689, Xiguan Road Rongcheng District,
Jieyang City Guangdong 522000
On behalf of China Flexible Packaging Holdings Limited, I
hereby present the results for the financial year of 2012.
Year in Review
With the slowing China economy and issues with our
production lines, the last fiscal year has proven to be
The China economy’s growth is slowing more quickly than
initially hoped. The latest data of 2012 from the National
Bureau of Statistics showed that China’s GDP grew by the
slowest rate of 7.4% in the third quarter since early 2009,
making a deceleration from an 8.1% and 7.6% in the previous
two quarters in 2012, and putting the economy on course
for its slowest expansion. Uncertainties in economy have
shaken consumer confidence and thus posed adverse impact
in local consumer spending. Together with the indication of
global economic depression, market sentiment and business
confidence in China slump further.
Internally, the Group suffered from production line deficiency.
Two of the Group’s production lines broke down during the
reporting period, causing temporary suspension of production.
Overseas vendors have been called in for emergency repair
works and replacement of the damage parts, incurring a
significant repair cost in the reporting year.
Although repaired and replaced with new components,
the two production lines have not resumed full production
performance and they produced a significant amount of substandard
products which were sold at a much lower selling
price. The senior management took immediate measures to
shorten the time for run-in process and to reduce the amount
of sub-standard finished products.
The production issues affected the quality of some of our
products and unfortunately resulted in disputes with a few
customers. Consequentially, we recognised an allowance for
impairment on these customer’s receivables. The management
will continue to monitor the progress of the collection of
those doubtful receivables.
Local demand from the tobacco, food processing and
consumable goods industries has weakened since early 2012.
Yet market competition has been fierce with new industry
players’ participations, which are often equipped with more
advanced production facilities. Against this backdrop, the
Group adjusted its product mix to cater for the changing
market condition. Average selling prices are lowered due to
lesser high margin products sold during the year under review
owing to the changing market demand as well as supply.
Therefore, it resulted in an overall decline in business.
The Group’s performance is prone to the volatility of oil price
with Polypropylene, one of the Group’s major raw materials,
being a by-product of petroleum. While the international crude oil price began to consolidate, the open market price
slid by 20% since its high price in March 2012. However, the
Group’s raw material prices remain steadily high, mainly due
to the control over the oil product prices and supplies in the
PRC by a few local petroleum suppliers. During the reporting
period, the continuous inflation in China further pressured
the already high operating costs.
Owing to substantial loss reported in the second quarter ended
30 April 2012, and in view of the changing market demand
and recurrence of deteriorating performance of production
lines, in accordance with the requirements of the International
Accounting Standards No. 36 – Impairment of Assets, the
Board consequently conducted a comprehensive review of the
carrying value of its non-current assets. The comprehensive
review included appointing an independent professional
valuer to assess the assets value of the Group’s production
facilities. After careful assessment, the Board considered it
necessary to make a substantial write-down of the book value
of the non-current assets as of the year ended 31 October
2012. The decision has brought a significant impact in the
financials for the reporting year.
Another measure taken as a result of the review was the
revision of the Group’s accounting estimate for depreciating
production facilities by changing their useful life from 15 years
to 10 years based on the revised estimate of the useful life
of our machinery. The change in this accounting estimate has
been applied prospectively from the start of the 4th quarter of the financial year 2012 and it caused a reduction in the book
value of the non-current assets as well as an increase in the
depreciation expenses for the current reporting year.
Factoring in the aforementioned incidences, the Group
recorded a gross loss of RMB46.3 million and net loss attributed
to shareholders of RMB550.0 million in the reporting year,
compared with the gross profit of RMB100.7 million and net
profit attributed to shareholders of RMB6.8 million in the
last financial year.
To conclude, the management has identified the major factors
which continue to affect the Group’s performance in near
term, including: (i) changing market demand; (ii) fluctuation
of the raw material cost; (iii) intense competition from new
entrants, and; (iv) production issues. In response, the Group
has instituted a more stringent control on operating costs
as an immediate measure to mitigate the above impacts.
The Group will also continue to adjust its product mix to
address the changing market condition in order to maintain
our revenue. In addition, the management will continue to
monitor the progress of the improvement of our production
issues closely. Should the issues persist, the Group would
consider engaging overseas machinery suppliers for further
Even with the credit crunch in the PRC, we see no significant
financial uncertainties ahead. The Group continues to maintain
a healthy balance sheet with no borrowings as at 31 October
Pursuant to the Revised Code of Corporate Governance and
Listing rules announced earlier in the reporting year, the
Group is taking measures to strengthen its already transparent
corporate governance. As an additional measure, the Board
has engaged an independent professional firm to develop
an Enterprise Risk Management Framework for the Group
during FY2012 that helped the Board to gain higher assurance
in the adequacy and effectiveness of the risk management
framework and process in place. The Board will keep working
closely with the audit committee, external professionals and regulators to stringently administer the best practice and
code of conduct to the executives, as well as maintaining
an effective and standardized system of risk management and
internal controls to safeguard our shareholders’ interests.
