Corporate Information The report details the company's fundamental registration information, principal business location, board and committee member rosters, share registrar, auditor, and share listing particulars - The report provides the company's basic registration information, principal place of business, lists of board and committee members, share registrar, auditor, and share listing information468 Director's Statement Financial Highlights In FY2019, the company's financial performance significantly deteriorated, marked by a 38.2% revenue decline, a shift to gross loss, and a substantial increase in loss attributable to owners of the parent, resulting in HKD 975 million in net liabilities and severe liquidity pressure FY2019 Financial Performance Summary (HKD '000) | Metric | FY2019 | FY2018 | Year-on-Year Change | | :--- | :--- | :--- | :--- | | Financial Performance | | | | | Revenue | 459,109 | 743,414 | -38.2% | | Gross (Loss)/Profit | (52,556) | 11,782 | From profit to loss | | Gross (Loss)/Profit Margin | (11.4%) | 1.6% | -13.0pp | | Loss Attributable to Owners of Parent | (905,423) | (703,767) | +28.7% | | Financial Position | | | | | Total Assets | 439,095 | 1,307,390 | -66.4% | | Total Liabilities | 1,413,850 | 1,400,349 | +1.0% | | Net Liabilities | (974,755) | (92,959) | Liabilities expanded | | Current Ratio | 0.3 | 1.3 | -76.9% | Business Overview In 2019, the Group's automotive engine business faced severe challenges due to a key customer's financial distress, leading to a sharp revenue decline and significant impairment losses, while the civil engineering and construction business also saw revenue decline and a shift to loss, with plans for industrial hemp cultivation terminated due to financing difficulties - The Group's consolidated revenue for 2019 decreased by 38.2% year-on-year to HKD 459 million, with loss attributable to owners expanding to HKD 905 million14 - The annual loss was primarily attributable to a 38.2% revenue decline resulting in a gross loss of HKD 52.6 million, inventory impairment provisions of approximately HKD 33.1 million for the automotive engine business, fair value impairment losses of approximately HKD 88 million for intangible assets and HKD 276 million for goodwill, and additional expected credit losses of approximately HKD 349 million on trade receivables and bills from automotive engine business customers14161718 Automotive Engines Business The automotive engine business sharply deteriorated in 2019, with revenue plummeting 70.6% to HKD 81.3 million and average monthly production dropping 83.7%, primarily due to a key customer's financial distress and bankruptcy filing, leading to over HKD 700 million in impairment and expected credit losses on related intangible assets, goodwill, and trade receivables Key Metrics for Automotive Engines Business | Metric | FY2019 | FY2018 | Year-on-Year Change | | :--- | :--- | :--- | :--- | | Revenue (HKD Mn) | 81.3 | 276.5 | -70.6% | | Average Monthly Production (Units) | 181 | 1,108 | -83.7% | | Gross Margin (Excluding Impairment & Amortization) | 2.5% | 10.9% | -8.4pp | - Due to deteriorating business prospects, the Group recorded significant non-cash impairment losses related to the automotive engine business, including approximately HKD 88 million in fair value impairment loss on intangible assets, approximately HKD 276 million on goodwill, and approximately HKD 349 million in expected credit losses on trade receivables and bills23 - A major customer, BAIC Yinxiang Automobile Co., Ltd., faced a bankruptcy petition in September 2019, exacerbating business uncertainties21 Civil Engineering and Construction Business In 2019, civil engineering and construction business revenue decreased by 19.1% to HKD 378 million, shifting from a 2.6% gross margin to a 5.3% gross loss margin due to market conditions, with 12 significant projects under construction by year-end Financial Performance of Civil Engineering and Construction Business | Metric | FY2019 | FY2018 | | :--- | :--- | :--- | | Revenue (HKD Mn) | 377.8 | 466.9 (Estimated) | | Gross (Loss)/Profit Margin | -5.3% | 2.6% | Withdrawal from Industrial Hemp Business The Group attempted to enter the industrial hemp cultivation and processing business in mid-2019 via acquisition but decided to divest all related interests due to a worsening global economic outlook and prolonged financing acquisition, with no plans to re-enter this business - The Group decided to withdraw from the industrial hemp business due to decreased optimism regarding the global economic and business environment outlook, which required more time to secure sufficient financing25 Outlook The Board maintains a cautious outlook for 2020, anticipating continued pressure on the automotive engine business due to customer restructuring delays and the COVID-19 pandemic, while remaining confident in securing new opportunities in the challenging Hong Kong construction sector, with plans to implement cost controls and conduct a strategic portfolio review for diversification - The automotive engine business is expected to continue facing adverse impacts in 2020 due to customer restructuring delays and the