The Stock Exchange of Hong Kong Limited and the Securities and Futures Commission take no responsibility for the contents of this Application Proof, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the con- tents of this Application Proof.
Application Proof of
COBELCO GROUP HOLDINGS LIMITED 高比集團控股有限公司 (incorporated in the Cayman Islands with limited liability)
WARNING
The publication of this Application Proof is required by The Stock Exchange of Hong Kong Limited (the “Exchange”)/the Securities and Futures Commission (the “Commission”) solely for the purpose of providing information to the public in Hong Kong.
This Application Proof is in draft form. The information contained in it is incomplete and is subject to change which can be material. By viewing this document, you acknowledge, accept and agree with the Company, its sponsor, advisers or member of the underwriting syndicate that:
(a) this document is only for the purpose of providing information about the Company to the public in Hong Kong and not for any other purposes. No investment decision should be based on the information contained in this document;
(b) the publication of this document or supplemental, revised or replacement pages on the Exchange’s website does not give rise to any obligation of the Company, its sponsor, advisers or members of the underwriting syndicate to proceed with an offering in Hong Kong or any other jurisdiction. There is no assurance that the Company will proceed with the offering;
(c) the contents of this document or supplemental, revised or replacement pages may or may not be replicated in full or in part in the actual final listing document;
(d) the Application Proof is not the final listing document and may be updated or revised by the Company from time to time in accordance with the Listing Rules;
(e) this document does not constitute a prospectus, offering circular, notice, circular, brochure or advertisement offering to sell any securities to the public in any jurisdiction, nor is it an invitation to the public to make offers to subscribe for or purchase any securities, nor is it calculated to invite offers by the public to subscribe for or purchase any securities;
(f) this document must not be regarded as an inducement to subscribe for or purchase any securities, and no such inducement is intended;
(g) neither the Company nor any of its affiliates, advisers or underwriters is offering, or is soliciting offers to buy, any securities in any jurisdiction through the publication of this document;
(h) no application for the securities mentioned in this document should be made by any person nor would such application be accepted;
(i) the Company has not and will not register the securities referred to in this document under the United States Securities Act of 1933, as amended, or any state securities laws of the United States;
(j) as there may be legal restrictions on the distribution of this document or dissemination of any information contained in this document, you agree to inform yourself about and observe any such restrictions applicable to you; and
(k) the application to which this document relates has not been approved for listing and the Exchange and the Commission may accept, return or reject the application for the subject public offering and/ or listing.
If an offer or an invitation is made to the public in Hong Kong in due course, prospective investors are reminded to make their investment decisions solely based on the Company’s prospectus registered with the Registrar of Companies in Hong Kong, copies of which will be distributed to the public during the offer period. THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE. THE INFORMATION IN THIS DOCUMENT MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT
IMPORTANT
If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
COBELCO GROUP HOLDINGS LIMITED 高比集團控股有限公司 (incorporated in the Cayman Islands with limited liability) [REDACTED] Total number of [REDACTED] : [REDACTED] Shares (subject to the [REDACTED]) Number of [REDACTED] : [REDACTED] Shares (subject to re-allocation) Number of [REDACTED] Shares : [REDACTED] Shares (subject to re-allocation and the [REDACTED]) [REDACTED] : Not more than HK$[REDACTED] per [REDACTED] and expected to be not less than HK$[REDACTED] per [REDACTED], plus brokerage of 1%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% (payable in full on application and subject to refund) Nominal value : HK$0.01 per Share [REDACTED] : [REDACTED] Sole Sponsor
[REDACTED] [REDACTED] [REDACTED] [REDACTED]
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. A copy of this document, having attached thereto the documents specified in the paragraph headed “Documents delivered to the Registrar of Companies and available for inspection” in Appendix V to this document, has been registered by the Registrar of Companies in Hong Kong as required under section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this document or any other documents referred to above. The [REDACTED] is expected to be determined by the [REDACTED] to be entered into between our Company and the [REDACTED] (for itself and on behalf of the [REDACTED])onthe[REDACTED] or such later date as may be agreed between our Company and the [REDACTED] (for itself and on behalf of the [REDACTED]) but in any event no later than [REDACTED]. The [REDACTED] will be not more than HK$[REDACTED] per [REDACTED] and is expected to be not less than HK$[REDACTED] per [REDACTED], unless otherwise announced. The [REDACTED] (for itself and on behalf of the [REDACTED]) may, with our Company’s consent, reduce the number of [REDACTED] under the [REDACTED] and/or the [REDACTED] stated in this document at any time prior to the morning of the last day for lodging applications under the [REDACTED]. In such a case, a notice of reduction in the number of [REDACTED] and/or the [REDACTED] will be published on the website of the Stock Exchange at www.hkexnews.hk and website of our Company at www.cobelco.com.hk not later than the morning of the last day for lodging applications under the [REDACTED]. Details of the arrangement will then be announced by our Company as soon as practicable. Further details are set out in the sections headed “Structure and Conditions of the [REDACTED]” and “How to Apply for [REDACTED]” in this document. If, for any reason, the [REDACTED] is not agreed between the [REDACTED] (for itself and on behalf of the [REDACTED]) and our Company on or before [REDACTED], the [REDACTED] will not become unconditional and will lapse immediately. Prior to making an investment decision, prospective investors should consider carefully all the information set out in this document, including risk factors set out in the section headed “Risk Factors”. The [REDACTED] have not been and will not be registered under the U.S. Securities Act or any state securities law in the United States and may not be offered, sold, pledged, or transferred within the United States. The [REDACTED] may be offered, sold or delivered outside the United States in offshore transactions in accordance with Regulation S. Pursuant to the [REDACTED], the [REDACTED] (for itself and on behalf of the [REDACTED]) has the right in certain circumstances to terminate the obligations of the [REDACTED] at any time prior to 8:00 a.m. (Hong Kong time) on the [REDACTED]. Further details of such circumstances are set out in the section headed “[REDACTED] arrangements and expenses – The [REDACTED] – Grounds for Termination” in this document.
[REDACTED] THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE. THE INFORMATION IN THIS DOCUMENT MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT
IMPORTANT
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IMPORTANT
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EXPECTED TIMETABLE
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EXPECTED TIMETABLE
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EXPECTED TIMETABLE
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EXPECTED TIMETABLE
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CONTENTS
IMPORTANT NOTICE TO INVESTORS This document is issued by our Company, solely in connection with the [REDACTED] and does not constitute an offer to sell or a solicitation of an offer to buy any security other than the [REDACTED]. This document may not be used for the purpose of, and does not constitute, an offer to sell or a solicitation of an offer to buy in any other jurisdiction or in any other circumstances. No action has been taken to permit a [REDACTED] of the [REDACTED] or the distribution of this document. The [REDACTED] and [REDACTED] of the [REDACTED] in other jurisdictions are subject to restrictions and may not be made except as permitted under the applicable securities laws of such jurisdiction pursuant to registration with or authorisation by the relevant securities regulatory authorities or an exemption therefrom. You should rely only on the information contained in this document to make your investment decision. Our Company, the Sole Sponsor, the [REDACTED], the [REDACTED] and the [REDACTED] have not authorised anyone to provide you with information that is different from what is contained in this document. Any information or representation not included in this document must not be relied on by you as having been authorised by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], any of their respective directors, advisers, officers, employees, agents or representatives or any other person or party involved in the [REDACTED]. Information contained in our Company’s website, located at www.cobelco.com.hk, does not form part of this document.
Page EXPECTED TIMETABLE...... i CONTENTS ...... iv SUMMARY ...... 1 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS ...... 11 FORWARD-LOOKING STATEMENTS ...... 23 RISK FACTORS ...... 24 INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED] ...... 47 DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED] ...... 52 CORPORATE INFORMATION ...... 55 INDUSTRY OVERVIEW ...... 57 REGULATORY OVERVIEW ...... 67 HISTORY, REORGANISATION AND CORPORATE STRUCTURE ...... 80 BUSINESS ...... 88 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ...... 177 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS ...... 189 CONNECTED TRANSACTION ...... 196 SUBSTANTIAL SHAREHOLDERS ...... 198 SHARE CAPITAL ...... 199 FINANCIAL INFORMATION ...... 202
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CONTENTS
FUTURE PLANS AND [REDACTED] ...... 255
[REDACTED] ...... 262
STRUCTURE AND CONDITIONS OF THE [REDACTED] ...... 270
HOW TO APPLY FOR [REDACTED] ...... 281
APPENDIX I – ACCOUNTANTS’ REPORT ...... I-1
APPENDIX II – [REDACTED] ...... II-1
APPENDIX III – SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW ...... III-1
APPENDIX IV – STATUTORY AND GENERAL INFORMATION ...... IV-1
APPENDIX V – DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION ...... V-1
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SUMMARY
This summary aims to give you an overview of the information contained in this document. As this is a summary, it does not contain all the information that may be important to you. You should read this document in its entirety before you decide to invest in the [REDACTED]. There are risks associated with any investment. Some of the particular risks in investing in the [REDACTED] are set out in the section headed “Risk Factors” in this document. You should read that section carefully before you decide to invest in the [REDACTED]. Various expressions used in this summary are defined in the section headed “Definitions and Glossary of Technical Terms” in this document. OVERVIEW We are a leading PRC ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong, specialising in design, development, manufacture, decoration and installation of customised elevator cabin products and a broad range of decorative stainless steel products according to our customers’ needs. Elevator cabins are the compartments which carry passengers in the elevators whereas decorative stainless steel products are architectural finishing materials commonly used to furnish the indoor and outdoor surface areas of residential buildings, commercial buildings as well as hospitality and infrastructure facilities. Our customers primarily include elevator companies and construction contractors for residential and commercial property projects in the PRC and Hong Kong. According to the Ipsos Report, we had a market share of approximately 1.4% and ranked fourth among over 1,000 market participants in the ECMD industry in the PRC in terms of revenue in 2019. In addition, we sell and distribute other architectural finishing materials, primarily including decorative films and functional films to our customers in the PRC and Hong Kong. We have been the distributor of decorative films and functional films in the PRC, Hong Kong and Macau for an international brand owned by Supplier A. We also install elevator cabin products, decorative films and functional films in Hong Kong upon customer’s request. The following table sets out a breakdown of revenue by product segments during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Elevator cabin 254,945 64.3 259,996 69.6 266,252 66.4 Decorative stainless steel 82,314 20.7 61,109 16.3 85,100 21.2 Other architectural finishing materials 59,598 15.0 52,721 14.1 49,499 12.4 Total 396,857 100.0 373,826 100.0 400,851 100.0
We believe our success is built on our proactive approach towards providing customised and high quality products according to our customers’ needs, which is based on our strong product design and development capabilities. We design, develop and manufacture customised elevator cabin products and decorative stainless steel products, and, over the years, we have established a diversified product portfolio of over 8,000 product models or specifications that can be used in a wide range of construction projects including residential buildings, commercial buildings as well as hospitality and infrastructure facilities such as exhibition centres, hotels and casinos. Our commitment to product design and development is also evidenced by the recognition of Cobelco GZ as a high-and-new technology enterprise（高新技術企業）since 2017. Going forward, we strive to continue to differentiate ourselves from our competitors by strengthening our production capabilities and product design and development capabilities. With over decades of operations since the establishment of Cobelco HK, our Group has been expanding our sales network and has built up our reputation in the ECMD industry and decorative stainless steel manufacturing industry in the PRC and Hong Kong. Our Directors believe that our Group’s expertise and experience in the design, development, manufacture, decoration and installation of our products has distinguished ourselves by our ability in providing customised products and one-stop solutions tailored to our customers covering product design
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SUMMARY and development, production, quality assurance, installation and after-sales support, which allows us to differentiate ourselves from other market participants. It also enables us to offer our customers a diversified product portfolio by integrating lengthy and complex production process of elevator cabin products and decorative stainless steel products in order to reduce lead time and production costs. Furthermore, our Group’s commitment to product design and development have allowed us to achieve technical enhancement and diversify our product portfolio in order to respond and adapt to changes in the ever-changing market environment, thus enabling us to continuously explore new business opportunities. Our principal markets are the PRC and Hong Kong. We have also supplied products to other locations, such as Macau, the Philippines, Thailand and South Korea during the Track Record Period. The following table sets out a breakdown of revenue, gross profit and gross profit margin from our customers based on the product segments and their respective locations during the Track Record Period:
For the year ended 31 March 2019 2020 2021 Gross Gross Gross Gross profit Gross profit Gross profit Revenue profit margin Revenue profit margin Revenue profit margin HK$’000 HK$’000 % HK$’000 HK$’000 % HK$’000 HK$’000 %
Elevator cabin – PRC 231,376 58,408 25.2 251,497 58,409 23.2 254,148 52,457 20.6 – Hong Kong 23,569 5,990 25.4 8,499 2,023 23.8 12,104 2,923 24.1 – Others (Note) N/A N/A N/A N/A N/A N/A N/A N/A N/A
Subtotal/Overall 254,945 64,398 25.3 259,996 60,432 23.2 266,252 55,380 20.8
Decorative stainless steel – PRC 24,772 9,328 37.7 12,364 4,571 37.0 12,714 4,679 36.8 – Hong Kong 50,308 23,640 47.0 35,095 17,048 48.6 61,099 29,821 48.8 – Others (Note) 7,234 1,787 24.7 13,650 3,626 26.6 11,287 3,089 27.4
Subtotal/Overall 82,314 34,755 42.2 61,109 25,245 41.3 85,100 37,589 44.2
Other architectural finishing materials – PRC 23,709 4,668 19.7 20,858 2,983 14.3 16,235 2,614 16.1 – Hong Kong 31,561 13,962 44.2 29,719 11,084 37.3 32,889 10,687 32.5 – Others (Note) 4,328 1,691 39.1 2,144 662 30.9 375 122 32.5
Subtotal/Overall 59,598 20,321 34.1 52,721 14,729 27.9 49,499 13,423 27.1
Total 396,857 119,474 30.1 373,826 100,406 26.9 400,851 106,392 26.5
Note: Others mainly included Macau, the Philippines, Thailand and South Korea. For details on the material fluctuations in our revenue, gross profit and gross profit margin, please refer to the section headed “Financial Information – Period to period comparison of results of operations” in this document. Our gross profit margin for our elevator cabin segment remained largely stable at approximately 25.3% and 23.2% for the years ended 31 March 2019 and 2020, respectively. Subsequently, our gross profit margin for our elevator cabin segment also remained broadly stable at approximately 23.2% for the year ended 31 March 2020 and approximately 20.8% for the year ended 31 March 2021, while the gross profit margin derived from Customer A as a whole was approximately 23.1% and 20.0% for the years ended 31 March 2020 and 2021, respectively. Our gross profit margin for our decorative stainless steel segment also remained largely stable at approximately 42.2% and 41.3% for the years ended 31 March 2019 and 2020, respectively, as our pricing policy remained largely consistent. Subsequently, our gross profit margin for our decorative stainless steel segment increased from approximately 41.3% for the year ended 31 March 2020 to approximately 44.2% for the year ended 31 March
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SUMMARY
2021, which was mainly attributable to the fact that a greater portion of our decorative stainless steel segment revenue was generated from customers based in Hong Kong, which we derived a comparably higher gross profit margin than customers based in the PRC and overseas. Our headquarters in Hong Kong carry out the functions of overall business operation, sales and marketing, and financial management, whilst our production facilities are primarily located at our Guangzhou Plant and carry out, among others, product design and development, production and quality assurance functions. We also established Cobelco KS and set up our Suzhou Workshop in 2018 as an ancillary production facilities to cater for the demands in Eastern China. As at the Latest Practicable Date, we acquired a piece of land for the establishment of our third production facilities, namely the Jiangmen Plant, which will form part of our Southern China Production Hub together with our Guangzhou Plant. For details, please refer to the paragraph headed “Business strategies” in this section. Our Group’s history can be traced back to 1987, when Mr. Colby Chiu, the chairman of the Board and founder of our Group, established Cobelco Industrial Supplies (a partnership formed with an Independent Third Party who ceased to be a partner in November 1995). Subsequently, Cobelco HK was incorporated in December 1995 by Mr. Colby Chiu as a successor of Cobelco Industrial Supplies to engage in the trading of decorative stainless steel products and elevator components. Since then, we have expanded our business operation through sourcing and distributing a variety of architectural finishing materials of international brands. To cope with the market demand for elevator cabin products and decorative stainless steel products, in 2005, we established Cobelco GZ and subsequently set up our Guangzhou Plant in the PRC, for the manufacture of, among others, elevator cabin products. OUR CUSTOMERS AND SUPPLIERS Our customers primarily include elevator companies and construction contractors for residential and commercial property projects in the PRC and Hong Kong. For the three years ended 31 March 2019, 2020 and 2021, our revenue attributable to our five largest customers combined amounted to approximately HK$255.5 million, HK$268.9 million and HK$273.9 million, representing approximately 64.4%, 71.9% and 68.3% of our total revenue, respectively. Our revenue attributable to our largest customer during the Track Record Period, namely Customer A, one of the top three elevator companies in the PRC between 2014 and 2019 in terms of revenue generated, amounted to approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, representing approximately 55.1%, 64.0% and 61.9% of our total revenue, respectively, for the same periods. According to the Ipsos Report, there is only a limited number of sizeable elevator companies in the industry and leading
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SUMMARY
ECMD companies may focus on serving a small number of elevator companies. As such, it is considered to be an industry norm for a sizeable ECMD market participant like our Group, which ranked fourth in the ECMD companies in the PRC in 2019, in terms of revenue generated, to have high customer concentration. For details on our Group’s reliance on Customer A and our supply framework agreements with Customer A, please refer to the sections headed “Business – Customers – Customer concentration” and “Business – Customers – Supply framework agreements with Customer A” in this document. Our Directors consider that our business is sustainable in view of the following reasons despite customer concentration during the Track Record Period: (i) Customer A was our largest customer during the Track Record Period, but we also supplied our products to other PRC major elevator companies or their affiliates in the PRC and/or Hong Kong; (ii) we have maintained a mutually beneficial and complementary business relationship with Customer A; (iii) revenue of the ECMD industry in the PRC is expected to grow; (iv) our skills and experience in the ECMD industry are transferable; (v) our measures to reduce reliance on Customer A in place. During the Track Record Period, two of our five largest customers, namely Customer A and Customer E, were also our suppliers. We purchased specified door opening devices and components as well as other electronic components from them to manufacture our elevator cabin products under their purchase orders, for their quality assurance purposes. The principal raw material and consumables used in the production of our products are stainless steel materials. Our raw materials and consumables were predominantly sourced from the PRC during the Track Record Period. Over the years, we have steadily expanded our network of suppliers. As at the Latest Practicable Date, we maintained a sourcing network comprising over 300 suppliers. During each of the three years ended 31 March 2019, 2020 and 2021, our five largest suppliers accounted in aggregate for approximately 42.5%, 38.7% and 37.3% of our total purchases, respectively. For the same financial years, the largest supplier accounted for approximately 14.5%, 14.8% and 12.1% of our total purchases, respectively. We have entered into authorised distributor agreements with Supplier A, our largest supplier during the Track Record Period. RESEARCH AND DEVELOPMENT During the Track Record Period, members of our senior management, sales and marketing team as well as research and development team have, from time to time, involved in the product design and development. Our Directors are of the view that elevator cabin products and decorative stainless steel products are susceptible to changes in market trends and demands. In order to keep ourselves abreast of the evolving trends and cater for customers’ demands, our Group has invested in product design and development activities continuously as we believe that it enables us to respond to and anticipate changes in the industry and the market environment in a timely manner and enhance our competitiveness. During the Track Record Period, our research and development expenses amounted to approximately HK$15.5 million, HK$12.4 million and HK$13.3 million, respectively. Our research and development expenses, which primarily consisted of employee benefit expenses for research and development staff and raw materials consumed for conducting research and development activities. Our continuous commitment is evidenced by the recognition of Cobelco GZ as a high-and-new technology enterprise（高新技術企業）since 2017. COMPETITIVE STRENGTHS We believe our success and potential for further growth are attributable to our following competitive strengths: (i) we have established strong presence in the ECMD industry and decorative stainless steel manufacturing industry in the PRC with long-term relationship with our major customers and suppliers; (ii) our strong product design and development capabilities enable us to provide customised products and one-stop solutions tailored to our customers; (iii) we have our own production facilities and the capability to handle different materials for manufacture of diversified portfolio of elevator cabin products and decorative stainless steel products; (iv) our production facilities have been strategically located near the manufacturing hubs in Southern China and Eastern China; (v) we have an experienced management team; and
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SUMMARY
(vi) we maintain stringent control over our quality and environmental management. For further details of our competitive strengths, please refer to the section headed “Business – Competitive strengths” in this document. BUSINESS STRATEGIES Our principal objective is to further strengthen our position as a leading ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong through increasing our market share in the PRC market and consolidate our position in Hong Kong and overseas markets in the relevant product segments. We intend to achieve these objectives by implementing the following strategies: (i) enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products; and (ii) upgrading our information technology systems. For further details of our business strategies and future plans, please refer to the section headed “Business – Business strategies’’ in this document.
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SUMMARY
OUR CONTROLLING SHAREHOLDERS Our Controlling Shareholders are Rich Topmax and Mr. Colby Chiu, who is our executive Director and the chairman of our Board. Immediately after completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares that may be allotted and issued upon the exercise of the [REDACTED] and any option that may be granted under the Share Option Scheme), our Company will be owned as to [REDACTED]% by Rich Topmax. Mr. Colby Chiu, being the legal and beneficial owners as to the entire issued share capital of Rich Topmax, is indirectly holding [REDACTED]% of the issued share capital of our Company and regarded as our Controlling Shareholder under the Listing Rules. Each of our Controlling Shareholders, Directors and their respective close associates does not have any interest in a business apart from our Group’s business which competes or is likely to compete, directly or indirectly, with our Group’s business that would require disclosure under Rule 8.10 of the Listing Rules. For further details of our Controlling Shareholders, please refer to the section headed “Relationship with our Controlling Shareholders” in this document. SUMMARY OF HISTORICAL FINANCIAL PERFORMANCE The tables below set out the summary of the audited financial information of our Group for the three years ended 31 March 2019, 2020 and 2021. For further details of our financial information, please refer to the Accountants’ Report in Appendix I to this document. Highlights of consolidated statements of profit or loss For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Revenue 396,857 373,826 400,851 Gross profit 119,474 100,406 106,392 Profit before tax 47,077 26,896 34,222 Profit for the year 38,952 21,742 26,676 Non-HKFRS measures The following table sets forth a reconciliation between the profit for the year as presented in accordance with HKFRS and the non-HKFRS adjusted profit for the year: For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Profit for the year 38,952 21,742 26,676 Adjusted for: [REDACTED] [REDACTED] [REDACTED] [REDACTED]
Non-HKFRS adjusted profit for the year (Note) 38,952 27,886 33,896
Net profit margin (%) 9.8 5.8 6.7
Non-HKFRS adjusted net profit margin (%) 9.8 7.5 8.5
Note: Adjusted profit represents profit for the year excluding the [REDACTED] incurred. Adjusted profit is not a measure of performance under HKFRS. As a non-HKFRS measure, adjusted profit is presented because the management believes such information will be helpful for investors in assessing the effect of [REDACTED] on our Group’s net profit. The use of adjusted profit has material limitations as an analytical tool as it does not include all items that impact our Group’s profit for the relevant year.
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SUMMARY
The above non-HKFRS information are included to illustrate to prospective investors the effect of excluding [REDACTED] (in the amount of approximately HK$[REDACTED] million and HK$[REDACTED] million for the years ended 31 March 2020 and 2021, respectively) on our net profit during the Track Record Period, as such expenses, recognised under the HKFRS, are non-recurring in nature and are not related to the ordinary and usual course of our business. Such non-HKFRS information are intended to assist prospective investors’ assessment of the operating performance and results of operations of our Group over the Track Record Period, but they do not have standardised meaning prescribed by the HKFRS, and therefore may not be comparable to similar measures presented by other issuers. The use of such measures has limitations as an analytical tool as they do not include all items that have an impact on our profit during the Track Record Period. As such, they should not be considered in isolation from, or as a substitute for analysis of, our results of operations or financial condition as reported under the HKFRS. We recorded revenue of approximately HK$396.9 million, HK$373.8 million and HK$400.9 million for the three years ended 31 March 2019, 2020 and 2021, respectively. For the three years ended 31 March 2019, 2020, and 2021, we recorded profit for the year of approximately HK$39.0 million, HK$21.7 million and HK$26.7 million, respectively. During the Track Record Period, our revenue was primarily derived from three major product segments, namely: (i) elevator cabin; (ii) decorative stainless steel; and (iii) other architectural finishing materials. The revenue contribution of our three major product segments were as follows, (i) approximately 64.3%, 69.6% and 66.4% of our revenue was derived from elevator cabin; (ii)
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SUMMARY approximately 20.7%, 16.3% and 21.2% of our revenue was derived from decorative stainless steel; and (iii) approximately 15.0%, 14.1% and 12.4% of our revenue was derived from other architectural finishing materials, during the three years ended 31 March 2019, 2020 and 2021, respectively. For elevator cabin segment, our gross profit margin remained largely stable at approximately 25.3% for the year ended 31 March 2019 and approximately 23.2% for the years ended 31 March 2020, mainly attributable to a majority of our revenue in this product segment was generated from Customer A with a relatively stable gross profit margin. Subsequently, our gross profit margin for our elevator cabin segment remained broadly stable at approximately 23.2% for the year ended 31 March 2020 and approximately 20.8% for the year ended 31 March 2021, while the gross profit margin derived from Customer A as a whole was approximately 23.1% and 20.0% for the years ended 31 March 2020 and 2021, respectively. For decorative stainless steel segment, our gross profit margin remained largely stable at approximately 42.2% for the year ended 31 March 2019 and approximately 41.3% for the year ended 31 March 2020, as our pricing policy remained largely consistent. Subsequently, our gross profit margin for our decorative stainless steel segment increased from approximately 41.3% for the year ended 31 March 2020 to approximately 44.2% for the year ended 31 March 2021, which was mainly attributable to the fact that a greater portion of our decorative stainless steel segment revenue was generated from customers based in Hong Kong, which we derived a comparably higher gross profit margin than customers based in the PRC and overseas. For other architectural finishing materials segment, our gross profit margin decreased from approximately 34.1% for the year ended 31 March 2019 to approximately 27.9% for the year ended 31 March 2020 which was attributable to the gross profit margin varied given the different types of products and quantity sold to our customers as well as our Group offered more favourable pricing terms in general with a view to attract additional potential customers. In addition, the development of the Outbreak during the last quarter of the year ended 31 March 2020 also impacted the gross profit margin of this product segment. Our gross profit margin for our other architectural finishing materials segment slightly decreased from approximately 27.9% for the year ended 31 March 2020 to approximately 27.1% for the year ended 31 March 2021 which was attributable to our Group offered more favourable pricing terms in general with a view to attract additional potential customers. In general, the development of the Outbreak during the year ended 31 March 2021 has impacted the gross profit margin of this product segment. Our profit for the year (inclusive of [REDACTED]) amounted to approximately HK$39.0 million, HK$21.7 million and HK$26.7 million for the three years ended 31 March 2019, 2020 and 2021, respectively. However, if profit for the year ended 31 March 2020 were to exclude the effects of [REDACTED] of approximately [REDACTED], the adjusted profit for the year ended 31 March 2020, being a non-HKFRS measure, would be approximately HK$27.9 million, compared to approximately HK$39.0 million for the year ended 31 March 2019, representing a decrease of approximately HK$11.1 million or 28.4%, mainly attributable to the effects of (i) the Outbreak, led to a decrease in revenue derived from our product segments; and (ii) the lowered gross profit and gross profit margin. If profit for the year ended 31 March 2021 were to exclude the effects of [REDACTED] of approximately HK$[REDACTED], the adjusted profit for the year ended 31 March 2021, being a non-HKFRS measure, would be approximately HK$33.9 million, representing an increase of approximately HK$6.0 million or 21.5%, mainly attributable to the effects of (i) the gradual recovery from the Outbreak; (ii) the lowered gross profit margin; and (iii) the effects of the more stringent costs control which led to a reduction in administrative expenses as well as selling and distribution expenses.
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SUMMARY
Highlights of consolidated statements of financial position As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000 Total assets 288,237 268,918 335,250 – Property, plant and equipment 43,742 38,929 58,812 – Right-of-use assets 42,740 43,365 48,004 – Inventories 65,447 64,657 75,420 – Trade receivables 93,350 54,163 104,332 – Bank balances and cash 23,974 41,487 23,816 Total liabilities 198,415 177,459 209,240 – Trade and other payables 94,180 69,864 95,218 – Bank borrowings – Current 34,572 40,782 43,679 – Non-current 1,412 814 8,569 – Lease liabilities – Current 7,794 7,942 8,813 – Non-current 24,708 25,785 25,972 Current assets 200,057 184,939 227,012 Current liabilities 169,084 146,791 169,906 Net current assets 30,973 38,148 57,106 Non-current assets 88,180 83,979 108,238 Non-current liabilities 29,331 30,668 39,334
Net assets 89,822 91,459 126,010
As at 31 March 2021, our net assets of approximately HK$126.0 million, representing an increase of approximately HK$34.6 million, as compared to approximately HK$91.5 million as at 31 March 2020. Our total assets as at 31 March 2021 of approximately HK$335.3 million primarily comprised of (i) inventories of approximately HK$75.4 million; (ii) trade receivables of approximately HK$104.3 million; (iii) right-of-use assets of approximately HK$48.0 million; and (iv) bank balances and cash of approximately HK$23.8 million. Our total liabilities as at 31 March 2021 of approximately HK$209.2 million primarily comprised of (i) trade and other payables of approximately HK$95.2 million; (ii) current and non-current bank borrowings of approximately HK$52.2 million; and (iii) current and non-current lease liabilities of approximately HK$34.8 million. For further details of our financial position, please refer to the section headed “Financial Information – Analysis of selected statement of financial position items” in this document.
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SUMMARY
Highlights of consolidated statements of cash flows For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Operating cash flows before movements in working capital 66,849 48,065 57,162 Net movement in working capital (40,260) 3,072 (37,652) Income tax (paid) refund (1,619) (10,443) 2,125 Withholding tax paid – – (518) Net cash from operating activities 24,970 40,694 21,117 Net cash used in investing activities (16,240) (4,058) (21,804) Net cash used in financing activities (18,110) (18,482) (18,817) Net increase (decrease) in cash and cash equivalents (9,380) 18,154 (19,504) Cash and cash equivalents at beginning of the year 33,871 23,974 41,487 Effect of foreign exchange rate changes (517) (641) 1,833 Cash and cash equivalents at end of the year, represented by bank balances and cash 23,974 41,487 23,816
For further details of our cash flows, please refer to the section headed “Financial Information – Liquidity and capital resources” in this document.
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SUMMARY
KEY FINANCIAL RATIOS As at/for the year ended 31 March 2019 2020 2021 Current ratio 1.2 times 1.3 times 1.3 times Quick ratio 0.8 times 0.8 times 0.9 times Gearing ratio (Note) 76.2% 82.4% 69.1% Return on equity 43.4% 23.8% 21.2% Return on total assets 13.5% 8.1% 8.0% Interest coverage 16.0 times 7.0 times 7.7 times Notes: Gearing ratio is calculated by total debt divided by total capital at the end of the relevant year As at 31 March 2019, 2020 and 2021, our current ratio remained relatively stable at approximately 1.2 times, 1.3 times and 1.3 times, respectively. Our quick ratio remained stable at approximately 0.8 times, 0.8 times and 0.9 times as at 31 March 2019, 2020 and 2021, respectively, which is in line with our strategy to keep our inventory at a relatively low level. Our gearing ratio increased from approximately 76.2% as at 31 March 2019 to approximately 82.4% as at 31 March 2020, which was mainly attributable to the increase in bank borrowings and lease liabilities. Our gearing ratio then decreased to approximately 69.1% as at 31 March 2021, which was mainly attributable to the increase in total capital to approximately HK$126.0 million as at 31 March 2021. The return on equity of our Group decreased from approximately 43.4% for the year ended 31 March 2019 to approximately 23.8% for the year ended 31 March 2020, which was mainly due to the year-on-year decrease in profit for the year of approximately 44.2% in the year ended 31 March 2020. The return on equity of our Group remained largely stable at approximately 21.2% for the year ended 31 March 2021 despite the notable increase in the total capital balance. Our return on total assets decreased from approximately 13.5% for the year ended 31 March 2019 to approximately 8.1% for the year ended 31 March 2020, which was mainly due to the decrease in profit for the year of approximately 44.2%, while the total assets decreased by approximately 6.7%. The return on assets of our Group remained largely stable at approximately 8.0% for the year ended 31 March 2021. Our interest coverage ratio decreased from approximately 16.0 times for the year ended 31 March 2019 to approximately 7.0 times for the year ended 31 March 2020, which was mainly due to the decrease in profit before interest expenses and tax of approximately 37.4% in the year ended 31 March 2020 as our Group incurred [REDACTED] of approximately HK$[REDACTED], while the finance costs increased by approximately 44.2%, during the year ended 31 March 2020. Our interest coverage remained largely stable at approximately 7.7 times for the year ended 31 March 2021. RISK FACTORS Our Group’s business and financial performance may be affected by a number of factors. Some of the major risks that may materially and adversely affect our business, financial condition and results of operations include: (i) our business operations may be affected by the COVID-19 pandemic; (ii) our production facilities may not have sufficient capacity to keep up with the growth in demand for our products; (iii) we derived a significant portion of our revenue from Customer A, being our largest customer during the Track Record Period; (iv) we generally do not enter into long-term contracts or framework agreements with our customers except Customer A which exposes us to the risk of uncertainty and potential volatility with respect of our revenue; and (v) we may fail to cater for changes in customers’ taste and preferences and produce commercially viable designs. More details of the risks we are exposed to are set out in the section headed “Risk Factors” in this document. INDUSTRY AND COMPETITIVE LANDSCAPE According to the Ipsos Report, the ECMD industry in the PRC is fragmented with over 1,000 market participants in the industry and approximately 5% of the market participants attain the ability to manufacture decorative stainless steel. Market participants mainly located in Pearl River Delta (“珠江三角洲”) and Yangtze River Delta (“長江三角洲”) in the PRC. Competition in the industry is relatively moderate, given that the elevator market in the PRC is mainly dominated by the foreign elevator companies who contribute to the majority of market share in terms of revenue, and these elevator companies generate a substantial portion of revenue for the market participants in the ECMD industry. According to the Ipsos Report, the top five elevator companies in the PRC in 2019 were all foreign elevator companies including Hitachi Elevator (China) Co., Ltd., KONE Elevators Co., Ltd. and Shanghai Mitsubishi Elevator Co., Ltd. Major market participants of the ECMD industry are often business partners of the top five elevator companies.
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SUMMARY
Besides, there are a lot of ECMD companies in different scales facilitating numerous domestic elevator companies in the PRC. In 2019, there were over 600 elevator companies established in the PRC. It is estimated that our Group had a market share of approximately 1.4% and ranked fourth in the ECMD industry in the PRC in terms of revenue in 2019, according to the Ipsos Report. [REDACTED] For the years ended 31 March 2019, we did not record any [REDACTED]. The estimated total [REDACTED] borne/to be borne by our Group, which primarily represent professional fees for our [REDACTED] is non-recurrent in nature, and including the [REDACTED] for all [REDACTED], has been estimated to be approximately HK$[REDACTED], representing approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (assuming the [REDACTED] is not exercised and assuming an [REDACTED] of HK$[REDACTED] per [REDACTED], being the mid-point of the indicative [REDACTED] range), of which approximately HK$[REDACTED] is directly attributable to the issue of the [REDACTED] to the public and is to be accounted for as a deduction from equity. For the years ended 31 March 2020 and 2021, we recognised approximately HK$[REDACTED] and HK$[REDACTED] of [REDACTED] which was charged to our consolidated statements of profit and loss and other comprehensive income. The remaining approximately HK$[REDACTED] is expected to be charged to our profit or loss during the year ending 31 March 2022. The Board wishes to inform the Shareholders and potential investors that our Group’s financial performance and results of operations for the year ending 31 March 2022 will be affected by the estimated expenses in relation to the [REDACTED]. It should be noted that the [REDACTED] are current estimate and for references only.
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SUMMARY
FUTURE PLANS AND [REDACTED] We estimate that the [REDACTED] from the [REDACTED] which we will receive, assuming an [REDACTED] of HK$[REDACTED] per [REDACTED], being the mid-point of the indicative [REDACTED] range, and after deducting related [REDACTED] fees and estimated expenses in connection with the [REDACTED] and the [REDACTED] is not exercised, our Group estimates that the aggregate [REDACTED] to our Company from the [REDACTED] will be approximately HK$[REDACTED]. Our Directors presently intend to apply such [REDACTED] as follows: ¼ approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the establishment of our Jiangmen Plant, which will form part of our Southern China Production Hub together with our Guangzhou Plant, with an aim to enhance our production capacity, among which: (i) approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the construction of office, factory buildings and other ancillary facilities for our Jiangmen Plant; and (ii) approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the acquisition of machinery and equipment for our Jiangmen Plant. ¼ approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to acquire certain machinery, equipment and robotic arms with an aim to enhance our production capacity and level of automation in our production process at our Guangzhou Plant which will form part of our Southern China Production Hub together with our Jiangmen Plant. ¼ approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to acquire certain machinery and equipment with an aim to enhance our production capacity at our Suzhou Workshop and upgrade it to full-scale production facilities. ¼ approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) for upgrading our information technology systems to a new version of ERP system to cover wider aspects in our daily operations and enhance electronic data interchange and data direct linkage among our three production facilities at our Southern China Production Hub and Suzhou Workshop. ¼ approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) for our working capital and general corporate purposes. For details of our [REDACTED] from the [REDACTED], please refer to the section headed “Future Plans and [REDACTED]” in this document. [REDACTED]
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SUMMARY
[REDACTED] DIVIDENDS For the three years ended 31 March 2019, 2020 and 2021, our subsidiaries declared and distributed dividends of approximately HK$27.5 million, HK$14.5 million and nil, respectively. Pursuant to our dividend policy, being effective upon [REDACTED], our Board may propose the payment of dividends, if any, on a per share basis, provided that our Group is profitable and without affecting the normal operations and business of our Group, our Board may consider declaring and paying dividends to the Shareholders by taking into account the following factors, among others, (i) the actual and expected financial performance of our Group; (ii) the general business conditions and strategies of our Group; (iii) the expected working capital requirements, capital expenditure requirements and future expansion plans of our Group; (iv) the retained earnings and distributable reserves of our Company and each of the other members of our Group; (v) the level of our Group’s debts to equity ratio and return on equity as well as financial covenants to which our Group is subject; (vi) our Group’s liquidity position and future commitments at the time of declaration of dividends; (vii) the statutory and regulatory restrictions which our Group is subject to from time to time; (viii) the general economic conditions, business cycle of our Group’s business and other internal or external factors that may have an impact on the business or financial performance and position of our Group; and (ix) any other factors that the Board may deem appropriate. Such declaration and payment of dividends by our Company shall remain to be determined at the sole discretion of our Board and subject to the requirements under all applicable laws, rules and regulations as well as the Articles of Association. Any future declarations and payments of dividends may or may not reflect the historical declarations and payments of dividends and will be at the absolute discretion of our Directors. We do not have any dividend payout ratio. Our future dividend payments will also depend upon the availability of dividends received from our operating subsidiaries in the PRC. PRC law requires that dividends be paid only out of the net profit calculated according to PRC accounting principles, which differ in certain aspects from the generally accepted accounting principles in other jurisdictions including HKFRS. PRC law also requires a foreign invested enterprise to transfer at least 10% of its net profit (after offsetting losses in the prior year) to a statutory reserve until the reserve balance reaches 50% of the registered capital of the enterprise. The transfer to its reserve must be made before distribution of dividends to its equity holders. For more details regarding our dividend policy, please refer to the section headed “Financial Information – Dividends” in this document. RECENT DEVELOPMENTS AND MATERIAL ADVERSE CHANGE We continued to focus on principal business of manufacture of elevator cabin products and decorative stainless steel products and other architectural finishing materials subsequent to the Track Record Period and up to the Latest Practicable Date. The Outbreak had an adverse impact on, where applicable, our revenue, gross profit margin and net profit for the years ended 31 March 2020 and 2021, details of which are set out in the section headed “Financial Information – Principal components of results of operations” in this document. Nonetheless, we managed to record an increase of approximately 7.2% in revenue for the year ended 31 March 2021 as compared to that in the previous year amid the development and temporary effects as a result of the Outbreak on the businesses of our Group, primarily attributable to the continued growth in revenue of the elevator cabin segment and notable recovery of the decorative stainless steel segment of our Group. We have received certain government support in both Hong Kong and the PRC due to the Outbreak. During the Track Record Period, we received two tranches of subsidies of approximately HK$1.6 million in aggregate under the Employment Support Scheme of the Government, which had been offset against the staff costs in the consolidated financial statements of our Group. In the PRC, we were granted cost concessions and government assistance on electricity, social insurance and rental expenses of approximately RMB4.5 million, among which, (i) approximately RMB3.5 million of government assistance related to our social insurance contribution had been offset against the staff costs; and (ii) approximately RMB1.0 million of cost concessions on electricity and rental expenses were recognised as deductions to
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SUMMARY the relevant expenses, in the consolidated financial statements of our Group. Subsequent to the Track Record Period and up to the Latest Practicable Date, we did not receive any government support from the Government and the PRC Government in relation to the Outbreak. The indebtedness of our Group as at 31 March 2021, being the latest practicable date for determining the amount of indebtedness in this document, amounted to approximately HK$95.9 million. Further details of our Group’s indebtedness statement as at 31 March 2021 are set out under the section headed “Financial Information – Indebtedness” in this document.
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SUMMARY
Save as disclosed and for the [REDACTED], of which approximately HK$[REDACTED] and HK$[REDACTED] was charged to our profit or loss for the years ended 31 March 2020 and 2021, respectively, and approximately HK$[REDACTED] is expected to be charged to our profit or loss during the year ending 31 March 2022, which would in turn adversely impact our Group’s financial results for the year ending 31 March 2022, our Directors confirm that, up to the date of this document, there has been no other material adverse change in the financial or trading position or prospects of our Group since 31 March 2021 (being the date to which the latest audited consolidated financial statements of our Group were prepared), and there is no event since 31 March 2021 which would materially affect the information shown in the Accountants’ Report set out in Appendix I to this document. Effect of the outbreak of COVID-19 An outbreak of respiratory illness caused by a novel coronavirus (COVID-19) first emerged in late December 2019 and continues to expand globally. The WHO declared the Outbreak a Public Health Emergency of International Concern on 30 January 2020 and subsequently a pandemic on 11 March 2020. With a view to contain the spread of COVID-19, the PRC Government has implemented various measures from time to time, including, among others, quarantine policies, monitoring and restriction of movement via the introduction of a colour code system by risk category, crowd gathering prevention, social distancing, suspension of work and school, closure of tourist attractions, eatery, entertainment and other public facilities. Following the PRC Government’s guidelines, the operation of our factories, including our Guangzhou Plant and Suzhou Workshop, were suspended since 3 February 2020, being the first day of operation following the Chinese New Year holiday had the suspension not taken place. Pursuant to the notices received by our Group from the PRC local government departments in charge of the prevention and control of the COVID-19, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approval from the said PRC Government departments by end of February 2020. As the Outbreak is under control in the PRC, the International Monetary Fund has anticipated a sharp recovery of GDP growth rate in 2021. Accordingly, the ECMD industry in the PRC is anticipated to grow from approximately RMB16,210.7 million in 2020 to approximately RMB21,132.2 million in 2024, rising at a CAGR of approximately 6.9%. The Outbreak has not posed much negative impact on the ECMD industry in the PRC and is predicted to recover in 2021. In Hong Kong, special work arrangement for government employees was implemented from time to time between January 2020 and August 2020, whereas work-from-home or other special arrangements have been adopted by the private sector on a discretionary basis. In addition, various regulations and measures have been implemented in Hong Kong from time to time, including, among others, quarantine policies, large group gathering preventive measures, social distancing, suspension of school, closure and/or restrictions in relation to eateries as well as public facilities. According to the Ipsos Report, there is an estimated temporary decline of the gross output value of the decorative stainless steel market in Hong Kong in 2020, which is mainly attributed to the Outbreak. Nevertheless, so far as COVID-19 is under control, the construction industry in Hong Kong is anticipated to rebound gradually from 2021 to 2024 and the gross output value of the decorative stainless steel market in Hong Kong is forecasted to increase from approximately HK$1,949.6 million in 2020 to approximately HK$2,273.0 million in 2024, estimated to increase at a CAGR of approximately 3.9%.
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SUMMARY
For the overseas market, COVID-19 had spread to over 180 countries and regions around the world with confirmed cases of more than 166 million as at the Latest Practicable Date. The Outbreak has resulted in unprecedented temporary local shutdowns or travel restrictions in many countries and regions including Macau, the Philippines, Thailand and South Korea to which we delivered our products during the Track Record Period, leading to certain adverse temporary impact to our revenue in the overseas market. In this connection, our Directors assessed its impact on our Group in the following aspects, namely (i) suppliers; (ii) customers; and (iii) production, as follows: Suppliers: Our major suppliers during the Track Record Period are mainly located in the Guangdong Province. Despite the temporary suspension of operations of our major suppliers due to the Outbreak, our Group understood from them that they have gradually resumed operation since February 2020. Our Directors consider that the supply of raw materials to our Guangzhou Plant and Suzhou Workshop have not been materially affected since the resumption of operation and, barring unforeseen circumstances, our Group has not encountered and does not expect to encounter any material supply chain disruption due to the Outbreak. Customers: As a result of the Outbreak, in particular, during the first quarter of 2020, the demand from a number of our customers, subject to their locations, were temporarily affected to various degrees as certain of our customers also encountered temporary suspension of operation. Nevertheless, since their resumption of operations since February 2020, the demand from our customers have continued to recover after the Track Record Period and up to the Latest Practicable Date, albeit to a different degree over time. In April 2021, our total secured orders amounted to approximately HK$37.0 million of which (i) approximately HK$27.6 million was attributable to the elevator cabin segment; (ii) approximately HK$5.0 million was attributable to the decorative stainless steel segment; and (iii) approximately HK$4.4 million was attributable to the other architectural finishing materials segment. Our major customers have confirmed to us that since the Outbreak, they have not requested for any material compensation for any incidents of delay in delivery or failure to perform contractual obligations of our Group. They have continued to place orders from our Group after the operation of our Group returns to normal. As such, our Directors are of the view that the temporary suspension of our operation did not harm our long-term relationship with customers or give rise to any material financial liabilities. Production: Pursuant to the notices received by our Group from the local government departments in charge of the prevention and control of the COVID-19, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approval from the said government departments by end of February 2020 and subsequently resumed full operation in March and April 2020, respectively. Based on information currently available to our Directors, after taking into account the governmental measures implemented to control the spread of the Outbreak and barring unforeseen circumstances, our Directors believe that the Outbreak shall not cause a material disruption on the operation of our Group going forward and may only affect our Group temporarily. Based on the purchase orders we received so far and having taken into account the impact of the COVID-19 on our business during the years ended 31 March 2020 and 2021, we anticipate that we may experience certain adverse temporary impact to our revenue, gross profit and/or gross profit margin in Hong Kong and overseas markets for the year ending 31 March 2022. In light of the aforesaid industry and market outlook, we, however, do not expect that such adverse impact arising from the Outbreak in Hong Kong and overseas on our operation to be long-lasting given that (i) our revenue from Hong Kong market experienced notable recovery for the year ended 31 March 2021; (ii) the PRC has been gradually resuming economic activities to full scale; and (iii) governments in Hong Kong and other countries have implemented numerous
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SUMMARY control measures with a view to manage the Outbreak and facilitate the recovery of local economic activities. In view of the above, our Directors are of the view that our expansion plans as discussed in the section headed “Business – Business strategies” in this document remain feasible. Our Directors will continue to assess the impact of the COVID-19 on our Group’s operations and financial performance and closely monitor our Group’s exposure to the risks and uncertainties in this connection. We will take appropriate measures as necessary and inform our Shareholders as and when necessary. For illustration purposes only, an analysis is conducted based on the worst-case scenario, whereby it is assumed that our Group will not derive any revenue commencing from the date of [REDACTED] onwards due to the Outbreak but will continue to incur operating and administrative expenses, rental expenses and salaries and wages at a reduced rate to maintain a minimal operation. Under the aforesaid unlikely and extreme event, it is also assumed that there will be no further financing from our then Shareholders, the existing banking facilities would be renewed upon its expiry, our Group will not pay any dividend during the said period, and taking into account prudent estimate of settlement of trade receivables based on historical settlement pattern, [REDACTED] from the [REDACTED] for general working capital purposes, our existing cash and cash equivalents and trade receivables as at 31 March 2021, it is estimated that we can maintain our Group’s financial viability for not less than 30 months with other [REDACTED] from the [REDACTED] only to be utilised in accordance with the applications as specified under the section headed “Future Plans and [REDACTED]” in this document and without utilising such for settling our estimated monthly fixed costs (including rentals and staff costs), trade payables and finance costs from bank borrowings outstanding as at 31 March 2021.
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
In this document, unless the context otherwise requires, the following expressions have the following meanings.
This definitions and glossary of technical terms contains certain definitions, terms and abbreviations used in this document in connection with our Group and our business. The definitions, terms, abbreviations and their meanings may not always correspond to standard industry meanings or usage of these definitions, terms and abbreviations, in particular, in the context of valuation methodology.
“architectural finishing materials” decorative materials that can only be applied or installed on surfaces with proper surface preparation, without affecting the building’s structure. Examples of architectural finishing materials include decorative stainless steel, wallpapers, paints, but exclude structural material, such as cement and concrete block
“Articles” or “Articles of the amended and restated articles of association of our Association” Company conditionally adopted on [¼] effective upon the [REDACTED] and as amended from time to time, a summary of which is set out in Appendix III to this document
“associate(s)” has the meaning ascribed thereto it under the Listing Rules
“Board” or “Board of Directors” the board of Directors of our Company
“business day” any day (other than a Saturday, and Sunday or public holidays in Hong Kong) on which banks in Hong Kong are generally open for normal banking business
“BVI” the British Virgin Islands
“CAGR” compounded annual growth rate
“Capitalisation Issue” the issue of [REDACTED] Shares to be made upon capitalisation of part of the amount standing to the credit of our share premium account as referred to in the paragraph headed “A. Further Information about our Company and our subsidiaries – 3. Written resolutions of our Shareholders passed on [¼]” in Appendix IV to this document
“CCASS” the Central Clearing and Settlement System established and operated by HKSCC
“CCASS Clearing Participant” a person permitted to participate in CCASS as a direct clearing participant or general clearing participant
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“CCASS Custodian Participant” a person permitted to participate in CCASS as a custodian participant
“CCASS Investor Participant” a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation
“CCASS Participants” a CCASS Clearing Participant, a CCASS Custodian Participant or a CCASS Investor Participant
“CIF” cost, insurance and freight where the seller is responsible to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier, and the risk delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel
“close associate(s)” has the meaning ascribed to it under the Listing Rules
“Cobelco GZ” 廣州市高比電梯裝飾工程有限公司 (Guangzhou Cobelco Elevator Decoration Engineering Limited*), a company established in the PRC with limited liability on 6 September 2005, which is an indirect wholly-owned subsidiary of our Company
“Cobelco GZ (GZ Branch)” 廣州市高比電梯裝飾工程有限公司廣州分公司 (Guangzhou Cobelco Elevator Decoration Engineering Limited (Guangzhou Branch)*) (formerly known as 廣州市高比 電梯裝飾工程有限公司海珠分公司 (Guangzhou Cobelco Elevator Decoration Engineering Limited (Haizhu Branch)*)), a branch office of Cobelco GZ established on 28 June 2012 and deregistered on 20 July 2020
“Cobelco HK” Cobelco (HK) Limited （高比（香港）有限公司）,a company incorporated in Hong Kong with limited liability on 21 December 1995, which is an indirect wholly-owned subsidiary of our Company
“Cobelco Industrial” Cobelco Industrial Supplies Limited（高比工業材料有限 公司）, a company incorporated in Hong Kong with limited liability on 26 November 1997, which is an indirect wholly-owned subsidiary of our Company
“Cobelco Industrial Supplies” a partnership established under the laws of Hong Kong and commenced business on 1 August 1987 as a predecessor of Cobelco Industrial
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“Cobelco KS” 昆山高比裝飾工程有限公司 (Kunshan Cobelco Decoration Engineering Limited*), a company established in the PRC with limited liability on 9 February 2018, which is an indirect wholly-owned subsidiary of our Company
“Companies Act” the Companies Act, Cap. 22 (Act 3 of 1961, as consolidated and revised) of the Cayman Islands
“Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended, modified and supplemented from time to time
“Companies (WUMP) Ordinance” the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), as amended, modified and supplemented from time to time
“Company” Cobelco Group Holdings Limited （高比集團控股有限公 司）, a company incorporated in the Cayman Islands as an exempted company with limited liability on 28 February 2019
“connected person(s)” has the meaning ascribed to it under the Listing Rules
“connected transaction(s)” has the meaning ascribed to it under the Listing Rules
“Controlling Shareholder(s)” has the meaning ascribed to it under the Listing Rules and unless the context otherwise requires, means Rich Topmax and Mr. Colby Chiu
“core connected person(s)” has the meaning ascribed to it under the Listing Rules
“Corporate Governance Code” the Corporate Governance Code as set out in Appendix 14 to the Listing Rules
“COVID-19” an infectious disease caused by a newly discovered coronavirus since December 2019, namely, severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) which has spread globally and resulted in a pandemic
“decorative stainless steels” materials used to furnish the indoor and outdoor surface areas of residential buildings, commercial buildings as well as hospitality and infrastructure facilities
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“decorative stainless steel the process of transforming stainless steel materials manufacturing” such as sheets or plates into decorative stainless steel products by different processing techniques, including but not limited to colour coating, anti-fingerprint treatment and surface pattern treatment. Decorative stainless steel manufacturers are also responsible for cutting, bending as well as welding decorative stainless steel into desired shapes and sizes
“Deed of Indemnity” the deed of indemnity dated [¼] given by our Controlling Shareholders in favour of our Company regarding certain indemnities, details of which are set out in the paragraph headed “E. Other Information – 1. Tax and other indemnities” in Appendix IV to this document
“Deed of Non-Competition the deed of non-competition dated [¼] given by our Controlling Shareholders in favour of our Company regarding certain non-competition undertakings, details of which are set out in the section headed “Relationship with our Controlling Shareholders – Non-competition undertakings by our Controlling Shareholders” in this document
“Director(s)” the director(s) of our Company
“ECMD industry” or “ECMD” elevator cabin manufacturing and decoration industry mainly focuses on the design, manufacture and decoration of elevator cabin. ECMD companies may also be responsible for the production of elevator floor doors, push-button panels and other elevator components which are mostly visible to passengers
“elevator cabin” the compartment which carries passengers in an elevator, typically formed by stainless steel
“Elite Honest” Elite Honest Investment Limited（雅誠投資有限公司）,a company incorporated in Hong Kong with limited liability on 10 March 2009, which was wholly owned by Mr. Colby Chiu as at the Latest Practicable Date
“ERP system” enterprise resource planning system
“Full Victory” Full Victory Investment Development Limited（豐華投 資發展有限公司）, a company incorporated in the BVI with limited liability on 2 January 2019, which is a direct wholly-owned subsidiary of our Company
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“GDP” gross domestic product
“Government” the government of Hong Kong
“[REDACTED]” [REDACTED]
“Group”, “we, “us” or “our” our Company and our subsidiaries at the relevant time or, where the context otherwise requires, in respect of the period prior to our Company becoming the holding company of our present subsidiaries, our present subsidiaries and the businesses operated by such subsidiaries (as the case may be)
“Guangzhou Plant” our existing production facilities in Guangzhou City, Guangdong Province, the PRC, which will form part of our Southern China Production Hub upon establishment of our Jiangmen Plant
[REDACTED] [REDACTED]
[REDACTED] [REDACTED]
“HKD” or “HK$” and “cents” Hong Kong dollars and cents respectively, the lawful currency of Hong Kong
“HKFRSs” Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants
“HKSCC” Hong Kong Securities Clearing Company Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited
“HKSCC Nominees” HKSCC Nominees Limited
“Hong Kong”, “HKSAR” or the Hong Kong Special Administrative Region of the “HK” PRC
“Hong Kong Branch Share [REDACTED], the Hong Kong branch share registrar Registrar” and transfer office of our Company
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“Independent Third Party(ies)” an individual(s) or a company(ies) who or which is/are independent of and not connected with (within the meaning of the Listing Rules) any of our Directors, chief executive, Substantial Shareholders of our Company, any of its subsidiaries, or any of their respective associates and not otherwise a connected person of our Company
“[REDACTED]” [REDACTED]
“Ipsos” Ipsos Asia Limited, an independent market research agency
“Ipsos Report” a market research report commissioned by us and prepared by Ipsos on the overview of the industry in which our Group operates
“IRD” the Inland Revenue Department of Hong Kong
“Jiangmen Plant” our planned production facilities in Jiangmen City, Guangdong Province, the PRC, which will form part of our Southern China Production Hub together with our Guangzhou Plant
“Latest Practicable Date” 18 May 2021, being the latest practicable date prior to the printing of this document for the purpose of ascertaining certain information in this document prior to its publication
“[REDACTED]” [REDACTED]
“Listing Committee” the Listing Committee of the Stock Exchange
“[REDACTED]” [REDACTED]
“Listing Rules” the Rules Governing the Listing of Securities on the Main Board of the Stock Exchange, as amended, modified and supplemented from time to time
“Macau” The Macao Special Administrative Region of the PRC
“Main Board” the Main Board of the Stock Exchange
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“Memorandum of Association” or the amended and restated memorandum of association “Memorandum” of our Company adopted on [¼] with immediate effect and as amended from time to time
“Mr. Colby Chiu” Mr. Chiu Yu Kui Colby（趙汝渠）, an executive Director, the chairman of the Board and one of our Controlling Shareholders, and the father of Mr. SY Chiu
“Mr. SY Chiu” Mr. Chiu Sung Yin（趙崇彥）, an executive Director, the chief executive officer and company secretary of our Company, and the son of Mr. Colby Chiu
“Ms. Wong” Ms. Wong Yuet Ha（黃月霞）, the spouse of Mr. Colby Chiu
“OECD Guidelines” the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“Outbreak” the outbreak of COVID-19
“[REDACTED]” [REDACTED]
“pH” a numerical scale from 0 to 14 used to specify the acidity or basicity of a water-based solution
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“PRC” or “China” the People’s Republic of China, and for the purpose of this document, excludes Hong Kong, Macau and Taiwan
“PRC Government” the government of the PRC
“PRC Legal Advisers” Jingtian & Gongcheng, legal advisers to our Company as to PRC law
“Predecessor Companies the predecessor Companies Ordinance (Chapter 32 of Ordinance” the Laws of Hong Kong) as in force from time to time before 3 March 2014
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“Regulation S” Regulation S under the U.S. Securities Act
“Reorganisation” the corporate reorganisation of our Group in preparation for the [REDACTED] as described in the section headed “History, Reorganisation and Corporate Structure” in this document
“Reorganisation Agreement” the reorganisation agreement dated 31 July 2019 and entered into between our Company, Full Victory, Rich Topmax and Mr. Colby Chiu, pursuant to which our Company acquired the entire issued share capital of Full Victory from Mr. Colby Chiu, details of which are set out in the section headed “History, Reorganisation and Corporate Structure – Reorganisation” in this document
“Rich Topmax” Rich Topmax Limited, a company incorporated in the BVI with limited liability on 16 January 2019, which is wholly owned by Mr. Colby Chiu, and one of our Controlling Shareholders
“SFC” the Securities and Futures Commission of Hong Kong
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time
“Share(s)” ordinary share(s) with nominal value of HK$0.01 each in the share capital of our Company
“Shareholder(s)” holder(s) of the Share(s)
“[REDACTED]” [REDACTED]
“Share Option Scheme” the share option scheme conditionally adopted by our Company on [¼], the principal terms of which are summarised in the paragraph headed “D. Share Option Scheme” in Appendix IV to this document
“Sitami Decorative” Sitami Decorative Metal Works Limited（施捷美裝飾金 屬工藝有限公司）, a company incorporated in Hong Kong with limited liability on 29 August 2017, which is an indirect wholly-owned subsidiary of our Company
“Sitami Film” Sitami Film Decoration Engineering Company, Limited （施捷美貼膜裝飾工程有限公司）, a company incorporated in Hong Kong with limited liability on 19 September 1996, which is an indirect wholly-owned subsidiary of our Company
“Sitami GD” 廣東施捷美裝飾金屬有限公司 (Guangdong Sitami Decorative Metal Co., Ltd*), a company established in the PRC with limited liability on 31 August 2017, which is an indirect wholly-owned subsidiary of our Company
“Sitami HK” Sitami (HK) Limited （施捷美（香港）有限公司）,a company incorporated in Hong Kong with limited liability on 3 August 2017, which is an indirect wholly-owned subsidiary of our Company
“Sole Sponsor” Red Sun Capital Limited, the sole sponsor for the [REDACTED] and a licensed corporation to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO
“Southern China Production Hub” comprises our Guangzhou Plant and Jiangmen Plant
“sq.ft.” square foot
“sq.m.” square metre
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“subsidiary(ies)” has the meaning ascribed to it under the Listing Rules
“Substantial Shareholder(s)” has the meaning ascribed to it under the Listing Rules and details of our Substantial Shareholders are set out in the section headed “Substantial Shareholders” in this document
“Suzhou Workshop” our ancillary production facilities in Suzhou City, Jiangsu Province, the PRC
“Takeovers Code” The Codes on Takeovers and Mergers, as amended, supplemented or otherwise modified from time to time
“Track Record Period” the three years ended 31 March 2019, 2020 and 2021
“[REDACTED]” [REDACTED]
“[REDACTED]” [REDACTED]
“United States” or “U.S.” the United States of America
“USD” or “US$” United States dollars, the lawful currency of the United States
“U.S. Securities Act” United States Securities Act of 1933, as amended, modified and supplemented from time to time
“UV” ultraviolet
“WHO” the World Health Organisation
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DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS
“%” per cent
Certain amounts and percentage figures included in this document have been subject to rounding adjustments. Unless otherwise stated, all the numerical figures are rounded to one decimal place. Any discrepancy in any table between totals and sums of individual amounts listed in any table are due to rounding. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures preceding them.
If there is any inconsistency between the official Chinese name of the PRC entities mentioned in this document and their English translation, the Chinese version shall prevail. English translations of official Chinese names and English translations which are marked with “*” are for identification purposes only.
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FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. In some cases the words such as “aim”, “anticipate”, “believe”, “estimate”, “expect”, “going forward”, “intend”, “may”, “plan”, “potential”, “predict”, “propose”, “seek”, “should”, “will”, “would” and other similar expressions are used to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to:
¼ our Group’s business and operating strategies and plans of operation;
¼ the amount and nature of, and potential for, future development of our Group’s business;
¼ our Company’s dividend distribution plans;
¼ the regulatory environment as well as the general industry outlook for the industry in which our Group operates;
¼ future developments in the industry in which our Group operates; and
¼ the trend of the economy of the PRC and Hong Kong and the world in general.
These statements are based on various assumptions, including those regarding our Group’s present and future business strategy and the environment in which our Group will operate in the future.
Our Group’s future results could differ materially from those expressed or implied by such forward-looking statements. In addition, our Group’s future performance may be affected by various factors including, without limitation, those discussed in the sections headed “Risk Factors” and “Financial Information” in this document.
Should one or more risks or uncertainties stated in the aforesaid sections materialise, or should any underlying assumptions prove to be incorrect, actual outcomes may vary materially from those indicated. Prospective investors should therefore not place undue reliance on any of the forward-looking statements. All forward-looking statements contained in this document are qualified by reference to the cautionary statements as set out in this section.
In this document, statements of, or references to, our Group’s intentions or those of any of our Directors are made as at the date of this document. Any such intentions may change in light of future developments.
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RISK FACTORS
Potential investors should carefully consider all of the information set out in this document and, in particular, should consider the following risks and special consideration associated with an investment in our Company before making any investment decision in relation to the [REDACTED]. If any of the possible events as described below materialises, our Group’s business, financial position and prospects could be materially and adversely affected and the [REDACTED] could decline due to any of these risks, and you may lose all or part of your investment.
RISK RELATING TO OUR BUSINESS
Our business operations may be affected by the COVID-19 pandemic
An outbreak of respiratory illness caused by COVID-19 first emerged in late December 2019 and continues to expand globally. The WHO declared the outbreak of COVID-19 a Public Health Emergency of International Concern on 30 January 2020 and subsequently a pandemic on 11 March 2020.
With a view to contain the spread of COVID-19 in the PRC, the PRC Government has implemented various measures from time to time, including, among others, quarantine policies, monitoring and restriction of movement via the introduction of a colour code system by risk category, crowd gathering prevention, social distancing, suspension of work and school, closure of tourist attractions, eatery, entertainment and other public facilities. Following the government’s guidelines, the operation of factories, including our Guangzhou Plant and Suzhou Workshop, were suspended since 3 February 2020, being the first day of operation following the Chinese New Year holiday had the suspension not taken place. Pursuant to the notices received by our Group from the local government authorities in charge of the prevention and control of the COVID-19, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approvals from the said government authorities by end of February 2020. In addition, COVID-19 has also impacted Hong Kong and other locations, governments in Hong Kong and other countries have implemented various control measures with a view to manage the Outbreak and facilitate the recovery of local economic activities. For details of the effect of the Outbreak, please refer to the section headed “Business – Effect of the outbreak of COVID-19” in this document.
According to the Ipsos Report, the ECMD industry and decorative stainless steel manufacturing industry in the PRC have continued its recovery from the Outbreak, which has caused, among others, disruptions to the supply chain both locally and globally. However, there are uncertainties around the continued recovery rate of our Group’s product segments in different geographical locations subject to the development of COVID-19 at the relevant time.
We are uncertain as to when the Outbreak will be contained, and we also cannot predict if the impact will be short-lived or long-lasting. If the Outbreak is not effectively controlled at the principal locations where we conduct business, our business operations and financial performance may be materially and adversely affected as a result of economic recession, changes in the outlook of the ECMD industry and decorative stainless steel manufacturing industry, any slowdown in economic growth, negative business sentiment or other factors that we cannot foresee.
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RISK FACTORS
Our production facilities may not have sufficient capacity to keep up with the growth in demand for our products
For the three years ended 31 March 2019, 2020 and 2021, the overall utilisation rate of our production facilities amounted to approximately 118.7%, 98.2% and 113.0%, respectively. Given that the overall utilisation rate of our production facilities exceeded 100% for each of the two years ended 31 March 2019 and 2021, and we may not be able to considerably increase our production capacity permanently, or at all, without significant additional investment to our existing production facilities. In the event that the demand for our products continue to increase in the future and we may be unable to supply such products due to failure to increase the capacity of our manufacturing facilities accordingly, our operations, profitability and growth may be materially and adversely affected.
We plan to utilise certain portion of the [REDACTED] from the [REDACTED] on enhancing our production capacity. For details please refer to the section headed “Business – Business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products” in this document. We cannot guarantee that our expansion plan will be successfully implemented. If our expansion plan does not proceed as we desire, is not timely completed or does not result in the anticipated benefits, our future plans, profitability and growth may be materially and adversely affected.
We derived a significant portion of our revenue from Customer A, being our largest customer during the Track Record Period
During the Track Record Period, Customer A has been our largest customer by revenue generated. For the three years ended 31 March 2019, 2020 and 2021, our revenue attributable to Customer A was approximately 55.1%, 64.0% and 61.9%, respectively.
We have entered into supply framework agreements with Customer A to confirm in advance the fundamental terms, including the rights and obligations of each party. However, we cannot assure you that we will successfully maintain our business relationship with Customer A or sufficiently diversify our customer portfolio and there is no assurance that we will be able to maintain our revenue generated from sales to Customer A in the future and/or secure new orders from other customers of similar volume and value on comparable terms to offset any reduction in revenue from Customer A. If Customer A ceases our business relationship or reduces its purchases from us or Customer A’s business experiences a decline, our business, financial conditions and results of operations will be materially and adversely affected.
We generally do not enter into long-term contracts or framework agreements with our customers except Customer A which exposes us to the risk of uncertainty and potential volatility with respect of our revenue
Save and except for the supply framework agreements with Customer A, we generally do not enter into any long-term contracts or framework agreements with our customers, which is a norm in the industry which our Group operates. As our customers only place orders with us on an order-by-order basis, there is no assurance that our customers will
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RISK FACTORS continue placing orders with us at a comparable level as they did during the Track Record Period or at all. Amount and/or volume of purchase orders from our customers may vary significantly from time to time attributable to factors beyond our control, which create uncertainties on our future revenue streams and we cannot guarantee that our business will grow or remain stable going forward. If our customers reduce their orders or cease placing orders with us altogether, and we are unable to secure new sales orders from our existing or new customers, our business, financial conditions and results of operations may be materially and adversely affected.
We may fail to cater for changes in customers’ taste and preferences and produce commercially viable designs
Our Directors believe that both the ECMD industry and decorative stainless steel manufacturing industry are subject to constantly evolving designs and customers’ preferences. Furthermore, we primarily focused on the supply of customised products. On this basis, our success depends largely on our ability to continually develop, in conjunction with our customers, new designs and products to meet our customers’ changing tastes and preferences. In addition, we may need to acquire more advanced processing technology or machinery to manufacture new products. In the event that we are unable to develop new and commercially viable designs and products to cater for changes in our customers’ preferences or meet the specifications of our customers, the demand for our products and hence our business, financial results and growth may be materially and adversely affected.
Our operations rely on our management team, key personnel and skilled labour and our ability to retain their services
We consider knowledge, skills and experience of our management team (including Mr. Colby Chiu, Mr. SY Chiu, Mr. Chiu Wai Leung, Mr. Poon Ka Cheuk and Ms. Cheung Ping Tse), key personnel and skilled labour as one of our biggest assets which differentiate us from our competitors and one of our key success contributing factors is the continued service of our management team, key personnel and our skilled labour.
As our manufacturing processes mainly involve the manual control of the machinery and other production facilities by our skilled labour, the skills of our labour to achieve the high precision demanded by our customers are critical to our quality. Our production operations are generally labour-intensive. As at the Latest Practicable Date, we employed approximately 380 production workers in our production facilities located in the PRC. With increasing demand for skilled labour in neighbouring regions and other rapidly developing cities in the PRC, there is no assurance that we will continue to attract suitable skilled workers at our current level of wages or that our current workers will continue to work for us. Due to the tightening labour market as well as the increase in the minimum wage requirements set by the relevant authorities from time to time, we have faced a general increase in labour costs during the Track Record Period. If the labour market continues to tighten, we may not be able to employ sufficient suitable skilled labour in a timely manner or we may have to pay higher wages for such employees and as a result, our financial performance could be materially and adversely affected.
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RISK FACTORS
In addition, our operation performance substantially depends on the retention of our senior management, key personnel and skilled labour. We cannot assure you that we will be able to retain members of our senior management, key personnel and skilled labour in the future. In the event of their departure or absence, we may not be able to recruit suitable candidates for replacement in a timely manner on acceptable terms or at all. In addition, new hires may require significant time and training before they attain full productivity. As such, our business, financial conditions and results of operations may be materially and adversely affected.
Failure to estimate costs accurately in our quotation could materially affect our profitability
During the Track Record Period, we derived revenue of approximately HK$254.9 million, HK$260.0 million and HK$266.3 million for the three years ended 31 March 2019, 2020 and 2021, respectively, from our elevator cabin segment, of which we primarily focused on the supply of customised elevator cabin products. In connection with these customised products, we may be required to (i) satisfy numerous specifications set by our customers; and/or (ii) supply numerous components and parts which may be subject to various manufacturing process. Given the range of raw materials and consumables required, as well as the production process we may be required to undertake, we may not be able to accurately estimate the associated costs when we prepare our quotation to our potential customers.
Our profitability depends largely on our quotation submitted to our customers, which is determined based on the estimated costs plus a mark-up. In preparing a quotation, we evaluate and analyse the customised product in terms of the raw materials and consumables required, complexity of the production process involved, production schedule and availability of production resources. It is our intention to maintain the competitiveness of our quotation while maximising our profit margin in the prevailing market conditions. If a significant mark-up is added to the estimated costs, our quotation may become less competitive. On the other hand, if our quotation is too low, our product may become less profitable.
We cannot assure you that the actual costs incurred by us would not exceed our estimate. If we are unable to control our costs within our estimation or recover the extra costs incurred, our profit margin and results of operations may be materially and adversely affected.
If we are not able to implement our future plans or effectively manage our business operations, our business, results of operation and financial condition could be materially and adversely affected
We plan to continue to expand our business to maintain and strengthen our market position in the industries in which we operate. As we intend to expand our overall production capacity, we expect to continue to invest in new production facilities and equipment. For details of our future plans, please refer to the section headed “Future Plans and [REDACTED]” in this document. In addition, we plan to continue our investment in our research and development activities. However, any business expansion will require
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RISK FACTORS additional managerial, technical, financial, production, operational and other resources, systematic internal control systems and the employment of additional staff. Our future plans may involve various risks such as uncertainties relating to market demands, and there is no assurance that we will be able to implement our business expansion plans successfully and manage our business operations effectively in the future and failure to do so could materially and adversely affect our business, financial conditions and results of operations.
We expect to incur additional depreciation expenses and labour costs associated with our expansion plan, which may adversely affect our profitability, results of operations and financial condition
In carrying out our expansion plan in the establishment of our Southern China Production Hub (including establishment of our Jiangmen Plant and upgrade of our Guangzhou Plant) and upgrade of our Suzhou Workshop, we expect to incur (i) additional depreciation expenses arising from acquiring machinery and equipment; and (ii) additional labour costs arising from recruiting additional workers and providing training to them. For details of our expansion plan, please refer to the section headed “Business – Our business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products” in this document. Based on our Group’s depreciation policy on properties for 50 years and on plant and machinery for 10 years, we estimate that an additional amount of approximately HK$6.0 million will be incurred as depreciation expenses per annum. We also expect to incur an additional labour costs of at least HK$21.2 million per annum, depending on the actual number of total workers to be recruited to work in the new and upgraded production facilities, which will be affected by the volume of orders from our customers and complexity of the products to be produced. Such additional depreciation expenses and labour costs may have a negative effect on our profitability, financial conditions and results of operations.
We may not be successful in the new product design and development initiatives or improvement in our existing products
During the Track Record Period, we have invested and put effort in product design and development. We cannot assure you that our new product design and development initiatives could be successfully completed within the budget cost and time frame, or that our new product models or specifications will launch within anticipated time frame or budget, or that our new product models or specifications will meet the market preference, achieve a wide market acceptance, or receive a positive market response. Furthermore, we cannot guarantee that these new product models or specifications will be well received by our customers and achieve the anticipated profit margin. In addition, we cannot assure you that our competitors will not develop similar product models or specifications as ours. If the products design and/ or development cannot be successfully commercialised or fail to attract sufficient customers’ demand and market response to generate sufficient revenue to cover the research and development expenses and resources invested, our market share, profitability and financial conditions may be adversely affected.
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RISK FACTORS
We may suffer from unexpected disruptions to our production facilities, systems and process
Our revenue is dependent on the uninterrupted operation of our production facilities. Our production is subject to operational risks beyond our control including fire, breakdown, failure or substandard performance of our equipment and machinery, power shortage, labour strikes, natural disasters and any interruption in our operations as a result of any failure to comply with all applicable laws and regulations in the jurisdictions where our production facilities are located. Frequent or prolonged occurrence of any of the aforesaid events may have a material adverse effect on our business, financial conditions and results of operations. If there is any damage to our production facilities, we may not be able to alleviate the impact of such damage in a timely and proper manner or at all. Accordingly, our production and delivery to our customers could be materially and adversely affected.
Any such disruption in our operations could materially and adversely affect our business, financial conditions and results of operations.
We may be affected by nationwide and/or regional social, political, regulatory and economic conditions as well as trade policies in the PRC and Hong Kong
We have production facilities and/or offices in the PRC and Hong Kong. In addition, our Group has mainly derived our revenue from (i) the PRC, which accounted for approximately 70.5%, 76.2% and 70.6% of our total revenue; and (ii) Hong Kong, which accounted for approximately 26.6%, 19.6% and 26.5% of our total revenue, for the three years ended 31 March 2019, 2020 and 2021, respectively.
Our financial performance depends significantly on the general economic conditions in the PRC and Hong Kong and their impact on the local economy, the property sector as well as consumer spending which could reduce the demand for our products. On the other hand, any changes in the PRC or Hong Kong government policy, including tightening of regulatory restrictions, industry-specific policies, such as labour or environmental policies, may have an adverse effect on our Group’s business operation, financial conditions and results of our operations.
As such, our business, results of operations and financial conditions are therefore subject to nationwide and/or regional policies, political events and economic, political, regulatory and social developments in the PRC and Hong Kong as well as the country(ies) where our customers conduct their business. Global and regional economic conditions may be affected by many unforeseen factors such as financial crisis, economic recessions or political and social turmoil and events which could adversely affect our business. If we fail to adapt to changes in the government policies, political events and social, political, regulatory and economic conditions of the countries where we and/or our customers operate, our business, results of operations and financial conditions may be materially and adversely affected.
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RISK FACTORS
We may not continue to receive government support from the Government and the PRC Government in relation to the Outbreak
During the Track Record Period, we received certain government support in both Hong Kong and the PRC due to the Outbreak. In Hong Kong, we received two tranches of subsidies of approximately HK1.6 million in aggregate under the Employment Support Scheme of the Government for the year ended 31 March 2021. In the PRC, we were granted cost concessions and government assistance on electricity, social insurance and rental expenses of approximately HK$1.5 million and HK$3.6 million for the years ended 31 March 2020 and 2021, respectively. Subsequent to the Track Record Period and up to the Latest Practicable Date, we did not receive any government support from the Government and the PRC Government in relation to the Outbreak. These one-off government support were granted by the relevant government authorities in their sole discretion and were subject to the status of the Outbreak, we cannot predict whether there will be such government support for the financial years afterwards and there is no assurance that our Group will receive such government support. If we fail to obtain such government support in the future, our operations and financial performance will be adversely affected.
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RISK FACTORS
We rely on Supplier A for the supply of decorative films and functional films, and any shortage of, or delay in, the supply from Supplier A may affect our business and results of operation
Apart from elevator cabin products and decorative stainless steel products, we also sell and distribute other architectural finishing materials, primarily including decorative films and functional films, to our customers primarily in the PRC and Hong Kong. We have been the distributor of decorative films and functional films in the PRC, Hong Kong and Macau for an international brand owned by Supplier A.
During each of the three years ended 31 March 2019, 2020 and 2021, Supplier A accounted for approximately 14.5%, 14.8% and 12.1% of our total purchases, respectively. Although we have entered into authorised distributor agreements with Supplier A, we cannot guarantee that Supplier A will not terminate these agreements or our relationship with Supplier A will not be deteriorated. Any shortage of, or delay in the supply, or our inability to obtain supply from alternative sources will have impact on our business and results of operations.
In addition, any deterioration in our relationship with Supplier A could affect our ability to secure sufficient supply of decorative films and functional films. In the event that Supplier A changes its sales or marketing strategy or appoints more distributors for the distribution of decorative films and functional films in the PRC, Hong Kong and Macau, our business and results of operation may be affected. For further details of our relationship with our Supplier A, please refer to the section headed “Business – Suppliers and procurement – Authorised distributor agreements with Supplier A” in this document.
We may be unable to effectively and efficiently manage the supply and quality of our raw materials and consumables and we may be affected by any potential fluctuation in the prices of raw materials and consumables
We do not produce all the components or parts that we use for production and we procure raw materials and consumables from third party suppliers. For the three years ended 31 March 2019, 2020 and 2021, purchases from our five largest suppliers accounted for approximately 42.5%, 38.7% and 37.3% of our total purchases, respectively.
If any of our major suppliers decides not to accept our future purchase orders on the same or similar terms, or decides to substantially reduce their volume of supply to us, or cease their business relationship with us, we may need to find a suitable replacement in a timely manner, failure of which may result in delay in our production schedules or default on our agreements with our customers. In addition, if any of our key suppliers fails to supply raw materials and consumables which satisfy our quality standards, we may need to source such raw materials and consumables from other suppliers, which may result in additional costs and delay in the delivery of our products to our customers. There is no assurance that our suppliers will be able to supply and deliver the required raw materials and consumables to us in a timely manner or that the raw materials and consumables they supply to us will not be defective or substandard. Any delay in the delivery of raw materials and consumables or any defects in the raw materials and consumables supplied to us may materially and adversely affect or delay our production schedule and affect our product
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RISK FACTORS quality. When required, if we cannot secure raw materials and consumables of similar quality and at reasonable prices from alternative suppliers in a timely manner or at all, we may not be able to deliver our products to our customers on time with required quality. As a result, our business, financial conditions and results of operations may be materially and adversely affected.
Moreover, any sudden or significant increases in the prices of raw materials and consumables for our production may materially and adversely affect our profit margin and results of operations. There is no assurance that the prices of the raw materials and consumables for our production will remain stable in the future, or that any price increases will not lead to unexpected and potentially significant increases in our production costs. We also cannot assure you that we will be able to transfer the increase in production costs to our customers without affecting our sales volume in the future. If we are unable to increase the prices of our products to offset any increases in our costs of raw materials and consumables used in a timely manner or at all, our profit margin and results of operations may be materially and adversely affected.
We may experience delays or defaults in recovering our contract assets
Our contract assets represent our Group’s right to consideration for the production of elevator cabin products in which the production are completed or partially completed but yet invoiced by our Group. Our contract assets are expected to be recovered or transferred to trade receivables within one year when the rights become unconditional. As at 31 March 2019, 2020 and 2021, our Group recorded contract assets of approximately HK$6.3 million, HK$5.0 million and HK$4.8 million, respectively. For further details, please refer to the section headed “Financial Information – Analysis of selected statement of financial position items – Contract assets/liabilities” in this document.
There is no assurance that we will be able to bill our customers on a timely basis since the design and quality of our elevator cabin products are subject to the satisfaction and acceptance of our customers. Any failure to bill our customers as per scheduled may have an adverse effect on our future liquidity, and our financial condition may be materially and adversely affected.
We are subject to credit risk of our trade receivables and may be exposed to delays and/or defaults of payments by our customers
We are subject to credit risk of our trade receivables and may be exposed to delays and/or defaults of payments by our customers, and our profitability and cash flow are dependent on our receipt of timely settlements from our customers. If there is any delay in settlement of our receivables by our customers, our profitability, working capital and cash flow may be adversely affected. As at 31 March 2019, 2020 and 2021, our trade receivables amounted to approximately HK$94.3 million, HK$55.3 million and HK$105.6 million, respectively. Our Group recorded allowance for credit losses of approximately HK$0.9 million, HK$1.2 million and HK$1.3 million, respectively, as at 31 March 2019, 2020 and 2021, representing approximately 1.0%, 2.1% and 1.2% of the trade receivables as at the respective dates. There is no assurance that we will be able to collect our trade receivables in a timely manner or at all. If any of our customers face unexpected situations such as
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RISK FACTORS financial difficulties, we may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such customers, and our business, results of operations and financial conditions could be materially and adversely affected.
We may not be able to fulfil our obligations in respect of contract liabilities
Our contract liabilities represent our Group’s obligation to complete the production order in which our Group has received deposits or advance payment from customers before the production activity commences. Our contract liability is recognised at the start of a contract, until the revenue recognised on the contract exceeds the amount of the deposit or advance payment received from our customers. As at 31 March 2019, 2020 and 2021, our Group recorded contract liabilities of approximately HK$15.6 million, HK$10.2 million and HK$9.5 million, respectively. For further details, please refer to the section headed “Financial Information – Analysis of selected statement of financial position items – Contract assets/liabilities” in this document.
There is no assurance that we will be able to fulfil our obligations in respect of contract liabilities as the production and delivery of our products to our customers are subject to various factors, including the operation of our production facilities and the supply of raw materials and consumables from our suppliers. If we are unable to fulfil our obligations with respect to our contract liabilities, the amount of contract liabilities will not be recognised as revenue, and we may have to refund the deposit and advance payment made by our customers. As a result, our cash and liquidity position may be materially and adversely affected.
We are subject to risk of inventories obsolescence
As at 31 March 2019, 2020 and 2021, we had inventories of approximately HK$65.4 million, HK$64.7 million and HK$75.4 million, respectively. As certain of our products are customised and manufactured based on purchase orders from our customers, our work-in-progress and finished goods are attributable to designated customers. Therefore, in the event that our customers reduce or cancel their orders, we may not be able to reuse or recycle the work-in-progress or finished goods to suit other customers, leading to the risk of inventories obsolescence and thus adversely affecting our results of operations and financial conditions.
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RISK FACTORS
We may suffer losses from fluctuation in foreign exchanges
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. During the Track Record Period, our sales are mainly denominated in RMB and HKD while our purchases are mainly denominated in RMB. In addition, we have production facilities and offices in the PRC, of which overheads are settled in RMB and therefore expose us to foreign exchange risks. We recorded net foreign exchange losses of approximately HK$1.2 million, HK$319,000, and a net foreign exchange gain of approximately HK$0.8 million for the three years ended 31 March 2019, 2020 and 2021, respectively. For the purposes of presenting the consolidated financial statements, the assets and liabilities of our Group’s operations are translated into the presentation currency of our Group (i.e. HK$) using exchange rates prevailing at the end of each reporting period and income and expenses items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates prevailing at the dates of transactions are used. Exchange differences arising from the such translation, if any, are recognised in other comprehensive income and accumulated in equity under the heading of translation reserve. Our Group recorded exchange difference in other comprehensive expense of approximately HK2.1 million, HK$5.6 million for the years ended 31 March 2019 and 2020 and exchange difference in other comprehensive income of approximately HK$7.9 million for the year ended 31 March 2021. Fluctuations in foreign exchange may be caused by various factors and unpredictable. We cannot guarantee that we will not suffer losses on foreign exchanges in the future. During the Track Record Period, we did not hedge against our foreign exchange risks as our results of operations has generally been partially mitigated by the natural offset of our foreign currency receivables with our foreign currency payables. In the event that we are unable to manage our foreign currency risks effectively or at all, our business, results of operations and financial conditions may be materially and adversely affected.
For further details of how foreign exchange rates affect our business, results of operations and financial condition, please refer to the section headed “Financial Information – Quantitative and qualitative disclosures about financial risk” in this document.
We may be unable to protect our intellectual property rights
We rely on intellectual property laws in the PRC and other jurisdictions to protect our trademarks, technological know-how and registered patents. As at the Latest Practicable Date, we had registered 24 patents and one software copyright in the PRC.
The assertion of rights under PRC intellectual property law is time consuming and complicated. In addition, policing unauthorised use of intellectual property may be difficult and potentially expensive, and we may need to resort to litigation to enforce or defend intellectual property owned by us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs, which may or may not be recoverable, in part or in full, and diversion of resources and management attention, which could harm our business and competitive position.
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RISK FACTORS
We cannot assure you that counterfeiting or imitation of our products will not occur in the future or, if it does occur, that we will be able to address the problem in a timely and effective manner. Any occurrence of counterfeiting or imitation of our products or other infringement of our intellectual property rights could negatively affect our reputation which in turn adversely affect our results of operations. Protracted litigation could also result in our customers deferring or limiting their purchase or use of or products until such litigation is resolved. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial conditions.
We may be susceptible to infringement of third party’s intellectual property rights
Our principal intellectual property rights cover our trademarks, technological know-how and registered patents. We may be susceptible to third parties claims that we are infringing their intellectual property rights, and if there is a successful claim of intellectual property rights infringement against us, we might be required to pay substantial damages to the party claiming infringement, refrain from further sale of our products, develop non-infringing technology or enter into costly licencing agreements on an on-going basis. However, we may not be able to obtain licencing agreements on terms acceptable to us or at all. Any intellectual property litigation or successful claim could have a material adverse effect on our business, operating results or financial condition.
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RISK FACTORS
We have limited insurance coverage, which could expose us to significant costs and business disruption
We cannot give assurance that our current insurance policies are sufficient to cover all the risks associated with our operations. Any business disruption, litigation or natural disaster may strain management resources, affect our reputation and/or require us to spend significant sums on legal costs.
As at the Latest Practicable Date, we maintained insurance policies covering our inventory, facilities and employees. There is no assurance that the insurance policies we maintain are sufficient to prevent us from all losses or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any losses that is not covered by our insurance policies, or the compensated amount is significantly less than our actual losses, our business, financial conditions and results of operations could be materially and adversely affected.
We may not be able to maintain an effective quality control system
We ascribe our success to our commitment to quality control and our effective quality control system. Quality of our products are especially important for the ECMD industry and decorative stainless steel manufacturing industry. The performance failure of any machinery or system may affect the entire production line of our products and lead to severe economic losses. However, the effectiveness of our quality control system depends on a number of factors, including the design of our quality control procedures, our training programmes and our ability to ensure that our employees adhere to our quality control policies and guidelines. We cannot assure you that our quality control system will be effective in maintaining our product quality. Any failure or deterioration of our quality control systems may have a material adverse effect on our business, results of operations and financial conditions.
We may face possible claims over our products which may be defective
Defects or flaws of our products may be latent and may only be revealed after we have delivered products to our customers. Any flaws or defects discovered in our products could result in damage to our reputation and our relationship with customers, loss of customers and increased service and/or replacement costs, any of which could adversely affect our business, financial condition and results of operations. Furthermore, we may be subject to claims for compensation and may incur significant legal costs, especially when some of our customers are large multinational companies with strong financial resources. Any claims for product defects, regardless of their outcomes, may materially and adversely affect our business, financial conditions and results of operations.
An increase in labour costs may adversely affect our business, results of operations, financial conditions and growth prospects
According to the Ipsos Report, labour cost is one of the major costs of operating a business in the ECMD industry and the average annual wage of employees working in the manufacturing sector in the PRC has indicated a sharp increase from RMB51,369.0 in 2014 to RMB78,147.0 in 2019, rising at a CAGR of 8.8% according to the National Bureau of
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RISK FACTORS
Statistics, PRC. As at the Latest Practicable Date, we had over 500 full-time employees in the PRC. We believe our production process sustainability is highly dependent on the ability to maintain cost effectiveness.
The employee costs accounted for approximately 14.9%, 16.8% and 14.6% of our cost of sales for the three years ended 31 March 2019, 2020 and 2021, respectively. The employee costs may be affected by the availability of labour in the market as well as economic factors in the PRC such as inflation rate and economic growth. Shortage in the labour market for workers may increase the salary level and correspondingly, the costs associated with hiring and retaining labour, which in turn may adversely affect the results of operations.
We cannot give assurance that we are able to control our labour costs at a reasonable level. If we fail to retain our existing labour and/or recruit sufficient labour in a timely manner, we may not be able to accommodate sudden and/or notable increase in demand for our products. If we are not able to manufacture and deliver its products on schedule or if we are unable to implement the expansion plans, our business, results of operations, financial conditions and growth prospects would be materially adversely affected. Furthermore, if there is a significant increase in labour costs, the costs of our Group’s business operations would increase, and our profitability would be adversely affected.
We may be required to make additional contributions of social insurance and housing provident fund and late payments or fines
We are required to make social insurance and housing provident fund contributions for our employees in the PRC. During the Track Record Period, we did not make social insurance and housing provident fund contributions in full for our employees in the PRC. As advised by our PRC Legal Advisers, in respect of social insurance contributions, the relevant PRC authorities may demand us to pay the underpaid social insurance within a stipulated deadline and also we may be liable for a late payment fee equal to 0.05% of the underpaid amount for each day of delay, if we fail to make such payments, we may be liable for a fine in the range between one and three times of the amount of underpaid contributions. In respect of the housing provident fund contributions, we may be requested by the relevant authorities to pay underpaid amount within a prescribed time limit, and we may be subject to the compulsory enforcement by the People’s Court if we fail to make payments as requested. For more details, please refer to the section headed “Business – Regulatory compliance” in this document.
Our operating results may fluctuate
Among others, our operating results may fluctuate significantly due to all or any of the following principal factors:
¼ changes in demand for our products;
¼ our customers’ sales outlook, purchasing and production patterns;
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RISK FACTORS
¼ the effectiveness of the management of our manufacturing processes and cost control;
¼ our ability to make optimal use of our capacity;
¼ changes in the costs and availability of the raw materials and consumables, labour, and other factory overheads which affect the margins and ability of our Group to meet delivery schedules; our ability to manage the timing of the purchases of raw materials and consumables, so that the raw materials and consumables are available when needed for production;
¼ our ability to obtain financing in a timely manner; and
¼ domestic conditions and events that may affect our production such as labour conditions and political instability.
Our operating results may fluctuate from period to period due to the various factors and other risks discussed in this section, many of which are beyond the control of our Group. We cannot assure you that we will be able to effectively alleviate these risks or manage these risks at all. If we are unable to do so, our business, financial conditions and results of operations will be materially and adversely affected.
Our use of certain leased properties for production and warehousing function could be challenged by third parties or governmental authorities, resulting from which we may be forced to relocate
The lessors of certain properties located in Lingxing Industrial Zone, Lianhuashan Processing Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province leased by us for manufacturing and warehousing function in the PRC have not provided us with their property ownership certificates or any other documentation proving their right to those properties. If the lessors do not have the right to lease those properties, or those properties are considered to be illegal property under the PRC laws, our relevant lease agreements could be invalidated. We may be forced to relocate and incur relocation costs. We cannot assure you that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, and the relocation could adversely affect our business, financial condition and results of operations. For more details, please refer to the section headed “Business – Properties – Lianhuashan Properties” in this document.
Certain of our leasehold interests in leased properties have not been registered with the competent PRC governmental authorities, which may expose us to potential fines
We have not registered certain of our lease agreements with the competent government authorities. Under the relevant PRC laws and regulations, we may be required to register and file the executed lease agreements with the relevant government authorities. Any failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, and we have not received any rectification order or been subject to any fine in respect of non-registration of lease agreements. However, the relevant authorities
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RISK FACTORS may order us to register the lease agreements in a prescribed period of time or impose a fine of the range between RMB1,000 and RMB10,000 for each non-registered lease agreement if we fail to complete the registration within the prescribed time limit.
We may not be able to renew our current leases or locate desirable alternatives for our facilities in the PRC
Our Guangzhou Plant and Suzhou Workshop are presently located on a number of leased premises. Upon expiry of some of these leases for certain of our production facilities, representing less than one-fifth of the total gross floor area of our leased premises in the PRC for our production facilities, which are expected to be 31 May 2021 and 30 June 2021, respectively, we may not be able to negotiate an extension of these leases and may therefore be forced to move to a different location, or the rent we pay may increase significantly. This could disrupt our operations and adversely affect our profitability. In addition, we may not be able to obtain new leases at desirable locations on acceptable terms to accommodate our future growth, which could materially and adversely affect our business, financial conditions and results of operations.
