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Business Overview
 

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   Overview 


Chairman’s Statement

Dear Shareholders,

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 exceptionally challenging.

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 rectification works.

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 2012.

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.

Looking Forward

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 materials.

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 looking ahead.

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.

Acknowledgement

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 the year.

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:

 
(i) 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 exception.
(ii) 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.
(iii) 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 challenges.

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.


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