(Name, Telephone, E-mail and/or Facsimile
Number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In this Annual Report
on Form 20-F (the “Annual Report”), unless otherwise indicated, “we,” “us,” “our,”
and “China Ceramics” refers to China Ceramics Co., Ltd., a British Virgin Islands company, and its subsidiaries,
including Success Winner Limited (“Success Winner”), a British Virgin Islands company and wholly owned subsidiary of
China Ceramics, Stand Best Creation Limited (“Stand Best”), a Hong Kong company and wholly owned subsidiary of Success
Winner and the entity that wholly owns Jinjiang Hengda Ceramics Co., Ltd. (“Hengda”), a PRC operating company
that in turn wholly owns Jiangxi Hengdali Ceramic Materials Co., Ltd. (“Hengdali”), and Fujian Province Hengdali
Building Materials Co., Ltd. each a PRC operating company.
On
November 20, 2009, China Holdings Acquisition Corp. (“CHAC”), our predecessor, merged with and into China
Ceramics, its wholly owned British Virgin Islands subsidiary, resulting in the redomestication of CHAC to the British Virgin
Islands as “China Ceramics Co., Ltd.” Immediately following the merger and redomestication (the
“Redomestication”), and as part of the same integrated transaction, China Ceramics acquired all of the
outstanding securities of Success Winner (the “Business Combination”). Unless the context indicates
otherwise, the “Company” refers to CHAC prior to the Business Combination and China Ceramics following the
Business Combination.
Unless the context
indicates otherwise, all references to “China” or “PRC” refer to the People’s Republic of China.
All references to “provincial-level regions” or “regions” include provinces as well as autonomous regions
and directly controlled municipalities in China, which have an administrative status equal to provinces, including Beijing.
All references to “Renminbi,” “RMB”
or “yuan” are to the legal currency of the People’s Republic of China, and all references to “U.S. dollars,”
“dollars,” “$” are to the legal currency of the United States. This Report contains translations of Renminbi
amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi
or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or Renminbi, as the case
may be, at any particular rate or at all. On May 8, 2020, the buying rate announced by the Federal Reserve Statistical Release
was RMB7.0732 to $1.00.
This Report contains
“forward-looking statements” that represent our beliefs, projections and predictions about future events. All statements
other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue
or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements
concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any
statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying
any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”,
“predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”,
“intends”, “plans”, “believes”, “estimates” and similar expressions, as well as
statements in the future tense, identify forward-looking statements.
These statements are
necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements
described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking
statements, including with respect to correct measurement and identification of factors affecting our business or the extent of
their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which
our business strategy is based on the success of our business.
Forward-looking
statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate
indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are
based on information available at the time those statements are made and management’s belief as of that time with
respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such
differences include, but are not limited to, those factors discussed under the headings “Risk Factors”,
“Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this
Annual Report.
This Annual Report
should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in Item
18 of this Annual Report.
On March 24, 2020,
the Company filed a Report on Form 6-K (the “6-K”) in compliance with and in reliance upon the SEC Order issued pursuant
to Section 36 of the Securities Exchange Act of 1934, as amended, granting Exemptions from Specified Provisions of the Exchange
Act and Certain Rules thereunder (SEC Release No. 34-88465 on March 25, 2020) (Relief Order) for the purpose of, among other things,
extending the time of filing of our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 in reliance on the Relief
Order.
This Annual Report
is being filed within the timeframe permitted by and in reliance upon the Relief Order.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not required.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not required.
|
A.
|
Selected financial data
|
The following selected
consolidated financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 have been derived
from the audited consolidated financial statements of China Ceramics included in this Annual Report. This information is only
a summary and should be read together with the consolidated financial statements, the related notes, the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations of China Ceramics” and other financial information
included in this Annual Report.
The consolidated financial
statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the
International Accounting Standards Board (“IASB”). The results of operations of China Ceramics in any period may not
necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” included elsewhere
in this Annual Report.
CHINA CERAMICS CO., LTD. AND SUBSIDIARIES
Selected Consolidated Financial Data
(RMB in Thousands except per Share and Operating
Data)
|
|
As of December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Consolidated Statements of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
8,212
|
|
|
|
9,016
|
|
|
|
2,328
|
|
|
|
110
|
|
|
|
514
|
|
Total current assets
|
|
|
362,248
|
|
|
|
366,895
|
|
|
|
728,535
|
|
|
|
781,769
|
|
|
|
877,772
|
|
Total assets
|
|
|
362,283
|
|
|
|
366,941
|
|
|
|
825,418
|
|
|
|
931,281
|
|
|
|
1,313,020
|
|
Total current liabilities
|
|
|
89,390
|
|
|
|
90,923
|
|
|
|
130,682
|
|
|
|
158,832
|
|
|
|
224,776
|
|
Long-term obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,404
|
|
Total liabilities
|
|
|
89,390
|
|
|
|
90,923
|
|
|
|
130,682
|
|
|
|
158,832
|
|
|
|
226,180
|
|
Total equity
|
|
|
272,893
|
|
|
|
276,018
|
|
|
|
694,736
|
|
|
|
772,449
|
|
|
|
1,086,840
|
|
Outstanding shares
|
|
|
7,306,985
|
|
|
|
5,678,703
|
|
|
|
3,851,485
|
|
|
|
2,820,939
|
|
|
|
2,565,136
|
|
|
|
As of December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Consolidated Statement of Comprehensive Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
327,581
|
|
|
|
498,189
|
|
|
|
821,792
|
|
|
|
793,745
|
|
|
|
1,017,146
|
|
Gross profit (loss)
|
|
|
81,326
|
|
|
|
(1,166
|
)
|
|
|
50,354
|
|
|
|
(30,111
|
)
|
|
|
125,426
|
|
Operating income (loss)
|
|
|
(24,081
|
)
|
|
|
(346,620
|
)
|
|
|
(50,635
|
)
|
|
|
(89,714
|
)
|
|
|
85,347
|
|
Loss before taxation
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
|
|
(78,285
|
)
|
|
|
(316,221
|
)
|
|
|
(339,159
|
)
|
Loss attributable to shareholders
|
|
|
(9,501
|
)
|
|
|
(418,674
|
)
|
|
|
(88,026
|
)
|
|
|
(321,802
|
)
|
|
|
(362,412
|
)
|
Earnings per share –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.56
|
)
|
|
|
(93.18
|
)
|
|
|
(26.36
|
)
|
|
|
(116.51
|
)
|
|
|
(141.91
|
)
|
Diluted
|
|
|
(1.56
|
)
|
|
|
(93.18
|
)
|
|
|
(26.36
|
)
|
|
|
(116.51
|
)
|
|
|
(141.91
|
)
|
Weighted average shares outstanding –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,075,667
|
|
|
|
4,493,036
|
|
|
|
3,339,487
|
|
|
|
2,761,998
|
|
|
|
2,553,855
|
|
Diluted
|
|
|
6,075,667
|
|
|
|
4,493,036
|
|
|
|
3,339,487
|
|
|
|
2,761,998
|
|
|
|
2,553,855
|
|
Cash dividends declared per share (RMB)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The following table sets forth information concerning exchange
rates between the RMB and the U.S. dollar for the periods indicated. On May 8, 2020, the buying rate announced by the Federal
Reserve Statistical Release was RMB 7.0732 to $1.00.
|
|
|
|
Spot Exchange Rate
|
|
Period
|
|
|
|
Period
Ended
|
|
Average
(1)
|
|
Low
|
|
High
|
|
|
|
|
|
(RMB per US$1.00)
|
|
2011
|
|
|
|
6.2939
|
|
6.4475
|
|
6.2939
|
|
6.6017
|
|
2012
|
|
|
|
6.2301
|
|
6.3093
|
|
6.2221
|
|
6.3879
|
|
2013
|
|
|
|
6.0537
|
|
6.1478
|
|
6.0537
|
|
6.2438
|
|
2014
|
|
|
|
6.2046
|
|
6.1619
|
|
6.0402
|
|
6.2591
|
|
2015
|
|
|
|
6.4778
|
|
6.2827
|
|
6.1870
|
|
6.4896
|
|
2016
|
|
|
|
6.9421
|
|
6.6424
|
|
6.4498
|
|
6.9570
|
|
2017
|
|
|
|
6.5063
|
|
6.7568
|
|
6.4773
|
|
6.9575
|
|
2018
|
|
|
|
6.8755
|
|
6.6896
|
|
6.2649
|
|
6.9737
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
6.6958
|
|
6.7863
|
|
6.6958
|
|
6.8708
|
|
|
|
February
|
|
6.6912
|
|
6.7367
|
|
6.6822
|
|
6.7907
|
|
|
|
March
|
|
6.7112
|
|
67119
|
|
6.6916
|
|
6.7381
|
|
|
|
April
|
|
6.7347
|
|
6.7161
|
|
6.6870
|
|
6.7418
|
|
|
|
May
|
|
6.9027
|
|
6.8519
|
|
6.7319
|
|
6.9182
|
|
|
|
June
|
|
6.8650
|
|
6.8977
|
|
6.8510
|
|
6.9298
|
|
|
|
July
|
|
6.8833
|
|
6.8775
|
|
6.8487
|
|
6.8927
|
|
|
|
August
|
|
7.1543
|
|
7.0629
|
|
6.8972
|
|
7.1628
|
|
|
|
September
|
|
7.1477
|
|
7.1137
|
|
7.0659
|
|
7.1786
|
|
|
|
October
|
|
7.0379
|
|
7.0961
|
|
7.0379
|
|
7.1473
|
|
|
|
November
|
|
7.0308
|
|
7.0199
|
|
6.9766
|
|
7.0389
|
|
|
|
December
|
|
6.9618
|
|
7.0137
|
|
6.9618
|
|
7.0609
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
6.9161
|
|
6.9184
|
|
6.8589
|
|
6.9749
|
|
|
|
February
|
|
6.9906
|
|
6.9967
|
|
6.9650
|
|
7.0286
|
|
|
|
March
|
|
7.0808
|
|
7.0205
|
|
6.9244
|
|
7.1099
|
|
|
|
April
|
|
7.0622
|
|
7.0708
|
|
7.0341
|
|
7.0989
|
|
Source: Federal Reserve Statistical Release.
|
(1)
|
Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using the average of the daily rates during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
You should carefully
consider the following risk factors, together with all of the other information included in this Annual Report.
Risk Factors Relating to Our Business
We generate a large percentage of
our revenues from a limited number of customers and our business will suffer if sales to such customers decline.
Our five largest customers accounted for an aggregate of 37.4%,
96.7% and 43.3% of our total revenue in fiscal years 2017, 2018 and 2019, respectively. We are particularly exposed to the credit
risks of these customers as defaults in payment by our major customers would have a significant impact on our cash flows and financial
results. Our agreements with our major customers do not specify minimum sales volume. There is no assurance that we will continue
to retain these customers or that they will continue to purchase our products at their current levels in the future. If there is
any reduction or cancellation of purchase orders by these customers for any reason, including a fall in demand from our customers’
downstream developer clients, or a termination of a relationship with these customers, our revenues will be negatively impacted.
Payment defaults by the customers
to whom we extend credit would harm our cash flows and results.
Our financial position and profitability are dependent on the
creditworthiness of our customers. We are exposed to the credit risks of our customers and this risk increases the larger the orders
are. We usually offer our customers credit terms of approximately 120 to 150 days. During the past two years our trade receivable
turnover has increased substantially. As of fiscal year end 2019, it was 194 days. We may experience increased credit risk from our customers
resulting in an increased level of doubtful or bad debts in the future. Should we experience any unexpected delay or difficulty
in collecting receivables from our customers, our cash flows and financial results may be adversely affected.
If our suppliers are unable to
fulfill our orders for raw materials, we may lose business.
Our
suppliers are all located in the PRC. Our purchases of raw materials is based on expected production levels, after taking into
consideration, amongst other factors, sales forecasts and actual orders from our customers. To ensure that we are able to deliver
quality products at competitive prices, we need to secure sufficient quantities of raw materials at acceptable prices and quality
on a timely basis. Typically, we do not enter into any long-term supply agreements with our suppliers. There is no assurance that
these suppliers will continue to supply us in the future or that they will do so at acceptable prices. In the event our suppliers
are unable to fulfill our orders or meet our requirements, we may not be able to find timely replacements at acceptable prices
and quality, and this will delay the fulfillment of our customers’ orders. Consequently, our reputation may be negatively
affected, leading to a loss of business and affecting our ability to attract new business.
Increases in the price of raw
materials will negatively impact our profitability.
In fiscal years
2017, 2018 and 2019 our cost of raw materials and energy source, which consist of clay (comprising mainly of kaolin, flint and
feldspar), coal and natural gas (used to heat our kilns), coloring materials and glazing materials, accounted for approximately
71.7%, 61.6% and 56.7% of our total cost of sales, respectively. The price of clay, coal, natural gas, coloring materials and glazing
materials may fluctuate due to factors such as global supply and demand for such raw materials and changes in global economic conditions.
Coal and natural gas in aggregate accounted for approximately 20.1%, 12.9% and 12.1% of our total costs of raw materials and energy
source in fiscal years 2017, 2018 and 2019, respectively. Any shortages or interruptions in the supply of clay, coal and natural
gas, coloring materials or glazing materials will result in an increase in the cost of production, thus increasing our cost of
sales. If we are not able to pass on such an increase to our customers or are unable to find alternative sources of clay, coal,
coloring materials, or glazing materials or appropriate substitute raw materials at comparable prices, our gross margins and overall
financial performance will be adversely affected.
The Company
may incur significant delays and/or expenses relating to the COVID-19 (coronavirus) outbreak in China and beyond
Beginning in late
2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak
to constitute a “Public Health Emergency of International Concern.” This has prompted government-imposed quarantines,
closures of certain travel and businesses. Following this outbreak, in February 2020, the Company temporarily shut down its
operations in Jinjiang City, Fujian Province, and Gao’An City, Jiangxi Province, as mandated by the local authorities. In
March 2020, the Company gradually resumed its operations in these cities and continues to operate such production facilities.
It is presently unknown whether and to what extent the Company’s supply chains may be affected if the pandemic persists for
an extended period of time. The Company may incur significant delays or expenses relating to such events outside of its control,
which could have a material adverse impact on its business, operating results and financial condition.
If do not regain compliance with
the Nasdaq continued listing requirements, our securities will be subject to delisting
On July 12, 2019,
the Company announced that it received a written notice (the “Notice) from the Listing Qualifications department of The Nasdaq
Stock Market (“Nasdaq Staff”) advising the Company that based upon the closing bid price for the Company’s shares
for the past 30 consecutive business days, the Company no longer met the minimum $1.00 per share Nasdaq continued listing requirement
set forth in Nasdaq Listing Rules. The notification also stated that the Company would be provided 180 calendar days, or until
January 8, 2020, to regain compliance with the foregoing listing requirement. To do so, the bid price of the Company’s shares
must close at or above $1.00 per share for a minimum of 10 consecutive business days prior to that date. In December 2019, the
Company requested additional 180 calendar days to regain compliance with the listing requirement in compliance with the Nasdaq
Listing Rule 5810(c)(3)(A)(ii)). If it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or
if the Company is otherwise not eligible, the staff will provide notice that its securities will be subject to delisting. In addition,
if our common shares are delisted at some later date, our common shares may be subject to the “penny stock” regulations.
These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than
established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature
and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our
common shares might decline. If our common shares are delisted from the Nasdaq Capital Market at some later date or become subject
to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it
difficult to sell their shares.
On January 10,
2020, the Company announced that it has received a notification letter from the NASDAQ Listing Qualification Staff stating that
the Staff has determined to grant the Company an additional 180 days, or until July 6, 2020 (the “Compliance Date”)
to regain compliance with the minimum bid price rule by maintaining a minimum closing bid price of at least $1.00 for ten consecutive
days. If the Company is not be able to regain compliance, its securities will be subject to delisting. At the February 21, 2020
Annual Meeting, the Company’s shareholders approved, among others, a proposal to amend the Company's Memorandum of Association
to effect a reverse stock split of the outstanding the Company’s common shares, at one of several split ratios, to be determined
by the Board of Directors in its sole discretion, prior to the one-year anniversary of this Annual Meeting, for the purposes of
regaining compliance with the NASDAQ continued listing requirements. The Company continues to monitor market conditions to determine
if, when or how to exercise such authority. On April 17, 2020, the Company received a notification from the Nasdaq Staff informing
the Company that as a part of and in compliance with the most recently implemented NASDAQ initiative (effective as of April 16,
2020) to mitigate current instability of world financial markets, the Staff has determined to toll the compliance periods for bid
price and market value of publicly held shares continued listing requirements (together, the “Price-based Requirements”)
through June 30, 2020. As a result, for the duration of the tolling period, the Company will remain at the same stage of the compliance
process and will not be subject to delisting for these concerns. Starting on July 1, 2020, the Company will receive the balance
of the remaining compliance period in effect at the start of the tolling period to regain compliance. Specifically, following this
tolling relief, the Company will have 81 calendar days from July 1, 2020, or until September 21, 2020, to regain compliance with
the Price-based Requirements. This can be accomplished in the event the bid price of the Company’s shares close at or above
$1.00 per share for a minimum of 10 consecutive business days prior to that date. At the February 21, 2020 Annual Meeting, the
Company’s shareholders approved, among others, a proposal to amend the Company's Memorandum of Association to effect a reverse
stock split of the outstanding the Company’s common shares, at one of several split ratios, to be determined by the Board
of Directors in its sole discretion, prior to the one-year anniversary of this Annual Meeting, for the purposes of regaining compliance
with the NASDAQ continued listing requirements. The Company continues to monitor market conditions to determine if, when or how
to exercise such authority. In the event the Company does not regain compliance with the Nasdaq continued listing requirements,
its securities may be subject to delisting which would have a material adverse effect on the value and liquidity of such securities.
If China’s
inflation increases or the prices of energy or raw materials increase, we may not be able to pass the resulting increased costs
to our customers and this may adversely affect our profitability or cause us to suffer operating losses.
Economic
growth in China has, in the past, been accompanied by periods of high inflation. In the past, the Chinese government has implemented
various policies from time to time to control inflation. For example, the Chinese government has periodically introduced measures
in certain sectors to avoid overheating of the economy, including tighter bank lending policies, increases in bank interest rates,
and measures to curb inflation, which has resulted in a decrease in the rate of inflation. An increase in inflation could cause
our costs for energy, labor costs, raw materials and other operating costs to increase, which would adversely affect our financial
condition and results of operations.
We are dependent on our management
team and any loss of our key management personnel without timely and suitable replacements may reduce our revenues and profits.
Our
business is also dependent on our executive officers who are responsible for implementing our business plans and driving growth.
Please refer to “Directors, Senior Management and Employees” herein for more information about our directors and officers.
The demand for such experienced personnel is intense and the search for personnel with the relevant skills set can be time consuming.
The loss of our key management personnel without timely and suitable replacements may reduce our revenues and profits.
Failure to compete successfully with our competitors
and new entrants to the ceramics industry in the PRC may result in China Ceramics losing market share.
We
operate in a competitive and fragmented industry. There is no assurance that we will not face competition from our existing competitors
and new entrants. We compete with a variety of companies, some of which have advantages that include: longer operating history,
larger clientele base, superior products, better access to capital, personnel and technology, or are better entrenched. Our competitors
may be able to respond more quickly to new and emerging technologies and changes in customer requirements or succeed in developing
products that are more effective or less costly than our products. Any increase in competition could have a negative impact on
our pricing (thus eroding our profit margins) and reduce our market share. If we are unable to compete effectively with our existing
and future competitors and do not adapt quickly to changing market conditions, we may lose market share.
We have
not purchased product liability insurance and any loss resulting from product liability claims must be paid by us.
Accidents
may arise as a result of defects in our products. If there are any defects in the products designed and/or manufactured by us,
we may face claims from our customers or third parties for the personal injury or property damage suffered as a result of such
defects. We have not purchased insurance coverage for product liability or third party liability and are therefore not covered
or compensated by insurance in respect of losses, damages, claims and liabilities arising from or in connection with product liability
or third party liability.
Our production facilities may
be affected by power shortages which could result in a loss of business.
Our
production facilities consume substantial amounts of electrical power, which is the principal source of energy for our manufacturing
operations. Although we have a back-up generator at both our production facilities, we may experience occasional temporary power
shortages disrupting production due to power rationing activities conducted by the authorities, thunderstorms or other natural
events beyond our control. Accordingly, these production disruptions could result in a loss of business.
Our research and development
efforts may not result in marketable products.
Our
research and development team develops products which we have identified as having good potential in the market. There is no assurance
that we will not experience delays in future product developments. There is also no assurance that the products which we are currently
developing or may develop in the future will be successful or that we will be able to market these new products to our customers
successfully. If our new products are unable to gain the acceptance of our customers or potential customers, we will not be able
to generate future sales from our investment in research and development.
We may not
be able to ensure the successful implementation of our future plans and strategies, resulting in reduced financial performance.
We
intend to expand our market presence and explore opportunities in strategic investments or alliances and acquisitions. These initiatives
involve various risks including, but not limited to, the investment costs in setting up new offices and sales offices and working
capital requirements. There is no assurance that any future plan can be successfully implemented as the successful execution could
depend on several factors, some of which are not within our control. Failure to successfully implement our future plans or to effectively
manage costs may lead to a material adverse change in our operating environment or affect our ability to respond to market or industry
changes, resulting in reduced financial performance. Decelerating economic growth in China has caused challenging market conditions
in the real estate and construction sectors resulting in a contraction in investment and new housing projects by property developers.
The challenging market conditions has resulted in an expected contraction in demand for our products. Due to the reduced demand
for our products, we recently recorded an impairment of assets. As we are currently operating our facilities at significantly less
than our maximum capacity, this could reduce our profitability.
Our facilities currently provide an aggregate annual maximum
production capacity of approximately 51.6 million square meters. However, due to a reduction in demand, as of fiscal year end 2019,
we are utilizing production facilities capable of producing only 12.42 million square meters. In addition, we currently have 12
production lines of which only 3 were utilized as of fiscal year end of 2019 due to challenging macroeconomic conditions that began
in the fourth quarter of 2012. The fact that a significant portion of our facilities are not being used means that our net income
will be significantly less than it would otherwise be because we must maintain those unused facilities even though they are not
currently being productive. Because certain of our facilities have remained idle for an extended period of time, the Company recorded
an impairment charge of RMB 85.0 million (US$ 12.9 million) in the second half of 2018 related to property, plant and equipment,
and land use rights at its Hengda and Hengdali production facilities. The impairment of the non-current assets is attributable
to challenging market conditions in China which resulted in a contraction in demand for the Company’s products in 2018. If
our facilities continue to remain idle, we may be required to take an additional impairment charge on our financial statements.
In order to maintain our market share and
move inventory, in October 2019, we decreased the pricing of our ceramic tile products by an average of 15%. This resulted in a
26% increase in our sales volume for the second half of 2019 as compared to the same period of 2018. For the full fiscal year 2019
revenue decreased by 34.2% as compared to fiscal 2018 mainly due to the 27.0% decrease in sales volume resulting from the continued
slowdown of China’s economy, especially in the manufacturing sector and the real estate industry. However, in July of
2018, we decreased the pricing of our ceramic tile products by an average of 10%, but this decrease did not offset the fall in
our sales volume due to deteriorating market conditions that persisted through the second half of 2018, and we do not believe that
further price decreases would have had a beneficial effect upon sales volume for this period. In past periods, we also decreased
the pricing of our products in order to increase sales. On July 1, 2016, we reduced the selling price of certain of our slow-moving
products beginning on July 1, 2016 with the goal to turn some of this inventory into cash. Beginning on October 1, 2016,
in order to generate sales and move inventory, we instituted a 20% reduction of our slow-moving products. This price reduction
led to a 35% increase in our sales volume in the fourth quarter of 2016 compared to the same period of 2015. The fourth quarter
of 2016 growth in sales volume was the first positive comparison to the previous comparable period after four straight fiscal quarters
of period over period decline in this key metric. Our strategy of decreasing the pricing of our products may or may not result
in an increase in our sales volume during differing periods. In addition, if customers grow accustomed to such significant reductions,
we may need to offer significant discounts in the future, which could reduce our net income and revenues long term.
We may lose
revenue if our intellectual property rights are not protected and counterfeit HD, Hengda, HDL, Hengdeli, WULIQIAO, TOERTO or Pottery
Capital of Tang Dynasty brand products are sold in the market.
We
believe our intellectual property rights are important to our success and competitive position. A portion of our products are
manufactured and marketed under our “HD” or “Hengda,” “HDL” or “Hengdeli,”
“Pottery Capital of Tang Dynasty”, “TOERTO” and “WULIQIAO” labels. We have filed our
labels as trademarks in the PRC. Before April13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda
Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda
Construction Materials Co., Ltd. and was licensed the exclusive right to use WULIQIAO during the terms of that
trademark. Since April 13, 2011, WULIQIAO has been transferred to Hengdali, according to Certificate of Approved
Transference of Trademark issued on April 13, 2011 by the Trademark Office of the State Administration for
Industry & Commerce of the P.R.C. In addition, we own twenty-two utility model patents and have certain trade
secrets and unpatented proprietary technology. We cannot assure you that there will not be any unauthorized usage or misuse
of our trademarks and patent rights or that our intellectual property rights will be adequately protected as it may be
difficult and costly to monitor any infringements of our intellectual property rights in the PRC. If we cannot adequately
protect our intellectual property, we may lose revenue. In addition, we believe the branding of our products and the brand
equity in our “HD” or “Hengda”, “HDL or Hengdeli”, “Pottery Capital of Tang
Dynasty”, “TOERTO” and “WULIQIAO” trademarks is critical to our expansion effort and the
continued success of our business. Our efforts to build our brand may be undermined by the sale of counterfeit goods. The
counterfeiting of our products may increase if our products become more popular. In order to preserve and enforce our
intellectual property rights, we may have to resort to litigation against the infringing or counterfeiting parties. Such
litigation could result in substantial costs and diversion of management resources which may have an effect on our financial
performance.
We may inadvertently
infringe third-party intellectual property rights, which could negatively impact our business and financial results.
We
are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property
rights of third parties by us as of the date of this Annual Report. Nevertheless, there can be no assurance that as we develop
new product designs and production methods, we would not inadvertently infringe the intellectual property rights of others or others
would not assert infringement claims against us or claim that we have infringed their intellectual property rights. Claims against
us, even if untrue or baseless, could result in significant costs, legal or otherwise, cause product shipment delays, require us
to develop non-infringing products, enter into licensing agreements or may be a distraction to our management. Licensing agreements,
if required, may not be available on terms acceptable to us or at all. In the event of a successful claim of intellectual property
rights infringement against us and our failure or inability to develop non-infringing products or to license the infringed intellectual
property rights in a timely or cost-effective basis, our business and/or financial results will be negatively impacted.
The PRC
government has historically introduced certain policy and regulatory measures to control the rapid increase in housing prices and
cool down the real estate construction market and has more recently adopted policies to stimulate the real estate sector, and the
government in the future may refrain from supporting the sector or adopt measures in the future that may further adversely affect
our business.
Our
business depends on the level of business activity in the property development and construction industries that use our
products in their operations in the PRC. Our products are sold to customers in the property development and construction
industries. If the property and construction industries fall into a recession in the future, the demand for construction
materials, such as ceramic tiles, may consequently decrease and have a significant adverse effect on our business. The PRC
government has committed to taking steps to regulate real estate development, promote the healthy development of the real
estate industry in China, and strengthen the supervision over land for real estate development purposes. For example, in his
2010 annual report to the National People’s Congress, as part of the 12th Five-Year Plan, Chinese Premier Wen Jiabao
pledged to curb the rise of housing prices in certain cities to increase the availability of affordable housing. The PRC
government has also enacted measures to cool down the real estate construction market and imposed lending curbs, higher
mortgage rates, higher down payments, a price cap on new developments and restrictions on the number of homes each family can
buy. This offered some incentive for property developers to develop new residential housing due to continued uncertainty,
resulting in the recent slowing construction sector. The PRC government has also adopted an array of policies to stimulate
the real estate sector which includes cutting benchmark interest rates five times in 2015, a lowering of the reserve
requirement ratio for banks, lower first home down payment ratios and a cut in the minimum capital ratio for fixed asset
investments which would help property developers. Although the Central Government’s measures have helped to sustain the
real estate sector from time to time, there has been a substantial slowdown in construction activity, and it is not clear if
supportive monetary and regulatory policies will continue in the future. We also cannot be certain that the PRC government
will not issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive
measures or practices in response to PRC governmental policies and regulations, which could negatively affect the industries
we serve in the PRC, and thereby harm our sales.
Our manufacturing
activities are dependent upon availability of skilled and unskilled labor, a deficiency of which could result in a reduction in
profits.
Our
manufacturing activities are labor intensive and dependent on the availability of skilled and unskilled labor in large numbers.
Large labor intensive operations call for good monitoring and maintenance of cordial relations. Non-availability of labor, poor
labor management and/or any disputes between the labor and management may result in a reduction in profits. Further, we rely on
contractors who engage on-site laborers for performance of many of our unskilled operations. The scarcity or unavailability of
contract laborers may affect our operations and financial performance.
We face increasing labor costs
and other costs of production in the PRC, which could limit our profitability.
The
ceramic tile manufacturing industry is labor intensive. Labor costs in China have been increasing in recent years and our labor
costs in the PRC could continue to increase in the future. If labor costs in the PRC continue to increase, our production costs
will likely increase which may in turn affect the selling prices of our products. We may not be able to pass on these increased
costs to consumers by increasing the selling prices of our products in light of competitive pressure in the markets where we operate.
In such circumstances, our profit margin may decrease.
Violation
of Foreign Corrupt Practices Act or China anti-corruption law could subject us to penalties and other adverse consequences.
We
are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States public companies from bribing
or making prohibited payments to foreign officials to obtain or retain business. PRC law also strictly prohibits bribery of government
officials. While we take precautions to educate our employees about the Foreign Corrupt Practices Act and Chinese anti-corruption
law, there can be no assurance that we or the employees or agents of our subsidiaries will not engage in such conduct, for which
we may be held responsible. If that were to occur, we could suffer penalties that may have a material adverse effect on our business,
financial condition and results of operations.
Our independent
registered public accounting firm’s audit documentation related to their audit reports included in this annual report may
be located in the People’s Republic of China. The Public Company Accounting Oversight Board currently cannot inspect audit
documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Auditors
of companies whose shares are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States,
including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight
Board (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to
assess their compliance with the laws of the United States and professional standards applicable to auditors. Because we have substantial
operations within the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the
Chinese authorities, our auditor is not currently inspected by the PCAOB. In May 2013, the PCAOB announced that it had entered
into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or CSRC, and the
PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit
documents relevant to investigations undertaken by the PCAOB, the CSRC or the Ministry of Finance in the United States and the
PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections
in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. This lack
of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors
operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability
of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's
audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Proceedings
instituted by the SEC against certain PRC-based accounting firms could result in financial statements being determined to not be
in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
On
December 3, 2012, the SEC issued an order instituting administrative proceedings against five of the largest global
public accounting firms relating to work performed in the PRC and such firms’ failure to provide audit work papers to
the SEC in this regard. Our independent registered public accounting firm is not one of the accounting firms referenced in
the order. On January 22, 2014, an initial administrative law decision was issued, censuring the five accounting firms
and suspending four of the five firms from practicing before the SEC for a period of six months. On February 12, 2014,
four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four
PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of
their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide
the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the
SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. In the event that the SEC
restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major
PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could
result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including
possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor
uncertainty regarding China-based, United States-listed companies and the market price of our shares may be adversely
affected. If our independent registered public accounting firm was denied, temporarily, the ability to practice before the
SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our
financial statements, our financial statements could be determined to not be in compliance with the requirements of the
Exchange Act.
Risk Factors Relating to Operations in
China
We are dependent on political, economic, regulatory and
social conditions in the PRC.
Approximately 94% of
our revenue in each of the last three fiscal years was derived from the PRC market and we anticipate that the PRC market will continue
to be the major source of revenue for the foreseeable future. Accordingly, any significant slowdown in the PRC economy or decline
in demand for our products from our customers in the PRC will have an adverse effect on our business and financial performance.
Furthermore, as our operations and production facilities are located in the PRC, any unfavorable changes in the social and/or political
conditions may also adversely affect our business and operations. While the current policy of the PRC government seems to be one
of economic reform to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy
will continue to prevail in the future. There is no assurance that our operations will not be adversely affected should there be
any policy changes.
We are subject to risks related to
the laws and regulations of the PRC and the interpretation and implementation thereof.
Our business and operations,
as well as those of our customers and suppliers in the PRC, are subject to the laws and regulations promulgated by relevant PRC
governmental authorities. The PRC government is still in the process of developing a comprehensive set of laws and regulations
in the course of the PRC’s transformation from a centrally planned economy to a market oriented economy. As the
legal system in the PRC is still in flux, laws and regulations or their interpretation may be subject to change. Furthermore, any
change in the political and economic policy of the PRC government may also result in similar changes in the laws and regulations
or the interpretation thereof. Such changes may adversely affect our operations and business in the PRC.
The PRC legal system
is a codified legal system comprising written laws, regulations, circulars, administrative directives, and internal guidelines
as well as judicial interpretations. Decided cases do not form part of the legal structure of the PRC and thus have no binding
effect. As such, the administration of PRC laws and regulations may be subject to a certain degree of discretion by the authorities.
This has resulted in the outcome of dispute resolutions not having the level of consistency or predictability as in other countries
with more developed legal systems. Due to such inconsistency and unpredictability, if we should be involved in any legal dispute
in the PRC, we may experience difficulties in obtaining legal redress or in enforcing our legal rights.
From time to
time, changes in law, registration requirements, and regulations or the implementation thereof may also require us to obtain
additional approvals and licenses from the PRC authorities for carrying out our operations in the PRC which would require us
to incur additional expenses in order to comply with such requirements and in turn affect our financial performance with the
increase in our business costs. Furthermore, there can be no assurance that approvals, registrations, or licenses will be
granted to us promptly or at all. If we experience delays in obtaining or are unable to obtain such required approvals,
registrations, or licenses, our operations and business in the PRC, and hence our overall financial performance will be
adversely affected.
Our business activities are subject to certain PRC laws
and regulations.
As our production and
operations are carried out in the PRC, we are subject to certain PRC laws and regulations. In addition, being wholly foreign-owned
enterprises, we are required to comply with certain additional laws and regulations. Pursuant to PRC laws and regulations, the
breach or non-compliance with such laws and regulations may result in the PRC authorities suspending, withdrawing or terminating
our business license, causing us to cease production of all or certain of our products, and this would materially and adversely
affect our business and financial performance. Our corporate affairs in the PRC are governed by our articles of association and
the corporate and foreign investment laws and regulations of the PRC. The principles of the PRC laws relating to matters such as
the fiduciary duties of directors and other corporate governance matters and foreign investment laws in the PRC are relatively
new. Hence, the enforcement of investors or shareholders’ rights under the articles of association of a PRC company and the
interpretation of the relevant laws relating to corporate governance matters remain largely untested in the PRC.
PRC foreign exchange control may
limit our ability to utilize our profits effectively and affect our ability to receive dividends and other payments from our PRC
subsidiaries.
Hengda is a foreign
investment enterprise, or “FIE,” and is subject to the rules and regulations in the PRC on currency conversion.
In the PRC, State Administration of Foreign Exchange, or SAFE, regulates the conversion of the RMB into foreign currencies. Currently,
FIEs are required to apply to SAFE for “Foreign Exchange Registration Certificates for Foreign Investment Enterprise”.
With such registration certifications (which need to be renewed annually), FIEs are allowed to open foreign currency accounts including
the “current account” and “capital account”. Currently, conversion of currency within the scope of the
“current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without
requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such
as direct investments, loans, securities, etc.) still requires the approval of SAFE.
On October 21,
2005, SAFE promulgated the “Notice on Issues concerning Foreign Exchange Management in Financing by PRC Residents by Overseas
Special Purpose Vehicle and Return Investments” (the “No. 75 Notice”).
The No. 75 Notice
came into effect on November 1, 2005 and requires the following matters, among others, to be complied with: every PRC domestic
resident who establishes or controls an overseas special purpose vehicle, or “SPV,” must apply to the local bureau
of SAFE for an “overseas investment foreign exchange registration.”
Every PRC
domestic resident of an SPV who has completed the “overseas investment foreign exchange registration”, or
“Registrant,” must make an application to the local bureau of SAFE to amend their registration particulars upon
(i) the injection of any PRC domestic assets or the equity interests of any PRC domestic company owned by the PRC
domestic resident into the SPV, and (ii) the implementation of any overseas equity fund-raising by the SPV following an
injection of PRC domestic assets or the equity interests of a PRC domestic company; every Registrant must apply to the local
bureau of SAFE for change of registration particulars or recordation within 30 days after the occurrence of any capital
increase or reduction, changes in shareholdings or share swap, merger, long-term investment in equities or debentures,
guarantee of foreign indebtedness and other major capital changes not involving “return investment”, undertaken
by an SPV; and every Registrant must repatriate, within 180 days, dividends or profits which he receives from an SPV and/or
income derived from changes in the shareholding of an SPV. On July 14, 2014, China’s State Administration of
Foreign Exchange (SAFE), the foreign exchange control authority, released the Notice of the State Administration of Foreign
Exchange on Relevant Issues Concerning Foreign Exchange Administration for Overseas Investment, Financing and Round Trip
Investment Undertaken by Domestic Residents via Special Purpose Vehicles (Notice 37). The new regulation took effect
July 4, 2014. At that time, the old regulation, “Notice on Issues concerning Foreign Exchange Management in
Financing by PRC Residents by Overseas Special Purpose Vehicle and Return Investments” (the “No. 75
Notice”), which was issued in 2005, was repealed. Compared with Circular 75, Circular 37 reflects the trend of
SAFE’s policy to gradually loosen the restrictions and simplify the procedures for overseas financing and investment by
Chinese residents, so as to fully utilize the financial resources in domestic and overseas markets. However, as Circular 37
has only recently been issued, the actual interpretation and enforcement of the above changes by SAFE in practice remain to
be seen. There can be no assurance that SAFE will not continue to issue new rules and regulations and/or further
interpretations of the No. 37 Notice that will strengthen the foreign exchange control. As we are located in the PRC and
all of our sales are denominated in RMB, our ability to pay dividends or make other distributions may be restricted by PRC
foreign exchange control restrictions. There can be no assurance that the relevant regulations will not be amended to our
detriment and that our ability to distribute dividends will not be adversely affected.
Introduction of new laws or changes
to existing laws by the PRC government may adversely affect our business.
The PRC legal system
is based on the Constitution of the People’s Republic of China and is made up of written laws, regulations, circulars and
directives. With the PRC’s entry into the WTO, the PRC government is in the process of developing its legal system so as
to encourage foreign investments and to meet the needs of investors. As the PRC economy is developing at a generally faster rate
than its legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations will
apply to certain events or circumstances. Some of the laws and regulations, and the interpretation, implementation and enforcement
thereof, are still at the experimental stage and therefore subject to policy changes. There is no assurance that the introduction
of new laws or regulations, changes to existing laws and regulations and the interpretation or application thereof or the delays
in obtaining approvals from the relevant PRC authorities will not have an adverse impact on our business or prospects.
In particular, on August 8,
2006, the Ministry of Commerce, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration
Commission, the State Administration of Taxation, the State Administration of Industry and Commerce and the State Administration
of Foreign Exchange promulgated the “Rules on the Mergers and Acquisition of Domestic Enterprises by Foreign Investors”
which came into effect on September 8, 2006, or “the M&A Rules.” Foreign investors should comply with the
rules when they purchase shareholding equities of a PRC domestic non-foreign-funded enterprise, or Domestic Company, or subscribe
to the increased capital of a Domestic Company, and thus changing the nature of the Domestic Company into a foreign investment
enterprise. The rules stipulate, inter alia, (i) that the acquisition of a Domestic Company by an affiliated foreign
enterprise established or controlled by PRC entities or individuals must be approved by the Ministry of Commerce; (ii) that
the incorporation of a special purpose vehicle, which is directly or indirectly controlled by PRC entities for the purpose of an
overseas listing of the equity interest of a Domestic Company, must be subject to the approval of the Ministry of Commerce; (iii) that
the acquisition of a Domestic Company by a special purpose vehicle shall be subject to approval of the Ministry of Commerce and
(iv) the offshore listing of a special purpose vehicle shall be subject to the prior approval from China Securities Regulatory
Commission.
As Hengda was incorporated
as a FIE and China Ceramics does not fall within the scope of being classified as a special purpose vehicle directly or indirectly
established or controlled by PRC entities or individuals, the M&A Rules did not apply to the Business Combination, and
we were not required to obtain the approval from the Ministry of Commerce, the approval from the China Securities Regulatory Commission
and/or any other approvals from PRC government authorities as stipulated by the M&A Rules. There is however no assurance that
the PRC authorities will not issue further directives, regulations, clarifications or implementation rules, which may require us
or other relevant parties to obtain further approvals with respect to the Business Combination. If new laws are promulgated or
the existing laws are reinterpreted, our structure could be determined to be in violation of such laws and subject to sanction
by applicable government authorities.
Environmental, health and safety
laws have in the past and may in the future impose material liabilities on us and require us to incur material capital and operational
costs.
We are subject to environmental,
health and safety laws and regulations in the PRC that impose controls on our air, water and waste discharges, on our storage,
handling, use, discharge and disposal of chemicals, and on exposure of our employees to hazardous substances. These laws and regulations
could require us to incur costs to maintain compliance and could impose liability to remedy the effects of hazardous substance
contamination. Although we do not believe that we have violated any of such laws and regulations and therefore have not incurred
any significant liabilities under these laws and regulations in the past, the environmental laws and regulations are constantly
evolving and becoming stricter in the PRC. The adoption of new laws or regulations or our failure to comply with these laws or
regulations in the future could cause us to incur material liabilities and could require us to incur additional expenses, curtail
operations and/or restrict our ability to expand. Hengdali is currently in the process of applying for a Pollutant Discharge Permit,
and the environmental protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is
not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by
the environmental protection agency. During 2014, our Hengda facility was required by the local governmental entity to begin using
natural gas to operate the facility, as opposed to coal. This mandated change in fuel source is part of a province-wide (and country-wide)
effort to reduce pollution. This change resulted in our incurring a one-time charge of approximately RMB5.6 million ($0.9 million)
in December 2013, and will increase our cost of goods produced at that facility because natural gas is a more expensive energy
source than coal. There is no assurance that in the future our other production facilities will not be required to make similar
modifications which could have similar adverse effects on our operations.
Our business will suffer if we lose our land use rights.
There is no
private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives.
In the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50
years, and are typically renewable. Land use rights can be granted upon approval by the land administrative authorities of
China (State Land Administration Bureau) upon payment of the required land granting fee, the entry into a land use agreement
with a competent governmental authority and certain other ministerial procedures. We have received land use certificates for
certain parcels of land on which our operations reside, but we may not have followed all procedures required to obtain such
certificates or paid all required fees. If the Chinese administrative authorities determine that we have not fully complied
with all procedures and requirements needed to hold a land use certificate, we may be forced by the Chinese administrative
authorities to retroactively comply with such procedures and requirements, which may be burdensome and require us to make
payments, or such Chinese administrative authorities may invalidate or revoke our land use certificate entirely. If the land
use right certificates needed for our operations are determined by the government of China to be invalid or if they are not
renewed, we may lose production facilities or employee accommodations that would be difficult or even impossible to replace.
Should we have to relocate, our workforce may be unable or unwilling to work in the new location and our business operations
will be disrupted during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase
our costs of production, which would negatively impact our financial results.
We own certain buildings collectively, which may limit
our right to use, renovate or dispose of such buildings.
Together with three
other companies, we collectively own several buildings located at the Junbing Industrial Zone in Jinjiang City with a total construction
area of 29,120.83 square meters. As a result, our right to use, renovate and dispose of such buildings may be limited.
Our business will suffer if we fail to comply with environmental
protection regulations
Companies which cause
severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within a prescribed
time limit. If a company fails to report and/or register the environmental pollution it caused, it will receive a warning or be
penalized. Companies that fail to restore the environment or remedy the effects of the pollution within the prescribed time will
be penalized or have their business licenses terminated. Companies that have polluted and endangered the environment must bear
the responsibility for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered
as a result of such environmental pollution. Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260)
granted by Jinjiang City Environmental Protection Bureau that will expire on May 1, 2016. Hengdali is currently in the process
of applying for a Pollutant Discharge Permit, and the environmental protection agency in Gaoan has accepted Hengdali’s application.
If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging
pollutants, and/or fined by the environmental protection agency. If Hengdali’s application is denied, or if the Hengdali
facility is ordered to stop discharging pollutants or is fined, that could have a material adverse effect on our results of operations
and financial condition.
Our corporate structure together with applicable law impede
shareholders from asserting claims against us and our principals.
All of our operations
and records, and all of our senior management are located in the People’s Republic of China. Shareholders of companies such
as ours have limited ability to assert and collect on claims in litigation against such companies and their principals. In addition,
China has very restrictive secrecy laws that prohibit the delivery of many of the financial records maintained by a business located
in China to third parties absent Chinese government approval. Since discovery is an important part of proving a claim in litigation,
and since most if not all of our records are in China, Chinese secrecy laws could frustrate efforts to prove a claim against us
or our management. In order to commence litigation in the United States against an individual such as an officer or director, that
individual must be served. Generally, service requires the cooperation of the country in which a defendant resides. China has a
history of failing to cooperate in efforts to affect such service upon Chinese citizens in China.
If we become directly subject to
the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or
defend the matter, which could harm our business operations, stock price and reputation and could result in a complete loss of
your investment in us.
In recent years, U.S.
public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors,
financial commentators and regulatory agencies. Although a portion of this scrutiny seems to have abated, this scrutiny has centered
around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and,
in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies
that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder
lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we
become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources
to investigate such allegations and/or defend our company. Such investigations or allegations will be costly and time-consuming
and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline
as a result of such allegations, regardless of the truthfulness of the allegations.
Risks to China Ceramics’ Shareholders
The price of our shares could be
volatile and could decline at a time when you want to sell your holdings.
The price of our shares has been and may
continue to be volatile, and that volatility may continue for an extended period of time. Since the completion of the business
combination through May 12, 2020, the trading price of our shares ranged between $36.32 and $0.27 per share. In June 2016,
following a Special Meeting of Shareholders held on May 23, 2016, the Company effected a 1-for-8 combination of all of the
Company’s outstanding ordinary shares. The Company’s shareholders also authorized an amendment to the Company’s
Amended and Restated Memorandum and Articles of Association to increase the par value of the Company’s shares from $0.001
per share to $0.008 per share.
There is a risk that China Ceramics
could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Redomestication and the Business
Combination, which, among other things, could result in significantly greater U.S. federal income tax liability to China Ceramics.
