Hongguo cover IR2011

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2 Contents PAGE(S) CORPORATE INFORMATION 2 FINANCIAL HIGHLIGHTS 5 MANAGEMENT DISCUSSION AND ANALYSIS 7 GENERAL INFORMATION 17 REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION 25 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 27 CONDENSED CONSOLIDATED STATEMENT OF FINANCAL POSITION 28 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 30 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 31 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 32 1

3 Corporate Information BOARD OF DIRECTORS Executive Directors Mr. Chen Yixi (Chairman) Mr. Li Wei (Chief Executive Officer) Mr. Zhao Wei Mr. Huo Li Mr. Xu Tingyu (Chief Financial Officer) Non-executive Directors Mr. Miao Bingwen Independent non-executive Directors Mr. Kwong Wai Sun Wilson Mr. Xu Chengming Mr. Li Xindan AUTHORISED REPRESENTATIVES Mr. Huo Li Ms. Mok Ming Wai AUDIT COMMITTEE Mr. Kwong Wai Sun Wilson (Chairman) Mr. Xu Chengming Mr. Li Xindan REMUNERATION COMMITTEE Mr. Xu Tingyu (Chairman) Mr. Kwong Wai Sun Wilson Mr. Xu Chengming Mr. Li Xindan NOMINATION COMMITTEE Mr. Huo Li (Chairman) Mr. Kwong Wai Sun Wilson Mr. Xu Chengming Mr. Li Xindan 2 Hongguo International Holdings Limited Interim Report 2011

4 Corporate Information COMPANY SECRETARY Ms. Mok Ming Wai REGISTERED OFFICE Canon s Court 22 Victoria Street Hamilton HM12 Bermuda PRINCIPAL PLACE OF BUISNESS IN HONG KONG 8th Floor, Gloucester Tower, The Landmark 15 Queen Road Central, Hong Kong STOCK CODE 1028 COMPANY WEBSITE COMPLIANCE ADVISOR First Shanghai Capital Limited LEGAL ADVISER Sidley Austin Level 39 Two International Finance Centre 8 Finance Street Central, Hong Kong Canon s Court 22 Victoria Street Hamilton HM12 Bermuda AUDITORS Deloitte Touche Tohmatsu Certified Public Accountants 3

5 Corporate Information SHARE REGISTRARS Principal Share Registrar and Share Transfer Agent Appleby Management (Bermuda) Ltd. Argyle House 41a Cedar Avenue Hamilton HM12 Bermuda Appleby Management (Bermuda) Ltd. Argyle House 41a Cedar Avenue Hamilton HM12 Bermuda Hong Kong Branch Share Registrar and Transfer Office Computershare Hong Kong Investor Services Limited Shops , 17th Floor Hopewell Centre 183 Queen s Road East Wanchai Hong Kong PRINCIPAL BANKERS Agricultural Bank of China, Nanjing Xinjiekou sub-branch DBS (Bank) Ltd., Hong Kong Branch China Merchants Bank, Nanjing Chengxi sub-branch Bank of China, Nanjing Economic Development Zone sub-branch 4 Hongguo International Holdings Limited Interim Report 2011

6 Financial Highlights The board (the Board ) of directors (the Directors ) of Hongguo International Holdings Limited (the Company ) is pleased to announce the unaudited interim results of the Company and its subsidiaries (collectively, the Group ) for the six months ended 30 June 2011, together with the comparative figures for the corresponding period in 2010, are as follows: Six months ended 30 June RMB 000 RMB 000 Revenue 928, ,111 Gross profit 578, ,061 Operating profit 180,533 79,963 Income tax expenses (49,886) (20,715) Net profit attributable to equity holders of the Company 130,647 58,529 % % Gross profit margin Operating profit margin Net profit margin RMB cents RMB cents Earnings per share Basic

7 Financial Highlights 30 June December RMB 000 RMB 000 Balance of cash and bank deposits 222, ,409 Bank loans 64,716 0 % % Liquidity ratio Gearing ratio Days Days Average inventory turnover period Average receivables turnover period Average payables turnover period Note: Liquidity ratio=current assets/current liabilities; gearing ratio=bills payable and bank loans/total assets = = 6 Hongguo International Holdings Limited Interim Report 2011

8 Management Discussion and Analysis BUSINESS REVIEW The Group primarily focuses on the design, production and sales of mid-to-premium women shoes in China. According to the report by Euromonitor, based on the estimated retail sales for the year ended 31 December 2010, the Group was the second largest retailer of mid-topremium formal and casual women shoes in China. The Group s selfdeveloped brands and licensed brands products are mainly distributed through the department stores and independent retail stores in different cities, ranging from first-tier to third-tier cities, in China. The Group also wholesales its self-developed brand products to authorised distributors. Furthermore, the Group also acts as the OEM or ODM manufacturer for international shoe companies dealing in export markets. The Group has established vertically integrated business model which includes design and development, sourcing, manufacturing, marketing, and wholesaling and retailing of shoes. Euromonitor OEM ODM The Group s self-developed brands are C.banner and EBLAN. In the first half of 2011, the Group introduced another brand Fabiola, which is distributed in the Group s C.banner retail outlets. The Group also sells women shoes through a licensed brand, Naturalizer. In August 2011, the Group launched another new brand called Sundance

