China Automation : (011) 2019 Interim Report (Eng)

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Interim Report 2019

CONTENTS

• Management Discussion and Analysis
• Financial Review

• Future Outlook

• Corporate Governance
  8 Other Information

1. Report on Review of Condensed Consolidated
2. • Financial Statements
3. Condensed Consolidated Statement of Profit or
4. • Loss and Other Comprehensive Income

14 Condensed Consolidated Statement of   Financial Position

1. Condensed Consolidated Statement of
2. • Changes in Equity
3. Condensed Consolidated Statement of
4. • Cash Flows
5. Notes to the Condensed Consolidated
6. • Financial Statements

41 Corporate Information

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

REVENUE

For the six months ended 30 June 2019, revenue of the Group increased by 19.7% to RMB969.0 million (1H 2018: RMB809.5 million).

Revenue generated from the petrochemical segment increased by 23.1% to RMB712.9 million (1H 2018: RMB579.3 million), whereas revenue generated from the hospital services segment increased by 11.3% to RMB256.1 million (1H 2018: RMB230.2 million) for the six months ended 30 June 2019.

TURNOVER ANALYSIS BY TYPES OF GOODS SUPPLIED AND SERVICES RENDERED

	For six months ended 30 June
2019		2018		Change
	Proportion		Proportion
(RMB million)	(%)	(RMB million)	(%)	(%)

Petrochemical

• Sales of system and software
• • and industrial control
  • valves plus related

	services	712.9	73.6	579.3	71.6	+23.1
Hospital services
- Sales of pharmaceuticals
	and healthcare services	256.1	26.4	230.2	28.4	+11.3
Total		969.0	100.0	809.5	100.0	+19.7

PETROCHEMICAL

For the six months ended 30 June 2019, revenue generated from system and software and industrial control valves plus related services in relation to the petrochemical industries increased by 23.1% to RMB712.9 million (1H2018: RMB579.3 million). Such increase was mainly contributed by sales of system and software and sales of industrial control valves. The increase in revenue generated from the system and software was primarily attributable to the increase in tendering and delivery activities in the petrochemical industry. The increase in revenue generated from industrial control valves was primarily attributable to more contracts won in the petrochemical and pharmaceutical industries during the six months ended 30 June 2019.

In addition, in terms of operating segment, 73.6% (1H2018: 71.6%) of the Group's revenue was generated from the petrochemical segment and 26.4% (1H2018: 28.4%) from the hospital services segment.

GROSS PROFIT

Gross profit for the six months ended 30 June 2019 was RMB244.3 million (1H 2018: RMB200.2 million), representing a 22.0% increase when compared to that of the corresponding period last year.

The overall gross profit margin for the six months ended 30 June 2019 remained stable at 25.2% (1H 2018: 24.7%).

THE HOSPITAL SERVICES

Pharmaceutical and healthcare services

Revenue generated from the hospital services for the six months ended 30 June 2019 increased by 11.3% to RMB256.1 million (1H2018: RMB230.2 million). The increase was primarily due to the partial completion of the Phase I internal renovation of the inpatient facilities and building which resulted in an increase in hospital beds for accommodation for patients.

2 China Automation Group Limited

MANAGEMENT DISCUSSION AND ANALYSIS

GROSS PROFIT ANALYSIS BY TYPES OF GOODS SUPPLIED AND SERVICES RENDERED

	For the six months
	ended 30 June
	2019	2018	Change
	(%)	(%)	(%)
Petrochemical
- System and software and industrial control
valves plus related services	22.4	21.5	+0.9
Hospital services
- Sales of pharmaceuticals and healthcare services	32.9	33.1	-0.2
Total	25.2	24.7	+0.5

GROSS PROFIT MARGIN IN THE PETROCHEMICAL

The gross profit margin in relation to the revenue generated from the petrochemical business marginally increased by 0.9% to 22.4% (1H2018: 21.5%).

GROSS PROFIT MARGIN IN THE HOSPITAL SERVICES

For the six months ended 30 June 2019, the gross profit margin of the hospital services business remained stable at 32.9% (1H2018: 33.1%).

OTHER INCOME

For the six months ended 30 June 2019, other income amounted to RMB22.5 million (1H 2018: RMB14.3 million). The increase was primarily attributable to the increase in government grants received by the Company's subsidiaries from relevant government bodies in connection with expenses on technology development.

OTHER LOSSES

For the six months ended 30 June 2019, other losses increased significantly to RMB109.3 million (1H 2018: losses of RMB67.9 million). The significant losses were primarily due to the increase in fair value of convertible bonds amounted to RMB113.4 million (1H2018: RMB67.9 million).