COVID-19 pandemic25 - The Group plans to conduct a strategic portfolio review of its businesses in February 2020, focusing on new construction-related business opportunities and potential business diversification3032 Summary of Significant Contracts on Hand Civil Engineering and Construction Contracts As of December 31, 2019, the Group held several significant civil engineering and construction contracts, including road and drainage works, utilities civil engineering, and building construction and maintenance, with specific contract amounts not provided for some due to their nature Selected Significant Contracts on Hand (HKD Mn) | Contract Category | Contract Details | Contract Amount | | :--- | :--- | :--- | | Road and Drainage Works | Provision of barrier-free access facilities for road structures (Contract 8) | 203 | | Road and Drainage Works | Provision of barrier-free access facilities for road structures (Contract 9) | 173 | | Building Construction and Maintenance | Renovation and new entrance works for Tsuen Wan West Station | 80 | | Building Construction and Maintenance | Superstructure works for Tseung Kwan O Depot Phase II Section 4 | 92 | Management Discussion and Analysis Business and Financial Review This section details FY2019 operating results, reiterating a 38.2% revenue decline and expanded losses primarily attributed to sales downturns, inventory impairment, and significant intangible asset, goodwill, and trade receivables impairment in the automotive engine business, with basic and diluted loss per share widening to HKD 4.527 - Due to the deteriorating performance of the automotive engine business, the Group recorded significant impairments, including approximately HKD 88 million in fair value impairment of intangible assets, approximately HKD 276 million in fair value impairment of goodwill, and approximately HKD 349 million in expected credit losses on trade receivables and bills4851 - For the year ended December 31, 2019, basic and diluted loss per share was approximately HKD 4.527, compared to approximately HKD 3.519 in 201847 Business Segment Analysis This section provides an in-depth analysis of segment performance, highlighting the automotive engine business's sharp revenue and production decline due to key customer issues and significant impairment losses, the civil engineering and construction business's 19.1% revenue decrease and shift to a 5.3% gross loss margin, and the confirmed withdrawal from industrial hemp cultivation Revenue by Business Segment (HKD Mn) | Business Segment | FY2019 | FY2018 | Year-on-Year Change | | :--- | :--- | :--- | :--- | | Automotive Engines Business | 81.3 | 276.5 | -70.6% | | Civil Engineering and Construction Business | 377.8 | 466.9 | -19.1% | | Total | 459.1 | 743.4 | -38.2% | Prospect Management maintains a cautious outlook for 2020, citing global economic recession signs, US-China trade conflicts, Hong Kong's political environment, and the COVID-19 pandemic as challenges, anticipating continued negative impacts on the automotive engine business from customer restructuring delays, while remaining confident in the construction sector and planning strategic portfolio reviews for diversification and cost control - Management maintains a cautious and conservative outlook for 2020, primarily influenced by macroeconomic factors such as global economic slowdown, US-China trade conflicts, and the COVID-19 pandemic64 - The Group plans to conduct a strategic portfolio review of its businesses in February 2020, evaluating strategic options in Hong Kong and internationally, with a focus on new opportunities and potential diversification in the construction sector6770 Principal Risks and Uncertainties The Group faces multiple risks, including business risks from market price and demand fluctuations, intense industry competition, policy risks from compliance requirements, credit risk from severe payment delays by automotive engine business customers, and liquidity risk due to net current liabilities and net liabilities, compounded by macroeconomic uncertainties like US-China trade conflicts, Hong Kong's economic downturn, and the COVID-19 pandemic - The Group's principal risks include business risk, industry risk, policy risk, credit risk, liquidity risk, and other macroeconomic risks such as the US-China trade war and the COVID-19 pandemic71727576777884 - As of December 31, 2019, the Group recorded net current liabilities and net liabilities, indicating exposure to liquidity risk7882 Capital Structure, Financial Resources, Liquidity and Gearing By the end of 2019, the Group's cash and equivalents increased to HKD 64.8 million, yet total assets sharply declined by 66.4% due to significant impairments, resulting in net current liabilities of HKD 981 million (from HKD 131 million net current assets) and a deteriorated current ratio of 0.3, with liquidity improved by extending convertible bond maturity and converting promissory notes to perpetual status Liquidity Metrics Changes | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents (HKD Mn) | 64.8 | 27.0 | | Total Assets (HKD Mn) | 439.1 | 1,307.4 | | Net Current (Liabilities)/Assets (HKD