9 Management Discussion and Analysis As of 30 June 2011, the Group s retail and wholesale networks spread over 31 provinces, autonomous regions and municipalities in China. In total, 1,071 retail stores were the Group s proprietary outlets and 373 were third-party retail outlets. The following table shows the geographic distribution of the Group s proprietary outlets and third-party outlets: , C.banner EBLAN Naturalizer Proprietary Third-party Proprietary Third-party Proprietary Distribution Regions outlets outlets outlets outlets outlets Total Northeast Beijing Tianjin Northwest Central China Eastern China Zhejiang Shanghai Southwest Southern China Total ,444 8 Hongguo International Holdings Limited Interim Report 2011

10 Management Discussion and Analysis Note: (1) Northeast region includes Jilin province, Liaoning province and Heilongjiang province; (2) Beijing region includes Beijing, Inner Mongolia Autonomous Region, Zhangjiakou city and Qinhuangdao city in Hebei province; (3) Tianjin region includes Tianjin, Shandong province and Hebei province (except Zhangjiakou city and Qinhuangdao city); (4) Northwest region includes Shanxi province, Shaanxi province, Qinghai province, Gansu province, Henan province, Xinjiang Autonomous Region and Ningxia Autonomous Region; (5) Central China region includes Hunan province and Hubei province; (6) Eastern China region includes Jiangsu province (except Wuxi city and Suzhou city), Anhui province and Jiangxi province; (7) Zhejiang region includes Zhejiang province and Wuxi city and Suzhou city in Jiangsu province; (8) Shanghai region includes Shanghai; (9) Southwest region includes Sichuan province, Guizhou province, Yunnan province, Chongqing city and Tibet Autonomous Region; (10) Southern China region includes Guangdong province, Hainan province, Guangxi Autonomous Region and Fujian province. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) For the six months ended 30 June 2011, the Group had a net addition of 155 new stores, among which, 99 were the Group s proprietary outlets, and 56 were third-party retail outlets. The expansion progress in the first half of the year was in pace with the Group s network expansion plan. Sales volume was in line with the growth expectation, with a 12.6% samestore sales growth during the corresponding period % 9

11 Management Discussion and Analysis In the first half of 2011, the consumer price index in Mainland China continued hitting record highs. The Chinese government has been adjusting constantly in order to control inflation. However, the middle to-high-end consumer market of shoe products, where the Group is positioned at, was not directly affected by the adjustment polices by the government. The Group attained satisfactory performance in sales, gross profit margin, operating profits and profit attributable to owners of the company in the first half of the year FINANCIAL REVIEW For the six months ended 30 June 2011, the Group s total revenue from continuing operations rose 29.8% to RMB928.0 million compared to the same period of last year. Operating profit rose 125.8% to RMB180.5 million in the period under review. Profit attributable to owners of the company from continuing operations increased 120.5% to RMB130.6 million compared to the same period of last year % 125.8% % Revenue For the six months ended 30 June 2011, the Group s total revenue from continuing operations rose 29.8% to RMB928.0 million, compared to RMB715.1 million in the first half of last year. The Group s revenue mix includes the retail, wholesale and contract manufacturing. Revenue distribution is as follows: % For the six months ended 30 June % on Total % on Total RMB( 000) Revenue RMB( 000) Revenue Growth % % % Retail and Wholesaling 817, , Contract Manufacturing 110, , Total 928, , Hongguo International Holdings Limited Interim Report 2011

