULANGER was appointed as the Chairman of the Remuneration Committee on 30 March 2012.

 

Summary Financial Information

 

The following is a summary of the published consolidated results and balance sheet of the Group prepared on the basis set out in note below:

 

 

 

Year ended 31 December

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

 

 

 

 

 

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turnover

 

1,953,342

 

1,768,913

 

1,404,769

 

1,108,286

 

138,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

128,669

 

214,831

 

177,228

 

91,673

 

11,273

 

Finance costs

 

(138,785

)

(40,953

)

(20,066

)

(12,765

)

(626

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit before tax

 

(10,312

)

173,878

 

157,162

 

78,908

 

14,431

 

Income tax expense

 

(3,941

)

(38,779

)

(26,227

)

(16,103

)

(155

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit for the year attributable to owners of the Company

 

(14,253

)

135,099

 

130,935

 

62,805

 

14,276

 

 

 

 

At 31 December

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

 

 

 

 

 

 

(restated)

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

5,661,917

 

3,381,099

 

1,635,045

 

993,948

 

429,406

 

Total liabilities

 

(4,361,707

)

(2,158,774

)

(1,415,353

)

(905,191

)

(413,887

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

1,300,210

 

1,222,325

 

219,692

 

88,757

 

15,519

 

 



 

Note:         The figures for the years 2007, 2008, 2009 and 2010 have been prepared as a continuation of the consolidated financial statements of Hong Kong Siwei Holdings Limited, being the acquirer of the Company for accounting purpose in a very substantial acquisition and reverse takeover completed on 30 September 2010, throughout the four years and please refer to note 2 in the Notes to Financial Statements for details.

 

Chairman’s Statement

 

To the Shareholders of ERA Mining Machinery:

 

On behalf of the directors (the “Directors”) of ERA Mining Machinery Limited (“ERA” or the “Company”) and its subsidiaries (collectively the “Group”), I am pleased to present the annual results for the year ended December 31, 2011.

 

2011 was an eventful year for us. The Chinese Government continued to implement measures enforcing the mechanization of China’s coal mines, an effort in which hydraulic roof support products play an important role. While the number of customers we were able to serve and orders remained strong, our decision to pull a secondary share offering in June 2011 and a tightening of credit in the second half of the year placed limits on the amount of orders we could manufacture and ship by year end. While we finished the year with a 10.4% increase in turnover, our cost of sales and financing costs increased substantially, reflecting our higher costs of steel relative to our state owned competitors in China and substantially increased finance costs due to increases in interest rates along with substantially increased borrowings.

 

On November 10, 2011, we issued a Joint Announcement with Caterpillar Inc. (“Caterpillar”) and its subsidiary Caterpillar (Luxembourg) Investment Co. S.A. of a pre-conditional voluntary offer by Caterpillar (Luxembourg) Investment Co. S.A. to acquire all of ERA’s listed shares and the cancellation of all of ERA’s outstanding share options. Combining the many resources of Caterpillar, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, with the market knowledge and sales position of ERA, one of China’s leading manufacturers of hydraulic roof supports, would allow the Company and its China employees the opportunity to offer ERA’s customers world class roof support products and related services.

 

Significant achievements during the year included the Company becoming a supplier to China’s largest coal mining company and completing its planned consolidation and relocation of its manufacturing operations into its new Guangwu factory, where it consolidated operations from three previous manufacturing locations.

 

We believe the steps we took will help our customers thrive in the years ahead and were therefore also in the best interests of our shareholders and employees. The Company hopes that those steps will assist China to achieve its continuing national mine safety and efficiency goals. On behalf of our Board and management team I sincerely thank the many employees, customers, shareholders and friends who supported us in 2011. We look forward to continuing our work together.

 



 

Emory Williams

Chairman

 

Hong Kong, 30 March 2012

 

Management Discussion and Analysis

 

FINANCIAL PERFORMANCE

 

Turnover

 

China’s tightening credit policy and an increasingly challenging operating environment resulted in a slowing turnover growth. For the year ended 31 December 2011, the Group recorded a turnover of approximately HK$1,953.3 million representing growth of 184.4 million or 10.4% in comparison to the prior year.

 

Cost of Sales

 

For the year ended 31 December 2011, cost of sales was approximately HK$1,653.3 million or 84.6% of turnover compared to HK$1,420 million and 80.3% of turnover in 2010. Steel costs as a percentage of sales grew in comparison with 2010 and are believed to be higher as a percentage of sales than our leading state-owned competitors principally due to two factors: 9% higher steel prices and a high percentage of our steel purchases being purchased indirectly through agents of steel companies (who provide more favorable payment terms) instead of directly from the steel mills.

 

Gross Profit and Gross Margin

 

The Group’s gross profit for the year ended 31 December 2011 was HK$300.0 million, 14.0% lower than in the prior year. Gross profit margin decreased to 15.4% from 19.7% in the prior year, with margin decreases primarily attributable to increases in materials costs which we were unable to pass on to our customers in a competitive environment.

 

Selling and Distribution Costs

 

For the year ended 31 December 2011, the Group incurred selling and distribution costs of approximately HK$96.6 million or 4.9% of sales, a decrease of approximately HK$8.0 million or 7.6% when compared to 2010, when selling and distribution costs represented 5.9% of sales. Efficiencies resulted primarily from the Company’s purchase of some of its principal former sales agencies.

 

Administrative Expenses

 

For the year ended 31 December 2011, the Group incurred administrative expenses of approximately HK$159.8 million, an increase of approximately HK$74.5 million or 87.2% when compared to last year. While some increase resulted from

 



 

business expansion, the most significant increases in administrative expenses were principally due to increases of HK$39.0 million in allowance for trade receivables, additional salary and benefits of HK$26.6 million and an increase in research and development expenditures of HK$4.9 million.

 

Total personnel at the end of 2011 increased by 671 persons or 21.2%, while wages and benefits increased by 65.8%, reflecting the continuing escalation of wages and benefits across China’s manufacturing employment sector.

 

Zhengzhou Siwei has invested significantly in research and development, adding 373 new research and development staffs during 2011, in the Company’s continuing effort to enhance mining safety, efficiency and environmental impact, while non-salary and benefit related expenditures for research and development of HK$9.1 million represented a 118% increase over 2010.

 

Finance Costs

 

Financing the Company’s physical plant consolidation and expansion along with working capital needs resulting from increased turnover resulted in a 142.9% increase in total borrowings and substantially higher financing costs in 2011. For the year ended 31 December 2011, the Group incurred finance costs of approximately HK$138.8 million, an increase of approximately HK$97.8 million or 238.5% when compared to 2010. In 2011, additional finance costs of HK$42.2 million were incurred in respect of short term bank borrowings and other borrowings as a result of an increase of HK$709.5 million in total borrowings to finance additional working capital and capital expenditures. In addition, bills receivables discounting charges increased by HK$42.9 million when compared to 2010.

 

Net loss Attributable to Owners of the Company

 

For the year ended 31 December 2011, the Group’s net loss attributable to owners of the Company was approximately HK$14.3 million, compared to a profit of HK$135 million made in last year. The loss was due primarily to (1) higher financial costs due to increased borrowings and higher interest rates during 2011, (2) a decrease in gross profit margin due to increased material costs and (3) a higher salaries and benefits and (4) an increased allowance for trade receivables.

 

EBITDA

 

Given the Group’s increased financing costs due to continued growth in fixed assets and working capital needs, the management team believes a comparison of 2011 and 2010 EBITDA (a non HKFRS accounting standard metric comprised of net (loss)/profit before income tax, net finance costs, depreciation and amortization) is informative for shareholders wanting to better understand the Group’s results. EBITDA for 2011 decreased by HK$88.2 million or 38.1% from the prior year.

 

 

 

Year ended 31 December

 

 

 

2011

 

2010

 

Variance

 

 

 

HK$’000

 

HK$’000

 

%

 

 

 

 

 

 

 

 

 

(Loss)/profit before tax

 

(10,312

)

173,878

 

(94.1

)

Depreciation & amortization

 

30,679

 

20,635

 

48.7

 

Net finance costs

 

122,991

 

37,053

 

231.9

 

 

 

 

 

 

 

 

 

EBITDA

 

143,358

 

231,566

 

(38.1

)

 



 

Note that a HK$110.9 million increase in fixed asset investment to expand its production capacity resulted in 48.7% higher depreciation and amortization in comparison to 2010.

 

BUSINESS REVIEW

 

Product

 

At present, the sole products of principal subsidiary of the Company, Zhengzhou Siwei, are hydraulic roof supports (also referred to as “shields”) and related equipment for underground coal mining. Zhengzhou Siwei designs and manufactures a full range of shields ranging from 0.8 m to 7.3 m in height and from 1,800 KN to 18,000 KN in terms of working resistance. All shields delivered are custom manufactured to the mining requirements of each customer.

 

During 2010, Zhengzhou Siwei dedicated substantial resources to its research and development capabilities. In addition to the many research and development initiatives in production techniques, materials and hydraulic parts, during the reporting period, Zhengzhou Siwei introduced a number of new products and technologies of potential importance such as:

 

·           Powerful and compact hydraulic supports with large mining height

 

 

A highly technical product for the high-end market, market demand keeps on increasing.

 

 

 

 

 

·           Efficient and powerful two-leg sublevel caving shield supports

 

 

Specific for ultra thick coal seam, facilitate mining in ultra thick coal seam, and improve mining efficiencies.

 

 

 

 

 

·           solid, high hydrophilic and paste backfill hydraulic supports for mining

 

 

This patented technology, exclusive to Zhengzhou Siwei, offers customers higher recovery rate while reducing damages to the environment.

 

 

 

 

 

·           Large dip angle face supports

 

 

Specific for coal seams with large dip angles, can improve mining efficiency and safety. This kind of support has a great demand in China.

 



 

·           Ultrathin seam mining supports

 

 

Targeted at highly technical and highly automated thin and ultra thin coal seams, this type of shield supports and fosters fully automated, unmanned mining faces, enabling efficient and safe mining thereof.