Section 7874(b) of
the Internal Revenue Code of 1986, as amended (the “Code”) generally provides that a corporation organized
outside the United States that acquires, directly or indirectly, pursuant to a plan or series of related transactions
substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for
U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired
corporation, own at least 80% (of either the voting power or the value) of the stock of the acquiring corporation after the
acquisition. Under regulations promulgated under Section 7874, a warrant holder of either the acquired corporation or
the acquiring corporation generally is treated for this purpose as owning stock of the acquired corporation or the acquiring
corporation, as the case may be, with a value equal to the excess of the value of the shares underlying the warrant over the
exercise price of the warrant. If Section 7874(b) were to have applied to the Redomestication, then, among other
things, China Ceramics, as the surviving entity, would have been subject to U.S. federal income tax on its worldwide taxable
income following the Redomestication and the Business Combination as if China Ceramics were a domestic corporation. Although
Section 7874(b) should not have applied to treat China Ceramics as a domestic corporation for U.S. federal income
tax purposes, due to the absence of full guidance on how the rules of Section 7874(b) applied to the
transactions completed pursuant to the Redomestication and Business Combination, this result is not entirely free from doubt.
Shareholders are urged to consult their own tax advisors on this issue. See the discussion in the section entitled
“Taxation — United States Federal Income Taxation — Tax Treatment of China Ceramics After the
Redomestication and the Business Combination.” The balance of this discussion assumes that China Ceramics has been and
will be treated as a foreign corporation for U.S. federal income tax purposes.
There is a risk that China Ceramics will be classified
as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences
to U.S. holders of its securities.
In general, China Ceramics
will be treated as a PFIC for any taxable year in which either (1) at least 75% of its gross income (including its pro rata
share of the gross income of its 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average
value of its assets (including its pro rata share of the assets of its 25% or more-owned corporate subsidiaries) produce, or are
held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains
from the disposition of passive assets. If China Ceramics is determined to be a PFIC for any taxable year (or portion thereof)
that is included in the holding period of a U.S. Holder (as defined in the section entitled “Taxation—United States
Federal Income Taxation—General”) of its shares, the U.S. Holder may be subject to increased U.S. federal income tax
liability upon a sale or other disposition of the shares of China Ceramics or the receipt of certain excess distributions from
China Ceramics and may be subject to additional reporting requirements. Based on the composition (and estimated values) of the
assets and the nature of the income of China Ceramics and its subsidiaries during its 2015 taxable year, China Ceramics does not
believe that it would be treated as a PFIC for such year. However, because China Ceramics has not performed a definitive analysis
as to its PFIC status for its 2015 taxable year, there can be no assurance in respect to its PFIC status for such year. There also
can be no assurance with respect to China Ceramics’ status as a PFIC for its current (2016) taxable year or any future taxable
year. U.S. Holders of the shares of China Ceramics are urged to consult their own tax advisors regarding the possible application
of the PFIC rules. See the discussion in the section entitled “Taxation—United States Federal Income Taxation—U.S.
Holders—Passive Foreign Investment Company Rules.”
Under the EIT Law, China Ceramics,
Success Winner and/or Stand Best may be classified as a “resident enterprise” of the PRC. Such classification could
result in PRC tax consequences to China Ceramics, our non-PRC resident shareholders, Success Winner and/or Stand Best.
On March 16, 2007,
the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,”
which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as “resident enterprises”
and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China
is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes.
The implementing
rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises
“substantial and overall management and control over the production and operations, personnel, accounting, and
properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body
as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax
authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.
If the PRC tax authorities
determine that China Ceramics, Success Winner and/or Stand Best is a “resident enterprise” for PRC enterprise income
tax purposes, a number of PRC tax consequences could follow. First, China Ceramics, Success Winner and/or Stand Best may be subject
to the enterprise income tax at a rate of 25% on China Ceramics’, Success Winner’s and/or Stand Best’s worldwide
taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules,
dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if China
Ceramics, Success Winner and Stand Best are each treated as “qualified resident enterprises,” all dividends from Hengda
to China Ceramics (through Success Winner and Stand Best) should be exempt from the PRC enterprise income tax.
If Stand Best were
treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Stand Best receives from Hengda (assuming
such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, provided that Stand
Best owns more than 25% of the registered capital of Hengda continuously within 12 months immediately prior to obtaining such dividend
from Hengda, and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the “PRC-Hong Kong Tax Treaty,”
were otherwise applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Stand Best
to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if Success Winner were
treated as a “non-resident enterprise” under the EIT Law and Stand Best were treated as a “resident enterprise”
under the EIT Law, then dividends Success Winner receives from Stand Best (assuming such dividends were considered sourced within
the PRC) may be subject to a 10% PRC withholding tax. A similar situation may arise if China Ceramics were treated as a “non-resident
enterprise” under the EIT Law, and Success Winner were treated as a “resident enterprise” under the EIT Law.
Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
Finally, if China
Ceramics is determined to be a “resident enterprise” under the EIT Law, this could result in a situation in which
a 10% PRC tax is imposed on dividends China Ceramics pays to its shareholders that are not tax residents of the PRC, or
“non-resident investors,” and that are enterprises but not individuals, and gains derived by them from
transferring China Ceramics’ shares, if such income is considered PRC-sourced income by the relevant PRC tax
authorities. In such event, China Ceramics may be required to withhold a 10% PRC tax on any dividends paid to such
non-resident investors. Such non-resident investors also may be responsible for paying PRC tax at a rate of 10% on any gain
derived by such investors from the sale or transfer of China Ceramics’ shares in certain circumstances. China Ceramics
would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws. Also, if China
Ceramics is determined to be a “resident enterprise,” its nonresident investors who are individuals may also be
subject to potential PRC individual income tax at a rate of 20% with respect to dividends received from China Ceramics and/or
gains derived by them from the sale or transfer of China Ceramics’ shares. Moreover, the State Administration of
Taxation, or “SAT,” released Circular Guoshuihan No. 698, or Circular 698, on December 10, 2009 that
reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698
addresses indirect equity transfers as well as other issues. Circular 698 is retroactively effective from January 1,
2008. According to Circular 698, where a nonresident investor who indirectly holds an equity interest in a PRC resident
enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise
by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where
the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident
investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant
information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the
offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of
business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC
income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer
under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international
(including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international
(including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the
offshore holding company that is used for tax planning purposes and subject the non-resident investor to PRC tax on the
capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. We (or a
nonresident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources
to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular 698,
which could have a material adverse effect on our financial condition and results of operations (or such non-resident
investor’s investment in us). In additional, the PRC resident enterprise may be required to provide necessary
assistance to support the enforcement of Circular 698. On February 3, 2015, the State Administration of Tax issued a
Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-tax Resident
Enterprise, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that
under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698
but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate
holding company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assess reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or
other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an
“indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an
overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which
directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance
over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer of the
equity interests in the PRC tax resident enterprise and other properties in China, As a result, gains derived from such
indirect transfer may be subject on PRC enterprise income tax, and the transferee or other person who is obligated to pay for
the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity
interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws
if transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face
uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or
other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or
sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our company and other
non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other
non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if
our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and
Public Notice 7. For the transfer to shares in our company by investors that are non-PRC resident enterprises, our PRC
subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required
to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom we
purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises
in our group should not be taxed under these circulars, which may have a material adverse effect on our financial condition
and results of operations. The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make
adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and
the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Circular
698 and Public Notice 7, our income tax costs associated with such potential acquisitions will be increased, which may have
an adverse effect on our financial condition and results of operations. If any PRC tax applies to a non-resident investor,
the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a
deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in respect of such
PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations).
Shareholders should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any
applicable income tax treaties, and any available deductions or foreign tax credits. For a further discussion of these
issues, see the section herein captioned “Taxation—PRC Taxation.”
Fluctuations in exchange rates could adversely affect
our business and the value of our shares.
The value of our shares
will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those currencies and
other currencies in which our revenue may be denominated. Because all of our earnings and cash assets are denominated in Renminbi,
fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds,
as well as our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business,
financial condition or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.
Since July 2005,
the Renminbi has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the Chinese
authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange
market. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to
2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant
fluctuation in the RMB’s value against the U.S. Dollar.
Very limited hedging
transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions
in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully
hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by Chinese exchange control regulations
that restrict our ability to convert Renminbi into foreign currencies.
As the rights of shareholders under
British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate
affairs will be governed by our memorandum and articles of association, the BVI Business Companies Act, 2004 (as amended)
(the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal
action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under
British Virgin Islands law are governed by the common law of the British Virgin Islands and by the BVI Act. The common law of
the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as
well as from English common law, which is applied in the British Virgin Islands by virtue of the Common Law (Declaration of
Application) Act. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin
Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in
the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the
United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate
law. As a result of all of the above, holders of our shares may have more difficulty in protecting their interests through
actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.
British Virgin Islands companies
may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
British Virgin Islands
companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances
in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may
result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company
organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate
wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts
in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original
actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in
nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the
courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able
to recover anything to make up for the losses suffered.
The laws of the British Virgin Islands
may provide comparatively limited protection for minority shareholders, so minority shareholders will have limited recourse if
the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the
British Virgin Islands, there is limited statutory law for the protection of minority shareholders in the form of the provisions
of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an
action to enforce the constitutional documents of the company, i.e. the memorandum and articles of association as shareholders
are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association
of the company. A shareholder may also bring an action under statute if he feels that the affairs of the company have been or will
be carried out in a manner that is unfairly prejudicial or discriminating or oppressive to him. There are also common law rights
for the protection of shareholders that may be invoked, largely dependent on English common law, since the common law of the British
Virgin Islands for business companies is limited.
The market price for our shares has been and may continue
to be volatile.
The market price for
our shares has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to factors including
the following:
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actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of companies specializing in the ceramics business in China;
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announcements by us and our affiliates or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;
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addition or departure of our senior management and key personnel; and
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fluctuations of exchange rates between the RMB and the U.S. dollar.
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Volatility in the price of our shares
may result in shareholder litigation that could in turn result in substantial costs and a diversion of our management’s attention
and resources.
The financial markets
in the United States and other countries have experienced significant price and volume fluctuations, and market prices have been
and continue to be extremely volatile. Volatility in the price of our shares may be caused by factors outside of our control and
may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the market price
of a public company’s securities, shareholders have frequently instituted securities class action litigation against that
company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
Although we paid semi-annual dividends
in July 2013, January 2014, July 2014 and January 2015, we did not pay a dividend after January 2015 and
do not currently plan to pay a dividend in the near future. Therefore, shareholders will benefit from an investment in our shares
only if those shares appreciate in value
We paid dividends in
July 2013, January 2014, July 2014 and January 2015. The declaration and payment of cash dividends is at the
discretion of our board of directors and will depend on factors our board of directors deems relevant, including among others,
our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities,
if any, and any other financing arrangements. We currently do not plan to pay a dividend in the near future. Therefore, the realization
of a gain on shareholders’ investments will depend on the appreciation of the price of our shares, and there is no guarantee
that our shares will appreciate in value.
We may not be able to pay any dividends on our shares
in the future due to British Virgin Islands law.
Under British Virgin
Islands law, we may only pay dividends to our shareholders if the value of our assets exceeds our liabilities and we are able to
pay our debts as they become due. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at
all in the future. Future dividends, if any, will be at the discretion of our board of directors, and will depend upon our results
of operations, cash flows, financial condition, payment to us of cash dividends by our subsidiaries, capital needs, future prospects
and other factors that our directors may deem appropriate.
We may need additional capital, and
the sale of additional shares or equity or debt securities could result in additional dilution to our shareholders.
We believe that our
current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs
for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy
our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more additional credit facilities.
The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness
would result in increased debt service obligations and could result in operating and financing covenants that would restrict our
operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
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ITEM
4.
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INFORMATION ON THE
COMPANY
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A.
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History and Development of the Company
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Our principal PRC-based
operating subsidiary, Hengda, was established on September 30, 1993 under the laws of the PRC. Hengda is a wholly foreign-owned
enterprise in China.
Our other PRC-based
operating subsidiary, Hengdali, was established on May 4, 2008 under the laws of the PRC. All of the equity interests in Hengdali
are 100% owned by Hengda.
Stand Best was established
on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on April 1, 2008
for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of Stand Best.
Success Winner was
established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder and
sole director.
On June 30,
2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted by
Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the same
date, the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success Winner.
Therefore, Mr. Wong Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand Best and
in turn, 100% of Hengda.
CHAC was incorporated
in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a stock exchange,
asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business
that had its principal operations in Asia, with a focus on potential acquisition targets in China.
Pursuant to the terms
of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China
Ceramics, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, and as part of the same integrated transaction,
China Ceramics acquired all of the outstanding securities of Success Winner.
Prior to China Ceramics’
acquisition of Success Winner, neither CHAC nor China Ceramics had any operations.
On November 19,
2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi Province, PRC
by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration
for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders
to Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s
operating and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration
of RMB 185.5 million for the acquisition.
On September 17,
2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian
Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials
and interior and exterior decoration materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017,
the Company disposed Fujian Hengdali for RMB0 to a third-party.
On September 22, 2017, Success Winner
incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong with an initial registered capital
of HKD1. Vast Elite is engaged in the trading of building materials, but had no operations during the year ended December 31,
2017.
On November 20, 2019, Vast Elite incorporated
a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu Future”) in China. Chengdu
Future is engaged in the business management and consulting services.
On December 3, 2019, Success Winner
incorporated a 100% owned subsidiary Antelope Enterprise Holdings Limited (“Antelope Holdings”) in Hong Kong. Antelope
Holdings only serves the purpose as a holding company.
The total maximum annual production capacity
from our two facilities was 51.6 million square meters of ceramic tiles as of December 31, 2019.
China Ceramics’ History
China Ceramics is a
British Virgin Islands limited liability company whose predecessor, CHAC, incorporated in Delaware on June 22, 2007, was organized
as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination,
or controlling, through contractual arrangements, an operating business, that has its principal operations in Asia.
The Initial Public Offering
On November 21,
2007, CHAC consummated its initial public offering of 12,000,000 units. On December 14, 2007, the underwriters of CHAC’s
initial public offering exercised their over-allotment option for an offering of 800,000 units. Each unit in the offering consisted
of one share and one share purchase warrant. Each warrant entitled the holder to purchase from China Ceramics one share in China
Ceramics at an exercise price of $7.50. CHAC’s shares and warrants started trading separately as of December 17, 2007.
The Business Combination
Pursuant to the terms
of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China
Ceramics, its wholly owned British Virgin Islands subsidiary, and, immediately thereafter, and as part of the same integrated
transaction, China Ceramics acquired all of the issued and outstanding shares of Success Winner held by its former shareholder
in exchange for $10.00 and 5,743,320 shares of China Ceramics shares. In addition, 8,185,763 shares of the China Ceramics shares
were placed in escrow (the “Contingent Shares”) to be released to the seller in the event certain earnings and stock
price thresholds were achieved. Of the Contingent Shares, 5,185,763 Contingent Shares were released based on our achieving growth
in either net earnings before tax or net earnings after tax. 3,000,000 Contingent Shares that were eligible to be released if
China Ceramics shares closed at or above certain share price targets for any twenty trading days within a thirty trading day period
prior to April 30, 2012 were canceled because we did not meet applicable price targets. Concurrent with the Business Combination,
we redeemed and purchased an aggregate of 11,193,149 of our shares from our public stockholders for an aggregate purchase price
of approximately $109.6 million (in transactions intended to assure the successful completion of the Business Combination). Such
shares were voted in favor of the Business Combination and the other related proposals. On November 16, 2012 all of our share
purchase warrants expired and ceased to trade. China Ceramics’ registered office is c/o Harneys Corporate Services Limited
of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands.
December 2019
Registered Offering
On December 16,
2019, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company
of 1,200,000 common shares at a purchase price of $0.75 per share. Concurrently with the sale of the Common Shares, pursuant to
the Purchase Agreement the Company also sold warrants to purchase 1,200,000 common shares. The Company sold the Common Shares and
Warrants for aggregate gross proceeds of $900,000. Subject to certain beneficial ownership limitations, the five-year Warrants
will be initially exercisable on the six-month anniversary of the issuance date at an exercise price equal to $0.82 per share,
subject to adjustments as provided under the terms of the Warrants, and will terminate on the five-year anniversary of the initial
exercise date of the Warrants. The closing of the sales of these securities under the Purchase Agreement took place on December 18,
2019. The Company received net proceeds from the transactions of approximately $748,000, after deducting certain fees due to the
placement agent and the Company’s estimated transaction expenses. The net proceeds received by the Company from the transactions
will be used for working capital and general corporate purposes. The Warrants and the shares issuable upon exercise of the Warrants
were sold without registration under the Securities Act of 1933 in reliance on the exemptions provided by Section 4(a)(2) of
the Securities Act as transactions not involving a public offering and Rule 506 promulgated under the Securities Act as sales
to accredited investors, and in reliance on similar exemptions under applicable state laws.
Dawson James Securities, Inc.
acted as the Company’s exclusive placement agent on a best efforts basis, in connection with the Offering. Pursuant to the
terms and provisions of the engagement letter between the Company and the Placement Agent, the Company agreed to pay the Placement
Agent a cash placement fee equal to 8% of the gross proceeds of the Offering, or $72,000, plus other expenses of the Placement
Agent not to exceed $45,000. The Placement Agent also received five-year warrants to purchase up to a number of common shares equal
to 5% of the aggregate number of shares sold in the Offering, including the warrant shares issuable upon exercise of the Warrants,
which such Compensation Warrants have substantially the same terms as the Warrants sold in the Offering, except that such Compensation
Warrants have an exercise price of $0.9375 per share and will terminate on the five year anniversary of the effective date of this
offering.
January 2020
Private Placement
On January 8, 2020, the Company executed
subscription agreements (each, a “Subscription Agreement”) in connection with a $500,000 private placement of its ordinary
shares with three accredited investors (the “Offering”) at the price of $0.75 per share. The Company agreed to register
the shares sold in the Offering for resale no later than 270 days after the closing of the Offering. All respective purchasers
in the Offering were “accredited investors” (as such term is defined under rules and regulations promulgated under
the Securities Act), and the Company sold the securities in the Offering in reliance upon an exemption from registration contained
in Section 4(2) and Rule 506 under the Securities Act. There were no discounts or brokerage fees associated with
this Offering. The net proceeds of the Offering will be used for working capital and general corporate purposes.
Nasdaq Compliance
Update
On July 12,
2019, the Company announced that it received a written notice (the “Notice) from the Listing Qualifications department
of The Nasdaq Stock Market (“Nasdaq Staff”) advising the Company that based upon the closing bid price for the
Company’s shares for the past 30 consecutive business days, the Company no longer met the minimum $1.00 per share
Nasdaq continued listing requirement set forth in Nasdaq Listing Rules. The notification also stated that the Company would
be provided 180 calendar days, or until January 8, 2020, to regain compliance with the foregoing listing requirement. To
do so, the bid price of the Company’s shares must close at or above $1.00 per share for a minimum of 10 consecutive
business days prior to that date. In December 2019, the Company requested additional 180 calendar days to regain
compliance with the listing requirement in compliance with the Nasdaq Listing Rule 5810(c)(3)(A)(ii)). If it appears to
the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, the
staff will provide notice that its securities will be subject to delisting. In addition, if our common shares are delisted at
some later date, our common shares may be subject to the “penny stock” regulations. These rules impose
additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established
customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and
risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our
common shares might decline. If our common shares are delisted from the Nasdaq Capital Market at some later date or become
subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders
would find it difficult to sell their shares.
On January 10,
2020, the Company announced that it has received a notification letter from the NASDAQ Listing Qualification Staff stating that
the Staff has determined to grant the Company an additional 180 days, or until July 6, 2020 (the “Compliance Date”)
to regain compliance with the minimum bid price rule by maintaining a minimum closing bid price of at least $1.00 for ten
consecutive days. If the Company is not be able to regain compliance, its securities will be subject to delisting.
At the February 21,
2020 Annual Meeting, the Company’s shareholders approved, among others, a proposal to amend the Company's Memorandum of
Association to effect a reverse stock split of the outstanding the Company’s common shares, at one of several split ratios,
to be determined by the Board of Directors in its sole discretion, prior to the one-year anniversary of this Annual Meeting, for
the purposes of regaining compliance with the NASDAQ continued listing requirements. The Company continues to monitor market conditions
to determine if, when or how to exercise such authority.
On April 17, 2020, the Company received a notification from the Nasdaq
Staff informing the Company that as a part of and in compliance with the most recently implemented NASDAQ initiative (effective
as of April 16, 2020) to mitigate current instability of world financial markets, the Staff has determined to toll the compliance
periods for bid price and market value of publicly held shares continued listing requirements (together, the “Price-based
Requirements”) through June 30, 2020. As a result, for the duration of the tolling period, the Company will remain
at the same stage of the compliance process and will not be subject to delisting for these concerns. Starting on July 1,
2020, the Company will receive the balance of the remaining compliance period in effect at the start of the tolling period to
regain compliance. Specifically, following this tolling relief, the Company will have 81 calendar days from July 1, 2020,
or until September 21, 2020, to regain compliance with the Price-based Requirements. This can be accomplished in the event
the bid price of the Company’s shares close at or above $1.00 per share for a minimum of 10 consecutive business days prior
to that date. At the February 21, 2020 Annual Meeting, the Company’s shareholders approved, among others, a proposal
to amend the Company's Memorandum of Association to effect a reverse stock split of the outstanding the Company’s common
shares, at one of several split ratios, to be determined by the Board of Directors in its sole discretion, prior to the one-year
anniversary of this Annual Meeting, for the purposes of regaining compliance with the NASDAQ continued listing requirements. The
Company continues to monitor market conditions to determine if, when or how to exercise such authority.
Operational Updates
The Company primarily conducts its mainland
China business operations in two cities: Jinjiang City, Fujian Province, and Gao’An City, Jiangxi Province. This business
is conducted through the Company’s two subsidiaries: Jinjiang Hengda Ceramics Co., Ltd. and Jiangxi Hengdali Ceramic Materials Co.,
Ltd. Following the COVID-19 outbreak in China, both companies were required by the local authorities to cease their operations
in February 2020; the respective operations gradually resumed beginning on March 1, 2020.
·
Jinjiang Hengda Ceramics Co., Ltd. (Jinjiang City, Fujian Province) – there is a total of 280 employees at this location;
no employee has been affected by the novel coronavirus. The local government maintains daily control and monitoring of traffic to Fujian province
from more severely affected provinces. In general, business entities in Jinjiang province resumed their operations, with some restrictions
on operations of commercial banks and municipal entities.
·
Jiangxi Hengdali Ceramic Materials Co. Ltd. (Gao’An City, Jiangxi Province) – there is a total 190 employees
at this location; no employee has been affected by the novel coronavirus. As a general matter, the municipal authorities require travel registration,
routine self-checks for elevated body temperature and other symptoms, with periodic reporting to such authorities.
In addition to the foregoing:
·
Most of the branches of Fujian and Jianxi commercial banks where the Company maintains bank accounts have not fully resumed
their operation or otherwise have refused to perform bank confirmations for fear of contacting contaminated items.
· Cities
and municipalities where the Company’s key customers and suppliers operate maintain monitoring and compulsory
quarantine policies adopted during the outbreak; a number of the Company’s key customers and suppliers are unable to
provide confirmations on time.
·
The express delivery companies have not fully resumed their operations in most cities. The delivery periods have
significantly extended as compared with those prior to the outbreak due to shortage of active staff. Additional disinfection and
sterilization requirements are in place to prevent the potential virus transmission through courier packages.
The
principle office of the Company’s auditors is located in Hong Kong Special Administrative Region of PRC (“HKSAR”).
In order to prevent the COVID-19 disease outbreak in HKSAR, the government of HKSAR announced that (i) beginning on February 4,
2020, individuals, including Hong Kong residents, travelling between Hong Kong and the Mainland or between Hong Kong and other
places will have to use control points at the Hong Kong International Airport, Shenzhen Bay and the Hong Kong-Zhuhai-Macao Bridge,
and closed other land and water ports between mainland and HKSAR, and (ii) beginning on February 8, 2020, the Department of Health
of the HKSAR issued quarantine orders to all people entering Hong Kong from the Mainland, including Hong Kong residents, Mainland
residents and visitors from other places. People involved are required to stay at home or are required to find other accommodations
to complete a fourteen-day compulsory quarantine. The Chief Executive of the government of the HKSAR under section 8 of the Prevention
and Control of Disease Ordinance (Cap. 599) enacted the Compulsory Quarantine of Certain Persons Arriving at Hong Kong Regulation
(“the Regulation”) to enforce the quarantine measure described in item (ii) above. The updated expiry date of the Regulation
is midnight June 7, 2020.
The Company files this Annual Report in
compliance with and reliance upon the SEC Order under Section 36 of the Securities Exchange Act of 1934, as amended, granting Exemptions
from Specified Provisions of the Exchange Act and Certain Rules thereunder (SEC Release No. 34-88318/March 4, 2020). As a standard
audit procedure, the auditors are required to control the confirmation procedures to ensure the effectiveness of this audit procedure,
i.e. to issue confirmations to bank, customers and suppliers directly, and required the counterparties to mail back the confirmations
directly to the auditors’ office. However, in light of the limited operation of the commercial banks and other business entities
(especially small and medium sized entities), and the extended processing period of the express delivery service during the outbreak
and subsequent recovery periods, the issuing time and related response period of audit confirmations was delayed. The recovery
rate of the audit confirmations distributed (especially for those to customers and suppliers) is also expected to be lower than
in previous years, as a result, additional alternative procedures would be required, such measures would also in return delay the
overall audit process. The above-referenced measures had or will have adverse impacts on the timeliness to the Company’s
annual audit, i.e., adversely affect the auditors’ overall on-site audit schedules as well as the timeliness of express delivery
service of documents (such as audit confirmations) between mainland and HKSAR, and the filing of this Annual Report.
Overview
We are a leading Chinese
manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings.
The ceramic tiles, sold under the “HD” or “Hengda,” “HDL” or “Hengdeli”, “Pottery
Capital of Tang Dynasty”, “TOERTO” and ”WULIQIAO” brands are available in over two thousand
styles, colors and size combinations. Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed
tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling
products, accounting for over 67.6% of our total revenue in 2017.
Ceramic tiles are widely
used in the PRC as a construction material for residential and commercial buildings. Ceramic tiles are used for flooring, interior
walls for decorative purposes and on exterior siding due to their resistance to temperature, extreme environments, erosion, abrasion
and discoloration for extended periods of time. Citigroup Global Markets reports that the PRC government has actively promoted
the construction of affordable housing by ensuring that 77% of the new land made available was allocated to those in the low-income
bracket, especially in Tier II and III cities. During the 11th National People’s Congress (NPC) relating to the central government’s
draft 12th Five Year Plan (2011 - 2015), Premier Wen Jiabao pledged that the government will curb excessive housing price growth
and provide enough affordable houses for needy residents. Premier Wen stated that, from 2011 to 2015, the country aims to build
36 million units of affordable housing covering 20 percent of the country’s households. In addition, the government recently
released a statement stating that the greatest potential for expanding domestic demand and sustaining economic growth lies in urbanization.
Since urbanization leads to new property development and construction, this could positively impact the Company’s business.
Our manufacturing facilities operated by
Jinjiang Hengda Ceramics Co., Ltd. are located in Jinjiang, Fujian Province, and our manufacturing facilities operated by
Jiangxi Hengdali Ceramic Materials Co., Ltd. are located in Gaoan, Jiangxi Province. Combined, these facilities currently
provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, our annual production
capacity has been effectively reduced from 72 million square meters of ceramic tiles to 66 million square meters of ceramic tiles
due to an eight-year contract to lease out one of the production lines from our Hengdali facility that we entered into in March 2016.
Therefore, for the term of the eight-year lease, and as a result of two old furnaces having been put out of use at the facility,
we may only produce up to 28.8 million square meters of ceramic tiles from our Hengdali facility. In 2017, Hengda retired two old
furnaces; in July of 2018, Hengda retired two more old furnaces, which caused Hengda’s annual maximum production capacity
to be reduced to approximately 22.8 million. Therefore, the Company’s effective annual production capacity has been effectively
reduced from 72 million square meters of ceramic tiles, to 51.6 million ceramic tiles as of fiscal year end 2019. Due to a reduction
in demand, as of fiscal year end 2019, we are utilizing production facilities capable of producing only 9.3 million square meters.
In addition, we currently have 12 production lines of which only 3 were utilized as of fiscal year end of 2019 due to challenging
macroeconomic conditions that began in the fourth quarter of 2012. Each production line is optimized to manufacture specific size
ranges to maximize efficiency and output.
We primarily sell our products through an
exclusive distributor network or directly to property developers. We have long-term relationships with our customers; most of our
top ten customers in 2019 have been purchasing from us for over ten years. We have been in discussions with some large property
developers in China to be their exclusive or primary provider of ceramic tiles and, although no arrangements or agreements have
been entered into, we expect to enter into arrangements of that type in the foreseeable future.
We focus our research and development efforts
on developing innovative and environmentally friendly products. We own eighteen utility model patents. Our stringent tile management
and marketing efforts have created a strong business reputation and high brand awareness as demonstrated by us receiving the “Chinese
Well-Known Trademark” award from the Intermediate People’s Court of Xiangtan City and “Asia’s 500 Most
Influential Brands 2014” award from the World Brand Laboratory.
Our Industry
We operate in the Chinese ceramic tile industry
which is fragmented, highly competitive and closely tied to the PRC economy. Although there is little industry data available,
management believes from its knowledge of other manufactures that it is one of the largest PRC-based manufacturers of ceramic tiles.
In 2019, China’s gross domestic product
(GDP) totaled approximately $14.1 trillion and was the world’s second largest economy after the United States. China’s
2019 GDP grew by 6.1% compared to 6.6% annual GDP growth in 2018, and we believe that construction and real estate development
will continue to be a key driver behind China’s GDP growth with property investment and related industries constituting a
significant percentage of its GDP. Demand for ceramic tile product depends upon and directly correlates to activity in the construction
and real estate development industries. The ceramic tile industry’s two primary markets in the PRC are residential construction
applications and commercial construction applications.
We believe that China’s real estate
sector is likely to be relatively stable as speculative activities have prompted government policies to restrict construction with
the intent to rein in rising prices. Further, tighter policy in the sector has occurred as some banks have increased their mortgage
lending rates and down payment requirements. However, the government has issued statements stating that the greatest potential
for expanding domestic demand and sustaining economic growth lies in urbanization. Since urbanization leads to new property development
and construction, this could positively impact our business.
We believe that
the real estate and the construction and building materials sectors continue to be vital to sustaining China’s economy growth.
The Chinese Government is intent upon curbing real estate speculation and stabilizing prices by pronouncing that real estate is
for habitation versus speculation and by promoting affordable housing and inexpensive rental housing. However, from time to time
the Chinese government has also taken various actions to stimulate real estate development and home purchases which include interest
rate cuts, lowering the reserve requirement ratio for banks, lowering first home down payment ratios and cutting the minimum capital
ratio for fixed asset investments to aid property developers.
Although
the Chinese Government’s measures have helped to sustain the real estate sector, there is an oversupply of building material
companies which has exacerbated occasional slowdowns in construction activity.
Commencing in the fourth quarter of 2012,
we began experiencing challenging market conditions in China’s real estate and construction markets which resulted in a marked
decrease of our sales volume of our ceramic tile products. Beginning in December 2012, we began reducing the selling price
of our ceramic tile products to be competitive in the market and to maintain market share. For fiscal 2013, our full year revenue
was down 35.4% as compared to fiscal 2012 full year revenue, resulting from a 24.8% decrease in the sales volume of our ceramic
tiles and a 14.1% decline in our average selling price. In fiscal 2014, we began emerging from the sector downturn that occurred
in late 2012 due to challenging macroeconomic conditions. For fiscal 2014, our full year revenue increased 11.2% as compared to
fiscal 2013 resulting from a 1.2% increase in the sales volume of our ceramic tiles and a 9.7% increase in our average selling
price. However, for fiscal 2015, our full year revenue decreased by 2.0% as compared to fiscal 2014 resulting from a 5.8% decrease
in the sales volume of our ceramic tiles somewhat offset by a 4.2% increase in our average selling price. The decrease in revenue
in fiscal 2015 as compared to fiscal 2014 was primarily due to a substantial decline in business activity in the fourth quarter
of 2015 as compared to the fourth quarter of 2014. The Company’s sales volume of 6.7 million square meters represented a
13.0% reduction in sales volume from the 7.7 million square meters recorded in the fourth quarter of 2014. The average selling
price in the fourth quarter of 2015 rose 0.3% to 31.2 per square meter of ceramic tile as compared to the fourth quarter of 2014
as we had been able to retain our pricing power. The increase in average selling price in the fourth quarter of 2015 represents
eight consecutive quarters of period over year-ago period growth in average selling price. However, business conditions became
very challenging since the beginning of 2016. For fiscal 2016, our full year revenue decreased by 22.0% as compared to fiscal 2015
resulting from a 12.9% decrease in the sales volume of our ceramic tiles and an 11.5% decrease in our average selling price. The
decrease in revenue in fiscal 2016 as compared to fiscal 2015 was primarily due to continued challenging market conditions and
an overall decline in business activity. Consequently, beginning on July 1, 2016, we reduced the selling price of certain
of our slow- moving products by 10% with the goal to turn some of this inventory into cash. Beginning on October 1, 2016,
in order to generate sales and move inventory, we instituted a 20% reduction of our slow-moving products. This further price reduction
led to a 35% increase in our sales volume to 9.00 million square meters in the fourth quarter of 2016 compared to 6.68 million
square meters for the same period of 2015. However, the average selling price in the fourth quarter of 2016 fell 28.2% to RMB 22.4
per square meter of ceramic tile as compared to the fourth quarter of 2015 due to the price discounting instituted at the beginning
of the fourth quarter. The decreases in average selling price in beginning in the third quarter of 2016 reversed eight consecutive
quarters of period over year-ago period growth in this metric. Business conditions continued to be challenging in fiscal 2017 as
we experienced a year-over-year 6.5% decrease to RMB 25.8 in our average selling price as compared to RMB 27.6 for fiscal 2016.
However, due to competitive pricing and the strong sales of our porcelain ceramic tiles, we were able to generate a 10.6% increase
in sales volume to 30.8 million square meters of ceramic tiles in 2017 from 28.8 million square meters of ceramic tiles for fiscal
2016. In fiscal 2018, we experienced difficult market conditions, especially in the second half of the year, which resulted in
a 44.6% decline in sales volume as compared to fiscal 2017. In an effort to bolster sales, in July of 2018, we decreased the
pricing of our ceramic tile products by an average of 10%, but certain core products maintained their pricing levels which resulted
in a 9.4% increase to RMB 28.2 in our average selling price as compared to RMB 25.8 for fiscal 2017. In October 2019, we decreased
the pricing of our ceramic tile products by an average of 15%. This resulted in a 26% increase in our sales volume for the second
half of 2019 as compared to the same period of 2018. For the full fiscal year 2019 revenue decreased by 34.2% as compared to fiscal
2018 mainly due to the 27.0% decrease in sales volume resulting from the continued slowdown of China’s economy, especially
in the manufacturing sector and the real estate industry.
Key Factors Affecting the Chinese Ceramic Tile Industry
The overall performance
of the ceramic tile industry is influenced by consumer confidence, spending for durable goods, interest rates, turnover in housing,
the condition of the residential and commercial construction industries and the overall strength of the economy and the recent
restriction policy on the purchase of property. Demand for our ceramic tile products in the PRC heavily depends on the following
economic factors and government policies designed to drive growth in the construction and real estate development sectors of the
PRC economy.
Urbanization
Over the last twenty
years, China has experienced rapid urbanization due to the increasingly limited capacity of rural areas to provide adequate economic
support for a large agrarian population, the increasing disparity in disposable incomes between rural and urban dwellers and the
easing of restrictions which historically limited rural to urban migration from rural areas to towns and cities. The development
of an industrial base and service sector in urban areas has also driven large labor pools with a broad range of skills to urban
areas. It is estimated that China’s urban population will expand from 572 million in 2005 to 926 million in 2025 and hit
the one billion mark by 2030. In 20 years, China’s cities will have added 350 million people to its urban population —
more than the entire population of the United States today. As a result of the urbanization trend and the associated need to expand
an underdeveloped infrastructure to accommodate and house such growth, we believe that commercial and residential construction
will expand measurably in future years, thereby creating additional demand for our products.
Potential of Tier II and III cities
Much of the growth
in China’s GDP is being driven by economic activity in Tier II and Tier III cities, such as Chengdu, Chongqing, and Tianjin,
which commonly have populations that exceed 10 million individuals who often live in dwellings that do not meet modern standards.
According to Jones Lang LaSalle, Tier I cities will account for only 10% of China’s commercial real estate activities by
2020, which highlights the attractive commercial development opportunities in Tier II and III cities. The economic impact of this
trend is being felt across China’s Tier II and Tier III cities as the upswing in new residential and commercial construction
projects and renovations is generating new demand for construction materials.
Importance of distributors
The majority of
exterior ceramic tile manufacturers do not have sufficient resources to provide their own sales coverage nationwide and rely
heavily on local distributors. As competition has intensified, many manufacturers have started to bid directly to real-estate
developers for large construction projects. Our direct sales represented 0%, 4% and 11% of total sales in 2019, 2018 and
2017, respectively and market participants expect that this share could increase, placing a premium on a
manufacturer’s internal sales force while requiring product lines with greater flexibility to meet customer
demands.
Industry and Product Offerings
There are two product segments within the
ceramic tile industry: exterior and interior.
Exterior ceramic tiles
Exterior ceramic tile
is mainly used as a decorative and protective component on building exteriors. Unlike other types of tiles, exterior ceramic tile
must endure harsh environmental conditions and typically is manufactured to be water/dirt-resistant, non-corrosive and energy efficient.
In addition, exterior ceramic tiles have other demands that interior ceramic tiles do not always have, including mandatory expansion
joints, moisture considerations and thermal demands. Depending on the ultimate use of the ceramic tile and customer preferences,
exterior ceramic tiles are often manufactured with customized glazing, coloring and other design and aesthetic features.
Interior ceramic
tiles
Interior ceramic tiles
are mainly used for decorative purposes on walls and floors in kitchens and bathrooms. Interior ceramic tiles are differentiated
by design, style and perceived quality. Within China, interior ceramic tiles are typically purchased by residential owners or renovation
contractors rather than property developers.
The manufacturing process
is similar for both segments, however the distribution channels are different. Interior ceramic tiles are sold through retail stores
and directly to contractors or residential owners. Exterior ceramic tiles are sold through distributors or directly to large property
developers. Due to the higher cost distribution chain and typically smaller order sizes, profit margins are generally less within
the interior ceramic tile industry.
Future Product Trends
As the ceramic tile
industry in the PRC matures, builders are demanding construction materials that reduce building weight, making it possible to use
light building structures and accelerate the speed of construction. Government policies meant to address energy efficiency are
promoting the use of innovative wall materials, particularly those performing well in heat preservation and insulation and that
are light in weight, and manufactured utilizing waste materials, less energy and fewer raw materials. In an effort to differentiate
their products and meet government policies, ceramic tile manufacturers are increasingly focusing on research and development efforts.
China Ceramics’ Products
Currently, all of our products are
exterior wall ceramic tiles. We produce five types of ceramic tiles:
Porcelain tiles: Porcelain
tiles are fired at extreme temperatures and are therefore stronger and harder than other types of ceramic tiles. The material and
the color are the same throughout and porcelain tiles are extremely durable. Although porcelain tiles have a matte surface, they
absorb less water than other ceramic tiles, and as such, they are a superior solution for exterior tiling where there is frequent
exposure to moisture.
Glazed tiles: Glazed
tiles have a glossy finish and color patterns may be added to the exterior surface of the tile. The glaze does not go beyond the
exterior surface of the tile and the interior color will show if the tile is chipped. Although glazed tiles are less water-resistant
than matte porcelain tiles, they are easier to clean due to their glossy surface.
Glazed porcelain
tiles: Glazed porcelain tiles combine the advantages of porcelain tiles and glazed tiles, thus enabling the tiles
to have a porcelain body with a stain-proof and glossy finish.
Rustic tiles: Rustic
tiles have greater versatility in their design as textures and colors can be added to their exterior surfaces and therefore can
be used in more decorative situations. In addition to being used on exterior walls, rustic tiles are also used for interior walls
and flooring.
Polished glazed
tiles: Ceramic tiles can be manufactured in differing sizes according to customer specifications, with the largest sized tiles
measuring 800 mm by 800 mm.
We can produce over
2,000 different combinations of products, colors, textures and sizes to meet the various demands of our customers.
In fiscal 2015, we constructed a new production
line to manufacture glazed brick ceramic tiles in our Hengdali facility, which we believe will be an attractive addition to our
current product portfolio. This new product is engineered to be competitively priced and a highly effective roofing solution for
both high rise apartment buildings and housing projects, and it complements our existing ceramic tile building siding products.
In fiscal 2019, the Company today announced that it has developed a new type of exterior ceramic tile designed to cool indoor temperatures
of buildings. The Company intends for this new product, when fully tested and receives its certification, to target the Southeast
Asia market due to the region’s generally hot and wet climate. The Company anticipates utilizing existing production lines
in its Hengdali facility to manufacture the new ceramic tiles. The new ceramic tiles are designed to allow air to pass through
its surface which the Company believes that this makes this product a well-suited material for designing evaporative cooling systems
and an energy efficient building materials solution for both high rise apartment buildings and general housing.
Our Competitive Strengths
We believe the following competitive strengths
will enable us to take advantage of the rapid growth of the ceramic tile industry in China:
Brand Recognition
We believe that the
“Hengda,” “HD,” “Hengdeli,” “HDL,”, “Pottery Capital of Tang Dynasty”,
“TOERTO” and “WULIQIAO” brands are well recognized and highly regarded in markets where our products are
sold. Before April 13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials
Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd.
and was licensed the exclusive right to use WULIQIAO during the term of that trademark, which expires on January 27, 2020.
On April 13, 2011, WULIQIAO was transferred to Hengdali. In 2005, the brands “Hengda” and “HD” were
each certified as a Fujian Well-Known Trademark by the Fujian Well-Known Trademark Award Commission and recognized as a “Chinese
Well-known Trademark” in 2005 by the Intermediate People’s Court of Xiangtan City. Since 2012, we have been recognized
with the “Asia’s 500 Most Influential Brands” award from the World Brand Laboratory. Our products are selected
for inclusion in strategic and high-profile projects such as the 16th Asian Games, the 11th National Chinese Games Village and
the Chinese Academy of Sciences.
Focus on Tier II and Tier III Cities
Because of recent efforts by the PRC government to tighten monetary
policy and constrain real estate prices in the “Tier-I” cities such as Beijing, Shanghai, Shenzhen, and Guangzhou,
we believe the outlook for our business has improved, given our concentration in Tier-II and Tier-III cities. Approximately 0%
of our revenue in the year ended December 31, 2019 was from sales of our products for use in projects in Tier-I cities, and
we expect any weakness in the Tier-I cities to be offset by continued demand growth in the Tier-II and Tier-III cities, driven
by urbanization trends as well as by the PRC government’s commitment to low-income housing.
Long-Term Sales Relationships
We have established
an extensive distributor network and long-term customer relationships, where most of Hengda’s top ten customers in 2019
have been purchasing from us for over 10 years each.
Experienced Management Team
Our experienced, professional
and dedicated management team brings a wealth of knowledge to our day-to-day operations and provides us with strategic direction
and many years of experience in the ceramic industry.
Modern, environmentally friendly, and
efficient manufacturing capabilities
We have modern manufacturing
facilities. Our Hengda facility received an ISO 9001:2000 accreditation, an international standard that acknowledged our quality
control process. Our employees are required to undergo internal training regarding quality control policies, targets and procedures,
as well as production and processing techniques.
We upgraded our Hengda
production lines to recover and/or reuse waste water, waste dust, exhaust and kiln after-heat in 2007, which reduced our energy
usage and energy costs. Our new Hengdali production lines were also built using new equipment that incorporates recovery methods
for recycling waste water, waste dust, exhaust and kiln after-heat that operate at a higher efficiency rate. We received an Energy
Conservation Advance Enterprise Award in 2008 from the Jinjiang City Government.
Focus on Research and Development
We have devoted substantial resources to establishing research
and development capabilities in an effort to improve our products and diversify our product mix. Our R&D team has developed
over 2000 types of different product combinations. As of the date of this Annual Report, we own eighteen utility model patents.
“Utility model patents” means any new technical solution relating to the shape, the structure, or their combination,
of a product, which is fit for practical use. In addition, we were awarded a “High-tech Enterprise Certificate” in
2007 from Fujian Provincial Department of Science and Technology, affirming our innovations in the industry. As of December 31,
2019, our research and development team includes 7 employees and focuses on new products as well as developing energy and resource
efficient production methods.
Strategic Location within the PRC
We are located in
Jinjiang and Gaoan. The Jinjiang region is an established ceramic and construction material hub in the PRC, and the Gaoan region
is a developing ceramic production area supported by the local government. Both of these areas are located near the raw materials
required to produce ceramic tiles. As distributors and direct customers come to these areas to procure construction materials
for sale, construction projects or export, these locations provide us a regular flow of customers and demand. These centralized
industry locations allow us to respond quickly to customer demands and react rapidly to emerging market trends. The proximity
and ease of access to major ports and transportation infrastructure in both of these regions enables us to decrease transportation
and logistics costs.
Our Growth Strategy
We intend to further
strengthen our position as a leading manufacturer of ceramic tiles in China by implementing the following strategies:
Broadening Our
Distribution Network
We sell our products
mainly to distributors located in major Tier-I cities such as Shanghai and Beijing and Tier-II cities such as Tianjin, Wuhan,
Chengdu and Shenyang. We plan to establish and/or increase our presence in Tier-II and Tier-III cities in provinces such as Zhejiang,
Anhui, Heilongjiang, Guizhou, Henan, Hebei, Shandong, Shanxi, Shaanxi, and Yunnan.
We believe that our
new Hengdali production facility in Gaoan will better position us to expand into new markets and reach additional end customers
as transportation and logistical costs of delivering products to these areas will be reduced.
Evaluating Opportunities to Increase
Exports
Currently, we export approximately 0.63% of our products through
PRC trading companies. We intend to increase the exported volume of our products with additional PRC trading companies and by promoting
our products in regional and international trade shows with a focus on direct selling efforts to property developers in the PRC.
Pursuing Selective
Acquisition Opportunities
We will explore business
combinations that broaden our product line, expand our customer base and allow us to penetrate new geographic regions. Our management
believes that it has sufficient expertise to find and acquire suitable ceramic production facilities and/or companies to increase
our scale and geographic diversification within the PRC. Our management intends to only pursue acquisitions where it believes
that we will be able to continue to provide cost competitive, high quality ceramic tiles to our customers.
Further Enhancing
Our Brand Awareness
We plan to enhance
awareness of the “Hengda” or “HD,” “HDL” or “Hengdeli,” “TOERTO” and
“WULIQIAO” brands in the PRC exterior ceramic tile industry. Hengda produces our “Hengda” or “HD”
brands, which are marketed toward the high-end market. Hengdali produces our “HDL” or “Hengdeli” brands,
which are marketed to the mid-level market, “TOERTO” brand, which is a specialized brand for our large-sized rustic
tiles and “WULIQIAO” brand, which is a specialized brand for oriental pattern large-sized rustic tiles. WULIQIAO is
a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing
Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and has been licensed the exclusive right
to use WULIQIAO during the term of that trademark. Our branding strategy is to reach a larger customer base with a wide spectrum
of product offerings. We plan on strengthening our brands by marketing our products to property developers and the construction
industry, partnering with local distributors, attending national fairs and promoting our products through inclusion in strategic
high-profile projects.
Developing Advanced Products That Meet
Evolving Building Construction Requirements
We strive to develop new products that
address market demand for advanced building materials that meet or exceed evolving government policies for energy efficiency.
