Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.
(Incorporated in Hong Kong with limited liability)
(Stock Code: 411) ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2015The Board of Directors (the "Board") of Lam Soon (Hong Kong) Limited (the "Company") is pleased to present the unaudited consolidated interim results of the Company and its subsidiaries (collectively the "Group") for the six months ended 31 December 2015.
OVERVIEWThe Group achieved stable revenue growth amid a weakening macroeconomic environment globally and in our major markets. Mainland China's GDP grew 6.9% in 2015, 0.5 percentage points lower than 2014 and at its slowest pace since 1990. Hong Kong retail sales value declined for the ninth consecutive month in November 2015 and shrunk 3.1% calendar year-to-date. This was steeper than the 2.3% decline recorded in 2003 during the SARS outbreak. Notwithstanding the deteriorating economic conditions, the growth of our core brand businesses and lower raw material costs allowed us to deliver improved profitability during the period.
We did not waver from our longstanding commitment to deliver premium, high quality, and safe products in the Food and Detergent segments to our customers in Hong Kong, Macau, and Mainland China. Guided by this vision, management maintained execution of strategic programs that will pave the way for sustainable future growth. Across the Group, we focused on accelerating the growth of our core brands and business-to-consumer segment via marketing, distribution, research, and production initiatives. For example, our new edible oil bottling and packaging line in Shekou will expand our manufacturing capacity to support future growth and allow us to produce safe and quality products in a more efficient and environmentally friendly manner. In our institutional flour business, wheat costs remained high despite some improvement from last year. Our team continued to pursue new opportunities to optimize costs and boost factory utilisation without compromising overall quality and profitability.
FINANCIAL RESULTSThe Group's revenue grew 8% to HK$2,466 million in this period. Gross margin improved by 1.3 percentage points to 19.2%, driven by growth of higher-margin core brand products and favourable raw material costs. Selling and distribution expenses totalled HK$261 million, 7% higher than last year but remain unchanged at 11% as a percentage of sales. The increase was in line with the overall expansion of the Group in Mainland China, as we continued to penetrate into new geographic locations and to sustain brand building and promotional activities to drive sales. Net profit attributable to shareholders increased by 50% to HK$109 million, mostly due to sales growth and gross profit improvements. As at 31 December 2015, the Group has a net cash position of HK$576 million, a 25% increase from 30 June 2015.
DIVIDENDSThe Board has declared an interim dividend of HK$0.1 per share for the six months ended 31 December 2015 (six months ended 31 December 2014: HK$0.08 per share), which will be payable on Wednesday, 23 March 2016 to the shareholders whose names appear on the register of members of the Company on Tuesday, 15 March 2016.
BUSINESS REVIEW Food SegmentFood segment's revenue and operating profit grew 8% and 36% to HK$2,154 million and HK$118 million, respectively, compared to last year.
The Group's edible oil business posted strong revenue and profit growth, as we benefited from strengthening fundamentals, more optimal product and channel mix, and lower raw material costs. Our core Knife brand retained its strong presence in Hong Kong, as our synchronized marketing and distribution programs were effective in stimulating consumer awareness and demand. We plan to solidify our market position in Hong Kong by building on the success of our latest Supreme Peanut Oil Product and launching new products that address consumers' increasing focus on quality and health. In Mainland China, our integrated marketing and distribution strategies are expected to further deepen Knife's penetration in the Southern region.
We officially launched our new environmentally friendly and high-tech retail bottling and packaging line in Shekou in November 2015. The enlarged production capacity will support future business growth and enhance our ability to provide high quality and safe products to consumers.
The Group's flour business performed solidly in this period, posting steady revenue and volume growth in spite of persistently low bran prices and our limited ability to pass-through high wheat costs to institutional customers. In the face of industry-wide headwinds, management remained focused on our institutional business' core competencies as well as actionable items within our strategic agenda that would sustain growth and soften the impact of external factors. As a result, sales of our higher margin premium specialty flour products grew strongly in Mainland China. Our expansion beyond our established presence in first and second-tier cities, along with ongoing efforts to optimize wheat formulation and operations, also continued to bear fruit.
The Group's approach towards addressing systemic risks within the flour industry remains unchanged. Management will strive to pursue more wheat quota allocation from governmental authorities.
The process of building our flour brands in the retail business-to-consumer segment in Hong Kong and Mainland China will require a sustained level of investment over a period of time. Our Group has adopted the long view and will remain persistent in building this extra pillar of growth in the flour business. In this current brand-building stage, we stayed focused in building our fundamentals, i.e. refining our go-to-market strategy and ensuring we have the right team to execute this strategy. In parallel, we have identified and initiated dialogues with several potential partners who can help expedite the growth process.