 

Over time, management expects these efforts to enhance profit margins for its current products, to increase sales of new, higher margin products and to result in increased export sales.

 

Market Overview

 

China’s increasing demand for highly mechanized coal mining equipment has been driven principally by two factors, China’s increasing demand for electricity and government policies directed at improving the safety and efficiency of Chinese mining. These government policies are reflected in the growing consolidation of the small and medium sized coal mines and the mandating of increasingly rigorous safety measures. While growth of new mines may slow during China’s 12th Five Year Plan, management expects intensified comprehensive mechanization in China’s existing and newly consolidated mines. The management expects these factors to continue to result in continued strong short and mid-term growth for China’s mining machinery market.

 

Expansion of Manufacturing Capabilities and Capacity

 

Zhengzhou Siwei has been constantly expanding its manufacturing capacity and capabilities. During 2011, most of this expansion has occurred or will occur in Zhengzhou Siwei’s newest Guangwu factory location in Zhengzhou, where Zhengzhou Siwei is consolidating all of its shield manufacturing. Significant additions to manufacturing capacity were made during the year, especially in advanced electro-plating and welding. The management expects to complete its physical consolidation of its former manufacturing facilities.

 

PROSPECTS

 

Indicators point to continued strong economic growth in China. Continued initiatives by China’s central government strengthening policies aimed at improving mine safety, efficiency and mitigating environmental impact, requiring mine mechanization and further consolidation of small and medium sized coal mines also bode well for the coal mining industry.

 

LIQUIDITY AND FINANCIAL RESOURCES

 

As at 31 December 2011, the Group had cash and cash equivalents of approximately HK$338.1 million (2010: HK$102.7 million). As at 31 December 2011, the Group had net current assets of approximately HK$89.9 million (2010: HK$415.8 million).

 

FOREIGN EXCHANGE EXPOSURE

 

The Group mainly operates in the PRC. Other than the foreign currency denominated bank deposits, the Group does not have any other material direct exposure to foreign exchange fluctuations. During 2011, though the exchange rates of Renminbi against U.S. dollar and the Hong Kong dollar kept on increasing, the directors of the Company expect that any fluctuation of Renminbi exchange rate will not have material adverse effect on the operation of the Group.

 

CAPITAL STRUCTURE

 

The Company was listed on The Growth Enterprise Market of the Stock Exchange of Hong Kong Limited. During the year ended 31 December 2011, the changes of the capital structure of the Company were set out below:

 

(a)              49,932,000 ordinary shares were issued on 5 January 2011, at HK$0.35 per share as the convertible bond holder exercised conversion right to convert the convertible bond into the Company’s ordinary shares.

 

(b)             18,200,000, 9,000,000 and 4,300,000 ordinary shares were issued on 5 January 2011, 24 May 2011 and 2 December 2011, respectively at HK$0.40 per share as exercise of share options.

 

CHARGES ON THE GROUP’S ASSETS

 

As at 31 December 2011, the Group’s time deposits of approximately HK$777.2 million (2010: HK$334.1 million) were pledged to banks in respect of bank borrowings granted to the Group. In addition, certain amounts of property, plant and equipment, prepaid land lease payments, inventories and trade receivables were pledged to banks for borrowings.

 

GEARING RATIO

 

The Group’s total borrowings as at 31 December 2011 amounted to approximately HK$1,725.5 million (2010: HK$576.7 million), which include borrowings, finance lease payables, amounts due to directors and amount due to a third party. On this basis, the gearing ratio is calculated at 1.33 (2010: 0.47), based on the equity approximately HK$1,300.2 million (2010: HK$1,222.3 million).

 



 

CAPITAL COMMITMENTS

 

As at 31 December 2011, the Group had capital commitments for property, plant and equipment contracted but not provided for of approximately HK$125.0 million.

 

CONTINGENT LIABILITIES

 

As at 31 December 2011, Zhengzhou Siwei and a third party mutually agreed to issue cross guarantees to the extent of approximately HK$305.8 million (2010: HK$270.7 million) to banks in respect of banking facilities granted to the Group and the third party. Under such cross guarantees, Zhengzhou Siwei and the third party are jointly and severally liable for all or any of each of their borrowings from the banks for one year. The directors of the Group do not consider it probable that a claim will be made against Zhengzhou Siwei under the above guarantees as the default risk is low.

 

EMPLOYEE INFORMATION

 

As at 31 December 2011, the Group had a total of 3,836 employees (2010: 3,165). The total staff costs, including directors’ emoluments, amounted to approximately HK$221.8 million for the year under review, compared to HK$144.9 million in 2010. Staff remuneration is reviewed by the Group from time to time depending on length of service and performance where warranted. In addition to salaries, the Group provides staff benefits including medical benefits and contributions to staff’s provident fund. Share options and bonuses are also available to employees of the Group at the discretion of the Directors.

 

The emoluments of the Directors and senior management of the Company are determined in accordance with the recommendations from the remuneration committee of the Company. The remuneration committee of the Company considers factors including salaries paid by comparable companies, time commitment and responsibilities of the relevant employee, employment conditions elsewhere in the Group and desirability of performance-based remuneration.

 

Directors and Senior Management

 

Details of the current management team are as follows:

 

DIRECTORS

 

Executive Directors

 

Mr. Emory WILLIAMS, aged 55, is the Chairman and a director of Zhengzhou Siwei, and is responsible for the Group’s business development and investment decisions. He obtained a Bachelor of Arts from Middlebury College in 1978 and a Master of Business Administration from Northwestern University, Kellogg Graduate School of Management in 1980. In 1994, Mr. WILLIAMS founded AIC which invested in SureBlock Company, a PRC-based manufacturer of modular concrete building systems. In 2004, he and Mr. LI Rubo co-founded International Mining Machinery Limited (“IMM”), a successor company of which was listed on the Main Board of the Stock Exchange on 10 February 2010 and which was purchased in early 2011 by Joy Global Asia Limited. Mr. WILLIAMS was a director of IMM from 16 May 2006 to 4 December 2009. Mr. WILLIAMS has also served in various community and volunteer capacities, including serving as chairman of the American Chamber of Commerce in China in 2005 and 2006.

 



 

Dr. Phil Qiu JIN(金秋), aged 49, is currently the Vice Chairman of the Company and a director of Zhengzhou Siwei, and is involved in for strategy implementation and its overall business operations. Dr. JIN joined Zhengzhou Siwei in September 2009. He obtained an electronic engineering degree from Changchun Institute of Optics and Fine Mechanics, China in 1983, a Master degree in Optical Engineering from the Chinese Academy of Science in 1986, a Doctor of Philosophy from the Department of Ophthalmology and Visual Science of the University of Chicago in 1995 and an MBA from the University of Pittsburgh in 1997. He has more than 20 years experience in the technology industry, including serving as the vice president of Hongguan Technologies (S) Pte, Ltd between July 2001 and October 2002, as well as the president and the global chief executive officer of PSM International between November 2002 and December 2008.

 

Dr. Jin was re-designated as a non-executive director on 3 January 2012.

 

Mr. WANG Fu(王富), aged 51, is currently the Chief Executive Officer of the Company and the chairman of the board of Zhengzhou Siwei, who has been a director of Zhengzhou Siwei since June 2003. He obtained a bachelor’s degree in machinery manufacturing from Liaoning Technical University in 1984, a Master of Business Administration from Renmin’s University of China in 2001 and a Master degree in machinery manufacturing from Liaoning Technical University in 2002. Mr. WANG has more than 20 years experience in the machinery manufacturing industry, in particular coal mining machinery. He has served as a shields designer for Zhengzhou Coal Mining Machinery Factory beginning in 1986.

 

Mr. LI Rubo(李汝波), aged 55, is a director of Zhengzhou Siwei, and is responsible for the Group’s overall strategy planning and strategic development of sales and marketing activities. He obtained a Bachelor’s degree in Surface Mining from Fuxin Mining Institute (currently known as Liaoning Technical University(遼寧工程技術大學)) of Liaoning Province, PRC in 1981 and a Master degree in Mining Engineering from South Dakota School of Mines, U.S. in 1988. From 1995 to May 2006, Mr. Li was the chairman and chief executive officer of GFT, which mainly invested in building material specialty equipment manufacturing and sales related enterprises. In 2004, Mr. Li and Mr. WILLIAMS co-founded IMM, which was initially engaged mainly in the manufacturing of hydraulic roof supports for underground coal mining. Mr. Li was the Vice Chairman of IMM prior to its listing on the Main Board of the Stock Exchange on 10 February 2010 and was a non-executive director of IMM since its listing until 31 January 2011 until it was sold in early 2011.

 

DIRECTORS (continued)

 

Executive Directors (continued)

 

Mr. LEE Jong Dae(李鍾大), aged 52, is an executive Director of the Company, and is involved for the Group’s overall strategic planning, reporting and business development. Mr. Lee received his Bachelor of Arts degree with major in Economics from Haverford College and holds a Juris Doctor degree from Georgetown University, Washington, D.C. He was an executive director of China HealthCare Holdings Limited (Stock Code: 673), a company listed on the Main Board of the Stock Exchange, for the period from July 2004 to August 2009, and a non-executive director of Asian Logic Limited, a company listed on Alternative Investment Market (“AIM”) of the London Stock Exchange for the period from January 2008 to June 2009.

 



 

Independent non-executive Directors

 

Mr. DONG Xiangge(董向閣), aged 62, recently retired in February 2010 as the Communist Party secretary and director of Jilin Coal Mine Safety Surveillance Bureau. Mr. DONG obtained his bachelor degree in economy management from the Central Party School in 1993 and holds a master degree in industry enterprise management from France Mining University in September 1999. In 1991, he became the Communist Party committee deputy secretary of Tiefa Bureau of Mine, the deputy director of Tiefa Bureau of Mine in 1994, the deputy director of Liaoning Coal Industry Bureau from 1994 to 2000, and the deputy director of Liaoning Coal Safety Surveillance Bureau from 2000 to 2002.