Our research and development efforts are focused on developing tiles which:
|
·
|
Reduce raw materials and energy consumption in the production process;
|
|
·
|
Have a density less than half of other tiles;
|
|
·
|
Reduce load bearing stress on exterior walls of buildings and tile shedding;
|
|
·
|
Recycle our by-products and limit waste output in our production process;
|
|
·
|
Utilize a honeycomb structure which optimizes insulation performance for new products, such as our light-weight product lines;
|
|
·
|
Have higher standards for water resistance; and
|
|
·
|
Are easier to attach to exterior walls.
|
We will continue to invest in research and
development to maintain our competitive position in the industry.
Production Process and Facilities
A typical production
line for ceramic tiles is comprised of preparation equipment (which typically includes a miller and a spray dryer), a press (which
is used for shaping raw ceramic material), a glazing line (used to supply glazed materials to the pressed tiles), a kiln (used
to harden the soft mixture of clay and minerals into a hard ceramic body by subjecting the mixture to high temperature) and packaging.
The following chart sets out the major
steps involved in the production process:
The procedures involved in the production
of ceramic tiles are summarized below:
Raw materials for ceramic products
consist mainly of clay (comprised of inorganic materials such as kaolin, flint and feldspar) obtained mostly from areas adjacent
to our facilities, such as Dehua county of Quanzhou city and the Fujian province. Raw materials are inspected by quality control
staff upon receipt. Batch calculations that take into consideration both physical properties and chemical compositions of the
raw materials are performed to ensure that the right amounts are mixed.
After stringent checks on the
quality of the clay and weighing, the raw material department mixes the clay as determined during inspection. The mixture is then
sent to a ball mill where water is added to form a slurry for finer grinding. This process takes approximately 12 hours to complete.
The slurry is then filtered and metallic particles are removed magnetically. The slurry is inspected at this stage for density,
flow speed and water ratio. Compared with many competitors who use stone ball millers, we use aluminum ball millers to grind materials.
Aluminum ball millers have a higher initial cost, but have higher grinding speed and can better process stone chips existing in
the slurry. The slurry is then moved to a large slurry pool. Based on the production schedule, portions of the slurry may be moved
to smaller slurry pools where coloring materials can be added. The mixture in smaller slurry pools are churned for approximately
24 hours to keep quality and color consistent in the end product.
A spray dryer is then used to
remove most of the water content in the slurry to obtain granules with the required moisture level for processing. The slurry
is pumped into an atomizer, consisting of a rapidly rotating disk or nozzle where droplets are formed. The droplets of the slurry
spray are then dried by a rising hot air column, forming small free-flowing granules of a standard size and specific moisture
content which is used in the next stage. The stream of gases used to dry the slurry can be at temperatures as high as 1,100°C.
The granules are then moved to and held in steel containers called hoppers for over 24 hours to ensure consistency and uniformity
of granule size and color.
The granules flow from a hopper
into the mold die where they are compressed by steel plungers and then ejected by the bottom plunger in varying sizes based on
specifications. The automated presses used operate at pressures as high as 1,600 tons per square meter. The ceramic bisque, a
shaped non-fired ceramic tile, is then passed through to the dryer to remove most of the remaining water content present in preparation
for the firing and/or glazing stages. The tiles are fed into the dryer and conveyed horizontally on rollers, at temperatures of
250°C for approximately 15 to 25 minutes based on tile type.
Glazing involves applying one
or more coats of glaze, comprised mainly of silica and other coloring agents such as iron, chromium, cobalt or manganese, onto
the tile surface. The dried ceramic bisque is then sent to the glazing station where a design and/or color is added. The glaze
concentration and glazing quantity is controlled by computers to avoid chromatic aberration and lack of uniformity. Not all products,
such as porcelain tiles, require glazing.
After molding and/or glazing,
the ceramic bisque is fired in a kiln. Typically, the temperature in a kiln is about 1,200°C and the firing process takes
less than one hour. The entire firing process is monitored and controlled by computers. We currently have twelve firing lines,
nine located in the Hengda facility and three located at the Hengdali facility.
After the firing process, tiles
are inspected for quality. Tiles which pass inspection are packaged and moved to the storage facility.
Quality Control & Assurance
The quality of our
products is critical to our continued growth and success. In July 2002, our Hengda facility received ISO 9001:2000 accreditation,
an international certification certificate, acknowledging our quality control process. Quality control procedures begin at the
receipt of raw materials and continue throughout the manufacturing process ending with a final quality check prior to packaging.
Our employees are required to undergo internal training regarding our quality control policies, targets and procedures, as well
as production and processing techniques. As of December 31, 2019, our quality assurance team consisted of 13 members.
Notable Awards & Certificates
We have received numerous
awards and certificates for our branding, product quality and R&D achievements. Select awards include:
Year Initially
Received
|
|
Award & Certificate Name
|
|
Issuer
|
|
|
|
|
|
2002
|
|
ISO 9001:2000 Quality Management System Certificate
|
|
China Certification Center for Quality Mark
|
|
|
|
|
|
2005
|
|
ISO 14001:2004 Environmental Management Standards Certificate
|
|
Fujian Branch of Beijing World Standards Certification Centre
|
|
|
|
|
|
2005
|
|
Fujian Well-known Trademark
|
|
Fujian Well-known Trademark Award Commission
|
|
|
|
|
|
2005
|
|
Chinese Well-known Trademark
|
|
Intermediate People’s Court of Xiangtan City
|
|
|
|
|
|
2006
|
|
Inspection Exempted Products Certificate
|
|
National Bureau of Quality and Technical Supervision
|
|
|
|
|
|
2007
|
|
High-tech Enterprise Certificate
|
|
Fujian Provincial Department of Science and Technology
|
|
|
|
|
|
2008
|
|
Energy Conservation Advanced Enterprise
|
|
Jinjiang City Government
|
|
|
|
|
|
2009
|
|
Fujian 100 Important Industrial Enterprise
|
|
Fujian Economic and Trading Commission
|
|
|
|
|
|
2010
|
|
Asia’s 500 Most Influential Brands 2010
|
|
World Brand Laboratory
|
|
|
|
|
|
2010
|
|
Fujian’s Top 300 Enterprises
|
|
Fujian Enterprise Evaluation Center and Fujian Enterprise Evaluation Association
|
|
|
|
|
|
2011
|
|
China’s 500 Most Valuable Brands
|
|
World Brand Laboratory
|
|
|
|
|
|
2011
|
|
Top 100 Fastest Growing Enterprises for China Building Material
|
|
China Building Materials Enterprise Management Association
|
|
|
|
|
|
2011
|
|
Top 500 Enterprise in China Building Material
|
|
China Building Materials Enterprise Management Association
|
|
|
|
|
|
2011
|
|
Customer Preferred Top 10 Brand
|
|
China International Nameplate Development Association
|
|
|
|
|
|
2012
|
|
Asia’s 500 Most Influential Brands 2012
|
|
World Brand Laboratory
|
|
|
|
|
|
2013
|
|
China’s 500 Most Valuable Brands
|
|
World Brand Laboratory
|
|
|
|
|
|
2013
|
|
Asia’s 500 Most Influential Brands 2013
|
|
World Brand Laboratory
|
|
|
|
|
|
2014
|
|
China’s 500 Most Valuable Brands
|
|
World Brand Laboratory
|
Customers, Sales & Marketing
We primarily sell
our products through an exclusive distributor network or directly to property developers. Distributors are located in major cities
such as Shanghai, Beijing, and Shenyang and second and third tier cities such as Chengdu, Haikou, Hefei, Tianjin, Wuhan and other
rural areas in the PRC. We have long-term relationships with many of our customers; most of our top ten customers in 2019 have
been purchasing from us for several years.
The following table sets
forth revenues by geographic market and the related percentage for the years ended 2017, 2018 and 2019:
Geographic
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Market
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
PRC
|
|
|
772,221
|
|
|
|
94.0
|
%
|
|
|
475,413
|
|
|
|
95.0
|
%
|
|
|
326,561
|
|
|
|
99.7
|
%
|
Japan
|
|
|
7,072
|
|
|
|
0.9
|
%
|
|
|
3,113
|
|
|
|
0.6
|
%
|
|
|
1,020
|
|
|
|
0.3
|
%
|
Burma
|
|
|
4,519
|
|
|
|
0.5
|
%
|
|
|
2,840
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
-
|
%
|
India
|
|
|
6,172
|
|
|
|
0.8
|
%
|
|
|
2,393
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Korea
|
|
|
4,213
|
|
|
|
0.5
|
%
|
|
|
2,673
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Thailand
|
|
|
4,031
|
|
|
|
0.5
|
%
|
|
|
2,122
|
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Hong Kong
|
|
|
5,743
|
|
|
|
0.7
|
%
|
|
|
1,661
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Spain
|
|
|
2,836
|
|
|
|
0.4
|
%
|
|
|
1,013
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Turkey
|
|
|
2,786
|
|
|
|
0.3
|
%
|
|
|
1,358
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
South Africa
|
|
|
2,573
|
|
|
|
0.3
|
%
|
|
|
1,495
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Sierra Leone
|
|
|
1,870
|
|
|
|
0.2
|
%
|
|
|
935
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Ghana
|
|
|
1,906
|
|
|
|
0.2
|
%
|
|
|
866
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Russia
|
|
|
2,280
|
|
|
|
0.3
|
%
|
|
|
709
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Morocco
|
|
|
1,737
|
|
|
|
0.2
|
%
|
|
|
773
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Great Britain
|
|
|
1,833
|
|
|
|
0.2
|
%
|
|
|
825
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
|
821,792
|
|
|
|
100
|
%
|
|
|
498,189
|
|
|
|
100
|
%
|
|
|
327,581
|
|
|
|
100
|
%
|
The following table sets forth revenue
for our major customers and the related percentage of our net revenue for the years 2017, 2018 and 2019:
|
|
2017
|
|
Customer Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co., Ltd.
|
|
|
86,249
|
|
|
|
10.5
|
%
|
Fuzhou Chuanpin Materials Co., Ltd.
|
|
|
54,785
|
|
|
|
6.7
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
64,216
|
|
|
|
7.8
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
57,005
|
|
|
|
6.9
|
%
|
Yangzhou Qiyang Trading Co., Ltd
|
|
|
25,161
|
|
|
|
3.1
|
%
|
Kunming Minhengda Trading Co. Ltd.
|
|
|
13,083
|
|
|
|
1.6
|
%
|
Nanjing Huli Construction Materials Co., Ltd.
|
|
|
44,946
|
|
|
|
5.5
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
28,906
|
|
|
|
3.5
|
%
|
Shangrao New Fangyuan Materials Co., Ltd.
|
|
|
34,377
|
|
|
|
4.2
|
%
|
Beihai Jinligao Materials Co., Ltd.
|
|
|
14,619
|
|
|
|
1.8
|
%
|
|
|
2018
|
|
Customer Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co., Ltd.
|
|
|
65,815
|
|
|
|
13.2
|
%
|
Gaoan Hechang Trading Co., Ltd.
|
|
|
33,065
|
|
|
|
6.6
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
45,971
|
|
|
|
9.2
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
42,285
|
|
|
|
8.5
|
%
|
Yangzhou Qiyang Trading Co., Ltd
|
|
|
20,079
|
|
|
|
4.0
|
%
|
Gaoan JinfaTrading Co. Ltd..
|
|
|
29,884
|
|
|
|
6.0
|
%
|
Nanjing Huli Construction Materials Co., Ltd.
|
|
|
22,770
|
|
|
|
4.6
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
23,084
|
|
|
|
6.0
|
%
|
Shangrao New Fangyuan Materials Co., Ltd.
|
|
|
8,022
|
|
|
|
1.6
|
%
|
Wuhan Dashunkai Materials Co., Ltd.
|
|
|
19,613
|
|
|
|
3.9
|
%
|
|
|
2019
|
|
Customer Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co., Ltd.
|
|
|
56,128
|
|
|
|
17.1
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
40,189
|
|
|
|
12.3
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
36,056
|
|
|
|
11.0
|
%
|
Gaoan Hechang Trading Co., Ltd
|
|
|
25,383
|
|
|
|
7.7
|
%
|
Gaoan Jinfa Trading Co. Ltd.
|
|
|
23,781
|
|
|
|
7.3
|
%
|
Wuhan Dashunkai Materials Co., Ltd.
|
|
|
18,123
|
|
|
|
5.5
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
17,837
|
|
|
|
5.4
|
%
|
Zhengzhou Qiyang Trading Co.,Ltd
|
|
|
17,190
|
|
|
|
5.2
|
%
|
Kunming Wuye Trading Co., Ltd.
|
|
|
14,586
|
|
|
|
4.5
|
%
|
Xieli (Fujian) Co., Ltd.
|
|
|
11,312
|
|
|
|
3.5
|
%
|
Our business and profitability
are not materially dependent on any industrial, commercial or financial contract with any of our customers. None of our directors
or executive officers or their respective affiliates has any interest, direct or indirect, in any of our customers.
Sales and Marketing
The sales and marketing
department is responsible for formulating sales policies and pricing based on market analysis, surveys and forecasts, developing
and implementing our sales and marketing campaigns, and promoting our products and brand. Additionally, our sales department is
responsible for cultivating new customers and business relationships, as well as servicing existing accounts.
We participate in
a variety of sales and marketing activities including trade shows, in-house sales and marketing seminars, factory tours, outdoor
advertising, B2B catalogs and customer calls. We believe that these techniques allow us to gather and better understand customers’
needs and requirements and to obtain feedback on our products and services and intend to continue utilizing these techniques.
In the future, we
intend to participate in international trade fairs and seminars from time to time to promote our brand and products, and to establish
a network with industry professionals outside the PRC. To augment our plan to expand our markets internationally, our products
will also be advertised on and available to purchase on the Internet. As of December 31, 2019, our Sales and Marketing Department
had 52 employees.
Backlog
We typically receive
orders from customers two months in advance of production on a rolling basis. We enter into a dealership agreement with customers,
and a sales or purchase contract each time a customer places an order. If a customer makes any changes to an order after we have
used any raw materials in fulfilling the order, the customer bears the losses. Once we have delivered the products to the customer
and the customer has examined and accepted the products, we provide no quality guarantees. We confirm amounts payable with each
customer on a monthly basis. The products typically must be delivered to customers within 90 days of receipt of the sales order,
and the customers typically must pay for the products within 120 to 150 days of delivery.
As of December 31, 2019, our backlog
was nil attributable to the novel coronavirus pandemic and the disruption of normal business activities.
Major Suppliers & Raw Materials
Our suppliers are
selected by our purchasing department and are assessed on criteria such as the quality of materials supplied, duration of their
business relationship with us, pricing, delivery reliability and response time to orders placed by us. We have sufficient raw
materials on hand to support, on average, three weeks of production at any point in time to minimize any potential production
delays that could arise due to a delay in raw material delivery.
We have not experienced
significant production disruptions due to a supply shortage from our suppliers, nor have we had a major dispute with a supplier.
Our major suppliers
for the last three years are set forth in the table below, and except for Jinjiang Xinao Gas Company Limited and Foshan City Sanshui
Baoligao Inorganic Materials Co., Ltd., no suppliers accounted for more than 10% of our total purchases of raw materials
and energy sources for the years ended December 31, 2017, 2018 and 2019. Our business or profitability is not materially
dependent on any industrial, commercial or financial contract with any of our suppliers.
The following chart lists
our major suppliers and the related percentage of our total purchases of raw materials and energy sources in fiscal years 2017,
2018 and 2019:
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Supplier Name
|
|
Type
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinjiang Xinao Gas Company Limited
|
|
Gas
|
|
|
69,248
|
|
|
|
9.4
|
%
|
|
|
36,050
|
|
|
|
10.9
|
%
|
|
|
21,970
|
|
|
|
10.5
|
%
|
Quanzhou Like Ceramic Materials Co., Ltd.
|
|
Color
|
|
|
53,493
|
|
|
|
7.3
|
%
|
|
|
10,573
|
|
|
|
3.1
|
%
|
|
|
9,920
|
|
|
|
4.7
|
%
|
Foshan City Nanhai Huaxiong Ceramic Materials Co., Ltd.
|
|
Color
|
|
|
38,403
|
|
|
|
5.2
|
%
|
|
|
30,843
|
|
|
|
9.2
|
%
|
|
|
24,443
|
|
|
|
11.7
|
%
|
Fengxin Huafeng Ceramic Co., Ltd.
|
|
Clay
|
|
|
52,853
|
|
|
|
7.2
|
%
|
|
|
31,275
|
|
|
|
9.4
|
%
|
|
|
28,419
|
|
|
|
13.6
|
%
|
Yongchun Junjie Mining Co., Ltd.
|
|
Coal
|
|
|
58,893
|
|
|
|
8.0
|
%
|
|
|
34,351
|
|
|
|
10.3
|
%
|
|
|
26,551
|
|
|
|
10.3
|
%
|
Foshan City Nanhai Zhongtai Glaze Production Plant
|
|
Color
|
|
|
14,449
|
|
|
|
2.0
|
%
|
|
|
30,843
|
|
|
|
9.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Foshan City Sanshui Golden Eagle Inorganic Materials Co., Ltd.
|
|
Color
|
|
|
39,922
|
|
|
|
5.4
|
%
|
|
|
25,975
|
|
|
|
7.8
|
%
|
|
|
29,088
|
|
|
|
13.9
|
%
|
Fujian Nanping Minning Mining Exploitation Co., Ltd.
|
|
Clay
|
|
|
30,899
|
|
|
|
4.2
|
%
|
|
|
18,023
|
|
|
|
5.4
|
%
|
|
|
10,524
|
|
|
|
5.0
|
%
|
None of our officers
or directors or their respective affiliates has any interest, direct or indirect, in any of the above major suppliers. There are
no arrangements or understanding with any suppliers pursuant to which any of our directors and executive officers were appointed.
Research and Development
We have devoted substantial
resources to establishing research and development capabilities in an effort to improve our products and diversify our product
mix. Our research and development team focuses on new products as well as developing energy and resource efficient production
methods.
We focus our research and development efforts
on the following:
|
·
|
Expanding and improving production capacity;
|
|
·
|
Improving and developing new production and processing techniques;
|
|
·
|
Improving the use and selection of raw materials to lower costs; and
|
|
·
|
Developing new products and designs to address changing market demands.
|
Our research and development costs
were approximately RMB 0.94 million, RMB 0.76 million, and RMB 6.38 million for fiscal years 2017, 2018 and 2019. From time
to time, we may enter into collaboration agreements with research institutes to develop new products or improve our
production process. As of December 31, 2019, our R&D department had 7 employees.
Competition
We face intense competition
from our existing competitors and new market entrants. Our primary competitors are usually privately owned companies that are
located mainly in the PRC. Our principal competitors are Guangdong White Rabbit Ceramics, Foshan Shiwan Yulong Ceramics Co., Ltd,
Jinjiang Haoyuan Ceramics, Co., Ltd, Jinjiang Wanli Ceramics Co., Ltd, Jinjiang Tengda Ceramics Co., Ltd and Jinjiang Haoshan
Construction Materials Co., Ltd. We compete primarily based on product quality, brand recognition, and an extensive distributor
network.
Intellectual Property
We protect our intellectual property primarily
through a mix of patent and trademark registrations.
Registered Trademarks
Our brand name distinguishes our products
and promotes consumer awareness of our products.
We have registered the following trademarks
in the PRC:
Trademark
|
|
Class/Products
|
|
Validity Term
|
|
Registration No.
|
|
|
|
|
|
|
|
|
|
19/ Tile, ceramic tile and wave pattern tile
|
|
From February 21, 2012 to February 20, 2022
|
|
1716827
|
|
|
|
|
|
|
|
|
|
19/ Tile; non-metallic tile; ceramic tile; glass mosaic; non-metallic tile for constructional use; non-metallic construction
material; marble; granite; manual stone.
|
|
From October 21, 2010 to October 20, 2020
|
|
7543650
|
|
|
19/ Tile; non-metallic tile; non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic ground tile; glass mosaic; plaster; cement; concrete building unit.
|
|
From May 14, 2011 to May 13, 2021
|
|
8289754
|
|
|
|
|
|
|
|
|
|
19/ Tile; non-metallic tile; non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic ground tile; glass mosaic; plaster; cement; concrete building unit.
|
|
From May 14, 2011 to May 13, 2021
|
|
8289921
|
Patents
We currently own twenty-two
utility model patents in the PRC for exterior wall tiles, which were applied for in November of 2007, July of 2011 and
November of 2012 respectively. A “utility model patent” is a new technical solution relating to the shape, the
structure, or their combination, of a product, which is fit for practical use. Utility model patents have a ten-year term from
the application date.
Except as disclosed
above, as of December 31, 2019, our business or profitability is not materially dependent on any other trademarks, copyrights,
registered designs, patents, grant of licenses from third parties, new manufacturing processes or other intellectual property
rights.
Environmental
We are subject to various environmental
regulations with respect to noise and air pollution and discharge of hazardous materials. We are also subject to periodic inspection.
Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260) granted by Jinjiang City Environmental
Protection Bureau that expired on May 1, 2016, and we are currently in the process of applying for the renewal of the permit.
The permit is subject to annual renewal. We are currently in the process of applying for a Pollutant Discharge Permit for our Hengdali
production facility. We are not subject to any pending actions of alleged violations of applicable PRC environmental laws. If the
Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging
pollutants, and/or fined by the environmental protection agency.
Legal Proceedings
We are currently not
involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Seasonality
The second and third
calendar quarters have been the peak season of the property developing industry, and, therefore, our quarterly sales are usually
highest from May to September compared to the rest of the year. We have lower sales between the months of January and
March due to the effects of cold weather and the PRC Spring Festival. The seasonality information above is based on our turnover
trend in the last three years and may vary slightly from year to year depending on the demand by our customers and end customers
for our products. However, management believes that the seasonality information for the last three years is representative of the
seasonality trend going forward.
Governmental Regulations
Environmental Protection Regulations
In accordance with
the PRC Environmental Protection Law adopted on December 26, 1989, the Administration Supervisory Department of Environmental
Protection of the State Council sets the national guidelines for the discharge of pollutants. The People’s Governments of
provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants within their
own provinces or districts in the event that the national guidelines are inadequate. A company which causes environmental pollution
and discharges other polluting materials which endanger the public should implement environmental protection methods and procedures
into their business operations. This may be achieved by setting up a system of accountability within the company’s business
structure for environmental protection, adopting effective procedures to prevent environmental hazards such as waste gases, water
and residues, dust powder, radioactive materials and noise arising from production, construction and other activities from polluting
and endangering the environment. The environmental protection system and procedures should be implemented simultaneously with the
commencement of and during the operation of construction, production and other activities undertaken by the company. Any company
which discharges environmental pollutants should report and register such discharge with the Administration Supervisory Department
of Environmental Protection and pay any fines imposed for the discharge. A fee may also be imposed on the company for the cost
of any work required to restore the environment to its original state. Companies which have caused severe pollution to the environment
are required to restore the environment or remedy the effects of the pollution within a prescribed time limit. If a company fails
to report and/or register the environmental pollution it caused, it will receive a warning or be penalized. Companies that fail
to restore the environment or remedy the effects of the pollution within the prescribed time will be penalized or have their business
licenses terminated. Companies that have polluted and endangered the environment must bear the responsibility for remedying the
danger and effects of the pollution, as well as to compensate any losses or damages suffered as a result of such environmental
pollution. Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260) granted by Jinjiang City
Environmental Protection Bureau that will expire on May 1, 2016, and we are currently in the process of applying for the renewal
of the permit. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental protection
agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges
pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency.
Government Regulations Relating to Foreign
Exchange Controls
The principal regulation
governing foreign exchange in the PRC is the Foreign Currency Administration Rules and a series of implementing rules and
regulations, as amended. Under these rules, the Renminbi, the PRC’s currency, is freely convertible for trade and service
related foreign exchange transactions (such as normal purchases and sales of goods and services from providers in foreign countries),
but not for direct investment, loan or investment in securities outside of China unless the prior approval of the State Administration
for Foreign Exchange, or SAFE, of the PRC is obtained. Foreign investment enterprises, or FIEs, are required to apply to the SAFE
for Foreign Exchange Registration Certificates for FIEs. With such registration certificates, which need to be renewed annually,
FIEs are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the
scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring
the approval of the SAFE. Such transactions are subject to the consent of PRC banks which are authorized by the SAFE to review
basic account currency transactions. However, conversion of currency in the capital account, including capital items such as direct
investment, loans and securities, still require approval of the SAFE. On November 21, 2005, the SAFE issued Circular No. 75
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents Corporate Financing and Roundtrip Investment Through
Offshore Special Purpose Vehicles. Circular No. 75 confirms that the use of offshore special purpose vehicles as holding companies
for PRC investments are permitted, but proper foreign exchange registration applications are required to be reviewed and accepted
by the SAFE.
Regulation of Foreign Currency Exchange
Foreign currency exchange
in the PRC is governed by a series of regulations, including, without limitation, the Foreign Currency Administrative Rules (1996),
as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under
these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for
direct investment, loans or investments in securities outside China without the prior approval of the SAFE. Pursuant to the Administrative
Regulations Regarding Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises in China may purchase foreign
exchange without the approval of the SAFE for trade and service-related foreign exchange transactions by providing commercial documents
evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange
liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign-invested
enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment,
loan and investment in securities outside China are still subject to limitations and require approvals from the SAFE. On August 29,
2008, SAFE issued Circular No. 142 on Relevant Business Operations Issues Concerning Improving the Administration of the Payment
and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, with respect to the administration of conversion of
foreign exchange capital contributions of FIEs into Renminbi, unless otherwise permitted by PRC laws or regulations, Renminbi converted
from foreign exchange capital contributions can only be applied to activities within the approved business scope of FIEs and cannot
be used for domestic equity investment or acquisitions.
Regulation of Dividend Distribution
The principal laws
and regulations in China governing distribution of dividends by foreign-invested companies include:
|
·
|
The Sino-foreign Equity Joint Venture Law (1979), as amended;
|
|
·
|
The Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended;
|
|
·
|
The Sino-foreign Cooperative Enterprise Law (1988), as amended;
|
|
·
|
The Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended;
|
|
·
|
The Foreign Investment Enterprise Law (1986), as amended; and
|
|
·
|
The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended.
|
Under these regulations,
foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance
with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside
at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds
have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends.
Insurance
We have not purchased
insurance coverage for product liability or third party liability and are therefore not covered or compensated by insurance in
respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability.
In addition, we currently do not maintain business interruption insurance. As a result, our business and prospects could be adversely
affected in the event of such problems in our operations and may suffer losses that could have a material adverse effect on our
business, financial condition, results of operations, or cash flows.
|
C.
|
Organizational Structure
|
The following chart illustrates China Ceramics’
organizational structure as of December 31, 2019:
Corporate Structure and Background
Our principal PRC-based
operating subsidiary, Hengda, was established on September 30, 1993 under the laws of PRC. All of the equity interests in
Hengda are 100% owned by Stand Best. Hengda is a wholly foreign-owned enterprise in China.
Hengdali was established
on May 4, 2008 under the laws of PRC. All of the equity interests in Hengdali are 100% owned by Hengda.
Stand Best was established
on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on April 1, 2008
for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of Stand Best.
Success Winner was
established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder and
sole director.
On June 30,
2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted
by Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the
same date, the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success
Winner. Therefore, Mr. Wong Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand
Best and in turn, 100% of Hengda.
CHAC was incorporated
in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a stock exchange,
asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business
that had its principal operations in Asia, with a focus on potential acquisition target in China.
Pursuant to the terms
of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China
Ceramics, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, as part of the same integrated transaction,
China Ceramics acquired all of the outstanding securities of Success Winner.
Prior to China Ceramics’
acquisition of Success Winner, neither CHAC nor China Ceramics’ had any operations.
On November 19,
2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi Province, PRC
by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration
for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders
to Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s
operating and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration
of RMB 185.5 million for the acquisition, of which RMB 145.4 million was advanced to Hengdali’s former shareholders by December 31,
2009.
On September 17,
2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian
Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials
and interior and exterior decoration materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017,
the Company disposed Fujian Hengdali for RMB0 to a third-party. A loss on disposal of RMB736,000 was recognized in other expenses
for the year ended December 31, 2017 relating to this transaction.
On September 22,
2017, Success Winner incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong with initial
registered capital of HKD1. Vast Elite is engaged in the trading of building materials but during the year ended December 31,
2017, Vast Elite had no operations.
On November 20, 2019, Vast Elite incorporated
a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu Future”) in China. Chengdu
Future is engaged in the business management and consulting services.
On December 3, 2019, Success Winner
incorporated a 100% owned subsidiary Antelope Enterprise Holdings Limited (“Antelope Holdings”) in Hong Kong. Antelope
Holdings only serves the purpose as a holding company.
At the February 21, 2020 Annual
Meeting, the Company’s shareholders approved, among others, a proposal to amend the Company's Memorandum of Association
to effect a reverse stock split of the outstanding the Company’s common shares, at one of several split ratios, to be determined
by the Board of Directors in its sole discretion, prior to the one-year anniversary of this Annual Meeting, for the purposes of
regaining compliance with the NASDAQ continued listing requirements. The Company continues to monitor market conditions to determine
if, when or how to exercise such authority.
|
D.
|
Property, plant and equipment
|
We jointly own six
buildings comprised of one office building and five workshops in Jinjiang, Fujian Province. We recorded the related fixed
assets in proportion to the amount we paid for our part of the buildings, which represents our interests in the buildings. As
co-owners of these six buildings under the relevant Building Ownership Certificate, all co-owners have collective rights and
obligations to the jointly-owned property under PRC law, and typically the disposal of such jointly owned property by one
owner without the consent of all other owners is prohibited.
The land-use rights
of this workshop and the co-owned six buildings expire in 2055 and cover approximately 10,023 square meters. We also own land-use
rights at two locations and seven buildings in Gaoan for office buildings, workshops, warehouses, and raw material yards and staff
quarters. The land-use rights for these two facilities expire in 2058 and cover an aggregate of approximately 244,324 square meters.
We currently lease
17 properties in Jinjiang, Fujian Province in the PRC for various uses including warehouses, office space, workshops, staff quarters
and stock yards. The lease terms range from three to five years. As of December 31, 2016 our Hengda production facility in
Jinjiang City, Fujian Province in the PRC, had a total gross floor area of approximately 140,000 square meters and employed 728
production personnel and our Hengdali production facility in Gaoan, Jiangxi Province in the PRC, has a total gross floor area of
approximately 244,324 square meters and employed 393 production personnel. The Hengda facility consists of nine production lines
with an annual production capacity of 42 million square meters. The Hengdali facility consists of five production lines with an
annual production capacity of 30 million square meters of ceramic tiles. Historically, we have not experienced any form of disruption
in our production facility. However, our annual production capacity has been effectively reduced from 72 million square meters
of ceramic tiles to 66 million square meters of ceramic tiles due to an eight-year contract to lease out one of the production
lines from our Hengdali facility that we entered into in March 2016. Our annual production capacity was further reduced to
56.5 million square meters of ceramic tiles due to our having retired two old furnaces at the Hengda facility in July of 2018.
Due to current economic conditions, we are currently utilizing production facilities capable of producing 16.9 million square meters.
We currently have twelve production lines (three of which were utilized at the end of 2018), with each production line optimized
to manufacture specific size ranges to maximize efficiency and output.
During 2014, our Hengda facility was required
by the local governmental entity to begin using natural gas to operate the facility, as opposed to coal. This mandated change in
fuel source is part of a province-wide (and country-wide) effort to reduce pollution. This change resulted in our incurring a one-time
charge of approximately RMB 5.6 million (US$ 0.9 million) in December 2013, and will increase our cost of goods produced at
that facility because natural gas is a more expensive energy source than coal. Fuel source (comprising coal and natural gas) accounted
for 12.9% and 12.1% of the total cost of sales in 2018 and 2019, respectively. There is no assurance that in the future our other
production facilities will not be required to make similar modifications which could have similar adverse effects on our operations.
In 2015, we began renovating the showroom
in our Hengda facility (the Hengda Exhibition Hall) that is a valuable resource for the marketing and promotion of our extensive
line of building material products. We believe that upgrading this showroom will enable us to continue to secure significant new
contracts for our products, especially from larger property developers. Capital expenditures for the new renovations to the Hengda
Exhibition Hall were RMB 3.9 million (US$ 0.6 million) in the third quarter of 2015 and RMB 6.6 million (US$ 1.0 million) in the
fourth quarter of 2015, with no unpaid balances as of December 31, 2015. The total cost of the renovations, which were completed
in the fourth quarter, was RMB 10.5 million (US$ 1.6 million). We also constructed a new production line to manufacture glazed
brick ceramic tiles in our Hengdali facility. Capital expenditures for the new line were RMB 18.6 million (US$ 2.9 million) in
the third quarter of 2015 and RMB 130.1 million (US$ 20.1 million) in the fourth quarter of 2015, with no unpaid balances as of
December 31, 2015. The total cost of the new production line was RMB 148.7 million (US$ 23.0 million). In March 2016,
we entered into an eight-year contract to lease out one of the production lines from our Hengdali facility. The production line
has the capacity to produce approximately 10 million square meters of ceramic tiles annually. The term of the contract is from
March 1, 2016 to February 29, 2024, and the contract stipulates for the receipt of rental income of RMB 15.0 million
(US$ 0.5 million) per year, including 6% value added tax. The purpose of this arrangement was to generate income from the unused
production capacity. Therefore, for the term of the eight-year lease, and as a result of two old furnaces having been put out of
use at the facility, we may only produce up to 28.8 million square meters of ceramic tiles from our Hengdali facility. In 2017,
Hengda retired two old furnaces; in July of 2018, Hengda retired two more old furnaces, which caused Hengda’s annual maximum
production capacity to be reduced to approximately 22.8 million. Therefore, the Company’s effective annual production capacity
has been effectively reduced from 72 million square meters of ceramic tiles, to 51.6 million ceramic tiles as of fiscal year end
2019.
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
|
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
We are a British Virgin Islands limited
liability company whose predecessor, CHAC, was incorporated in Delaware on June 22, 2007 and was organized as a “blank check”
company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling,
through contractual arrangements, an operating business that had its principal operations in Asia, with a focus on potential acquisition
target in China.
Pursuant to the terms of a merger and stock
purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British
Virgin Islands subsidiary, and, immediately thereafter, as part of the same integrated transaction, China Ceramics acquired all
of the outstanding securities of Success Winner.
China Ceramics, through its operating subsidiaries, is a leading
PRC-based manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial
buildings. The ceramic tiles sold under the “HD” or “Hengda”, “HDL” or “Hengdali”,
“TOERTO” and “WULIQIAO” brands, are available in over two thousand styles, colors and size combinations.
Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed tiles, (iii) glazed porcelain tiles, (iv)
rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling products, accounting for 76.12% and 70.40% of
our total revenue for the years ended December 31, 2019 and 2018, respectively.
The Company’s combined facilities
currently provide an aggregate annual maximum production capacity of approximately 51.6 million square meters (excluding 10 million
square meters that is leased out) as of December 31, 2019. In March 2016, the Company entered into an eight-year contract to lease
out one of the production lines from its Hengdali facility. The production line has the capacity to produce approximately 10 million
square meters of ceramic tiles annually. The term of the contract is from March 1, 2016 to February 29, 2024. The Company believes
that it is prudent to generate income from its unused production capacity from a third party rather than let it remain idle. Therefore,
for the term of the eight-year lease, the Company may only produce up to 28.8 million square meters of ceramic tiles from its Hengdali
facility. In 2017, Hengda retired two old furnaces; in July of 2018, Hengda retired two more old furnaces, which caused Hengda’s
annual maximum production capacity to be reduced to approximately 22.8 million, and total effective annual production capacity
to 51.6 million ceramic tiles for both Hengda and Hengdali at December 31, 2019.
Due to currently challenging economic conditions,
for the year ended December 31, 2019, we utilized production facilities capable of producing 12.42 million square meters ceramic
tiles, as compared with the year ended December 31, 2018, when we utilized production facilities capable of producing 16.9 million
square meters, During the year ended December 31, 2019, we had 12 production lines available for production and utilized seven
production lines during the peak season. As of December 31, 2019, we had twelve production lines available for production, two
of which were in use as of December 31, 2019. When in operation, each production line is optimized to manufacture specific size
ranges to maximize efficiency and output.
On November 20, 2019, we incorporated a
100% owned operating subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu Future”) in China.
Chengdu Future is engaged in the business management and consulting services.
In December 2019, a novel strain of coronavirus
(COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public
Health Emergency of International Concern” and a global pandemic. We experienced (and continue to experience) significant
adverse impacts resulting from COVID-19 pandemic and the related public health orders. The COVID-19 pandemic is disrupting supply
chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel
and logistics restrictions in connection with the outbreak. Our factories were closed from the beginning of the Lunar New Year
Holiday through the end of February. We are also experiencing reduced demand for our products and an increased level of purchase
order cancellations as a result of the COVID-19 pandemic. We expect that the impact of the COVID-19 outbreak will have a material
adverse impact on the demand of our products. Because of the significant uncertainties surrounding the COVID-19 pandemic, the related
financial impact cannot be reasonably estimated at this time.
Basis of Presentation
The following discussion and analysis of
our financial condition and results of operations is based on the selected financial information as of and for the year ended December
31, 2019 and has been prepared based on the consolidated financial statements of China Ceramics Co., Ltd. and its subsidiaries.
The consolidated financial statements of China Ceramics Co., Ltd. and its subsidiaries have been prepared in accordance with IFRS
as issued by the International Accounting Standards Board, or “IASB.” The consolidated financial statements have been
prepared on the historical cost basis, except for derivative financial instruments that have been measured at fair value.
The business combination on November 20,
2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in the former owner of Success Winner
obtaining effective operating and financial control of the combined entity. Prior to the acquisition, we had no operating business.
Accordingly, the acquisition does not constitute a business combination for accounting purposes and is accounted for as a capital
transaction. That is, the transaction is in substance a reverse recapitalization, equivalent to the issuance of equity interests
by Success Winner for the net monetary assets of China Ceramics accompanied by a recapitalization. The consolidated financial statements
are a continuation of the financial statements of Success Winner. The assets and liabilities of China Ceramics are recognized at
their carrying amounts at the date of acquisition with a corresponding credit to the consolidated equity and no goodwill or other
intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition represents the equity
balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined as described above. However,
the equity structure presented in the consolidated financial statements (number and values of equity instruments issued) reflects
the equity structure of the legal parent, China Ceramics. Costs directly attributable to the transaction have been debited to equity
to the extent of net monetary assets received.
Results of Operations
The following table sets forth our financial
results for the years ended December 31, 2017, 2018 and 2019, respectively:
RMB(‘000)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Revenue
|
|
|
821,792
|
|
|
|
498,189
|
|
|
|
327,581
|
|
Cost of sales
|
|
|
(771,438
|
)
|
|
|
(499,355
|
)
|
|
|
(246,255
|
)
|
Gross profit
|
|
|
50,354
|
|
|
|
(1,166
|
)
|
|
|
81,326
|
|
Other income
|
|
|
14,253
|
|
|
|
14,637
|
|
|
|
14,636
|
|
Other expenses
|
|
|
(5,220
|
)
|
|
|
(1,461
|
)
|
|
|
-
|
|
Selling and distribution expenses
|
|
|
(11,962
|
)
|
|
|
(11,026
|
)
|
|
|
(11,321
|
)
|
Administrative expenses
|
|
|
(17,249
|
)
|
|
|
(17,990
|
)
|
|
|
(25,111
|
)
|
Bad debt expense
|
|
|
(71,565
|
)
|
|
|
(316,438
|
)
|
|
|
(68,660
|
)
|
Loss from asset devaluation
|
|
|
(36,683
|
)
|
|
|
(85,021
|
)
|
|
|
|
|
Finance costs
|
|
|
(213
|
)
|
|
|
-
|
|
|
|
(315
|
)
|
Loss before taxation
|
|
|
(78,285
|
)
|
|
|
(418,465
|
)
|
|
|
(9,445
|
)
|
Income tax expenses
|
|
|
(9,741
|
)
|
|
|
(209
|
)
|
|
|
(56
|
)
|
Loss attributable to shareholders
|
|
|
(88,026
|
)
|
|
|
(418,674
|
)
|
|
|
(9,501
|
)
|
Description of Selected Income Statement Items
Revenue. We generate revenue
from the sales of ceramic tiles, including porcelain tiles, glazed porcelain tiles, glazed tiles, rustic tiles and polished glazed
tiles, net of rebates and discounts. For the past three fiscal years, the second and third calendar quarters have been the peak
season of the property developing industry, and, therefore, our quarterly sales are usually highest from May to September compared
to the rest of the year. Conversely, our sales were lower between the months of January to March. This is because property developing
activities tend to be low due to the effects of cold weather and the PRC Spring Festival. Beginning on July 1, 2016, we reduced
the selling price of certain of our slow-moving products by 10% with the goal of turning some of this inventory into cash. Beginning
on October 1, 2016, in order to generate sales and move inventory, we instituted a 20% reduction in price of our slow-moving products.
However, in 2017, we increased the pricing of our ceramic tile products by an average of 20%. Although we increased our average
selling price twice with 10% product raises in 2017, we were not able to return to the price levels achieved prior to 2016. In
April of 2018, we increased the pricing of our ceramic tile products by an average of 5%, but the sales did not improve as we expected,
but decreased sharply due to a slowdown of the real estate industry. Therefore, we decreased the pricing of our ceramic tile products
by an average of 10% in July 2018 to respond to the difficult market conditions. In October 2019, we further decreased the pricing
of our ceramic tile products by an average of 15%. However, while the 15% price decrease in October 2019 helped boost sales volume
in the latter half of the fiscal year, it did not offset the fall in our sales volume due to deteriorating market conditions that
persisted through the entire year 2019. Revenue decreased by 34.2% for the year ended December 31, 2019, as compared to the year
ended December 31, 2018, mainly due to the 27.0% decrease in sales volume resulting from the continued slowdown of China’s
economy, especially in the manufacturing sector and the real estate industry.
Cost of sales. Cost of
sales consists of costs directly attributable to production, including the cost of clay, color materials, glaze materials, coal,
salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.
The most significant factors that directly
or indirectly affect our cost of sales are as follows:
|
·
|
Availability and price of clay;
|
|
·
|
Availability and price of coal; and
|
|
·
|
Availability and price of dyes; and
|
Clay is a key material for making ceramic
tiles, and accounted for approximately 22.4% and 21.3% of our cost of sales for the years ended December 31, 2019 and 2018, respectively.
Fujian and Jiangxi Provinces, where our production facilities are located, are the largest clay resources areas in China and clay
supply is stable and sufficient for our production and planned production.
Dyes are another key material for making
ceramic tiles, and accounted for approximately 22.2% and 27.4% of our cost of sales for the years ended December 31, 2019 and 2018,
respectively. A number of dyes are used in ceramic tiles, and the prices of different dyes have experienced fluctuations over the
past few years.
Coal is another key material for making
ceramic tiles during the firing stage. Coal accounted for approximately 6.5% and 6.2% of our cost of sales for the years ended
December 31, 2019 and 2018, respectively. We have long-term relationships with our coal suppliers. The price of coal has experienced
fluctuations over the past few years. The Company’s Hengda facility used natural gas instead of coal for manufacturing ceramic
tiles, and natural gas accounted for approximately 5.6% and 6.6% of our cost of sales for the years ended December 31, 2019 and
2018.
Other income and other expenses. Other
income consists of interest income, foreign exchange gain/loss, gain on disposal of equipment and rental income by leasing out
one of its production lines. Other expenses primarily consist of the loss on disposal of equipment and the depreciation by leasing
out one of our production lines. In addition, we had RMB 109,000 technology consulting income from our newly incorporated subsidiary
Chengdu Future during the year ended December 31, 2019.
Selling and distribution expenses. Selling
and distribution expenses consist of payroll, traveling expenses, transportation and advertising expenses incurred by our selling
and distribution team.
Administrative expenses. Administrative
expenses consist primarily of R&D expense, employee remuneration, payroll taxes and benefits, general office expenses, depreciation.
We expect administrative expenses to remain constant as compared to the prior year; however, we had increased R&D expenses for
developing new products in 2019.
Income taxes. Our subsidiaries in
the PRC are subject to the PRC Enterprise Income Tax Law, and the applicable income tax rate pursuant to such law for the years
ended December 31, 2019 and 2018 is 25%.
Results of Operations
Fiscal Year Ended 2019 Compared to the
Fiscal Year Ended 2018
Revenue. The following
table sets forth the breakdown of revenue, by product categories, for the years ended December 31, 2019 and 2018
Revenue RMB (000)
|
|
2018
|
|
|
Percentage
|
|
|
2019
|
|
|
Percentage
|
|
Porcelain
|
|
|
350,749
|
|
|
|
70.4
|
%
|
|
|
249,355
|
|
|
|
76.1
|
%
|
Glazed Porcelain
|
|
|
11,031
|
|
|
|
2.2
|
%
|
|
|
5,975
|
|
|
|
1.8
|
%
|
Glazed
|
|
|
9,973
|
|
|
|
2.1
|
%
|
|
|
6,323
|
|
|
|
1.9
|
%
|
Rustic
|
|
|
56,264
|
|
|
|
11.2
|
%
|
|
|
40,507
|
|
|
|
12.4
|
%
|
Polished Glazed
|
|
|
70,172
|
|
|
|
14.1
|
%
|
|
|
25,421
|
|
|
|
7.8
|
%
|
Total
|
|
|
498,189
|
|
|
|
100.0
|
%
|
|
|
327,581
|
|
|
|
100.0
|
%
|
Revenue was to RMB 327.6 million
(US$ 47.4 million) for the year ended December 31, 2019, compared to RMB 498.2 million (US$ 75.4 million) for the year ended December
31, 2018, representing a decrease of RMB 170.6 million, or 34.2%. The decrease in revenue was primarily due to the decrease
in sales volume of 27.0% and a decrease in average selling price of 9.9%. The decrease in sales resulted from the continued slowdown
of China’s economy as China’s GDP growth rate decreased to 6.1% in 2019, the lowest figure since 1990, and both the
manufacturing sector and the real estate industry were affected by the weaker economy.
Porcelain tiles. Revenue from the
sales of porcelain tiles decreased 28.9%, from RMB 350.7 million (US$ 53.1 million) for the year ended December 31, 2018 to RMB
249.4 million (US$ 36.1 million) for the year ended December 31, 2019. The decrease was primarily attributable to a decrease in
our sales volume for the year of 2019 as compared to the same period of 2018. Porcelain tiles for exterior walls are still our
most popular product and have the largest market potential of all of our tiles. We expect porcelain tiles to continue to be our
key product for the foreseeable future.
Glazed porcelain tiles. Revenue
from glazed porcelain tiles decreased 45.8%, from approximately RMB 11.0 million (US$ 1.7 million) for the year ended December
31, 2018 to RMB 6.0 million (US$ 0.9 million) for the year ended December 31, 2019.
Glazed tiles. Revenue from glazed
tiles decreased 36.6%, from RMB 10.0 million (US$ 1.5 million) for the year ended December 31, 2018 to RMB 6.3 million (US$ 0.9
million) for the year ended December 31, 2019.
Rustic tiles. Revenue from rustic
tiles decreased 28.0%, from RMB 56.3 million (US$ 8.5 million) for the year ended December 31, 2018 to RMB 40.5 million (US$ 5.9
million) for the year ended December 31, 2019.
