01B_ _Cor_Inf.pm6

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1 Interim Report 2007 中期報告

2 CORPORATE INFORMATION Directors Executive Mr. FANG Hongbo (Chairman) Mr. ZHANG Quan Mr. LI Dong Lai Mr. LI Jianwei Ms. YUAN Liqun (redesignated from non-executive Director to executive Director on 4 January 2007) Non-executive Mr. ZHANG Xin Hua Mr. CHEN Yu Hang (resigned on 30 July 2007) Independent non-executive Mr. CHAN Wai Dune Mr. LAM Ming Yung Ms. CHEN Chunhua Qualified Accountant & Company Secretary Ms. TANG Wai Ying, Tracy CPA FCCA CPA FCCA Auditors PricewaterhouseCoopers Certified Public Accountants 22nd Floor, Prince s Building, Central, Hong Kong 1

3 Hualing Holdings Limited Interim Report 2007 CORPORATE INFORMATION (Continued) Legal Advisers Richards Butler 20th Floor, Alexandra House, Chater Road, Hong Kong Registered Office Suite 3904, 39/F, Tower 6, The Gateway, Harbour City, 9 Canton Road, Tsim Sha Tsui, Kowloon Share Registrar Computershare Hong Kong Investor Services Limited 46th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong Stock Code Principal Bankers Bank of China (Hong Kong) Limited Bank of China Industrial and Commercial Bank of China China Construction Bank Website Address 2

4 INTERIM RESULTS The directors (the Directors ) of Hualing Holdings Limited (the Company ) hereby announce the unaudited consolidated results of the Company and its subsidiaries (together, the Group ) for the six months ended 30 June 2007 (the Period ), together with the comparative figures for These interim financial information have not been audited, but have been reviewed by the Company s audit committee and its external auditors (the Auditors ). MANAGEMENT DISCUSSION AND ANALYSIS Overall Market Environment In the first half of 2007, the home appliances industry was impacted by the rise in the upstream raw materials prices and the acceleration in the pace of Renminbi appreciation. Such factors have resulted in an increasing pressure on production costs and the diminishing edges on low costs as enjoyed by Made in China. Competition in the PRC home appliances industry was severe while pace of consolidation within the industry has been accelerated and this has made the Matthew Effect, under which, the strong has become stronger, even more obvious. Refrigerator Industry Environment In the first half of 2007, the PRC refrigerator industry sustained strong growth and the growth in sales volume has scaled a new height. In terms of product mix, there was a vigorous growth in demand for high-end refrigerators, such as dual-opening doors and multiple-doors series. According to China Market Monitor Co., Ltd. ( ), market shares of dual-opening doors and multiple-doors refrigerators have risen to 11%. In respect of brand competition within the industry, the growth of renowned brands was strong and the competition was increasingly severe, resulting in the circumstances under which the strong has become stronger. 11% 3

5 Hualing Holdings Limited Interim Report 2007 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Air-conditioner Industry Environment The first half of 2007 indicated an improvement in the market environment of the PRC air-conditioner industry where a growth was resumed, in particular the year-on-year sales volume increased by over 10% in the domestic market, however, a rapid slow down in the growth rate of export. In respect of products development, consumers have become more conscious of energy saving and environmental protection. In respect of brand competition within the industry, with the further expansion of the market share of the major brands, such as Gree, Midea and Haier, and the diminishment in the operating environment for the weaker brands, there arose an oligarchic competition in the air-conditioner industry. 10% Business Performance In the first half of 2007, the Group recorded a turnover of approximately HK$2,004,512,000, representing a year-onyear growth of 51%. Gross profit amounted to approximately HK$189,092,000, representing a year-on-year growth of 20%. Loss attributable to the equity holders of the Company decreased significantly to HK$409,000. However, gross profit margin decreased from approximately 12% in the first half of 2006 to approximately 9% in the first half of 2007 due to, among others, the rise in the raw materials prices and the appreciation of Renminbi. The overall operating environment remained gloomy. 2,004,512,00051% 189,092,00020% 409,000 12% 9% 4

6 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Analysis of Refrigerator Business The Group s sales revenue from refrigerators accounted for approximately 38% of its total turnover during the Period. The Group s sales revenue from refrigerators in the first half of 2007 amounted to approximately HK$754,154,000, representing an increase of approximately 29% from that of the corresponding period of last year. Sales volume was approximately 948,000 units, representing an increase of 34% from that of the corresponding period of last year. This was mainly attributable to the changes in sales mix of the refrigerator business. There was a larger increase in sales revenue from OEM operation compared with previous periods. The OEM sales from the controlling shareholder, Midea Group Co., Ltd. (the Midea Group ), during the Period amounted to approximately HK$120,529,000, representing a year-on-year increase of 452%. In the first half of 2007, the Group s refrigerator export sales revenue amounted to approximately HK$455,959,000, representing an increase of 40% from that of the corresponding period of last year and accounted for 60% of the total revenue from the Group s refrigerator business. During the Period, the Group s export sales volume was approximately 658,900 units, representing an increase of 32% from that of the corresponding period of last year, and this was mainly attributable to the benefits brought by the significant achievements with the Group s efforts in expanding its overseas market. However, due to the continuous appreciation of Renminbi, the edge of low cost as enjoyed by Made in China will vanish gradually, and as such, expansion of overseas market will be threatened. During the Period, domestic sales revenue from refrigerator business amounted to approximately HK$298,195,000, representing an increase of 15% from that of the corresponding period of last year. Domestic sales volume was approximately 289,100 units, representing an increase of 38% from that of the corresponding period of last year. Such improvement was mainly due to the adjustment in the sales mix during the Period, in which the amount of OEM sales increased as compared to the previous years, which mainly generated from the OEM sales of HK$120,529,000 from the Midea Group. Further opening up in the domestic market led to the escalating competition among renowned brands. Sales revenue generate from OEM sales of Midea Group will become the main source of sales revenue of the Group. 38% 754,154,00029% 948,000 34% 120,529,000452% 455,959,000 40% 60% 658,900 32% 298,195,000 15% 289,100 38% 120,529,000 5