 

Mr. CHAN Sze Hon(陳思翰), aged 38, is an independent non-executive Director of the Company. He is an executive Director of Fantasia Holdings Group Co., Limited a company listed on Main Board of Stock Exchange. He is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a fellow member of The Association of Chartered Certified Accountants. He holds a Bachelor of Arts Degree in Accountancy from City University of Hong Kong and a Master Degree in Corporate Finance from the Hong Kong Polytechnic University. He has over 16 years of experience in accounting and financial management and had worked for an international accounting firm in Hong Kong for over 8 years. He is currently a non-executive director of Greater China Holdings Limited(大中華實業控股有限公司)(“Greater China”), a company listed on the Main Board of the Stock Exchange. During the period from 18 July 2005 to 12 October 2008, he was an executive director of Greater China. During the period from 5 December 2007 to 23 November 2011, he was an independent non-executive director of China Mining Resources Group Limited(中國礦業資源集團有限公司), a company listed on the Main Board of the Stock Exchange and during the period from 7 September 2007 to 10 January 2012, he was an independent non-executive director of China AU Group Holdings Limited(中國金豐集團控股有限公司)a company listed on the GEM Board of the Stock Exchange.

 

DIRECTORS (continued)

 

Independent non-executive Directors (continued)

 

Mr. David Marc BOULANGER, aged 47, is a director of Northman Holdings Inc., a company that owns Supplierpipeline Inc., a company engaged in the distribution of both professional and do-it-yourself hardware products and accessories and Lite Products Inc., a company engaged in the manufacture of ladders and other climbing products under proprietary brand names including “LITE” “EAGLE”, and “GRIFFIN”. Mr. BOULANGER holds an honours bachelor of science degree in chemical engineering from University of Waterloo.

 

Mr. Christopher John PARKER, aged 44, is an independent non-executive Director of the Company. He had also been an executive director of Asian Logic Limited, a company listed on AIM of the London Stock Exchange during the period from January 2008 to June 2009, which is engaged in online gaming and multiplayer games, live video streaming, casino gaming and related business. He has been a director of The Tressider-Tuohy Group (Hong Kong) Limited, an independent financial services firm, since 2003.

 

Mr. PARKER was re-designated as a non-executive director on 3 January 2012.

 

SENIOR MANAGEMENT

 

Mr. LEUNG Ka Wo(梁家和), AICPA, aged 38, is the Finance Director and Company Secretary of the Company and a

 



 

director of Zhengzhou Siwei. He holds a Bachelor of Arts Degree in Accountancy from Seattle University, Seattle, Washington, USA. He is a member of the American Institute of Certified Public Accountants. He has over 12 years of experience in auditing and accounting, and had worked as a manager for Deloitte Touche Tohmatsu before joining the Company.

 

Mr. David LENG, aged 65, is the General Counsel of the Company. He holds a Juris Doctor degree from Harvard University, Cambridge, Massachusetts. He has almost thirty years of work experience in Asia, including being a senior lawyer for the Asian Development Bank in Manila, Philippines, and serving as the head of the inhouse legal departments for the Asian operations of Digital Equipment Corporation and Kraft Foods Asia Limited.

 

Directors’ Report

 

The Directors have pleasure in presenting their report and the audited financial statements of the Group for the year ended 31 December 2011.

 

PRINCIPAL ACTIVITIES

 

The principal activity of the Company is investment holding. Details of the principal activities of the subsidiaries are set out in note 22 to the financial statements.

 

RESULTS AND DIVIDENDS

 

The results of the Group for the year ended 31 December 2011 and the state of the affairs of the Group at that date are set out in the financial statements on pages 34 to 106.

 

The Directors do not recommend the payment of a dividend for the year ended 31 December 2011.

 

There is no arrangement under which a shareholder of the Company has waived or agreed to waive any dividends.

 

PROPERTY, PLANT AND EQUIPMENT

 

Details of the movements in the Group’s property, plant and equipment during the year are set out in note 18 to the financial statements.

 

SUBSIDIARIES

 

Particulars of the Company’s subsidiaries as at 31 December 2011 are set out in note 22 to the financial statements.

 

SHARE CAPITAL AND SHARE OPTIONS

 

Details of the movement in the Company’s share capital and share options during the year are set out in notes 35 and 37 to

 



 

the financial statements respectively.

 

RESERVES

 

Movements in the reserves of the Company and the Group during the year are set out in note 36 to the financial statements and the consolidated statement of changes in equity respectively.

 

DISTRIBUTABLE RESERVES

 

At 31 December 2011, the Company had reserves of approximately HK$452.8 million available for cash distribution and/or distribution in specie. Under the Companies Law (Revised) of the Cayman Islands, the share premium of the Company is distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. The share premium may also be distributed in the form of fully paid bonus shares.

 

PRE-EMPTIVE RIGHTS

 

There are no provisions for pre-emptive rights under the Company’s articles of association or the relevant law of the Cayman Islands, being the jurisdiction in which the Company is incorporated, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders to the Company.

 

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

 

Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year under review.

 

MAJOR CUSTOMERS AND SUPPLIERS

 

During the year, the aggregate sales attributable to the Group’s five largest customers accounted for approximately 39% of the total sales for the year and the sales attributable to the largest customer included therein amounted to approximately 13% of the total sales for the year.

 

The aggregate purchases attributable to the Group’s five largest suppliers accounted for approximately 67% of the total purchases for the year and purchases attributable to the largest supplier included therein amounted to approximately 23% of the total purchase for the year.

 

None of the Directors, any of their associates or shareholders (which, to the best knowledge of the Directors, own more than 5% of the Company’s issued share capital) had any beneficial interest in the Group’s five largest customers or suppliers.

 

DIRECTORS

 

The Directors during the year under review and up to the date of this report were as follows:

 



 

Executive directors

Mr. Emory WILLIAMS (Chairman)

Dr. Phil Qiu JIN (Vice Chairman) (Note)

Mr. LI Rubo

Mr. WANG Fu

Mr. LEE Jong Dae

 

Independent non-executive directors

Mr. DONG Xiangge

Mr. CHAN Sze Hon

Mr. David Marc BOULANGER

Mr. Christopher John PARKER (Note)

Mr. JIANG Ming (resigned on 5 September 2011)

 

Note:                   Re-designated as non-executive directors on 3 January 2012.

 

In accordance with article 87(1) and (2) of the Company’s articles of association as resolved by the board of Directors, Mr. Emory WILLIAMS, Mr. LI Rubo and Mr. WANG Fu will retire by rotation and, being eligible, will offer themselves for re-election at the forthcoming annual general meeting of the Company.

 

BIOGRAPHICAL DETAILS OF THE DIRECTORS

 

Biographical details of the Directors are set out on pages 15 to 17 of the annual report.

 

DIRECTORS’ EMOLUMENTS AND THE INDIVIDUALS WITH HIGHEST EMOLUMENTS

 

Details of the emoluments of the Directors and of the individuals with highest emoluments of the Group are set out in note 13 to the financial statements.

 

RETIREMENT BENEFITS SCHEMES

 

Details of the retirement benefits schemes of the Group are set out in note 14 to the financial statements.

 

DIRECTORS’ SERVICE CONTRACTS

 

None of the Directors proposed for re-election at the forthcoming annual general meeting has a service contract with the Company or any of its subsidiaries which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.

 



 

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

 

As at 31 December 2011, the interests of the Directors and the chief executive of the Company in shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (the “SFO”)) which would have to be notified to the Company and the Exchange pursuant to the provisions of Divisions 7 and 8 of Part XV of the SFO (including interests and/or short positions of which they were taken or deemed to have taken under such provisions of the SFO) and/or required to be entered in the register maintained by the Company pursuant to Section 352 of the SFO or which have been be notified to the Company and the Exchange pursuant to Rule 5.46 of the GEM Listing Rules relating to securities transactions by the Directors were as follows:

 

Interests in shares of the Company

 

Name of Directors

 

Capacity 

 

Number and
class of
shares held

 

Approximate
percentage of
issued share
capital

 

 

 

 

 

 

 

 

 

Mr. Emory WILLIAMS

 

Corporate Interest (Note 1)

 

2,667,597,312 ordinary shares (long position)

 

46.90

%

 

 

 

 

 

 

 

 

Mr. LEE Jong Dae

 

Corporate Interest (Note 2)

 

20,000,000 ordinary shares (long position)

 

0.35

%

 

 

 

 

 

 

 

 

Mr. Christopher John PARKER

 

Corporate Interest (Note 3)

 

56,028,000 ordinary shares (long position)

 

0.97

%

 

 

 

 

 

 

 

 

Mr. David Marc BOULANGER

 

Personal

 

900,000 ordinary shares (long position)

 

0.02

%

 

Notes:

 

1.                             2,617,507,028 Shares (representing approximately 46.05% of the issued share capital of the Company) ultimately beneficially owned by the Controlling Shareholders are held through Mining Machinery Ltd., which in turn is owned by Mr. Emory WILLIAMS as to 32.66% and Mr. James Edward THOMPSON III as to 67.34%. 20,500,000 Shares (representing approximately 0.36% of the issued share capital of the Company) ultimately beneficially owned by Mr. Emory WILLIAMS are owned by and registered in the name of Power Castle Development Limited, which in turn is wholly owned by Mr. Emory WILLIAMS. 10,988,000 Shares (representing approximately 0.19% of the issued share capital of the Company) ultimately beneficially owned by Mr. Emory WILLIAMS are held through a third party broker. Mr. Emory WILLIAMS directly beneficially owns 3,200,000 Shares (representing approximately 0.06% of the issued share capital of the Company). 15,402,284

 



 

shares are held by Madam Liu Jie, spouse of Mr. Emory WILLIAMS.

 

2.                             The 20,000,000 Shares ultimately beneficially owned by Mr. LEE Jong Dae are held through Wah Hong Investment Limited, which in turn is indirectly wholly owned by Mr. LEE Jong Dae.

 

3.                             The 56,028,000 Shares ultimately beneficially owned by Mr. Christopher John PARKER are held through Clydesdale International Ltd. which in turn is wholly owned by Mr. Christopher John PARKER.