Polished glazed tiles. Revenue
from polished glazed tiles decreased 63.8%, from RMB 70.2 million (US$ 10.6 million) for the year ended December 31, 2018 to RMB
25.4 million (US$ 3.7 million) for the year ended December 31, 2019. We began selling polished glazed tiles in the second quarter
of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble or stone materials
used in a decorative fashion inside homes. The polished glazed tiles are larger than our other tiles and we believe that demand
for this series will increase in the future.
Cost of sales. The following
table sets forth the breakdown of cost of sales, by product segment, for the years ended December 31, 2019 and 2018:
Cost of sales RMB (‘000)
|
|
2018
|
|
|
Percentage
|
|
|
2019
|
|
|
Percentage
|
|
Porcelain
|
|
|
350,644
|
|
|
|
70.2
|
%
|
|
|
187,176
|
|
|
|
76.0
|
%
|
Glazed Porcelain
|
|
|
12,285
|
|
|
|
2.5
|
%
|
|
|
5,379
|
|
|
|
2.2
|
%
|
Glazed
|
|
|
10,368
|
|
|
|
2.1
|
%
|
|
|
4,711
|
|
|
|
1.9
|
%
|
Rustic
|
|
|
55,093
|
|
|
|
11.0
|
%
|
|
|
29,293
|
|
|
|
11.9
|
%
|
Polished Glazed
|
|
|
70,965
|
|
|
|
14.2
|
%
|
|
|
19,696
|
|
|
|
8.0
|
%
|
Total
|
|
|
499,355
|
|
|
|
100.00
|
%
|
|
|
246,255
|
|
|
|
100.00
|
%
|
Cost of sales was RMB 246.3 million (US$
35.6 million) for the year ended December 31, 2019 compared to RMB 499.4 million (US$ 75.6 million) for the year ended December
31, 2018, representing a decrease of RMB 253.1 million, or 50.7%. The decrease in cost of sales was primarily due to decreased
sales and production, and the decrease in inventory provision.
Gross profit. The following
table breaks down of our gross profit (loss) and gross profit (loss) margin by product segment for the years ended December 31,
2019 and 2018:
|
|
2018
|
|
|
2019
|
|
RMB (‘000)
|
|
Gross
Profit (Loss)
|
|
|
Profit (Loss)
Margin
|
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
Porcelain
|
|
|
105
|
|
|
|
0.0
|
%
|
|
|
62,179
|
|
|
|
24.9
|
%
|
Glazed Porcelain
|
|
|
(1,254
|
)
|
|
|
(11.4
|
)%
|
|
|
596
|
|
|
|
10.0
|
%
|
Glazed
|
|
|
(395
|
)
|
|
|
(4.0
|
)%
|
|
|
1,612
|
|
|
|
25.5
|
%
|
Rustic
|
|
|
1,171
|
|
|
|
2.1
|
%
|
|
|
11,214
|
|
|
|
27.7
|
%
|
Polished Glazed
|
|
|
(793
|
)
|
|
|
(1.1
|
)%
|
|
|
5,725
|
|
|
|
22.5
|
%
|
All products
|
|
|
(1,166
|
)
|
|
|
(0.2
|
)%
|
|
|
81,326
|
|
|
|
24.8
|
%
|
Gross profit was RMB 81.3 million (US$ 11.8
million) for the year ended December 31, 2019, as compared to a gross loss of RMB 1.2 million (US$ 0.2 million) for the year ended
December 31, 2018, a decrease of RMB 82.5 million.
Other income. Other income for
the year ended December 31, 2019 was RMB 14.6 million (US$ 2.1 million), as compared to RMB 14.6 million (US$ 2.2 million) for
the same period of 2018. For both 2019 and 2018, other income was mainly the leasing income from leasing out one of the production
lines from our Hengdali facility pursuant to an eight-year lease contract. In addition, we had RMB 109,000 technology consulting
income from our newly incorporated subsidiary Chengdu Future during the year ended December 31, 2019.
Selling and distribution expenses. Selling
and distribution expenses were RMB 11.3 million (US$ 1.6 million) for the year ended December 31, 2019, compared to RMB 11.0 million
(US$ 1.7 million) for the year ended December 31, 2018, representing an increase of RMB 295,000, or 2.7%.
Administrative expenses. Administrative
expenses were RMB 25.1 million (US$ 3.6 million) for the year ended December 31, 2019, compared to RMB 18.0 million (US$ 2.7 million)
for the year ended December 31, 2018, representing an increase of RMB 7.1 million, or 39.6%. The increase in administrative expenses
was primarily due to increased research and development expenses of RMB 6.4 million and increased consultant fee of RMB 0.8 million.
which was partly offset by an RMB 0.1 million decrease in meal and entertainment expenses.
Bad debt expense. Bad debt expense
was RMB 68.7 million (US$ 10.0 million) for the year ended December 31, 2019, compared to RMB 316.4 million (US$ 47.9 million)
for the year ended December 31, 2018. We recognize a loss allowance for expected credit loss on our financial assets, primarily
on trade receivables, which are subject to impairment under IFRS 9, Financial Instruments, first effective for year 2018.
We believe that we have undertaken appropriate measures to resolve the bad debt expense. We will continue to review each of our
customers for credit quality as well as assiduously test their accounts receivables balances in each upcoming fiscal period.
Finance costs. Finance costs
were RMB 315,000 (US$ 0.05 million) for the year ended December 31, 2019, compared to nil for the year ended December 31, 2018.
The increase was mainly due to the interest expense on lease liabilities. We adopted IFRS 16 during the year ended December
31, 2019, and recognized lease liabilities in relation to leases which had previously been classified as “operating leases”.
These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental
borrowing rate as of January 1, 2019. The difference between the actual payment and lease liabilities was the interest expense.
Other expenses. Other
expenses were RMB nil (US$ nil) for the year ended December 31, 2019, as compared to RMB 1.5 million (US $0.2 million) for
the year ended December 31, 2018, representing a decrease of RMB 1.5 million or 100.0%. The decreased other expenses were
mainly due to decreased depreciation expense resulting from the fixed asset write-off due to impairment that occurred in the
year ended December 31, 2018.
Loss before taxation. Loss before
taxation was RMB 9.4 million (US$ 1.4 million) for the year ended December 31, 2019, as compared to a loss before taxation of RMB
418.5 million (US$ 63.3 million) for the year ended December 31, 2018. The decrease in loss before taxation was mainly due to decreased
bad debt expense and decreased loss from assets devaluation for the year ended December 31, 2019.
Income taxes. We incurred an
income tax expense of RMB 56,000 (US$ 8,000) for the year ended December 31, 2019 compared to an income tax expense of RMB 209,000
(US$ 31,000) for the year ended December 31, 2018. Our PRC statutory enterprise income tax rate was 25% for the year ended December
31, 2019 and 2018.
Loss attributable to shareholders. Loss
attributable to shareholders was RMB 9.5 million (US$ 1.4 million) for the year ended December 31, 2019, as compared to a loss
attributable to shareholders of RMB 418.7 million (US$ 63.4 million) for the year ended December 31, 2018. The decrease in net
loss attributable to shareholders in 2019 was for the reasons described above.
Fiscal Year Ended 2018 Compared to the Fiscal Year
Ended 2017
Revenue. The following
table sets forth the breakdown of revenue, by product categories, for the years ended December 31, 2018 and 2017:
Revenue RMB (000)
|
|
2017
|
|
|
Percentage
|
|
|
2018
|
|
|
Percentage
|
|
Porcelain
|
|
|
555,642
|
|
|
|
67.6
|
%
|
|
|
350,749
|
|
|
|
70.4
|
%
|
Glazed Porcelain
|
|
|
32,063
|
|
|
|
3.9
|
%
|
|
|
11,031
|
|
|
|
2.2
|
%
|
Glazed
|
|
|
35,021
|
|
|
|
4.3
|
%
|
|
|
9,973
|
|
|
|
2.1
|
%
|
Rustic
|
|
|
81,354
|
|
|
|
9.9
|
%
|
|
|
56,264
|
|
|
|
11.2
|
%
|
Polished Glazed
|
|
|
117,712
|
|
|
|
14.3
|
%
|
|
|
70,172
|
|
|
|
14.1
|
%
|
Total
|
|
|
821,792
|
|
|
|
100.0
|
%
|
|
|
498,189
|
|
|
|
100.0
|
%
|
Revenue decreased by RMB 323.6 million,
or 39.4%, to RMB 498.2 million ($75.4 million) in the year ended December 31, 2018, from RMB 821.8 million (US$ 121.7 million)
for the year ended December 31, 2017. The decrease in revenue was primarily due to the decrease in sales volume of 44.6% despite
our average sales price increase of 9.4%.
Porcelain tiles. Revenue from
the sales of porcelain tiles decreased 36.9%, from RMB 555.6 million ($82.3 million) for the year ended December 31, 2017 to RMB
350.7 million ($53.1 million) for the year ended December 31, 2018. The decrease was primarily attributable to a decrease in our
sales volume in 2018 as compared to 2017. Porcelain tiles for exterior walls are still our most popular product and have the largest
market potential of all of our tiles. We expect porcelain tiles to continue to be our key product for the foreseeable future.
Glazed porcelain tiles. Revenue
from glazed porcelain tiles decreased 65.6%, from approximately RMB 32.1 million ($4.8 million) for the year ended December 31,
2017 to RMB 11.0 million ($1.7 million) for the year ended December 31, 2018.
Glazed tiles. Revenue from glazed
tiles decreased 71.6%, from RMB 35.0 million ($5.2 million) for the year ended December 31, 2017 to RMB 10.0 million ($1.5 million)
for the year ended December 31, 2018.
Rustic tiles. Revenue from rustic
tiles decreased 30.8%, from RMB 81.4 million ($12.1 million) for the year ended December 31, 2017 to RMB 56.3 million ($8.5 million)
for the year ended December 31, 2018.
Polished glazed tiles. Revenue
from polished glazed tiles decreased 40.4%, from RMB 117.7 million ($17.4 million) for the year ended December 31, 2017 to RMB
70.2 million ($10.6 million) for the year ended December 31, 2018. We began selling polished glazed tiles in the second quarter
of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble or stone materials
used in a decorative fashion inside homes. The polished glazed tiles are larger than our other tiles and we believe that demand
for this series will increase in the future.
Cost of sales. The following
table sets forth the breakdown of cost of sales, by product segment, for the years ended December 31, 2018 and 2017:
Cost of sales RMB (‘000)
|
|
2017
|
|
|
Percentage
|
|
|
2018
|
|
|
Percentage
|
|
Porcelain
|
|
|
519,830
|
|
|
|
67.4
|
%
|
|
|
350,644
|
|
|
|
70.2
|
%
|
Glazed Porcelain
|
|
|
35,345
|
|
|
|
4.6
|
%
|
|
|
12,285
|
|
|
|
2.5
|
%
|
Glazed
|
|
|
34,418
|
|
|
|
4.4
|
%
|
|
|
10,368
|
|
|
|
2.1
|
%
|
Rustic
|
|
|
76,184
|
|
|
|
9.9
|
%
|
|
|
55,093
|
|
|
|
11.0
|
%
|
Polished Glazed
|
|
|
105,661
|
|
|
|
13.7
|
%
|
|
|
70,965
|
|
|
|
14.2
|
%
|
Total
|
|
|
771,438
|
|
|
|
100.0
|
%
|
|
|
499,355
|
|
|
|
100.0
|
%
|
Cost of sales was RMB 499.4 million ($75.6
million) for the year ended December 31, 2018 compared to RMB 771.4 million (US$ 114.3 million) for the year ended December 31,
2017, representing a decrease of RMB 272.1 million, or 35.3%. The decrease in cost of sales was primarily due to decreased sales.
Gross profit (loss). The following
table breaks down of our gross profit (loss) and gross profit (loss) margin by product segment for the years ended December 31,
2018 and 2017:
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
RMB (‘000)
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
Porcelain
|
|
|
35,812
|
|
|
|
6.2
|
%
|
|
|
105
|
|
|
|
0.0
|
%
|
Glazed Porcelain
|
|
|
(3,282
|
)
|
|
|
(10.5
|
)%
|
|
|
(1,254
|
)
|
|
|
(11.4
|
)%
|
Glazed
|
|
|
603
|
|
|
|
1.5
|
%
|
|
|
(395
|
)
|
|
|
(4.0
|
)%
|
Rustic
|
|
|
5,170
|
|
|
|
6.1
|
%
|
|
|
1,171
|
|
|
|
2.1
|
%
|
Polished Glazed
|
|
|
12,051
|
|
|
|
10.0
|
%
|
|
|
(793
|
)
|
|
|
(1.1
|
)%
|
All products
|
|
|
50,354
|
|
|
|
5.9
|
%
|
|
|
(1,166
|
)
|
|
|
(0.2
|
)%
|
Our gross profit (loss) decreased RMB 51.5
million from a gross profit of RMB 50.4 million (US$ 7.5 million) for the year ended December 31, 2017 to a gross loss of RMB 1.2
million ($0.2 million) for 2018.
Other income. Other income for
the year ended December 31, 2018 was RMB 14.6 million ($2.2 million), as compared to RMB 14.3 million ($2.1 million) for the same
period of 2017. For both 2018 and 2017, other income was mainly the leasing income from leasing out one of the production lines
from its Hengdali facility pursuant to an eight-year lease contract.
Selling and distribution expenses. Selling
and distribution expenses were RMB 11.0 million ($1.7 million) for the year ended December 31, 2018, compared to RMB 12.0 million
($1.8 million) for the year ended December 31, 2017, representing a decrease of RMB 936,000, or 7.8%. The decrease in selling and
distribution expenses was primarily due to decreased sales.
Administrative expenses. Administrative
expenses were RMB 18.0 million ($2.7 million) for the year ended December 31, 2018, compared to RMB 17.2 million for the year ended
December 31, 2017, representing an increase of RMB 741,000, or 4.2%. The increase in administrative expenses was mainly due to
the increased audit and consulting fees of RMB 724,116 for the year ended December 31, 2018.
Bad debt expense. Bad debt expense
was RMB 316.4 million ($47.9 million) for the year ended December 31, 2018, compared to RMB 71.6 million ($10.6 million) for the
year ended December 31, 2017, representing an increase of RMB 244.9 million, or 342.2%. We recognize a loss allowance for expected
credit loss on our financial assets, primarily on trade receivables, which are subject to impairment under IFRS 9, Financial
Instruments, first effective for the current accounting period. We believe that we have undertaken appropriate measures to resolve
the bad debt expense. We will continue to review each of our customers for credit quality as well as assiduously test their accounts
receivables balances in each upcoming fiscal period.
Loss from Asset Devaluation. The
loss from asset devaluation resulting from an impairment of non-current assets (fixed assets and land use rights) was RMB 85.0
million ($12.7 million) for the year ended December 31, 2018 as compared to RMB 36.7 million ($5.4 million) for the year ended
December 31, 2017. The loss from asset devaluation resulted from an impairment of non-current assets due to decelerating growth
in China and an expected contraction in the demand for the Company’s products.
Finance costs. Finance costs
decreased from RMB 0.2 million for the year ended December 31, 2017 to nil for the year ended December 31, 2018. The decrease mainly
due to the decrease in interest expense.
Other expenses. Other expenses
decreased 72.0% or RMB 3.8 million, from RMB 5.2 million ($0.8 million) for the year ended December 31, 2017 to RMB 1.5 million
($0.2 million) for the year ended December 31, 2018. For the year ended December 31, 2018, loss on disposal of a subsidiary was
nil. For the year ended December 31, 2017, loss on disposal of a subsidiary was RMB 0.7 million.
Loss before taxation. Loss before
taxation was RMB 78.3 million for the year ($11.6 million) ended December 31, 2017 as compared to a loss before taxation of RMB
418.5 million ($63.3 million) for the year ended December 31, 2018. The increase in loss before taxation was mainly due to increased
bad debt expense and increased loss from assets devaluation for the year ended December 31, 2018.
Income taxes. We incurred an
income tax expense of RMB 209,000 ($31,000) for the year ended December 31, 2018 compared to an income tax expense of RMB 9.7 million
($1.4 million) for the year ended December 31, 2017, representing a decrease in tax expense of RMB 9.5 million. Our PRC statutory
enterprise income tax rate was 25% for the year ended December 31, 2018 and 2017.
Loss attributable to shareholders. Loss
attributable to shareholders was RMB 88.0 million ($13.0 million) for the year ended December 31, 2017 as compared to a loss attributable
to shareholders of RMB 418.7 million ($63.4 million) for year ended December 31, 2018. The increase in net loss attributable to
shareholders in 2018 was for the reasons described above.
Liquidity and Capital Resources
The following table presents a summary
of our cash flows and beginning and ending cash balances for the years ended December 31, 2019, 2018 and 2017:
RMB (‘000)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Net cash generated from / (used in) operating activities
|
|
|
(2,046
|
)
|
|
|
(6,234
|
)
|
|
|
6,287
|
|
Net cash used in investing activities
|
|
|
(5,548
|
)
|
|
|
(1,719
|
)
|
|
|
(1,066
|
)
|
Net cash generated from / (used in) financing activities
|
|
|
9,537
|
|
|
|
15,448
|
|
|
|
(5,907
|
)
|
Net cash flow
|
|
|
1,943
|
|
|
|
7,495
|
|
|
|
(686
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
110
|
|
|
|
2,328
|
|
|
|
9,016
|
|
Effect of foreign exchange rate differences
|
|
|
275
|
|
|
|
(807
|
)
|
|
|
(118
|
)
|
Cash and cash equivalents at end of year
|
|
|
2,328
|
|
|
|
9,016
|
|
|
|
8,212
|
|
We have historically financed our liquidity
requirements mainly through operating cash flow, bank loans and issuance of new shares. We believe that we will generate sufficient
cash from operations to meet our needs for the next twelve months.
However, we may sell additional equity or
obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future acquisitions and capital
equipment expenditures. The sale of additional equity would result in further dilution to our shareholders. The incurrence in indebtedness
would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot
provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.
On April 3, 2017, the Company, pursuant
to a securities purchase agreement, between the Company and an institutional accredited investor, completed a registered offering
of US$ 631,579 principal amount of its 5% original issue discount convertible promissory note due January 3, 2018 for the purchase
price of US$ 600,000. At its option, the holder of the Note may convert the Note into the right to acquire shares of the Company
at any time prior to the Maturity Date at the conversion price which is equal to 85% of the volume weighed average price (VWAP)
per share over the five (5) trading day period prior to each conversion of the note, subject to US$ 1.00 per share floor price
and other conversion limitations to ensure compliance with the Nasdaq Stock Exchange and other applicable laws, rules and regulations.
Right after the issuance of the convertible promissory note, from April 4, 2017 through May 23, 2017, the investors converted this
note into 369,626 common shares at the conversion price ranging from US$ 1.1828 – US$ 1.9355 per share.
On July 18, 2017, the Company completed
a US$ 861,000 private placement of its ordinary shares pursuant to subscription agreements (the “Subscription Agreements”)
with certain accredited investors (the “Offering”) at the price of US$ 1.36 per share, the closing price of the Company’s
securities on July 17, 2017. The Company agreed to register the shares sold in the Offering for resale no later than 270 days after
the closing of the Offering. All respective purchasers in the Offering were “accredited investors” (as such term is
defined in Rule 501(a) of Regulation D under the Securities Act ), and the Company sold the securities in the Offering in reliance
upon an exemption from registration contained in Section 4(2) and Rule 506 under the Securities Act. There were no discounts or
brokerage fees associated with this Offering. The net proceeds of the Offering were used for working capital and general corporate
purpose. On April 16, 2018, the Company filed a registration statement on Form F-3 to register its shares sold in the Offering
for resale.
On April 19, 2018,
the Company entered into a securities purchase agreement (the “Agreement”) with certain individual investors relating
to a registered direct offering, issuance and sale (the “Offering”) of an aggregate of 770,299 of its shares (the “Shares”),
at a purchase price of $1.56 per share, the closing price of the Company’s equity securities as reported on Nasdaq on the
same date. The Shares were offered pursuant to the Company’s previously filed and effective Registration Statement on Form
F-3 that was filed with the Securities and Exchange Commission on August 21, 2015, subsequently amended, and declared effective
October 15, 2015 (File No. 333-206516). The Company filed a prospectus supplement related to the Offering dated April 19, 2018.
The gross proceeds to the Company from the Offering, before deducting the Company’s estimated offering expenses, were approximately
US$ 1.2 million. The Offering closed on April 23, 2018. Proceeds from the Offering were used for working capital and general corporate
purposes. There were no discounts or brokerage fees associated with this Offering.
On November 29, 2018, the Company announced
and on December 4, 2018, the Company closed a public offering of its common shares (and common stock warrants) with net proceeds
of RMB 7,332,000 (US$ 1.07 million). The gross proceeds were RMB 8,732,000 (US$ 1.27 million) and related commission and legal
expense was RMB 1,400,000 (US $203,600). The Company intends to use the net proceeds from the offering to fund inventory, distribution
expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital purposes.
In connection with the offering, the Company
issued 1,000,000 common shares at the price of US$ 1.27 per share, with each common share coupled with a warrant (500,000 warrants
in the aggregate) to purchase one common share. The common shares and the warrants were sold as units, but are immediately separable
and will be issued separately. The warrants have an exercise price of US$ 1.27 per share. The warrants will be exercisable on or
after the date of issuance and will terminate on the five-year anniversary of the date of issuance.
In connection with the offering, the Company
executed a Placement Agency Agreement, to pay the Placement Agent a cash placement fee equal to 8% of the gross proceeds of the
offering, plus road show, diligence, legal and other expenses incurred by the Placement Agent of US$ 45,000. The Placement Agent
also receive five-year warrants to purchase up to 50,000 common shares, which such Compensation Warrants will have substantially
the same terms as the warrants sold in the offering, except that such Compensation Warrants will have an exercise price of US$
1.5875 per share or 125% of the public offering price and will terminate on the five year anniversary of the effective date of
this offering.
On December 16, 2019, the Company entered
into a Securities Purchase Agreement with certain institutional investors for the sale by the Company of 1,200,000 common shares,
at a purchase price of $0.75 per share. Concurrently with the sale of the Common Shares, the Company also sold warrants to purchase
1,200,000 common shares. The Company sold the Common Shares and Warrants for aggregate gross proceeds of $900,000 (the “Offering”).
Subject to certain beneficial ownership limitations, the five-year Warrants will be initially exercisable on the six-month anniversary
of the issuance date at an exercise price equal to $0.82 per share, subject to adjustments as provided under the terms of the Warrants,
and will terminate on the five-year anniversary of the initial exercise date of the Warrants. The closing of the sales of these
securities under the Purchase Agreement took place on December 18, 2019. The Company received net proceeds from the transactions
of approximately $748,000, after deducting certain fees due to the placement agent and the Company’s estimated transaction
expenses. The net proceeds received by the Company from the transactions will be used for working capital and general corporate
purposes.
Pursuant to the terms and provisions of
the engagement letter between the Company and the Placement Agent, the Company agreed to pay the Placement Agent a cash placement
fee equal to 8% of the gross proceeds of the Offering, or $72,000, plus other expenses of the Placement Agent not to exceed $45,000.
The Placement Agent also received five-year warrants to purchase up to a number of common shares equal to 5% of the aggregate number
of shares sold in the Offering, including the warrant shares issuable upon exercise of the Warrants, which such Compensation Warrants
have substantially the same terms as the Warrants sold in the Offering, except that such Compensation Warrants have an exercise
price of $0.9375 per share and will terminate on the five year anniversary of the effective date of this offering.
On January 8, 2020, the Company executed
subscription agreements (each, a “Subscription Agreement”) in connection with a $500,000 private placement of its ordinary
shares with three accredited investors (the “Offering”) at the price of $0.75 per share. The Company agreed to register
the shares sold in the Offering for resale no later than 270 days after the closing of the Offering. All respective purchasers
in the Offering were “accredited investors” (as such term is defined under rules and regulations promulgated under
the Securities Act), and the Company sold the securities in the Offering in reliance upon an exemption from registration contained
in Section 4(2) and Rule 506 under the Securities Act. There were no discounts or brokerage fees associated with
this Offering. The net proceeds of the Offering will be used for working capital and general corporate purposes.
Cash flows from operating activities.
Our net cash provided by operating
activities was RMB 6.3 million (US$ 0.9 million) for the year ended December 31, 2019, an increase of RMB 12.5 million as compared
to a cash outflow of RMB 6.2 million for the year ended December 31, 2018. The increase of cash inflow was mainly due to an increase
in cash inflow from inventory of RMB 10.5 million and a decrease in cash outflow on trade payables of RMB 35.0 million, both of
which were partly offset by a decrease in operating cash inflow before working capital of RMB 32.9 million.
Our net cash used in operating activities
was RMB 6.2 million ($0.9 million) for the year ended December 31, 2018, an increase of RMB 4.2 million, or 205%, from cash outflow
of RMB 2.0 million in 2017. The increase of cash outflows was mainly due decreased cash inflow from inventory by RMB 15.5 million,
increased cash outflow on other receivables by RMB 14.6 million and increased cash outflow from trade payables by RMB 13.6 million,
which was partly offset by decreased cash outflow on trade receivable by RMB 27.1 million, decreased cash outflow on other payables
by 3.7 million, and increased operating cash inflows before working capital by RMB 8.0 million.
Cash flows from investing activities.
Net cash used in investing activities for
the year ended December 31, 2019 was RMB 1.1 million (US$ 0.2 million), compared to RMB 1.7 million for the year ended December
31, 2018. The decrease of cash outflow was mainly due to increase in restricted cash.
Net cash used in investing activities
for the year ended December 31, 2018 was RMB 1.7 million ($0.26 million), compare to RMB 5.5 million cash outflow for 2017. In
the year ended December 31, 2018, we have increased in restricted cash of RMB 1.7 million. In 2017, we purchased fixed asset for
RMB 5.6 million and received RMB 70,000 from disposal of two vehicles.
Cash flows from financing activities.
Net cash used in financing activities was
RMB 5.9 million (US$ 0.9 million) for the year ended December 31, 2019, compared to a cash inflow of RMB 15.4 million for the year
ended December 31, 2018, primarily due to a decrease in the issuance of share capital of RMB 7.3 million and a payment for lease
liabilities of RMB 13.9 million for the year ended December 31, 2019.
Net cash generated from financing activities
was RMB 15.4 million ($2.3 million) for the year ended December 31, 2018, comparing with cash inflow of RMB 9.5 million for 2017,
primarily due to the increase insurance of share capital by RMB 5.7 million in 2018.
Cash and bank balances were RMB 8.2 million
(US$ 1.2 million) as of December 31, 2019, as compared to RMB 9.0 million as of December 31, 2018.
As of December 31, 2019, our total outstanding
bank loan amounts were nil.
Operating lease commitments totaled RMB
5.8 million ($0.8 million) as of December 31, 2019.
Operating lease commitments totaled RMB
19.7 million ($3.0 million) as of December 31, 2018.
There were no commitments for advertising
and insurance expenditure as of December 31, 2019.
In our opinion, our working capital, including
our cash, income and cash flows from operations, and short-term borrowings, is sufficient for our present requirements.
However, we may sell additional equity or
obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future acquisitions and capital
equipment expenditures. The sale of additional equity would result in further dilution to our shareholders. The incurrence in indebtedness
would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot
provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Inventory
Management
Our inventory is comprised of raw materials,
work in progress and finished goods. Raw materials are purchased from our suppliers located in Fujian, Guangdong and Jiangxi Provinces
and comprise mainly of clay, coal, colorings, and glazing materials.
We have sufficient raw materials to support,
on average, three weeks of production at any point in time. This helps to minimize any potential delays in our production process
which may arise due to insufficient raw materials. Our production of ceramic tiles is based on customers’ orders. In doing
so, we minimize storage space and maintain a relatively low inventory level of finished products. Our inventory turnover for the
years ended December 31, 2019, 2018 and 2017 are as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Inventories (RMB’000)
|
|
|
191,667
|
|
|
|
127,346
|
|
|
|
165,296
|
|
Inventory turnover (days) (1)
|
|
|
95
|
|
|
|
117
|
|
|
|
217
|
|
(1)
|
The average inventory turnover is computed based on the formula: (simple average opening and closing inventories balance in a financial year / cost of sales) × 365 days.
|
The write-down of inventory for the years
ended December 31, 2019, 2018 and 2017 was a reversal of write-down RMB 56.8 million in 2019, a write-down RMB of 56.0 million
in 2018, and a reversal of a write-down of RMB 2.7 million in 2017, and was charged to Cost of Sales.
Credit Management
Credit terms to our customers
We typically extend credit terms of approximately
90 days to our customers. We will grant credit terms based on the reputation, creditworthiness, size of orders, payment records
and number of years we have done business with the customer. We do not have a products’ return policy. Considering the challenging
market conditions in China’s real estate industry, we extended the collection period to 150 days to address funding pressures
of our distributors since the year ended December 31, 2012. Other customers were granted a credit period of 90 days in the years
ended December 31, 2013 and 2012 and extended to 120 days in the year ended December 31, 2014. In the year ended December 31, 2019
and December 31, 2018, we recorded RMB 68.7 million (US$ 9.9 million) and RMB 316.4 million, respectively, for provision for bad
debt related to the amount of outstanding trade receivables that did not conform with the Company’s credit policy.
Personnel from our sales and marketing department
typically conduct visits to new customers to evaluate their credit worthiness before entering into any arrangements with them.
In addition, as Hengda was awarded a Top 500 Brand award, we increased the deposit required from new distributors from RMB
0.4 million to RMB 1.0 million.
Our average trade receivables’ turnover
for the years ended December 31, 2019, 2018 and 2017 are as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Trade receivables (RMB’000)
|
|
|
532,361
|
|
|
|
224,114
|
|
|
|
177,023
|
|
Trade receivables turnover (days) (1)
|
|
|
206
|
|
|
|
233
|
|
|
|
194
|
|
(1)
|
The average trade receivables’ turnover is computed based on the formula: (simple average opening and closing trade receivables balance, net of value-added tax in fiscal year / revenue) × 365 days.
|
Credit terms from our suppliers
Our typical credit terms from our major
suppliers are from 1 to 4 months after the raw materials have been delivered. Our average trade payables’ turnover days for the years
ended December 31, 2019, 2018 and 2017 are as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Trade payables (RMB’000)
|
|
|
61,084
|
|
|
|
24,329
|
|
|
|
22,577
|
|
Trade payables turnover (days) (1)
|
|
|
32
|
|
|
|
26
|
|
|
|
30
|
|
(1)
|
The average trade payables’ turnover is computed based on the formula: (simple average opening and closing trade payables balance, net of value-added tax in facial year / purchases) × 365 days.
|
Capital Expenditures
Our capital expenditures primarily consist
of expenditures on property, plant and equipment.
There were no capital expenditures for the
fiscal year ended December 31, 2019.
Contractual Obligations
Our contractual obligations consist mainly
of debt obligations, operating lease obligations and other purchase obligations and commitments, and will be paid off with our
cash flow from operations. The following table sets forth a breakdown of our contractual obligations (including both interest and
principal cash flows) as of December 31, 2019:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Short-term debt obligations (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating purchase obligations (2)
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other obligations (3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
5,792
|
|
|
|
5,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Amounts represent principal and interest cash payments over the life of the bank loans, including anticipated interest payments that are not recorded in the financial statements.
|
(2)
|
We lease plant buildings, production factories, warehouses and employees’ hostel from non-related parties under non-cancellable operating lease arrangements.
|
(3)
|
Includes advertising and insurance expenditure contracted but not provided for in the financial statements.
|
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance
arrangements and have not entered into any transactions that are established for the purpose of facilitating off-balance sheet
arrangements.
Impact of Inflation
The general annual inflation rate in China
was approximately 1.5% in 2018, and 2.9% in 2019 according to the National Bureau of Statistics. Our results of operations may
be affected by inflation, particularly rising prices for energy, labor costs, raw materials and other operating costs. See “Item
3. Key Information — Risk Factors — Risks relating to our business. If China’s inflation increases or the prices
of energy or raw materials increase, we may not be able to pass the resulting increased costs to our customers and this may adversely
affect our profitability or cause us to suffer operating losses.”
FINANCIAL RISK MANAGEMENT
We are exposed to financial risks arising
from our operations and the use of financial instruments. The key financial risks included credit risk, liquidity risk, interest
rate risk, foreign currency risk and market price risk.
We do not hold or issue derivative financial
instruments for trading purposes or to hedge against fluctuations, if any, in interest rates and foreign exchange rates.
Credit risk refers to the risk that a counterparty
will default on its contractual obligations resulting in financial loss us. Our exposure to credit risk arises primarily from bank
balances and trade receivables. For trade receivables, we adopt the policy of dealing only with customers of appropriate credit
history to mitigate credit risk. For other financial assets, we adopt the policy of dealing only with high credit quality counterparties.
As we do not hold any collateral, the maximum
exposure to credit risk for each class of financial assets is the carrying amount of that class of financial assets presented on
the consolidated statements of financial position.
Cash and bank balances
Our bank deposits are placed with reputable
banks in the PRC, Hong Kong and the United States. The credit exposure of our cash and bank balances (excluding restricted cash)
as of December 31, 2017, 2018 and 2019 were RMB 2,328,000 and RMB 9,016,000 and RMB 8,212,000, respectively.
Liquidity risk is the risk that we will
encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from
an inability to sell a financial asset quickly at close to its fair value.
Our exposure to liquidity risk arises primarily
from mismatches of the maturities of financial assets and liabilities. Our objective is to maintain a balance between continuity
of funding and flexibility through the use of stand-by credit facilities.
The table below summarizes the maturity
profile of the liabilities based on contractual undiscounted payments:
|
|
As of December 31, 2019
|
|
|
|
Within 1 year
|
|
|
More than 1
year but less
than 3 years
|
|
|
Total
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
22,577
|
|
|
|
-
|
|
|
|
22,577
|
|
Amounts owed to related parties
|
|
|
36,217
|
|
|
|
-
|
|
|
|
36,217
|
|
Interest-bearing bank borrowings(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
58,794
|
|
|
|
-
|
|
|
|
58,794
|
|
(1)
|
Includes contractual interest payments
|
We intend to ensure that there are adequate
funds to meet all its obligations in a timely and cost-effective manner. We intend to maintain a sufficient level of cash and cash
equivalents and have available an adequate amount of committed credit facilities from financial institutions to meet our liquidity
requirements in the short and longer term.
Interest rate risk is the risk that the
fair value or future cash flows of our financial instruments will fluctuate because of changes in market interest rates.
Our interest-bearing bank deposits and borrowings
were nil as of December 31, 2019.
|
(iv)
|
Foreign currency risk
|
Currency risk is the risk that the value
of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises when transactions are denominated
in foreign currencies.
Our operations are primarily conducted in
the PRC. All the sales and purchases transactions are denominated in RMB. As such, our operations are not exposed to exchange rate
fluctuation.
As at December 31, 2017, 2018 and 2019,
nearly all of our monetary assets and monetary liabilities were denominated in RMB except certain bank balances and other payables
which were denominated in US dollars.
Critical Accounting Policies and Judgment
The preparation of the condensed consolidated
interim financial statements, which have been prepared in accordance with International Accounting Standard (“IAS”)
as issued by the International Accounting Standards Board (“IASB”), requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and judgments are continually evaluated
and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable
under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions.
See Note 2 to our condensed consolidated
interim financial statements, “Basis of Preparation and Summary of Significant Accounting Policies.”
Inventories
Inventories are carried at the lower of
cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work in progress and finished
goods, comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is the estimated selling
price in the ordinary course of business less the estimated cost of completion and applicable selling expenses.
When inventories are sold, the carrying
amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of
any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period
the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the reversal occurs.
Financial instruments
Financial assets and financial liabilities
are recognized when a group entity becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities
are initially measured at fair value except for trade debtors arising from contracts with customers which are initially measured
in accordance with HKFRS 15 since 1 January 2018. Transaction costs that are directly attributable to the acquisition or issue
of financial assets and financial liabilities (other than financial assets or liabilities at fair value through profit or loss)
are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit
or loss are recognized immediately in profit or loss.
The effective interest method is a method
of calculating the amortized cost of a financial asset or financial liability and of allocating interest income and interest expense
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts and payments
(including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and
other premiums or discounts) through the expected life of the financial asset or financial liability, or, where appropriate, a
shorter period, to the net carrying amount on initial recognition.
Interest income which are derived from the
Company’s ordinary course of business are presented as revenue.
Financial assets
Classification and subsequent measurement
of financial assets (upon application of IFRS 9)
Financial assets that meet the following
conditions are subsequently measured at amortized cost:
· the financial asset is held within a business model whose objective is to collect contractual cash flows; and
· the
contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All other financial assets are subsequently
measured at fair value through profit or loss (“FVTPL”).
A financial asset is classified as held
for trading if:
· it has been acquired principally for the purpose of selling in the near term; or
· on
initial recognition it is a part of a portfolio of identified financial instruments that the Company manages together and has
a recent actual pattern of short-term profit-taking; or
· it is a derivative that is not designated and effective as a hedging instrument.
In addition, the Company may irrevocably
designate a financial asset that are required to be measured at the amortized cost as measured at FVTPL if doing so eliminates
or significantly reduces an accounting mismatch.
(i) Amortized cost and interest income
Interest income is recognized using the
effective interest method for financial assets measured subsequently at amortized cost. Interest income is calculated by applying
the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently
become credit-impaired. For financial assets that have subsequently become credit-impaired, interest income is recognized by applying
the effective interest rate to the amortized cost of the financial asset from the next reporting period. If the credit risk on
the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is
recognized by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the
reporting period following the determination that the asset is no longer credit impaired.
(ii) Financial assets at FVTPL
Financial assets that do not meet the criteria
for being measured at amortized cost are measured at FVTPL.
Financial assets at FVTPL are measured at
fair value at the end of each reporting period, with any fair value gains or losses recognized in profit or loss. The net gain
or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is included in the “other
gains and losses” line item.
Impairment of financial assets (upon application
IFRS 9)
The Company recognizes a loss allowance
for expected credit loss (“ECL”) on financial assets which are subject to impairment under IFRS 9 (including trade
and other receivables, bank deposits and bank balances). ECLs are based on the difference between the contractual cash flows due
in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the
original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms. The amount of ECL is updated at each reporting date to reflect changes
in credit risk since initial recognition.
General approach
ECLs are recognized in two measurement bases.
For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided
for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit
exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required
for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Company assesses
whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment,
the Company compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default
occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information
that is available without undue cost or effort, including historical and forward looking information.
The Company considers a financial asset
in default when contractual payments are 90 days past due. However, in certain cases, the Company may also consider a financial
asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding
contractual amounts in full before taking into account any credit enhancements held by the Company. A financial asset is written
off when there is no reasonable expectation of recovering the contractual cash flows.
Financial assets at amortized cost are subject
to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for
trade receivables which apply the simplified approach as detailed below.
Stage 1 — Financial instruments for
which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an
amount equal to 12-month ECLs
Stage 2 — Financial instruments for
which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for
which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 — Financial assets that are
credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance
is measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain
a significant financing component or when the Company applies the practical expedient of not adjusting the effect of a significant
financing component, the Company applies the simplified approach in calculating ECLs. Under the simplified approach, the Company
does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date.
The Company assesses at the end of each
reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. An
impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated
future cash flows of the financial asset or the Company of financial assets that can be reliably estimated. Evidence of impairment
may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency
in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable
data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Financial assets carried at amortized cost
For financial assets carried at amortized
cost, the Company first assesses whether impairment exists individually for financial assets that are individually significant,
or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence
of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group
of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually
assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment
of impairment.
The amount of any impairment loss identified
is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding
future credit losses that have not been incurred). The present value of the estimated future cash flows is discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).
The carrying amount of the asset is reduced
through the use of an allowance account and the loss is recognized in profit or loss. Interest income continues to be accrued on
the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the
impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect
of future recovery and all collateral has been realised or has been transferred to the Company.
If, in a subsequent period, the amount of
the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery
is credited to other expenses in the statement of profit or loss.
Loans and receivables
Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognized at
fair value. Subsequent to initial recognition, loans and receivables (including trade and other receivables, pledged bank deposits,
fixed bank deposits with maturity periods over three months and bank balances) are measured at amortized cost using the effective
interest method, less any identified impairment losses).
Impairment of financial assets
Financial assets are assessed for indicators
of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence
that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future
cash flows of the financial assets have been affected.
Objective evidence of impairment could include:
· significant
financial difficulty of the issuer or counterparty; or
· breach
of contract, such as a default or delinquency in interest or principal payments; or
· it
becoming probable that the borrower will enter bankruptcy or financial re-organization; or disappearance of an active market for
that financial asset because of financial difficulties.
If any such evidence exists, the impairment
loss on trade receivables and other current receivables and other financial assets carried at amortized cost is measured as the
difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the
financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these
assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar
risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for
financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit
risk characteristics similar to the collective group.
If in a subsequent period the amount of
an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized,
the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s
carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
Impairment losses are written off against
the corresponding assets directly, except for impairment losses recognized in respect of trade receivables included within trade
and other receivables and prepayments, whose recovery is considered doubtful, but not remote. In this case, the impairment losses
for doubtful debts are recorded using an allowance account. When the Company is satisfied that recovery is remote, the amount considered
irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt
are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account.
Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit
or loss.
Derecognition of financial assets
The Company derecognizes a financial asset
only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially
all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially
all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes its retained interest
in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and
rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and recognizes a
collateralized borrowing for the proceeds received.
On derecognition of a financial asset measured
at amortized cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
is recognized in profit or loss.
Financial liabilities and equity instruments
Debt and equity instruments issued by a
group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements
and the definitions of a financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that
evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by
the Company are recognized at the proceeds received, net of direct issue costs.
Effective interest method
The effective interest method is a method
of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received
that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected
life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest expense is recognized on an effective
interest basis.
Financial liabilities
Interest-bearing borrowings are recognized
initially at fair value less attributable transaction costs. They are subsequently stated at amortized cost with any difference
between the amount initially recognized and redemption value being recognized in profit or loss over the period of the borrowings,
together with any interest and fees payable, using the effective interest method.
Trade and other payables are initially recognized
at fair value. They are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case
they are stated at cost.
Derecognition
The Company derecognizes a financial asset
only when the contractual rights to the cash flows from the asset expire.
On derecognition of a financial asset in
its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized
in profit or loss.
The Company derecognizes a financial liability
when, and only when, the Company’s obligations are discharged, cancelled or expire. The difference between the carrying amount
of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.
Derivative financial instruments
Initial recognition and subsequent measurement
We use derivative financial instruments,
such as forward currency contracts, for investment purposes. Such derivative financial instruments are initially recognized at
fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives
are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes
in the fair value of derivatives are taken directly to profit or loss.
Leases
Financial leases refers to the situation
that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and
rewards of ownership of the leased asset.
All other leases are treated as operating
leases. Where we have the right to use of assets held under operating leases, payments made under the leases are charged to profit
or loss on a straight line basis over the lease terms except where an alternative basis is more representative of the time pattern
of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an integral part
of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they
are incurred. Operating leases were treated in accordance to IFRS 16 commencing January 1, 2019.
All of our leases are operating leases for
the years ended December 31, 2019, 2018 and 2017.
Revenue recognition
Revenue comprises the fair value of the
consideration received or receivable for the sale of goods, net of rebates and discounts. We paid rebates to some distributors
on their annual cash collections in 2012 and 2011. No such rebates were paid to distributors since year 2013. Provided it is probable
that the economic benefits will flow to us and the revenue and costs, if applicable, can be measured reliably, revenue is recognized
as follows:
·
|
Sales of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing management involvement with the goods and we do not have the obligation to accept the return of the goods to us from the customer.
|
·
|
Interest income is recognized on a time-proportion basis using the effective interest method.
|
Impairment of non-financial assets
Impairment testing is made on our goodwill
at each reporting date. Property, plant and equipment and land use rights are tested for impairment if there is any indication
that the assets may be impaired at the balance sheet date.
If any indication exists, or when annual
impairment testing for an asset is required, we estimate the asset’s recoverable amount.
Calculation of recoverable amount
An asset’s recoverable amount is the
greater of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash
inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that
generates cash inflows independently (i.e. a cash-generating unit).
Recognition of impairment losses
An impairment loss is recognized in profit
or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount.
Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill
allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying amount of the
other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its individual
fair value less costs of disposal (if measurable) or value in use (if determinable).
Reversal of impairment losses
In respect of assets other than goodwill,
an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
An impairment loss in respect to goodwill is not reversed.
A reversal of an impairment loss is limited
to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals
of impairment losses are credited to profit or loss in the year in which the reversals are recognized.
Share-based employee remuneration
We operate equity-settled share-based remuneration
plans for its employees. None of our plans feature any options for a cash settlement.
The fair value of share options granted
to employees is recognized as an employee cost with a corresponding increase in the share-based payment reserve within equity.
The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account the terms and conditions
upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled
to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account
the probability that the options will vest.
During the vesting period, the number of
share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized in prior years is
charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for recognition
as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized as
an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based
payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of our
shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred
to the share premium account) or the option expires (when it is released directly to retained earnings).
Accounting for income taxes
Income tax comprises current tax and deferred
tax.
Current tax and movements in deferred tax
assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized in other comprehensive
income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly
in equity, respectively.
Current tax is the expected tax payable
on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any
adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the liability
method on temporary differences at the reporting date between the carrying amounts of assets and liabilities in the financial statements
and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred
tax assets are recognized for all deductible temporary differences, tax losses available to be carried forward as well as other
unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary differences, will
be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.
Deferred tax assets and liabilities are
not recognized if the temporary difference arises from goodwill or from initial recognition (other than in a business combination)
of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred tax liabilities are recognized
for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except where we are able
to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred tax is calculated, without discounting,
at tax rates that are expected to apply in the period the liability is settled or the asset realized, based on tax rate (and tax
laws) that have been enacted or substantively enacted at the reporting date.
The carrying amount of a deferred tax asset
is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it
becomes probable that sufficient taxable profits will be available.
Additional income taxes that arise from
the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current tax assets and current tax liabilities
are presented in net if we have the legally enforceable right to set off the recognized amounts and the following additional conditions
are met:
|
a)
|
in the case of current tax assets and liabilities, we intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
|
|
b)
|
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
|
|
(i)
|
the same taxable entity; or
|
|
(ii)
|
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to settle the liabilities and realize the assets simultaneously.
|
Critical accounting estimates and assumptions
We make estimates and assumptions concerning
the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key sources of
estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed
below:
Useful lives and impairment assessment
of property, plant and equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual
depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis or
in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by
each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Useful lives and impairment assessment
of investment property
Investment properties are stated at cost
less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation
expenses recorded. Investment properties are evaluated for possible impairment on a specific asset basis or in groups of similar
assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group
of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written
down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Impairment loss recognized in respect
of property, plant and equipment
As of December 31, 2019, the carrying amount
of property, plant and equipment was approximately RMB 35,000 (2018: RMB 46,000). No impairment loss was recognized in 2019. An
impairment loss of approximately RMB 75,906,000 and RMB 33,653,000 were recognized against the original carrying amount of property,
plant and equipment in fiscal 2018 and 2017, respectively. Determining whether property, plant and equipment are impaired requires
an estimation of the recoverable amount of the property, plant and equipment. Such an estimate was based on certain assumptions
which are subject to uncertainty and might materially differ from the actual results.