12 Management Discussion and Analysis Profitability For the six months ended 30 June 2011, the Group s gross profit from continuing operations rose 47.1% to RMB578.1 million, increased RMB185.1 million from RMB393.1 million in the first half of last year. As of 30 June 2011, the gross profit margin from continuing operations was 62.3%, increased 7.3 percentage points from 55.0% in the corresponding period of last year. The growth in gross profit was attributable to the increase in selling price and effective cost control. Since 2011, Mainland China has entered the inflation cycle and general price level has risen. Retail prices of shoe product have increased due to the rise in raw material prices and labour costs. The Group was well ahead in cost control with the lift in productivity, which contributed to the growth in gross profit margin. Lowering the percentage of contract manufacturing revenue contribution to the Group s total revenue also facilitated the rise in overall gross profit margin % % 55.0% 7.3 For the six months ended 30 June 2011, distribution and selling expenses for continuing operations reached RMB359.7 million, increased RMB88.5 million with a growth rate of 32.7% from the corresponding period of last year. Distribution and selling expenses mainly consisted of concessionaire fees, rental expenses, salaries and commission of salespersons, renovation expenses of the Group s retail stores, advertising and marketing expenses. As of 30 June 2011, distribution and selling expenses for continuing operations accounted for 38.8% of the total revenue, compared to 37.9% in the corresponding period of last year % % % For the six months ended 30 June 2011, administrative and general expenses for continuing operations reached RMB35.1 million, a decrease of RMB7.8 million compared to the same period of last year. Administrative and general expenses mainly included the salaries and benefits of management and executives, rental payment of office premises, depreciation of office equipment and other related administrative expenses. As of 30 June 2011, administrative and general expenses for continuing operations accounted for 3.8% of the total revenue, compared to 6.0% in the same period of last year, which included a one-off payment of RMB7.5 million for option fee % %

13 Management Discussion and Analysis For the six months ended 30 June 2011, other income and expense, other gains and losses from continuing operations were RMB-943,000, a decline of RMB4.3 million compared to same period of last year. This was mainly attributed to listing fees of RMB10 million only being partially offset by a RMB7.8 million increase in government subsidies , For the six months ended 30 June 2011, finance costs for continuing operations were RMB980,000, which was the interest expenses of a USD9.8 million loan made on 9 March In the corresponding period in 2010, finance costs were RMB903,000, which included RMB400,000 interest of USD6.0 million loans repaid on 23 April 2010, and RMB500,000 expenses for setting up Renminbi credit facilities , , , ,000 For the six months ended 30 June 2011, income tax expense for continuing operations increased RMB29.2 million to RMB49.9 million, with a growth rate of 140.8% compared to RMB20.7 million in the corresponding period of last year. The effective income tax rate of continuing operations for the first half of 2011 was 27.6%, increased 1.7 percentage points from 25.9% in the same period of last year. The increase in effective tax rate was due to the increased in non-deductible expenses incurred overseas before tax % 27.6% 25.9% 1.7 As of 30 June 2011, profit attributable to owners of the company from continuing operations rose 120.5% to RMB130.6 million increased RMB71.4 million from RMB59.2 million in the same period of last year. Excluding the one-off option expense payment of RMB7.5 million in the administrative and general expenses during the first half of 2010, the actual growth rate was 97.9% % % 12 Hongguo International Holdings Limited Interim Report 2011

14 Management Discussion and Analysis Liquid Assets and Financial Resources As of 30 June 2011, the Group had bank balances and cash of RMB222.9 million (31 December 2010: RMB161.4 million). Excluding short-term bank loans totaled RMB64.7 million (31 December 2010: nil), net cash was RMB158.2 million (31 December 2010: RMB161.4 million) ( ) For the six months ended 30 June 2011, net cash generated from operating activities was RMB78.9 million, decrease of RMB2.4 million compared to RMB81.3 million in the same period of last year. This was mainly due to the increased in inventory caused by establishing new stores For the six months ended 30 June 2011, net cash outflow from investing activities was RMB5.0 million, compared to a net inflow of RMB5.3 million for the same period of last year. The outflow primarily consisted of purchasing premises, factories and equipment of RMB21.5 million, which was offset by the interest income of RMB1.2 million and the net decrease of pledged bank deposits of RMB15.3 million For the six months ended 30 June 2011, net cash outflow from financing activities was RMB12.4 million, which was mainly due to payment for the global listing and other related fees of RMB12.7 million. The net cash outflow from financing activities in 2010 was RMB136.1 million, which consisted of a repayment for short-term bank loans of RMB40.9 million and dividend payments of RMB95.2 million As of 30 June 2011, the net current assets of the Group were RMB528.3 million, compared to RMB476.1 million as of 31 December The net increase was RMB52.2 million, with a growth rate of 11% % 13

15 Management Discussion and Analysis Pledge of Asset As of 30 June 2011, the Group has short-term bank loans of RMB64.7 million (USD10 million). The loans were guaranteed with assets of the Group, including fixed charge, transfer and floating charge collateral, as well as guaranteed by several directors of the Company. The guarantees provided by certain directors of the Company were released upon the listing of the Company on 23 September The Group s bank deposit was fully pledged for 100% margin on bank s acceptance bill facilities. As of 30 June 2011, pledged bank deposit was RMB18.5 million, compared to RMB33.8 million as of 31 December % Contingent Liabilities The Group did not have any substantial or contingent liabilities as of 30 June Foreign Exchange Risk Management The Group s sales were mainly denominated in RMB, while contract manufacturing business was denominated in USD. As the contract manufacturing business accounted for only 11.9% of the total sales, the Board of Directors did not foresee a substantial influence of exchange rate fluctuation in the Group s business. The Board will closely monitor the effects of exchange rate on the contract manufacturing business and mitigate the impact. For the six month ended 30 June 2011, the Group recorded a RMB78,000 gain from currency exchange, compared to a RMB40,000 gain in the corresponding period of last year. The Group did not have any derivative instrument for hedging against foreign exchange risk. 11.9% ,000 40, Hongguo International Holdings Limited Interim Report 2011