 

Long positions in underlying shares of equity derivatives of the Company

 

Name of Directors

 

Capacity

 

Description of
equity derivatives
(number and class of
underlying shares)

 

Approximate
percentage
of issued
share capital

 

 

 

 

 

 

 

 

 

Mr. LI Rubo

 

Beneficial owner

 

share options to subscribe for shares (3,200,000 ordinary shares) (Note)

 

0.06

%

 

 

 

 

 

 

 

 

Dr. Phil Qiu JIN

 

Beneficial owner

 

share options to subscribe for shares (51,839,743 ordinary shares) (Note)

 

0.91

%

 

 

 

 

 

 

 

 

Mr. LEE Jong Dae

 

Beneficial owner

 

share options to subscribe for shares (55,639,743 ordinary shares) (Note)

 

0.98

%

 

 

 

 

 

 

 

 

Mr. David Marc BOULANGER

 

Beneficial owner

 

share options to subscribe for shares (1,000,000 ordinary shares) (Note)

 

0.02

%

 

 

 

 

 

 

 

 

Mr. Christopher John PARKER

 

Beneficial owner

 

share options to subscribe for shares (1,000,000 ordinary shares) (Note)

 

0.02

%

 

 

 

 

 

 

 

 

Mr. CHAN Sze Hon

 

Beneficial owner

 

share options to subscribe for shares (600,000 ordinary shares) (Note)

 

0.01

%

 

Note:         The aforesaid share options are classified as “long position” under the SFO. For details of the share options granted, please refer to note 37.

 

Save as disclosed above, as at 31 December 2011, none of the Directors nor the chief executive of the Company had any

 



 

interests or short positions in any shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which would have to be notified to the Company and the Exchange pursuant to the provisions of Divisions 7 and 8 of Part XV of the SFO (including interests and/or short positions which they were taken or deemed to have taken under such provisions of the SFO), or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to Rules 5.46 to 5.68 of the GEM Listing Rules.

 

DIRECTORS’ INTERESTS IN CONTRACTS

 

No Director had a significant beneficial interest, either directly or indirectly, in any contract of significance to the business of the Group to which the Company, its holding company or any of its subsidiaries was a party thereof during the year under review.

 

SUBSTANTIAL SHAREHOLDERS’ AND OTHER PERSON’S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

 

As at 31 December 2011, so far is known to the Directors, the following persons (not being a Director or a chief executive of the Company) had an interest and/or a short position in the shares, underlying shares and debentures of the Company which would fall to be disclosed to the Company and the Exchange pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO and/or required to be entered in the register maintained by the Company pursuant to Section 336 of the SFO and/or were directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group.

 

Name of
substantial shareholder

 

Capacity

 

Number and
class of
shares held

 

Approximate
percentage
of issued
share capital

 

 

 

 

 

 

 

 

 

Mining Machinery Ltd.

 

Beneficial owner

 

2,617,507,028 ordinary shares (long position) (Note)

 

46.05

%

 

Note:                   Mr. Emory WILLIAMS and Mr. James Edward THOMPSON III have 32.66% and 67.34% equity interests, respectively, in Mining Machinery Ltd. Mr. Emory WILLIAMS was appointed as the chairman and an executive Director of the Company.

 

Save as disclosed above, as at 31 December 2011, there was no person who had an interest and/or a short position in the shares and/or underlying shares of the Company which would fall to be disclosed to the Company and the Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO and/or required to be entered in the register maintained by the Company pursuant to Section 336 of the SFO and/or was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group, or any options in respect of such capital.

 



 

SHARE OPTION SCHEME

 

The following table discloses details of options outstanding under the Company’s share option scheme (the “Share Option Scheme”) adopted by the Company on 14 July 2011.

 

 

 

 

 

Number of shares options

 

Name of grantee

 

Option type

 

Outstanding
as at
1 January
 2011

 

Exercised

 

Granted

 

Lapsed

 

Outstanding
as at
31 December
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Emory WILLIAMS

 

A

 

3,200,000

 

(3,200,000

)

 

 

 

Mr. LI Rubo

 

A

 

3,200,000

 

 

 

 

3,200,000

 

Mr. LEE Jong Dae

 

A

 

3,800,000

 

 

 

 

3,800,000

 

 

 

B

 

 

 

51,839,743

 

 

51,839,743

 

Dr. Phil Qiu JIN

 

B

 

 

 

51,839,743

 

 

51,839,743

 

Mr. David Marc BOULANGER

 

A

 

900,000

 

(900,000

)

 

 

 

 

 

B

 

 

 

1,000,000

 

 

1,000,000

 

Mr. Christopher John PARKER

 

A

 

900,000

 

(900,000

)

 

 

 

 

 

B

 

 

 

1,000,000

 

 

1,000,000

 

Mr. CHAN Sze Hon

 

A

 

300,000

 

 

 

 

300,000

 

 

 

B

 

 

 

300,000

 

 

300,000

 

Mr. LEE Sung Min (resigned on 13 October 2010)

 

A

 

900,000

 

(900,000

)

 

 

 

Mr. KIM Beom Soo (resigned on 13 October 2010)

 

A

 

900,000

 

(900,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,100,000

 

(6,800,000

)

105,979,486

 

 

113,279,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees in aggregate

 

A

 

4,900,000

 

(2,500,000

)

 

(400,000

)

2,000,000

 

 

 

B

 

 

 

178,219,233

 

 

178,219,233

 

Advisors and Consultants

 

A

 

19,400,000

 

(14,100,000

)

 

 

5,300,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

38,400,000

 

(23,400,000

)

284,198,719

 

(400,000

)

298,798,719

 

 



 

Option type

 

Date of grant

 

Exercisable period

 

Exercise price

 

 

 

 

 

 

 

HK$

 

 

 

 

 

 

 

 

 

A

 

10 July 2008

 

10 July 2009-9 July 2013

 

0.4

 

B

 

12 August 2011

 

12 August 2012-11 August 2018

 

0.5

 

 

CONNECTED TRANSACTIONS

 

Certain related party transactions as disclosed in note 42 to the financial statements also constituted continuing connected transactions under the GEM Listing Rules which are required to be disclosed in this report in accordance with Chapter 20 of the GEM Listing Rules. During the year ended 31 December 2011, the Group paid interest expenses to the directors, Mr. LI Rubo, Mr. Emory WILLIAMS, Mr. LEE Jong Dae and Mr. Christopher PARKER, of approximately HK$1,767,000, HK$378,000, HK$109,000 and HK$229,000 respectively on loans from the directors.

 

Since each of the percentage ratios (other than the profits ratio) for the annual amount of the above transactions were less than 0.1%, the transactions are defined by the GEM Listing Rules as “De minimis transactions” and are exempt from the reporting, announcement and independent shareholders’ approval requirements.

 

SUFFICIENCY OF PUBLIC FLOAT

 

Based on the information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained a sufficient public float of not less than 25% of the total issued share capital of the Company as required under the GEM Listing Rules throughout the financial period under review and up to the date of this Annual Report.

 

COMPETING INTEREST

 

As at 31 December 2011, none of the Directors or their respective associates (as defined in the GEM Listing Rules) had any interests in any business that competes or may compete with the business of the Group and any other conflicts of interest which any such person has or may have with the Group.

 

CORPORATE GOVERNANCE

 

The Company has applied the principles of the code provisions set out in the Code on Corporate Governance Practices (“CG Code”) contained in Appendix 15 of the GEM Listing Rules and is satisfied that the Company has complied throughout the year ended 31 December 2011 with the CG Code.

 

A report on the principal corporate governance practices adopted by the Company is set out on pages 27 to 31 of this annual report.

 



 

SUBSEQUENT EVENT

 

Subsequent event after 31 December 2011 is disclosed in note 44 to the financial statements.

 

AUDITOR

 

RSM Nelson Wheeler will retire and, being eligible, offer themselves for re-appointment. A resolution for the re-appointment of RSM Nelson Wheeler as auditor of the Company is to be proposed at the forthcoming annual general meeting.

 

There is no change in auditor of the Company in the preceding three years.

 

On behalf of the Board

 

Emory WILLIAMS

Chairman and Executive Director

 

Hong Kong, 30 March 2012

 

Corporate Governance Report

 

CORPORATE GOVERNANCE PRACTICES

 

The Company has established a formal and transparent procedure to protect the interests of the shareholders of the Company. The Company applied the principles and complied with all the code provisions as set out in the Code on Corporate Governance Practices contained in Appendix 15 of the GEM Listing Rules throughout the year under review.

 

DIRECTORS’ SECURITIES TRANSACTIONS

 

The Company has adopted a code of conduct regarding Directors’ securities transactions on terms no less exacting than the required standard of dealings as set out in Rules 5.48 to 5.67 of the GEM Listing Rules. Having made specific enquiry of all Directors, the Directors have complied with such code of conduct and the required standard of dealing and its code of conduct regarding securities transactions by the Directors throughout the year ended 31 December 2011.

 



 

BOARD OF DIRECTORS

 

Directors

 

Attendance

 

 

 

 

 

The Directors held 13 meetings during the year. Details of the attendance are as follows:

 

 

 

 

 

 

 

Executive Directors

 

 

 

Mr. Emory WILLIAMS (Chairman)

 

13/13

 

Dr. Phil Qiu JIN (Vice Chairman) (Note)

 

10/13

 

Mr. LI Rubo

 

9/13

 

Mr. WANG Fu

 

9/13

 

Mr. LEE Jong Dae

 

13/13

 

 

 

 

 

Independent non-executive Directors

 

 

 

Mr. DONG Xiangge

 

8/13

 

Mr. CHAN Sze Hon

 

8/13

 

Mr. David Marc BOULANGER

 

8/13

 

Mr. Christopher John PARKER (Note)

 

8/13

 

Mr. JIANG Ming (resigned on 5 September 2011)

 

6/13

 

 

Note:         Re-designated as non-executive directors on 3 January 2012.