Revocation of, or changes to, any of the tax preferential treatments or incentives provided to us by the PRC Government could materially reduce our profitability
The PRC Government has provided various incentives to our business, including reduced enterprise income tax rates. For instance, Cobelco GZ, our major PRC subsidiary, has been recognised as a high-and-new technology enterprise（高新技術企業）since 2017, we were eligible to a preferential income tax rate of 15% (compared to the statutory income tax rate of 25%) since 1 January 2017 and up to the Latest Practicable Date. For the three years ended 31 March 2019, 2020 and 2021, the effective tax rate of our Group were approximately 17.3%, 19.2% and 22.1%, respectively. In 2020, we have been re-accredited as a high-and-new technology enterprise with a term of three years. However, we cannot assure you that such tax benefits policies will continue to be enforced by the relevant PRC authorities. The revocation of, or changes to, any of the tax preferential treatments could adversely affect our financial condition and results of operations.
Our operations may be subject to transfer pricing adjustments by competent authorities
In the course of business, our subsidiaries in Hong Kong purchase products from Cobelco GZ for onward sale to customers in Hong Kong. The manufacturing and quality of the products is considered a key value driver for our Group, and the quality control function is provided by Cobelco GZ. Our subsidiaries in Hong Kong may also be engaged locally by third party customers to perform some installation services accompanying the sale of our products. For details, please refer to the section headed “Business – Transfer pricing arrangement” in this document.
Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, we were not aware of any inquiries, audit or investigation by any tax authority in Hong Kong and the PRC with respect to the abovementioned transactions. There is no assurance that the relevant tax authorities would not subsequently challenge the appropriateness of our Group’s transfer pricing arrangement or that the relevant regulations or standards governing such arrangement will not be subject to future changes. If the
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RISK FACTORS relevant tax authorities later conclude that the transfer prices and the terms that our Group has applied are not appropriate, such authorities may require our Group to re-assess the transfer prices and re-allocate the income or adjust the taxable income. Any such reallocation or adjustment could result in a higher tax liability for our Group and may adversely affect the business, financial conditions and results of operations of our Group.
We have risks associated with our information technology infrastructure, network security and data storage
Our operations rely on our information technology infrastructure. However, there is no assurance that our information technology infrastructure and data storage are sufficiently protected from all possible damages including acts of nature, telecommunications breakdown, electricity failure or similar unexpected events which are beyond our control. Any failure, total or partial, of our information technology infrastructure will negatively affect our operations and hence our business and financial conditions.
Our computer network system may be the subject of attack of computer virus, hackers or other similar computer network disruptive problems. Any failure in safeguarding the computer network system from these disruptive problems may cause breakdown of the computer network system and leakage of our confidential information and that of our customers. Any failure in the protection of computer network system from external threat may cause disruption of our operation and may damage our reputation for any breach of confidentiality to our customers, which in turn may adversely affect our business, financial conditions and results of operations.
RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE
We face market competition in the ECMD industry in the PRC and failure to compete efficiently could materially and adversely affect our business
According to the Ipsos Report, the ECMD industry in the PRC is fragmented with over 1,000 players in the industry. ECMD companies typically compete on the product design and development capability and ability to handle different materials, existing customer portfolio, track record as well as the location of the production plants. The abovementioned factors could affect our ability to sell and market. If we fail to maintain or improve our market position or fail to respond accordingly to changes in the competitive landscape, our business, profit margins, financial conditions and operating results may be materially and adversely affected.
We are subject to a variety of environmental, occupational health and safety laws and regulations
We are subject to the PRC laws and regulations relating to the discharge of pollutants as a result of our production processes. Compliance with existing and future environmental, occupational health and safety laws could subject us to costs or liabilities, including fines, impact on our production capabilities, result in suspension of our business operations, expand or acquire facilities and generally impact our financial performance. If we are held liable for damages in the event of any violation of applicable environmental, occupational
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RISK FACTORS health and safety laws, our reputation, licences and certifications to manufacture may be revoked, and our financial conditions and results of operations could be materially and adversely affected.
Our operation may be affected by changes in existing laws and government policies
Our operation is subject to certain laws and regulations of the PRC and Hong Kong. Please refer to the section headed “Regulatory Overview” of this document for further details. Such laws and regulations may be adjusted, modified or changed from time to time to reflect the latest requirements and any changes may increase the costs incurred by us for due compliance. There can be no assurance that there will be no changes in the laws, regulations and/or government policies in the PRC or Hong Kong. Failure to comply with and satisfy any of such laws, regulations and government policies may adversely affect our business and financial conditions and operating results.
We may be subject to liability in connection with industrial accidents at our production facilities
As our production process involves the operation of machinery and equipment which are potentially dangerous, industrial accidents resulting in personal injuries may occur. We are not able to provide assurance to you that industrial accidents at our production facilities, whether due to malfunctions of machinery or equipment or other reasons, will not occur in the future. As such, we may be held liable for the personal injuries or deaths and subject to monetary losses, fines or penalties or other forms of legal liability as well as business interruptions caused by equipment shutdowns for government investigation or implementation or imposition of safety measures. For example, work safety laws imposed by the PRC Government authorities could impose compliance costs or reduce the efficiency of our operations, thereby materially and adversely affecting our business, results of operations and financial condition.
RISKS RELATING TO CONDUCTING BUSINESS IN THE PRC
We operate our production facility in the PRC. A substantial part of our raw materials and consumables are sourced from various suppliers in the PRC. Accordingly, the business, results of operations and financial condition as well as the prospects of our Group are subject, to a significant degree, to the economic, political and legal developments in the PRC.
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RISK FACTORS
Political and economic policies of the PRC Government may affect our business and results of operations and may result in our inability to sustain our growth and expansion strategies
The PRC economy has largely been a centrally planned economy, which differs from other developed economies of the world in many respects, including:
¼ the degree of the PRC Government’s involvement;
¼ the growth rate and degree of development;
¼ the uniformity in implementation and enforcement of laws;
¼ the content of and control over capital investment;
¼ the control of foreign exchange; and
¼ the allocation of resources.
The PRC economy has been transitioning from a centrally planned economy to a more market-oriented economy. For approximately three decades, the PRC Government has implemented economic reform measures to utilise market forces in the development of the PRC economy. The PRC economy has grown significantly in recent decades, though we cannot assure you that this growth will continue or continue at the same pace.
In addition, the PRC Government continues to play a significant role in regulating industries and the economy through policy measures. As such, we cannot assure you that we will not be adversely affected by the measures that are under continuous adjustments. Also, the PRC Government has implemented various measures to guide the allocation of resources. Some of these measures may benefit the overall economy of the PRC, but may have a negative impact on the industries of which we operate in or on us. For example, our financial results may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The PRC legal system may have significant uncertainties regarding the interpretation and enforcement of PRC laws and regulations which could limit the legal protection available to the Shareholders
Our Group’s PRC business and operations are governed by the PRC laws, regulations and rules. The PRC legal system is a civil law system based on written statutes. Prior court decisions may only be cited as a reference and consequently have limited precedential value. Due to the fact that many of these laws, regulations and rules are relatively new, and court decisions published by the Supreme Court of the PRC are scarce and of non-binding nature, the interpretation and enforcement of the laws, rules and regulations in the PRC may involve considerable uncertainties and may not be as consistent or predictable as in other jurisdictions. Hence, the legal protection under the PRC laws, regulations and rules available to the Shareholders may be restricted. Any litigation or regulatory enforcement action in the PRC may be protracted and could result in substantial costs and diversion of resources and
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RISK FACTORS management attention. In addition, our Group cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes in existing laws or their interpretation or enforcement, or the pre-emption of local regulations by national laws. Any changes in the PRC laws and regulations may materially increase our operational costs in complying with them. Please see the section headed “Regulatory Overview” in this document for further details.
PRC regulations on direct investment and loans by offshore holding companies to PRC subsidiaries may delay or prevent or restrict us from using the [REDACTED] from the [REDACTED] to make additional capital contributions or loans to our PRC subsidiaries, which could harm our liquidity and our ability to fund and expand our business
As an offshore holding company incorporated in the Cayman Islands, we may make additional capital contributions or loans to our PRC subsidiaries, including from the [REDACTED] of the [REDACTED]. Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans from us to our wholly-owned PRC subsidiaries, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange (the “SAFE”) or its local counterparts. Any medium or long-term loan to be provided by us to our PRC subsidiaries must be recorded and registered by the National Development and Reform Commission and the SAFE or its local branches. We may also decide to finance our wholly-owned PRC subsidiaries by means of capital contributions. These capital contributions must be filed in the Foreign Investment Comprehensive Management Information System and registration with other government authorities in the PRC.
According to Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises（《國家外匯管理局關於改革外商投 資企業外匯資本金結匯管理方式的通知》）(the “SAFE Circular 19”) and Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts（《國家外匯管理局關於改革和規範資本項目結匯管理政策的通知》）(the “SAFE Circular 16”) issued by the SAFE, foreign-invested enterprises may convert foreign currency in their capital accounts into RMB at any time. However, the converted RMB capital may only be used for purposes within the business scope, and the use of such RMB capital may not be changed without approval of SAFE or banks. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties.
We cannot assure you that we will be able to obtain the necessary government registrations or recording on a timely basis, if at all, with respect to future loans or capital contributions by us to our subsidiaries. If we fail to receive such registrations or recordings, our ability to use the [REDACTED] of the [REDACTED] and to capitalise our PRC operations may be adversely affected, which in turn could adversely affect our liquidity and our ability to fund and expand our business.
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RISK FACTORS
Dividends payable to our Hong Kong subsidiaries may not qualify for the reduced PRC withholding tax rate under the special arrangement between Hong Kong and the PRC
Under the Enterprise Income Tax Law of PRC （《中華人民共和國企業所得稅法》） (the “EIT Law”), if the foreign shareholder is not deemed a PRC tax resident enterprise under the EIT Law, dividend payments from PRC subsidiary to their foreign shareholders are subject to a withholding tax at the rate of 10%, unless the jurisdiction of such foreign shareholders has a tax treaty or similar arrangement with the PRC and the foreign shareholder obtains approval from competent local tax authorities for application of such tax treaty or similar arrangement. Pursuant to a special arrangement between Hong Kong and the PRC, the withholding tax rate is lowered to 5% if a Hong Kong resident enterprise is the beneficial owner of more than 25% of a PRC company distributing the dividends. According to the Announcement on Promulgating the Administrative Measures for Convention Treatment for Non-resident Taxpayers（關於發佈《非居民納稅人享受協定待遇管理辦法》的公告） (“2019 Administration Measures”), which was promulgated by the State Taxation Administration of PRC (the “SAT”) on 14 October 2019 and became effective on 1 January 2020, prior approval from or filings with the SAT is not required before a non-resident taxpayer can enjoy the tax preferential treatment under the relevant treaties. A non-resident taxpayer may enjoy the tax preferential treatment at the time of return filings or withholding and declaration through a withholding agent if it is eligible for the tax preferential treatment under the relevant provisions of a tax treaty, subject to the follow-up administration by the relevant tax authority. In order to enjoy the tax preferential treatment, the non-tax resident shall file documents as required by the 2019 Administration Measures with tax authority when filing tax returns or withholding and declaration through a withholding agent, among which is the tax resident identity issued by the tax authority of the counter party to the treaty. During the follow-up administration, the PRC tax authorities shall verify if the non-resident taxpayer is eligible for the tax preferential treatment, ask for supplemental documents from the non-tax resident or, if the non-resident taxpayer is deemed not eligible for the tax preferential treatment, require the non-resident taxpayer to pay up the non-payment or underpayment of the tax and hold the non-resident taxpayer liable for the delayed payment. Moreover, according to the Notice of the State Administration of Taxation on the Issues Concerning the Application of the Dividend Clauses of Tax Agreements（國家 稅務總局關於執行稅收協定股息條款有關問題的通知）issued by the SAT on 20 February 2009, if the main purpose of an offshore arrangement is to obtain preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate for which an offshore entity would otherwise be eligible. There is no assurance that the PRC tax authorities will recognise and accept the 5% withholding tax rate on dividends paid by our PRC subsidiary and received by our Hong Kong subsidiary.
We will rely on dividends payable by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business
We will rely on dividends payable by our subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our Shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by subsidiaries established in the PRC is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in
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RISK FACTORS accordance with accounting standards and regulations in the PRC. Each of our PRC subsidiaries is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its statutory common reserves until the cumulative amount of such reserves reaches 50% of its respective registered capital unless the laws regarding foreign investment otherwise provide. A PRC subsidiary shall not distribute any profits until any losses from prior fiscal years have been offset. The statutory common reserves of our PRC subsidiaries are not distributable as loans, advances or cash dividends. PRC withholding tax will also be imposed on dividends paid to non-PRC resident investors. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
The PRC Government’s control over currency conversion may affect the value of our Shares and limit our ability to utilise our cash effectively
The PRC Government imposes controls on the convertibility between RMB and foreign currencies and, in certain cases, the remittance of foreign currency into and out of the PRC. Under existing PRC foreign exchange regulations, payments of current account items, including, among others, dividend distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from or registration with appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies.
Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to their holding companies or our Company, or otherwise satisfy their foreign currency-denominated obligations. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our Shareholders.
Compliance with environmental and safe production regulations can be costly, while non-compliance with such regulations may result in adverse publicity and potentially significant monetary damages, fines and suspension of our business operations
We generate and discharge air pollutants, waste water and other industrial waste at various stages of our manufacturing process, and are subject to a variety of government regulations related to the use, storage and disposal of such hazardous chemicals and waste. Any failure by us to control the use of, or to adequately restrict the discharge of, dangerous substances could subject us to potentially significant monetary damages and fines or the suspension of our business operations. In addition, we are required to conduct periodic safety evaluation of our manufacturing and storage facilities and equipment, file the results of such evaluation with competent safety supervision and administrative authorities, and satisfy other applicable requirements in relation to safe production. We are required to
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RISK FACTORS comply with all PRC national and local environmental protection regulations. Under such regulations, we are prohibited from commencing commercial operations of our manufacturing facilities until we have obtained the relevant approvals from PRC environmental protection authorities.
We cannot assure you that we will be able to obtain or renew all the safe production and environmental permits for our operations in a timely manner or at all. Failure to obtain or renew any necessary safe production and environmental permits and approvals, including the pollutant discharge permit, could result in administrative fines and suspension of operations and may materially and adversely affect our business, financial condition, and results of operations.
In addition, the PRC Government may issue more stringent environmental protection and safe production regulations in the future and the costs of compliance with new regulations could be substantial. If we fail to comply with the future environmental and safe production laws and regulations, we may be required to pay fines, suspend construction or production, or cease operations. Moreover, any failure by us to control the use of, or to adequately restrict the discharge of, dangerous substance could subject us to potentially significant monetary damages of our business operations.
RISKS RELATING TO THE [REDACTED]
There has not been any prior public market for our Shares and an active trading market may not develop
An active trading market for our Shares may not develop and the [REDACTED] may fluctuate significantly. Prior to the [REDACTED], there has been no public market for our Shares. The [REDACTED] was the result of negotiation between our Company and the [REDACTED] (for themselves and on behalf of the [REDACTED]), and the [REDACTED] may not be indicative of the price at which our Shares will be traded following completion of the [REDACTED]. In addition, we cannot assure you that an active trading market for our Shares will develop, or, if it does develop, that it will be sustained following completion of the [REDACTED], or that the [REDACTED] will not fall below the [REDACTED].
Shareholders’ interests may be diluted as a result of additional equity financing or additional Shares being issued by us in the future
We may need to raise additional funds in the future to finance further expansion of our business. If additional funds are raised through the issuance of new equity or equity-linked securities of our Group other than on a pro rata basis to existing Shareholders, the percentage of ownership of such Shareholders in our Company may be reduced, and such new securities may confer rights and privileges that take priority over those conferred by our Shares.
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RISK FACTORS
In addition, we may issue additional Shares upon exercise of options to be granted under the Share Option Scheme in the future. The increase in the number of Shares outstanding after the issue would result in the reduction in the percentage ownership of the Shareholders and may result in a dilution in the earnings per Share and net asset value per Share.
The trading volume and price of our Shares may fluctuate. Further, any disposal of a substantial number of Shares by our Controlling Shareholders in the public market may adversely affect market price of our Shares
The trading volume and price of our Shares may be highly volatile. Factors such as variations in our revenue, earnings and cash flow, announcements of business development, strategic alliances or acquisitions, new projects, industrial or environmental accidents suffered by us, loss of key personnel, changes in ratings by financial analysts and credit rating agencies or litigation may cause large and sudden changes in the volume and price at which our Shares will trade. In addition, the Stock Exchange and other securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of any particular company. These fluctuations may also materially and adversely affect the market price of our Shares.
Further, we cannot assure you that our Controlling Shareholders will not dispose of, in part or in whole of, their Shares following the expiration of their respective lock-up periods after the [REDACTED]. We cannot predict the effect, if any, of any future sale of our Shares by any of our Controlling Shareholders on the market price of the Shares. Sale of our Shares by any of our Controlling Shareholders may materially and adversely affect the prevailing market price of our Shares.
Difficulties in enforcing Shareholder rights due to difference in jurisdictions
Our Company is an exempted company incorporated in the Cayman Islands with limited liability. Our corporate affairs are governed by, among others, the Articles of Association, the Companies Act and common law of the Cayman Islands. The rights of our Shareholders to take action against our Directors, action by minority Shareholders and the fiduciary responsibilities of our Directors to our Company are to a large extent governed by the common law of the Cayman Islands and the Articles of Association. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The laws of the Cayman Islands relating to the protection of the interests of minority shareholders differ in some respects from those in Hong Kong and other jurisdictions. Furthermore, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in Hong Kong courts.
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RISK FACTORS
RISKS RELATING TO STATEMENTS MADE IN THIS DOCUMENT
Certain facts, statistics and data contained in this document have not been independently verified and may not be reliable
Certain facts, statistics and data in this document are derived from various sources including various official government sources that we believe to be reliable and appropriate for such information. However, we cannot guarantee the quality or reliability of such source materials. We believe that the sources of the said information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted rendering such information false or misleading. Nevertheless, such information has not been independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED] or any of their respective directors, affiliates or advisers and therefore, none of them makes any representation as to the accuracy or completeness of such facts, statistics and data. Furthermore, we cannot assure you that they are stated or compiled on the same basis or with the same degree of accuracy as similar statistics presented elsewhere. In all cases, investors should give consideration as to how much weight or importance they should attach to, or place on, such information or statistics.
Investors should read the entire document and we strongly caution you not to place any reliance on any information contained in press articles, other media and/or research reports
There may be press and media coverage regarding our Group or the [REDACTED], which may include certain events, financial information, financial projections and other information about our Group that do not appear in this document. We have not authorised the disclosure of any other information not contained in this document. We do not accept any responsibility for any such press or media coverage and make no representation as to the accuracy or completeness or reliability of any such information or publication. To the extent that any such information appearing in publications other than this document is inconsistent or conflicts with the information contained in this document, our Group disclaims responsibility for them. Accordingly, investors should not rely on any such information. In making your decision as to whether to subscribe for and/or purchase our Shares, you should rely only on the financial, operational and other information included in this document.
Forward-looking statements contained in this document are subject to risks and uncertainties
This document contains certain statements and information that are “forward-looking” and uses forward-looking terminologies such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “might”, “plan”, “potential”, “project”, “predict”, “propose”, “seek”, “should”, “target”, “will”, “would” or similar terms. Those statements include, among other things, the discussion of our growth strategy and expectations concerning our future operations, liquidity and capital resources. Investors of our Shares are cautioned that reliance on any forward-looking statements involves risks and
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RISK FACTORS uncertainties and that any or all of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. The uncertainties in this regard include, but are not limited to, those identified in this section, many of which are beyond our control. In light of these and other uncertainties, the inclusion of forward-looking statements in this document should not be regarded as representations by us that our plans or objectives will be achieved and investors should not place undue reliance on such forward-looking statements. We do not undertake any obligation to update publicly or release any revisions of any forward-looking statements, whether as a result of new information, future events or otherwise.
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]
[REDACTED]
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]
[REDACTED]
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]
[REDACTED]
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]
[REDACTED]
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]
[REDACTED]
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DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED]
DIRECTORS
Name Residential address Nationality
Executive Directors
Mr. Chiu Yu Kui Colby Flat A, 32/F, Tower 8B Chinese （趙汝渠先生） Bel-Air No. 8 Bel-Air on the Peak Island South No. 8 Bel-Air Peak Avenue Hong Kong
Mr. Chiu Sung Yin Flat A, 32/F, Tower 8B Chinese （趙崇彥先生） Bel-Air No. 8 Bel-Air on the Peak Island South No. 8 Bel-Air Peak Avenue Hong Kong
Non-executive Director
Ms. Lei Soi Kun Avenida Panoramica do Lago Nam Chinese （李瑞娟女士） Van Lake View Mansion (BL 1) 9-And-1 Macau
Independent non-executive Directors
Mr. Cheung Kwok Kwan JP Flat E, 11/F Chinese （張國鈞先生） Block 1, Island Place 51 Tanner Road North Point Hong Kong
Mr. Choi Tak Shing Stanley JP Flat D, 5/F Chinese （蔡德昇先生） Prince’s Heights (Stage II) 273/275 Prince Edward Road West Kowloon Hong Kong
Mr. Lam Chi Wing Flat 3, 18/F Chinese （林至頴先生） Block A, Elizabeth House 250 Gloucester Road Causeway Bay Hong Kong
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DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED]
PARTIES INVOLVED
Sole Sponsor Red Sun Capital Limited A licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities Room 3303, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Sheung Wan Hong Kong
[REDACTED] [REDACTED]
[REDACTED] [REDACTED]
Legal advisers to our Company As to Hong Kong law Stevenson, Wong & Co. Solicitors, Hong Kong 39th Floor, Gloucester Tower The Landmark 15 Queen’s Road Central Hong Kong
As to PRC law Jingtian & Gongcheng PRC attorneys-at-law 34/F, Tower 3 China Central Place 77 Jianguo Road Chaoyang District Beijing, PRC
As to Cayman Islands law Conyers Dill & Pearman Cayman Islands attorneys-at-law Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands
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DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED]
Legal advisers to the Sole As to Hong Kong law Sponsor, the [REDACTED], David Fong & Co. the [REDACTED] and the Solicitors, Hong Kong [REDACTED] Unit A, 12/F China Overseas Building 139 Hennessy Road Wanchai Hong Kong
As to PRC law Shu Jin Law Firm PRC attorneys-at-law 11-12/F, Taiping Finance Tower No. 6001 Yitian Road Shenzhen PRC
Auditors and reporting Deloitte Touche Tohmatsu accountants Certified Public Accountants Registered Public Interest Entity Auditor 35/F One Pacific Place 88 Queensway Hong Kong
Industry consultant Ipsos Asia Limited 6/F China Life Center Tower A One HarbourGate, No. 18 Hung Luen Road Kowloon Hong Kong
Compliance adviser Red Sun Capital Limited A licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities Room 3303, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Sheung Wan Hong Kong
[REDACTED] [REDACTED]
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CORPORATE INFORMATION
Registered office Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands
Headquarters and principal Room 2701, 27/F place of business in Hong Tung Wai Commercial Building Kong 109-111 Gloucester Road Wanchai Hong Kong
Company secretary Mr. Chiu Sung Yin（趙崇彥先生） Certified Public Accountant Flat A, 32/F, Tower 8B Bel-Air No. 8 Bel-Air on the Peak Island South No. 8 Bel-Air Peak Avenue Hong Kong
Authorised representatives Mr. Chiu Yu Kui Colby（趙汝渠先生） Flat A, 32/F, Tower 8B Bel-Air No. 8 Bel-Air on the Peak Island South No. 8 Bel-Air Peak Avenue Hong Kong
Mr. Chiu Sung Yin（趙崇彥先生） Certified Public Accountant Flat A, 32/F, Tower 8B Bel-Air No. 8 Bel-Air on the Peak Island South No. 8 Bel-Air Peak Avenue Hong Kong
Audit Committee Mr. Lam Chi Wing（林至頴先生）(Chairman) Mr. Cheung Kwok Kwan JP（張國鈞先生） Mr. Choi Tak Shing Stanley JP（蔡德昇先生）
Remuneration Committee Mr. Cheung Kwok Kwan JP（張國鈞先生）(Chairman) Mr. Chiu Sung Yin（趙崇彥先生） Mr. Choi Tak Shing Stanley JP（蔡德昇先生）
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CORPORATE INFORMATION
Nomination Committee Mr. Chiu Yu Kui Colby（趙汝渠先生）(Chairman) Mr. Cheung Kwok Kwan JP（張國鈞先生） Mr. Choi Tak Shing Stanley JP（蔡德昇先生）
Cayman Islands principal share [REDACTED] registrar and transfer office
Hong Kong branch share [REDACTED] registrar and transfer office
Principal bank Bank of China (Hong Kong) Limited 1 Garden Road Hong Kong
Company website www.cobelco.com.hk (information on this website does not form part of this document)
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INDUSTRY OVERVIEW
This and other sections of this document contain information relating to the industry in which we operate. Certain information and statistics contained in this section have been derived from various official and publicly available sources. In addition, certain information and statistics set forth in this section and elsewhere in the document have been extracted from a market research report commissioned by us and prepared by Ipsos, an independent market research agency. We believe that the sources of such information and statistics are appropriate and have taken reasonable care in extracting and reproducing such information and statistics. We have no reason to believe that such information or statistics is false or misleading in any material respect or that any fact has been omitted that would render such information or statistics false or misleading in any material respect. However, such information and statistics have not been independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], any of the [REDACTED], our or their respective directors and officers or any other parties involved in the [REDACTED] except Ipsos. No representation is given as to the fairness, correctness and accuracy. Accordingly, you should not place under reliance on such information of statistics.
SOURCE AND RELIABILITY OF INFORMATION Background of Ipsos We commissioned Ipsos Business Consulting, an independent market research company, to conduct an analysis of, and to report on (i) the ECMD industry in the PRC; and (ii) the decorative stainless steel manufacturing industry in the PRC and Hong Kong for the period from 2014 to 2024 at a fee of HK$630,000. The payment of such amount was not conditional on our Group’s successful [REDACTED] or on the results of the Ipsos Report. Ipsos is an independent market research company wholly-owned by Ipsos Group S.A.. Founded in Paris, France, in 1975 and publicly-listed on the NYSE Euronext Paris in 1999, Ipsos Group S.A. acquired Synovate Limited in October 2011 and employs approximately 18,000 personnel worldwide across 90 countries. Ipsos Group S.A. conducts research on market profiles, market size, share and segmentation analyses, distribution and value analyses, competitor tracking and corporate intelligence. Ipsos Business Consulting, a division of Ipsos, has solid experience in conducting market research for various industries in initial public offerings of companies listed on the Stock Exchange. Research methodology The information in the Ipsos Report are derived by data and intelligence obtained by: (i) primary research via in-depth telephone conversations and face to face interviews with key knowledge leaders; (ii) secondary desk research by gathering background information from government and regulatory statistics, industry reports and other analyst reports to support facts and identify trends on the industry; and (iii) performing client consultation to facilitate the research including in-house background information of the client (such as the business of our Group). The information and statistics as set forth in this section have been extracted from the Ipsos Report. Assumptions used in the Ipsos Report The following bases and assumptions are used in the market sizing and forecasting model in the Ipsos Report: ¼ It is assumed that the global economy will rebound in 2021 and remain in steady growth across the period from 2020 to 2024, in expectation that COVID-19 will be under control in the foreseeable future; and
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¼ The external environment is assumed to have no shocks, such as financial crises or natural disasters, that will influence the demand and supply of (i) the ECMD industry in the PRC; and (ii) the decorative stainless steel manufacturing industry in the PRC and Hong Kong from 2020 to 2024, except for COVID-19. Our Directors confirmed that, as at the Latest Practicable Date, after taking reasonable care, there is no adverse change in the market information since the date of the Ipsos Report which may qualify, contradict or have an impact on the information in this section. Except as otherwise noted, all the data and forecasts contained in this section are derived from the Ipsos Report. MARKET OVERVIEW OF THE ECMD INDUSTRY IN THE PRC ECMD industry mainly focuses on the design, manufacture and decoration of elevator cabin. ECMD companies may also be responsible for the production of elevator floor doors and other elevator components which are mostly visible to users. Elevator cabin refers to a compartment which carries people from floor to floor via the elevator shaft. As a major component of elevators, the demand for elevator cabin is highly correlated to the number of elevator manufactured. The PRC currently has the largest elevator market in the world with an annual production volume reaching approximately 1,173,000 units in 2019, accounted for approximately half of the world production. In 2019, there were approximately 7.1 million elevators in the PRC. Majority of the domestic production is to cater the local demand, and while some may export to countries in regions such as Southeast Asia and the Middle-east. In recent years, the demand for furnished elevator cabin grows rapidly following the rising investment in interior design, fitting-out and renovation on residential and commercial buildings. With the improved living standards and favourable economic environment, people are paying more attention to the living and working environment. Property developers are putting more capital to invest in the interior design and fittings-out of residential and commercials buildings. Elevator as a basic component of every building, the interior design of its cabin becomes a crucial element to create a good impression to visitors. Hence, the demand for the ECMD industry in the PRC has recorded a notable growth over the past decade.
Value chain of the ECMD industry in the PRC
Upstream Mid-stream Downstream
Raw material suppliers Customers
Stainless steel Elevator Property suppliers companies developers Wood suppliers ECMD companies Government Marble suppliers Contractors Other material suppliers
Number of elevators manufactured in the PRC The number of elevators manufactured in the PRC increased from approximately 498,400 in 2014 to approximately 1,173,000 in 2019, increased at a CAGR of approximately 18.7%.
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The number of elevator manufactured in the PRC from 2014 to 2019 (note 1)
1,400 CAGR = 18.7% 1,173.0 1,200 1,000 800 719.0 638.0 679.0 600 498.4 529.0
Thousand unit 400 200 0 2014E 2015 2016 2017 2018 2019
Notes: (1) The number of elevators manufactured stated above also included the production of escalators. (2) E denotes estimation, 2014 data was estimated by Ipsos in-house due to unavailable official data. Sources: National Bureau of Statistics, PRC; Ipsos research and analysis
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The fixed-asset investment in real-estate development increased from approximately RMB9,503.6 billion in 2014 to approximately RMB13,219.4 billion in 2019, at a CAGR of approximately 6.8%. Such growth of fixed asset investment related to property sector has supported the rising demand for the elevators from 2014 to 2019, which positively affected the ECMD industry. Meanwhile, according to the Report on the Work of the Government published on 5 March 2019, the PRC Government supports the installation of elevators and development of barrier-free environments. With the PRC Government’s contribution and encouragement, cities in the PRC began to focus on modernising and installation of elevators, especially for old buildings, which led to a sharp increase in the number of elevators manufactured in the PRC in 2019. In addition, the total square metre of newly commenced real estate construction area has increased by approximately 17.2% from 2017 to 2018, which is significantly higher than approximately 7.0% increment in the previous period. The expansion of the real estate construction sector is believed to create a lagged effect supporting the demand for elevators in 2019. Estimated revenue of the ECMD industry in the PRC The ECMD industry in the PRC increased from approximately RMB9,932.0 million in 2014 to approximately RMB16,274.9 million in 2019, increased at a CAGR of approximately 10.4%. The growing number of newly manufactured elevators is one of the major driving forces supporting the demand for the ECMD industry. Still, the demand generated from other business activities such as the renovation of elevator cabin as well as the manufacture and sales of elevator components, for example, cabin ceiling, walls and floors are also key driving forces to the ECMD industry. PRC Government initiatives to enhance the accessibility of existing buildings for people with disability and elderly has been another driving force of the ECMD industry. With a large number of buildings in the PRC lacking the installation of elevators, such government initiatives shall sustain the demand for new elevators. Under which, more elevators are expected to be installed to buildings, therefore increasing demand for the ECMD industry. Estimated revenue of the ECMD industry in the PRC from 2014 to 2024F
CAGR = 10.4% CAGR = 6.9% 21,132.2 19,807.1 18,297.5 1,338.1 20,000 16,992.2 1,259.7 16,274.9 16,210.7 1,143.8 1,044.0 13,482.9 846.4 992.0 15,000 12,294.5 13,041.8 19,794.1 10,805.0 768.3 918.9 18,547.4 9,932.0 655.2 17,153.7 612.8 15,948.2 10,000 392.6 15,428.6 15,218.7 RMB Million 12,564.0 11,639.3 12,273.5 5,000 10,192.2 9,539.4
0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F
New elevators Replacement
CAGR’14-19 CAGR’20-24
Replacement of old elevators 16.6% 7.8%
New elevators 10.1% 6.8%
Note: The revenue of the ECMD industry includes the revenue of industry players generated from business activities including (i) the manufacture, design, decoration of elevator cabin; (ii) the manufacture of elevator components such as elevator floor doors, handrails, walls, ceiling, floorings and push-buttons; and (iii) the renovation works and installation of elevator cabin and floor doors. Source: Ipsos research and analysis
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Over the forecast period, the ECMD industry in the PRC is anticipated to grow from approximately RMB16,210.7 million in 2020 to approximately RMB21,132.2 million in 2024, increased at a CAGR of approximately 6.9%. With the outbreak of COVID-19 in the PRC and globally, the estimated gross output value of the ECMD industry in the PRC is expected to be slightly affected in 2020 and is estimated to decrease to approximately RMB16,210.7 million. As the outbreak of COVID-19 in the PRC was under control in a relatively short period, it has not posed much negative impact on the ECMD industry in the PRC and is predicted to recover in 2021. The PRC’s ECMD industry is expected to be continuously supported by the PRC Government investments in infrastructure and the potential increase in building construction from 2020 to 2024. As urbanisation is expected to continue, more rural residents are going to move to urban areas, thereby creating a substantial demand for residential and commercial buildings as well as hospitality and infrastructure facilities to support their daily activities. Potential increase in new buildings is expected to drive the demand for elevator and the ECMD industry in the PRC.
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In addition, the prospects of the fitting-out works industry in the PRC is going to support the ECMD industry. A rising trend of renovations works to renew existing building is expected, while elevator cabin, floor doors, push-button panels and other elevator cabin components are often refurbished or replaced in residential and commercial renovation projects. In general, renovation works often take place on elevator every five to six years, the abundant number of elevators installed is expected to create a constant demand for the ECMD industry in the PRC. PRICE TREND OF MAJOR COST COMPONENTS IN THE PRC The major cost components of the ECMD industry in the PRC include stainless steel and wood.
CAGR’ CAGR’ 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 14-19 20-24 Average wage of employees working in the manufacturing sector (RMB per year) 51,369.0 55,324.0 59,470.0 64,452.0 72,088.0 78,147.0 81,118.4 85,375.4 89,842.7 94,531.6 99,713.0 8.8% 5.3% Price of stainless steel (RMB per tonne) 15,313.1 12,537.5 12,192.2 14,492.4 14,733.9 14,352.3 13,368.1 13,412.7 13,420.0 13,345.6 13,313.8 –1.3% –0.1% Price of wood (RMB per tonne) 1,131.4 1,102.3 1,104.4 1,122.7 1,103.5 1,097.2 1,100.3 1,092.1 1,083.8 1,075.6 1,070.3 –0.6% –0.7% Sources: National Bureau of Statistics, PRC; Ipsos research and analysis Average wage of employees working in the manufacturing sector The average wage of employees working in the manufacturing sector increased from approximately RMB51,369.0 per year in 2014 to approximately RMB78,147.0 per year in 2019, increased at a positive CAGR of approximately 8.8%. The persistent increase in wages is due to the PRC’s economic growth over the past six years, where GDP of the PRC increased from approximately RMB64,128.1 billion in 2014 to approximately RMB94,691.5 billion in 2019. Employees’ income is often affected by the performance of the economy. Since the PRC’s economy has been booming, the average wage of employees working in the manufacturing sector has been increasing as well. According to the Global Wage Report by the International Labor Organization, the PRC is the only emerging G20 country whose average real wages almost doubled between 2008 and 2017. Stainless steel The price of stainless steel decreased from approximately RMB15,313.1 per tonne in 2014 to approximately RMB14,352.3 per tonne in 2019, at a negative CAGR of approximately 1.3%. The decrease in the price of stainless steel from 2014 to 2016 was attributed to the excess capacity of stainless steel. According to the World Steel Association, the amount of produced steel that is unused in the PRC increased from approximately 13.7% in 2014 to approximately 15.8% in 2016. In 2016, the PRC Government has taken effort to eliminate outdated production capacity in major industrial sectors, including coal and steel production industries. Under such initiatives, a substantial number of steel production plants were shut down. The reduction of production capacity partially eased the problem of excess supply, in turn, led to the rebound of the price of stainless steel in 2017 and remained stable to 2019. Wood The price of wood remained largely stable at approximately RMB1,131.4 per tonne in 2014 and approximately RMB1,097.2 per tonne in 2019, declining slightly at a negative CAGR of approximately 0.6%. The relatively stable price can be attributed to sufficient supply in the PRC. Being one of the most widely used building materials in the construction industry in the PRC, including ceilings, floorings, doors and walls, demand for buildings would affect the demand for wood. With the increasing fixed asset investments in real-estate development in the PRC, the constant supply and increasing demand for wood, therefore, support the stability of its price.
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COMPETITIVE LANDSCAPE OF THE ECMD INDUSTRY IN THE PRC Overview of the competitive landscape The ECMD industry in the PRC is fragmented with over 1,000 market participants in the industry and approximately 5% of the market participants attain the ability to manufacture decorative stainless steel. ECMD companies mainly located in Pearl River Delta （“珠江三角洲”）and Yangtze River Delta（“長江三角洲”）in the PRC. However, competition in the industry is considered to be relatively moderate, given that the elevator manufacturing industry in the PRC is concentrated with a few elevator companies dominating the market. Major elevator companies such as, Hitachi Elevator (China) Co., Ltd（“日立電梯（中國）有限公 司”）, Shanghai Mitsubishi Elevator Co., Ltd（“上海三菱電梯有限公司”）and Kone Elevators Co., Ltd （“通力電梯有限公司”）, have established long business relationships with a few ECMD companies. Major market participants of the ECMD industry in the PRC are often business partners of the top five elevator companies. Besides, there are a lot of ECMD companies in different scales facilitating numerous domestic elevator companies in the PRC. In 2019, there were over 600 elevator companies established in the PRC.
Market share of top five elevator companies in the PRC in 2019
Rank Company Market Share approximately 1 Elevator Company A (Affiliate of our customer) 14.1% 2 Elevator Company B (Affiliate of our customer) 13.3% 3 Elevator Company C (Our Customer A) 11.0% 4 Elevator Company D (Affiliate of our customer B) 7.1% 5 Elevator Company E (Affiliate of our customer C) 5.8%
Top five market participants in the ECMD industry In 2019, the top five ECMD companies in the PRC accounted for approximately 9.1% of the market share. In 2019, our Group generated revenue of approximately RMB231.9 million from its ECMD business and such accounted for approximately 1.4% of the market share in the PRC.
Estimated Rank Company Headquarters location revenue in 2019 Market share RMB million approximately 1 Company A Suzhou 506.2 3.1% 2 Company B Shanghai 317.2 1.9% 3 Company C Shanghai 243.7 1.5% 4 Our Group Hong Kong 231.9 1.4% 5 Company D Suzhou 186.8 1.1% Others 14,789.3 90.9% Total 16,274.9 100.0% Notes: (1) The revenue figures refer to the revenue generated by (i) the manufacture, design and decoration of elevator cabin; (ii) the manufacture of elevator components; and (iii) the renovation works and installation of elevator cabin and floor doors from the respective company. Thus, the revenue figures shown above may be different from the figures disclosed in the respective companies’ annual report. (2) Percentages/figures may not add up to 100%/total amount due to rounding. Source: Ipsos research and analysis Factors of competition Product design and development capability and the ability to handle different materials. ECMD companies’ level of product design and development capability and ability to handle different materials are key competitive factors in the industry. Different customers
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INDUSTRY OVERVIEW may request for the interior of their elevator cabins to be designed in a unique and customised way using specific materials. ECMD companies that have well-equipped production facilities that are able to work with various materials, as well as possess the technical ability to design, develop and produce such elevator cabins, would have the ability to not only accept orders from different customers at the same time, but also fulfill these
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INDUSTRY OVERVIEW orders in a shorter period of time compared to companies that outsource their production line. Therefore, these ECMD companies tend to be more successful in capturing a wider customer base. Existing customer portfolio. The existing customer portfolio of ECMD companies also has an impact on their competitiveness in the industry. In general, ECMD companies do not enter into any long-term contracts or framework sales agreement with their customers in the ECMD industry in the PRC. Customers often place orders with ECMD companies on an order-by-order basis since designs and requirements on elevator cabin may vary in different projects. Nevertheless, ECMD companies may build up business relationships with their customers from previous cooperation. ECMD companies that have secured business relationships with major elevator companies, construction contractors and property developers have a competitive advantage over other companies in the ECMD industry, as they have proven themselves to be capable of meeting the rigid expectations and requirements set by these high-profile customers. Such manufacturers would, therefore, be seen as a more dependable business partner amongst others in the industry. Hence, ECMD companies with high-profile customers are more prominent in the ECMD industry. Track record. Having a notable track record is also a key competitive factor in the industry. ECMD companies that have consistently delivered high-quality services are generally very well received and trusted by customers. Moreover, a track record which demonstrates that companies have produced elevator cabins for renowned architectures further demonstrates the capabilities of the companies and convinces potential customers that they are competent. Hence, customers are usually more confident in the services provided by ECMD companies with a notable track record. Geographical advantages of production plants. Our Group has strategically located our plants in areas with geographical advantages and good accessibility which would enhance our ability to seize the relevant business opportunities. For instance, one of the manufacturing plants of our Group is operated in Taishan, which is one of the core areas of the Pearl River Delta economic zone (“PRD”). Particularly, Taishan is located at the Dajiang exit of Xintai Expressway, which is able to enjoy the low logistics cost among the cities located within the PRD due to the convenient transportation network. The completed and on-going construction of major transportation infrastructures such as Hong Kong-Zhuhai-Macao Bridge, Shenmao Railway and Guangfo River Expressway Jiangmen Section, further enhanced the transportation infrastructure advantages of Jiangmen, which in turn narrowed the travelling gap among cities located in and near the area. Being one of the PRC’s major manufacturing centres, manufacturers based in the PRD are anticipated to benefit from well-established facilities and resources. With the improved transportation connectivity, manufacturing plants located in cities such as Taishan, Kaiping and Yangjiang, are expected to take advantage of shorter travelling time from and to the PRD. Market drivers and opportunities The increased investment value of properties and demand from hospitality industry. The ECMD industry in the PRC was supported by the significant residential buildings investments from 2014 to 2019. According to the National Bureau of Statistics, total investment in residential buildings in the PRC increased from approximately RMB64,354.2 billion in 2014 to approximately RMB97,071.0 billion in 2019, increased at a CAGR of approximately 8.6%. In recent years, customers have been paying more attention to the interior design of premises. With the rising value in properties, users also pay higher attention to the interior design of elevator. Generally, property owners opt to pay more attention to the comfortableness and appearance of the elevator. They focus more on the design of elevator which higher requirements on decoration and superior quality of elevator are expected by the homeowners. In addition, the ECMD industry is also supported by the increasing number of hotels, which is driven by the rising number of tourists in the PRC. According to the National Bureau of Statistics, number of visitors in the PRC increased from approximately 128.5 million in 2014 to 145.3 million in 2019, at a positive CAGR of
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INDUSTRY OVERVIEW approximately 2.5%. The growing tourism industry has driven the demand for hotel, which increased the number of hotels, in turn boosted the demand for elevators in the hospitality industry. In particular, multinational hotel chains with good quality and luxury interior design often gain higher customer satisfaction. The increasing importance of interior design and appearance of elevator cabins in new building properties and hospitality facilities will provide further room for the development of the ECMD industry in the PRC. Urbanisation plan initiated by the PRC Government. The aim of National Urbanisation Plan (2014-2020)（“國家新型城鎮化規劃（2014-2020年）”）published by the State Council in March 2014 is to promote urbanisation by developing medium and small-sized cities in the PRC by increasing the proportion of urban residents among the PRC’s population from approximately 53.7% in 2014 to approximately 60.0% by 2020. According to the National Bureau of Statistics, the population in cities increased from approximately 749.2 million in 2014 to approximately 848.4 million in 2019, increased at a CAGR of approximately 2.5%. With the rising urban population, numbers of residential and commercial buildings are also increasing, which in turn, drives the demand for elevators. In
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INDUSTRY OVERVIEW particular, elevator as a key element for every building, fancy interior design of elevator cabins aids to create a positive impression to visitors and guests. This created business opportunities for elevator companies and ECMD companies in the PRC. Rising adoption of free-barrier elevators. The ageing population and regulation supporting the disabled are expected to increase the demand for elevators and, therefore, drive the growth of the ECMD industry. According to the National Bureau of Statistics, population aged 65 and above increased from approximately 137.6 million in 2014 to approximately 234.9 million in 2019. The World Bank has projected that the number of people aged 65 and above to reach approximately 185.9 million in 2023, accounting for approximately 13.2% of the total population. With the increasing number of elderly, newly constructed infrastructure and residential buildings are expected to install elevators in order to facilitate their daily access. Moreover, the PRC Government initiated the “People with disabilities act of the Peoples Republic of China”（“中華人民共和國殘疾人保障法”）in 2008. Under the policy, people with disability have to be treated equally, in which more barrier-free elevators should be installed to cater to their needs. The ageing population in the PRC and the government’s initiative to install free-barrier elevator is expected to drive the demand for ECMD industry in the PRC. Entry barriers High initial capital investment. Operating an ECMD business requires a large amount of capital investment, which poses a barrier to new entrants. In particular, an elevator cabin production plant requires substantial fixed asset investments including, among others, laser cutting machines, punch-shear machines and panel benders. Other than machinery, sufficient initial capital investment on renting or buying land and hiring experienced staff is also crucial. A large amount of capital is required to set up a production plant and support its operations. Therefore, the high capital requirements serve as a deterrent to new entrants in the ECMD industry. Well established relationship with elevator companies. Well-established relationship between existing ECMD companies and their customers may become an entry barrier for new entrants. Typically, elevator companies are unlikely to replace their manufacturing partners whom they have been in collaboration with. A well-established manufacturer-customer business relationship allows ECMD companies to have a better understanding of their customer requirements, particularly, on the product quality and specifications. Hence, it reduced the risks of elevator companies receiving sub-standard products. In addition, customers switching ECMD companies may be exposed to additional costs and potential risks of quality inconsistency. Due to the preferences of elevator companies to acquire manufactured products from their existing partners, new entrants without established relationships with customers may encounter difficulties in competing for businesses from existing market players and building up their customer base in the ECMD industry. High product design and development capabilities, and flexibility requirement. The high product design and development capabilities, and flexibility required to successfully run an elevator cabin manufacturing and decoration company pose barriers to new entrants. In general, each customer has different requirements for the interior design of the elevators. Since the design and material used often vary from different customers and development projects, high levels of product design and development capabilities and flexibility are needed to accommodate different customers’ preferences. New entrants who are unfamiliar with and inexperienced in the industry may not possess such specific elevator design and development capabilities and flexibility to enter and sustain in the market. Therefore, the high levels of product design and development capabilities and flexibility required to thrive in the elevator cabin manufacturing and decoration industry serve as barriers to new entrants.
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Threats and challenges Rise in labour costs. The increase in labour costs may impose a threat to the ECMD industry in the PRC. Labour costs is one of the major cost components of operating a business in the ECMD industry. According to the National Bureau of Statistics, the average annual wage of employees working in the manufacturing sector in the PRC has indicated a significant increase from approximately RMB51,369 in 2014 to approximately RMB78,147.0 in 2019, increased at a CAGR of approximately 8.8%. The continuous rise in wages may became a challenge for the ECMD companies to overcome in order to maintain their profit margin. As a result, the rise in labour costs may pose a potential threat to the ECMD industry. Potential rise of stainless steel costs. Any rise in stainless steel costs is likely to be a challenge to the ECMD industry in the PRC. The elimination of outdated production capacity in major industrial sectors initiated by the PRC Government in 2016 has led to a substantial number of steel production plants being shut down. The reduction of production capacity aided in easing the problem of excess supply of steel during the period 2014 to 2016, in turn, led to the increase in price of stainless steel. With the continuous implementation of the plan, the supply of stainless steel may further tighten and may pose a threat to the ECMD industry. MARKET OVERVIEW OF THE DECORATIVE STAINLESS STEEL INDUSTRY IN THE PRC AND HONG KONG Decorative stainless steel is used to improve the aesthetic appeal of the living environment in modern urban society. Nowadays, the majority of the decorative stainless steel are used as architectural finishing materials for fitting-out works while some decorative stainless steel are used as raw materials for stand-alone decorative pieces. With different types of surface processing, decorative stainless steels come with different kind of finishes and appearances, while decorative stainless steel also comes in different colours. A layer of coloured chemical material is coated to the surface of the decorative stainless steel, giving the coloured stainless steel an appealing appearance. As decorative stainless steel is available in different appearances and colours, it can be applied to a wide range of projects. The key usage of decorative stainless steel includes wall panel, ceiling as well as elevator cabin. Below are some examples, where decorative stainless steel products are used: ¼ Elevator cabins: Due to the aesthetic property and durability property, decorative stainless steel is often used as the decorative materials for the elevator cabin. Decorative stainless steel is mostly used as wall panels, door as well as ceiling materials inside the elevator cabin, but rarely used as the flooring materials. ¼ Wall panels and ceiling: Decorative stainless steels are installed on the walls of buildings as wall panels. Stainless steel wall panels can be found in malls, hotel lobbies, clubhouses, offices as well as public facilities, such as train stations and airport. Decorative stainless steel sheets are also installed on the interior of the elevator cabin for decorative purposes. ¼ Decorative art pieces: With the longevity and the shiny appearance, stainless steel is preferred by many artists as the material for their decorative art pieces. Estimated revenue of the decorative stainless steel manufacturing industry in the PRC The revenue of decorative stainless steel manufacturing industry in the PRC increased from approximately RMB42.2 billion in 2014 to approximately RMB52.2 billion in 2019, increased at a CAGR of approximately 4.3% during 2014 and 2019. Urbanisation has been a driving force behind the development of constructions in commercial, residential buildings and hospitality and infrastructure facilities. The gross floor area of newly commenced
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INDUSTRY OVERVIEW construction increased from approximately 12,498.3 million m2 in 2014 to approximately 14,416.4 million m2 in 2019, at a CAGR of approximately 2.9%. The robust growth in construction area likely to drive the demand for decorative stainless steel. Estimated revenue of the decorative stainless steel manufacturing industry in the PRC from 2014 to 2024F
100 CAGR = 4.3% CAGR = 6.8% 90 80 70 62.5 64.9 60 56.8 49.6 52.2 49.8 52.6 50 46.0 42.2 40.1 43.1 40 RMB Billion 30 20 10 0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F
Source: Ipsos research and analysis During the forecast period, the gross output value of the decorative stainless steel manufacturing industry in the PRC is anticipated to reduce slightly to approximately RMB49.8 billion in 2020 due to the outbreak of COVID-19. However, in the foreseeable future after the COVID-19 has receded, the gross output value of decorative stainless steel manufacturing industry in the PRC is expected to increase from approximately RMB49.8 billion in 2020 to approximately RMB64.9 billion in 2024, at a CAGR of approximately 6.8%. The positive outlook of the decorative stainless steel manufacturing industry in the PRC is attributed to the government’s initiative of continuous urbanisation. According to the “National Plan of New-type Urbanisation (2014-2020)” published by the PRC Government, the percentage of urban population in the PRC is expected to reach approximately 60% by 2020. The continuous increase in urban population will further boost the demand for decorative stainless steel used in ECMD industry as well as the fitting-out industry and fueling the future growth of the decorative stainless steel manufacturing industry in the PRC. Estimated revenue of the decorative stainless steel industry in Hong Kong The revenue of the decorative stainless steel market in Hong Kong increased from approximately HK$1,722.7 million in 2014 to approximately HK$2,104.4 million in 2019, increased at a CAGR of approximately 4.1%. The increase in the revenue of the decorative stainless steel market was attributed to the increasing use of decorative stainless steel as an architectural finishing materiel as well as demand for elevator modernisation. Due to the aesthetic property as well as the non-corrosive nature of stainless steel, there is an increasing trend of using decorative stainless steel in fitting-out projects.
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INDUSTRY OVERVIEW
Estimated revenue of the decorative stainless steel industry in Hong Kong from 2014 to 2024F
3,500 CAGR = 4.1% CAGR = 3.9% 3,000
2,500 2,273.0 2,175.3 2,049.4 2,112.8 2,104.4 2,004.5 2,049.5 1,873.4 1,949.6 2,000 1,722.7 1,753.1 1,500 HK$ Million 1,000 500 0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F 2024F
Source: Ipsos research and analysis The revenue of the decorative stainless steel market in Hong Kong is forecasted to increase from approximately HK$1,949.6 million in 2020 to approximately HK$2,273.0 million in 2024, increased at a CAGR of approximately 3.9%. The estimated temporary decline of the gross output value of the decorative stainless steel market in Hong Kong in 2020 is mainly attributed to the outbreak of COVID-19. With a negative growth rate of the gross output value of the fitting-out works from 2019 to 2020 forecasted, the demand for decorative stainless steel market is expected to be affected as well. Nevertheless, so far as COVID-19 is under control, the construction industry in Hong Kong is anticipated to rebound gradually from 2021 to 2024. In particular, the future growth of the decorative stainless steel market is continuously supported by the Government’s support in elevator modernisation projects as well as the increasing use of decorative stainless steel in fitting-out projects. According to the 2018 Policy Address, the Hong Kong Government is going to launch lift modernisation subsidy scheme over the next six years from the financial year 2019/2020. The Hong Kong Government has reserved approximately HK$2.5 billion in subsidising aged elevators owners to undergo renovation and modernisation works to enhance elevator safety in aged buildings. The scheme is expected to stimulate the growth of the decorative stainless steel market in Hong Kong. On the other hand, the increasing use of decorative stainless steel in high-end fitting-out works will also fuel the future growth of the decorative stainless steel market in Hong Kong. Over the forecast period, some high-profile development projects, including the Kai Tak development and Kwu Tung North Development Areas, are expected to be completed in the forecast period. These new development projects are going to stimulate the demand for fitting-out works and thus the demand for decorative stainless steel in the forecast period.
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REGULATORY OVERVIEW
We are a leading PRC ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong, specialising in design, development, manufacture, decoration and installation of customised elevator cabin products and a broad range of decorative stainless steel products according to our customers’ needs. Set out below is a summary of certain aspects of the laws and regulations in Hong Kong and the PRC which are relevant to our operation.
HONG KONG
Laws and regulations in relation to business practices
1. Trade Descriptions Ordinance (Chapter 362 of the Laws of Hong Kong) (“TDO”)
The objective of the TDO is to protect customers against unfair trade practices by regulating businesses to sell products and services in a truthful manner. Under the TDO, false trade descriptions in respect of services supplied in the course of trade are prohibited.
Section 2 of the TDO provides, among other things, that “trade description” in relation to services means an indication, direct or indirect, and by whatever means given, with respect to the service or any part of the service including an indication of any of the matters – nature, scope, quantity (including the number of occasions on which, and the length of time for which, the service is supplied or to be supplied), standard, quality, value or grade; fitness for purpose, strength, performance, effectiveness, benefits or risks; method and procedure by which, manner in which, and location at which, the service is supplied or to be supplied; availability; testing by any person and the results of the testing; approval by any person or conformity with a type approved by any person; a person by whom it has been acquired, or who has agreed to acquire it; the person by whom the service is supplied or to be supplied; after-sale service assistance concerning the service; price, how price is calculated or the existence of any price advantage or discount.
According to Section 7 of the TDO, no person shall in the course of trade or business apply a false trade description to any goods or supply or offer to supply any goods with false trade descriptions applied thereto.
According to Section 7A of the TDO, a trader who applies a false trade description to a service supplied or offered to be supplied to a consumer or supplies or offers to supply to a consumer a service to which a false trade description is applied, commits an offence.
Sections 13E, 13F, 13G, 13H and 13I of the TDO provide that a trader who engages in relation to a consumer in a commercial practice that (i) is a misleading omission; or (ii) is aggressive; (iii) constitutes bait advertising; (iv) constitutes a bait and switch; or (v) constitutes wrongly accepting payment for a product, commits an offence.
Any person who commits an offence under Sections 7, 7A, 13E, 13F, 13G, 13H or 13I shall be subject to a fine of HK$500,000 and to imprisonment for 5 years on conviction on indictment, and to a fine of up to HK$100,000 and to imprisonment for two years on summary conviction.
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REGULATORY OVERVIEW
2. Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (“CO”)
The CO that came into force on 14 December 2015, which (i) prohibits conduct that prevents, restricts or distorts competition in Hong Kong; (ii) prohibits mergers that substantially lessen competition in Hong Kong; and (iii) provides for incidental and connected matter.
The “First Conduct Rule” prohibits anti-competitive agreements, practices and decisions, which provides that an undertaking must not (i) make or give effect to an agreement; (ii) engage in a concerted practice; or (iii) as a member of an association of undertakings, make or give effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong. Serious anti-competitive conduct includes (i) fixing, maintaining, increasing or controlling the price for the supply of goods or services; (ii) allocating sales, territories, customers or markets for the production or supply of goods or services; (iii) fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services; and (iv) bid-rigging.
The “Second Conduct Rule” prohibits the abuse of market power, which provides that an undertaking that has a substantial degree of market power in a market must not abuse such power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. This conduct may in particular, lead to an abuse of such market power if it involves predatory behavior towards competitors or limiting production, markets or technical development to the prejudice of consumers. The following matters may be taken into consideration when determining whether an undertaking has a substantial degree of market power in a market: (i) the market share of the undertaking; (ii) the undertaking’s power to make pricing and other decisions; and (iii) any barriers to entry to competitors into the relevant market.
The above First Conduct Rule and the Second Conduct Rule apply to all sectors of the Hong Kong economy. Our Group is therefore subject to the CO.
Where there is contravention of a competition rule under the CO, the Competition Tribunal may (i) on application by the Competition Commission, impose pecuniary penalty of any amount it considers appropriate subject to a maximum of 10% of the turnover of the undertaking concerned for each year in which the contravention occurred for each single contravention (if the contravention occurred in more than three years, 10% of the turnover of the undertaking for the three years that saw the highest, second highest and third highest turnover); (ii) on application by the Competition Commission, make an order disqualifying a person from being a director of a company or from otherwise being concerned in the affairs of a company; or (iii) make orders it considers appropriate, including but not limited to prohibiting an entity from making or giving effect to an agreement, requiring modification or termination of an agreement, requiring payment of damages to a person who has suffered loss or damage as a result of the contravention.
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REGULATORY OVERVIEW
Laws and regulations in relation to labour, health and safety
3. Employment Ordinance (Chapter 57 of the Laws of Hong Kong) (“EO”)
The EO is the major legislation for, among others, the protection of the wages of employees and the regulation of the general conditions of employment and employment agencies in Hong Kong. It covers a wide range of employment protection and benefits for employees including, among others, wage protection, paid annual leave, sickness allowance, maternity protection, severance payment, long service payment and termination of employment contract.
4. Minimum Wage Ordinance (Chapter 608 of the Laws of Hong Kong) (“MWO”)
With effect from 1 May 2019, the statutory minimum wage rate is HK$37.5 per hour for every employee employed under the EO. In essence, wages payable to an employee in respect of any wage period should be no less than the statutory minimum wage rate on average for the total number of hours worked. Under the MWO, any provision of the employment contract which purports to extinguish or reduce the right, benefit or protection conferred on the employee by the MWO is void.
5. Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong) (“MPFSO”)
The mandatory provident fund (“MPF”) scheme is a defined contribution retirement scheme managed by authorised independent trustees. The MPFSO provides that an employer shall participate in a MPF scheme and make contributions for its employees aged between 18 and 65. Under the MPF scheme, an employer and its employee are both required to contribute 5% of the employee’s monthly income as mandatory contribution for and in respect of the employee, subject to the minimum and maximum relevant income levels for contribution purposes. The maximum level of relevant income for contribution purposes is currently HK$30,000 per month or HK$360,000 per year.
6. Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong) (“ECO”)
The ECO establishes a no-fault and non-contributory employee compensation system for work injuries and sets out the rights and obligations of employers and employees regarding injuries or death caused by accidents arising out of and in the course of employment, or by prescribed occupational diseases suffered by the employees.
According to Sections 5 and 6 of the ECO, if an employee sustains an injury or dies as a result of an accident arising out of and in the course of his employment, his employer is in general liable to pay compensation even if the employee might have committed acts of faults or negligence when the accident occurred. Similarly, pursuant to Section 32 of the ECO, an employee who suffers incapacity or dies arising from an occupational disease is entitled to receive the same compensation as that payable to employees injured in occupational accidents.
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REGULATORY OVERVIEW
According to Section 40 of the ECO, all employers are required to take out insurance policies to cover their liabilities both under the ECO and at common law for injuries at work in respect of all their employees (including full-time and part-time employees). An employer who fails to comply with the ECO to secure an insurance cover is liable on conviction upon indictment to a fine of HK$100,000 and imprisonment for two years, and liable on summary conviction to a fine of HK$100,000 and imprisonment for one year.
7. Occupational Safety and Health Ordinance (Chapter 509 of the Laws of Hong Kong) (“OSHO”)
The OSHO provides for the safety and health protection to employees in both industrial and non-industrial workplaces.
Employers must as far as reasonably practicable ensure the safety and health of their employees in their workplaces by:
(i) providing and maintaining plant and work systems that are safe and without risks to health;
(ii) making arrangement for ensuring safety and absence of risks to health in connection with the use, handling, storage or transport of plant or substances;
(iii) providing all necessary information, instruction, training, and supervision for ensuring safety and health;
(iv) as regards any workplace under the employer’s control:
– maintaining the workplace in a condition that is safe and without risks to health; and
– providing and maintaining means of access to and egress from the workplace that are safe and without any such risks; and
(v) providing and maintaining a working environment that is safe and without risks to health.
An employer who fails to comply with the above provisions constitutes an offence and shall be liable on conviction to a fine of HK$200,000. An employer who fails to do so intentionally, knowingly or recklessly commits an offence and shall be liable on conviction to a fine of HK$200,000 and to imprisonment for six months.
The Commissioner for Labour may also issue (i) an improvement notice against any non-compliance of the OSHO or the FIUO; or (ii) a suspension notice against an employer if in general an activity is undertaken at the workplace which may create an imminent risk of death or serious bodily injury to the employees. An employer who, without reasonable excuse, fails to comply with a requirement of an improvement notice commits an offence and is liable on conviction to a fine of $200,000 and to imprisonment for 12 months. An employer who, without reasonable excuse, contravenes a suspension notice commits an
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REGULATORY OVERVIEW offence and is liable on conviction (a) to a fine of $500,000 and to imprisonment for 12 months; and (b) to a further fine of $50,000 for each day or part of a day during which the offender knowingly and intentionally continues the contravention.
8. Occupiers Liability Ordinance (Chapter 314 of the Laws of Hong Kong) (“OLO”)
The OLO regulates the liability of persons occupying or having control of premises for injury resulting to persons or damages caused to goods or other property lawfully on the land.
The OLO imposes a common duty of care on an occupier of premises to take reasonable care as in all the circumstances, in order to ensure that this visitor will be reasonably safe in using premises for the purposes for which he is invited or permitted by the occupier to be there.
Laws and regulations in relation to transfer pricing
9. Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (“IRO”)
Section 20A of the IRO grants the Inland Revenue Department (the “IRD”) wide powers to collect tax due from non-residents. The IRD may also make transfer pricing adjustments by disallowing expenses incurred by the Hong Kong resident under Sections 16(1), 17(1)(b) and 17(1)(c) of the IRO, make additional assessments under Section 60 of the IRO and challenging the entire arrangement under general anti-avoidance provisions such as Sections 61 and 61A of the IRO.
The Departmental Interpretation and Practice Notes No. 46 “Transfer Pricing Guidelines – Methodologies And Related Issues” (“DIPN 46”) was released by the IRD in December 2009, which provides clarifications and guidance on the IRD’s views on transfer pricing and how it intends to apply the existing provisions of the IRO to establish whether related parties are transacting at arm’s length prices. The practices followed by the IRD are generally based on the transfer pricing methodologies recommended by the OECD Transfer Pricing Guidelines.
The Departmental Interpretation and Practice Notes No. 45 “Relief From Double Taxation Due To Transfer Pricing Or Profit Reallocation Adjustments” (“DIPN 45”) was released by the IRD in April 2009, which provides that where double taxation arises as a result of transfer pricing adjustments made by the tax authorities of another country, a Hong Kong taxpayer may potentially claim relief under the treaty between Hong Kong and that country. Countries entered into tax arrangements with Hong Kong includes the PRC.
On 13 July 2018, the Hong Kong Government gazetted the Inland Revenue (Amendment) (No. 6) Ordinance 2018 (“Amendment Ordinance No. 6”), which introduces provisions for a statutory transfer pricing regime and for transfer pricing documentation in Hong Kong. The major provisions under the Amendment Ordinance No. 6 begin to apply for years of assessment commencing from 1 April 2018.
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REGULATORY OVERVIEW
THE PRC
Laws and regulations in relation to foreign investment in the PRC
The incorporation, operation and management of corporate entities in the PRC, including foreign invested enterprises, are subject to the following principal laws and regulations:
¼ the Company Law of the PRC（《中華人民共和國公司法》）which was promulgated by the Standing Commitment of the National People’s Congress (the “SCNPC”) in 1993 and amended in 1999, 2004, 2005, 2013, and 2018, respectively.
¼ The National People’s Congress adopted and issued Foreign Investment Law（《中 華人民共和國外商投資法》） promulgated by the National People’s Congress on March 15, 2019 and became effective on January 1, 2020. The Foreign Investment Law is the primary law governing foreign investment in China and replaced the three existing laws regulating foreign investments in China, including the Wholly Foreign-owned Enterprises Law and its implementing rules and ancillary regulations.
¼ the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2020 Version) （《外商投資准入特別管理措施（負面清單）（2020年版）》）, which was promulgated jointly by the Ministry of Commerce of the PRC (the “MOFCOM”) and the National Development and Reform Commission on June 23, 2020 and became effective on July 23, 2020.
¼ the Measures for Reporting of Information on Foreign Investment（《外商投資信息報 告辦法》）, which was promulgated jointly by the MOFCOM and State Administration for Market Regulation on December 30, 2019 and became effective on January 1, 2020.
Laws and regulations in relation to foreign trade and customs
The Foreign Trade Law of the PRC（《中華人民共和國對外貿易法》）promulgated by the SCNPC in 1994, amended in 2004 and 2016, respectively, provides that any foreign trade business operator that engaged in the import and export of goods or technology shall be registered for archival purposes with the administrative department of foreign trade of the State Council or the institution entrusted thereby. Where any foreign trade business operator fails to file for archival registration according to relevant provisions, the customs authority shall refuse to handle the procedures of customs declarations and clearance of the import or export goods. To this end, the MOFCOM promulgated the Measures for Record Filing and Registration by Foreign Trade Business Operator（《對外貿易經營者備案登記辦法》）on June 25, 2004, which was amended subsequently on August 18, 2016, November 30, 2019 and May 10, 2021.
Pursuant to the Customs Law of the PRC（《中華人民共和國海關法》）promulgated by the SCNPC on January 22, 1987 and amended on July 8, 2000, June 29, 2013, December 28, 2013, November 7, 2016, November 4, 2017 and April 29, 2021, respectively, unless otherwise stipulated, the declaration of import and export goods may be by consignees and
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REGULATORY OVERVIEW consignors themselves, and such formalities may also be completed by their entrusted customs brokers. The consignees and consignors for import or export of goods and the customs brokers engaged in customs declaration shall register with the Customs in accordance with the laws.
Pursuant to the Administration Provisions of the Customs of the PRC on the Registration of Customs Declaration Entities（《中華人民共和國海關報關單位註冊登記管理規定》）promulgated by the General Administration of Customs on March 13, 2014 and amended on December 20, 2017, and May 29, 2018, the registration of customs declaration entities comprises the registration of the customs declaration enterprise and the registration of the consignor or consignee of imported and exported goods. The consignor or consignee of imported and exported goods shall register with local customs in accordance with the laws.
Laws and regulations in relation to foreign exchange
The principal regulations governing foreign currency exchange in the PRC are the Foreign Exchange Administration Regulations of the PRC（《中華人民共和國外匯管理條例》） which was promulgated by the State Council on January 29, 1996, became effective on April 1, 1996 and was amended on January 14, 1997 and August 5, 2008, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment（《結匯、售匯及付匯管 理規定》）which was promulgated on June 20,1996 and effective on July 1,1996. Under these rules and other PRC rules and regulations on currency conversion, upon payment of the applicable taxes, foreign invested enterprises may convert the dividends they received in RMB into foreign currencies at designated foreign exchange banks or remit such amount directly outside the PRC through their foreign exchange bank accounts. However, approval from SAFE is required for the relevant capital account transactions of the foreign invested enterprises, such as the capital increase and decrease. In addition, foreign exchange transactions involving direct investment, loans and investment in securities outside the PRC are subject to limitations and require approvals from SAFE.
The Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment （《國家外匯管理局關於進一步簡化和改進直接投資外匯管理政策的通知》） (the “SAFE Circular 13”), effective from June 1, 2015, cancelled the administrative approvals of foreign exchange registration of direct domestic investment and direct overseas investment. Besides, it simplifies the procedure of registration of foreign exchange and banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment.
Pursuant to the Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises（《國家外匯管理局關 於改革外商投資企業外匯資本金結匯管理方式的通知》） (the “SAFE Circular 19”), which was promulgated by the SAFE on March 30, 2015 and became effective on June 1, 2015, a foreign invested enterprise may also choose to convert its registered capital from foreign currency to RMB on a self-discretionary basis, but the use of such converted registered capital is subject to certain limitations, including but not limited to, that a foreign-invested enterprise shall not use such converted registered capital to provide entrusted loans or repay loans between non-financial enterprises, or use such converted registered capital for expenditures beyond its business scope or expenditures prohibited by PRC laws or regulations. When an ordinary foreign-invested enterprise makes domestic equity investments
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REGULATORY OVERVIEW with the amount of foreign exchanges converted, the invested enterprise shall first go through domestic reinvestment registration and open a corresponding account for foreign exchange settlement pending payment with the foreign exchange bureau or the bank at its registration place.
Pursuant to the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts（《國家外匯管理局關於改革和規範資本項目結 匯管理政策的通知》）(the “SAFE Circular 16”), which was promulgated by the SAFE and became effective on June 9, 2016, enterprises registered in PRC may also convert their foreign debts from foreign currency into RMB on a self-discretionary basis. The SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis, which applies to all enterprises registered in the PRC (including Chinese-funded enterprises and foreign-invested enterprises, excluding financial institutions). The SAFE Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC unless otherwise specifically provided. Besides, the converted RMB shall not be used to make loans for non-related enterprises unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise’s own use with the exception of the real estate enterprise.
Pursuant to the Circular Concerning Relevant Issues on the Foreign Exchange Administration of Offshore Investing and Financing and Round-Trip Investing by Domestic Residents through Special Purpose Vehicles（《關於境內居民通過特殊目的公司境外投融資及返程 投資外匯管理有關問題的通知》）(the “SAFE Circular 37”) promulgated by the SAFE on July 4, 2014, PRC residents shall register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with their legally owned assets, equity interests in domestic enterprises or offshore assets, interests. As advised by our PRC Legal Advisers, Mr. Colby Chiu is not a PRC resident under SAFE Circular 37, and thus he is not required to conduct the registration under SAFE Circular 37.
Laws and regulations in relation to taxation
Enterprise Income Tax
According to the Enterprise Income Tax Law of the PRC（《中華人民共和國企業所得稅法》）, which was promulgated on March 16, 2007 by the SCNPC, amended on February 24, 2017, December 29, 2018, and the Regulation on the Implementation of the Enterprise Income Tax Law of the PRC（《中華人民共和國企業所得稅法實施條例》）which was enacted on December 6, 2007, amended on April 23, 2019, by the State Council (collectively the “EIT Law”), enterprises are classified into resident enterprises and non-resident enterprises. Enterprises, which are incorporated in the PRC or which are incorporated pursuant to the foreign laws with their “de facto management bodies” located in the PRC, are deemed “resident enterprise” and subject to an enterprise income tax rate of 25% on their global income. Non-resident enterprises are subject to (i) an enterprise income tax rate of 25% on their income generated by their establishments or
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REGULATORY OVERVIEW places of business in the PRC and its income derived outside the PRC which are effectively connected with their establishments or places of business in the PRC; and (ii) an enterprise income tax rate of 10% on their income derived from the PRC but not connected with its establishments or places of business located in the PRC. Non-resident enterprises without an establishment or place of business in the PRC are subject to an enterprise income tax of 10% on their income derived from the PRC.
Pursuant to the EIT Law, the enterprise income tax rate of a high and new technology enterprise is 15%. According to the Administrative Measures for the Recognition of High and New Technology Enterprises（《高新技術企業認定管理辦法》）, effective on January 1, 2008 and amended on January 29, 2016, the certificate of a high and new technology enterprise is valid for three years.
Dividend Tax
According to the EIT Law, dividends paid to foreign investors of foreign-invested companies are subject to withholding tax at a rate of 10%, unless otherwise provided in the relevant tax agreements entered into with the central government of the PRC. According to the Arrangement between the Mainland of China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income （《內地和香港特別行政區關於對所得稅避免雙重徵稅和防止偷漏稅的安排》） entered into by State Administration of Taxation and Hong Kong Special Administrative Region on August 21, 2006, if an enterprise in Hong Kong directly holds at least 25% of the equity of an enterprise in the PRC, then the withholding tax rate shall be 5% for the dividends distributed by the enterprise in the PRC to the enterprise in Hong Kong.
Value-Added Tax
Pursuant to the Interim Regulations on Value-added Tax of the PRC（《中華人民共和國增 值稅暫行條例》）promulgated by the State Council on December 13, 1993 and amended on 2008, 2011, 2016, 2017 respectively, and the Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-Added Tax（《中華人民共和國增值稅暫行條例實施 細則》） promulgated by Ministry of Finance on December 25, 1993 and amended on December 15, 2008 and October 28, 2011, all enterprises and individuals engaged in sale of goods, provision of processing, repair and replacement services, sale of services, intangible assets and, or real estate, and the importation of goods within the territory of the PRC shall pay value-added tax (the “VAT”). For general VAT taxpayers selling or importing goods other than those specifically listed in the VAT Law, the VAT rate is 17%, and in certain limited circumstances, the VAT rate is 11%. Unless otherwise stipulated by the State Council, the tax rate for taxpayers exporting goods shall be zero.
Pursuant to the Circular of the Ministry of Finance and the State Administration of Taxation on Adjusting Value-added Tax Rates（《財政部、稅務總局關於調整增值稅稅率的通知》） which was issued by the Ministry of Finance and the SAT on April 4, 2018 and became effective on May 1, 2018, enterprises and individuals engaged in a taxable sales activity for the VAT purpose or imports goods, the previous applicable 17% and 11% VAT rates are adjusted to be 16% and 10% respectively. In addition, exported goods, originally subject to
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REGULATORY OVERVIEW
17% VAT rate and 17% export rebate rate, will be subject to a lower export rebate rate which is 16% rate, while exported goods and cross-border taxable activities, subject to 11% VAT rate and 11% export rebate rate, will be subject to 10% export rebate rate.
The Circular on Relevant Policies for Deepening Value-Added Tax Reform（《關於深化 增值稅改革有關政策的公告》） which was issued by the Ministry of Finance, the General Administration of Customs and the SAT on March 20, 2019 and came into force on April 1, 2019, further reduce the VAT tax rates. Pursuant to the Circular on Relevant Policies for Deepening Value-Added Tax Reform, the VAT tax rates of 16% and 10% have been further adjusted to be 13% and 9%.
Laws in relation to dividend distribution
The principal laws and regulations regulating the dividend distribution of dividends by foreign-invested enterprises in the PRC include the Company Law of the PRC（《中華人民共 和國公司法》）. A PRC company is required to set aside as statutory reserve funds at least 10% of its after-tax profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital unless laws regarding foreign investment provide otherwise. A PRC company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Laws in relation to product quality
Products made in the PRC are subject to the Product Quality Law of the PRC（《中華人 民共和國產品質量法》）(the “Product Quality Law”), which was promulgated by the SCNPC on February 22, 1993, amended on July 8, 2000, August 27, 2009, and December 29, 2018, respectively. According to the Product Quality Law, a manufacturer of a product is responsible to compensate for the damages to any person or property caused by the defect of such a product, unless the manufacturer is able to prove that: (i) it has not circulated the product; (ii) the defect causing the damage did not exist at the time when the product was circulated; or (iii) scientific or technological knowledge at the time when the product was circulated did not allow the defect to be discovered.
Laws and regulations in relation to special equipment
According to the Special Equipment Safety Law of the PRC（《中華人民共和國特種設備 安全法》） promulgated on June 29, 2013,and effective on January 1, 2014, and the Regulations on Safety Supervision of Special Equipment （《特種設備安全監察條例》） promulgated by State Council on March 11, 2003, amended on January 24, 2009, enterprises using special equipment, including boilers, pressure vessels (including gas cylinders), pressure pipelines, elevators, cranes, passenger cableways, large entertainment facilities and in-plant (in-factory) special motor vehicles that involve great danger to the personal and property safety, are required to obtain the registration certificate for the usage, and shall establish and improve the special equipment’s safety and energy-saving administration system and the job safety and energy-saving responsibility system to ensure the safety of production, business operation and use of special equipment.
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REGULATORY OVERVIEW
Laws and regulations in relation to environmental protection
According to the Law on Environmental Protection of the PRC（《中華人民共和國環境保 護法》）promulgated on December 26, 1989 by the SCNPC and amended on April 24, 2014, the Environmental Protection Administrative Department of the State Council is empowered to formulate the environmental quality standards and pollutant discharge standards of the PRC at national level. The provincial, autonomous and municipal people’s governments, subject to report for record to the Environmental Protection Administrative Department of the State Council, may formulate local environmental quality standards and pollutant discharge standards for the subjects not yet regulated under the respective national standards and may formulate stricter standards for the subjects regulated under existing national standards. Enterprises shall comply with both national and local standards.
According to the Law on the Evaluation of Environmental Effects of the PRC（《中華人 民共和國環境影響評價法》）promulgated by the SCNPC on October 28, 2002 and amended on July 2, 2016, December 29, 2018, and the Regulation on the Administration of Construction Project Environmental Protection（《建設項目環境保護管理條例》）which was promulgated by State Council on November 29, 1998 and amended on July 16, 2017, the PRC has carried out the categorized administration for the evaluation of environmental effects of construction projects based on the extent of effects to the environment. The construction units shall submit to the relevant administrative departments of environmental protection the report on the environmental effects or the report form for the environmental effects, which shall be prepared by institutions with corresponding qualifications, or the registration form for the environmental effects as stipulated and obtain approvals from such administrative departments prior to the construction. Environmental protection facilities shall be designed, built and put into operation together with the whole construction project. Upon completion of the construction projects for which the report on the environmental effects or the report form for the environmental effects is prepared, the construction units shall make an acceptance check of the matching environmental protection facilities and prepare an acceptance report according to the standards and procedures stipulated by the competent administrative department of environmental protection under the State Council before the construction projects can be put into operation.
Laws in relation to production safety
Pursuant to the Production Safety Law of the PRC（《中華人民共和國安全生產法》）which was promulgated by the SCNPC on June 29, 2002 and amended on August 27, 2009 and August 31, 2014 respectively, any entity engaging in manufacturing must meet national or industry standards regarding safety production and provide qualified working conditions required by laws, administrative rules and national or industry standards. The entity engaging in manufacturing must install prominent warning signs at or on the relevant dangerous operation site, facility and equipment. The design, production, installation, use, testing, maintenance, upgrade and disposal of safety equipment must comply with national or industry standards.
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REGULATORY OVERVIEW
Laws and regulations in relation to labor law and social security
Enterprises in the PRC are subject to the Labor Law of the PRC（《中華人民共和國勞動 法》） (the “Labor Law”) which was promulgated by the SCNPC on July 5, 1994 and became effective on January 1, 1995, and was amended on August 27, 2009, December 29, 2018, the Labor Contract Law of the PRC （《中華人民共和國勞動合同法》） (the “Labor Contract Law”) which was promulgate by the SCNPC on June 29, 2007, came into effect on January 1, 2008, and was amended on December 28, 2012, and the Implementations Regulations of Labor Contract Law of the PRC（《中華人民共和國勞動合同法實施條例》）which was promulgated on September 18, 2008 and became effective on the same day, as well as other related regulations, rules and provisions issued by the relevant governmental authorities from time to time. According to the Labor Contract Law, enterprises established in PRC shall enter into employment agreements with their employees, in which the term of the employment agreement, job duties, working hours, rest and leave, social insurance, labor compensation, labor protection, working conditions and protection against occupational hazards shall be provided for. Both employer and employee shall duly perform their duties. Meanwhile, the Labor Contract Law also provides for the scenario of rescission and termination. Except in the situations explicitly stipulated in the Labor Contract Law which will not be subject to economic compensation, economic compensation shall be paid to the employee by the employer for the illegal rescission or termination of the employment agreement.
According to the Law on Social Insurance of the PRC（《中華人民共和國社會保險法》） implemented on July 1, 2011, amended on December 29, 2018, the Decision of the State Council on Establishing a Unified Basic Pension System for Employees Working in Enterprises （《國務院關於建立統一的企業職工基本養老保險制度的決定》） issued on July 16, 1997, the Decision of the State Council on Establishing the Urban Employees’ Basic Medical Insurance System （《國務院關於建立城鎮職工基本醫療保險制度的決定》） promulgated on December 14, 1998, the Provisional Measures on Birth Insurance for Employees Working in Enterprises （《企業職工生育保險試行辦法》） implemented on 1 January 1995, the Regulations on Work-Related Injury Insurance（《工傷保險條例》）implemented on January 1, 2004 and amended on December 20, 2010, and the Regulations on Unemployment Insurance （《失業保險條例》）promulgated on January 22, 1999, employers in the PRC shall conduct registration of social insurance with the competent authorities, and make contributions to the basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance for their employees. If employers fail to pay the social insurance, the competent authority shall request the employers to pay the overdue payment or the deficit and the overdue fine within a specific term. In the event of failure to make the aforesaid payment, an additional fine may be imposed.
According to the Regulations on Management of the Housing Provident Fund（《住房公 積金管理條例》）, which was promulgated by the State Council on April 3, 1999 and amended on March 24, 2002, March 24, 2019, the employers must register with the competent housing provident fund management center and, complete procedures for opening an account at relevant banks for the deposit of their employees’ housing provident fund. The housing provident fund to be deposited by an individual employee shall be withheld by his employer. Employers are required to pay, on behalf of their employees, to housing funds. In the event
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REGULATORY OVERVIEW of any failure of the employers to pay the housing provident fund, the competent housing provident fund management center shall request payment and deposit within a prescribed time limit.
Laws and regulations in relation to intellectual property
The Computer Software Protection Regulations（《計算機軟件保護條例》）promulgated by the State Council on December 20, 2001 and amended on January 8, 2011, and January 30, 2013 respectively, the National Copyright Administration of the People’s Republic of China issued the Computer Software Copyright Registration Procedures （《計算機軟件著作權登記辦法》） on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration.
Pursuant to the Measures for the Administration of Internet Domain Names（《互聯網域 名管理辦法》）, promulgated on August 24, 2017 and with effect from November 1, 2017, “domain name” shall refer to the character mark of hierarchical structure, which identifies and locates a computer on the internet and corresponds to the Internet protocol (IP) address of that computer.
The SCNPC adopted the Patent Law （《中華人民共和國專利法》） in 1984, as most recently amended in 2008. A patentable invention, utility model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation.
Both Trademark Law of the PRC（《中華人民共和國商標法》）promulgated by the SCNPC in 1982 and amended respectively on February 22, 1993, October 27, 2001, August 30, 2013, and April 23, 2019 and the Regulation on Implementation of Trademark Law of the PRC （《中華人民共和國商標法實施條例》） promulgated by the State Council on August 3, 2002, amended on April 29, 2014 and with effective on May 1, 2014 provide protection to the holders of registered trademarks. In the PRC, registered trademarks include commodity trademarks, service trademarks, collective marks and certificate marks.
COMPLIANCE WITH THE RELEVANT REQUIREMENTS
Our Directors confirmed that our Group had obtained all material licences, permits and approvals required for carrying on our business activities during the Track Record Period and up to the Latest Practicable Date.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
OVERVIEW
Our Company was incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Act on 28 February 2019 in anticipation of the [REDACTED]. As at the Latest Practicable Date, the subsidiaries of our Group comprised Full Victory, Cobelco HK, Sitami Film, Cobelco Industrial, Sitami Decorative, Sitami HK, Cobelco GZ, Sitami GD and Cobelco KS. Details of these subsidiaries of our Group are set out in the paragraph headed “Corporate development” below in this section.
Prior to the [REDACTED], our Group underwent the Reorganisation and immediately following completion of the Reorganisation, the issued share capital of our Company was wholly owned by Rich Topmax, a company incorporated in the BVI which is in turn wholly owned by Mr. Colby Chiu.
Immediately following the completion of the Capitalisation Issue and the [REDACTED], Rich Topmax will own [REDACTED]% of the issued share capital of our Company (without taking into account any Share which will be allotted and issued upon the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme).
BUSINESS DEVELOPMENT
Our Group’s history can be traced back to 1987, when Mr. Colby Chiu, the chairman of our Board and founder of our Group, started his business in the trading name of Cobelco Industrial Supplies with a then business partner, who was an Independent Third Party. Shortly after the retiring of the aforesaid business partner from Cobelco Industrial Supplies, Cobelco HK was incorporated in December 1995 by Mr. Colby Chiu as a successor of Cobelco Industrial Supplies to engage in the trading of decorative stainless steel products and elevator components. Since then, we have expanded our business operation by sourcing and distributing a variety of architectural finishing materials of international brands. To cope with the market demand for elevator cabin products and decorative stainless steel products, we established Cobelco GZ in 2005 and set up our first factory in Guangzhou, the PRC in 2006, for the manufacture of, among others, decorative stainless steel products for elevator cabins.
Milestones of our Group
The key events of the development of our Group are set out below:
Year Key events
1987 Cobelco Industrial Supplies was established.
1995 Cobelco HK was incorporated as a successor of Cobelco Industrial Supplies to engage in the trading of decorative stainless steel products and elevator components.
1999 We became the authorised distributor of decorative films of Supplier A (Note 1) in the Hong Kong and Macau regions.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
Year Key events
2005 We established Cobelco GZ.
2006 We set up our first factory in Guangzhou, the PRC and subsequently relocated to the current location of our Guangzhou Plant in 2009.
2008 We were appointed as the qualified supplier of Customer A (Note 2).
2013 We started to export our products to Southeast Asia.
2014 We supplied stainless steel products to our customer for a construction project in the Republic of Azerbaijan, with a contract sum of over HK$10 million for the first time.
2016 We became the authorised distributor of decorative films of Supplier A (Note 1) in the PRC region.
2017 Cobelco GZ was recognised as a high-and-new technology enterprise（高新技 術企業）by the PRC authorities.
2018 We established Cobelco KS and set up our Suzhou Workshop in Kunshan, Jiangsu Province, the PRC, to mainly cater for the demands in Eastern China.
2019 Our Company was incorporated in the Cayman Islands as part of the Reorganisation for the purpose of the [REDACTED].
Notes:
1. Please refer to the section headed “Business – Suppliers and procurement” for the background of Supplier A.
2. Please refer to the section headed “Business − Customers” for the background of Customer A.
CORPORATE DEVELOPMENT
Set out below are the history and development of our subsidiaries incorporated in Hong Kong and the PRC:
Cobelco HK
Cobelco HK was incorporated in Hong Kong on 21 December 1995 as a limited liability company. It engages in the trading of decorative stainless steel products and elevator components.
As at the date of incorporation, Cobelco HK had an initial issued share capital of HK$2 divided into two shares, and was owned as to 50% by Mr. Colby Chiu and 50% by Ms. Wong. On 31 January 1996, the issued share capital of Cobelco HK was increased to HK$500,000 divided into 500,000 shares by the allotment and issue of 399,999 shares to Mr. Colby Chiu and 99,999 shares to Ms. Wong at the subscription price of HK$1 per share,
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE respectively. Upon completion of the aforesaid allotment of shares, Cobelco HK was owned as to 80% by Mr. Colby Chiu and 20% by Ms. Wong. On 11 January 2012, Ms. Wong transferred 100,000 shares, representing 20% of the issued share capital of Cobelco HK to Mr. Colby Chiu at the consideration of HK$100,000, which was based on the then par value of the transferred shares. The aforesaid transfer had been legally completed and settled. Since then and until the implementation of the Reorganisation, Cobelco HK had been wholly owned by Mr. Colby Chiu.
Sitami Film
Sitami Film was incorporated in Hong Kong on 19 September 1996 as a limited liability company. It engages in supply and installation of functional films, and decorative materials for elevator cabins.
As at the date of incorporation, Sitami Film had an initial issued share capital of HK$2 divided into two shares, which were respectively held by two subscribers who were Independent Third Parties. The aforesaid subscribers transferred their shares to an Independent Third Party and a nephew of Mr. Colby Chiu, from whom Mr. Colby Chiu and Ms. Wong then collectively acquired 100% of the issued share capital of Sitami Film at the total consideration of HK$2 on 15 May 1997 through their controlled corporations, namely Cobelco HK and National Silver Limited. In order to streamline the corporate structure of Sitami Film, there were subsequent share transfers amongst Cobelco HK, National Silver Limited, Mr. Colby Chiu and Ms. Wong, and the issued share capital of Sitami Film was also increased to HK$500,000 divided into 500,000 shares by allotment and issue of shares to Mr. Colby Chiu and Ms. Wong. Since 12 January 2006, Sitami Film had been owned as to 80% by Mr. Colby Chiu and 20% by Ms. Wong. On 21 June 2018, Ms. Wong transferred 100,000 shares, representing 20% of the issued share capital of Sitami Film to Mr. Colby Chiu at the consideration of HK$100,000, which was based on the previous par value of the transferred shares. The aforesaid transfer had been legally completed and settled. Since then and until the implementation of the Reorganisation, Sitami Film had been wholly owned by Mr. Colby Chiu.
Cobelco Industrial
Cobelco Industrial was incorporated in Hong Kong on 26 November 1997 as a limited liability company. It engages in trading of functional films and decorative materials.
As at the date of incorporation, Cobelco Industrial had an initial issued share capital of HK$2 divided into two shares, which were respectively held by two subscribers who were Independent Third Parties. On 16 June 1998, the said subscribers transferred one share to Mr. Colby Chiu at the consideration of HK$1 and one share to Ms. Wong at the consideration of HK$1, respectively. On 22 June 1998, the issued share capital of Cobelco Industrial was increased to HK$500,000 divided into 500,000 shares by the allotment and issue of 399,999 shares and 99,999 shares to Mr. Colby Chiu and Ms. Wong at the subscription price of HK$1 per share, respectively. Upon completion of the aforesaid allotment and transfer of shares, Cobelco Industrial was owned as to 80% by Mr. Colby Chiu and 20% by Ms. Wong. On 12 June 2018, Ms. Wong transferred 100,000 shares, representing 20% of the issued share capital of Cobelco Industrial to Mr. Colby Chiu at the consideration of HK$100,000, which was based
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE on the previous par value of the transferred shares. The aforesaid transfer had been legally completed and settled. Since then and until the implementation of the Reorganisation, Cobelco Industrial had been wholly owned by Mr. Colby Chiu.
Cobelco GZ
Cobelco GZ was established under the laws of the PRC with limited liability on 6 September 2005 with an initial registered capital of HK$3 million. The registered capital of Cobelco GZ was increased to HK$3.56 million on 22 August 2006, to HK$8.5 million on 24 September 2009 and to HK$10 million on 16 January 2012, respectively. On 26 July 2018, the registered capital of Cobelco GZ was further increased to HK$22 million, which had been fully paid up by Cobelco HK as at the Latest Practicable Date. Cobelco GZ engages in the manufacture of elevator cabins and decorative stainless steel products, and the distribution of decorative films and functional films.
Since the establishment of Cobelco GZ, the entire equity interest of Cobelco GZ has been wholly owned by Cobelco HK.
Cobelco GZ (GZ Branch)
Cobelco GZ (GZ Branch), a branch office of Cobelco GZ, was established on 28 June 2012. In order to streamline the business operation and corporate structure of the Group, Cobelco GZ (GZ Branch) was deregistered on 20 July 2020. Cobelco GZ (GZ Branch) had remained solvent and had no outstanding claims or liabilities on or before its deregistration.
Sitami HK
Sitami HK was incorporated in Hong Kong on 3 August 2017 as a limited liability company, with an issued share capital of HK$500,000 divided into 500,000 shares. It engages in investment holding.
Since the incorporation of Sitami HK and until the implementation of the Reorganisation, Sitami HK had been wholly owned by Mr. Colby Chiu.
Sitami Decorative
Sitami Decorative was incorporated in Hong Kong on 29 August 2017 as a limited liability company, with an issued share capital of HK$500,000 divided into 500,000 shares. It has been inactive since incorporation.
Since the incorporation of Sitami Decorative and until the implementation of the Reorganisation, Sitami Decorative had been wholly owned by Mr. Colby Chiu.
Sitami GD
Sitami GD was established under the laws of the PRC with limited liability on 31 August 2017, with a registered capital of HK$100 million, of which RMB11,740,000 had been paid up as at the Latest Practicable Date. Sitami GD engages in property holding.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
Since the incorporation of Sitami GD, the entire equity interest of Sitami GD has been wholly owned by Sitami HK.
Cobelco KS
Cobelco KS was established under the laws of the PRC with limited liability on 9 February 2018, with a registered capital of RMB1 million. The registered capital of Cobelco KS had been fully paid up by Cobelco GZ as at the Latest Practicable Date. Cobelco KS engages in manufacture of elevator cabins and decorative stainless steel products.
Since the incorporation of Cobelco KS, the entire equity interest of Cobelco KS has been wholly owned by Cobelco GZ.
REORGANISATION
The following diagram illustrates our corporate structure immediately before the Reorganisation:
Mr. Colby Chiu
100% 100% 100% 100% 100%
Cobelco Sitami Cobelco HK Sitami Film Sitami HK Industrial Decorative (HK) (HK) (HK) (HK) (HK)
100% 100%
Cobelco GZ Cobelco GZ Sitami GD (GZ Branch) (PRC) (PRC) (PRC)
100%
Cobelco KS (PRC)
Incorporation of Rich Topmax and Full Victory
(1) Rich Topmax was incorporated under the laws of BVI with limited liability on 16 January 2019. On 28 March 2019, one share, credited as fully paid at par, was allotted and issued to Mr. Colby Chiu.
(2) Full Victory was incorporated under the laws of BVI with limited liability on 2 January 2019. On 28 March 2019, one share, credited as fully paid at par, was allotted and issued to Mr. Colby Chiu.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
Incorporation of our Company
Our Company was incorporated as an exempted company in the Cayman Islands on 28 February 2019 with an authorised share capital of HK$380,000 divided into 38,000,000 Shares of HK$0.01 each. Upon incorporation, (i) one (1) nil-paid subscriber Share was allotted and issued to the initial subscriber (being the register agent responsible for the incorporation of our Company), and was then transferred to Mr. Colby Chiu and credited as fully paid on the same day; and (ii) 99 fully-paid Shares were further allotted and issued to Mr. Colby Chiu.