16 Management Discussion and Analysis HUMAN RESOURCES As of 30 June 2011, the Group had 9,436 employees (31 December 2010: 8,886 employees). The Group provides its employees with competitive remuneration package including mandatory pension fund, insurance and medical benefits. In addition, the Group would pay discretionary bonus to qualified employees according to the business performance and their individual work performance , ,886 INTERIM DIVIDEND The Board of directors of the Company does not recommend the payment of an interim dividend for the six months ended 30 June OUTLOOK With the listing of the Company on the Main Board of the Hong Kong Stock Exchange on 23 September 2011 and global offering, the Group will utilize the fund raised according to the usage specified in the prospectus of the Company dated 12 September 2011, which includes, inter alia, expanding the retail network, increasing production capacities, developing sales channels and selecting suitable targets for acquiring footwear businesses The Group will sustain same-store growth for its proprietary outlets by enhancing the quality of the outlets, raising standards of its products, and creating values for customers. The Group will continuously expand the wholesale and retail network by opening more proprietary outlets and third party retail outlets. By the end of each year through 2011 to 2013, the Group s targeted net increase of proprietary outlets is approximately 220 to 320; besides, the Group targets an increase of approximately 80 to 125 third-party retail outlets through the distributors in The Group also plans to sell its products through third-party online platform. The Group will also develop its own online platform for selling products when the time is ripe

17 Management Discussion and Analysis The Group will continue to focus on the women shoes market, especially middle to high-end shoes market in China, with a vision of complementing the Group s brand mix through establishing more middle to high-end brands. In August 2011, the Group s new brand Sundance was introduced as scheduled. The Group will also continuously enhance its research, design and development capabilities to facilitate brand expansion. The Directors believe that a variety of brand combination can enhance product mix, expand the Group s customer base and increase market shares There will be an expansion of the Group s production base, particularly in the Suining county of Jiangsu province, to boost up the Group s production capacities while controlling the costs of production. Through improving internal management system, personnel training, and supply chain management, the Group will raise its operation capability and efficiency. In the future, the Group will seize growth opportunities by selective acquisitions of footwear retailers in China. The Group s acquisition targets are footwear companies which have well-established distribution channels or footwear companies which own regional footwear brands. The Group will also consider other potential companies which can complement its existing operation. To ensure the acquisition will create synergies, acquisition decision is based on the stability of the management team, financial status, and bidding price of the acquisition targets. The Directors are confident that leveraging on its experienced and dedicated management team, the Group can expand its business through selective acquisitions. 16 Hongguo International Holdings Limited Interim Report 2011

18 General Information MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code ) as set out in Appendix 10 to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the Listing Rules ) as its own code of conduct regarding directors securities transactions. 10 The Company confirms that, having made specific enquiry of all the Directors, the Directors have complied with the required standards as set out in the Model Code since the Company s listing on 23 September 2011 up to the date of this interim report. CORPORATE GOVERNANCE Since the Company was only listed on the Hong Kong Stock Exchange on 23 September 2011, the Code on Corporate Governance Practices (the CG Code ) contained in Appendix 14 to the Listing Rules was not applicable to the Company for the period under review. 14 However, none of the Directors is aware of any information that would reasonably indicate that the Company or any of its Directors was not in compliance with the CG Code during the period from 23 September 2011 up to the date of this interim report

19 General Information INTERESTS AND SHORT POSITIONS OF THE DIRECTORS IN SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS The Company was listed on the Hong Kong Stock Exchange on 23 September No disclosure of interests or short positions of any directors and/or chief executives of the Company in any shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the SFO )) were made to the Company under the provisions of Divisions 7 and 8 of Part XV of the SFO as at 30 June XV 7 8 / As extracted from the prospectus of the Company dated 12 September 2011 (the Prospectus ), upon the Company s listing on 23 September 2011, the interests and short positions of the directors and/or chief executive of the Company in any shares, underlying shares and debentures of the Company (taking no account of the shares to be issued pursuant to any options which may be granted under the Share Option Scheme of the Company or pursuant to the exercise of the Over-allotment Option (as defined in the Prospectus)) or any of its associated corporations (within the meaning of Part XV of the SFO) which are required to be notified to the Company and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, or which are required, pursuant to Section 352 of Part XV of the SFO, to be entered in the register kept by the Company, or which are required to be notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code ) were as follows: XV XV Hongguo International Holdings Limited Interim Report 2011