 

Apart from the above regular board meetings of the year, the board of Directors will meet on other occasions when a board-level decision on a particular matter is required. The Directors receive details of agenda items for decision and minutes of committee meetings in advance of each board meeting. The board of Directors has reserved for its decision or consideration matters covering corporate strategy, annual and interim results, Directors’ appointment, succession planning, risk management, major acquisitions, disposals and capital transactions, and other significant operational and financial matters. Major corporate matters that are specifically delegated by the board of Directors to the management include the preparation of annual and interim accounts for board approval before public reporting, execution of business strategies and initiatives adopted by the board of Directors, implementation of adequate systems of internal controls and risk management procedures, and compliance with relevant statutory requirements and rules and regulations.

 

As at 31 December 2011, the Company appointed five independent non-executive Directors who have appropriate and sufficient experience and qualification pursuant to the GEM Listing Rules to carry out their duties so as to protect the interests of shareholders.

 

The board of Directors established audit committee and remuneration committee and their duties were discussed and approved in the board meeting.

 

CHAIRMAN, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

 

The roles of the Chairman, Vice Chairman and Chief Executive Officer of the Company are separated with clear division of responsibilities.

 

·                                Mr. Emory WILLIAMS, the Chairman of the Company, is responsible for the Group’s business development and

 



 

investment decisions.

 

·                                Dr. Phil Qiu JIN(金秋), the Vice Chairman of the Company, is responsible for the Group’s overall strategy planning, business development and significant legal compliance matter.

 

·                                Mr. Wang Fu(王富), the Chief Executive Officer of the Company, is responsible for strategy implementation and overall business operations.

 

NON-EXECUTIVE DIRECTORS

 

Each of Mr. DONG Xiangge, Mr. CHAN Sze Hon, Mr. Christopher John PARKER and Mr. David Marc BOULANGER has been appointed for a term of one year commencing from 12 November 2010, 25 February 2008, 17 August 2007 and 17 August 2007 respectively and may be extended for such period as agreed by the concerned directors and the Company. All of them are subject to retirement by rotation in accordance with the Company’s articles of association.

 

REMUNERATION COMMITTEE AND REMUNERATION OF DIRECTORS

 

Remuneration Committee Responsibilities

 

·                                The remuneration committee is to review and formulate policies in respect of remuneration structure for all directors of the Company and senior management and make recommendations to the Board for its consideration.

 

·                                The remuneration committee should consult the chairman of the Board and/or chief executive about their remuneration proposals for other executive directors. The remuneration committee should have access to professional advice if necessary.

 

The remuneration committee meets at least once a year. The terms of reference of the remuneration committee are posted on the Company’s website (www.eraholdings.com.hk)

 

Full minutes of remuneration committee meetings are kept by a duly appointed secretary of the meeting. Draft and final versions of minutes of the remuneration committee meetings are sent to all members of the remuneration committee for their comments and records, in both cases within a reasonable time after the meeting.

 

Members of the remuneration committee included:

 

Mr. Emory WILLIAMS (resigned as the chairman of remuneration committee on 30 March 2012)

Mr. CHAN Sze Hon

Mr. David Marc BOULANGER (appointed as the chairman of remuneration committee on 30 March 2012)

Mr. Christopher John PARKER (resigned as remuneration committee member on 3 January 2012)

 

The remuneration committee has held one meeting during the year. Details of the attendance of the remuneration committee meetings are as follows:

 



 

Members

 

Attendance

 

 

 

 

 

Mr. Emory WILLIAMS (resigned as the chairman of remuneration committee on 30 March 2012)

 

1/1

 

Mr. CHAN Sze Hon

 

1/1

 

Mr. David Marc BOULANGER (appointed as the chairman of remuneration committee on 30 March 2012)

 

1/1

 

Mr. Christopher John PARKER (resigned as remuneration committee member on 3 January 2012)

 

1/1

 

 

The remuneration committee of the Company has considered and reviewed the existing terms of employment contracts of the executive Directors and appointment letters of the independent non-executive Directors with reference to the factors including salaries paid by comparable companies, time commitment and responsibilities of the Directors, employment conditions elsewhere in the Group and desirability of performance-based remuneration. The remuneration committee of the Company considers that the existing terms of employment contracts of the executive Directors and appointment letters of the independent non-executive Directors are fair and reasonable.

 

Pursuant to the service agreements entered into during 2011 between the Company and the following directors, the term of service is one year or upon the completion of closing any follow up matters relating to the voluntary conditional offer. Details of the voluntary conditional offer are disclosed in the announcement dated 10 November 2011.

 

Mr. Emory WILLIAMS

 

HK$650,000 per annum

Mr. LI Rubo

 

HK$650,000 per annum

Dr. Phil Qiu JIN

 

RMB1,500,000 per annum

Mr. WANG Fu

 

RMB1,500,000 per annum

Mr. LEE Jong Dae

 

HK$1,800,000 per annum

 

NOMINATION OF DIRECTORS

 

The board of Directors considers the past performance and qualification of the candidates for Directors, general market conditions and the Company’s articles of association in selecting and recommending candidates for directorship during the year under review.

 

The board of Directors held a meeting for nomination of Directors on 28 March 2011. Details of the attendance of the meetings are as follows:

 

Directors

 

Attendance

 

 

 

 

 

Executive Directors

 

 

 

Mr. Emory WILLIAMS (Chairman)

 

1/1

 

Dr. Phil Qiu JIN (Vice Chairman) (Note)

 

1/1

 

 



 

Mr. LI Rubo

 

1/1

 

Mr. WANG Fu

 

1/1

 

Mr. LEE Jong Dae

 

1/1

 

 

 

 

 

Independent non-executive Directors

 

 

 

Mr. DONG Xiangge

 

1/1

 

Mr. CHAN Sze Hon

 

1/1

 

Mr. David Marc BOULANGER

 

1/1

 

Mr. Christopher John PARKER (Note)

 

1/1

 

Mr. JIANG Ming (resigned on 5 September 2011)

 

1/1

 

 

Note:         Re-designated as non-executive directors on 3 January 2012.

 

During the meeting, the board of Directors considered and resolved that all the existing Directors shall be recommended to be retained by the Company.

 

DIRECTORS’ RESPONSIBILITY FOR FINANCIAL STATEMENT

 

The Directors acknowledge their responsibility for the preparation of the consolidated financial statements, which give a true and fair view of the results and financial position of the Group. The auditors are responsible to form an independent opinion based on the audit, on the consolidated financial statements prepared by the Directors and report the opinion solely to the shareholders of the Company.

 

The Directors are not aware of any material uncertainties relating to events or conditions which may cast significant doubt upon the Company’s ability to continue as a going concern.

 

COMMUNICATION WITH SHAREHOLDERS AND INVESTORS

 

The Company believes that maintaining a high level of transparency is a key to enhancing investor relations. It is committed to a policy of open and timely disclosure of corporate information to its shareholders and investors.

 

The Company updates its shareholders on its latest business developments and financial performance through its annual, interim and quarterly report and notices, announcements and circulars. The corporate website of the Company (www.eraholdings.com.hk) provides a communication platform to the public and the shareholders.

 

AUDITOR’S REMUNERATION

 

The Company’s external auditor is RSM Nelson Wheeler. The Audit Committee is responsible for considering the appointment of the external auditor and reviewing any non-audit functions performed by the external auditor, including whether such non-audit functions could lead to any potential material adverse effect on the Group. During the year under review, the Group has paid an aggregate of approximately HK$96,000 to the external auditor for their non-audit services including taxation and other advisory services.

 



 

AUDIT COMMITTEE

 

As required by Rules 5.28 to 5.33 of the GEM Listing Rules, the Company has established an audit committee with written terms of reference which deal clearly with its authority and duties. Its principal duties are to review and supervise the Group’s financial reporting process and internal control systems.

 

Full minutes of audit committee meetings are kept by a duly appointed secretary of the meeting. Draft and final versions of minutes of the audit committee meetings are sent to all members of the audit committee for their comments and records, in both cases within a reasonable time after the meeting.

 

Members of the audit committee included:

 

Mr. CHAN Sze Hon

Mr. David Marc BOULANGER

Mr. DONG Xiangge (appointed as audit committee member on 3 January 2012)

Mr. Christopher John PARKER (resigned as audit committee member on 3 January 2012)

 

The audit committee held four meetings during the year. Details of the attendance of the audit committee meetings are as follows:

 

Members

 

Attendance

 

 

 

 

 

Mr. CHAN Sze Hon

 

4/4

 

Mr. Christopher John PARKER (resigned as audit committee member on 3 January 2012)

 

4/4

 

Mr. David Marc BOULANGER

 

4/4

 

Mr. DONG Xiangge (appointed as audit committee member on 3 January 2012)

 

0/4

 

 

The Group’s audited results for the year ended 31 December 2011 and the unaudited results for the financial statements published during the year ended 31 December 2011 have been reviewed by the audit committee, which was of the opinion that the preparation of such results complied with the applicable accounting standards, the GEM Listing Rules and legal requirements, and that adequate disclosures have been made.

 

The audit committee of the Company considered that the existing and proposed terms in relation to the appointment of the Group’s external auditor are fair and reasonable.

 

INTERNAL CONTROL

 

The board of Directors have overall responsibilities for maintaining and reviewing the effectiveness of the system of internal control of the Group. The internal control system is to safeguard the assets of the Group and the shareholders’ investment and to ensure the reliability of financial reporting as well as compliance with the relevant requirements of the GEM Listing Rules. During the year ended 31 December 2011, the board of Directors had reviewed the effectiveness of the system of internal control of the Group. The review had covered all material aspects of internal control including financial, operational and compliance controls and risk management functions of the Group.