BUSINESS REVIEW (continued) Food Segment (continued)In light of prevailing market volatilities, management will continue to monitor closely market conditions and exercise a prudent approach in the procurement of raw materials so as to safeguard the gross profit margin of our Food segment. Given the importance of e-Commerce in increasing the exposure of our retail brands across Mainland China, management will further refine its online business model and allocate resources accordingly to achieve balanced and sustainable growth.
Detergent SegmentDetergent segment posted modest revenue growth of 7% to HK$310 million in this period. Operating profit increased 41% to HK$49 million, driven by favourable raw material costs, product and channel mix, and geographic expansion in Mainland China.
In the Hong Kong dishwashing detergent market, AXE and Labour maintained their leading positions amid a mature and weakening market. Our premium AXE Plus product line, developed to upgrade our brand franchise and help us penetrate into higher value segments in the dishwashing detergent category, continued to gain traction in key distribution channels. Despite our established presence in South China, we see room to further bolster our sales and marketing efforts and reinforce our brands' image and value proposition in this highly competitive market.
Looking ahead, AXE and Labour are expected to retain their status as household names in the dishwashing detergent category in Hong Kong and key cities in South China. To achieve meaningful incremental value, we need to leverage our brand equity in our stronghold markets to penetrate into other product categories and widen the geographic reach of our franchise across Mainland China. Management will step up ongoing efforts to develop and refine a cohesive sales and marketing strategy across traditional and e-Commerce channels to achieve these objectives.
OUTLOOKMainland China's economy has entered into a new phase of decelerating growth as part of its structural transformation from an investment-led economy into one that is more consumption- driven. Nevertheless, the Group continues to see opportunities in what is still the second largest and one of the fastest growing economies in the world. Furthermore, Mainland China's rebalancing towards a more balanced economy is likely to benefit our businesses over the long term. The trend of increasingly affluent Chinese consumers and their tendency to trade up and demand for premium, high quality, and safe brands are in line with the Group's vision and core competency to deliver such goods. We aim to benefit from this opportunity through our ongoing development, integration, and refinement of targeted marketing and omni-channel solutions. Product innovation, in the form of more environmentally friendly and cost effective packaging designs, will allow us to differentiate ourselves against competitors and enhance our overall competitive advantage.
Our vision and strategic initiatives in this dynamic and challenging environment can be achieved by having our fundamentals keep pace with business growth and having the right teams of people in place. We are improving our existing operational processes and investing in the relevant infrastructure and personnel across all key functions: marketing, sales and distribution, research and development, information systems, and production. With the further strengthening of our fundamentals built over the preceding years, we are cautiously optimistic of our capability to cope and move ahead in this challenging period.
FINANCIAL REVIEW Liquidity and Financial ResourcesAt 31 December 2015, the Group had a net cash position (defined as cash minus bank loans and obligations under finance leases) of HK$576 million (30 June 2015: HK$462 million). This was mainly attributable to the increased net cash generated from operating activities.
At 31 December 2015, the Group had a cash balance of HK$718 million (30 June 2015: HK$800 million). About 94% of these funds were denominated in Renminbi ("RMB"), 5% in Hong Kong dollars ("HK$"), and 1% in United States dollars ("USD") and Macau Pataca ("MOP").
As at 31 December 2015, the Group had HK$1,104 million committed bank loan facilities (30 June 2015: HK$974 million) and had outstanding borrowings of HK$141 million (30 June 2015: HK$337 million), of which HK$81 million were repayable within 1 year (30 June 2015: HK$269 million). Except for an outstanding fixed term loan amounting to HK$76 million (30 June 2015: HK$84 million), all bank borrowings carried interest at floating rates.
The Group centralises all the financing and treasury activities at the corporate level. There are internal controls over the application of financial and hedging instruments which can only be employed to manage and mitigate the commodities price risk and currency risk for trade purposes.
As at 31 December 2015, the inventory turnover days improved from 55 days at the end of last financial year to 53 days. The trade receivable turnover days remained at a stable level of 24 days (30 June 2015: 24 days).
In view of the strong liquidity and financial position, management believes the Group will have sufficient resources to fund its daily operations and capital expenditure commitments.
The Group has operations in Mainland China, Hong Kong and Macau. Local costs and revenue are primarily denominated in RMB, HK$, and MOP. All the Group's borrowings were denominated in HK$.
The Group is exposed to currency risk primarily through sales, purchases and deposits that are denominated in currencies other than the functional currency of the entity to which they relate. The Group will monitor its exposure by considering factors including, but not limited to, exchange rate movement of the relevant foreign exchange currencies as well as the Group's cash flow requirements to ensure that its foreign exchange exposure is kept at an acceptable level.
Capital ExpenditureDuring the period, the Group invested a total sum of HK$20 million on acquisition of plant, equipment and implementation of new enterprise resource planning system.