20 General Information Interests and short position in the shares of the Company Approximate percentage of shareholding in the Company immediately after the Global Offering (as defined in the Prospectus) (5) Name of Director Capacity Number of shares (1) (1) (5) Mr. Chen Yixi (2) Interest in a controlled corporation 731,770,000(L) 36.59% (2) Mr. Li Wei (3) Interest in a controlled corporation 400,180,000(L) 20.01% (3) Mr. Miao Bingwen (4) Interest in a controlled corporation 368,050,000(L) 18.40% (4) Notes: 1. The letter L denotes long position in the shares of the Company. 2. Mr. Chen Yixi is the beneficial owner of all the issued share capital of High Score Holdings Limited which holds 731,770,000 shares. 3. Mr. Li Wei is the beneficial owner of all the issued share capital of Media Value Holdings Limited which holds 400,180,000 shares. 4. Mr. Miao Bingwen is the beneficial owner of all the issued share capital of Sure Manage Investments Limited which holds 368,050,000 shares. 5. Assuming the Over-allotment Option is not exercised. (1) L (2) High Score Holdings Limited 731,770,000 (3) Media Value Holdings Limited 400,180,000 (4) Sure Manage Investments Limited 368,050,000 (5) 19

21 General Information Save as disclosed above, as at 23 September 2011 upon the Company s listing, none of the directors or chief executives of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required to be notified to the Company and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, or which would be required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or otherwise to be notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code XV INTERESTS AND SHORT POSITIONS OF SUBSTANTIAL SHAREHOLDERS IN SHARES AND UNDERLYING SHARES OF THE COMPANY The Company was listed on the Hong Kong Stock Exchange on 23 September No disclosure of interests or short positions in any shares or underlying shares of the Company were made to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as at 30 June XV 2 3 As extracted from the Prospectus of the Company, on 23 September 2011 upon the Company s listing, so far as is known to the directors and taking no account of the shares to be issued pursuant to options which may be granted under the Share Option Scheme of the Company or pursuant to the exercise of the Over-allotment Option (as defined in the Prospectus), the following persons (other than the directors or chief executive of the Company), who had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company in accordance with the provisions of Divisions 2 and 3 of Part XV of the SFO, or which would be required, pursuant to Section 336 of the SFO, to be entered in the register referred to therein, were as follows: XV Hongguo International Holdings Limited Interim Report 2011

22 General Information Interests and short position in the shares of the Company Approximate percentage of shareholding in the Company immediately after the Global Offering (as defined in the Prospectus) Name of Shareholder Capacity Number of shares (1) (1) (2) High Score Holdings Limited Beneficial owner 731,770,000 (L) 36.59% Media Value Holdings Limited Beneficial owner 400,180,000 (L) 20.01% Sure Manage Investments Limited Beneficial owner 368,050,000 (L) 18.40% Notes: 1. The letter L denotes long position in the shares of the Company. 2. Assuming the Over-allotment Option is not exercised. (1) L (2) Save as disclosed above, as at 23 September 2011 upon the Company s listing, the directors of the Company were not aware of any person (who were not directors or chief executive of the Company) who had interest or short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or which would be required, pursuant to Section 336 of the SFO, to be entered in the register referred to therein XV

23 General Information PURCHASE, SALE OR REPURCHASE OF THE COMPANY S LISTED SECURITIES The shares of the Company were listed on the Main Board of the Hong Kong Stock Exchange on 23 September Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company s securities during the period under review SHARE OPTION SCHEME The terms of the share option scheme (the Share Option Scheme ) were disclosed in the section headed Share Option Scheme in Appendix VII to the prospectus of the Company dated 12 September 2011 (the Prospectus ). The Company adopted the Share Option Scheme on 26 August 2011 which has become effective upon the Company s listing. The purpose of the Share Option Scheme is to enable the Group to grant options to the Eligible Participants (as defined in the section headed Share Option Scheme in the Prospectus) as rewards or incentives for their contribution to the Group. No share options have been granted by the Company pursuant to the Share Option Scheme since its adoption. ( 22 Hongguo International Holdings Limited Interim Report 2011

24 General Information AUDIT COMMITTEE The audit committee of the Company (the Audit Committee ) comprises three independent non-executive Directors. None of the committee members were former or external auditors employed by the Group. One of the Audit Committee members possesses recognized accounting qualifications and has rich experience in auditing, accounting and financial management. 3 Duties of the Audit Committee include monitoring the relationship of external auditors with the Group, reviewing the Group s financial information, overseeing the financial reporting process, internal control and risk management systems, as well as giving relevant recommendation to the Board. The unaudited condensed consolidated interim financial information has not been audited, but has been reviewed by the auditor, Messrs. Deloitte Touche Tohmatsu, and the audit committee of the Company. 23