 



 

Independent Auditor’s Report

 

INDEPENDENT AUDITOR’S REPORT

TO THE SHAREHOLDERS OF

ERA MINING MACHINERY LIMITED

(FORMERLY KNOWN AS ERA HOLDINGS GLOBAL LIMITED)

(Incorporated in the Cayman Islands with limited liability)

 

We have audited the consolidated financial statements of ERA Mining Machinery Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 34 to 106, which comprise the consolidated statement of financial position as at 31 December 2011, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

 

DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

 

The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

AUDITOR’S RESPONSIBILITY

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

AUDITOR’S RESPONSIBILITY (continued)

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the

 



 

appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

OPINION

 

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2011, and of the Group’s results and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

 

RSM Nelson Wheeler

Certified Public Accountants

Hong Kong

 

30 March 2012

 

Consolidated Statement of Comprehensive Income

 

 

 

 

 

2011

 

2010

 

 

 

Note

 

HK$’000

 

HK$’000

 

 

 

 

 

 

 

 

 

Turnover

 

7

 

1,953,342

 

1,768,913

 

Cost of goods sold

 

 

 

(1,653,310

)

(1,420,110

)

 

 

 

 

 

 

 

 

Gross profit

 

 

 

300,032

 

348,803

 

Other income

 

8

 

97,275

 

69,933

 

Selling expenses

 

 

 

(96,649

)

(104,622

)

Administrative expenses

 

 

 

(159,846

)

(85,371

)

Fair value loss on derivative components of convertible bond

 

31

 

 

(10,790

)

Other operating expenses

 

 

 

(12,143

)

(3,122

)

 

 

 

 

 

 

 

 

Profit from operations

 

 

 

128,669

 

214,831

 

Finance costs

 

10

 

(138,785

)

(40,953

)

Share of losses of jointly controlled entities

 

23

 

(196

)

 

 

 

 

 

 

 

 

 

(Loss)/profit before tax

 

 

 

(10,312

)

173,878

 

Income tax expense

 

11

 

(3,941

)

(38,779

)

 

 

 

 

 

 

 

 

(Loss)/profit for the year attributable to the owners of the Company

 

16

 

(14,253

)

135,099

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Exchange differences on translating foreign operations

 

 

 

36,817

 

20,397

 

Exchange differences reclassified to profit or loss on disposal of a subsidiary

 

 

 

 

506

 

 

 

 

 

 

 

 

 

Other comprehensive income for the year, net of tax:

 

 

 

36,817

 

20,903

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year attributable to the owners of the Company

 

 

 

22,564

 

156,002

 

 

 

 

 

 

 

 

 

 

 

 

 

HK Cents

 

HK Cents

 

(Loss)/earnings per share

 

17

 

 

 

 

 

Basic

 

 

 

(0.25

)

3.07

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

(0.25

)

3.06

 

 



 

Consolidated Statement of Financial Position

 

 

 

 

 

2011

 

2010

 

 

 

Note

 

HK$’000

 

HK$’000

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

18

 

623,952

 

345,264

 

Prepaid land lease payments

 

19

 

28,815

 

13,691

 

Goodwill

 

20

 

530,776

 

461,866

 

Intangible assets

 

21

 

5,585

 

6,965

 

Investments in jointly controlled entities

 

23

 

26,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,215,299

 

827,786

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

24

 

675,361

 

202,014

 

Trade and other receivables

 

25

 

2,655,252

 

1,914,153

 

Prepaid land lease payments

 

19

 

690

 

364

 

Current tax assets

 

 

 

 

9

 

Pledged bank deposits

 

26

 

777,180

 

334,109

 

Bank and cash balances

 

26

 

338,135

 

102,664

 

 

 

 

 

 

 

 

 

 

 

 

 

4,446,618

 

2,553,313

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

27

 

2,623,678

 

1,535,710

 

Borrowings

 

28

 

1,205,969

 

496,442

 

Provisions

 

29

 

4,308

 

5,670

 

Finance lease payables

 

30

 

32,924

 

22,189

 

Derivative components of convertible bond

 

31

 

 

23,967

 

Convertible bond

 

31

 

 

12,761

 

Amounts due to directors

 

32

 

96,579

 

99

 

Amount due to a third party

 

33

 

385,000

 

 

Current tax liabilities

 

 

 

8,250

 

40,626

 

 

 

 

 

 

 

 

 

 

 

 

 

4,356,708

 

2,137,464

 

 

 

 

 

 

 

 

 

Net current assets

 

 

 

89,910

 

415,849

 

 

 

 

 

 

 

 

 

Total assets less current liabilities

 

 

 

1,305,209

 

1,243,635

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease payables

 

30

 

4,999

 

21,310

 

 

 

 

 

 

 

 

 

NET ASSETS

 

 

 

1,300,210

 

1,222,325

 

 

 

 

 

 

 

 

 

Capital and reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued equity

 

35

 

847,365

 

846,632

 

Reserves

 

36

 

452,845

 

375,693

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

 

1,300,210

 

1,222,325

 

 



 

The financial statements on pages 34 to 106 were approved and authorised for issue by the Board of Directors on 30 March 2012 and are signed on its behalf by

 

Emory WILLIAMS

 

WANG Fu

Chairman

 

Executive Director

 

Consolidated Statement of Changes in Equity

 

 

 

Issued
equity

 

Share
premium
account

 

Statutory
reserve

 

Share
option
reserve

 

Exchange
reserve

 

Retained
profits

 

Total

 

 

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

HK$’000

 

 

 

(Note 35)

 

(Note 36(c)(i))

 

(Note 36(c)(iv))

 

(Note 36(c)(iii))

 

(Note 36(c)(ii))

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2010

 

1

 

 

35,246

 

 

11,675

 

172,770

 

219,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

20,903

 

135,099

 

156,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer

 

 

 

25,536

 

 

 

(25,536

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalisation of an amount due to shareholder of Hong Kong Siwei Holdings Limited as share capital

 

23,010

 

 

 

 

 

 

23,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arising from reverse takeover

 

823,621

 

 

 

 

 

 

823,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in equity for the year

 

846,631

 

 

25,536

 

 

20,903

 

109,563

 

1,002,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2010 and 1 January 2011

 

846,632

 

 

60,782

 

 

32,578

 

282,333

 

1,222,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

36,817

 

(14,253

)

22,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer

 

 

 

11,433

 

 

 

(11,433

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible bond

 

499

 

36,246

 

 

 

 

 

36,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issue of shares

 

234

 

9,126

 

 

 

 

 

9,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of share-based payments

 

 

 

 

9,216

 

 

 

9,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in equity for the year

 

733

 

45,372

 

11,433

 

9,216

 

36,817

 

(25,686

)

77,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2011

 

847,365

 

45,372

 

72,215

 

9,216

 

69,395

 

256,647

 

1,300,210

 

 



 

Consolidated Statement of Cash Flows

 

 

 

 

 

2011

 

2010

 

 

 

Note

 

HK$’000

 

HK$’000

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit before tax

 

 

 

(10,312

)

173,878

 

Adjustments for:

 

 

 

 

 

 

 

Allowance for trade and other receivables

 

 

 

41,472

 

2,471

 

Allowance for inventories

 

 

 

11,559

 

2,853

 

Amortisation of intangible assets

 

 

 

1,867

 

1,583

 

Amortisation of prepaid land lease payments

 

 

 

682

 

353

 

Depreciation

 

 

 

28,130

 

18,699

 

Fair value loss on derivative components of convertible bonds

 

31

 

 

10,790

 

Gain on disposal of a subsidiary

 

38(b)

 

(110

)

(1,583

)

Gain on disposals of property, plant and equipment

 

 

 

(391

)

(234

)

Net (gain)/loss on cross guarantee

 

 

 

(3,562

)

3,629

 

Provision of warranty expense

 

 

 

1,995

 

 

Interest expenses

 

 

 

137,367

 

38,892

 

Interest income

 

 

 

(15,794

)

(3,900

)

 

 

 

 

 

 

 

 

Operating profit before working capital changes

 

 

 

192,903

 

247,431

 

Increase in inventories

 

 

 

(466,669

)

(14,306

)

Increase in trade and other receivables

 

 

 

(699,502

)

(309,799

)

(Increase)/decrease in amount due from a director

 

 

 

(23

)

23

 

Decrease in amounts due from related companies

 

 

 

 

48,704

 

Increase in trade and other payables

 

 

 

917,480

 

374,340

 

Decrease in amount due to a substantial shareholder

 

 

 

 

(8

)

Increase in amounts due to directors

 

 

 

 

99

 

Decrease in amounts due to related companies

 

 

 

 

(6,133

)

 

 

 

 

 

 

 

 

Cash (used in)/generated from operations

 

 

 

(55,811

)

340,351

 

Interest paid

 

 

 

(133,855

)

(30,009

)

Tax paid

 

 

 

(37,637

)

(21,471

)

 

 

 

 

 

 

 

 

Net cash (used in)/generated from operating activities

 

 

 

(227,303

)

288,871

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in pledged bank deposits

 

 

 

(425,209

)

(231,410

)

Purchases of property, plant and equipment

 

 

 

(265,431

)

(154,533

)

Payment for prepaid land leases

 

 

 

(15,416

)

 

Purchases of intangible assets

 

 

 

(235

)

(4,707

)

Net cash outflow on disposal of a subsidiary

 

38(b)

 

(690

)

 

Interest received

 

 

 

15,794

 

3,900

 

Acquisition of subsidiaries

 

38(a)

 

5,457

 

1,561

 

Proceeds from disposal of property, plant and equipment

 

 

 

1,074

 

4,793

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

 

(684,656

)

(380,396

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank borrowings raised

 

 

 

1,192,550

 

727,504

 

Borrowings from a third party

 

 

 

385,000

 

 

Amounts due to directors

 

 

 

96,500

 

 

Proceeds from concession of share options

 

 

 

9,360

 

 

Repayment of bank borrowings

 

 

 

(509,721

)

(390,661

)

Repayment of finance lease payables

 

 

 

(31,830

)

(13,563

)

Repayment of other loan

 

 

 

 

(112,070

)

Repayment of directors

 

 

 

 

(40,518

)

Repayment of a related company

 

 

 

 

(11,264

)

 

 

 

 

 

 

 

 

Net cash generated from financing activities

 

 

 

1,141,859

 

159,428

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

 

229,900

 

67,903

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes

 

 

 

5,571

 

3,814

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

 

102,664

 

30,947

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

 

 

338,135

 

102,664

 

 

 

 

 

 

 

 

 

ANALYSIS OF CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank and cash balances

 

 

 

338,135

 

102,664

 

 



 

Notes to the Financial Statements

 

1.                             GENERAL INFORMATION

 

The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 26 May 2000 under the Companies Law (Revised) of the Cayman Islands. The address of registered office and principal place of business of the Company are disclosed in the Corporate Information section of the annual report. The Company’s shares are listed on The Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.