7 Hualing Holdings Limited Interim Report 2007 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Analysis of Air-conditioner Business The Group s sales revenue from air-conditioners accounted for approximately 62% of its total turnover during the Period. The Group s sales revenue from air-conditioners in the first half of 2007 amounted to approximately HK$1,250,358,000, representing an increase of 68% from that of the corresponding period of last year. Sales volume of airconditioners was approximately 880,100 units, representing an increase of 41% from that of the corresponding period of last year. There was a significant improvement in the turnover of the Group s air-conditioners business and this was mainly because the selling prices increased as a result of the rise in raw materials prices in the air-conditioner industry and the sales revenue from the OEM business grew at a faster pace as compared with previous periods. The OEM sales revenue from the Midea Group during the Period amounted to approximately HK$407,499,000. There were no OEM products for Midea Group during the corresponding period of last year, coupled with the Group s unremitting effort in introducing new models and the expansion of the third and fourth tier domestic markets. The Group expects airconditioner business will face fierce competition due to the low price competition arising from the emergence of small household appliances brands domestically and the fact that famous brands attach great important to environmental friendly and quality design. In the first half of 2007, the export sales revenue from the Group s air-conditioner business amounted to approximately HK$338,210,000, representing a decrease of 24% as compared with the corresponding period of last year and accounted for 27% of the total revenue from the airconditioner business. During the Period, the Group s export sales volume was approximately 285,900 units, representing a decrease of 34% from that of the corresponding period of last year, and this was mainly attributable to the adjustment in the sales channels, the rise in raw materials prices which undermined the competitiveness in export and the appreciation of Renminbi. In the domestic market, sales revenue from the Group s air-conditioner business amounted to approximately HK$912,148,000, representing an increase of 205% from that of the corresponding period of last year. During the Period, the domestic sales volume of the Group s air-conditioner business was approximately 594,200 units, representing an increase of 209% from that of the corresponding period of last year, and this was mainly due to the Group s effective expansion in the third and fourth tier domestic markets as well as the significantly larger volume in OEM sales during the Period, which mainly generated from the OEM sales of HK$407,499,000 from the Midea Group. In the face of increasingly cutthroat competition in the industry, sales revenue from OEM sales of Midea Group will become the main source of sales revenue of the Group. 62% 1,250,358,000 68% 880,100 41% 407,499, ,210,000 24% 27% 285,900 34% 912,148, % 594, % 407,499,000 6

8 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Overall Operating Performance Strengthening Research & Development of High-end Products and Emphasis on Building up Core Technologies In the first half of 2007, the Group insisted on increasing its investment in research and development and focused on building up the core technologies in the fields of airconditioners and refrigerators. Research and development of air-conditioners has made a breakthrough in terms of efficiency and direct current invertors technologies, while in-depth research and development of refrigerators was undertaken in the studies on cryogenic, frost-free and preservation technologies. Further Delegation of Power and Expansion of Distribution Channel Reforms in marketing system were implemented and more power was delegated to the regional sales offices, which enjoyed greater autonomy in terms of human, financial and material resources. The Group further expanded its sales channels on the foundation of the regional sales offices and developed marketing strategies with clear targets that suit specific local environment. Implementation of Production Efficiency Improvement Project The Group realised lean production and set up a production system with higher efficiency by upgrading the production technologies of local factories under its production efficiency improvement project. Key Performance Indicators (KPI) were adopted and provisional examination target rates were assigned to every factory. In 2007, the Group s production efficiency will be increased through such production efficiency improvement project. Bolstering up the Integration of Value Chain and Materializing a Seamless Value Chain Export sales and domestic sales value chain working groups were established and regular joint meetings with relevant departments, such as the research and development, production, sales and quality control departments, were held. Practical solutions in respond to the problems arising from the real life production processes were adopted in such meetings and the smooth product delivery along the internal value chain was largely realised. (KPI) 7