25 General Information REMUNERATION COMMITTEE The Remuneration Committee comprised three independent non-executive Directors and an executive Director. Duties of the Remuneration Committee are regularly reviewing and evaluating the remuneration policy of Directors and senior management of the Group, and providing recommendation to the Board. 3 1 NOMINATION COMMITTEE The Nomination Committee comprised three independent non-executive Directors and an executive Director. Duties of the Nomination Committee are regularly reviewing the structure, size and composition of the Board, and providing advice to the Board for any proposed changes Hongguo International Holdings Limited Interim Report 2011

26 Report on Review of Interim Financial Information TO THE BOARD OF DIRECTORS OF HONGGUO INTERNATIONAL HOLDINGS LIMITED INTRODUCTION We have reviewed the interim financial information set out on pages 27 to 52, which comprises the condensed consolidated statement of financial position of Hongguo International Holdings Limited (the Company ) and its subsidiaries (collectively referred to as the Group ) as of 30 June 2011 and the related condensed consolidated statement of comprehensive income, statement of changes in equity and statement of cash flows for the six-month then ended, and certain explanatory notes. The Main Board Listing Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the preparation of a report on interim financial information to be in compliance with the relevant provisions thereof and International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ) issued by the International Accounting Standards Board. The directors of the Company are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34. Our responsibility is to express a conclusion on this interim financial information based on our review, and to report our conclusion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. SCOPE OF REVIEW We conducted our review in accordance with International Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the International Auditing and Assurance Standards Board. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion

27 Report on Review of Interim Financial Information CONCLUSION Based on our review, nothing has come to our attention that causes us to believe that the interim financial information is not prepared, in all material respects, in accordance with IAS Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 26 September Hongguo International Holdings Limited Interim Report 2011

28 Condensed Consolidated Statement of Comprehensive Income For the six months ended 30 June 2011 Six months ended 30 June Notes RMB 000 RMB 000 (unaudited) (unaudited) Continuing operations Revenue 3 928, ,111 Cost of sales (349,863) (322,050) Gross profit 578, ,061 Other income and expenses, other gains and losses (943) 3,352 Distribution and selling expenses (359,673) (271,124) Administrative and general expenses (35,108) (42,866) Finance costs (980) (903) Share of losses of joint ventures (900) (1,557) Profit before tax 4 180,533 79,963 Income tax expense 5 (49,886) (20,715) Net profit for the period from continuing operations 130,647 59,248 Discontinued operations Loss for the period from discontinued operations (719) Net profit and total comprehensive income for the period attributable to owners of the Company 130,647 58,529 Earnings per share From continuing and discontinued operations Basic (RMB cents) ( ) From continuing operations Basic (RMB cents) ( )

29 Condensed Consolidated Statement of Financial Position At 30 June 2011 At At 30 June 31 December Notes RMB 000 RMB 000 (unaudited) (audited) Non-current assets Property, plant and equipment 100,149 86,277 Prepaid lease payments 15,495 15,686 Investment properties 46,069 46,069 Intangible assets 1,960 1,814 Interest in joint ventures 4,473 5,804 Deferred tax assets 11,880 10,200 Long-term deposit 8,113 7, , ,047 Current assets Inventories 383, ,263 Trade receivables 8 191, ,930 Other receivables and prepayments 41,395 38,360 Pledged bank deposits 18,498 33,784 Bank balances and cash 222, , , ,746 Current liabilities Trade payables 9 129, ,161 Other payables 89,032 95,471 Income tax liabilities 32,771 46,435 Deferred revenue 13,872 8,581 Short-term bank loans 10 64, , ,648 Net current assets 528, ,098 Total assets less current liabilities 716, ,145 Non-current liability Deferred tax liabilities 8,099 7, , , Hongguo International Holdings Limited Interim Report 2011

30 Condensed Consolidated Statement of Financial Position At 30 June 2011 At At 30 June 31 December Notes RMB 000 RMB 000 (unaudited) (audited) Capital and reserves Share capital 11 49,271 49,271 Reserves 659, ,815 Total equity attributable to owners of the Company 708, ,086 29

31 Condensed Consolidated Statement of Changes in Equity For the six months ended 30 June 2011 Equity attributable to owners of the Company PRC Share Statutory option Share reserve reserve Accumulated premium profits Share capital Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 At 1 January 2010 (audited) ,271 98,093 68,690 3, , ,304 Net profit and total comprehensive income for the period 58,529 58,529 Recognition of equity-settled share based payments 7,502 7,502 Transfer on cancellation of equity-settled share based payments (10,576) 10,576 Dividend paid (95,180) (95,180) At 30 June (unaudited) 49,271 98,093 68, , ,155 At 1 January 2011 (audited) ,271 98,093 83, , ,086 Net profit and total comprehensive income for the period 130, ,647 Dividend paid (64,441) (64,441) At 30 June 2011 (unaudited) ,271 98,093 83, , , Hongguo International Holdings Limited Interim Report 2011