 

The principal activity of the Company is investment holding. The principal activities of the Company’s subsidiaries are set out in note 22 to the financial statements.

 



 

2.                             REVERSE TAKEOVER

 

On 30 September 2010, a very substantial acquisition and reverse takeover involving a new listing application were completed. The Group acquired from Mining Machinery Ltd (“MML”). The entire issued share capital of Hong Kong Siwei Holdings Limited (“HK Siwei”), a company incorporated in Hong Kong with limited liability, and its subsidiary, Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co., Ltd (“Zhengzhou Siwei”) (collectively as “Siwei Group”).

 

The details of the above transactions are set out in the circular to shareholders of the Company dated 30 June 2010.

 

The reverse takeover transaction (the “Transaction”) has been accounted for as a reverse takeover under Hong Kong Financial Reporting Standard 3 (Revised) (“HKFRS 3 (Revised)”) “Business Combinations” since the issuance of the consideration shares resulted in Mining Machinery Ltd. controlling the Company. For accounting purposes and in accordance with HKFRS 3 (Revised), in preparing these consolidated financial statements, the Siwei Group is treated as the acquirer while the Company and its subsidiaries, prior to the Transaction, which were mainly engaged in provision of corporate secretarial services, and distribution of films and sub-licensing of film rights (referred thereafter to as the “Services Group”), were deemed to have been acquired by the Siwei Group as acquiree. The comparative figures of these consolidated financial statements have been prepared as a continuation of the consolidated financial statements of the Siwei Group and accordingly:

 

(i)                           The assets and liabilities of the Siwei Group are recognised and measured at their pre-combination carrying amounts;

 

(ii)                        The assets and liabilities of the Services Group are recognised and measured initially at their fair value in accordance with the HKFRS 3 (Revised).

 

2.                             REVERSE TAKEOVER (continued)

 

The Siwei Group has applied the acquisition method to account for the acquisition of the Services Group. In applying the acquisition method, the separately identifiable assets and liabilities of the Services Group were recorded in the consolidated statement of financial position at their fair value at the completion date of the Transaction. In addition, goodwill arising on the acquisition of the Services Group of approximately HK$458,358,000, being the excess of the cost of acquisition of the Services Group over the sum of the fair values of the separately identifiable assets less liabilities of the Services Group, was recorded in 2010. The results of the Services Group have been consolidated to the Group’s consolidated financial statements since the completion date of the Transaction.

 

3.                             ADOPTION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

 

In the current year, the Group has adopted all the new and revised Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are relevant

 



 

to its operations and effective for its accounting year beginning on 1 January 2011. HKFRSs comprise Hong Kong Financial Reporting Standards; Hong Kong Accounting Standards (“HKAS”); and Interpretations. The adoption of these new and revised HKFRSs did not result in significant changes to the Group’s accounting policies and amounts reported for the current year and prior years.

 

The Group has not applied the new HKFRSs that have been issued but are not yet effective. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a material impact on its results of operations and financial position.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES

 

These financial statements have been prepared in accordance with HKFRSs issued by the HKICPA, accounting principles generally accepted in Hong Kong and the applicable disclosures required by the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”) and by the Hong Kong Companies Ordinance.

 

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivatives which are carried at their fair values.

 

The preparation of financial statements in conformity with HKFRSs requires the use of certain key assumptions and estimates. It also requires the directors of the Company to exercise its judgements in the process of applying the accounting policies. The areas involving critical judgements and areas where assumptions and estimates are significant to these financial statements are disclosed in note 5 to the financial statements .

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The significant accounting policies applied in the preparation of these financial statements are set out below.

 

(a)                        Consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31 December. Subsidiaries are entities over which the Group has control. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group has control.

 

Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date the control ceases.

 

The gain or loss on the disposal of a subsidiary that results in a loss of control represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that subsidiary and (ii) the Company’s share of the net assets of that subsidiary plus any remaining goodwill relating to that subsidiary and any related accumulated exchange reserve.

 



 

Intragroup transactions, balances and unrealised profits are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

Non-controlling interests represent the equity in subsidiaries not attributable, directly or indirectly, to the Company. Non-controlling interests are presented in the consolidated statement of financial position and consolidated statement of changes in equity within equity. Non-controlling interests are presented in the consolidated statement of comprehensive income as an allocation of profit or loss and total comprehensive income for the year between the non-controlling shareholders and owners of the Company.

 

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling shareholders even if this results in the non-controlling interests having a deficit balance.

 

Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e. transactions with owners in their capacity as owners). The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(b)                       Business combination and goodwill

 

The acquisition method is used to account for the acquisition of a subsidiary in a business combination. The cost of acquisition is measured at the acquisition-date fair value of the assets given, equity instruments issued, liabilities incurred and contingent consideration. Acquisition-related costs are recognised as expenses in the periods in which the costs are incurred and the services are received. Identifiable assets and liabilities of the subsidiary in the acquisition are measured at their acquisition-date fair values.

 

The excess of the cost of acquisition over the Company’s share of the net fair value of the subsidiary’s identifiable assets and liabilities is recorded as goodwill. Any excess of the Company’s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss as a gain on bargain purchase which is attributed to the Company.

 

In a business combination achieved in stages, the previously held equity interest in the subsidiary is remeasured at its acquisition-date fair value and the resulting gain or loss is recognised in consolidated profit or loss. The fair value is added to the cost of acquisition to calculate the goodwill.

 

If the changes in the value of the previously held equity interest in the subsidiary were recognised in other

 



 

comprehensive income (for example, available-for-sale investment), the amount that was recognised in other comprehensive income is recognised on the same basis as would be required if the previously held equity interest were disposed of.

 

Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is measured at cost less accumulated impairment losses. The method of measuring impairment losses of goodwill is the same as that of other assets as stated in the accounting policy (u) below. Impairment losses of goodwill are recognised in consolidated profit or loss and are not subsequently reversed. Goodwill is allocated to cash-generating units that are expected to benefit from the synergies of the acquisition for the purpose of impairment testing.

 

The non-controlling interests in the subsidiary are initially measured at the non-controlling shareholders’ proportionate share of the net fair value of the subsidiary’s identifiable assets and liabilities at the acquisition date.

 

4.                            SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(c)                        Joint venture

 

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over the economic activity when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the “venturers”).

 

A jointly controlled entity is a joint venture that involves the establishment of a separate entity in which each venturer has an interest.

 

Investment in a jointly controlled entity is accounted for in the consolidated financial statements by the equity method and is initially recognised at cost. Identifiable assets and liabilities of the jointly controlled entity in an acquisition are measured at their fair values at the acquisition date. The excess of the cost of acquisition over the Group’s share of the net fair value of the jointly controlled entity’s identifiable assets and liabilities is recorded as goodwill. The goodwill is included in the carrying amount of the investment and is tested for impairment together with the investment at the end of each reporting period when there is objective evidence that the investment is impaired. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss.

 

The Group’s share of a jointly controlled entity’s post-acquisition profits or losses is recognised in consolidated profit or loss, and its share of the post-acquisition movements in reserves is recognised in the consolidated reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in a jointly controlled entity equals or exceeds its interest in the jointly controlled entity, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the jointly

 



 

controlled entity. If the jointly controlled entity subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

 

The gain or loss on the disposal of a jointly controlled entity that results in a loss of joint control represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that jointly controlled entity and (ii) the Group’s share of the net assets of that jointly controlled entity plus any remaining goodwill relating to that jointly controlled entity and any related accumulated foreign currency translation reserve.

 

4.                            SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(c)                        Joint venture (continued)

 

Unrealised profits on transactions between the Group and its jointly controlled entities are eliminated to the extent of the Group’s interests in the jointly controlled entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of jointly controlled entities have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(d)                       Foreign currency translation

 

(i)                                     Functional and presentation currency

 

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency.

 

(ii)                                  Transactions and balances in each entity’s financial statements

 

Transactions in foreign currencies are translated into the functional currency on initial recognition using the exchange rates prevailing on the transaction dates. Monetary assets and liabilities in foreign currencies are translated at the exchange rates at the end of each reporting period. Gains and losses resulting from this translation policy are included in profit or loss.

 

Non-monetary items that are measured at fair values in foreign currencies are translated using the exchange rates at the dates when the fair values are determined.

 

When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss is recognised in other comprehensive income. When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised in profit or loss.

 



 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(d)                       Foreign currency translation (continued)

 

(iii)                               Translation on consolidation

 

The results and financial position of all the Group entities that have a functional currency different from the Company’s presentation currency are translated into the Company’s presentation currency as follows:

 

·                                Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

 

·                                Income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the exchange rates on the transaction dates); and

 

·                                All resulting exchange differences are recognised in the exchange reserve.

 

On consolidation, exchange differences arising from the translation of the net investment in foreign entities and of borrowings are recognised in the exchange reserve. When a foreign operation is sold, such exchange differences are recognised in consolidated profit or loss as part of the gain or loss on disposal.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(e)                        Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.

 

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss during the period in which they are incurred.

 

Depreciation of property, plant and equipment is calculated at rates sufficient to write off their cost less their residual values over the estimated useful lives on a straight-line basis. The principal annual rates are as follows:

 



 

Buildings

 

2% – 5%

Plant and machinery

 

10% – 20%

Office equipment

 

20% – 25%

Motor vehicles

 

20%

 

The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at end of each reporting period.

 

Construction in progress represents buildings under construction and plant and machinery pending installation, and is stated at cost less impairment losses. Depreciation begins when the relevant assets are available for use.

