I would like to present to you our annual report for Luxking Group Holdings Limited (the “Group”) for the financial year ended 30 June 2017 (“FY2017”).
The business environment remained difficult in FY2017 due to the dual challenge of intensified industry rivalry and rising operating costs. Even though the Group was able to deliver marginally higher sales amid the heightened market competition, these factors exerted a certain degree of pressure on the profit margin of the business.
The Group recorded a 3.4% increase in revenue to RMB515.6 million in FY2017 as the sales growth in the domestic market outweighed the contraction in export sales. Sales to the domestic market improved by 10.7% to RMB448.7 million in FY2017 to account for 87.0% of Group revenue. This was however partially negated by weaker demand from overseas markets which resulted in a 28.4% contraction in export sales to RMB66.9 million in FY2017.
In terms of sales by product segments, the Group achieved a 10.2% increase in sales of biaxially oriented polypropylene films (“BOPP films”) to RMB323.0 million in FY2017 primarily on the back of higher average selling prices. As a result, the revenue contribution of the BOPP films segment expanded to 62.6% in FY2017 compared to 58.8% in the financial year ended 30 June 2016 (“FY2016”).
Sales of the industrial specialty tapes (“IS tapes”) dipped slightly by 2.8% to RMB117.2 million in FY2017 due mainly to lower average selling prices. The IS tapes segment made up 22.7% of total revenue in FY2017. The remaining 14.7% was contributed by the general purpose adhesive tapes (“General tapes”) segment which saw sales decline 11.4% to RMB75.4 million, dragged by slower demand from overseas markets and reduction in selling prices.
The competitive pressure on average selling prices, coupled with higher raw material costs, labour expenses, and production overheads as well as an inventory write-down, shaved the Group’s gross profit margin to 10.3% in FY2017 from 12.9% in FY2016. Hence, gross profit for the year dropped by 17.5% or RMB11.3 million to RMB53.0 million in FY2017.
Nevertheless, the Group partly mitigated the effect of lower gross profit margin on its bottom line by reducing operating expenses and finance costs during FY2017. Total operating expenses decreased from RMB48.3 million to RMB40.5 million, while finance costs fell from RMB10.0 million to RMB7.9 million in FY2017. The Group continued to deleverage its balance sheet through a consistent reduction of a long-term loan over the past years.
As a result, net profit in FY2017 narrowed by 28.9% or RMB1.3 million to RMB3.3 million in FY2017. With effective control on collections and payments, the Group continued to generate positive net cash flow from operations of RMB25.0 million during FY2017. As at 30 June 2017, the Group’s net asset value per share increased to RMB1,345 cents from RMB1,316 cents at the end of FY2016 (based on 12,650,000 ordinary shares).
In view of rising raw material costs, continued price pressures from relentless competition, tight labour situation and potentially higher overhead costs arising from stricter compliance with environment policies, the Group expects the operating environment to stay challenging.
To manage the challenges and take the Group forward, Luxking’s strategy is to focus its efforts on the development and sales of higher value IS tapes and BOPP films that command better profit margins, while expanding its business opportunities with existing and new customers. At the same time, the Group will continue to work on production efficiency improvements and cost optimisation measures to mitigate the impact of price and cost pressures on its profit margins. It will also continue to monitor and manage the potential impact of fluctuations in foreign exchange currency rates on its financial performance.
The Group supplies a wide range of IS tapes for the consumer electronics industry from personal smartphones and devices to home appliances. Luxking’s excellent track record and sound reputation in the IS tapes market is underscored by its quality customer base which comprises leading and major brands of smartphones and other handheld consumer devices.
As a qualified supplier to major brands, Luxking has expended significant efforts to maintain its standing with these customers which typically have stringent requirements for adhesive products. In a bid to deepen the relationships with its customers, the Group constantly keeps abreast of their upcoming projects so as to develop and introduce IS tapes that will suit customers’ requirements and specifications for their new products.
Given its strong in-house research and development (“R&D”) expertise as well as manufacturing capabilities, Luxking is confident of its ability to continue addressing the evolving needs of the major brands. In fact, the Group is currently in the process of setting up clean-room facilities for two new IS tapes production lines in response to customers’ need for even higher quality products and more stringent manufacturing standards. These new production lines are expected to be operationally ready before end of 2017. To support the long-term growth of its IS tapes business, the Group also plans to continue broadening its customer base and exploring new product opportunities in tandem with market trends and requirements.
Luxking is also focusing on increasing sales of its higher grade BOPP films. These products are gaining traction as the Group witnessed encouraging customers’ response during FY2017. This range of 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.
The Group plans to continue shifting the sales mix of its BOPP films business in the direction of the more sophisticated and higher end products as this market segment has relatively higher barriers of entry. The Group aims to drive sales of the higher grade BOPP films through greater engagement with existing customers and by seeking new customers. It will also continue to maintain and enhance its BOPP films manufacturing line to achieve optimal quality and production efficiency.
On behalf of the Board of Directors, I would like to express my gratitude to our shareholders, customers, suppliers and business partners for your continued support of Luxking Group. I also wish to express my deepest appreciation to our management and employees for their unwavering commitment, hard work and contributions to the Group.
Leung Chee Kwong
Executive Chairman and Chief Executive Officer
20 September 2017