32 Condensed Consolidated Statement of Cash Flows For the six months ended 30 June 2011 Six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Net cash from operating activities 78,864 81,255 Investing activities: Payments for acquisition of property, plant and equipment (21,503) (13,568) Payments for acquisition of intangible assets (346) (59) Proceeds from disposal of property, plant and equipment 370 Interest received 1,229 1,938 Placement of pledged bank deposits (26,418) (16,187) Proceeds from release of pledged bank deposits 41,704 33,145 Net cash (used in) from investing activities (4,964) 5,269 Financing activities: Short-term bank loans raised 64,716 Repayment of short-term bank loans (40,893) Dividends paid (64,441) (95,180) Expenses relating to proposed listing (12,661) Net cash from (used in) financing activities (12,386) (136,073) Net increase (decrease) in cash and cash equivalents 61,514 (49,549) Cash and cash equivalents at 1 January , ,379 Cash and cash equivalents at 30 June, 6 30 represented by bank balances and cash 222, ,830 31

33 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June GENERAL INFORMATION AND BASIS OF PREPARATION The Company was incorporated in Bermuda under the Companies Act as an exempted company with limited liability on 26 April 2002 and was listed on the Singapore Exchange Security Trading Limited ( SGX-ST ) in June The Company was later delisted from the SGX-ST on 6 May 2010 (the Delisting ). The Company s shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange ) on 23 September The parent and ultimate parent of the Company is High Score Holdings Limited High Score Holdings Limited The condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and International Accounting Standard 34, Interim Financial Reporting Hongguo International Holdings Limited Interim Report 2011

34 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June PRINCIPAL ACCOUNTING POLICIES The condensed consolidated financial statements have been prepared on the historical cost basis except for certain properties that are measured at fair value. 2. The accounting policies and method of computation used in the condensed consolidated financial statements for the six months ended 30 June 2011 are the same as those followed in the preparation of the Group s financial information for each of the three years ended 31 December 2010 and three months ended 31 March 2011 as contained in the accountants report (the Accountants Report ) under Appendix I of the Company s prospectus dated 12 September 2011 (the Prospectus ) The Group has not early applied new or revised International Financial Reporting Standards, International Accounting Standards and amendments (hereafter collectively referred to as IFRSs ) that have been issued but are not yet effective as set out in Note 2 to Section A of the Accountants Report. A2 The directors of the Company anticipate that the application of these new or revised IFRSs will have no material impact on the results and the financial position of the Group in the future. There are no new or revised IFRSs have been issued but are not effective subsequent to the date of the Prospectus. 33

35 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June REVENUE AND SEGMENT INFORMATION The following is an analysis of the Group s revenue and results from continuing operations by reportable and operating segments, i.e. retail and wholesale of branded fashion footwear ( Retail and wholesale ) and contract manufacturing of footwear ( Contract manufacturing ), for the period under review: 3. Six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Segment revenue Retail and wholesale external sales 817, ,774 Contract manufacturing external sales 110, ,337 inter-segment sales 2,948 Eliminations (2,948) 928, ,111 Segment results Retail and wholesale 172,114 76,855 Contract manufacturing 10,299 5, ,413 82,423 Unallocated finance costs (980) (903) Share of losses of joint ventures (900) (1,557) Profit before tax 180,533 79,963 Income tax expense (49,886) (20,715) Net profit for the period from continuing operations 130,647 59,248 Inter-segment sales are charged at prevailing market prices. 34 Hongguo International Holdings Limited Interim Report 2011

36 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June REVENUE AND SEGMENT INFORMATION (CONTINUED) The following is an analysis of the Group s assets by reportable and operating segments: June 31 December RMB 000 RMB 000 (unaudited) (audited) Continuing operations Retail and wholesale 938, ,226 Contract manufacturing 221, ,980 Eliminations (118,087) (154,217) Total segment assets 1,042, ,989 Unallocated 4,473 5,804 Consolidated assets 1,046, ,793 35

37 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June PROFIT BEFORE TAX FOR THE PERIOD FROM CONTINUING OPERATIONS Profit for the period from continuing operations has been arrived at after crediting (charging) the following items: 4. Six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Depreciation of property, plant and equipment 7,331 6,537 Amortisation of prepaid lease payments (included under administrative and general expenses) Amortisation of intangible assets (included under administrative and general expenses) Total depreciation and amortisation 7,722 6,879 Cost of inventories recognised as an expense (including allowance for inventories obsolescence) 313, ,707 Expense recognised in respect of equity-settled share-based payments 7, Hongguo International Holdings Limited Interim Report 2011