Impairment loss recognized in respect
of investment property
As of December 31, 2019, the carrying amount
of investment property was nil (2018: nil). No impairment loss was recognized in 2019. An impairment loss of approximately RMB
4,858,000 and RMB 1,617,000 were recognized against the original carrying amount of investment property in fiscal 2018 and 2017,
respectively. Determining whether an investment property is impaired requires an estimate of the recoverable amount of the investment
property. Such an estimate was based on certain assumptions which are subject to uncertainty and might materially differ from the
actual results.
Impairment loss recognized in respect
of land use rights
As of December 31, 2019, the carrying amount
of land use rights was nil (2018: nil). No impairment loss was recognized in 2019. The carrying amounts of land used rights were
reclassified to right-of-use assets to conform to IFRS 16 during the year ended December 31, 2019. An impairment loss of approximately
RMB 4,257,000 and RMB 1,413,000 were recognized against the original carrying amount of land use rights in fiscal 2018 and 2017,
respectively. Determining whether land use rights are impaired requires an estimate of the recoverable amount of the land use rights.
Such an estimate was based on certain assumptions which are subject to uncertainty and might materially differ from the actual
results.
Income tax
The Company has exposure to income taxes
in the PRC. Significant judgment is required in determining the provision for income taxes. There are certain transactions and
computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes
liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made.
Impairment of financial assets (trade
receivables)
The Company recognizes
a loss allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment under IFRS 9
(including trade and other receivables, amounts due from related parties, restricted cash, bank balances and cash). The amount
of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.
Lifetime ECL represents
the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast, 12-month
ECL (“12m ECL”) represents the portion of lifetime ECL that is expected to result from default events that are possible
within 12 months after the reporting date. Assessment are done based on the Company’s historical credit loss experience,
adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions
at the reporting date as well as the forecast of future conditions.
The Company applies
the IFRS 9 simplified approach to measure ECL which uses a lifetime ECL for all trade receivables. The ECL on these assets are
assessed individually for debtors with significant balances and/or collectively using a provision matrix with appropriate groupings.
For all other instruments,
the Company measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since
initial recognition, the Company recognizes lifetime ECL. The assessment of whether lifetime ECL should be recognized is based
on significant increases in the likelihood or risk of a default occurring since initial recognition.
The Company recognized
bad debts of RMB 68.7 million and RMB 316.4 million in the years ended December 31, 2019 and 2018, respectively.
Net realizable value of inventories
Net realizable value of inventories is management’s
estimate of future selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These
estimates are based on current market conditions and the historical experience of selling products of a similar nature and could
change significantly as a result of various market factors.
Share-based payment transaction
The Company measures the cost of equity-settled
transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating
fair value for share-based payment transactions requires determining the most appropriate valuation model which is dependent on
the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model
including the expected life of the stock option, volatility and dividend yield, and the assumptions as to these components.
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ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and senior management
|
Our current directors and executive officers
are:
Name
|
|
Age
|
|
Position
|
Huang Meishuang
|
|
35
|
|
Chair of the Board and Chief Executive Officer
|
Hen Man Edmund
|
|
47
|
|
Chief Financial Officer
|
Roy Tan Choon Kang (1)(2)(3)(4)
|
|
48
|
|
Director
|
Shen Cheng Liang (1)(2)(3)
Song Chungen (1)(2)(3)
|
|
64
43
|
|
Director
Director
|
Alex Ng Man Shek
|
|
50
|
|
Executive Director and Corporate Secretary
|
|
(1)
|
Member of audit committee
|
|
(2)
|
Member of compensation committee
|
|
(3)
|
Member of nominations committee
|
|
(4)
|
Audit committee financial expert
|
Huang Meishuang was appointed the
Chairman of the Board effective as of June 17, 2019, following Huang Jia Dong’s resignation. Ms. Huang is Mr. Huang’s
daughter. She has been employed at the Company’s Treasury Department from August 2008 to August 2013. From September 2013
to present, she has been employed as CEO’s Assistant. Ms. Huang holds a Bachelor’s degree in Business Administration
from JiMei University, Xiamen (2008). She also holds a postgraduate diploma of the Executive Development Program from Xiamen University
(2009).
Hen Man Edmund has served as our
Chief Financial Officer since November 20, 2009. Mr. Hen joined Hengda in 2008 as the Chief Financial Officer. Mr. Hen
is responsible for the corporate finance function and oversees matters relating to compliance and reporting obligation of our company.
Prior to joining Hengda, Mr. Hen was a Financial Controller of a switchgear manufacturer in Sichuan PRC and was responsible
for the corporate finance function of the company. Prior to that, Mr. Hen was the accountant of Dickson Concepts (International)
Ltd., a public listed company in Hong Kong and oversaw the accounting and financial administration of the company. He also worked
at a variety of international accountancy firms, including Deloitte Touche Tohmatsu, in assurance and advisory services during
the period from 1995 to 2001. Mr. Hen graduated from the University of East Anglia, United Kingdom, with a Bachelor’s
Degree in Science in 1995. He is a member of the Institute of Chartered Accountants in England and Wales and a member of the Hong
Kong Institute of Certified Public Accountants.
Roy Tan Choon Kang commenced his
career at the Government of Singapore Investment Corporation (GIC) in 1996 at the Economics & Strategy Department handling
GIC’s equity and fixed income investments in North America and Latin America. From February 1, 2009 to December 31,
2016, Mr. Tan held the title of Managing Partner of One Tree Partners PTE Ltd., an asset management company. From November 2016
to July 31, 2017, Mr. Tan held the office of the CFO of Fuse Enterprises Inc., a digital marketing and mining company.
Mr. Tan holds a joint MBA degree from National University of Singapore and Columbia University, NY (1999).
Song Chungen was appointed effective
as of November 1, 2019 as an independent member of the Board as well as a member of Audit, Compensation and Nominating Committees,
to fill the vacancy following Liu Jun’s resignation. From 2009 to present, Song Chungen has been a practicing lawyer at Guangdong
Weihao Law firm. He obtained his law license in May 2003, and in November 2009, he obtained Securities Qualification
in China. Song Chungen holds a Bachelor’s degree in Law from Sun Yat Sen University (2007).
Shen Cheng Liang is a ceramics production
expert with over 30 years of experience in the ceramics industry in China. Prior to his retirement from the industry in 2012, he
was a senior production engineer and general manager at Fujian Yiyan Ceramics Ltd. where he worked from 1983 to 2012. Mr. Liang
graduated with a bachelor’s degree in material physics from Jingdezhen Ceramics College in 1983.
Alex Ng Man Shek has been served
as the position of corporate secretary of Nova Lifestyle Inc. (NASDAQ: NVFY) from June 2011 to October 2016 and the chief
operating officer of a wholly-owned subsidiary of Nova Lifestyle Inc. in Dongguan, the PRC since 2003. He worked in various companies
in Hong Kong, Canada and the PRC. Mr. Ng received his Bachelor’s degree in Economics from York University, Canada in
1994. He has also received a Certificate in Securities Course, a Certificate in Technical Analysis Course and a Certificate in
Derivatives Course from The Canadian Securities Institute during the period from 1998 to 2002. There is no arrangement or understanding
between Mr. Ng and any other persons pursuant to which he was appointed as discussed above. Nor are there any family relationships
between Mr. Ng and any executive officers and directors.
There are no family relationships among
our directors or officers.
The business address
of each party described above is c/o Jinjiang Hengda Ceramics Co., Ltd., Junbing Industrial Zone, Anhai, Jinjiang City, Fujian
Province, People’s Republic of China.
Compensation Committee Interlocks and Insider Participation
No member of our compensation
committee has at any time been our officer or employee, or our subsidiaries. No interlocking relationship exists between our board
of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking
relationship existed in the past.
During the last fiscal year, none of our
officers and employees, and none of our former officers participated in deliberations of our Board of Directors concerning executive
officer compensation.
Director Compensation
Starting April 1,
2010, our Board determined to provide its non-employee members annual compensation of $40,000.
The following table
sets forth all of the compensation paid by us or our significant subsidiaries in 2019 to each of our non-employee directors for
such person’s service as a director (including contingent or deferred compensation accrued during 2019):
Name and Principal Position
|
|
|
Compensation
RMB
|
|
|
|
Value of
Options(1)
RMB
|
|
|
|
Total RMB
|
|
Liu Jun(2)
|
|
|
276,296
|
|
|
|
-
|
|
|
|
276,296
|
|
Song Chungen
|
|
|
46,056
|
|
|
|
-
|
|
|
|
46,056
|
|
Roy Tan Choon Kang
|
|
|
310,864
|
|
|
|
-
|
|
|
|
310,864
|
|
Alex Ng Man Shek
|
|
|
862,130
|
|
|
|
|
|
|
|
862,130
|
|
Shen Cheng Liang
|
|
|
252,000
|
|
|
|
|
|
|
|
252,000
|
|
|
(1)
|
No options were granted to our directors in 2019.
|
|
(2)
|
Liu Jun was resigned on November 1, 2019
|
Executive Officers
The following table sets forth all of the
compensation paid by us or our significant subsidiaries in 2019 to each of our officers for such person’s service as an officer
(including contingent or deferred compensation accrued during 2019, but not including any amounts paid to such persons for their
services as directors):
|
|
Salary
|
|
|
Bonus
|
|
|
|
Value of Stock
Compensation (2)
|
|
|
Total
|
Name and Principal Position (1)
|
|
RMB
|
|
|
RMB
|
|
|
|
RMB
|
|
|
RMB
|
Huang Meishuang, CEO
|
|
50,916
|
|
|
-
|
|
|
|
-
|
|
|
50,916
|
Hen Man Edmund, CFO
|
|
618,829
|
|
|
-
|
|
|
|
621,729
|
|
|
1,240,558
|
|
(1)
|
No options were granted to our executives in 2019.
|
|
(2)
|
Stock Compensation were granted to our Chief Financial Officer in 2019.
|
Retirement Benefits
As of December 31,
2019, we have contributed to the government-mandated employee welfare and retirement benefit plan and provided pension, retirement
or similar benefits to its employees. The PRC regulations require us to pay the local labor administration bureau a monthly contribution
at a stated contribution rate based on the monthly basic compensation of qualified employees. The local labor administration bureau,
which manages various investment funds, will take care of employee retirement, medical and other fringe benefits. We have no further
commitments beyond our monthly contribution.
Employment Agreements
Upon consummation of
the acquisition of Success Winner, we entered into employment agreements with certain of our executive officers. The following
discussion summarizes the material terms of employment agreements entered into between us and our executive officers:
We entered into employment
agreements with the following officers: Huang Meishuang, CEO, Hen Man Edmund, CFO, and Alex Ng Man Shek, Executive Director and
Corporate Secretary.
|
·
|
The term of the employment agreements
is three years (June 19, 2019 to June 18, 2022 for Huang Meishuang), one year (July 1, 2019 to June 30, 2020
for Hen Man Edmund and Alex Ng Man Shek).
|
|
·
|
From July 1, 2017, Hen Man Edmund received compensation of RMB 50,715 (HKD 58,500) per month. From July 1, 2017, Alex Ng Man
Shek received compensation of RMB 69,354 (HKD 80,000) per month. Alex became our director starting from October 2017.
|
|
·
|
We may dismiss any of the above
officers if any of the following events occurs with respect to the officer: (1) failure to show up for work,
(2) failure to provide required documents, (3) falsification of documents, criminal record, etc.,
(4) serious violation of such officers’ labor rules and of regulations, (5) serious lapse of duties and
responsibilities, (6) activities that violate regulations, resulting in loss of more than RMB 4,000, (7) operation
of his own business during the term of his employment, (8) criminal prosecution
and labor punishment, (9) request by the officer to resign, (10) causing us to sign or change any contract through fraud,
coercion and other fraudulent means, or (11) other situations stipulated by law and statutes.
|
|
·
|
Each officer is subject to the non-compete
provisions of the agreement for a period of three years following termination of the employment agreement and non-solicitation
provisions of the agreement for a period of two years following termination of the employment agreement.
|
Other Employees
Compensation for our
senior executives is comprised of four elements: a base salary, an annual performance bonus, equity and benefits.
In developing salary
ranges, potential bonus payouts, equity awards and benefit plans, it is anticipated that our compensation committee takes into
account: 1) competitive compensation among comparable companies and for similar positions in the market, 2) relevant ways to incentivize
and reward senior management for improving shareholder value while building a successful company, 3) individual performance, 4)
how best to retain key executives, 5) the overall performance of us and our various key component entities, 6) our ability to pay
and 7) other factors deemed to be relevant at the time.
Our senior management have discussed our
above-mentioned planned process for executive compensation and the four compensation components. Specific compensation plans for
our key executives are negotiated and established by our compensation committee.
We have not entered into any service contracts
with any of our officers, directors or employees that contain any provisions for benefits upon termination of employment.
China Ceramics Co., Ltd. 2010 Incentive Compensation
Plan
On December 27,
2010, our shareholders approved the 2010 Incentive Plan. The purpose of the 2010 Incentive Plan is to assist us and our subsidiaries
in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, and independent
contractors by enabling such persons to acquire or increase a proprietary interest in us in order to strengthen the mutuality of
interests between such persons and our shareholders, and providing such persons with annual and long-term performance incentives
to expand their maximum efforts in the creation of shareholder value. Awards under the 2010 Incentive Plan will be limited
in the aggregate to 1,200,000 shares. The 2010 Incentive Plan shall terminate at such time as no shares remain available for issuance
under the 2010 Incentive Plan, when we have no further obligations with respect to outstanding awards under the 2010 Incentive
Plan. As of December 31, 2016, no stock options under the 2010 Incentive Plan have been granted.
Administration.
The 2010 Incentive Plan is administered by a committee (the “Committee”) designated by our board of directors (the
“Board”), which shall consist of at least two directors, each of whom is (i) a “non-employee director”
within the meaning of Rule 16b-3 promulgated under the Exchange Act and (ii) an “outside director” within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time, including regulations
thereunder and successor provisions and regulations thereto (the “Code”); provided, however, that except as otherwise
expressly provided in the 2010 Incentive Plan or in order to comply with Code Section 162(m) or Rule 13b-3 under
the Exchange Act, the Board may exercise any power or authority granted to the Committee under the 2010 Incentive Plan. Among
other things, the Committee has complete discretion, subject to the express limits of the 2010 Incentive Plan, to determine the
officers, directors, employees and independent contractors to be granted an award, the type of award to be granted, the number
of shares subject to each award, the terms and conditions of each award, the exercise price of each award which is a stock option
(“Option”) and the base price of each award which is a stock appreciation right (“SAR”), the term of each
award, the vesting schedule for an award, whether to accelerate award vesting, the value of the Shares underlying an award, and
the required withholdings, if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating
to the 2010 Incentive Plan. Notwithstanding the foregoing, neither the Committee nor the Board has any authority to grant or modify
an award under the 2010 Incentive Plan with terms or conditions that would cause the award to be considered nonqualified “deferred
compensation” subject to Code Section 409A.
Grant of Awards;
Shares Available for Awards. The 2010 Incentive Plan provides for the grant of Options (both incentive stock options and non-incentive
stock options), SARs (including limited SARs), restricted stock, deferred stock, stock granted as a bonus or in lieu of another
award, dividend equivalents, bonus stock, awards in lieu of obligations, and performance or annual incentive awards (each an “award”)
to our executive officers, directors and employees, and independent contractors (each a “participant”) (however, solely
employees are eligible for awards which are incentive stock options). We have reserved a total of 1,200,000 shares for issuance
as or under awards to be made under the 2010 Incentive Plan. If any award lapses, expires, is cancelled, or terminates
unexercised or ceases to be exercisable for any reason, the number of shares subject thereto is again available for grant under
the 2010 Incentive Plan. The number of shares for which awards which are Options, SARs, performance awards or annual incentive
awards may be granted to a participant under the 2010 Incentive Plan in any fiscal year is limited to 350,000.
The number of awards
to be granted to officers, directors, employees and consultants cannot be determined at this time as the grant of awards is dependent
upon various factors such as hiring requirements and job performance.
Options. The
exercise price per share purchasable under an Option shall be determined by the Committee or the Board, provided that such per
share exercise price shall not be less than 100% of the fair market value of a share on the date of grant of the Option and shall
not, in any event, be less than the par value of a share on the date of grant of such option. The Committee or the Board shall
determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part, the time
or times at which Options shall cease to be or become exercisable following termination of employment or upon other conditions,
the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, and the methods by or forms
in which shares will be delivered or deemed to be delivered to participants who exercise Options.
Options which are
incentive stock options (“ISOs”) granted under the 2010 Incentive Plan shall comply in all respects with Code
Section 422. In the case of ISOs, if an employee owns or is deemed to own (by reason of the attribution
rules applicable under Code Section 424(d)) more than 10% of the combined voting power of all classes of our shares
or the shares of any parent or subsidiary (a “ten percent shareholder”) and an ISO is granted to such employee,
the per share exercise price under such ISO (to the extent required by the Code at the time of grant) shall be no less than
110% of the fair market value of a share on the date such ISO is granted. The term of an ISO may not exceed 10 years (5 years
in the case of an ISO granted to a ten percent shareholder). ISOs may be granted to solely employees. In addition, the
aggregate fair market value of the shares subject to an ISO (determined at the time of grant) which are exercisable for the
first time by an employee during any calendar year may not exceed $100,000.
Stock Appreciation
Rights. A SAR provides the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the
fair market value of the number of shares subject to the SAR on the date of exercise (or, in the case of a “Limited SAR”
(as defined in the 2010 Incentive Plan) which may be exercised only in the event of a “change in control” (as defined
in the 2010 Incentive Plan), the fair market value determined by reference to the change in control price, as defined in the 2010
Incentive Plan), over (B) the product of the number of shares subject to the SAR multiplied by the grant price under the SAR,
as determined by the Committee or the Board. The per share grant price of a SAR shall not be less than the fair market value of
a share on the date of grant.
Restricted Stock
Awards. A restricted stock award is a grant or sale of shares to the participant, subject to such restrictions on transferability,
risk of forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee or the Board may determine at the date of grant or purchase
or thereafter. Except to the extent restricted under the terms of the 2010 Incentive Plan and any agreement relating to the restricted
stock award, a participant who is granted or has purchased restricted stock shall have all of the rights of a shareholder, including
the right to vote the restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other
requirement imposed by the Committee or the Board). During the restricted period applicable to the restricted stock, subject to
certain exceptions, the restricted stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered
by the participant.
Deferred Stock.
A deferred stock award is a right to receive shares, cash, or a combination thereof at the end of a specified deferral period,
subject to certain terms and conditions, and in compliance with Code Section 409A. Payment under an award of deferred stock
shall occur upon expiration of the deferral period specified for such deferred stock award by the Committee or the Board (or, if
permitted by the Committee or the Board, as elected by the participant). In addition, deferred stock awards shall be subject to
such restrictions (which may include a risk of forfeiture) as the Committee or the Board may impose, if any, which restrictions
may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance
goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee or the
Board may determine. Payments under deferred stock awards may be by delivery of Shares, cash equal to the fair market value of
the specified number of shares covered by the deferred stock award, or a combination thereof, as determined by the Committee or
the Board at the date of grant or thereafter. Prior to the end of the specified deferral period for a deferred stock award, the
award carries no voting or dividend or other rights associated with share ownership.
Bonus Shares and
Awards in Lieu of Obligations. The Committee and the Board are each authorized to grant shares as a bonus, or to grant shares
or other awards in lieu of our obligations to pay cash or deliver other property under the 2010 Incentive Plan or under other
plans or compensatory arrangements, provided that, in the case of participants subject to Section 16 of the Exchange Act,
the amount of such grants remains within the discretion of the Committee to the extent necessary to ensure that acquisitions of
shares or other awards are exempt from liability under Section 16(b) of the Exchange Act. These bonus shares or awards
granted under the 2010 Incentive Plan shall be subject to such other terms as shall be determined by the Committee or the Board.
Dividend Equivalents.
The Committee and the Board are each authorized to grant dividend equivalents to a participant, entitling the participant to receive
cash, shares, other awards, or other property equal in value to dividends paid with respect to a specified number of Shares, or
other periodic payments. Dividend equivalents may be awarded on a free-standing basis or in connection with another award. The
Committee or the Board may provide that dividend equivalents shall be paid or distributed when accrued or shall be deemed to have
been reinvested in additional shares, awards, or other investment vehicles, and subject to such restrictions on transferability
and risks of forfeiture, as the Committee or the Board may specify.
Other Stock-Based
Awards. The Committee and the Board are each authorized, subject to limitations under applicable law, to grant to participants
such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or
related to, shares, as deemed by the Committee or the Board to be consistent with the purposes of the 2010 Incentive Plan, including,
without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards with value and payment contingent upon our performance or any other factors designated by the Committee
or the Board, and awards valued by reference to the book value of shares or the value of securities of or the performance of our
specified subsidiaries or business units.
Performance and
Annual Incentive Awards. The Committee and the Board (except for such awards to be made to participants who are
“covered employees” for purposes of Code Section 162(m), which awards must be made by the Committee) are each
authorized to grant (i) performance awards, under which participants will receive cash payments, shares or other awards upon
the satisfaction of pre-specified (generally, other than annual) performance criteria, and (ii) annual incentive awards, under
which participants will receive cash payments, shares or other awards upon the satisfaction of pre-specified annual performance
criteria. The performance criteria which may be used for performance awards or annual incentive awards made to participants
who are “covered employees” for purposes of Code Section 162(m) may solely include, for us, on a consolidated
basis and/or our specified subsidiaries or business units (except with respect to total shareholder return and earnings per share
criteria) - total shareholder return; total shareholder return as compared to total return (on a comparable basis) of a publicly
available index such as, but not limited to, the Standard & Poor’s 500 Stock Index or the S&P Specialty Retailer
Index; net income; pretax earnings; earnings before interest expense, taxes, depreciation and amortization; pretax operating earnings
after interest expense and before bonuses, service fees, and extraordinary or special items; operating margin; earnings per share;
return on equity; return on capital; return on investment; operating earnings; working capital or inventory; and ratio of debt
to shareholders’ equity.
Change in
Control Provisions. In the event of a change in control (as defined in the 2010 Incentive Plan), (i) any award
subject to vesting and exercisability requirements that was not previously vested and exercisable shall become fully vested
and exercisable as of the occurrence of the change in control, subject to certain restrictions; (ii) Limited SARs (and
other SARs if so provided by their terms) shall become exercisable for amounts, in cash, determined by reference to the
change in control price; (iii) the restrictions, deferral of settlement, and forfeiture conditions applicable to any
other award shall lapse and such awards shall be deemed fully vested as of the occurrence of the change in control, except to
the extent of any waiver by the participant and subject to certain restrictions; (iv) with respect to any outstanding
award subject to achievement of performance goals and conditions under the 2010 Incentive Plan, such performance goals and
other conditions will be deemed to be met if and to the extent so provided by the Committee in the award agreement relating
to such award; (v) the Board may in its sole and absolute discretion, provide on a case by case basis that Options shall
terminate, provided however, that a participant holding a terminating Option shall have the right, immediately prior to the
occurrence of such change in control and during such period as the Board in its sole discretion shall determine and
designate, to exercise that Option, to the extent exercisable, in whole or in part; and (vi) the Board may in its sole
and absolute discretion, provide on a case by case basis that any award entitled to be settled in shares shall instead be
entitled to be settled, during such period as the Board in its sole discretion shall determine and designate, by means of a
cash payment equal to the fair market value of such award immediately prior to the occurrence of such change in control, as
determined in good faith by the Board.
Amendment and Termination.
The Board may amend, alter, suspend, discontinue or terminate the 2010 Incentive Plan, or the Committee’s authority to grant
awards under the 2010 Incentive Plan, without the consent of shareholders or participants, except that any amendment or alteration
to the 2010 Incentive Plan shall be subject to the approval of the Company’s shareholders not later than the annual meeting
next following such Board action if such shareholder approval is required by any federal or state law or regulation (including,
without limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock exchange or automated quotation
system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other
such changes to the 2010 Incentive Plan to shareholders for approval; provided that, without the consent of an affected participant,
no such Board action may materially and adversely affect the rights of such participant under any previously granted and outstanding
award. The Committee or the Board may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate
any award theretofore granted and any award agreement relating thereto, except as otherwise provided in the 2010 Incentive Plan;
provided that, without the consent of an affected participant, no such Committee or the Board action may materially and adversely
affect the rights of such participant under such award.
Compensation Committee.
The shareholders of the Company approved the 2010 Incentive Plan at the annual meeting held on December 27, 2010. In accordance
with the 2010 Incentive Plan, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”)
to administer the 2010 Incentive Plan. The Company granted an aggregate of 1,130,000 stock options to Huang Jia Dong, Su Pei Zhi,
Su Wei Feng, Hen Man Edmund, Paul K. Kelly, Cheng Yan Davis, Ding Wei Dong and William L. Stulginsky, upon the approval by the
Board of Directors on January 27, 2011, the grant date. The exercise price of the share options granted is $7.65 per share
and the share options are valid for a period of 5 years from January 27, 2011 to January 27, 2016. One-fourth of options
granted will vest in every year from the grant date. As at the grant date of January 27, 2011, the estimated total fair value
of the options granted is $3,977,600.
Certain U.S. Federal Income Tax Consequences
of the 2010 Incentive Plan
The following is
a general summary of the U.S. federal income tax consequences under current tax law to China Ceramics, were it subject to
U.S. federal income taxation on a net income basis, and to participants under the 2010 Incentive Plan who are individual
citizens or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of Options,
which include ISOs and Options that are not ISOs, SARs, restricted stock, deferred stock, performance shares, performance
units, restricted stock units, dividend equivalent rights and bonus stock. It does not purport to cover all of the special
rules that may apply, including special rules relating to limitations on the ability of China Ceramics to deduct
certain compensation, special rules relating to deferred compensation, golden parachutes, participants subject to
Section 16(b) of the Exchange Act and the exercise of an Option with previously-acquired shares. This summary
assumes that U.S. participants will hold their shares as capital assets within the meaning of Section 1221 of the Code.
This summary does not address the application of the passive foreign investment company rules of the Code to U.S.
participants. These rules are discussed generally under the section below entitled “Taxation–United States
Federal Income Taxation–U.S. Holders–Passive Foreign Investment Company Rules”. In addition, this summary
does not address the foreign, state or local income or other tax consequences, or any U.S. federal non-income tax
consequences, inherent in the acquisition, ownership, vesting, exercise, termination or disposition of an award under the
2010 Incentive Plan or shares issued pursuant thereto. Participants are urged to consult their own tax advisors concerning
the tax consequences to them of an award under the 2010 Incentive Plan or shares issued pursuant thereto.
A U.S. participant
generally does not recognize taxable income upon the grant of an Option. Upon the exercise of an Option that is not an ISO, the
participant generally recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the shares
acquired on the date of exercise over the exercise price therefor, and China Ceramics would be entitled to a deduction for such
amount at that time. If the U.S. participant later disposes of the shares acquired under an Option that is not an ISO, the U.S.
participant generally recognizes a long-term or short-term gain or loss, depending upon the period for which the shares were held
thereby. A long-term capital gain generally is subject to more favorable tax treatment than ordinary income or a short-term capital
gain. The deductibility of capital losses is subject to certain limitations.
Upon the exercise of
an ISO, a U.S. participant generally does not recognize taxable income. If the U.S. participant disposes of the shares acquired
pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of the
shares to the participant, the U.S. participant generally recognizes a long-term capital gain or loss, and China Ceramics would
not be entitled to a deduction. However, if the U.S. participant disposes of such shares prior to the end of the required holding
period, all or a portion of the gain is treated as ordinary income, and China Ceramics generally would be entitled to deduct such
amount.
In addition to the
U.S. federal income tax consequences described above, the U.S. participant may be subject to the alternative minimum tax (“AMT”),
which is payable to the extent it exceeds the participant’s regular income tax. For this purpose, upon the exercise of an
ISO, the excess of the fair market value of the shares for which the ISO is exercised over the exercise price thereunder for such
shares is a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such shares is increased
by such excess for purposes of computing the gain or loss on the disposition of the shares for AMT purposes. If a U.S. participant
is required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including any ISO adjustment)
generally may be allowed as a credit against the participant’s regular income tax liability (and, in certain cases, may be
refunded to the participant) in subsequent years. To the extent the credit is not used, it may be carried forward.
A U.S. participant
who receives a restricted stock award or who purchases shares of restricted stock, which shares, in either case, are subject to
a substantial risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of the award
or the purchased restricted shares and generally recognizes ordinary compensation income at the time the restrictions lapse in
an amount equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the U.S. participant
for the shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted shares based on the value
of the shares at the time of receipt. China Ceramics generally would be entitled to deduct such amount at the same time as ordinary
compensation income is required to be included by the U.S. participant and in the same amount. Dividends received with respect
to restricted shares generally are treated as compensation, unless the U.S. participant elects to be taxed on the receipt (rather
than the vesting) of the restricted shares.
A U.S. participant
generally does not recognize income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation income upon
the exercise of the SAR equal to the increase in the value of the underlying shares, and China Ceramics generally would be entitled
to a deduction for such amount.
A U.S. participant
generally does not recognize income on the receipt of a deferred stock award or a bonus stock award and generally recognizes income
when the shares are received. At such time, the U.S. participant recognizes ordinary compensation income equal to the excess, if
any, of the fair market value of the shares over any amount paid for the shares, and China Ceramics generally would be entitled
to deduct such amount at such time.
A U.S. participant
generally does not recognize income on the receipt of a performance award, annual incentive award or dividend equivalent right
award until a payment is received under the award. At such time, the U.S. participant recognizes ordinary compensation
income equal to the amount of any cash payments and the fair market value of any shares received, and China Ceramics generally
would be entitled to deduct such amount at such time.
China Ceramics Co., Ltd. 2017 Equity Compensation Plan
On May 21, 2017,
the Board of Directors of the Company (the “Board”) approved the 2017 Equity Compensation Plan (the “Plan”)
is to attract and retain outstanding individuals as employees, directors and consultants of the Company and its subsidiaries, to
recognize the contributions made to the Company and its Subsidiaries by such individuals and to provide them with additional incentive
to expand and improve the profits and achieve the objectives of the Company
The Plan is administered
by the Board. The Board, in its sole discretion, will determine the eligible individuals to whom, and the time or times at which
awards will be granted, the form and amount of each award, the expiration date of each award, the time or times within which the
awards may be exercised, the cancellation of the awards and the other limitations, restrictions, terms and conditions applicable
to the grant of the awards.
The total number of
shares that may be issued under the Plan is 280,000, subject to adjustments in the event of any reorganization, recapitalization,
share split, distribution, merger, consolidation, split-up, spin-off, combination, subdivision, consolidation or exchange of shares,
any change in the capital structure of the Company or any similar corporate transaction. The Board may, in its discretion, (a) grant
shares under the Plan to any participant without consideration from such Participant or (b) sell shares under the Plan to
any participant for such amount of cash, shares or other consideration as the Board deems appropriate. Notwithstanding any of
the provisions of the Plan or any outstanding award agreement, upon a Change in Control of the Company, the Board is authorized
and has sole discretion to provide that all restrictions applicable to all awards shall terminate or lapse in order that Participants
may fully realize the benefits thereunder. Awards granted under the Plan, and any rights and privileges pertaining thereto, may
not be transferred, assigned, pledged or hypothecated in any manner, or be subject to execution, attachment or similar process,
by operation of law or otherwise, other than by will or by the laws of descent and distribution. The Board may terminate, suspend,
or amend the Plan, in whole or in part, from time to time. The Board also has the authority to amend any award agreement at any
time.
2019 Equity Incentive
Plan
At the 2019
Annual Meeting the Company’s shareholders approved the 2019 Equity Incentive Plan. In December 2019, our Board
approved the 2019 Equity Incentive Plan, subject to shareholder approval. All of our employees, officers, and directors, and
consultants are eligible to be granted options or restricted stock awards (each, an “Award”) under the Plan. The
Plan is currently administered by the Board, which has all the power to administer the Plan according to its terms, including
the power to grant Awards, determine who may be granted Awards and the types and amounts of Awards to be granted, prescribe
Award agreements, and establish programs for granting Awards. Awards may be made under the Plan for up to 1,000,000 of our
common shares. No awards have been granted under the Plan as of today. The Plan is a stock-based compensation plan that
provides for discretionary grants of, among others, stock options, stock awards and stock unit awards to employees and
directors of the Company. The purpose of the Plan is to recognize contributions made to our company and its subsidiaries by
such individuals and to provide them with additional incentive to achieve the objectives of our Company.
Administration.
The Plan will be administered by our board of directors, or, once constituted, the Compensation Committee of the board of directors
(we refer to body administering the Plan as the “Committee”).
Number of Shares
of Common Shares. The number of common shares that may be issued under the Plan is 1,000,000. Shares issuable under the Plan
may be authorized but unissued shares or treasury shares. If there is a lapse, forfeiture, expiration, termination or cancellation
of any award made under the Plan for any reason, the shares subject to the award will again be available for issuance. Any shares
subject to an award that are delivered to us by a participant, or withheld by us on behalf of a participant, as payment for an
award or payment of withholding taxes due in connection with an award will not again be available for issuance, and all such shares
will count toward the number of shares issued under the Plan. The number of common shares issuable under the Plan is subject to
adjustment, in the event of any reorganization, recapitalization, stock split, stock distribution, merger, consolidation, split-up,
spin-off, combination, subdivision, consolidation or exchange of shares, any change in the capital structure of the company or
any similar corporate transaction. In each case, the Committee has the discretion to make adjustments it deems necessary to preserve
the intended benefits under the Plan. No award granted under the Plan may be transferred, except by will, the laws of descent and
distribution.
Eligibility.
All employees, directors, and consultants of the Company are eligible to receive awards under the Plan.
Awards to Participants.
The Plan provides for discretionary awards of, among others, stock options, stock awards and stock unit awards to participants.
Each award made under the Plan will be evidenced by a written award agreement specifying the terms and conditions of the award
as determined by the Committee in its sole discretion, consistent with the terms of the Plan.
Stock Options.
The Committee has the discretion to grant non-qualified stock options or incentive stock options to participants and to set the
terms and conditions applicable to the options, including the type of option, the number of shares subject to the option and the
vesting schedule; each option will expire ten years from the date of grant and no dividend equivalents may be paid with respect
to stock options.
Stock
Awards. The Committee has the discretion to grant stock awards to participants. Shares granted under the Plan will be
effective and exercisable as of the Company’s completion of our initial public offering of its securities and other
terms, restrictions and qualifications that may be set forth in the individual grant agreements. Stock awards will consist of
common shares granted without any consideration from the participant or shares sold to the participant for appropriate
consideration as determined by the Board. The number of shares awarded to each participant, and the restrictions, terms and
conditions of the award, will be at the discretion of the Committee. Subject to the restrictions, a participant will be a
shareholder with respect to the shares awarded to him or her and will have the rights of a shareholder with respect to the
shares, including the right to vote the shares and receive dividends on the shares; provided that dividends otherwise payable
on any performance-based stock award will be held by us and will be paid to the holder of the stock award only to the extent
the restrictions on such stock award lapse, and the Committee in its discretion can accumulate and hold such amounts payable
on any other stock awards until the restrictions on the stock award lapse.
Payment for Stock
Options and Withholding Taxes. The Committee may make one or more of the following methods available for payment of any award,
including the exercise price of a stock option, and for payment of the minimum required tax obligation associated with an award:
(i) cash; (ii) cash received from a broker-dealer to whom the holder has submitted an exercise notice together with irrevocable
instructions to deliver promptly to us the amount of sales proceeds from the sale of the shares subject to the award to pay the
exercise price or withholding tax; (iii) by directing us to withhold common shares otherwise issuable in connection with the
award having a fair market value equal to the amount required to be withheld; and (iv) by delivery of previously acquired
common shares that are acceptable to the Committee and that have an aggregate fair market value on the date of exercise equal to
the exercise price or withholding tax, or certification of ownership by attestation of such previously acquired shares.
Amendment of Award
Agreements; Amendment and Termination of the Plan; Term of the Plan. The Committee may amend any award agreement at any time,
provided that no amendment may adversely affect the right of any participant under any agreement in any material way without the
written consent of the participant, unless such amendment is required by applicable law, regulation or stock exchange rule. The
Board may terminate, suspend or amend the Plan, in whole or in part, from time to time, without the approval of the shareholders,
unless such approval is required by applicable law, regulation or stock exchange rule, and provided that no amendment may adversely
affect the right of any participant under any outstanding award in any material way without the written consent of the participant,
unless such amendment is required by applicable law, regulation or rule of any stock exchange on which the shares are listed.
Notwithstanding the foregoing, neither the Plan nor any outstanding award agreement can be amended in a way that results in the
repricing of a stock option. Repricing is broadly defined to include reducing the exercise price of a stock option or cancelling
a stock option in exchange for cash, other stock options with a lower exercise price or other stock awards. No awards may be granted
under the Plan on or after the tenth anniversary of the effective date of the Plan.
The term of each director is until their
resignation or removal.
Our board of directors has established an
audit committee, a compensation committee and a governance and nominating committee.
Audit Committee. The audit
committee consists of Roy Tan Choon Kang (Chair and the Audit Committee financial expert), Shen Cheng Liang and Song Chungen.
The board of directors has adopted an audit
committee charter, providing for the following responsibilities of the audit committee:
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·
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appointing and replacing our independent auditors and pre-approving all auditing and permitted non-auditing services to be performed by the independent auditors;
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·
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reviewing and discussing the annual audited financial statements with management and the independent auditors;
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·
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annually reviewing and reassessing the adequacy of our audit committee charter;
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·
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such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
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·
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meeting separately and periodically with management, the internal auditors and the independent auditors; and
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·
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reporting regularly to the board of directors.
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A copy of the audit committee
charter is available on our website at http://cceramics.com/Corporate-Governance.html. The information contained on our
website is not a part of this Annual Report.
Compensation
Committee. Our compensation committee consists of Shen Cheng Liang (Chair), Song Chungen and Roy Tan. Our board of
directors adopted a compensation committee charter, providing for the following responsibilities of the compensation
committee:
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reviewing and making recommendations to the board regarding our compensation policies and forms of compensation provided to our directors and officers;
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·
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reviewing and making recommendations to the board regarding bonuses for our officers and other employees;
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·
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administering our incentive-compensation plans for our directors and officers;
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·
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reviewing and assessing the adequacy of the charter annually;
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·
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administering our share option plans, if they are established in the future, in accordance with the terms thereof; and
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·
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such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
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A copy of the compensation committee
charter is available on our website at http://cceramics.com/Corporate-Governance.html. The information contained on our
website is not a part of this Annual Report.
Governance and Nominating Committee. Our
governance and nominating committee consists Shen Cheng Liang (Chair), Song Chungen and Roy Tan. Our board of directors adopted
a governance and nominating committee charter, providing for the following responsibilities of the governance and nominating committee:
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overseeing the process by which individuals may be nominated to our board of directors;
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identifying potential directors and making recommendations as to the size, functions and composition of our board of directors and its committees;
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reviewing candidates proposed by our shareholders;
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developing the criteria and qualifications for the selection of potential directors; and
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making recommendations to the board of directors on new candidates for board membership.
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A copy of the governance and
nominating committee charter is available on our website at http://cceramics.com/Corporate-Governance.html. The information
contained on our website is not a part of this Annual Report.
In making
nominations, the governance and nominating committee is required to submit candidates who have the highest personal and
professional integrity, who have demonstrated exceptional ability and judgment and who shall be most effective, in
conjunction with the other nominees to the board, in collectively serving the long-term interests of the shareholders. In
evaluating nominees, the governance and nominating committee is required to take into consideration the following attributes,
which are desirable for a member of the board: leadership, independence, interpersonal skills, financial acumen, business
experiences, industry knowledge, and diversity of viewpoints.
Code of Ethics
In May 2010, our
board of directors adopted a code of ethics that applies to our directors, officers and employees. Our code of ethics is available
on our website at http://cceramics.com/Corporate-Governance.html.
Director Independence
Our Board is subject
to the independence requirements of the Nasdaq Stock Market (“Nasdaq”). The Board undertakes periodic reviews of director
independence. During this review, the Board considers transactions and relationships between each director or any member of his
immediate family, the Company and its affiliates to determine whether any such relationships or transactions exist that are inconsistent
with a determination that the director is independent. Our Board has determined that all current members of the Audit Committee,
the Compensation Committee and the Nominating and Governance Committee (Song Chungen, Roy Tan Choon Kang, and Shen Cheng Liang)
are ‘‘independent” in accordance with the Nasdaq independence requirements. Our Chairman and Chief Executive
Officer does not serve on any of the Board committees. The majority of the Board is comprised of independent directors. The Board
based these determinations primarily on a review of the responses of the directors and executive officers to questions regarding
employment and transaction history, affiliations and family and other relationships and on discussions with the directors and the
fact that no director previously reported a change in circumstances that could affect his independence.
The table below provides
information as to the total number of employees at the end of the last three fiscal years. We reduced the number of our employees
in 2019 due to the reduction in the facilities that were being operated. We have no contracts or collective bargaining agreements
with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our employees
to be good.
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2017
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2018
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2019
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Number of Employees
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1,265
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579
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431
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See Item 7 below.
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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The following table
sets forth certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially own
more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive
officers, and all directors and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole
voting and investment powers with respect to the shares indicated. Our major shareholders do not have different voting rights than
any other holder of our shares.
Shares which an individual
or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible
or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual
or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown
in the table.
Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes voting and investment power. Except as otherwise
indicated below, each beneficial owner holds voting and investment power directly. The percentage of ownership is based on 8,015,084
shares issued and outstanding as of May 12, 2020.
Name (1)
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Number of Shares
Beneficially Owned
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% of Ownership
|
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Huang Meishuang
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41,250
|
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*
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Hen Man Edmund
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10,135
|
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*
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Song Chungen
|
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-
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-
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Roy Tan Choon Kang
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|
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-
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-
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Shen Cheng Liang
|
|
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-
|
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-
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Alex Ng Man Shek
|
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-
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|
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-
|
|
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|
|
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All directors and executive officers as a group (6 individuals)
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|
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51,385
|
|
|
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*
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Sound Treasure Limited
|
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651,613
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(2)
|
|
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8.12
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%
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Wang Quguo
|
|
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421,149
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(3)
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5.25
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%
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Huang Shipu
|
|
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624,671
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(4)
|
|
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7.79
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%
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Zhang Weilai
|
|
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491,338
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(5)
|
|
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6.13
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%
|
* Less than 1%
(1) Unless
otherwise indicated, the business address of each of the individuals is c/o Jinjiang Hengda Ceramics Co., Ltd.; Junbing Industrial
Zone; Anhai, Jinjiang City; Fujian Province, PRC.
(2) Huang
Jia Dong is the sole director and shareholder of Sound Treasure Limited. The mailing address for Sound Treasure is c/o c/o Jinjiang
Hengda Ceramics Co., Ltd.; Junbing Industrial Zone; Anhai, Jinjiang City; Fujian Province, PRC, Attn: Huang Jia Dong. Includes
(i) an aggregate of 335,300 shares owned by Mr. Huang’s spouse and children for which Mr. Huang may be deemed
to be the beneficial owner, which beneficial ownership Mr. Huang disclaims, and (ii) 651,613 shares owned by Sound Treasure
Limited, an entity of which Mr. Huang is the sole director and shareholder.
(3) The
mailing address for this individual is 2601 Bldg. 2 Renheng, Binhewan No. 88, Jinjiang District, Chengdu, China.
(4) The
mailing address for this individual is No. 3001 Bldg. 1 Tazizhau 1 No. 66, Erlang Mountain Road, Dongda Road, Jinjiang
District, Chengdu, China.
(5) The
mailing address for this individual is 2302 Bldg. 2 Renheng, Binhewan No. 88, Jinjiang District, Chengdu, China.
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B.
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Related Party Transactions
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Pursuant to an administrative
services agreement dated as of December 1, 2009 between the Company and Stuart Management Co., an affiliate of Paul K. Kelly,
an ex-director who resigned on Nov 27, 2013, the Company paid US$ 6,000 (equivalent to RMB 40,000) and US$ 12,000 (equivalent to
RMB 81,000) during the years ended December 31, 2018 and 2017 plus out-of-pocket expenses to Stuart Management Co. for administrative
services. The initial one-year term began on December 1, 2009, and the agreement automatically renews for successive one-year
terms unless either party notifies the other of its intent not to renew. During the term of the agreement, Stuart Management Co.
provided the Company with general administrative services, including acting as the Company’s administrative agent in the
United States and the British Virgin Islands, and allow the Company to utilize certain of its office space for meetings. The agreement
was renewed to reduce the amount to US$ 4,900 (equivalent to RMB 30,000) a month in December 2013. The amount was further
reduced to US$ 1,000 (equivalent to RMB 6,000) a month commencing October 2014. The Company terminated service with Stuart
Management starting from July 1, 2018.
Mr. Huang Jia Dong, the founder and
Chairman of Hengda and the Chief Executive Officer and one of the directors of the Company and Mr. Wong Kung Tok, formerly
one of the Company’s significant shareholders, provide working capital loans to the Company from time to time during the
normal course of its business. These loans amounted to RMB 35,057,000 and RMB 35,057,000 as of December 31, 2019 and 2018,
respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law.
Mr. Huang and Mr. Wong are brothers-in-law.
As of December 31, 2019, the Company
had a loan of US$167,000 (equivalent to RMB 1,160,000) (2018: US$167,000 (equivalent to RMB 1,146,000)) payable to Sound Treasure
Limited, an affiliate of Mr. Huang Jia Dong and a shareholder of the Company. This loan is interest free, unsecured and repayable
on demand.
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C.
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Interests of Experts and Counsel
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Not required.
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ITEM 8.
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FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information.
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See Item 18 for our audited consolidated
financial statements.
Legal Proceedings
From time to time in
the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The
results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming,
result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We
are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are
not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary
stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at
issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult
to predict. We have insurance policies covering potential losses where such coverage is cost effective.
We are not at this
time involved in any legal proceedings.
Dividend Policy
Our Board of Directors
has discretion to pay dividends. The form, frequency and amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.
Although we have paid dividends in the past, there is no assurance that we will continue to pay dividends in the future.
On February 25,
2014, we announced two semi-annual cash dividends of $0.0125 per share. The first dividend of $0.0125 per share was paid on July 14,
2014 and the second of $0.0125 per share was paid on January 14, 2015, with record dates of June 13, 2014 and December 12,
2014, respectively. No dividends were paid subsequent to January 14, 2015. The Company does not anticipate paying dividends
in the near future.
We are a holding company
incorporated in the British Virgin Islands. We rely on dividends paid by our Hong Kong and Chinese subsidiaries for our cash needs.
The payment of dividends by entities organized in China is subject to limitations. If the Boards of our Chinese subsidiaries decide
to pay dividends in the future, these restrictions may impede our ability to pay dividends and/or the amount of dividends we could
pay. In addition, if our Chinese subsidiaries incur debt on their own behalf in the future, the instruments governing the debt
may restrict their ability to pay dividends or make other distributions to us.
Except as disclosed
elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this Annual Report.
ITEM 9.
|
THE OFFER AND LISTING
|
|
A.