Mn) | (980.8) | 130.7 | | Current Ratio | 0.3 | 1.3 | - The company reached agreements with convertible bond and promissory note holders to extend the convertible bond maturity by five years to 2025 and convert promissory notes to perpetual status, which helps improve the Group's liquidity position8991 Going Concern Despite significant net losses, net current liabilities, and net liabilities in FY2019, coupled with COVID-19 impacts, the Directors believe the Group remains a going concern, based on measures including extended convertible bond and promissory note terms, a commitment from a major shareholder for at least HKD 58.6 million in additional funding, ongoing automotive business customer restructuring, and implemented cost control measures - Despite recording a net loss of HKD 906 million and net current liabilities of HKD 981 million, the Board believes the company remains a going concern94 - Key measures supporting going concern include extending repayment terms for convertible bonds and promissory notes, securing a commitment from a major shareholder for at least HKD 58.6 million in additional funding, ongoing restructuring of the automotive engine business customer, and implementing stringent cost control measures9496 Employees and Remuneration Policies As of end-2019, the Group had approximately 452 employees in Hong Kong and China, a decrease from 611 in 2018, with remuneration policies regularly reviewed based on market terms, company performance, and individual qualifications - As of December 31, 2019, the Group's employee count was 452, a 26% decrease from 611 in 2018113 Biographical Details of Directors and Senior Management This section provides detailed personal biographies of executive directors, non-executive directors, independent non-executive directors, and senior management, including their age, academic background, professional qualifications, and internal and external appointments - This section provides detailed personal biographies of executive directors, non-executive directors, independent non-executive directors, and senior management, including their age, academic background, professional qualifications, and internal and external appointments117119121123125128 Corporate Governance Report Compliance with the CG Code During the reporting period, the company largely complied with the Corporate Governance Code, but noted deviations including the absence of separate Chairman and Chief Executive Officer roles (functions performed by all executive directors), non-executive directors lacking specific terms, the Chairman's absence from the AGM due to the lack of a designated Chairman, and an executive director's oversight in not retiring by rotation as required - The company had several deviations from the Corporate Governance Code during the reporting year, such as the non-separation of Chairman and Chief Executive Officer roles and non-executive directors lacking specific terms132133134 The Board and its Committees This section details the Board's responsibilities, composition, and changes, noting significant member turnover during the period, with the Board responsible for overall leadership and strategic decisions; the company established Audit, Remuneration, and Nomination Committees, all chaired by independent non-executive directors to oversee specific matters, also outlining director appointment, re-election, meeting attendance, training, nomination, and diversity policies - During the reporting period and up to the report date, there were multiple changes in Board members, including resignations and new appointments of several directors143148 - The company has established Audit, Remuneration, and Nomination Committees, all composed of and chaired by independent non-executive directors186201207 - The Board has adopted nomination and board diversity policies, acknowledging the current gender imbalance among its members (all male)212226236 Risk Management and Internal Control The Board is responsible for maintaining sound risk management and internal control systems, conducting annual effectiveness reviews covering financial, operational, and compliance controls, and has reviewed and deemed the systems appropriate for FY2019 - The Board is responsible for maintaining and annually reviewing the effectiveness of the Group's risk management and internal control systems, deeming the 2019 systems appropriate244248 Shareholder Rights This section clarifies key shareholder rights, including attending and voting at general meetings, requisitioning extraordinary general meetings (requiring at least 10% of paid-up share capital with voting rights), electing and re-electing directors and auditors, and communicating with the company and accessing information, also detailing meeting procedures to ensure effective shareholder communication - Shareholders holding not less than 10% of the company's paid-up share capital with voting rights are entitled to requisition an extraordinary general meeting256 Report of the Directors Principal Activities and Business Review This report reiterates the Group's principal activities as the development, production, and sale of automotive engines, alongside