I would like to present to you our annual report for Luxking Group Holdings Limited (the “Group”) for the financial year ended 30 June 2016 (“FY2016”).
Amid the uncertain global economic climate, business conditions remained difficult as weaker demand for adhesive tapes and keen market competition dampened the Group’s revenue in FY2016. Notwithstanding this, the Group was able to increase its bottom line performance.
To withstand the slower business environment, the Group kept its focus on three key areas – enhancing sales mix of higher profit margin products, improving production efficiency and cost management and reducing its debt level. These efforts have enabled the Group to post a 25.5% increase in net profit to RMB4.6 million in FY2016 despite the decrease in revenue by 20.7% to RMB498.8 million.
Consequent to weaker demand and lower average selling prices, the Group witnessed lower revenues across its three product segments - biaxially oriented polypropylene films (“BOPP films”), industrial specialty tapes (“IS tapes”), and general purpose adhesive tapes (“General tapes”).
Sales of BOPP films dipped 7.9% to RMB293.1 million in FY2016. Nonetheless, the BOPP films business continued to make up the largest share of the Group’s revenue with a contribution of 58.8% in FY2016 compared to 50.6% in FY2015. Sales of IS tapes also decreased 42.0% to RMB120.6 million amid softer demand conditions and pressure on average selling prices. The IS tapes business contributed 24.2% to Group revenue in FY2016 compared to 33.0% in FY2015. The remaining 17.0% of Group revenue was derived from the General tapes business which recorded a decrease of 17.5% in sales to RMB85.1 million in FY2016.
Despite the decrease in revenue, the Group posted a higher gross profit of RMB64.3 million in FY2016, an increase of 4.0% from RMB61.8 million in FY2015.
While the Group had to contend with selling price pressure and cost pressures from rising labour costs, it attained a higher gross profit margin of 12.9% in FY2016 compared to 9.8% in FY2015. This margin expansion was attributed primarily to the improved sales mix of the BOPP films business, lower raw material costs, higher profit margins of overseas sales due to the appreciation of the US dollar against the Renminbi, and better production efficiency.
The Group’s total operating expenses in FY2016 increased to RMB48.3 million from RMB42.4 million in FY2015. The increase of RMB5.9 million was due mainly to adjustments to staff salaries, a net foreign exchange loss of RMB1.5 million, and a one-off impairment of trade receivables of RMB2.3 million.
The Group has also pared down its finance costs in FY2016 as it continued to deleverage through the reduction of a long-term loan. As a result of improved gross profit and lower finance costs, the Group delivered a higher net profit in FY2016 despite tougher business conditions.
With effective control on collections and payments, the Group continued to generate positive cash flow from operations during the year under review. As at 30 June 2016, the Group’s net asset value per share increased to RMB1,316.00 cents from RMB1,255.99 cents as at 30 June 2015 (based on 12,650,000 ordinary shares).
As the global economic environment remains uncertain, business conditions are expected to be challenging in the face of slower market demand and continued price pressures. In addition to operating in an intense competitive environment, the Group will have to continue evaluating and managing the potential impact from fluctuations in exchange rates and raw materials costs, as well as rising labour costs.
To deal with slower business momentum, the Group will focus its efforts on the sales of products with higher profit margins to counter the impact of potentially lower market demand. It will also continue to work on production efficiency improvements and cost optimisation programs while exercising financial prudence in its business operations. Leveraging its research and development (“R&D”) capabilities, the Group will constantly enhance its product lines in a bid to seek business growth opportunities from existing and new customers. The IS tapes and higher-grade BOPP films businesses will remain as the cornerstone to the Group’s long-term sustainability.
The demand for the Group’s IS tapes is driven largely by smartphone manufacturers who have stringent requirements for adhesive products. Today, Luxking is a qualified supplier of IS tapes to several leading manufacturers of smartphones and tablets.
The Group will continue to work on improving its business with existing customers and seek opportunities with new fast-growing manufacturers in the PRC. The Group serves a quality base of customers and it intends to stay competitive and relevant to its customers by adapting and expanding its product offerings to cater to customers’ new product launches. To this end, the Group is investing in an additional production line to meet customers’ demand for higher-grade IS tape products.
As for the BOPP films business, the Group will continue to maintain and enhance its manufacturing line as necessary to produce higher-grade and more sophisticated BOPP films to optimise its product mix.
The Group believes its strategy to focus on higher- grade BOPP films will augur well for the future growth of this business segment. The higher-grade products face relatively lower competition compared to the standard BOPP films. It requires significant technical knowledge, highly-controlled manufacturing processes and investments in high-end machinery and technology to produce the fine quality standards and also achieve efficiency for low- volume manufacturing. As such, the domestic supply of this specialised product line is presently limited and the barriers to entry are also relatively higher.
Given its strong technical expertise and advanced manufacturing facility, the Group saw this market gap as an attractive business opportunity to raise its competitive standing. Today, its improved BOPP films production line boasts higher production efficiency with increased manufacturing speed and lower product defect rates. The higher-grade BOPP films have higher transparency, greater flexibility and strength and are used in a wide range of applications from paper laminations to industrial packaging uses. To strengthen the higher-grade BOPP films business, the Group plans to continue expanding its customer base and widening its product range through further R&D initiatives.
On behalf of your Board of Directors, I would like to express our appreciation to our shareholders, customers, suppliers and business partners for your continued support of Luxking Group. I also wish to extend my gratitude to our management and employees for their dedication, perseverance and valuable contributions to the Group.
Leung Chee Kwong
Executive Chairman and Chief Executive Officer
20 September 2016