9 Hualing Holdings Limited Interim Report 2007 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Overall Operating Performance (Continued) Reinforcement of the Efficiency-oriented Corporate Culture The Group gradually introduced an efficiency-oriented corporate culture within itself that linked staff s remuneration with the company, departments and their personal evaluation results. Through the introduction and nurturing of the efficiency-oriented corporate culture, staff was fully mobilized and was given more incentive to work. Financial Review Liquidity and Financial Resources The Group continues to adopt prudent funding and treasury policies. As at 30 June 2007, the Group s aggregate borrowings increased to approximately HK$434,089,000 (31 December 2006: approximately HK$391,162,000), which all are bearing fixed interest rate. The increase in borrowings is mainly due to the net addition of approximately HK$42,927,000 during the Period. Bank balances and cash amounted to approximately HK$342,948,000 (31 December 2006: HK$247,199,000). The balances of the Group s trade and notes receivables amounted to approximately HK$1,287,354,000 (31 December 2006: HK$438,830,000). Capital Structure and Pledge of Assets As at 30 June 2007, the Group had net deficit attributable to the shareholders of approximately HK$322,026,000. As at 30 June 2007, the gearing ratio, represented by the ratio between total bank borrowings and total assets, was approximately 14% (31 December 2006: approximately 20%). As at 30 June 2007, property, plant and equipment and leasehold land and land use rights with net book value of approximately HK$59,437,000 (31 December 2006: approximately HK$81,335,000) were pledged as security for the Group s short term bank borrowings. Although the Group faces difficulties in raising loans from banks as it continues to record net deficit attributable to the shareholders, all banks are willing to renew the existing loans and/or extend the repayment terms, which is attributable to the financial support of the controlling shareholder, Midea Group. As at 30 June 2007, approximately HK$370,752,000 (31 December 2006: approximately HK$316,512,000) of the Group s borrowings were guaranteed by the Midea Group or a subsidiary of the Midea Group. In addition, the Group has unutilised banking facilities of approximately HK$168,671,000, the whole balance were guaranteed by the Midea Group or a subsidiary of the Midea Group, which can be used to meet the short-term cash demands. Details of contingent liabilities are set out in Note 23 to the interim financial information. 434,089, ,162,000 42,927, ,948,000: 247,199,000 1,287,354,000 : 438,830, ,026,000 14% 20% 59,437,000 81,335,000 / 370,752, ,512, ,671,

10 MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Financial Review (Continued) Exposure to the Risk of Fluctuations in Exchange Rate Since most of the Group s loans and transactions are denominated in Renminbi, Hong Kong Dollar and United States Dollar, the risk borne by the Group with respect to exchange rate fluctuation is relatively low. During the Period, the Group mainly used its income in Renminbi to settle the expenses from its PRC operations, and had not used any financial instruments to hedge its bank borrowings denominated in Renminbi, which was mainly used to meet the working capital requirements of its PRC operations. Human Resources As at 30 June 2007, the Group employed approximately 5,620 full time staff in Hong Kong and the PRC. The Group continued to improve its human resources management. With several years of efforts, the Group has established hiring, remuneration, appraisal, training and benefits systems that suit its corporate development. The Group perfected its staff appraisal system and processes and digitalised them with its IT system in the first half of The Company has also adopted a share options scheme and has provided free housing to certain staff in the PRC. Future Prospect Since the Group is still recording shareholders net deficit, while the household appliance industry is affected by factors such as increased price of upstream raw materials, nationwide labour shortage and acceleration of appreciation of Renminbi, we therefore encounter difficulties arising from further increased cost pressure and a more competitive global household appliance industry. The Group will face a more severe business environment in the second half of this year as the household appliance industry enters into slack season. The management will continue to review the business policies, asset structure and operation efficiency of the Group and actively explore other strategic measures to increase the value of the Group. Looking forward, we will endeavour to optimise our capital structure and seek to enhance shareholder value. Meanwhile, the management will continue to optimise the allocation of resources, enhance operation efficiency and cost and expenses management in order to improve our financial results and conditions. 5,620 IT 9

11 Hualing Holdings Limited Interim Report 2007 DIRECTORS AND CHIEF EXECUTIVE INTERESTS IN EQUITY AND DEBT SECURITIES As at 30 June 2007, the interests and short positions of the Directors and chief executive of the Company in office as at 30 June 2007 in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance ( SFO ), Chapter 571 of the laws of Hong Kong), as recorded in the register required to be kept by the Company under Section 352 of the SFO or which have to be notified to the Company and The Stock Exchange of Hong Kong Limited (the Stock Exchange ) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such Director or chief executive is taken or deemed to have under such provisions of the SFO) and the Model Code for Securities Transactions by the Directors of Listed Issuers contained in the Rules Governing the Listing of Securities on the Stock Exchange (the Listing Rules ), were as follows: Interests in share options of the Company XV7 8 Options Options held at Options Options held at 1 January granted exercised 30 June 2007 during the during the 2007 Period Period Exercise Grant Exercisable Exercisable Name price date from until HK$ Directors: Mr. Fang Hongbo 25,000,000 25,000, Mr. Li Jianwei 5,000,000 5,000, Ms. Yuan Liqun 3,900,000 3,900, Share options are granted to the Directors under the 2003 Share Option Scheme. Details of share options schemes are disclosed in Note 12(b) to the interim financial information. 12(b) Other than those interests disclosed above, as at 30 June 2007, no Directors and chief executives of the Company (including their spouse and children under 18 years of age) had any interests in, or had been granted, or exercised, any rights to subscribe for the shares of the Company and its associated corporations (within the meaning of the SFO). 10