IMPAIRMENT LOSSES UNDER EXPECTED CREDIT LOSS MODEL, NET OF REVERSAL

For the six months ended 30 June 2019, impairment losses under expected credit loss model net of reversal decreased by RMB8.1 million to RMB8.3 million (1H 2018: losses of RMB16.4 million). During the current interim period, the Group provided impairment allowance of RMB8.3 million, In particular, a specific loss allowance of RMB11.2 million had been made to an individual debtor which had been suffering significant financial difficulties during the current interim period. In addition, a specific reversal of RMB5.0 million has been made to an individual debtor due to the settlement of the receivable.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses for the six months ended 30 June 2019 were RMB54.6 million (1H 2018: RMB44.4 million), representing an increase of 23.0% when compared with the corresponding period last year. Such increase was mainly attributable to (i) higher promotion and travelling expenses; and (ii) higher performance bonus for the sales staff in line with the increased business activities.

Selling and distribution expenses for the six months ended 30 June 2019 as a percentage of the Group's revenue was 5.6% (1H 2018: 5.5%).

INTERIM REPORT 2019

3

MANAGEMENT DISCUSSION AND ANALYSIS

ADMINISTRATIVE EXPENSES

Administrative expenses for the six months ended 30 June

2019 increased by 9.4% to RMB102.7 million (1H 2018: RMB93.9 million). Such increase was mainly attributable to (i) the increased salaries; and (ii) maintenance expenses for the office building and exhibition center.

LOSS FOR THE PERIOD

As a result of the forgoing, the Group recorded loss attributable to equity holders of the Company at RMB95.8 million for the six months ended 30 June 2019 (1H 2018: RMB82.2 million).

Administrative expenses for the six months ended 30 June 2019 as a percentage of the Group's revenue was 10.6% (1H 2018: 11.6%).

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the six months ended 30 June 2019 were RMB37.4 million (1H 2018: RMB28.6 million). The research and development projects undertaken during the period were mainly related to (i) development of high-end control valves in response to the preferential policies regarding localisation enacted by the Chinese Government; and (ii) core hardware for turbine machinery control systems.

FINANCE COSTS

Finance costs for the six months ended 30 June 2019 decreased by 1.4% to RMB27.5 million (1H 2018: RMB27.9 million) after deducting amount of RMB13.7 million (1H 2018: RMB4.1 million) capitalised under construction in construction.

INCOME TAX EXPENSES

Income tax expenses amounted to RMB21.7 million (1H 2018: RMB16.1 million) for the six months ended 30 June 2019.

The effective tax rate for the six months ended 30 June 2019 was 29.3% (1H 2018: 24.4%).

The differences between the PRC enterprise income tax rate of 25% and the effective tax rates of the Group for both the current and prior interim periods are mainly attributable to: (i) tax benefit granted to certain PRC subsidiaries qualified as "High and New Technology Enterprises" which subject to the preferential rate of 15%; and (ii) tax losses and deductible temporary differences of certain subsidiaries not recognised as deferred tax assets due to the unpredictability of future profit streams of respective subsidiaries.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

Net cash generated from operating activities amounted to RMB98.4 million for the six months ended 30 June 2019 (1H 2018: RMB23.1 million). The Group has adopted a prudent working capital management strategy. As such, the Group was able to generate positive operating cash flow due to: (i) the decrease in trade and bills receivables; and (ii) the significant increase in contract liabilities.

Net cash used in investing activities amounted to RMB167.5 million for the six months ended 30 June 2019 (1H 2018: RMB41.9 million). This was primarily due to the purchases of property, plant and equipment in relation to investment projects in Wuzhong city.

Net cash used in financing activities amounted to RMB65.1 million for the six months ended 30 June 2019 (1H 2018: net cash generated from financing activities amounted to RMB101.1 million). The net cash used in financing activities for the period was mainly due to the repayments of bank borrowings amounted to RMB56.0 million.

As at 30 June 2019, cash and bank balances (including pledged bank deposits) amounted to RMB713.0 million (31 December 2018: RMB848.1 million).

GEARING POSITION

The net gearing (total borrowings less cash over equity) ratio was 104.9% as at 30 June 2019 (31 December 2018: at 80.1%). As at 30 June 2019, the total borrowings of the Group amounted to RMB2,045.5 million (31 December 2018: RMB1,946.7 million), of which the long term payables in relation to the capital contribution from Ningxia Industrial Guide Fund Management Limited amounted to RMB500.0 million; the convertible bonds amounted to RMB731.2 million, the corporate bonds due 2019 amounted to RMB208.9 million and the guaranteed notes due 2019 amounted to US$10.0 million (equivalent to approximately RMB69.5 million).

CONTINGENT LIABILITIES

As at 30 June 2019, the Group had no material contingent liabilities.

4 China Automation Group Limited