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CORPORATE PROFILE TCL Communication Technology Holdings Limited (“TCT” or the “Company”) and its subsidiaries (collectively the “Group”) are engaged in the design, manufacture and marketing of a wide range of mobile handsets for global market. The Group’s handsets are sold in the PRC, Europe and Latin America under two key brands - “TCL” and “Alcatel”. TCT operates its highly efficient manufacturing plants and R&D centres in various provinces of China and France with headquarters in Shenzhen, China. Currently, TCL Corporation (“TCL Corp.”) is the Group’s largest shareholder. For more information, please visit the Group’s website: www.tclcom.com. CONTENTS Financial Highlights 2 Report of the Directors 49 Corporate Structure 4 Report of the Auditors 59 Year in Review 5 Consolidated Income Statement 60 Chairman’s Statement 8 Consolidated Balance Sheet 61 Management Discussion and Analysis 14 Consolidated Statement of Changes 63 Directors and Senior Management 24 in Equity Corporate Governance Report 28 Consolidated Cash Flow Statement 65 Human Resources and Balance Sheet 67 Social Responsibility 47 Notes to Financial Statements 68 Company Information 48 Five Years Financial Summary 112 2 FINANCIAL HIGHLIGHTS FINANCIAL PERFORMANCE (HK$ Million) 2005 2004 Revenue 5,664 7,310 Gross profits 88 1,028 Gross profit margin (%) 2% 14% Net loss (1,608) (185) Basic LPS (HK cents) (55.6) (6.5) FINANCIAL POSITION (HK$ Million) 2005 2004 Property, plant & equipment and prepaid land lease payments 372 440 Net current (liabilities)/assets (189) 1,464 Cash and pledged deposits 460 2,017 Total liabilities 4,043 3,617 Interest bearing borrowings 771 175 Net assets 41 1,904 KEY FINANCIAL INDICATORS 2005 2004 Inventory turnover (days) * 24 20 Trade receivable turnover (days) 80 60 Trade payable turnover (days) 90 92 Current ratio (times) 1.0 1.4 Interest bearing borrowings/Total assets 18.9% 3.2% * Finished goods only Note: The above turnover days are calculated on average balance of the year. TCL Communication Technology Holdings Limited Annual Report 2005 3 REVENUE BY PRODUCTS 2005 2004 Colour 21% 33% Multimedia Colour 39% 57% Multimedia 22% Monochrome 28% Monochrome REVENUE BY MARKETS 2005 2004 The PRC 34% 27% Overseas 66% Overseas 73% The PRC 4 CORPORATE STRUCTURE TCL Corporation Directors(Listed on Shenzhen Stock Exchange, Public Stock Code: 000100) 11% 55% 34% TCL Communication Technology Holdings Limited (Listed on Hong Kong Stock Exchange, Stock Code: 2618)) 100% 100% Huizhou TCL Mobile T&A Mobile Communication Co., Ltd. Phones Limited (Sales and manufacture of TCL (Sales of Alcatel brand brand mobile handsets ) mobile handsets) TCL Communication Technology Holdings Limited Annual Report 2005 5 2005 YEAR IN REVIEW January Dr. LIU Fei appointed as T&A Mobile Phone Limited’s (“T&A”) Chief Executive Officer (“CEO”) May Issued convertible notes to strengthen the Group’s financial position Entered into Framework Agreement with Alcatel Participations with aim to further evolve T&A business platform June Dr. LIU Fei appointed as the Company’s CEO July Completion of Framework Agreement. T&A became a wholly-owned subsidiary of TCT September New range of core value handset models was highly recommended in the sub-US$30 handsets tender program by the GSM Association December Proposed open offer of new shares to shareholders to raise approximately HK$600 million 6 THE POWER OF MUSIC MUSIC TCL Communication Technology Holdings Limited Annual Report 2005 7 Mission To become a globally competitive and innovative mobile phone producer, supplying quality products that satisfy the ever-changing needs of customers, and providing employees with career advancement and job satisfaction. 8 CHAIRMAN’S STATEMENT Dear Shareholders, The Company has experienced a very difficult year in 2005. The handset market is ever-changing and the fierce competition worldwide has given rise to the absolute leading position of top-tier brands. It was therefore very difficult for small handset manufacturers to counter this trend. Although the business scale of the Company is far larger than its domestic peers, it is still comparatively smaller than the global giants. In view of this market landscape, the new management team of TCT has led the Company to implement reforms and enhancement programmes to form a new organizational structure, to reposition its products, to redefine R&D direction and to broaden customer base, with an aim to enhance its core competitiveness and build a strong foundation for sustainable growth in the long run. TCL Communication Technology Holdings Limited Annual Report 2005 9 Overseas market monthly unit shipment in 2005 ’000 1,500 1,200 900 600 300 Jul Apr Oct Jan Jun Feb Mar Sep Nov Aug Dec May BUSINESS PERFORMANCE