Acquisition of Cobelco HK, Cobelco Industrial, Sitami Film, Sitami Decorative, Sitami HK by Full Victory
On 30 July 2019, Full Victory acquired the entire issued capital of the following companies:
(1) 500,000 shares in Cobelco HK from Mr. Colby Chiu, and in consideration of which, Full Victory allotted and issued one share to Mr. Colby Chiu;
(2) 500,000 shares in Cobelco Industrial from Mr. Colby Chiu, and in consideration of which, Full Victory allotted and issued one share to Mr. Colby Chiu;
(3) 500,000 shares in Sitami Film from Mr. Colby Chiu, and in consideration of which, Full Victory allotted and issued one share to Mr. Colby Chiu;
(4) 500,000 shares in Sitami Decorative from Mr. Colby Chiu, and in consideration of which, Full Victory allotted and issued one share to Mr. Colby Chiu; and
(5) 500,000 shares in Sitami HK from Mr. Colby Chiu, and in consideration of which, Full Victory allotted and issued one share to Mr. Colby Chiu.
The aforesaid transactions had been legally completed and settled, and each of Cobelco HK, Cobelco Industrial, Sitami Film, Sitami Decorative and Sitami HK became a direct wholly-owned subsidiary of Full Victory.
Acquisition of Full Victory by our Company
Pursuant to the Reorganisation Agreement, on 31 July 2019, our Company acquired the entire issued share capital of Full Victory from Mr. Colby Chiu, and in consideration thereto, our Company issued and allotted, credited as fully paid, one Share to Rich Topmax as directed by Mr. Colby Chiu.
The aforesaid acquisition and allotment were legally completed and settled, upon which, Full Victory became a direct wholly-owned subsidiary of our Company.
Transfer of Share from Mr. Colby Chiu to Rich Topmax
On 31 July 2019, Mr. Colby Chiu transferred his 100 fully-paid Shares to Rich Topmax at the consideration of HK$1, which was completed and settled on the same date.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
CORPORATE STRUCTURE IMMEDIATELY FOLLOWING THE COMPLETION OF THE REORGANISATION
Mr. Colby Chiu
100%
Rich Topmax (BVI)
100%
Company (Cayman Islands)
100%
Full Victory (BVI)
100% 100% 100% 100% 100%
Cobelco Sitami Cobelco HK Sitami Film Sitami HK Industrial Decorative (HK) (HK) (HK) (HK) (HK)
100% 100%
Cobelco GZ Cobelco GZ Sitami GD (GZ Branch) (PRC) (PRC) (PRC)(Note)
100%
Cobelco KS (PRC)
Note: Cobelco GZ (GZ Branch) was deregistered on 20 July 2020.
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HISTORY, REORGANISATION AND CORPORATE STRUCTURE
CORPORATE STRUCTURE IMMEDIATELY AFTER THE COMPLETION OF THE [REDACTED] (WITHOUT TAKING INTO ACCOUNT ANY SHARES THAT MAY BE ALLOTTED AND ISSUED UPON THE EXERCISE OF THE [REDACTED] AND THE OPTIONS THAT MAY BE GRANTED UNDER THE SHARE OPTION SCHEME)
Mr. Colby Chiu
100%
Rich Topmax Public (BVI) shareholders
[REDACTED]% [REDACTED]%
Company (Cayman Islands)
100%
Full Victory (BVI)
100% 100%100% 100% 100%
Cobelco Sitami Cobelco HK Sitami Film Sitami HK Industrial Decorative (HK) (HK) (HK) (HK) (HK)
100% 100%
Cobelco GZ Sitami GD (PRC) (PRC)
100%
Cobelco KS (PRC)
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BUSINESS
OVERVIEW
We are a leading PRC ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong, specialising in design, development, manufacture, decoration and installation of customised elevator cabin products and a broad range of decorative stainless steel products according to our customers’ needs. Elevator cabins are the compartments which carry passengers in the elevators whereas decorative stainless steel products are architectural finishing materials commonly used to furnish the indoor and outdoor surface areas of residential buildings, commercial buildings as well as hospitality and infrastructure facilities. Our customers primarily include elevator companies and construction contractors for residential and commercial property projects in the PRC and Hong Kong. According to the Ipsos Report, we ranked fourth in the ECMD industry in the PRC in terms of revenue in 2019. In addition, we sell and distribute other architectural finishing materials, primarily including decorative films and functional films to our customers primarily in the PRC and Hong Kong. We have been the distributor of decorative films and functional films in the PRC, Hong Kong and Macau for an international brand owned by Supplier A. We also install elevator cabin products, decorative films and functional films in Hong Kong upon customer’s request.
The following table sets out a breakdown of revenue by product segments during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Elevator cabin 254,945 64.3 259,996 69.6 266,252 66.4 Decorative stainless steel 82,314 20.7 61,109 16.3 85,100 21.2 Other architectural finishing materials 59,598 15.0 52,721 14.1 49,499 12.4
Total 396,857 100.0 373,826 100.0 400,851 100.0
Our Group’s history can be traced back to 1987, when Mr. Colby Chiu, the chairman of the Board and founder of our Group, established Cobelco Industrial Supplies (a partnership formed with an Independent Third Party who ceased to be a partner in November 1995). Subsequently, Cobelco HK was incorporated in December 1995 by Mr. Colby Chiu as a successor of Cobelco Industrial Supplies to engage in the trading of decorative stainless steel products and elevator components. Since then, we have expanded our business operation through sourcing and distributing a variety of architectural finishing materials of international brands. To cope with the market demand for elevator cabin products and decorative stainless steel products, in 2005, we established Cobelco GZ and subsequently set up our Guangzhou Plant in the PRC, for the manufacture of elevator cabin products and decorative stainless steel products.
With over decades of operations since the establishment of Cobelco HK, our Group has been expanding our sales network and has built up our reputation in the ECMD industry and decorative stainless steel manufacturing industry in the PRC and Hong Kong. Our Directors believe that our Group’s expertise and experience in the design, development, manufacture, decoration and installation of elevator cabin products and decorative stainless steel products has distinguished ourselves by our ability in providing customised products and one-stop solutions tailored to our customers diversified product portfolio covering, product design and
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BUSINESS development, production, quality assurance, installation and after-sales support to our customers, which allows us to differentiate ourselves from other market participants. It also enables us to offer our customers diversified product portfolio by integrating lengthy and complex production process of elevator cabin products and decorative stainless steel products in order to reduce lead time and production costs. Furthermore, our Group’s commitment to product design and development, which is evidenced by the recognition of Cobelco GZ as a high-and-new technology enterprise （高新技術企業） since 2017, have allowed us to achieve technical enhancement and diversify our product portfolio in order to respond and adapt to changes in the ever-changing market environment, thus enabling us to continuously explore new business opportunities.
Our principal markets are the PRC and Hong Kong. We have also supplied products to other locations, such as Macau, the Philippines, Thailand and South Korea during the Track Record Period. The following table sets out a breakdown of revenue from our customers based on their respective locations during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
PRC 279,857 70.5 284,719 76.2 283,097 70.6 Hong Kong 105,438 26.6 73,313 19.6 106,092 26.5 Others (Note) 11,562 2.9 15,794 4.2 11,662 2.9
Total 396,857 100.0 373,826 100.0 400,851 100.0
Note: Others mainly included Macau, the Philippines, Thailand and South Korea.
Our headquarters in Hong Kong carry out the functions of overall business operation, sales and marketing, and financial management, whilst our production facilities are primarily located at our Guangzhou Plant and carry out, among others, product design and development, production and quality assurance functions. We also established our Suzhou Workshop in 2018 as an ancillary production facilities to cater for the demand in Eastern China. As at the Latest Practicable Date, we acquired a piece of land in Jiangmen, Guangdong Province for the establishment of our third production facilities, namely the Jiangmen Plant, which will form part of our Southern China Production Hub together with our Guangzhou Plant. For details, please refer to the paragraph headed “Business strategies” in this section.
Customer A, a global group supplying elevators and escalators, power products, railway, automotive products, home appliances, industrial equipment and information technology products, was our largest customer during the Track Record Period, which accounted for approximately 55.1%, 64.0% and 61.9% of our revenue for the three years ended 31 March 2019, 2020 and 2021, respectively. Our business relationship with Customer A was established in 2000. Our Group and Customer A have entered into supply framework agreements since January 2008. For details, please refer to the paragraph headed “Customers” in this section.
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COMPETITIVE STRENGTHS
We believe our success and potential for further growth are attributable to our competitive strengths as set out below:
We have established strong presence in the ECMD industry and decorative stainless steel manufacturing industry in the PRC with long-term relationship with our major customers and suppliers
We have established long-term relationship with our major customers, including reputable and internationally-recognised elevator companies headquartered in Japan, the PRC, United States and Switzerland.
According to the Ipsos Report, ECMD companies that have secured business relationships with major elevator companies, construction contractors and property developers have a competitive advantage over other market participants in the industry, as they prove themselves to be capable of maintaining product quality and catering to the production timelines set by these high-profile customers. Hence, ECMD companies with high-profile customers are more prominent in the ECMD industry. According to the Ipsos Report, we ranked fourth in the ECMD industry in the PRC in terms of revenue in 2019.
Among the top five elevator companies in the PRC in 2019 according to the Ipsos Report, we had business relationships with all of them or their affiliates in the PRC or Hong Kong during the Track Record Period. As at the Latest Practicable Date, a majority of our major customers during the Track Record Period had been working with us for over 10 years. We believe that we have built up a strong presence in the ECMD industry and decorative stainless steel manufacturing industry in the PRC and established good and close business relationship with our major customers. According to the Ipsos Report, customers which have established long-standing business relationships with the ECMD companies may be more willing to approach them in the first place when customers begin a new project, which in turn ensure a stable demand for elevator cabins. Attributable to the long-term cooperation with these internationally-recognised elevator companies, we have developed our capability with reference to international standards in terms of quality assurance, and exchange ideas on the latest development in elevator design. For details of our customers, please refer to the paragraph headed “Customers” in this section.
We source our raw materials and consumables from a wide sourcing network comprising over 300 suppliers. We have developed long-term business relationships with our five largest suppliers for the Track Record Period. Among our eight major suppliers for the Track Record Period, four of them have more than 10 years of business relationship with our Group as at the Latest Practicable Date. Given the well-established business relationships with our suppliers, we are able to secure a stable supply of high quality raw materials and consumables, and may be able to obtain more competitive pricing. For details of our suppliers, please refer to the paragraph headed “Suppliers and procurement” in this section.
Our Directors believe that our credentials, proven track record and practical knowledge accumulated over our operating history are valuable assets to our Group.
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Our strong product design and development capabilities enable us to provide customised products and one-stop solutions tailored to our customers
To fulfil each customer’s specific needs and requirements, we offer one-stop solutions tailored to them which encompass, where applicable, provision of feedbacks on customers’ designs, creation of product samples and computerised drawings, manufacture, assembling and testing of elevator cabin products and decorative stainless steel products, as well as the provision of installation services and after-sales support. Our Directors consider this can only be achieved by possessing strong research and development team with relevant skilled labour and advanced machineries to manufacture customised products to fit our customers’ specifications.
With over 24 years of history and accumulated experience in the ECMD industry and decorative stainless steel industry, we have developed manufacturing know-hows and experiences, which give us the capabilities to design and develop new products in terms of appearances and physical properties and enhance existing product models as well as our production process to meet the specific requirements of our customers. Our research and development team, comprising over 40 members, is led by Mr. Poon Ka Cheuk, our deputy general manager and a member of our senior management, who has over 14 years of experience in the ECMD industry and over 17 years of experience in the field of decorative stainless steel trading and manufacturing. Mr. Poon also obtained a Bachelor of Engineering in Mechanical Engineering degree from The Hong Kong University of Science and Technology in 2002.
Our research and development team is also capable of transforming our customers’ concepts, drawings and specifications into product design and computerised drawings. According to the Ipsos Report, the level of product design and development capabilities is one of the key factors of competition in the ECMD industry as different customers may request for the interior of their elevator cabins to be designed in a unique and customised way using specific materials.
As a result of the continuous efforts by our dedicated research and development team, we had offered a diversified product portfolio of over 8,000 product models or specifications with 24 registered patents and one registered software copyright in the PRC as at the Latest Practicable Date. These 24 registered patents, as confirmed by our Directors, could in general enhance our product portfolios, improve the quality of our products and our production efficiency. For details of these patents, please refer to the paragraph headed “Research and development” in this section. Our commitment to product design and development is evidenced by the recognition of Cobelco GZ as a high-and-new technology enterprise（高新技術企業）since 2017.
Besides, senior staff members in our production team have years of experience with us. Our Directors consider that they are equipped with the practical knowledge and technical skills for our business operation. Our Directors believe that our staff members are our treasured assets and having such stable and experienced management team is our driving force to deliver high quality products to our customers.
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We have our own production facilities and the capability to handle different materials for manufacture of diversified portfolio of elevator cabin products and decorative stainless steel products
According to the Ipsos Report, approximately 5% of the market participants in the ECMD industry attain the ability to manufacture decorative stainless steel. Without the need of procuring from other supplier and outsource manufacturing, the foremost advantages of vertical integration include flexibility, efficiency and quality control. Moreover, ECMD companies which are able to handle different materials in-house would be able to fulfill production orders in a shorter period of time compared to companies that outsource their production line, and thus tend to be more successful in capturing a wider customer base.
We have our own production facilities located in the PRC. Our production facilities can be used to produce a wide range of elevator cabin products and decorative stainless steel products with different specifications according to customer’s needs. We are capable of manufacturing the entire elevator cabin on our own and our customers do not have to source a variety of suppliers for the manufacture of different elevator components. Please refer to the paragraph headed “Our production process and production facilities” in this section for details of our production facilities. Our Directors believe that, by operating a variety of production machinery and equipment, we are able to provide a diversified portfolio of quality elevator cabin products and decorative stainless steel products efficiently, be more responsive to customers’ needs and exercise more control over the quality of our products.
Our production facilities have been strategically located near the manufacturing hubs in Southern China and Eastern China
Pearl River Delta (“珠江三角洲”) in Southern China and Yangtze River Delta (“長江三角 洲”) in Eastern China are the major bases for the ECMD industry in the PRC. Our Guangzhou Plant is strategically located in Guangzhou, Guangdong Province, one of the elevator manufacturing hubs in the PRC, which allows us to reach out to a large number of elevator companies and suppliers of our raw materials and consumables in Guangdong Province. According to the Ipsos Report, it is a common practice that top elevator companies in the PRC make their purchases centrally as the practice of businesses in various cities acquiring products through one common point reduces duplication of efforts. For instance, the central office of an elevator company based in Guangzhou, makes purchase orders for its branch offices located in other cities such as Shanghai, Chengdu and Beijing. Customer A, our largest customer during the Track Record Period and one of the top three elevator companies in the PRC between 2014 and 2019 in terms of revenue generated according to the Ipsos Report, has its PRC elevator business headquartered in Guangzhou with branch offices across the PRC.
In 2018, we strategically established another production facilities in Suzhou City, Jiangsu Province, namely the Suzhou Workshop, to mainly cater for the demands in Eastern China. Our Suzhou Workshop is located in Kunshan, Suzhou City, which is near Shanghai. According to the Ipsos Report, most of the popular elevator companies are based in Shanghai and with the geographical proximity, it is more convenient to explore and expand the market to Shanghai and ECMD companies with manufacturing plants in Kunshan also benefit from locating near these popular elevator companies by reducing logistics costs.
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As a result, our Directors believe that our strategic location gives us logistical advantages which allow us to benefit from low logistics costs and short transportation time for our customers.
In addition, we have easy access to suppliers in Guangdong Province and the regions near Jiangsu Province as most of our major suppliers are located in Guangzhou and Jiangmen of Guangdong Province, Zhejiang Province and Shanghai City. Since the principal raw materials and consumables used in the production of our products are stainless steel materials, which are bulky in terms of size and weight, our geographical proximity to our suppliers allows us to lower the logistics costs and shorten the delivery time for the raw materials and consumables we purchase.
We have an experienced management team
We have an experienced management team that has extensive experience in the ECMD industry and decorative stainless steel manufacturing industry. Mr. Colby Chiu, our chairman of the Board and an executive Director, possesses over 14 years of experience in the ECMD industry and over 24 years of experience in the field of decorative stainless steel trading and manufacturing. Mr. Chiu Wai Leung, our general manager and one of our senior management, has over 14 years of experience in the ECMD industry and over 24 years of experience in the field of decorative stainless steel trading and manufacturing. Mr. Poon Ka Cheuk, our deputy general manager and one of our senior management, has over 14 years of experience in the ECMD industry and over 17 years of experience in the field of decorative stainless steel trading and manufacturing. Most of our senior management have extensive experience in their respective industries. Please refer to the section headed “Directors, Senior Management and Employees” in this document for details of the biography and experience of our Directors and senior management.
The manufacture of elevator cabin products and decorative stainless steel products require knowledge and experience in mechanical engineering, architecture as well as product design and development. Our Directors consider that the combination of their in-depth knowledge and relevant experience in the industry in the PRC and Hong Kong have enabled our Directors and senior management to position our Group to capture future business opportunities.
We maintain stringent control over our quality and environmental management
Our Directors believe that distinctive and consistent quality production is crucial to our business operations. As such, in addition to our commitment to high technical quality, we have implemented a quality control system that complies with international standard. Since July 2015, our quality management system has been certified to be in compliance with the requirements of ISO 9001 accreditation. Besides, our various recognitions received from different accreditation bodies illustrated, among other things, our high performance in quality control. For details of our awards and recognitions, please refer to the paragraph headed “Awards and certifications” in this section.
Furthermore, we have adopted an environmental management system to promote environmental awareness and prevent pollution to the environment resulting from our business operation and such system has been certified to be in compliance with the requirements of ISO 14001 accreditation since July 2017.
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Our Directors believe that our stringent controls over our quality and environmental management will give us competitive edge as well as improve our corporate image and therefore further strengthen our position as a leading ECMD company and an established decorative stainless steel product manufacturer.
BUSINESS STRATEGIES
Our principal objective is to further strengthen our position as a leading ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong through increasing our market share in the PRC market and consolidate our position in Hong Kong and overseas markets in the relevant product segments. We intend to achieve our objectives by implementing the following strategies:
Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products
As at the Latest Practicable Date, we strategically operated our Guangzhou Plant as our primary production facilities for the manufacture of both elevator cabin products and decorative stainless steel products serving our customers’ demand based in Southern China, including the Guangdong Province and other adjacent provinces and Suzhou Workshop as our ancillary production facilities to cater for the demands in Eastern China. During the Track Record Period, our production facilities in the PRC maintained consistently high overall utilisation rate. For the three years ended 31 March 2019, 2020 and 2021, our overall utilisation rate were approximately 118.7%, 98.2% and 113.0%, respectively. Please refer to the paragraph headed “Our production process and production facilities – Production capacity” in this section for further details. In view of the expected increase in demand for our products in Southern China and Eastern China and given the insufficient space at our Guangzhou Plant for the installation of new facilities, we plan to expand our production capacity through the establishment of our third production facility (i.e. our Jiangmen Plant) to form our Southern China Production Hub together with our Guangzhou Plant and upgrade of our Suzhou Workshop.
Our Southern China Production Hub comprises our Guangzhou Plant and Jiangmen Plant. We intend to set up our Jiangmen Plant with an aggregate gross land area of approximately 24,311 sq.m., which is expected to house approximately 220 staff. The estimated total investment costs for our Jiangmen Plant which include, among others, costs of construction, acquisition of land, machinery and equipment, labour and logistics arrangement are approximately HK$127.6 million. As at the Latest Practicable Date, we had already incurred a portion of costs in connection with the establishment of our Jiangmen Plant, for details, please refer to the paragraph headed “Establishment of our Jiangmen Plant – (a) Planned total investment costs” in this section below.
We intend to use approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the establishment of our Jiangmen Plant (representing approximately [REDACTED]% of the estimated total investment costs) and the remaining portion of approximately HK$[REDACTED] (representing approximately [REDACTED]% of the estimated total investment costs) will be financed by our internal resources.
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Our Guangzhou Plant is currently our primary production facilities for the manufacture of both elevator cabin products and decorative stainless steel products. Subsequent to the establishment of our Jiangmen Plant, having considered our customers’ preference, operational efficiency and logistics arrangements, in addition to the new machinery and equipment to be acquired by us for our Jiangmen Plant, we also intend to strategically relocate certain of our existing machinery and equipment currently operated at our Guangzhou Plant to Jiangmen Plant in order to release sufficient space at our Guangzhou Plant for installation of new production facilities with an aim to enhance our production capacity and efficiency as well as level of automation in our production process at our Guangzhou Plant, which is expected to house approximately 540 staff upon completion of its upgrade. The estimated total upgrade costs for our Guangzhou Plant which include, among others, costs of machinery and equipment and other miscellaneous costs are approximately HK$[REDACTED]. We intend to use approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to upgrade our Guangzhou Plant through acquisition of additional machinery, equipment and robotic arms (representing approximately 37.6% of the estimated investment cost for the upgrade of our Guangzhou Plant) and the remaining portion of approximately HK$[REDACTED] (representing approximately [REDACTED]% of the estimated investment cost for the upgrade of our Guangzhou Plant) will be financed by our internal resources.
We established Cobelco KS and set up our Suzhou Workshop in 2018 as an ancillary production facilities to cater for the demands in Eastern China. As at the Latest Practicable Date, the production scale of and product portfolio offered at our Suzhou Workshop was limited as compared to that of our Guangzhou Plant. In order to increase the production capacity and expand the product portfolio offered at our Suzhou Workshop, we intend to use approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to acquire certain machinery and equipment with an aim to enhance its production capabilities and capacity as well as to upgrade our Suzhou Workshop to full-scale production facilities (representing approximately [REDACTED]%of the estimated total investment costs for the upgrade of our Suzhou Workshop) and the remaining portion of approximately HK$[REDACTED] (representing approximately [REDACTED]% of the estimated total investment costs for the upgrade of our Suzhou Workshop) will be financed by our internal resources.
Upon completion of the abovementioned expansion plan, we estimate that our designated production capacity for the decorative stainless steel and elevator cabin segments is expected to increase by approximately 73.9% and 42.0%, respectively, for the year ending 31 March 2023 compared to that of the year ended 31 March 2021.
Establishment of our Southern China Production Hub
Our Guangzhou Plant has been established since 2005. Through the improvement of our plants and machinery, we have increased our production capacity at our Guangzhou Plant as well as the range of our product offerings overtime. However, having consistently attained a high overall utilisation rate of our existing production facilities over the Track Record Period attributable to increased customers’ demand, with a view to cater for our customers’ increasing demand for our products in Southern China in the future, we have strategically evaluated possible options for the expansion of our Guangzhou Plant and have decided to pursue the establishment of the Jiangmen Plant on merits to form our Southern China Production Hub.
Establishment of our Jiangmen Plant
Given (i) the consistently high overall utilisation rate of our existing production facilities during the Track Record Period; (ii) the demand for elevator cabin products and decorative stainless steel products are expected to continue to grow in the coming years as indicated in the Ipsos Report; and (iii) our ability to increase our market share and obtain
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BUSINESS will be relocated to Jiangmen Plant to release sufficient space for installation of new production facilities. On 16 January 2019, we entered into a land use rights transfer contract with Taishan Bureau of Land and Resources, pursuant to which we agreed to acquire the land use rights of a piece of land in Taishan, Jiangmen City, Guangdong Province, the PRC for a consideration of approximately HK$11.1 million. We obtained the relevant real property ownership certificate and the construction permits for our phase I expansion in March 2019 and June 2020, respectively.
The following sets forth the details of our Jiangmen Plant:
Location in Taishan Industrial New Town: No. 168 Industrial Avenue, Shuibu Town, Taishan, Jiangmen City, Guangdong Province the PRC Gross land area: Approximately 24,311 sq.m. Expected number of employees: Approximately 220 employees Estimated total investment costs: Approximately HK$127.6 million Estimated breakeven period (Note 1): Approximately two years Estimated investment payback period (Note 2): Approximately six years
Notes:
1. Breakeven period refers to the length of time required for our new production facility to generate revenue to our Group which equals its operating costs during the same financial year for the first time since the commencement of its operation, assuming (i) an annual revenue growth rate of approximately 5%; and (ii) gross profit margins would be similar to our existing production facility during the Track Record Period.
2. Investment payback period refers to the length of time required to recover the initial investment costs from the accumulated net cash inflow to be generated from our new production facility since the commencement of its operation, assuming (i) an annual revenue growth rate of approximately 5%; and (ii) there will be no material impact on our sales due to fluctuation in market demand, exchange rates, inflations, increase in the costs of raw materials and consumables used and employee costs.
(a) Planned total investment costs
The following sets out the breakdown of our total investment costs to be incurred in connection with the establishment of our Jiangmen Plant:
Major cost items Estimated cost HK$ million
Land acquisition 11.1 Construction 72.8 Machinery and equipment 29.3 Labour and related costs 13.4 Logistics arrangement 1.0
Total 127.6
We plan to finance the establishment of our Jiangmen Plant partially from the [REDACTED] from the [REDACTED] and partially from our internal resources. For details, please refer to the section headed “Future Plans and [REDACTED] –
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[REDACTED]” in this document. As at the Latest Practicable Date, we had already incurred approximately HK$30.8 million for the land acquisition and construction costs in connection with the establishment of Jiangmen Plant.
(b) Expected timeframes
The expected timeframe for the establishment of our Jiangmen Plant is as follows:
Major milestones of our production expansion plan Expected timeframe
Land acquisition February 2019
Phase I expansion: – Government approvals Late October 2020 – Commencement of construction Late October 2020 – Completion of construction and subsequent By June 2021 transitional arrangement(Note) – Machinery and equipment installation By November 2021 – Trial operation, machinery fine-tuning, recruitment By November 2021 and training – Commencement of production By December 2021
Phase II expansion: – Government approvals By August 2021 – Commencement of construction By November 2021 – Completion of construction By May 2022 – Machinery and equipment installation By July 2022 – Trial operation, machinery fine-tuning, recruitment By September 2022 and training – Commencement of production By October 2022
Note: As a transitional arrangement between completion of the phase I construction and receipt of the [REDACTED] from the [REDACTED] by our Company for the acquisition of the major machinery and equipment, we intend to acquire certain machinery with our internal resources and relocate certain existing machinery and equipment in our Guangzhou Plant to our Jiangmen Plant in order to (i) release sufficient space in our Guangzhou Plant for its subsequent upgrade; (ii) perform small-scale trial operation in our Jiangmen Plant before the commencement of full production by December 2021; and (iii) increase our overall production capacity to deal with our capacity constraint and the rising demands for our products as evidenced by the increase in our revenue for the year ended 31 March 2021. Such machinery and equipment primarily comprise the major machinery used in the production process of our decorative stainless steel products, including the surface pattern processing, colour coating processing, anti-fingerprint processing and fabrication processing.
As at 31 March 2021, the factory building in the phase I expansion had been substantially constructed.
(c) Site selection
Given that the available floor area at our Guangzhou Plant has been fully utilised, we were unable to expand our production capacity for either elevator cabin products or decorative stainless steel products without acquiring or leasing additional properties to set up new production facility. In view of the above, we acquired a parcel of land in Taishan Industrial New Town (the “Industrial New Town”) in Jiangmen in 2019 for
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the establishment of our Jiangmen Plant. To the best knowledge of our Directors, the PRC Government authorities in Taishan has announced that it would provide certain financial supports in connection with the establishment of our Jiangmen Plant in the Industrial New Town including (i) one-off financial assistance of approximately RMB3.0 million (approximately HK$3.5 million) from the relevant PRC authorities for the plant establishment and construction of our new production facilities which will be recognised as reductions on machinery costs upon receipt by our Group; and (ii) one-off financial assistance of approximately RMB0.3 million (approximately HK$0.4 million) from PRC tax authorities for High-and-New Technology Enterprises accreditation which will be recognised as reductions on tax expenses upon receipts by our Group, subject to the fulfilment of certain criteria set by the PRC authorities and any policy change in the future.
Jiangmen is one of the core areas of the Pearl River Delta economic zone. In particular, Taishan is located at the Dajiang exit of Xintai Expressway, which is able to enjoy the low logistics costs among the cities located within the Pearl River Delta economic zone due to the well-developed transportation network according to the Ipsos Report. The completed and on-going construction of major transportation infrastructures such as Hong Kong-Zhuhai-Macao Bridge, Shenmao Railway and Guangfo River Expressway Jiangmen Section, further enhanced the transportation infrastructure advantages of Jiangmen, which in turn shorten the travelling time among
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cities located in and near the area. With the improved transportation connectivity, manufacturing plants located in cities such as Taishan, Kaiping and Yangjiang, are expected to take advantage of shorter travelling time to the Pearl River Delta economic zone. According to the Ipsos Report, the average annual salary of workers in Taishan was approximately RMB65,053.0 in 2018 while the average annual salary of workers in Guangzhou already reached approximately RMB109,879.0 in 2018, approximately 68.9% higher than that in Taishan.
In view of the various supports to be provided by the PRC Government authorities and the benefits of owning a production facility in Taishan as set out below, our Directors consider that acquiring a parcel of land in the Industrial New Town for the establishment of our Jiangmen Plant will enable us to achieve our expansion plan in a cost-effective manner and therefore in the interests of our Group in the long run.
(d) Reasons for acquiring a parcel of land to establish our Jiangmen Plant
Our Directors consider that acquiring a parcel of land in Jiangmen, Guangzhou Province to establish our new production facility to meet our long-term business needs is more beneficial to us in the long run as compared to leasing a property from an Independent Third Party due to the following reasons:
(i) Demonstration of our dedication and financial commitment to our business and financial strength
Our Directors believe that owning our own production plant will assist us in maintaining our business relationships with existing customers and establishing business relationships with new customers as our customers visit our production facilities from time to time. In addition, owning production plant demonstrates to our customers that we are willing to invest in our business on a continuing basis, which demonstrates our dedication to our business and the industry in which we operate in.
(ii) Cost effectiveness of owning a production plant
Taking into account the useful life and relevant costs of our owned property, it is more cost effective for us to own a property than leasing a property as our production facility given that the estimated annual depreciation charges after acquiring a property for a period of ten years is lower than the annual rental payment for leasing a property during the same period, we believe that it is more cost effective for our Group to acquire and own rather than to lease our new production facility.
(iii) Minimising our exposure to fluctuations in rental expenses
Owning our own production plant can minimise our exposure to fluctuations in rental expenses which is dependent on market conditions and the landlord’s own interests which are out of our control. According to the Ipsos Report, the average land leasing price in Panyu where our Guangzhou Plant is located was
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approximately RMB1,706.8 thousand per 1,000 sq.m. in 2018, while in Kunshan, Suzhou and Taishan, Jiangmen were approximately RMB295.0 thousand per 1,000 sq.m. and RMB289.7 thousand per 1,000 sq.m., respectively. Hence, the average land leasing price in Panyu in 2018 was approximately 5.8 times and 5.9 times as much as that in Kunshan and Taishan, respectively.
(iv) Strengthening our asset base for obtaining bank facilities
Our Directors believe that owning our production plants can strengthen our asset base which can help us to obtain more preferential terms from banks for financing arrangements for our operation, where necessary.
(e) Planned acquisition of machinery and equipment
Function Quantity Estimated cost HK$ million
Cutting and flattening Surface pattern processing 15 11.7 machine, hairline finishing machine, cross-hairline finishing machine, vibration finishing machine and bead blasting finishing machine
Colour coating machine Colour coating processing 3 6.2
Laser etching machine Laser etching processing 1 1.6
Anti-fingerprint machine Anti-fingerprint 1 0.4 processing
Cutting machine and Fabrication processing 4 2.6 bending machine
Others Other ancillary N/A 6.8 machinery, fixture, furniture and office equipment
Total 29.3
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Upgrade of our Guangzhou Plant
Subsequent to the establishment of our Jiangmen Plant, we would relocate certain of our existing machinery and equipment currently operated at our Guangzhou Plant to Jiangmen Plant in order to release sufficient space at our Guangzhou Plant for the installation of new production facilities. We plan to increase the production capacity and level of automation throughout the production process at our Guangzhou Plant by acquiring more machinery and automated robots. In this connection, we intend to use approximately HK$[REDACTED] of the [REDACTED] from the [REDACTED] (representing approximately [REDACTED]% of the estimated costs for purchasing new production facilities) and the remaining portion of approximately HK$[REDACTED] (representing approximately [REDACTED]% of the estimated cost for purchasing new production facilities) will be financed by our internal resources.
Details of the new production facilities for the upgrade of our Guangzhou Plant are set out below:
Function Quantity Estimated cost HK$ million
(a) Increasing the production capacity at our Guangzhou Plant
Laser cutting machines Fabrication processing 1 2.4
(b) Increasing the level of automation at our Guangzhou Plant
Robotic arms Fabrication processing 5 6.4
Total 8.8
The ECMD industry and decorative stainless steel manufacturing industry in the PRC are facing rising labour costs, with the average annual salary of workers in Guangdong Province increased from approximately RMB59,481.0 in 2014 to approximately RMB98,889.0 in 2019, at a CAGR of approximately 10.7%, according to the Ipsos Report, and using robotic arms should result in higher precision and accuracy as robots operate precisely as programmed, which will enhance quality and reduce defective products. Our Directors believe the increase in the level of automation will lower our production costs and increase our profit margins in the long run. In addition, a high level of automation in the production process will further increase our capabilities to produce quality products, enhance our production efficiency and reduce our reliance on labour force going forward.
To the best of our Directors’ knowledge, information and belief having made reasonable enquiries with certain commercial banks, the machinery to be acquired by us for new production facilities, upgrading existing production facilities and for increasing the
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BUSINESS level of automation in our production process are not available for leasing in the market from the aforesaid commercial banks, and these machinery are also bulky in size and difficult to be relocated.
We do not consider subcontracting our key production processes to be a viable alternative to us as our Directors believe that substantial part, if not all, of the production process should remain in our own plants given that (i) our products need to fulfil numerous quality standards, requirements and specifications set by our customers, and the compliance with all of these is crucial; and (ii) outsourcing part of our production process to subcontractors may expose our Group to the risk of infringement of our skills, techniques and/or our intellectual properties.
For illustrative purpose only, we set out below an analysis on the financial benefits and cost savings of acquiring additional automated robots:
Costs saving per annum after automation HK$’000
Employee costs saved per annum (Note 1) 4,320
Minus: Depreciation of the automated robots per annum (Note 2) 640 Additional utilities costs incurred per annum (Note 3) 160 Additional repair and maintenance costs incurred per annum (Note 4) 321
Total 3,199
Notes:
1. Annual employee costs saved is calculated by the number of production workers to be replaced by the automated robots multiplied by their annual wages. It is estimated that the acquisition of automated robots will help to reduce the employee costs of approximately 40 production workers.
2. The annual depreciation of the additional automated robots is based on an expected useful life of 10 years.
3. The additional utilities consumed by the additional automated robots is calculated by the number of operating hours of the automated robots in a year, multiplied by (i) the estimated amount of electricity consumption per operating hour; and (ii) the current price of electricity per unit.
4. The additional repair and maintenance costs incurred per annum is calculated with reference to the corresponding item under cost of sales recorded in the year ended 31 March 2021.
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Our Directors are of the view that other than the benefits of cost-saving as mentioned above, there is also non-monetary benefits for acquiring additional automated robots, as the automated robots can substitute the repetitive labour works conducted by the production workers, thereby alleviating the burdens from labour shortage and reducing the financial effects arising from future increase in staff costs.
Based on the above, our Directors are of the view that the establishment of our Jiangmen Plant and the upgrade of our Guangzhou Plant will enhance our production efficiency and such investment will also expand our production capacity and further enhance our profitability.
Upgrade of our Suzhou Workshop
In order to increase the production capacity and expand our product portfolio offered at our Suzhou Workshop, we plan to acquire certain machinery and equipment with an aim to enhance our production capacity at our Suzhou Workshop and upgrade it to full-scale production facilities with the estimated investment costs of approximately HK$6.6 million. In this connection, we intend to use approximately HK$[REDACTED] from the [REDACTED] from the [REDACTED] (representing approximately [REDACTED]%ofthe estimated investment costs) and the remaining portion of approximately HK$[REDACTED] (representing approximately [REDACTED]% of the estimated investment costs) will be financed by our internal resources.
Details of the estimated investment costs are set out below:
Function Quantity Estimated cost HK$ million
Hairline finishing machine, Surface pattern processing 5 3.3 cross-hairline finishing machine, vibration finishing machine and bead blasting machine
Colour coating machine Colour coating processing 1 2.1
Anti-fingerprint machine Anti-fingerprint 1 0.4 processing
Others Other ancillary machinery 5 0.8 and equipment
Total 6.6
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Upgrading our information technology systems
In addition to our product design and development capabilities, our capacity to design, develop and manufacture customised elevator cabin and decorative stainless steel products also depends on the performance of our information technology system. Our Directors believe that continued investment in information technology system is necessary in order to increase our overall efficiency and capacity in product design, development and manufacture. We have invested in different types of software and self-developed system to effectively and comprehensively improve our business operations. We have been using an ERP system to provide us with a centralised and integrated management platform which allows us to enhance our client management and communications between various departments as well as to conduct data analysis on our sales orders.
We plan to utilise approximately HK$[REDACTED] (or approximately [REDACTED]%ofthe[REDACTED] from the [REDACTED]) for upgrading our information technology systems through purchasing a new version of customised ERP system to cover wider aspects in our daily operations, including financial management, supply chain management and production management on a cloud-based multi-organisational management platform and enhance electronic data interchange and data direct linkage among our three production facilities at our Southern China Production Hub and Suzhou Workshop.
With the upgraded and integrated system, we can increase efficiency in our information exchange and improve inventory and logistics management and ultimately increase customer satisfaction. We will also provide staff training on the usage and system infrastructure as well as system maintenance and system development. Our Directors believe that the aforesaid software and hardware upgrade and installation of a new ERP system will enable us to cope with our business development and optimise our operational processes.
OUR BUSINESS MODEL
We are a leading PRC ECMD company and established decorative stainless steel product manufacturer, specialising in design, development, manufacture, decoration and installation of customised elevator cabin products as well as a broad range of decorative stainless steel products primarily in the PRC and Hong Kong. We believe our success is built on our proactive approach towards providing customised and high quality products according to our customers’ needs, which is based on our strong product design and development capabilities. Going forward, we strive to continue to differentiate ourselves from our competitors by strengthening our production capacity and product design and development capabilities.
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BUSINESS
We also install elevator cabin products, decorative films and functional films in Hong Kong upon customer’s request. The following table sets out a breakdown of revenue by product segments during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Elevator cabin 254,945 64.3 259,996 69.6 266,252 66.4 Decorative stainless steel 82,314 20.7 61,109 16.3 85,100 21.2 Other architectural finishing materials 59,598 15.0 52,721 14.1 49,499 12.4
Total 396,857 100.0 373,826 100.0 400,851 100.0
Our major product segments can be categorised into (i) elevator cabin; and (ii) decorative stainless steel, both of which go through similar stages in our general business operations with the production procedures vary on an order-by-order basis.
We also generated a portion of our revenue from the sales and distribution of other architectural finishing materials which primarily include decorative films and functional films as we purchase decorative films and functional films from Supplier A and supply them to our customers in the PRC, Hong Kong and Macau. The general business operations of the sales and distribution of other architectural finishing materials typically involve preparation of fee quotations, receipt of purchase orders from our customers, provision of products and installation works (if applicable). For details about our business operations and arrangements with Supplier A and our distributors in the PRC, please refer to the paragraphs headed “Suppliers and procurement – Authorised distributor agreements with Supplier A“ and “Sales channels – Distribution sales” in this section.
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BUSINESS
The following diagram illustrates the general business operations of our major product segments:
Our product design and development initiatives
Enquiries from customers
With With general design specifications concept provided by provided by customers customers
Provision of detailed computerised drawings
Feedback and/or quotation to customers
Approximately one month to three months(Note)
Placement of purchase orders
Purchase of materials and preliminary inspection
Scheduled production
Packing, delivery and installation
After-sales support }
Note: Actual production time varies depending on the type, size, specification, quantity and complexity of the final product.
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BUSINESS
The following sets out our general business operational procedures as illustrated in the above diagram, as the nature, scope and complexity of each product varies, operational procedures undertaken by our Group may also differ from order to order:
Our product design and development initiatives
We believe our success is built on our proactive approach towards providing customised and high quality products according to our customers’ needs, which is based on our strong product design and development capabilities. In order to respond to and anticipate the trends in the industry and the market environment, our sales and marketing team will communicate with our customers or conduct market research to assess and analyse the latest development trends in the industry from time to time and provide recommendations to our management. Our research and development team will then collaborate with our production team to formulate research proposals based on the recommendations from our sales and marketing team to increase our existing product offerings or develop new products with different colours, surface patterns, structures and devices. If the product samples satisfy us with desired requirements, we will add such product models or specifications into our product catalogues which will then be distributed to elevator companies, interior designers, architects and construction contractors for their selection. For details about the new models developed and patents registered by us, please refer to the paragraph headed “Research and development” in this section. As our elevator cabin products typically comprised of stainless steel, wood components and marble components, the anti-fingerprint feature, surface patterns, colours and physical properties of our decorative stainless steel products will also be applied to the manufacture of our elevator cabin products.
Enquiries from customers, provision of detailed computerised drawings (where applicable), feedback and/or quotation to customers
As the case may be, our customers may provide us with specifications and requirements for elevator cabin products or decorative stainless steel products that they intend to purchase. Riding on our experience in the ECMD industry and decorative stainless steel manufacturing industry, our sales and marketing team with the assistance from research and development team may advise our customers on the implementation and/or improvement of the design by using our existing products or making adjustments, modifications or alterations to our existing products. Our sales and marketing team, together with our production team, will also formulate a production plan, including budget, timetable, resource allocation arrangement, and revert to our customers with quotation.
Alternatively, our customers may provide general design concepts to us. From time to time, our customers may also indicate the materials to be used for the production or specify the suppliers of standard parts to be procured from. Our research and development team will work closely with our customers to go through their design concepts and specifications to determine the feasibility of the production and to provide necessary feedbacks to improve the quality of the products. After which, we will transform our customers’ concepts, drawings or specifications into detailed computerised drawings. At the customer’s request, we will pass the product designs together with specifications and requirements to our production team to produce small piece of product samples of the contemplated designs for their comment and approval.
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Placement of purchase orders
Having satisfied with the product samples submitted by us, our customers will then place purchase orders or sales confirmations with us. For certain recurring orders or existing products, we do not need to provide the product sample to our customers. The required quantity and the price, as well as the arrangement of delivery of the scheduled production may vary from order to order. In general, the quantity is based on the purchase orders or sales confirmations given by our customers.
Purchase of materials and preliminary inspection
Our procurement team will procure the required raw materials and consumables used based on our production needs and inventory level. For further details, please refer to the paragraph headed “Suppliers and procurement” in this section. We will perform in-coming quality check on materials and parts. For further details, please refer to the paragraph headed “Quality control” in this section.
Scheduled production
For products manufactured by us, the production procedures will be performed in our production facilities. For details of our production process, please refer to the paragraph headed “Our production process and production facilities” in this section.
With a view to ensure that our product meets the specifications required by our customers, from the arrival of materials and throughout the entire production process, we have implemented quality control measures on raw materials and consumables, semi-finished products and final products. After the components and/or parts are finished, they will be assembled in accordance with the customers’ specifications. We will then perform final quality checks to the finished goods to ensure that our products have satisfied our customers’ specifications and quality standards before the products are sent for packing and delivery. For details of our quality control procedures, please refer to the paragraph headed “Quality control” in this section.
For certain elevator cabin products, we may conduct trial installation at our production facilities at customer’s request.
Packing, delivery and installation
All finished products will be packed carefully to minimise damages and to ensure that the packing is arranged orderly with neat appearance and contains the correct information of the products and the delivery information. After packing, we are normally responsible for the delivery of our products from our production facilities to the locations designated by our customers in the PRC. In relation to our sales in Hong Kong, we will engage third party logistics companies for delivery of our products or provide delivery services with our own staff. We may also engage third party service providers for the installation of our elevator cabin products in Hong Kong. On the other hand, for overseas sales, some of our customers may prefer to arrange transportation by themselves. However, in cases where we are
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BUSINESS responsible for the arrangement of transportation, we will engage external service provider for the exportation under standard CIF terms. Customers’ acceptances of the products are assured upon the acknowledgement of the delivery order by the customers.
After-sales support
We value our relationship with our customers. For elevator cabin products, if our customers discover any issue associated with the quality of our products, they may report to us and request for our assistance or technical support. Our quality assurance team will handle the feedback or complaint from our customers and may send staff to the job site for further inspection. The responsible staff will complete an inspection report which provides a detailed assessment on the issue and a series of remedial measures for resolving the problem as well as preventive measures for further improvement in our internal procedures.
OUR PRODUCTS
We design, develop, manufacture, decorate and install customised elevator cabin products and decorative stainless steel products according to our customers’ needs. Over the years, we have established a diversified product portfolio of over 8,000 product models or specifications that can be used in a wide range of construction projects including residential buildings, commercial buildings as well as hospitality and infrastructure facilities such as exhibition centres, hotels and casinos. In addition, we also sell and distribute other architectural finishing materials which primarily include decorative films and functional films for an international brand owned by Supplier A in the PRC, Hong Kong and Macau. Based on the experience and best knowledge of our Directors, given our products are primarily customised according to specifications of our customers and we offer a broad range of elevator cabin products and decorative stainless steel products to suit different customers’ preferences, the concept of product life cycles is generally not applicable to our products.
Elevator cabin products
Elevator cabins are the compartments which carry passengers in the elevators. Some elevator companies outsource the production of elevator cabin coupled with elevator cabin decoration to ECMD companies. ECMD companies may also be responsible for the production of elevator floor doors, push-button panels and other elevator components which are mostly visible to passengers. During the Track Record Period, we designed, developed, manufactured, decorated and installed customised elevator cabin products including elevator cabins, elevator floor doors and elevator cabin components mainly for elevator companies for residential, commercial and hospitality projects. We may manufacture and decorate the entire elevator cabins or specific components of elevator cabin such as cabin walls, ceilings, doors, floorings, push-button panels, depending on the purchase orders from our customers.
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Elevator cabins
Elevator floor doors
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The following diagram illustrates the structure of an elevator cabin:
Elevator floor door
Elevator cabin Elevator ceiling
Elevator wall
Elevator floor door
Elevator floor
Elevator floor door
The specifications of our customised elevator cabin products vary significantly. As such, the unit price of our products has a wide range. For illustrative purpose, the price range of (i) elevator cabins was approximately HK$5,000 to HK$84,000 per unit; and (ii) elevator floor doors was approximately HK$400 to HK$7,300 per unit, during the Track Record Period. Decorative stainless steel products
Decorative stainless steel is used to improve the aesthetic appeal of the living environment in modern urban society. Nowadays, the majority of the decorative stainless steel are used as architectural finishing materials for fitting-out works while some decorative stainless steel are used as raw materials for stand-alone decorative pieces. Due to the aesthetic property and durability, fabricated decorative stainless steel materials can also be used as the decorative materials for our elevator cabin products. During the Track Record Period, we designed, developed and manufactured customised decorative stainless steel products with various shape, size, color, surface pattern and texture according to our customers’ needs. We provide our customers with a variety of methods for surface processing, which can be applied in different combinations to form unique products in accordance with our customer’s specifications. Our decorative stainless steel products are commonly used in architectural finishing materials industry for various applications on different buildings and premises, the price of which typically ranged from approximately HK$100 to HK$74,000 per unit during the Track Record Period.
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Decorative stainless steel with different surface patterns
Rough hairline processed decorative stainless steel Vibration processed decorative stainless steel
Cross-hairline processed decorative stainless steel Bead blasted decorative stainless steel
Laser etched decorative stainless steel coated with black colour
Fabricated stainless steel products
Fabricated steel decoration Lighting decoration
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Wall decoration Wall decoration
Decorative screen with laser etched Decorative screen patterns
Other architectural finishing materials
During the Track Record Period, we also sold and distributed other architectural finishing materials, which included decorative films, functional films, electronic components, industrial adhesives and metal parts for architectural finishing purpose. We sell and distribute decorative films and functional films for an international brand owned by Supplier A, in the PRC, Hong Kong and Macau. Decorative films and functional films are thin layer of plastics that can be installed on a variety of surface materials, including stainless steel and the interior or exterior of glass. Decorative films are used for decoration, whereas functional films can be used for heat reduction, UV filtration as well as safety and security. The price range of (i) decorative films was approximately HK$300 to HK$1,000 per metre; and (ii) functional films was approximately HK$70 to HK$500 per feet, during the Track Record Period. For details of the sales and distribution of other architectural finishing materials, in particular our business operations and arrangements with Supplier A and our distributors in the PRC, please refer to the paragraphs headed “Suppliers and procurement – Authorised distributor agreements with Supplier A“ and “Sales channels – Distribution sales” in this section.
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OUR PRODUCTION PROCESS AND PRODUCTION FACILITIES
Due to the diversity of our products and the customer-specific requirements on our products, we do not have a common production flow for each of the products we produced. Nonetheless, the production process for our elevator cabin products and decorative stainless steel products can be broadly categorised into the following major steps:
The following flow chart illustrates the general production process of our products:
Packing, delivery Assembly (for elevator and installation (for elevator Manufacture and processing cabin products) cabin products)
Packing and delivery to Surface pattern processing customers For decorative Colour coating processing stainless steel products Laser etching processing Decorative stainless steel products Anti-fingerprint processing Fabricated decorative Fabrication processing stainless steel components Packing and delivery to Assembly customers Processed Wood component processing wood components Installation Trial installation (if required) (upon customer’s request) Processed Marble component processing marble components
Note: Subject to the demand of our customers and the complexity of the final product, certain but not all of the above processes may apply.
The following flow chart illustrates the production process of our decorative stainless steel products, which may be directly sold to our customers or used in our further production process for elevator cabin products as mentioned above:
Decorative stainless steel products Surface pattern Colour coating Laser etching Anti-fingerprint Fabrication processing processing processing processing processing Fabricated decorative stainless steel components
Due to aesthetic property and durability, fabricated decorative stainless steel components can also be used as the decorative materials for our elevator cabin products. Decorative stainless steel is mostly used as wall panels, doors as well as ceiling materials inside the elevator cabin, but seldom used as the flooring materials.
The following flow chart illustrates the production process of our elevator cabin products:
Fabricated Processed Elevator Processed decorative stainless marble Assembly cabin wood components steel components components products
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Surface pattern processing
Before we conduct any processing on our stainless steel materials, our workers will carry out physical inspection in relation to their appearances. If there are any raised edges or unwanted pieces of metal materials remain attached to the edges of the stainless steel materials, our workers will remove them through the process of deburring.
We mainly provide four different kinds of surface pattern processing, including hairline finishing, cross-hairline finishing, vibration finishing and bead blasting finishing to create different patterns on the surface of the stainless steel materials.
Procedures Description
Hairline finishing It is a process of grinding and scratching short or long hairlines with a specific direction on the surface of the stainless steel materials with a hairline finishing machine.
Cross-hairline finishing It is a process of grinding and scratching short or long cross-hairlines at different angles by manually adjusting the direction of the stainless steel materials before being processed by the cross-hairline finishing machine.
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Procedures Description
Vibration finishing It is a process of grinding and scratching random and non-directional lines on the surface of the stainless steel materials with a vibration finishing machine.
Bead blasting finishing It is a process of propelling abrasive materials, such as glass beads, on the surface of the stainless steel materials at a range of density and pressure to create different texture and pattern. The remaining beads left on the surface of the materials will be blown away with air guns.
Colour coating processing
Before the stainless steel materials are coloured, they are first cleaned by our ultrasonic cleaning machine under a specified range of temperature and pH value. The materials will be installed on a curved rack, which will be put into the colour coating machine. By using a different combination of electric current, voltage, nitrogen gas and ethyne, our stainless steel materials can be plated with various colours.
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Laser etching processing
It is a process of engraving customised patterns on the surface of the stainless steel materials. Our laser etching machine allows patterns to be engraved with a high level of precision.
Anti-fingerprint processing
Anti-fingerprint treatment can help to increase surface hardness, prevent discolouration and improve anti-corrosion of the stainless steel products. Our stainless steel materials are first cleaned thoroughly with water and detergent to remove any oil stain or dirt on the surface of the materials. Then, industrial anti-fingerprint oil is spread on the surface of the materials by rollers in an anti-fingerprint machine. Finally, the anti-fingerprint oil is dried under high temperature in an industrial oven to form a layer of coating.
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Fabrication processing
Metal fabrication encompasses cutting, bending and welding stainless steel materials into the desired shape and size. Fabricated decorative stainless steel are either (i) delivered to customers as decorative stainless steel products; or (ii) used as raw materials and consumables for the assembly and manufacture of elevator cabin products. Computer numerical control machines may be used in the metal fabrication as they can manufacture complex products in a repeated manner with minimum errors. Our metal fabrication consists of the following procedures:
Procedures Description
Cutting It is a process of cutting stainless steel materials into smaller parts of predetermined sizes and lengths for subsequent processing.
By using a high-powered numerical control laser cutting machine, the stainless steel materials are cut with a high level of precision and efficiency.
V-shaped cutting It is a process where stainless steel materials are planed to create a v-shaped pit along the straight line against which the materials will be bent in order to form a sharp edge after bending.
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Procedures Description
Bending It is a process where stainless steel materials are shaped using force, causing it to bend at an angle and form the desired shape.
Welding It is a process of joining the stainless steel materials by heating, heat-pressing or the combination of both. Through the welding process, the stainless steel materials are joined together in accordance with our customers’ specifications.
Wood component processing
Our wood component processing encompasses compressing, forming and cutting wood materials into the desired shape and size as well as wood engraving through the use of our machineries. Computer numerical control machines are commonly used in the wood component processing as they can manufacture complex products in a repeated manner with minimum errors. Our wood component processing consists of the following procedures:
Procedures Description
Cutting Cutting is a process of cutting wood component into smaller parts of predetermined sizes and lengths.
Wood engraving The wood component will be engraved for further assembly in our elevator cabins.
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Marble component processing
Our marble component processing encompasses cutting marble components into the desired shape and size through the use of our machineries, jointing of marble components and subsequent polishing. Our marble component processing consists of the following procedures:
Procedures Description Cutting Cutting is a process of cutting marble components into smaller parts of predetermined sizes and lengths.
Jointing In order to form different patterns, marble components of various sizes may be joined together with industrial adhesives. After that, the marble components need to be compressed for a period of time by weights to fix the position of the marble components.
Polishing Polishing is a surface treatment process of creating a smooth and shiny surface by rubbing the marble components with industrial polishing wax.
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Assembly
The above stainless steel, wood and marble components, where required, will be transferred to our assembly lines for elevator cabin products for final assembly and checking. These components will be assembled into final products in accordance with our customers’ specifications and requirements. Some of the equipment and device, such as the elevator button panels, will also be integrated into the final products. To ensure the quality of our products, our quality assurance team will conduct quality assurance check on each of our finished products before packing. For details, please refer to the paragraph headed “Quality control” in this section.
Production facilities and warehouse
Our primary production facilities and warehouse are located in our Guangzhou Plant for the manufacture of elevator cabin products and decorative stainless steel products. We also established our Suzhou Workshop in 2018 as an ancillary production facilities to cater for the demands in Eastern China. As at the Latest Practicable Date, we did not have any production facility in Hong Kong but we have warehouses for the storage of inventory which will be sold to our Hong Kong customers. For details of our properties, please refer to the paragraph headed “Properties” in this section.
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Various machinery and equipment are used in different stages of our production process. According to the accounting policy of our Group, the expected useful life of our plant and machinery is approximately 10 years. The table below sets forth the details of the major machinery used in our production process as at the Latest Practicable Date:
Total net book value Approximate Approximate as at the average average Total cost Latest year(s) of remaining of Practicable Type of machine Function service useful life Quantity acquisition Date HK$’000 HK$’000
Hairline finishing machine Surface pattern 6 4 2 2,113 670 processing Cross-hairline finishing Surface pattern 4 6 1 165 110 machine processing Vibration finishing Surface pattern 4 6 2 757 460 machine processing Bead blasting machine Surface pattern 4 6 16 4,164 2,633 processing Colour coating machine Colour coating 6 4 6 9,332 4,555 processing Anti-fingerprint machine Anti-fingerprint 9 1 1 330 63 processing Laser etching machine Laser etching 3 7 1 1,071 814 Laser cutting machine Fabrication 2 8 7 6,854 4,858 processing V-shaped cutting machine Fabrication 8 3 4 1,520 441 processing Wood engraving machine Wood component 7 3 1 264 88 processing Marble cutting machine Marble component 10 2 4 1,187 241 processing
Note: Certain of our major machinery have been in use for more than 10 years, thus the average years of service together with the average remaining useful life may exceed 10 years.
Production capacity
Over the years, we have established a diversified product portfolio of over 8,000 product models or specifications that can be used by a wide range of construction projects including residential buildings, commercial buildings as well as hospitality and infrastructure facilities such as exhibition centres, hotels and casinos. Due to the diversity of our products and the customer-specific requirements of our products, and given that there is no common production flow and most of our machineries are highly flexible that can be used to produce different models with different specifications, our Directors consider it impractical to accurately estimate our production capacity as well as utilisation rate of our production facilities in terms of units or sales volume produced during the Track Record Period.
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The following table sets out our designated production capacity, actual production volume and the estimated overall utilisation rate of our production facilities based on man hours and machine hours in our production process for the three years ended 31 March 2019, 2020 and 2021, respectively:
For the year ended 31 March 2019 2020 2021 Guangzhou Suzhou Guangzhou Suzhou Guangzhou Suzhou Plant Workshop Plant Workshop Plant Workshop
Overall
Designated production capacity (machine hours) (Note 1) 85,300 4,700 86,900 6,300 102,900 11,900 Actual production output (man hours) (Note 2) 101,900 5,000 84,500 7,000 115,200 14,500 Utilisation rate by location (Note 3) 119.5% 106.3% 97.2% 111.1% 112.0% 121.8%
Overall utilisation rate (Note 3) 118.7% 98.2% 113.0%
For the year ended 31 March 2019 2020 2021
A. Key steps in general production process
1. For the manufacture of decorative stainless steel (Note 4) products/components
Designated production capacity (machine hours) (Note 1) 51,800 56,700 71,700 Actual production output (man hours) (Note 2) 60,200 49,500 77,800 Overall utilisation rate by production process (Note 3) 116.2% 87.3% 108.5%
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For the year ended 31 March 2019 2020 2021
2. For the assembly of elevator cabin products
Designated production capacity (machine hours) (Note 1) 26,300 25,100 31,100 Actual production output (man hours) (Note 2) 34,400 31,100 38,300 Overall utilisation rate by production process (Note 3) 130.8% 123.9% 123.2%
3. Other steps (Note 5)
Designated production capacity (machine hours) (Note 1) 11,900 11,400 12,000 Actual production output (man hours) (Note 2) 12,300 10,900 13,600 Overall utilisation rate by production process (Note 3) 103.4% 95.6% 113.3%
B. Product segments
1. Elevator cabin
Designated production capacity (machine hours) (Note 1) 78,900 81,200 101,100 Actual production output for the manufacture of elevator cabin products (man hours) (Note 2) 94,000 80,900 115,100 Overall utilisation rate by product segment (Note 3) 119.1% 99.6% 113.8%
2. Decorative stainless steel
Designated production capacity (machine hours) (Note 1) 11,100 12,000 13,700 Actual production output for the manufacture of decorative stainless steel products (man hours) (Note 2) 12,900 10,600 14,600 Overall utilisation rate by product segment (Note 3) 116.2% 88.3% 106.6%
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Notes:
1. Designated production capacity is measured by machine hours, which is calculated by multiplying total number of relevant machines in use by daily machine hours (10 hours) and by planned production days for the year (26 days x 11.5 months) taking into account effective working hours (excluding time for meals, workers’ resting time and training time, where appropriate) and the effect of Chinese New Year holiday and the movements of the total number of machines during the year. For the year ended 31 March 2020, our Guangzhou Plant and Suzhou Workshop suspended operation since mid-January 2020 due to the Outbreak and resumed full operation in March and April 2020, respectively, resulting in an adjustment in designated production capacity as compared to the year ended 31 March 2019.
2. Actual production volume is measured by man hours, which is calculated by multiplying total number of workers operating the relevant machines by daily working hours (10 hours) and by planned production days for the year (26 days x 11.5 months) taking into account effective working hours (excluding time for meals, workers’ resting time and training time, where appropriate) and the effect of Chinese New Year holiday and the movements of the total number of workers operating the relevant machines during the year. For the year ended 31 March 2020, our Guangzhou Plant and Suzhou Workshop suspended operation since mid-January 2020 due to the Outbreak and resumed full operation in March and April 2020, respectively, resulting in an adjustment in actual production volume as compared to the year ended 31 March 2019.
3. Utilisation rate is calculated by dividing the respective actual production output (man hours) for the year by the respective designated production capacity (machine hours) for the year.
4. The manufacture of decorative stainless steel products/components typically involves surface pattern processing, colour coating processing, laser etching processing, anti-fingerprint processing and fabrication processing, depending on the request of customers.
5. Other steps in our general production process include wood component processing and marble component processing.
We have maintained a consistently high overall utilisation rate of our production facilities during the Track Record Period. For the three years ended 31 March 2019, 2020 and 2021, our overall utilisation rate were approximately 118.7%, 98.2% and 113.0%, respectively. In response to the rising demands for our products, we acquired additional machinery and reallocated our production resources to enhance our production efficiency throughout the Track Record Period, resulting in the continuous increase in our designated and actual production capacity during the same period.
The fluctuation in the overall utilisation rate of our production facilities during the Track Record Period was primarily due to, amongst others, the fluctuation in purchase order for our elevator cabin products and decorative stainless steel products, additions and disposals of our machinery and equipment as well as the delivery schedule of our products during the same period.
For the year ended 31 March 2019, our overall designated production capacity increased as compared to that for the year ended 31 March 2018 primarily due to the additions of new machinery and equipment in our Guangzhou Plant and the impact from the establishment of our Suzhou Workshop in the second half of 2018 as an ancillary production facilities. The increase in the actual production output and overall utilisation rate aligned with the increase in our revenue for the same period.
For the year ended 31 March 2020, our actual production output and utilisation rate decreased as compared to that for the year ended 31 March 2019 primarily due to the impact of the Outbreak and the temporary suspension of our Guangzhou Plant and Suzhou Workshop between January and February 2020, resulting in the limited production scale in the first quarter of 2020.
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For the year ended 31 March 2021, our overall utilisation rate remained at a relatively high rate as compared to that for the year ended 31 March 2020 as we had resumed our manufacturing operations to almost full-scale since April 2020, in particular, our Suzhou Workshop expanded its production capacity to cater for the demands in Eastern China.
Repair and maintenance
Our staff from the production team are required to conduct regular inspections and checks on each of our manufacturing machines with reference to the internal checklists for these machines before their operations. Machines that are discovered to be malfunctioning would be examined by our mechanics. We would then decide to repair or dispose of such machines based on, where applicable, their reason for breakdown, damage level, value, estimated costs of repair and year of service. Our repair and maintenance costs for plant and machinery amounted to approximately HK$0.6 million, HK$0.3 million and HK$0.3 million for the three years ended 31 March 2019, 2020 and 2021, respectively.
Save for the disruption to our business operations due to the Outbreak as disclosed in the paragraph headed “Effect of the outbreak of COVID-19” in this section, our Group had not experienced any material disruption to our production during the Track Record Period and up to the Latest Practicable Date.
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EFFECT OF THE OUTBREAK OF COVID-19
An outbreak of respiratory illness caused by a novel coronavirus (COVID-19) first emerged in late December 2019 and continues to expand globally. The WHO declared the Outbreak a Public Health Emergency of International Concern on 30 January 2020 and subsequently a pandemic on 11 March 2020.
With a view to contain the spread of COVID-19, the PRC Government has implemented various measures from time to time, including, among others, quarantine policies, monitoring and restriction of movement via the introduction of a colour code system by risk category, crowd gathering prevention, social distancing, suspension of work and school, closure of tourist attractions, eatery, entertainment and other public facilities. Following the PRC Government’s guidelines, the operation of our factories, including our Guangzhou Plant and Suzhou Workshop, were suspended since 3 February 2020, being the first day of operation following the Chinese New Year holiday had the suspension not taken place. Pursuant to the notices received by our Group from the PRC local government departments in charge of the prevention and control of the COVID-19, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approval from the said PRC Government departments by end of February 2020.
As the Outbreak is under control in the PRC, the International Monetary Fund has anticipated a sharp recovery of GDP growth rate in 2021. Accordingly , the ECMD industry in the PRC is anticipated to grow from approximately RMB16,210.7 million in 2020 to approximately RMB21,132.2 million in 2024, rising at a CAGR of approximately 6.9%. The Outbreak has not posed much negative impact on the ECMD industry in the PRC and is predicted to recover in 2021.
In Hong Kong, special work arrangement for government employees was implemented from time to time between January 2020 and August 2020, whereas work-from-home or other special arrangements have been adopted by the private sector on a discretionary basis. In addition, various regulations and measures have been implemented in Hong Kong from time to time, including, among others, quarantine policies, large group gathering preventive measures, social distancing, suspension of school, closure and/or restrictions in relation to eateries as well as public facilities.
According to the Ipsos Report, there is an estimated temporary decline of the gross output value of the decorative stainless steel market in Hong Kong in 2020, which is mainly attributed to the Outbreak.
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Nevertheless, so far as COVID-19 is under control, the construction industry in Hong Kong is anticipated to rebound gradually from 2021 to 2024 and the gross output value of the decorative stainless steel market in Hong Kong is forecasted to increase from approximately HK$1,949.6 million in 2020 to approximately HK$2,273.0 million in 2024, estimated to increase at a CAGR of approximately 3.9%.
For the overseas market, COVID-19 had spread to over 180 countries and regions around the world with confirmed cases of more than 166 million as at the Latest Practicable Date. The Outbreak has resulted in unprecedented temporary local shutdowns or travel restrictions in many countries and regions including Macau, the Philippines, Thailand and South Korea to which we delivered our products during the Track Record Period, leading to certain adverse temporary impact to our revenue in the overseas market.
In this connection, our Directors assessed its impact on our Group in the following aspects, namely (i) suppliers; (ii) customers; and (iii) production, as follows:
Suppliers: Our major suppliers during the Track Record Period are mainly located in the Guangdong Province. Despite the temporary suspension of operations of our major suppliers due to the Outbreak, our Group understood from them that they have gradually resumed operation since February 2020. Our Directors consider that the supply of raw materials to our Guangzhou Plant and Suzhou Workshop have not been materially affected since the resumption of operation and, barring unforeseen circumstances, our Group has not encountered and does not expect to encounter any material supply chain disruption due to the Outbreak.
Customers: As a result of the Outbreak, in particular, during the first quarter of 2020, the demand from a number of our customers, subject to their locations, were temporarily affected to various degrees as certain of our customers also encountered temporary suspension of operation. Nevertheless, since their resumption of operations since February 2020, the demand from our customers have continued to recover after the Track Record Period and up to the Latest Practicable Date, albeit to a different degree over time. In April 2021, our total secured orders amounted to approximately HK$37.0 million of which (i) approximately HK$27.6 million was attributable to the elevator cabin segment; (ii) approximately HK$5.0 million was attributable to the decorative stainless steel segment; and (iii) approximately HK$4.4 million was attributable to the other architectural finishing materials segment. Our major customers have confirmed to us that since the Outbreak, they have not requested for any material compensation for any incidents of delay in delivery or failure to perform contractual obligations of our Group. They have continued to place orders from our Group after the operation of our Group returns to normal. As such, our Directors are of the view that the temporary suspension of our operation did not harm our long-term relationship with customers or give rise to any material financial liabilities.
Production: Pursuant to the notices received by our Group from the local government departments in charge of the prevention and control of the COVID-19, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approval from the said government departments by end of February 2020 and subsequently resumed full operation in March and April 2020, respectively.
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Based on information currently available to our Directors, after taking into account the governmental measures implemented to control the spread of the Outbreak and barring unforeseen circumstances, our Directors believe that the Outbreak shall not cause a material disruption on the operation of our Group going forward and may only affect our Group temporarily.
Based on the purchase orders we received so far and having taken into account the impact of the COVID-19 on our business during the years ended 31 March 2020 and 2021, we anticipate that we may experience certain adverse temporary impact to our revenue, gross profit and/or gross profit margin in Hong Kong and overseas markets for the year ending 31 March 2022. In light of the aforesaid industry and market outlook, we, however, do not expect that such adverse impact arising from the Outbreak in Hong Kong and overseas on our operation to be long-lasting given that (i) our revenue from Hong Kong market experienced notable recovery for the year ended 31 March 2021; (ii) the PRC has been gradually resuming economic activities to full scale; and (iii) governments in Hong Kong and other countries have implemented numerous control measures with a view to manage the Outbreak and facilitate the recovery of local economic activities. In view of the above, our Directors are of the view that our expansion plans as discussed in the paragraph headed “Business strategies” in this section remain feasible.
Our Directors will continue to assess the impact of the COVID-19 on our Group’s operations and financial performance and closely monitor our Group’s exposure to the risks and uncertainties in this connection. We will take appropriate measures as necessary and inform our Shareholders as and when necessary.
Enhanced precautionary measures
We have adopted enhanced hygiene and precautionary measures within our premises, including but not limited to (i) frequent sterilisation within our premises; (ii) distribution of surgical masks and relevant sanitising products to our staff; (iii) implementation of temperature measurement for all staff each day before they enter our premises; (iv) requiring all staff to report on their whereabouts for tracking; and (v) prohibition of entering into our premises by any individual without clearance.
To the best of our Directors’ knowledge, as at the Latest Practicable Date, there had been no confirmed cases of COVID-19 infection of our employees.
QUALITY CONTROL
Our Directors believe that ensuring the quality of our products and maintaining our reputation is critical to our success. As such, we put great emphasis on ensuring quality and consistent production to ensure that the final products that we manufactured and delivered to our customers are of acceptable quality. As at the Latest Practicable Date, our quality assurance team consisted of over 20 members. We have implemented a quality management system which has been certified to be in compliance with the requirements of ISO 9001 accreditation since July 2015. Under our quality management system, we conduct quality control testing at various stages throughout our production process, details of which are set out as follows:
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In-coming materials
During the Track Record Period, we procured the required raw materials and consumables used from our approved suppliers. Our list of approved suppliers will be reviewed from time to time, based on factors including, among others, their quality of products or services.
We review the examination reports of the in-coming materials provided by our suppliers and check whether the size, quantity and other specifications of the in-coming materials correspond to our orders. Our quality assurance team will also conduct physical and visual inspection on materials outsourced parts to ensure such materials meet the general quality standards. If obvious defects are identified through the inspection, we will return the related non-conforming materials for replacement.
Production process
Our quality assurance team and production team will work together and closely monitor the production process of our products to ensure strict compliance with our standard operating procedures. Throughout our entire production process, our staff in the production team are primarily responsible for monitoring and testing the quality of the raw materials and consumables and semi-finished products at each key production stage to ensure conformity with customer specifications. If any defect is discovered, the responsible staff will report to the quality assurance team after investigating into the matter and provide solutions to tackle the defect as well as recommendations for future improvement. Our Directors consider that early detection of non-conformity will help to reduce overall cost of productions and, more importantly, lower the risks of delay in delivery to our customers.
Finished products
Out-going quality control is the last quality control process put in place prior to the packing and delivery of the products to our customers. It is an important process to ensure that our products delivered to customer conformed to our customers’ specifications. Our quality control inspector from the quality assurance team will conduct a series of checks and assessments to ensure the products comply with our quality standards and the specifications required by our customers. During the Track Record Period, we had not experienced any material quality issues in relation to the raw materials and consumables and our products.
Product returns and warranty
We do not typically offer product warranty or product exchange for any product sold to our customers but we offer after-sales support to our customers if we are found to be wholly or partly responsible for any defects associated with our product after the on-site inspection conducted by our staff. During the Track Record Period, we did not encounter major quality control issues with our customers nor experience any major sales returns.
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During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant quality defects or product claims, refunds or returns from our customers in respect of the products supplied by us, which materially and adversely affected our financial condition nor any material complaint about product quality from our customers.
According to the Special Equipment Safety Law of the PRC（《中華人民共和國特種設備 安全法》）, elevator manufacturers and their principals are responsible for safety of elevator products. As advised by our PRC Legal Advisers, we are not the elevator manufacturer referred to under the Special Equipment Safety Law of the PRC. Based on the above, our PRC Legal Advisers are of the opinion that we are not subject to product safety and liability of the elevator cabins manufactured by us.
SALES CHANNELS
We sell our elevator cabin products and decorative stainless steel products primarily to elevator companies as well as construction contractors principally in the PRC and Hong Kong, and sell other architectural finishing materials, primarily including decorative films and functional films mainly to distributors in the PRC and other customers in Hong Kong and Macau.
We primarily supply our products on order-by-order basis to customers mainly located in the PRC and Hong Kong. The sales process typically involves preparation of fee quotations, receipt of purchase orders from our customers, provision of products and installation works (if applicable).
Our sales and marketing team, led by Mr. Chiu Wai Leung, our general manager and a member of our senior management, who is responsible for sales to customers. We will provide our quotation to potential customers. We strive to customise our product offerings, in particular, for elevator cabin products, to each of our potential customers. Our sales team may also attend meetings with the potential customers to discuss in detail about the project, our recommendation of products and price. Upon confirming our quotations, the customers will place purchase order(s) or enter into sales contract(s) with us.
Sales and marketing
Our sales and marketing team focuses primarily on the promotion of business relationship with our existing and potential customers including elevator companies, interior designers, architects and construction contractors. As at the Latest Practicable Date, we had sales and marketing teams based in Hong Kong and the PRC which were dedicated to sales and marketing of our products.
We actively explore new business opportunities by identifying potential customers in the industry and liaising with existing and potential customers. We review and update our product catalogues from time to time and will then distribute them to existing and potential customers for their selection. We also visit our existing and potential customers regularly to secure purchase orders for our products and keep our customers informed of our new products. It enables us to improve our understanding of our customers’ needs and keep ourselves abreast of the latest market trend. We communicate with our customers to collect
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We exhibit in or visit local and international market exhibitions in, among other locations, Hong Kong, the Philippines, Singapore and Dubai, as well as spend resources on online advertising to promote our elevator cabin products and decorative stainless steel products with an aim to explore new customers. Participation in market exhibitions and online advertising are our primary modes of marketing to the potential overseas customers.
Pricing policy
Our sales and marketing team is responsible for determining pricing policy.
According to the Ipsos Report, the ECMD industry in the PRC typically competes on product design and development capabilities as well as the ability to handle different materials, existing customer portfolio, track record as well as the location of the production plants, and thus price competition is relatively less significant given that the price of customised elevator cabin depends to a large extent on the specifications, material used, complexity and design.
In general, our pricing policy is subject to size of the purchase order, product specifications, delivery schedule and prevailing market conditions, targeted pricing and profit margin. Each contract or purchase order (where relevant) will be reviewed and approved by our Group’s management to ensure the products are sold at a cost-plus approach with an acceptable profit margin.
Distribution sales
In addition to purchasing decorative films from Supplier A for the manufacture of our elevator cabin products from time to time, we also sell and distribute decorative films and functional films for Supplier A in the PRC, Hong Kong and Macau. For the three years ended 31 March 2019, 2020 and 2021, revenue generated from our distributors amounted to approximately HK$17.1 million, HK$14.4 million and HK$11.8 million, representing approximately 4.3%, 3.8% and 3.0% of our total revenue, respectively. In the PRC, we distribute decorative films to our distributors as we believe that this enables us to expand our business quickly without incurring significant additional costs, including but not limited to, administrative, selling, and marketing expenses, given that it generally takes more time to assess market opportunities and develop our own local sales and marketing teams in new regions. We believe that the use of distributors is generally in line with the industry practice of the architectural finishing materials in the PRC. We did not have any distributors in Hong Kong and other locations outside the PRC during the Track Record Period. The following table sets out a breakdown of our revenue by direct customers and distributors during the Track Record Period:
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For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Direct customers 379,726 95.7 359,452 96.2 389,019 97.0 Distributors 17,131 4.3 14,374 3.8 11,832 3.0
Total 396,857 100.0 373,826 100.0 400,851 100.0
Our distributors are mainly traders of architectural finishing materials in the PRC. To the best knowledge of our Directors, our distributors have their own local sales networks, and primarily sell our products to their corporate customers. We sell decorative films to our distributors (who are considered as our end customers) and they resell the products in their designated sales areas in the PRC pursuant to their respective distributorship agreements entered into between them and our Group.
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On the other hand, we consider the possibility of cannibalisation among our distributors to be remote as we implement a strict and comprehensive reporting system for our distributors in respect of the projects undertaken or to be undertaken by our distributors from their customers to prevent destructive competition between our distributors who operate in close proximity. Moreover, the PRC market is significantly large and the effect of cannibalisation would be minimal. Furthermore, our distributors are mostly located in different regions of the PRC with different sales network.
We recognise our sales to distributors when control of the goods has transferred, being at the point the goods are delivered to such distributors, and there are no goods return policy with our distributors under the distributorship agreements. Our distributors are generally required to pay an upfront deposit with the remaining balance to be settled before delivery of products.
The following table sets forth the changes in the number of our distributors who have/ had valid distributorship arrangements or agreements with us as at the respective year-ends:
From 1 April 2021 to the Latest For the year ended 31 March Practicable 2019 2020 2021 Date
Total number of distributors as at the beginning of the relevant year/period 5 5 7 12 Addition 135– Termination/expiration 11––
Total number of distributors as at the end of the relevant year/period 5 7 12 12
As at the Latest Practicable Date, we had 12 distributors purchasing decorative films from us. Our 12 distributors are located in different regions of the PRC, including Northern China, Eastern China and Southern China, and they distribute our products mainly in their respective regions.
The key aspects of our typical distributorship agreement are set forth below.
¼ Term. Our distributorship agreements generally have a term of one year. The renewal, amendment or extension of the agreements are subject to further negotiation with our distributors. For our distributors who successfully meet their respective annual sales target as stated in their respective distributorship agreements, they will have the preferential right to renew their agreements.
¼ Designated sales areas. Our distributorship agreements specify the designated regions in which our distributors can resell our products. However, our distributors may sell our products outside their designated regions under our supervision and direction through a strict and comprehensive reporting system.
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¼ Exclusive supplier. Our distributors are required to undertake not to purchase the product under distribution from any party other than our Group during the term of the agreement. Otherwise, we are entitled to immediately terminate their rights to distribute our products.
¼ Market stabilisation. In order to protect the stability of the market, our distributors are usually prohibited from reselling our products at a low price or engaging in destructive competition to interrupt the market. Otherwise, we are entitled to immediately terminate their rights to distribute our products or terminate their distributorship agreements and to claim for our loss in connection with the dumping behaviours of our distributors.
¼ Pricing. We generally supply our products at the prices specified in the price list provided by our Group to each of the distributors, and the prices are set with or without discount on the prices quoted. Discount on orders of large quantity may also be available. We will notify our distributors by fax or email if there is any change in the price of our products.
¼ Sales target. Our distributorship agreements specify different annual sales targets. In relation to distributors who fail to meet 90% of the minimum sales target, we may reserve the right to raise the price of the products in the following year, while for those who fail to meet the minimum sales target for two consecutive years, we may reserve the right to terminate their qualification to distribute the products.
¼ Payment terms. Our distributors are required to enter into a sale and purchase agreement with our Group and are generally required to pay an upfront deposit ranging from RMB50,000 to RMB200,000 when they want to order our products. The payment of the orders made by our distributors will be settled by the balance of their upfront deposit before delivery of products. When the balance is insufficient for the next purchase, our distributors will need to pay a further deposit of the same amount before they can order our products.
¼ Returns. There is no product return clause in our distributorship agreements.
¼ Support. We usually update our distributors on the latest inventory level of our products on a weekly basis, and will respond to enquiries from our distributors, if any. We are responsible for providing training on installation of decorative films as well as marketing strategies to our distributors.
¼ Film installation team. To ensure the quality of the work done by our distributors, they are required to have at least more than two members in their film installation team, who have attended the training on the installation of decorative films organised by us every year.
¼ Management and supervision. We manage and supervise our distributors through a strict and comprehensive reporting system. Whenever our distributors have ear-marked or obtained a project, which involves the supply of our decorative
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films, they are required to submit a reporting form. In the reporting form, our distributors are required to fill in the details of the subject project, including the identity as well as contact information of their customers and other parties, the locations of the job site, the description of the work to be carried out and the expected purchase amount of decorative films. By assessing the completeness of the information provided by our distributors, we determine the progress of our distributors in relation to the project. If two or more distributors are competing for the same project, we will assist to resolve the dispute and determine which distributor should get the project with reference to the information provided by them as well as the timing of which such information was submitted. Moreover, our distributors are required to update the status of the project on a regular basis.
¼ Termination. The distributorship agreement is terminated when the agreement term expires or when we terminate the qualification of our distributors to distribute our products. Any update, amendment or extension of the agreement is subject to further negotiation between our Group and our distributors.
As confirmed by our Directors, our Group did not have any unsold goods returned from our distributors during the Track Record Period.
We had no ownership or managerial control over any of our distributors during the Track Record Period and up to the Latest Practicable Date. To the best knowledge of our Directors, all of our distributors are Independent Third Parties. There were no other relationships (including family or employment relationships) between us, our Directors, our Substantial Shareholders, our senior management or any of our associates on the one hand, and our PRC distributors or any of their respective associates on the other hand during the Track Record Period and up to the Latest Practicable Date except for the business relationship described above. To the best knowledge of our Directors, save as disclosed above, all of our distributors do not have any past or present relationships with our Group and our connected persons or related parties, nor have they received any assistance (whether financial or otherwise) from our Group and our connected persons or related parties.
SEASONALITY
Our sales performance is affected by seasonality. Seasonal fluctuations have affected, and are likely to continue to affect, our business. Save for the temporary impact of COVID-19, our sales tend to peak during summer of each year, namely June, July and August while sales during Chinese New Year are generally lower in comparison as our Directors believe that traditionally, there are less residential and commercial premises renovation and property construction activities during those periods of time. Accordingly, we record relatively less sales in January and February of each year in general, subject to the timing of the Chinese New Year in the relevant year.
CUSTOMERS
Our customers primarily include elevator companies and construction contractors for residential and commercial property projects in the PRC and Hong Kong.
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The following table shows a breakdown of our revenue by geographical location for the years indicated:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
PRC 279,857 70.5 284,719 76.2 283,097 70.6 Hong Kong 105,438 26.6 73,313 19.6 106,092 26.5 Others (Note) 11,562 2.9 15,794 4.2 11,662 2.9
Total 396,857 100.0 373,826 100.0 400,851 100.0
Note: Others mainly included Macau, the Philippines, Thailand and South Korea.
For the three years ended 31 March 2019, 2020 and 2021, we derived revenue of (i) approximately HK$279.9 million, HK$284.7 million and HK$283.1 million, respectively, from our customers located in the PRC; and (ii) approximately HK$105.4 million, HK$73.3 million and HK$106.1 million, respectively, from our customers located in Hong Kong.
Depending on the size of orders and the request of customers, we may be required to enter into sales contracts with our customers. Set out below is a summary of the salient terms of our typical sales transactions with our customers:
¼ Specifications. Products are required to comply with a set of specifications and requirements set out in the sales contracts.
¼ Pricing. Price includes charges for modifying or customising products where applicable.
¼ Payment and credit terms. We may require our customers to pay a deposit in the amount representing 10% to 50% of the total purchase price before our delivery of products. We generally grant our customers credit period of 30 to 75 days after the date of delivery depending on the customer’s reputation and creditworthiness and size of sales order.
¼ Delivery. We are generally responsible for delivering our products to the location designated by our customers.
Credit control
During the Track Record Period, payments by our customers were primarily made by cheque and bank transfer. The payment method and the credit period are granted after having considered the respective customer’s known financial position, creditworthiness, size of sales order and future business prospects. Typically, we impose more stringent credit terms on our new customers.
Our finance team is responsible for preparing monthly statements to our customers and monitoring settlement from them. Our finance team also generates and continually updates a monthly report, which sets out the status of invoice issuance and settlement of payment for every
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Major customers
The following sets out the background of and our business relationship with our five largest customers during the Track Record Period.
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For the year ended 31 March 2019
Approximate Revenue percentage to Business with Principal type of products attributable to the revenue of Payment our customer Rank Customer supplied by our Group the customer our Group Credit terms method commenced since HK$’000 %
1 Customer A Elevator cabin products 218,517 55.1 30-70 days Bank’s 2000 and decorative stainless acceptance bill, steel products bank transfer and cheque 2 Customer B Elevator cabin products 12,138 3.1 60 days; cash on Bank transfer 2007 and decorative stainless delivery and cheque steel products 3 Customer C Elevator cabin products 9,640 2.4 30-75 days Bank transfer 2008 and decorative stainless steel products 4 Customer D Elevator cabin products 8,519 2.1 30 days; cash on Bank transfer 2009 and decorative stainless delivery steel products 5 Customer E Elevator cabin products 6,663 1.7 60-75 days Bank transfer 2007 and decorative stainless steel products Five largest customers combined 255,477 64.4 All other customers 141,380 35.6 Total revenue 396,857 100.0
For the year ended 31 March 2020
Approximate Revenue percentage to Business with Principal type of products attributable to the revenue of Payment our customers Rank Customer supplied by our Group the customer our Group Credit terms method commenced since HK$’000 %
1 Customer A Elevator cabin products 239,376 64.0 30-70 days Bank’s 2000 and decorative stainless acceptance bill, steel products bank transfer and cheque 2 Customer B Elevator cabin products 12,478 3.3 60 days; cash on Bank transfer 2007 and decorative stainless delivery and cheque steel products 3 Customer C Elevator cabin products 6,643 1.8 30-75 days Bank transfer 2008 and decorative stainless steel products 4 Customer E Elevator cabin products 5,490 1.5 60-75 days Bank transfer 2007 and decorative stainless steel products 5 北京柯林國際貿 Decorative films 4,910 1.3 Deposit and Bank transfer 2010 易有限公司 payment before (Beijing Ke delivery Lin International Trading Co., Ltd.*) Five largest customers combined 268,897 71.9 All other customers 104,929 28.1 Total revenue 373,826 100.0
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For the year ended 31 March 2021
Approximate Revenue percentage to Business with Principle type of products attributable to the revenue of Payment our customers Rank Customer supplied by our Group the customer our Group Credit terms method commenced since HK$’000 %
1 Customer A Elevator cabin products 247,942 61.9 30-70 days Bank’s 2000 and decorative stainless acceptance bill, steel products bank transfer and cheque 2 Customer E Elevator cabin products 9,355 2.3 60-75 days Bank transfer 2007 and decorative stainless steel products 3 Customer B Elevator cabin products 6,037 1.5 60 days; cash on Bank transfer 2007 and decorative stainless delivery and cheque steel products 4 上海葆樹實業發 Decorative films 5,845 1.4 Deposit and Bank transfer 2012 展有限公司 payment before (Shanghai delivery Baoshu Industrial Development Co., Ltd.*) 5 Customer F Decorative stainless steel 4,751 1.2 Deposit and Cheque 2009 products payment upon delivery; 30 days Five largest customers combined 273,930 68.3 All other customers 126,921 31.7 Total revenue 400,851 100.0
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Customer A, which is also our Supplier B, consists of a number of companies within the same group, the parent company of which is listed on the Tokyo Stock Exchange. The principal activities of the group involve supplying elevators and escalators, power products, railway, automotive products, home appliances, industrial equipment and information technology products. The five focal areas of the parent group of Customer A are information technology, energy, industry, mobility and smart life. Its mobility sector primarily consists of (i) building systems business, which carries out design, manufacturing, sales, installation and maintenance of elevators and escalators; and (ii) railway systems business. According to its published financial results, the group’s revenue and net profit for the year ended 31 March 2021 were approximately Japanese Yen 8,729.1 billion and Japanese Yen 518.5 billion, respectively. The mobility sector contributed approximately Japanese Yen 1,199.6 billion for its financial year ended 31 March 2021, out of which approximately Japanese Yen 465.3 billion were derived from its Asia segment (excluding Japan). Its building systems business operates mainly in the PRC through one of its non-wholly owned subsidiary, which, together with its fellow members, constitutes our Customer A. According to the information as shown in the subsidiary’s website, the subsidiary, together with its fellow members, has an operating revenue of approximately RMB19.5 billion in 2019 and 21,000 staff in the PRC. According to the Ipsos Report, Customer A ranked third among the top elevator companies in the PRC in 2019.
Customer B mainly consists of two companies operated by a joint venture of two companies which are listed on the SIX Swiss Exchange and the London Stock Exchange, respectively. The principal activities of the joint venture involve designs, installation, maintenance and modernisation of elevators, escalators and moving walkways in various Southeast Asian countries. According to the published annual report of one of the joint venture partners, its revenue and net profit for the year ended 31 December 2020 were approximately CHF10,640 million and CHF774 million, respectively, and its revenue generated from its Asia-Pacific segment for the same period amounted to approximately CHF2,948 million. According to information publicly available as at the Latest Practicable Date, the joint venture is headquartered in Hong Kong and employs over 5,000 staff. According to the Ipsos Report, the abovementioned joint venture partner is one of the top five elevator companies in the PRC in 2019.
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Customer C consists of two members within the same group, the parent company of which is listed on the New York Stock Exchange. The principal activities of the group involve elevator and escalator manufacturing, installation and services. According to its published annual report, the group’s net sales and net income for the year ended 31 December 2020 were approximately US$12,756 million and US$1,056 million, respectively. Moreover, the group had around 69,000 staff, and has business operation in more than 200 countries and territories worldwide. According to the Ipsos Report, the parent group of Customer C is one of the top five elevator companies in the PRC in 2019.
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Customer D consists of a number of companies within the same group, the parent company of which is listed on the Tokyo Stock Exchange. The principal activities of the group involve manufacturing of elevators and escalators. According to its published financial results, the group’s revenue and net profit for the year ended 31 March 2021 were approximately Japanese Yen 169,573.0 million and approximately Japanese Yen 10,652.0 million, respectively.
Customer E, which is also our Supplier F, consists of a number of companies within the same group, the parent company of which is listed on the Shanghai Stock Exchange. The principal activities of the group involve design, manufacture, installation and maintenance of elevators and escalators, and provision of transportation services. According to its published annual report, the group’s revenue and net profit for the year ended 31 December 2020 were approximately RMB6.8 billion and RMB704.7 million, respectively. The group mainly focuses on markets in the southern and eastern areas of the PRC, and, for the year ended 31 December 2020, the two markets recorded an operating revenue of approximately RMB2.8 billion and RMB1.7 billion, respectively. According to the published annual report, the major member of our Customer E focuses on manufacture, sales, installation and maintenance of elevators and multi-dimensional car parking garage in Guangzhou market. For the year ended 31 December 2020, it contributed an operating revenue of approximately RMB2.2 billion, and a net profit representing approximately 13.0% of the net profit of the parent group. According to the Ipsos Report, Customer E is one of the top three major domestic brands with its headquarters in Guangzhou of the PRC. The parent company of Customer E is also a minority shareholder of certain members of Customer A and Supplier B.
北京柯林國際貿易有限公司 (Beijing Ke Lin International Trading Co., Ltd.*) is a private company registered in the PRC, with a paid-up capital of RMB5,000,000. Its principal activities involve, amongst others, sales of electronic products, hardware and electrical material, and decoration material.
上海葆樹實業發展有限公司 (Shanghai Baoshu Industrial Development Co., Ltd.*) is a private company registered in the PRC, with a paid-up capital of RMB1,000,000. Its principal activities involve, amongst others, environmental engineering construction, construction engineering, machinery equipment installation and maintenance, and indoor and outdoor design and decoration.
Customer F is a private company registered in Hong Kong, with a paid-up capital of HK$716,800. Its principal activities involve, amongst others, manufacturing of elevator components and metals.
During each of the three years ended 31 March 2019, 2020 and 2021, each of our five largest customers was an Independent Third Party, respectively.
To the best knowledge and belief of our Directors after making reasonable enquiries, none of our Directors, their respective close associates or any Shareholder (whom to the knowledge of our Directors owns more than 5% of our issued share capital) had any interest in any of our five largest customers during the Track Record Period.
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Customer concentration
For the three years ended 31 March 2019, 2020 and 2021, our revenue attributable to our five largest customers combined amounted to approximately HK$255.5 million, HK$268.9 million and HK$273.9 million, representing approximately 64.4%, 71.9% and 68.3% of our total revenue, respectively. Our revenue attributable to our largest customer, namely Customer A, amounted to approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, representing approximately 55.1%, 64.0% and 61.9% of our total revenue, respectively, for the same periods. According to the Ipsos Report, there is only a limited number of sizeable elevator companies in the PRC and it is not uncommon for leading ECMD companies to focus on serving a small number of elevator companies. As such, it is considered to be an industry norm for a sizeable ECMD market participant like our Group, which ranked fourth in the ECMD companies in the PRC in 2019, in terms of revenue generated, to have high customer concentration.
Our Directors consider that our business is sustainable in view of the following reasons despite customer concentration during the Track Record Period:
(i) Customer A was our largest customer during the Track Record Period, but we also supplied our products to other PRC major elevator companies or their affiliates in the PRC and/or Hong Kong
The elevator market in the PRC are mainly dominated by foreign elevator companies which contribute to the majority of market share in terms of revenue, according to the Ipsos Report, and these elevator company generate a substantial portion of revenue for the market participants in the ECMD industry in the PRC.
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According to the Ipsos Report, the existing customer portfolio of ECMD companies also has an impact on their competitiveness in the industry. ECMD companies which have secured business relationships with major elevator companies and property developers have a competitive advantage over other companies in the industry, as they prove themselves to be capable of meeting the rigid expectations and compliance requirements set by these high-profile customers. Such manufacturers would, therefore, be seen as a more dependable business partner amongst others in the industry.
It is not uncommon for the leading ECMD companies to focus primarily on serving a small number of elevator companies. Our revenue attributable to our largest customer, namely Customer A, amounted to approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, representing approximately 55.1%, 64.0% and 61.9% of our total revenue, respectively, for the three years ended 31 March 2019, 2020 and 2021. Nevertheless, during the Track Record Period, we had cooperated not only with Customer A but also other PRC major elevator companies or their affiliates in the PRC and/or Hong Kong. According to the Ipsos Report, the top five elevator companies in the PRC accounted for approximately 51.3% of the market share in 2019. We also have an established business relationship with the remaining four PRC major elevator companies (excluding Customer A) or their affiliates in the PRC and/or Hong Kong, ranging from 12 to 15 years. For the three years ended 31 March 2019, 2020 and 2021, we derived an aggregate revenue of approximately HK$27.1 million, HK$21.1 million and HK$11.9 million, respectively, from them.
(ii) We have maintained a mutually beneficial and complementary business relationship with Customer A
According to the Ipsos Report, the elevator market in the PRC is concentrated with a few elevator companies dominating the market, including Customer A, one of the top three elevator companies in the PRC between 2014 and 2019 in terms of revenue generated. These major elevator companies work primarily with only a few ECMD companies which they have established business relationship with. Moreover, our Directors believe that a well-established manufacturer-customer business relationship allows us to have a better understanding on customer’s requirements, particularly, on the product quality and specifications, hence reducing the risks of elevator companies receiving sub-standard products.