12 SUBSTANTIAL SHAREHOLDERS INTERESTS So far as the Directors are aware, the register of substantial shareholders maintained under Section 336 of the SFO shows that as at 30 June 2007, the Company had been notified of the following substantial shareholders interests, being 5% or more of the Company s issued share capital. These interests are in addition to those disclosed above in respect of the Directors. 336 Number of Percentage of Name of shareholder shares held shareholding Midea International Corporation Company Limited Long positions 1,747,754, % ( Midea International ) (Note 1) 1 Midea Group (Note 2) Long positions 1,747,754, % 2 Foshan Shunde Tiantuo Investment Co., Ltd. Long positions 1,747,754, % ( Shunde Tiantuo ) (Note 3) 3 Foshan Shunde Lixun Investment Co., Ltd. Long positions 1,747,754, % ( Lixun Investment ) (Note 4) 4 Mr. He Xiangjian (Note 5) Long positions 1,747,754, % 5 Ms. Liang Fengchai (Note 6) Long positions 1,747,754, % 6 Mr. Zhang Hechuan (Note 7) Long positions 1,747,754, % 7 Ms. Zhao Hongying (Note 8) Long positions 1,747,754, % 8 11

13 Hualing Holdings Limited Interim Report 2007 SUBSTANTIAL SHAREHOLDERS INTERESTS (Continued) Notes: 1. These 1,747,754,805 shares were registered in the name of and beneficially owned by Midea International. 2. Midea Group was deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of its holding 100% equity interest in Midea International. 3. The registered capital of Midea Group is owned as to 55% by Shunde Tiantuo and 45% by Lixun Investment. Accordingly, Shunde Tiantuo was deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of its holding 55% equity interest in Midea Group. 4. The registered capital of Midea Group is owned as to 55% by Shunde Tiantuo and 45% by Lixun Investment. Accordingly, Lixun Investment was deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of its holding 45% equity interest in Midea Group. 5. The registered capital of Shunde Tiantuo is owned as to 90% by Mr. He Xiangjian and 10% by Ms. Lu De Yan. Accordingly, Mr. He Xiangjian was deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of his holding 90% equity interest in Shunde Tiantuo. 6. Ms. Liang Fengchai is the spouse of Mr. He Xiangjian and is therefore deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of Mr. He Xiangjian s holding 90% equity interest in Shunde Tiantuo. 7. The registered capital of Lixun Investment is owned as to 34% by Mr. Zhang Hechuan, 33% by Mr. Li Jianwei and 33% by Ms. Yuan Liqun. Accordingly, Mr. Zhang Hechuan was deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of his holding 34% equity interest in Lixun Investment. 8. Ms. Zhao Hongying is the spouse of Mr. Zhang Hechuan and was therefore deemed to be interested in the 1,747,754,805 shares which Midea International was interested in by virtue of Mr. Zhang Hechuan s holding 34% equity interest in Lixun Investment. 1. 1,747,754, % 1,747,754, % 45% 55% 1,747,754, % 45% 45% 1,747,754, % 10% 90% 1,747,754, % 1,747,754, % 33% 33% 34% 1,747,754, % 1,747,754,805 12

14 PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES The Company has not redeemed any of its shares during the Period. Neither the Company nor any of its subsidiaries has purchased or sold any of the Company s shares during the Period. COMPLIANCE WITH THE MODEL CODE OF THE LISTING RULES The Company has adopted a code of conduct rules (the Model Code ) regarding securities transactions by the Directors, the terms of which are no less exacting than the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules. Having made specific enquiry to the Directors, all Directors confirmed that they have complied with the Model Code throughout the Period. COMPLIANCE WITH CODE ON CORPORATE GOVERNANCE PRACTICES Throughout the Period, the Company has complied with the code provisions of the Code on Corporate Governance Practices as set out in Appendix 14 of the Listing Rules. 13

15 Hualing Holdings Limited Interim Report 2007 AUDIT COMMITTEE To protect the interest of shareholders, the Group formed an audit committee (the Audit Committee ) on 5 August The Audit Committee currently comprises three independent non-executive Directors of the Company, namely, Mr. Chan Wai Dune (chairman), Mr. Lam Ming Yung and Ms. Chen Chunhua and is set to improve the system of internal control of the Group. The Audit Committee has reviewed the unaudited interim results of the Company for the six months ended 30 June 2007 and agreed to the accounting treatment adopted by the Company. In addition, the Auditors have reviewed these unaudited interim results in accordance with Hong Kong Standard on Review Engagement 2410 issued by the Hong Kong Institute of Certified Public Accountants. The independent review report of the Auditors is set out below REMUNERATION COMMITTEE The Company established a remuneration committee (the Remuneration Committee ) to consider the remuneration of the Directors and senior management of the Company. The Remuneration Committee currently comprises two executive Directors, namely, Mr. Fang Hongbo and Mr. Li Jianwei and three independent non-executive Directors of the Company, namely, Ms. Chen Chunhua (chairman), Mr. Chan Wai Dune and Mr. Lam Ming Yung. 14

16 PricewaterhouseCoopers 22/F, Prince s Building Central, Hong Kong Telephone: (852) Facsimile: (852) REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION TO THE BOARD OF DIRECTORS OF HUALING HOLDINGS LIMITED (incorporated in Hong Kong with limited liability) Introduction We have reviewed the interim financial information set out on pages 17 to 48, which comprises the condensed consolidated balance sheet of Hualing Holdings Limited (the Company ) and its subsidiaries (together, the Group ) as at 30 June 2007 and the related condensed consolidated statements of income, changes in equity and cash flows for the six-month period then ended and a summary of significant accounting policies and other explanatory notes. The Rules Governing the Listing of Securities on the Main Board of 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 Hong Kong Accounting Standard 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants. The directors of the Company are responsible for the preparation and presentation of this interim financial information in accordance with Hong Kong Accounting Standard 34 Interim Financial Reporting. 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