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Offer and Listing Details
|
The following tables
set forth, for the calendar quarters indicated and through April 2020, the quarterly high and low sale prices for our shares,
as reported on NASDAQ Stock Market, the OTC Bulletin Board or the NYSE Amex, as applicable. The OTC Bulletin Board market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
|
|
Shares
|
|
|
|
High
|
|
|
Low
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
2012
|
|
|
36.32
|
|
|
|
11.76
|
|
2013
|
|
|
32.48
|
|
|
|
15.84
|
|
2014
|
|
|
20.48
|
|
|
|
5.92
|
|
2015
|
|
|
11.36
|
|
|
|
6.00
|
|
2016
|
|
|
8.64
|
|
|
|
2.09
|
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.53
|
|
|
|
2.08
|
|
Second Quarter
|
|
|
2.26
|
|
|
|
1.32
|
|
Third Quarter
|
|
|
1.68
|
|
|
|
1.31
|
|
Fourth Quarter
|
|
|
2.39
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.69
|
|
|
|
1.43
|
|
Second Quarter
|
|
|
1.76
|
|
|
|
1.37
|
|
Third Quarter
|
|
|
1.87
|
|
|
|
1.32
|
|
Fourth Quarter
|
|
|
3.67
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.08
|
|
|
|
1.38
|
|
Second Quarter
|
|
|
1.76
|
|
|
|
0.80
|
|
Third Quarter
|
|
|
0.93
|
|
|
|
0.73
|
|
Fourth
|
|
|
1.06
|
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
January
|
|
|
0.90
|
|
|
|
0.67
|
|
February
|
|
|
0.73
|
|
|
|
0.51
|
|
March
|
|
|
0.55
|
|
|
|
0.27
|
|
April
|
|
|
0.75
|
|
|
|
0.38
|
|
Not Applicable.
Our shares have been
listed on the NASDAQ Stock Market under the symbols CCCL, since January 18, 2011. Our shares were listed on the NASDAQ Capital
Market from November 3, 2010 through January 17, 2011 and were relisted on the Nasdaq Capital Market on March 23,
2016 following the listing transfer where it is trading now under the same symbol “CCCL.” Our shares were listed on
the NASDAQ Global Market from January 18, 2011 until March 22, 2016. The shares were previously quoted on the OTC Bulletin
Board from December 29, 2009 through November 2, 2010. Prior to December 29, 2009, our shares were traded on NYSE
Amex, under the symbols “HOL.” CHAC’s shares commenced to trade on December 17, 2007.
Not Applicable.
Not Applicable.
Not Applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not Applicable.
|
B.
|
Memorandum and Articles of Association
|
The information required
by Item 10.B of Form 20-F is included in the section titled “Description of Securities–Memorandum and Articles
of Association” in our Registration Statement on Form F-1 initially filed with the SEC on October 29, 2010 (File
No.: 333-170237), which section is incorporated herein by reference.
During 2013 and 2014,
we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to the fluctuation
in value of the Renminbi against the U.S. dollar. We recorded fair value gains on these agreements totaling RMB 3,346,000 for the
year ended December 31, 2013. However, in 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized
and unrealized losses totaling RMB 59,477,000 from January 1 to July 31, 2014 in connection with these agreements. On
July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, executed an
agreement (the “Novation”) with us and the financial institution that originated the foreign currency transaction agreements
pursuant to which Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution)
and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under
the foreign currency transaction agreements. As a result, we will not be required to fund any losses related to these agreements,
and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.
At the time that
each of the foreign currency transaction agreements was established with the financial institution, we were required to
deposit monies (the “Deposits”) with the financial institution that was the counterparty to the agreements. RMB
6.7 million of a total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the
brother-in-law of our Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong
Kung Tok as of July 9, 2014. In connection with the Novation discussed above, our Chief Executive Officer, Sound
Treasure Limited and Wong Kung Tok executed an agreement with the Company on July 31, 2014 (the “Offset
Agreement”) pursuant to which loans totaling RMB 20.7 million owed by us to Wong Kung Tok were transferred to Sound
Treasure Limited and then were forgiven by Sound Treasure Limited, and in return the Company agreed to forego any claim to
RMB 15.6 million in Deposits under the foreign currency transaction agreements which were transferred to Sound Treasure
Limited pursuant to the Novation.
Under British Virgin
Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
The following summary
of the material PRC and U.S. federal income tax consequences of the acquisition, ownership and disposition of China Ceramics shares,
sometimes referred to as “securities,” is based upon laws and relevant interpretations thereof in effect as of the
date of this Annual Report, all of which are subject to change. This summary does not deal with all possible tax consequences relating
to an investment in China Ceramics’ securities, such as the tax consequences under state, local and other tax laws. For purposes
of this discussion, references to “China Ceramics,” “we,” “us” or “our” refer only
to China Ceramics Co., Ltd.
PRC Taxation
The following discussion
summarizes the material PRC income tax considerations relating to the acquisition, ownership and disposition of China Ceramics’
securities.
You should consult
with your own tax adviser regarding the PRC tax consequences of the acquisition, ownership and disposition of China Ceramics’
securities.
Resident Enterprise
Treatment
On March 16, 2007, the Fifth Session of the Tenth National
People’s Congress passed the Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on January 1,
2008. Under the EIT Law, enterprises are classified as “resident enterprises” and “non-resident enterprises.”
Pursuant to the EIT Law and its implementing rules, enterprises established outside China whose “de facto management bodies”
are located in China are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate
on their worldwide taxable income. According to the implementing rules of the EIT Law, “de facto management body”
refers to a managing body that in practice exercises overall management control over the production and business, personnel, accounting
and assets of an enterprise.
On April 22, 2009,
the State Administration of Taxation issued the Notice on the Issues Regarding Recognition of Enterprises that are Domestically
Controlled as PRC Resident Enterprises Based on the De Facto Management Body Criteria, which was retroactively effective as of
January 1, 2008. This notice provides that an overseas incorporated enterprise that is controlled by PRC domestic companies
will be recognized as a “tax-resident enterprise” if it satisfies all of the following conditions: (i) the senior
management responsible for daily production/business operations are primarily located in the PRC, and the location(s) where
such senior management execute their responsibilities are primarily in the PRC; (ii) strategic financial and personnel decisions
are made or approved by organizations or personnel located in the PRC; (iii) major properties, accounting ledgers, company
seals and minutes of board meetings and stockholder meetings, etc., are maintained in the PRC; and (iv) 50% or more of
the board members with voting rights or senior management habitually reside in the PRC.
Given the short history
of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine the resident
enterprise status of a company organized under the laws of a foreign (non-PRC) jurisdiction, such as China Ceramics, Success Winner
and Stand Best. If the PRC tax authorities determine that China Ceramics, Success Winner and/or Stand Best is a “resident
enterprise” under the EIT Law, a number of tax consequences could follow. First, China Ceramics, Success Winner and/or Stand
Best could be subject to the enterprise income tax at a rate of 25% on their worldwide taxable income, as well as PRC enterprise
income tax reporting obligations. Second, the EIT Law provides that dividend income between “qualified resident enterprises”
is exempt from income tax. As a result, if China Ceramics, Success Winner and Stand Best are each treated as a “qualified
resident enterprise,” all dividends paid from Hengda to China Ceramics, through Success Winner and Stand Best, should be
exempt from the PRC enterprise income tax.
As of the date of this
Annual Report, there has not been a definitive determination by China Ceramics, Success Winner, Stand Best or the PRC tax authorities
as to the “resident enterprise” or “non-resident enterprise” status of China Ceramics, Success Winner and
Stand Best. However, since it is not anticipated that China Ceramics, Success Winner and/or Stand Best would receive dividends
or generate other income in the near future, China Ceramics, Success Winner and Stand Best are not expected to have any income
that would be subject to the 25% enterprise income tax on worldwide taxable income in the near future. China Ceramics, Success
Winner and Stand Best will make any necessary tax payment if China Ceramics, Success Winner or Stand Best (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that China Ceramics, Success Winner or Stand Best is a resident
enterprise under the EIT Law, and if China Ceramics, Success Winner or Stand Best were to have income in the future.
Dividends From Hengda
If Stand Best is not
treated as a resident enterprise under the EIT Law, then dividends that Stand Best receives from Hengda may be subject to PRC
withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25%
will normally be applicable to investors that are “non-resident enterprises” which (i) have an establishment
or place of business inside the PRC, and (ii) have income in connection with their establishment or place of business
that is sourced from the PRC or is earned outside the PRC but has an actual connection with their establishment or place of
business inside the PRC, and (B) a PRC withholding tax at a rate of 10% will normally be applicable to dividends payable
to non-resident enterprises that (i) do not have an establishment or place of business in the PRC or (ii) have an
establishment or place of business in the PRC, but the relevant income is not effectively connected with such establishment
or place of business, to the extent such dividends are derived from sources within the PRC.
As described above,
the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions
on a case-by-case basis. China Ceramics, Success Winner and Stand Best are holding companies and substantially all of China Ceramics’,
Success Winner’s and Stand Best’s income may be derived from dividends. Thus, if China Ceramics, Success Winner and/or
Stand Best are considered a “non-resident enterprise” under the EIT Law and the dividends paid to China Ceramics, Success
Winner and/or Stand Best are considered income sourced within the PRC, such dividends received may be subject to PRC withholding
tax as described in the foregoing paragraph.
The State Council of
the PRC or a tax treaty between China and the jurisdiction in which the non-resident enterprise resides may reduce such income
or withholding tax, with respect to a non-resident enterprise. Pursuant to the Arrangement between the Mainland of China and the
Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income (the “PRC-Hong Kong Tax Treaty”), if the Hong Kong resident enterprise that is not deemed to be
a conduit by the PRC tax authorities owns more than 25% of the equity interest in a PRC resident enterprise, the 10% PRC withholding
tax on the dividends the Hong Kong resident enterprise receives from such PRC resident enterprise is reduced to 5%.
China Ceramics is a
British Virgin Islands holding company, and it has a British Virgin Islands subsidiary (Success Winner), which owns a 100% equity
interest in a subsidiary in Hong Kong (Stand Best), which in turns owns a 100% equity interest in Hengda, a PRC company. As a result,
if Stand Best were treated as a “non-resident enterprise” under the EIT Law, then dividends that Stand Best receives
from Hengda (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax,
if the PRC-Hong Kong Tax Treaty were applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities
may deem Stand Best to be a conduit that is not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly,
if Success Winner were treated as a PRC “non-resident enterprise” under the EIT Law and Stand Best were treated as
a PRC “resident enterprise” under the EIT Law, then dividends that Success Winner receives from Stand Best (assuming
such dividends were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. A similar situation may arise
if China Ceramics were treated as a “non-resident enterprise” under the EIT Law, and Success Winner were treated as
a “resident enterprise” under EIT Law. Any such taxes on dividends could materially reduce the amount of dividends,
if any, China Ceramics could pay to its shareholders.
As of the date of this
Annual Report, there has not been a definitive determination by China Ceramics, Success Winner, Stand Best or the PRC tax authorities
as to the “resident enterprise” or “non-resident enterprise” status of China Ceramics, Success Winner and
Stand Best. As described above, however, Hengda, Stand Best and Success Winner are not expected to pay any dividends in the near
future. Hengda, Stand Best and Success Winner will make any necessary tax withholding if, in the future, Hengda, Stand Best or
Success Winner were to pay any dividends and Hengda, Stand Best or Success Winner (based on future clarifying guidance issued by
the PRC), or the PRC tax authorities, determine that Stand Best, Success Winner or China Ceramics is a non-resident enterprise
under the EIT Law.
Dividends that Non-PRC Resident Investors
Receive From China Ceramics; Gain on the Sale or Transfer of China Ceramics’ Securities
If we are determined
to be a resident enterprise under the EIT Law and dividends payable to (or gains realized by) China Ceramics’ investors that
are not tax residents of the PRC (“non-resident investors”) are treated as income derived from sources within the PRC,
then the dividends that the non-resident investors receive from us and any such gain derived by such investors on the sale or transfer
of China Ceramics’ securities may be subject to income tax under the PRC tax laws.
Under the PRC tax laws,
PRC withholding tax at the rate of 10% is applicable to dividends payable to non-resident investors that are enterprises, but not
individuals, and that (i) do not have an establishment or place of business in the PRC or (ii) have an establishment
or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business,
to the extent that such dividends are deemed to be sourced within the PRC. Similarly, any gain realized on the transfer of China
Ceramics’ securities by such investors also is subject to 10% PRC income tax if such gain is regarded as income derived from
sources within the PRC.
The dividends paid
by us to such non-resident investors with respect to China Ceramics’ securities, or gain such non-resident investors may
realize from the sale or transfer of China Ceramics’ securities, may be treated as PRC-sourced income and, as a result, may
be subject to PRC tax at a rate of 10%. In such event, China Ceramics may be required to withhold a 10% PRC tax on any dividends
paid to such non-resident investors. In addition, such non-resident investors in China Ceramics’ securities may be responsible
for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of China Ceramics’ securities if such
non-resident investors and the gain satisfy the requirements under the PRC tax laws. However, under the PRC tax laws, China Ceramics
would not have an obligation to withhold PRC income tax in respect of the gains that such non-resident investors (including U.S.
enterprise investors) may realize from the sale or transfer of China Ceramics’ securities. Also, if China Ceramics is determined
to be a “resident enterprise,” its non-resident investors who are individuals may also be subject to potential PRC
individual income tax at a rate of 20% with respect to dividends received from China Ceramics and/or gains derived by them from
the sale or transfer of China Ceramics’ securities.
If China Ceramics were
to pay any dividends in the future, and if China Ceramics (based on future clarifying guidance issued by the PRC), or the PRC tax
authorities, determine that China Ceramics must withhold PRC tax on any dividends payable by China Ceramics under the PRC tax laws,
China Ceramics will make any necessary tax withholding on dividends payable to its non-resident investors. If non-resident investors
as described under the PRC tax laws (including U.S. investors) realize any gain from the sale or transfer of China Ceramics’
securities and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying
the applicable PRC income tax on the gain from the sale or transfer of China Ceramics’ securities. As indicated above, under
the PRC tax laws, China Ceramics would not have an obligation to withhold PRC income tax in respect of the gains that non-resident
investors (including U.S. investors) may realize from the sale or transfer of China Ceramics’ securities.
On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”) that reinforces the
taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses
indirect equity transfers as well as other issues. Circular 698 is retroactively effective from January 1, 2008.
According to Circular 698, where a non-resident investor who indirectly holds an equity interest in a PRC resident enterprise
through a non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise by selling
an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual
tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident investor is
required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within
30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the PRC tax authorities determine that such transfer is abusing forms of
business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC
income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer
under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international
(including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international
(including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the
offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from
such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. China Ceramics (or a
non-resident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources
to comply with Circular 698 or to establish that China Ceramics (or such non-resident investor) should not be taxed under
Circular 698, which could have a material adverse effect on China Ceramics’ financial condition and results of
operations (or such non-resident investor’s investment in China Ceramics).
In addition, the PRC
resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.
On February 3,
2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer
of Properties by Non-tax Resident Enterprise, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly
different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under
Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate
holding company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assess reasonable commercial
purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public
securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is
obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer”
by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident
enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the
relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize
such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in
China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or
other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up
to 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject
to penalties under PRC tax laws if transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face
uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or
other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or
sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our company and other
non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other
non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if
our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and
Public Notice 7. For the transfer of shares to our company by investors that are non-PRC resident enterprises, our PRC
subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required
to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom we
purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises
in our group should not be taxed under these circulars, which may have a material adverse effect on our financial condition
and results of operations.
The PRC tax authorities
have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference
between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments
to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such potential
acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
Penalties for Failure to Pay Applicable
PRC Income Tax
A non-resident investor
in us may be responsible for paying PRC tax on any gain realized from the sale or transfer of China Ceramics’ securities
if such non-resident investor and the gain satisfy the requirements under the PRC tax laws, as described above.
According to the EIT
Law and its implementing rules, the PRC Individual Income Tax Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures for the Administration of Withholding
of Enterprise Income Tax for Non-resident Enterprises (the “Administration Measures”) and other applicable PRC laws
or regulations (collectively the “Tax Related Laws”), where any gain derived by a non-resident investor from the sale
or transfer of China Ceramics’ securities is subject to any income tax in the PRC, and such non-resident investor fails to
file any tax return or pay tax in this regard pursuant to the Tax Related Laws, such investor may be subject to certain fines,
penalties or punishments, including without limitation: (1) if the non-resident investor fails to file a tax return and present
the relevant information in connection with tax payments, the competent tax authorities shall order it to do so within the prescribed
time limit and may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000;
(2) if the non-resident investor fails to file a tax return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a surcharge on overdue tax payments (the daily surcharge
is 0.05% of the overdue amount, beginning from the day the deferral begins) and a fine ranging from 50% to 500% of the unpaid amount
of the tax payable; (3) if the non-resident investor fails to file a tax return and to pay the tax within the prescribed time
limit according to the order by the PRC tax authorities, the PRC tax authorities may collect and check information about the income
receivable by the non-resident investor in the PRC from other payers (the “Other Payers”) who will pay amounts to such
non-resident investor, and send a “Notice of Tax Issues” to the Other Payers to collect and recover the tax payable
and overdue fines imposed on such non-resident investor from the amounts otherwise payable to such non-resident investor by the
Other Payers; (4) if the non-resident investor fails to pay the tax payable within the prescribed time limit as ordered by
the PRC tax authorities, a fine may be imposed on the non-resident investor ranging from 50% to 500% of the unpaid tax payable,
and the PRC tax authorities may, upon approval by the director of the tax bureau (or sub-bureau) of, or higher than, the county
level, take the following compulsory measures: (i) notify in writing the non-resident investor’s bank or other financial
institution to withhold from the account thereof for payment of the amount of tax payable, and (ii) detain, seal off, or sell
by auction or on the market the non-resident investor’s commodities, goods or other property in a value equivalent to the
amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount of tax payable or surcharge
for overdue tax payment, and cannot provide a guarantee to the PRC tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or its legal representative from leaving the PRC.
United States Federal Income Taxation
General
The following is a
summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of China Ceramics’
securities.
The discussion below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of China Ceramics’
securities that is for U.S. federal income tax purposes:
|
·
|
an individual citizen or resident of the United States;
|
|
·
|
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
|
|
·
|
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
|
|
·
|
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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A beneficial owner
of our securities that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of China
Ceramics’ securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through
entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal
income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based
on the Internal Revenue Code of 1986, as amended, or the “Code,” its legislative history, Treasury regulations promulgated
thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing
interpretations, possibly on a retroactive basis.
This discussion does
not address all aspects of U.S. federal income taxation that may be relevant to any particular holder of China
Ceramics’ securities based on such holder’s individual circumstances. In particular, this discussion considers
only holders that own and hold China Ceramics’ securities as capital assets within the meaning of Section 1221 of
the Code. This discussion also does not address the alternative minimum tax. In addition, this discussion does not address
the U.S. federal income tax consequences to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents of the United States;
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persons that actually or constructively own 5% or more of China Ceramics’ voting shares;
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persons that acquired China Ceramics’ securities pursuant to an exercise of employee share options, in connection with employee share incentive plans or otherwise as compensation;
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persons that hold China Ceramics’ securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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controlled foreign corporations; or
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passive foreign investment companies.
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This discussion does
not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws,
or, except as discussed herein, any tax reporting obligations of a holder of China Ceramics’ securities. Additionally, this
discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold China Ceramics’
securities through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes)
is the beneficial owner of China Ceramics’ securities, the U.S. federal income tax treatment of a partner in the partnership
will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes that any
distribution made (or deemed made) in respect to the China Ceramics’ securities and any consideration received (or deemed
received) by a holder in connection with the sale or other disposition of such securities will be in U.S. dollars.
China Ceramics has
not sought, and will not seek, a ruling from the Internal Revenue Service, or “IRS,” or an opinion of counsel, as to
any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination
may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements in this discussion.
THIS DISCUSSION
IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS’
SECURITIES. EACH HOLDER OF CHINA CERAMICS’ SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR
TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS’ SECURITIES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Tax Treatment of
China Ceramics After the Redomestication and the Business Combination
Section 7874(b) of
the Code generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant
to a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States will
be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason
of owning shares of the acquired corporation, own at least 80% of either the voting power or the value of the stock of the acquiring
corporation after the acquisition. Under regulations promulgated under Section 7874, a warrant holder of either the acquired
corporation or the acquiring corporation generally is treated for this purpose as owning stock of the acquired corporation or the
acquiring corporation, as the case may be, with a value equal to the excess of the value of the shares underlying the warrant over
the exercise price of the warrant. If Section 7874(b) were to have applied to the Redomestication, then, among other
things, China Ceramics, as the surviving entity, would have been subject to U.S. federal income tax on its worldwide taxable income
following the Redomestication and the Business Combination as if it were a domestic corporation.
After the completion
of the Business Combination, which occurred immediately after and as part of the same integrated transaction as the Redomestication,
the former stockholders of CHAC (including warrant holders treated as owning stock of CHAC pursuant to the regulations under Section 7874)
should have been considered as owning, by reason of owning (or being treated as owning) stock of CHAC, less than 80% of the voting
power and the value of the shares of China Ceramics (including any warrants treated as shares of China Ceramics pursuant to the
regulations promulgated under Section 7874). Accordingly, Section 7874(b) should not have applied to treat China
Ceramics as a domestic corporation for U.S. federal income tax purposes. However, due to the absence of full guidance on how the
rules of Section 7874(b) applied to the transactions completed pursuant to the Redomestication and the Business
Combination, this result is not entirely free from doubt. If, for example, the Redomestication were ultimately determined for purposes
of Section 7874(b) as having occurred prior to, and separate from, the Business Combination for U.S. federal income tax
purposes, the share ownership threshold for applicability of Section 7874(b) generally would have been satisfied (and
China Ceramics would have been treated as a domestic corporation for U.S. federal income tax purposes) because the former stockholders
of CHAC (including warrant holders treated as owning stock of CHAC), by reason of owning (or being treated as owning) stock of
CHAC, would have owned all of the shares (including any warrants treated as shares) of China Ceramics immediately after the Redomestication.
Although normal “step transaction” tax principles supported the view that the Redomestication and the Business Combination
should have been viewed together for purposes of determining whether Section 7874(b) was applicable, because of the absence
of guidance under Section 7874(b) directly on point, this result is not entirely free from doubt. The balance of this
discussion assumes that China Ceramics has been and will be treated as a foreign corporation for U.S. federal income tax purposes.
U.S. Holders
Taxation of Cash
Distributions Paid on Shares
Subject to the passive
foreign investment company, or “PFIC,” rules discussed below, a U.S. Holder generally will be required to include
in gross income as ordinary income the amount of any cash dividend paid on the shares of China Ceramics. A cash distribution on
such shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid
out of current or accumulated earnings and profits of China Ceramics (as determined for U.S. federal income tax purposes). Such
dividend generally will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect
of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and
profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted basis in its shares in China Ceramics.
Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such shares.
With respect to
non-corporate U.S. Holders, such dividends may be subject to U.S. federal income tax at the lower applicable regular
long-term capital gains tax rate (see “—Taxation on the Disposition of Securities” below) provided that
(1) the shares of China Ceramics are readily tradable on an established securities market in the United States or, in
the event China Ceramics is deemed to be a Chinese “resident enterprise” under the EIT Law, China Ceramics is
eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the
People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes
on Income, or the “U.S.-PRC Tax Treaty,” (2) China Ceramics is not a PFIC, as discussed below, for either
the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period
requirements are met. Under published IRS authority, shares are considered for purposes of clause (1) above to be
readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which
presently include the NASDAQ Stock Market. Although China Ceramics’ shares are currently listed and traded on the
NASDAQ Stock Market, it cannot guarantee that its shares will continue to be listed or traded on the NASDAQ Stock Market.
U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any dividends paid with
respect to the shares of China Ceramics.
If a PRC income tax
applies to any cash dividends paid to a U.S. Holder on the shares of China Ceramics, such tax may be treated as a foreign tax eligible
for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal
income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to such dividends,
such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the
United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their
own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC
Tax Treaty.
Taxation on the
Disposition of Securities
Upon a sale or other
taxable disposition of the securities in China Ceramics, and subject to the PFIC rules discussed below, a U.S. Holder generally
will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s
adjusted tax basis in the securities.
The regular U.S. federal
income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate
on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S.
federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the
U.S. Holder’s holding period for the securities exceeds one year. The deductibility of capital losses is subject to various
limitations.
If a PRC income tax applies
to any gain from the disposition of the securities in China Ceramics by a U.S. Holder, such tax may be treated as a foreign tax
eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s
U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to
any gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident
of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult
their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC
Tax Treaty.
Additional Taxes
U.S. Holders that are
individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution
tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of,
China Ceramics’ securities, subject to certain limitations and exceptions. Under regulations, in the absence of a special
election, such unearned income generally would not include income inclusions under the qualified electing fund, or QEF, rules discussed
below under “ Passive Foreign Investment Company Rules,” but would include distributions of earnings and profits from
a QEF. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition
of China Ceramics’ securities.
Passive Foreign Investment
Company Rules
A foreign (i.e., non-U.S.)
corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro
rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive
income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation,
ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets
of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties
derived from the active conduct of a trade or business) and gains from the disposition of passive assets.
Based on the composition
(and estimated values) of the assets and the nature of the income of China Ceramics and its subsidiaries during its 2015 taxable
year, China Ceramics does not believe that it was treated as a PFIC for such year. However, because China Ceramics has not performed
a definitive analysis as to its PFIC status for its 2015 taxable year, there can be no assurance in respect to its PFIC status
for such year. There also can be no assurance with respect to China Ceramics’ status as a PFIC for its current (2016) taxable
year or any future taxable year.
If China Ceramics is
determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of China
Ceramics’ shares and, the U.S. Holder did not make a timely QEF election for China Ceramics’ first taxable year as
a PFIC in which the U.S. Holder held (or was deemed to hold) shares, a QEF election along with a purging election or a mark-to-market
election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income
tax purposes with respect to:
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any gain recognized
by the U.S. Holder on the sale or other disposition of its shares; and
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any “excess distribution”
made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are
greater than 125% of the average annual distributions received by such U.S. Holder in respect of the shares of China Ceramics
during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the
shares).
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Under these rules:
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the U.S. Holder’s
gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares;
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the amount allocated
to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or
to the period in the U.S. Holder’s holding period before the first day of the first taxable year of China Ceramics in
which China Ceramics qualified as a PFIC will be taxed as ordinary income;
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the amount allocated
to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest
tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge
generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable
year of the U.S. Holder.
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In general, if we are
determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its shares in China Ceramics
by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder
generally will be required to include in income its pro rata share of China Ceramics’ net capital gains (as long-term capital
gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the
taxable year of the U.S. Holder in which or with which China Ceramics’ taxable year ends if China Ceramics is treated as
a PFIC for that taxable year. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income
inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The QEF election is made
on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally
makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment
Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the taxable year to which the election relates. Retroactive QEF elections generally may be
made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the
IRS.
In order to comply with
the requirements of a QEF election, a U.S. Holder must receive certain information from China Ceramics. Upon request from a U.S.
Holder, China Ceramics will endeavor to provide to the U.S. Holder, no later than 90 days after the request, such information
as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain
a QEF election. However, there is no assurance that China Ceramics will have timely knowledge of its status as a PFIC in the future
or of the required information to be provided.
If a U.S. Holder has
made a QEF election with respect to its shares in China Ceramics, and the special tax and interest charge rules do not apply
to such shares (because of a timely QEF election for China Ceramics’ first taxable year as a PFIC in which the U.S. Holder
holds (or is deemed to hold) such shares or a QEF election, along with a purge of the PFIC taint pursuant to a purging election,
as described below), any gain recognized on the sale or other taxable disposition of such shares generally will be taxable as
capital gain and no interest charge will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders
of a QEF generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed.
In such case, a subsequent distribution of such earnings and profits that were previously included in income generally should
not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s shares in a QEF will be increased
by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules.
Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable
attribution rules as owning shares in a QEF.
Although a determination
as to China Ceramics’ PFIC status will be made annually, an initial determination that it is a PFIC generally will apply
for subsequent years to a U.S. Holder who held shares of China Ceramics while it was a PFIC, whether or not it met the test for
PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for China Ceramics’ first
taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) shares in China Ceramics, however, will not be subject
to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not
be subject to the QEF inclusion regime with respect to such shares for any taxable year of China Ceramics that ends within or
with a taxable year of the U.S. Holder and in which China Ceramics is not a PFIC. On the other hand, if the QEF election is not
effective for each of the taxable years of China Ceramics in which China Ceramics is a PFIC and during which the U.S. Holder holds
(or is deemed to hold) shares in China Ceramics, the PFIC rules discussed above will continue to apply to such shares unless
the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging election to recognize
under the rules of Section 1291 of the Code any gain that the U.S. Holder would otherwise recognize if the U.S. Holder
had sold its shares for their fair market value on the “qualification” date. The qualification date is the first day
of China Ceramics’ tax year in which it qualifies as a QEF with respect to such U.S. Holder. The purging election can only
be made if such U.S. Holder held shares on the qualification date. The gain recognized by the purging election will be subject
to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result
of the purging election, the U.S. Holder will increase the adjusted tax basis in its shares by the amount of the gain recognized
and will also have a new holding period in the shares for purposes of the PFIC rules.
Alternatively, if a U.S.
Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder may make
a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election
for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) shares in China Ceramics and
for which China Ceramics is determined to be a PFIC, such holder generally will not be subject to the PFIC rules described
above in respect to its shares as long as such shares continue to be treated as marketable stock. Instead, in general, the U.S.
Holder will include as ordinary income for each year that China Ceramics is treated as a PFIC, the excess, if any, of the fair
market value of its shares at the end of its taxable year over the adjusted tax basis in its shares. The U.S. Holder also will
be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its shares over the fair market
value of its shares at the end of its taxable year (but only to the extent of the net amount of previously included income as
a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its shares will be adjusted to reflect
any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the shares in a taxable
year in which China Ceramics is treated as a PFIC generally will be treated as ordinary income. Special tax rules may apply
if a U.S. Holder makes a mark-to-market election for a taxable year after the U.S. Holder holds (or is deemed to hold) the shares
and for which China Ceramics is determined to be a PFIC.
The mark-to-market election
is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities
and Exchange Commission, including the NASDAQ Stock Market, or on a foreign exchange or market that the IRS determines has rules sufficient
to ensure that the market price represents a legitimate and sound fair market value. Although China Ceramics’ shares are
currently listed and traded on the NASDAQ Stock Market, it cannot guarantee that its shares will continue to be listed or traded
on the NASDAQ Stock Market. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to the shares of China Ceramics under their particular circumstances.
If China Ceramics is
a PFIC and, at any time, has a foreign subsidiary that is classified as a PFIC, a U.S. Holder of China Ceramics’ shares
generally should be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the
deferred tax and interest charge described above if China Ceramics receives a distribution from, or disposes of all or part of
its interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. Upon request,
China Ceramics will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request
the information that may be required to make or maintain a QEF election with respect to the lower- tier PFIC. However, there is
no assurance that China Ceramics will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause
the lower-tier PFIC to provide the required information. A mark-to-market election generally would not be available with respect
to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier
PFICs.
A U.S. Holder that owns
(or is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether
or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return
and provide such other information as may be required by the U.S. Treasury Department.
The rules dealing
with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those
described above. Accordingly, U.S. Holders of shares in China Ceramics should consult their own tax advisors concerning the application
of the PFIC rules to such shares under their particular circumstances.
Non-U.S. Holders
Cash dividends paid or
deemed paid to a Non-U.S. Holder in respect to its securities in China Ceramics generally will not be subject to U.S. federal
income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within
the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed
base that such holder maintains or maintained in the United States).
In addition, a Non-U.S.
Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition
of securities in China Ceramics unless such gain is effectively connected with its conduct of a trade or business in the United
States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such
holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case,
such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that
are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or
maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal
income tax rates applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal
income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding
and Information Reporting
In general, information
reporting for U.S. federal income tax purposes should apply to distributions made on the securities of China Ceramics within the
United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of securities
of China Ceramics by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and
sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited
circumstances. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its securities and adjustments
to that tax basis and whether any gain or loss with respect to such securities is long-term or short-term also may be required
to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial
Assets) to report their interest in our securities.
Moreover, backup withholding
of U.S. federal income tax at a rate of 28% generally will apply to dividends paid on the securities of China Ceramics to a U.S.
Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of securities of China Ceramics by
a U.S. Holder (other than an exempt recipient), in each case who (a) fails to provide an accurate taxpayer identification
number; (b) is notified by the IRS that backup withholding is required; or (c) in certain circumstances, fails to comply
with applicable certification requirements.
A Non-U.S. Holder generally
may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status,
under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is
not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s
or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain
required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application
of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular
circumstances.
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F.
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Dividends and paying
agents
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Not required.
Not required.
Documents concerning
us that are referred to in this document may be inspected at Junbing Industrial Zone, Anhai, Jinjiang City, Fujian Province, PRC.
In addition, we file
annual reports and other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and
submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements
of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider short-swing
disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file
with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street,
N.E., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of the prescribed
fees. You may call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms and
you can request copies of the documents upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission
maintains a web site that contains reports and other information regarding registrants (including us) that file electronically
with the Commission which can be assessed at http://www.sec.gov.
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I.
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Subsidiary Information
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Not required.
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ITEM
11.
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QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Interest Rate Risk
Our exposure to interest rate risk primarily relates to our
outstanding debts and interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning
instruments carry a degree of interest rate risk. As of December 31,
2019, our total outstanding loans for the continuing operations amounted to RMB nil_ ($ nil) with interest rates in the range of
-% to -% per annum. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in market interest
rates.
Foreign Currency
Risk
During 2013 and 2014,
we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to the fluctuation
in value of the Renminbi against the U.S. dollar, for investment and not hedging purposes. The Company recorded fair value gains
on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated
against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 54,977,000 for the year ended December 31,
2014 in connection with these agreements. We do not intend to enter into similar investment transactions in the future.
In June 2014, we,
our Chief Executive Officer and the Audit Committee set out to attempt to terminate the foreign currency transaction agreements;
and to reach a resolution that would preclude the depletion of our liquid assets by virtue of its having entered into the foreign
currency transaction agreements. Ultimately our Chief Executive Officer agreed to cause an entity controlled by him to assume
those agreements. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive
Officer, executed an agreement (the “Novation”) with us and the financial institution that originated the foreign
currency transaction agreements pursuant to which Sound Treasure Limited assumed these agreements and all assets (mainly deposits
placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released
from the liabilities arising under the foreign currency transaction agreements. As a result, we will not be required to fund any
losses related to these agreements, and will neither suffer any future liabilities arising under those agreements nor enjoy any
benefits arising under those agreements.
At the time that each
of the foreign currency transaction agreements was established with the financial institution, we were required to deposit monies
(the “Deposits”) with the financial institution that was the counterparty to the agreements. RMB 6.7 million of a
total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the brother-in-law of our
Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong Kung Tok as of July 9,
2014. In connection with the Novation discussed above, our Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok executed
an agreement with the Company on July 31, 2014 (the “Offset Agreement”) pursuant to which loans totaling RMB
20.7 million owed by us to Wong Kung Tok were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited,
and in return the Company agreed to forego any claim to RMB 15.6 million in Deposits under the foreign currency transaction agreements
which will be transferred to Sound Treasure Limited pursuant to the Novation.
The Novation and the
Offset Agreement became effective on July 31, 2014. As a result of these transactions, Sound Treasure Limited released us
from liabilities aggregating RMB 76.8 million and we transferred ownership of RMB 15.6 million in deposits held at the financial
institution from us to Sound Treasure Limited. As a result of the Novation and the Offset Agreement, approximately RMB 76.8 million
in liabilities on our books were extinguished in 2014 and the Capital Reserve account was increased by approximately RMB 61.3
million.
Except as disclosed above,
we do not currently have any significant foreign exchange exposure as our sales and purchases are predominantly denominated in
RMB. As of December 31, 2017, nearly all of our monetary assets and monetary liabilities were denominated in RMB except for
certain bank balances, bank borrowings and other payables which were denominated in US dollars. However, in the future, a proportion
of our sales may be denominated in other currencies as we expand into overseas markets. In such circumstances, we anticipate our
primary market risk, if any, to be related to fluctuations in exchange rates. Exchange rate risk may arise if we are required
to use different currencies for various aspects of its operations.
The Renminbi’s
exchange rate with the U.S. dollar and other currencies is affected by, among other things, changes in China’s political
and economic conditions. The exchange rate for conversion of Renminbi into foreign currencies is heavily influenced by intervention
in the foreign exchange market by the People’s Bank of China. From 1995 until July 2005, the People’s Bank of
China intervened in the foreign exchange market to maintain an exchange rate of approximately 8.3 Renminbi per U.S. dollar. On
July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S.
dollar. However, the Renminbi is restricted to a rise or fall of no more than 0.5% per day versus the U.S. dollar, and the People’s
Bank of China continues to intervene in the foreign exchange market to prevent significant short-term fluctuations in the Renminbi
exchange rate. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased
to 2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant
floatation in the RMB’s value against the U.S. dollar. The international reaction to the RMB revaluation has generally been
positive. But, international pressure continues to be placed on the Chinese government to adopt an even more flexible currency
policy, which could result in significant fluctuation of the RMB against the U.S. dollar.
Very limited hedging
transactions are available in China to reduce our exposure to exchange rate fluctuations. While we have no present intention to
enter into currency hedging transactions in the future. we may decide to enter into hedging transactions if we are exposed to
foreign currency risk. The availability and effectiveness of these hedging transactions may be limited and we may not be able
to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert Renminbi into foreign currency.
|
ITEM
12.
|
DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES
|
Not required.
CHINA CERAMICS CO., LTD AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Notes
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxation
|
|
|
|
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
|
|
(78,285
|
)
|
Adjustments for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of land use rights
|
|
|
14
|
|
|
|
-
|
|
|
|
108
|
|
|
|
143
|
|
Operating lease charge
|
|
|
22
|
|
|
|
12,187
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation of property, plant and equipment
|
|
|
12
|
|
|
|
12
|
|
|
|
11,500
|
|
|
|
15,371
|
|
Amortization of prepaid expenses
|
|
|
|
|
|
|
2,677
|
|
|
|
-
|
|
|
|
-
|
|
Gain on disposal of property, plant and equipment
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
Write down of inventories ( reversal of inventory provision)
|
|
|
16
|
|
|
|
(56,766
|
)
|
|
|
55,973
|
|
|
|
(2,733
|
)
|
Bad debt provision of trade receivables
|
|
|
|
|
|
|
68,661
|
|
|
|
316,438
|
|
|
|
71,565
|
|
Loss from assets devaluation
|
|
|
12-14
|
|
|
|
-
|
|
|
|
85,021
|
|
|
|
36,683
|
|
Share based compensation
|
|
|
26
|
|
|
|
627
|
|
|
|
619
|
|
|
|
294
|
|
Interest expense
|
|
|
|
|
|
|
315
|
|
|
|
-
|
|
|
|
206
|
|
Operating cash flows before working capital changes
|
|
|
|
|
|
|
18,268
|
|
|
|
51,194
|
|
|
|
43,174
|
|
Decrease in inventories
|
|
|
|
|
|
|
18,817
|
|
|
|
8,347
|
|
|
|
23,808
|
|
Increase in trade receivables
|
|
|
|
|
|
|
(21,570
|
)
|
|
|
(23,309
|
)
|
|
|
(50,384
|
)
|
Decrease (Increase) in other receivables and prepayments
|
|
|
|
|
|
|
(40
|
)
|
|
|
(2,521
|
)
|
|
|
12,058
|
|
Decrease in trade payables
|
|
|
|
|
|
|
(1,753
|
)
|
|
|
(36,755
|
)
|
|
|
(23,173
|
)
|
Increase in unearned revenue
|
|
|
|
|
|
|
619
|
|
|
|
-
|
|
|
|
-
|
|
Increase (decrease) in taxes payable
|
|
|
|
|
|
|
(5,502
|
)
|
|
|
635
|
|
|
|
-
|
|
Decrease in accrued liabilities, other payables, and amounts owed to related parties
|
|
|
|
|
|
|
(2,552
|
)
|
|
|
(3,825
|
)
|
|
|
(7,529
|
)
|
Cash generated from (used in) operations
|
|
|
|
|
|
|
6,287
|
|
|
|
(6,234
|
)
|
|
|
(2,046
|
)
|
Interest paid
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax paid
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) operating activities
|
|
|
|
|
|
|
6,287
|
|
|
|
(6,234
|
)
|
|
|
(2,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,618
|
)
|
Proceed from disposal of property, plant and equipment
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
(1,066
|
)
|
|
|
(1,719
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(1,066
|
)
|
|
|
(1,719
|
)
|
|
|
(5,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for lease liabilities
|
|
|
|
|
|
|
(13,902
|
)
|
|
|
-
|
|
|
|
-
|
|
Insurance of share capital for equity financing
|
|
|
24
|
|
|
|
5,033
|
|
|
|
15,262
|
|
|
|
9,537
|
|
Warrants exercised
|
|
|
24
|
|
|
|
2,948
|
|
|
|
-
|
|
|
|
-
|
|
Advance from related parties
|
|
|
|
|
|
|
14
|
|
|
|
186
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) financing activities
|
|
|
|
|
|
|
(5,907
|
)
|
|
|
15,448
|
|
|
|
9,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS
|
|
|
|
|
|
|
(686
|
)
|
|
|
7,495
|
|
|
|
1,943
|
|
CASH & EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
9,016
|
|
|
|
2,328
|
|
|
|
110
|
|
EFFECT OF FOREIGN EXCHANGE RATE DIFFERENCES
|
|
|
|
|
|
|
(118
|
)
|
|
|
(807
|
)
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH & EQUIVALENTS, END OF YEAR
|
|
|
|
|
|
|
8,212
|
|
|
|
9,016
|
|
|
|
2,328
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
For the Three Years Ended December 31, 2017, 2018 and 2019
|
China Ceramics Co., Ltd. (“China
Ceramics” or the “Company”) is a British Virgin Islands company operating under the BVI Business Companies Act
(2004) with its shares listed on the NASDAQ (“symbol: CCCL”). Its predecessor company, China Holdings Acquisition Corp.
(“CHAC”), was incorporated in Delaware on June 22, 2007, and was organized as a blank check company for the purpose
of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual
arrangements, an operating business, that has its principal operations in Asia. The Company has no operations and has no assets
or liabilities of consequence outside its investments in its operating subsidiaries. The head office of the Company is located
at Junbing Industrial Zone, Jinjiang City, Fujian Province, the People’s Republic of China (“PRC”).
On November 20, 2009, CHAC merged with
and into China Ceramics, its wholly owned British Virgin Islands subsidiary, with China Ceramics surviving the merger (the “Redomestication”).
On the same day, pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009 (the “acquisition
agreement”), China Ceramics acquired all of the outstanding securities of Success Winner Limited (“Success Winner”)
held by Mr. Wong Kung Tok in exchange for US$10.00 and 5,743,320 shares of China Ceramics (the “Success Winner Acquisition”).
The total number of issued and outstanding shares of China Ceramics immediately after the acquisition was 8,950,171.
Prior to the Success Winner Acquisition
on November 20, 2009, neither CHAC nor China Ceramics had an operating business.
Jinjiang Hengda Ceramics Co., Ltd.
(“Hengda”), which became the operating entity of China Ceramics in connection with the Success Winner Acquisition,
was established on September 30, 1993 under the laws of PRC with 15% of its equity interest owned by Fujian Province Jinjiang
City Anhai Junbing Hengda Construction Material Factory (“Anhai Hengda”) and 85% owned by Chi Wah Trading Import and
Export Company (“Chi Wah”). Chi Wah is a sole proprietor under the laws of Hong Kong with its legal and equitable interest
solely owned by Mr. Wong Kung Tok. Anhai Hengda was owned by Mr. Wong Kung Tok’s family, which was considered an
act-in-concert party of Mr. Wong Kung Tok for accounting purposes.
Hengda is principally engaged in the manufacture
and sale of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings.
Hengda’s owners reorganized the corporate
structure in 2008 and 2009 (the “Hengda Reorganization” or the “Reorganization”), as follows:
Stand Best Creation Limited (“Stand
Best”) was established on January 17, 2008 under the laws of Hong Kong with its paid-up share capital being HK$1.00
divided into 1 ordinary share solely owned by Mr. Wong Kung Tok. Stand Best acquired 100% of Hengda’s equity interest
from Anhai Hengda and Chi Wah on April 1, 2008 at the consideration of RMB 58,980,000.
Success Winner Limited (“Success Winner”)
was incorporated in the British Virgin Islands on May 29, 2009 as a limited liability company. Its paid-up and issued capital
is US$1 divided into 1 ordinary share solely owned by Mr. Wong Kung Tok.
On June 30, 2009, through a capitalization
agreement between Mr. Wong Kung Tok and Stand Best, Stand Best capitalized a shareholder loan due to Mr. Wong Kung Tok
in the amount of HK$67.9 million (equivalent to approximately RMB 58.9 million) through the issuance of an aggregate of 9,999 ordinary
shares of HK$1.00 par value which Mr. Wong Kung Tok allotted to Success Winner.
On the same date, Mr. Wong Kung Tok
transferred his ownership of the remaining 1 ordinary share of Stand Best to Success Winner, thus making Success Winner the sole
parent company of Stand Best.
On January 8,
2010, Hengda completed the acquisition of all voting equity interests of Jiangxi Hengdali Ceramic Materials Co., Ltd. (“Hengdali”
or the “Gaoan Facility”), located in Gaoan, Jiangxi Province (the “Hengdali Acquisition”). Hengdali manufactures
and sells ceramics tiles used for exterior siding and for interior flooring. In total, Hengda assumed loans of RMB 60.0 million
and paid cash consideration of RMB 185.5 million for the acquisition.
On September 17, 2013, Fujian Province
Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian Province, 100% owned
by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials and interior and exterior decoration
materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017, the Company disposed of Fujian
Hengdali for RMB 0 to a third-party. A loss on disposal of RMB 736,000 was recognized in other expenses for the year ended December 31,
2017 relating to this transaction.
On September 22, 2017, Success Winner
incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong with an initial registered capital
of HKD1. Vast Elite is engaged in the trading of building materials, but had no operations during the year ended December 31,
2019.
On November 20, 2019, Vast Elite incorporated
a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu Future”) in China. Chengdu
Future is engaged in the business management and consulting services.
On December 3, 2019, Success Winner
incorporated a 100% owned subsidiary Antelope Enterprise Holdings Limited (“Antelope Holdings”) in Hong Kong. Antelope
Holdings only serves the purpose as a holding company.