We have established a stable and strong business relationship with Customer A since 2000. Our Group and Customer A have entered into supply framework agreements since January 2008. According to the Ipsos Report, elevator companies typically would not replace their manufacturing partners whom they have been in satisfactory collaboration with as the elevator companies would have more assurance over the product quality and manufacturing capabilities of the existing ECMD companies that they have been working with, and on the other hand it is not uncommon for ECMD companies to have limited customer base and high customer concentration as longer and well-established manufacturer-customer business relationship allows ECMD companies to have a better understanding on their customer requirements, particularly, on the product quality and specifications. As we have been
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engaged by Customer A since year 2000, representing an established working relationship of over 20 years, our Directors believe that we have fully acquainted ourselves with the requirements of Customer A and have established ourselves as a reliable and capable supplier to Customer A over the years with a proven track record.
Our established business relationship with Customer A was further strengthened in 2020 as we entered into a longer term master supply framework agreement with Customer A. Between 2008 and 2019, we entered into a number of supply framework agreements with several member companies of Customer A on a yearly basis. Since 2020, we have entered into a master supply framework agreement with Customer A’s headquarters of elevator and escalator business segment in the PRC directly for a term of three years with automatic renewal. Customer A’s headquarters of elevator and escalator business segment in the PRC, together with its member companies, had an operating revenue of approximately RMB19.5 billion in 2019 and approximately 21,000 staff in the PRC according to the information as set out in its website as at the Latest Practicable Date. We believe that our new master supply framework agreement with Customer A indicates that Customer A acknowledges and values our Group’s contributions in its supply chain, and both parties intend to further strengthen such mutually beneficial and complementary business relationship. As advised by Customer A, as at 31 March 2021, it had entered into master supply framework agreements with four ECMD suppliers (including our Group) in total and our Group was the largest among them in terms of purchase amount. Apart from supplying our products to Customer A’s headquarters in Guangzhou and its largest overseas elevator manufacturing base in Panyu District, Guangzhou City, we also supply our products to other Customer A’s elevator manufacturing bases in Shanghai, Chengdu and Tianjin. Our Directors are of the view that our business relationship with Customer A is mutually beneficial and complementary on the following basis:
Limited number of ECMD companies attaining both production capacity of decorative stainless steel and in-house design capability
¼ it is estimated that there are over 1,000 ECMD companies in the PRC as per the Ipsos Report. Due to budget constraints, the majority of them are small-scale businesses with approximately 2% of the total ECMD companies in the PRC possess both the capability to produce decorative stainless steel and to provide design solutions, according to the Ipsos Report. Therefore, only a limited number of ECMD companies are able to manufacture elevator cabins involving high level of design complexity and provide comprehensive tailor-made one-stop solutions to elevator companies, covering the areas of design, manufacturing and installation of elevator cabins that require customised design;
¼ decorative stainless steel can be (i) sold to customers directly as decorative stainless steel products; or (ii) used as raw materials and consumables for the assembly and manufacture of elevator cabin products. We have our own production plants and facilities for manufacturing decorative stainless steel which enable us to have a greater control over quality and production time compared to engaging sub-contractors to manufacture the same, such ability
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is a notable competitive advantage in the ECMD industry in the PRC. For the three years ended 31 March 2019, 2020 and 2021, our direct sales of decorative stainless steel products to Customer A amounted to approximately HK$6.0 million, HK$0.6 million and HK$0.2 million, respectively. Save as these direct sales of decorative stainless steel products to Customer A, our sales of elevator cabin products to Customer A, which required decorative stainless steel and in-house design capacity for the manufacture of elevator cabins with customised design, amounted to approximately 97.2%, 99.7% and 99.9% of our total sales to Customer A during the Track Record Period, respectively. According to the Ipsos Report, approximately 5% of market participants in the ECMD industry attain the ability to manufacture decorative stainless steel. Whilst approximately 95% of the ECMD companies may have to procure decorative stainless steel from other sources, we can manufacture our own decorative stainless steel products from stainless steel plates and further assemble and manufacture elevator cabin products in our production plants and facilities. Apart from enjoying higher flexibility and efficiency from vertical integration, we can prioritise our manufacturing resources when required and are able to react to any unpremeditated amendments from the customers in shorter notice, have better cost control as well as time management without the need to inform and negotiate with supplier to further procure from other supplier and outsource the relevant manufacturing processes, thereby enhancing our in-house capabilities to better satisfy a wider range of Customer A’s demands;
¼ according to the Ipsos Report, only approximately 2% of the market participants in the ECMD industry has in-house design capacity. Leveraging on our strong product design and development capabilities as well as our production facilities which can be used to produce a wide range of elevator cabin products with different specifications according to customers’ needs, we are able to manufacture customised products and provide one-stop solutions tailored to Customer A. Customer A acknowledges our strong product design and development capabilities as we are able to transform descriptions and technical specifications provided by Customer A’s clients into detailed designs and computerised drawings which can then be used for production; and
¼ most of our production facilities can be used to produce a wide range of elevator cabin products and decorative stainless steel products with different specifications according to customers’ needs. In addition, our capability of manufacturing the entire elevator cabin allows customers to undergo coordinated-process service without the need of sourcing from different suppliers for the manufacture of elevator cabins, thereby providing one-stop solutions to our customers. With the ability of handling different materials and fulfilling production orders in a shorter period of time compared to companies that outsource their production line, we tend to be more successful in capturing more sales orders from a wider customer base and fulfilling these orders timely. The general production lead time in the ECMD
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industry ranges from three to six weeks, according to Ipsos Report. However, the production lead time for the manufacture of elevator cabins with customised design is generally longer, especially for the situation in which imported materials are required. Taking into account the delivery time of imported materials from overseas, the production lead time may be extended to up to three months or even longer. Our elevator cabin products are mainly customised according to specifications of our customers with a lead time of approximately one to three months in our general business operations. During the Track Record Period, we were able to manufacture the entire elevator cabin to satisfy our purchase orders in two weeks in some circumstances.
Fewer suitable alternative ECMD companies available to elevator companies due to stringent selection criteria
¼ given the key business strengths and focuses of elevator companies are developing and manufacturing elevator systems, it is a common industry practice for them to engage ECMD companies for the manufacture of elevator cabins that require, among others, customised design, according to the Ipsos Report. Leading elevator companies in the PRC commonly maintain an approved internal list for the supply of a wide variety of components and materials. As advised by Customer A, it has granted access to a total of 70 to 80 suppliers of different raw materials to its integrated supplier portal platform and our Group is one of the ten largest suppliers among them. According to the Ipsos Report, leading elevator companies in general have a limited number of major ECMD companies on their approved internal lists, typically less than five, primarily attributable to operational efficiency as well as stringent selection process, including but not limited to, the business scale and operating status such as financial conditions, the design capabilities, production capabilities, research and development particularly in terms of design and aesthetic aspects, timely delivery as well as product quality. In view of the limited number of ECMD companies that are capable of providing both production and design services in the PRC, there are fewer suitable alternative ECMD companies available to elevator companies in the event that they were to replace the current suppliers in the ECMD category; and
¼ leading elevator companies and ECMD companies which are on the approved internal supplier list have typically established long-term business relationship, which enables the ECMD companies to have a better and more thorough understanding of the requirements for the manufacture of elevator cabins with customised design. Therefore, it is more common for leading elevator companies to continue engaging ECMD companies who are already on their approved internal supplier list, according to the Ipsos Report. Moreover, given the stringent selection criteria and limited number of ECMD companies that possess both in-house design capacity and production capacity of decorative stainless steel, leading elevator companies may face difficulties to find a suitable alternative ECMD company to replace existing
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ECMD companies who are on their approved internal list of suppliers. Thereafter, leading elevator companies consider their business relationships with ECMD suppliers as complementary and mutually beneficial.
Our Group was the largest ECMD supplier of Customer A during the Track Record Period and is regarded by Customer A as a strategic business partner that is not easily replaceable
¼ as advised by Customer A, it will usually engage ECMD companies for the manufacture of elevator cabins that require customised design, and among the four ECMD companies who provide tailor-made one-stop solutions to Customer A, our Group attains one of the best performance in terms of design capability and cost control. Therefore, our Group was the largest ECMD supplier of Customer A during the Track Record Period as Customer A engaged us for a substantial portion of its manufacture of elevator cabins that require customised design mainly in Guangdong Province (where its headquarters in Guangzhou and largest overseas elevator manufacturing base are located), which accounted for in the region of 40% in terms of its total purchase amount from ECMD companies. For information purposes, Customer A’s purchase from our Group fluctuated from approximately RMB187.0 million to RMB216.3 million (equivalent to approximately HK$218.5 million to HK$247.9 million) per annum during the Track Record Period. As for Customer A’s other ECMD suppliers, the purchase amount of Customer A from its second, third and fourth largest ECMD suppliers amounted to approximately RMB80 million, RMB60 million and less than RMB60 million annually, respectively, each of which has notably smaller total purchase amount from Customer A. According to the Ipsos Report, our Group excels in design capabilities with great attention to details, cost control and timely delivery compared to other companies who are also on Customer A’s approved internal supplier list for ECMD category. Customer A has indicated its intention to continue its business partnership with us as it regards our Group as a strategic business partner that is not easily replaceable considering (i) our Group’s ability to manufacture and deliver consistently high quality products in a timely manner; (ii) such long-term business relationship which allows our Group to better understand Customer A’s requirements for products and specifications with customised design elements; (iii) there are limited number of ECMD companies that are able to fulfill the stringent selection criteria for approved internal suppliers; and (iv) the competitive advantages as a result of the geographical proximity of our Group;
Increasing demand from elevator companies for elevator cabins that require customised design
¼ elevator cabins with customised design elements have been increasingly popular for the high-end commercial property development projects including hotels, shopping malls and office buildings, as well as high-end residential property development projects, according to the Ipsos Report. As the key
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strengths of elevator companies are technological development and manufacture of elevator systems, it is an industry common practice for elevator companies to engage ECMD companies for the design and manufacture of associated decorative components and parts.
Other mutually beneficial and complementary advantages achieved from our geographical proximity to Customer A, experienced management team and long-term business relationship
¼ certain leading elevator companies, including Customer A, prefer suppliers whose manufacturing plants are close to their business location given their high-quality requirements. To ensure high quality on a consistent basis, these leading elevator companies would visit the manufacturing plants of ECMD suppliers on a regular basis to perform quality control procedures. Therefore, geographical proximity is one of the considerations by these leading elevators companies for the purpose of convenience and efficiency, according to the Ipsos Report;
¼ Pearl River Delta in Guangdong Province is one of the clusters of ECMD industry in the PRC apart from Yangtze River Delta in Eastern China. Customer A’s headquarters of elevator and escalator business segment in the PRC is located in Guangzhou City with its largest overseas elevator manufacturing base in Panyu District, Guangzhou City where our Group is based in. According to the Ipsos Report, In the ECMD industry, production plant located closer to the customers tends to help ECMD companies lower their delivery costs. The logistic costs of delivering elevator cabins vary based on the delivery distance. To the best of our Directors’ knowledge, information and belief, having made reasonable enquiries, subject to the actual delivery distance, product size, quantity, delivery costs and surcharges incurred, it is estimated that Customer A may save in the range of approximately 41.3% to 66.6% of its delivery cost if it procures elevator cabin products from our Group as compared to suppliers locating outside Guangdong Province. Production plant located closer to the customer site often requires lower delivery costs, which in turn enhanced our operation efficiency and cost effectiveness. Moreover, our Guangzhou Plant and Customer A’s largest overseas elevator manufacturing base are both located in Panyu District, Guangzhou City. Due to geographical proximity, we were able to deploy our staff to station at Customer A’s manufacturing base to provide installation support at Customer A’s request from time to time. Our strategic location provides logistical and geographical advantages to gain businesses from reputable brands and bring benefits to our customers through the application of our extensive working knowledge and our commitment to continuous research and development efforts. Apart from our Group, there are three ECMD suppliers of Customer A who have in-house design capacity and attain the ability to manufacture decorative stainless steel. Although they have established manufacturing plants to manufacture decorative stainless steel, only two of them have set up a manufacturing
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plant in Guangzhou City. To the best of our Directors’ knowledge, information and belief, having made reasonable enquiries, our Group has the largest business scale among them in terms of registered capital;
¼ our management team has more than 14 years of experience in the ECMD industry and over 24 years of experience in the field of decorative stainless steel trading and manufacturing. We believe that the extensive knowledge and on-site experience of our management team support our Group during the manufacture of the elevator cabins by ensuring the quality and specifications of the products meet customers’ standards while providing professional advice; and
¼ we have been a long-term supplier of Customer A with over 20 years of business relationship. Our long-term cooperation with Customer A has proven our capability to maintain product quality, enable us to gain a thorough understanding of Customer A’s internal procurement procedures which facilitate us to meet Customer A’s demand for relatively short manufacturing turnaround time and effective management of production and delivery timeline. Furthermore, our Group, as an established supplier of Customer A with a proven track record, is also granted access by Customer A to its integrated supplier portal platform on which Customer A could place orders with us from time to time whilst we could download the order details and communicate with Customer A simultaneously, which in turn increases efficiency in the information exchange between our Group and Customer A. As advised by Customer A, it has granted access to a total of 70 to 80 suppliers of different raw materials to its integrated supplier portal platform and our Group is one of the ten largest suppliers among them. On this basis, we believe that Customer A will prefer to engage our Group over other suppliers which they have not previously ordered from, in turn our Group has experienced a stable demand for our elevator cabins from Customer A. Over the years, we supply our products not only to Customer A’s headquarters in Guangzhou and its manufacturing base in Panyu District, Guangzhou City, but also to other Customer A’s manufacturing bases in Shanghai, Chengdu and Tianjin and further to its overseas affiliates in Hong Kong amid benefits from geographical proximity diminishes over distance. Our Directors believe that recurring orders from different elevator manufacturing bases of Customer A throughout the PRC and its affiliates in Hong Kong has proved that we are a well-regarded supplier of Customer A and our established business relationship with it.
In view of the above, we believe that our Group has maintained a mutually beneficial and complementary business relationship with Customer A taking into account the fact that (i) limited number of ECMD companies in the PRC attain the ability to manufacture decorative stainless steel and have in-house design capacity, and we are one of the few market participants whom possesses both of the aforesaid capabilities in the ECMD market; (ii) fewer suitable alternative ECMD companies available to elevator companies due to stringent selection criteria, resulting in difficulties encountered by leading elevator companies to find an alternative ECMD
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company to replace existing ECMD companies on the approved internal supplier list; (iii) our Group was the largest ECMD supplier of Customer A during the Track Record Period and is regarded by Customer A as a strategic business partner that is not easily replaceable; (iv) increasing demand from elevator companies for elevator cabins that require customised design; and (v) other mutually beneficial and complementary advantages achieved from our geographical proximity to Customer A, experienced management team and long-term business relationship, all of which indicate our complementary role in Customer A’s operations and reinforce the importance of our Group to Customer A’s manufacturing business of elevator cabins with customised design.
Our established business relationship with Customer A is also evidenced by the increasing number of sales orders placed by Customer A during the Track Record Period, of which we derived revenue of approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, respectively. Despite we maintained business relationships with the major elevator companies in the PRC and continued to diversify both our product and customer portfolios during the Track Record Period, the increase in the sales orders placed by Customer A outweighed that of other major elevator companies, in particular, for the year ended 31 March 2020 when the demands from a number of our customers, subject to their locations, were temporarily affected to various degrees as some of our customers encountered temporary suspension of operation due to COVID-19. Furthermore, our Guangzhou Plant and Suzhou Workshop temporarily suspended their operation and were resumed after obtaining the approvals from the government departments by end of February 2020. In view of the limited production scale at the relevant time, we reallocated our production resources and prioritised the orders from Customer A until we resumed full operation in April 2020. As such, the proportion of revenue contribution from Customer A increased from approximately 55.1% for the year ended 31 March 2019 to approximately 64.0% for the year ended 31 March 2020. Based on the above, our Directors believe that it is mutually beneficial and complementary for Customer A and us, in particular given our strong presence in the Guangdong Province, to maintain a close and stable business relationship.
Given that, among others, (i) we have established a long-term business relationship with Customer A for over 20 years since 2000; (ii) we have entered into new master supply framework agreement with Customer A’s headquarters of elevator and escalator business segment in the PRC since 2020 for a longer term of three years with automatic renewal; (iii) the increasing number of sales orders placed by Customer A during the Track Record Period, of which we derived revenue of approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, respectively; (iv) Customer A has continued to grant our Group access to its integrated supplier portal platform; (v) Customer A has continued to place sizeable orders with our Group subsequent to the Track Record Period and up to the Latest Practicable Date; and (vi) there is no sizeable product returns and/or material complaints from Customer A in relation to our products as at the Latest Practicable Date, our Directors are of the view, and the Sole Sponsor concurs, that as at the Latest Practicable Date, no material red flag indicating that our relationship with Customer A is likely to materially adversely deteriorate or terminate in the foreseeable future has been brought to our attention.
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(iii) Revenue of the ECMD industry in the PRC is expected to grow
The revenue of the ECMD industry in the PRC is anticipated to increase from approximately RMB16,210.7 million in 2020 to approximately RMB21,132.2 million in 2024, increasing at a CAGR of approximately 6.9%, which is expected to be
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continuously supported by the PRC Government investment in infrastructure and the potential increase in building construction from 2020 to 2024, according to the Ipsos Report. As the urbanisation plan continues, more rural residents are going to relocate to urban area, which created an ongoing substantial demand for residential and commercial buildings to support their daily activities. Potential increase in new buildings are expected to drive the demand for elevator and the ECMD industry in the PRC. With our experience in serving the top five PRC’s elevator companies or their affiliates in the PRC and/or Hong Kong, our Directors believe that we are well-positioned to capture the growing business and opportunities in the ECMD industry in the PRC and Hong Kong and increase our market share. As our Group continues to grow our business through a combination of the following strategies, namely (a) continuing to serve other major elevator companies in the PRC and/or Hong Kong with a view to further establish good business relationships with them; (b) expanding our customer base with a view to capture a larger market share in the ECMD industry and decorative stainless steel manufacturing industry overtime; and (c) utilising some of our expanded capacity from our Southern China Production Hub and Suzhou Workshop after [REDACTED] to serve our other existing customers and new customers, thereby reducing our reliance on Customer A in the long term.
(iv) Our skills and experience in the ECMD industry are transferable
We have been supplying elevator cabin products and decorative stainless steel products for over 20 years. Our established operating history and reputation with a wide range of job references from residential, commercial and hospitality development projects would assist us in obtaining new orders from other major elevator companies in the PRC and Hong Kong even if Customers A’s demand for our products unexpectedly reduces in the future.
Given that we have established a good reputation, built a stable pool of suppliers and possessed product design and development capabilities with a broad range of jobs experience from residential, commercial and hospitality development projects, we are well-positioned to compete for additional orders from our existing customers and/or orders from new customers, in particular major elevator companies in the PRC and Hong Kong, as evidenced by orders we obtained from Customer E, a major domestic elevator company in the PRC.
(v) Our measures to reduce reliance on Customer A in place
To the extent we maintain our complementary business relationship with Customer A on the one hand and diversify our customer and product portfolios on the other hand, we have put in place a series of robust sales and marketing measures to reduce our reliance on customer A as below:
¼ leveraging on our production facilities in Suzhou to broaden our customer base in Eastern China which enables us to explore more opportunities with new customers given that most of the popular elevator companies are based
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in Shanghai and it is convenient for businesses to explore and expand their markets to Shanghai with the geographical advantages according to the Ipsos Report.
According to the Ipsos Report, elevator companies typically would not replace their manufacturing partners whom they have been in satisfactory collaboration with and new entrants without established relationships with customers may find difficulties in winning business from existing market participants and to build up their customer bases in the ECMD industry in a short period of time. However, our Group, as a leading ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong, is not a new entrant to the ECMD industry and has been the manufacturing partners of all the top five elevator companies in the PRC or their affiliates during the Track Record Period. For the three years ended 31 March 2019, 2020 and 2021, we derived an aggregate revenue of approximately HK$27.1 million, HK$21.1 million and HK$11.9 million, respectively, from the remaining four major elevator companies (excluding Customer A) in the PRC or their affiliates. Each of our Customer B and Customer C (together with their affiliates) ranked fourth and fifth among the top five elevator companies in the PRC in terms of revenue in 2019, respectively. Nevertheless, it is also observed that elevator companies review their lists of suppliers from time to time, and market participants in the ECMD industry who have past work experience and established business relationship with top elevator companies in the PRC would have a competitive advantage over other companies or new entrants, as such market participants would be seen as more dependable business partners by the elevator companies according to the Ipsos Report. Hence, our Directors are of the view that, being one of the leading ECMD companies that continues to supply products to all these major elevator companies from time to time, we shall be able to benefit from such phenomenon in the industry and boost our sales over time.
Besides, the strong demand in Eastern China is also evidenced by the significant increase in our revenue contributed by customers in the region. Our revenue contributed by customers based in Shanghai increased from approximately HK$47.9 million for the year ended 31 March 2019 to approximately HK$67.3 million for the year ended 31 March 2021. Among the top five elevator companies in the PRC, four of them are headquartered in or near Shanghai. In view of the increasing demand in the ECMD industry in the PRC, we believe that with the upgrade of our Suzhou Workshop, our Group is well-positioned to capture such demand given our established strong presence in the ECMD industry with long-term relationship with our major customers and suppliers, our strong product design and development capabilities, our production facilities for comprehensive manufacture of diversified product portfolio as well as our capabilities to offer customised products and one-stop solutions.
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In view of the above, we intend to acquire certain machinery and equipment with an estimated investment amount of approximately HK$6.6 million to enhance our production capacity at our Suzhou Workshop and upgrade it to full-scale production facilities. Upon the commencement of production for our new production facilities at our Suzhou Workshop by December 2021, we estimate that the designated production capacity of our Suzhou Workshop will increase by approximately 100% from that of the year ended 31 March 2021. For details, please refer to the sections headed “Business – Business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products – Upgrade of our Suzhou Workshop” and “Future Plans and [REDACTED] – [REDACTED] – (a) Facilitate the implementation of our business strategies” in this document;
¼ further expanding our customer base and presence in the market by establishment of our production facilities in other regions in the PRC. We believe that the establishment of our Suzhou Workshop is a successful example of our business strategy to strengthening and broadening our customer base in Eastern China. Our management will from time to time explore and assess the opportunity to further expand our customer base and presence in the market by establishment of our production facilities in other regions in the PRC, if and when appropriate. In general, we will conduct internal assessments, market research, field trips and/or feasibility studies on the market demand and potential competition in different regions in the PRC. After identifying a potential site, we will then estimate, among others, the total investment amount, human resources allocation, financial budget as well as timetable for plant establishment, and prepare a preliminary report for our management to evaluate on the feasibility of such expansion plan. During the Track Record Period and up to the Latest Practicable Date, we conducted feasibility studies on certain locations in Eastern China and Western China for the potential establishment of our production facilities with a view to expand our customer base and presence to cater the customer demands in such regions. Please refer to the paragraph headed “Competitive strengths - Our production facilities have been strategically located near the manufacturing hubs in Southern China and Eastern China” in this section for the details and rationale behind the establishment of our Suzhou Workshop. For Western China, the gross investment on real estate construction of 12 provinces in Western China increased by approximately 7.6% in the first half of 2020 compared to that in 2019 according to National Bureau of Statistics, PRC, such was significantly higher than the national average of approximately 1.9%. We believe that such notable increase indicates potential demand for elevators in these regions. According to the Ipsos Report, four of the top five elevator companies in the PRC in 2019 have set up their subsidiaries in Chengdu, Sichuan Province in Western China. Hence, we are also evaluating the potentials of establishing our presence in Western China to cater for the customer demands in these regions;
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¼ appointing Ms. Lei Soi Kun as our non-executive Director to enhance our market presence in Macau. Ms. Lei has rich experience in fitting-out industry in Macau and she is responsible for advising on marketing and corporate governance of our Group. For details, please refer to the section headed “Directors, Senior Management and Employees – Non-executive Director” in this document. Leveraging on her experience in the fitting-out industry and business network in Macau, we believe her appointment will enable our Group to further expand our customer base and enhance our market presence in Macau;
¼ capturing additional market share through enhancing our marketing initiatives to expand the geographic coverage of our products and our customer base. Although we do not have any overseas subsidiaries or representative offices, we regularly exhibit in or visit local and international market exhibitions to promote our products and explore potential customers. Participation in market exhibitions is one of our primary modes of marketing to the potential overseas customers, which has proven to be a successful avenue to secure orders from new overseas customers in the past. In addition, we also conduct site visits to keep our existing and potential customers informed of our updated product portfolio and keep ourselves abreast of the latest market trends in the overseas markets. Going forward, we will continue to adopt the aforesaid marketing strategy for our overseas markets and target to increase our market penetration in the overseas markets through building our track record and continue our efforts in maintaining and further improving our relationships with our existing overseas customers;
¼ recruiting sales executives who will be responsible for identifying potential customers. Our Directors believe that there also are opportunities to explore the markets both within and outside the PRC, in other parts of Asia. For such purposes, we intend to strengthen our sales strategies and expand our sales and marketing team, and explore business opportunities through conducting internal market assessment and/or obtaining commissioned market research reports from independent market research analysts, placing advertisements on industry and trade magazines specialised in elevator market and recruiting additional marketing executives, who will be responsible for identifying the potential customers; and
¼ identifying and keeping up to date with the latest trends and designs in the respective geographical markets we operate in, through our research and development team, we shall continue to develop new product offerings with different designs and technology, modify and improve our existing products. Through offering our customers a more diversified product portfolio that can be used in a wide range of construction projects, we shall be able to meet a wide range of product demands for both new and existing customers, further enhancing our market competitiveness and increase our market share in the long run. We believe our success is built on our proactive approach towards providing customised and high quality products according to our customers’ needs, which is based on our strong product design and development
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capabilities. We continue to enhance our product design and development capabilities with a view to achieve technical enhancement and expand our product portfolio in order to explore new business opportunities.
Given that no material red flag, indicating that our relationship with Customer A is likely to materially and adversely deteriorate or terminate in the foreseeable future, has been brought to our attention, our Directors believe that the likelihood of any material adverse changes to or termination of our relationship with Customer A is low. Further, in the unlikely event that there are any material adverse changes to or termination of our relationship with Customer A, our Directors are of the view that we would be able to effectively mitigate our exposure based on the following factors:
¼ we have put in place a series of robust sales and marketing measures to reduce our reliance on customer A to the extent that we maintain our complementary business relationship with Customer A on the one hand and diversify our customer and product portfolios on the other hand, details of which are set out in the paragraph headed “Customers – Customer concentration – (v) Our measures to reduce reliance on Customer A in place” in this section above;
¼ among the top five elevator companies in the PRC, Customer A is headquartered in Guangzhou and the remaining four of them are headquartered in or near Shanghai. As part of our business strategies to diversify our customer base, we established Cobelco KS and set up our Suzhou Workshop in 2018 as an ancillary production facilities to cater for the demands in Eastern China. Leveraging on our existing production facilities in Suzhou, we intend to further acquire certain machinery and equipment with an estimated investment amount of approximately HK$6.6 million to enhance our production capacity at our Suzhou Workshop and upgrade it to full-scale production facilities. We will also continue to enhance our sales and marketing efforts to explore business opportunities through identifying potential customers in Eastern China. Our Directors believe that the further development of our production facilities in Suzhou will be one of the major steps in our business transformation from a leading ECMD company serving primarily the elevator companies in Southern China to a nationwide ECMD company with a more diversified customer base and product portfolios covering both Eastern China and Southern China where all the top five elevator companies in the PRC are headquartered;
¼ in view of our mutually beneficial and complementary relationship with Customer A and the limitation of our production capacity, we had given priorities to the sales orders placed by Customer A during the Track Record Period, in particular during the relevant time after the Outbreak, with the aim to further strengthen our business relationship with Customer A and secured more orders from Customer A so as to prudently manage the adverse impact during and after the Outbreak, which was largely unknown at the relevant time, resulted in a further increase to our revenue attributable to Customer A from approximately 55.1% for the year ended 31 March 2019 to
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approximately 64.0% and 61.9% for the years ended 31 March 2020 and 2021, respectively. For information purposes, potential orders from our major customers which did not proceed due to, including but not limited to, lower profit margin, limitation of production capacity, failure to agree on commercial terms or other reasons, amounted to not less than HK$177.7 million, HK$74.3 million and HK$170.2 million during the Track Record Period. Hence, our Directors believe that there will still be sufficient demand from other customers in the unlikely event that there are any material adverse changes to or termination of our relationship with Customer A;
¼ we have an established business relationship with the remaining four PRC major elevator companies (excluding Customer A) or their affiliates in the PRC and/or Hong Kong, ranging from 12 to 15 years. Those customers continued to place orders with us during the Track Record Period. Our Directors believe that our proven track record in serving all the top five elevator companies in the PRC or their affiliates is a credit to our market position in the ECMD industry and our ability to provide quality elevator cabin products with customised design to major elevator companies with stringent requirements on their suppliers. Leveraging such proven track record in the ECMD industry and given that only approximately 2% of ECMD companies in the PRC possess both the capability to produce decorative stainless steel and to provide design solutions, our Directors believe that it is not materially difficult for us to increase our sales to other major elevator companies or source new customers with similar scale of operation should such need arises; and
¼ for Hong Kong and the overseas markets, our Directors believe that the adverse impact arising from the Outbreak was temporary given that the Group’s revenue from the PRC and Hong Kong markets for the year ended 31 March 2021 had rebounded to approximately HK$283.1 million and HK$106.1 million, respectively. In view of the travel restrictions imposed by many countries, apart from the sales and marketing measures as set out in the paragraph headed “Customers – Customer concentration – (v) Our measures to reduce reliance on Customer A in place” above, we also reinforce our sales and marketing efforts and continue to identify and solicit potential customers in Hong Kong and within certain designated local markets in Southeast Asia such as the Philippines and Thailand and in Middle East such as Dubai through various local marketing efforts, including conducting telemarketing activities and visits via our established business network, promoting our products via online web portals as well as identifying and soliciting potential customers via access to industry databases where available.
Supply framework agreements with Customer A
During the Track Record Period, we had also entered into supply framework agreements with Customer A, our largest customer, to confirm in advance the fundamental terms of our business relationship, the rights and obligations as well as the
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risks on both sides. Between 2008 and 2019, we entered into a number of supply framework agreements with several member companies of Customer A, which was renewed on a yearly basis. Since 2020, we have entered into a master supply framework agreement with Customer A’s headquarters of elevator and escalator business segment in the PRC directly for a term of three years with automatic renewal. The following is a summary of the salient terms in our supply framework agreements (including previous agreements entered into during the Track Record Period and the master supply framework agreement entered into in 2020) with Customer A:
¼ Term. Our supply framework agreements with Customer A generally have a term of one (for previous agreements) to three years (for master supply framework agreement).
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¼ Product. The type and quantity of the products are subject to the purchase orders issued by Customer A, which include the description and detailed specifications of the required products.
¼ Quotation and pricing. For any sales transaction with Customer A, we are required to comply with a set of standard quotation procedures. Customer A will first provide us with an estimated sales price, which is calculated with reference to the current market conditions, for the product they want. We then negotiate and determine the price within two working days. Furthermore, to deal with any material fluctuations in the costs of raw materials and consumables used, we have a price adjustment mechanism, under which the agreed sales price may be increased or decreased to a certain extent.
¼ Payment terms. Customer A will provide us with a list of purchase records for our products. Within five working days of receiving the list, we are required to issue relevant invoices to Customer A.
¼ Quality assurance. Before delivery, we are required to carry out comprehensive checks on the quality, quantity, model as well as function of our products and to ensure that our products fulfil the requirements of the purchase orders.
¼ Delivery. We are required to arrange transportation of our products in compliance with the terms for delivery as stated in each purchase order, for example to deliver our products to the locations designated by Customer A before the required date of delivery.
¼ Site inspection. Customer A may also randomly send its staff to visit our factory and inspect our production process from time to time.
¼ Intellectual property rights. We undertake to ensure that all patents and other intellectual property involved in our products are legal and authorised under relevant laws and regulations. We are also under the responsibility to keep confidential and protect all intellectual property owned by Customer A, including all drawings, technological statistics and standards.
¼ After-sales support. In accordance with the requirements of Customer A, we are required to supply the parts of our products and provide all services related to our products, such as repairing, provision of technological information and training.
¼ Termination. The supply framework agreements are terminated upon expiration of the agreement term or the occurrence of the following event, among others, (i) we fail to make improvements or rectifications after the formal assessment and notification by Customer A; (ii) we fail to carry out remedial measures after serious problems on product quality and delivery are discovered; (iii) we do not pass the supplier annual evaluation conducted by
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Customer A; (iv) some serious events happened to our Group which affect our ability to comply with the agreements, such as revocation of relevant qualification or winding-up; or (v) we are in breach of any other term stated in the supply framework agreements.
To the best knowledge of our Directors, the relevant parties to the supply framework agreements did not report any material breach during the Track Record Period and up to the Latest Practicable Date.
As advised by our PRC Legal Advisers, the master supply framework agreement with Customer A is valid and legally binding under the PRC laws.
Our major customers who were also our suppliers
During the Track Record Period, two of our five largest customers, namely Customer A and Customer E, were also our suppliers. We purchased specified door opening devices and components as well as other electronic components from them to manufacture our elevator cabin products under their purchase orders, for their quality assurance purposes. Negotiations of the terms of our sales to and purchases from these customers were conducted on an individual basis. Our Directors confirmed that the terms and the pricing policies of transactions with these entities were broadly in line with the market and similar to comparable transactions with our other customers and suppliers.
For the three years ended 31 March 2019, 2020 and 2021, the revenue contributed by Customer A amounted to approximately HK$218.5 million, HK$239.4 million and HK$247.9 million, representing approximately 55.1%, 64.0% and 61.9% of our total revenue, respectively. For the same periods, the purchase amount from Customer A (i.e. Supplier B) totaled to approximately HK$15.8 million, HK$16.3 million and HK$14.9 million, representing approximately 7.6%, 8.0% and 6.5% of our total purchase, respectively. The gross profit margin of sales to Customer A for the same periods amounted to approximately 25.1%, 23.1% and 20.0%, respectively. The gross profit margin we derived from Customer A during the Track Record Period fluctuated from year to year as the specifications of products, the product mix and quantity sold varied. Given that Customer A was our largest customer in terms of revenue throughout the Track Record Period and that the amount and quantity of our products sold to Customer A were significantly higher than those sold to our other customers, the overall gross profit margin derived by our Group from Customer A for the respective financial years during the Track Record Period was lower than the range of our Group’s overall gross profit margin during the Track Record Period from approximately 26.5% to 30.1%.
For the three years ended 31 March 2019, 2020 and 2021, the revenue contributed by Customer E amounted to approximately HK$6.7 million, HK$5.5 million and HK$9.4 million, representing approximately 1.7%, 1.5% and 2.3% of our total revenue, respectively. For the same periods, the purchase amount from Customer E (i.e. Supplier F) totaled to approximately HK$2.4 million, HK$4.9 million and HK$11.3 million, representing approximately 1.2%, 2.4% and 4.9% of our total purchase, respectively. The gross profit margin we derived from Customer E during the Track Record Period fluctuated from year to year as the specifications of products, the product mix and quantity sold varied. Nonetheless, the overall gross profit margin range recorded by our Group from Customer E for the
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To the best knowledge and belief of our Directors, each of Customer A, Customer E and their respective ultimate beneficial owner is an Independent Third Party as at the Latest Practicable Date.
Save for the transactions as set out above, during the Track Record Period, none of our major customers were also our suppliers and vice versa.
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SUPPLIERS AND PROCUREMENT
Purchasing from suppliers
The principal raw material and consumables used in the production of our products are stainless steel materials. Our raw materials and consumables are predominantly sourced from the PRC. Over the years, we have steadily expanded our network of suppliers. As at the Latest Practicable Date, we maintained a sourcing network comprising of over 300 suppliers.
We select our suppliers based on a number of criteria including (i) quality control of materials; (ii) production capacity of the suppliers; (iii) previous collaboration experience; (iv) delivery cost considerations; and (v) price. We do not rely on any single supplier as we maintain a wide sourcing network of suppliers. For stainless steel materials with certain specifications, we are required by Customer A to purchase from certain designated suppliers. As at the Latest Practicable Date, we had eight suppliers designated by Customer A out of our sourcing networks comprising of over 300 suppliers. Our Directors are of the view that the industry is susceptible to changes in the market trends and customers preferences, thus we strive to continuously source new products and we normally source from different suppliers from time to time. Save and except for the authorised distributor agreements we entered into with one of our major suppliers and those with the designated suppliers mentioned above, we generally do not enter into long-term agreements with our suppliers. In general, most of our suppliers grant us approximately 25 to 60 days’ credit terms after date of delivery pursuant to the purchase orders.
In order to manage our inventory level by placing procurement orders with our suppliers at appropriate time with appropriate quantities, our sales team will estimate the quantity of products to be ordered from our suppliers based on the sales projections (which are normally determined according to historical sales figures as well as projected market trends) for our management’s approval prior to placing any purchase order. Our ERP system provides us with the sales information of our products and the inventory levels. We would also consult our suppliers from time to time about their stock availability and the delivery time. During the Track Record Period, we did not experience any material shortage or delay in the supply of major raw materials and consumables.
A typical procurement order contains the following salient terms:
¼ Description. A brief description of the products, including size and technical specification of raw materials and consumables.
¼ Order details. The quantity, unit price and total amount.
¼ Payment terms. Payment is normally settled by bank transfer and there is usually a credit period of 25 to 60 days. The payments made to our suppliers are primarily in RMB.
¼ Delivery details. We generally require our suppliers to deliver the goods to our production facilities. The transportation fee is normally covered by our suppliers.
¼ Quality. Our suppliers shall be responsible for inferior quality and/or other non-conformities with the specifications.
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Selection of suppliers
As at the Latest Practicable Date, we maintained a sourcing network comprising over 300 suppliers. Prior to the admission of suppliers onto our approved supplier list, assessment will take place based on various factors including (i) quality control of materials; (ii) production capacity of the suppliers; (iii) previous collaboration experience; (iv) delivery considerations; and (v) price. Prices are determined with reference to quotations from suppliers as agreed between us on an individual basis.
During the Track Record Period and up to the Latest Practicable Date, we did not experience any material fluctuations in the costs of raw materials and consumables used that had a material impact on our business, financial conditions or results of operation.
Authorised distributor agreements with Supplier A
We had entered into certain authorised distributor agreements with Supplier A during the Track Record Period. The following is a summary of the salient terms in our authorised distributor agreements with Supplier A:
PRC authorised distributor Hong Kong and Macau Principal terms agreement authorised distributor agreement
Duration of the Approximately one year. Approximately one year. agreement
Designated product We are authorised to distribute a We are authorised to distribute and distribution range of products under the different brands of decorative area product category construction and films and functional films from building market of the commercial Supplier A in Hong Kong and solutions division from Supplier Macau. A, in particular its decorative films, in the entire PRC region.
Exclusivity Our agreement with Supplier A is Our agreement with Supplier A is on a non-exclusive basis. Supplier on a non-exclusive basis. Supplier A has the right to directly sell or A has the right to directly sell or authorise other distributors to sell authorise other distributors to sell its designated products to its designated products to customers in the designated customers in the designated distribution area. distribution area.
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PRC authorised distributor Hong Kong and Macau Principal terms agreement authorised distributor agreement
Pricing policies We are required to purchase the We are required to purchase the designated products according to designated products according to the price list provided by Supplier the price list provided by Supplier A, which may be modified by A, which may be modified by Supplier A at any time upon Supplier A at any time upon giving prior written notice to us. giving prior written notice to us. On the other hand, Supplier A On the other hand, Supplier A may provide a non-compulsory may provide a non-compulsory pricing guidelines for us to fix the pricing guidelines for us to fix the resale price of the designated resale price of the designated products, but we are authorised to products, but we are authorised to solely and independently solely and independently determine the resale price. determine the resale price.
Payment and credit We are usually granted a credit Generally, we are required to pay terms amount of RMB3,300,000 and are 30% of the purchase price as a required to make full settlement non-refundable deposit when an on or before the 25th of the order for non-stock items is calendar month following the placed to Supplier A. We are month of invoice. usually granted a standard credit term of net 30 days, end of month, under which we are required to make full settlement within 30 days from the first day of the calendar month following the month of invoice.
Sales target We are required to meet the We are required to meet the annual annual sales target determined by sales target determined by Supplier Supplier A, failing which Supplier A, which will be reviewed from A is able to terminate the time to time during the agreement agreement by giving written term. If we fail to meet the sales notice. However, such sales target target, Supplier A has the right to is not a minimum purchase terminate the agreement by giving commitment. written notice. However, such sales target is not a minimum purchase The annual sales target for the commitment. four years ended/ending 31 December 2018, 2019, 2020 and The annual sales target for the four 2021 were approximately years ended/ending 31 December RMB12.0 million, RMB20.0 2018, 2019, 2020 and 2021 were million, RMB20.0 million and approximately HK$9.5 million, RMB18.0 million, respectively. HK$12.1 million, HK$10.3 million and HK$11.6 million, respectively.
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PRC authorised distributor Hong Kong and Macau Principal terms agreement authorised distributor agreement
Quality assurance Supplier A warrants that the Supplier A warrants that the and warranty designated products are new and designated products are free of of good quality. If any defect in defects in material and the designated product is manufacture at the time of discovered, we will mainly resort shipment. If any defect in the to negotiation. If the problem designated product is discovered, cannot be solved by negotiation, Supplier A may solely decide to we may engage an independent either (i) repair the defective third party for inspection and products; (ii) replace the defective assessment of the defective products; or (iii) refund the product. purchase price.
Product return No product return arrangement. Supplier A provides a set of standard product return policy, under which we can only return the designated products when (i) Supplier A’s personnel misinterpreted our orders and we inform Supplier A within 60 days after receipt of the products; or (ii) we made an error in ordering and request that the products be returned for credit within 60 days after receipt of the products. In the latter situation, we are required to keep the products in full packages and in saleable condition based on appearance and quality while Supplier A reserves the right to review and determine the acceptance of the return of products.
Use of intellectual We are granted the limited We are granted the limited property rights permission to use the trademarks permission to use the trademarks and logos registered and owned by and logos registered and owned by Supplier A in connection with our Supplier A in connection with our resale and distribution of the resale and distribution of the designated products in the designated products in the designated distribution area during designated distribution area during the agreement term. the agreement term.
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PRC authorised distributor Hong Kong and Macau Principal terms agreement authorised distributor agreement
Conditions for The agreement can be terminated The agreement can be terminated terminating the upon expiration or the occurrence upon expiration or the occurrence agreement of any of the events stated in the of any of the events stated in the termination clause. For example, termination clause. For example, when we commit any breach of when we commit any breach of the agreement and fail to rectify the agreement or when we fail to within one month after receiving meet the annual sales target. written notification from Supplier A or when we fail to meet the annual sales target.
As the ownership of the products we purchased during the term of the authorised distributor agreements has been transferred to our Group and given that the authorised distributor agreements do not stipulate that we are prohibited from selling unsold inventory after the expiry or termination of distribution rights, we are allowed to sell any unsold inventory despite such expiry or termination.
Save and except for (i) the year ended 31 December 2019 in the PRC as well as Hong Kong and Macau; and (ii) the year ended 31 December 2020 in the PRC, we were able to meet the annual sales targets as stipulated in the relevant authorised distributor agreements with Supplier A during the Track Record Period and up to the Latest Practicable Date. Given that (i) such annual sales targets are not minimum purchase commitments; (ii) all the authorised distributor agreements are renewed on an annual basis; and (iii) we have an established business relationship with Supplier A since 1999 and we continued to enter into such authorised distributor agreements with Supplier A in 2020 and 2021 despite that the relevant sales targets were not fulfilled in full, our Directors are of the view that such shortfalls in the sales targets would not have any material impacts on our business operations and financial performance.
To the best knowledge of our Directors, the relevant parties to the authorised distributor agreements did not report any material breach during the Track Record Period and up to the Latest Practicable Date.
Major suppliers
During each of the three years ended 31 March 2019, 2020 and 2021, our five largest suppliers, who were suppliers of various materials in general and Independent Third Parties, accounted in aggregate for approximately 42.5%, 38.7% and 37.3% of our total purchases, respectively. For the same financial years or period, the largest supplier accounted for approximately 14.5%, 14.8% and 12.1% of our total purchases, respectively.
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The following sets out the background of and our business relationship with our five largest suppliers during the Track Record Period.
For the year ended 31 March 2019
Approximate Business with Type of products Purchases percentage to our supplier purchased by our attributable to the purchases Payment commenced Rank Supplier Group the supplier of our Group Credit terms method since HK$’000 %
1 Supplier A Decorative films and 29,851 14.5 25-60 days Bank transfer 1999 functional films and cheque 2 Supplier B Elevator cabin 15,768 7.6 60 days Bank transfer 2000 components 3 Supplier C Stainless steel materials 14,902 7.2 30 days Bank transfer 2008 4 Supplier G Stainless steel materials 14,228 6.9 Payment before Bank transfer 2018 delivery 5 Supplier D Elevator cabin 12,938 6.3 60 days Bank transfer 2014 components Five largest suppliers combined 87,687 42.5 All other suppliers 118,754 57.5 Total purchases 206,441 100.0
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For the year ended 31 March 2020
Approximate Business with Type of products Purchases percentage to our suppliers purchased by our attributable to the purchases Payment commenced Rank Supplier Group the supplier of our Group Credit terms method since HK$’000 %
1 Supplier A Decorative films and 30,040 14.8 25-60 days Bank transfer 1999 functional films and cheque 2 Supplier B Elevator cabin 16,291 8.0 60 days Bank transfer 2000 components 3 Supplier E Stainless steel materials 11,277 5.5 30-60 days Bank transfer 2016 4 Supplier C Stainless steel materials 11,073 5.5 30 days Bank transfer 2008 5 Supplier G Stainless steel materials 9,933 4.9 Payment before Bank transfer 2018 delivery Five largest suppliers combined 78,614 38.7 All other suppliers 124,551 61.3 Total purchases 203,165 100.0
For the year ended 31 March 2021
Approximate Business with Type of products Purchases percentage to our suppliers purchased by our attributable to the purchases Payment commenced Rank Supplier Group the supplier of our Group Credit terms method since HK$’000 %
1 Supplier A Decorative films and 27,725 12.1 25-60 days Bank transfer 1999 functional films and cheque 2 Supplier E Stainless steel materials 20,973 9.2 30-60 days Bank transfer 2016 3 Supplier B Elevator cabin 14,897 6.5 60 days Bank transfer 2000 components 4 Supplier F Elevator cabin 11,281 4.9 60 days Bank transfer 2007 components 5 Supplier H Stainless steel materials 10,508 4.6 30-50 days Bank transfer 2017
Five largest suppliers combined 85,384 37.3 All other suppliers 143,466 62.7 Total purchases 228,850 100.0
Supplier A consists of a number of companies within the same group, the parent company of which is listed on the New York Stock Exchange and the SIX Swiss Exchange. The principal activities of the group involve product development, manufacturing and marketing, with a focus on (i) safety and industrial business; (ii) transportation and electronics business; (iii) health care business; and (iv) consumer business. According to its published annual report, the group’s revenue and net profit for the year ended 31 December 2020 were approximately US$32,184.0 million and approximately US$5,388.0 million, respectively.
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Supplier B, which is also our Customer A, consists of a number of companies within the same group, the parent company of which is listed on the Tokyo Stock Exchange. The principal activities of the group involve supplying elevators and escalators, power products, railway, automotive products, home appliances, industrial equipment and information technology products. For further details of Customer A, please refer to the paragraph headed “Major customers” in this section.
Supplier C is a private company registered in the PRC, with a paid-up capital of US$590,000. Its principal activities involve manufacture and processing of stainless steel and other metal materials.
Supplier D consists of two private companies registered in the PRC, both with a registered capital of RMB500,000. The principal activities of both of the companies involve (i) manufacture of metal structure, metal kitchen utensils, metal tableware and utensil; (ii) manufacture of construction and furniture metal parts; (iii) manufacture of metal door and window; (iv) manufacture of elevator, escalator and lifter; and (v) wholesale of metal products and wholesale trade of commodities.
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Supplier E consists of two private companies registered in the PRC, with a paid-up capital of RMB500,000 and RMB5,000,000 respectively. Their principal activities involve sales of stainless steel, metal materials and products, and hardware products.
Supplier F, which is also our Customer E, consists of a number of companies within the same group, the parent company of which is listed on the Shanghai Stock Exchange. The principal activities of the group involve design, manufacture, installation and maintenance of elevators and escalators, and provision of transportation services. The parent company of Supplier F is also a minority shareholder of certain members of Customer A and Supplier B. For further details of Customer E, please refer to the paragraph headed “Major customers” in this section.
Supplier G is a private company registered in the PRC, with a registered capital of RMB1,000,000. Its principal activities involve sales of stainless steel and metal materials. We became acquainted with Supplier G in 2018 through a salesman of one of our former suppliers who subsequently worked for Supplier G. Given that Supplier G provided similar stainless steel materials to us at a relatively lower price than that of such former supplier, over time we changed to place our procurement order with Supplier G since 2018. We did not have any business relationship with such former supplier since late 2018. The increase in our purchases from approximately HK$5.0 million attributable to such former supplier during the year ended 31 March 2018 to approximately HK$14.2 million attributable to Supplier G during the year ended 31 March 2019 was primarily due to (i) the increase in our revenue from approximately HK$321.7 million to approximately HK$396.9 million during the respective period; and (ii) the decrease in our purchases in stainless steel materials attributable to another supplier from approximately HK$11.3 million to approximately HK$3.2 million, during the same period. To the best of our Directors’ knowledge, information and belief having made reasonable enquiries, there is no past or present relationships (including, without limitation, business, employment, family, trust, financing, fund flow or otherwise) between Supplier G and the Company, including their respective subsidiaries, shareholders, directors, senior management or any of their associates.
Supplier H is a private company registered in the PRC, with a registered capital of RMB2,400,000. Its principal involve sales of commercial and material supplies.
During each of the three years ended 31 March 2019, 2020 and 2021, each of our five largest suppliers was an Independent Third Party, respectively.
To the best knowledge and belief of our Directors, after making reasonable enquiries, none of our Directors, their respective close associates or any Shareholder (whom to the knowledge of our Directors owns more than 5% of our issued share capital) had any interest in any of our five largest suppliers during the Track Record Period.
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INVENTORY
Our inventory includes direct materials, work-in-progress and finished goods. The table below sets out the breakdown of our inventories as at 31 March 2019, 31 March 2020 and 31 March 2021:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Direct materials 51,203 55,863 65,226 Work-in-progress 5,372 3,148 4,610 Finished goods 8,872 5,646 5,584
65,447 64,657 75,420
Inventories control
We generally source raw materials and consumables when our customers place their purchase orders to avoid excessive procurement and wastage. Upon receipt of purchase orders or sales confirmations, our sales and marketing team will notify the production team
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BUSINESS with production orders and the ERP system will then generate a production task with detailed material list for production. However, we also keep a certain amount of raw materials and consumables, which are mainly stainless steel materials, to cater for our customers’ demands on urgent basis. Our inventory is primarily stored in the warehouse of the Guangzhou Plant and Suzhou Workshop.
For the three years ended 31 March 2019, 2020 and 2021, our inventory turnover days were approximately 87.6 days, 86.8 days and 86.8 days, respectively. For details of inventory analysis, please refer to the section headed “Financial Information – Analysis of selected statement of financial position items – Inventories” in this document.
We regularly monitor our inventory levels and conduct comprehensive physical stock take annually to ensure the accuracy of our inventory records. This information will be reviewed by our senior management to ensure that we are adequately funded and appropriately stocked with inventory.
RESEARCH AND DEVELOPMENT
During the Track Record Period, members of our senior management, sales and marketing team as well as research and development team have, from time to time, involved in the product design and development. Our Directors are of the view that elevator cabin products and decorative stainless steel products are susceptible to changes in market trends and demands. In order to keep ourselves abreast of the evolving trends and cater for customers’ demands, our Group has invested in research and development activities continuously as we believe that it enables us to respond to and anticipate changes in the industry and the market environment in a timely manner and enhance our competitiveness. During the Track Record Period, our research and development expenses amounted to approximately HK$15.5 million, HK$12.4 million and HK$13.3 million, respectively. Our research and development expenses primarily consisted of employee benefit expenses for research and development staff and raw materials consumed for conducting research and development activities. Our continuous commitment is evidenced by the recognition of Cobelco GZ as a high-and-new technology enterprise（高新技術企業）since 2017.
As at the Latest Practicable Date, our research and development team consisted of over 40 personnel, a majority of which had diploma or higher degrees. Our research and development team is led by Mr. Poon Ka Cheuk, our deputy general manager and a member of our senior management, who has over 14 years of experience in the ECMD industry and over 17 years of experience in the field of decorative stainless steel trading and manufacturing. Mr. Poon obtained a Bachelor of Engineering in Mechanical Engineering degree from The Hong Kong University of Science and Technology in 2002.
We believe that our product design and development capabilities are important to our future growth and we have also been able to successfully implement our product design and development results into marketable products and technical know-hows. Our product design and development efforts focus on the following areas:
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Development of new models for our products
We prioritise our efforts on expanding our product portfolio and launching more new models or specifications of surface patterns, colours and decoration of our products to differentiate ourselves from other manufacturers. Over the years, we have successfully developed a wide range of new models with different features and registered the patents in the PRC, including:
¼ Illuminated lighting board （發光照明板） (Patent registration number: ZL201110032094.7)
¼ Elevator cabin with solid wood decoration（實木裝飾電梯轎廂）(Patent registration number: ZL201220749545.9)
¼ A type of elevator cabin wall structure（一種電梯轎廂壁板結構）(Patent registration number: ZL201620828288.6)
¼ A type of elevator cabin ceiling structure （一種電梯轎廂頂部結構） (Patent registration number: ZL201620830212.7)
¼ A type of elevator control device（一種電梯控制裝置）(Patent registration number: ZL201620828311.1)
¼ A type of new elevator cabin floor door device（一種新型電梯轎廂層門裝置）(Patent registration number: ZL201620834385.6)
¼ A type of new decorative structure of elevator cabin（一種新型電梯轎廂裝飾結構） (Patent registration number: ZL201620831023.1)
¼ A type of joining and installation structure for the decorative sheets on building pillars （一種建築物柱體外飾板拼接安裝結構） (Patent registration number: ZL201921014272.1)
Improvement of production process
We continue to invest in improving our existing machines and equipment to streamline our production process with an aim to improve our production capability and efficiency. Patents registered by us in the PRC include:
¼ Elevator cabin decoration materials hairline machine （電梯轎廂裝飾材料髮紋機） (Patent registration number: ZL201220749625.4)
¼ A type of engraving machine （一種雕刻機） (Patent registration number: ZL201620830214.6)
¼ A type of film laminating workstation （一種貼膜工作臺） (Patent registration number: ZL201620830331.2)
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¼ A type of stone polishing machine with eight working heads（一種用於石材八頭拋 光機）(Patent registration number: ZL201620834436.5)
¼ A type of neutral salt spray testing equipment （一種中性鹽霧測試設備） (Patent registration number: ZL201620830335.0)
¼ A type of UV weathering test equipment （一種紫外線耐候試驗設備） (Patent registration number: ZL201620830978.5)
¼ A type of automatic materials loading and cutting device for metal fabrication（一種 用於鈑金生產的切割自動上料裝置）(Patent registration number: ZL201811567427.4)
¼ A type of hairline finishing system and technique for surface pattern processing of metal sheets （一種金屬板材拉絲加工系統及該系統的拉絲工藝）(Patent registration number: ZL201810769815.4)
¼ A type of bead blasting equipment （一種噴砂設備） (Patent registration number: ZL201920886518.8)
¼ A type of bead removal machine （一種掃砂機） (Patent registration number: ZL201920963898.0)
¼ A type of stiffening rib compressing device （一種加強筋壓緊裝置） (Patent registration number: ZL201921014271.7)
¼ A type of assembled mould for bending the four edges of decorative sheets（一種 電梯飾板四邊折彎組合模具）(Patent registration number: ZL201921014268.5)
¼ A type of high-speed film removal device（一種快速撕膜裝置）(Patent registration number: ZL201921014674.1)
¼ A type of decorative sheets compressing device in the assembly line（一種飾板組裝 線覆膜壓緊裝置）(Patent registration number: ZL201920963902.3)
¼ A type of rotatable rack （一種轉架） (Patent registration number: ZL201921409991.3)
¼ A type of ultrasonic cleaning tank（一種超聲波清洗池）(Patent registration number: ZL201921409985.8)
We develop new models for products based on feedbacks we received from our customers, research and analysis of market trend. We closely collaborate with our customers in the product design and development process, which we believe has helped us identify potential manufacturing and design problems at an early stage and avoid costly redesign at a later stage. Such product design and development capabilities enable us to customise elevator cabin products and decorative stainless steel products in order to best meet the demand and needs of our customers and their end-users.
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TRANSFER PRICING ARRANGEMENT
In the course of business, our subsidiaries in Hong Kong, namely Cobelco HK, Cobelco Industrial and Sitami Film (collectively the “Hong Kong Distribution Entities”), purchase products from Cobelco GZ for onward sale to customers in Hong Kong. The manufacturing and quality of the products is considered a key value driver for our Group, and the quality control function is provided by Cobelco GZ. Our Hong Kong Distribution Entities may also be engaged locally by third party customers to perform some installation services accompanying the sale of our products. Both our Hong Kong Distribution Entities and Cobelco GZ have their own sales and distribution team responsible for their own unrelated customers located in Hong Kong and the PRC, respectively. In manufacturing the products, Cobelco GZ owns and utilises its manufacturing know-how for the production of goods for sale to our Hong Kong Distribution Entities.
During the Track Record Period, the abovementioned entities conducted the following material cross-border related party transactions:
¼ sales of finished products by Cobelco GZ to Hong Kong Distribution Entities for their onward distribution to third party customers in Hong Kong; and
¼ sales of raw materials/semi-finished products by Sitami Film and Cobelco Industrial to Cobelco GZ for further processing and onward distribution of our products to third party customers in the PRC.
The abovementioned transactions are collectively referred to as the “Covered Transactions”.
We have engaged an independent tax consultant to conduct a transfer pricing review on the Covered Transactions during the Track Record Period based on, among other things, the applicable laws and regulations on transfer pricing in the PRC and Hong Kong and the OECD Guidelines. Based on the transfer pricing review:
Sales of products to Cobelco HK
¼ For the year ended 31 March 2019 and the year ended 31 March 2020, the segmented operating margins were above the arm’s length range established by companies considered as comparable to Cobelco HK. As no tax disadvantage was created from a Hong Kong transfer pricing perspective. Cobelco HK should be considered to have satisfied the arm’s length principle from the Hong Kong perspective.
¼ However the PRC tax authority may consider Cobelco HK to be overcompensated for the year ended 31 March 2019 and the year ended 31 March 2020, and may impose transfer pricing adjustments on Cobelco GZ. Given that Cobelco GZ is
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subject to preferential enterprise Income Tax rate at 15%, which is lower than the Hong Kong Profits Tax rate of 16.5%. Cobelco HK may be in a position to apply to the IRD for relief from double taxation in accordance with the PRC-Hong Kong Double Taxation Agreement. Hence any transfer pricing adjustments that may be imposed by the PRC tax authority on Cobelco GZ should not result in additional tax overall.
¼ For the year ended 31 March 2021, the segmented operating margin was below the arm’s length range established by companies considered as comparable to Cobelco HK. As such, Cobelco HK may be considered to have not satisfied with the arm’s length principle pursuant to the relevant regulations in Hong Kong and the OECD Guidelines, and may thus be subject to transfer pricing adjustment from the IRD.
¼ Cobelco GZ, on the other hand, may be in a position to apply to the PRC tax authority for relief from double taxation in accordance with the PRC-Hong Kong Double Taxation Agreement.
¼ Based on the segmented financials of Cobelco HK, the potential transfer pricing exposure for the year ended 31 March 2021 would be approximately HK$2,277.
Sales of products to Cobelco Industrial
¼ For the three years ended 31 March 2019, 2020 and 2021, the segmented operating margin were below the arm’s length range established by companies considered as comparable to Cobelco Industrial. As such, Cobelco Industrial may be considered to have not satisfied with the arm’s length principle pursuant to the relevant regulations in Hong Kong and the OECD Guidelines, and may thus be subject to transfer pricing adjustment from the IRD.
¼ Cobelco GZ, on the other hand, may be in a position to apply to the PRC tax authority for relief from double taxation in accordance with the PRC-Hong Kong Double Taxation Agreement.
¼ Based on the segmented financials of Cobelco Industrial, the potential transfer pricing exposure for the three years ended 31 March 2019, 2020 and 2021 would be approximately HK$11,375.
Sales of products to Sitami Film
¼ For the three years ended 31 March 2019, 2020 and 2021, the segmented operating margin were above the arm’s length range established by companies considered as comparable to Sitami Film. This would not be considered disadvantageous from a Hong Kong transfer pricing perspective and the risk of any adjustments to be imposed by the IRD may be considered as low.
¼ However the PRC tax authority may consider Sitami Film to be overcompensated for the year ended 31 March 2019, 2020 and 2021, and may impose transfer pricing adjustments on Cobelco GZ. Given that Cobelco GZ is subject to preferential Enterprise Income Tax rate at 15%, which is lower than the Hong Kong Profit Tax rate of 16.5%. Sitami Film may be in a position to apply to the IRD for relief from double taxation in accordance with the PRC-Hong Kong
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Double Taxation Agreement. Hence, any transfer pricing adjustments that may be imposed by the PRC tax authority on Cobelco GZ should not result in additional tax overall.
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With respect to the preparation of local transfer pricing documentation, the HK Distribution Entities and Cobelco GZ were exempt from the contemporaneous transfer pricing documentation requirement in Hong Kong and the PRC respectively, during the Track Record Period.
Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, we were not aware of any inquiries, audit or investigation by any tax authority in Hong Kong and the PRC with respect to the abovementioned transactions.
Our Directors confirm that our transfer pricing arrangement is part of a normal trading operation and has been conducted on normal commercial terms. Nevertheless, we may be subsequently challenged by the relevant tax authorities on the appropriateness of these transactions or that the relevant regulations or standards governing such arrangement may be subject to future changes. Please also refer to the section headed “Risk Factors – Risk relating to our business – Our operations may be subject to transfer pricing adjustments by competent authorities” in this document.
We have also engaged an internal control consultant to review, among others, the controls on tax management and identified certain major findings and provided us with the following recommendations:
Major findings Recommendations
1. Tax provision was recorded yearly in Accounting department should estimate according to the tax computation. the profits tax and the provision to be Director would review the calculation made at the end of each quarter. The once he received the tax computation profits tax calculation should be reviewed and prepared voucher. It may not be by appropriate personnel before recording sufficient for a [REDACTED] any tax provision. company.
2. The Company did not perform any Accounting department should assess its assessment on its deferred tax position. deferred tax position every half year. The deferred tax calculation should be reviewed by the appropriate person before recording any deferred tax assets/ liabilities.
In addition to the abovementioned measures, we will adopt the following measures to ensure our compliance with the relevant transfer pricing laws and regulations in jurisdictions where we operate:
(i) we will identify updates on transfer pricing laws and regulations and assessment of related risks on our Group and regularly review our transfer pricing policy and exposure; and
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(ii) Mr. SY Chiu, an executive Director and our chief executive officer, will monitor our pricing policy of intra-group transactions to ensure that such transactions are made on arm’s length principle.
HEDGING
During the Track Record Period, our Group did not engage in any hedging activity.
MARKET AND COMPETITION
Our principal markets are the PRC and Hong Kong, and our principal products mainly consisted of elevator cabin products and decorative stainless steel products.
According to the Ipsos Report, the ECMD industry in the PRC is fragmented with over 1,000 market participants in the industry and approximately 5% of the market participants attain the ability to manufacture decorative stainless steel. Competition is relatively moderate given that the elevator market in the PRC is mainly dominated by the foreign elevator companies who contribute to the majority of market share in terms of revenue, and these elevator companies generate a substantial portion of revenue for the market participants in the ECMD industry. According to the Ipsos Report, the top five elevator companies in the PRC in 2019 were all foreign elevator companies including Hitachi Elevator (China) Co., Ltd., KONE Elevators Co., Ltd. and Shanghai Mitsubishi Elevator Co., Ltd. Major market participants of the ECMD industry are often business partners of the top five elevator companies. Besides, there are a lot of the ECMD companies in different scales facilitating numerous domestic elevator companies in the PRC. The top five ECMD companies accounted for approximately 9.1% of the industry in terms of revenue in 2019. Our Group recorded a revenue of approximately HK$260.0 million in the year ended 31 March 2020, ranked fourth in the ECMD industry in the PRC accounted for approximately 1.4% of the total market share in terms of revenue in 2019. The ECMD industry in the PRC typically competes on the product design and development capabilities and ability to handle different materials, existing customer portfolio, track record as well as the location of the production plants.
The main entry barriers for the ECMD industry in the PRC include (i) high initial capital investment; (ii) well established relationship with elevator companies; and (iii) high product design and development skills and flexibility requirement.
We believe that our Group is well-positioned to capture the increasing demand in the ECMD industry in the PRC given our established strong presence in the industry with long-term relationship with our major customers and suppliers, our strong product design and development capabilities, our production facilities for comprehensive manufacture of diversified product portfolio. For details, please refer to the paragraph headed “Competitive strengths” in this section.
For further details of the relevant markets in which we operate, please refer to the section headed “Industry Overview” in this document.
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AWARDS AND CERTIFICATIONS
Over the past years, we have received various awards and certifications, among which are the following:
Awards and Valid period/ certifications grant date Awarding authority Entity awarded
High-and-new (1) Three years Guangdong Provincial Cobelco GZ technology from 1 Science and Technology enterprise January Department, certificate 2017 Guangdong Provincial （高新技術企業 Finance Department, 證書） (2) Three years Guangdong National from 1 Taxation Administration, January Guangdong Local 2020(Note) Taxation Administration
ISO 9001: 2015 16 July 2015 to Zhongjian Certification Cobelco GZ 10 May 2024 Co., Ltd.
ISO 14001: 2015 25 July 2017 to Zhongjian Certification Cobelco GZ (The relative 15 June 2023 Co., Ltd. management activities of processing and service of elevator decoration)
OHSAS 18001: 25 July 2017 to Zhongjian Certification Cobelco GZ 2007 (The 30 September Co., Ltd. relative 2021 management activities of processing and service of elevator decoration)
Note:
As at the Latest Practicable Date, we were granted the high-and-new technology enterprise certificate.
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ENVIRONMENTAL PROTECTION
We are subject to various laws and regulations regarding environmental protection, health and workplace safety in the PRC. We review the environmental protection laws and regulations on a regular basis to ensure due compliance with the applicable laws and regulations. For instance, enterprises shall adopt effective measures to prevent and control any pollutions and harms caused to the environment pursuant to the applicable laws and regulations, including but not limited to the Environmental Protection Law of the PRC（《中
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華人民共和國環境保護法》）. For details, please refer to the section headed “Regulatory Overview – The PRC – Laws and regulations in relation to environmental protection” in this document.
During the production process of our products, there are noise and certain waste generated. Our Group has in place an environmental management system and standard procedures to manage, review, treat and reduce the noise pollution and emission of waste in accordance with national and local environmental laws and regulations.
In addition, we will monitor the industrial waste water to be discharged and neutralise any acidic waste water with chemicals if necessary. We have engaged an external company to handle the dangerous waste created during production. As at the Latest Practicable Date, we have completed the registration for discharging certain fixed pollution sources including waste water and gas with a term from 24 March 2020 to 23 March 2025. To the best knowledge of our Directors, during the Track Record Period and up to the Latest Practicable Date, we had no material non-compliance or violations of environmental protection laws and regulations that would materially and adversely affect our business operations and financial conditions. For the three years ended 31 March 2019, 2020 and 2021, we incurred approximately HK$0.2 million, HK$0.1 million and HK$0.3 million, respectively, in relation to the cost of compliance with applicable environmental protection laws and regulations. Assuming there are no material changes in applicable environmental laws and regulations, our Directors expect our Group to incur similar level of cost in connection with the compliance with applicable environmental protections laws and regulations in the foreseeable future.
RISK MANAGEMENT AND INTERNAL CONTROL
Our Board is responsible for establishing our internal control and risk management systems and reviewing their effectiveness. We have procedures for maintaining our internal control and risk management systems, covering areas such as business operations, corporate governance, management, legal matters, finance and audit. We believe that our internal control and risk management systems are sufficient in terms of comprehensiveness, practicability and effectiveness.
In order to strengthen our internal control and risk management systems, and to ensure compliance with the applicable laws and regulations (including the Listing Rules) upon [REDACTED], we have adopted the following additional measures:
(i) our Board and our audit committee of the Board will continuously monitor, evaluate and review our internal control and risk management systems to ensure compliance with the applicable legal and regulatory requirements and will refine and enhance our internal control and risk management systems as appropriate;
(ii) Mr. SY Chiu, our executive Director, will be responsible for overseeing our internal control and risk management systems in general and will act as the chief coordinator of matters relating to legal, regulatory and financial reporting compliance. Upon receipt of any query or report relating to legal, regulatory and financial reporting compliance, Mr. SY Chiu will look into the matter and, if
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considered necessary or appropriate, seek advice, guidance or recommendation from professional advisers and report to our Board. For the qualifications and experience of Mr. SY Chiu, please refer to the section headed “Directors, Senior Management and Employees” in this document;
(iii) we have appointed Red Sun Capital Limited as our compliance adviser upon [REDACTED] to advise us on matters relating to compliance with the Listing Rules;
(iv) we will continue to identify and assess our operational, business and financial risks on an ongoing basis, implement sufficient measures to minimise and mitigate such risks, and ensure that all such measures remain effective;
(v) if necessary, we may arrange our Directors, members of our senior management and relevant employees to attend training on the legal and regulatory requirements applicable to our business operations from time to time; and
(vi) if necessary, we may consider appointing external Hong Kong legal advisers to advise us on matters relating to compliance with the Listing Rules and the applicable Hong Kong laws and regulations.
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PROPERTIES
Owned properties
As at the Latest Practicable Date, we owned the following properties in the PRC:
Approximate Registered owner gross floor as at Latest Location Usage area Practicable Date sq.m.
中國廣東省台山市水步鎮工業大道 Industrial 24,311 Sitami GD 168號 (No. 168 Industrial (For the Avenue, Shuibu Town, construction Taishan, Guangdong Province, of our the PRC*) (the “Taishan Jiangmen Land”) Plant)
中國廣東省廣州市番禺區石樓鎮石 Staff quarter 384 Cobelco GZ 樓碧桂園觀蓮街6號1701 (Unit 1701, No. 6 Guanlian Street, Shilou Country Garden, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
中國廣東省廣州市天河區花城大道 Staff quarter 200 Cobelco GZ 132號3601房 (Room 3601, No. 132 Huacheng Avenue, Tianhe District, Guangzhou City, Guangdong Province, the PRC*)
中國廣東省廣州市天河區花城大道 Car park Not Cobelco GZ 134號地下2層B2132車位 applicable (Car parking space No. B2132, Basement Level 2, No. 134 Huacheng Avenue, Tianhe District, Guangzhou City, Guangdong Province, the PRC*)
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Taishan Land
Overview
In accordance with the land use rights transfer contract dated 16 January 2019 entered into between Taishan Bureau of Land and Resources (currently known as Taishan Natural Resources Bureau) and Sitami GD (the “Taishan Land Contract”), we shall commence the construction prior to 16 January 2020, failure of commencement from 16 January 2020 or the postponed date agreed by the Taishan Land Contract parties would result in our liquidated damages obligated to pay to Taishan Natural Resources Bureau in the amount equal to 1% of the total amount of land use right grant fee which amounted to RMB 9,120 for each day of delay. Based on written confirmation issued by the Taishan Natural Resources Bureau, the commencement date of construction as provided in the Taishan Land Contract was extended to 16 April 2020 (the “Extended Term”). As advised by our PRC Legal Advisers, for the aforesaid breach of the Taishan Land Contract, Sitami GD has a risk of being subject to liquidated damages, and Sitami GD shall pay liquidated damages upon the receipt of the notice from Taishan Natural Resources Bureau with respect to its default in the contract and payment of liquidated damages. Up to the Latest Practicable Date, we have not received any notice in this regard. Nonetheless, our Group has made relevant provision of approximately HK$0.8 million and HK$3.0 million for the years ended 31 March 2020 and 2021, respectively.
Since we obtained the real property ownership certificate for the use right of Taishan Land in March 2019, we have been working with different external parties and relevant government authorities continuously in preparation for the establishment of our Jiangmen Plant. Subsequently, we obtained the building permits（建設工程規劃許可證）for the Taishan Land in September 2019 and construction permits （建築工程施工許可證） for the phase I expansion of our Jiangmen Plant in June 2020. However, as progress was further delayed by the Outbreak, our Group was allowed to commence the construction in accordance with the relevant permits instead. However, for the sake of prudence, we also submitted the requisite report form on the environmental effects of the construction as advised by our PRC Legal Advisers and obtained the approval from the relevant government authority in late October 2020. We commenced the construction for the phase I expansion of our Jiangmen Plant in late October 2020 upon we received the aforesaid permits and approvals.
Directors’ view on the breach of the Taishan Land Contract
According to the Urban Real Estate Administration Law of the PRC（《中華人民共和國城 市房地產管理法》）and the Measures for Disposal of Unused Land（《閒置土地處置辦法》）,we are required to develop the Taishan Land in accordance with the use of land and period of construction as prescribed by the Taishan Land Contract. If we are not able to commence the construction of the Taishan Land for more than one year from the commencement date stipulated in the Taishan Land Contract, the competent authority may impose an idle land fee of up to 20% of the land use right grant fee on it. If we are not able to commence construction of the Taishan Land for more than two years, the Taishan Land may be subject to forfeiture by the competent authority unless the delay is caused by government actions or force majeure. As advised by our PRC Legal Advisers, given the commencement date
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Having considered (i) the view of our PRC Legal Advisers; and (ii) the construction of Jiangmen Plant has already commenced in late October 2020, the Directors are of the view that our Group will not subject to any further material penalty for the delay in commencement and completion of the construction of our Jiangmen Plant.
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Leased properties
As at the Latest Practicable Date, we leased the following properties in Hong Kong:
Approximate gross floor Term of tenancy/ Location Usage area licence Annual rental sq.ft. HK$
Room 2701, 27th Floor, Office 1,895 From 1 September 723,180 Tung Wai Commercial 2020 to 31 Building, 109-111 August 2022 Gloucester Road, Wan Chai, Hong Kong
Unit B1, 2nd Floor, Warehouse 2,099 From 1 August 231,600 Rodeo Centre, 73-79 2020 to 31 July Larch Street, Tai Kok 2021 Tsui, Kowloon, Hong Kong
Unit 3 and 3A, Ground Warehouse 1,599 From 1 September 648,000 Floor, Cheung Fat 2019 to 31 Industrial Building, August 2022 64-76 Larch Street, Tai Kok Tsui, Kowloon, Hong Kong
Flat A, 32nd Floor, Staff quarter 1,364 From 1 April 960,000 Tower 8B and Car Park and car park 2020 to 31 March No. 96 on Car Park 2022 Level 7, Bel-Air No. 8, Bel-Air on the Peak, Island South, No. 8 Bel-Air Peak Avenue, Hong Kong
Car Park No. 105 Car park Not applicable From 18 February 43,200 on Car Park Level 8 2021 to 17 Bel-Air No. 8, Bel-Air February 2023 on the Peak, Island South, No. 8 Bel-Air Peak Avenue, Hong Kong
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As at the Latest Practicable Date, we leased the following properties in the PRC:
Approximate gross floor Location Usage area Term of tenancy Annual rental sq.m. RMB
Guangzhou Plant
中國廣東省廣州市番禺區石 Office, factory 4,396 From 1 June 2018 659,400 (for 樓鎮蓮花山保稅加工區靈 and warehouse to 31 May 2028 the first year 興工業區11號A及12號A and is 廠房 (Factory Buildings increased by No. 11A and 12A, 3% annually Lingxing Industrial from the Zone, Lianhuashan second year of Processing Bonded the tenancy) Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
中國廣東省廣州市番禺區石 Office, factory 22 From 1 June 2018 3,096 (for the 樓鎮蓮花山保稅加工區靈 and warehouse to 31 May 2028 first year and 興工業區11號廠房東北側 is increased by 物業 (A property at 3% annually northeast of Factory from the Building No. 11, second year of Lingxing Industrial the tenancy) Zone, Lianhuashan Processing Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
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Approximate gross floor Location Usage area Term of tenancy Annual rental sq.m. RMB
中國廣東省廣州市番禺區石 Office, factory 1,244 From 1 April 141,816 (for 樓鎮蓮花山保稅加工區靈 and warehouse 2017 to 31 March the first year 興工業區17號廠房 2027 and is (Factory Building No. increased by 17, Lingxing Industrial 3% annually Zone, Lianhuashan from the Processing Bonded second year of Area, Shilou Town, the tenancy) Panyu District, Guangzhou City, Guangdong Province, the PRC*)
中國廣東省廣州市番禺區石 Office, factory 23,805 From 1 September 2,197,644 (for 樓鎮蓮花山保稅加工區靈 and warehouse 2018 to 31 the first year 興工業區18號廠房 August 2028 and is (Factory Building No. increased by 18, Lingxing Industrial 3% annually Zone, Lianhuashan from the Processing Bonded second year of Area, Shilou Town, the tenancy) Panyu District, Guangzhou City, Guangdong Province, the PRC*) (Note)
中國廣東省廣州市番禺區石 Office, factory 4,795 From 1 June 2020 838,800 樓鎮蓮花山保稅加工區靈 and warehouse to 31 May 2021 興工業區20號B廠房 (Factory Building No. 20B, Lingxing Industrial Zone, Lianhuashan Processing Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
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Approximate gross floor Location Usage area Term of tenancy Annual rental sq.m. RMB
中國廣東省廣州市番禺區石 Warehouse 1,669 From 18 July 240,336 (for 樓鎮蓮花山保稅加工區靈 2019 to 17 July the first year 興工業區原危險品倉庫A 2029 and is 地塊 (Former increased by Dangerous Goods 3% annually Warehouse A, Lingxing from the Industrial Zone, second year of Lianhuashan Processing the tenancy) Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
中國廣東省廣州市番禺區石 Warehouse 669 From 1 August 96,384 (for the 樓鎮蓮花山保稅加工區靈 2019 to 31 July first year and 興工業區原危險品倉庫B 2029 is increased by 地塊 (Former 3% annually Dangerous Goods from the Warehouse B, Lingxing second year of Industrial Zone, the tenancy) Lianhuashan Processing Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province, the PRC*)
Note: The leased properties for our Guangzhou Plant except Factory Building No. 18 are referred below as the “Lianhuashan Properties”.
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Approximate gross floor Location Usage area Term of tenancy Annual rental sq.m. RMB
Suzhou Workshop
中國江蘇省蘇州市昆山市淀 Office, factory 3,816 From 19 January 1,323,195 山湖鎮馬家庫路6號3號廠 and warehouse 2020 to 18 房 (Factory Building January 2022 (for No. 3, 6 Majiaku Road, the central portion Dianshanhu Town, of Workshop No. Kunshan, Suzhou City, 3) Jiangsu Province, the PRC*) From 1 July 2019 to 30 June 2021 (for the south portion of Workshop No. 3)
Lianhuashan Properties
Overview
As advised by our PRC Legal Advisers, the lessor of certain of our leased properties in our Guangzhou Plant located in Lingxing Industrial Zone, Lianhuashan Processing Bonded Area, Shilou Town, Panyu District, Guangzhou City, Guangdong Province（廣東省廣州市番禺 區石樓鎮蓮花山保稅加工區靈興工業區）, with a total gross floor area of approximately 12,795 sq.m. (the “Lianhuashan Properties”), of which approximately 10,457 sq.m. are for the mixed uses as production facilities, warehouses and offices and the remaining portion of approximately 2,338 sq.m. are warehouses and other ancillary facilities, does not possess the relevant building ownership certificates. The Lianhuashan Properties represent approximately 35.0% of the total gross floor area of our Guangzhou Plant. As at the Latest Practicable Date, our production facilities in the Lianhuashan Properties were used for certain production processes for the manufacture of elevator cabin products and decorative stainless steel products.
As we do not own any of the Lianhuashan Properties, it is beyond our control to rectify the title defects. Further, pursuant to the written confirmations respectively issued by Guangzhou Municipal Panyu District Housing and Urban-Rural Construction Bureau（廣州市 番禺區住房和城鄉建設局）and Guangzhou Land Resources and Planning Commission（廣州市 國土資源和規劃委員會）in September 2019, it was confirmed that (i) the lessor legally holds the land use right of the lands where the Lianhuashan Properties are situated; (ii) the construction of the Lianhuashan Properties does not breach the construction plan of the relevant district and will not be dismantled; (iii) there are no upcoming plans to demolish or expropriate the Lianhuashan Properties in the following five years; (iv) there are no immediate plans to expropriate the relevant lands in the following five years; and (v) our
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Group is allowed to continue to use the Lianhuashan Properties for the existing purposes and manners, and the government authorities did not and will not impose any penalty on our Group for our use of the Lianhuashan Properties.
As advised by our PRC Legal Advisers, the abovementioned authorities are the competent government authorities governing and handling the relevant matters. Based on the above, our PRC Legal Advisers are of the opinion that the risks of the Lianhuashan Properties being demolished or expropriated, or that our Group is not permitted to use the Lianhuashan Properties in the near future, are remote.
Our Directors confirmed that as at the Latest Practicable Date, there had not been any dispute, litigation or other disagreement between the lessor of the Lianhuashan Properties and us regarding the title of the leased properties and there had not been any breach of the lease agreements by either party in respect of the leased properties. In addition, no penalty had been imposed on us in relation to the leases or the titles of the Lianhuashan Properties as at the Latest Practicable Date.
Rectification measures
In order to address the above property title defects in the future, we have in place a series of internal control guidelines which aim at ensuring compliance with relevant legal and regulatory requirements across a wide spectrum of corporate affairs, including legal compliance and approval requirements relating to property interests in the future. We are dedicated to the continual enhancement and strengthening of our corporate governance and internal control system and seek to adopt and enforce further measures and mechanisms in the future as and when appropriate to ensure a high standard of corporate governance and internal control.
On the basis of the above and taking into consideration the costs for the relocation discussed below, we intend to continue to lease the Lianhuashan Properties until we are informed that the Lianhuashan Properties will be demolished or expropriated, or that our Group is not permitted to use the Lianhuashan Properties.
We have identified certain potential properties in Guangdong Province through real estate agency as alternative options for the relocation of our production facilities in the event that the Lianhuashan Properties are to be demolished or expropriated, or that our Group is not permitted to use the Lianhuashan Properties. As at the Latest Practicable Date, we had shortlisted several potential properties for further consideration and may negotiate with the relevant landlords for formal or pre-lease agreements if and when necessary.
In the event that the Lianhuashan Properties are to be demolished or expropriated, or that our Group is not permitted to use the Lianhuashan Properties, we will need to relocate to one of the potential properties above and the relocation cost is estimated to be approximately HK$7.1 million, including but not limited to, the installation costs for electrical facilities, environmental protection facilities, fire safety facilities and ancillary production equipment, logistics expenses for relocation of existing machinery and equipment
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Potential risks with respect to the Lianhuashan Properties
Our Group has operated on the Lianhuashan Properties since 2009 and there has not been any investigation or penalty initiated by any government authorities in relation to our use of the Lianhuashan Properties. Based on the fact that we have not received any notice from the PRC Government authorities to vacate from the Lianhuashan Properties, and based further on the confirmations issued by the aforementioned government authorities, our PRC
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Legal Advisers are of the opinion that the risks of the Lianhuashan Properties being demolished or expropriated, or that our Group is not permitted to use the Lianhuashan Properties in the near future, are remote.
Save as disclosed in this section, as at the Latest Practicable Date, we did not have any owned or leased properties.
As at the Latest Practicable Date, no single property interest forming part of our Group’s non-property activities had a carrying amount of 15% or more of our total assets. Accordingly, this document is exempted from compliance with the requirements of rules 5.01A and 5.01B of the Listing Rules and the requirements of Section 342(1) and paragraph 34(2) of the Third Schedule of the Companies (Winding Up and Miscellaneous Provisions) Ordinance with respect to the requirements of the inclusion of a property valuation report in this document.
EMPLOYEES
As at the Latest Practicable Date, we had 557 full-time employees in the PRC and 30 full time employees in Hong Kong. The following table sets out a breakdown of our employees by function as at the Latest Practicable Date:
Number of Hong Kong employees
Management 5 Finance 2 Human resources and administration 5 Procurement 1 Sales and marketing 8 Logistics, warehouse and installation 8 Research and development 1
Total 30
Number of PRC employees
Management 2 Finance 11 Human resources and administration 42 Procurement 32 Production 380 Quality assurance 22 Research and development 44 Sales and marketing 24
Total 557
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Training and recruitment policies
We generally recruit our employees through job advertisements on online recruitment platforms. We also place an emphasis on the continuing education and training of our staff necessary for them to perform their functions. We provide induction and on-the-job training to our employees to enhance their technical and product knowledge including safety standards, quality assurance and control and job related skills. We also assess the available human resources on a continuous basis and will determine whether additional personnel are required to cope with our Group’s business development.
Remuneration
The remuneration package we offer to our employees includes, where applicable, salary, commission, discretionary performance-based bonuses and allowances. We determine our employees’ remuneration based on factors such as position, contribution and responsibility, working experience and skills.
Please refer to the paragraph headed “Statutory and General Information – C. Further information about our Directors and Substantial Shareholders − 1. Directors” in Appendix IV to this document for details of remuneration paid and payable to our Directors.
Welfare contribution
PRC
We are required to make social insurance and housing provident fund contributions for our employees. During the Track Record Period, we did not make social insurance and housing provident fund contributions in full for our employees. As of the Latest Practicable Date, we had not received any notification from the relevant authorities demanding additional payments of social insurance and the housing provident fund. Our PRC Legal Advisers are of the opinion that the risk of us being fined is remote provided that we will pay the underpaid amount for social insurance and housing provident fund in full in a timely manner after receiving notices from the relevant authorities requiring rectifications for such non-compliance. Please refer to the paragraph headed “Regulatory compliance” in this section for further details.
Hong Kong
We maintain employees’ compensation insurance as required under the Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong) for our employees in Hong Kong.
We also participate in a provident fund scheme registered under the Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong) for all our eligible employees in Hong Kong. As required under the ordinance, 5% of our employees’ relevant income per month is contributed to the provident fund, subject to a maximum of HK$1,500 per employee per month.
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Employee relationship
Our Group believes that we had maintained good relationship with our employees, and had not experienced any significant labour dispute over the Track Record Period.
During the Track Record Period, our Group had not experienced any material work stoppage or labour strike and had not experienced any significant difficulty in recruiting or retaining qualified staff. Our employees in the PRC had established a labour union for fostering our relationship with employees.
Health and work safety
We carry out our production in the PRC. We make necessary arrangements and provide internal guidelines on work safety for our employees to increase their awareness of safety in the workplace and to ensure that our operations are in compliance with applicable work safety laws and regulations. As confirmed by our PRC Legal Advisers, during the Track Record Period, we had complied with the applicable work safety related regulations of the PRC in all material aspects.
During the Track Record Period and up to the Latest Practicable Date, we did not receive any material claims of work-related injuries of our employees.
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LICENCES, PERMITS AND APPROVALS
We are subject to various laws, rules and regulations with regard to our business operations, and are required to obtain certain licences, approvals and permits from relevant government entities to operate our business. For details, please refer to the section headed “Regulatory Overview” in this document. The table below sets forth the key licences, permits and approvals necessary for our operations:
Licences, permits Valid period/ and approvals issuance date Issuing authority Entity granted
Business 6 September 2005 廣州市番禺區工商行 Cobelco GZ registration to 6 September 政管理局 certificate 2023 (Guangzhou City Panyu District Administration for Industry and Commerce*)
Business 31 August 2017 to 江門市市場監督 Sitami GD registration 31 August 2057 管理局 (Jiangmen certificate City Administration for Market Regulation*)
Business 9 February 2018 昆山市市場監督 Cobelco KS registration (Note) 管理局 (Kunshan certificate City Administration for Market Regulation*)
Certificate of 6 May 2015 (Note) 番禺海關 (Panyu Cobelco GZ customs Customs*) declaration entity registration
Special equipment 7 September 2018 廣州市番禺區市場和 Cobelco GZ utilisation (Note) 質量監督管理局 registration (Guangzhou City certificate Panyu District Administration for Market Regulation*)
Note: Long-term or no expiry date as stated on the relevant certificates.
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BUSINESS
As confirmed by our PRC Legal Advisers, each of our operating subsidiaries in the PRC has obtained the requisite licences, permits and approvals in all material aspects which are necessary for its respective operations.
Our Directors confirm, and our PRC Legal Advisers concur, that during the Track Record Period and up to the Latest Practicable Date, our Group had not experienced any difficulties in renewing any of our licences, permits and approvals which are necessary for our operations.
INTELLECTUAL PROPERTY RIGHTS
Our intellectual property rights and production know-how in the production process are crucial to our success. We rely on a combination of laws and regulations including but not limited to patent and trademark laws, as well as employment contracts entered into between our Group and our employees, to protect our intellectual property rights. Pursuant to the confidentiality clause in such employment contracts, our employees are required to keep all such information relating to our trade secrets and intellectual property rights in strict confidence. Our PRC Legal Advisers confirm that such obligations imposed on our employees are enforceable and legally binding under the PRC laws.
As at the Latest Practicable Date, we were the registered owner of 24 patents, three trademarks and one software copyright in the PRC, and we were also applying for the registration of one patent in the PRC.
As at the Latest Practicable Date, we were the registered owner of two trademarks in Hong Kong and six domain names.
Detailed information of our intellectual property rights is set out in the section headed “Statutory and General Information – B. Further information about the business of our Group – 2. Intellectual property rights” in Appendix IV to this document.
During the Track Record Period and up to the Latest Practicable Date, to the best knowledge of our Directors after having made all reasonable enquiries, we had not infringed or had not alleged to infringe any intellectual property rights owned by third parties and we had not been subject to any material intellectual property claims against us or involved in any material intellectual property dispute.
INSURANCE
We maintain property all risks insurance for our inventories, property, plant and equipment against certain risks of physical loss or damage and employees’ compensation insurance for our employees.
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BUSINESS
For the three years ended 31 March 2019, 2020 and 2021, we recorded in aggregate approximately HK$0.8 million, HK$0.8 million and HK$0.8 million, respectively, as insurance expenses for our various insurance policies.
During the Track Record Period, we had not made any material insurance claims. Our Directors consider that the above insurance plans and amounts insured are sufficient to cover the operational risks and protect us from any potential material losses or damages and are in line with the industry norm.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
During the Track Record Period and up to the Latest Practicable Date, we were not engaged in any litigation, arbitration or claim of material importance. In addition, our Directors are not aware of any litigation, arbitration or claim pending or threatened by or against us which may have a material adverse effect on our business, financial condition or results of operations.
REGULATORY COMPLIANCE
Our Directors confirm that save as disclosed below, we had complied with all major applicable laws and regulations in the PRC and Hong Kong in all material respects during the Track Record Period and up to the Latest Practicable Date.
Set out below is a summary of our non-compliance incidents during the Track Record Period and up to the Latest Practicable Date:
– 171 – Non-compliance in relation to social insurance contribution DOCUMENT DOCUMENT THIS THIS OF IN COVER INFORMATION THE THE ON “WARNING” CHANGE. HEADED TO SECTION SUBJECT THE AND WITH INCOMPLETE CONJUNCTION IN FORM, READ DRAFT BE IN MUST IS DOCUMENT THIS
Non-compliance incidents Reasons for the non-compliance Legal consequences Remedies and rectification measures
During the Track Record Period, These non-compliance incidents were According to the Law on Social Insurance of the PRC Cobelco GZ and Cobelco KS did not due to inadvertent errors of relevant （《中華人 make adequate social insurance staff in民共和國社會保險法》 our human resources） and , the social insurance authorities are contribution for their employees. administrationentitled department to demand in us to pay the Social Insurance Contribution Such contribution shortfall of preparation and calculationShortfall within of the a stipulated deadline and we may also be(i) Our Group has made provisions for the Social Cobelco GZ and Cobelco KS in social insurance contributionliable for a for late the payment fee equal to 0.05% of the Social Insurance Contribution Shortfall for the relevant aggregate, were approximately relevant employeesInsurance as they were Contribution not Shortfall for each day of delay, if we periods. HK$8.7 million, HK$7.5 million and familiar with andfail misunderstood to make such the payments, we may be liable for a fine in the HK$4.3 million for the three years relevant laws of therange PRC. between one and three times of the amount of the Social(ii) To ensure compliance with the relevant social ended 31 March 2019, 2020 and Insurance Contribution Shortfall. insurance laws and regulations,(a) our human 2021, respectively (the “Social resources and administration department will review Insurance Contribution Guangzhou Panyu Human Resources and Social Insurance on a monthly basis if our social insurance contribution Shortfall”). Bureau complies with the relevant laws and regulations; and (b) our Group will seek advice from legal advisers as to the latest requirements of applicable laws and （廣州市番禺區人力資源和社會保障局）has issued written regulations from time to time. BUSINESS confirmations, stating that, among other things, (i) no
7 – 172 – administrative punishments owing to violation of the social (iii) Our Controlling Shareholders will execute the Deed of insurance laws and regulations had been imposed on Cobelco Indemnity to indemnify our Group against any GZ since the date of incorporation of Cobelco GZ until the economic losses, save for the amount already provided end of the Track Record Period; (ii) Cobelco GZ has duly by our Group under paragraph (i) above, arising from registered under the relevant law for making sufficient social these non-compliance incidents. insurance contribution for its employees and passed the annual examination regarding the social insurance contribution, and Having considered (a) the above rectification measures; (b) there has been no objection from the authority regarding the written confirmations from the relevant competent Cobelco GZ’s social insurance payment condition; (iii) the authorities as described above; and (c) the view of our PRC types and basis of social insurance contribution made by Legal Advisers as described above, our Directors are of the Cobelco GZ were in compliance with the relevant laws, rules view that these non-compliance incidents will not have and regulations and confirmed by the authority; (iv) in view material adverse impact on our business or results of of the general situation in its jurisdiction and unless there is operation. material change in the policy environment, the authority allows Cobelco GZ to continue to pay the social insurance contribution based on current basis and will not request Cobelco GZ to repay the Social Insurance Contribution Shortfall or impose any penalty on Cobelco GZ; and (v) there is no ongoing or potential dispute or litigation between the authority and Cobelco GZ. UTB EDI OJNTO IHTESCINHAE WRIG NTECVRO HSDOCUMENT DOCUMENT THIS THIS OF IN COVER INFORMATION THE THE ON “WARNING” CHANGE. HEADED TO SECTION SUBJECT THE AND WITH INCOMPLETE CONJUNCTION IN FORM, READ DRAFT BE IN MUST IS DOCUMENT THIS Non-compliance incidents Reasons for the non-compliance Legal consequences Remedies and rectification measures
Kunshan Municipal Social Insurance Fund Management Centre
（昆山市社會保險基金管理中心）has issued written confirmations, stating that, among other things, (i) no administrative punishments owing to violation of the social insurance laws and regulations had been imposed on Cobelco KS since the date of incorporation of Cobelco KS until the end of the Track Record Period; (ii) Cobelco KS has duly registered under the relevant law for making sufficient social insurance contribution for its employees and passed the annual examination regarding the social insurance contribution, and there has been no objection from the authority regarding Cobelco KS’s social insurance payment condition; (iii) the types and basis of social insurance contribution made by Cobelco KS are in compliance with the relevant laws, rules and regulations and confirmed by the authority; (iv) the authority allows Cobelco KS to continue to pay the social insurance contribution based on current basis and will not request Cobelco KS to repay the Social Insurance Contribution BUSINESS Shortfall or impose any penalty on Cobelco KS unless there is
7 – 173 – any material change in policy; and (v) there is no ongoing or potential dispute or litigation between the authority and Cobelco KS.