INTERNATIONAL AND PROFESSIONAL MANAGEMENT During the year under review, the Company redefined its R&D In the year under review, the Company appointed Dr. LIU Fei as strategies and decided to slow down the pace of R&D. New product executive director and CEO. Including Dr. Liu, the management team launches were delayed, hampering overall sales, especially in the now comprises 25 professional members with international PRC market. Furthermore, the change in the operating mode of experience. Steered by a new management team, we believe that sales channels and the initiatives to assist distributors to clear the Group’s management and business development will be further channel inventories affected the Group’s sales performance in the strengthened in the future. PRC. Meanwhile, the Group aspired to enhance its operation efficiency and strengthen its supply chain management capability, SHAREHOLDING AND ORGANIZATION RESTRUCTURING rather than seeking sheer sales volume growth. Although these During the past year, the Company completed its shareholding measures have caused reduction in sales, the management believes restructuring through a share swap. Alcatel exercised its option and that will benefit the Company’s long term development. transferred its interest in T&A into a stake in TCT. Hence, Alcatel became a strategic shareholder of TCT and T&A became a wholly owned subsidiary of the Company. Upon completion of the Upon the establishment of T&A, the Company actively expanded to shareholding restructure, the resources of the two subsidiaries were overseas markets through Alcatel’s global network, targeting high- utilized efficiently. Restructuring of the operating structure facilitated demand global operators and aiming to exploring new room for integration and realization of synergies. development by providing cost effective and high quality entry level handsets to these operators. The Group recorded satisfactory results during the year under review. Notable achievements were made in the second half of the year, which was marked by the breakeven of the overseas business in the month of December 2005. 10 CHAIRMAN’S STATEMENT Vision To be a trusted and respected mobile terminal product provider in the global marketplace with sustainable growth. Upon completion of shareholding restructure, the Company through the issue of approximately HK$185 million convertible notes. endeavoured to reform its organizational structure in order to In addition, the Company successfully completed an open offer to materialize the synergies through the integration of the two wholly- shareholders and raised approximately HK$600 million in February owned subsidiaries. In terms of organizational restructuring, the 2006. The related proceeds will be applied for R&D, settlement of Company has established six sales and marketing centers around accounts payable and as general working capital. These moves the world, namely Europe, the Middle East and Africa (“EMEA”), have greatly strengthened the Company’s financial position. Latin America (“LATAM”), Alcatel brand in the PRC (“Alcatel PRC”), TCL brand in the PRC (“TCL PRC”), Asia Pacific (“APAC”) and ODM. PRODUCT R&D At the same time, the Company also consolidated its manufacturing, During the year under review, the Company has repositioned its R&D and after sales services to optimize resource allocation through products with focuses on manufacturing the most competitive entry centralized operation and integration. To further enhance level voice phones and innovative multimedia phones. Amid fierce manufacturing and operation efficiency, reduce management costs competition in the global handset market, the availability of R&D and avoid mismatching of resources, the Company has gradually resources is not only the key to success, but also one of the streamlined its product line and started the outsourcing of product determining factors for the Company to achieve sustainable growth. development projects. In addition, the Company also implemented centralized procurement to reduce costs and improve Huge R&D investment is needed to support the development of competitiveness. innovative ideas to solidify the Company’s core competitiveness and market position. In view of this, the Company announced in STRENGTHENING FINANCIAL POSITION April 2006 its plan to increase investment in a handset R&D joint venture which was established with strategic partners. By To achieve sustainable growth in the global market, we have set consolidating R&D expertise and resources, the Company seeks priority to the stregthening of our financial position. The Group to strike a balance between strengthening product development entered into Framework Agreement with its strategic shareholder and controlling costs. According to the plan, the Company will Alcatel