China Ceramics and its subsidiaries’
(the “Company”) corporate structure as of December 31, 2019 is as follows:
Name
|
|
Place and date of
incorporation or
establishment/
operations
|
|
Nominal value of
issued ordinary
share
/registered
capital
|
|
|
Percentage of
equity
attributable to the
Company
|
|
|
Principal activities
|
|
|
|
|
|
|
|
Direct
|
|
|
Indirect
|
|
|
|
Success Winner Limited
|
|
British Virgin Islands,
May 29, 2009
|
|
US$
|
1
|
|
|
|
100
|
|
|
|
-
|
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand Best Creation Limited
|
|
Hong Kong,
January 17, 2008
|
|
HKD
|
10,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinjiang Hengda Ceramics Co., Ltd. (note 1)
|
|
PRC,
September 30, 1993
|
|
RMB
|
288,880,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Manufacture and sale of ceramic tiles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jiangxi Hengdali Ceramic Materials Co., Ltd. (note 1)
|
|
PRC,
May 4, 2008
|
|
RMB
|
55,880,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Manufacture and sale of ceramic tiles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fujian Province Hengdali Building Materials Co., Ltd (note 2)
|
|
PRC,
September 17,2013
|
|
RMB
|
1,000,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Sale of building and decoration materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vast Elite Limited (note 1)
|
|
Hong Kong,
September 22, 2017
|
|
HKD
|
1
|
|
|
|
-
|
|
|
|
100
|
|
|
Trading of building material
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Future (note 3)
|
|
PRC,
November 20, 2019
|
|
RMB
|
30,000,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Business management and consulting services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antelope Enterprise Holdings Limited
|
|
Hong Kong,
December 3, 2019
|
|
HKD
|
10,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Investment holding
|
Note:
1. The registered capital of Hengda, Hengdali,
Fujian Hengdali, Vast Elite and Antelope Holdings had been fully paid up.
2. Fujian Hengdali was disposed in August 2017.
3. Chengdu Future is allowed to pay the registered capital
in full before November 12, 2049.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated financial statements have
been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International
Accounting Standards Board (“IASB”), which collective term includes all applicable individual International Financial
Reporting Standards, International Accounting Standards and Interpretations issued by the IASB.
The significant accounting policies that
have been used in the preparation of these consolidated financial statements are summarized below. These policies have been consistently
applied to all the years presented unless otherwise stated. The adoption of new or amended IFRSs and the impacts on the Company’s
financial statements, if any, are disclosed in Note 3.
The consolidated financial statements have
been prepared on the historical cost basis, except for derivative financial instruments that have been measured at fair value.
The preparation of financial statements
in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies
and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical
experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying amounts of assets and liabilities not readily apparent from other sources. Actual results
may differ from these estimates.
The estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised
if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current
and future periods.
Judgments made by management in the application
of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in
Note 4.
The consolidated financial statements were
approved and authorized for issue by the Board of Directors on May 20, 2020.
|
2.2
|
Basis of consolidation
|
The Success Winner Acquisition on
November 22, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in the former
owner of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition,
China Ceramics had no operating business. Accordingly, the acquisition does not constitute a business combination for
accounting purposes and is accounted for as a capital transaction. That is, the transaction is in substance a reverse
recapitalization, equivalent to the issuance of equity interests by Success Winner for the net monetary assets of China
Ceramics accompanied by a recapitalization. The consolidated financial statements are a continuation of the financial
statements of Success Winner. The assets and liabilities of China Ceramics are recognized at their carrying amounts at the
date of acquisition with a corresponding credit to the consolidated equity and no goodwill or other intangible assets are
recognized. The equity of the combined entity recognized at the date of acquisition represents the equity balances of Success
Winner together with the deemed proceeds from the reverse recapitalization determined as described above. However, the equity
structure presented in the consolidated financial statements (number and values of equity instruments issued) reflects the
equity structure of the legal parent, China Ceramics. Costs directly attributable to the transaction have been debited to
equity to the extent of net monetary assets received.
Success Winner and its subsidiaries as a
group is regarded as a continuing entity resulting from the Hengda Reorganization since the management of all the entities which
took part in the Reorganization were controlled by the same director and shareholder before and immediately after the Reorganization.
Immediately after the Reorganization, there was a continuation of the control over the entities’ financial and operating
policy decision and risk and benefits to the ultimate shareholders that existed prior to the Reorganization. Accordingly, the reorganization
has been accounted for as a reorganization under common control and the financial statements of Success Winner, Stand Best and
Hengda have been combined on the basis of merger accounting for all periods presented.
The assets and liabilities of the combining
entities or businesses are combined using the existing book values from the controlling party’s perspective. No amount is
recognized as consideration for goodwill or excess of the acquirer’s interest in the net fair values of the acquiree’s
identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combination. The consolidated
statement of comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented
or the date of their incorporation/establishment or since the date when the combining entities or businesses first came under common
control, where this is a shorter period, regardless of the date of the common control combination.
The Hengdali Acquisition on January 8,
2010 has been accounted for as a business combination using the acquisition method. Hengdali is a subsidiary of the Company, and
the Company has the power to govern the financial and operating policies which accompanies its shareholding of 100% of the voting
rights in Hengdali. Therefore, Hengdali as a subsidiary is fully consolidated from January 8, 2010, the date on which control
was transferred to the Company.
The accounting for the Hengdali Acquisition
under the acquisition method, treats the consideration transferred for the acquisition of Hengdali as the fair values of the assets
transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the
fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed
as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in this business combination are measured
initially at their fair values at the acquisition date.
The excess of the consideration transferred
over the fair value of the identifiable net assets acquired is recorded as goodwill.
The Company’s financial statements
consolidate those of the Company and all of its subsidiaries as of December 31, 2019. Subsidiaries are entities controlled
by the Company. The Company controls an entity when it is exposed, or has rights, to variable returns from its involvement with
the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Company has
power, only substantive rights (held by the Company and other parties) are considered. All subsidiaries have a reporting date of
December 31.
An investment in a subsidiary is consolidated
into the consolidated financial statements form the date that control commences until the date that control ceases. Inter-company
transactions, balances and unrealized gains or losses on transactions between group companies are eliminated. Accounting policies
of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
|
2.3
|
Foreign currency translation
|
The financial statements are presented in
RMB (to the nearest thousand), being the currency that best reflects the economic substance of the underlying events and circumstances
relevant to the Company. The Company’s operations are conducted through the subsidiaries in the People’s Republic of
China (“PRC”). The functional currency of these subsidiaries is Renminbi (“RMB”). The functional currency
of China Ceramics is the United State dollars (US$).
In the individual financial statements of
the consolidated entities, foreign currency transactions are translated into the functional currency of the individual entity using
the exchange rates prevailing at the dates of the transactions. At the reporting date, monetary assets and liabilities denominated
in foreign currencies are translated at the foreign exchange rates ruling at that date. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the reporting date retranslation of monetary assets and liabilities are recognized
in profit or loss.
Non-monetary items carried at fair value
that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined
and are reported as part of the fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a
foreign currency are not retranslated.
In the consolidated financial statements,
all individual financial statements of foreign operations, originally presented in a currency different from the Company’s
presentation currency, have been converted into Renminbi. Assets and liabilities have been translated into Renminbi at the closing
rates at the reporting date. Income and expenses have been converted into Renminbi at the exchange rates ruling at the transaction
dates, or at the average rates over the reporting period provided that the exchange rates do not fluctuate significantly. Any differences
arising from this procedure have been recognized in other comprehensive income and accumulated separately in the currency translation
reserve in equity.
When a foreign operation is sold, such exchange
differences are reclassified from equity to profit or loss as part of the gain or loss on sale.
The translation of certain RMB amounts as
of and for the year ended December 31, 2019 into US$ is included in these financial statements solely for the convenience
of readers and was made at the rate of RMB 6.96 to US$1.00, which was based on the noon buying rate on December 31, 2019 in
the City of New York cable transfers of RMB as certified for customers purposes by the Federal Reserve Bank of New York. Such translation
should be construed as representation that RMB amounts could be converted, realized or settled into US$ at the rate stated above
or at any other rate.
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2.4
|
Property, plant and equipment
|
Leasehold land and buildings for own
use
When a lease includes both land and building
elements, the Company assesses the classification of each element as a finance or an operating lease separately based on the assessment
as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Company,
unless it is clear that both elements are operating leases in which case the entire lease is classified as an operating lease.
Specifically, the minimum lease payments (including any lump sum upfront payments) are allocated between the land and the building
elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease
at the inception of the lease.
To the extent the allocation of the lease
payments can be made reliably, interest in leasehold land that is accounted for as an operating lease is presented as "land
use rights" in the consolidated statements of financial position and is amortized over the lease term on a straight-line basis.
All buildings are depreciated over their
expected useful lives of 40 years.
Other property, plant and equipment
Property, plant and equipment are stated
in the consolidated statements of financial position at cost less any accumulated depreciation and any accumulated impairment losses.
Depreciation is provided to write off the
cost less their residual values over their estimated useful lives as follows, using the straight-line method:
Plant and machinery
|
10 years
|
Motor vehicles
|
10 years
|
Office equipment
|
5 years
|
The assets’ residual values, depreciation
methods and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period, with the effect of any
changes in estimate accounted for on a prospective basis.
Historical cost includes expenditure that
is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item
will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized.
All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they are incurred.
An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
The gain or loss arising on retirement or
disposal is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit
or loss.
Investment properties are properties held
to earn rentals or for capital appreciation.
Investment properties are initially measured
at historical cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are
measured at their historical cost less any accumulated depreciation and any accumulated impairment losses.
Historical cost includes expenditure that
is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item
will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized.
All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they are incurred.
An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
The gain or loss arising on retirement or
disposal is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit
or loss.
An investment property is derecognized upon
disposal or when the investment property is permanently withdrawn from use or no future economic benefits are expected from its
disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds
and the carrying amount of the asset) is included in profit or loss in the period in which the item is derecognized.
Upfront payments made to acquire land held
under an operating lease are stated at cost less accumulated amortization and any accumulated impairment losses. Amortization is
calculated on a straight line basis over the leasing period of 50 years. The carrying amounts of land used rights were reclassified
to right-of-use assets to conform to IFRS 16.
Goodwill arising on an acquisition of a
business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
For the purposes of impairment testing,
goodwill is allocated to each of the Company’s cash-generating units, or groups of cash-generating units, that is expected
to benefit from the synergies of the combination.
A cash-generating unit to which goodwill
has been allocated is tested for impairment annually, or more frequently whenever there is indication that the unit may be impaired.
If some or all of the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual
period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable amount of the
cash-generating unit is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of
any goodwill allocated to the unit and then to the other assets of the unit on a pro – rata basis based on the carrying amount
of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized
for goodwill is not reversed in subsequent periods.
On disposal of the relevant cash generating
unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Inventories are carried at the lower of
cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work in progress and finished
goods, comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is the estimated selling
price in the ordinary course of business less the estimated cost of completion and applicable selling expenses.
When inventories are sold, the carrying
amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of
any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period
the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the reversal occurs.
|
2.9
|
Cash and cash equivalents
|
Cash and cash equivalents include cash at
bank and in hand, demand deposits with banks and short term highly liquid investments with original maturities of three months
or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
For the purpose of the statement of cash flows presentation, cash and cash equivalents include bank overdrafts which are repayable
on demand and form an integral part of the Company’s cash management.
|
2.10
|
Financial instruments
|
Financial assets and financial liabilities
are recognized when a group entity becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities
are initially measured at fair value except for trade debtors arising from contracts with customers which are initially measured
in accordance with HKFRS 15 since 1 January 2019. Transaction costs that are directly attributable to the acquisition or issue
of financial assets and financial liabilities (other than financial assets or liabilities at fair value through profit or loss)
are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit
or loss are recognized immediately in profit or loss.
The effective interest method is a
method of calculating the amortized cost of a financial asset or financial liability and of allocating interest income and
interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future
cash receipts and payments (including all fees and points paid or received that form an integral part of the effective
interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or
financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest income which are derived from the
Company’s ordinary course of business are presented as revenue.
Financial assets
Classification and subsequent measurement
of financial assets (upon application of IFRS 9)
Financial assets that meet the following
conditions are subsequently measured at amortized cost:
· the
financial asset is held within a business model whose objective is to collect contractual cash flows; and
· the
contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All other financial assets are subsequently
measured at fair value through profit or loss (“FVTPL”).
A financial asset is classified as held
for trading if:
· it
has been acquired principally for the purpose of selling in the near term; or
· on
initial recognition it is a part of a portfolio of identified financial instruments that the Company manages together and has a
recent actual pattern of short-term profit-taking; or
· it
is a derivative that is not designated and effective as a hedging instrument.
In addition, the Company may irrevocably
designate a financial asset that are required to be measured at the amortized cost as measured at FVTPL if doing so eliminates
or significantly reduces an accounting mismatch.
(i) Amortized
cost and interest income
Interest income is recognized using the
effective interest method for financial assets measured subsequently at amortized cost. Interest income is calculated by applying
the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently
become credit-impaired. For financial assets that have subsequently become credit-impaired, interest income is recognized by applying
the effective interest rate to the amortized cost of the financial asset from the next reporting period. If the credit risk on
the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is
recognized by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the
reporting period following the determination that the asset is no longer credit impaired.
(ii) Financial
assets at FVTPL
Financial assets that do not meet the
criteria for being measured at amortized cost are measured at FVTPL.
Financial assets at FVTPL are measured at
fair value at the end of each reporting period, with any fair value gains or losses recognized in profit or loss. The net gain
or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is included in the “other
gains and losses” line item.
Impairment of financial assets (upon
application IFRS 9)
The Company recognizes a loss
allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment under IFRS 9
(including trade and other receivables, bank deposits and bank balances). ECLs are based on the difference between the
contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive,
discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from
the sale of collateral held or other credit enhancements that are integral to the contractual terms. The amount of ECL is
updated at each reporting date to reflect changes in credit risk since initial recognition.
General approach
ECLs are recognized in two measurement bases.
For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided
for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit
exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required
for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Company assesses
whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment,
the Company compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default
occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information
that is available without undue cost or effort, including historical and forward looking information.
The Company considers a financial asset
in default when contractual payments are 90 days past due. However, in certain cases, the Company may also consider a financial
asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding
contractual amounts in full before taking into account any credit enhancements held by the Company. A financial asset is written
off when there is no reasonable expectation of recovering the contractual cash flows.
Financial assets at amortized cost are subject
to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for
trade receivables which apply the simplified approach as detailed below.
Stage 1 — Financial instruments for
which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an
amount equal to 12-month ECLs
Stage 2 — Financial instruments for
which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for
which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 — Financial assets that are
credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance
is measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain
a significant financing component or when the Company applies the practical expedient of not adjusting the effect of a significant
financing component, the Company applies the simplified approach in calculating ECLs. Under the simplified approach, the Company
does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date.
The Company assesses at the end of each
reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. An
impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated
future cash flows of the financial asset or the Company of financial assets that can be reliably estimated. Evidence of impairment
may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency
in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable
data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Financial assets carried at amortized
cost
For financial assets carried at amortized
cost, the Company first assesses whether impairment exists individually for financial assets that are individually significant,
or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence
of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group
of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually
assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment
of impairment.
The amount of any impairment loss identified
is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding
future credit losses that have not been incurred). The present value of the estimated future cash flows is discounted at the financial
asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).
The carrying amount of the asset is reduced
through the use of an allowance account and the loss is recognized in profit or loss. Interest income continues to be accrued on
the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the
impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect
of future recovery and all collateral has been realised or has been transferred to the Company.
If, in a subsequent period, the amount of
the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery
is credited to other expenses in the statement of profit or loss.
Classification and subsequent measurement
of financial assets (before application of IFRS 9 on January 1, 2018)
The Company’s financial assets are
loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time
of initial recognition.
Loans and receivables
Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognized at
fair value. Subsequent to initial recognition, loans and receivables (including trade and other receivables, pledged bank deposits,
fixed bank deposits with maturity periods over three months and bank balances) are measured at amortized cost using the effective
interest method, less any identified impairment losses).
Impairment of financial assets
Financial assets are assessed for indicators of impairment at
the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result
of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the
financial assets have been affected.
Objective evidence of impairment could include:
· significant
financial difficulty of the issuer or counterparty; or
· breach
of contract, such as a default or delinquency in interest or principal payments; or
· it
becoming probable that the borrower will enter bankruptcy or financial re-organisation; or disappearance of an active market for
that financial asset because of financial difficulties.
If any such evidence exists, the impairment
loss on trade receivables and other current receivables and other financial assets carried at amortized cost is measured as the
difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the
financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these
assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar
risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for
financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit
risk characteristics similar to the collective group.
If in a subsequent period the amount of
an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized,
the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s
carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
Impairment losses are written off against
the corresponding assets directly, except for impairment losses recognized in respect of trade receivables included within trade
and other receivables and prepayments, whose recovery is considered doubtful but not remote. In this case, the impairment losses
for doubtful debts are recorded using an allowance account. When the Company is satisfied that recovery is remote, the amount considered
irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt
are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account.
Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit
or loss.
Derecognition of financial assets
The Company derecognizes a financial asset
only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially
all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers nor retains substantially
all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes its retained interest
in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and
rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and recognizes a
collateralized borrowing for the proceeds received.
On derecognition of a financial asset measured
at amortized cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
is recognized in profit or loss.
Financial liabilities and equity instruments
Debt and equity instruments issued by a
group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements
and the definitions of a financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that
evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by
the Company are recognized at the proceeds received, net of direct issue costs.
Effective interest method
The effective interest method is a method of calculating the
amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate
is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an
integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the
financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest expense is recognized on an effective
interest basis.
Financial liabilities
Interest-bearing borrowings are recognized
initially at fair value less attributable transaction costs. They are subsequently stated at amortized cost with any difference
between the amount initially recognized and redemption value being recognized in profit or loss over the period of the borrowings,
together with any interest and fees payable, using the effective interest method.
Trade and other payables are initially recognized
at fair value. They are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case
they are stated at cost.
Derecognition
The Company derecognizes a financial asset
only when the contractual rights to the cash flows from the asset expire.
On derecognition of a financial asset in
its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized
in profit or loss.
The Company derecognizes a financial liability
when, and only when, the Company’s obligations are discharged, cancelled or expire. The difference between the carrying amount
of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.
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2.11
|
Derivative financial instruments
|
Initial recognition and subsequent measurement
The Company uses derivative financial instruments,
such as forward currency contracts, for investment purposes. Such derivative financial instruments are initially recognized at
fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives
are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes
in the fair value of derivatives are taken directly to profit or loss.
Finance leases refers to the situation that
the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards
of ownership of the leased asset.
All other leases are treated as operating
leases. Where the Company has the use of assets under operating leases, payments made under the leases are charged to profit or
loss on a straight line basis over the lease terms except where an alternative basis is more representative of the time pattern
of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an integral part
of the aggregate net lease payments made. Contingent rental are charged to profit or loss in the accounting period in which they
are incurred. Operating leases were treated in accordance to IFRS 16 commencing January 1, 2019.
All the leases of the Company are operating
leases for the years ended December 31, 2019, 2018 and 2017.
|
2.13
|
Provisions and contingencies
|
Provisions for product warranties,
legal disputes, onerous contracts or other claims are recognized when the Company has a present obligation (legal or
constructive) as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate of the amount of the obligation can be made. Where the time value of money is
material, provisions are stated at the present value of the expenditure expected to settle the obligation.
All provisions are reviewed at each reporting
date and adjusted to reflect the current best estimate.
Where it is not probable that an outflow
of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within the control of the Company
are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
Ordinary shares are classified as equity.
Share capital is determined using the nominal value of shares that have been issued.
Any transaction costs associated with the
issuing of shares are deducted from share premium (net of any related income tax benefit) to the extent they are incremental costs
directly attributable to the equity transaction.
Revenue comprises the fair value of the
consideration received or receivable for the sale of goods, net of rebates and discounts. In 2012, the Company paid rebates to
some distributors on their annual cash collections. No such rebates were paid to distributors since year 2013. Provided it is probable
that the economic benefits will flow to the Company and the revenue and costs, if applicable, can be measured reliably, revenue
is recognized as follows:
Sales of goods are recognized upon transfer
of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered
and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing management involvement with
the goods and the Company does not have the obligation to accept the return of the goods to the Company from the customer.
Rental income is recognized based upon our
annual rental over the life of the lease under operating lease, using the straight-line method.
Interest income is recognized on a time-proportion
basis using the effective interest method.
|
2.16
|
Impairment of non-financial assets
|
Impairment testing is made on the Company’s
goodwill at each reporting date. Property, plant and equipment and land use rights are tested for impairment if there is any indication
that the assets may be impaired at the balance sheet date.
If any indication exists, or when annual
impairment testing for an asset is required, the Company estimates the asset’s recoverable amount.
Calculation of recoverable amount
An asset’s recoverable amount is the
greater of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash
inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that
generates cash inflows independently (i.e. a cash-generating unit).
Recognition of impairment losses
An impairment loss is recognized in profit
or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount.
Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill
allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying amount of the
other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its individual
fair value less costs of disposal (if measurable) or value in use (if determinable).
Reversal of impairment losses
In respect of assets other than goodwill,
an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount.
An impairment loss in respect of goodwill is not reversed.
A reversal of an impairment loss is limited
to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals
of impairment losses are credited to profit or loss in the year in which the reversals are recognized.
Retirement benefits
The employees of the Company’s PRC
subsidiaries are required to participate in a central pension scheme operated by the local municipal government. Contributions
are recognized as an expense in profit or loss as employees render services during the year. The Company’s obligation under
these plans is limited to the fixed percentage contributions payable.
Share-based employee remuneration
The Company operates equity-settled share-based
remuneration plans for its employees. None of the Company’s plans feature any options for a cash settlement.
The fair value of share options granted
to employees is recognized as an employee cost with a corresponding increase in the share-based payment reserve within equity.
The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account the terms and conditions
upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled
to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account
the probability that the options will vest.
During the vesting period, the number of
share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized in prior years is
charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for recognition
as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized as
an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based
payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the
Company’s shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised
(when it is transferred to the share premium account) or the option expires (when it is released directly to retained earnings).
Borrowing costs consist of interest and
other costs incurred in connection with the borrowing of funds. Borrowing costs directly attributable to the acquisition, construction
or production of qualifying asset which necessarily takes a substantial period of time to get ready for its intended use or sale
are capitalized as part of the cost of that asset until such time as the assets are substantially ready for their intended use
or sale. Other borrowing costs are expensed when incurred.
|
2.19
|
Accounting for income taxes
|
Income tax comprises current tax and deferred
tax.
Current tax and movements in deferred tax
assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized in other comprehensive
income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly
in equity, respectively.
Current tax is the expected tax payable
on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any
adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the liability
method on temporary differences at the reporting date between the carrying amounts of assets and liabilities in the financial statements
and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred
tax assets are recognized for all deductible temporary differences, tax losses available to be carried forward as well as other
unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary differences, will
be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.
Deferred tax assets and liabilities are
not recognized if the temporary difference arises from goodwill or from initial recognition (other than in a business combination)
of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred tax liabilities are recognized
for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the Company
is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse
in the foreseeable future.
Deferred tax is calculated, without discounting,
at the tax rates that are expected to apply in the period the liability is settled or the asset realized, based on tax rate (and
tax laws) that have been enacted or substantively enacted at the reporting date.
The carrying amount of a deferred tax asset
is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it
becomes probable that sufficient taxable profits will be available.
Additional income taxes that arise from
the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current tax balances and deferred tax balances,
and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current
tax liabilities, and deferred tax assets are offset against deferred tax liabilities, if the Company has the legally enforceable
right to set off the recognized amounts and the following additional conditions are met:
|
(a)
|
in the case of current tax assets and liabilities, the Company intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
|
|
(b)
|
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
|
|
(i)
|
the same taxable entity; or
|
|
(ii)
|
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to settle the liabilities and realize the assets simultaneously.
|
|
2.20
|
Research and development activities
|
Costs associated with research activities
are expensed in profit or loss as they incur. Costs that are directly attributable to development activities are recognized as
intangible assets if, and only if, all of the following have been demonstrated:
|
(i)
|
the technical feasibility of completing the intangible asset so that the asset will be available for use or sale;
|
|
(ii)
|
the intention to complete the intangible asset and use or sell it;
|
|
(iii)
|
the ability to use or sell the intangible asset;
|
|
(iv)
|
how the intangible asset will generate probable future economic benefits;
|
|
(v)
|
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
|
|
(vi)
|
the ability to measure reliably the expenditure attributable to the intangible asset during its development.
|
The amount initially recognized for internally-generated
intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria
listed above. Where no internally-generated intangible asset can be recognized, development expenditure is recognized in profit
or loss in the period in which it is incurred.
Subsequent to initial recognition, internally-generated
intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible
assets that are acquired separately.
Gains and losses arising from derecognition
of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are
recognized in profit or loss when the asset is derecognized.
The Company identifies operating segments
and prepares segment information based on the regular internal financial information reported to the Chief Executive Officer and
executive directors, who are the Company’s chief operating decision maker, for their decisions about the allocation of resources
to the Company’s business components and for their review of the performance of those components.
Business segment
The Company operates principally in the
manufacturing and sale of medium to high-end ceramic tiles. The Chief Executive Officer and executive directors regularly review
the Company’s business as one business segment.
Geographical segment
The business of the Company is engaged entirely
in the PRC. The Chief Executive Officer and executive directors regularly review the Company’s business as one geographical
segment.
|
(a)
|
A person, or a close member of that person’s family, is related to the Company if that person:
|
|
(i)
|
has control or joint control over the Company;
|
|
(ii)
|
has significant influence over the Company; or
|
|
(iii)
|
is a member of the key management personnel of the Company or the Company’s parent.
|
|
(b)
|
An entity is related to the Company if any of the following conditions applies:
|
|
(iv)
|
The entity and the Company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
|
|
(v)
|
One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
|
|
(vi)
|
Both entities are joint ventures of the same third party.
|
|
(vii)
|
One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
|
|
(viii)
|
The entity is a post-employment benefit plan for the benefit of employees of either the Company or an entity related to the Company.
|
|
(ix)
|
The entity is controlled or jointly controlled by a person identified in (a).
|
|
(x)
|
A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
|
Close members of the family of a person
are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.
|
3.
|
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
|
|
3.1
|
Adoption of new or amended IFRSs
|
The following amendments to standards have
been adopted by the Company for the first time for the financial year beginning on 1 January 2019. The application of the
amendments to IFRSs in the current year has had no material impact on the Company's financial performance and positions for the
current and prior years and/or on the disclosures set out in these consolidated financial statements.
IFRS 16 Lease
IFRS 16 will result in almost all leases
being recognized on the statement of financial position, as the distinction between operating and finance leases is removed. Under
the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only
exceptions are short-term and low-value leases. The accounting for lessors will not be significantly changed. The standard will
affect primarily the accounting for Company’s operating leases.
Management has just commenced its assessment
and have not yet determined to what extent its commitments will result in the recognition of an asset and a liability for future
payments and how this will affect the Company’s profit and classification of cash flows.
The Company adopted IFRS 16 Leases retrospectively
from January 1, 2019. In accordance with the transitional provision under IFRS 16, the Company applied the simplified transition
approach, and all right-of-use assets were measured at the amount of the lease liabilities on adoption (adjusted for any prepaid
or accrued lease expenses). Comparative figures for the 2018 financial year have not been restated.
On adoption of IFRS 16, the Company
recognized lease liabilities in relation to leases which had previously been classified as “operating leases”
under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments,
discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average
lessee’s incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 5.75% (Note 22).
|
|
RMB’000
|
|
Operating lease commitments disclosed as at December 31, 2018
|
|
|
19,695
|
|
Discounted using weighted average incremental borrowing rate of 5.75%
|
|
|
15,496
|
|
Lease liabilities recognized as at January 1, 2019
|
|
|
19,380
|
|
All right-of-use assets were measured at
the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease
recognized in the consolidated statement of financial position as at December 31, 2018. The impact on transition of IFRS 16
is summarized as below:
|
|
January 1, 2019
|
|
|
|
RMB’000
|
|
Right-of-use assets
|
|
|
17,266
|
|
Lease liability
|
|
|
(19,380
|
)
|
Retained earnings
|
|
|
2,114
|
|
|
3.2
|
Accounting standards issued but not yet effective
|
At the date of authorization of these financial
statements, there was no new standards, amendments and interpretations to existing standards that were relevant to the Company
have been published by the IASB but are not yet effective, and have not been adopted by the Company.
|
4.
|
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
|
The preparation of the Company’s consolidated
financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about
these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or
liabilities affected in future periods.
Estimates and judgments are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed to
be reasonable under the circumstances.
The Company makes estimates and assumptions
concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key
sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed
below:
Useful lives and impairment assessment
of property, plant and equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual
depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis or
in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by
each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Investment properties are stated at cost
less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation
expenses recorded. Investment properties are evaluated for possible impairment on a specific asset basis or in groups of similar
assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group
of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written
down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Impairment loss recognized in respect
of property, plant and equipment
As of December 31, 2019, the net carrying
amount of property, plant and equipment was approximately RMB 35,000 (2018: RMB 46,000). No impairment loss was recognized against
the original carrying amount of property, plant and equipment for the year ended December 31, 2019. The impairment loss recognized
for the years ended December 31, 2018 and 2017 was RMB 75,907,000 and RMB 33,653,000, respectively. Determining whether property,
plant and equipment are impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such estimation
was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.
Impairment loss recognized in respect
of investment property
As of December 31, 2019, the net carrying
amount of investment property was nil (2018: nil). No impairment loss was recognized against the original carrying amount of investment
property for the year ended December 31, 2019. The impairment loss recognized for the years ended December 31, 2018 and
2017 was approximately RMB 4,858,000 and RMB 1,617,000, respectively. Determining whether investment property are impaired requires
an estimation of the recoverable amount of the investment property. Such estimation was based on certain assumptions, which are
subject to uncertainty and might materially differ from the actual results.
Impairment loss recognized in respect
of land use rights
As of December 31, 2019, the net carrying
amount of land use rights was nil (2018: nil). No impairment loss was recognized against the original carrying amount of land use
rights for the year ended December 31, 2019. The carrying amounts of land used rights were reclassified to right-of-use assets
to conform to IFRS 16 during the year ended December 31, 2019. The impairment loss recognized for the years ended December 31,
2018 and 2017 was RMB 4,256,000 and RMB 1,413,000, respectively. Determining whether land use rights are impaired requires an estimation
of the recoverable amount of the land use rights. Such estimation was based on certain assumptions, which are subject to uncertainty
and might materially differ from the actual results.
Impairment of goodwill
Determining whether goodwill is impaired
requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use
calculation requires the Company to estimate the future cash flows expected to arise from the cash-generating unit and a suitable
discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material impairment
loss may arise. No impairment was made on goodwill for the year ended December 31, 2019. The impairment made on goodwill for
the years ended December 31, 2018 and 2017 was nil.
Income tax
The Company has exposure to income taxes
in the PRC. Significant judgment is required in determining the provision for income taxes. There are certain transactions and
computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes
liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made. The carrying amounts of the Company’s income tax payable
as of December 31, 2019 and 2018 were nil.
Impairment of trade receivables
The Company’s management assesses
the collectability of trade receivables. This estimate is based on the credit history of the Company’s customers and the
current market conditions. Management assesses the collectability of trade receivables at the balance sheet dates and makes the
provision, if any. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in assessing
the ultimate realization of these receivables, including the current creditworthiness, past collection history of each customer
and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact the
carrying value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed.
The net carrying amounts of the Company’s trade receivables as of December 31, 2019 and 2018 were RMB 177,023,000 and
RMB 224,114,000, respectively.
Net realizable value of inventories
Net realizable value of inventories is the
management’s estimation of future selling price in the ordinary course of business, less estimated costs of completion and
selling expenses. These estimates are based on the current market condition and the historical experience of selling products of
a similar nature. It could change significantly as a result of various market factors. The net carrying amounts of the Company’s
inventories as of December 31, 2019 and 2018 were RMB 165,296,000 and RMB 127,346,000, respectively.
Share-based payment transaction
The Company measures the cost of equity-settled
transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating
fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on
the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model
including the expected life of the stock option, volatility and dividend yield and making assumptions about them. The assumptions
and models used for estimating fair value for share-based payment transactions are disclosed in Note 27.
|
5.
|
REVENUE AND OTHER INCOME
|
Revenue comprises the fair value of the
consideration received or receivable for the sale of goods. An analysis of the Company’s revenue and other income is as follows:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of goods
|
|
|
327,581
|
|
|
|
498,189
|
|
|
|
821,792
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
73
|
|
|
|
36
|
|
|
|
32
|
|
Foreign exchange gain
|
|
|
74
|
|
|
|
450
|
|
|
|
-
|
|
Consulting income
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
Rent deposit refund
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
96
|
|
|
|
-
|
|
|
|
-
|
|
Gain on disposal of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
Rental income
|
|
|
14,196
|
|
|
|
14,151
|
|
|
|
14,151
|
|
|
|
|
14,636
|
|
|
|
14,637
|
|
|
|
14,253
|
|
Finance costs comprise interest expense
on the Company’s bank borrowings:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Interest on lease liability
|
|
|
315
|
|
|
|
-
|
|
|
|
-
|
|
Interest on bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
7.
|
REALIZED AND UNREALIZED FAIR VALUE (LOSS)/GAIN ON DERIVATIVE FINANCIAL INSTRUMENTS
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Realized and unrealized fair value (loss)/gain on derivative financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The Company’s loss before taxation
is arrived at after charging:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Cost of inventories recognized as expense(1)
|
|
|
246,255
|
|
|
|
499,355
|
|
|
|
771,438
|
|
Depreciation expenses
|
|
|
12
|
|
|
|
11,500
|
|
|
|
15,371
|
|
Amortization of land use rights
|
|
|
-
|
|
|
|
108
|
|
|
|
143
|
|
Right-of-use asset depreciation charge
|
|
|
12,187
|
|
|
|
-
|
|
|
|
-
|
|
Auditors’ remuneration
|
|
|
|
|
|
|
|
|
|
|
|
|
– Audit fees
|
|
|
1,689
|
|
|
|
1,628
|
|
|
|
320
|
|
– Audit-related fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,689
|
|
|
|
1,628
|
|
|
|
320
|
|
Directors’ remuneration
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries and related cost
|
|
|
1,747
|
|
|
|
1,418
|
|
|
|
1,200
|
|
– retirement scheme contribution
|
|
|
16
|
|
|
|
16
|
|
|
|
9
|
|
– share-based payments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Key management personnel (other than directors)
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries and related cost
|
|
|
671
|
|
|
|
753
|
|
|
|
1,447
|
|
– retirement scheme contribution
|
|
|
20
|
|
|
|
24
|
|
|
|
23
|
|
– share-based payments
|
|
|
622
|
|
|
|
619
|
|
|
|
304
|
|
Research and development personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries and related cost
|
|
|
313
|
|
|
|
789
|
|
|
|
936
|
|
– retirement scheme contribution
|
|
|
45
|
|
|
|
78
|
|
|
|
102
|
|
Other personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries and related cost
|
|
|
26,001
|
|
|
|
33,023
|
|
|
|
55,526
|
|
– retirement scheme contribution
|
|
|
3,867
|
|
|
|
5,526
|
|
|
|
5,526
|
|
Total employee benefit expenses
|
|
|
33,302
|
|
|
|
42,246
|
|
|
|
68,025
|
|
(1) Cost
of inventories recognized as expense included staff costs of RMB 19,867,000, RMB 27,087,000 and RMB 48,857,000, retirement scheme
contribution of RMB 2,734,411, RMB 4,135,000 and RMB 6,984,000, depreciation and amortization expense of RMB nil, RMB 8,457,000
and RMB 11,203,000, right-of-use asset depreciation/operating lease charges of RMB 12,503,000, RMB 13,902,000 and RMB 13,902,000,
and (reversal of ) / (reversal) write-down of inventories of RMB (56,766,000), RMB 55,973,000 and RMB (2,733,000) for the years
ended December 31, 2019, 2018, and 2017, respectively, which amounts are also included in the respective total amounts disclosed
separately for each of these types of expenses.
|
9.
|
INCOME TAX EXPENSE/(CREDIT)
|
|
|
For the years ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Current Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC Income Tax
|
|
|
29
|
|
|
|
-
|
|
|
|
5,185
|
|
Reversal of income tax refundable
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,185
|
|
Deferred tax expense
|
|
|
-
|
|
|
|
209
|
|
|
|
4,556
|
|
|
|
|
56
|
|
|
|
209
|
|
|
|
9,741
|
|
Reconciliation between income tax expense (credit)
and (loss) profit before taxation at applicable tax rates is as follows:
|
|
For the years ended December 31,
|
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
|
2017
RMB’000
|
|
Loss before taxation
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
|
|
(78,285
|
)
|
Tax calculated at a tax rate of 25%
|
|
|
(2,361
|
)
|
|
|
(104,616
|
)
|
|
|
(19,571
|
)
|
Tax effect on non-deductible expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tax effect on different tax rates of group entities operating in other jurisdictions
|
|
|
842
|
|
|
|
588
|
|
|
|
218
|
|
Impairment losses on property, plant and equipment, and investment property that are not tax deductible
|
|
|
-
|
|
|
|
20,191
|
|
|
|
8,817
|
|
Impairment losses on land use right that are not tax deductible
|
|
|
-
|
|
|
|
1,064
|
|
|
|
353
|
|
Inventory provision (reversal) that are not tax deductible (taxable)
|
|
|
(14,192
|
)
|
|
|
13,993
|
|
|
|
(683
|
)
|
Bad debts expense that are not tax deductible
|
|
|
17,165
|
|
|
|
79,057
|
|
|
|
6,232
|
|
Depreciation and amortization adjustments that are not tax deductible
|
|
|
(18,050
|
)
|
|
|
(15,890
|
)
|
|
|
(15,617
|
)
|
Other
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
Income tax refund that are not expected to receive
|
|
|
-
|
|
|
|
-
|
|
|
|
24,270
|
|
Net operating losses not recognized to deferred tax assets
|
|
|
16,623
|
|
|
|
5,822
|
|
|
|
5,722
|
|
Tax per financial statements
|
|
|
56
|
|
|
|
209
|
|
|
|
9,741
|
|
British Virgin Islands Profits Tax
The Company has not been subject to any taxation in
this jurisdiction for the years ended December 31, 2019, 2018 and 2017.
Hong Kong Profits Tax
The subsidiary in Hong Kong is subject to
tax charged on Hong Kong sourced income with a statutory tax rate of 16.5% for the years ended December 31, 2019, 2018 and
2017. No Hong Kong profits tax has been provided as the Company has no assessable profit arising in Hong Kong for the years ended
December 31, 2019, 2018 and 2017.
PRC Income Tax
The subsidiaries in the PRC are subject
to the enterprise income tax in accordance with “PRC Enterprise Income Tax Law” (“EIT Law”), and the applicable
income tax rate for the years ended December 31, 2019, 2018 and 2017 is 25%.
Under the prevailing EIT Law and its relevant
regulations, any dividends paid by the Company’s PRC subsidiaries to an overseas parent made out of profits earned after
January 1, 2008 to non-PRC corporate residents are subject to a 10% PRC dividend withholding tax, unless reduced by tax treaties
or arrangements. In addition, under the Sino-Hong Kong Double Tax Arrangement and its relevant regulations, a qualified Hong Kong
tax resident will be liable for withholding tax at the rate of 5% for dividend income derived from the PRC if the Hong Kong tax
resident is the “beneficial owner” and holds 25% or more of the equity interests of the PRC company. Deferred tax liabilities
have been provided for based on the expected dividends to be distributed from these subsidiaries in the foreseeable future in respect
of the profits generated since 1 January 2008.
Dividends withholding tax represents tax
charged/to be charged by the PRC tax authority on dividends distributed or intended to be distributed by the Company’s subsidiaries
in Mainland China during the years.
Deferred tax (assets)/liabilities recognized
in the consolidated statements of financial position and the movements during the years are as follows:
|
|
Dividend withholding
|
|
|
Inventory
|
|
|
Impairment
|
|
|
Bad debt
|
|
|
Net operating
|
|
|
Depreciation and
|
|
|
|
|
Deferred tax arising
from:
|
|
tax
|
|
|
provision
|
|
|
loss
|
|
|
allowance
|
|
|
loss
|
|
|
amortization
|
|
|
Total
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
As of January 1, 2017
|
|
|
-
|
|
|
|
(4,765
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,765
|
)
|
Charges/(credits)
for the year
|
|
|
-
|
|
|
|
4,765
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
4,556
|
|
As of December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
(209
|
)
|
Charges/(credits)
for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
209
|
|
|
|
209
|
|
As of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Charges/(credits)
for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hengda and Hengdali, the Company’s
PRC subsidiaries, have cumulative undistributed earnings of RMB 267,193,000, RMB 329,503,000 and RMB 380,109,000, as of December 31,
2019, 2018 and 2017, which are included in consolidated retained earnings. Deferred tax liabilities of RMB nil has been recognized
to the extent of distributable profits earned by Hengda as of December 31, 2019, 2018and 2017. No provision has been made
for deferred taxes related to future repatriation of the remaining earnings, as the Company controls the dividend policy of these
PRC subsidiaries and it has been determined that it is probable that these profits will not be distributed in the foreseeable future.
If the Company were to distribute these cumulated earnings in the foreseeable future, the deferred tax liabilities of RMB 13,360,000,
RMB 16,475,000 and RMB 19,005,000 would be recognized as of December 31, 2019, 2018 and 2017, respectively.
For the purpose of presentation in the consolidated
statements of financial position, certain deferred tax assets and liabilities have been offset. The following is the analysis of
the deferred tax balances in the consolidated statements of financial position for financial presentation purposes:
|
|
As of December 31,
|
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Loss attributable to holders of ordinary shares (RMB’000):
|
|
|
(9,501
|
)
|
|
|
(418,674
|
)
|
|
|
(88,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding used in computing basic and diluted (loss)/earnings per share
|
|
|
6,075,667
|
|
|
|
4,493,036
|
|
|
|
3,339,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic (RMB)
|
|
|
(1.56
|
)
|
|
|
(93.18
|
)
|
|
|
(26.36
|
)
|
Loss per share - diluted (RMB)
|
|
|
(1.56
|
)
|
|
|
(93.18
|
)
|
|
|
(26.36
|
)
|
Warrants to purchase common stock are not
included in the diluted loss per share calculations when their effect is antidilutive. For the year ended December 31, 2019,
about 1,669,437 of potential common stock related to outstanding warrants and stock options were excluded from the calculation
of diluted net loss per share as such shares are antidilutive when there is a loss. There were 728,571 and 178,571 shares for the
years ended December 31, 2018 and 2017.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Carrying amount
|
|
|
3,735
|
|
|
|
3,735
|
|
Accumulated impairment losses
|
|
|
(3,735
|
)
|
|
|
(3,735
|
)
|
|
|
|
-
|
|
|
|
-
|
|
On January 8, 2010, the Company consummated
the acquisition of all voting equity interests of Hengdali (which is considered to be a CGU), and the excess of the consideration
transferred over the fair value of the identifiable net assets acquired is recorded as goodwill.
The Company performs a goodwill impairment
test in year 2015 and was fully impaired at that time. At the end of the reporting period, the Company assessed the recoverable
amount of goodwill, and determined that no further impairment of goodwill was required for the 2016 year-end because it was written
down to zero in 2015. The impairment loss on goodwill recognized during the year ended December 31, 2015 was RMB 3,735,000.
|
12.
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
Buildings
RMB'000
|
|
|
Plant and
machinery
RMB'000
|
|
|
Motor
vehicles
RMB'000
|
|
|
Office
equipment
RMB'000
|
|
|
Total
RMB'000
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2018
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,886
|
|
|
|
1,101,783
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31,2018
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,886
|
|
|
|
1,101,783
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31, 2019
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,886
|
|
|
|
1,101,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2018
|
|
|
48,034
|
|
|
|
339,328
|
|
|
|
3,720
|
|
|
|
1,518
|
|
|
|
392,600
|
|
Depreciation charge
|
|
|
1,263
|
|
|
|
10,054
|
|
|
|
28
|
|
|
|
18
|
|
|
|
11,363
|
|
At December 31, 2018
|
|
|
49,297
|
|
|
|
349,382
|
|
|
|
3,748
|
|
|
|
1,536
|
|
|
|
403,963
|
|
Depreciation charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
At December 31, 2019
|
|
|
49,297
|
|
|
|
349,382
|
|
|
|
3,748
|
|
|
|
1,547
|
|
|
|
403,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January1, 2018
|
|
|
260,068
|
|
|
|
361,062
|
|
|
|
446
|
|
|
|
291
|
|
|
|
621,867
|
|
Impairment losses recognized in profit or loss
|
|
|
40,265
|
|
|
|
35,598
|
|
|
|
31
|
|
|
|
13
|
|
|
|
75,907
|
|
At December 31, 2018
|
|
|
300,333
|
|
|
|
396,660
|
|
|
|
477
|
|
|
|
304
|
|
|
|
697,774
|
|
Impairment losses recognized in profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31, 2019
|
|
|
300,333
|
|
|
|
396,660
|
|
|
|
477
|
|
|
|
304
|
|
|
|
697,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
At December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
35
|
|
All property, plant and equipment held by
the Company are located in the PRC. The Company’s buildings are situated on land under medium-term land use rights.
For the buildings owned collectively
by the Company and other three unrelated companies, the cost of buildings are stated according to the amounts paid by the
Company for its part of buildings, which represent the Company’s interests in the buildings. Buildings are depreciated
over their expected useful lives of 40 years. These buildings’ cost was RMB 2,913,000, and accumulated depreciation of
RMB 1,226,000 and RMB 1,226,000 as of December 31, 2019 and 2018, respectively, and an impairment allocation of RMB
1,687,000 and RMB 1,687,000 as of December 31, 2019 and 2018, respectively. No property, plant and equipment was
pledged to secure the Company interest-bearing bank borrowings at December 31, 2019 and 2018.
At the end of the reporting period, the
Company assessed the recoverable amount of property, plant and equipment, and determined that carrying amount was impaired by RMB
nil (2018: RMB 75,907,000).
Loss (gain) on disposal of property, plant
and equipment in 2019, 2018 and 2017 was nil, nil, and RMB 70,000 gain, respectively.
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Cost
|
|
|
|
|
|
|
|
|
At December 31, 2019 and 2018
|
|
|
37,253
|
|
|
|
37,253
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
As of beginning of the year
|
|
|
(1,886
|
)
|
|
|
(1,750
|
)
|
Depreciation for the year
|
|
|
-
|
|
|
|
(136
|
)
|
As of end of the year
|
|
|
(1,886
|
)
|
|
|
(1,886
|
)
|
|
|
|
|
|
|
|
|
|
Impairment for the year
|
|
|
|
|
|
|
|
|
As of beginning of the year
|
|
|
(35,367
|
)
|
|
|
(30,509
|
)
|
Impairment losses recognized in profit or loss transferred from property, plant and equipment
|
|
|
-
|
|
|
|
(4,858
|
)
|
As of end of the year
|
|
|
(35,367
|
)
|
|
|
(35,367
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
At December 31, 2019 and 2018
|
|
|
-
|
|
|
|
-
|
|
The fair value of this investment property,
which is the estimation of the depreciated replacement cost, as of December 31, 2019 was RMB 35,400,000.
At the end of the reporting period, the
Company assessed the recoverable amount of investment property, and determined that carrying amount was impaired by RMB nil (2018:
4,858,000).