2012 is a year full of challenges for the plastic packaging
industry. Business confidence and demand continue to slide
across the already slowing China economy, severely affecting
the Group’s downstream customers who are in consumer
goods based sector. They experienced setbacks in both
local and overseas orders in FY2012 and hence adversely
affecting the Group as their upstream supplier of packaging
Moreover, there are signs that the adverse economic situation
and uncertainties in both global and local economy will
further extend into 2013 which are expected to hinder the
future development of the industry. Globally, the developed
economies are still struggling to get back on their feet. As
an industry closely in phase with economic cycles, the plastic
packaging industry would be losing its driving force of growth
under the global economic slowdown. Locally, the industry
is confronted with increasing costs and withering internal
demand. While the quickly diminishing global market has
quenched the source of income for local plastic manufacturers
and their downstream players, on the other hand the local
demand has yet to catch up, this put the industry facing
a dilemma creating difficulty to the industry development
The local plastic packaging market is facing a highly
fragmented future with numerous new industry players.
There are not only some new players entered with more
advanced production facilities, but also a trend of upstream
and downstream businesses expanding into packaging sector.
This creates further pressure on the packaging industry. Some
new entrants have no regards for quality so that they can
lower their selling price to capture market share. This causes
a very competitive market and a challenging situation.
As a manufacturer with almost 20 years of relevant industry
experience, China Flexible firmly believes that “quality,
customer service and experience” are the unique qualities
that would make us to remain competitive, survive in and
overcome current difficult time.
On behalf of the Board of Directors and Management, I
would like to take this opportunity to extend my heartfelt
gratitude and thanks to the retiring directors, Messrs Ong
Tiew Siam and Yeung Koon Sang Alias David Yeung (who
have already served as Independent Directors for a cumulative
term of 9 years) for their invaluable contributions during their
tenures as Independent Directors of the Company. They have
decided to retire at the forthcoming annual general meeting
of the Company to be held on 28 February 2013 and we will
nominate suitable candidates for their replacements.
In closing, I would like to express my utmost appreciation to
our business partners, customers and shareholders for their
invaluable support through the years. We look forward to
your continued support as we strive to bring China Flexible to
greater heights and conquering new grounds. Furthermore, I
would like to pay tribute to our employees and to thank them
for their commitment and unceasing hard work throughout
Mr Zeng Hanming
Chairman and CEO
Industrial Outlook and Future Plans
Taking a macro view, we noticed the following factors and
events presented in our environment that may lift uncertainty or
exert influence on the development of packaging industry:
||There are indications that the growth of the
manufacturing industry appeared to be slowing down.
According to the Purchasing Managers Index (“PMI“)
statistics dated June 2012, although production growth
remains positive albeit at a slower pace, new orders
appeared to be shrinking. According to a report on
the June 2012 PMI published by HSBC, more stimulus
policies to be imposed by the PRC like reserve-ratio cuts
are expected, following falling prices and significant
slowdown pressures in the manufacturing industry.
Apart from this, according to the figures announced
by the National Bureau of Statistics of China on 9 July
2012, the Consumer Price Index (CPI) in June 2012
eased to 2.2% year on year, representing a record
low in 29 months and a month-on-month decrease
of 0.6%. The National Bureau of Statistics of China
also revealed that the Producer Price Index (“PPI”) in
June 2012 has decreased by 2.1%, which is the 4th
consecutive month in a downward trend, suggesting
that the heated economic growth is slowing down.
The withering global economy and the slowed
local economic growth have put setbacks to nearly
all industries, where the packaging industry is no
||The plastic packaging industry is highly fragmented
with a large number of players. According to Research
In China, the top five businesses accounted for only
19.4% of its total market worth in 2011, with the
largest player having a market share of merely 7.2%.
The industry is expected to stay fragmented in the
coming years due to the new entrants of players with
more advanced technology and production facilities.
With new players settling in Guangdong province
recently, competition is expected to intensify, putting
the market share and profitability of the Group’s
business under more pressure.
||With the economic downturn, corporations are
suffering from quickly diminishing revenue and are
actively seeking ways to reduce costs. Amongst their
cost cutting measures, reducing packaging is one of the
popular options especially for daily consumer goods as
it poses less effect to the consumers and is beneficial
to both the corporation and the environment. With
more corporations opting for reduced packaging
in response to the adverse economic situation, the
plastic packaging industry is faced with unprecedented
However, amongst the total production output of
plastic packaging industry, plastic films account for
the largest production volume, with an average growth
in production volume of 13.1% between 2005 and
2010. Proven by track records, the production growth
of plastic film and packaging is highly sensitive to
the economic cycles. When the economic recovery
comes along and consumer confidence is restored, the
plastic packaging industry will be hopeful to maintain
a sustainable growth, although it may not happen in
a very near term.
The economic recovery has suffered setbacks and uncertainty
weighs heavily on our prospects. It is important for China
Flexible Packaging to correctly address the adverse situation
and make necessary adaptations. This new and constantly
changing environment will require a rapid response with
significant adjustment to our business strategy.
By stringent control of expenditure, careful risk analysis,
inventory management and good relationships with suppliers
and customers, the Group will continue to move forward
with cautiousness. We will spend every effort and prepare
ourselves for the next recovery.