RESULTS
The board of directors ("Board") of Denway Investment Limited (the "Company") announce that the audited consolidated results of the Company and its subsidiaries, associated companies and a jointly controlled entity (the "Group") for the year ended 31st December 1999, together with comparative figures for the corresponding period in 1998, are as follows:
Note 1999 1998
HK$'000 HK$'000
Turnover 1 624,523 559,060
Cost of sales (541,380) (484,875)
--------- ---------
Gross profit 83,143 74,185
Other revenue 1 18,838 19,845
Selling and distribution costs (11,979) (14,752)
General and administrative expenses (85,657) (95,679)
Net other operating income 2 59,145 83,378
--------- ---------
Operating profit 63,490 66,977
Finance costs (15,810) (29,384)
Share of (losses)/profits of:
A jointly controlled entity (12,628) (14,541)
Non-consolidated subsidiaries (461) (962)
Associated companies (1,054) 557
--------- ---------
(14,143) (14,946)
========= =========
Profit before taxation 33,537 22,647
Taxation 3 (957) (1,330)
--------- ---------
Profit after taxation 32,580 21,317
Minority interests 5,287 2,314
--------- ---------
Profit attributable to shareholders 37,867 23,631
========= =========
Earnings per share 4 1.6 cents 1.7 cents
========= =========
Notes:
1. Revenue and turnover
The Group is principally engaged in the manufacturing and trading of motor vehicles, motor vehicle related equipment and parts and audio equipment.
Group
1999 1998
HK$'000 HK$'000
(a) Turnover
Trading of motor vehicles 244,193 196,060
Manufacturing and assembly of
motor vehicles 157,535 142,063
Manufacturing and trading of
automotive equipment, parts and
other operatons 62,310 95,785
Manufacturing and trading of
audio equipment 160,485 125,152
------- -------
624,523 559,060
------- -------
(b) Other revenues
Interest income 9,101 11,518
Gross rental income from
investment properties 2,825 2,450
Sales of marketable securities 1,162 1,575
Other income 5,750 4,302
------- -------
18,838 19,845
------- -------
Total revenues 643,361 578,905
======= =======
2. Net other operating income
Group
1999 1998
HK$'000 HK$'000
Gain on disposal of subsidiaries 53,900 --
Revaluation deficit of investment properties (2,478) (27,979)
Waiver of interest payable to and
purchase discount granted by
Guangzhou Motor Limited Company -- 69,975
Write-back of provision for doubtful debts 5,708 46,662
Write-back of/(provision for)
loss on inventories 1,183 (5,280)
Others 832 --
------- -------
59,145 83,378
======= =======
3. Taxation
Hong Kong profits tax has been provided at the rate of 16 per cent. (1998: 16 per cent.) on the estimated assessable profit for the year. Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the countries in which the Group operates.
The amount of taxation charged to the consolidated profit and loss account represents:
Group
1999 1998
HK$'000 HK$'000
Hong Kong profits tax 80 52
Overseas taxation 695 1,070
Over provision in prior years - Hong Kong (9) (11)
Under provision in prior years - Overseas -- 490
Deferred taxation 98 (405)
------- -------
864 1,196
Share of taxation attributable to
associated companies 93 134
------- -------
957 1,330
======= =======
There was no material unprovided deferred taxation for the year.
4. Earnings per share
The calculation of basic earnings per share is based on the consolidated profit attributable to shareholders of HK$37,867,000 (1998: HK$23,631,000) and the weighted average number of 2,411,081,609 (1998: 1,368,534,540) shares in issue during the year ended 31st December 1999. The fully diluted earnings per share is not disclosed as it would not be materially different from the basic earnings per share had it been calculated based on 2,474,126,862 ordinary shares which represents the weighted average number of ordinary shares in issue during the year plus the weighted average number of 63,045,253 ordinary shares deemed to be issued at no consideration if all outstanding options had been exercised.
FINAL DIVIDEND
The Board does not recommend a final dividend for the year ended 31st December 1999 (1998: Nil).
BUSINESS REVIEW
For the year ended 31st December 1999, turnover of the Group amounted to approximately HK$624,523,000 (1998: HK$559,060,000), and the audited consolidated profit attributable to shareholders amounted to approximately HK$37,867,000 (1998: HK$23,631,000). Earnings per share were 1.6 cents (1998: 1.7 cents).
The Company completed the placement of new shares in February 1999. The new shares issued had been fully underwritten by China Lounge Investments Limited, the Company's substantial shareholder, pursuant to the underwriting agreement. Consequently, a total of 2,509,190,970 shares had been issued by the Company, and the net proceeds of approximately HK$529,000,000 from the rights issue had been applied to the repayment of loan due to Guangzhou Automobile Group Company Limited ("Guangzhou Automobile"). The loan had been committed as the registered capital for the Guangzhou Honda Automobile Company Limited ("Guangzhou Honda") project. Currently, Guangzhou Automobile is the Company's ultimate controlling shareholder which has 55.54 per cent shareholding in the Company.