civil engineering and building construction and maintenance, directing readers to the 'Director's Statement' and 'Management Discussion and Analysis' sections for detailed business reviews, significant events, and future developments - The Group is principally engaged in (i) the development, production, and sale of automotive engines; and (ii) civil engineering and building construction and maintenance businesses280 Major Customers and Suppliers The Group exhibits very high customer and supplier concentration, with the largest customer accounting for 42.5% of total revenue and the top five customers for 98.8% in 2019; similarly, the top five suppliers accounted for 71.6% of total cost of sales, and the largest supplier for 38.5%, posing significant operational risks due to this high concentration Customer and Supplier Concentration | Concentration Metric | FY2019 | FY2018 | | :--- | :--- | :--- | | Largest Customer as % of Total Revenue | 42.5% | 22.3% | | Top Five Customers as % of Total Revenue | 98.8% | 74.7% | | Largest Supplier as % of Cost of Sales | 38.5% | 20.7% | | Top Five Suppliers as % of Cost of Sales | 71.6% | 46.6% | Shareholding Concentration The Hong Kong SFC announced on May 10, 2019, that as of April 23, 2019, controlling shareholders and 19 other shareholders collectively held 90.6% of the company's issued shares, leaving only 9.4% held by other shareholders, warning investors to exercise extreme caution due to potential significant share price volatility from limited trading caused by this high concentration - The Hong Kong SFC noted that as of April 23, 2019, controlling shareholders and 19 other shareholders collectively held 90.6% of the company's shares, with public float at only 9.4%, indicating a risk of high shareholding concentration301 Share Option Scheme The company adopted a share option scheme in March 2016 to incentivize and reward eligible contributors to the Group, granting 12 million share options on April 26, 2019, at an exercise price of HKD 7.128 per share, including 500,000 options to Director Mr. Lam Wah - On April 26, 2019, the company granted 12,000,000 share options under the share option scheme, with an exercise price of HKD 7.128 and an expiry date of April 25, 2024334335 Environmental, Social and Governance Report Caring for Environment This section outlines the Group's environmental commitments and practices, focusing on Hong Kong's civil engineering and construction business, demonstrating compliance with environmental regulations and ISO 14001 certification, detailing measures in green management, water consumption, noise control, construction waste management (3R policy), and energy saving (green office policy), with office greenhouse gas emissions decreasing by 2% and paper consumption by 26% during the period - The Group's environmental management system is ISO 14001 certified, and it strictly adheres to Hong Kong's environmental regulations in its construction business368370 - During the reporting period, total Scope 2 greenhouse gas emissions from the Hong Kong headquarters and engineering business headquarters offices decreased by 2% year-on-year379380 Caring for People This section details the Group's policies and performance in employment and labor practices, health and safety, development and training, and operational practices, emphasizing a non-discriminatory, fair, and harmonious workplace, strict prohibition of child and forced labor, OHSAS 18001 certification for occupational health and safety with zero fatalities, and practices in supply chain management, product quality, anti-corruption, and community investment - As of the end of 2019, the Group's total number of employees was 452, a decrease from 611 in the same period last year397404 Safety Performance (Hong Kong Civil Engineering and Construction Business) | Metric | FY2019 | FY2018 | | :--- | :--- | :--- | | Fatalities | 0 | 0 | | Lost Time Injuries | 5 | 7 | | Lost Time Injury Rate | 2.5 | 3.4 | - The Group's occupational health and safety management system is OHSAS 18001 certified418 Independent Auditor's Report Auditor's Opinion Auditor Cheng & Co. Certified Public Accountants Limited believes the consolidated financial statements fairly present the Group's consolidated financial position as of December 31, 2019, and its consolidated financial performance and cash flows for the year then ended, in accordance with Hong Kong Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance - The auditor issued a standard unmodified opinion, stating that the financial statements fairly present the company's financial position453 Material Uncertainty Related to Going Concern The auditor draws attention to Note 2 of the financial statements, which highlights the Group's significant losses, net current liabilities, and net liabilities in FY2019, indicating a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern; however, the auditor's opinion is not modified in respect of this matter, implying adequate disclosure by management - The auditor's report includes a 'Material Uncertainty Related to Going Concern' paragraph, emphasizing that the Group's significant losses and net liability