The Company’s land use rights are
under medium-term leases in the PRC, and are analyzed for reporting purposes as follows:
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Cost
|
|
|
|
|
|
|
|
|
At the beginning of the year
|
|
|
32,619
|
|
|
|
32,619
|
|
Impact on initial application of
HKFRS 16 (Note 2.6)
|
|
|
(32,619
|
)
|
|
|
-
|
|
At end of the year
|
|
|
-
|
|
|
|
32,619
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
(4,649
|
)
|
|
|
(4,541
|
)
|
Amortization
|
|
|
-
|
|
|
|
(108
|
)
|
Impact on initial application of
HKFRS 16 (Note 2.6)
|
|
|
4,649
|
|
|
|
-
|
|
At end of the year
|
|
|
-
|
|
|
|
(4,649
|
)
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
(27,970
|
)
|
|
|
(23,714
|
)
|
Impairment for the year
|
|
|
-
|
|
|
|
(4,256
|
)
|
Impact on initial application of
HKFRS 16 (Note 2.6)
|
|
|
27,970
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
At end of the year
|
|
|
-
|
|
|
|
(27,970
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
At December 31, 2019 and 2018
|
|
|
-
|
|
|
|
-
|
|
No land use rights of the Company were pledged
to the banks as securities for the Company’s interest-bearing bank borrowings at December 31, 2019 and 2018. At the
end of the reporting period, the Company assessed the recoverable amount of land use right, and determined that carrying amount
was impaired by RMB nil (2018: 4,256,000). The carrying amounts of land used rights were reclassified to right-of-use assets to
conform to IFRS 16.
|
15.
|
LONG-TERM PREPAID EXPENSES
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Prepaid advertising fees
|
|
|
-
|
|
|
|
-
|
|
The amount represents the advertising fees
paid in advance covering periods over one year.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Raw materials
|
|
|
14,776
|
|
|
|
15,738
|
|
Work in progress
|
|
|
1,103
|
|
|
|
1,526
|
|
Finished goods
|
|
|
149,417
|
|
|
|
110,082
|
|
|
|
|
165,296
|
|
|
|
127,346
|
|
The analysis of the amount of inventories
recognized as an expense and included in profit or loss is as follows:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Carrying amount of inventories sold
|
|
|
303,021
|
|
|
|
443,382
|
|
|
|
774,171
|
|
Write down (reversal) of inventories (included in cost of sales)
|
|
|
(56,766)
|
|
|
|
55,973
|
|
|
|
(2,733)
|
|
|
|
|
246,255
|
|
|
|
499,355
|
|
|
|
771,438
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade receivables
|
|
|
672,533
|
|
|
|
650,963
|
|
Less: provision for bad debt allowance
|
|
|
(495,510
|
)
|
|
|
(426,849
|
)
|
|
|
|
177,023
|
|
|
|
224,114
|
|
The Company’s trade receivables are
denominated in Renminbi and non-interest bearing. In 2011, the credit period granted to distributors was generally for a period
within 90 days. Since the end of 2012, the Company had extended the collection period to 150 days to address funding pressures
of its distributors. Other customers were granted a credit period of 90 days in the year ended December 31, 2013, and extended
to 120 days in the year ended December 2016 and 2017. As of December 31, 2019 and 2018, the Company accrued RMB 495,510,000
and RMB 426,849,000, respectively, as a provision for bad debt related to the amount of outstanding trade receivables that did
not conform with the Company’s credit policy.
All of the trade receivables are expected
to be recovered within one year. An aging analysis of the Company's trade receivables, based on the invoice date, is as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within 90 days
|
|
|
35,846
|
|
|
|
57,785
|
|
Between 3 and 6 months
|
|
|
72,241
|
|
|
|
69,037
|
|
More than 6 months
|
|
|
68,936
|
|
|
|
97,292
|
|
|
|
|
177,023
|
|
|
|
224,114
|
|
An aging analysis of trade receivables that
were neither past due nor impaired or past due but not impaired, is as follows:
|
|
|
|
|
Past due but not impaired
|
|
|
|
|
|
|
Neither past due nor
impaired
|
|
|
Less than
30 days
|
|
|
31 to 120 days
|
|
|
Over 120
days
|
|
|
Sub-total
|
|
|
Total
|
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
|
RMB'000
|
|
December 31, 2018
|
|
|
126,823
|
|
|
|
97,291
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
224,114
|
|
December 31, 2019
|
|
|
141,177
|
|
|
|
35,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,023
|
|
Receivables that were neither past due nor
impaired relate to a large number of customers for whom there was no recent history of default. All amounts are short-term. The
Company does not hold any collateral over these receivables.
The net carrying value of trade receivables
is considered a reasonable approximation of fair value. As of December 31, 2019, the Company is exposed to certain credit
risks as 13% and 42% of the total trade receivables were due from the Company's largest and the five largest customers, respectively.
As of December 31, 2018, the Company is exposed to certain credit risks as 30% and 97% of the total trade receivables were
due from the Company's largest and the five largest customers, respectively.
|
18.
|
OTHER RECEIVABLES AND PREPAYMENTS
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Prepayments for advertising and legal fee
|
|
|
2,036
|
|
|
|
4,673
|
|
|
|
|
2,036
|
|
|
|
4,673
|
|
All of the other receivables and prepayments
are expected to be recovered or recognized as expense within one year. The net carrying value of these balances is considered a
reasonable approximation of fair value.
|
19.
|
CASH AND BANK BALANCES
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Cash on hand
|
|
|
18
|
|
|
|
35
|
|
Cash at banks
|
|
|
8,194
|
|
|
|
8,981
|
|
Cash and bank balances
|
|
|
8,212
|
|
|
|
9,016
|
|
Cash and bank balances are denominated in
the following currencies:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Renminbi
|
|
|
784
|
|
|
|
203
|
|
Hong Kong dollars
|
|
|
6
|
|
|
|
6
|
|
US dollars
|
|
|
7,422
|
|
|
|
8,807
|
|
|
|
|
8,212
|
|
|
|
9,016
|
|
Bank balances denominated in Renminbi are
deposited with banks in the PRC and are not freely convertible to foreign currencies. The conversion of these RMB denominated balances
into foreign currencies is subject to the foreign exchange control rules and regulations promulgated by the PRC Government.
Bank balances denominated in US dollars
are mainly held in bank accounts in Hong Kong and the United States of America.
Cash at banks and bank deposits comprise
cash held by the Company and short-term bank deposits with an original maturity of three months or less. The deposits carry interest
at prevailing market rates.
As of December 31, 2019, the Company
has restricted cash of RMB 2,785,000 (2018: 1,719,000), of which nil (2018: nil) was used as collateral for the Company’s
bank borrowings, and nil was used as collateral for the Company’s financial derivatives (2018: nil). They were temporarily
not available for general use by the Company.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
22,577
|
|
|
|
24,329
|
|
|
|
|
|
|
|
|
|
|
Trade payables are denominated in Renminbi,
non-interest bearing and generally settled within 120-day terms. All of the trade payables are expected to be settled within one
year. The carrying value of trade payables is considered to be a reasonable approximation of fair value.
|
21.
|
ACCRUED LIABILITIES AND OTHER PAYABLES
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Deposits received from distributors
|
|
|
16,200
|
|
|
|
16,200
|
|
Accrued salary
|
|
|
1,208
|
|
|
|
2,331
|
|
Accrued rent, electricity and water
|
|
|
1,563
|
|
|
|
2,500
|
|
Accrued other taxes
|
|
|
1,027
|
|
|
|
1,541
|
|
Others
|
|
|
3,344
|
|
|
|
3,322
|
|
|
|
|
23,342
|
|
|
|
25,894
|
|
Accrued liabilities and other payables are
denominated in the following currencies:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
‘000
|
|
|
‘000
|
|
In Renminbi
|
|
|
23,342
|
|
|
|
25,894
|
|
In US dollars
|
|
|
35
|
|
|
|
35
|
|
Deposits received represent deposits from
the Company’s distributors. The Company usually requests a deposit from RMB 400,000 to RMB 1,000,000 from new distributors
upon signing a distributorship agreement as security for the performance of their obligations under the distributorship agreement.
Accrued liabilities consist mainly of accrued
rental, wages and utility expenses.
The carrying value of accrued liabilities
and other payables is considered to be a reasonable approximation of fair value.
22.
|
RIGHT-OF-USE ASSETS AND LEASES LIABILITIES
|
|
(a)
|
Amounts recognized in the consolidated statement of financial position
|
Except recognition of lease liabilities,
the carrying amounts of right-of-use assets for lease are as below:
Net book amount at January 1, 2019
|
RMB17,266
|
|
|
Net book amount at December 31, 2019
|
RMB5,078
|
(b) Amounts recognized in the consolidated
income statement
The consolidated income statement shows
the following amounts relating to leases:
|
|
Year ended December 31, 2019
|
|
Depreciation charge of right-of-use assets
|
|
|
12,187
|
|
Interest expense
|
|
|
315
|
|
The total cash outflow in financing activities
for leases during the year ended December 31, 2019 was RMB 13,902,000.
|
23.
|
INTEREST- BEARING BANK BORROWINGS (SECURED)
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Short-term bank borrowings - repayable within one year – shown under current liabilities
|
|
|
-
|
|
|
|
-
|
|
Long-term bank borrowings - repayable more than one year but not more than 5 years - shown under non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Bank borrowings are denominated in the following
currencies:
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Renminbi
|
|
|
-
|
|
|
|
-
|
|
US dollars
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
The exposure of the Company’s loans
is as follows:
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
Effective
interest rates %
|
|
|
|
RMB’000
|
|
|
|
Effective
interest rates %
|
|
|
|
RMB’000
|
|
Fixed rate borrowings:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Variable rate borrowings:
|
|
|
-%
|
|
|
|
-
|
|
|
|
-%
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
All of the Company’s bank borrowings
are carried at amortized cost. The carrying values of the Company’s bank borrowings approximate their fair value.
The Company’s banking facilities were
pledged by bank deposits, the Company’s buildings and land use rights, land use rights of third parties, and guaranteed by
related parties, a subsidiary of the Company and third parties. As of December 31, 2019 and 2018, such banking facilities
were utilized to the extent of nil.
As of the end of the reporting periods, the Company
has the following undrawn bank borrowing facilities:
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
RMB’000
|
|
|
|
RMB’000
|
|
Variable-rate - expiring within one year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
|
|
|
US$
|
|
|
Number
|
|
|
US$
|
|
|
|
of shares
|
|
|
‘000
|
|
|
of shares
|
|
|
‘000
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1 and December 31
|
|
|
51,000,000
|
|
|
|
400
|
|
|
|
51,000,000
|
|
|
|
400
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
|
|
|
RMB
|
|
|
Number
|
|
|
RMB
|
|
|
|
of shares
|
|
|
‘000
|
|
|
of shares
|
|
|
‘000
|
|
Issued:
|
|
|
7,306,985
|
|
|
|
397
|
|
|
|
5,678,703
|
|
|
|
306
|
|
Outstanding and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1
|
|
|
5,678,703
|
|
|
|
306
|
|
|
|
3,851,485
|
|
|
|
206
|
|
Issuance of new shares
|
|
|
1,200,000
|
|
|
|
67
|
|
|
|
1,770,299
|
|
|
|
97
|
|
Warrants exercised into shares
|
|
|
333,420
|
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
Equity compensation
|
|
|
94,862
|
|
|
|
5
|
|
|
|
56,919
|
|
|
|
3
|
|
At December 31
|
|
|
7,306,985
|
|
|
|
397
|
(2)
|
|
|
5,678,703
|
|
|
|
306
|
(1)
|
(1) Equivalent to US$45,000
(2) Equivalent to US$58,000
On November 21, 2007, CHAC consummated
its initial public offering, or IPO, of 12,800,000 units, including 800,000 units subject to an over-allotment option, with each
unit consisting of one ordinary share, US$0.001 par value per share, and one warrant to purchase one ordinary share at an exercise
price of US$7.50 per share. The units were sold at an offering price of US$10.00 per unit, generating total gross proceeds of US$128,000,000.
Simultaneously with the consummation of the IPO, CHAC consummated the private sale of 2,750,000 warrants to CHAC’s founders
at a price of US$1.00 per warrant, generating total proceeds of US$2,750,000. CHAC’s founders had 3,200,000 ordinary shares
as founding shares.
All ordinary shares are equally eligible
to receive dividends and represent one vote at shareholders’ meetings of the Company.
Each warrant entitled the holder to purchase
shares at US$7.50 per share, subject to adjustment in the event of stock dividends and splits, reclassifications, combinations
and similar events for a period commencing on the later of: (a) completion of the business combination and (b) one year
from the closing date of the IPO, and ending November 16, 2012. On November 16, 2012, all of the share purchase warrants
expired and ceased to trade.
On November 20, 2009, pursuant to the
acquisition agreement, China Ceramics acquired all of the issued and outstanding shares of Success Winner held by Mr. Wong
Kung Tok in exchange for US$10.00 and 5,743,320 shares of China Ceramics. In addition, 8,185,763 shares of China Ceramics were
placed in escrow (the “Contingent Shares”) and for release to Mr. Wong Kung Tok in the event certain earnings
and stock price thresholds are achieved. Of the Contingent Shares, up to 5,185,763 Contingent Shares could have been released based
on achieving growth in either net earnings before tax or net earnings after tax, following the completion of an annual audit. Additionally,
3,000,000 Contingent Shares could have been released if China Ceramics shares closed at or above certain share price targets for
any twenty trading days within a thirty trading day period prior to April 30, 2012. The Contingent Shares were to be released
without regard to continued employment and were only contingent on future earnings and the stock price of China Ceramics. On May 24,
2010, the Company issued 1,214,127 shares to Mr. Wong Kung Tok based on the audited earnings before tax result for the fiscal
year 2009. On April 7, 2011, the Company issued 1,794,800 shares to Mr. Wong Kung Tok based on the audited earnings before
tax result for the fiscal year 2010. On April 3, 2012, the Company issued 2,176,836 shares to Mr. Wong Kung Tok based
on the audited earnings before tax result for the fiscal year 2011. No further Contingent Shares may be issued to Mr. Wong
Kung Tok. The issuance of the Contingent Shares is accounted for as a stock dividend.
The share price targets for the issuance
of the additional 3,000,000 Contingent Shares were not met by April 30, 2012.
Also, concurrent with the Success Winner
Acquisition, the Company purchased an aggregate of 11,193,149 ordinary shares from the public stockholders for an aggregate purchase
price of approximately RMB 752.2 million in transactions intended to assure the successful completion of the business combination.
In connection with the closing of the Success Winner Acquisition, the CHAC’s founders forfeited 1,600,000 of their founders’
shares to CHAC for cancellation.
On May 25, 2010, the Company purchased
996,051 public warrants from four warrant holders (all managed by a single entity) at a price of US$1.00 per warrant in a privately
negotiated transaction. The total amount paid to purchase the public warrants was US$996,051 (equivalent to RMB 6,803,000) and
has been deducted from shareholders’ equity.
The Company initiated an exchange offer
(the “Offer”) pursuant to which holders of all 14,553,949 of the Company’s outstanding warrants (the “Warrants”)
had the opportunity to acquire the Company’s shares through a warrant for share exchange. The Company issued one share for
every four warrants tendered. On September 1, 2010, pursuant to the terms of the tender offer, 11,779,649 warrants were exchanged
for 2,944,904 shares, which are freely tradable.
On November 24, 2010, the Company closed
an underwritten public offering of 3,350,000 shares at a price of US$7.75 per share for gross proceed of approximately RMB 172.7
million. The total net proceeds of the offering to the Company, after deduction of underwriters’ commissions and discounts
and estimated transaction expenses, were approximately RMB 159.6 million.
On February 4, 2016, we announced the
pricing of public offering of its shares (and common stock equivalents) with total gross proceeds of approximately $900,000 (the
“Offering”). The net proceeds to the Company from this offering, before deducting the placement agent’s fees
and expenses, were approximately $785,000.
In connection with the Offering, the Company
issued 1,428,571 shares at the price of $0.63 per share, with each share coupled with a Class A Warrant (1,428,571 Class A
Warrants in the aggregate) to purchase one share and a Class B Warrant (1,428,571 Class B Warrants in the aggregate)
to purchase one share. The shares, the Class A Warrants and the Class B Warrants were sold as units, but were issued
separately. The Class A Warrants have an exercise price of $0.63 per share and the Class B Warrants have an exercise
price of $0.78 per share. The Class A Warrants are exercisable on or after the date of issuance and will terminate on the
six-month anniversary of the date of issuance. The Class B Warrants are exercisable on or after the date of issuance and will
terminate on the five-year anniversary of the date of issuance.
Dawson James Securities, Inc. acted
as the Company’s exclusive placement agent, on a best efforts basis, in connection with the Offering. Pursuant to the terms
and provisions of the Placement Agency Agreement by and between the Company and the Placement Agent, dated as of February 3,
2016 (the “PAA”), the Company paid the Placement Agent a cash placement fee equal to 8% of the gross proceeds of the
Offering, or $71,999, plus a non-accountable expense allowance equal to $25,000. The Placement Agent also received five-year warrants
(the “Compensation Warrants”) to purchase up to a number of shares equal to 8% of the aggregate number of shares sold
in the Offering, or 114,286 shares. The Compensation Warrants have substantially the same terms as the Class B Warrants in
the Offering, except that such Compensation Warrants have an exercise price of $0.78 (125% of the public offering price per share)
and terminate on the five year anniversary of the effective date of this offering.
Effective as of June 28, 2016,
the Company implemented a reverse stock split of its ordinary shares. The new CUSIP number for the Company's common stock
following the reverse split is G2113X134. On May 23, 2016, the Company’s Board of Directors approved a
one-for-eight reverse stock split intended to increase the per share trading price of the Company's outstanding ordinary
shares in order to comply with the minimum bid price requirement of $1.00 per share for continued listing on the NASDAQ Stock
Market. In order to maintain the Company's listing on the NASDAQ Capital Market, the Company's common stock must have a
closing bid price of $1.00 or more for a minimum of ten consecutive trading days by September 19, 2016. The reverse
stock split reduced the number of outstanding ordinary shares of the Company from approximately 21.9 million shares to
approximately 2.7 million shares and the par value per share will increase from $0.001 to $0.008. In lieu of issuing
fractional shares, the Company rounded fractions of shares down to the nearest whole share. All outstanding stock options,
warrants and other rights to purchase the Company's ordinary shares was adjusted proportionately as a result of the reverse
stock split. The number of total authorized ordinary shares of the Company was not changed as a result of the reverse split.
The December 31, 2015 number of shares was retroactively restated to reflect the 8:1 reverse split made in June 28,
2016.
On April 3, 2017, the Company,
pursuant to a securities purchase agreement, between the Company and an institutional accredited investor, completed a registered
offering of US$631,579 principal amount of its 5% original issue discount convertible promissory note due January 3, 2018
for the purchase price of US$600,000. At its option, the holder of the Note may convert the Note into the right to acquire shares
of the Company at any time prior to the Maturity Date at the conversion price which is equal to 85% of the volume weighed average
price (VWAP) per share over the five (5) trading day period prior to each conversion of the Note, subject to $1.00 per share
floor price and other conversion limitations to ensure compliance with the Nasdaq Stock Exchange and other applicable laws, rules and
regulations. Right after the issuance of the convertible promissory note, from April 4, 2017 through May 23, 2017, the
investors converted this note into 369,626 common shares at the conversion price ranging from US$1.1828 – US$1.9355 per share.
On July 18, 2017, the Company completed
a private place for proceeds of US$861,595 by issuing 633,526 shares at US$1.36 per share.
From August to December 2017,
the Company issued aggregate of 27,394 shares to its Chief Financial Officer as stock compensation expense. The fair value of 27,394
shares was RMB 294,000.
On April 19, 2018, the Company entered
into a securities purchase agreement with certain individual investors relating to a registered direct offering, issuance and sale
of an aggregate of 770,299 of its shares, at a purchase price of US$1.56 per share. The net proceeds to the Company from the Offering
were RMB 7,952,000 (US$1.2 million). The Offering closed on April 23, 2018. Proceeds from the Offering is used for working
capital and general corporate purposes. There were no discounts or brokerage fees associated with this Offering.
On November 29,
2018, the Company announced and on December 4, 2018, the Company closed a public offering of its common shares (and common
stock warrants) with net proceeds of RMB 7,332,000 (US$1.07 million). The gross proceeds was RMB 8,732,000 (US$1.27 million) and
related commission and legal expense was RMB 1,400,000 (US$203,600). The Company intends to use the net proceeds from the offering
to fund inventory, distribution expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital
purposes.
In connection with
the Offering, the Company issued 1,000,000 common shares at the price of $1.27 per share, with each common share coupled with a
warrant (500,000 warrants in the aggregate) to purchase one common share. The common shares and the warrants were sold as units,
but are immediately separable and will be issued separately. The warrants have an exercise price of $1.27 per share. The warrants
will be exercisable on or after the date of issuance and will terminate on the five-year anniversary of the date of issuance. In
January and February 2019, the investors exercised 333,420 shares of warrants.
In connection with
the Offering, the Company executed a Placement Agency Agreement, to pay the Placement Agent a cash placement fee equal to 8% of
the gross proceeds of the Offering, plus road show, diligence, legal and other expenses of the Placement Agent of $45,000. The
Placement Agent also receive five-year warrants to purchase up to 50,000 common shares, which such Compensation Warrants will have
substantially the same terms as the warrants sold in the Offering, except that such Compensation Warrants will have an exercise
price of $1.5875 per share or 125% of the public offering price and will terminate on the five year anniversary of the effective
date of this offering.
The total fair value of the warrants
granted to investors and placement agent is RMB 4,955,000. The fair values of warrants granted were determined using a
variation of the Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive plans,
such as the vesting period. The following principal assumptions were used in the valuation:
Grant date
|
|
|
December 4, 2018
|
|
Share price at date of grant
|
|
|
US$
|
|
|
|
1.18
|
|
Exercise price at date of grant (investors and placement agent, respectively)
|
|
|
US$
|
|
|
|
1.27 & US$ 1.5875
|
|
Volatility
|
|
|
|
|
|
|
168
|
%
|
Warrant life
|
|
|
|
|
|
|
5 years
|
|
Dividend yield
|
|
|
|
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
2.63
|
%
|
Fair value at grant date
|
|
|
US$
|
|
|
|
1.45
|
|
On December 16,
2019, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company
of 1,200,000 common shares, at a purchase price of $0.75 per share. Concurrently with the sale of the Common Shares, the Company
also sold warrants to purchase 1,200,000 common shares. The Company sold the Common Shares and Warrants for aggregate gross proceeds
of $900,000 (the “Offering”). Subject to certain beneficial ownership limitations, the five-year Warrants will be initially
exercisable on the six-month anniversary of the issuance date at an exercise price equal to $0.82 per share, subject to adjustments
as provided under the terms of the Warrants, and will terminate on the five-year anniversary of the initial exercise date of the
Warrants. The closing of the sales of these securities under the Purchase Agreement took place on December 18, 2019. The Company
received net proceeds from the transactions of approximately $748,000, after deducting certain fees due to the placement agent
and the Company’s estimated transaction expenses. The net proceeds received by the Company from the transactions will be
used for working capital and general corporate purposes.
Pursuant to the terms
and provisions of the engagement letter between the Company and the Placement Agent, the Company agreed to pay the Placement Agent
a cash placement fee equal to 8% of the gross proceeds of the Offering, or $72,000, plus other expenses of the Placement Agent
not to exceed $45,000. The Placement Agent also received five-year warrants to purchase up to a number of common shares equal to
5% of the aggregate number of shares sold in the Offering, including the warrant shares issuable upon exercise of the Warrants,
which such Compensation Warrants have substantially the same terms as the Warrants sold in the Offering, except that such Compensation
Warrants have an exercise price of $0.9375 per share and will terminate on the five year anniversary of the effective date of this
offering.
The total fair value of the warrants granted
to investors and placement agent is RMB 5,250,000. The fair values of warrants granted were determined using a variation of the
Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive plans, such as the vesting period.
The following principal assumptions were used in the valuation:
Grant date
|
|
|
December 18, 2019
|
|
Share price at date of grant
|
|
|
US$
|
|
|
|
0.68
|
|
Exercise price at date of grant (investors and placement agent, respectively)
|
|
|
US$
|
|
|
|
0.82 & US$ 0.9375
|
|
Volatility
|
|
|
|
|
|
|
141
|
%
|
Warrant life
|
|
|
|
|
|
|
5 years
|
|
Dividend yield
|
|
|
|
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
1.74
|
%
|
Average fair value at grant date
|
|
|
US$
|
|
|
|
0.598
|
|
Following is a summary of the warrant activity
for the years ended December 31, 2019 and 2018:
|
|
Number of
Warrants
|
|
|
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Outstanding at January 1, 2018
|
|
|
192,857
|
|
|
$
|
6.24
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2018
|
|
|
192,857
|
|
|
|
6.24
|
|
|
|
3.09
|
|
Granted
|
|
|
550,000
|
|
|
|
1.30
|
|
|
|
5
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
742,857
|
|
|
|
2.58
|
|
|
|
4.19
|
|
Exercisable at December 31, 2018
|
|
|
742,857
|
|
|
|
2.58
|
|
|
|
4.19
|
|
Granted
|
|
|
1,260,000
|
|
|
|
0.83
|
|
|
|
5
|
|
Exercised
|
|
|
(333,420
|
)
|
|
|
1.30
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
1,669,437
|
|
|
$
|
1.52
|
|
|
|
4.38
|
|
Exercisable at December 31, 2019
|
|
|
1,669,437
|
|
|
$
|
1.52
|
|
|
|
4.38
|
|
From January to December 31, 2018,
the Company issued aggregate of 56,919 shares to its Chief Financial Officer as stock compensation expense. The fair value of 56,919
shares was RMB 619,000.
From January to December 31, 2019,
the Company issued aggregate of 94,862 shares to its Chief Financial Officer as stock compensation expense. The fair value of 94,862
shares was RMB 627,000.
In accordance with the relevant laws and regulations
of the PRC, the Company’s PRC subsidiaries are required to transfer 10% of its profit after taxation prepared in accordance
with the accounting regulation of the PRC to the statutory reserve until the reserve balance reaches 50% of the respective registered
capital. Such reserve may be used to offset accumulated losses or increase the registered capital of these subsidiaries, subject
to the approval from the Board of Directors, and are not available for dividend distribution to the shareholders.
|
(b)
|
Currency translation reserve
|
The reserve comprises all foreign exchange differences
arising from the translation of the financial statements of foreign operations.
The merger reserve of the Company represents the difference
between the nominal value of the shares of the subsidiaries acquired in the Hengda Reorganization (Note 1) over the nominal value
of the shares of the Company issued in exchange thereof.
|
(d)
|
Share-based payment reserve
|
After the successful consummation of the reverse recapitalization,
Mr. Wong Kung Tok, the former sole shareholder of Success Winner, allotted a total of 1,521,528 China Ceramics’ ordinary
shares to two financial advisors for their financial advisory services related to the recapitalization activities. The shared based
payment reserve represents the fair value of these allotted shares measured based on the average market price over the service
periods.
The share-based payment reserve also represents the
equity-settled share options granted to employees (Note 27). The reserve is made up of the cumulative value of services received
from employees recorded over the vesting period commencing from the grant date of equity-settled share options, and is reduced
by the expiry or exercise of the share options.
The share-based payment reserve also represents the
shares issued to its senior officers as stock compensation expense.
|
(e)
|
Reverse recapitalization reserve
|
The reverse recapitalization reserve arises as a result
of the method of accounting for the Success Winner Acquisition. In accordance with IFRS, the acquisition has been accounted for
as a reverse recapitalization.
On July 31, 2014, Sound Treasure Limited, the Company’s
largest shareholder and an affiliate of the Company’s Chief Executive Officer, entered into a three party agreement (the
“Novation”) with the financial institution that originated the foreign currency transaction agreements and the Company.
Under the Novation, Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution)
and all existing and future liabilities arising under these agreements, and the Company was released from the liabilities arising
under the foreign currency transaction agreements. As a result, after July 31, 2014, the Company is no longer required to
fund any losses related to these agreements, and the Company will neither suffer any future liabilities arising under those agreements
nor enjoy any benefit arising under those agreements.
At the time that each of the foreign currency transaction
agreements was established with the financial institution, the Company was required to deposit monies with the financial institution.
RMB 6.7 million of a total of RMB 15.6 million in deposits were funded on behalf of the Company by Wong Kung Tok (who is the brother-in-law
of the Company’s Chief Executive Officer) at the request of the Chief Executive Officer, and were included in a total of
RMB 40.2 million in loans owed by the Company to Wong Kung Tok as of July 9, 2014. In connection with the Novation discussed
above, the Company’s Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok entered into an agreement with the
Company (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by the Company to Wong Kung
Tok as of the date of the Offset Agreement were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure
Limited; and in return the Company agreed to forego any claim to RMB 15.6 million in deposits under the foreign currency transaction
agreements which were transferred to Sound Treasure Limited pursuant to the Novation. As a result of these transactions, Sound
Treasure Limited released the Company from liabilities aggregating RMB 76.8 million and the Company transferred ownership of RMB
15.6 million in deposits held at the financial institution from the Company to Sound Treasure Limited. Except as disclosed above,
neither the Company’s Chief Executive Officer nor any affiliate of the Chief Executive Officer received any remuneration
for agreeing to assume the foreign currency transaction agreements. The material terms of the Novation and the Sound Treasure Agreement
were reviewed and approved by the Audit Committee of the Company. As a result of the Novation and the Offset Agreement, approximately
RMB 76.8 million in liabilities on the Company’s books were extinguished in 2014 and the Capital Reserve account was increased
by approximately RMB 61.3 million.
The Company paid a cash dividend of US$0.10
(equivalent to RMB 0.61) per share each on July 13, 2013 and January 14, 2014, respectively, to its shareholders which
totaled in aggregate US$4.1 million (equivalent to RMB 24.9 million gross, RMB 23.66 million net of 5% PRC withholding tax (Note
9)).
The Company paid a cash dividend of US$0.0125
(equivalent to RMB 0.08) per share each on July 14, 2014 and January 14, 2015, respectively, to its shareholders which
totaled in aggregate US$0.5 million (equivalent to RMB 3.2 million gross, RMB 3.01 million net of 5% PRC withholding tax (Note
9)).
|
27.
|
SHARE-BASED EMPLOYEE REMUNERATION
|
(a) Employee share scheme
The Board of Directors duly adopted
and approved the 2017 Equity Compensation Plan (“the 2017 Plan”) on May 21, 2017. The purpose of the 2017
Plan was to attract and retain outstanding individuals as Employees, Directors and Consultants of the Company and its
Subsidiaries, to recognize the contributions made to the Company and its Subsidiaries by Employees, Directors and
Consultants, and to provide such Employees, Directors and Consultants with additional incentive to expand and improve the
profits and achieve the objectives of the Company and its Subsidiaries, by providing such Employees, Directors and
Consultants with the opportunity to acquire or increase their proprietary interest in the Company through receipt of
Awards.
The Board, in its sole discretion, shall
determine the Employees, Consultants and Directors to whom, and the time or times at which Awards will be granted, the form and
amount of each Award, the expiration date of each Award, the time or times within which the Awards may be exercised, the cancellation
of the Awards and the other limitations, restrictions, terms and conditions applicable to the grant of the Awards. To the extent
permitted by applicable law, regulation, and rules of a stock exchange on which the Ordinary Shares are listed or traded,
the Board may delegate its authority to grant Awards to Employees or Consultants and to determine the terms and conditions thereof
to its standing committee, e.g., Compensation Committee, as it may determine in its discretion, on such terms and conditions as
it may impose.
The total number of shares that may be issued
under the 2017 Plan was 280,000. Such shares may be either be authorized but unissued shares or treasury shares. In the event of
any reorganization, recapitalization, share split, distribution, merger, consolidation, split-up, spin-off, combination, subdivision,
consolidation or exchange of shares, any change in the capital structure of the Company or any similar corporate transaction, the
Board shall make such adjustments as it deems appropriate, in its sole discretion, to preserve the benefits or intended benefits
of the 2017 Plan and Awards granted under the 2017 Plan.
The number of shares issued to Employees,
Directors and Consultants is the offer amount divided by the Fair Market Value, meaning (i) if the principal trading market
for the Ordinary Shares is the NASDAQ Capital Market or another national securities exchange, the “closing transaction”
price at which shares of Ordinary Shares are traded on such securities exchange on the relevant date or (if there were no trades
on that date) the latest preceding date upon which a sale was reported, (ii) if the Ordinary Shares is not principally traded
on a national securities exchange, but is quoted on the NASD OTC Bulletin Board (“OTCBB”) or the Pink Sheets, the last
reported “closing transaction” price of Ordinary Shares on the relevant date, as reported by the OTCBB or Pink Sheets,
or, if not so reported, as reported in a customary financial reporting service, as the Committee determines, or (iii) if the
Ordinary Shares is not publicly traded or, if publicly traded, is not subject to reported closing transaction prices as set forth
above, the Fair Market Value per share shall be as determined by the Board.
From August to December 2017,
the Company issued aggregate of 27,394 shares to its Chief Financial Officer as stock compensation expense. From January to
December 31, 2018, the Company issued aggregate of 56,919 shares to its Chief Financial Officer as stock compensation expense.
From January to December 31, 2019, the Company issued aggregate of 94,862 shares to its Chief Financial Officer as stock
compensation expense.
For the years ended December 31, 2019,
2018 and 2017, employee remuneration expense (all of which related to equity-settled share-based payment transactions) of RMB 627,000,
RMB 619,000 and RMB 294,000, respectively, has been included in profit or loss and credited to the share-based payment reserve.
|
28.
|
SIGNIFICANT RELATED PARTY TRANSACTIONS
|
|
(a)
|
Apart from those discussed elsewhere in these financial statements, the following are significant related party transactions entered into between the Company and its related parties at agreed rates:
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Service fees paid to Stuart Management Co.
|
|
|
-
|
|
|
|
40
|
|
|
|
81
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Amounts owed to related parties
|
|
|
36,217
|
|
|
|
36,203
|
|
Service fees accrued to Stuart Management Co.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
36,217
|
|
|
|
36,203
|
|
Pursuant to an administrative services agreement
dated as of December 1, 2009 between the Company and Stuart Management Co., an affiliate of Paul K. Kelly, an ex-director
who resigned on Nov 27, 2013, the Company paid US$6,000 (equivalent to RMB 40,000) and US$12,000 (equivalent to RMB 81,000) during
the years ended December 31, 2018 and 2017 plus out-of-pocket expenses to Stuart Management Co. for administrative services.
The initial one-year term began on December 1, 2009, and the agreement automatically renews for successive one-year terms
unless either party notifies the other of its intent not to renew. During the term of the agreement, Stuart Management Co. provided
the Company with general administrative services, including acting as the Company’s administrative agent in the United States
and the British Virgin Islands, and allow the Company to utilize certain of its office space for meetings. The agreement was renewed
to reduce the amount to US$4,900 (equivalent to RMB 30,000) a month in December 2013. The amount was further reduced to US$1,000
(equivalent to RMB 6,000) a month commencing October 2014. The Company terminated service with Stuart Management starting
from July 1, 2018.
Mr. Huang Jia Dong, the founder and
Chairman of Hengda and the Chief Executive Officer and one of the directors of the Company and Mr. Wong Kung Tok, formerly
one of the Company’s significant shareholders, provide working capital loans to the Company from time to time during the
normal course of its business. These loans amounted to RMB 35,057,000 and RMB 35,057,000 as of December 31, 2019 and 2018,
respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law.
Mr. Huang and Mr. Wong are brothers-in-law.
As of December 31, 2019, the Company
had a loan of US$167,000 (equivalent to RMB 1,160,000) (2018: US$167,000 (equivalent to RMB 1,146,000)) payable to Sound Treasure
Limited, an affiliate of Mr. Huang Jia Dong and a shareholder of the Company. This loan is interest free, unsecured and repayable
on demand.
|
(a)
|
Operating lease commitments
|
The Company leases production factories,
warehouses and employees’ hostel from unrelated parties under non-cancellable operating lease arrangements. The leases have
varying terms and the total future minimum lease payments of the Company under non-cancellable operating leases are payable as
follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Within one year
|
|
|
5,792
|
|
|
|
13,902
|
|
|
|
13,902
|
|
After one year and within five years
|
|
|
-
|
|
|
|
5,792
|
|
|
|
19,694
|
|
|
|
|
5,792
|
|
|
|
19,694
|
|
|
|
33,596
|
|
The leases typically run for an initial
period of three to five years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually increased
every five years to reflect market rentals. None of the leases includes contingent rentals.
The Company’s capital expenditures
consist of expenditures on property, plant and equipment and capital contribution. Capital expenditures contracted for at the balance
sheet date but not recognized in the financial statements are as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Contracted for capital commitment in respect of capital contribution to its wholly foreign owned subsidiary in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu Future
|
|
|
30,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Contracted but not provided for in the financial statements – acquisition of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The Company had the following other commitments:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Advertising expenditure contracted but not provided for in the financial statements
|
|
|
-
|
|
|
|
-
|
|
|
|
1,670
|
|
|
30.
|
FINANCIAL RISK MANAGEMENT
|
The Company’s overall financial risk
management program seeks to minimize potential adverse effects of financial performance of the Company. Management has in place
processes and procedures to monitor the Company’s risk exposures while balancing the costs associated with such monitoring
and management against the costs of risk occurrence. The Company’s risk management policies are reviewed periodically for
changes in market conditions and the Company’s operations.
The Company is exposed to financial risks
arising from its operations and the use of financial instruments. The key financial risks included credit risk, liquidity risk,
interest rate risk, foreign currency risk and market price risk.
Except as disclosed in (d), the Company
does not hold or issue derivative financial instruments for trading purposes or to hedge against fluctuations, if any, in interest
rates and foreign exchange rates.
Credit risk refers to the risk that a counterparty
will default on its contractual obligations resulting in financial loss to the Company. The Company’s exposure to credit
risk arises primarily from bank balances and trade receivables. For trade receivables, the Company adopts the policy of dealing
only with customers of appropriate credit history to mitigate credit risk. For other financial assets, the Company adopts the policy
of dealing only with high credit quality counterparties.
As the Company does not hold any collateral,
the maximum exposure to credit risk for each class of financial assets is the carrying amount of that class of financial assets
presented on the consolidated statements of financial position.
Cash and bank balances
The Company’s bank deposits are placed
with reputable banks in the PRC, Hong Kong and the United States, which management believes are of high credit quality. The Company
performs periodic evaluations of the relative credit standing of these financial institutions.
Trade receivables
The Company’s objective is to seek
continual growth while minimizing losses incurred due to increased credit risk exposure.
The Company’s exposure to credit risks
is influenced mainly by the individual characteristics of each customer. The Company typically gives the existing customers credit
terms of approximately 120 days to 150 days. In deciding whether credit shall be extended, the Company will take into consideration
factors such as the relationship with the customer, its payment history and credit worthiness. In relation to new customers, the
sales and marketing department will prepare credit proposals for approval by the Chief Executive Officer.
The Company performs ongoing credit evaluations
of its customers’ financial condition and requires no collateral from its customers. The provision for impairment loss for
doubtful debts is based upon a review of the expected collectability of all trade and other receivables.
The Company’s concentration of credit
risk by geographical location is wholly in the PRC as of December 31, 2018 and 2017. Further details of the Company’s
concentration of credit risk are set out in Note 17.
The Company’s policy is to regularly
monitor current and expected liquidity requirements and its compliance with loan covenants to ensure that it maintains a sufficient
amount of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in
the short and longer term.
The following table details the Company’s
remaining contractual maturities for its financial liabilities. The table has been drawn up based on undiscounted cash flows of
financial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest
and principal cash flows. To the extent that interest flows are at a floating rate, the undiscounted amount is calculated based
on interest rate at the end of the reporting periods:
|
|
As of December 31, 2019
|
|
|
|
|
|
|
More than 1
|
|
|
Total contractual
|
|
|
|
|
|
|
|
|
|
year but less
|
|
|
undiscounted
|
|
|
Carrying
|
|
|
|
Within 1 year
|
|
|
than 3 years
|
|
|
cash flow
|
|
|
amount
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
22,577
|
|
|
|
-
|
|
|
|
22,577
|
|
|
|
22,577
|
|
Amounts owed to related parties
|
|
|
36,217
|
|
|
|
|
|
|
|
36,217
|
|
|
|
36,217
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
58,794
|
|
|
|
-
|
|
|
|
58,794
|
|
|
|
58,794
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
More than 1
|
|
|
Total contractual
|
|
|
|
|
|
|
|
|
|
year but less
|
|
|
undiscounted
|
|
|
Carrying
|
|
|
|
Within 1 year
|
|
|
than 3 years
|
|
|
cash flow
|
|
|
amount
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade payables
|
|
|
24,329
|
|
|
|
-
|
|
|
|
24,329
|
|
|
|
24,329
|
|
Amounts owed to related parties
|
|
|
36,203
|
|
|
|
|
|
|
|
36,203
|
|
|
|
36,023
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
60,532
|
|
|
|
-
|
|
|
|
60,532
|
|
|
|
60,532
|
|
Interest rate risk is the risk that the
fair value or future cash flows of the Company’s financial instruments will fluctuate because of changes in market interest
rates.
The Company’s exposure to interest
rate risk arises primarily from the Company’s interest-bearing bank deposits and borrowings. The interest rates and terms
of repayment of the bank borrowings are disclosed in Note 23.
The Company is exposed to fair value interest
rate risk in relation to its fixed-rate bank borrowings. Bank borrowings subject to fixed interest rates are contractually repriced
at intervals of 12 months. The Company currently does not have an interest rate hedging policy. However, the management monitors
interest rate exposure and will consider other necessary actions when significant interest rate exposure is anticipated.
The Company is also exposed to cash flow
interest rate risk related to bank balances and cash held at financial institutions carried at the prevailing market rates and
variable-rate bank borrowings.
At December 31, 2019 and 2018, the
company has paid off all its loan. Thus was no variable-rate risk.
|
(d)
|
Foreign currency risk
|
Currency risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk
arises when transactions are denominated in foreign currencies.
The Company is mainly exposed to foreign
exchange risk arising from future commercial transactions, recognized assets and liabilities denominated in currencies other than
the functional currency of the Company entities to which they relate. The Company’s operations are primarily conducted in
the PRC. All the sales and purchases transactions are denominated in RMB. As such, the operations are not exposed to exchange rate
fluctuation.
As of December 31, 2019 and 2018, nearly
all of the Company’s monetary assets and monetary liabilities were denominated in RMB except that as of December 31,
2019 and 2018, certain bank balances (Note 19), bank borrowings (Note 23) and other payables (Note 21) were denominated in US dollars.
Sensitivity analysis
The Company’s foreign currency
risk is mainly concentrated on the fluctuation of US$ and HK$. The following table details the Company’s sensitivity to
a 4% increase and decrease in RMB against the relevant foreign currencies. The sensitivity analysis includes only outstanding
foreign currency denominated monetary items and adjusts their translation at the years end for a 4% change. On this basis, if
RMB strengthens against foreign currencies by 4%, the Company’s loss before taxation for the year would decrease by the
following amount, and vice versa.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Loss before taxation
|
|
|
414
|
|
|
|
353
|
|
|
|
86
|
|
The sensitivity analysis has been determined
assuming that the change in foreign exchange rates had occurred at the end of the reporting period and had been applied to re-measure
those financial instruments held by the Company which expose the Company to foreign currency risk at the end of the reporting period.
The stated changes represent management’s assessment of reasonably possible changes in foreign exchange rates over the period
until the end of next annual reporting period. The analysis is performed on the same basis for 2019, 2018 and 2017.
In management’s opinion, the sensitivity
analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure at the end of the reporting period
does not reflect the exposure during the year.
|
(e)
|
Fair value measurements
|
|
(i)
|
Financial instruments carried at fair value
|
Fair value hierarchy
The following table presents the fair value
of the Company’s financial instruments measured at the end of the reporting period on a recurring basis, categorized into
the three-level fair value hierarchy as defined in IFRS 13 Fair value measurement. The level into which a fair value measurement
is classified is determined with reference to the observability and significance of the inputs used in the valuation technique
as follows:
|
·
|
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
·
|
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)
|
|
·
|
Level 3: inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs). The Company’s directors are responsible to determine the appropriate valuation techniques and inputs for fair value measurements.
|
There were no transfers between instrument
levels during the years ended December 31, 2019 and 2018.
As of December 31, 2019 and 2018 there
were no other financial instruments measured on a recurring basis.
|
(ii)
|
Financial assets and liabilities measured at other than fair value
|
The carrying amounts of the Company’s
other financial instruments carried at cost or amortized cost approximate their fair values as of December 31, 2019 and 2018.
The Company’s objectives when managing capital
are:
(i) To
safeguard the Company’s ability to continue as a going concern and to be able to service its debts when they are due;
(ii) To
maintain an optimal capital structure so as to maximize shareholder value; and
(iii) To
maintain a strong credit rating and healthy capital ratios in order to support the Company’s stability and growth.
The Company actively and regularly reviews
and manages its capital structure to ensure optimal shareholder returns, taking into consideration the future capital requirements
of the Company and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities. The Company manages its common shares and stock options as capital.
The Company is not subject to externally
imposed capital requirements, except for, as disclosed in Note 25(a), the Company’s PRC subsidiaries are required by the
Foreign Enterprise Law of the PRC to contribute to and maintain a non-distributable statutory reserve fund whose utilization is
subject to approval by the Board of Directors. This externally imposed capital requirement has been complied with by the PRC subsidiaries
for the years ended December 31, 2019, 2018 and 2017.
In order to maintain or adjust the capital
structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, increase share
capital, obtain new borrowings or sell assets to reduce debt.
There were no changes in the Company’s
overall approach to capital management during the report periods.
The capital structure of the Company consists
of debts (which include borrowings, less cash and cash equivalents) and equity attributable to shareholders of the Company (comprising
issued capital and reserves). The Company monitors capital on the basis of the debt to capital ratio, which is calculated as net
debts divided by equity attributable to shareholders of the Company.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
Amounts owed to related parties
|
|
|
36,217
|
|
|
|
36,203
|
|
Total debts
|
|
|
36,217
|
|
|
|
36,203
|
|
Less: Cash and cash equivalents (excluding restricted bank balances)
|
|
|
(8,212
|
)
|
|
|
(9,016
|
)
|
Net debts
|
|
|
28,005
|
|
|
|
27,187
|
|
Equity attributable to shareholders of the Company
|
|
|
272,496
|
|
|
|
275,712
|
|
Gearing ratio
|
|
|
10.3
|
%
|
|
|
9.9
|
%
|
The Company has evaluated all events that
have occurred subsequent to December 31, 2019 through the date that the consolidated financial statements were issued. Management
has concluded that the following subsequent events required disclosure in these financial statements:
On January 8, 2020,
the “Company executed subscription agreements in connection with a $500,000 private placement of its ordinary shares with
three accredited investors at the price of $0.75 per share. The Company agreed to register the shares sold in the Offering for
resale no later than 270 days after the closing of the Offering. There were no discounts or brokerage fees associated with this
Offering. The net proceeds of the Offering will be used for working capital and general corporate purposes.
Beginning in late 2019,
there have been reports of the COVID-19 (coronavirus) outbreak originating in China, prompting government-imposed quarantines,
closures of certain travel and businesses. Following this outbreak, in February 2020, the Company temporarily shut down its
operations in Jinjiang City, Fujian Province, and Gao’An City, Jiangxi Province, as mandated by the local authorities. In
March 2020, the Company gradually resumed its operations in these cities and continues to operate such production facilities.
It is presently unknown whether and to what extent the Company’s supply chains may be affected if the pandemic persists
for an extended period of time. The Company may incur significant delays or expenses relating to such events outside of its control,
which could have a material adverse impact on its business, operating results and financial condition.
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