OPERATIONS REVIEW & DEVELOPMENT
FY2004 - The Year in Review
FY2004 marked a year where we enhanced our capabilities to position ourselves for strong growth ahead. Significantly, we commissioned a new five-layer co-extrusion barrier film production line to boost our capabilities and increase our production capacity, adding on to our two existing production lines.
Our record financial performance for FY2004 demonstrates the continued success of our focus on high margin products, production capabilities and our commitment to quality and excellence. These attributes form the hallmark of ChinaFlex's business strategy and are critical factors that turn our plans into reality.
In FY2004, revenue increased 44.3% to RMB655.7 million as compared to FY2003's RMB454.5 million. We attribute our commendable results to the contribution of higher-margin products such as high shrinkage film from our subsidiary, Yuntong (PRC), as well as from the launch of synthetic paper. Yuntong (PRC) was previously the Group's BOPP film manufacturing arm and was treated as a jointly
controlled entity of the Group, but was acquired in April 2003 as a result
of a restructuring exercise.
Gross profit increased 42.5% from RMB204.4 million to RMB291.3 million while our gross profit margin saw a marginal decline from 44.97% to 44.27%. Our margins were affected mainly due to the increase in raw material costs as a result of the oil price hike last year, however, this was partially offset by the contribution of synthetic paper ? a higher margin product ? launched during the latter part of the year in review. We were also able to pass the increase in raw material costs in high shrinkage products to our customers.
Group net profit rose 31.9% from RMB 140.6 million to RMB 185.5 million. Our strong performance raised our earnings per share (based on weighted average number of ordinary shares on issue), from RMB 45 cents in FY2003 to RMB 47 cents in FY2004. Over the same period, net asset value per share jumped from RMB 1.29 to RMB 2.30.
We ended FY2004 with a healthy balance sheet and a strong cash position of RMB 406.7 million.
Focus on Higher Margin Products
In July 2004, we successfully launched a new higher margin product - synthetic paper - which contributed significantly to our top and bottomlines as well as our ability to maintain good margins in the wake of rising raw material costs as a result of the worldwide oil price increase during the year.
The Group now has three main product segments - low shrinkage film, high shrinkage film and synthetic paper, which saw good growth across all segments.
In FY2004, the Group's revenue for high shrinkage film rose 22.8% to RMB 427.0 million, accounting for about 65.1% of total sales. With the addition of synthetic paper which contributed RMB 111.3 million or 16.7% of total sales during the year under review, we increased our combined contribution of higher margin products (synthetic paper and high shrinkage film) in our sales mix to 81.8%.
In FY2004, the Group's revenue for low shrinkage film grew 9.9% from RMB 106.8 million to reach RMB 117.4 million, and accounted for 17.6% of total sales, down from 23.5% the previous year.
Commitment to R&D
At China Flexpack, we pride ourselves on having a dedicated R&D team focused on improving product quality and diversifying our product range. During the year under review, we focused on the development of five-layer high barrier film used in raw meat packaging as well as other new products such as high solvent resistant, high shrinkage tobacco film.
Going forward, we will continue to engage in more R&D activities to further enhance our production capabilities and diversify our product range. Already in the pipeline are plans to add an experimental production facility in our current R&D centre to research on five-layer high barrier BOPP film.
This investment in R&D will ensure that we are able to continue to provide products tailored to the needs of our customers and stay ahead of the competition.
Enhancing Our Infrastructure
During the year under review, we also added a new warehouse facility. This enabled us to stock up on raw materials, particularly in PP Resin, when prices were low, and keep a certain level of stock to prevent shortage of raw materials which were experienced by some BOPP factories. Hence, our inventories increased to RMB158.2 million in FY2004 from RMB64.1 million in FY2003. Inventory turnover days also increased from 77 to 103 days. The increase in inventories was mainly due to the commencement of production of synthetic paper and production capacity expansion which resulted in the increase in the stocking of more raw materials.
We also have plans to acquire a new PP Resin recycling machine to recycle and re-use deformed raw materials, scrap materials and trimmings. This will significantly reduce wastage and cost of raw materials.
Growth Strategies
We believe our strategy of focusing on higher margin products is sound and has served us well in the growing competitive BOPP film industry over the years.
Looking ahead, we intend to continue to diversify our product range and continue our drive to introduce more higher margin products to counter margin erosion in the competitive low shrinkage film sector. The opportune launch of higher margin synthetic paper in July 2004, which enabled us to weather rising raw material costs, is a testimony to the success of our strategy.
Additionally, we will continue to expand our market and customer base for our packaging business to tap on the strong growth demand for quality packaging products.
Prospects
Looking ahead, we are optimistic of our business direction and expect our operations to continue to grow. In July 2004, we commenced production of synthetic paper and have since received encouraging feedback from potential customers. We expect this new product segment to see strong growth and contribute to the Group's top and bottomlines in the year ahead.
We have also completed trials on our new five-layer high barrier film for the packaging of raw meat and are targetting to launch the product in the coming year. This will not only contribute to our turnover but also enhance our cost efficiency and lead to cost efficiency.
We are also looking into the restructuring of our overseas operations in the next financial year. Under the proposed restructuring operations, all our overseas operations will be relocated to Rui Xing (PRC) which is entitled to the PRC's "two years exemption and three years reduction" tax holiday. The Directors believe that this is not expected to have a significant impact on the Group performance in FY2005.
Barring any unforeseen circumstances, we expect Group turnover and operating profit to improve in FY2005.