As advised by our PRC Legal Advisers, the above authorities are the competent social insurance authorities governing the relevant matters. Our PRC Legal Advisers are of the opinion that the risks of Cobelco GZ and Cobelco KS being ordered to repay the Social Insurance Contribution Shortfall and late payment fee are remote. Non-compliance in relation to housing provident funds contribution DOCUMENT DOCUMENT THIS THIS OF IN COVER INFORMATION THE THE ON “WARNING” CHANGE. HEADED TO SECTION SUBJECT THE AND WITH INCOMPLETE CONJUNCTION IN FORM, READ DRAFT BE IN MUST IS DOCUMENT THIS
Non-compliance incidents Reasons for the non-compliance Legal consequences Remedies and rectification measures
During the Track Record Period, This non-compliance incident was due According to the Regulation on Management of the Housing Cobelco KS did not make adequate to inadvertent errors of relevant staff Provident Fund housing provident funds contribution in our human resources and（《住房公積金管理條例》, we） may be requested for its employees. The total amount administrationbythe department relevant authorities in to pay the HPF Contribution (i) As at the Latest Practicable Date, Cobelco KS has of contribution shortfall was preparation andShortfall calculation within of a the prescribed time limit, and we may be made housing（《住房公積金管理條例》 provident. funds） contribution in approximately HK$90,000, housing providentsubject funds to the contribution compulsory enforcement by the People’s Court accordance with the Regulation on Management of the HK$90,000 and HK$50,000 for the for the relevantif employees we fail to as settle they the HPF Contribution Shortfall as (ii) Our Group hasHousing made Provident provision Fund for the HPF period starting from its incorporation were not familiarrequested. with and Contribution Shortfall for the period. to 31 March 2019, and for the years misunderstood the relevant laws of the ended 31 March 2020 and 2021, PRC. Suzhou Municipal Housing Provident Fund Management (iii) To ensure compliance with the laws and regulations in respectively (the “HPF Centre relation to housing provident funds contribution, (a) Contribution Shortfall”). our human resources and administration department （蘇州市住房公積金管理中心）has issued awill written review on a monthly basis if our housing confirmation, stating that Cobelco KS has registered forprovident and funds contribution complies with the made housing provident funds contribution and there hadrelevant been laws and regulations; and (ii) our Group will no record of any administrative punishments in respectseek of the advice from legal advisers as to the latest BUSINESS housing provident funds contribution up to 16 April 2021.requirements of applicable laws and regulations from 7 – 174 – time to time. As advised by our PRC Legal Advisers, the above authority is the competent housing provident funds authority(iv) governing Our the Controlling Shareholders will execute the Deed of relevant matter. Our PRC Legal Advisers are of the opinionIndemnity to indemnify our Group against any that Cobelco KS has the risk of being ordered to repayeconomic the losses, save for the amount already provided HPF Contribution Shortfall, and Cobelco KS will notby our be Group under paragraph (ii) above, arising from subject to any administrative penalties provided thatthis it will non-compliance incident. pay the HPF Contribution Shortfall in full in a timely manner after receiving notices from the relevant authoritiesHaving requiring considered (a) the above rectification measures; (b) rectification of this non-compliance. the written confirmations from the relevant competent authorities as described above; and (c) the view of our PRC Legal Advisers as described above, our Directors are of the view that this non-compliance incident will not have material adverse impact on our business or results of operation. Non-compliance in relation to environmental protection requirements DOCUMENT DOCUMENT THIS THIS OF IN COVER INFORMATION THE THE ON “WARNING” CHANGE. HEADED TO SECTION SUBJECT THE AND WITH INCOMPLETE CONJUNCTION IN FORM, READ DRAFT BE IN MUST IS DOCUMENT THIS
Non-compliance incidents Reasons for the non-compliance Legal consequences Remedies and rectification measures
During the Track Record Period, Cobelco GZ did not comply with certain requirements under the Regulation on the Administration of Construction （《廣州 Project Environmental Protection 市規範環境行政處罰自由裁量權規定》） and the Regulation on the Administration of Construction Project Environmental (i) We have completed rectification of such non-compliance, （《建設項目環境保護管理 Pursuant to the Regulation on Discretionary Power of 條例》） Protection including the Report Form and Acceptance Check. (the “Regulation”) in relation to the Environmental（《建設項目環境保護管理條例》 Administrative, regarding） Punishment this in Guangzhou construction project which expanded our production non-compliance incident, the environmental protection bureau (ii) In order to prevent occurrence of similar non-compliance capacity in our Guangzhou Plant. Cobelco GZ did not may issue an order to suspend the operation of our relevant incidents, our factory manager will review the progress of submit the report form on the environmental effectsThese of non-complianceproduction on obtaining facilities, the and impose a fine of less than environmental assessment studies as well as implementation the construction project (the “Report Form”) toApproval the was due toRMB200,000 the reason that on Cobelco our GZ. of environmental protection measures as required under the relevant environmental protection bureau for approvalmanagement misunderstood the PRC laws and regulations. We will also seek legal advice on (the “Approval”) and complete acceptance checkenvironmental for protectionThe requirements Environmental under Protection Bureau of Panyu District in compliance with environmental laws of the PRC as and when environmental protection facilities (the “Acceptancethe Regulation at the timeGuangzhou of adopting the necessary. Check”) as required under the Regulation. On 23plan July for expansion of the production capacity 2018, Guangzhou City Panyu District Environmentalof our Guangzhou Plant. Our management（廣州市生態環境局番禺區分局）has issued written Having considered our PRC Legal Advisers’ advice and based on our Protection Bureau then delegated a deputy（廣州市番禺confirmations, head of our research stating that during the Track Record Period, assessment of the likelihood of the imposition of administrative 區環境保護局）and development teamCobelco to GZ be had the not engaged in any environmental pollution penalty, our Directors are of the view that the potential penalty would staff-in-chargein July 2018. of the Subsequently, rectificationaccidents or we of been such imposed any environmental administrative not have material and adverse impact on our business, results of obtained the Approval in December 2018. （廣州市番禺區環境保護局）ordered non-compliance after wepunishment. received the notice operations or financial conditions. As a result, noBUSINESS provisions in Cobelco GZ to rectify such non-compliance withinHowever, a from due Guangzhou to the reason City thatPanyu such District connection with this non-compliance were made during the Track specified – 175A – period, by (i) submission of the requisitestaff-in-chargeEnvironmental inadvertently Protection overlookedAs Bureau advised bythe our PRC Legal Advisers, given that Cobelco GZ Record Period. Report Form; (ii) implementing the preventiverelevant requirements as he didhas not rectified realise its non-compliance in relation to the late measures of pollution indicated in the Report Formthat Cobelco GZ had tosubmission complete of the the Report Form for Approval and completed the and Approval; and (iii) completing the AcceptanceAcceptance Check within a relativelyAcceptance short Check, the risk of Cobelco GZ being imposed any Check within three months from the date of obtainingperiod (i.e. three months fromadministrative the date of punishments in respect of this non-compliance is the Approval. obtaining the Approval). It wasremote. not until he realised such non-compliance after several Cobelco GZ had subsequently submitted the requisitemonths and thus the rectification was further Report Form and obtained the Approval fromdelayed and Cobelco GZ had subsequently Guangzhou City Panyu District Environmentalcompleted the Acceptance Check in Protection Bureau December 2019.
（廣州市番禺區環境保護局）on 4 December 2018. Cobelco GZ had completed the Acceptance Check in December 2019. UTB EDI OJNTO IHTESCINHAE WRIG NTECVRO HSDOCUMENT DOCUMENT THIS THIS OF IN COVER INFORMATION THE THE ON “WARNING” CHANGE. HEADED TO SECTION SUBJECT THE AND WITH INCOMPLETE CONJUNCTION IN FORM, READ DRAFT BE IN MUST IS DOCUMENT THIS Non-compliance incidents Reasons for the non-compliance Legal consequences Remedies and rectification measures
For the delay in meeting the timeline in completing the Acceptance Check, according to the notice issued by Guangzhou City Panyu District Environmental Protection Bureau
（廣州市番禺區環境保護局）(currently known as the Environmental Protection Bureau of Panyu District in Guangzhou （廣州市生態環境局番禺區分局）in relation to ordering Cobelco GZ to rectify within a time limit (the “Notice”), Cobelco GZ is ordered to complete the Acceptance Check within three months from the date of obtaining the Approval, otherwise the Cobelco GZ will be subject to penalties or shut down.
Pursuant to the Regulation on Discretionary Power of Environmental Administrative Punishment in Guangzhou
（《廣州 市規範環境行政處罰自由裁量權規定》） and the Construction Project Environmental Protection （《建設項目環境保護管理條例》, where） the main part of a construction project formally goes into production before the completion of the construction of supporting environmental protection facilities or the Acceptance BUSINESS Check, the competent authority to grant the Approval shall 7B– 175B – order it to stop the production, and may impose a fine of less than RMB100,000.
In the light of above, as Cobelco GZ’s was not able to complete the Acceptance Check within three months from the date of obtaining the Approval, as stipulated in the Notice, there is a risk that Cobelco GZ will be subject to penalties, or be shut down by the competent authority. With respect to the penalties, as advised by our PRC Legal Advisers, pursuant to the aforesaid regulations, Cobelco GZ is exposed to the penalties of being ordered to suspend its production and a fine less than RMB100,000. Given that Cobelco GZ had completed the Acceptance Check in December 2019, and the Environmental Protection Bureau of Panyu District in Guangzhou had issued written confirmations, stating that during the Track Record Period, Cobelco GZ had not engaged in any environmental pollution accidents or been imposed any environmental administrative penalties, our PRC Legal Advisers are of the opinion that the risk of Cobelco GZ being imposed the aforesaid penalties or being shut down is remote. THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE. THE INFORMATION IN THIS DOCUMENT MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT
BUSINESS
Having reviewed the factors considered by our Directors, the Sole Sponsor concurs with our Directors’ view that the non-compliance incidents disclosed above do not have material adverse impact on our business, results of operations or financial conditions.
Indemnity by our Controlling Shareholders with respect to non-compliance incidents
Pursuant to the Deed of Indemnity, Rich Topmax and Mr. Colby Chiu, our Controlling Shareholders, have agreed to indemnify our Group in respect of, among other matters, any penalty which would be incurred or suffered by our Group as a result of the non-compliance incidents as set out above. Our Directors are satisfied that Rich Topmax and Mr. Colby Chiu have sufficient financial resources to honour their respective obligations to provide indemnities in respect of any penalty which would be incurred or suffered by our Group as a result of the aforesaid non-compliance incidents.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Our Board consists of six Directors comprising two executive Directors, one non-executive Director and three independent non-executive Directors. Our Board is responsible and has general powers for the management and conduct of our business.
Members of our Board
The following table sets forth the information regarding the members of our Board.
Relationship with the other Roles and Directors and Date of joining Date of responsibilities in our senior Name Age Position our Group appointment Group management
Mr. Chiu Yu Kui 63 Executive Director 1 August 1987 28 February The overall strategic Father of Mr. Colby and chairman of 2019 planning, project SY Chiu and （趙汝渠先生） our Board management and uncle of Mr. business direction of Chiu Wai our Group Leung Mr. Chiu Sung Yin 32 Executive Director 3 March 2014 28 February The overall management, Son of Mr. （趙崇彥先生） and chief 2019 administrative matters Colby Chiu executive officer and daily operations of and cousin of our Group Mr. Chiu Wai Leung Ms. Lei Soi Kun 62 Non-executive 28 February 28 February Advising on marketing Not applicable （李瑞娟女士） Director 2019 2019 and corporate governance of our Group Mr. Cheung Kwok 46 Independent [¼][¼] Overseeing our Group Not applicable Kwan JP non-executive with an independent （張國鈞先生） Director perspective and judgment Mr. Choi Tak Shing 44 Independent [¼][¼] Overseeing our Group Not applicable Stanley JP non-executive with an independent （蔡德昇先生） Director perspective and judgment Mr. Lam Chi Wing 41 Independent [¼][¼] Overseeing our Group Not applicable （林至頴先生） non-executive with an independent Director perspective and judgment
Senior Management
The following table sets forth the information regarding our senior management.
Relationship with the other Directors and Date of joining Roles and responsibilities in our senior Name Age Position our Group Group management
Mr. Chiu Wai Leung 52 General manager July 1991 Overseeing the sales and marketing Nephew of Mr. （趙偉樑先生） department and the procurement Colby Chiu department of our Group. and cousin of Mr. SY Chiu Mr. Poon Ka Cheuk 41 Deputy general August 2002 Responsible for research and Not applicable （潘嘉爵先生） manager development, and production of our Group Ms. Cheung Ping Tse 58 Deputy general July 1997 Overseeing the accounting department Not applicable （張平姐女士） manager of our Group
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
EXECUTIVE DIRECTORS
Mr. Chiu Yu Kui Colby（趙汝渠先生）, aged 63, founded our Group in August 1987. He was appointed as our Director on 28 February 2019, and was re-designated as our executive Director and chairman of our Board on 23 August 2019. He also serves as a director of each subsidiary of our Company. Mr. Colby Chiu is responsible for the overall strategic planning, project management and business direction of our Group.
Mr. Colby Chiu has over 14 years of experience in the ECMD industry and over 24 years of experience in the field of decorative stainless steel trading and manufacturing. Mr. Colby Chiu obtained a Higher Certificate in Mechanical Engineering from the Hong Kong Polytechnic (currently known as the Hong Kong Polytechnic University) in 1986.
Mr. Colby Chiu is the father of Mr. SY Chiu, our executive Director and chief executive officer; and the uncle of Mr. Chiu Wai Leung, a member of our senior management.
Mr. Colby Chiu currently holds positions at various organisations including, a member of the Fourteenth Guangzhou Panyu Committee（第十四屆廣州市番禺區委員會委員）, Chinese People’s Political Consultative Conference（中國人民政治協商會議）; a vice president of the Fourth Committee, Guangdong International Overseas Chinese Chamber of Commerce*（廣 東國際華商會）; a member of the Fifteenth Standing Committee, Guangzhou Federation of Industry and Commerce （廣州市工商業聯合會）; an executive vice president, Guangzhou Foreign Investment Enterprises Chamber of Commerce* （廣州外商投資企業商會）; a vice president of the Eighth Council, Guangzhou Panyu Manufacturer Association*（廣州市番禺區 廠商會）; and a director of The Hong Kong Chinese Importers’ & Exporters’ Association（香 港中華出入口商會）.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. Colby Chiu holds the following positions in the entities set out below which were established in the PRC prior to their respective deregistration:
Nature of principal business prior to Name of the relevant the cessation of Date of Date of Position in the entity business establishment deregistration entity
Cobelco (Zhejiang) Manufacture of 24 April 2009 27 June Chairman Decoration Materials decorative materials 2014 Engineering Co., Ltd.*（高比（浙江）裝飾 材料工程有限公司）
Guangzhou Cobelco Trading of 30 June 1998 25 November Legal Industrial Materials decorative materials 2013 representative Co., Ltd.*（廣州高比 工業材料有限公司）
Guangzhou City Panyu Manufacture of 19 March 2003 24 May Person-in-charge District Dashi elevator cabins and 2006 Jingang Stainless components Decoration Factory* （廣州市番禺區大石金港 不銹鋼裝璜廠）
Each of the above entities had remained solvent and had no outstanding claims or liabilities on or before its dissolution.
Mr. Colby Chiu does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Mr. Chiu Sung Yin （趙崇彥先生）, aged 32, was appointed as our Director on 28 February 2019, and was re-designated as our executive Director and chief executive officer on 23 August 2019. Mr. SY Chiu joined our Group in March 2014. He also serves as a director of Full Victory, Cobelco HK, Cobelco Industrial and Sitami Film. Mr. SY Chiu was appointed as the company secretary of our Company on 23 August 2019. Mr. SY Chiu is responsible for the overall management, administrative matters and daily operations of our Group.
Mr. SY Chiu obtained a Bachelor of Science degree from The London School of Economics and Political Science in July 2011, and a Master of Business Administration degree in November 2018 from The University of Hong Kong. Mr. SY Chiu has been a certified public accountant of the Hong Kong Institute of Certified Public Accountants since January 2015.
Mr. SY Chiu is the son of Mr. Colby Chiu, our executive Director and chairman of our Board; and a cousin of Mr. Chiu Wai Leung, a member of our senior management.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. SY Chiu currently holds positions at various organisations including, a member of Import & Export Industry Training Advisory Committee （進出口業行業培訓諮詢委員會）;a director of The Hong Kong Chinese Importers’ & Exporters’ Association（香港中華出入口商 會）; a young executives’ committee member, The Chinese General Chamber of Commerce, Hong Kong（香港中華總商會）; an executive committee member of Hong Kong United Youth Association（香港青年聯會）; a member of the Fifteenth Executive Committee, Guangzhou Federation of Industry & Commerce（廣州市工商業聯合會）; and a council member, Chamber of Commerce of Guangzhou Foreign Investment Enterprises*（廣州外商投資企業商會）.
Mr. SY Chiu does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
NON-EXECUTIVE DIRECTOR
Ms. Lei Soi Kun（李瑞娟女士）, aged 62, is our non-executive Director. Ms. Lei joined our Group as our Director on 28 February 2019 and was re-designated as our non-executive Director on 23 August 2019. Ms. Lei is responsible for advising on marketing and corporate governance of our Group.
Ms. Lei has rich experience in fitting-out industry. From 1976 to 1990, she was an administrative clerk at Macau Fuhe Construction Property Co., Ltd*（澳門福和建築置業有限公 司）. She was a real estate agent from 1990 to 1993. Prior to joining our Group in February 2019, Ms. Lei has served as the director and general manager of Bo Ngai Engineering Co., Ltd, a company which carried out fitting-out business in Macau. Since 2010, Ms. Lei has served as the director of Space Construction & Engineering Co., Ltd., a company which provides services of fitting-out works and building construction works in Macau. In 2014, Ms. Lei also became the director of Nanli (Macau) Engineering Co., Ltd. which is engaged in fitting-out business. Since December 2017, she has served as the executive director of Space Group Holdings Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 2448).
Save as disclosed, Ms. Lei does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
INDEPENDENT NON-EXECUTIVE DIRECTORS
Mr. Cheung Kwok Kwan JP （張國鈞先生）, aged 46, joined our Group and was appointed as our independent non-executive Director on [¼]. Mr. Cheung is primarily responsible for overseeing our Group with an independent perspective and judgment.
Mr. Cheung is a practising solicitor of the High Court of Hong Kong with 20 years of experience in the legal profession. Mr. Cheung has been a partner of Cheung & Yeung, Solicitors since June 2012. He is also a civil celebrant of marriages and China-appointed attesting officer in Hong Kong.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. Cheung serves as a member of the Executive Council and Legislative Council of Hong Kong. He also served as a member of the Central and Western District Council of Hong Kong from 2012 to 2019. In addition, he is a non-executive director of The Hong Kong Mortgage Corporation Limited and a member of the Hong Kong Housing Authority.
Mr. Cheung obtained a Bachelor of Laws degree and Postgraduate Certificate in Laws from the City University of Hong Kong in November 1997 and August 1998, respectively. He was admitted as a solicitor of the High Court of Hong Kong in September 2000.
Mr. Cheung has served as an independent non-executive director as well as a member of the audit committee, remuneration committee and nomination committee of C&D Property Management Group Co., Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 2156) since December 2020. Mr. Cheung served as an independent non-executive director of Hang Yick Holdings Company Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 1894), from September 2018 to September 2020. He was an independent non-executive director of Innovax Holdings Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 2680), from August 2018 to February 2020.
Save as disclosed, Mr. Cheung does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Mr. Cheung was a director of the following companies which were incorporated in Hong Kong prior to their respective dissolution:
Nature of principal Name of the relevant business prior to the Date of Means of company cessation of business dissolution dissolution
Heungkong Business And Provision of advisory 7 September Deregistration Professional Services service to small and 2018 Centre Limited（香江工商 medium enterprises in 專業服務中心有限公司） Hong Kong
Smart Ip Consultancy Never commenced 7 December Deregistration Limited（匯中顧問有限 business after 2007 公司） incorporation
Each of the above companies had remained solvent and had no outstanding claims or liabilities on or before its dissolution.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. Choi Tak Shing Stanley JP（蔡德昇先生）, aged 44, joined our Group and was appointed as an independent non-executive Director on [¼]. Mr. Choi is primarily responsible for overseeing our Group with an independent perspective and judgment.
Mr. Choi obtained a Bachelor of Commerce degree in Accounting and Finance from the University of New South Wales in June 1998, a Bachelor of Laws degree from the University of London through distance learning in August 2002 and a Master of Business Administration degree from The Hong Kong University of Science and Technology in November 2007. Mr. Choi is a certified public accountant of the Hong Kong Institute of Certified Public Accountants. He has been a certified practising accountant of the CPA Australia since February 2001.
Mr. Choi worked at KPMG from January 1998 to August 2002, with his last position as an assistant manager. He joined Pacific Basin Shipping (HK) Limited, a group member of Pacific Basin Shipping Limited (whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 2343)) in January 2003, where he served as the director in business analysis prior to his departure in July 2016. Mr. Choi has been serving as a chief investment officer at Pacific Capital Planning Limited since February 2014.
Mr. Choi is a member of the HKSAR Town Planning Board; chairman of the HKSAR Committee on the Promotion of Civic Education; member of the HKSAR Quality Education Fund Steering Committee; lay member of the HKSAR Joint Committee on Student Finance and adjudicator of the HKSAR Registration of Persons Tribunal. He is a member of the Eleventh committee of the Ningxia Chinese People’s Political Consultative Conference*（中 國人民政治協商會議寧夏回族自治區第十一屆委員會會員）; and a member of the fifth council of the China Overseas Friendship Association*（中華海外聯誼會第五屆理事會理事）.
Mr. Choi is currently an executive director of The Hong Kong Chinese Importers’ & Exporters’ Association. He is also the chief counselor of Hong Kong United Youth Association and the chairman of the Standing Committee of the Convocation of The Hong Kong University of Science & Technology.
Mr. Choi was a director of the following company which was incorporated in Hong Kong prior to its dissolution:
Nature of principal Name of the business prior to the Date of Means of relevant company cessation of business dissolution dissolution
Syniar Consulting Limited Never commenced 4 August 2006 Deregistration （盛亞諮詢有限公司） business after incorporation
The above company had remained solvent and had no outstanding claims or liabilities on or before its dissolution.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. Choi does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Mr. Lam Chi Wing（林至頴先生）, aged 41, joined our Group and was appointed as an independent non-executive Director on [¼]. Mr. Lam is primarily responsible for overseeing our Group with an independent perspective and judgment.
Mr. Lam obtained a Bachelor of Business Administration degree in Accounting and Finance at The University of Hong Kong in December 2003, a Master of Science degree in Knowledge Management at The Hong Kong Polytechnic University in December 2006 and a Master of Business Administration degree at The Chinese University of Hong Kong in December 2010. Mr. Lam joined Li & Fung Group in September 2003, where he served as the Group Chief Representative and General Manager, Southern China of Li & Fung Development (China) Limited prior to his departure in July 2015. Since June 2020, he has been a brand and new retail strategic officer at Bonjour Holdings Limited.
Mr. Lam is a member of the Twelfth Guangdong Committee of the Chinese People’s Political Consultative Conference* （中國人民政治協商會議第十二屆廣東省委員） and the vice chairman of the Hong Kong Guangdong Youth Association （香港廣東青年總會）. Mr. Lam served as a part-time member of the Central Policy Unit of the HK Government in 2012, and currently serves as a member of the advisory committee of the Sustainable Agricultural Development Fund of the HK Government, a committee member of the Appeal Panel (Housing) of the HK Government, and a committee member of the Mainland Business Advisory Committee of the Hong Kong Trade Development Council.
Mr. Lam is currently the vice chairman of the eighth council of the Guangdong Society of Commercial Economy*（廣東省商業經濟學會第八屆理事會副會長）and an adjunct associate professor of information systems, business statistics and operations management of The Hong Kong University of Science and Technology.
Mr. Lam has served as an independent non-executive director as well as a member of the audit committee, remuneration committee and nomination committee of Common Splendor International Health Industry Group Limited (currently known as Aidigong Maternal & Child Health Limited), a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 286), since March 2016. He has also served as an independent non-executive director as well as a member of the audit committee, nomination committee and the chairman of the remuneration committee of Wai Hung Group Holdings Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 3321), since March 2019. From July 2020 to December 2020, Mr. Lam served as an executive director of Bonjour Holdings Limited, a company whose shares are currently listed on the Main Board of the Stock Exchange (stock code: 653).
Save as disclosed, Mr. Lam does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Save as disclosed in this section, each of our Directors confirms with respect to him or her that: (i) he/she did not have any other relationships with any Directors, senior management or Substantial Shareholders or Controlling Shareholders of our Company as at
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES the Latest Practicable Date; and (ii) he/she did not hold any other positions in our Company or other members of our Group as at the Latest Practicable Date. As at the Latest Practicable Date, save as disclosed in the section headed “Substantial Shareholders” and the paragraph headed “C. Further information about our Directors and Substantial Shareholders” in Appendix IV to this document, each of our Directors did not have any interests in our Shares within the meaning of Part XV of the SFO.
Except as disclosed in this section, to the best of the knowledge, information and belief of our Directors having made all reasonable enquiries, there were no other matters that need to be brought to the attention of our Shareholders in connection with the appointment of our Directors, and there was no information relating to our Directors required to be disclosed under Rule 13.51(2) of the Listing Rules as at the Latest Practicable Date.
SENIOR MANAGEMENT
Mr. Chiu Wai Leung（趙偉樑先生）, aged 52, joined our Group in July 1991. Mr. Chiu is the general manager of our Group, who oversees our sales and marketing department and procurement department. He is also responsible for design management and production of sample books, catalogs and marketing tools. Mr. Chiu has over 14 years of experience in the ECMD industry and over 24 years of experience in the field of decorative stainless steel trading and manufacturing.
Mr. Chiu obtained a Higher Diploma in Medical Laboratory Science from the Hong Kong Polytechnic (currently known as The Hong Kong Polytechnic University) in November 1991, and a Master of Management degree from the Macquarie University through distance learning in June 2001.
Mr. Chiu is a nephew of Mr. Colby Chiu, our executive Director and chairman of the Board; and a cousin of Mr. SY Chiu, our executive Director and chief executive officer.
Mr. Chiu was a director and the legal representative in the following entity which was established in the PRC prior to their respective deregistration:
Nature of principal Name of the business prior to the Date of Date of relevant entity cessation of business establishment deregistration
Cobelco (Zhejiang) Manufacture of 24 April 2009 27 June 2014 Decoration Materials decorative materials Engineering Co., Ltd.* （高比（浙江）裝飾材料 工程有限公司）
The above company had remained solvent and had no outstanding claims or liabilities on or before its dissolution.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Mr. Chiu does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Mr. Poon Ka Cheuk（潘嘉爵先生）, aged 41, joined our Group in August 2002. Mr. Poon is a deputy general manager of our Group, who is responsible for our research and development, and production. Mr. Poon has over 14 years of experience in the ECMD industry and over 17 years of experience in the field of decorative stainless steel trading and manufacturing.
Mr. Poon obtained a Higher Diploma in Marine Engineering from Hong Kong Technical Colleges in September 1999 and a Bachelor of Engineering in Mechanical Engineering degree from The Hong Kong University of Science and Technology in November 2002.
Mr. Poon does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
Ms. Cheung Ping Tse（張平姐女士）, aged 58, joined our Group in July 1997. Ms. Cheung is a deputy general manager of our Group, who oversees our accounting department and is responsible for general accounting matters of our Group. Prior to joining our Group, Ms. Cheung worked as an accountant in Kar Tat (Art) Embroidery Company Limited from August 1988 to April 1991, and as an accountant and administration manager in Global Reprographic Limited from July 1991 to November 1995.
Ms. Cheung graduated from New Method College in July 1981 and received an Intermediate Stage Certificate in Book-Keeping under the Commercial Education Scheme of The London Chamber of Commerce and Industry in Autumn 1982.
Ms. Cheung does not hold any current or past directorships in the last three years preceding the date of this document in any public companies listed on any securities market in Hong Kong or overseas.
COMPANY SECRETARY
Mr. Chiu Sung Yin （趙崇彥先生） was appointed as the company secretary of our Company on 23 August 2019. Please refer to the paragraph headed “Executive Directors” above in this section for details of his biography.
REMUNERATION OF DIRECTORS
Our Group reimburses our Directors for expenses which are necessarily and reasonably incurred for providing services to our Group by executing their functions in relation to our Group’s operations. Our Directors receive remuneration in the form of Directors’ salaries, allowances, discretionary bonuses and other benefits in kind as well as contributions to retirement benefit schemes. For the three years ended 31 March 2019, 2020 and 2021, the aggregate amount of remuneration paid to our Directors were approximately HK$5.4 million, HK$6.6 million and HK$6.7 million, respectively. Under the arrangements currently in force,
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES the estimated aggregate remuneration, excluding discretionary bonus and share based payments expense, if any, of our Directors for the year ending 31 March 2022 is approximately HK$7.4 million.
The aggregate amount of remuneration (including Directors’ salaries, allowances, discretionary bonuses, contributions to retirement benefit schemes, pension and other benefits in kind) attributable to our five highest paid individuals for the three years ended 31 March 2019, 2020 and 2021 were approximately, HK$8.9 million, HK$10.6 million and HK$9.9 million, respectively.
During the Track Record Period, the remuneration of our Directors was determined with reference to their respective experience, responsibilities with our Group and general market conditions. Any discretionary bonus (if any) payable to our Directors is linked to the performance of our Group and of individual Director. Our Company intends to continue its remuneration policy after the [REDACTED], subject to the review by and the recommendation of the remuneration committee of our Company. None of our Directors or the five highest paid individuals have been paid any sum of money (i) as an inducement to join or upon joining our Company; or (ii) as a compensation for loss of office during the Track Record Period. There were no arrangements under which a Director has waived or agreed to waive any remuneration for the same period.
Further information on the remuneration of each Director during the Track Record Period as well as information on the highest paid individuals is set out in note 10 to the Accountants’ Report as set out in Appendix I to this document.
SHARE OPTION SCHEME
Our Group has conditionally adopted the Share Option Scheme, pursuant to which, among others, our Directors and employees of our Group may be granted options to subscribe for Shares. The principal terms of the Share Option Scheme are summarised in the section headed “Statutory and General Information – D. Share Option Scheme” in Appendix IV to this document.
BOARD DIVERSITY
In order to enhance the effectiveness of our Board and to maintain the high standard of corporate governance, we have adopted the board diversity policy which sets out the objective and approach to achieve and maintain diversity of our Board. Pursuant to the board diversity policy, we seek to achieve Board diversity through the consideration of a number of factors when selecting the candidates to our Board, including but not limited to gender, skills, age, professional experience, knowledge, cultural, education background, ethnicity and length of service. The ultimate decision of the appointment will be based on merits and the contribution which the selected candidates will bring to our Board.
Our Directors have a balanced mix of knowledge and skills, including overall management and strategic development, research and development, accounting and financial management, legal knowledge and corporate governance. They obtained degrees in various majors including business administration, laws, accounting and science. We have three independent non-executive Directors with different industry backgrounds, representing more than one third of the members of our Board. Furthermore, our Board has a wide range of
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES age, ranging from 32 years old to 63 years old. Taking into account our existing business model and specific needs as well as the different background of our Directors, the composition of our Board satisfies our board diversity policy.
Our nomination committee is responsible for ensuring the diversity of our Board members. After the [REDACTED], the nomination committee of our Board will review the board diversity policy from time to time to ensure its continued effectiveness and we will disclose in our corporate governance report about the implementation of the board diversity policy on an annual basis.
BOARD COMMITTEES
We have established the following committees in our Board, of which the operation is in accordance with terms of reference established by our Board.
Audit committee
Our Company established an audit committee on [¼] with written terms of reference in compliance with Rule 3.21 of the Listing Rules and the Corporate Governance Code and Corporate Governance Report as set out in Appendix 14 to the Listing Rules (the “Corporate Governance Code”). The primary duties of the audit committee are to, among other things, make recommendations to the Board on the appointment and removal of external auditor, review the financial statements and provide advice in respect of financial reporting, and oversee internal control procedures of our Company. The audit committee consists of three members who are Mr. Lam Chi Wing, Mr. Cheung Kwok Kwan JP and Mr. Choi Tak Shing Stanley JP. Mr. Lam Chi Wing is the chairman of the audit committee.
Remuneration committee
Our Company established a remuneration committee on [¼] with written terms of reference in compliance with Rule 3.25 of the Listing Rules and the Corporate Governance Code. The primary duties of the remuneration committee are to, among other things, make recommendation to the Board on the overall remuneration policy and structure relating to all Directors and senior management of our Group, review performance based remuneration, and ensure none of our Directors determine their own remuneration. The remuneration committee consists of three members who are Mr. Cheung Kwok Kwan JP, Mr. SY Chiu and Mr. Choi Tak Shing Stanley JP. Mr. Cheung Kwok Kwan JP is the chairman of the remuneration committee.
Nomination committee
Our Company established a nomination committee on [¼] with written terms of reference in compliance with the Corporate Governance Code. The primary duties of the nomination committee are to, among other things, review the structure, size and composition of our Board, access the independence of independent non-executive Directors, and make recommendations to our Board on relevant matters relating to the appointment of Directors.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The nomination committee consists of three members who are Mr. Colby Chiu, Mr. Cheung Kwok Kwan JP and Mr. Choi Tak Shing Stanley JP. Mr. Colby Chiu is the chairman of the nomination committee.
COMPLIANCE ADVISER
In accordance with Rule 3A.19 of the Listing Rules, our Company has appointed Red Sun Capital Limited to be the compliance adviser, who will have access to all relevant records and information relating to our Company that it may reasonably require to properly perform its duties. Pursuant to Rule 3A.23 of the Listing Rules, our Company will consult with and, if necessary, seek advice from the compliance adviser on a timely basis in the following circumstances:
(i) before the publication of any regulatory announcement, circular or financial report;
(ii) where a transaction, which might be a notifiable or connected transaction, is contemplated by our Company, including share issues and share repurchases;
(iii) where our Company proposes to use the [REDACTED] of the [REDACTED] in a manner different from that detailed in this document or where the business activities, developments or results of our Company deviate from any forecast, estimate (if any) or other information in this document; and
(iv) where the Stock Exchange makes an inquiry of our Company under Rule 13.10 of the Listing Rules.
The terms of appointment shall commence on the [REDACTED] and end on the date on which our Company complies with Rule 13.46 of the Listing Rules in respect of its financial results for the first full financial year commencing after the [REDACTED] and such appointment may be subject to extension by mutual agreement.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
CONTROLLING SHAREHOLDERS
Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account the exercise of the [REDACTED] and any option which may be granted under the Share Option Scheme), [REDACTED]% of the issued share capital of our Company will be owned by Rich Topmax, which is in turn wholly owned by Mr. Colby Chiu. In view of the above, Mr. Colby Chiu and Rich Topmax will be considered to be our Controlling Shareholders within the meaning of the Listing Rules.
BACKGROUND OF OUR CONTROLLING SHAREHOLDERS
Rich Topmax was incorporated in the BVI with limited liability on 16 January 2019, which is an investment holding company.
Mr. Colby Chiu is our executive Director and the chairman of our Board. For details of Mr. Colby Chiu’s background, please refer to the section headed “Directors, Senior Management and Employees – Executive Directors” in this document.
RULE 8.10 OF THE LISTING RULES
Our Controlling Shareholders, our Directors and their respective close associates do not have any interest in a business apart from our Group’s business which competes and is likely to compete, directly or indirectly, with our Group’s business that would require disclosure under Rule 8.10 of the Listing Rules.
INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS
Our Directors believe that our Group is capable of carrying on our business independently of our Controlling Shareholders and their respective close associates taking into account the factors below.
Management independence
Our Board and members of our senior management, rather than any single Director, are responsible for the implementation of business strategies, management and operation of our Group. Our Board consists of six Directors, comprising two executive Directors, one non-executive Director and three independent non-executive Directors, which as a whole deliberates and determines all important corporate acts of our Group. Our Board and members of our senior management therefore operate independently from our Controlling Shareholders.
None of our independent non-executive Directors are connected to our Controlling Shareholders or any of their respective close associates. This can ensure that our Board is making independent decisions on any matters even in the case of matters involving potential conflicts of interest and/ or material interest for any executive Director.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
Our Group has also implemented corporate governance procedures to protect the interest of and maximise the value of our Shareholders. Each Director has attended relevant training and is fully aware of his/her fiduciary duties to our Company and will abstain from voting in respect of any matters involving conflicts of interest or potential conflicts of interest for him/her in accordance with the requirements prescribed by the Articles and the Listing Rules. In the event that Mr. Colby Chiu is required to be abstained from voting on any resolution in which he is materially interested at our Board meeting, and the transaction or arrangement to be approved by such resolution is a connected transaction under Chapter 14A of the Listing Rules, so long as Mr. SY Chiu is an associate of Mr. Colby Chiu, Mr. SY Chiu shall also be required to abstain from voting on such resolution at our Board meeting pursuant to Rule 13.44 of the Listing Rules. Under such circumstances, the three independent non-executive Directors and the non-executive Director will be able to form a quorum prescribed under the Articles to ensure that the decisions of our Board are made after due and careful consideration. Given the substantial experiences of our independent non-executive Directors and non-executive Director as set out in the section headed “Directors, Senior Management and Employees” in this document, we believe that our Board with the remaining members is still able to function properly when Mr. Colby Chiu and Mr. SY Chiu are required to be abstained from voting, and the matter concerned will be managed in line with the general corporate governance practice to protect the interests of our Company and our Shareholders as a whole.
In addition, our Board is supported by members of our senior management in formulating business plans and strategies of our Group. The day-to-day management and operation of our Company is independent from our Controlling Shareholders and their respective close associates.
Operational independence
Our Company has established our own organisational structure, with specific areas of duties and responsibilities assigned to each department of our Company. We have sufficient operational capacity in terms of capital, equipment and human resources to operate and manage our business independently from our Controlling Shareholders and their respective close associates. We have an independent management team which is responsible for our daily operations, as well as our own headcount of employees for our operations and management for human resources.
We own, or have the right to use, all of our operational and production facilities relating to our business, without reliance on our Controlling Shareholders. We are also in possession of all applicable licenses, approvals, certificates and intellectual property rights to conduct and operate our business. All the trademarks, patents, domain names and software copyright material to our business are owned by and registered or being applied for registration in the name(s) of our Group. For details, please refer to the paragraph headed “B. Further information about the business of our Group – 2. Intellectual property rights” in Appendix IV to this document.
We have independent access to, and communicate independently with, all of our suppliers and customers.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
In view of the above, our Directors consider that there is no operational dependence by us on our Controlling Shareholders and our Group is able to operate independently from our Controlling Shareholders after the [REDACTED].
Financial independence
During the Track Record Period, our Controlling Shareholders and/or entities controlled by them had provided guarantees and securities for certain of our bank borrowings, please refer to the section headed “Financial Information – Indebtedness” in this document for further details. All such guarantees and securities provided to our Group will be released and replaced by a corporate guarantee provided by our Company upon the [REDACTED].
Our Directors are of the view that our Company is capable of obtaining financing from independent third parties without reliance on our Controlling Shareholders should the need arise. Accordingly, our Directors believe that our Company will have independent access to bank financing after the [REDACTED] through the provision of corporate guarantees and/or other security by our Group. Furthermore, our Directors believe that the sustainability of our business as demonstrated by the performance, results of operation and financial position of our Group during the Track Record Period will enhance our Company’s ability to obtain or renew the loans from financial institutions without recourse to our Controlling Shareholders after the [REDACTED]. In view of the above, our Directors consider that our Company is financially independent of our Controlling Shareholders.
NON-COMPETITION UNDERTAKINGS BY OUR CONTROLLING SHAREHOLDERS
Each of our Controlling Shareholders (collectively, the “Covenantors”), has given certain non-competition undertakings in favour of our Company (for itself and as trustee for each of our subsidiaries) under the Deed of Non-competition, pursuant to which each of the Covenantors irrevocably and unconditionally, jointly and severally, warrants and undertakes with our Company that, from the [REDACTED] and ending on the occurrence of the earlier of,
(a) any of the Covenantors, and his/its close associates and/or successor, individually and/or collectively, cease to own 30% (or such percentage as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer) or more of the then issued share capital of our Company directly or indirectly or cease to be deemed as our Controlling Shareholder; or
(b) the Shares cease to be [REDACTED] on the Stock Exchange (except for temporary suspension of the Shares due to any reason),
he/it will not, and will procure any of his/its close associates and any company directly or indirectly controlled by him/it (which for the purpose of the Deed of Non-competition, shall not include any member of our Group) not to either on his/its own or in conjunction with any body corporate, partnership, joint venture or other contractual agreement, whether directly or indirectly, whether for profit or not, carry on, participate in, hold, engage in, acquire or operate, or provide any form of assistance to any person, firm or company (except members of our Group) to conduct
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
any business which, directly or indirectly, competes or may compete with the business presently carried on by our Company or any of our subsidiaries or any other business that may be carried on by any of them from time to time during the term of the Deed of Non-competition, in Hong Kong, the PRC and such other places as our Company or any of our subsidiaries may conduct or carry on business from time to time, including but not limited to (i) design, development, manufacture, decoration and installation of customised elevator cabin products as well as decorative stainless steel products (the “Restricted Business”) and (ii) directly or indirectly take any action which constitutes an interference with or a disruption of the Restricted Business. Such non-competition undertakings do not apply to:
(i) the holding of Shares or other securities issued by our Company or any of our subsidiaries from time to time;
(ii) the holding of shares or other securities in any company which has an involvement in the Restricted Business, provided that such shares or securities are listed on a recognised stock exchange and the aggregate interest of the Covenantor and his/its close associates (as “interest” is construed in accordance with the provisions contained in Part XV of the SFO) does not amount to more than 5% of the relevant share capital of the company in question;
(iii) the contracts or other agreements entered into between our Group and the Covenantor and/or his/its close associates; and
(iv) the involvement, participation or engagement of the Covenantor and/or his/its close associates in the Restricted Business in relation to which our Company has agreed in writing to such involvement, participation or engagement, following a decision by our independent non-executive Directors to allow such involvement, participation or engagement subject to any conditions our independent non-executive Directors may require to be imposed.
New business opportunity
The Covenantors have further undertaken to procure that, any business investment or other commercial opportunity relating to the Restricted Business (the “New Opportunity”) identified by or offered to the Covenantors and/or any of their close associates (other than members of our Group) (the “Offeror”) is first referred to us in the following manner:
(a) the Covenantors are required to, and shall procure their close associates (other than members of our Group) to, refer, or procure the referral of, the New Opportunity to us, and shall give written notice to us of any New Opportunity containing all information reasonably necessary for us to consider whether (i) the New Opportunity would constitute competition with our core business and/or any other new business which our Group may undertake at the relevant time, and (ii) it is in the interest of our Group to pursue the New Opportunity, including but not limited to the nature of the New Opportunity and the details of the investment or acquisition costs (the “Offer Notice”);
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
(b) the Offeror will be entitled to pursue the New Opportunity only if (i) the Offeror has received a written notice from us declining the New Opportunity and confirming that the New Opportunity would not constitute competition with our core business, or (ii) the Offeror has not received the notice from us within ten business days from our receipt of the Offer Notice;
(c) if there is a material change in the terms and conditions of the New Opportunity pursued by the Offeror, the Offeror will refer to the New Opportunity as so revised to us in the manner as set out above; and
(d) upon receipt of the Offer Notice, we will seek opinions and decisions from a committee of our Board consisting of Directors who do not have a material interest in the matter (the “Independent Board Committee”) as to whether (i) such New Opportunity would constitute competition with our core business, and (ii) it is in the interest of our Company and our Shareholders as a whole to pursue the New Opportunity.
General undertakings
To ensure the performance of the above non-competition undertakings given under the Deed of Non-competition, each of the Covenantors shall:
(a) when required by our Company, provide all information necessary for the Independent Board Committee to conduct annual examination with regard to the compliance of the terms of the Deed of Non-competition and the enforcement thereof;
(b) procure our Company to disclose to the public either in our annual report or issuing a public announcement in relation to any decisions made by the Independent Board Committee with regard to the compliance of the terms of the Deed of Non-competition and the enforcement of it;
(c) where the Independent Board Committee shall deem fit, make a declaration in relation to the compliance of the terms of the Deed of Non-competition in our annual report, and ensure that the disclosure of information relating to compliance with the terms of the Deed of Non-competition and the enforcement of it are in accordance with the requirements of the Listing Rules;
(d) where the Independent Board Committee has rejected the New Opportunity referred to by the Offeror as stipulated above regardless of whether the Offeror would thereafter invest or participate in such New Opportunity, procure our Company to disclose to the public either in the annual or interim report of our Company or an announcement the decision of the Independent Board Committee regarding the decision on the New Opportunity and the basis thereof; and
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
(e) that during the period when the Deed of Non-competition is in force, fully and effectually indemnify our Company against any losses, liabilities, damages, costs, fees and expenses as a result of any breach on the part of such Covenantor of any statement, warrant or undertaking made under the Deed of Non-competition.
In respect of the above undertakings, our Company confirms that, if the Independent Board Committee has rejected the New Opportunity referred to by the Offeror as stipulated above regardless of whether the Offeror would thereafter invest or participate in such New Opportunity, it will disclose to the public either in the annual or interim report of our Company or an announcement the decision of the Independent Board Committee regarding the decision on the New Opportunity and the basis thereof.
CORPORATE GOVERNANCE MEASURES
Our Company expects to adopt the following corporate governance measures:
(a) our Directors will comply with our Articles of Association which requires the interested Director to absent themselves from any resolution of the Board approving any contract or arrangement or other proposal in which he/she or any of his/her close associates is interested. Any such resolution shall only be passed by the affirmative notes of at least half of the total number of the voting Directors who are not associated with any counterparty of the transactions or have any interest therein;
(b) we have appointed three independent non-executive Directors to ensure the effective exercise of independent judgment in the decision making process and provide independent advice to our Board and Shareholders. All of our independent non-executive Directors are well-educated and have substantial experience in their profession. Our Directors believe that our independent non-executive Directors are of sufficient caliber, are free of any business or other relationship which may interfere in any material manner with the exercise of their independent judgement and will be able to provide impartial and professional advice to protect the interests of the minority Shareholders. Our Directors also believe that the presence of our Directors from different backgrounds can provide a balance of views and opinions. For details of our independent non-executive Directors, please refer to the section headed “Directors, Senior Management and Employees – Independent non-executive Directors” in this document.
In addition, our Directors, including our independent non-executive Directors, will be able to seek advice from the senior management who are independent from our Controlling Shareholders as well as independent professional advice from external parties (such as financial advisers) where necessary, including but not limited to the situation where our independent non-executive Directors are required to resolve on matters where Mr. Colby Chiu is required to be abstained from voting due to conflict of interests;
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
(c) our independent non-executive Directors will, on an annual basis, review the compliance and enforcement of the Deed of Non-competition executed by our Controlling Shareholders. Our Controlling Shareholders have undertaken that they will and will procure the entities controlled by them and their close associates to provide all information reasonably required by our independent non-executive Directors to assist them in the assessment. We will disclose the review in our annual report or by way of announcement to the public. Our Controlling Shareholders have also undertaken that they will make an annual declaration on the compliance with the Deed of Non-competition and other connected transaction agreements in our annual report;
(d) our independent non-executive Directors will also review, on an annual basis, all decisions made in relation to any business opportunities which is referred to by our Controlling Shareholders or any of their respective close associates (other than members of our Group) during the year. We will disclose such decisions and basis for them in our annual report or by way of announcement to the public;
(e) we have appointed Red Sun Capital Limited as our compliance adviser upon [REDACTED] to advise our Group on matters relating to compliance with the Listing Rules; and
(f) any transaction between (or proposed to be made between) our Group and connected persons will be required to comply with Chapter 14A of the Listing Rules, including, where applicable, the announcement, reporting, annual review, circular and independent shareholders’ approval requirements and with those conditions imposed by the Stock Exchange for the granting of waiver from strict compliance with the relevant requirements under the Listing Rules.
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CONNECTED TRANSACTION
ONE-OFF TRANSACTION ENTERED INTO PRIOR TO [REDACTED] WHICH WOULD OTHERWISE CONSTITUTE CONNECTED TRANSACTION
During the Track Record Period, our Group entered into the following transaction with Elite Honest, which is a connected person (as defined under the Listing Rules) of our Company. Such transaction is accounted as one-off in nature under HKFRS 16, and would constitute a one-off connected transaction under Chapter 14A of the Listing Rules if it was entered into after the [REDACTED]. Details of such transaction are set out below:
The Tenancy Agreement
Elite Honest as landlord and Cobelco Industrial as tenant entered into a tenancy agreement on 30 March 2020, which was supplemented by a supplemental agreement dated 15 May 2020 (collectively, the “Tenancy Agreement”), in respect of the property situated at Flat A, 32nd Floor, Tower 8B and Car Park No. 96 on Car Park Level 7, Bel-Air No. 8, Bel-Air on the Peak, Island South, No. 8 Bel-Air Peak Avenue, Hong Kong (collectively, the “Premises”) with a total gross floor area of approximately 1,364 sq. ft.. The Premises are used by the Group as staff quarter and car park. Pursuant to the Tenancy Agreement, Elite Honest leased the Premises to Cobelco Industrial for a term commencing from 1 April 2020 to 31 March 2022, at a monthly rent of HK$80,000, exclusive of water, electricity, management fee, rates and government rent which are payable by the tenant.
The monthly rent of the Premises for the term of the tenancy was determined after arm’s length negotiation between the parties with reference to the prevailing market rent of similar properties in the vicinity of the Premises.
For the three years ended 31 March 2019, 2020 and 2021, the rental paid by Cobelco Industrial to Elite Honest in respect of the Premises amounted to HK$960,000, HK$960,000 and HK$960,000, respectively. The annual rental payable by our Group under the Tenancy Agreement for the financial year ending 31 March 2022 will be HK$960,000.
Accounting treatment of the Tenancy Agreement
Our Group has applied HKFRS 16 in the preparation of our financial information throughout the Track Record Period, pursuant to which, at the commencement date of a lease, our Group as lessee shall recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Accordingly, the lease transaction under the Tenancy Agreement would be regarded as acquisition of asset by the tenant for the purpose of the Listing Rules.
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CONNECTED TRANSACTION
Implications under the Listing Rules
As Elite Honest is wholly owned by Mr. Colby Chiu, who is our executive Director and a Controlling Shareholder, Elite Honest is a connected person of our Company pursuant to the Listing Rules. Accordingly, the transaction contemplated under the Tenancy Agreement was entered into between our Group and a connected person of our Company.
Given the Tenancy Agreement was entered into prior to the [REDACTED] and the transaction contemplated thereunder is regarded as one-off in nature for the purpose of the Listing Rules, such transaction will not be subject to any of the reporting, announcement, annual review and independent Shareholders’ approval requirements under Chapters 14 and 14A of the Listing Rules.
In the event that there is any material change to the terms and conditions of the Tenancy Agreement (including any increase in the total rent payable by our Group under the Tenancy Agreement), we shall comply with Chapters 14 and 14A of the Listing Rules (as the case may be) in respect of such amended agreement as and when appropriate, including, where required, seeking independent Shareholders’ approval prior to effecting such change.
In the event where we enter into further tenancy agreement with the counterparty of the Tenancy Agreement, we shall also comply with Chapters 14 and 14A of the Listing Rules (as the case may be) as and when appropriate.
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SUBSTANTIAL SHAREHOLDERS
Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account of the Shares which may be issued pursuant to the exercise of the [REDACTED] and any options that may be granted under the Share Option Scheme), the following persons/entities will have an interest or a short position in the Shares or the underlying Shares which would be required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly or indirectly, be 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 our Company or any other member of our Group:
Percentage of Number of Shares shareholding held held immediately immediately after after completion of completion of the the Capitalisation Capitalisation Issue Name of Capacity/Nature of Issue and and the Shareholder interest the [REDACTED] [REDACTED] (Note 1)
Rich Topmax Beneficial owner [REDACTED](L) [REDACTED]% (Note 2) Mr. Colby Chiu Interest of controlled [REDACTED](L) [REDACTED]% corporation (Note 2) Ms. Wong Interest of spouse [REDACTED](L) [REDACTED]% (Note 3)
Notes:
(1) The Letter “L” denotes the entity/person’s long position in the Shares.
(2) Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account the Shares which may be issued pursuant to the exercise of the [REDACTED] and the options which may be granted under the Share Option Scheme), our Company will be owned as to [REDACTED]% by Rich Topmax, which is in turn wholly owned by Mr. Colby Chiu. Under the SFO, Mr. Colby Chiu is deemed to be interested in all the Shares which are registered in the name of Rich Topmax.
(3) Ms. Wong is the spouse of Mr. Colby Chiu. Under the SFO, Ms. Wong is deemed to be interested in the same number of Shares in which Mr. Colby Chiu is interested.
Save as disclosed above, our Directors are not aware of any person who will, immediately following the completion of the Capitalisation Issue and the [REDACTED] (without taking into account of the Shares which may be issued pursuant to the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme), have an interest or short position in the Shares or the underlying Shares which would be required to be disclosed to our Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly or indirectly, be 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 member of our Group.
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SHARE CAPITAL
SHARE CAPITAL
The following table sets forth information with respect to the share capital of our Company immediately following the Capitalisation Issue and the [REDACTED], without taking into account any Shares which may be issued pursuant to the exercise of the [REDACTED] and any options that may be granted under the Share Option Scheme:
Authorised share capital: HK$
1,000,000,000 Shares 10,000,000
Shares in issue or to be issued, fully paid or credited as fully paid:
101 Shares in issue as at the date of this document 1.01 [REDACTED] Shares to be issued under the Capitalisation Issue [REDACTED] [REDACTED] Shares to be issued under the [REDACTED] [REDACTED]
[REDACTED] Total: [REDACTED]
Assumptions
The above table assumes that the Capitalisation Issue and the [REDACTED] become unconditional and the issue of Shares pursuant thereto is made as described herein. It does not take into account any Shares which may be allotted and issued pursuant to the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme, or any Shares which may be allotted and issued or repurchased by our Company pursuant to the general mandates granted to our Directors to allot and issue or repurchase Shares referred to in the paragraphs headed “General mandate to issue Shares” or “General mandate to repurchase Shares” below in this section, as the case may be.
Minimum public float
Pursuant to Rule 8.08(1)(a) of the Listing Rules, at the time of the [REDACTED] and at all times thereafter, our Company must maintain the minimum prescribed percentage of 25% of the issued share capital of our Company in the hands of the public (as defined in the Listing Rules).
RANKING
The [REDACTED] and the Shares which may be issued under the [REDACTED] will rank pari passu in all respects with all other Shares now in issue or to be issued as mentioned in this document, and will rank in full for all dividends and other distributions hereafter declared, paid or made on the Shares in respect of a record date which falls after the date of this document save for any entitlement under the Capitalisation Issue.
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SHARE CAPITAL
CAPITALISATION ISSUE
Pursuant to the resolutions in writing of our Shareholders passed on [¼], subject to the share premium account of our Company being credited as a result of the [REDACTED], our Directors were authorised to allot and issue a total of [REDACTED] Shares to the holders of shares on the register of members of our Company at the close of business on [¼] (or as they may direct) in proportion to their respective shareholdings (save that no Shareholder shall be entitled to be allotted or issued any fraction of a Share), credited as fully paid at par by way of capitalisation of the sum of HK$[REDACTED] standing to the credit of the share premium account of our Company, and the Shares to be allotted and issued pursuant to this resolution shall rank pari passu in all respects with the Shares in issue (save for the right to participate in the Capitalisation Issue).
CIRCUMSTANCES UNDER WHICH GENERAL MEETING AND CLASS MEETING ARE REQUIRED
The circumstances under which general meeting and class meeting are required are provided in our Articles, a summary of which is set out in the section headed “Summary of the Constitution of our Company and Cayman Islands Company Law” in Appendix III to this document.
SHARE OPTION SCHEME
Our Company has conditionally adopted the Share Option Scheme, the principal terms of which are summarised in the section headed “Statutory and General Information – D. Share Option Scheme” in Appendix IV to this document. As at the Latest Practicable Date, no option had been granted under the Share Option Scheme.
GENERAL MANDATE TO ISSUE SHARES
Conditional on the conditions as stated in the section headed “Structure and Conditions of the [REDACTED] – Conditions of the [REDACTED]” in this document being fulfilled, our Directors have been granted a general unconditional mandate to allot, issue and deal with the Shares and to make or grant offers, agreements or options which might require such Shares to be allotted and issued or dealt with subject to the requirements that the aggregate number of the Shares so allotted and issued or agreed conditionally or unconditionally to be allotted and issued (otherwise than pursuant to a rights issue, or scrip dividend scheme or similar arrangements, or a specific authority granted by our Shareholders) shall not exceed the aggregate of:
(a) 20% of the aggregate number of the Shares in issue immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be issued pursuant to the [REDACTED] and any Shares which may be granted under the Share Option Scheme); and
(b) the aggregate number of the Shares repurchased (if any) pursuant to the authority granted to our Directors as referred to in the section headed “General mandate to repurchase Shares” below in this section.
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SHARE CAPITAL
This mandate does not cover the Shares to be allotted, issued, or dealt with under a rights issue or upon the exercise of any options which may be granted under the Share Option Scheme. This general mandate to issue Shares will remain in effect until whichever is the earliest of:
(a) the conclusion of our Company’s next annual general meeting unless otherwise renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or
(b) it is varied or revoked by an ordinary resolution of our Shareholders in a general meeting.
For further details of this general mandate, please refer to the section headed “Statutory and General Information – Written resolutions of our Shareholders passed on [¼]” in Appendix IV to this document.
GENERAL MANDATE TO REPURCHASE SHARES
Conditional on the fulfillment of the conditions as stated in the section headed “Structure and Conditions of the [REDACTED] – Conditions of the [REDACTED]” in this document, our Directors have been granted a general unconditional mandate to exercise all the powers to repurchase Shares with an aggregate number of not more than 10% of the aggregate number of the Shares in issue immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be issued upon the exercise of the [REDACTED] and any options that may be granted under the Share Option Scheme).
This mandate only relates to repurchases made on the Stock Exchange or on any other stock exchange on which the Shares may be listed as recognised by the SFC and the Stock Exchange for this purpose and made in connection with all applicable laws, rules and regulations and the requirements of the Listing Rules. A summary of the relevant Listing Rules is set out in the section headed “Statutory and General Information – Repurchase by our Company of our own securities” in Appendix IV to this document.
The general mandate to repurchase Shares will remain in effect until whichever is the earliest of:
(a) the conclusion of our Company’s next annual general meeting unless otherwise renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or
(b) it is varied or revoked by an ordinary resolution of our Shareholders in a general meeting.
For further details of this general mandate, please refer to the section headed “Statutory and General Information – Written resolutions of our Shareholders passed on [¼]” in Appendix IV to this document.
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FINANCIAL INFORMATION
You should read this section in conjunction with our Group’s audited combined financial statements, including the notes thereto, as set out in the Accountants’ Report in Appendix I to this document. The Accountants’ Report has been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”). You should read the entire Accountants’ Report and not merely rely on the information contained in this section.
The following discussion and analysis contains certain forward-looking statements that reflect the current views in respect of future events and financial performance. These statements are based on assumptions and analyses made by our Group in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors our Group believes are appropriate under the circumstances. However, whether our actual results reported in future periods differ materially from those discussed below depends on various factors which we do not have any control over. Factors that could cause or contribute to such differences include those discussed in the sections headed “Forward-Looking Statements”, “Risk Factors” and “Business” as well as those discussed elsewhere in this document.
OVERVIEW
We are a leading PRC ECMD company and established decorative stainless steel product manufacturer in the PRC and Hong Kong, specialising in design, development, manufacture, decoration and installation of customised elevator cabin products and a broad range of decorative stainless steel products according to our customers’ needs. Elevator cabins are the compartments which carry passengers in the elevators whereas decorative stainless steel products are architectural finishing materials commonly used to furnish the indoor and outdoor surface areas of residential buildings, commercial buildings as well as hospitality and infrastructure facilities. Our customers primarily include elevator companies and construction contractors for residential and commercial property projects in the PRC and Hong Kong. According to the Ipsos Report, we ranked fourth in the ECMD industry in the PRC in terms of revenue in 2019. In addition, we sell and distribute other architectural finishing materials, primarily including decorative films and functional films to our customers in the PRC and Hong Kong. We have been the distributor of decorative films and functional films in the PRC, Hong Kong and Macau for an international brand owned by Supplier A. We also install elevator cabin products, decorative films and functional films in Hong Kong upon customer’s request. For further information about our business and operations, please refer to the section headed “Business” in this document.
We recorded revenue of approximately HK$396.9 million, HK$373.8 million and HK$400.9 million for the years ended 31 March 2019, 2020 and 2021, respectively. For the years ended 31 March 2019, 2020 and 2021, we also recorded profit of approximately HK$39.0 million, HK$21.7 million and HK$26.7 million, respectively. During the Track Record Period, our revenue was primarily derived from three major product types, namely: (i) elevator cabin; (ii) decorative stainless steel; and (iii) other architectural finishing materials. The revenue contribution of our three major product types were as follows, (i) approximately 64.3%, 69.6% and 66.4% of our revenue was derived from elevator cabin; (ii) approximately 20.7%, 16.3% and 21.2% of our revenue was derived from decorative stainless steel; and (iii) approximately 15.0%, 14.1% and 12.4% of our revenue was derived from other architectural finishing materials, during the years ended 31 March 2019, 2020 and 2021, respectively.
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FINANCIAL INFORMATION
BASIS OF PRESENTATION
Our Group comprising our Company and our subsidiaries resulting from the Reorganisation, which is continued to be controlled by the controlling shareholder and is regarded as a continuing entity. Please refer to the section headed “History, Reorganisation and Corporate Structure” in this document for details.
Accordingly, the consolidated financial information of our Group for the Track Record Period now comprising our Group, as if the group structure upon the completion of the Reorganisation had been in existence throughout the Track Record Period or since the respective dates of incorporation or establishment, whichever is shorter.
The historical financial information of our Group for the Track Record Period, as set out in the Accountants’ Report to this document, which has been prepared based on the accounting policies set out in note 4 to the Accountants’ Report which conform with the Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA and the principle of merger accounting under Accounting Guidance 5 “Merger Accounting for Common Control Combinations” issued by the HKICPA (the “Historical Financial Information”). All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of our Group are eliminated in full on consolidation.
For the purpose of preparing and presenting the Historical Financial Information for the Track Record Period, our Group has consistently applied the accounting policies which conform with Hong Kong Accounting Standards (“HKASs”), HKFRSs, amendments to HKFRSs and interpretations issued by the HKICPA which are effective for our Group’s accounting period beginning on 1 April 2019 throughout the Track Record Period. Our Group has adopted HKFRS 9 “Financial Instruments”, HKFRS 15 “Revenue from contracts with customers” and HKFRS 16 “Leases” on a consistent basis throughout the Track Record Period. The adoption of HKFRS 9, HKFRS 15 and HKFRS 16 did not have any significant impact on our Group’s financial position or results of operations during the Track Record Period when compared to that of HKAS 39, HKAS 18 and HKAS 17. Further details of the accounting policies are set forth in and note 3 “Application of HKFRSs” and note 4 “Significant accounting policies” of the Accountants’ Report contained in Appendix I to this document.
The functional currency of our Company is RMB. The Historical Financial Information is presented in HK$, which the directors of our Company considered it is more relevant for the user of the Historical Financial Information.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENT
Critical accounting policies and estimates refer to those accounting policies and estimates that entail significant uncertainty and judgement and could yield materially different results under different conditions and/or assumptions. The preparation of the financial information in conformity with HKFRSs requires our management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The methods and approach that we use in determining these items is based on our experience, the nature of our business operations, the relevant rules and regulations and the relevant circumstances. These underlying
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FINANCIAL INFORMATION assumptions and estimates are reviewed on an ongoing basis as they may have a significant impact on our operational results as reported in our consolidated financial statements included elsewhere in this document.
Set out below are selected critical accounting policies adopted, critical judgement in applying accounting policies and estimates made in the preparation of our consolidated financial statements which we believe are both important to the presentation of our financial results and involve significant estimates and judgements. Further details are set forth in note 4 “Significant accounting policies” and note 5 “Key sources of estimation uncertainty” of the Accountants’ Report contained in Appendix I to this document.
Revenue from contracts with customers
Our Group recognises revenue when (or as) a performance obligation is satisfied, i.e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer.
A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.
Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met: (i) the customer simultaneously receives and consumes the benefits provided by our Group’s performance as our Group performs; (ii) our Group’s performance creates or enhances an asset that the customer controls as our Group performs; or (iii) our Group’s performance does not create an asset with an alternative use to our Group and our Group has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct good or service.
A contract asset represents our Group’s right to consideration in exchange for goods or services that our Group has transferred to a customer that is not yet unconditional. It is assessed for impairment in accordance with HKFRS 9. In contrast, a receivable represents our Group’s unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.
A contract liability represents our Group’s obligation to transfer goods or services to a customer for which our Group has received consideration (or an amount of consideration is due) from the customer.
A contract asset and a contract liability relating to the same contract are accounted for and presented on a net basis.
Over time revenue recognition: measurement of progress towards complete satisfaction of a performance obligation:
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FINANCIAL INFORMATION
Input method
The progress towards complete satisfaction of a performance obligation is measured based on input method, which is to recognise revenue on the basis of our Group’s efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation, that best depict our Group’s performance in transferring control of goods or services.
Performance obligations for contracts with customers
Sales of elevator cabin
For the sales of elevator cabin, our Group’s performance does not create an asset with an alternative use to our Group and our Group has an enforceable right to payment for performance completed to date. The revenue is recognised progressively over time using the input method, i.e. based on the proportion of the actual costs incurred relative to the estimated total costs plus a margin. The contract asset (either partially or in full) is transferred to receivables when the rights to payment for that amount has become unconditional. No refund nor warranty clauses were included in the contracts with customers. No refund nor warranty clauses were included in the contracts with customers.
Sales of decorative stainless steel
For the sales of decorative stainless steel, revenue is recognised when control of the goods has transferred, being at the point the goods are delivered to the customer. No refund nor warranty clauses were included in the contracts with customers. No refund nor warranty clauses were included in the contracts with customers.
Sales of other architectural finishing materials
For the provision of integrated solutions of sales, modification and installation of other architectural finishing materials, our Group’s performance creates or enhances the products that the customer controls as the products are created or enhanced. The revenue is recognised progressively over time using the input method, i.e. based on the proportion of the actual costs incurred relative to the estimated total costs plus a margin. The contract asset (either partially or in full) is transferred to receivables when the rights to payment for that amount has become unconditional. For purely sales of other architectural finishing materials, revenue is recognised when control of the goods has transferred, being at the point the goods are delivered to the customer. No refund nor warranty clauses were included in the contracts with customers.
In order to keep track of the actual costs incurred for a given sales orders, our actual costs incurred for each sales order are monitored and recorded by accounting department assessed by its manager for accuracy and monitored by management. In addition, the officer would perform monthly assessment of such cost records by cross checking the relevant information against, where applicable, the purchase order, project budget cost schedule, supplier’s invoice and costs calculation, after which the relevant costs would be recorded. Furthermore, the accounting personnel would re-calculate the amount of revenue recognised
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FINANCIAL INFORMATION at each month end based on the purchase orders and the related supporting documents attached to the respective voucher for revenue recognition. For other common costs recorded under the cost of sales, such are allocated among sales orders based on its respective revenue.
Our total costs incurred for elevator cabin or other architectural finishing materials mainly represented, among others, costs of materials, labour costs for production, other expenses directly attributable to the sales orders and other manufacturing overheads. From time to time, (i) our customers may provide us with specifications and requirements for products that they intend to purchase; and/or (ii) our sales and marketing team as assisted by our research and development team may advise our customers on the implementation and/or make adjustments, modifications or alterations to our existing products. Based on the aforesaid information, a production plan, including costs budget, timetable, resource allocation arrangement, will be formulated and the relevant costs would be incorporated into the subject quotation revert to our customers. Once the customer confirms the design and specifications for the subject sales orders, the production team would finalise the estimated costs accordingly. Such information would be used for revenue and cost recognition purposes.
In this connection, our Group has implemented internal control procedures across the procurement cycle and the sales cycle involving, where appropriate, the procurement team, the sales team and the accounting team as well as the management. Such internal control procedures are implemented with a view to ensure revenue and costs for the sales of elevator cabin and other architectural finishing materials are recognised in accordance with the accounting policies adopted by our Group consistently throughout the Track Record Period.
Our Directors confirmed that there were no significant changes in underlying judgements and assumptions adopted in revenue and cost recognition during the Track Record Period and there were no material differences between the estimated costs and actual total costs recognised by our Group which resulted in material reversal of revenue in the subsequent financial year during the Track Record Period.
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FINANCIAL INFORMATION
Revenue recognition from sales of other architectural finishing materials over time
For the modification and installation of other architectural finishing materials, significant judgment is required in determining whether our Group’s performance creates or enhances the products that the customer controls as the products are created or enhanced. Based on the assessment of our Group’s management, our Group’s performance creates or enhances the products that the customer controls as the products are created or enhanced. Accordingly, the revenue from modification and installation of other architectural finishing materials are considered to be performance obligation satisfied over time.
Provision of expected credit losses (“ECL”) allowance for trade receivables and contract assets
Our Group has applied the simplified approach under HKFRS 9 to measure ECL which used a lifetime ECL for all trade receivables and contract assets. Except for debtors with significant or credit-impaired balances, our Group determines the ECL on these items by using a provision matrix, grouped by past due status. The provision matrix was based on our Group’s historical default rates taking into consideration forward-looking information that was reasonable and supportable available without undue costs or effort. At every reporting date, the historical observed default rates were reassessed and changes in the forward looking information were considered. As at 31 March 2019, 31 March 2020 and 31 March 2021, the carrying amounts of trade receivables were approximately HK$93.4 million (net of loss allowance of approximately HK$0.9 million), HK$54.2 million (net of loss allowance of approximately HK$1.2 million) and HK$104.3 million (net of loss allowance of approximately HK$1.3 million), and the carrying amounts of contract assets were approximately HK$6.3 million (net of loss allowance of HK$60,000), HK$5.0 million (net of allowance of HK$59,000) and HK$4.8 million (net of allowance of approximately HK$9,000), respectively. For details of impairment assessment, please refer to note 31 “Financial instruments” of the Accountants’ Report contained in Appendix I to this document.
Further details of impairment assessment are set forth in Note 31 “Financial Instruments” of the Accountants’ Report contained in Appendix I to this document.
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Estimated allowance for slow-moving inventories
Our Group makes allowance for inventories based on an assessment of the net realisable value of inventories. Allowances are applied to inventories where events or changes in circumstances indicate that the net realisable value is lower than the cost of inventories. The identification of obsolete inventories requires the use of judgment and estimates on the conditions and marketability of the inventories. Where the subsequent selling prices decline or costs necessary to make the sales increase, additional allowance may arise. As at 31 March 2019, 2020 and 2021, the carrying amounts of inventories were approximately HK$65.4 million (net of allowance for slow-moving inventories of approximately HK$4.2 million), approximately HK$64.7 million (net of allowance for slow-moving inventories of approximately HK$5.3 million) and approximately HK$75.4 million (net of allowance for slow-moving inventories of approximately HK$3.0 million), respectively.
SIGNIFICANT FACTORS AFFECTING OUR GROUP’S RESULTS OF OPERATION AND FINANCIAL CONDITION
The results of operations and financial condition during the Track Record Period have been and will continue to be affected by a number of factors, including but not limited to those set forth in the section headed “Risk Factors” in this document and as set out below.
We derived a significant portion of our revenue from Customer A, being our largest customer during the Track Record Period
During the Track Record Period, Customer A has been our largest customer by revenue generated. For the years ended 31 March 2019, 2020 and 2021, our revenue attributable to Customer A was approximately 55.1%, 64.0% and 61.9%, respectively. For details of Customer A and an analysis on the sustainability of our business in consideration of our reliance on Customer A, please refer to the section headed “Business – Customers – Customer concentration” in this document. In light of the above, we face the risks arising from our reliance on Customer A in the future.
During the Track Record Period, we had entered into supply framework agreements with Customer A to confirm in advance the fundamental terms, including the rights and obligations of each party. However, we cannot assure you that we will successfully maintain our business relationship with Customer A or diversify our customer portfolio and there is no assurance that we will be able to maintain our revenue generated from sales to Customer A in the future and/or secure new orders from other customers of similar volume and value on comparable terms to offset any reduction in revenue from Customer A. If Customer A ceases our business relationship or reduces its purchases from us or Customer A’s business experiences a decline, our business, financial condition and results of operations will be materially and adversely affected.
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FINANCIAL INFORMATION
We may be affected by nationwide and/or regional social, political, regulatory and economic conditions as well as trade policies in the PRC and Hong Kong
We have production facilities and/or offices in the PRC and Hong Kong. In addition, our Group has mainly derived our revenue from (i) the PRC, which accounted for approximately 70.5%, 76.2% and 70.6% of our total revenue; and (ii) Hong Kong, which accounted for approximately 26.6%, 19.6% and 26.5% of our total revenue, for the years ended 31 March 2019, 2020 and 2021, respectively.
Our financial performance depends significantly on the general economic conditions in the PRC and Hong Kong and their impact on the local economy, the property sector as well as consumer spending which could reduce the demand for our products. On the other hand, any change in the PRC or Hong Kong government policy, including tightening of regulatory restrictions, industry-specific policies, such as labour or environmental policies, may have an adverse effect on our Group’s business operation, financial condition and results of our operations.
As such, our business, results of operations and financial condition are therefore subject to nationwide and/or regional policies, political events and economic, political, regulatory and social developments in the PRC and Hong Kong as well as the country(ies) where our customers conduct their business. Global and regional economic conditions may be affected by many unforeseen factors such as financial crisis, economic recessions or political and social turmoil and events which could adversely affect our business. If we fail to adapt to changes in the government policies, political events and social, political, regulatory and economic conditions of the countries where we and/or our customers operate, our business, results of operations and financial condition may be materially and adversely affected.
We generally do not enter into long-term contracts or framework agreements with our customers except Customer A which exposes us to the risk of uncertainty and potential volatility with respect of our revenue
Save and except for the supply framework agreements with Customer A, we generally do not enter into any long-term contracts or framework agreement with our customers, which is a norm in the industry which our Group operates. As our customers only place orders with us on an order-by-order basis, there is no assurance that our customers will continue placing orders with us at a comparable level as they did during the Track Record Period or at all. Amount and/or volume of purchase orders from our customers may vary significantly from time to time attributable to factors beyond our control, which create uncertainties on our future revenue streams and we cannot guarantee that our business will grow or remain stable going forward. If our customers reduce their orders or cease placing orders with us altogether, and we are unable to secure new sales orders from our existing or new customers, our business, financial condition and results of operations may be materially and adversely affected.
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We may be unable to effectively and efficiently manage the supply and quality of our raw materials and consumables and we may be affected by any potential fluctuation in the prices of raw materials and consumables
We do not produce all the components or parts that we use for production and we procure raw materials and consumables from third party suppliers. For the years ended 31 March 2019, 2020 and 2021, purchases from our five largest suppliers accounted for approximately 42.5%, 38.7% and 37.3% of our total purchases, respectively.
If any of our major suppliers decides not to accept our future purchase orders on the same or similar terms, or decides to substantially reduce their volume of supply to us, or cease their business relationship with us, we may need to find a situation replacement in a timely manner, failure of which may result in delay in our production schedules or default on our agreements with our customers. In addition, if any of our key suppliers fails to supply raw materials and consumables which satisfy our quality standards, we may need to source such raw materials and consumables from other suppliers, which may result in additional costs and delay in such delivery of our products to our customers. There is no assurance that our suppliers will be able to supply and deliver the required raw materials and consumables to us in a timely manner or that the raw materials and consumables they supply to us will not be defective or substandard. Any delay in the delivery of raw materials and consumables or any defects in the raw materials and consumables supplied to us may materially and adversely affect or delay our production schedule and affect our product quality. When required, if we cannot secure raw materials and consumables of similar quality and at reasonable prices from alternative suppliers in a timely manner or at all, we may not be able to deliver our products to our customers on time with required quality. As a result, our business, financial condition and results of operations may be materially and adversely affected.
Moreover, any sudden or significant increases in the prices of raw materials and consumables for our production may materially and adversely affect our profit margin and results of operations. There is no assurance that the prices of the raw materials and consumables for our production will remain stable in the future, or that any price increases will not lead to unexpected and potentially significant increases in our production costs. We also cannot assure you that we will be able to transfer the increase in production costs to our customers without affecting our sales volume in the future. If we are unable to increase the prices of our products to offset any increases in our costs of raw materials and consumables used in a timely manner or at all, our profit margin and results of operations may be materially and adversely affected.
We may suffer losses from fluctuation in foreign exchanges
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. During the Track Record Period, our sales and purchases are mainly denominated in RMB and HKD while our purchases are mainly denominated in RMB. In addition, we have production facilities and/or offices in the PRC, of which overheads are settled in RMB and therefore expose us to foreign exchanges risks. We recorded net foreign exchange losses of approximately HK$1.2 million, HK$319,000 and net foreign exchange gain of approximately HK$0.8 million for the years ended 31 March 2019, 2020 and 2021, respectively. For the purposes of presenting the consolidated financial statements, the assets and liabilities of our
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FINANCIAL INFORMATION
Group’s operations are translated into the presentation currency of our Group (i.e. HK$) using exchange rates prevailing at the end of each reporting period and income and expenses items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates prevailing at the dates of transactions are used. Exchange differences arising from the such translation, if any, are recognised in other comprehensive income and accumulated in equity under the heading of translation reserve. Our Group recorded exchange difference in other comprehensive expense of approximately HK2.1 million and HK$5.6 million for the year ended 31 March 2019 and 2020, and exchange difference in other comprehensive income of approximately HK$7.9 million for the year ended 31 March 2021. Fluctuations in foreign exchange may be caused by various factors and unpredictable. We cannot guarantee that we will not suffer losses on foreign exchanges in the future. During the Track Record Period,
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FINANCIAL INFORMATION we did not hedge against our foreign exchange risks as our results of operations has generally been partially mitigated by the natural offset of our foreign currency receivables with our foreign currency payables. In the event that we are unable to manage our foreign currency risks effectively or at all, our business, results of operation and financial condition may be materially and adversely affected.
For further details of how foreign exchange rates affect our business, results of operations and financial condition, please refer to note 31 “Financial instruments − market risk − foreign currency risk” of the Accountants’ Report contained in Appendix I to this document.
Revocation of, or changes to, any of the tax preferential treatments or incentives provided to us by the PRC Government could materially reduce our profitability
The PRC Government has provided various incentives to our business, including reduced enterprise income tax rates. For instance, Cobelco GZ, our major PRC subsidiary, has been recognised as a high-and-new technology enterprise（高新技術企業）since 2017, we were eligible to a preferential income tax rate of 15% (compared to the statutory income tax rate of 25%) since 1 January 2017 and up to the Latest Practicable Date. For the years ended 31 March 2019, 2020 and 2021, the effective tax rate of our Group were approximately 17.3%, 19.2% and 22.1%, respectively. In 2020, we have been re-accredited as a high-and-new technology enterprise with a term of three years. However, we cannot assure you that such tax benefits policies will continue to be enforced by the relevant PRC authorities. The revocation of, or changes to, any of the tax preferential treatments could adversely affect our financial condition and results of operations.
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FINANCIAL INFORMATION
SUMMARY OF RESULTS OF OPERATIONS
Our Group’s consolidated statements of profit or loss and other comprehensive income during the Track Record Period are summarised below, which have been extracted from the Accountants’ Report set out in Appendix I to this document. As such, the following sections should be read in conjunction with the Accountants’ Report set out in Appendix I to this document.
For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Revenue 396,857 373,826 400,851 Cost of sales (277,383) (273,420) (294,459)
Gross profit 119,474 100,406 106,392 Other income, gains and losses (330) 1,508 632 (Impairment losses, net of reversal) reversal of impairment losses, net of impairment on trade receivables and contract assets (654) (294) 2 Selling and distribution expenses (13,671) (13,510) (12,757) Administrative expenses (39,072) (38,146) (34,372) Research and development expenses (15,539) (12,409) (13,312) [REDACTED] [REDACTED] [REDACTED] [REDACTED] Finance costs (3,131) (4,515) (5,143)
Profit before tax 47,077 26,896 34,222 Income tax expense (8,125) (5,154) (7,546)
Profit for the year 38,952 21,742 26,676
Other comprehensive (expense) income Item that will not be reclassified to profit or loss: Exchange difference on translation from functional currency to presentation currency (3,851) (5,641) 8,291
Item that may be reclassified subsequently to profit or loss: Exchange difference arising on translation of foreign operations 1,733 8 (416)
Other comprehensive (expense) income for the year (2,118) (5,633) 7,875
Total comprehensive income for the year 36,834 16,109 34,551
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FINANCIAL INFORMATION
PRINCIPAL COMPONENTS OF RESULTS OF OPERATIONS
Revenue
The following table sets forth the breakdown of the revenue of our Group by product segments during the Track Record Period.
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Elevator cabin 254,945 64.3 259,996 69.6 266,252 66.4 Decorative stainless steel 82,314 20.7 61,109 16.3 85,100 21.2 Other architectural finishing materials 59,598 15.0 52,721 14.1 49,499 12.4
Total Revenue 396,857 100.0 373,826 100.0 400,851 100.0
Elevator cabin
We mainly supply our elevator cabin products to elevator companies. The elevator cabin segment of our Group contributed revenue of approximately HK$254.9 million, HK$260.0 million and HK$266.3 million, representing approximately 64.3%, 69.6% and 66.4% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively.
Decorative stainless steel
Major products of our Group under the decorative stainless steel segment are architectural finishing materials commonly used to furnish the indoor and outdoor surface areas of residential buildings, commercial buildings as well as hospitality and infrastructure facilities. The revenue from decorative stainless steel segment amounted to approximately HK$82.3 million, HK$61.1 million and HK$85.1 million for the years ended 31 March 2019, 2020 and 2021, representing approximately 20.7%, 16.3% and 21.2% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively.
Other architectural finishing materials
In addition to the revenue derived from the elevator cabin segment and the decorative stainless steel segment, we also derived a small portion of our revenue from the other architectural finishing materials segment, which primarily included products such as decorative films and functional films, electronic components, industrial adhesives and metal parts for architectural finishing purpose to our customers. We sell and distribute decorative films and functional films for an international brand owned by Supplier A in the PRC, Hong Kong and Macau. The other architectural finishing materials segment contributed approximately HK$59.6 million, HK$52.7 million and HK$49.5 million for the years ended 31 March 2019, 2020 and 2021, representing
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FINANCIAL INFORMATION
approximately 15.0%, 14.1% and 12.4% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively.
Revenue by geographical location
Our principal markets are the PRC and Hong Kong. We have also supplied products to other locations, such as Macau, the Philippines, Thailand and South Korea during the Track Record Period. The following table sets out a breakdown of revenue from our customers based on their respective locations where our goods or services are delivered or provided and the respective percentages to our total revenue during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Geographical location PRC 279,857 70.5 284,719 76.2 283,097 70.6 Hong Kong 105,438 26.6 73,313 19.6 106,092 26.5 Others (Note) 11,562 2.9 15,794 4.2 11,662 2.9
Total revenue 396,857 100.0 373,826 100.0 400,851 100.0
Note: Others primarily included Macau, the Philippines, Thailand and South Korea.
During the Track Record Period, PRC is the largest geographical segment in terms of revenue primarily due to our strategic location in the PRC with close proximity to major customers and suppliers thereof. Our revenue derived from customers located in the PRC accounted for approximately 70.5%, 76.2% and 70.6% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively. During the same period, our revenue derived from customers located in Hong Kong also contributed a significant portion of our revenue, which accounted for approximately 26.6%, 19.6% and 26.5% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively.
The demand for our products in the elevator cabin segment have increased over the Track Record Period, which was mainly attributable to the increase in revenue derived from customers located in the PRC. Our Group generated approximately HK$231.4 million, HK$251.5 million, HK$254.1 million in elevator cabin segment revenue from customers located in the PRC for the year ended 31 March 2019, 2020 and 2021, respectively, which represented approximately 90.8%, 96.7% and 95.4% of the total revenue elevator cabin segment for the corresponding year. Furthermore, our Group have maintained a consistently high overall utilisation rate of our production facilities over the Track Record Period. For further details, please refer to information as set out under section headed “Business – Our production process and production facilities – Production capacity” in this document.
In addition, our Group derived approximately HK$105.4 million, HK$73.3 million and HK$106.1 million from customers located in Hong Kong for the year ended 31 March 2019, 2020 and 2021, respectively, of which approximately HK$50.3 million, HK$35.1 million and HK$61.1 million of revenue was attributable to our decorative stainless steel segment, representing approximately 47.7%, 47.9% and 57.6% of our revenue derived from customers located in Hong Kong for the corresponding year.
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FINANCIAL INFORMATION
Given the development of the Outbreak during the last quarter of the year ended 31 March 2020, our revenue derived from customers located in Hong Kong has decreased for the year ended 31 March 2020 mainly attributable to the year-on-year decrease in (i) elevator cabin segment revenue of approximately HK$15.1 million; and (ii) decorative stainless steel segment revenue of approximately HK$15.2 million, as the aforesaid segments were temporarily affected to various degrees. However, revenue derived from customers located in Hong Kong has since recovered from approximately HK$73.3 million for the year ended 31 March 2020 to approximately HK$106.1 million for the year ended 31 March 2021.
During the Track Record Period, our revenue derived from customers located in locations other than the PRC and Hong Kong, including but not limited to Macau, the Philippines, Thailand and South Korea, in aggregate, accounted for approximately 2.9%, 4.2% and 2.9% of our total revenue for the years ended 31 March 2019, 2020 and 2021, respectively. Such revenue generated from customers located in locations other than the PRC and Hong Kong was mainly attributable to revenue generated from the decorative stainless steel segment which contributed approximately HK$7.2 million, HK$13.6 million and HK$11.3 million for the year ended 31 March 2019, 2020 and 2021, respectively, represented approximately 62.6%, 86.4% and 96.8% of our revenue derived from customers located outside the PRC and Hong Kong for the corresponding year. During the Track Record Period, sales to customers located outside the PRC and Hong Kong has not been a significant revenue contributor to our Group as a whole.
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FINANCIAL INFORMATION
Cost of sales
During the Track Record Period, our cost of sales mainly consisted of (i) costs of raw materials and consumables used, which mainly represented stainless steel materials, decorative films, functional films and electronic components; (ii) employee costs; (iii) depreciation of property, plant and equipment; and (iv) other cost of sales associated with the production of our elevator cabin and decorative stainless steel including, among others, water and electricity expenses and packing and freight charges. The following table sets forth, for the years indicated, the breakdown of the cost of sales of our Group during the Track Record Period.
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Raw materials and consumables used 196,911 71.0 195,140 71.4 214,758 72.9 Employee costs 41,440 14.9 45,844 16.8 42,898 14.6 Others 39,032 14.1 32,436 11.8 36,803 12.5
Total cost of sales 277,383 100.0 273,420 100.0 294,459 100.0
Fluctuations in our cost of sales
The results of operations and financial positions of our Group could be significantly affected by the fluctuations in the cost of sales, which primarily included costs of raw materials and consumables used and employee costs.
Costs of raw materials and consumables used primarily consisted of stainless steel materials. The price and availability of different materials may vary from period to period due to factors such as customer specifications, demand and market conditions. Employee costs primarily represented salaries and wages for our labour involved in production. Our other cost of sales mainly represented depreciation for property, plant and equipment for production use, rent and rates, consumables and freight charges.
Costs of raw materials and consumables used
Costs of raw materials and consumables used mainly comprised the purchases of materials for the manufacturing of elevator cabin, decorative stainless steel and selling of other architectural finishing materials of our Group. The costs of raw materials and consumables used accounted for approximately 71.0%, 71.4% and 72.9% of the cost of sales of our Group for the years ended 31 March 2019, 2020 and 2021, respectively. The fluctuations in costs of raw materials and consumables used may adversely affect the results of operations of our Group. For further discussion of the costs of raw materials and consumables of our Group, please refer to the sub-section headed “Period to period comparison of results of operations” in this section. The following sensitivity analysis illustrates the impacts of hypothetical fluctuations in the costs of raw materials and
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FINANCIAL INFORMATION consumables in cost of sales on our profit before tax during the Track Record Period. The hypothetical fluctuation rates are set at 2.0% and 5.0% while all other things being held constant:
Hypothetical fluctuations in costs of raw materials and consumables used in cost of sales +2.0% +5.0% -2.0% -5.0% HK$’000 HK$’000 HK$’000 HK$’000
Increase/(decrease) in profit before tax For the year ended 31 March 2019 (3,938) (9,846) 3,938 9,846 For the year ended 31 March 2020 (3,903) (9,757) 3,903 9,757 For the year ended 31 March 2021 (4,295) (10,738) 4,295 10,738
Employee costs
Employee costs mainly represented the salaries and wages for our staff involved in production. The employee costs also accounted for approximately 14.9%, 16.8%, and 14.6% of the cost of sales of our Group for the years ended 31 March 2019, 2020 and 2021, respectively. The employee costs may be affected by the availability of labour in the market as well as economic factors in the PRC such as inflation rate and economic growth. Shortage in the labour market for workers may increase the salary level, and correspondingly, the costs associated with hiring and retaining labour, which in turn may adversely affect the results of operations. For further discussion of the employee costs of our Group, please refer to the sub-section headed “Period to period comparison of results of operations” in this section. The following sensitivity analysis illustrates the impact of hypothetical fluctuations in our Group’s employee costs in cost of sales on our Group’s profit before tax during the Track Record Period. The hypothetical fluctuation rates are set at 2.0% and 5.0% while all other things being held constant:
Hypothetical fluctuations in employee costs in cost of sales +2.0% +5.0% -2.0% -5.0% HK$’000 HK$’000 HK$’000 HK$’000
Increase/(decrease) in profit before tax For the year ended 31 March 2019 (829) (2,072) 829 2,072 For the year ended 31 March 2020 (917) (2,292) 917 2,292 For the year ended 31 March 2021 (858) (2,145) 858 2,145
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FINANCIAL INFORMATION
Gross profit and gross profit margin
For the years ended 31 March 2019, 2020 and 2021, our gross profit amounted to approximately HK$119.5 million, HK$100.4 million and HK$106.4 million and gross profit margin of approximately 30.1%, 26.9% and 26.5%, respectively.
Our gross profit decreased by approximately HK$19.1 million, or 16.0%, from approximately HK$119.5 million for the year ended 31 March 2019 to approximately HK$100.4 million for the year ended 31 March 2020. Our gross profit amounted to approximately HK$106.4 million for the year ended 31 March 2021. During the Track Record Period, the gross profit margin for our Group fluctuated between approximately 26.5% to approximately 30.1%. Our gross profit margin may fluctuate from year-to-year as our customer and sales mix as well as cost structure of the products sold varied over time.
Other income, gains and losses
The following table sets forth the breakdown of other income, gains and losses of our Group during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Other income: – Bank interest income 34 50 43 – Other interest income 63 67 56 – Government grants 243 1,652 2,033 – Sales of scrap materials 792 960 923
1,132 2,729 3,055
Other gains or losses: – Losses on disposal of property, plant and equipment, net (269) (172) (208) – Provision for penalty – (767) (3,001) – Exchange losses, net (1,214) (319) 771 – Others 21 37 15
(1,462) (1,221) (2,423)
(330) 1,508 632
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Other income, gains and losses primarily consisted of government grants, sales of scrap materials, exchange gain or loss and provision for penalty.
Our Group recognised government grants of approximately HK$0.2 million, HK$1.7 million and HK$2.0 million for the years ended 31 March 2019, 2020 and 2021, respectively, which was mainly attributable to the incentives for being recognised as the high-and-new technology enterprise and there were no unfulfilled condition attached to these government grants and these amounts have been recognised as other income upon receipt during the Track Record Period.
Our Group recognised provision for penalty of approximately HK$0.8 million and HK$3.0 million for the year ended 31 March 2020 and 2021, respectively, as the Taishan Bureau of Land and Resources (currently known as Taishan Natural Resources Bureau) may charge a penalty for the delay in the date of scheduled building construction commencement and completion, according to the contract of transfer of state-owned land use right entered into by Sitami GD.
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FINANCIAL INFORMATION
Selling and distribution expenses
The following table sets forth the breakdown of selling and distribution expenses of our Group during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Employee benefit expenses 10,012 73.2 10,638 78.7 9,844 77.2 Transportation expenses 1,633 12.0 1,818 13.5 1,837 14.4 Motor vehicle expenses 772 5.6 465 3.4 244 1.9 Others 1,254 9.2 589 4.4 832 6.5
13,671 100.0 13,510 100.0 12,757 100.0
Our selling and distribution expenses primarily consisted of employee benefit expenses paid to our selling and distribution personnel, transportation and motor vehicle expenses. Throughout the Track Record Period, our Group maintained a relatively stable selling and distribution costs at approximately 3.4%, 3.6% and 3.2% of our Group’s total revenue, respectively.
Administrative expenses
The following table sets forth the breakdown of administrative expenses of our Group during the Track Record Period.
For the year ended 31 December 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Employee benefit expenses 23,101 59.1 24,445 64.1 20,423 59.4 Depreciation of right-of-use assets 3,091 7.9 2,984 7.8 2,277 6.6 Motor vehicle expenses 2,065 5.3 1,773 4.7 1,608 4.7 Travelling expenses 2,645 6.8 2,113 5.5 1,889 5.5 Entertainment 1,442 3.7 1,358 3.5 1,261 3.7 Depreciation of property, plant and equipment 977 2.5 569 1.5 1,202 3.5 Others (Note) 5,751 14.7 4,904 12.9 5,712 16.6
39,072 100.0 38,146 100.0 34,372 100.0
Note: Others mainly included bank charges, insurance expenses, offices expenses, repair and maintenance and telecommunication expenses.
The administrative expenses primarily comprised of employee benefit expenses for administrative staff, depreciation of right-of-use assets, motor vehicle expenses, travelling expenses, entertainment expenses and depreciation of property, plant and equipment.
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FINANCIAL INFORMATION
Research and development expenses
The following table sets forth the breakdown of the research and development expenses of our Group during the Track Record Period.
