Financial Statements And Related Announcement - Third Quarter Results
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Profit & Loss
Consolidated Statement of Comprehensive Income
Review of Group Performance
Review of Financial Performance (3Q2018 vs 3Q2017)
Revenue rose by RMB 181.5 million to RMB 551.1million in 3Q2018 due mainly to the Group's continued focus on execution of ongoing projects during the current period.
However, gross profit fell by RMB 25.3 million to RMB 27.8 million with gross profit margin of 5.0% in 3Q2018 as compared to 14.4% in 3Q2017. The Group's gross profit margin was mainly affected by the rising costs of construction materials such as cement, construction sand and gravel due to government directives issued to limit production in order to reduce pollution and environmental impact for the upcoming winter season, the tail-end phase of some projects (where operating margins are lower) as well as the sale of railway sleepers (which commanded lower margins).
Other income rose by RMB 5.1 million to RMB 5.6 million due mainly to gain on the fair value change of financial assets, unwinding of discount for long-term receivables, higher government grants as well as the absence of exchange loss in 3Q2018 .
Distribution costs fell by RMB 0.8 million to RMB 1.8 million, due mainly to lower Ranken's advertising and promotion cost incurred in 3Q2018.
Administrative expenses fell by RMB 4.7 million to RMB 14.6 million, due mainly to lower staff costs incurred in 3Q2018.
Other expenses in 3Q2018 was a profit of RMB 0.4 million, mainly due to reversal of impairment loss on long-term other investments and reversal of fair value loss on financial assets. The reversal of impairment loss on long-term other investments was due a decrease in fair value of equity investments at FVOCI, which should have been recorded in the OCI. The reversal of fair value loss on financial assets was due to the increase in share price (fair value) of equity securities designated at fair value to profit and loss.
Finance costs fell by RMB 3.8 million to RMB 4.7 million, due mainly due to lower financial liabilities.
Income tax expense of RMB 2.2 million was incurred in 3Q2018, attributable to provision for income tax on taxable profits for Ranken's operations.
Given the above, net profit for 3Q2018 fell by 20.4% to RMB 10.4 million from RMB 13.0 million for 3Q2017, net of non-controlling interest.
Review of Financial Position (30 September 2018 vs 31 December 2017)
Total non-current assets rose by RMB 18.7 million as at 30 September 2018, mainly due to (a) increase in plant and equipment (in particular addition of a tunnel boring machine by way of finance lease) of RMB 29.2 million for its on-going projects, net of depreciation during the period under review, partially offset by (b) repayment by a former subsidiary company ("Mancala") resulting in lower other receivables by RMB 7.1 million and (c) decrease in fair value of equity investments at FVOCI (long-term other investments).
Total current assets rose by RMB 225.7 million as at 30 September 2018, mainly due to the following significant changes during the period under review:
- Other investment comprised quoted shares classified as financial assets carried at fair value through profit or loss, whose fair value rose and resulted in a fair value gain of RMB 2.5 million.
- Inventories fell by RMB 5.9 million due to sale of railway sleeper stock for the Meng Hua project.
- Contract assets (previously known as construction work in progress and reclassification of retention monies, Built and Transfer contract receivable and other guarantee sums from trade receivable arising from the adoption of SFRS(I) 15) rose by RMB 187.7 million to RMB 1,137.4 million due mainly to works completed in stages that have yet to be certified (and thus not invoiced and not recognized as trade debtors) during the period.
- Trade receivables related to Ranken's projects fell by RMB 14.7 million to RMB 325.5 million. Trade debtor's turnaround time fell to 75 days as compared to 95 days as at 31 December 2017.
- Other receivables, deposits and prepayment, which comprised mainly (i) Ranken's materials procured on behalf of project owners and (ii) security deposits placed with the project owners (refundable on project completion) rose by RMB 53.5 million to RMB 256.7 million.
- Cash and cash equivalents for the Group rose by RMB 2.6 million to RMB 128.3 million, with operating cash inflow of RMB 99.1 million which was adequate for the investing activities (mainly purchase of plant and equipment for its on-going projects) and the financing activities (net repayment of financial liabilities).
Total non-current liabilities fell by RMB 79.1 million as at 30 September 2018, mainly due to reclassification of long term bond and certain long term finance lease liabilities to current liabilities during the period.