17 Hualing Holdings Limited Interim Report 2007 Scope of Review We conducted our review in accordance with Hong Kong Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Hong Kong Institute of Certified Public Accountants. 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 Hong Kong 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. 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 Hong Kong Accounting Standard 34 Interim Financial Reporting. Material uncertainty concerning going concern basis of accounting Without qualifying our conclusion, we draw attention to Note 2 to the interim financial information, which indicates that the Group incurred a loss attributable to the equity holders of the Company of HK$409,000 for the six months ended 30 June 2007, and had net current liabilities and net liabilities of HK$730,876,000 and HK$263,353,000, respectively, as at 30 June The interim financial information of the Group have been prepared on a going concern basis in the light of existence of a written undertaking of continuing financial support from Midea Group Co., Ltd., its ultimate holding company and the availability of unutilised banking facilities of approximately HK$168,671,000 as at 30 June The validity of the interim financial information being prepared on a going concern basis depends upon the success of the measures to improve profitability and cash flows, the successful renewal and/or extension of the shortterm bank loans, availability of financing from other resources and the continuing financial support of Midea Group Co., Ltd.. These conditions, along with other matters as set forth in Note 2, indicate the existence of a material uncertainty which may cast significant doubt about the Group s ability to continue as a going concern. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 10 September , ,876,000263,353, ,671,

18 (ALL AMOUNTS IN HK DOLLARS THOUSANDS UNLESS OTHERWISE STATED) CONDENSED CONSOLIDATED BALANCE SHEET As at 30 June 2007 Unaudited Audited 30 June 31 December Note ASSETS Non-current assets Property, plant and equipment 7 345, ,410 Investment properties 7 101, ,224 Leasehold land and land use rights 30,133 29,470 Other non-current assets , ,609 Current assets Inventories 8 359, ,909 Due from related companies 25(c) 360, ,084 Trade and other receivables 9 1,451, ,401 Prepaid value-added tax net 10 6,628 19,698 Cash and cash equivalents , ,199 2,520,948 1,467,291 Total assets 2,998,770 1,943,900 EQUITY Capital and reserves attributable to the Company s equity holders Share capital , ,709 Other reserves , ,488 Accumulated losses (1,401,096) (1,400,687) (322,026) (300,490) Minority interests 58,673 50,247 Total equity (263,353) (250,243) LIABILITIES Non-current liabilities Borrowings 15 10,299 39,813 Current liabilities Trade and other payables 14 2,301,889 1,595,692 Due to related companies 25(c) 472, ,771 Current income tax liabilities 2, Borrowings , ,349 Provisions for warranty 16 50,710 36,304 3,251,824 2,154,330 Total liabilities 3,262,123 2,194,143 Total equity and liabilities 2,998,770 1,943,900 Net current liabilities (730,876) (687,039) Total assets less current liabilities (253,054) (210,430) 17

19 Hualing Holdings Limited Interim Report 2007 (ALL AMOUNTS IN HK DOLLARS THOUSANDS UNLESS OTHERWISE STATED) CONDENSED CONSOLIDATED INCOME STATEMENT For the six months ended 30 June 2007 Unaudited Six months ended 30 June Note Sales 6 2,004,512 1,329,472 Cost of goods sold (1,815,420) (1,171,683) Gross profit 189, ,789 Other gains net 18 8,936 4,799 Selling and marketing costs (126,147) (99,518) Administrative expenses (40,674) (73,185) Other operating expenses (2,301) (6,736) Operating profit/(loss) 28,906 (16,851) Finance costs net 19 (16,457) (17,913) Profit/(loss) before income tax 12,449 (34,764) Income tax expense 20 (4,432) (604) Profit/(loss) for the half year 8,017 (35,368) Attributable to: Equity holders of the Company (409) (28,508) Minority interests 8,426 (6,860) 8,017 (35,368) Loss per share for loss attributable to the equity holders of the Company, expressed in HK cents per share basic and diluted 21 (0.01) (0.72) Dividends 22 18

20 (ALL AMOUNTS IN HK DOLLARS THOUSANDS UNLESS OTHERWISE STATED) CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2007 Unaudited Attributable to equity holders of the Company Share Other Accumulated Minority capital reserves losses interests Total Balance at 1 January , ,415 (1,288,040) 43,336 (218,280) Loss for the period (28,508) (6,860) (35,368) Translation differences (5,575) (5,575) Disposal of a subsidiary (358) (358) Employees share option scheme value of employee services 4,125 4,125 Balance at 30 June , ,607 (1,316,548) 36,476 (255,456) Balance at 1 January , ,488 (1,400,687) 50,247 (250,243) (Loss)/profit for the period (409) 8,426 8,017 Translation differences (25,811) (25,811) Employees share option scheme: proceeds from shares issued 3, ,684 Balance at 30 June , ,471 (1,401,096) 58,673 (263,353) 19