For the year ended 31 March 2019 2020 2021 HK$’000 % HK$’000 % HK$’000 %
Employee benefit expenses 6,672 42.9 7,381 59.5 6,835 51.3 Raw materials and consumables 7,956 51.2 3,977 32.0 5,484 41.2 Others 911 5.9 1,051 8.5 993 7.5
15,539 100.0 12,409 100.0 13,312 100.0
The research and development expenses primarily comprised of employee benefit expenses for research and development staff and raw materials and consumable consumed for conducting research and development activities.
Income tax expenses
The following table sets forth the breakdown of our Group’s taxation expenses during the Track Record Period:
For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Current income tax – Hong Kong 3,551 1,228 4,108 – PRC Enterprise Income Tax (“EIT”) 3,780 3,353 1,416 – PRC withholding tax – – 518
7,331 4,581 6,042
(Over) under provision in prior years – Hong Kong (99) (34) (58) – PRC EIT – – 460
(99) (34) 402
Deferred tax – Current year 893 607 1,102
8,125 5,154 7,546
Our Company is incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Act of the Cayman Islands and is accordingly not subject to income tax in the Cayman Islands.
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FINANCIAL INFORMATION
On 21 March 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered profits tax rates regime. The Bill was signed into law on 28 March 2018 and was gazetted on the following day. Under the two-tiered profits tax rates regime, the first HK$2,000,000 of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2,000,000 will be taxed at 16.5%. For the year ended 31 March 2019, 2020 and 2021, Hong Kong profits tax of the qualified entity is calculated in accordance with the two-tiered profit tax regime. The profits of other group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%.
Under the EIT Law of the PRC and the Regulation on the Implementation of the EIT Law of the PRC, the tax rate of the PRC subsidiaries is 25% for the Track Record Period, except for Cobelco GZ. In November 2017, Cobelco GZ was jointly recognised as a high-and-new technology enterprise by Guangdong Provincial Science and Technology Department, Guangdong Provincial Finance Department, Guangdong National Taxation Administration, and Guangdong Local Taxation Administration for a period of 3 years, i.e. from 2017 to 2019. In December 2020, Cobelco GZ’s qualification as a high-and-new technology enterprise has been extended for another period of 3 years, i.e. from 2020 to 2022. Accordingly, Cobelco GZ, as a high-and-new technology enterprise, is subject to EIT at a preferential income tax rate of 15%.
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FINANCIAL INFORMATION
Income tax expense for the respective years during the Track Record Period can be reconciled to the profit before tax per the consolidated statements of profit or loss and other comprehensive income as follows:
For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Profit before tax 47,077 26,896 34,222
Tax calculated at PRC statutory income tax rate of 25% 11,769 6,724 8,556 Tax effect of expenses not deductible for tax purpose 1,001 1,903 2,795 Tax effect of income not taxable for tax purpose (101) 147 (416) Tax effect of tax losses not recognised 488 186 163 Utilisation of tax losses previously not recognised – – (108) Tax effect of deductible temporary differences not recognised 22 – 377 Utilisation of deductible temporary differences previously not recognised (3) (41) – (Over) under provision in respect of prior years (99) (34) 402 Effect of income tax at concessionary rate (3,153) (2,943) (2,158) Effect of different tax rate of subsidiaries operating in other jurisdiction (1,862) (476) (2,400) Effect of additional tax benefits applicable to our Group (Note) (993) (816) (907) Deferred tax on undistributed earnings of the PRC subsidiaries 1,116 858 1,242 Others (60) (60) –
Income tax expense for the year 8,125 5,154 7,546
Effective tax rate 17.3% 19.2% 22.1%
Note: Pursuant to the relevant tax rules and regulations, expenses in research and development nature were deductible additionally for 15% of the qualified research and development expenses incurred for the years ended 31 March 2019, 2020 and 2021.
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FINANCIAL INFORMATION
PERIOD TO PERIOD COMPARISON OF RESULTS OF OPERATIONS
Year ended 31 March 2021 compared with year ended 31 March 2020
Revenue
Our revenue amounted to approximately HK$373.8 million for the year ended 31 March 2020 and approximately HK$400.9 million for the year ended 31 March 2021, representing an increase of approximately HK$27.1 million, or 7.2%. The following table sets out the revenue breakdown by product segment for the year ended 31 March 2020 and 2021, respectively.
For the year ended 31 March 2020 2021 HK$’000 % HK$’000 % (unaudited)
Elevator cabin 259,996 69.6 266,252 66.4 Decorative stainless steel 61,109 16.3 85,100 21.2 Other architectural finishing materials 52,721 14.1 49,499 12.4
Total Revenue 373,826 100.0 400,851 100.0
The revenue generated from the elevator cabin segment increased slightly from approximately HK$260.0 million for the year ended 31 March 2020 to approximately HK$266.3 million for the year ended 31 March 2021. Such increase in revenue generated from the elevator cabin segment was primarily attributable to the increase in sales of elevator cabin products to Customer A, being our largest customer in terms of revenue during the Track Record Period and one of the top three elevator companies in the PRC between 2014 and 2019 in terms of revenue generated according to lpsos Report.
Our revenue from the elevator cabin segment from our customers located in the PRC amounted to approximately HK$254.1 million for the year ended 31 March 2021 compared to approximately HK$251.5 million for the year ended 31 March 2020, representing a slight increase of approximately HK$2.6 million or 1.0%. The PRC has remained as our largest geographical revenue contributor for our elevator cabin segment for each of the years ended 31 March 2020 and 2021, respectively.
The revenue generated from the decorative stainless steel segment amounted to approximately HK$61.1 million for the year ended 31 March 2020 and approximately HK$85.1 million for the year ended 31 March 2021, representing an increase of approximately HK$24.0 million or 39.3%. Such fluctuation was primarily attributable to the net increase in sales of decorative stainless steel made to (i) our customers located in Hong Kong from approximately HK$35.1 million for the year ended 31 March 2020 to approximately HK$61.1 million for the year ended 31 March 2021; and partially offset by (ii) customers in locations other than Hong Kong and the PRC which decreased slightly
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FINANCIAL INFORMATION from approximately HK$13.6 million for the year ended 31 March 2020 to approximately HK$11.3 million for the year ended 31 March 2021, mainly as a result of the development of the Outbreak during the year ended 31 March 2021.
The revenue generated from the other architectural finishing materials segment decreased by approximately HK$3.2 million, or 6.1%, from approximately HK$52.7 million for the year ended 31 March 2020 to approximately HK$49.5 million for the year ended 31 March 2021. The decrease was primarily attributable to our segment revenue generated from the PRC decreased from approximately HK$20.9 million for the year ended 31 March 2020 to approximately HK$16.2 million for the year ended 31 March 2021 given the development of the Outbreak and the decrease in sales to our distributors primarily in relation to decorative films during the year ended 31 March 2021.
Our principal markets remained to be the PRC and Hong Kong for each of the years ended 31 March 2020 and 2021, and we have also supplied products to customers based in other locations including Macau, the Philippines, Thailand and South Korea during the Track Record Period. For each of the years ended 31 March 2020 and 2021, the PRC remained to be our largest geographical segment in terms of revenue primarily due to our strategic location in the PRC with close proximity to major customers and suppliers thereof, which contributed to approximately 76.2% and 70.6%, respectively.
Our revenue generated from customers based on their respective locations where our goods or services are delivered or provided was as follows, (i) the PRC, which amounted to approximately HK$284.7 million and HK$283.1 million for the years ended 31 March 2020 and 2021, respectively; (ii) Hong Kong, which amounted to approximately HK$73.3 million and HK$106.1 million for the years ended 31 March 2020 and 2021, respectively; and (iii) other locations, which amounted to approximately HK$15.8 million and HK$11.7 million for the years ended 31 March 2020 and 2021, respectively.
Given the temporary impact and the knock-on effects of the Outbreak during the year ended 31 March 2021, the demand from a number of our customers, subject to their locations, were temporarily affected to various degrees. However, given the Outbreak has been largely under control in the PRC and Hong Kong, the demand from our customers have continued to recover since their resumption of operations, albeit to a differ degree over time. For further details, please refer to the paragraph headed “Business – Effect of the outbreak of COVID-19” in this document.
Cost of sales
Given the movement in our revenue during the same period, cost of sales of our Group increased by approximately HK$21.1 million, or 7.7%, from approximately HK$273.4 million for the year ended 31 March 2020 to approximately HK$294.5 million for the year ended 31 March 2021. Cost of sales as a percentage of our revenue was largely stable at approximately 73.1% for the year ended 31 March 2020 and approximately 73.5% for the year ended 31 March 2021.
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FINANCIAL INFORMATION
Costs of raw materials and consumables used, being our largest cost of sales component, amounted to approximately HK$195.1 million and HK$214.8 million for the years ended 31 March 2020 and 2021, respectively, representing approximately 71.4% and 72.9% of the total cost of sales for the respective years. Raw materials and consumables primarily comprised, among others, stainless steel materials, decorative films and electronic components which were mainly used for production of our elevator cabin products and decorative stainless steel products.
Employee costs, being another component of our cost of sales, mainly comprised of salaries and wages for our staff involved in the production of our Group, decreased by approximately HK$2.9 million, or 6.3%, from approximately HK$45.8 million for the year ended 31 March 2020 to approximately HK$42.9 million for the year ended 31 March 2021. The slight decrease in employee costs was mainly attributable to the government grants from the government in PRC which have been offset against the employee costs.
The remaining cost of sales which consisted of, among others, (i) depreciation charges; (ii) water and electricity expenses; and (iii) packing and freight charges, amounted to approximately HK$32.4 million for the year ended 31 March 2020 and approximately HK$36.8 million for the year ended 31 March 2021, which was primarily attributable to the level of manufacturing activities during the respective years.
Gross profit and gross profit margin
Our overall gross profit increased by approximately HK$6.0 million, or 6.0%, from approximately HK$100.4 million for the year ended 31 March 2020 to approximately HK$106.4 million for the year ended 31 March 2021, which was primarily attributable to (i) the increase in revenue from elevator cabin segment and decorative stainless steel segment, which in aggregate increased by approximately HK$30.3 million or 9.4% from approximately HK$321.1 million for the year ended 31 March 2020 to approximately HK$351.4 million for the year ended 31 March 2021; and (ii) the slight fluctuation in our overall gross profit margin, being approximately 26.9% for the year ended 31 March 2020 and approximately 26.5% for the year ended 31 March 2021. The gross profit margin derived from Customer A was approximately 20.0% for the year ended 31 March 2021 compared to approximately 23.1% for the year ended 31 March 2020.
In general, our gross profit margin would be affected by, among others, (i) our sales mix for a given period as our Group specialises in design, development, manufacture, decoration and installation of customised elevator cabin products and a broad range of decorative stainless steel products according to its customers’ needs; (ii) the price and quantity of the range of products sold to our customers; and (iii) the cost structure, raw materials and components used for products sold by us. In this connection, our gross profit margin had and may continue to fluctuate from period to period.
Our overall gross profit margin for our elevator cabin segment remained broadly stable at approximately 23.2% for the year ended 31 March 2020 and approximately 20.8% for the year ended 31 March 2021, which was mainly attributable to (i) over 94.0% of our gross profit from this product segment was derived from customers based in the PRC for each of the years ended 31 March 2020 and 2021, respectively; and (ii) a majority of our revenue in
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FINANCIAL INFORMATION this product segment was generated from Customer A. The gross profit margin derived from Customer A as a whole was approximately 23.1% and 20.0% for the years ended 31 March 2020 and 2021, respectively. For further information on our relationship and transactions with Customer A, please refer to the section headed “Business – Customers – Customer concentration” in this document.
Our overall gross profit margin for our decorative stainless steel segment increased from approximately 41.3% for the year ended 31 March 2020 to approximately 44.2% for the year ended 31 March 2021. During the year ended 31 March 2021, our Group derived a greater portion of our decorative stainless steel segment revenue from customers based in Hong Kong, which we derived a comparably higher gross profit margin than customers based in the PRC and overseas attributable to our pricing strategy, which would be adjusted by, among others, our then available resources, delivery schedule as well as our orders on hand at the relevant time. The effects of the aforesaid fluctuation in geographic mix on the gross profit margin was largely offset by the period-on-period decrease in the gross profit margin derived from each of the geographical locations for the decorative stainless steel segment, which was adversely affected by the development and knock-on effects of Outbreak. Our gross profit margin for our other architectural finishing materials segment slightly decreased from approximately 27.9% for the year ended 31 March 2020 to approximately 27.1% for the year ended 31 March 2021 which was primarily attributable to our Group offered more favourable pricing terms in general with a view to attract additional potential customers, which adversely affected our gross profit margin, in particular, from customers based in Hong Kong. In general, the development of the Outbreak during the year ended 31 March 2021 has impacted the gross profit margin of this product segment.
Other income, other gains and losses
Our other income, other gains and losses decreased from a net gain of approximately HK$1.5 million for the year ended 31 March 2020 to approximately HK$0.6 million for the year ended 31 March 2021. Such fluctuation was primarily attributable to the increase in provision for penalty from approximately HK$0.8 million for the year ended 31 March 2020 to approximately HK$3.0 million for the year ended 31 March 2021 , as the Taishan Bureau of Land and Resources (currently known as Taishan Natural Resources Bureau) may
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FINANCIAL INFORMATION potentially impose a penalty for the delay in the date of scheduled building construction commencement and completion, according to the contract of transfer of state-owned land use right entered into by Sitami GD.
Selling and distribution expenses
Our selling and distribution expenses decreased by approximately HK$0.7 million from approximately HK$13.5 million for the year ended 31 March 2020 to approximately HK$12.8 million for the year ended 31 March 2021, respectively. Such expenses primarily comprised of employee benefit expenses and transportation expenses, which in aggregate represented approximately 92.2% and 91.6% of the total selling and distribution expenses for the year ended 31 March 2020 and 2021, respectively.
Administrative expenses
Our administrative expenses decreased from approximately HK$38.1 million for the year ended 31 March 2020 to approximately HK$34.4 million for the year ended 31 March 2021. The largest expense item was employee benefit expenses, being approximately HK$24.4 million and HK$20.4 million for the year ended 31 March 2020 and 2021, respectively. The decrease in such employee benefit expenses was mainly attributable to government grants from the Hong Kong government under the Employment Support Scheme and government grants from the State Taxation Administration of the PRC which have been offset against the employee benefit expenses. The remaining administrative expenses mainly consisted of (i) depreciation of right-of-use of assets; (ii) travelling expenses; (iii) motor vehicle expenses; and (iv) other administrative expenses, which in aggregate remained stable at approximately HK$11.8 million and HK$11.5 million for the year ended 31 March 2020 and 2021, respectively.
Research and development expenses
As our Group has continued to commit itself to research and development, our research and development expenses remained stable at approximately HK$12.4 million and HK$13.3 million for the year ended 31 March 2020 and 2021, respectively.
Finance costs
Given our outstanding bank borrowings and the interest rate at the relevant period, our finance costs increased from approximately HK$4.5 million for the year ended 31 March 2020 to approximately HK$5.1 million for the year ended 31 March 2021, which was primarily attributable to the increase in bank borrowings.
Income tax expense
Our income tax expense increased by approximately HK$2.3 million, or 44.2%, from approximately HK$5.2 million for the year ended 31 March 2020 to approximately HK$7.5 million for the year ended 31 March 2021. Our effective tax rate was approximately 19.2% and 22.1% for the years ended 31 March 2020 and 2021, respectively.
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FINANCIAL INFORMATION
Profit for the period and profit margin
As a result of the foregoing factors and [REDACTED] of approximately HK$[REDACTED] and [REDACTED] recognised for the year ended 31 March 2020 and 2021, respectively, our profit for the year increased by approximately HK$5.0 million, or 23.0%, from approximately HK$21.7 million for the year ended 31 March 2020 to approximately HK$26.7 million for the year ended 31 March 2021. Our net profit margin slightly increased from approximately 5.8% for the year ended 31 March 2020 to approximately 6.7% for the year ended 31 March 2021.
If the effects of [REDACTED] of approximately HK$[REDACTED] million and HK$[REDACTED] million for the year ended 31 March 2020 and 2021, respectively, were to be excluded, the adjusted profit for the year ended 31 March 2021, being a non-HKFRS measure, would be approximately HK$33.9 million, compared to approximately HK$27.9 million for the year ended 31 March 2020, representing an increase of approximately HK$6.0 million or 21.5%. The movement in profit for the year ended 31 March 2020 and 2021 was mainly attributable to the effects of (i) the gradual recovery from the outbreak of COVID-19, which has been further detailed under the paragraph headed “Business – Effect of the outbreak of COVID-19” in this document; (ii) the lowered gross profit margin attributable to the reasons as set out above; and (iii) the effects of the more stringent costs control which led to a reduction in administrative expenses as well as selling and distribution expenses. Our non-HKFRS adjusted net profit margin (excluding the effects of [REDACTED]) increased from approximately 7.5% for the year ended 31 March 2020 to approximately 8.5% for the year ended 31 March 2021.
Year ended 31 March 2020 compared with year ended 31 March 2019
Revenue
Our revenue amounted to approximately HK$396.9 million for the year ended 31 March 2019 and approximately HK$373.8 million for the year ended 31 March 2020, representing a decrease of approximately HK$23.1 million, or 5.8%. The following table sets out the revenue breakdown by product segment for, respectively.
For the year ended 31 March 2019 2020 HK$’000 % HK$’000 %
Elevator cabin 254,945 64.3 259,996 69.6 Decorative stainless steel 82,314 20.7 61,109 16.3 Other architectural finishing materials 59,598 15.0 52,721 14.1
Total Revenue 396,857 100.0 373,826 100.0
The revenue generated from the elevator cabin segment remained largely stable at approximately HK$254.9 million for the year ended 31 March 2019 and approximately HK$260.0 million for the year ended 31 March 2020. Such slight increase in revenue generated from the elevator cabin segment was primarily attributable to the increase in sales
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FINANCIAL INFORMATION of elevator cabin products to Customer A, being our largest customer in terms of revenue during the Track Record Period and one of the top three elevator companies in the PRC between 2014 and 2019 in terms of revenue generated according to lpsos Report.
In addition, despite the impact resulting from the Outbreak in the last quarter of the year ended 31 March 2020, we were still able to generated approximately HK$251.5 million in revenue from our elevator cabin from the PRC for the year ended 31 March 2020 compared to approximately HK$231.4 million for the year ended 31 March 2019, representing an increase of approximately 8.7%. The PRC has remained as our largest geographical revenue contributor for our elevator cabin segment for each of the years ended 31 March 2019 and 2020.
The revenue generated from the decorative stainless steel segment amounted to approximately HK$82.3 million for the year ended 31 March 2019 and approximately HK$61.1 million for the year ended 31 March 2020, representing a decrease of approximately HK$21.2 million or 25.8%. Such fluctuation was primarily attributable to the decrease in sales of decorative stainless steel to customers based (i) in Hong Kong from approximately HK$50.3 million for the year ended 31 March 2019 to approximately HK$35.1 million for the year ended 31 March 2020; and (ii) in the PRC from approximately HK$24.8 million for the year ended 31 March 2019 to approximately HK$12.4 million for the year ended 31 March 2020, mainly as a result of the development of the Outbreak during the last quarter of the year ended 31 March 2020.
The revenue generated from the other architectural finishing materials segment decreased by approximately HK$6.9 million, or 11.6%, from approximately HK$59.6 million for the year ended 31 March 2019 to approximately HK$52.7 million for the year ended 31 March 2020. The decrease was primarily attributable to (i) our segment revenue generated
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FINANCIAL INFORMATION from Hong Kong decreased from approximately HK$31.6 million for the year ended 31 March 2019 to approximately HK$29.7 million for the year ended 31 March 2020 given the development of the Outbreak in Hong Kong during the last quarter of the year ended 31 March 2020; and (ii) the decrease in sales to our distributors primarily in relation to decorative films and functional films of an international brand in the PRC in terms of revenue for the year ended 31 March 2020, from approximately HK$17.1 million for the year ended 31 March 2019 to approximately HK$14.4 million for the year ended 31 March 2020, which led to a decrease in our revenue from other architectural finishing materials from the PRC from approximately HK$23.7 million for the year ended 31 March 2019 to approximately HK$20.9 million for the year ended 31 March 2020.
Our principal markets were the PRC and Hong Kong for each of the years ended 31 March 2019 and 2020, and we have also supplied products to customers based in other locations including Macau, the Philippines, Thailand and South Korea during the Track Record Period. For each of the years ended 31 March 2019 and 2020, the PRC remained to be our largest geographical segment in terms of revenue primarily due to our strategic location in the PRC with close proximity to major customers and suppliers thereof, which contributed to approximately 70.5% and 76.2%, respectively.
Our revenue generated from customers based on their respective locations where our goods or services are delivered or provided was as follows, (i) the PRC, which amounted to approximately HK$279.9 million and HK$284.7 million for the years ended 31 March 2019 and 2020, respectively; (ii) Hong Kong, which amounted to approximately HK$105.4 million and HK$73.3 million for the years ended 31 March 2019 and 2020, respectively; and (iii) other locations, which amounted to approximately HK$11.6 million and HK$15.8 million for the years ended 31 March 2019 and 2020, respectively.
Given the development of the Outbreak during the last quarter of the year ended 31 March 2020, the demand from a number of our customers, subject to their locations, were temporarily affected to various degrees. Nevertheless, as the operations of our major customers have gradually resumed since February 2020, and the demand from our customers have continued to recover since their resumption of operations, albeit to a differ degree over time. For further details, please refer to the paragraph headed “Business – Effect of the outbreak of COVID-19” in this document.
Cost of sales
Cost of sales of our Group decreased by approximately HK$4.0 million, or 1.4%, from approximately HK$277.4 million for the year ended 31 March 2019 to approximately HK$273.4 million for the year ended 31 March 2020. Cost of sales as a percentage of our revenue was largely stable at approximately 69.9% for the year ended 31 March 2019 and approximately 73.1% for the year ended 31 March 2020.
Costs of raw materials and consumables used, being our largest cost of sales component, remained stable at approximately HK$196.9 million and HK$195.1 million for the years ended 31 March 2019 and 2020, respectively, representing approximately 71.0% and 71.4% of the total cost of sales for the respective years. Raw materials and consumables primarily comprised, among others, stainless steel materials, decorative films and electronic components which were mainly used for production of our elevator cabin products and decorative stainless steel products.
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FINANCIAL INFORMATION
Employee costs, were another component of our cost of sales and mainly comprised of salaries and wages for our staff involved in the production of our Group, increased by approximately HK$4.4 million, or 10.6%, from approximately HK$41.4 million for the year ended 31 March 2019 to approximately HK$45.8 million for the year ended 31 March 2020. Such increase was primarily attributable to the increase in the total number of workers during the year ended 31 March 2020 as well as their wages.
The remaining cost of sales mainly consisted of among (i) depreciation charges; (ii) water and electricity expenses; and (iii) packing and freight charges, which decreased from approximately HK$39.0 million for the year ended 31 March 2019 to approximately HK$32.4 million for the year ended 31 March 2020, which was primarily attributable to a decrease in consumption rate of costs as a result of the decrease in revenue for the year ended 31 March 2020. Our manufacturing overhead expenses comprised mainly of water and electricity expenses, packing and freight charges, which were affected by factors such as the level of production output and activities, quantity of products delivered to our customers as well as the delivery locations. Our revenue recorded a decrease of approximately HK23.1 million from approximately HK$396.9 million for the year ended 31 March 2019 to approximately HK$373.8 million for the year ended 31 March 2020. Our manufacturing overhead expenses represented approximately 9.8% and 8.7% of the revenue for the year ended 31 March 2019 and 2020 respectively and such slight decrease was attributable to, among others, (i) the VAT tax rates of 16% and 10% have been adjusted to be 13% and 9% which came into force on 1 April 2019, for further details, please refer to the paragraph headed “Regulatory Overview – Laws and regulations in relation to taxation – Value-Added Tax” in this document and the relevant expenses were decreased by approximately HK$1.1 million for the 31 March 2020; and (ii) the decrease in water and electricity expenses of approximately HK$0.3 million as there was one-off expenses waived as assistance of COVID-19 during the year ended 31 March 2020. As a result, there was a year-on-year decrease in the consumption of the aforementioned manufacturing overhead expenses during the year ended 31 March 2020.
Gross profit and gross profit margin
The overall gross profit of our Group decreased by approximately HK$19.1 million, or 16.0%, from approximately HK$119.5 million for the year ended 31 March 2019 to approximately HK$100.4 million for the year ended 31 March 2020, was primarily attributable to (i) the decrease in revenue from decorative stainless steel segment and other architectural finishing materials segment, which in aggregate decreased by approximately HK$28.1 million from approximately HK$141.9 million for the year ended 31 March 2019 to approximately HK$113.8 million for the year ended 31 March 2020; and (ii) the fluctuation in our overall gross profit margin, being approximately 30.1% for the year ended 31 March 2019 and approximately 26.9% for the year ended 31 March 2020, which was mainly attributable to the difference in sales mix for the respective financial year and the effects of COVID-19 in the year ended 31 March 2020.
In general, our gross profit margin would be affected by, among others, (i) our sales mix; (ii) the price and quantity of the range of products sold to our customers; and (iii) the cost structure, raw materials and components used for products sold by us. In this connection, our gross profit margin had and may continue to fluctuate from year to year. Such decrease in overall gross profit margin was also attributable to the increased revenue generated from Customer A, being our largest customer in terms of revenue during the Track Record Period, was approximately HK$218.5 million and HK$239.4 million for the years ended 31 March 2019 and 2020, respectively, of which we derived an overall gross profit
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FINANCIAL INFORMATION margin from sales to Customer A of approximately 25.1% for the year ended 31 March 2019 and approximately 23.1% for the year ended 31 March 2020. For further information on our relationship and transactions with Customer A, please refer to the section headed “Business – Customers – Customer concentration” in this document.
Our gross profit margin for our elevator cabin segment remained largely stable at approximately 25.3% and 23.2% for the years ended 31 March 2019 and 2020, respectively, which was mainly attributable to (i) a majority of our revenue in this product segment was generated from Customer A with a relatively stable gross profit margin of approximately 25.1% and 23.1% for the years ended 31 March 2019 and 2020; (ii) approximately 90.7% and 9.3% of the gross profit from our elevator cabin segment was derived from customers based in the PRC and Hong Kong for the year ended 31 March 2019 respectively compared to approximately 96.7% and 3.3% for the year ended 31 March 2020 respectively, and that our Group derived a relatively higher gross profit margin from our customers based in Hong Kong compared to those based in the PRC during each of the years ended 31 March 2019 and 2020 attributable to, in general, a greater proportion of our customers in Hong Kong would require our ancillary services, such as installation services, in turn, we were able to incorporate a slightly higher gross profit margin into these purchase orders, which would also be affected by, among others, our then available resources, delivery schedule as well as our orders on hand at the relevant time; and (iii) the units of elevator cabin principal components, such as elevator ceiling, elevator door, elevator wall, elevator floor, sold totalled to over 13,000 units and 16,000 units for the year ended 31 March 2019 and 2020, respectively. The unit price of these principal components ranged from (i) in excess of HK$1,000 per unit to approximately HK$31,000 per unit for the year ended 31 March 2019; and (ii) in excess of HK$1,000 per unit to approximately HK$33,000 per unit for the year ended 31 March 2020. The fluctuation in price range of these elevator cabin principal components were affected by, among others, the costs of these principal components, design of the elevator cabin adopted, the quality and origin of the materials selected as well as other specifications and/or requirements as requested by the customer.
Our gross profit margin for our decorative stainless steel segment also remained largely stable at approximately 42.2% for the year ended 31 March 2019 and approximately 41.3% for the year ended 31 March 2020 as our pricing policy remained largely consistent year-on-year for each of the geographic locations, respectively. Our gross profit margin for our other architectural finishing materials segment decreased from approximately 34.1% for the year ended 31 March 2019 to approximately 27.9% for the year ended 31 March 2020 which was attributable to the gross profit margin varied given the different types of products and quantity sold to our customers as well as our Group offered more favourable pricing terms in general with a view to attract additional potential customers and drive sales for this segment given, in particular, the development of the Outbreak during the last quarter of the year ended 31 March 2020, which adversely affected our PRC, Hong Kong and overseas markets to various degrees in terms of revenue as well as their respective gross profit margins.
With a view to contain the spread of the Outbreak in the PRC, the PRC Government has implemented various measures from time to time during the year 2020. Following the PRC Government’s guidelines, the operation of our factories, including our Guangzhou Plant and Suzhou Workshop, were suspended since 3 February 2020, being the first day of operation following the Chinese New Year holiday had the suspension not taken place. Subsequently, our Guangzhou Plant and Suzhou Workshop resumed operation after obtaining the approval from the said PRC Government departments by end of February 2020. During the aforesaid period, our Guangzhou Plant and Suzhou Workshop suspended its production
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FINANCIAL INFORMATION and its products delivery to our customers. Furthermore, our sales was also temporary affected after we have resumed operation around the end of February 2020. Due to the Outbreak, our revenue from decorative stainless steel segment decreased from approximately HK$82.3 million for the year ended 31 March 2019 to approximately HK$61.1 million for the year ended 31 March 2020, representing a decrease of approximately 25.8%, which was mainly attributable to the decrease in decorative stainless steel segment revenue derived from customers located in Hong Kong and the PRC of approximately HK$15.2 million and HK$12.4 million, respectively, nonetheless our gross profit margin of the decorative stainless steel segment remained largely stable at approximately 42.2% for the year ended 31 March 2019 and approximately 41.3% for the year ended 31 March 2020.
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FINANCIAL INFORMATION
Other income, other gains and losses
Our other income, other gains and losses increased from a net loss of approximately HK$0.3 million for the year ended 31 March 2019 to a net gain of approximately HK$1.5 million for the year ended 31 March 2020. Such fluctuation was primarily attributable to (i) the increase in government grants from approximately HK$0.2 million for the year ended 31 March 2019 to approximately HK$1.7 million for the year ended 31 March 2020 attributable to incentives for the high-and-new technology enterprise; and (ii) the decrease in net exchange losses from approximately HK$1.2 million for the year ended 31 March 2019 to approximately HK$0.3 million for the year ended 31 March 2020.
Selling and distribution expenses
Our selling and distribution expenses remained stable at approximately HK$13.7 million and HK$13.5 million for the years ended 31 March 2019 and 2020, respectively. Such expenses primarily comprised of employee benefit expenses and transportation expenses, which in aggregate represented approximately 85.2% and 92.2% of the total selling and distribution expenses for the years ended 31 March 2019 and 2020, respectively.
Administrative expenses
Our administrative expenses remained stable at approximately HK$39.1 million for the year ended 31 March 2019 and approximately HK$38.1 million for the year ended 31 March 2020. The largest expense item was employee benefit expenses, being approximately HK$23.1 million and HK$24.4 million for the years ended 31 March 2019 and 2020, respectively. Such increase was primarily attributable to the increase in wages of management, general and administrative staff for the year ended 31 March 2020. The remaining administrative expenses mainly consisted of (i) depreciation of right-of-use of assets; (ii) travelling expenses; (iii) motor vehicle expenses; and (iv) other administrative expenses, which in aggregate decreased from approximately HK$13.6 million for the year ended 31 March 2019 to approximately HK$11.8 million for the year ended 31 March 2020.
Research and development expenses
Our research and development expenses decreased by approximately HK$3.1 million or 20.0% from approximately HK$15.5 million for the year ended 31 March 2019 to approximately HK$12.4 million for the year ended 31 March 2020. Such decrease was mainly attributable to the temporary suspension of our operations and the subsequent resumption rate of the relevant research and development activities caused by the Outbreak in 2020.
Finance costs
Our finance costs increased by approximately HK$1.4 million, or 45.2%, from approximately HK$3.1 million for the year ended 31 March 2019 to approximately HK$4.5 million for the year ended 31 March 2020. Such increase was primarily attributable to the increase in total bank borrowings from approximately HK$36.0 million as at 31 March 2019 to approximately HK$41.6 million as at 31 March 2020 and the increase in total lease liabilities from approximately HK$32.5 million as at 31 March 2019 to approximately HK$33.7 million as at 31 March 2020.
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FINANCIAL INFORMATION
Income tax expense
Our income tax expense decreased by approximately HK$2.9 million, or 35.8%, from approximately HK$8.1 million for the year ended 31 March 2019 to approximately HK$5.2 million for the year ended 31 March 2020. Our effective tax rate was approximately 17.3% and 19.2% for the years ended 31 March 2019 and 2020, respectively, which was mainly due to the increase in tax effect of non tax deductible expenses in calculation of income tax expense for the year ended 31 March 2020.
Profit for the period and profit margin
As a result of the foregoing factors and [REDACTED] of approximately HK$[REDACTED] recognised for the year ended 31 March 2020, our profit for the year decreased by approximately HK$17.3 million, or 44.4%, from approximately HK$39.0 million for the year ended 31 March 2019 to approximately HK$21.7 million for the year ended 31 March 2020. Our net profit margin decreased from approximately 9.8% for the year ended 31 March 2019 to approximately 5.8% for the year ended 31 March 2020.
However, if the effects of [REDACTED] of approximately HK$[REDACTED] were to be excluded, the adjusted profit for the year ended 31 March 2020, being a non-HKFRS measure, would be approximately HK$27.8 million, compared to approximately HK$39.0 million for the year ended 31 March 2019, representing a decrease of approximately HK$11.2 million or 28.7%. The movement in profit for the years ended 31 March 2019 and 2020 was mainly attributable to the effects of (i) the outbreak of COVID-19, which has been further detailed under the paragraph headed “Business – Effect of the outbreak of COVID-19” in this document, led to a decrease in revenue derived from our product segments; and (ii) the lowered gross profit and gross profit margin attributable to the reasons as set out above. Our non-HKFRS adjusted net profit margin decreased from approximately 9.8% for the year ended 31 March 2019 to approximately 7.5% for the year ended 31 March 2020.
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FINANCIAL INFORMATION
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FINANCIAL INFORMATION
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FINANCIAL INFORMATION
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FINANCIAL INFORMATION
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth the selected cash flow data from the consolidated statements of cash flows for the years as indicated:
For the year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Operating cash flows before movements in working capital 66,849 48,065 57,162 Net movement in working capital (40,260) 3,072 (37,652) Income tax (paid) refund (1,619) (10,443) 2,125 Withholding tax paid – – (518) Net cash from operating activities 24,970 40,694 21,117 Net cash used in investing activities (16,240) (4,058) (21,804) Net cash used in financing activities (18,110) (18,482) (18,817)
Net (decrease)/increase in cash and cash equivalents (9,380) 18,154 (19,504) Cash and cash equivalents at beginning of the year 33,871 23,974 41,487 Effect of foreign exchange rate changes (517) (641) 1,833
Cash and cash equivalents at end of year, represented by bank balances and cash 23,974 41,487 23,816
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FINANCIAL INFORMATION
During the Track Record Period, our Group financed our working capital and other liquidity requirements principally from cash generated from our operations, bank borrowings and shareholder’s equity. Our Directors believe that our Group’s operations will be funded with a combination of various sources, including cash generated from our operations, bank borrowings, the [REDACTED] from the [REDACTED] as well as other external equity and debt financing.
Net cash from operating activities
During the Track Record Period, our Group derived our cash inflow from operating activities principally through the receipt of payments for sales of our products, whereas our cash outflow for operating activities mainly related to purchase of raw materials and consumables, employee costs and related costs used in production.
For the year ended 31 March 2019, our net cash generated from operating activities amounted to approximately HK$25.0 million, which was largely attributable to the combined effect of (i) operating cash flows before movements in working capital of approximately HK$66.8 million, as adjusted the profit before tax of approximately HK$47.1 million for non-cash items which principally included depreciation of property, plant and equipment of approximately HK$6.1 million and depreciation of right-of-use assets of approximately HK$7.6 million, and non-operating activities items which principally included finance costs of approximately HK$3.1 million; and (ii) the net working capital outflow of approximately HK$40.3 million, which was primarily attributable to (a) the increase in inventories of approximately HK$2.4 million; (b) the increase in trade receivables of approximately HK$47.4 million; (c) the decrease in contract assets of approximately HK$2.7 million; (d) the decrease in other receivables, deposits and prepayment of approximately HK4.1 million; (e) the increase in trade and other payables of approximately HK$18.1 million; and (f) the decrease in contract liabilities of approximately HK$15.4 million.
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FINANCIAL INFORMATION
For the year ended 31 March 2020, our net cash generated from operating activities amounted to approximately HK$40.7 million, which was largely attributable to the combined effect of (i) operating cash flows before movements in working capital of approximately HK$48.1 million, as adjusted the profit before tax of approximately HK$26.9 million for non-cash items which principally included depreciation of property, plant and equipment of approximately HK$5.6 million and depreciation of right-of-use assets of approximately HK$8.5 million, and non-operating activities items which principally included finance costs of approximately HK$4.5 million; (ii) income tax paid of approximately HK$10.4 million; and (iii) the net working capital inflow of approximately HK$3.1 million, which was primarily attributable to (a) the increase in inventories of approximately HK$4.2 million; (b) the decrease in trade receivables of approximately HK$34.8 million; (c) the decrease in contract assets of approximately HK$1.0 million; (d) the increase in other receivables, deposits and prepayments of approximately HK$3.1 million; (e) the decrease in trade and other payables of approximately HK$20.6 million; and (f) the decrease in contract liabilities of approximately HK$4.9 million.
For the year ended 31 March 2021, our net cash generated from operating activities amounted to approximately HK$21.1 million, which was largely attributable to the combined effect of (i) operating cash flows before movements in working capital of approximately HK$57.2 million, as adjusted the profit before tax of approximately HK$34.2 million for non-cash items which principally included depreciation of property, plant and equipment of approximately HK$5.6 million and depreciation of right-of-use assets of approximately HK$8.2 million, and non-operating activities items which principally included finance costs of approximately HK$5.1 million; and (ii) the net working capital outflow of approximately HK$37.7 million, which was primarily attributable to (a) the increase in inventories of approximately HK$6.7 million; (b) the increase in trade receivables of approximately HK$46.0 million; (c) the decrease in contract assets of approximately HK$0.5 million; (d) the increase in other receivables, deposits and prepayments of approximately HK$1.9 million; and (e) the increase in trade and other payables of approximately HK$17.7 million.
Net cash used in investing activities
The net cash used in investing activities during the year ended 31 March 2019 of approximately HK$16.2 million was primarily attributable to the purchases of property, plant and equipment and leasehold land of approximately HK$16.3 million in aggregate, which was partially offset by the proceeds from disposal of property, plant and equipment of approximately HK$0.9 million.
The net cash used in investing activities during the year ended 31 March 2020 of approximately HK$4.1 million was primarily attributable to the purchases of property, plant and equipment of approximately HK$3.7 million.
The net cash used in investing activities during the year ended 31 March 2021 of approximately HK$21.8 million was primarily attributable to the purchases of property, plant and equipment of approximately HK$22.9 million.
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FINANCIAL INFORMATION
Net cash used in financing activities
During the year ended 31 March 2019, our net cash used in financing activities was approximately HK$18.1 million primarily attributable to (i) dividend paid of approximately HK$7.5 million; (ii) repayments of leases liabilities and payments of interest on lease liabilities of approximately HK$6.9 million and HK$1.6 million, respectively; (iii) repayments of bank borrowings of approximately HK$30.8 million; (iv) payments of interest on bank borrowings of approximately HK$1.5 million; and (v) repayments to a director of approximately HK$33.6 million, which was partially offset by (a) the new bank borrowings raised of approximately HK$41.1 million; and (b) advances from a director of approximately HK$23.2 million.
During the year ended 31 March 2020, our net cash used in financing activities was approximately HK$18.5 million primarily attributable to (i) dividend paid of approximately HK$14.5 million; (ii) repayments of leases liabilities and payments of interest on lease liabilities of approximately HK$8.1 million and HK$2.3 million, respectively; (iii) repayments of bank borrowings of approximately HK$21.7 million; (iv) payments of interest on bank borrowings of approximately HK$2.3 million; (v) repayments to a director of approximately HK$1.2 million; and (vi) payments of share issue costs of approximately HK$1.2 million, which was partially offset by (a) the new bank borrowings raised of approximately HK$29.0 million; and (b) advance from a director of approximately HK$4.0 million.
During the year ended 31 March 2021, our net cash used in financing activities was approximately HK$18.8 million primarily attributable to (i) repayments of leases liabilities and payments of interest on lease liabilities of approximately HK$10.9 million and HK$2.5 million, respectively; (ii) repayments of bank borrowings of approximately HK$32.8 million; (iii) payments of interest on bank borrowings of approximately HK$2.7 million; and (iv) repayments to a director of approximately HK$11.7 million, which was partially offset by (a) the new bank borrowings raised of approximately HK$40.9 million; and (b) advance from a director of approximately HK$2.5 million.
WORKING CAPITAL
Taking into account the financial resources of our Group, including the credit facility available to our Group and the estimated [REDACTED] of the [REDACTED], our Directors are of the opinion, and the Sole Sponsor concurs, that our Group has sufficient working capital for our present requirements and for at least the next 12 months from the date of this document.
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FINANCIAL INFORMATION
NET CURRENT ASSETS
The following table sets forth the details of current assets and current liabilities of our Group as at the respective dates indicated.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Current assets Inventories 65,447 64,657 75,420 Trade receivables 93,350 54,163 104,332 Contract assets 6,314 5,007 4,787 Other receivables, deposits and prepayments 10,653 15,222 18,406 Tax recoverable – 4,146 – Restricted bank deposits 319 257 251 Bank balances and cash 23,974 41,487 23,816
200,057 184,939 227,012
Current liabilities Trade and other payables 94,180 69,864 95,218 Contract liabilities 15,583 10,204 9,450 Amount due to a director 15,186 17,999 8,883 Amount due to a related party 100 – – Tax liabilities 1,669 – 3,863 Leases liabilities 7,794 7,942 8,813 Bank borrowings 34,572 40,782 43,679
169,084 146,791 169,906
Net current assets 30,973 38,148 57,106
As at 31 March 2019, 2020 and 2021, we had net current assets of approximately HK$31.0 million, HK$38.1 million and HK$57.1 million, respectively. The key components of our current assets as at such dates included inventories, trade receivables, other receivables, deposits and prepayments, contract assets, tax recoverable and bank balances and cash. The key components of our current liabilities as at such dates included trade and other payables, contract liabilities, amount due to a director, leases liabilities and bank borrowings.
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FINANCIAL INFORMATION
As at 31 March 2020, we had net current assets of approximately HK$38.1 million, representing an increase of approximately HK$7.1 million, as compared to that as at 31 March 2019. This was attributable to the decrease in current liabilities primarily due to the net effect of (i) the decrease in trade and other payables by approximately HK$24.3 million; (ii) the decrease in contract liabilities of approximately HK$5.4 million; (iii) the increase in amount due to a director by approximately HK$2.8 million; and (iv) the increase in bank borrowings under current liabilities by approximately HK$6.2 million. Such decrease in current liabilities was partially offset by the decrease in current assets primarily due to the net effect of (i) the decrease in inventories by approximately HK$0.8 million; (ii) the decrease in trade receivables by approximately HK$39.2 million; (iii) the decrease in contract assets by approximately HK$1.3 million; (iv) the increase in other receivables, deposits and prepayments and by approximately HK$4.6 million; (v) the increase in tax recoverable by approximately HK$4.1 million; and (vi) the increase in bank balances and cash by approximately HK$17.5 million.
As at 31 March 2021, we had net current assets of approximately HK$57.1 million, representing an increase of approximately HK$19.0 million, as compared to that as at 31 March 2020. The movement in current liabilities was primarily due to the net effect of (i) the increase in trade and other payables by approximately HK$25.3 million; (ii) the decrease in amount due to a director by approximately HK$9.1 million; (iii) the increase in tax liabilities of approximately HK$3.9 million; and (iv) the increase in bank borrowings under current liabilities by approximately HK$2.9 million. The movement in current assets was primarily due to the net effect of (i) the increase in inventories by approximately HK$10.8 million; (ii) the increase in trade receivables by approximately HK$50.2 million; (iii) the decrease in bank balances and cash by approximately HK$17.7 million; and (iv) the decrease in tax recoverable by approximately HK$4.1 million.
For further details regarding the items affecting our net current asset position during the Track Record Period, please refer to the paragraph headed “Financial Information – Analysis of selected statement of financial position items” below.
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FINANCIAL INFORMATION
ANALYSIS OF SELECTED STATEMENT OF FINANCIAL POSITION ITEMS
Property, plant and equipment
Our property, plant and equipment mainly consists of properties, leasehold improvements and plants and machinery. Our property, plant and equipment amounted to approximately HK$43.7 million, HK$38.9 million and HK$58.8 million as at 31 March 2019, 2020 and 2021, respectively, representing respectively 49.6%, 46.4% and 54.3% of our Group’s total non-current assets.
The decrease in property, plant and equipment from 31 March 2019 to 31 March 2020 was primarily due to depreciation charges for the year ended 31 March 2020 and the balance increased to approximately HK$58.8 million as at 31 March 2021 which was attributable to the additions of construction in progress of Jiangmen Plant. Our Group has pledged properties with carrying values of approximately HK$10.7 million, HK$9.8 million and HK$13.8 million as at 31 March 2019, 2020 and 2021, respectively, to secure general banking facilities granted to our Group. Please refer to note 14 to our consolidated financial statements included in the Accountants’ Report in Appendix I to this document for further information.
Right-of-use assets
Our Group recognises right-of-use assets with respect to lease agreements which conveys the right to control the use of an identified asset for a period of time in exchange for consideration at the commencement date of the lease, except for short-term leases and leases of low value assets. The right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities.
The following table sets forth the carrying amount of our right-of-use assets as at the dates indicated:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Right-of-use assets 42,740 43,365 48,004
Our right-of-use assets remained stable at approximately HK$42.8 million as at 31 March 2019 and HK$43.4 million as at 31 March 2020. Our right-of-use assets increased from approximately HK$43.4 million as at 31 March 2020 to approximately HK$48.0 million as at 31 March 2021, which was primarily attributable to additions of machinery during the year. The Group has pledged the leasehold land with carrying value of approximately HK$11.1 million as at 31 March 2021 to secure general banking facilities granted to our Group.
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FINANCIAL INFORMATION
Inventories
Our inventories primarily consist of direct materials, work in progress and finished goods. We periodically perform an assessment of the net realisable value of inventories and make allowance for slow-moving inventories accordingly. Allowances are applied to inventories where events or changes in circumstances indicate that the net realisable value is lower than the cost of inventories. The identification of obsolete inventories requires the use of management judgment and estimates on the conditions and marketability of the inventories. Where the subsequent selling prices decline or costs necessary to make the sales increase, additional allowance may arise. The following table sets forth the breakdown of our inventory balances as of the dates indicated.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Direct materials 51,203 55,863 65,226 Work-in-progress 5,372 3,148 4,610 Finished goods 8,872 5,646 5,584
65,447 64,657 75,420
The inventory balance decreased slightly from approximately HK$65.4 million as at 31 March 2019 to approximately HK$64.7 million as at 31 March 2020 and increased to approximately HK$75.4 million as at 31 March 2021.
The following table sets forth our inventory turnover days during the Track Record Period:
For the year ended 31 March 2019 2020 2021
Inventory turnover days (Note) 87.6 days 86.8 days 86.8 days
Note: Inventory turnover days are calculated based on the average inventory divided by the cost of sales for the relevant year multiplied by number of days in the relevant year (i.e. 365 days for the years ended 31 March 2019, 2020 and 2021). Average inventory is calculated as the sum of the beginning balance and ending balance for the relevant year, divided by two.
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FINANCIAL INFORMATION
The inventory turnover days remained stable approximately 87.6 days, 86.8 days and 86.8 days for the years ended 31 March 2019, 2020 and 2021, respectively.
In order to satisfy our customers’ demands and requirements as one-stop solutions service provider, our Group offer customised products with a range of designs, specifications, requirements and materials, thus our Group maintains a range of raw materials for decorative stainless steel products and decorative films with different specifications, colour, pattern and coating.
As at 31 March 2021, our Group recorded net inventories balance aged over 360 days of approximately HK$7.3 million (being the gross inventories balance of approximately HK$10.2 million less the relevant provision of approximately HK$3.0 million) and all of such net inventories balance comprised of stainless-steel and decorative films, which have a relatively long product shelve life.
Our inventories are stated at the lower of cost and net realisable value which represented the estimated selling price for inventories less the estimated costs of completion and costs necessary to make the sale. Our Group makes allowance for inventories based on our assessment of the net realisable value of inventories. The quality assurance team monitor our inventories’ quality and relevant market price from time to time to ensure their status were good for its production process and where events or changes in circumstances indicate that the net realisable value is lower than the cost of inventories. As at 31 March 2021, allowance for slow-moving inventories of approximately HK$3.0 million was recorded and our Directors are of the view that the amount in such allowance was sufficient.
Subsequent to 31 March 2021 and up to Latest Practicable Date, approximately HK$51.2 million, or 65.3% of inventories as at 31 March 2021 had been subsequently utilised or sold.
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FINANCIAL INFORMATION
Trade receivables and other receivables, deposits and prepayments
The following table sets forth the amounts of trade and other receivables, deposits and prepayments of our Group as at the dates indicated.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Trade receivables 94,251 55,323 105,605 Less: Allowance for credit losses (901) (1,160) (1,273)
93,350 54,163 104,332
Deposits 7,035 9,640 8,603 Prepayments 1,098 497 3,063
Deposits and prepayments 8,133 10,137 11,666 Deferred share issue costs – 1,876 4,278 Prepaid [REDACTED] [REDACTED] [REDACTED] [REDACTED] Other receivables 3,316 2,896 2,997
Other receivables, deposits and prepayment 11,449 15,864 19,150
104,799 70,027 123,482
Presented as non-current assets 796 642 744 Presented as current assets 10,653 15,222 18,406
Other receivables, deposits and prepayment 11,449 15,864 19,150
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FINANCIAL INFORMATION
Trade receivables
Our trade receivables decreased from approximately HK$93.4 million as at 31 March 2019 to approximately HK$54.2 million as at 31 March 2020, which was mainly attributable to the decrease in sales of the year ended 31 March 2020 given the development of the Outbreak during the last quarter of the year ended 31 March 2020. Our trade receivables increased to approximately HK$104.3 million as at 31 March 2021, which was mainly attributable to the increase in trade receivables from sales recognised near the period ended and our trade receivable within 60 days were increased from approximately HK$45.2 million as at 31 March 2020 to approximately HK$83.3 million as at 31 March 2021.
The following table sets forth an aging analysis of our net trade receivables based on the invoice date at the end of each reporting period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within 30 days 51,118 43,009 68,306 31 to 60 days 8,508 2,202 15,013 61 to 90 days 24,324 2,995 15,239 91 to 180 days 6,748 3,037 4,721 Over 180 days 2,652 2,920 1,053
Total 93,350 54,163 104,332
We usually allow our customers a credit period ranging from 30 days to 60 days. In determining the recoverability of trade receivables, our Group considers any change in the credit quality of the customers from the date credit was initially granted up to the end of each of the reporting period. The majority of our Group’s trade receivables that are past due but not impaired are from customers with good credit quality with reference to respective settlement history and forward-looking information. Our Group does not hold any collateral as security over these balances.
As at 31 March 2019, 2020 and 2021, carrying amounts of trade receivables amounted to approximately HK$51.9 million, HK$12.6 million and HK$36.3 million have been pledged as security for our Group’s borrowings and undrawn facilities, respectively.
As at Latest Practicable Date, approximately HK$20.0 million, represented approximately 19.2% of our trade receivables that were outstanding as at 31 March 2021 was settled.
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FINANCIAL INFORMATION
The following tables sets forth our trade receivable turnover days during the Track Record Period:
For the year ended 31 March 2019 2020 2021
Trade receivables turnover days (Note) 65.5 days 72.0 days 72.2 days
Note: Trade receivables turnover days are calculated based on the average trade receivables divided by the revenue for the relevant year multiplied by number of days in the relevant year (i.e. 365 days for the years ended 31 March 2019, 2020 and 2021). Average trade receivables are calculated as the sum of the beginning balance and ending balance for the relevant year, divided by two.
The trade receivables turnover days remained largely stable approximately 65.5 days, 72.0 days and 72.2 days for the years ended 31 March 2019, 2020 and 2021, respectively.
The following tables sets forth our trade receivables and contract assets turnover days during the Track Record Period:
For the year ended 31 March 2019 2020 2021
Contract assets turnover days (Note) 72.8 days 77.5 days 76.6 days
Note: Contract assets turnover days are calculated based on the average trade receivables and contract assets divided by the revenue for the relevant year multiplied by number of days in the relevant year (i.e. 365 days for the years ended 31 March 2019, 2020 and 2021). Average trade receivables and contract assets are calculated as the sum of the beginning balance and ending balance for the relevant year, divided by two.
The trade receivables and contract assets turnover days turnover days were approximately 72.8 days, 77.5 days and 76.6 days for the years ended 31 March 2019, 2020 and 2021, respectively, which remained stable throughout the Track Record Period.
There were trade receivables with a carrying amount of approximately HK$30.9 million, HK$10.9 million and HK$22.4 million as at 31 March 2019, 2020 and 2021, respectively, which are past due but not impaired. Out of the past due balances, approximately HK$5.7 million, HK$4.7 million and HK$1.2 million have been past due 90 days or more and is not considered as credit-impaired as at 31 March ,2019, 2020 and 2021, respectively, because there is no significant change in credit quality and the amounts are still considered recoverable. For further details on the contract asset balance, please refer to the paragraph headed “Contract assets/liabilities” in this section below.
Our Group has applied the simplified approach under HKFRS 9 to measure ECL which uses a lifetime ECL for all trade receivables and contract assets. Except for debtors with significant or credit-impaired balances, our Group determines the ECL on these items by using a provision matrix, grouped by past due status. For details of impairment assessment on trade receivables and other receivables for the Track Record Period, please refer to note 31 “Financial instruments – credit risk and impairment assessment” of the Accountants’ Report contained in Appendix I to this document.
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FINANCIAL INFORMATION
Other receivables, deposits and prepayments
Our Group’s other receivables, deposits and prepayments increased from approximately HK$11.4 million as at 31 March 2019 to approximately HK$15.9 million as at 31 March 2020, which was primarily attributable to the increase in (i) deposits and prepayments of approximately HK$2.0 million; and (ii) deferred share issue costs of approximately HK$1.9 million. Our Group’s other receivables, deposits and prepayments increased to approximately HK$19.2 million as at 31 March 2021, mainly attributable to the increase in deferred share issue costs of approximately HK$2.4 million.
Contract assets/liabilities
The contract assets represent our Group’s right to consideration for the production of elevator cabin products in which the production are completed/partially completed but yet invoiced by our Group. All the contract assets are expected to be recovered or transferred to trade receivables within one year when the rights become unconditional. The contract liabilities represent our Group’s obligation to complete the production order in which our Group has received deposits or advance payments from customers before the production activity commences. This will give rise to contract liabilities at the start of a contract, until the revenue recognised on the contract exceeds the amount of the deposit received or advance payments from customers.
The following table sets out the details of the contract assets and contract liabilities as at each reporting date:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Contract assets 6,314 5,007 4,787
Contract liabilities 15,583 10,204 9,450
As at 31 March 2019, 2020 and 2021, our Group recorded (i) contract assets of approximately HK$6.3 million, HK$5.0 million and HK$4.8 million, respectively; and (ii) contract liabilities of approximately HK$15.6 million, HK$10.2 million and HK$9.5 million, respectively.
Our contract assets decreased from approximately HK$6.3 million as at 31 March 2019 to approximately HK$5.0 million as at 31 March 2020. Our contract assets remained largely stable at approximately HK$4.8 million as at 31 March 2021. Such fluctuation was mainly attributable to the movement in the production of elevator cabin products contracts with
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FINANCIAL INFORMATION customers in which the production are completed/partially completed but yet invoiced by our Group as at the respective year end date. All the contract assets are expected to be recovered within one year.
As at the Latest Practicable Date, approximately HK$0.8 million, representing approximately 16.7% of our contract assets which were outstanding as at 31 March 2021, was billed.
Our Group typically receives a certain percentage of deposit on acceptance of purchase orders. Such contract liabilities represent advance payments received from customers in relation to their purchase orders placed with our Group and our Group does not expect to refund any of the advance payments. When our Group receives a deposit before the delivery of goods, such will give rise to contract liabilities at the start of the contract, until the revenue has been recognised on the relevant contract. The fluctuation of our contract liabilities was mainly attributable to the movement in deposits and advance payments received or advances payments from our customers before the production activity commences as at the respective year end date.
The following table sets forth the movement of our contract liabilities during the Track Record Period.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
At the beginning of the year 32,807 16,070 10,341 Add: Deposits or advance payment 8,376 5,254 6,802 Less: Revenue recognised that was included in the contract liabilities balance at the beginning of the year (25,113) (10,983) (7,668)
At the end of the year 16,070 10,341 9,475
Net off under same contract (487) (137) (25) Net contract liabilities at the end of the year 15,583 10,204 9,450
Our contract liabilities decreased from approximately HK$16.1 million as at 31 March 2019 to approximately HK$10.3 million as at 31 March 2020 and remained largely stable at approximately HK$9.5 million as at 31 March 2021 attributable to the combined effects of (i) deposits or advance payment received of approximately HK$5.3 million and HK$6.8 million, respectively; and (ii) production orders with deposits or advance payment, which was included in the respective contract liabilities balance, of approximately HK$11.0 million and HK$7.7 million respectively, have been delivered to customers and the relevant balances have been recognised as revenue during the year ended 31 March 2020 and 2021, respectively.
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FINANCIAL INFORMATION
The following table sets forth an aging analysis of our contract liabilities based on the date of deposits received or advance payments from customers at the end of each reporting period.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within 30 days 8,028 2,450 3,295 31 to 60 days 496 187 1,544 61 to 90 days 136 1,060 910 91 to 180 days 2,307 1,283 979 Over 180 days 5,103 5,361 2,747
At the end of the year 16,070 10,341 9,475
The contract liabilities balance mainly comprised of deposits or advance payments. As at 31 March 2021, the contract liabilities balance amounted to approximately HK$9.5 million, of which (i) approximately HK$6.7 million was aged 180 days or less, representing approximately 70.5% of the contract liabilities balance; and (ii) approximately HK$2.7 million was aged more than 180 days, representing approximately 28.4% of the contract liabilities balance. The carrying amount of contract liabilities aged over 180 days amounted to approximately HK$5.1 million, HK$5.4 million and HK$2.7 million as at 31 March 2019, 31 March 2020 and 31 March 2021, respectively. Such contract liabilities balance aged over 180 days was mainly attributable to the deposits or advance payments received from customers whereby the relevant orders were cancelled, delayed and/or put on hold by the relevant customers due to modifications to original specifications which is/are to be finalised and agreed with the customers, and therefore the relevant deposits or advance payments received by us shall remain to be recorded under the contract liabilities balance until the relevant products have been delivered by our Group. As at the Latest Practicable Date, approximately HK$2.8 million, represented approximately 29.5% of our contract liabilities that were outstanding as at 31 March 2021 has been recognised as revenue.
Details of the revenue recognised relates to carried-forward contract liabilities in respective year are set out in note 18 “Contract assets/liabilities” to the Accountants’ Report as set out in Appendix I to this document.
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FINANCIAL INFORMATION
Trade and other payables
Trade payables
The following table sets forth our trade payables at the end of each reporting period during the Track Record Period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Trade payables 58,722 34,135 54,002
Our trade payables decreased from approximately HK$58.7 million as at 31 March 2019 to approximately HK$34.1 million as at 31 March 2020, which was primarily due to the decrease in purchase during the year ended 31 March 2020 due to the development of the Outbreak at the relevant time. Our trade payables further increased to approximately HK$54.0 million as at 31 March 2021, it was primarily due to the amount of trade payables with invoice date within 90 days increased to approximately HK$40.4 million as at 31 March 2021, compared with approximately HK$26.8 million as at 31 March 2020. Trade payables primarily related to the raw materials and consumables purchased from our suppliers. The trade payables are granted credit terms ranging from 30 days to 90 days.
As at the Latest Practicable Date, approximately HK$23.6 million or 43.7% of our Group’s trade payables as at 31 March 2021 has been settled.
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FINANCIAL INFORMATION
The table below sets forth, as of the dates indicated, the aging analysis of our trade payables based on invoice date at the end of each reporting period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within 30 days 25,530 19,432 30,619 31 days to 60 days 6,991 3,236 3,140 61 days to 90 days 10,975 4,118 6,610 Over 90 days 15,226 7,349 13,633
58,722 34,135 54,002
The following table sets forth our trade payables turnover days during the Track Record Period:
For the year ended 31 March 2019 2020 2021
Trade payables turnover days (Note) 71.7 days 62.0 days 54.6 days
Note: Trade payables turnover days are calculated based on the average trade payables divided by the cost of sales for the relevant year multiplied by number of days in the relevant year (i.e. 365 days for the years ended 31 March 2019, 2020 and 2021). Average trade payables are calculated as the sum of the beginning balance and ending balance for the relevant year, divided by two.
Trade payables turnover days were approximately 71.7 days, 62.0 days and 54.6 days for the years ended 31 March 2019, 2020 and 2021, respectively. The decrease in trade payable turnover days from approximately 71.7 days for the year ended 31 March 2019 to approximately 62.0 days for the year ended 31 March 2020 was mainly attributable to the lower level of trade payables as at 31 March 2020 as less cost of sales incurred during the year ended 31 March 2020. Our trade payable turnover days further decreased to approximately 54.6 days for the year ended 31 March 2021 as the average trade payables balance used to calculate the trade payables turnovers days for the year ended 31 March 2021 was lower than that of the year ended 31 March 2020, in addition to a slightly higher cost of sales balance for the year ended 31 March 2021 attributable to the increased revenue.
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FINANCIAL INFORMATION
Other payables
The following table sets forth our other payables at the end of each reporting period during the Track Record Period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Accrued expenses 34,825 31,191 30,798 Provision for penalty – 747 3,910 Other payables 633 1,129 1,667 Accrued share issue costs – 663 1,133 Accrued [REDACTED] [REDACTED] [REDACTED] [REDACTED]
Total 35,458 35,729 41,216
Our Group’s other payables primarily represents staff salaries, bonus and welfare payables and provision for long services payment. Other payables increased to approximately HK$41.2 million as at 31 March 2021 which was primarily attributable to the increase in accrued [REDACTED].
INDEBTEDNESS
The following table sets out our Group’s indebtedness excluding contingent liabilities as at the respective dates:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Current liabilities Amount due to a director 15,186 17,999 8,883 Amount due to a related party 100 – – Lease liabilities 7,794 7,942 8,813 Bank borrowings 34,572 40,782 43,679
57,652 66,723 61,375
Non-current liabilities Lease liabilities 24,708 25,785 25,972 Bank borrowings 1,412 814 8,569
83,772 93,322 95,916
As at 31 March 2019, 31 March 2020 and 31 March 2021, our Group had total indebtedness of approximately HK$83.8 million, HK$93.3 million and HK$95.9 million, respectively, all of which were denominated in HK$ and RMB.
The bank borrowings of our Group increased from HK$36.0 million as at 31 March 2019 to approximately HK$41.6 million as at 31 March 2020, and increased to approximately
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FINANCIAL INFORMATION
HK$52.2 million as at 31 March 2021. The bank borrowings as at 31 March 2019, 2020 and 2021 were guaranteed by Mr. Colby Chiu and certain bank borrowings were secured by properties, leasehold land and trade receivables of our Group. The such guarantee provided by Mr. Colby Chiu shall be released upon the [REDACTED]. The bank borrowings carried variable interest rates and the weighted average interest rates of the borrowings were approximately 5.5%, 5.5% and 4.8% per annum as at 31 March 2019, 2020 and 2021, respectively. Our Group had unutilised banking facilities, including bank loans and overdraft, of approximately HK$23.9 million as at 31 March 2021.
As at 31 March 2021, being the latest practicable date of our indebtedness statement, except as disclosed in the table above, our Group did not have any outstanding debt securities, bank overdrafts, borrowings, indebtedness, mortgages, debentures, hire purchase commitments, guarantees or other material contingent liabilities. The aggregate of amount due to a director as at 31 March 2021 amounted to approximately HK$8.9 million. The entire balance of the amount due to a director shall be settled and/or capitalised prior to the [REDACTED]. For details of the fluctuation of our indebtedness, please refer to the paragraph headed “Analysis of selected statement of financial position items” in this section.
Save as disclosed, there is no material adverse change in our indebtedness up to the Latest Practicable Date.
Our Directors confirm that there was no material delay or default in repayment of our indebtedness, nor breach of any relevant finance covenant on our part, during the Track Record Period and up to the Latest Practicable Date. There was no material covenant relating to our Group’s outstanding debts.
Amounts due to a director and a related party
The following table sets forth amounts due to related parties at the end of each reporting period during the Track Record Period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Amount due to a director 15,186 17,999 8,883 Amount due to a related party 100 – –
15,286 17,999 8,883
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FINANCIAL INFORMATION
The amount due to a director represented amount owed by our Group to Mr. Colby Chiu. The amount due to a related party represented amount owed by our Group to Ms. Wong. Such balances are non-trade in nature, unsecured, interest-free and repayable on demand and will be settled prior to the [REDACTED].
For details on transactions between related parties, please refer to the sub-section headed “Financial Information – Related party transactions” below.
Bank borrowings
The following table sets out our Group’s bank borrowings at of the dates indicated.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Bank borrowings 35,984 41,596 52,248
Bank borrowings during the Track Record Period were mainly for our working capital purpose.
Our Directors confirm that as at the Latest Practicable Date, there was no material covenant on any of the outstanding debt and there was no breach of any covenants during the Track Record Period and up to the Latest Practicable Date. Our Directors further confirm that our Group did not have any material default in payment of trade and other payables, bank loans and other borrowings or breach of covenants during the Track Record period and up to the Latest Practicable Date. The outstanding bank borrowings as at 31 March 2019, 2020 and 2021 of approximately HK$36.0 million, HK$41.6 million and HK$52.2 million, respectively, were guaranteed by Mr. Colby Chiu and the such guarantee shall be released prior to the [REDACTED].
Lease Liabilities
The following table sets out our Group’s lease liabilities at of the dates indicated.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Non-current 24,708 25,785 25,972 Current 7,794 7,942 8,813
32,502 33,727 34,785
Our Group assess whether a contract is or contains a lease at the inception of this contract. Our Group recognise a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which we are the lessee, except for (i) short-term leases with a lease term of 12 months or less from the commencement date and do not contain a purchase option; and (ii) leases of low-value assets.
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FINANCIAL INFORMATION
At the commencement date of a lease, the Group recognises and measures the lease liability at the present value of lease payments that are unpaid at that date. In calculating the present value of lease payments, our Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, lease liabilities are adjusted by interest accretion and lease payments.
As at 31 March 2019, 2020 and 2021, our Group recognised lease liabilities of approximately HK$32.5 million, HK$33.7 million and HK$34.8 million, respectively.
CAPITAL EXPENDITURES
Our major capital expenditure consisted primarily of property, plant and equipment during the Track Record Period. We incurred capital expenditures of approximately HK$5.5 million, HK$3.8 million and HK$22.9 million for the years ended 31 March 2019, 2020 and 2021, respectively.
CONTRACTUAL OBLIGATIONS
Capital commitments
Our capital commitments during the Track Record Period were primarily relating to the acquisition of property, plant and equipment related to our production facilities.
The following table set forth capital commitments as of the dates indicated:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Contracted but not provided for: Property, plant and equipment – 1,545 9,874
Lease commitments
Our operating lease commitment was mainly for the lease of our production facilities. For the lease commitments of our Group, please refer to the paragraph headed “Indebtedness − Lease liabilities” in this section above for details.
CONTINGENT LIABILITIES
As at 31 March 2021, our Group had no significant contingent liabilities or outstanding litigation.
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FINANCIAL INFORMATION
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As at the Latest Practicable Date, save as disclosed, we have not, nor do we expect, to enter into, any off-balance sheet arrangements. In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as owners’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an uncombined entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any uncombined entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
KEY FINANCIAL RATIOS
As at/for the year ended 31 March 2019 2020 2021
Current ratio (Note 1) 1.2 times 1.3 times 1.3 times Quick ratio (Note 2) 0.8 times 0.8 times 0.9 times Gearing ratio (Note 3) 76.2% 82.4% 69.1% Return on equity (Note 4, 7) 43.4% 23.8% 21.2% Return on total assets (Note 5, 7) 13.5% 8.1% 8.0% Interest coverage (Note 6) 16.0 times 7.0 times 7.7 times
Notes:
1. Current ratio is calculated by dividing total current assets with total current liabilities as at the end of the relevant year.
2. Quick ratio is calculated by dividing total current assets minus inventories with the total current liabilities as at the end of the relevant year.
3. Gearing ratio is calculated by total debt divided by total capital at the end of the relevant year.
4. Return on equity is calculated by dividing profit for the relevant year with total equity as at the end of the respective year multiplied by 100%.
5. Return on total assets is calculated by dividing profit for the relevant year with total assets as at the end of the respective year multiplied by 100%.
6. Interest coverage is calculated by dividing profit before interest and tax with interest expenses for the relevant year.
7. Return on total assets and return on equity are calculated on a full year basis.
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FINANCIAL INFORMATION
Current ratio
As at 31 March 2019, 2020 and 2021, our current ratio remained relatively stable at approximately 1.2 times, 1.3 times and 1.3 times, respectively.
Quick ratio
Inventories accounted for approximately 32.7%, 35.0% and 33.2% of our current assets as at 31 March 2019, 2020 and 2021, respectively. Thus, our quick ratio fluctuated by similar proportions to their corresponding current ratios as at the indicated dates. Our quick ratio remained stable at approximately 0.8 times, 0.8 times and 0.9 times as at 31 March 2019, 2020 and 2021, respectively, which is in line with our strategy to keep our inventory at a relatively low level.
Gearing ratio
Our gearing ratio increased from approximately 76.2% as at 31 March 2019 to approximately 82.4% as at 31 March 2020 which was mainly attributable to increase in bank borrowings and lease liabilities as at 31 March 2020. As at 31 March 2020, our bank borrowings amounted to approximately HK$41.6 million and lease liabilities amounted to approximately HK$33.7 million. Our gearing ratio decreased to approximately 69.1% as at 31 March 2021, which was mainly attributable to the increase in total capital to approximately HK$126.0 million as at 31 March 2021.
Return on equity
Our Group recorded return on equity of approximately 43.4%, 23.8% and 21.2% for the years ended 31 March 2019, 2020 and 2021, respectively.
The return on equity of our Group decreased from approximately 43.4% for the year ended 31 March 2019 to approximately 23.8% for the year ended 31 March 2020 which was mainly due to the year-on-year decrease in profit for the year of approximately 44.2% in the year ended 31 March 2020 as a result of the reasons and factors as set out under sub-section headed “Financial Information – Period to period comparison of results of operations” and paragraph headed “Financial information − Analysis of selected statement of financial position items” in this document. The return on equity of our Group remained largely stable at approximately 21.2% for the year ended 31 March 2021 despite the notable increase in the total capital balance.
Return on total assets
Our return on total assets decreased from approximately 13.5% for the year ended 31 March 2019 to approximately 8.1% for the year ended 31 March 2020.
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FINANCIAL INFORMATION
The decrease in return on assets for the year ended 31 March 2020 was mainly due to the decrease in profit for the year of approximately 44.2%, while the total assets decreased of approximately 6.7%. For further details, please refer to paragraphs headed “Financial information – Period to period comparison of results of operations” and paragraph headed “Financial information − Analysis of selected statement of financial position items” in this document. The return on assets of our Group remained largely stable at approximately 8.0% for the year ended 31 March 2021.
Interest coverage
Our interest coverage ratio decreased from 16.0 times for the year ended 31 March 2019 to approximately 7.0 times for the year ended 31 March 2020. The decrease in the ratio for the year ended 31 March 2020 was mainly due to the decrease in profit before interest expenses and tax of approximately 37.4% in the year ended 31 March 2020 as our Group incurred [REDACTED] of approximately HK$[REDACTED], while the finance costs increased by approximately 44.2% during the year ended 31 March 2020. Our interest coverage remained largely stable at approximately 7.7 times for the year ended 31 March 2021. For further details on our borrowings, please refer to information as set out under sub-section headed “Financial information – Indebtedness” in this document.
[REDACTED]
For the years ended 31 March 2019, we did not record any [REDACTED]. The estimated total [REDACTED] borne/to be borne by our Group, which primarily represent professional fees for our [REDACTED] is non-recurrent in nature, and including the [REDACTED] for all [REDACTED], has been estimated to be approximately HK$[REDACTED] (assuming an [REDACTED] of HK$[REDACTED] per [REDACTED], being the midpoint of the indicative [REDACTED] range), of which approximately HK$[REDACTED] is directly attributable to the issue of the [REDACTED] to the public and is to be accounted for as a deduction from equity. For the year ended 31 March 2020 and 2021, we recognised approximately HK$[REDACTED] and HK$[REDACTED] of [REDACTED] which was charged to our consolidated statements of profit and loss and other comprehensive income. The remaining approximately HK$[REDACTED] is expected to be charged to our profit or loss during the year ending 31 March 2022. The Board wishes to inform the Shareholders and potential investors that our Group’s financial performance and results of operations for the year ending 31 March 2022 will be affected by the estimated expenses in relation to the [REDACTED]. It should be noted that the [REDACTED] are current estimate and for references only.
RELATED PARTY TRANSACTIONS
Please refer to the section headed “Related party transactions” under Note 29 of Accountants’ Report set out in Appendix I to this document for details of our related party transactions, including balances with related parties, during the Track Record Period.
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FINANCIAL INFORMATION
Save for amounts due to related parties, our Directors are of the view that during the Track Record Period, the related party transactions were conducted based on normal commercial terms and were no less favourable to us than terms available to or from Independent Third Parties.
Amount due to a director and amount due to a related party are measured at amortised cost, unsecured, interest free, and repayable on demand. Our Group shall settle and/or capitalise all such outstanding amounts prior to [REDACTED].
Having considered that there was no material impact on the combined statements of comprehensive income arising from the related party transaction as described above during the Track Record Period, save as disclosed above, our Directors are of the view that the aforesaid related party transactions did not distort our financial results during the Track Record Period or cause our Track Record Period results to be unreflective of our future performance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISK
We are exposed to various types of financial risks, including currency risk, interest rate risk, credit risk and liquidity risk during the normal course of our business. Our overall risk management focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on our financial performance.
Foreign currency risk
Our Group is mainly exposed to the foreign currency risk of HK$ and RMB, however we consider that our exposure to currency exposure is limited as the majority of our revenue are denominated in the functional currency of the relevant group entities. We currently do not have a foreign currency hedging policy. However, we will monitor the related foreign currency exposure closely and will consider hedging significant currency exposure should the need arise. Please refer to note 31 to the Accountants’ Report set out in Appendix I to this document for more details.
Interest rate risk
Our Group is exposed to cash flow interest rate risk in relation to variable rate bank balances and variable-rate bank borrowings. Our cash flow interest rate risk is mainly concentrated on the fluctuation of interest rates on bank balances and borrowings arising from our Hong Kong dollar denominated borrowings. We manage our interest rate exposures by assessing the potential impact arising from any interest rate movements based on interest rate level and outlook. Please refer to note 31 to the Accountants’ Report set out in Appendix I to this document for more details.
Credit risk
Our credit risk is attributable to balances, including trade and other receivables, contract assets and other financial assets. Our exposure to credit risk may cause a financial loss to our Group due to failure to discharge an obligation by the counterparties arises from
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FINANCIAL INFORMATION the carrying amounts of the respective recognised financial assets as stated in the consolidated statements of financial position. Please refer to note 31 to the Accountants’ Report set out in Appendix I to this document for more details.
Liquidity risk
Liquidity risk relates to the risk that our Group will not be able to meet our financial obligations as they become due. In the management of liquidity risk, our Group’s objective is to monitor and maintain adequate cash and cash equivalents to finance our operations and mitigate the effects of fluctuations in cash flows. Please refer to note 31 to the Accountants’ Report set out in Appendix I to this document for more details.
DIVIDENDS
For the years ended 31 March 2019, 2020 and 2021, our subsidiaries declared and distributed dividends of approximately HK$27.5 million, HK$14.5 million and HK$nil, respectively.
Subject to the Companies Act, we may declare dividends in any currency through a general shareholders’ meeting, but no dividend shall be declared in excess of the amount recommended by our Board. Our Articles of Association provide that dividends may be declared and paid out of our profits, realised or unrealised, or from any reserves set aside from profits which our Directors determine are no longer needed. With the sanction of an ordinary resolution passed by our shareholders, dividends may also be declared and paid out of our share premium account or any other fund or account which can be authorised for this purpose in accordance with the Companies Act.
Pursuant to our dividend policy, being effective upon [REDACTED], our Board may propose the payment of dividends, if any, on a per share basis, provided that our Group is profitable and without affecting the normal operations and business of our Group, our Board may consider declaring and paying dividends to the Shareholders by taking into account the following factors, among others, (i) the actual and expected financial performance of our Group; (ii) the general business conditions and strategies of our Group; (iii) the expected working capital requirements, capital expenditure requirements and future expansion plans of our Group; (iv) the retained earnings and distributable reserves of our Company and each of the other members of our Group; (v) the level of our Group’s debts to equity ratio and return on equity as well as financial covenants to which our Group is subject; (vi) our Group’s liquidity position and future commitments at the time of declaration of dividends; (vii) the statutory and regulatory restrictions which our Group is subject to from time to time; (viii) the general economic conditions, business cycle of our Group’s business and other internal or external factors that may have an impact on the business or financial performance and position of our Group; and (ix) any other factors that the Board may deem appropriate. Such declaration and payment of dividends by our Company shall remain to be determined at the sole discretion of our Board and subject to the requirements under all applicable laws, rules and regulations as well as the Articles of Association. Any future declarations and payments of dividends may or may not reflect the historical declarations and payments of dividends and will be at the absolute discretion of our Directors. We do not have any dividend payout ratio.
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FINANCIAL INFORMATION
Our future dividend payments will also depend upon the availability of dividends received from our operating subsidiaries in the PRC. PRC law requires that dividends be paid only out of the net profit calculated according to PRC accounting principles, which differ in certain aspects from the generally accepted accounting principles in other jurisdictions including HKFRS. PRC law also requires a foreign invested enterprise to transfer at least 10% of its net profit (after offsetting losses in the prior year) to a statutory reserve until the reserve balance reaches 50% of the registered capital of the enterprise. The transfer to its reserve must be made before distribution of dividends to its equity holders. Distributions from our PRC operating subsidiaries may also be restricted if they incur debt or losses due to PRC law restricting payments of dividends to us or in accordance with any restrictive covenants in bank credit facilities, convertible bond instrument or other agreements that we or our PRC operating subsidiaries may enter into in future.
For more details regarding the restrictions on the payment of dividends by our PRC subsidiaries and taxes payable on dividends, please refer to the sections headed “Risk Factors – Risks relating to business operations in the PRC” in this document.
DISTRIBUTABLE RESERVE
Our Company was incorporated in the Cayman Islands on 28 February 2019 and has not carried on any business since the date of our incorporation. As such, as at 31 March 2019, we had no distributable reserve available for distribution to our shareholders.
SUBSEQUENT EVENTS
For significant events that took place subsequent to 31 March 2021, please refer to section headed “Events after the end of the reporting period” of note 36 to the Accountants’ Report set out in Appendix I to this document.
[REDACTED] ADJUSTED NET TANGIBLE ASSETS
Our [REDACTED] adjusted combined net tangible assets was prepared for illustrative purposes only and may not give a true picture of our financial position due to its hypothetical nature. For further details, please refer to the section headed “[REDACTED]” in Appendix II to this document.
RECENT DEVELOPMENTS AND MATERIAL ADVERSE CHANGE
We continued to focus on principal business of manufacture of elevator cabin products and decorative stainless steel products and other architectural finishing materials subsequent to the Track Record Period and up to the Latest Practicable Date. The Outbreak had an adverse impact on, where applicable, our revenue, gross profit margin and net profit for the years ended 31 March 2020 and 2021, details of which are set out in the section headed “Financial Information – Principal components of results of operations” in this document. Nonetheless, we managed to record an increase of approximately 7.2% in revenue for the year ended 31 March 2021 as compared to that in the previous year amid the development and temporary effects as a result of the Outbreak on the businesses of our Group, primarily attributable to the continued growth in revenue of the elevator cabin segment and notable recovery of the decorative stainless steel segment of our Group.
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FINANCIAL INFORMATION
We have received certain government support in both Hong Kong and the PRC due to the Outbreak. During the Track Record Period, we received two tranches of subsidies of approximately HK$1.6 million in aggregate under the Employment Support Scheme of the Government, which had been offset against the staff costs in the consolidated financial statements of our Group. In the PRC, we were granted cost concessions and government assistance on electricity, social insurance and rental expenses of approximately RMB4.5 million, among which, (i) approximately RMB3.5 million of government assistance related to our social insurance contribution had been offset against the staff costs; and (ii) approximately RMB1.0 million of cost concessions on electricity and rental expenses were recognised as deductions to the relevant expenses, in the consolidated financial statements of our Group. Subsequent to the Track Record Period and up to the Latest Practicable Date, we did not receive any government support from the Government and the PRC Government in relation to the Outbreak.
The indebtedness of our Group as at 31 March 2021, being the latest practicable date for determining the amount of indebtedness in this document, amounted to approximately HK$95.9 million. Further details of our Group’s indebtedness statement as at 31 March 2021 are set out under the section headed “Financial Information – Indebtedness” in this document.
Save as disclosed and for the [REDACTED], of which approximately HK$[REDACTED] and HK$[REDACTED] was charged to our profit or loss for the years ended 31 March 2020 and 2021, respectively, and approximately HK$[REDACTED] is expected to be charged to our profit or loss during the year ending 31 March 2022, which would in turn adversely impact our Group’s financial results for the year ending 31 March 2022, our Directors confirm that, up to the date of this document, there has been no other material adverse change in the financial or trading position or prospects of our Group since 31 March 2021 (being the date to which the latest audited consolidated financial statements of our Group were prepared), and there is no event since 31 March 2021 which would materially affect the information shown in the Accountants’ Report set out in Appendix I to this document.
Effect of the outbreak of COVID-19
An outbreak of respiratory illness caused by a novel coronavirus (COVID-19) first emerged in late December 2019 and continues to expand globally. The WHO declared the outbreak of COVID-19 a Public Health Emergency of International Concern on 30 January 2020 and subsequently a pandemic on 11 March 2020. The outbreak of COVID-19 has impacted our business and operations during the Track Record Period.
In this connection, our Directors assessed its impact on our Group in the following aspects, namely (i) suppliers; (ii) sales and customers; and (iii) manpower. For details, please refer to the section headed “Business – Effect of the outbreak of COVID-19” in this document.
Based on the purchase orders we received so far and having taken into account the impact of the COVID-19 on our business during the years ended 31 March 2020 and 2021, we anticipate that we may experience certain adverse temporary impact to our revenue, gross
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FINANCIAL INFORMATION profit and/or gross profit margin in Hong Kong and overseas markets for the year ending 31 March 2022. In light of the aforesaid industry and market outlook, we, however, do not expect that such adverse impact arising from the Outbreak in Hong Kong and overseas on our operation to be long-lasting given that (i) our revenue from Hong Kong market experienced notable recovery for the year ended 31 March 2021; (ii) the PRC has been gradually resuming economic activities to full scale; and (iii) governments in Hong Kong and other countries have implemented numerous control measures with a view to manage the Outbreak and facilitate the recovery of local economic activities.
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FINANCIAL INFORMATION
Our Directors will continue to assess the impact of the COVID-19 on our Group’s operations and financial performance and closely monitor our Group’s exposure to the risks and uncertainties in this connection. We will take appropriate measures as necessary and inform our Shareholders as and when necessary.
For illustration purposes only, an analysis is conducted based on the worst-case scenario, whereby it is assumed that our Group will not derive any revenue commencing from the date of [REDACTED] onwards due to the Outbreak but will continue to incur operating and administrative expenses, rental expenses and salaries and wages at a reduced rate to maintain a minimal operation. Under the aforesaid unlikely and extreme event, it is also assumed that there will be no further financing from our then Shareholders, the existing banking facilities would be renewed upon its expiry, our Group will not pay any dividend during the said period, and taking into account prudent estimate of settlement of trade receivables based on historical settlement pattern, [REDACTED] from the [REDACTED] for general working capital purposes, our existing cash and cash equivalents and trade receivables as at 31 March 2021, it is estimated that we can maintain our Group’s financial viability for not less than 30 months with other [REDACTED] from the [REDACTED] only to be utilised in accordance with the applications as specified under the section headed “Future Plans and [REDACTED]” in this document and without utilising such for settling our estimated monthly fixed costs (including rentals and staff costs), trade payables and finance costs from bank borrowings outstanding as at 31 March 2021.
DISCLOSURE UNDER RULES 13.13 TO 13.19 OF THE LISTING RULES
Our Directors have confirmed that, as at the Latest Practicable Date, they were not aware of any circumstances which would give rise to a disclosure requirement under Rules 13.13 to 13.19 of the Listing Rules.
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FUTURE PLANS AND [REDACTED]
BUSINESS OBJECTIVES AND STRATEGIES
Please refer to the section headed “Business – Business strategies” in this document for detailed description of our future plans.
[REDACTED]
In the event that the [REDACTED] is not exercised, we estimate the [REDACTED] from the [REDACTED] which we will receive, assuming an [REDACTED] of HK$[REDACTED] per [REDACTED] (being the mid-point of the [REDACTED] range stated in this document), will be approximately HK$[REDACTED], after deduction of [REDACTED] and commissions and other estimated expenses in connection with the [REDACTED].
In the event that the [REDACTED] is exercised in full and assuming an [REDACTED] of HK$[REDACTED] per [REDACTED] (being the mid-point of the [REDACTED] range stated in this document), we will receive additional [REDACTED] from the [REDACTED] of approximately HK$[REDACTED].
If the [REDACTED] is fixed at HK$[REDACTED] per [REDACTED] (being the high end of the [REDACTED] range stated in this document), we will receive additional [REDACTED] from the [REDACTED] of approximately HK$[REDACTED], assuming the [REDACTED] is not exercised.
If the [REDACTED] is fixed at HK$[REDACTED] per [REDACTED] (being the low end of the [REDACTED] range stated in this document), the [REDACTED] from the [REDACTED] we receive will be reduced by approximately HK$[REDACTED], assuming the [REDACTED] is not exercised.
We intend to use the [REDACTED] or approximately HK$[REDACTED] from the [REDACTED] for the following purposes assuming the [REDACTED] is not exercised and assuming an [REDACTED] of HK$[REDACTED] per [REDACTED], being the mid-point of the [REDACTED] range stated in this document:
¼ approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the establishment of our Jiangmen Plant, which will form part of our Southern China Production Hub together with our Guangzhou Plant, with an aim to enhance our production capacity, among which:
(i) approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the construction of office, factory buildings and other ancillary facilities for our Jiangmen Plant which will include, among others, (aa) our phase I expansion plan consisting of the construction of a factory building with a gross floor area of approximately 7,900 sq.m. and ancillary facilities with a gross floor area of approximately 700 sq.m.; and (bb) our phase II expansion plan consisting of the construction of a multi-storey building for a mixed use of factory and office; and
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FUTURE PLANS AND [REDACTED]
(ii) approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to partially finance the acquisition of machinery and equipment for our Jiangmen Plant.
For further details and analysis on the establishment of our Jiangmen Plant, including but not limited to, background information on our Jiangmen Plant, the estimated total investment costs, expected timeframe for the establishment of our Jiangmen Plant and reasons for acquiring the plant site, please refer to the section headed “Business – Business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products – Establishment of our Jiangmen Plant” in this document.
¼ approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to acquire certain machinery, equipment and robotic arms with an aim to enhance our production capacity and level of automation in our production process at our Guangzhou Plant which will form part of our Southern China Production Hub together with our Jiangmen Plant.
For further details and analysis on the upgrade of our Guangzhou Plant, including but not limited to, our strategy regarding our Guangzhou Plant going forward, the details of key machinery proposed to be acquired, reasons for the proposed upgrades of our Guangzhou Plant, please refer to the section headed “Business – Business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products – Upgrade of our Guangzhou Plant” in this document.
¼ approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) to acquire certain machinery and equipment with an aim to enhance our production capacity at our Suzhou Workshop and upgrade it to full-scale production facilities.
For further details and analysis on the upgrade of our Suzhou Workshop, including but not limited to, our strategy regarding our Suzhou Workshop going forward, the details of key machinery proposed to be acquired, reasons for the proposed upgrades of our Suzhou Workshop, please refer to the section headed “Business – Business strategies – Enhancing our production capacity through the establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop to full-scale production facilities to keep up with the growth in demand for our products – Upgrade of our Suzhou Workshop” in this document.
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FUTURE PLANS AND [REDACTED]
¼ approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) for upgrading our information technology systems to a new version of ERP system to cover wider aspects in our daily operations and enhance electronic data interchange and data direct linkage among our three production facilities at our Southern China Production Hub and Suzhou Workshop.
¼ approximately [REDACTED]% of the [REDACTED] from the [REDACTED] (approximately HK$[REDACTED]) for our working capital and general corporate purposes.
For further details, please refer to the section headed “Business – Business strategies” in this document.
The above allocation of the [REDACTED] from the [REDACTED] will be adjusted on a pro rata basis in the event that the [REDACTED] is fixed at a higher or lower level compared to the mid-point of the proposed [REDACTED] range.
In the event that the [REDACTED] is exercised in full, we intend to apply the additional [REDACTED] from the [REDACTED] to the above uses in the proportions stated above.
To the extent that the [REDACTED] from the [REDACTED] are not immediately applied to the above purposes and to the extent permitted by applicable law and regulations, we intend to deposit the [REDACTED] from the [REDACTED] into interest-bearing accounts with licensed bank and/or financial institutions. We will make an appropriate announcement if there is any change to the above proposed [REDACTED].
REASONS FOR THE [REDACTED]
Our Directors believe that the commercial rationale of the [REDACTED] and the [REDACTED] is as follows:
(a) Facilitate the implementation of our business strategies
We believe that the [REDACTED] and the [REDACTED] will facilitate our implementation of the following business strategies to expand our production capacity and strengthen and broaden our customer base:
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FUTURE PLANS AND [REDACTED]
As disclosed above, we plan to utilise approximately [REDACTED]% of the [REDACTED] from the [REDACTED] to significantly increase our overall production capacity by partially financing the establishment of our Jiangmen Plant to form our Southern China Production Hub together with our Guangzhou Plant and upgrade of our Suzhou Workshop to full-scale production facilities. We will continue to lease the properties where our Guangzhou Plant and Suzhou Workshop are located. Our Directors consider that our expansion plan is necessary for our future growth due to the following reasons:
(i) we achieved consistently high overall utilisation rate of our existing production facilities throughout the Track Record Period. For the three years ended 31 March 2019, 2020 and 2021, our overall utilisation rate were approximately 118.7%, 98.2% and 113.0%, respectively. Please refer to the section headed “Business – Our production process and production facilities – Production capacity” in this document for further details. Hence, our Directors believe that we have a genuine need to carry out our production expansion plan in view of our consistently high overall utilisation rate during the Track Record Period and the anticipated demand in near future as discussed below. Following the expected commencement of production at our Jiangmen Plant and the upgrade of our Guangzhou Plant and Suzhou Workshop, based on information available and after reasonable enquiries, we estimate that our designated production capacity for the decorative stainless steel and elevator cabin segments is expected to increase by approximately 73.9% and 42.0%, respectively, for the year ending 31 March 2023 compared to that of the year ended 31 March 2021;
(ii) we carried out all major steps of our general production process in house during the Track Record Period. Our Directors consider that such practice is indispensable to ensuring the quality of our products and forms an integral part of our business model. We insist on completing all major steps of our production process at our production facilities as (aa) we are able to control the utilisation of raw materials and consumables which we believe is key to the cost of our products. Furthermore, we can effectively manage the wastage of raw materials and consumables, which would also affect the profit margin of our orders; (bb) any error or inaccuracy in the production process can result in non-conformance of the final products with our customers’ product specifications and quality standards; and (cc) finishing, final quality inspection and packing, being the final production steps of the production of our products, are critical quality control steps. During these final steps, it is the last chance that we can reassure that our products conform with our customers’ standards before they are delivered to our customers. Our Directors also believe that it is necessary for our Group to maintain the production processes at our production facilities to accommodate the manufacturing of products with higher complexity. Given that we have fully utilised the working space at our current production facility, our ability to take further orders in the future hinges on our production capacity expansion plans.
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FUTURE PLANS AND [REDACTED]
Our Directors believe that there will be adequate demand for our products to support our expansion plan based on the following:
(i) according to the Ipsos Report, the ECMD industry in the PRC and decorative stainless steel manufacturing industry in the PRC and Hong Kong are anticipated to grow at a CAGR of approximately 6.9%, 6.8% and 3.9%, respectively, from 2020 to 2024. Nevertheless, we outperformed the industry growth as our revenue increased by approximately HK$75.2 million, or 23.4%, from approximately HK$321.7 million for the year ended 31 March 2018 to approximately HK$396.9 million for the year ended 31 March 2019. The overall revenue of our Group decreased by approximately HK$23.1 million, or approximately 5.8%, from approximately HK$396.9 million for the year ended 31 March 2019 to approximately HK$373.8 million for the year ended 31 March 2020 due to the temporary suspension of our operations from February to March 2020 in the PRC in response to the COVID-19 outbreak. Howsoever the revenue generated from our elevator cabin segment remained strong at approximately HK$254.9 million for the year ended 31 March 2019 and approximately HK$260.0 million for the year ended 31 March 2020, which was primarily attributable to the increase in sales of elevator cabin products to Customer A. Having considered (aa) our competitive strengths as mentioned in the section headed “Business – Competitive strengths” in this document; and (bb) the anticipated growth in the revenue of the ECMD industry in the PRC and decorative stainless steel manufacturing industry in the PRC and Hong Kong, our Directors believe that we can expand our business on top of our present scale of operation if we continue to enhance our production capacity through establishment of our Southern China Production Hub and upgrade of our Suzhou Workshop. For further information on the detailed strategy of our Group and the underlying rationale, please refer to the section headed “Business – Business strategies” in this document;
(ii) during the Track Record Period, our production facilities in the PRC maintained consistently high overall utilisation rate. For the three years ended 31 March 2019, 2020 and 2021, our overall utilisation rate were approximately 118.7%, 98.2% and 113.0%, respectively. Please refer to the paragraph headed “Business - Our production process and production facilities – Production capacity” in this document;
(iii) we believe we will continue to achieve revenue growth based on the continuous growth in our elevator cabin segment during the Track Record Period, in particular, revenue derived from Customer A, our largest customer during the Track Record Period which has secured its place as one of the top three companies in the PRC’s elevator industry between 2014 and 2019 in terms of revenue generated according to the Ipsos Report, continued to increase during the Track Record Period amid the development and temporary effects as a result of the Outbreak on the businesses of our Group;
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FUTURE PLANS AND [REDACTED]
(iv) the elevator industry is undergoing a consolidation phase in recent years as major elevator companies are gradually expanding their businesses into second and third-tier cities in the past few years with the top five elevator companies in the PRC experienced year-on-year growth of approximately 9.2% from 2017 to 2018 on average. Among the top five elevator companies in the PRC in 2019, we had business relationships with all of them or their affiliates in the PRC or Hong Kong during the Track Record Period. Our Directors are of the view that being one of the leading ECMD companies that conduct businesses with these major elevator companies, we are able to benefit from the phenomenon in the industry and boost our sales;
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FUTURE PLANS AND [REDACTED]
(v) our business strategy to strengthen and broaden our customer base in Eastern China by establishment of our Suzhou Workshop in 2018 enables us to explore more business opportunities with existing and potential customers. According to the Ipsos Report, most of the popular elevator companies are based in Shanghai and it is convenient for businesses to explore and expand their markets to Shanghai with the geographical advantages. In addition, there are also some other large elevator companies located in and near Kunshan, ECMD companies with manufacturing plants in Kunshan therefore benefit from locating near to popular elevator companies by reducing logistics costs;
(vi) we believe that strategically locating our production facilities near the elevator manufacturing hubs in the PRC is part of our on-going business strategy. We will from time to time explore and assess the opportunity to further expand our customer base and presence in the market by establishment of our production facilities in other regions in the PRC, if and when appropriate;
(vii) according to the Ipsos Report, our market share in the ECMD industry in the PRC in terms of revenue was only approximately 1.4% in 2019. We believe that given that the ECMD industry in the PRC in which we operate in are fragmented coupled with our low market share despite us being ranked fourth in terms of revenue in 2019, we can increase our market share by capturing existing demand; and
(viii) we plan to capture additional market share through enhancing our marketing initiatives to expand the geographic coverage of our products and our customer base. We intend to, subject to the travel restrictions imposed by many countries, (aa) attend certain exhibitions held in Hong Kong, the Philippines, Indonesia, Cambodia and Kazakhstan; (bb) conduct customer visits to both existing and potential customers to enhance our market presence in the PRC, Hong Kong, Macau and countries in Southeast Asia and the Middle East; (cc) enhance our marketing efforts through spending more resources on online advertising campaigns; and (dd) recruit sales executives who will be responsible for identifying the potential customers and markets.
