2018/19 Annual Report

Annual Report 2018/19

CHAIRMAN'S STATEMENT

On behalf of the Board of Directors of Heng Tai Consumables Group Limited (the "Company" or "Heng Tai"), it is my great privilege to present to our shareholders the Annual Report for the Company and its subsidiaries (together the "Group") for the financial year ended 30 June 2019 ("FY2019").

FINANCIAL PERFORMANCE

Following the outbreak of the trade war between China and the United States, the operating environment has been rapidly deteriorating. Many economic figures such as GDP growth, retail sales growth and PMI showing a significant downturn in China. On the other hand, the competition from domestic brands has become increasingly intense over recent years, while domestic brands have been spending huge advertising and promotion costs to increase their market share, shrinking gap in product quality and product variety between domestic brands and imported products that led to the continuous improvement in the popularity of domestic brands. Furthermore, the trade war also triggered further Renminbi depreciation during the financial year. Weak Renminbi made imported goods more expensive and substantially undermined its competitiveness against domestic products. In August 2019, Renminbi fell past the important psychological level of 7 against US dollar for the first time since 2008 and the Group's traditional trading business is expected to encounter more difficult environment over next year. Although the Group continuously sourced niche products and expanded procurement network to enhance our competitiveness, the Group trimmed down cold chain products trading in the light of its high maintenance costs, complicated customs procedures and highly competitive environment. Furthermore, the continuous anti-extravagance and deleveraging campaigns in China also hit the consumer market and tightened the liquidity position and consequently, the Group needed to stop supplying products to the customers with weak creditworthiness to avoid debt collection issues. As a result, the revenue of the Group's traditional trading business broadly decreased during the financial year. On the other hand, after having implemented careful development for several years, the upstream farming business has been providing stable revenue stream with healthy growth over past few years. In order to facilitate the upstream farming business, broaden revenue stream and diversify operational risks, the Group has been developing a food processing center where the Group's self grown fruits will be centralised for washing, packaging and distributing with its own brand. In the meantime, various facilities surrounding the food processing center including pick-your-own farm, recreational facilities, restaurant and exhibition hall to display the Group's products will be developed to broaden income stream.

In order to smooth out the fluctuations in trading businesses which are highly correlated with Chinese consumer market condition, the Group made an attempt to diversify its business by investing in securities brokerage business, the trademark sub-licensing in petrol business and the tourist retailing business. However, the escalation of the trade tension and the turmoil in Hong Kong severely affected brokerage commission income and retail revenue in Hong Kong. For the sub-licensing of the "Gulf" trademarks to oil petrol stations in China, the Group decided to dispose of the investment so as to avoid future capital commitment considering required heavy advertising spending and economic uncertainties ahead.

Revenues fell approximately 14.3% to approximately HK$840.7 million in FY2019. The net loss for FY2019 was approximately HK$286.0 million, compared to the net loss of approximately HK$156.6 million for the preceding financial year ("FY2018"). The increase in the net loss was mainly attributable to a decrease in turnover and gross profit margin, an increase in other operating expenses, impairment loss on receivables and deposits and loss of changes in fair value due to biological transformation and partly offset by a decrease in selling and distribution expenses, administrative expenses and an increase in other gains and income.

BUSINESS REVIEW

During the financial year under review, the consumer market in China has been deteriorating, primarily stemmed from the escalation of trade tension between China and the United States and the resultant weakening economic growth. The FMCG Trading Business and the agri-product trading business faced same challenges with weak market demand, increasingly keen competition, persistent anti-extravagance environment and complicated customs formalities. Worse still, the sharp depreciation of Renminbi further undermined the competitiveness of the Group's imported products. To cope with the very challenging environment, the Group continuously expands product portfolio in terms of geographic coverage and product categories and strengthens sales channels including on-premises and online platforms. For instance, the Group continued to expand the procurement network of domestic fresh produce so that its trading revenue recorded steady growth in spite of the weak economic environment, and partly offset the decline in the revenue of the imported fresh produce trading business. On the other hand, packaged foods remained as the most important category and its contribution over the FMCG Trading Business increased from approximately 75% to approximately 78% because the Group trimmed down cold-chain product trading in order to save considerable amount of maintenance expenses and more resources were deployed for packaged foods trading business.