21 Hualing Holdings Limited Interim Report 2007 (ALL AMOUNTS IN HK DOLLARS THOUSANDS UNLESS OTHERWISE STATED) CONDENSED CONSOLIDATED CASH FLOW STATEMENT For the six months ended 30 June 2007 Unaudited Six months ended 30 June Net cash generated from operating activities net 66, ,639 Net cash used in investing activities net (18,084) (38,620) Net cash used in financing activities net (28,273) (37,231) Net increase in cash and cash equivalents 19,865 34,788 Cash and cash equivalents at 1 January 151, ,070 Cash and cash equivalents at 30 June 171, ,858 Analysis of balances of cash and cash equivalents Cash at bank and in hand 342, ,309 Less: Pledged bank deposits (171,441) (136,451) 171, ,858 20

22 (ALL AMOUNTS IN HK DOLLARS THOUSANDS UNLESS OTHERWISE STATED) NOTES TO INTERIM FINANCIAL INFORMATION 1. General Information 1. The Group manufactures, distributes and sells household electrical appliances, which include airconditioners, refrigerators and mini-refrigerators. The Group has manufacturing plants in the People s Republic of China ( PRC ) and sells mainly within the PRC and countries in Europe, Americas, Asia Pacific and Africa. The Company is a limited liability company incorporated in Hong Kong. Its registered office is at Suite 3904, 39/F, Tower 6, The Gateway, Harbour City, 9 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong The Company has listed its shares on The Stock Exchange of Hong Kong Limited. This interim financial information has been approved for issue by the Board on 10 September Basis of preparation 2. The Group incurred a loss attributable to the equity holders of the Company of HK$409,000 for the six months ended 30 June In addition, the Group had net current liabilities and net liabilities of HK$730,876,000 and HK$263,353,000 respectively, as at 30 June Nevertheless, the directors of the board ( Directors ) have adopted the going concern basis in the preparation of this interim financial information based on the following assumptions: 409, ,876, ,353,000 The written undertaking of continuing financial support provided by the Group s ultimate holding company, Midea Group Co., Ltd. (the Midea Group ) in the future 12 months from the date of approval of the interim financial information for the six months ended 30 June 2007; 12 21

23 Hualing Holdings Limited Interim Report Basis of preparation (Continued) 2. As disclosed in Note 15 to the interim financial information, certain bank loans, with which the Group largely finances its day-to-day working capital requirements, are due for repayment in Besides, at 30 June 2007, the Group has unutilised banking facilities of approximately HK$168,671,000, the whole balance was guaranteed by the Midea Group or a subsidiary of the Midea Group. The Directors are of the opinion that, the Group will succeed in negotiating with its bankers to renew its outstanding bank loans as fall due and/or to extend their repayment terms to meet its future working capital and financial requirements. Nevertheless, the Group is also actively exploring the availability of alternative sources of financing; and ,671,000 As disclosed in Note 15 to the interim financial information, the banking facilities of approximately HK$370,752,000 were guaranteed by the Midea Group or a subsidiary of the Midea Group as at 30 June The Directors believe that the Midea Group will continue to provide assistance to procure the Group in obtaining adequate additional banking facilities and in extending credit from established and new suppliers or to inject funding into the Group ,752,000 22

24 2. Basis of preparation (Continued) 2. In addition, the Group underwent the following activities in current period to improve its profitability and cash flows: The Group successfully implemented new business strategies which included the termination of production of certain unprofitable models and disposal of certain off-strategy investments to generate additional cash flows for the Group s operations. The Group s gross profit increased from HK$157,789,000 for the first six months of 2006 to HK$189,092,000 for the first six months of 2007; and 157,789, ,092,000 In January 2007, the Directors and employees of the Company exercised 33,900,000 and 5,000,000 share options, respectively, at a price of HK$ per share which raised approximately HK$4,691,000 to provide additional funding to the Group ,900,0005,000,000 4,691,000 In the opinion of the Directors, in light of the measures taken to date and on the basis of the above-mentioned major assumptions, the Group will have sufficient working capital to finance its operation and to maintain its operating existence in the foreseeable future. Accordingly, the Directors are satisfied that it is appropriate to prepare the interim financial information on a going concern basis. This interim financial information for the six months ended 30 June 2007 has been prepared in accordance with Hong Kong Accounting Standard 34, Interim Financial Reporting issued by the Hong Kong Institution of Certified Public Accountants ( HKICPA ). The interim financial information should be read in conjunction with the 2006 annual financial statements for the year ended 31 December

25 Hualing Holdings Limited Interim Report Accounting policies The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2006, as described in the annual financial statements for the year ended 31 December The adoption of new/revised Hong Kong Financial Reporting Standards In 2007, the Group adopted the new standard, amendment and interpretations of Hong Kong Financial Reporting Standards for the period ended 30 June HKAS 1 (Amendment) HK (IFRIC) Int 9 HK (IFRIC) Int 10 HKFRS 7 Presentation of Financial Statements: Capital Disclosures Reassessment of Embedded Derivatives Interim Reporting and Impairment Financial Instruments: Disclosure The Group has assessed the impact of the adoption of these new standard, amendment and interpretations and considered that there was no significant impact on the Group s results and financial position nor any substantial changes in the Group s accounting policies, whereas the adoption of HKAS 1 (Amendment) and HKFRS 7 requires additional disclosures to be made in annual consolidated accounts. Interpretations and standards that are not yet effective and have not been adopted by the Group The following new/revised standards and interpretations have been published and are mandatory for the Group s accounting periods beginning on or after 1 March 2007 or later periods. 1 7 HKFRS 8 HKAS 23 (Revised) HK (IFRIC) Int 11 HK (IFRIC) Int 12 Operating Segment Borrowing Costs HKFRS 2 Group and Treasury Share Transactions Service Concession Arrangements