Based on our cost-benefit analysis, we believe that it is more cost effective for us to acquire rather than to lease the property for establishment of our Jiangmen Plant. For further details, please refer to the section headed ”Business – Business strategies” in this document.
(b) Provide a platform for us to access the capital markets for future secondary fund-raising
We have historically financed our business operation and internal resources through our internal resources and bank borrowings. Due to the expansion of our business operation, our bank borrowing balances increased from approximately
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FUTURE PLANS AND [REDACTED]
HK$36.0 million as at 31 March 2019 to approximately HK$52.2 million as at 31 March 2021. Finance costs incurred also increased from approximately HK$3.1 million for the year ended 31 March 2019 to approximately HK$5.1 million for the year ended 31 March 2021.
Our Directors believe that [REDACTED] provides a platform for us to access the capital markets for future secondary fund-raising through the issuance of shares and debt securities, which can provide funding sources for the implementation of our business strategies in the future as and when necessary.
Although we have successfully expanded our business using internally generated funds, short-term and long-term bank borrowings during the Track Record Period and have been able to repay bank loans as they fell due in the past, we believe that solely relying on bank borrowings to finance our above expansion plans is not a commercially viable method. We had approached certain commercial banks for bank loan facilities to finance the above expansion plans, but were unable to obtain sufficient bank borrowings for the aforesaid purpose at acceptable terms which we believe is mainly attributable to the lack of assets that we could offer to such banks as security for the bank loan. Furthermore, we believe that many commercial banks are unwilling to grant us sizeable bank loans to construct our new production facility given that we have no track record in such constructions.
(c) Strengthen our competitiveness in the market through the [REDACTED]
It is expected that our brand recognition can be broadened and our corporate profile will be enhanced through the [REDACTED], which in turn will help attract more customers. As we plan to further increase our market share and broaden our customer base in the geographical locations which we have served in particular, the PRC and Hong Kong, we believe that our potential customers tend to give preference to a company which has a public [REDACTED] status with a sound reputation. We also believe that the [REDACTED] status will also enhance our credibility, which would increase our bargaining power in negotiating terms with our customers and suppliers.
(d) Other commercial benefits arising from a public [REDACTED] status
We believe that our internal control and corporate governance practices would be further enhanced through the [REDACTED]. The [REDACTED] will strengthen the liquidity of our Shares by achieving the [REDACTED] status of the Shares which will be freely traded on the Stock Exchange when compared to the limited liquidity of our Shares that are privately held before the [REDACTED].
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[REDACTED]
[REDACTED]
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[REDACTED]
[REDACTED]
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[REDACTED]
[REDACTED]
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[REDACTED]
[REDACTED]
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[REDACTED]
[REDACTED]
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[REDACTED]
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[REDACTED]
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[REDACTED]
[REDACTED]
INDEPENDENCE OF THE SOLE SPONSOR
Red Sun Capital Limited, being the Sole Sponsor, satisfies the independence criteria applicable to sponsors as set out in Rule 3A.07 of the Listing Rules.
[REDACTED]
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STRUCTURE AND CONDITIONS OF THE [REDACTED]
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APPENDIX I ACCOUNTANTS’ REPORT
The following is the text of a report received from the Company’s reporting accountants, [Deloitte Touche Tohmatsu], Certified Public Accountants, Hong Kong, for the purpose of incorporation in this document.
ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF COBELCO GROUP HOLDINGS LIMITED AND RED SUN CAPITAL LIMITED
Introduction
We report on the historical financial information of Cobelco Group Holdings Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages [¼]to[¼], which comprises the consolidated statements of financial position of the Group as at 31 March 2019, 2020 and 2021, the statements of financial position of the Company as at 31 March 2019, 2020 and 2021, and the consolidated statements of profit or loss and other comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows of the Group for each of the three years ended 31 March 2021 (the “Track Record Period”) and a summary of significant accounting policies and other explanatory information (together, the “Historical Financial Information”). The Historical Financial Information set out on pages [¼]to[¼] forms an integral part of this report, which has been prepared for inclusion in the document of the Company dated [REDACTED] (the “Document”) in connection with the initial [REDACTED] of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).
Directors’ Responsibility for the Historical Financial Information
The directors of the Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.
Reporting Accountants’ Responsibility
Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 “Accountants’ Reports on Historical Financial Information in the Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.
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APPENDIX I ACCOUNTANTS’ REPORT
Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants’ judgment, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity’s preparation of Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information in order to design 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. Our work also included evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors of the Company, as well as evaluating the overall presentation of the Historical Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Historical Financial Information gives, for the purposes of the accountants’ report, a true and fair view of the Group’s financial position as at 31 March 2019, 2020 and 2021, of the Company’s financial position as at 31 March 2019, 2020 and 2021, and of the Group’s financial performance and cash flows for the Track Record Period in accordance with the basis of preparation and presentation set out in Note 2 to the Historical Financial Information.
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APPENDIX I ACCOUNTANTS’ REPORT
Report on Matters Under the Rules Governing the Listing of Securities on the Stock Exchange and the Companies (Winding Up and Miscellaneous Provisions) Ordinance
Adjustments
In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page I-3 have been made.
Dividends
We refer to Note 12 to the Historical Financial Information which contains information about the dividends declared or paid by the Company’s subsidiaries in respect of the Track Record Period and states that no dividend has been declared or paid by the Company since its incorporation.
[Deloitte Touche Tohmatsu] Certified Public Accountants Hong Kong [REDACTED]
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APPENDIX I ACCOUNTANTS’ REPORT
HISTORICAL FINANCIAL INFORMATION OF THE GROUP
Preparation of Historical Financial Information
Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.
The consolidated financial statements of the Group for the Track Record Period, on which the Historical Financial Information is based, have been prepared in accordance with the accounting policies which conform with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA and were audited by us in accordance with Hong Kong Standards on Auditing issued by the HKICPA (“Underlying Financial Statements”).
The Historical Financial Information is presented in Hong Kong dollars (“HK$”), while the functional currency of the Company is Renminbi (“RMB”), and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.
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APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Year ended 31 March NOTES 2019 2020 2021 HK$’000 HK$’000 HK$’000
Revenue 6 396,857 373,826 400,851 Cost of sales (277,383) (273,420) (294,459)
Gross profit 119,474 100,406 106,392 Other income, gains and losses 7 (330) 1,508 632 (Impairment losses, net of reversal) reversal of impairment losses, net of impairment on trade receivables and contract assets (654) (294) 2 Selling and distribution expenses (13,671) (13,510) (12,757) Administrative expenses (39,072) (38,146) (34,372) Research and development expenses (15,539) (12,409) (13,312) [REDACTED] [REDACTED] [REDACTED] [REDACTED] Finance costs 8 (3,131) (4,515) (5,143)
Profit before tax 9 47,077 26,896 34,222 Income tax expense 11 (8,125) (5,154) (7,546)
Profit for the year 38,952 21,742 26,676
Other comprehensive (expense) income Item that will not be reclassified to profit or loss: Exchange difference on translation from functional currency to presentation currency (3,851) (5,641) 8,291
Item that may be reclassified subsequently to profit or loss: Exchange difference arising on translation of foreign operations 1,733 8 (416)
Other comprehensive (expense) income for the year (2,118) (5,633) 7,875
Total comprehensive income for the year 36,834 16,109 34,551
Earnings per share – Basic (HK$) 13 [0.078] [0.043] [0.053]
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APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at 31 March NOTES 2019 2020 2021 HK$’000 HK$’000 HK$’000
Non-current assets Property, plant and equipment 14 43,742 38,929 58,812 Right-of-use assets 15 42,740 43,365 48,004 Deposits paid for acquisition of property, plant and equipment 86 – – Refundable rental deposits paid 17 796 642 744 Deferred tax assets 24 816 1,043 678
88,180 83,979 108,238 Current assets Inventories 16 65,447 64,657 75,420 Trade receivables 17 93,350 54,163 104,332 Contract assets 18 6,314 5,007 4,787 Other receivables, deposits and prepayments 17 10,653 15,222 18,406 Tax recoverable – 4,146 – Restricted bank deposits 19 319 257 251 Bank balances and cash 19 23,974 41,487 23,816
200,057 184,939 227,012
Current liabilities Trade and other payables 20 94,180 69,864 95,218 Contract liabilities 18 15,583 10,204 9,450 Amount due to a director 21 15,186 17,999 8,883 Amount due to a related party 21 100 – – Tax liabilities 1,669 – 3,863 Lease liabilities 22 7,794 7,942 8,813 Bank borrowings 23 34,572 40,782 43,679
169,084 146,791 169,906
Net current assets 30,973 38,148 57,106
Total assets less current liabilities 119,153 122,127 165,344
Non-current liabilities Lease liabilities 22 24,708 25,785 25,972 Bank borrowings 23 1,412 814 8,569 Deferred tax liabilities 24 3,211 4,069 4,793
29,331 30,668 39,334
Net assets 89,822 91,459 126,010
Capital and reserves Share capital 25 2,500 –* –* Reserves 87,322 91,459 126,010
89,822 91,459 126,010
* Less than HK$1,000.
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APPENDIX I ACCOUNTANTS’ REPORT
STATEMENTS OF FINANCIAL POSITION OF THE COMPANY
As at 31 March NOTES 2019 2020 2021 HK$’000 HK$’000 HK$’000
Non-current asset Investment in a subsidiary 26 – 84,899 84,899
Current assets Prepayments – 2,831 4,557 Bank balance – 15 20
– 2,846 4,577
Current liabilities Accrued expenses – 2,662 4,841 Amount due to a director 21 42 392 425 Amounts due to subsidiaries 21 – 6,066 13,210
42 9,120 18,476
Net current liabilities (42) (6,274) (13,899)
Net (liabilities) assets (42) 78,625 71,000
Capital and reserves Share capital 25 −* −* −* Reserves 27 (42) 78,625 71,000
(42) 78,625 71,000
* Less than HK$1,000.
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APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share Share Other Statutory Translation Retained capital premium reserve reserve reserve profits Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note a) (note b)
At 1 April 2018 2,500 – – 5,634 5,779 66,531 80,444 Profit for the year ––––−38,952 38,952 Other comprehensive expense for the year ––––(2,118) – (2,118)
Total comprehensive (expense) income for the year ––––(2,118) 38,952 36,834
Transfer to statutory reserve – – – 2,789 – (2,789) – Dividends declared (Note 12) –––––(27,456) (27,456)
At 31 March 2019 2,500 – – 8,423 3,661 75,238 89,822 Profit for the year –––––21,742 21,742 Other comprehensive expense for the year ––––(5,633) – (5,633)
Total comprehensive (expense) income for the year ––––(5,633) 21,742 16,109
Effect of Reorganisation (note a) (2,500) 84,899 (82,399) –––– Transfer to statutory reserve – – – 2,431 – (2,431) – Dividends declared (Note 12) –––––(14,472) (14,472)
At 31 March 2020 –* 84,899 (82,399) 10,854 (1,972) 80,077 91,459 Profit for the year –––––26,676 26,676 Other comprehensive income for the year ––––7,875 – 7,875
Total comprehensive income for the year ––––7,875 26,676 34,551
Transfer to statutory reserve – – – 963 – (963) –
At 31 March 2021 –* 84,899 (82,399) 11,817 5,903 105,790 126,010
* Less than HK$1,000.
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APPENDIX I ACCOUNTANTS’ REPORT
Notes:
(a) Amount represents the difference between the net assets value of Full Victory Investment Development Limited (“Full Victory”) at the date of which it was acquired by the Company and the share capital of Full Victory pursuant to the Reorganisation as detailed in Note 2.
(b) The statutory reserve represents the amount transferred from net profit for the year of the subsidiaries established in the People’s Republic of China (the “PRC”) (based on the subsidiaries’ PRC statutory financial statements) in accordance with the relevant PRC laws until the statutory reserve reaches 50% of the registered capital of the subsidiaries. Transfer to this reserve must be made before distributing dividends to owner of the subsidiaries. The statutory reserve cannot be reduced except either use to set off the accumulated losses or increase capital.
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APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Operating activities Profit before tax 47,077 26,896 34,222 Adjustments for: Finance costs 3,131 4,515 5,143 Bank interest income (34) (50) (43) Other interest income (63) (67) (56) Depreciation of property, plant and equipment 6,113 5,638 5,624 Depreciation of right-of-use assets 7,611 8,531 8,207 Losses on disposal of property, plant and equipment, net 269 172 208 Provision for penalty – 767 3,001 Allowance made for inventories 786 1,163 1,108 Impairment losses, net of reversal (reversal of impairment losses, net of impairment) on trade receivables and contract assets 654 294 (2) Effect of foreign exchange rate changes on intra-group balances 1,305 206 (250)
Operating cash flows before movements in working capital 66,849 48,065 57,162 Increase in inventories (2,350) (4,160) (6,686) (Increase) decrease in trade receivables (47,402) 34,799 (46,012) Decrease in contract assets 2,709 968 493 Decrease (increase) in other receivables, deposits and prepayments 4,115 (3,075) (1,850) Increase (decrease) in trade and other payables 18,058 (20,589) 17,692 Decrease in contract liabilities (15,390) (4,871) (1,289)
Cash generated from operations 26,589 51,137 19,510 Income tax (paid) refund (1,619) (10,443) 2,125 Withholding tax paid – – (518)
Net cash from operating activities 24,970 40,694 21,117
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APPENDIX I ACCOUNTANTS’ REPORT
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Investing activities Purchases of property, plant and equipment (5,297) (3,735) (22,925) Payments for leasehold land (10,976) – – Payments for right-of-use assets (160) (463) – Placement for restricted bank deposits (120) (13) – Proceeds on disposal of property, plant and equipment 871 87 816 Deposits paid for acquisition of property, plant and equipment (86) – – Refund of refundable rental deposits – 105 282 Payments for refundable rental deposits (506) (145) (46) Withdrawal of restricted bank deposits – 56 26 Interest received 34 50 43
Net cash used in investing activities (16,240) (4,058) (21,804)
Financing activities Dividends paid (7,456) (14,472) – Repayments of lease liabilities (6,862) (8,068) (10,879) Payments of interest on lease liabilities (1,614) (2,265) (2,490) Payments of interest on bank borrowings (1,517) (2,250) (2,653) Repayments of bank borrowings (30,807) (21,691) (32,795) Repayments to a director (33,616) (1,177) (11,691) Repayments to a related party (575) (100) – Advances from a director 23,247 3,991 2,542 New bank borrowings raised 41,090 28,966 40,919 Prepayments of share [REDACTED] [REDACTED] [REDACTED] [REDACTED] Payments of share [REDACTED] [REDACTED] [REDACTED] [REDACTED]
Net cash used in financing activities (18,110) (18,482) (18,817)
Net (decrease) increase in cash and cash equivalents (9,380) 18,154 (19,504)
Cash and cash equivalents at beginning of the year 33,871 23,974 41,487
Effect of foreign exchange rate changes (517) (641) 1,833
Cash and cash equivalents at end of the year, represented by bank balances and cash 23,974 41,487 23,816
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APPENDIX I ACCOUNTANTS’ REPORT
NOTES TO THE HISTORICAL FINANCIAL INFORMATION
1. GENERAL INFORMATION
The Company was incorporated and registered as an exempted company with limited liability in the Cayman Islands on 28 February 2019. The addresses of the registered office and the principal place of business of the Company are set out in the section headed “Corporate Information” of the Document. The Company’s immediate and ultimate holding company is Rich Topmax Limited (“Rich Topmax”), a company incorporated in the British Virgin Islands (“BVI”), which is ultimately controlled by Mr. Chiu Yu Kui Colby, who has been the controlling shareholder of the Group throughout the Track Record Period.
The Company acts as an investment holding company and its subsidiaries are principally engaged in processing and trading of elevator cabin, decorative stainless steel and other architectural finishing materials.
The functional currency of the Company is RMB. The Historical Financial Information is presented in HK$, which the directors of the Company considered it is more relevant for the user of the Historical Financial Information.
2. BASIS OF PREPARATION AND PRESENTATION OF HISTORICAL FINANCIAL INFORMATION AND REORGANISATION
The Historical Financial Information has been prepared based on the accounting policies set out in Note 4 which conform with HKFRSs issued by the HKICPA and the principle of merger accounting under Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by the HKICPA.
Prior to a group reorganisation as more fully explained in the section headed “History, Reorganisation and Corporate Structure” in the Document (the “Reorganisation”), all the companies comprising the Group were controlled by Mr. Chiu Yu Kui Colby. In preparation of the application of [REDACTED] of the Company’s shares on the Main Board of the Stock Exchange of Hong Kong, the companies comprising the Group underwent Reorganisation as described below.
On 2 January 2019, Full Victory was incorporated under the laws of BVI with limited liability and is authorised to issue a maximum of 50,000 shares of a single class with a par value of United States dollars (“US$”) one each. On 28 March 2019, one ordinary share of par value of US$1 was allotted and issued at par to Mr. Chiu Yu Kui Colby.
On 16 January 2019, Rich Topmax was incorporated under the laws of BVI with limited liability and is authorised to issue a maximum of 50,000 shares of a single class with a par value of US$1 each. On 28 March 2019, one ordinary share of par value of US$1 was allotted and issued at par to Mr. Chiu Yu Kui Colby.
On 28 February 2019, the Company was incorporated as an exempted company in the Cayman Islands with an authorised share capital of HK$380,000 divided into 38,000,000 shares of HK$0.01 each. Upon incorporation, (i) one nil-paid subscriber share was allotted and issued to the initial subscriber who was an independent third party at par, and was then transferred to Mr. Chiu Yu Kui Colby and credited as fully paid on the same day, and (ii) 99 fully-paid shares were further allotted and issued to Mr. Chiu Yu Kui Colby.
Pursuant to a sale and purchase agreement dated 30 July 2019, Mr. Chiu Yu Kui Colby as a vendor sold and Full Victory as a purchaser acquired the entire equity interests in companies comprising the Group as below:
a) Full Victory acquired 500,000 shares in Cobelco (HK) Limited (“Cobelco HK”), a limited company incorporated in Hong Kong, from Mr. Chiu Yu Kui Colby, and in consideration of which, Full Victory allotted and issued one share to Mr. Chiu Yu Kui Colby. Upon completion of share transfer, Cobelco HK became a direct wholly-owned subsidiary of Full Victory.
b) Full Victory acquired 500,000 shares in Cobelco Industrial Supplies Limited (“Cobelco Industrial”), a limited company incorporated in Hong Kong, from Mr. Chiu Yu Kui Colby, and in consideration of which Full Victory allotted and issued one share to Mr. Chiu Yu Kui Colby. Upon completion of share transfer, Cobelco Industrial became a direct wholly-owned subsidiary of Full Victory.
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APPENDIX I ACCOUNTANTS’ REPORT
c) Full Victory acquired 500,000 shares in Sitami Film Decoration Engineering Company, Limited (“Sitami Film”), a limited company incorporated in Hong Kong, from Mr. Chiu Yu Kui Colby, and in consideration of which Full Victory allotted and issued one share to Mr. Chiu Yu Kui Colby. Upon completion of share transfer, Sitami Film became a direct wholly-owned subsidiary of Full Victory.
d) Full Victory acquired 500,000 shares in Sitami Decorative Metal Works Limited (“Sitami Decorative”), a limited company incorporated in Hong Kong, from Mr. Chiu Yu Kui Colby, and in consideration of which Full Victory allotted and issued one share to Mr. Chiu Yu Kui Colby. Upon completion of share transfer, Sitami Decorative became a direct wholly-owned subsidiary of Full Victory.
e) Full Victory acquired 500,000 shares in Sitami (HK) Limited (“Sitami HK”), a limited company incorporated in Hong Kong, from Mr. Chiu Yu Kui Colby, and in consideration of which Full Victory allotted and issued one share to Mr. Chiu Yu Kui Colby. Upon completion of share transfer, Sitami HK became a direct wholly-owned subsidiary of Full Victory.
On 31 July 2019, the Company acquired the entire issued share capital of Full Victory from Mr. Chiu Yu Kui Colby, and in consideration thereto, the Company issued and allotted, credited as fully paid, one share to Rich Topmax as directed by Mr. Chiu Yu Kui Colby.
On 31 July 2019, Mr. Chiu Yu Kui Colby transferred his 100 fully-paid shares in the Company to Rich Topmax at the consideration of HK$1, which has completed and settled on the same date.
Upon the completion of Reorganisation on 31 July 2019, the Company became the holding company of the companies now comprising the Group. The Group resulting from the Reorganisation, has been under the common control of the controlling shareholder throughout the years ended 31 March 2019 and 31 March 2020 or since their respective dates of incorporation, whichever is a shorter period, and is regarded as a continuing entity. Accordingly, the consolidated statements of profit or loss and other comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years ended 31 March 2019 and 31 March 2020 have been prepared to include the results, changes in equity and cash flows of the companies now comprising the Group, as if the group structure upon the completion of the Reorganisation had been in existence throughout the years ended 31 March 2019 and 31 March 2020 or since the respective dates of incorporation or establishment, whichever is shorter.
The consolidated statement of financial position of the Group as at 31 March 2019 has been prepared to present the assets and liabilities of the companies now comprising the Group as if the current group structure had been in existence at the date taking into account the respective dates of incorporation or establishment, where applicable.
3. APPLICATION OF HKFRSs
For the purpose of preparing and presenting the Historical Financial Information for the Track Record Period, the Group has consistently applied the accounting policies which conform with Hong Kong Accounting Standards (“HKASs”), HKFRSs, amendments to HKFRSs and interpretations issued by HKICPA which are effective for the Group’s accounting period beginning on 1 April 2020 throughout the Track Record Period, including HKFRS 16 “Leases” (“HKFRS 16”) which is mandatory for the financial year beginning on 1 January 2019 on a consistent basis throughout the Track Record Period. The accounting policies are set out in note 4 below.
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APPENDIX I ACCOUNTANTS’ REPORT
New and amendments to HKFRSs in issue but not yet effective
The Group has not early applied the following new and amendments to HKFRSs that have been issued but are not yet effective as at the date of this report:
HKFRS 17 Insurance Contracts and the Related Amendments5 Amendments to HKFRS 3 Reference to the Conceptual Framework4 Amendments to HKFRS 9, HKAS 39, Interest Rate Benchmark Reform – Phase 22 HKFRS 7, HKFRS 4 and HKFRS 16 Amendments to HKFRS 10 and HKAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture6 Amendments to HKFRS 16 Covid-19-Related Rent Concessions1 Amendments to HKFRS 16 Covid-19-Related Rent Concessions beyond 30 June 20213 Amendments to HKAS 1 Classification of Liabilities as Current or Non-current and related amendments to Hong Kong Interpretation 5 (2020)5 Amendments to HKAS 1 and HKFRS Disclosure of Accounting Policies5 Practice Statement 2 Amendments to HKAS 8 Definition of Accounting Estimates5 Amendments to HKAS 16 Property, Plant and Equipment – Proceeds before Intended Use4 Amendments to HKAS 37 Onerous Contracts – Cost of Fulfilling a Contract4 Amendments to HKFRSs Annual Improvements to HKFRSs 2018-20204
1 Effective for annual periods beginning on or after 1 June 2020. 2 Effective for annual periods beginning on or after 1 January 2021. 3 Effective for annual periods beginning on or after 1 April 2021. 4 Effective for annual periods beginning on or after 1 January 2022. 5 Effective for annual periods beginning on or after 1 January 2023. 6 Effective for annual periods beginning on or after a date to be determined.
Except for the new and amendments to HKFRSs mentioned below, the management of the Group anticipates that the application of the above new and amendments to HKFRSs will have no material impact on the Historical Financial Information in the foreseeable future.
Amendment to HKFRS 16 “Covid-19-Related Rent Concessions”
The amendment is effective for annual reporting periods beginning on or after 1 June 2020.
The amendment introduces a new practical expedient for lessees to elect not to assess whether a Covid-19-related rent concession is a lease modification. The practical expedient only applies to rent concessions occurring as a direct consequence of the Covid-19 that meets all of the following conditions:
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APPENDIX I ACCOUNTANTS’ REPORT
¼ the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
¼ any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
¼ there is no substantive change to other terms and conditions of the lease.
A lessee applying the practical expedient accounts for changes in lease payments resulting from rent concessions the same way it would account for the changes applying HKFRS 16 if the changes were not a lease modification. Forgiveness or waiver of lease payments are accounted for as variable lease payments. The related lease liabilities are adjusted to reflect the amounts forgiven or waived with a corresponding adjustment recognised in the profit or loss in the period in which the event occurs.
The application is not expected to have impact on the Group’s financial position and performance as the Group does not intend to apply the practical expedient.
4. SIGNIFICANT ACCOUNTING POLICIES
The Historical Financial Information has been prepared in accordance with the accounting policies which conform with HKFRSs issued by the HKICPA. For the purpose of preparation of the Historical Financial Information, information is considered material if such information is reasonably expected to influence decisions made by primary users. In addition, the Historical Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange and by the Hong Kong Companies Ordinance.
The Historical Financial Information has been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if the market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in the Historical Financial Information is determined on such basis, except for share-based payment transactions that are within the scope of HKFRS 2 “Share-based Payment”, leasing transactions that are within the scope of HKFRS 16, and measurement that have some similarities to fair value but are not fair value, such as net realisable value in HKAS 2 “Inventories” or value in use in HKAS 36 “Impairment of Assets”.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 and 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follow:
¼ Level 1 inputs are quoted price (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
¼ Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset and liability, either directly or indirectly; and
¼ Level 3 inputs are unobservable inputs for the asset or liability.
The principal accounting policies are set out below.
Basis of consolidation
The Historical Financial Information incorporates the financial statements of the Company and its subsidiaries. Control is achieved when the Company:
¼ has power over the investee;
¼ is exposed, or has rights, to variable returns from its involvement with the investee; and
¼ has the ability to use its power to affect its returns.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
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APPENDIX I ACCOUNTANTS’ REPORT
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the Track Record Period are included in the consolidation statements of profit or loss and other comprehensive income from the date, the Group gains control until the date when the Group ceases to control the subsidiary.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
Merger accounting for business combination involving entities under common control
The Historical Financial Information incorporates the financial statements items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.
The net assets of the combining entities or businesses are consolidated using the existing book values from the controlling party’s perspective. No amount is recognised in respect of goodwill or bargain purchase gain at the time of common control combination.
The consolidated statements of profit or loss and other comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where this is a shorter period.
Investment in a subsidiary
Investment in a subsidiary is stated at cost less any identified impairment loss.
Revenue from contracts with customers
The Group recognises revenue when (or as) a performance obligation is satisfied, i.e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer.
A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.
Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:
¼ the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs;
¼ the Group’s performance creates or enhances an asset that the customer controls as the Group performs; or
¼ the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.
Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct good or service.
A contract asset represents the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer that is not yet unconditional. It is assessed for impairment in accordance with HKFRS 9 “Financial Instruments” (“HKFRS 9”). In contrast, a receivable represents the Group’s unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.
A contract liability represents the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer.
A contract asset and a contract liability relating to the same contract are accounted for and presented on a net basis.
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APPENDIX I ACCOUNTANTS’ REPORT
Over time revenue recognition: measurement of progress towards complete satisfaction of a performance obligation
Input method
The progress towards complete satisfaction of a performance obligation is measured based on input method, which is to recognise revenue on the basis of the Group’s efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation, that best depict the Group’s performance in transferring control of goods or services.
Lease
Definition of a lease
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
As a lessee
Short-term leases
The Group applies the short-term lease recognition exemption to leases of car parking spaces and office premise that have a lease term of 12 months or less from the commencement date and do not contain a purchase option.
Right-of-use assets
Except for short-term leases and leases of low value assets, the Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities.
The cost of right-of-use asset includes:
¼ the amount of the initial measurement of the lease liability;
¼ any lease payments made at or before the commencement date, less any lease incentives received;
¼ any initial direct costs incurred by the Group; and
¼ an estimate of costs to be incurred by the Group in dismantling and removing the underlying assets, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.
Right-of-use assets in which the Group is reasonably certain to obtain ownership of the underlying leased assets at the end of the lease term are depreciated from commencement date to the end of the useful life. Otherwise, right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.
The Group presents right-of-use assets as a separate line item on the consolidated statements of financial position.
Refundable rental deposits
Refundable rental deposits paid are accounted and initially measured at fair value. Adjustments to fair value at initial recognition are considered as additional lease payments and included in the cost of right-of-use assets.
Lease liabilities
At the commencement date of a lease, the Group recognises and measures the lease liability at the present value of lease payments that are unpaid at that date. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable.
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APPENDIX I ACCOUNTANTS’ REPORT
The lease payments include:
¼ fixed payments (including in-substance fixed payments) less any lease incentives receivable;
¼ the exercise price of a purchase option if the Group is reasonably certain to exercise the option; and
¼ payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate the lease.
After the commencement date, lease liabilities are adjusted by interest accretion and lease payments.
The Group remeasures lease liabilities (and makes a corresponding adjustment to the related right-of-use assets) whenever:
¼ the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the related lease liability is remeasured by discounting the revised lease payments using a revised discount rate at the date of reassessment.
¼ the lease payments change due to changes in market rental rates following a market rent review, in which cases the related lease liability is remeasured by discounting the revised lease payments using the initial discount rate.
The Group presents lease liabilities as a separate line item on the consolidated statements of financial position.
Lease modifications
The Group accounts for a lease modification as a separate lease if:
¼ the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
¼ the consideration for the leases increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.
For a lease modification that is not accounted for as a separate lease, the Group remeasures the lease liability based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The Group accounts for the remeasurement of lease liabilities by making corresponding adjustments to the relevant right-of-use asset.
Foreign currencies
In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recognised at the rates of exchanges prevailing on the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s operations are translated into the presentation currency of the Group (i.e. HK$) using exchange rates prevailing at the end of each reporting period. Income and expenses items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity under the heading of translation reserve.
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APPENDIX I ACCOUNTANTS’ REPORT
On the disposal of a foreign operation (that is, a disposal of the Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss.
Exchange differences relating to the retranslation of the Group’s net assets in RMB to the Group’s presentation currency (i.e. HK$) are recognised directly in other comprehensive income and accumulated in translation reserve. Such exchange differences accumulated in the translation reserve are not reclassified to profit or loss subsequently.
Borrowing costs
All borrowing costs are recognised in profit or loss in the period in which they are incurred as the Group does not have any qualifying asset.
Government grants
Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.
Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognised as deferred income in the consolidated statements of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.
Government grants related to income that are 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 compensation of expenses are deducted from the related expenses, other government grants are presented under “other income, gains and losses”.
The benefit of a government loan at a below-market rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates.
Retirement benefit costs and termination benefits
Payments to defined contribution retirement benefit plans, state-managed retirement benefit schemes and the Mandatory Provident Fund Scheme are recognised as expenses when employees have rendered service entitling them to the contributions.
Short-term and other long-term employee benefits
Short-term employee benefits are recognised at the undiscounted amount of the benefits expected to be paid as and when employees rendered the services. All short-term employee benefits are recognised as an expense unless another HKFRS requires or permits the inclusion of the benefit in the cost of an asset.
A liability is recognised for benefits accruing to employees (such as wages and salaries, annual leave and sick leave) after deducting any amount already paid.
Liabilities recognised in respect of other long-term employee benefits are measured at the present value of the estimated future cash outflows expected to be made by the Group in respect of services provided by employees up to the reporting date. Any changes in the liabilities’ carrying amounts resulting from service cost, interest and remeasurements are recognised in profit or loss except to the extent that another HKFRS requires or permits their inclusion in the cost of an asset.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax because of income or expense that are taxable or deductible in other years and 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 temporary differences between the carrying amounts of assets and liabilities in the consolidated 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. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets
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APPENDIX I ACCOUNTANTS’ REPORT and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill.
Deferred tax liabilities are recognised for taxable temporary differences associated with 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. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to 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 assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of each reporting period.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of each reporting period, to recover or settle the carrying amount of its assets and liabilities.
For the purposes of measuring deferred tax for leasing transactions in which the Group recognises the right-of-use assets and the related lease liabilities, the Group first determines whether the tax deductions are attributable to the right-of-use assets or the lease liabilities.
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 to the same taxable entity by the same taxation authority.
Current and deferred tax are recognised in profit or loss.
In assessing any uncertainty over income tax treatments, the Group considers whether it is probable that the relevant tax authority will accept the uncertain tax treatment used, or proposed to be use by individual group entities in their income tax filings. If it is probable, the current and deferred taxes are determined consistently with the tax treatment in the income tax filings. If it is not probable that the relevant taxation authority will accept an uncertain tax treatment, the effect of each uncertainty is reflected by using either the most likely amount or the expected value.
Property, plant and equipment
Property, plant and equipment are tangible assets that are held for use in production or supply of goods or services or for administrative purpose. Property, plant and equipment are stated in the consolidated statements of financial position at cost less subsequent accumulated depreciation and subsequent accumulated impairment losses, if any.
Construction in progress
Buildings in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Costs include any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
Ownership interests in leasehold land and building
When the Group makes payments for ownership interests of properties which includes both leasehold land and building elements, the entire consideration is allocated between the leasehold land and the building elements in proportion to the relative fair values at initial recognition.
To the extent the allocation of the relevant payments can be made reliably, interest in leasehold land is presented as “right-of-use assets” in the consolidated statements of financial position. When the consideration cannot be allocated reliably between non-lease building element and undivided interest in the underlying leasehold land, the entire properties are classified as property, plant and equipment.
Depreciation is recognised so as to write off the cost of assets less their residual values over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
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APPENDIX I ACCOUNTANTS’ REPORT
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
Impairment on property, plant and equipment and right-of-use assets
At the end of each reporting period, the Group reviews the carrying amounts of its property, plant and equipment and right-of-use assets to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the relevant asset is estimated in order to determine the extent of the impairment loss (if any).
The recoverable amount of property, plant and equipment and right-of-use assets are estimated individually. When it is not possible to estimate the recoverable amount individually, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
In testing a cash-generating unit for impairment, corporate assets are allocated to the relevant cash-generating unit when a reasonable and consistent basis of allocation can be established, or otherwise they are allocated to the smallest group of cash generating units for which a reasonable and consistent allocation basis can be established. The recoverable amount is determined for the cash-generating unit or group of cash-generating units to which the corporate asset belongs, and is compared with the carrying amount of the relevant cash-generating unit or group of cash-generating units.
Recoverable amount is the higher of fair value less costs of disposal 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 (or a cash-generating unit) for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or a cash-generating unit) is reduced to its recoverable amount. For corporate assets or portion of corporate assets which cannot be allocated on a reasonable and consistent basis to a cash-generating unit, the Group compares the carrying amount of a group of cash-generating units, including the carrying amounts of the corporate assets or portion of corporate assets allocated to that group of cash-generating units, with the recoverable amount of the group of cash-generating units. In allocating the impairment loss, the impairment loss is allocated first to reduce the carrying amount of any goodwill (if applicable) and then to the other assets on a pro-rata basis based on the carrying amount of each asset in the unit or the group of cash-generating units. The carrying amount of an asset is not reduced below the highest of its fair value less costs of disposal (if measurable), its value in use (if determinable) and zero. The amount of the impairment loss that would otherwise have been allocated to the asset is allocated pro rata to the other assets of the unit or the group of cash-generating units. An impairment loss is recognised immediately in profit or loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit or a group of cash-generating units) 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 had no impairment loss been recognised for the asset (or a cash-generating unit or a group of cash-generating units) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.
Research and development expenditure
Expenditure on research activities is recognised as expense in the period in which it is incurred.
When no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred.
Inventories
Inventories are stated at the lower of cost and net realisable value. Costs of inventories are determined on a weighted average method. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
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APPENDIX I ACCOUNTANTS’ REPORT
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material).
Financial instruments
Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instrument. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place.
Financial assets and financial liabilities are initially measured at fair value except for trade receivables arising from contracts with customers which are initially measured in accordance with HKFRS 15 “Revenue from Contracts with Customers” (“HKFRS 15”). Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts and payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest income is presented as other income.
Financial assets
Classification and subsequent measurement of financial assets
Financial assets that meet the following conditions are subsequently measured at amortised cost:
¼ the financial asset is held within a business model whose objective is to collect contractual cash flows; and
¼ the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Amortised cost and interest income
Interest income is recognised using the effective interest method for financial assets measured subsequently at amortised cost and debt instruments / receivables subsequently measured at fair value through other comprehensive income. For financial instruments other than purchased or originated credit-impaired financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit-impaired (see below). For financial assets that have subsequently become credit-impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset from the next reporting period. If the credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the reporting period following the determination that the asset is no longer credit impaired.
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APPENDIX I ACCOUNTANTS’ REPORT
Impairment of financial assets and contract assets
The Group performs impairment assessment under ECL model on financial assets which are subject to impairment under HKFRS 9 (including trade receivables, other receivables and deposits, restricted bank deposits and bank balances) and contract assets. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.
Lifetime ECL represents the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast, 12m ECL represents the portion of lifetime ECL that is expected to result from default events that are possible within 12 months after the reporting date. Assessment are done based on the Group’s historical credit loss experience, and factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions at the reporting date as well as the forecast of future conditions.
The Group always recognises lifetime ECL for trade receivables and contract assets. The ECL on these assets are assessed individually for significant or credit-impaired balances and/or collectively using a provision matrix with appropriate groupings.
For all other instruments, the Group measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since initial recognition, the Group recognises lifetime ECL. The assessment of whether lifetime ECL should be recognised is based on significant increases in the likelihood or risk of a default occurring since initial recognition.
(i) Significant increase in credit risk
In assessing whether the credit risk has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.
In particular, the following information is taken into account when assessing whether credit risk has increased significantly:
¼ an actual or expected significant deterioration in the financial instrument’s external (if available) or internal credit rating;
¼ existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations;
¼ an actual or expected significant deterioration in the operating results of the debtor;
¼ an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor’s ability to meet its debt obligations.
Irrespective of the outcome of the above assessment, the Group presumes that the credit risk has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise.
Despite the aforegoing, the Group assumes that the credit risk on a debt instrument has not increased significantly since initial recognition if the debt instrument is determined to have low credit risk at the reporting date. A debt instrument is determined to have low credit risk if i) it has a low risk of default, ii) the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and iii) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group considers a debt instrument to have low credit risk when it has an internal or external credit rating of “investment grade” as per globally understood definitions.
The Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due.
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APPENDIX I ACCOUNTANTS’ REPORT
(ii) Definition of default
For internal credit risk management, the Group considers an event of default occurs when information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full (without taking into account any collaterals held by the Group).
Irrespective of the above, the Group considers that default has occurred when a financial asset is more than 90 days past due unless the Group has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.
(iii) Credit-impaired financial assets
A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:
(a) significant financial difficulty of the issuer or the borrower;
(b) a breach of contract, such as a default or past due event;
(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or
(e) the disappearance of an active market for that financial asset because of financial difficulties.
(iv) Write-off policy
The Group writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, for example, when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. A write-off constitutes a derecognition event. Any subsequent recoveries are recognised in profit or loss.
(v) Measurement and recognition of ECL
The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data and forward-looking information. Estimation of ECL reflects an unbiased and probability-weighted amount that is determined with the respective risks of default occurring as the weights.
Generally, the ECL is the difference between all contractual cash flows that are due to the Group in accordance with the contract and the cash flows that the Group expects to receive, discounted at the effective interest rate determined at initial recognition.
Lifetime ECL for certain trade receivables and contract assets are considered on a collective basis using a provision matrix taking into consideration past due information and relevant credit information such as forward looking macroeconomic information.
For collective assessment using a provision matrix, the Group takes into consideration the following characteristics when formulating the grouping:
¼ Past-due status;
¼ Nature, size and industry of debtors; and
¼ External credit ratings where available.
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APPENDIX I ACCOUNTANTS’ REPORT
The grouping is regularly reviewed by management to ensure the constituents of each group continue to share similar credit risk characteristics.
Interest income is calculated based on the gross carrying amount of the financial asset unless the financial asset is credit impaired, in which case interest income is calculated based on amortised cost of the financial asset.
The Group recognises an impairment loss in profit or loss for all financial instruments by adjusting their carrying amount, with the exception of trade receivables and contract assets where the corresponding adjustments are recognised through loss allowance accounts.
Derecognition of financial assets
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.
Financial liabilities and equity
Classification as debt or equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognised at the proceeds received, net of direct issue costs.
Financial liabilities at amortised cost
Financial liabilities including trade and other payables, amount due to a director, amount due to a related party, amounts due to subsidiaries and bank borrowings are subsequently measured at amortised cost, using the effective interest method.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consolidation paid and payable is recognised in profit or loss.
5. KEY SOURCES OF ESTIMATION UNCERTAINTY
In the application of the Group’s accounting policies, which are described in Note 4, the management of the Group is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of each reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next twelve months.
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APPENDIX I ACCOUNTANTS’ REPORT
Provision of ECL allowance for trade receivables and contract assets
The Group has applied the simplified approach under HKFRS 9 to measure ECL which uses a lifetime ECL for all trade receivables and contract assets. Except for debtors with significant or credit-impaired balances, the Group determines the ECL on these items by using a provision matrix, grouped by past due status. The provision matrix is based on the Group’s historical default rates taking into consideration forward-looking information that is reasonable and supportable available without undue costs or effort. At every reporting date, the historical observed default rates are reassessed and changes in the forward looking information are considered. As at 31 March 2019, 31 March 2020 and 31 March 2021, the carrying amounts of trade receivables are HK$93,350,000 (net of loss allowance of HK$901,000), HK$54,163,000 (net of loss allowance of HK$1,160,000) and HK$104,332,000 (net of loss allowance of HK1,273,000), and the carrying amounts of contract assets are HK$6,314,000 (net of loss allowance of HK$60,000), HK$5,007,000 (net of allowance of HK$59,000) and HK$4,787,000 (net of allowance of HK$9,000), respectively. For details of impairment assessment, please refer to Note 31.
Estimated allowance for slow-moving inventories
The Group makes allowance for inventories based on an assessment of the net realisable value of inventories. Allowances are applied to inventories where events or changes in circumstances indicate that the net realisable value is lower than the cost of inventories. The identification of obsolete inventories requires the use of judgment and estimates on the conditions and marketability of the inventories. Where the subsequent selling prices decline or costs necessary to make the sales increase, additional allowance may arise. As at 31 March 2019, 2020 and 2021, the carrying amounts of inventories are HK$65,447,000 (net of allowance for slow-moving inventories of HK$4,232,000), HK$64,657,000 (net of allowance for slow-moving inventories of HK$5,272,000) and HK$75,420,000 (net of allowance for slow-moving inventories of HK$2,995,000).
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APPENDIX I ACCOUNTANTS’ REPORT
6. REVENUE AND SEGMENT INFORMATION
(i) Disaggregation of revenue from contracts with customers
Year ended 31 March Types of goods or services 2019 2020 2021 HK$’000 HK$’000 HK$’000
Elevator cabin 254,945 259,996 266,252 Decorative stainless steel 82,314 61,109 85,100 Other architectural finishing materials 59,598 52,721 49,499
Total 396,857 373,826 400,851
Geographical markets* Mainland China 279,857 284,719 283,097 Hong Kong 105,438 73,313 106,092 Others 11,562 15,794 11,662
Total 396,857 373,826 400,851
Timing of revenue recognition Rendering of services recognised over time Elevator cabin 254,945 259,996 266,252 Other architectural finishing materials 24,681 17,753 13,354
279,626 277,749 279,606 Sale of goods recognised at a point in time Decorative stainless steel 82,314 61,109 85,100 Other architectural finishing materials 34,917 34,968 36,145
117,231 96,077 121,245
Total 396,857 373,826 400,851
* The presentation of the geographical markets is based on the location where the types of goods or services are delivered or provided.
(ii) Performance obligations for contracts with customers
Sales of elevator cabin
For the sales of elevator cabin, the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. The revenue is recognised progressively over time using the input method, i.e. based on the proportion of the actual costs incurred relative to the estimated total costs plus a margin. The contract asset (either partially or in full) is transferred to receivables when the rights to payment for that amount has become unconditional. No refund nor warranty clauses were included in the contracts with customers.
Sales of decorative stainless steel
For the sales of decorative stainless steel, revenue is recognised when control of the goods has transferred, being at the point the goods are delivered to the customer. No refund nor warranty clauses were included in the contracts with customers.
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APPENDIX I ACCOUNTANTS’ REPORT
Sales of other architectural finishing materials
For the provision of integrated solutions of sales, modification and installation of other architectural finishing materials, the Group’s performance creates or enhances the products that the customer controls as the products are created or enhanced. The revenue is recognised progressively over time using the input method, i.e. based on the proportion of the actual costs incurred relative to the estimated total costs plus a margin. The contract asset (either partially or in full) is transferred to receivables when the rights to payment for that amount has become unconditional.
For direct trading of other architectural finishing materials, revenue is recognised when control of the goods has transferred, being at the point the goods are delivered to the customer.
No refund nor warranty clauses were included in the contracts with customers.
(iii) Transaction price allocated to the remaining performance obligations for contracts with customers
The Group applies practical expedient of HKFRS 15 which allows the Group not to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of each reporting period because the performance obligation is part of a contract that has an original expected duration of one year or less.
(iv) Segment information
Information is reported to the controlling shareholder of the Company, who is also the chief operating decision marker (“CODM”) of the Group, for the purpose of resource allocation and performance assessment. The CODM reviews the overall results and financial position of the Group as a whole. No other analysis of the Group’s results, assets or liabilities and no discrete financial information is regularly provided to the CODM. Accordingly, only entity-wide disclosures on revenue from external customers for each product and service, major customers and geographical information are presented in accordance with HKFRS 8 “Operating Segments”.
(v) Information about major customer
Information about major customer
Revenue from customers contributing over 10% of the total revenue of the Group during each of the Track Record Period are as follows:
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Customer A 218,517 239,376 247,942
(vi) Geographical information of non-current assets
Substantially all of the Group’s non-current assets are located in the PRC.
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APPENDIX I ACCOUNTANTS’ REPORT
7. OTHER INCOME, GAINS AND LOSSES
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Other income Bank interest income 34 50 43 Other interest income 63 67 56 Government grants (Note i) 243 1,652 2,033 Sales of scrap materials 792 960 923
1,132 2,729 3,055
Other gains and losses Losses on disposal of property, plant and equipment, net (269) (172) (208) Provision for penalty (Note ii) – (767) (3,001) Exchange (losses) gains, net (1,214) (319) 771 Others 21 37 15
(1,462) (1,221) (2,423)
(330) 1,508 632
Notes:
(i) The Group recognised government grants of RMB208,000 (equivalent to approximately HK$243,000), RMB1,474,000 (equivalent to approximately HK$1,652,000) and RMB1,774,000 (equivalent to approximately HK$2,033,000) for the years ended 31 March 2019, 2020 and 2021 respectively as the incentives for being recognised as the high-and-new technology enterprise. There are no unfulfilled condition attached to these government grants and these amounts have been recognised as other income upon receipt during the Track Record Period.
(ii) According to the contract of transfer of state-owned land use right entered into by Guangdong Sitami Decorative Metal Company Limited (“Guangdong Sitami”), penalty may be charged by Taishan Bureau of Land and Resources (currently known as Taishan Natural Resources Bureau) for the delay in the date of scheduled building construction commencement (i.e. before 16 January 2020) and completion (i.e. before 16 January 2021).
8. FINANCE COSTS
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Interest expenses on bank borrowings 1,517 2,250 2,653 Interest expenses on lease liabilities 1,614 2,265 2,490
3,131 4,515 5,143
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APPENDIX I ACCOUNTANTS’ REPORT
9 PROFIT BEFORE TAX
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Profit before tax has been arrived at after charging (crediting):
Directors’ remuneration (Note 10 and Note a) 4,475 5,661 5,773 Other staff costs – salaries and other allowance 66,448 72,286 71,273 – retirement benefit scheme contributions (other than those included in directors’ remuneration) 10,302 10,361 2,954
Total staff costs (Note b) 81,225 88,308 80,000 Less: Staff costs included in cost of sales (41,440) (45,844) (42,898)
39,785 42,464 37,102
Auditor’s remuneration 145 292 151
Depreciation of property, plant and equipment 6,113 5,638 5,624 Depreciation of right-of-use assets 7,611 8,531 8,207
13,724 14,169 13,831 Less: Depreciation included in cost of sales (8,740) (9,766) (9,363)
4,984 4,403 4,468
Cost of inventories recognised as expenses 196,911 195,140 214,758
Notes:
(a) In addition to the employee benefits expense presented above, the Group also provides other non-monetary benefits (such as accommodation) to employee. During the Track Record Period, depreciation of right-of-use assets in relation to these non-monetary benefits amounted to HK$919,000, HK$919,000 and HK$919,000 for the years ended 31 March 2019, 2020 and 2021, respectively.
(b) During the year ended 31 March 2021, government grants of HK$1,563,000 under the Employment Support Scheme of Hong Kong and government assistance of RMB2,766,000 (equivalent to approximately HK$3,170,000) under the State Taxation Administration of the PRC have been granted to the Group respectively. Amounts have been offset against the staff costs disclosed above.
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APPENDIX I ACCOUNTANTS’ REPORT
10. DIRECTORS’, CHIEF EXECUTIVE’S AND EMPLOYEES’ EMOLUMENTS
(a) Directors’ and the chief executive’s emoluments
Mr. Chiu Yu Kui Colby and his son, Mr. Chiu Sung Yin were appointed as executive directors of the Company on 28 February 2019, respectively. The emoluments paid or payable to the directors and chief executive of the Company (including emoluments for services as director/employee of the group entities prior to becoming the directors of the Company) during the Track Record Period are as follows:
Year ended 31 March 2019
Salaries, Performance Retirement allowances related benefit and benefits incentive scheme Fees in kind payments contributions Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note iii) (note ii)
Executive directors Mr. Chiu Yu Kui Colby (note i) – 3,885 – 78 3,963 Mr. Chiu Sung Yin – 1,008 446 18 1,472
– 4,893 446 96 5,435
Year ended 31 March 2020
Salaries, Performance Retirement allowances related benefit and benefits incentive scheme Fees in kind payments contributions Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note iii) (note ii)
Executive directors Mr. Chiu Yu Kui Colby (note i) – 4,353 – 78 4,431 Mr. Chiu Sung Yin – 1,440 732 18 2,190
– 5,793 732 96 6,621
Year ended 31 March 2021
Salaries, Performance Retirement allowances related benefit and benefits incentive scheme Fees in kind payments contributions Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note iii) (note ii)
Executive directors Mr. Chiu Yu Kui Colby (note i) – 4,338 250 78 4,666 Mr. Chiu Sung Yin – 1,440 609 18 2,067
– 5,778 859 96 6,733
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APPENDIX I ACCOUNTANTS’ REPORT
Notes:
(i) Mr. Chiu Yu Kui Colby acts as the chief executive of the Company with effect from 28 February 2019 and his emoluments disclosed above included those for services rendered by him as the chief executive in management of the affairs of the group entities.
(ii) The performance related incentive payments are determined based on the performance of the individual and the Group’s performance.
(iii) The Group has been providing accommodation, which is leased from a related party, to Mr. Chiu Yu Kui Colby for use by him and his family at no charge. The estimate money value of the benefit in kind is approximately HK$960,000, HK$960,000 and HK$960,000, respectively, for the years ended 31 March 2019, 2020 and 2021.
(b) Employees’ emoluments
The five highest paid individuals include two, two and two directors of the Company for the years ended 31 March 2019, 2020 and 2021, details of whose emoluments are included above. The emoluments of the remaining highest paid individuals were as follows:
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Employees – salaries and other allowances 2,150 2,259 2,420 – performance related incentive payments 1,257 1,696 689 – retirement benefit schemes contributions 54 54 54
3,461 4,009 3,163
The emoluments of the aforesaid employees (who are not directors of the Company) were within the following bands:
Year ended 31 March 2019 2020 2021 Number of Number of Number of employees employees employees
Nil to HK$1,000,000 – – 1 HK$1,000,001 to HK$1,500,000 3 2 2 HK$1,500,001 to HK$2,000,000 – 1 –
During the Track Record Period, no emoluments were paid by the Group to the directors of the Company or the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors of the Company waived or agreed to waive any emoluments during the Track Record Period.
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APPENDIX I ACCOUNTANTS’ REPORT
11. INCOME TAX EXPENSE
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Current tax: Hong Kong Profits Tax 3,551 1,228 4,108 PRC Enterprise Income Tax (“EIT”) 3,780 3,353 1,416 PRC withholding tax – – 518
7,331 4,581 6,042
(Over) under provision in prior years: Hong Kong (99) (34) (58) PRC EIT – – 460
(99) (34) 402
Deferred tax (Note 24): Current year 893 607 1,102
8,125 5,154 7,546
On 21 March 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered profits tax rates regime. The Bill was signed into law on 28 March 2018 and was gazette on the following day. Under the two-tiered profits tax rates regime, the first HK$2,000,000 of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2,000,000 will be taxed at 16.5%. For the years ended 31 March 2019, 2020 and 2021, Hong Kong Profits Tax of the qualified entity is calculated in accordance with the two-tiered profit tax regime. The profits of other group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%.
Under the EIT Law of the PRC and the Regulation on the Implementation of the EIT Law of the PRC, the tax rate of the PRC subsidiaries is 25% for the Track Record Period, except for Guangzhou Cobelco Elevator Decoration Engineering Limited (“Cobelco GZ”). On 9 November 2017, Cobelco GZ was jointly recognised as a high-and-new technology enterprise by Guangdong Provincial Science and Technology Department, Guangdong Provincial Finance Department, Guangdong National Taxation Administration, and Guangdong Local Taxation Administration for a period of 3 years, i.e. from 2017 to 2019. On 1 December 2020, Cobelco GZ’s qualification of high-and-new technology enterprise has been extended for another period of 3 years, i.e. from 2020 to 2022. Accordingly, Cobelco GZ, as a high-and-new technology enterprise, is subject to EIT at a preferential income tax rate of 15%.
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APPENDIX I ACCOUNTANTS’ REPORT
Income tax expense for each of the years during the Track Record Period can be reconciled to the profit before tax per the consolidated statements of profit or loss and other comprehensive income as follows:
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Profit before tax 47,077 26,896 34,222
Tax calculated at PRC statutory income tax rate of 25% 11,769 6,724 8,556 Tax effect of expenses not deductible for tax purpose 1,001 1,903 2,795 Tax effect of income not taxable for tax purpose (101) (147) (416) Tax effect of tax losses not recognised 488 186 163 Utilisation of tax losses previously not recognised – – (108) Tax effect of deductible temporary differences not recognised 22 – 377 Utilisation of deductible temporary differences previously not recognised (3) (41) – (Over) under provision in respect of prior years (99) (34) 402 Effect of income tax at concessionary rate (3,153) (2,943) (2,158) Effect of different tax rate of subsidiaries operating in other jurisdiction (1,862) (476) (2,400) Effect of additional tax benefits applicable to the Group (Note) (993) (816) (907) Deferred tax on undistributed earnings of the PRC subsidiaries 1,116 858 1,242 Others (60) (60) –
Income tax expense for the year 8,125 5,154 7,546
Note: Pursuant to the relevant tax rules and regulations, expenses in research and development nature were deductible additionally for 15% of the qualified research and development expenses incurred for each of the three years ended 31 March 2021.
12. DIVIDENDS
No dividend has been paid or declared by the Company since its incorporation.
Dividend during each of the years ended 31 March 2019 and 2020 represented dividends declared by Cobelco HK, Cobelco Industrial, Sitami Film and Cobelco GZ now comprising the Group to the then shareholders of the companies (i.e. Mr. Chiu Yu Kui Colby and Ms. Wong Yuet Ha) for each of the years ended 31 March 2019 and 2020 prior to the completion of the Reorganisation. Dividends were either settled in cash or through current accounts with the director, Mr. Chiu Yu Kui Colby and the related party, Ms. Wong Yuet Ha. The rates for dividend and the number of shares ranking for dividends are not presented as such information is not considered meaningful for the purpose of this report.
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Dividends 27,456 14,472 –
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APPENDIX I ACCOUNTANTS’ REPORT
13. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the following data.
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Earnings: Earnings for the purpose of basic earnings per share (profit for the year attributable to owners of the Company) 38,952 21,742 26,676
Number of Shares: Number of shares for the purpose of basic earnings per share [500,000,000] [500,000,000] [500,000,000]
The number of ordinary shares outstanding during the Track Record Period on the assumption that the Reorganisation and the Capitalisation Issue (as defined in the Document) of [500,000,000] shares as detailed in section headed “Share Capital” in the Document, had been effective on 1 April 2018.
No diluted earning per share is presented for the Track Record Period as there was no potential ordinary share in issue.
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APPENDIX I ACCOUNTANTS’ REPORT
14. PROPERTY, PLANT AND EQUIPMENT
Furniture, Leasehold Plant and fixtures and Motor Construction Properties improvements machinery equipment vehicles in progress Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
COST At 1 April 2018 18,213 11,560 47,757 3,478 4,264 – 85,272 Additions – 286 3,774 1,363 108 – 5,531 Disposals – – (5,305) – (445) – (5,750) Transfer from right-of-use assets – – 2,627 – – – 2,627 Exchange realignment (1,202) (737) (3,153) (166) – – (5,258)
At 31 March 2019 17,011 11,109 45,700 4,675 3,927 – 82,422 Additions – 445 1,437 1,029 128 778 3,817 Disposals – (190) (434) (167) – – (791) Exchange realignment (1,100) (696) (2,982) (256) (3) (21) (5,058)
At 31 March 2020 15,911 10,668 43,721 5,281 4,052 757 80,390 Additions – – 7,111 1,440 335 14,039 22,925 Disposals – – (2,692) (1) – – (2,693) Exchange realignment 1,349 861 3,681 396 15 533 6,835
At 31 March 2021 17,260 11,529 51,821 7,116 4,402 15,329 107,457
DEPRECIATION At 1 April 2018 972 7,901 22,977 2,636 4,141 – 38,627 Provided for the year 307 1,433 3,942 295 136 – 6,113 Eliminated on disposals – – (4,165) – (445) – (4,610) Transfer from right-of-use assets – – 773 – – – 773 Exchange realignment (64) (518) (1,516) (125) – – (2,223)
At 31 March 2019 1,215 8,816 22,011 2,806 3,832 – 38,680 Provided for the year 295 1,080 3,662 551 50 – 5,638 Eliminated on disposals – (96) (274) (162) – – (532) Exchange realignment (86) (585) (1,514) (140) – – (2,325)
At 31 March 2020 1,424 9,215 23,885 3,055 3,882 – 41,461 Provided for the year 301 687 3,828 703 105 – 5,624 Eliminated on disposals – – (1,669) – – – (1,669) Exchange realignment 129 786 2,098 215 1 – 3,229
At 31 March 2021 1,854 10,688 28,142 3,973 3,988 – 48,645
CARRYING VALUES At 31 March 2019 15,796 2,293 23,689 1,869 95 – 43,742
At 31 March 2020 14,487 1,453 19,836 2,226 170 757 38,929
At 31 March 2021 15,406 841 23,679 3,143 414 15,329 58,812
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APPENDIX I ACCOUNTANTS’ REPORT
The above items of property, plant and equipment (except for the construction in progress) are depreciated on a straight-line basis at the following rates per annum:
Properties 2% Leasehold improvements Over the shorter of the term of the lease, or 20% Plant and machinery 10% Furniture, fixtures and equipment 20% Motor vehicles 33%
The Group has pledged properties with carrying values of HK$10,700,000, HK$9,810,000 and HK$13,842,000 as at 31 March 2019, 2020 and 2021 respectively to secure general banking facilities granted to the Group.
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APPENDIX I ACCOUNTANTS’ REPORT
15. RIGHT-OF-USE ASSETS
Leasehold Leased Motor land properties Machinery vehicle Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost At 1 April 2018 – 30,276 2,986 – 33,262 Additions 10,976 31,570 – – 42,546 Expiration of lease contracts – (5,498) – – (5,498) Transfer to property, plant and equipment – – (2,627) – (2,627) Effect of lease modification – 383 – – 383 Exchange realignment (12) (1,398) (194) – (1,604)
At 31 March 2019 10,964 55,333 165 – 66,462 Additions – 9,198 3,437 – 12,635 Expiration of lease contracts – (12,758) – – (12,758) Effect of lease modification – (793) – – (793) Exchange realignment (709) (2,920) (101) – (3,730)
At 31 March 2020 10,255 48,060 3,501 – 61,816 Additions – 3,234 4,865 1,298 9,397 Expiration of lease contracts – (7,873) – – (7,873) Exchange realignment 870 3,204 460 – 4,534
At 31 March 2021 11,125 46,625 8,826 1,298 67,874
Depreciation At 1 April 2018 – 22,558 880 – 23,438 Charge for the year – 7,562 49 – 7,611 Expiration of lease contracts – (5,498) – – (5,498) Transfer to property, plant and equipment – – (773) – (773) Exchange realignment – (999) (57) – (1,056)
At 31 March 2019 – 23,623 99 – 23,722 Charge for the year – 8,352 179 – 8,531 Expiration of lease contracts – (12,758) – – (12,758) Exchange realignment – (1,033) (11) – (1,044)
At 31 March 2020 – 18,184 267 – 18,451
Charge for the year – 7,196 650 361 8,207 Expiration of lease contracts – (7,873) – – (7,873) Exchange realignment – 1,041 44 – 1,085
At 31 March 2021 – 18,548 961 361 19,870
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APPENDIX I ACCOUNTANTS’ REPORT
Leasehold Leased Motor land properties Machinery vehicle Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Carrying amounts At 31 March 2019 10,964 31,710 66 – 42,740
At 31 March 2020 10,255 29,876 3,234 – 43,365
At 31 March 2021 11,125 28,077 7,865 937 48,004
The tenure of the Group’s leases contracts are as follows: Leasehold land 50 years Leased properties 2 to 10 years Machinery 2 years Motor vehicle 3 years
No extension nor termination options are included in the leases contracts for the Track Record Period.
The Group has pledged the leasehold land with carrying value of HK$11,125,000 as at 31 March 2021 to secure general banking facilities granted to the Group.
The Group does not have the option to purchase the leasehold land and leased properties for a nominal amount at the end of the lease terms. Lease terms are negotiated on an individual basis and contain various different terms and conditions.
For each of the Track Record Period, the Group’s addition of lease contracts are for business expansion. Certain contracts early terminated or expired were replaced by the new leases for underlying assets. The Group applies the short-term lease recognition exemption to leases of car parking spaces and office premise that have a lease term of 12 months or less from the commencement date and do not contain a purchase option.
For each of the years ended 31 March 2019, 2020 and 2021, the Group’s expenses relating to short-term leases amounting to HK$155,000, HK$32,000 and HK$302,000, respectively, were recognised.
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APPENDIX I ACCOUNTANTS’ REPORT
16. INVENTORIES
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Direct materials 51,203 55,863 65,226 Work-in-progress 5,372 3,148 4,610 Finished goods 8,872 5,646 5,584
65,447 64,657 75,420
17. TRADE RECEIVABLES AND OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Trade receivables (note) 94,251 55,323 105,605 Less: Allowance for credit losses (901) (1,160) (1,273)
93,350 54,163 104,332
Deposits and prepayments 8,133 10,137 11,666 Deferred share [REDACTED] [REDACTED] [REDACTED] [REDACTED] Prepaid [REDACTED] [REDACTED] [REDACTED] [REDACTED] Other receivables 3,316 2,896 2,997
Other receivables, deposits and prepayments 11,449 15,864 19,150
104,799 70,027 123,482
Presented as non-current assets 796 642 744 Presented as current assets 10,653 15,222 18,406
Other receivables, deposits and prepayments 11,449 15,864 19,150
As at 1 April 2018, trade receivables amounted to HK$49,019,000.
The Group usually allows a credit period of 30 to 60 days to its customers. The following is an aging analysis of net trade receivables based on the invoice date at the end of each reporting period are as follows:
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APPENDIX I ACCOUNTANTS’ REPORT
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within 30 days 51,118 43,009 68,306 31 to 60 days 8,508 2,202 15,013 61 to 90 days 24,324 2,995 15,239 91 to 180 days 6,748 3,037 4,721 Over 180 days 2,652 2,920 1,053
93,350 54,163 104,332
Note: The above amounts include trade receivables backed by bills issued by the reputable PRC banks amounting to nil, RMB3,388,000 (equivalent to approximately HK$3,699,000) and RMB1,862,000 (equivalent to approximately HK$2,205,000) as at 31 March 2019, 2020 and 2021 respectively. All bills held by the Group are with a maturity period of less than one year.
Before accepting any new customer, the Group assesses the potential customer’s credit quality and defines credit limits by customer. In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the customers from the date credit was initially granted up to the end of each of the reporting period. The majority of the Group’s trade receivables that are past due but not impaired are from customers with good credit quality with reference to respective settlement history and forward-looking information. The Group does not hold any collateral over these balances.
Included in the trade receivables are debtors with a carrying amount of HK$30,857,000, HK$10,903,000 and HK$22,407,000 at 31 March 2019, 31 March 2020 and 31 March 2021, respectively, which are past due but not impaired. Out of the past due balances, HK$5,650,000, HK$4,740,000 and HK$1,167,000 have been past due 90 days or more and is not considered as credit-impaired at 31 March 2019, 31 March 2020 and 31 March 2021, respectively, because there is no significant change in credit quality and the amounts are still considered recoverable.
The Group has applied the simplified approach under HKFRS 9 to measure ECL which uses a lifetime ECL for all trade receivables and contract assets. Except for debtors with significant or credit-impaired balances, the Group determines the ECL on these items by using a provision matrix, grouped by past due status.
Details of impairment assessment on trade receivables and other receivables for the years ended 31 March 2019, 2020 and 2021 are set out in Note 31.
18. CONTRACT ASSETS/LIABILITIES
The following is the analysis of the contract assets and contract liabilities balances for financial reporting purpose:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Contract assets 6,314 5,007 4,787 Contract liabilities 15,583 10,204 9,450
Contract assets and contract liabilities arising from the same contract are presented on a net basis on the consolidated statements of financial position on each reporting date, if any.
The contract assets represent the Group’s right to consideration for the production of elevator cabin products in which the production are completed/partially completed but yet invoiced by the Group. All the contract assets are expected to be recovered or transferred to trade receivables within one year when the rights become unconditional.
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APPENDIX I ACCOUNTANTS’ REPORT
The contract liabilities represent the Group’s obligation to complete the production order in which the Group has received deposits or advance payments from customers before the production activity commences. This will give rise to contract liabilities at the start of a contract, until the revenue recognised on the contract exceeds the amount of the deposit received or advance payments from customers.
(a) Contract assets
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Contract assets 6,801 5,144 4,812
As at 1 April 2018, contract assets amounted to HK$9,997,000.
Details of impairment assessment on contract assets for the years ended 31 March 2019, 2020 and 2021 are set out in Note 31.
(b) Contract liabilities
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Contract liabilities 16,070 10,341 9,475
As at 1 April 2018, contract liabilities amounted to HK$32,807,000.
The amounts represent advance payments received from customers in relation to their purchase orders placed with the Group. The advance payments from customers are contract liabilities and the Group does not expect to refund any of the advance payments.
When the Group receives a deposit before the delivery of goods, this will give rise to contract liabilities at the start of the contract, until the revenue recognised on the relevant contract. The Group typically receives a certain percentage of deposit on acceptance of purchase orders.
The following table shows how much of the revenue recognised relates to carried-forward contract liabilities:
Deposits received in advance HK$’000 For the year ended 31 March 2019 Revenue recognised that was included in the contract liabilities balance at the beginning of the year 25,113
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APPENDIX I ACCOUNTANTS’ REPORT
Deposits received in advance HK$’000 For the year ended 31 March 2020 Revenue recognised that was included in the contract liabilities balance at the beginning of the year 10,983
Deposits received in advance HK$’000
For the year ended 31 March 2021 Revenue recognised that was included in the contract liabilities balance at the beginning of the year 7,668
19. RESTRICTED BANK DEPOSITS/BANK BALANCES AND CASH
Restricted bank deposits as at 31 March 2019, 2020 and 2021 are pledged to secure the guarantees and acceptances issued for contracts with customers and are therefore classified as current assets as the contract with the customer is less than one year.
As at 31 March 2019, 2020 and 2021, bank balances and cash comprise of cash held and short-term bank deposits with an original maturity of three months or less which carry interest at prevailing market rate of around 0.01% per annum.
Details of impairment assessment on restricted bank deposits, and bank balances and cash for the years ended 31 March 2019, 2020 and 2021 are set out in Note 31.
20. TRADE AND OTHER PAYABLES
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Trade payables 58,722 34,135 54,002 Accrued expenses 34,825 31,191 30,798 Provision for penalty – 747 3,910 Other payables 633 1,129 1,667 Accrued [REDACTED] [REDACTED] [REDACTED] [REDACTED] Accrued [REDACTED] [REDACTED] [REDACTED] [REDACTED]
94,180 69,864 95,218
The credit period of trade payables is ranging from 30 to 90 days. The following is an aging analysis of the trade payables based on the invoice date at the end of each reporting period:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within 30 days 25,530 19,432 30,619 31 to 60 days 6,991 3,236 3,140 61 to 90 days 10,975 4,118 6,610 Over 90 days 15,226 7,349 13,633
58,722 34,135 54,002
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APPENDIX I ACCOUNTANTS’ REPORT
21. AMOUNTS DUE TO A DIRECTOR/A RELATED PARTY/SUBSIDIARIES
The Group
Amount due to a director
Details of the amount due to a director were stated as follows:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Mr. Chiu Yu Kui Colby 15,186 17,999 8,883
The amount is non-trade in nature, unsecured, interest-free and repayable on demand. Mr. Chiu Yu Kui Colby, a director of the Company, is also the controlling shareholder of group companies. [The non-trade balance will be settled prior to the [REDACTED] of shares of the Company on the Main Board of the Stock Exchange.]
Amount due to a related party
Details of the amount due to a related party were stated as follows:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Ms. Wong Yuet Ha (Note) 100––
Note: Being the wife of Mr. Chiu Yu Kui Colby, a director of the Company.
The amount is non-trade in nature, unsecured, interest-free and repayable on demand.
The Company
Amount due to a director
Details of the amount due to a director were stated as follows:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Mr. Chiu Yu Kui Colby 42 392 425
The amount is non-trade in nature, unsecured, interest-free and repayable on demand. Mr. Chiu Yu Kui Colby, a director of the Company, is also the controlling shareholder of group companies. [The non-trade balance will be settled prior to the [REDACTED] of shares of the Company on the Main Board of the Stock Exchange.]
Amounts due to subsidiaries
The amounts are unsecured, interest-free and repayable on demand.
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APPENDIX I ACCOUNTANTS’ REPORT
22. LEASE LIABILITIES
The Group
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Non-current 24,708 25,785 25,972 Current 7,794 7,942 8,813
32,502 33,727 34,785
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Minimum lease payment due: – within one year 8,002 8,249 10,191 – more than one year but not exceeding two years 4,229 5,444 6,097 – more than two years but not exceeding five years 11,741 13,516 14,454 – more than five years 18,708 15,559 12,067
42,680 42,768 42,809 Less: future finance charge (10,178) (9,041) (8,024)
Present value of lease liabilities 32,502 33,727 34,785
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Present value of lease liabilities: – within one year 7,794 7,942 8,813 – more than one year but not exceeding two years 3,852 5,093 5,911 – more than two years but not exceeding five years 9,293 10,786 12,120 – more than five years 11,563 9,906 7,941
32,502 33,727 34,785
The Group leases various properties to operate its business and to provide director’s quarter and these lease liabilities were measured at the present value of the lease payments that are not yet paid.
The Group does not have a significant liquidity risk with regard to its lease liabilities. Lease liabilities are monitored within the Group’s treasury function.
The total cash outflows for leases including the payments of lease liabilities for the years ended 31 March 2019, 2020 and 2021 were HK$8,631,000, HK$10,365,000 and HK$13,671,000, respectively.
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APPENDIX I ACCOUNTANTS’ REPORT
23. BANK BORROWINGS
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Secured bank borrowings 35,984 41,596 52,248
The carrying amounts of the borrowings that do not contain a repayment on demand clause as repayable: – within one year 22,572 25,782 28,679 – more than one year but not exceeding two years 542 – 302 – more than two years but not exceeding five years 870 814 – – more than five years – – 8,267
23,984 26,596 37,248
The carrying amounts of the borrowings that contain a repayment on demand clause but repayable (note): – within one year 12,000 15,000 15,000
Total bank borrowings 35,984 41,596 52,248 Less: Amounts shown under current liabilities (including borrowings that contain a repayment on demand clause) (34,572) (40,782) (43,679)
Amounts shown under non-current liabilities 1,412 814 8,569
Note: The amounts due are based on scheduled repayment date set out in the loan agreements.
The exposure of the Group’s bank borrowings are as follows:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Fixed-rate borrowings 10,107 9,118 13,887 Variable-rate borrowings 25,877 32,478 38,361
35,984 41,596 52,248
The Group’s variable-rate bank borrowings bear interest at RMB Loan Prime Rate or China Interbank Offered Rate plus a margin (i.e. 1.05% to 1.87%) per annum or Hong Kong Prime Rate minus a percentage (i.e. 1%) per annum.
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APPENDIX I ACCOUNTANTS’ REPORT
The range of effective interest rates on the Group’s bank borrowing is as follows:
As at 31 March 2019 2020 2021
Effective interest rates: Fixed-rate bank borrowings 5.87% to 5.66% 4.65% to 6.09% 5.25% Variable-rate bank borrowings 4.13% to 4.13% to 4.13% to 6.34% 6.74% 6.62%
As at 31 March 2019, 2020 and 2021, these bank borrowings were guaranteed by the controlling shareholder. Certain bank borrowings were secured by properties, leasehold land and trade receivables of the Group as detailed in Note 14, Note 15, Note 17 and Note 33 respectively.
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APPENDIX I ACCOUNTANTS’ REPORT
24. DEFERRED TAX ASSETS (LIABILITIES)
The following is the analysis of deferred tax assets (liabilities) for financial reporting purposes:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Deferred tax assets 816 1,043 678 Deferred tax liabilities (3,211) (4,069) (4,793)
(2,395) (3,026) (4,115)
The following are the major deferred tax assets (liabilities) recognised by the Group and movements thereon during each of the three years ended 31 March 2021:
ECL allowance on trade receivables Undistributed and earnings of contract Inventories the PRC assets provision subsidiaries Total HK$’000 HK$’000 HK$’000 HK$’000
At 1 April 2018 49 562 (2,095) (1,484) Credit (charge) for the year (Note 11) 104 119 (1,116) (893) Exchange realignment (1) (17) – (18)
At 31 March 2019 152 664 (3,211) (2,395) Credit (charge) for the year (Note 11) 46 205 (858) (607) Exchange realignment (7) (17) – (24)
At 31 March 2020 191 852 (4,069) (3,026) Charge for the year (Note 11) (4) (374) (724) (1,102) Exchange realignment 4 9 – 13
At 31 March 2021 191 487 (4,793) (4,115)
As at 31 March 2019, 2020 and 2021, the Group has unused tax losses of HK$2,467,000, HK$2,418,000 and HK$837,000 available for offset against future profits. No deferred tax asset has been recognised in respect of such tax losses due to the unpredictability of future profit streams. As at 31 March 2019, 2020 and 2021, included in unrecognised tax losses are losses of RMB2,068,000 (equivalent to approximately HK$2,414,000), RMB2,115,000 (equivalent to approximately HK$2,309,000) and RMB464,000 (equivalent to approximately HK$549,000) that will expire during 2024 to 2026, other tax losses may be carried forward indefinitely.
Under the EIT Law, withholding tax of 5% is imposed on dividends declared in respect of profits earned by the PRC subsidiaries from 1 January 2008 onwards. Deferred taxation has been provided for in respect of temporary differences attributable to accumulated undistributed earnings of the PRC subsidiaries.
At the end of each reporting period, the Group has recognised deferred taxation in relation to the temporary difference arising from ECL allowance on trade receivables and contract assets and inventories provision.
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APPENDIX I ACCOUNTANTS’ REPORT
25. SHARE CAPITAL
The Group
The issued share capital as at 1 April 2018 represented the share capital of Cobelco HK, Cobelco Industrial, Sitami Decorative, Sitami Film and Sitami HK.
On 28 February 2019, the Company was incorporated in Cayman Islands as an exempted company with limited liability, with an authorised share capital of HK$380,000 divided into 38,000,000 shares of HK$0.01 each. Upon incorporation, (i) one nil-paid subscriber share was allotted and issued to the initial subscriber who was an independent third party at par, and was then transferred to Mr. Chiu Yu Kui Colby and credited as fully paid on the same day; and (ii) 99 fully-paid shares were further alloted and issued Mr. Chiu Yu Kui Colby.
The issued share capital as at 31 March 2019 represented the share capital of Cobelco HK, Cobelco Industrial, Sitami Decorative, Sitami Film, Sitami HK and the Company.
The issued share capital as at 31 March 2020 and 31 March 2021 represented the share capital of the Company.
The Company
Shown in Historical Financial Number of Information share(s) Amount as HK$ HK$’000
Ordinary share of HK$0.01 each Authorised: At 28 February 2019 (date of incorporation), 31 March 2019, 31 March 2020 and 31 March 2021 38,000,000 380,000 380
Issued and paid: At 28 February 2019 (date of incorporation) 1 – –* Issue of shares (Note 2) 99 1 –*
At 31 March 2019 100 1 –* Issue of shares (Note 2) 1 – –*
At 31 March 2020 and 31 March 2021 101 1 –*
* Less than HK$1,000.
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APPENDIX I ACCOUNTANTS’ REPORT
26. INVESTMENT IN A SUBSIDIARY AND PARTICULARS OF SUBSIDIARIES
The Company
As at As at 31 March 31 March 2020 2021 HK$’000 HK$’000
Unlisted investment, at cost 84,899 84,899
At the date of this report, the Company has direct and indirect equity interests in the following subsidiaries:
Equity interest attributable to the owners of the Company as at Place and date of As at Principal activities Name of incorporation/ Issued and fully 31.3. 31.3. 31.3. date of and place of subsidiaries establishment paid capital 2019 2020 2021 this report operation Notes
Directly held: Full Victory BVI US$1 100% 100% 100% 100% Investment holding (a) 2 January 2019 in the BVI
Indirectly held: Cobelco HK Hong Kong HK$500,000 100% 100% 100% 100% Trading of (b) 21 December 1995 decorative materials in Hong Kong
Cobelco Industrial Hong Kong HK$500,000 100% 100% 100% 100% Trading of (b) 26 November 1997 decorative materials in Hong Kong
Guangdong Sitami* PRC 31.3.2021: 100% 100% 100% 100% Property holding in (c) 31 August 2017 RMB16,740,000 the PRC 31.3.2020: RMB14,740,000 31.3.2019: RMB11,740,000
Cobelco GZ* PRC HK$22,000,000 100% 100% 100% 100% Processing (d) 6 September 2005 of decorative materials in the PRC
Kunshan Cobelco PRC RMB1,000,000 100% 100% 100% 100% Processing (e) Decoration 9 February 2018 of decorative Engineering Limited materials in the (“Cobelco KS”)* PRC
Sitami Decorative Hong Kong HK$500,000 100% 100% 100% 100% Inactive in Hong (f) 29 August 2017 Kong
Sitami Film Hong Kong HK$500,000 100% 100% 100% 100% Lift decoration (b) 19 September 1996 projects in Hong Kong
Sitami HK Hong Kong HK$500,000 100% 100% 100% 100% Investment holding (f) 3 August 2017 in Hong Kong
* English name for identification purpose only.
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APPENDIX I ACCOUNTANTS’ REPORT
Notes:
(a) No audited financial statements of Full Victory have been prepared since its date of incorporation as it is incorporated in the jurisdiction where there is no statutory audit requirements.
(b) The statutory financial statements for the years ended 31 March 2019 and 2020 were audited by Y.M. Hon & Co. Certified Public Accountants, certified public accountants in Hong Kong, in accordance with Small and Medium-sized Entity Financial Reporting Standards issued by the HKICPA. No statutory financial statements have been prepared for the year ended 31 March 2021 as the financial statements have not yet been due to issue.
(c) No statutory financial statements were issued for the years ended 31 December 2018, 2019 and 2020 as there was no requirement to issue audited accounts by local authorities.
(d) Cobelco GZ was established under the laws of the PRC with limited liability on 6 September 2005 with an initial registered capital of HK$3,000,000. The registered capital of Cobelco GZ was increased to HK$3,560,000 on 18 July 2006, to HK$8,500,000 on 11 July 2009 and to HK$10,000,000 on 24 November 2011, respectively. On 25 July 2018, the registered capital of Cobelco GZ was increased to HK$22,000,000, which had been fully paid up by Cobelco HK. The statutory financial statements were prepared in accordance with relevant accounting principles and regulation applicable to entities established in the PRC. The PRC statutory financial statements of Cobelco GZ for the years ended 31 December 2018 and 2019 were audited by GP Certified Public Accountants registered in the PRC. No statutory financial statements have been prepared for the year ended 31 December 2020 as the financial statements have not yet been due to issue.
(e) Cost of investment has been recognised from the year ended 31 March 2019. The PRC statutory financial statements of Cobelco KS for the year ended 31 December 2019 were audited by GP Certified Public Accountants registered in the PRC. No statutory financial statements have been prepared for the year ended 31 December 2020 as the financial statements have not yet been due to issue.
(f) The statutory financial statements for the years ended 31 March 2019 and 2020 were audited by CL Partners CPA Limited, a certified public accounting firm registered in Hong Kong, in accordance with Small and Medium-sized Entity Financial Reporting Standards issued by the HKICPA. No statutory financial statements have been prepared for the year ended 31 March 2021 as the financial statements have not yet been due to issue.
27. RESERVES OF THE COMPANY
Share Translation Accumulated premium reserve losses Total HK$’000 HK$’000 HK$’000 HK$’000
At 28 February 2019 (date of incorporation) –––– Loss and total comprehensive expense for the period – – (42) (42)
At 31 March 2019 – – (42) (42) Loss and total comprehensive expense for the year – 170 (6,402) (6,232) Effect of Reorganisation 84,899 – – 84,899
At 31 March 2020 84,899 170 (6,444) 78,625 Loss and total comprehensive expense for the year – (763) (6,862) (7,625)
At 31 March 2021 84,899 (593) (13,306) 71,000
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APPENDIX I ACCOUNTANTS’ REPORT
28. RETIREMENT BENEFITS SCHEME
The Group participates in a defined contribution scheme which is registered under the Mandatory Provident Fund Scheme (the “MPF Scheme”) established under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed in Hong Kong. The assets of the MPF Schemes are held separately from those of the Group in funds under the control of an independent trustee. The Group contributes 5% of the relevant payroll costs for each employee to the MPF Scheme, subject to a cap of monthly relevant income of HK$1,500 for the MPF Scheme, which contribution is matched by employees.
The employees employed by the PRC subsidiaries are members of the stated-managed retirement benefits scheme operated by the PRC government. The PRC subsidiaries are required to contribute a certain percentage of the payroll cost to the retirement benefits scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.
For the years ended 31 March 2019, 2020 and 2021, the amounts of contributions recognised by the Group are HK$10,398,000, HK$10,457,000 and HK$3,050,000, respectively.
29. RELATED PARTY TRANSACTIONS
In addition to the transactions and balances disclosed elsewhere in the Historical Financial Information, the Group entered into the following related party transactions:
Year ended 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Repayment of lease liabilities 960 960 960
(a) Mr. Chiu Yu Kui Colby have provided personal guarantee to certain banks in respect of the Group’s total banking facility of HK$85,608,000, HK$96,303,000 and HK$76,128,000 as at 31 March 2019, 2020 and 2021, respectively. [The guarantees will be released upon the [REDACTED] of shares of the Company on the Main Board of the Stock Exchange.]
(b) During the years ended 31 March 2019, 2020 and 2021, the Group repaid lease liabilities of HK$960,000, HK$960,000 and HK$960,000, respectively, to Mr. Chiu Yu Kui Colby, to rent certain premises with details disclosed in Note 10.
Compensation of key management personnel
Compensation of key management personnel represents the remuneration of the directors of the Company during the Track Record Period, which is disclosed in Note 10.
30. CAPITAL RISK MANAGEMENT
The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged throughout the Track Record Period.
The capital structure of the Group consists of bank borrowings, lease liabilities, amounts due to a director and a related party, net of cash and cash equivalents and equity, comprising issued share capital and reserves including retained profits.
The management of the Group reviews the capital structure on a regular basis. As part of this review, the management of the Group considers the cost of capital and the risks associated with each class of capital. Based on recommendations of the management of the Group, the Group will balance its overall capital structure through the payment of dividends and issue of new shares and debts.
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APPENDIX I ACCOUNTANTS’ REPORT
31. FINANCIAL INSTRUMENTS
Categories of financial instruments
The Group
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Financial assets At amortised cost 124,444 102,455 132,926
Financial liabilities At amortised cost 110,625 94,859 116,800 Lease liabilities 32,502 33,727 34,785
The Company
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Financial assets At amortised cost – 15 20
Financial liabilities At amortised cost 42 6,458 13,635
Financial risk management objectives and policies
The Group and the Company’s major financial instruments include trade receivables, other receivables and deposits, restricted bank deposits, bank balances and cash, trade and other payables, amounts due to a director, a related party and subsidiaries and bank borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risks (foreign currency risk and interest rate risk), credit risk and liquidity risk, and the policies on how to mitigate these risks are set out below. Management of the Group manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
Market risk
(i) Foreign currency risk
The Group has limited currency exposures as the majority of its revenue are denominated in the functional currency of the relevant group entities. The Company has intra-group balances with several subsidiaries denominated in foreign currency which also expose the Group to foreign currency risk. The carrying amounts of the Group’s monetary assets denominated in currencies other than the respective group entities functional currencies at the end of each reporting period are as follows:
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APPENDIX I ACCOUNTANTS’ REPORT
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
The Group Assets US$ 5,961 1,727 2,507 HK$ 2,932 – – RMB 1,408 143 105 Euro (“EUR”) 5 5 132
Liabilities US$ (106) – – Japanese Yem (“JPY”) (1,930) (342) (18) EUR (222) (6) (6)
Intra-group balances Liabilities RMB (3,494) (506) (9,296)
The Group is mainly exposed to the foreign currency risk of US$, HK$, RMB, JPY and EUR.
The Group currently does not have a foreign currency hedging policy in respect of foreign currency exposure. However, management monitors the related foreign currency exposure closely and will consider hedging significant currency exposure should the need arise.
Sensitivity analysis
The following table details of the Group’s sensitivity to a 5% increase and decrease in the functional currency of the group entities against the relevant foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at each year end for a 5% change in foreign currency rates. The analysis illustrates the impact for a 5% strengthening of the functional currency of the relevant group entities against the relevant currency and a positive and negative number below indicates an increase and a decrease in profit respectively. For a 5% weakening of the functional currency of the relevant group entities against the relevant currency, there would be an equal and opposite impact on the profit.
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
(Decrease) increase in post-tax profit US$ (294) (86) (125) HK$ (126) – – RMB 75 14 (5) JPY (81) 14 – EUR 9 – (7)
The impact is mainly attributable to the exposure of outstanding bank balances and intra-group balances denominated in foreign currency at the end of each reporting period.
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APPENDIX I ACCOUNTANTS’ REPORT
(ii) Interest rate risk
The Group is exposed to fair value interest rate risk in relation to fixed-rate bank borrowings and lease liabilities (see Notes 23 and 22). The Group is also exposed to cash flow interest rate risk in relation to variable-rate bank balances and variable-rate bank borrowings (see Notes 19 and 23). The Group’s cash flow interest rate risk is mainly concentrated on the fluctuation of interest rates on bank balances and borrowings arising from the Group’s Hong Kong dollar denominated borrowings. The Group manages its interest rate exposures by assessing the potential impact arising from any interest rate movements based on interest rate level and outlook. The management will review the proportion of borrowings in fixed and floating rates and ensure they are within reasonable range.
Sensitivity analysis
The sensitivity analyses below have been determined based on the exposure to interest rates at the end of each reporting period. The analysis is prepared assuming the financial instruments outstanding at the end of each reporting period were outstanding for the whole year. A 50 basis point increase or decrease in variable-rate bank borrowings are used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.
Bank balances are excluded from sensitivity analysis as the management of the Group considers that the exposure of cash flow interest rate risk arising from variable-rate bank balances is insignificant.
If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s post-tax profit for the years ended 31 March 2019, 2020 and 2021 would decrease/increase by HK$108,000, HK$136,000 and HK$158,000, respectively. This is mainly attributable to the Group’s exposure to interest rates on its variable-rate bank borrowings.
Credit risk and impairment assessment
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. At the end of each reporting period, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties arises from the carrying amount of the respective recognised financial assets as stated in the consolidated statements of financial position.
The Group is exposed to concentration of credit risk at 31 March 2019, 2020 and 2021 on trade receivables from the Group’s top five major customers amounting to HK$74,515,000, HK$33,779,000 and HK$58,312,000, respectively, and accounted for 80%, 62% and 56%, respectively, of the Group’s total trade receivables. The Group has the concentration of credit risk from the Group’s largest customer at 31 March 2019, 2020 and 2021 amounting to HK$63,893,000, HK$26,948,000 and HK$49,657,000, respectively, and accounted for 68%, 50% and 48%, respectively, of the Group’s total trade receivables.
Trade receivables and contract assets arising from contracts with customers
In order to minimise credit risk, the Group has delegated its finance team to develop and maintain the Group’s credit risk grading to categorise exposures according to their degree of risk of default. The finance team uses publicly available financial information and the Group’s own historical repayment records to rate its major customers and debtors. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.
For trade receivables and contract assets, the Group has applied the simplified approach in HKFRS 9 to measure the loss allowance at lifetime ECL. Trade receivables and contract assets for significant or credit-impaired balances are assessed individually while the remaining balances based on provision matrix. The impairment assessment are based on the Group’s internal credit rating, historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting dates, including time value of money where appropriate.
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APPENDIX I ACCOUNTANTS’ REPORT
Other receivables and deposits, restricted bank deposits and bank balances
At 31 March 2019, 2020 and 2021, the gross carrying amount of refundable rental deposits amounted to HK$1,255,000, HK$1,233,000 and HK$857,000, respectively, and management of the Group makes periodic individual assessments on the recoverability of deposits based on landlords’ credit quality. The management of the Group believes there is no material credit risk inherent in the Group’s outstanding balances of deposits. The management of the Group considers that ECL for refundable rental deposits is insignificant as at 31 March 2019, 2020 and 2021.
Management of the Group and the Company makes individual assessment on the recoverability of other receivables, based on historical settlement records, past experience, and also available reasonable and supportive forward-looking information. Management of the Group and the Company believes that there is no material credit risk inherent in the Group’s outstanding balances of other receivables. The management of the Group considers that ECL for other receivables, is insignificant as at 31 March 2019, 2020 and 2021.
The credit risk on liquid funds of the Group and the Company is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.
Internal credit risk grading
The Group’s internal credit risk grading assessment comprises the following categories:
Trade receivables/ Other financial Category Description Contract assets assets
Low risk The counterparty has a low risk of Lifetime ECL – 12m ECL default and does not have any not credit past-due amounts -impaired
Watch list Debtor frequently repays after due Lifetime ECL – 12m ECL dates but usually settle in full not credit -impaired
Doubtful There have been significant Lifetime ECL – Lifetime ECL – not increase in credit risk since not credit credit-impaired initial recognition through -impaired information developed internally or external resources
Loss There is evidence that the asset is Lifetime ECL – Lifetime ECL – credit-impaired credit-impaired credit-impaired
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APPENDIX I ACCOUNTANTS’ REPORT
The tables below detail the credit risk exposures of the Group’s financial assets and contract assets which are subject to ECL assessment:
External Internal Gross carrying amount as at credit credit 12m ECL or 31 March 31 March 31 March 31 March 31 March 31 March rating rating lifetime ECL 2019 2019 2020 2020 2021 2021 Notes HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Financial assets at amortised cost Trade receivables 17 N/A Note Lifetime ECL – provision matrix 20,247 18,984 49,653 Note Lifetime ECL – significant balances 72,963 34,625 54,220 Loss Lifetime ECL – credit-impaired 1,041 94,251 1,714 55,323 1,732 105,605
Refundable deposits and other receivables 17 N/A Low risk 12m ECL 6,801 6,548 4,527
Restricted bank deposits 19 A1 N/A 12m ECL 319 257 251
Bank balances 19 Aa2-A3 N/A 12m ECL 23,924 41,416 23,745
Other item
Contract assets 18 N/A Note Lifetime ECL – provision matrix 6,374 5,066 4,796
Note: For trade receivables and contract assets, the Group has applied the simplified approach under HKFRS 9 to measure the loss allowance at lifetime ECL. Except for debtors with significant or credit-impaired balances, the Group determines the ECL on these items by using a provision matrix, grouped by past due status.
As part of the Group’s credit risk management, the Group applies internal credit rating for its customers. The estimated loss rates are estimated based on historical observed default rates over the expected life of the debtors and are adjusted for forward-looking information that is available without undue cost or effort. The grouping is regularly reviewed by management to ensure relevant information about specific debtors is updated. The contract assets have substantially the same risk characteristics as the trade receivables for the same type of contracts. The Group has therefore concluded that the loss rates for trade receivables are a reasonable approximation of the loss rates for contract assets. During the years ended 31 March 2019, 31 March 2020 and 31 March 2021, the estimated loss rates for trade receivables and contract assets are ranging from 0.02% to 54.3%.