position may cast significant doubt on its ability to continue as a going concern456458 Key Audit Matters The auditor identified two key audit matters: the impairment assessment of goodwill and intangible assets, which involves significant management judgment in forecasting future cash flows; and the recoverability of trade receivables and bills, which involves material amounts and significant judgment and assumptions in determining expected credit losses - Key Audit Matter One: Impairment assessment of goodwill and intangible assets, where management's forecasts of future cash flows for the cash-generating unit involve significant judgment due to delayed resumption of production by the automotive engine business customer463466 - Key Audit Matter Two: Recoverability of trade receivables and bills, considered a key audit matter due to the material amounts involved (47% of total assets) and significant judgment required in the expected credit loss model468471 Consolidated Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income In FY2019, the Group's revenue was HKD 459 million, a 38.2% year-on-year decrease, resulting in a gross loss of HKD 52.56 million due to higher cost of sales than revenue; after significant goodwill and intangible asset impairments (totaling HKD 364 million) and high administrative expenses, loss before tax reached HKD 922 million, with a final annual loss of HKD 906 million, of which HKD 905 million was attributable to owners of the parent Consolidated Statement of Profit or Loss Summary (HKD '000) | Item | FY2019 | FY2018 | | :--- | :--- | :--- | | Revenue | 459,109 | 743,414 | | Gross (Loss)/Profit | (52,556) | 11,782 | | Goodwill Impairment | (275,821) | (174,933) | | Intangible Assets Impairment | (88,042) | (430,928) | | Loss Before Tax | (922,494) | (769,826) | | Loss for the Year | (906,245) | (703,767) | | Loss Attributable to Owners of Parent | (905,423) | (703,767) | Consolidated Statement of Financial Position As of end-2019, the Group's total assets sharply decreased from HKD 1.307 billion to HKD 439 million, primarily due to significant reductions in goodwill, intangible assets, and trade receivables, while total liabilities remained at HKD 1.414 billion, severely deteriorating the balance sheet from HKD 92.96 million net liabilities to HKD 975 million net liabilities, with net current liabilities reaching HKD 981 million Consolidated Statement of Financial Position Summary (HKD '000) | Item | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Total Non-current Assets | 51,929 | 681,157 | | Total Current Assets | 387,166 | 626,233 | | Total Assets | 439,095 | 1,307,390 | | Liabilities and Equity | | | | Total Current Liabilities | 1,367,928 | 495,519 | | Total Non-current Liabilities | 45,922 | 904,830 | | Total Liabilities | 1,413,850 | 1,400,349 | | Net Liabilities | (974,755) | (92,959) | Consolidated Statement of Cash Flows In FY2019, the Group generated net cash flow from operating activities of HKD 42.66 million, a significant improvement from a net outflow of HKD 44.29 million in the prior year, primarily due to reduced contract assets and inventories, with net cash outflow from investing activities of HKD 16.28 million and net cash inflow from financing activities of HKD 16.72 million, resulting in year-end cash and cash equivalents increasing to HKD 64.78 million Consolidated Statement of Cash Flows Summary (HKD '000) | Item | FY2019 | FY2018 | | :--- | :--- | :--- | | Net Cash Flows from/(used in) Operating Activities | 42,655 | (44,292) | | Net Cash Flows used in Investing Activities | (16,279) | (2,486) | | Net Cash Flows from Financing Activities | 16,719 | 18,557 | | Net Increase/(Decrease) in Cash and Cash Equivalents | 43,095 | (28,221) | | Cash and Cash Equivalents at End of Year | 64,777 | 21,706 | Notes to Financial Statements The notes to the financial statements provide detailed explanations of accounting policies, key accounting judgments and estimates, and in-depth breakdowns of various financial statement items, with important notes covering the going concern assumption (Note 2), segment information (Note 5), goodwill and intangible asset impairment testing assumptions and processes (Notes 16, 17), expected credit losses on trade receivables (Note 20), and changes in terms of convertible bonds and promissory notes (Notes 26, 27) - Note 2 details management's basis and measures for concluding that the company remains a going concern despite significant losses and net liabilities513515 - Notes 16 and 17 disclose key assumptions for goodwill and intangible asset impairment tests, such as cash flow forecasts, growth rates, and discount rates, explaining the reasons for significant impairments730733 Five-Year Financial Summary This section provides summary data on the Group's performance, assets, and liabilities for the past five financial years, facilitating comparative analysis of long-term financial performance trends - This section provides summary data on the Group's performance, assets, and liabilities for the past five financial years, facilitating comparative analysis of long-term financial performance trends3
中国碳中和(01372) - 2019 - 年度财报