26 3. Accounting policies (Continued) 3. The Group has not yet early adopted any of the above standards or interpretations. Management is in the process of making an assessment of their impact and is not yet in a position to state what impact they would have on the Group s results of operations and financial position. 4. Financial Risk Management 4. All aspects of the Group s financial risk management objectives and policies are consistent with those disclosed in the annual financial statements for the year ended 31 December Critical Accounting Estimates and Judgments 5. Estimates and judgments used 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 resulting accounting estimates will, by definition, seldom equal the related actual results. 6. Segment information 6. Primary reporting format business segments As at 30 June 2007, the Group is organised into three main business segments: Refrigerator business manufacture and distribution of a broad range of refrigerators Air-conditioner business manufacture and distribution of a broad range of air-conditioners Mini-refrigerator business manufacture and distribution of a broad range of mini-refrigerators Other businesses of the Group mainly comprise holding of investment properties and renting of properties, neither of which are of a sufficient size to be reported separately. 25

27 Hualing Holdings Limited Interim Report Segment information (Continued) 6. Primary reporting format business segments (Continued) The segment results for the six months ended 30 June 2007 are as follows: Sales 276,418 1,250, ,736 2,004,512 Segment results 10,917 2,328 23,775 (8,114) 28,906 Finance costs net (16,457) Profit before income tax 12,449 Income tax expense (4,432) Profit for the period 8,017 The segment results for the six months ended 30 June 2006 are as follows: Air- Mini- Refrigerator conditioner refrigerator Other business business business businesses Group Air- Mini- Refrigerator conditioner refrigerator Other business business business businesses Group Sales 224, , ,240 1,329,472 Segment results 18,350 (10,230) (14,801) (10,170) (16,851) Finance costs net (17,913) Loss before income tax (34,764) Income tax expense (604) Loss for the period (35,368) 26

28 6. Segment information (Continued) Primary reporting format business segments (Continued) The segment assets and liabilities as at 30 June 2007 and capital expenditure for the six months then ended are as follows: 6. Segment liabilities 722,387 2,138, ,588 3,250,359 Unallocated liabilities 11,764 Total liabilities 3,262,123 Capital expenditures 3,483 3,680 27,596 34,759 The segment assets and liabilities as at 31 December 2006 and capital expenditure for the six months ended 30 June 2006 are as follows: Air- Mini- Refrigerator conditioner refrigerator Other business business business businesses Group Segment assets 569,889 1,800, ,742 2,882,166 Unallocated assets 116,604 Total assets 2,998,770 Air- Mini- Refrigerator conditioner refrigerator Other business business business businesses Group Segment assets 377,284 1,092, ,151 1,864,705 Unallocated assets 79,195 Total assets 1,943,900 Segment liabilities 434,150 1,422, ,567 2,185,671 Unallocated liabilities 8,472 Total liabilities 2,194,143 Capital expenditures 9,144 13,462 25,350 47,956 27

29 Hualing Holdings Limited Interim Report Segment information (Continued) 6. Secondary reporting format geographical segments The Group s three business segments are operated in five main geographical areas: PRC manufacture and sale of household electrical appliances Europe sale of household electrical appliances Asia-Pacific sale of household electrical appliances Americas sale of household electrical appliances Africa sale of household electrical appliances There are no sales between the geographical segments. Analysis of financial information by geographical segment is as follows: Analysis of sales of refrigerators into domestic sales in the PRC and export sales outside the PRC by region is as follows: Six months ended 30 June Domestic sales 198, ,037 Export sales Europe 28,186 9,597 Asia-Pacific 22,512 31,274 Americas 24,751 2,445 Africa 2,102 1,590 Total export sales 77,551 44,906 Total 276, ,943 28

30 6. Segment information (Continued) Secondary reporting format geographical segments (Continued) Analysis of sales of air-conditioners into domestic sales in the PRC and export sales outside the PRC by region is as follows: 6. Six months ended 30 June Domestic sales 912, ,725 Export sales Europe 115, ,530 Asia-Pacific 65,450 53,504 Americas 157, ,530 Total export sales 338, ,564 Total 1,250, ,289 Analysis of sales of mini-refrigerators into domestic sales in the PRC and export sales outside the PRC by region is as follows: Six months ended 30 June Domestic sales 99,328 78,532 Export sales Europe 94,670 89,272 Asia-Pacific 128,833 78,129 Americas 116,613 87,806 Africa 38,292 24,501 Total export sales 378, ,708 Total 477, ,240 No geographical segment analysis on total assets and capital expenditure is prepared as over 90% of the Group s total assets and capital expenditures were located/incurred in the PRC. 29