During the years ended 31 March 2019 and 31 March 2020, the Group provided net impairment allowance of HK$202,000 and net reversal of impairment allowance of HK$92,000 for trade receivables and provided net impairment allowance of HK$55,000 and nil for contract assets, respectively, for not credit-impaired balances. Net impairment allowance of HK$397,000 and HK$386,000 were made on credit-impaired debtors, respectively, for the years ended 31 March 2019 and 31 March 2020.
During the year ended 31 March 2021, the Group provided net impairment allowance of HK$81,000 for trade receivables and provided net reversal of impairment allowance of HK$54,000 for contract assets, respectively, for not credit-impaired balances. Net reversal of impairment allowance of HK$29,000 was made on credit-impaired debtors for the year ended 31 March 2021.
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APPENDIX I ACCOUNTANTS’ REPORT
The following table shows the movement in lifetime ECL that has been recognised for trade receivables and contract assets under the simplified approach.
Trade Trade Contract receivables receivables assets – – Lifetime – Lifetime Lifetime ECL (not ECL ECL (not credit- (credit- credit- impaired) impaired) impaired) Total HK$’000 HK$’000 HK$’000 HK$’000
At 1 April 2018 137 177 6 320 Impairment losses recognised 202 436 55 693 Impairment losses reversed – (39) – (39) Exchange realignment (3) (9) (1) (13)
At 31 March 2019 336 565 60 961
Impairment losses recognised – 595 – 595 Impairment losses reversed (92) (209) – (301) Exchange realignment (10) (25) (1) (36)
At 31 March 2020 234 926 59 1,219
Impairment losses recognised 81 25 – 106 Impairment losses reversed – (54) (54) (108) Exchange realignment 10 51 4 65
At 31 March 2021 325 948 9 1,282
Liquidity risk
In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows.
The following table details the Group’s remaining contractual maturity for its financial liabilities based on the agreed repayment terms. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.
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APPENDIX I ACCOUNTANTS’ REPORT
The Group
More than 3 Weighted On demand or months but Total average less than 3 less than 1 More than undiscounted Carrying interest rate months year 1 to 5 years 5 years cash flows amount % HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 31 March 2019 Financial liabilities Trade and other payables – 59,355 – – – 59,355 59,355 Amount due to a director − 15,186 – – – 15,186 15,186 Amount due to a related party − 100 – – – 100 100 Bank borrowings (note) 5.51 24,585 10,962 1,519 – 37,066 35,984
99,226 10,962 1,519 – 111,707 110,625
Lease liabilities 6.22 2,149 5,853 15,970 18,708 42,680 32,502
At 31 March 2020 Financial liabilities Trade and other payables – 35,264 – – – 35,264 35,264 Amount due to a director – 17,999 – – – 17,999 17,999 Bank borrowings (note) 5.53 30,253 11,471 849 – 42,573 41,596
83,516 11,471 849 – 95,836 94,859
Lease liabilities 5.30 1,984 6,265 18,960 15,559 42,768 33,727
At 31 March 2021 Financial liabilities Trade and other payables – 55,669 – – – 55,669 55,669 Amount due to a director – 8,883 – – – 8,883 8,883 Bank borrowings (note) 4.75 31,976 12,699 1,844 9,897 56,416 52,248
96,528 12,699 1,844 9,897 120,968 116,800
Lease liabilities 5.79 2,890 7,301 20,551 12,067 42,809 34,785
The Company
At 31 March 2019 Financial liability Amount due to a director – 42 – – – 42 42
At 31 March 2020 Financial liabilities Amount due to a director – 392 – – – 392 392 Amounts due to subsidiaries – 6,066 – – – 6,066 6,066
6,458 – – – 6,458 6,458
At 31 March 2021 Financial liabilities Amount due to a director – 425 – – – 425 425 Amounts due to subsidiaries – 13,210 – – – 13,210 13,210
13,635 – – – 13,635 13,635
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APPENDIX I ACCOUNTANTS’ REPORT
Note: Bank borrowings with a repayment on demand clause are included in the “on demand or less than 3 months” time band in the above maturity analysis. As at 31 March 2019, 2020 and 2021, the aggregate carrying amount of these bank borrowings amounted to HK$12,000,000, HK$15,000,000 and HK$15,000,000, respectively. Taking into account the Group’s financial position, the management of the Group does not believe that it is probable that the bank will exercise its discretionary rights to demand immediate repayment. The management believe that such bank borrowings will be repaid in accordance with the scheduled repayment dates set out in the loan agreements. At that time, the principal and interest cash outflows will be as follows:
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APPENDIX I ACCOUNTANTS’ REPORT
Aggregate principal and interest cash outflows repayable:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Within three months 12,124 15,155 15,155
12,124 15,155 15,155
Fair value measurements of financial instruments
The fair value of financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.
The management of the Group considers that the carrying amounts of financial assets and liabilities recorded at amortised cost in the Historical Financial Information approximate their fair values at the end of each reporting period.
32. CAPITAL COMMITMENTS
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Capital expenditure in respect of the acquisition of property, plant and equipment contracted for but not provided in the Historical Financial Information – 1,545 9,874
33. PLEDGE OF OR RESTRICTIONS ON ASSETS
Pledge of assets
The Group’s bank borrowings, guarantees and acceptances issued for contracts with customers had been secured by the pledge of the Group’s assets and the carrying amounts of the respective assets are as follows:
As at 31 March 2019 2020 2021 HK$’000 HK$’000 HK$’000
Properties 10,700 9,810 13,842 Leasehold land – – 11,125 Trade receivables 51,930 12,588 36,298 Restricted bank deposits 319 257 251
62,949 22,655 61,516
Restrictions on assets
In addition, lease liabilities of HK$32,502,000, HK$33,727,000 and HK$34,785,000 are recognised with related right-of-use assets of HK$31,776,000, HK$33,110,000 and HK$36,879,000 as at 31 March 2019, 2020 and 2021 respectively. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor and the relevant leased assets may not be used as security for borrowing purposes.
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APPENDIX I ACCOUNTANTS’ REPORT
34. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
The table below details changes in the Group liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statements of cash flows as cash flows from financing activities.
Amount Accrued Amount due to a share Dividend due to a related Lease Bank issue costs payable director party liabilities borrowings Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 April 2018 – – 5,626 675 8,446 27,447 42,194 Financing cash flows – (7,456) (10,369) (575) (8,476) 8,766 (18,110) Finance costs ––––1,614 1,517 3,131 New leases ––––30,984 – 30,984 Lease modification ––––383–383 Dividends recognised as distribution (Note 12) – 27,456 ––––27,456 Dividend settlement through current accounts – (20,000) 20,000 –––– Exchange realignment – – (71) – (449) (1,746) (2,266)
At 31 March 2019 – – 15,186 100 32,502 35,984 83,772
Financing cash flows (1,246) (14,472) 2,814 (100) (10,333) 5,025 (18,312) Finance costs ––––2,265 2,250 4,515 New leases ––––12,105 – 12,105 Lease modification ––––(793) – (793) Issue costs recognised 1,927 –––––1,927 Dividends recognised as distribution (Note 12) – 14,472 ––––14,472 Exchange realignment (18) – (1) – (2,019) (1,663) (3,701)
At 31 March 2020 663 – 17,999 – 33,727 41,596 93,985
Financing cash flows (1,770) – (9,149) – (13,369) 5,471 (18,817) Finance costs ––––2,490 2,653 5,143 New leases ––––9,397 – 9,397 Issue costs recognised 2,171 –––––2,171 Exchange realignment 69 – 33 – 2,540 2,528 5,170
At 31 March 2021 1,133 – 8,883 – 34,785 52,248 97,049
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APPENDIX I ACCOUNTANTS’ REPORT
35. MAJOR NON-CASH TRANSACTIONS
For the years ended 31 March 2019, 2020 and 2021, the Group entered into new lease agreements for the use of leased properties. On the lease commencement, the Group recognised HK$31,410,000, HK$12,172,000 and HK$9,397,000 of right-of-use assets and lease liabilities, respectively.
During the year ended 31 March 2019, dividends declared amounting to HK$20,000,000 were settled against amount due to a director, Mr. Chiu Yu Kui Colby.
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APPENDIX I ACCOUNTANTS’ REPORT
36. EVENTS AFTER THE END OF THE REPORTING PERIOD
[Save as disclosed elsewhere in the Historical Financial Information, subsequent to 31 March 2021, the following significant events took place:
(i) On [¼] 2021, conditional upon the share premium account of the Company being credited as a result of the initial [REDACTED] of shares of the Company on the Main Board of the Stock Exchange, the directors were authorised to capitalise an amount of HK$[REDACTED] standing to the credit of the share premium account of the Company and applied in paying up in full at par a total of [REDACTED] shares for allotment and issue to the shareholders of the Company.
(ii) The share option scheme of the Company was conditionally adopted on [¼] 2021 and the principal terms of which are set out in Appendix IV to the Document.]
37. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements of the Group, the Company or any of its subsidiaries have been prepared in respect of any period subsequent to the end of the Track Record Period.
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APPENDIX II [REDACTED]
[REDACTED]
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APPENDIX II [REDACTED]
[REDACTED]
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APPENDIX II [REDACTED]
[REDACTED]
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APPENDIX II [REDACTED]
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
Set out below is a summary of certain provisions of the Memorandum and Articles of Association of the Company and of certain aspects of Cayman company law.
The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 28 February 2019 under the Companies Act, Cap 22 (Act 3 of 1961, as consolidated and revised) of the Cayman Islands (the “Companies Act”). The Company’s constitutional documents consist of its Amended and Restated Memorandum of Association (the “Memorandum”) and its Amended and Restated Articles of Association (the “Articles”).
1. MEMORANDUM OF ASSOCIATION
(a) The Memorandum states, inter alia, that the liability of members of the Company is limited to the amount, if any, for the time being unpaid on the shares respectively held by them and that the objects for which the Company is established are unrestricted (including acting as an investment company), and that the Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, as provided in section 27(2) of the Companies Act and in view of the fact that the Company is an exempted company that the Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands.
(b) The Company may by special resolution alter its Memorandum with respect to any objects, powers or other matters specified therein.
2. ARTICLES OF ASSOCIATION
The Articles were conditionally adopted on [¼] with effect from the [REDACTED]. The following is a summary of certain provisions of the Articles:
(a) Shares
(i) Classes of shares
The share capital of the Company consists of ordinary shares.
(ii) Variation of rights of existing shares or classes of shares
Subject to the Companies Act, if at any time the share capital of the Company is divided into different classes of shares, all or any of the special rights attached to the shares or any class of shares may (unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting the provisions of the Articles relating to general meetings will mutatis mutandis apply, but so that the necessary
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
quorum (other than at an adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting two holders present in person or by proxy (whatever the number of shares held by them) shall be a quorum. Every holder of shares of the class shall be entitled to one vote for every such share held by him.
Any special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
(iii) Alteration of capital
The Company may by ordinary resolution of its members:
(i) increase its share capital by the creation of new shares;
(ii) consolidate all or any of its capital into shares of larger amount than its existing shares;
(iii) divide its shares into several classes and attach to such shares any preferential, deferred, qualified or special rights, privileges, conditions or restrictions as the Company in general meeting or as the directors may determine;
(iv) subdivide its shares or any of them into shares of smaller amount than is fixed by the Memorandum; or
(v) cancel any shares which, at the date of passing of the resolution, have not been taken and diminish the amount of its capital by the amount of the shares so cancelled.
The Company may reduce its share capital or any capital redemption reserve or other undistributable reserve in any way by special resolution.
(iv) Transfer of shares
All transfers of shares may be effected by an instrument of transfer in the usual or common form or in a form prescribed by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) or in such other form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the board may approve from time to time.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
Notwithstanding the foregoing, for so long as any shares are listed on the Stock Exchange, titles to such listed shares may be evidenced and transferred in accordance with the laws applicable to and the rules and regulations of the Stock Exchange that are or shall be applicable to such listed shares. The register of members in respect of its listed shares (whether the principal register or a branch register) may be kept by recording the particulars required by Section 40 of the Companies Act in a form otherwise than legible if such recording otherwise complies with the laws applicable to and the rules and regulations of the Stock Exchange that are or shall be applicable to such listed shares.
The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee. The transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect of that share.
The board may, in its absolute discretion, at any time transfer any share upon the principal register to any branch register or any share on any branch register to the principal register or any other branch register.
The board may decline to recognise any instrument of transfer unless a fee (not exceeding the maximum sum as the Stock Exchange may determine to be payable) determined by the Directors is paid to the Company, the instrument of transfer is properly stamped (if applicable), it is in respect of only one class of share and is lodged at the relevant registration office or registered office or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do).
The registration of transfers may be suspended and the register closed on giving notice by advertisement in any newspaper or by any other means in accordance with the requirements of the Stock Exchange, at such times and for such periods as the board may determine. The register of members must not be closed for periods exceeding in the whole thirty (30) days in any year.
Subject to the above, fully paid shares are free from any restriction on transfer and free of all liens in favour of the Company.
(v) Power of the Company to purchase its own shares
The Company is empowered by the Companies Act and the Articles to purchase its own shares subject to certain restrictions and the board may only exercise this power on behalf of the Company subject to any applicable requirements imposed from time to time by the Stock Exchange.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
Where the Company purchases for redemption a redeemable share, purchases not made through the market or by tender must be limited to a maximum price determined by the Company in general meeting. If purchases are by tender, tenders must be made available to all members alike.
The board may accept the surrender for no consideration of any fully paid share.
(vi) Power of any subsidiary of the Company to own shares in the Company
There are no provisions in the Articles relating to ownership of shares in the Company by a subsidiary.
(vii) Calls on shares and forfeiture of shares
The board may from time to time make such calls upon the members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal value of the shares or by way of premium). A call may be made payable either in one lump sum or by installments. If the sum payable in respect of any call or instalment is not paid on or before the day appointed for payment thereof, the person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding twenty per cent. (20%) per annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment, but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any member willing to advance the same, either in money or money’s worth, all or any part of the monies uncalled and unpaid or installments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may pay interest at such rate (if any) as the board may decide.
If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than fourteen (14) clear days’ notice on him requiring payment of so much of the call as is unpaid, together with any interest which may have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited.
If the requirements of any such notice are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made be forfeited by a resolution of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share and not actually paid before the forfeiture.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon from the date of forfeiture until the date of actual payment at such rate not exceeding twenty per cent. (20%) per annum as the board determines.
(b) Directors
(i) Appointment, retirement and removal
At each annual general meeting, one third of the Directors for the time being (or if their number is not a multiple of three, then the number nearest to but not less than one third) shall retire from office by rotation provided that every Director shall be subject to retirement at an annual general meeting at least once every three years. The Directors to retire by rotation shall include any Director who wishes to retire and not offer himself for re-election. Any further Directors so to retire shall be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot.
Neither a Director nor an alternate Director is required to hold any shares in the Company by way of qualification. Further, there are no provisions in the Articles relating to retirement of Directors upon reaching any age limit.
The Directors have the power to appoint any person as a Director either to fill a casual vacancy on the board or as an addition to the existing board. Any Director appointed to fill a casual vacancy shall hold office until the first general meeting of members after his appointment and be subject to re-election at such meeting and any Director appointed as an addition to the existing board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election.
A Director may be removed by an ordinary resolution of the Company before the expiration of his period of office (but without prejudice to any claim which such Director may have for damages for any breach of any contract between him and the Company) and members of the Company may by ordinary resolution appoint another in his place. Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two. There is no maximum number of Directors.
The office of director shall be vacated if:
(aa) he resigns by notice in writing delivered to the Company;
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
(bb) he becomes of unsound mind or dies;
(cc) without special leave, he is absent from meetings of the board for six (6) consecutive months, and the board resolves that his office is vacated;
(dd) he becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;
(ee) he is prohibited from being a director by law; or
(ff) he ceases to be a director by virtue of any provision of law or is removed from office pursuant to the Articles.
The board may appoint one or more of its body to be managing director, joint managing director, or deputy managing director or to hold any other employment or executive office with the Company for such period and upon such terms as the board may determine and the board may revoke or terminate any of such appointments. The board may delegate any of its powers, authorities and discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes, but every committee so formed must, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be imposed upon it by the board.
(ii) Power to allot and issue shares and warrants
Subject to the provisions of the Companies Act and the Memorandum and Articles and to any special rights conferred on the holders of any shares or class of shares, any share may be issued (a) with or have attached thereto such rights, or such restrictions, whether with regard to dividend, voting, return of capital, or otherwise, as the Directors may determine, or (b) on terms that, at the option of the Company or the holder thereof, it is liable to be redeemed.
The board may issue warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may determine.
Subject to the provisions of the Companies Act and the Articles and, where applicable, the rules of the Stock Exchange and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, all unissued shares in the Company are at the disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons,
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
at such times, for such consideration and on such terms and conditions as it in its absolute discretion thinks fit, but so that no shares shall be issued at a discount to their nominal value.
Neither the Company nor the board is obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares to members or others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.
(iii) Power to dispose of the assets of the Company or any of its subsidiaries
There are no specific provisions in the Articles relating to the disposal of the assets of the Company or any of its subsidiaries. The Directors may, however, exercise all powers and do all acts and things which may be exercised or done or approved by the Company and which are not required by the Articles or the Companies Act to be exercised or done by the Company in general meeting.
(iv) Borrowing powers
The board may exercise all the powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets and uncalled capital of the Company and, subject to the Companies Act, to issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.
(v) Remuneration
The ordinary remuneration of the Directors is to be determined by the Company in general meeting, such sum (unless otherwise directed by the resolution by which it is voted) to be divided amongst the Directors in such proportions and in such manner as the board may agree or, failing agreement, equally, except that any Director holding office for part only of the period in respect of which the remuneration is payable shall only rank in such division in proportion to the time during such period for which he held office. The Directors are also entitled to be prepaid or repaid all travelling, hotel and incidental expenses reasonably expected to be incurred or incurred by them in attending any board meetings, committee meetings or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties as Directors.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extra remuneration as the board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration as a Director. An executive Director appointed to be a managing director, joint managing director, deputy managing director or other executive officer shall receive such remuneration and such other benefits and allowances as the board may from time to time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director.
The board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company’s monies to any schemes or funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or past Director who may hold or have held any executive office or any office of profit with the Company or any of its subsidiaries) and ex-employees of the Company and their dependents or any class or classes of such persons.
The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or their dependents are or may become entitled under any such scheme or fund as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement.
The board may resolve to capitalise all or any part of any amount for the time being standing to the credit of any reserve or fund (including a share premium account and the profit and loss account) whether or not the same is available for distribution by applying such sum in paying up unissued shares to be allotted to (i) employees (including directors) of the Company and/or its affiliates (meaning any individual, corporation, partnership, association, joint-stock company, trust, unincorporated association or other entity (other than the Company) that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the Company) upon exercise or vesting of any options or awards granted under any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the members in general meeting, or (ii) any trustee of any trust to whom shares are to be allotted and issued by the Company in connection with the operation of any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the members in general meeting.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
(vi) Compensation or payments for loss of office
Pursuant to the Articles, payments to any Director or past Director of any sum by way of compensation for loss of office or as consideration for or in connection with his retirement from office (not being a payment to which the Director is contractually entitled) must be approved by the Company in general meeting.
(vii) Loans and provision of security for loans to Directors
The Company must not make any loan, directly or indirectly, to a Director or his close associate(s) if and to the extent it would be prohibited by the Companies Ordinance (Chapter 622 of the laws of Hong Kong) as if the Company were a company incorporated in Hong Kong.
(viii) Disclosure of interests in contracts with the Company or any of its subsidiaries
A Director may hold any other office or place of profit with the Company (except that of the auditor of the Company) in conjunction with his office of Director for such period and upon such terms as the board may determine, and may be paid such extra remuneration therefor in addition to any remuneration provided for by or pursuant to the Articles. A Director may be or become a director or other officer of, or otherwise interested in, any company promoted by the Company or any other company in which the Company may be interested, and shall not be liable to account to the Company or the members for any remuneration, profits or other benefits received by him as a director, officer or member of, or from his interest in, such other company. The board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favour of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company.
No Director or proposed or intended Director shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any other contract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company or the members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby established. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company must declare the nature of his interest at the meeting of the board at which the question of entering into the
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case, at the first meeting of the board after he knows that he is or has become so interested.
A Director shall not vote (nor be counted in the quorum) on any resolution of the board approving any contract or arrangement or other proposal in which he or any of his close associates is materially interested, but this prohibition does not apply to any of the following matters, namely:
(aa) any contract or arrangement for giving to such Director or his close associate(s) any security or indemnity in respect of money lent by him or any of his close associates or obligations incurred or undertaken by him or any of his close associates at the request of or for the benefit of the Company or any of its subsidiaries;
(bb) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his close associate(s) has himself/themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security;
(cc) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his close associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;
(dd) any contract or arrangement in which the Director or his close associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company; or
(ee) any proposal or arrangement concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death, or disability benefits scheme or other arrangement which relates both to Directors, his close associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his close associate(s), as such any privilege or advantage not accorded generally to the class of persons to which such scheme or fund relates.
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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN ISLANDS COMPANY LAW
(c) Proceedings of the Board
The board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate. Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have an additional or casting vote.
(d) Alterations to constitutional documents and the Company’s name
The Articles may be rescinded, altered or amended by the Company in general meeting by special resolution. The Articles state that a special resolution shall be required to alter the provisions of the Memorandum, to amend the Articles or to change the name of the Company.
(e) Meetings of members
(i) Special and ordinary resolutions
A special resolution of the Company must be passed by a majority of not less than three-fourths of the votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their duly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which notice has been duly given in accordance with the Articles.
Under the Companies Act, a copy of any special resolution must be forwarded to the Registrar of Companies in the Cayman Islands within fifteen (15) days of being passed.
An ordinary resolution is defined in the Articles to mean a resolution passed by a simple majority of the votes of such members of the Company as, being entitled to do so, vote in person or, in the case of corporations, by their duly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which notice has been duly given in accordance with the Articles.
(ii) Voting rights and right to demand a poll
Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting on a poll every member present in person or by proxy or, in the case of a member being a corporation, by its duly authorised representative shall have one vote for every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share. A member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.
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At any general meeting a resolution put to the vote of the meeting is to be decided by way of a poll save that the chairman of the meeting may in good faith, allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands in which case every member present in person (or being a corporation, is present by a duly authorized representative), or by proxy(ies) shall have one vote provided that where more than one proxy is appointed by a member which is a clearing house (or its nominee(s)), each such proxy shall have one vote on a show of hands.
If a recognised clearing house (or its nominee(s)) is a member of the Company it may authorise such person or persons as it thinks fit to act as its representative(s) at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorised, the authorisation shall specify the number and class of shares in respect of which each such person is so authorised. A person authorised pursuant to this provision shall be deemed to have been duly authorised without further evidence of the facts and be entitled to exercise the same powers on behalf of the recognised clearing house (or its nominee(s)) as if such person was the registered holder of the shares of the Company held by that clearing house (or its nominee(s)) including, where a show of hands is allowed, the right to vote individually on a show of hands.
Where the Company has any knowledge that any shareholder is, under the rules of the Stock Exchange, required to abstain from voting on any particular resolution of the Company or restricted to voting only for or only against any particular resolution of the Company, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.
(iii) Annual general meetings and extraordinary general meetings
The Company must hold an annual general meeting of the Company every year within a period of not more than fifteen (15) months after the holding of the last preceding annual general meeting or a period of not more than eighteen (18) months from the date of adoption of the Articles, unless a longer period would not infringe the rules of the Stock Exchange.
Extraordinary general meetings may be convened on the requisition of one or more shareholders holding, at the date of deposit of the requisition, not less than one-tenth of the paid up capital of the Company having the right of voting at general meetings. Such requisition shall be made in writing to the board or the secretary for the purpose of requiring an extraordinary general meeting to be called by the board for the transaction of any business specified in such requisition. Such meeting shall be held within 2 months after the deposit of such requisition. If within 21 days of such deposit, the board fails to proceed to convene such meeting, the requisitionist(s) himself/herself (themselves) may do so
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in the same manner, and all reasonable expenses incurred by the requisitionist(s) as a result of the failure of the board shall be reimbursed to the requisitionist(s) by the Company.
(iv) Notices of meetings and business to be conducted
An annual general meeting must be called by notice of not less than twenty-one (21) clear days and not less than twenty (20) clear business days. All other general meetings must be called by notice of at least fourteen (14) clear days and not less than ten (10) clear business days. The notice is exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and must specify the time and place of the meeting and particulars of resolutions to be considered at the meeting and, in the case of special business, the general nature of that business.
In addition, notice of every general meeting must be given to all members of the Company other than to such members as, under the provisions of the Articles or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, and also to, among others, the auditors for the time being of the Company.
Any notice to be given to or by any person pursuant to the Articles may be served on or delivered to any member of the Company personally, by post to such member’s registered address or by advertisement in newspapers in accordance with the requirements of the Stock Exchange. Subject to compliance with Cayman Islands law and the rules of the Stock Exchange, notice may also be served or delivered by the Company to any member by electronic means.
All business that is transacted at an extraordinary general meeting and at an annual general meeting is deemed special, save that in the case of an annual general meeting, each of the following business is deemed an ordinary business:
(aa) the declaration and sanctioning of dividends;
(bb) the consideration and adoption of the accounts and balance sheet and the reports of the directors and the auditors;
(cc) the election of directors in place of those retiring;
(dd) the appointment of auditors and other officers; and
(ee) the fixing of the remuneration of the directors and of the auditors.
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(v) Quorum for meetings and separate class meetings
No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment of a chairman.
The quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class.
(vi) Proxies
Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company and is entitled to exercise the same powers on behalf of a member who is an individual and for whom he acts as proxy as such member could exercise. In addition, a proxy is entitled to exercise the same powers on behalf of a member which is a corporation and for which he acts as proxy as such member could exercise as if it were an individual member. Votes may be given either personally (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy.
(f) Accounts and audit
The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Companies Act or necessary to give a true and fair view of the Company’s affairs and to explain its transactions.
The accounting records must be kept at the registered office or at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorised by the board or the Company in general meeting. However, an exempted company must make available at its registered office in electronic form or any other medium, copies of its books of account or parts thereof as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Act of the Cayman Islands.
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A copy of every balance sheet and profit and loss account (including every document required by law to be annexed thereto) which is to be laid before the Company at its general meeting, together with a printed copy of the Directors’ report and a copy of the auditors’ report, shall not less than twenty-one (21) days before the date of the meeting and at the same time as the notice of annual general meeting be sent to every person entitled to receive notices of general meetings of the Company under the provisions of the Articles; however, subject to compliance with all applicable laws, including the rules of the Stock Exchange, the Company may send to such persons summarised financial statements derived from the Company’s annual accounts and the directors’ report instead provided that any such person may by notice in writing served on the Company, demand that the Company sends to him, in addition to summarised financial statements, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.
At the annual general meeting or at a subsequent extraordinary general meeting in each year, the members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the next annual general meeting. Moreover, the members may, at any general meeting, by special resolution remove the auditor at any time before the expiration of his terms of office and shall by ordinary resolution at that meeting appoint another auditor for the remainder of his term. The remuneration of the auditors shall be fixed by the Company in general meeting or in such manner as the members may determine.
The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards which may be those of a country or jurisdiction other than the Cayman Islands. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor must be submitted to the members in general meeting.
(g) Dividends and other methods of distribution
The Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board.
The Articles provide dividends may be declared and paid out of the profits of the Company, realised or unrealised, or from any reserve set aside from profits which the directors determine is no longer needed. With the sanction of an ordinary resolution dividends may also be declared and paid out of share premium account or any other fund or account which can be authorised for this purpose in accordance with the Companies Act.
Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata according to the amount paid
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up on the shares during any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to any member or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.
Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as the board may think fit.
The Company may also upon the recommendation of the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his registered address, or in the case of joint holders, addressed to the holder whose name stands first in the register of the Company in respect of the shares at his address as appearing in the register or addressed to such person and at such addresses as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders.
Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind.
All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company.
No dividend or other monies payable by the Company on or in respect of any share shall bear interest against the Company.
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(h) Inspection of corporate records
Pursuant to the Articles, the register and branch register of members shall be open to inspection for at least two (2) hours during business hours by members without charge, or by any other person upon a maximum payment of HK$2.50 or such lesser sum specified by the board, at the registered office or such other place at which the register is kept in accordance with the Companies Act or, upon a maximum payment of HK$1.00 or such lesser sum specified by the board, at the office where the branch register of members is kept, unless the register is closed in accordance with the Articles.
(i) Rights of minorities in relation to fraud or oppression
There are no provisions in the Articles relating to rights of minority shareholders in relation to fraud or oppression. However, certain remedies are available to shareholders of the Company under Cayman Islands law, as summarised in paragraph 3(f) of this Appendix.
(j) Procedures on liquidation
A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares:
(i) if the Company is wound up and the assets available for distribution amongst the members of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members in proportion to the amount paid up on the shares held by them respectively; and
(ii) if the Company is wound up and the assets available for distribution amongst the members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively.
If the Company is wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Companies Act divide among the members in specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of one kind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deems fair upon any one or more class or classes of property to be divided as aforesaid and may determine how such division shall be
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carried out as between the members or different classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.
(k) Subscription rights reserve
The Articles provide that to the extent that it is not prohibited by and is in compliance with the Companies Act, if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in any transaction which would result in the subscription price of such warrants being reduced below the par value of a share, a subscription rights reserve shall be established and applied in paying up the difference between the subscription price and the par value of a share on any exercise of the warrants.
3. CAYMAN ISLANDS COMPANY LAW
The Company is incorporated in the Cayman Islands subject to the Companies Act and, therefore, operates subject to Cayman Islands law. Set out below is a summary of certain provisions of Cayman company law, although this does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of Cayman company law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar:
(a) Company operations
As an exempted company, the Company’s operations must be conducted mainly outside the Cayman Islands. The Company is required to file an annual return each year with the Registrar of Companies of the Cayman Islands and pay a fee which is based on the amount of its authorised share capital.
(b) Share capital
The Companies Act provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the value of the premiums on those shares shall be transferred to an account, to be called the “share premium account”. At the option of a company, these provisions may not apply to premiums on shares of that company allotted pursuant to any arrangement in consideration of the acquisition or cancellation of shares in any other company and issued at a premium.
The Companies Act provides that the share premium account may be applied by the company subject to the provisions, if any, of its memorandum and articles of association in (a) paying distributions or dividends to members; (b) paying up unissued shares of the company to be issued to members as fully paid bonus shares; (c) the redemption and repurchase of shares (subject to the provisions of section 37 of the
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Companies Act); (d) writing-off the preliminary expenses of the company; and (e) writing-off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.
No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which the distribution or dividend is proposed to be paid, the company will be able to pay its debts as they fall due in the ordinary course of business.
The Companies Act provides that, subject to confirmation by the Grand Court of the Cayman Islands (the “Court”), a company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its articles of association, by special resolution reduce its share capital in any way.
(c) Financial assistance to purchase shares of a company or its holding company
There is no statutory restriction in the Cayman Islands on the provision of financial assistance by a company to another person for the purchase of, or subscription for, its own or its holding company’s shares. Accordingly, a company may provide financial assistance if the directors of the company consider, in discharging their duties of care and acting in good faith, for a proper purpose and in the interests of the company, that such assistance can properly be given. Such assistance should be on an arm’s-length basis.
(d) Purchase of shares and warrants by a company and its subsidiaries
A company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder and the Companies Act expressly provides that it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company’s articles of association, so as to provide that such shares are to be or are liable to be so redeemed. In addition, such a company may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares. However, if the articles of association do not authorise the manner and terms of purchase, a company cannot purchase any of its own shares unless the manner and terms of purchase have first been authorised by an ordinary resolution of the company. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business.
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Shares purchased by a company is to be treated as cancelled unless, subject to the memorandum and articles of association of the company, the directors of the company resolve to hold such shares in the name of the company as treasury shares prior to the purchase. Where shares of a company are held as treasury shares, the company shall be entered in the register of members as holding those shares, however, notwithstanding the foregoing, the company is not be treated as a member for any purpose and must not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void, and a treasury share must not be voted, directly or indirectly, at any meeting of the company and must not be counted in determining the total number of issued shares at any given time, whether for the purposes of the company’s articles of association or the Companies Act.
A company is not prohibited from purchasing and may purchase its own warrants subject to and in accordance with the terms and conditions of the relevant warrant instrument or certificate. There is no requirement under Cayman Islands law that a company’s memorandum or articles of association contain a specific provision enabling such purchases and the directors of a company may rely upon the general power contained in its memorandum of association to buy and sell and deal in personal property of all kinds.
Under Cayman Islands law, a subsidiary may hold shares in its holding company and, in certain circumstances, may acquire such shares.
(e) Dividends and distributions
The Companies Act permits, subject to a solvency test and the provisions, if any, of the company’s memorandum and articles of association, the payment of dividends and distributions out of the share premium account. With the exception of the foregoing, there are no statutory provisions relating to the payment of dividends. Based upon English case law, which is regarded as persuasive in the Cayman Islands, dividends may be paid only out of profits.
No dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share.
(f) Protection of minorities and shareholders’ suits
The Courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against or derivative actions in the name of the company to challenge (a) an act which is ultra vires the company or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority.
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In the case of a company (not being a bank) having a share capital divided into shares, the Court may, on the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine into the affairs of the company and to report thereon in such manner as the Court shall direct.
Any shareholder of a company may petition the Court which may make a winding up order if the Court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company’s affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorising civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the Court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.
Generally claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company’s memorandum and articles of association.
(g) Disposal of assets
The Companies Act contains no specific restrictions on the power of directors to dispose of assets of a company. However, as a matter of general law, every officer of a company, which includes a director, managing director and secretary, in exercising his powers and discharging his duties must do so honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
(h) Accounting and auditing requirements
A company must cause proper books of account to be kept with respect to (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.
Proper books of account shall not be deemed to be kept if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.
An exempted company must make available at its registered office in electronic form or any other medium, copies of its books of account or parts thereof as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Act of the Cayman Islands.
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(i) Exchange control
There are no exchange control regulations or currency restrictions in the Cayman Islands.
(j) Taxation
Pursuant to the Tax Concessions Act of the Cayman Islands, the Company has obtained an undertaking:
(1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to the Company or its operations; and
(2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on or in respect of the shares, debentures or other obligations of the Company.
The undertaking for the Company is for a period of twenty years from 11 June 2019.
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company levied by the Government of the Cayman Islands save for certain stamp duties which may be applicable, from time to time, on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are a party to a double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties.
(k) Stamp duty on transfers
No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands.
(l) Loans to directors
There is no express provision in the Companies Act prohibiting the making of loans by a company to any of its directors.
(m) Inspection of corporate records
The notice of registered office is a matter of public record. A list of the names of the current directors and alternate directors (if applicable) is made available by the Registrar of Companies for inspection by any person on payment of a fee. The register of mortgages is open to inspection by creditors and members.
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Members of the Company have no general right under the Companies Act to inspect or obtain copies of the register of members or corporate records of the Company. They will, however, have such rights as may be set out in the Company’s Articles.
(n) Register of members
An exempted company may maintain its principal register of members and any branch registers at such locations, whether within or without the Cayman Islands, as the directors may, from time to time, think fit. The register of members shall contain such particulars as required by section 40 of the Companies Act. A branch register must be kept in the same manner in which a principal register is by the Companies Act required or permitted to be kept. The company shall cause to be kept at the place where the company’s principal register is kept a duplicate of any branch register duly entered up from time to time.
There is no requirement under the Companies Act for an exempted company to make any returns of members to the Registrar of Companies of the Cayman Islands. The names and addresses of the members are, accordingly, not a matter of public record and are not available for public inspection. However, an exempted company shall make available at its registered office, in electronic form or any other medium, such register of members, including any branch register of members, as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Act of the Cayman Islands.
(o) Register of Directors and Officers
The Company is required to maintain at its registered office a register of directors and officers which is not available for inspection by the public. A copy of such register must be filed with the Registrar of Companies in the Cayman Islands and any change must be notified to the Registrar within thirty (30) days of any change in such directors or officers.
(p) Beneficial Ownership Register
An exempted company is required to maintain a beneficial ownership register at its registered office that records details of the persons who ultimately own or control, directly or indirectly, 25% or more of the equity interests or voting rights of the company or have rights to appoint or remove a majority of the directors of the company. The beneficial ownership register is not a public document and is only accessible by a designated competent authority of the Cayman Islands. Such requirement does not, however, apply to an exempted company with its shares listed on an approved stock exchange, which includes the Stock Exchange. Accordingly, for so long as the shares of the Company are listed on the Stock Exchange, the Company is not required to maintain a beneficial ownership register.
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(q) Winding up
A company may be wound up (a) compulsorily by order of the Court, (b) voluntarily, or (c) under the supervision of the Court.
The Court has authority to order winding up in a number of specified circumstances including where the members of the company have passed a special resolution requiring the company to be wound up by the Court, or where the company is unable to pay its debts, or where it is, in the opinion of the Court, just and equitable to do so. Where a petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court has the jurisdiction to make certain other orders as an alternative to a winding-up order, such as making an order regulating the conduct of the company’s affairs in the future, making an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct, or making an order providing for the purchase of the shares of any of the members of the company by other members or by the company itself.
A company (save with respect to a limited duration company) may be wound up voluntarily when the company so resolves by special resolution or when the company in general meeting resolves by ordinary resolution that it be wound up voluntarily because it is unable to pay its debts as they fall due. In the case of a voluntary winding up, such company is obliged to cease to carry on its business (except so far as it may be beneficial for its winding up) from the time of passing the resolution for voluntary winding up or upon the expiry of the period or the occurrence of the event referred to above.
For the purpose of conducting the proceedings in winding up a company and assisting the Court therein, there may be appointed an official liquidator or official liquidators; and the court may appoint to such office such person, either provisionally or otherwise, as it thinks fit, and if more persons than one are appointed to such office, the Court must declare whether any act required or authorised to be done by the official liquidator is to be done by all or any one or more of such persons. The Court may also determine whether any and what security is to be given by an official liquidator on his appointment; if no official liquidator is appointed, or during any vacancy in such office, all the property of the company shall be in the custody of the Court.
As soon as the affairs of the company are fully wound up, the liquidator must make a report and an account of the winding up, showing how the winding up has been conducted and how the property of the company has been disposed of, and thereupon call a general meeting of the company for the purposes of laying before it the account and giving an explanation thereof. This final general meeting must be called by at least 21 days’ notice to each contributory in any manner authorised by the company’s articles of association and published in the Gazette.
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(r) Reconstructions
There are statutory provisions which facilitate reconstructions and amalgamations approved by a majority in number representing seventy-five per cent. (75%) in value of shareholders or class of shareholders or creditors, as the case may be, as are present at a meeting called for such purpose and thereafter sanctioned by the Court. Whilst a dissenting shareholder would have the right to express to the Court his view that the transaction for which approval is sought would not provide the shareholders with a fair value for their shares, the Court is unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management.
(s) Take-overs
Where an offer is made by a company for the shares of another company and, within four (4) months of the offer, the holders of not less than ninety per cent. (90%) of the shares which are the subject of the offer accept, the offeror may at any time within two (2) months after the expiration of the said four (4) months, by notice in the prescribed manner require the dissenting shareholders to transfer their shares on the terms of the offer. A dissenting shareholder may apply to the Court within one (1) month of the notice objecting to the transfer. The burden is on the dissenting shareholder to show that the Court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders.
(t) Indemnification
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of committing a crime).
(u) Economic Substance Requirements
Pursuant to the International Tax Cooperation (Economic Substance) Act, 2018 of the Cayman Islands (“ES Act”) that came into force on 1 January 2019, a “relevant entity” is required to satisfy the economic substance test set out in the ES Act. A “relevant entity” includes an exempted company incorporated in the Cayman Islands as is the Company; however, it does not include an entity that is tax resident outside the Cayman Islands. Accordingly, for so long as the Company is a tax resident outside the Cayman Islands, including in Hong Kong, it is not required to satisfy the economic substance test set out in the ES Act.
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4. GENERAL
Conyers Dill & Pearman, the Company’s special legal counsel on Cayman Islands law, have sent to the Company a letter of advice summarising certain aspects of Cayman Islands company law. This letter, together with a copy of the Companies Act, is available for inspection as referred to in the paragraph headed “Documents available for inspection” in Appendix V to this document. Any person wishing to have a detailed summary of Cayman Islands company law or advice on the differences between it and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
A. FURTHER INFORMATION ABOUT OUR COMPANY AND OUR SUBSIDIARIES
1. Incorporation
Our Company was incorporated as an exempted company with limited liability in the Cayman Islands under the Companies Act on 28 February 2019. Our Company’s registered office is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our Company has established our principal place of business in Hong Kong at Room 2701, 27/F, Tung Wai Commercial Building, 109-111 Gloucester Road, Wan Chai, Hong Kong and has been registered with the Companies Registry as a non-Hong Kong company on 11 July 2019 under Part 16 of the Companies Ordinance, with Mr. Colby Chiu appointed as the authorised representative of our Company for acceptance of service of process in Hong Kong.
As our Company was incorporated in the Cayman Islands, its operations are subject to the relevant laws and regulations of the Cayman Islands, Companies Act and its constitution, which comprises its Memorandum and Articles. A summary of various provisions of the Memorandum and Articles and relevant aspects of the Companies Act is set out in Appendix III to this document.
2. Changes in share capital of our Company
(a) Our Company was incorporated in the Cayman Islands on 28 February 2019 with an authorised share capital of HK$380,000 divided into 38,000,000 Shares of HK$0.01 each. As at the date of incorporation, (i) one (1) nil-paid subscriber Share was allotted and issued to the initial subscriber (being the register agent responsible for the incorporation of our Company), and was then transferred to Mr. Colby Chiu and credited as fully paid on the same day; and (ii) 99 fully-paid Shares were further allotted and issued to Mr. Colby Chiu at par.
(b) On 31 July 2019, pursuant to the Reorganisation Agreement, our Company acquired the entire issued share capital of Full Victory from Mr. Colby Chiu, and in consideration thereto, our Company issued and allotted, credited as fully paid, one Share to Rich Topmax as directed by Mr. Colby Chiu.
(c) On 31 July 2019, Mr. Colby Chiu transferred his 100 fully-paid Shares to Rich Topmax at the consideration of HK$1. As a result thereof, our Company is beneficially owned as to 100% by Rich Topmax, and Full Victory is directly wholly-owned by our Company.
(d) Pursuant to the written resolutions of our Shareholders passed on [¼], the authorised share capital of our Company was increased from HK$380,000 to HK$10,000,000 by the creation of a further 962,000,000 Shares.
(e) Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be allotted and issued pursuant to the [REDACTED] and any options which may be granted under the Share Option Scheme), the issued share capital of our Company will be
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
HK$[REDACTED] divided into [REDACTED] Shares fully paid or credited as fully paid and [REDACTED] Shares will remain unissued. Other than pursuant to the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme, our Directors do not have any present intention to issue any part of the authorised but unissued share capital of our Company and, without prior approval of our Shareholders at general meeting, no issue of Shares will be made which would effectively alter the control of our Company.
(f) Save for the changes in share capital as disclosed above and the sections headed “History, Reorganisation and Corporate Structure – Capitalisation Issue” and “Share Capital – Share capital” in this document as well as the paragraphs headed “Further information about our Company and our subsidiaries – 3. Written resolutions of our Shareholders passed on [¼]” and “Further information about our Company and our subsidiaries – 4. Corporate reorganisation” in this appendix, there has been no alteration in the share capital of our Company since its incorporation.
3. Written resolutions of our Shareholders passed on [¼]
Pursuant to the written resolutions of our Shareholders passed on [¼]:
(a) the authorised share capital of our Company was increased from HK$380,000 to HK$10,000,000 by the creation of a further 962,000,000 Shares of HK$0.01 each ranking pari passu in all respect with the then existing Shares;
(b) the Memorandum was adopted with immediate effect and the Articles were conditionally approved and adopted;
(c) conditional on the conditions as set out in the section headed “Structure and Conditions of the [REDACTED]” in this document:
(i) the [REDACTED] and the [REDACTED] were approved and our Directors were authorised to allot and issue the [REDACTED] and the Shares which may be allotted and issued upon the exercise of the [REDACTED];
(ii) conditional on the share premium account of our Company being credited as a result of the [REDACTED], our Directors were authorised to capitalise an amount of HK$[REDACTED] standing to the credit of the share premium account of our Company and to apply such sum in paying up in full at par a total of [REDACTED] Shares for allotment and issue to Rich Topmax;
(iii) the rules of the Share Option Scheme were approved and adopted and our Directors were authorised to implement the same, to grant options to subscribe for Shares thereunder and to allot, issue and deal with Shares pursuant thereto;
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(iv) a general unconditional mandate was given to our Directors to exercise all the powers of our Company to allot, issue and deal with, otherwise than (I) pursuant to a rights issue or (II) pursuant to any scrip dividend schemes or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the Articles or (III) pursuant to the grant of options under the Share Option Scheme or other similar arrangement or (IV) pursuant to the Capitalisation Issue, [REDACTED] or upon the exercise of the [REDACTED] or (V) pursuant to a specific authority granted by the Shareholders in general meeting, Shares with an aggregate number not exceeding the aggregate of (i) 20% of the aggregate number of the Shares in issue immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be issued pursuant to the [REDACTED] and any Shares which may be granted under the Share Option Scheme) and (ii) the aggregate number of Shares repurchased under the authority granted to our Directors as referred to in paragraph (v) below, until whichever is the earliest of:
(1) the conclusion of the next annual general meeting of our Company unless otherwise renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or
(2) it is varied or revoked by an ordinary resolution of our Shareholders in a general meeting.
(v) a general unconditional mandate was given to our Directors authorising them to exercise all powers of our Company to repurchase Shares on the Stock Exchange or other stock exchange on which Shares may be listed and recognised by the SFC and the Stock Exchange for this purpose with an aggregate number of not exceeding 10% of the aggregate number of the Shares in issue immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be issued pursuant to the [REDACTED] and any Shares which may be granted under the Share Option Scheme), until whichever is the earliest of:
(1) the conclusion of the next annual general meeting of our Company unless otherwise renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or
(2) it is varied or revoked by an ordinary resolution of our Shareholders in a general meeting.
4. Corporate reorganisation
The companies comprising our Group underwent the Reorganisation in preparation for the [REDACTED]. Please refer to the section headed “History, Reorganisation and Corporate Structure” in this document for further details.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
5. Changes in share capital of subsidiaries of our Company
Our subsidiaries are set forth under the Accountants’ Report as included in Appendix I to this document. Save for the subsidiaries mentioned in Appendix I to this document, our Company has no other subsidiaries.
Save as disclosed in the section headed “History, Reorganisation and Corporate Structure” in this document, there has been no alteration in the share capital of any of our subsidiaries within the two years immediately preceding the date of this document.
6. Repurchase by our Company of our own securities
The following paragraphs include information required by the Stock Exchange to be included in this document concerning the repurchase by our Company of our own securities.
(a) Provisions of the Listing Rules
The Listing Rules permit companies with a primary listing on the Stock Exchange to repurchase their securities on the Stock Exchange subject to certain restrictions, the most important of which are summarised below:
(i) Shareholders’ approval
All proposed repurchases of securities (which must be fully paid up in the case of shares) by a company listed on the Stock Exchange must be approved in advance by an ordinary resolution of the shareholders in a general meeting, either by way of general mandate or by special approval of a particular transaction.
Pursuant to the written resolutions of our Shareholders passed on [¼], a general mandate (the “Repurchase Mandate”) was given to our Directors to exercise all powers of our Company to purchase Shares on the Stock Exchange, or on any other stock exchange on which our Shares may be listed and which is recognised by the SFC and the Stock Exchange for this purpose, of up to 10% of the aggregate number of the Shares in issue immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account any Shares which may be issued pursuant to the [REDACTED] and any Shares which may be granted under the Share Option Scheme). The general mandate will expire at the conclusion of the next annual general meeting of our Company, or the expiration of the period within which the next annual general meeting of our Company is required by the Articles or applicable laws of Cayman Islands to be held, or when revoked or varied by ordinary resolution of our Shareholders in general meeting, whichever shall first occur.
(ii) Source of funds
Any repurchases must be paid out of funds legally available for such purpose in accordance with the Memorandum and Articles and any applicable laws of the Cayman Islands. A listed company is prohibited from repurchasing its
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
own securities on the Stock Exchange for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Stock Exchange from time to time.
Under the Companies Act, any repurchases by our Company may be made out of profits of our Company, out of our Company’s share premium account or out of the proceeds of a fresh issue of shares made for the purpose of the repurchase or, if authorised by the Articles and subject to the Companies Act, out of capital. Any premium payable on the redemption or purchase over the par value of the shares to be repurchased must be provided for out of profits of our Company or from sums standing to the credit of the share premium accounts of our Company, or if authorised by the Articles and subject to the Companies Act, out of capital.
(iii) Trading restrictions
A company is authorised to repurchase on the Stock Exchange or on any other stock exchange recognised by the SFC and the Stock Exchange the total number of shares which represent up to a maximum of 10% of the aggregate number of the Shares in issue of that Company or warrants to subscribe for shares in that company representing up to 10% of the amount of warrants then outstanding at the date of the passing of the relevant resolution granting the repurchase mandate. A company may not issue or announce an issue of new securities of the type that have been repurchased for a period of 30 days immediately following a repurchase of securities whether on the Stock Exchange or otherwise (except pursuant to the exercise of warrants, share options or similar instruments requiring the company to issue securities which were outstanding prior to the repurchase) without the prior approval of the Stock Exchange. A company is also prohibited from making securities repurchase on the Stock Exchange if the result of the repurchases would be that the number of the listed securities in hands of the public would be below the relevant prescribed minimum percentage for that company as required and determined by the Stock Exchange. A company shall not purchase its shares on the Stock Exchange if the purchase price is higher by 5% or more than the average closing market price for the five preceding trading days on which its shares were traded on the Stock Exchange.
(iv) Status of repurchased securities
The listing of all repurchased securities (whether on the Stock Exchange or otherwise) is automatically cancelled upon the repurchase and the relevant certificates must be cancelled and destroyed. Under the laws of the Cayman Islands, a company’s repurchased shares if not held by the company as treasury shares, may be treated as cancelled and, if so cancelled, the amount of that company’s issued share capital shall be reduced by the aggregate nominal value of the repurchased shares accordingly although the authorised share capital of the company will not be reduced.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(v) Suspension of repurchase
A listed company shall not make any repurchase of securities at any time after inside information has come to its knowledge until the information is made publicly available. In particular, during the period of one month immediately preceding the earlier of: (i) the date of the board meeting (as such date is first notified to the Stock Exchange in accordance with the Listing Rules) for the approval of a listed company’s results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules) and (ii) the deadline for publication of an announcement of a listed company’s results for any year or half-year under the Listing Rules, or quarterly or any other interim period (whether or not required under the Listing Rules) and ending on the date of the results announcement, the listed company may not repurchase its shares on the Stock Exchange other than in exceptional circumstances and provided that a waiver on all or any of the restrictions under the Listing Rules has been granted by the Stock Exchange. In addition, the Stock Exchange may prohibit repurchases of securities on the Stock Exchange if a company has breached the Listing Rules.
(vi) Reporting requirements
Certain information relating to repurchases of securities on the Stock Exchange or otherwise must be reported to the Stock Exchange not later than 30 minutes before the earlier of the commencement of the morning trading session or any pre-opening session on the following business day. In addition, a listed company’s annual report is required to disclose details regarding repurchases of securities made during the year, including a monthly analysis of the number of securities repurchased, the purchase price per share or the highest and lowest price paid for all such repurchases, where relevant, and the aggregate prices paid.
(vii) Core connected persons
Under the Listing Rules, a company shall not knowingly repurchase shares from a core connected person (as defined in the Listing Rules) and a core connected person shall not knowingly sell his shares to the company.
(b) Exercise of the Repurchase Mandate
Exercise in full of the Repurchase Mandate, on the basis of [REDACTED] Shares in issue immediately after [REDACTED], could accordingly result in up to [REDACTED] Shares being repurchased by our Company during the period in which the Repurchase Mandate remains in force.
(c) Reasons for repurchases
Repurchases of Shares will only be made when our Directors believe that such a repurchase will benefit our Company and Shareholders. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net asset value and/or earnings per Share.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(d) Funding of repurchases
In repurchasing Shares, our Company may only apply funds legally available for such purpose in accordance with our Memorandum and Articles and the applicable laws and regulations of the Cayman Islands.
On the basis of the current financial position of our Group as disclosed in this document and taking into account the current working capital position of our Group, our Directors consider that, if the Repurchase Mandate was to be exercised in full, it might have a material adverse effect on the working capital and/or the gearing position of our Group as compared with the position disclosed in this document. However, our Directors do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital requirements of our Group or the gearing levels which in the opinion of our Directors are from time to time appropriate for our Group.
(e) General
None of our Directors, to the best of their knowledge having made all reasonable enquiries, nor any of their respective close associates (as defined in the Listing Rules) currently intends to sell any Shares to our Company.
Our Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules, our Memorandum and Articles and the applicable laws of the Cayman Islands.
No core connected person (as defined in the Listing Rules) of our Company has notified our Company that he or she has a present intention to sell Shares to our Company, or has undertaken not to do so, in the event that the Repurchase Mandate is exercised.
If as a result of a repurchase of Shares, a Shareholder’s proportionate interest in the voting rights of our Company is increased, such increase will be treated as an acquisition for the purpose of the Takeovers Code. As a result, a Shareholder, or a group of Shareholders acting in concert, depending on the level of increase in the Shareholder’s interest, could obtain or consolidate control of our Company and become(s) obliged to make a mandatory offer in accordance with Rule 26 of the Takeovers Code. Save as aforesaid, our Directors are not aware of any consequence which would arise under the Takeovers Code due to any repurchase made pursuant to the Repurchase Mandate immediately after the [REDACTED].
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
B. FURTHER INFORMATION ABOUT THE BUSINESS OF OUR GROUP
1. Summary of material contracts
The following contracts (not being contracts in the ordinary course of business) have been entered into by members of our Group within the two years immediately preceding the date of this document and are or may be material:
(a) the Reorganisation Agreement;
(b) the Deed of Indemnity;
(c) the Deed of Non-competition; and
(d) the [REDACTED].
2. Intellectual property rights
(a) Trademarks
(i) Registered trademarks
As at the Latest Practicable Date, our Group had registered the following trademarks which are material to our business:
Place of Registration Name of Trademark registration Number registrant Class Expiry date PRC 4812087 Cobelco GZ 37 27 June 2029
PRC 6955676 Cobelco GZ 19 6 July 2030
PRC 10284968 Cobelco GZ 40 13 April 2023
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
A. Hong Kong 304935655 Cobelco HK 6, 19, 37, 22 May 2029 40
B.
A. Hong Kong 304935664 Cobelco HK 6, 19, 37, 22 May 2029 40
B.
(b) Software copyright
As at the Latest Practicable Date, our Group had registered the following software copyright in the PRC which is material to our business:
Registered Registration Date of Software copyright owner number registration
Cobelco workshop Cobelco GZ 2016SR397043 27 December management system v1.0 2016 (高比車間管理系統 v1.0)
(c) Patents
As at the Latest Practicable Date, our Group had registered the following patents in the PRC which are material to our business:
Date of Patent type Patent description Patent number Patentee application Patent term
Utility model A type of ultrasonic ZL201921409985.8 Cobelco GZ 28 August 2019 10 years cleaning tank （一種超聲波清洗池）
Utility model A type of rotatable rack ZL201921409991.3 Cobelco GZ 28 August 2019 10 years （一種轉架）
Utility model A type of stiffening rib ZL201921014271.7 Cobelco GZ 2 July 2019 10 years compressing device （一種加強筋壓緊裝置）
Utility model A type of assembled ZL201921014268.5 Cobelco GZ 2 July 2019 10 years mould for bending the four edges of decorative sheets（一種電梯飾板四邊 折彎組合模具）
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
Date of Patent type Patent description Patent number Patentee application Patent term
Utility model A type of joining and ZL201921014272.1 Cobelco GZ 2 July 2019 10 years installation structure for the decorative sheets on building pillars（一種建築 物柱體外飾板拼接安裝結構）
Utility model A type of high-speed ZL201921014674.1 Cobelco GZ 2 July 2019 10 years film removal device （一種快速撕膜裝置）
Utility model A type of decorative ZL201920963902.3 Cobelco GZ 25 June 2019 10 years sheets compressing device in the assembly line（一種飾板組裝線覆膜壓 緊裝置）
Utility model A type of bead removal ZL201920963898.0 Cobelco GZ 25 June 2019 10 years machine（一種掃砂機）
Utility model A type of bead blasting ZL201920886518.8 Cobelco GZ 13 June 2019 10 years equipment（一種噴砂設備）
Invention A type of automatic ZL201811567427.4 Cobelco GZ 20 December 20 years materials loading and 2018 cutting device for metal fabrication（一種用於鈑金 生產的切割自動上料裝置）
Invention A type of hairline ZL201810769815.4 Cobelco GZ 13 July 2018 20 years finishing system and technique for surface pattern processing of metal sheet（一種金屬板材 拉絲加工系統及該系統的拉 絲工藝）
Utility model A type of elevator cabin ZL201620828288.6 Cobelco GZ 30 July 2016 10 years wall structure （一種電梯轎廂壁板結構）
Utility model A type of elevator ZL201620828311.1 Cobelco GZ 30 July 2016 10 years control device （一種電梯控制裝置）
Utility model A type of elevator cabin ZL201620830212.7 Cobelco GZ 30 July 2016 10 years ceiling structure （一種電梯轎廂頂部結構）
Utility model A type of engraving ZL201620830214.6 Cobelco GZ 30 July 2016 10 years machine （一種雕刻機）
Utility model A type of film ZL201620830331.2 Cobelco GZ 30 July 2016 10 years laminating workstation （一種貼膜工作臺）
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
Date of Patent type Patent description Patent number Patentee application Patent term
Utility model A type of neutral salt ZL201620830335.0 Cobelco GZ 30 July 2016 10 years spray testing equipment （一種中性鹽霧測試設備）
Utility model A type of UV weathering ZL201620830978.5 Cobelco GZ 30 July 2016 10 years test equipment （一種紫外線耐候試驗設備）
Utility model A type of new decorative ZL201620831023.1 Cobelco GZ 30 July 2016 10 years structure of elevator cabin （一種新型電梯轎廂裝飾結構）
Utility model A type of new elevator ZL201620834385.6 Cobelco GZ 30 July 2016 10 years cabin floor door device （一種新型電梯轎廂層門裝置）
Utility model A type of stone polishing ZL201620834436.5 Cobelco GZ 30 July 2016 10 years machine with eight working heads （一種用於石材八頭拋光機）
Utility model Elevator cabin with solid ZL201220749545.9 Cobelco GZ 31 December 10 years wood decoration 2012 （實木裝飾電梯轎廂）
Utility model Elevator cabin ZL201220749625.4 Cobelco GZ 31 December 10 years decoration materials 2012 hairline machine （電梯轎廂裝飾材料髮紋機）
Invention Illuminated lighting ZL201110032094.7 Cobelco GZ 28 January 20 years board 2011 （發光照明板）
As at the Latest Practicable Date, our Group had applied for registration of the following patent in the PRC which is material to our business:
Date of Patent type Patent description Application number Applicant application
Invention Elevator decorative ceiling 201911215393.7 Cobelco GZ 2 December 2019 device（電梯裝飾吊頂裝置）
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(d) Domain name
As at the Latest Practicable Date, our Group was the registered proprietor of the following domain names:
Registration Domain names (Note) Registrant date Expiry date
高比.商標 Cobelco GZ 26 April 2019 26 April 2029
cobelco.cn Cobelco GZ 31 August 2005 31 August 2025
cobelco.com.cn Cobelco GZ 19 July 2005 19 July 2022
cobelco.com.hk Cobelco 25 November 24 November Industrial 1998 2021
cobelco-steel.com Cobelco HK 15 May 2012 13 May 2022
sitami.com.hk Sitami Film 7 February 13 February 2007 2022
Note: Information contained in these websites does not form part of this document.
C. FURTHER INFORMATION ABOUT OUR DIRECTORS AND SUBSTANTIAL SHAREHOLDERS
1. Directors
(a) Disclosure of interests of Directors and chief executive
So far as our Directors are aware, immediately following completion of the Capitalisation Issue and the [REDACTED] without taking into account the Shares which may be issued pursuant to the exercise of the [REDACTED] and the options which may be granted under the Share Option Scheme, the interests and short positions of our Directors and chief executive of our Company in the Shares, underlying shares and debentures of our Company or any associated corporation (within the meaning of Part XV of the SFO) which will have to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions in which they are taken or deemed to have taken under such provisions), or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein or which will be required to be notified to our Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, once the Shares are [REDACTED], will be as follows:
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(i) Long position in Shares
Name of Director/ Capacity/nature of Number of Percentage of chief executive interests Shares shareholding (%)
Mr. Colby Chiu Interest in a controlled [REDACTED] [REDACTED] corporation (Note 1)
Note:
(1) Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account the Shares which may be issued pursuant to the exercise of the [REDACTED] and the options which may be granted under the Share Option Scheme), our Company will be owned as to [REDACTED] by Rich Topmax. Rich Topmax is owned as to 100% by Mr. Colby Chiu and under the SFO, Mr. Colby Chiu is deemed to be interested in all the Shares which are registered in the name of Rich Topmax.
(ii) Long position in the ordinary shares of associated corporation
Percentage of Name of shareholding in associated Capacity/nature Number of the associated Name of Director corporation of interests shares corporation (%)
Mr. Colby Chiu Rich Topmax Beneficial owner 1 100% (Note 1)
Note:
(1) Immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account the Shares which may be issued pursuant to the exercise of the [REDACTED] and the options which may be granted under the Share Option Scheme), our Company will be owned as to [REDACTED] by Rich Topmax. Rich Topmax is owned as to 100% by Mr. Colby Chiu and under the SFO, Mr. Colby Chiu is deemed to be interested in all the Shares which are registered in the name of Rich Topmax.
Save as disclosed above, as at the Latest Practicable Date, none of our Directors and chief executive of our Company has for the purposes of Divisions 7 and 8 of Part XV of the SFO or the Listing Rules, nor is any of them taken to or deemed to have under Divisions 7 and 8 of Part XV of the SFO, an interest or short position in the shares, underlying shares and debentures of our Company or any associated corporations (within the meaning of the SFO) or any interests which will have to be entered in the register to be kept by our Company pursuant to section 352 of the SFO or which will be required to be notified to our Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules once the Shares are [REDACTED] on the Stock Exchange.
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(b) Particulars of service contracts and letters of appointment
Executive Directors
Each of Mr. Colby Chiu and Mr. SY Chiu, being our executive Directors, has entered into a service contract with our Company for an initial fixed term of three years commencing from the [REDACTED], after which it is renewable automatically, provided that it is subject always to re-election as and when required under the Articles of Association. Either party can at any time terminate the service contract by giving to the other party not less than three months’ prior notice in writing.
Commencing from the [REDACTED], each of our executive Directors is entitled to an initial annual salary set out below, such salary to be reviewed annually by our Board and the remuneration committee of our Company. In addition, each of our executive Directors is entitled to such discretionary management bonus by reference to the consolidated net profits of our Group after taxation and minority interest but before extraordinary items as our Board and the remuneration committee of our Company may approve, provided that our relevant executive Director shall abstain from voting and not be counted in the quorum in respect of any resolution of our Board approving the amount of annual salary, management bonus and other benefits payable to him.
Name Amount (HK$)
Mr. Colby Chiu 3,000,000 Mr. SY Chiu 1,440,000
Non-executive Director
Our non-executive Director, Ms. Lei Soi Kun, has entered into an appointment letter with our Company. The appointment letter shall continue for an initial fixed term of three years from the [REDACTED], subject always to re-election as and when required under the Articles of Association. Either party can at any time terminate the appointment by giving to the other not less than three months’ prior notice in writing. Commencing from the [REDACTED], our non-executive Director is entitled to an annual director’s fee of HK$600,000.
Independent non-executive Directors
Each of Mr. Cheung Kwok Kwan JP, Mr. Choi Tak Shing Stanley JP and Mr. Lam Chi Wing, being our independent non-executive Directors, [has entered] into a letter of appointment with our Company on [¼]. Each letter of appointment takes effect from the date of the letter of appointment, and shall continue for an initial fixed term of three years from the [REDACTED], after which it is renewable automatically, provided that it is subject always to re-election as and when required under the Articles of Association. Either party can at any time
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terminate the appointment by giving to the other party not less than three months’ prior notice in writing. Commencing from the [REDACTED], our independent non-executive Directors are entitled to annual director’s fee set out below:
Name Amount (HK$)
Mr. Cheung Kwok Kwan JP 360,000 Mr. Choi Tak Shing Stanley JP 120,000 Mr. Lam Chi Wing 120,000
Save as disclosed above, none of our Directors has or is proposed to enter into a service contract/letter of appointment with our Company or any of our subsidiaries (other than contracts expiring or determinable by our Group within one year without the payment of compensation (other than statutory compensation)).
(c) Directors’ remuneration
Our Company’s policies concerning remuneration of executive Directors are:
(i) the amount of remuneration payable to our executive Directors will be determined on a case by case basis depending on the experience, responsibility, workload and the time devoted to our Group by the relevant Director;
(ii) non-cash benefits may be provided to our Directors under their remuneration package; and
(iii) our executive Directors may be granted, at the discretion of our Board, share options of our Company, as part of the remuneration package.
The aggregate of the remuneration (including salaries and allowance) paid and benefits in kind granted by our Group to our Directors for the three years ended 31 March 2019, 2020 and 2021 was approximately HK$5.4 million, HK$6.6 million and HK$6.7 million, respectively. Further information in respect of our Directors’ remuneration is mentioned in note 10 to the Accountants’ Report as set out in Appendix I to this document.
2. Substantial Shareholders
For the information on the persons or entities who will, immediately following completion of the Capitalisation Issue and the [REDACTED] (without taking into account of the Shares which may be issued pursuant to the exercise of the [REDACTED] and any options that may be granted under the Share Option Scheme), have an interest or a short position in the Shares or the underlying Shares which would fall to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who will be, directly or indirectly, to be interested in 10% or more of the
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APPENDIX IV STATUTORY AND GENERAL INFORMATION nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of our Company or any other member of our Group, please refer to the section headed “Substantial Shareholders” in this document.
3. Related party transactions
Our Group entered into the related party transactions during the Track Record Period as mentioned in note 29 to the Accountants’ Report in Appendix I to this document.
4. Disclaimers
(a) Save as disclosed in the section headed “History, Reorganisation and Corporate Structure” in this document, none of our Directors nor the experts named in the paragraph headed “Qualifications of experts” in this appendix has any direct or indirect interest in the promotion of, or in any assets which have been, within the two years immediately preceding the issue of this document, acquired or disposed of by or leased to, any member of our Group, or are proposed to be acquired or disposed of by or leased to any member of our Group.
(b) Save as disclosed in the section headed “Connected Transaction” in this document, none of our Directors is materially interested in any contract or arrangement subsisting at the date of this document which is significant in relation to the business of our Group.
(c) Neither our Controlling Shareholders nor our Directors are interested in any business apart from our Group’s business which competes or is likely to compete, directly or indirectly, with the business of our Group.
(d) So far as is known to our Directors, none of our Directors, their respective close associates or any Shareholder (whom to the knowledge of our Directors owns more than 5% of our issued share capital) had any interest in any of our five largest suppliers or customers during the Track Record Period.
D. SHARE OPTION SCHEME
The following is a summary of the principal terms of the Share Option Scheme conditionally approved by our existing Shareholders on [¼].
For the purpose of this section, unless the context otherwise requires:
“Board” means our board of Directors from time to time or a duly authorised committee thereof;
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“Eligible Person” means any full-time or part-time employee of our Company or any member of our Group, including any executive directors, non– executive directors and independent non-executive directors, suppliers, customers, agents, advisors and consultants of our Group who, in the sole opinion of our Board, will contribute or have contributed to our Group;
“Option” means an option to subscribe for Shares granted pursuant to the Share Option Scheme;
“Option Period” means in respect of any particular Option, the period to be determined and notified by our Board to each Participant, which period may commence on a day on or after the date upon which the Option is accepted or deemed to be accepted in accordance with the Share Option Scheme but shall end in any event not later than 10 years from such date;
“Other Schemes” means any other share option schemes adopted by our Group from time to time pursuant to which options to subscribe for Shares may be granted;
“Participant” means any Eligible Person who accepts or is deemed to have accepted the offer of any Option in accordance with the terms of the Share Option Scheme or (where the context so permits) a person entitled to any such Option in consequence of the death of the original Participant;
“Shareholders” means shareholders of our Company from time to time;
“Subsidiary” means a company which is for the time being and from time to time a subsidiary (within the meaning of section 15 of the Companies Ordinance) of our Company, whether incorporated in Hong Kong or elsewhere; and
“Trading Day” means a day on which trading of Shares take place on the Stock Exchange.
(a) Purpose of the Share Option Scheme
The Share Option Scheme enables our Company to grant Options to the Eligible Persons as incentives or rewards for their contributions to our Group.
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(b) Who may join
Our Board may, at its discretion, invite any Eligible Persons to take up Options at a price calculated in accordance with sub-paragraph (d) below. Upon acceptance of the Option, the Eligible Person shall pay HK$1.00 to our Company by way of consideration for the grant. The Option will be offered for acceptance for a period of 28 days from the date on which the Option is granted.
(c) Grant of Option
(i) Any grant of Options must not be made after inside information has come to our knowledge until such inside information has been announced in accordance with the requirements of the Listing Rules. In particular, during the period commencing one month immediately preceding the earlier of (i) the date of our Board meeting (as such date is first notified to the Stock Exchange in accordance with the Listing Rules) for the approval of our Company’s results for any year, half-year, quarter-year period or any other interim period (whether or not required under the Listing Rules), and (ii) the deadline for our Company to publish an announcement of its results for any year, half-year, quarter-year period or any interim period (whether or not required under the Listing Rules), and ending on the date of the results announcement, no Option may be granted. The period during which no Option may be granted will cover any period of delay in the publication of results announcement. Our Directors may not grant any Option to an Eligible Person who is our Director during the periods or times in which directors of the listed issuer are prohibited from dealing in shares pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules or any corresponding code or securities dealing restrictions adopted by our Company.
(ii) The total number of Shares issued and to be issued upon exercise of the Options granted to a Participant under the Share Option Scheme and Other Schemes (including both exercised and outstanding Options) in any 12-month period must not exceed 1% of the Shares in issue from time to time, and provided that if approved by our Shareholders in general meeting with such Participant and his close associates (or his associates if the participant is a connected person) abstaining from voting, our Company may make a further grant of Options to such Participant (the “Further Grant”) notwithstanding that the Further Grant would result in the Shares issued and to be issued upon exercise of all Options granted and to be granted under the Share Option Scheme and Other Schemes to such Participant (including exercised, cancelled and outstanding Options) in the 12-month period up to and including the date of the Further Grant representing in aggregate over 1% of the Shares in issue from time to time. In relation to the Further Grant, our Company must send a circular to our Shareholders, which discloses the identity of the relevant Participant, the number and the terms of the Options to be granted (and Options previously granted to such Participant under the Share Option Scheme and Other Schemes) and the information required under the Listing Rules. The number and terms (including the exercise price) of Options which is the subject of the Further Grant shall be fixed before the relevant
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
Shareholders’ meeting and the date of meeting of our Board for proposing the Further Grant should be taken as the date of grant for the purpose of calculating the relevant subscription price.
(d) Price of Shares
The subscription price for the Shares subject to Options will be a price determined by our Board and notified to each Participant and shall be the highest of (i) the closing price of the Shares as stated in the Stock Exchange’s daily quotations sheet on the date of grant of the Options, which must be a Trading Day; (ii) the average closing price of the Shares as stated in the Stock Exchange’s daily quotations sheets for the five Trading Days immediately preceding the date of grant of the Options; and (iii) the nominal value of a Share. For the purpose of calculating the subscription price, in the event that on the date of grant, our Company has been [REDACTED] for less than five Trading Days, the [REDACTED] shall be used as the closing price for any Trading Day falling within the period before the [REDACTED].
(e) Maximum number of Shares
(i) The total number of Shares which may be issued upon the exercise of all Options to be granted under the Share Option Scheme and Other Schemes must not, in aggregate, exceed 10% of the Shares in issue as at the [REDACTED] (the “Scheme Mandate Limit”) provided that the Options lapsed in accordance with the terms of the Share Option Scheme or Other Schemes will not be counted for the purpose of calculating the Scheme Mandate Limit. On the basis of [REDACTED] Shares in issue on the [REDACTED], the Scheme Mandate Limit will be equivalent to [REDACTED] Shares, representing 10% of the Shares in issue as at the [REDACTED].
(ii) Subject to the approval of Shareholders in general meeting, our Company may refresh the Scheme Mandate Limit to the extent that the total number of Shares which may be issued upon exercise of all Options to be granted under the Share Option Scheme and Other Schemes under the Scheme Mandate Limit as refreshed must not exceed 10% of the Shares in issue as at the date of such Shareholders’ approval provided that Options previously granted under the Share Option Scheme and Other Schemes (including those outstanding, cancelled, exercised or lapsed in accordance with the terms thereof) will not be counted for the purpose of calculating the Scheme Mandate Limit as refreshed. In relation to the Shareholders’ approval referred to in this paragraph (ii), our Company shall send a circular to our Shareholders containing our information required by the Listing Rules.
(iii) Subject to the approval of Shareholders in general meeting, our Company may also grant Options beyond the Scheme Mandate Limit provided that Options in excess of the Scheme Mandate Limit are granted only to the Eligible Persons specifically identified by our Company before such Shareholders’ approval is sought. In relation to the Shareholders’ approval referred to in this paragraph (iii), our Company shall send a circular to its Shareholders containing a generic
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
description of the identified Eligible Persons, the number and terms of the Options to be granted, the purpose of granting Options to the identified Eligible Persons, an explanation as to how the terms of such Options serve the intended purpose and such other information required by the Listing Rules.
(iv) Notwithstanding the foregoing, our Company may not grant any Options if the number of Shares which may be issued upon exercise of all outstanding Options granted and yet to be exercised under the Share Option Scheme and Other Schemes exceeds 30% of the Shares in issue from time to time.
(f) Time of exercise of Option
An Option may be exercised in accordance with the terms of the Share Option Scheme at any time during a period to be determined and notified by our Board to each Participant provided that the period within which the Option must be exercised shall not be more than 10 years from the date of the grant of Option. The exercise of an Option may be subject to the administration of our Board whose decision as to all matters arising from or in relation to the Share Option Scheme as its interpretation or effect shall (save as otherwise provided herein) be final and binding on all parties to the Share Option Scheme.
(g) Rights are personal to grantee
An Option shall be personal to the Participant and shall not be assignable or transferable and no Participant shall in any way sell, transfer, charge, mortgage, encumber or create any interest whether legal or beneficial in favour of any third party over or in relation to any Option. Any breach of the foregoing by the Participant shall entitle our Company to cancel any Option or any part thereof granted to such Participant (to the extent not already exercised) without incurring any liability on our Company.
(h) Rights on death
If a Participant dies before exercising the Options in full, his or her personal representative(s) may exercise the Options in full (to the extent that the Options have become exercisable on the date of death and not already exercised) within a period of 12 months from the date of death, failing which such Options will lapse.
(i) Changes in capital structure
(i) In the event of any alteration in the capital structure of our Company while an Option remains exercisable, and such event arises from a capitalisation of profits or reserves, rights issue, consolidation, subdivision or reduction of the share capital of our Company, such corresponding alterations (if any) shall be made in the number of Shares (without fractional entitlements) subject to the Options so far as unexercised, and/or the subscription price.
(ii) Except alterations made on a capitalisation issue, any alteration to the number of Shares which is the subject of the Option and the subscription price shall be conditional on the auditors of our Company or an independent financial adviser
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
appointed by our Company confirming in writing to our Board that the alteration is made on the basis that the proportion of the issued share capital of our Company to which a Participant is entitled after such alteration shall remain the same as that to which he or she was entitled before such alteration. No such alteration shall be made to the effect of which would be to enable any Share to be issued at less than its nominal value or which would result in the aggregate amount payable on the exercise of any Option in full being increased.
(j) Rights on take-over
If a general offer (whether by way of takeover offer, repurchase offer or scheme of arrangement or otherwise in like manner) has been made to all the Shareholders (other than the offeror and/or any persons acting in concert with the offeror), to acquire all or part of the issued Shares, and such offer, having been approved in accordance with applicable laws and regulatory requirements, becomes or is declared unconditional, the Participant shall be entitled to exercise his or her outstanding Option in full or any part thereof within 14 days after the date on which such offer becomes or is declared unconditional. For the purposes of this sub-paragraph, “acting in concert” shall have the meaning ascribed to it under the Takeovers Code.
(k) Rights on a compromise or arrangement
(i) If an application is made to the court (otherwise than where our Company is being voluntarily wound up), pursuant to the Companies Act or the Companies Ordinance, in connection with a proposed compromise or arrangement between our Company and our creditors (or any class of them) or between our Company and our Shareholders (or any class of them), a Participant may by notice in writing to our Company, within a period of 21 days after the date of such application, exercise his or her outstanding Option in full extent or to the extent specified in such note. Upon the compromise or arrangement becoming effective, all Options shall lapse except insofar as exercised. Notice of the application referred to herein and the effect thereof shall be given by our Company to all Participants as soon as practicable.
(ii) In the event of a notice being given by our Company to our Shareholders to convene a general meeting for the purpose of approving a resolution to voluntarily wind up our Company when our Company is solvent, our Company shall on the day of such notice to each Shareholder or as soon as practicable, give notice thereof to all Participants. Thereupon each Participant shall be entitled to exercise all or any of his or her outstanding Options at any time no later than two business days prior to the proposed general meeting of our Company by giving notice in writing to our Company, accompanied by a remittance for the full amount of the aggregate subscription price for the Shares in respect of which the notice is given, whereupon our Company shall as soon as possible and, in any event, no later than the business day immediately prior to the date of the proposed general meeting referred to above, allot and issue the relevant Shares to the Participant credited as fully paid.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(l) Lapse of Option
An Option shall lapse forthwith and not exercisable (to the extent not already exercised) on the earliest of:
(i) the date of expiry of the Option as may be determined by our Board;
(ii) subject to paragraphs (f) and (p), the expiry of the Option Period;
(iii) the first anniversary of the death of the Participant;
(iv) the commencement of the winding up of our Company;
(v) in the event that the Participant was an employee or director of any member of our Group on the date of grant of Option to him or her, the date on which such member of our Group terminates the Participant’s employment or removes the Participant from his or her office on the ground that the Participant has been guilty of misconduct, has committed an act of bankruptcy or has become insolvent or has made any arrangements or composition with his or her creditors generally, or has been convicted of any criminal offence involving his or her integrity or honesty. A resolution of our Board or the board of directors of the relevant member of our Group to the effect that such employment or office has or has not been terminated or removed on one or more grounds specified in this sub-paragraph shall be conclusive;
(vi) in the event that the Participant was an employee or director of any member of our Group on the date of grant of Option to him or her, the expiry of a period of three months from the date of the Participant ceasing to be an employee or director of such member of our Group by reason of:
(1) his or her retirement on or after attaining normal retirement age or, with the express consent of our Board in writing for the purpose of this sub-paragraph, at a younger age;
(2) ill health or disability recognised as such expressly by our Board in writing for the purpose of this sub-paragraph;
(3) the company by which he or she is employed and/or of which he or she is a director (if not our Company) ceasing to be a subsidiary of our Company;
(4) expiry of his or her employment contract or vacation of his or her office with such member of our Group such contract or office is not immediately extended or renewed; or
(5) at the discretion of our Board, any reason other than death or the reasons described in sub-paragraph (v) or (vi) (1) to (4) above;
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(vii) the expiry of any period referred to in paragraph (k) above, provided that in the case of paragraph (k)(i), all Options granted shall lapse upon the proposed compromise or arrangement becoming effective; and
(viii) the date the Participant commits any breach of the provisions of paragraph (g) above.
(m) Ranking of Shares
Shares allotted and issued upon the exercise of an Option will be subject to our Articles as amended from time to time and will rank pari passu in all respects with the fully paid or credited as fully paid Shares in issue on the date of such allotment or issue and accordingly will entitle the holders to participate in all dividends or other distributions paid or made on or after the date, of allotment and issue other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date thereof shall be before the date of allotment or issue.
(n) Cancellation of Options granted
Any cancellation of Options granted in accordance with the Share Option Scheme but not exercised must be approved by the grantee concerned in writing. In the event that our Board elects to cancel any Options and issue new ones to the same grantee, the issue of such new Options may only be made with available unissued Options (excluding the cancelled Options) within the Scheme Mandate Limit.
(o) Period of Share Option Scheme
The Share Option Scheme will be valid and effective for a period of 10 years commencing on the [REDACTED], after which period no further Options may be granted but the provisions of the Share Option Scheme shall remain in full force and effect in all other respects and Options granted during the life of the Share Option Scheme may continue to be exercisable in accordance with their terms of issue.
(p) Alteration to and termination of Share Option Scheme
(i) The Share Option Scheme may be altered in any respect by resolution of our Board, except that (1) any alteration to the advantage of the Participants or the Eligible Persons (as the case may be) relating to matters contained in Chapter 17 of the Listing Rules; and (2) any material alteration to the terms and conditions of the Share Option Scheme or any change to the terms of Options granted, except where the alterations take effect automatically under the existing terms of the Share Option Scheme, shall first be approved by the Shareholders in general meeting (with the Eligible Persons, the Participants and their respective close associates abstaining from voting) provided that if the proposed alteration shall adversely affect any Options granted or agreed to be granted prior to the date of alteration, such alteration shall be further subject to the consent or sanction of the Participants in accordance with the terms of the Share Option Scheme.
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(ii) Our Company may, by ordinary resolution in general meeting, at any time terminate the operation of the Share Option Scheme before the end of its life and in such event no further Options will be offered but the provisions of the Share Option Scheme shall remain in all other respects in full force and effect in respect of Options granted prior thereto but not yet exercised at the time of termination, which shall continue to be exercisable in accordance with their terms of grant. Details of the Options granted, including Options exercised or outstanding, under the Share Option Scheme, and (if applicable) Options that become void or non-exercisable as a result of termination must be disclosed in the circular to the Shareholders seeking approval for the new scheme to be established after such termination.
(q) Granting of Options to a director, chief executive or Substantial Shareholder of our Company or any of their associates
(i) Where Options are proposed to be granted to a director, chief executive or Substantial Shareholder of our Company or any of their respective associates, the proposed grant must be approved by all independent non-executive Directors (excluding any independent non-executive Director who is the grantee of the Options).
(ii) If a grant of Options to a Substantial Shareholder or an independent non-executive Director, or any of their respective associates will result in the total number of the Shares issued and to be issued upon exercise of the Options already granted and to be granted (including Options exercised, cancelled and outstanding) to such person under the Share Option Scheme or Other Schemes in any 12-month period up to and including the date of the grant (i) representing in aggregate over 0.1% (or such other percentage as may from time to time specified by the Stock Exchange) of the Shares in issue from time to time, and (ii) having an aggregate value, based on the closing price of the Shares at the date of the grant, in excess of HK$5 million, then the proposed grant of Options must be approved by the Shareholders. The Participant, his/her/its associates and all core connected persons of our Company must abstain from voting at such general meeting. Our Company will send a circular to our Shareholders containing the information required under Rule 17.04(3) of the Listing Rules.
(iii) In addition, Shareholders’ approval as described above will also be required for any change in terms of the Options granted to an Eligible Person who is a Substantial Shareholder, an independent non-executive Director or their respective associates.
(iv) The circular must contain the following:
(1) details of the number and terms of the Options (including the subscription price relating thereto) to be granted to each Eligible Person, which must be fixed before the relevant Shareholders’ meeting, and the date of Board meeting for proposing such further grant is to be taken as the date of grant for the purpose of calculating the subscription price;
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(2) a recommendation from our independent non-executive Directors (excluding any independent non-executive Director who is a proposed grantee of the Options in question) to independent Shareholders, as to voting; and
(3) all other information as required by the Listing Rules. For the avoidance of doubt, the requirements for the granting of Options to a Director or chief executive (as defined in the Listing Rules) set out in this paragraph (q) above do not apply where the Eligible Person is only a proposed Director or proposed chief executive.
(r) Performance Target
The exercise of an Option may be subject to the achievement of performance target and/or any other conditions to be notified by our Board to each Participant, which our Board may in its absolute discretion determine.
(s) Conditions of Share Option Scheme
(i) The Share Option Scheme is conditional on (i) the passing of the written resolution to adopt the Share Option Scheme by all our existing Shareholders in general meeting; and (ii) the Stock Exchange granting approval for the [REDACTED] of and [REDACTED] in the Shares which may be issued pursuant to the exercise of Options.
(ii) As at the Latest Practicable Date, no options had been granted or agreed to be granted by our Company under the Share Option Scheme.
(iii) Application has been made to the Stock Exchange for the [REDACTED] of and [REDACTED] in the Shares which fall to be issued pursuant to the exercise of Options granted under Share Option Scheme.
(iv) The terms of the Share Option Scheme are in compliance with Chapter 17 of the Listing Rules.
E. OTHER INFORMATION
1. Tax and other indemnities
Our Controlling Shareholders, namely, Mr. Colby Chiu and Rich Topmax (collectively the “Indemnifiers”) [have entered] into the Deed of Indemnity to provide the following indemnities in favour of our Company (for itself and as trustee for its subsidiaries).
Under the Deed of Indemnity, each of the Indemnifiers irrevocably, jointly and severally agrees, covenants and undertakes with our Company (for itself and as trustee for each member of our Group) that he/it will indemnify our Company (for itself and as trustee for each member of our Group) against, amongst others, the following:
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(a) any liability to any form of taxation falling on any or all members of our Group resulting from or by reference to any income, profit or gains earned, accrued or received (or deemed to be so earned, accrued or received) or transactions, events, acts, omissions, matters or things entered into or occurring on or before the [REDACTED];
(b) all necessary costs (including all legal costs), expenses, interests, penalties, damages, losses or other liabilities incurred by any members of our Group due to any litigation, arbitration and/or legal proceedings (including without limitation any court proceeding, administrative proceedings or other proceedings commenced or instituted by any regulatory body or governmental department) against any member of our Group in relation to, arising out of or in connection with any cause of action, subject matter, dispute or breach, infringement or contravention of any law, regulation, legal right or proprietary right (whether intellectual, property or otherwise) that are issued or accrued occurred in anywhere in the world on or before the [REDACTED];
(c) all relocation fees, costs and any loss suffered or incurred by any member of our Group in the event that we cannot continue to use certain leased properties before the expiration of the current term of the tenancy/lease/licence due to the denial of the ownership titles of the relevant landlords or is otherwise prohibited from using or occupying any of such properties, on or before the [REDACTED]; and
(d) all claims, actions, demands, proceedings, judgments, losses, liabilities, damages, costs, charges, fees, expenses and fines suffered or incurred by any member of our Group arising from the non-compliance by any member of our Group with any laws, regulations or administrative orders or measures in Hong Kong and the PRC, on or before the [REDACTED].
The Indemnifiers will, however, not be liable under the Deed of Indemnity for taxation where, among others:
(a) to the extent that provision has been made for such taxation in the audited accounts of our Company or any member of our Group up to 31 March 2021 (“Accounts”); or
(b) falling on any member of our Group in respect of any period commencing on the day immediately after the date on which the [REDACTED] becomes unconditional unless liability for such taxation would not have arisen but for any act or omission of, or transaction by any member of our Group voluntarily effected (other than pursuant to a legally binding commitment created on or before the date on which the [REDACTED] becomes unconditional) without the prior written consent or agreement of the Indemnifiers; or
(c) to the extent that such taxation arises or is incurred as a result of any change in the law having retrospective effect coming into force after the date on which the [REDACTED] becomes unconditional or to the extent that such taxation arises or is increased by an increase in rates of taxation after the date on which the
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
[REDACTED] becomes unconditional with retrospective effect (except the imposition of or an increase in the rate of Hong Kong profits tax or any tax of anywhere else in the world on the profits of companies for the current or any earlier financial period); or
(d) to the extent that any provision or reserve made for such taxation in the Accounts is established to be an over-provision or an excessive reserve.
The Indemnifiers will not be liable in respect of the liabilities arising from the non-compliance with laws and regulations which are promulgated or amended after the [REDACTED].
Our Directors have been advised that no material liability for estate duty is likely to fall on our Company or any of its subsidiaries in the Cayman Islands, the BVI or Hong Kong, being jurisdictions in which one or more of the companies comprising our Group were incorporated.
2. Litigation
As at the Latest Practicable Date, neither our Company nor any of our subsidiaries was engaged in any litigation or claims of material importance and no litigation or claims of material importance is known to our Directors to be pending or threatened against our Company or any of our subsidiaries.
3. Sole Sponsor
The Sole Sponsor has made an application for and on behalf of our Company to the Stock Exchange for the [REDACTED] of, and [REDACTED] in, the Shares in issue and to be issued as mentioned in this document, including the [REDACTED] and any Shares which may fall to be allotted and issued pursuant to the Capitalisation Issue and the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme. The Sole Sponsor is independent from our Company pursuant to Rule 3A.07 of the Listing Rules. The Sole Sponsor is entitled to the sponsor’s fee in the amount of HK$[REDACTED].
4. Compliance adviser
In accordance with the requirements of the Listing Rules, our Company will appoint Red Sun Capital Limited as its compliance adviser to provide advisory services to our Company to ensure compliance with the Listing Rules for a period commencing on the [REDACTED] and ending on the date on which our Company complies with Rule 13.46 of the Listing Rules in respect of its financial results for the first full financial year commencing after the [REDACTED] or until the agreement is terminated, whichever is the earlier.
5. Preliminary expenses
The preliminary expenses relating to the incorporation of our Company are approximately HK$42,000 which has been paid by our Company.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
6. Promoters
Our Company has no promoter for the purpose of the Listing Rules.
7. Qualifications of experts
The qualifications of the experts who have given reports, letter or opinions (as the case may be) in this document are as follows:
Name Qualification
Conyers Dill & Pearman Cayman Islands attorneys-at-law
Deloitte Touche Tohmatsu Certified public accountants Registered Public Interest Entity Auditor
Red Sun Capital Limited Licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities
Jingtian & Gongcheng PRC legal adviser
Ipsos Asia Limited Industry consultant
As at the Latest Practicable Date, none of the experts named above had any shareholding interest in our Company or any of our subsidiaries or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of our Group.
8. Consents of experts
Each of the experts referred to above has given and has not withdrawn its written consent to the issue of this document with the inclusion of its reports, letters, opinions or summaries of opinions (as the case may be) and the references to its name included in this document in the form and context in which it respectively appears.
9. Binding effect
This document shall have the effect, if an application is made in pursuance hereof, of rendering all persons concerned bound by all of the provisions (other than the penalty provisions) of Sections 44A and 44B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance so far as applicable.
10. Agency fees or commission
The [REDACTED] will receive an [REDACTED] commission as referred to in the section headed “[REDACTED]”.
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
11. Share registrar
The principal register of members of our Company will be maintained in the Cayman Islands by [REDACTED] and a branch register of members of our Company will be maintained in Hong Kong by [REDACTED]. Unless our Directors otherwise agree, all transfer and other documents of title of Shares must be lodged for registration with and registered by our Hong Kong Branch Share Registrar and may not be lodged in the Cayman Islands.
12. Miscellaneous
(a) Save as disclosed in the section headed “History, Reorganisation and Corporate Structure” in this document and this appendix, within the two years immediately preceding the date of this document, no share or loan capital of our Company or any of our subsidiaries has been issued or agreed to be issued fully or partly paid either for cash or for a consideration other than cash.
(b) Save in connection with the [REDACTED] as detailed in the section headed “[REDACTED]” in this document, no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any capital of our Company or any of our subsidiaries within two years immediately preceding the date of this document.
(c) No commission has been paid or payable (excluding commission payable to sub-underwriters) for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any shares in our Company within two years immediately preceding the date of this document.
(d) No share or loan capital of our Company or any of our subsidiaries is under option or is agreed conditionally or unconditionally to be put under option.
(e) No founder, management or deferred shares of our Company or any of our subsidiaries have been issued or agreed to be issued.
(f) Our Directors confirm that, up to the date of this document, save as disclosed in the section headed “Financial Information – Recent developments and material adverse change” in this document, there has been no material adverse change in the financial or trading position or prospects of our Group since 31 March 2021 (being the date to which the latest audited consolidated financial statements of our Group were made up).
(g) There has not been any interruption in the business of our Group which has had a material adverse effect on the financial position of our Group in the 12 months preceding the date of this document.
(h) None of the experts as set out in the paragraph headed “Qualifications of experts” in this appendix:
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APPENDIX IV STATUTORY AND GENERAL INFORMATION
(i) is interested beneficially or non-beneficially in any shares in any member of our Group; or
(ii) has any right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of our Group.
(i) No company within our Group is presently listed on any stock exchange or traded on any trading system.
(j) Our Company has no outstanding convertible debt securities.
(k) All necessary arrangements have been made to enable the Shares to be admitted into CCASS for clearing and settlement.
(l) There are no arrangements under which future dividends are waived or agreed to be waived.
13. Bilingual Document
Pursuant to Rule 19.36(5) of the Listing Rules and Section 4 of the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong), the English language and Chinese language versions of this document are being published separately but are available to the public at the same time as each place where this document is distributed by or on behalf of our Company.
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APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG
The documents attached to the copy of this document and delivered to the Registrar of Companies in Hong Kong for registration were, among other documents:
(1) a copy of [REDACTED];
(2) the written consents referred to in the paragraph headed “E. Other Information – 8. Consents of experts” in Appendix IV to this document; and
(3) a copy of each of the material contracts referred to in the paragraph headed “B. Further information about the business of our Group – 1. Summary of material contracts” in Appendix IV to this document.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the office of Stevenson, Wong & Co. at 39th Floor, Gloucester Tower, The Landmark, 15 Queen’s Road Central, Hong Kong during normal business hours up to and including the date which is 14 days from the date of this document:
(1) the Memorandum and the Articles;
(2) the Accountants’ Report prepared by Deloitte Touche Tohmatsu, the text of which is set out in Appendix I to this document;
(3) the audited consolidated financial statements of our Group for the Track Record Period underlying the historical financial information of our Group incorporated in the Accountants’ Report;
(4) the report from Deloitte Touche Tohmatsu in respect of the [REDACTED] financial information of our Group, the text of which is set out in Appendix II to this document;
(5) the letter of advice prepared by Conyers Dill & Pearman summarising certain aspects of Cayman Islands Company Law referred to in Appendix III to this document;
(6) the Companies Act;
(7) the material contracts referred to in the paragraph headed “B. Further information about the business of our Group – 1. Summary of material contracts” in Appendix IV to this document;
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APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
(8) the service contracts and letters of appointment referred to in the paragraph headed “C. Further information about our Directors and Substantial Shareholders – 1. Directors – (b) Particulars of service contracts and letters of appointment” in Appendix IV to this document;
(9) the rules of the Share Option Scheme referred to in the paragraph headed “D. Share Option Scheme” in Appendix IV to this document;
(10) the written consents referred to in the paragraph headed “E. Other information – 8. Consents of experts” in Appendix IV to this document;
(11) the legal opinion issued by Jingtian & Gongcheng as to certain aspects of PRC law relating to general matters of our Group; and
(12) the Ipsos Report.
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