38 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June INCOME TAX EXPENSE (RELATING TO CONTINUING OPERATIONS) 5. Six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Current tax: Enterprise income tax 50,526 20,579 Deferred tax (credit) charge: Current period (640) ,886 20,715 The Company incorporated in Bermuda and subsidiaries of the Group incorporated in the British Virgin Islands and Hong Kong are not subject to local income tax in their respective jurisdiction. In accordance with the Law of the People s Republic of China (the PRC ) on Enterprise Income Tax promulgated on 16 March 2007 (the New Tax Law ), subsidiaries of the Group located in the PRC are subject to PRC Enterprise Income Tax rate of 25% (six months ended 30 June 2010: 25%, except for Nanjing Soft Garment & Footwear Co., Ltd. which was subject to a tax rate at 12.5% pursuant to certain tax concessions applicable under the New Tax Law) % % 25% 37

39 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June INCOME TAX EXPENSE (RELATING TO CONTINUING OPERATIONS) (CONTINUED) Upon the New Tax Law, PRC withholding income tax is applicable to dividends payable to investors that are non- PRC tax resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Under such circumstances, dividends distributed from the PRC subsidiaries to non-prc tax resident group entities in Hong Kong shall be subject to the withholding tax at 5%. At 30 June 2011, deferred tax in relation to withholding income tax for the undistributed profits of PRC entities, amounting to RMB377,218,000 (31 December 2010: RMB258,486,000) have not been provided, as the directors of the Company did not anticipate to distribute for such profits from its PRC subsidiaries in the foreseeable future. 5. 5% ,218, ,486, DIVIDENDS During the current interim period, a dividend of USD per share amounting to USD 9,801,000 (equivalent to RMB 64,441,000) was proposed and paid to shareholders. The directors do not recommend the payment of an interim dividend for the six months ended 30 June ,801,000 64,441, During the prior interim period, total dividends of USD per share amounting to USD 14,000,000 (equivalent to RMB 95,180,000) was proposed and paid to shareholders ,000,000 95,180, Hongguo International Holdings Limited Interim Report 2011

40 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June EARNINGS PER SHARE From continuing and discontinued operations 7. The calculation of basic earnings per share attributable to owners of the Company is based on the following data: Six months ended 30 June (unaudited) (unaudited) Earnings (RMB 000) Earnings for the purposes of basic earnings per share 130,647 58,529 Number of shares ( 000) Number of ordinary shares for the purpose of basic earnings per share 1,700,000 1,700,000 Earnings per share (RMB cents) Basic The number of ordinary shares for the purpose of calculating basic earnings per share for the periods has been retrospectively adjusted for the capitalization issue disclosed in Appendix VII to the Prospectus as if the shares had been in issue throughout the periods. 7 No diluted earnings per share had been presented for the period ended 30 June 2010 because the exercise price of the Company s outstanding share options, after adjustment for future services to be rendered according to IFRS 2 Sharebased Payment, was higher than the average market price of the Company s shares throughout the period before cancellation upon the Delisting in May

41 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June EARNINGS PER SHARE (CONTINUED) From continuing operations 7. The calculation of the basic earnings per share from continuing operations attributable to owners of the Company is based on the following data: Six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Earning figures are calculated as follows: Profit for the period attributable to owners of the Company 130,647 58,529 Less: Loss for the period from discontinued operations (719) Earnings for the purpose of basic earnings per share from continuing operations 130,647 59,248 The denominators used are the same as those detailed above for calculation of basic earnings per share from continuing and discontinued operations. From discontinued operations Basic loss per share for the discontinued operations is nil (six months ended 30 June 2010: RMB 0.04 cents per share) based on the loss for the period from the discontinued operations of nil (six months ended 30 June 2010: RMB 719,000) and the denominators used are the same as those detailed above for calculation of basic earnings per share from continuing operations , Hongguo International Holdings Limited Interim Report 2011

42 Notes to the Condensed Consolidated Financial Statements For the six months ended 30 June MOVEMENTS IN PROPERTY, PLANT AND EQUIPMENT During the period, the Group spent approximately RMB 21,503,000 (six months ended 30 June 2010:RMB 12,915,000).on construction costs for a new manufacturing plant in the PRC and machinery, fixtures and equipments and motor vehicles in order to upgrade its manufacturing capabilities and expand its sales network ,503, ,915, DEFERRED TAXATION The following are the deferred tax balances recognised by the Group and movements thereon during the current and prior periods: 9. Withholding Revaluation tax on of Write undistributed investment down of Tax Deferred profits properties inventories losses revenue Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 At 1 January , (3,021) (2,702) 1,035 Credit (charge) to profit or loss 843 (979) (136) At 30 June , (4,000) (2,702) 899 Credit (charge) to profit or loss ,145 (357) 2,242 At 31 December , ,145 (4,000) (3,059) 3,141 Credit (charge) to profit or loss 357 1,323 (1,040) 640 At 30 June , ,468 (5,040) (3,059) 3,781 41