 

The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(f)                          Leases

 

(i)                                     Operating leases

 

Leases that do not substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as operating leases. Lease payments (net of any incentives received from the lessor) are recognised as an expense on a straight-line basis over the lease term.

 

(ii)                                  Finance leases

 

Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as finance leases. At the commencement of the lease term, a finance lease is capitalised at the lower of the fair value of the leased asset and the present value of the minimum lease payments, each determined at the inception of the lease.

 

The corresponding liability to the lessor is included in the statement of financial position as finance lease payables. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

Assets under finance leases are depreciated the same as owned assets.

 

(g)                       Research and development expenditure

 



 

Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s products development is recognised only if all of the following conditions are met:

 

·                               An asset is created that can be identified (such as software and new processes);

 

·                               It is probable that the asset created will generate future economic benefits; and

 

·                               The development cost of the asset can be measured reliably.

 

Internally generated intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over their estimated useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(h)                       Intangible assets

 

Intangible assets represented technical know-how and computer software acquired and are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over their estimated useful lives which are ranging from three to ten years.

 

(i)                           Inventories

 

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour and an appropriate proportion of all production overhead expenditure, and where appropriate, subcontracting charges. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

 

(j)                           Recognition and derecognition of financial instruments

 

Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instruments.

 

Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire; the Group transfers substantially all the risks and rewards of ownership of the assets; or the Group neither transfers nor retains substantially all the risks and rewards of ownership of the assets but has not retained control on the assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised in other comprehensive income is recognised in the profit or loss.

 



 

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in the profit or loss.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(k)                        Trade and other receivables

 

Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is the difference between the receivables’ carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate computed at initial recognition. The amount of the allowance is recognised in the profit or loss.

 

Impairment losses are reversed in subsequent periods and recognised in profit or loss when an increase in the receivables’ recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the receivables at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.

 

(l)                           Cash and cash equivalents

 

For the purpose of the statement of cash flows, cash and cash equivalents represent cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term highly liquid investments which are readily convertible into known amounts of cash and subject to an insignificant risk of change in value. Bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents.

 

(m)                     Financial liabilities and equity instruments

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument under HKFRSs. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

 

Borrowings

 

Borrowings are recognised initially at fair value, net of transaction costs incurred, and subsequently

 



 

measured at amortised cost using the effective interest method.

 

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(m)                     Financial liabilities and equity instruments (continued)

 

Financial guarantee contract liabilities

 

Financial guarantee contract liabilities are measured initially at their fair values and are subsequently measured at the higher of:

 

·                               the amount of the obligations under the contracts, as determined in accordance with HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”; and

 

·                               the amount initially recognised less cumulative amortisation recognised in profit or loss on a straight-line basis over the terms of the guarantee contracts.

 

Convertible bonds

 

Convertible bonds which entitle the holder to convert into equity instruments, other than into a fixed number of equity instruments at a fixed conversion price, are regarded as combined instruments consist of a liability and a derivative component. At the date of issue, the fair value of the derivative component is determined using an option pricing model; and this amount is carried as a derivative liability until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the liability components and is carried as a liability at amortised cost using the effective interest rate method until extinguished on conversion or redemption. The derivative components is measured at fair value with gains and losses recognised in profit or loss.

 

Transaction costs are apportioned between the liability and derivative components of the convertible bonds based on the allocation of proceeds to the liability and derivative components on initial recognition.

 

Trade and other payables

 

Trade and other payables are stated initially at their fair value and subsequently measured at amortised cost using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

 

Equity instruments

 

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

 



 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(n)                       Revenue recognition

 

Revenue is measured at the fair value of the consideration received or receivable and is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably.

 

Revenue from the sales of manufactured goods and trading of raw material are recognised on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the title has passed to the customers and the goods are delivered or the customers have taken delivery of the goods.

 

Consultancy fee income is recognised when the service is rendered.

 

Revenue from the provision of accounting, management and consultancy services is recognised when the services are rendered.

 

Interest income is recognised on a time-proportion basis using the effective interest method.

 

Revenue from financial guarantee contracts issued is recognised on a straight-line basis over the term of the guarantee contracts.

 

(o)                       Employee benefits

 

(i)                                     Employee leave entitlements

 

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the end of the reporting period.

 

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

 

(ii)                                  Pension obligations

 

The Group contributes to defined contribution retirement schemes which are available to all employees. Contributions to the schemes by the Group and employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to profit or loss represents contributions payable by the Group to the funds.

 

(iii)                               Termination benefits

 

Termination benefits are recognised when, and only when, the Group demonstrably commits itself

 



 

to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(p)                       Share-based payments

 

The Group issues equity-settled share-based payments to certain directors, employees and consultants.

 

Equity-settled share-based payments to directors and employees are measured at fair value (excluding the effect of non market-based vesting conditions) of the equity instruments at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for effect of non market-based vesting conditions.

 

Equity-settled share-based payments to consultants are measured at the fair value of the services rendered or if the fair value of the services rendered cannot be reliably measured, at the fair value of the equity instruments granted. The fair value is measured at the date the Group receives the services and recognised as an expense.

 

(q)                       Borrowing costs

 

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

 

To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

 

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

 

(r)                          Government grants

 

A government grant is recognised when there is reasonable assurance that the Group will comply with the conditions attached to it and that the grant will be received.

 

Government grants relating to income are deferred and recognised in profit or loss over the period to match

 



 

them with the costs they are intended to compensate.

 

Government grants that become receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

 

Government grants relating to the purchase of assets are recorded as deferred income and recognised in profit or loss on a straight-line basis over the useful lives of the related assets.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(s)                        Taxation

 

Income tax represents the sum of the current tax and deferred tax.

 

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit recognised in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of each reporting period.

 

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences, unused tax losses or unused tax credits can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition other than in a business combination of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates that have been enacted or substantively enacted by the end of reporting period. Deferred tax is recognised in profit or loss, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax

 



 

assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(t)                          Related parties

 

A related party is a person or entity that is related to the Group.

 

(A)                   A person or a close member of that person’s family is related to the Group if that person:

 

(i)                         has control or joint control over the Group;

 

(ii)                      has significant influence over the Group; or

 

(iii)                   is a member of the key management personnel of the Company or of a parent of the Company.

 

(B)                     An entity is related to the Group (reporting entity) if any of the following conditions applies:

 

(i)                         The entity and the Company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

 

(ii)                      One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

 

(iii)                   Both entities are joint ventures of the same third party.

 

(iv)                  One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

 

(v)                     The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group. If the Group is itself such a plan, the sponsoring employers are also related to the Group.

 

(vi)                  The entity is controlled or jointly controlled by a person identified in (A).

 

(vii)               A person identified in (A)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

 



 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(u)                       Impairment of assets

 

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets except goodwill, inventories and receivables to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in the profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

4.                             SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(v)                       Provisions and contingent liabilities

 

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

 

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow is remote.

 

(w)                     Events after the reporting period

 

Events after the reporting period that provide additional information about the Group’s position at the end

 



 

of the reporting period or those that indicate the going concern assumption is not appropriate are considered adjusting events and are reflected in the financial statements. Events after the end of reporting period that are not adjusting events are disclosed in the notes to the financial statements when material.

 

5.                             CRITICAL JUDGEMENTS AND KEY ESTIMATES

 

Critical judgements in applying accounting policies

 

In the process of applying the accounting policies, the directors of the Company have made the following judgements that have the most significant effect on the amounts recognised in the financial statements.

 

Legal titles of certain buildings

 

As stated in note 18 to the financial statements, the titles of certain buildings in the PRC have not been obtained by the Group as at 31 December 2011. These buildings are erected on lands which the Group did not have the relevant land use right. Despite the fact that the Group did not have the legal titles of these buildings, the directors of Company determine to recognise these buildings as property, plant and equipment on the ground that the Group is in substance controlling these buildings.

 

Key sources of estimation uncertainty

 

The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

 

(a)      Property, plant and equipment and intangible assets

 

The Group determines the estimated useful lives, residual values and related depreciation and amortisation charges for the Group’s property, plant and equipment and intangible assets. These estimates are based on the historical experience of the actual useful lives of property, plant and equipment and intangible assets of similar nature and functions. The Group will revise the depreciation and amortisation charge where useful lives and residual values are different to those previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

 

5.                             CRITICAL JUDGEMENTS AND KEY ESTIMATES (continued)

 

Key sources of estimation uncertainty (continued)

 

(b)     Impairment loss for bad and doubtful debts

 

The Group makes impairment loss for bad and doubtful debts based on assessments of the recoverability of the trade receivables and other receivables including and the current creditworthiness of each debtor.

 



 

Impairments arise where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad and doubtful debts requires the use of judgement and estimates. Where the actual result is different from the original estimate, such difference will impact the carrying value of the trade receivables and other receivables and amounts due from related parties and doubtful debt expenses in the year in which such estimate has been changed. If the financial conditions of the debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

(c)      Allowance for slow-moving inventories

 

Allowance for slow-moving inventories is made based on the ageing and estimated net realisable value of inventories. The assessment of the allowance amount involves judgement and estimates. Where the actual outcome in the future is different from the original estimate, such difference will impact the carrying value of inventories and allowance charge/write-back in the period in which such estimate has been changed.

 

(d)     Impairment of goodwill

 

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating unit to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. The carrying amount of goodwill at the end of the reporting period was approximately HK$530,776,000. No impairment loss was recognised during 2011.

 

(e)      Income taxes

 

The Group is subject to income taxes in several jurisdictions. Significant estimations are required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions the period in which such determination is made.

 

6.                             FINANCIAL RISK MANAGEMENT

 

The Group’s activities expose it to a variety of financial risks: foreign currency risk, credit risk, liquidity risk and interest rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

 

(a)                       Foreign currency risk

 

The Group has minimal exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in Hong Kong dollars, US dollars and Renminbi (“RMB”). Accordingly the Group’s profit or loss is substantially independent of changes in foreign currency exchange rate. The Group currently does not have a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. The Group will monitor its foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

 



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