financials

Balance Sheet

Review of Performance

Revenue

The Company surpassed RMB100 million in quarterly revenue for the 2^nd time since listing to register revenue of RMB100.3 million for 2Q2008. Total revenue for the first 6 months of 2008 was RMB191.0 million. Quantity of products sold was 422,000 units and capacity utilisation stands at 88% (based on 1 production shift) for the first 6 months of 2008 compared to 91% for the corresponding period in 2007.

Revenue analysis

Revenue – Geographic sector

Our Southeast Asia market registered strong growth for the first 6 months of 2008 ("HY2008) with a 23% increase in revenue over the first 6 months of 2007 ("HY2007") and accounted for 26% of revenue. On a quarterly comparison, 2Q2008 posted an increase of 14% over 2Q2007 in revenue, anchored by strong Brush Cutter (anchor product of Garden & Lawn) sales.

China remained our biggest market with sales of RMB 111.7 million for HY2008 and accounted for 59% of revenue. On a quarterly comparison, sales in 2Q2008 decreased by RMB 12.2 million compared to 2Q2007. Both the Agriculture & Forestry segment and the Garden & Lawn experienced temporary market saturation in 2Q2008, leading to lower sales in 2Q2008 compared to 2Q2007.

Sales to Europe and Australia remained stable for 2Q2008 compared to 2Q2007. While sales to our Europe customers resumed in 2Q2008 following the implementation of Stage 2 of the emission requirements for Non-Road Mobile Machinery in February 2008, overall sales figure for HY2008 remained lower by 28% compared to HY2007.

Revenue from the other markets remained stable in 2Q2008 except for the Hong Kong, Sri Lanka and India markets (classified under Others) which experienced higher demand which led to the increased sales.

Revenue – Business sector

Revenue from the Garden & Lawn sector declined by 1% for 2Q2008 compared to 2Q2007 and 7% for the HY2008 compared to HY2007. While the quarterly comparison did not show significant fluctuation in overall sales, the half yearly fluctuation between 2008 and 2007 arose mainly due to lower sales in China due to the snowstorm in 1Q2008 and lower sales to Europe due to the implementation of Stage 2 of the Non-Road Mobile Machinery Exhaust Emission directive in the European Union in 1Q2008.

Revenue from the Agriculture & Forestry sector declined by 13% for 2Q2008 compared to 2Q2007 which led to an overall 1% decline for HY2008 compared to HY2007. In spite of the robust sales from the SE Asia market, the temporary market saturation in the domestic China market led to the net overall decline in this sector. In addition, our export sales were also affected due to the denomination of most of our exports in USD. With the rapid appreciation of the RMB against the USD, selling prices had not been able to keep up with the appreciation and consequently contributed to a decrease to the RMB-denominated revenue.

Sales of gasoline engines and spare parts sales remained stable in 2Q2008 compared to 2Q2007. 

Gross margin from sale of goods

Gross margin for 2Q2008 is 22.5% compared to 25.5% for 2Q2007. Margin for HY2008 is approximately 27.1% compared to 28.8% for HY2007.

On the export front, our selling prices experienced difficulty in keeping up with the rapid appreciation of the RMB against the USD. In addition, rising costs of production arising from more costly raw materials and energy costs presented further pressure on our margins for both our domestic and export sales. These factors led to the decline in gross margin.

Interest Income

Interest income for the half year of 2008 increased by RMB2.7 million to RMB4.5 million as a result of higher fixed deposit placements arising from the share proceeds raised via the share issue exercise in March 2007. 

Other Expenses

Distribution cost for 2Q2008 decreased by RMB1.9 million, representing a decrease of 16.8% compared to 2Q2007. This decrease in distribution cost is consistent with the decrease in revenue for 2Q2008 as compared to 2Q2007.
On a year to date basis, distribution cost was marginally higher by 1.4% for half year 2008 compared to half year 2007. This is attributable to the higher distribution costs incurred in 1Q2008 where there were increased travelling by the sales department and more promotional activities were held.

Administrative expenses for 2Q2008 remained relatively consistent compared to 2Q2007, with amounts of RMB5.7 million for 2Q2008 and RMB5.5 million for 2Q2007. On a year to date basis, administrative expenses increased by 9% for half year 2008 compared to half year 2007. This is attributable mainly to the certification fees incurred in 1Q2008 to certify that our products meet the Europe emission standards as well as higher advertising expenses.

Expenses arising from other credits/(charges) increased in 2Q2008. In addition to a lower overall foreign exchange adjustment gain, the Group wrote off an amount of RMB203,000 of intangibles. These intangibles relate to patent rights in relation to obsolete products and technology which were no longer used in production and were assessed to be of low importance to the Group.

Income tax expense

Under the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws, our subsidiary was entitled to income tax exemption for FY2003 and FY2004 and a preferential income tax rate of 15% for FY2005 to FY2007. From FY2008, our subsidiary is subject to the income tax rate of 25%. Consequently, income tax expense increased with the increase in tax rate. 

Balance sheet

Balance sheet of the Group remains strong with cash and bank balance of about RMB273 million.

Trade receivables had increased mainly due to higher sales in 2Q2008 as compared to 4Q2007 of which the trade receivables figures were compared against in the balance sheet. These receivables are within our credit terms.

Inventory had increased mainly due to orders which were received late in the quarter and were not sold by the end of 2Q2008. The increase is consistent with an increase in Trade payables.

Prepayments had increased mainly due to higher advances paid to suppliers.

Trade payables and accrued liabilities had increased mainly due to advances from customers for sales orders that were received late in the quarter as well as an increase in prices of our purchases made. The increase in purchases is consistent with the increase in inventory.

Cash flow

Operational cash flow of the Group remains positive with operational cash inflow of about RMB7.6 million for 2Q2008 and RMB11.2 million for half year of 2008.

Commentary On Prospects

Faced with increasing inflation, a strengthening RMB as well as rising production costs, the economic conditions faced in 2008 are more challenging than prior years. In addition, the authorities have imposed power supply rationing during the period of the Beijing Olympics to ensure adequate power supply throughout the Olympic Games in August 2008. The Group will endeavour to overcome these challenges and maintain its competitiveness. Notwithstanding, the Group remains committed in establishing itself as a leading international portable power tools company with strong branding and high product quality.

The Group is also holding an Extraordinary General Meeting on 15 August 2008 to seek shareholders' approval for the proposed acquisition of a 46.25% stake in China Steel Australia Limited. The proposed acquisition will provide a long-term strategic fit with the existing business as well as provide an additional channel of revenue to the Group.