Total current liabilities rose by RMB 300.5 million as at 30 September 2018, mainly due to the following significant changes during the period under review:
- Trade payables related to Ranken's projects rose by RMB 176.1 million to RMB 826.6 million, mainly due to higher operating activities during the period.
- Other payables and accruals rose by RMB 64.8 million to RMB 530.9 million, mainly due to higher cash advances from clients.
- Current financial liabilities rose by RMB 78.9 million to RMB 223.2 million mainly due to long term bond and certain long-term financial lease liabilities are now due within the next 12 months.
Total equity attributable to owners of the Company or Shareholders' Equity rose by RMB 22.5 million to RMB 522.5 million as at 30 September 2018, due to current period earnings of RMB 24.9 million, movements of foreign currency translation reserve of RMB 1.4 million, net of change in fair value of equity investments at FVOCI of RMB 1.4 million, the effects of the adoption of SFRS(I) 9 of RMB 0.8 million (for details of the effects, see page 15) and dividend declared of RMB 1.6 million.
Review of Cash Flows (3Q2018 vs 3Q82017)
Operating cash inflow for 3Q2018 fell by RMB 32.6 million, but continued to be positive with cash inflow of RMB 59.9 million after accounting for (i) operating profit before working capital changes of RMB 27.4 million and (ii) net working capital changes of RMB 34.1 million, net of tax payment of RMB 1.6 million.
Cash outflow from investing activitiesfell by RMB 20.4 million with lower cash investment in plant and equipment. Ranken had acquired a tunnel boring machine by way of finance lease during 3Q2018.
Cash flows used in financing activities 3Q2018 were RMB 2.0 million, which increased from RMB 0.9 million cash inflow in 3Q2017.
Given the above, cash and cash equivalents rose by RMB 52.3 million to RMB 124.3 million (net of fixed deposits pledged of RMB 4.1 million).
Sapphire's core revenue driver - Ranken - is an established infrastructure and construction group in China with 20 years of operating track record.
Aligned with our capabilities and working experience, Ranken's business strategy is positioned towards China's macro urbanization trends and green policies under the country's 2016-2020 13th Five-Year Plan.
While China plans to spend approximately RMB 15 trillion (S$3.1 trillion) on infrastructure, including RMB3.5 trillion (S$729.2 billion) for railways infrastructure under its 2016-2020 13th Five-Year Plan, the Chinese government also intend to shift its economic growth model to one more reliant on consumption and less on investment.
Since the beginning of 2018, the growth rate of infrastructure investment in China has slowed down. In the first three quarters of 2018, infrastructure investment only increased by 3.3%, down by 16.5% as compared to first three quarters of last year.
On October 31, 2018, the State Council of China issued a guidance which highlights key shortcomings in the infrastructure sector, maintaining necessary investments as well as expand domestic infrastructure utilisation and structural improvements.
In addition, the ongoing trade tensions between China and United States which is still unfolding and post risk of adverse ramification on China, which may adversely impact the underlying growth prospects for the Group.
In response, the Chinese government has recently unveiled a package of policies in July 2018 to boost domestic demand and support the economy.
In August 2018, it was reported that China's state planner has approved a total RMB 78.7 billion of urban railway projects, that includes eight new rail lines with a total length of 135.4 kilometres, in the capital of the northern Jilin province, marking the country's first urban rail project to be approved in a year.
And it was reported that the coastal cities around Jiangsu province and Zhejiang province have plans to invest the equivalent of billions of renminbi to boost their underground subway systems.
Engineering, procurement and construction ("EPC") is a key component of Ranken's business model in this area. With its previous track records in major railway infrastructure projects within the Jiangzhe (江浙) region, the Group intend to further expand our presence in this segment by proactively identify and bid for new contracts while improving operational capabilities and efficiencies in its efforts to sustain margins.
On the back of increasingly stringent environmental protection regulations in China, investments in environmental conservation and water environmental improvement projects in China is expected to reach RMB 3.3 trillion under China's 13th Five-Year Plan.
On this front, the Group intends to continue pursuing strategic collaborations such as the cooperation agreement signed with Hong Kong mainboard-listed Beijing Enterprises Water Group Co., Ltd. in May 2017, and may also evaluate industry consortiums through which to participate, construct and operate large-scale infrastructure projects on a public-private partnership basis.
The Group currently has an order book of RMB 2.8 billion.