4 Heng Tai Consumables Group Limited

Annual Report 2019

CHAIRMAN'S STATEMENT

For the upstream farming business, while the weather was unstable during the financial year, its revenue recorded steady growth thanks to the improving distribution network and farming operations. In order to facilitate the upstream farming business, broaden revenue stream and diversify operational risks, the Group has been proactively developing a project including the construction of a food processing center and the development of agri-tourism business nearby. After the completion of the food processing center, the Group's citrus products will be centralised for distribution which will facilitate its brand building and distribution network expansion. Additionally, the agri-tourism business will also provide another income stream.

Revenue from logistics business represented approximately 2% of the Group's total revenue, same as that of the last financial year. This business unit is highly correlated to the performance of the Group's traditional trading business, the decline in its revenue was primarily attributable to the decline in the business volume of the Group's trading business. Additionally, the Group downsized its cold-chain products trading business, and thus the associated cold-chain logistics income also decreased accordingly. Going forward, the Group will be continuously streamlining the logistics operations in southern China.

The Group also carefully developed non-trading businesses including securities brokerage business, trademark sub-licensing in petrol business and tourist retailing business with the aim of generating stable income streams and smoothing out the fluctuations in existing businesses that are highly correlated with the Chinese consumer market. The securities brokerage business was severely affected by the weak global financial markets, in particular the escalation of the trade tension between China and the United States significantly impacting on the stock markets of Hong Kong and China. There are no signs of recovery in near term. The petrol sub-licensing business was an attempt to tap into China's gasoline market with small investment amount. However, the revenue gained since the acquisition was less than expected because of the fierce competition from state-owned oil retailers and weak market demand. The Group decided to dispose this business unit to save future capital commitment during the financial year. Leverage on the investment in a joint venture namely Waygood Investment Development Limited ("Waygood"), the Group has established network in the tourist retailing industry in Hong Kong. Therefore, the Group acquired 100% interest in Lucky Billion Trading Limited ("Lucky Billion"), which is principally engaged in tourist retailing in jewellery during the financial year. This business unit has contributed stable revenue since the acquisition until the end of FY2019. However, the ongoing large scale protests in Hong Kong severely hit the overall retail and tourism market and this business unit is expected to encounter big challenges for the coming financial year.

DIVIDENDS

The Board does not recommend the payment of the final dividend in respect of the year ended 30 June 2019. In view of the unpredictable global, China and Hong Kong economic conditions and future capital requirement, the Board decided to maintain adequate cash reserves to prepare for the ongoing commitments to reinforce existing businesses and any unforeseen events that might come up.

LOOKING AHEAD

There are many uncertainties such as the trade tension between China and the United States and the ongoing large scale protests in Hong Kong, which cast a significant negative outlook and uncertainty over the economic growth and thus the Group's business performance. Therefore, the Group will continue to adopt a conservative stance by implementing various cost-saving initiatives to reduce daily operating expenses and capital spending.

For the existing traditional trading business, the Group will continue to strengthen its procurement network, product portfolio and distribution channels. Fluctuations in the Renminbi's exchange rate continues to increase the difficulty in trading imported products. In addition to arranging hedging instruments to reduce currency risks, the Group has also been expanding its procurement network for domestic products with the aim of providing another income stream and mitigating the impact of Renminbi depreciation. The increasing size of middle class in China is the Group's major target customers and the Group will continue to source high quality products to fit target customers' needs. On the other hand, the Group will uphold a stable pricing strategy and negotiate the best terms from the suppliers to improve gross profit margin.

After several years of operations, the upstream farming business has been more mature in its productivity and distribution network. To facilitate brand building, the food processing center is essential for the Group to centralise all post-harvest work, and the ancillary income from agri-tourism business further underpin the attractiveness of its development.

This is an excerpt of the original content. To continue reading it, access the original document here.