31 Hualing Holdings Limited Interim Report Capital expenditure 7. Property, plant and equipment Investment properties Opening net book amount as at 1 January , ,978 Additions 47,956 Fair value gain 3,789 Disposals (13,642) Depreciation (34,708) Foreign exchange adjustments 3,685 Closing net book amount as at 30 June , ,767 Additions 19,964 Fair value loss (6,543) Disposal of subsidiaries (380) Other disposals (11,959) Depreciation (25,302) Provision for impairment charge (2,046) Foreign exchange adjustments 8,956 Closing net book amount as at 31 December , ,224 Opening net book amount as at 1 January , ,224 Additions 34,759 Fair value gain 733 Disposals (17,149) Provision for impairment charge (186) Depreciation (29,497) Foreign exchange adjustments 11,979 Closing net book amount as at 30 June , ,957 30

32 8. Inventories 8. As at 30 June 31 December Raw materials 84,611 76,598 Work-in-progress 25,665 18,824 Finished goods 249, , , , Trade and other receivables 9. As at 30 June 31 December Trade receivables (Note (a)) (a)) 530, ,691 Less: provision for impairment of trade receivables (52,493) (44,424) Trade receivables net 477, ,267 Notes receivable (Note (b)) (b)) 809, ,563 Prepayments and other receivables 164, ,571 1,451, ,401 31

33 Hualing Holdings Limited Interim Report Trade and other receivables (Continued) 9. (a) The majority of the Group s export sales are on (a) letter of credit or documents against payment, or covered by customers standby letters of credit 30 or bank guarantees. The remaining amounts with 270 credit terms of 30 days to 270 days. At 30 June 2007, the ageing analysis of the trade receivables are as follows: As at 30 June 31 December Within 1 year 482, ,681 In the second year 14,762 20,237 Over 2 years 33,368 22, , ,691 (b) The balance represents bank acceptance notes (b) with maturity periods within six months. 10. Prepaid value-added tax net 10. The Group had paid input value-added taxes ( VAT ) to the State Tax Bureau for the finished goods purchased from its suppliers. In accordance with the relevant PRC tax regulations, these VAT can be offset with the output VAT arising from the sales in the future but are not refundable. The balances at 30 June 2007 and 31 December 2006 represented net input VAT after offsetting the output VAT payable by the Group for the domestic sales made in current period/year. 32

34 11. Cash and cash equivalents 11. As at 30 June 31 December Cash at bank and in hand 342, ,199 The effective interest rate on bank deposits was 0.81% (31 December 2006: 0.72%). 0.81% 0.72% For the purposes of cash flow statement, cash and cash equivalents comprise the following: As at 30 June 31 December Cash at bank and in hand 342, ,199 Less: Pledged bank deposits * * (171,441) (95,557) 171, ,642 * These represented bank balances pledged against bank acceptance notes issued by the Group (Note 14). * 14 At 30 June 2007, cash at bank and in hand of the Group (including pledged deposits) amounted to HK$329,670,000 (31 December 2006: HK$234,515,000), were kept in bank accounts opened with banks in the PRC of which the remittance of funds were subject to foreign exchange control. 329,670, ,515,000 33

35 Hualing Holdings Limited Interim Report Share capital and share options 12. (a) Share capital (a) Authorised Ordinary shares of HK$0.1 each 0.1 Number of shares ( 000) HK$ 000 At 31 December 2006 and 30 June ,000,000 1,000,000 Issued and fully paid Ordinary shares of HK$0.1 each 0.1 Number of shares ( 000) HK$ 000 At 31 December 2006 and 1 January ,687, ,709 Employee share option scheme proceeds from shares issued (i) (i) 38,900 3,890 At 30 June ,725, ,599 (i) The share options exercised by the Directors (i) and employees of the Group during the 12(b) period (Note 12(b) below), resulted in 38,900,000 38,900,000 shares being issued at HK$0.1206, yielding proceeds after transaction costs of approximately 4,684,000 HK$4,684,

36 12. Share capital and share options (Continued) 12. (b) Share options (b) Share options were granted to the Directors of the Company and certain employees of the Group in respect of their services provided to the Group in accordance with the scheme adopted by the Company on 27 June 2003 (the 2003 Share Option Scheme ). The purpose of the 2003 Share Option Scheme is for the Company to attract, retain and motivate talented participants to strive for future developments and expansion of the Group and to provide the Company with a flexible means of giving incentive to, rewarding, remunerating, compensating and/or providing benefits to the participants. Eligible participants of the 2003 Share Option Scheme include the directors (including executive directors and non-executive directors) or employees of the Group, consultants or advisors of the Group, substantial shareholders or employees of substantial shareholders of the Company, associates of directors or chief executives or substantial shareholders of the Company, employees or directors of suppliers or customers of the Group, discretionary objects of a discretionary trust established by employees or directors of the Group, as to be determined by the board at its absolute discretion within the above categories. The maximum numbers of shares which may be issued upon the exercise of all outstanding options granted and yet to be exercised under 2003 Share Option Scheme and any other share option schemes adopted by the Company must not in aggregate exceed 30% of the shares in issue from time to time. The total number of shares which may be issued upon the exercise of all options to be granted under the 2003 Share Option Scheme and any other share option schemes of the Company must not in aggregate exceed 10% of the shares of the Company in issue as at 27 June 2003, but the Company may seek approval of its shareholders in general meeting to refresh the 10% limit under 2003 Share Option Scheme. 30% 10% 10% 35