In 1999, demand for automobile in the Mainland of China ("China") has been rising steadily. According to statistics, total production volume of 112 domestic automobile manufacturing enterprises amounted to 1,830,000 vehicles, amongst which 570,000 vehicles were sedans manufactured by 15 manufacturers which was, increased by 12 per cent over 1998. Since Guangzhou Honda commenced production of its first sedan on 26th March 1999, the company has achieved its production capacity of 60 vehicles per day starting from June and recorded monthly profits since August. The revamp of facilities on 354 items of factory was completed in October, representing a total investment of RMB 440,000,000 on new fixed assets. In November, the Guangzhou Honda Accord sedan passed the State's inspection requirement of 40 per cent domestic content level for locally made sedans, with actual domestic content level reaching 45.38 per cent. The quality of the Guangzhou Honda Accord sedan was inspected by Honda Motor Co., Ltd. ("Honda Motor") and attained the technological and quality standards of Honda Motor, and won the top position in the comprehensive appraisal for all Honda Motor's overseas factories. The annual production and sales targets of 10,000 Guangzhou Honda Accord sedans were exceeded.
The establishment and development of Guangzhou Honda demonstrated the success of Sino-Japanese cooperation on project management, production management, quality management, sales management and product development. Both shareholders spent a mere 18 months to complete the State-approved investment and development plan, and passed the acceptance test for national engineering project with an annual production capacity of 30,000 vehicles in February 2000, laying a solid foundation for further realization of next stage production output of 50,000 - 80,000 vehicles per annum.
Other businesses of the Group including manufacture of coaches, automotive spare parts and electronic products, emphasize on internal management, market exploitation and development of new products. The target set at the beginning of the year has been accomplished with most of them showing good signs of further development.
However, Guangzhou Weida Machinery Enterprises Corporation Limited-Automotive Electrical Equipment Factory, Automotive Parts Company, People's Automotive Parts Factory and Guangzhou Automotive Industry Supply and Marketing Company continue to incur losses over the past few years, and their net assets have already become negative. Accordingly, the Company transferred all of its shareholdings in these four enterprises, being 95 per cent, at a nominal price of HK$1 each to a party which is a wholly-owned subsidiary of Guangzhou Automobile. The disposal of the above-mentioned subsidiaries has been approved by the relevant authorities of China.
At the same time, in order to reduce the burden of the Group and streamlining its corporate structure to focus on its core businesses, the Company has made applications to formally terminate all the contracts and articles of association of the following four enterprises: the Second and Eighth Business Section of the Guangzhou Weida - Automotive Industry Trading Company, the Service Company of Automotive Electrical Equipment Factory, After-sales Service Company of Guangzhou Automotive & Agriculture Machinery Industry Corporation, thus dissolving these enterprises and revoking the respective permits and licenses. The above-mentioned termination applications have also been formally approved by the relevant authorities of China.
Since Guangzhou Automobile became the controlling shareholder of the Company in early 1999, the Company has been concentrating on the development of automobile business, enhancement of management quality, increasing company transparency, formulating the optimal investment strategy and strengthening the ongoing good relationship with its investors. The result, among others, was the award of the "Best Small Company in China" by asiamoney in 1999. Since March 2000, the Company has further been included by Morgan Stanley Capital International as a constituent stock of China Free Index. This has helped the Company to better attract the attention of local and overseas investors, and serves as a recognition and encouragement of the steady, pragmatic, organized as well as aggressive style of its management.
FUTURE PROSPECTS
Moving into the year 2000, we anticipate that the relevant authorities of China will gradually announce incentive policies on automobile consumption, and a double digit growth in the demands of sedans in China over 1999 can be expected. In the wake of China's accession to the World Trade Organisation ("WTO"), the majority of the small scale automobile manufacturers are relatively disadvantaged with their inferior means and scale of production, product quality and varieties as well as prices and services when comparing with overseas counterparts. Their future development prospects are worrying. On the other hand, however, joining the WTO will enable us to fully capitalize on the inflow of foreign capital, technology, resources, marketing and advanced management experience, which will be particularly to the advantage of sedan manufacturers in China who are already in joint ventures with internationally renowned car makers. The principles of free competition, mutual trade benefits, non-discrimination and national treatments which the WTO has been adhering to, will actively promote and enhance the development of our national sedan industry. It will also speed up the rectification of the existing scattered and disorderly state of our national automobile industry, the adjustment and the optimization of the industry structure; whereas for individual enterprises, when they are in direct competition with foreign counterparts, they will consider the fundamental need for development instead of sitting on their laurels. As far as the government is concerned, it will enable it to enact laws and regulations that are systematic and adequate in meeting international practices. Therefore, China's entering into the WTO will mean the transformation of pressure into motivation for the sedan industry in China, especially for those sedan manufacturers who are already in joint ventures with foreign parties, and for them to speed up the pace of development.
According to the full text of the Sino-US Agreement released recently, in three years after its entry into the WTO, China shall allow foreign companies to set up their automobile sales network and businesses providing full range of spare parts and car maintenance services in China. This will mean that the existing sedan manufacturers in China will have at least 3-4 years to establish their sales networks ahead of their foreign counterparts who have not yet set up their sedan manufacturing plants in China. According to the original negotiations, by the year 2005, import duties for automobiles in China will be reduced to 25 per cent, but the latest version is that the 25 per cent rate will not have to be applied until July 2006.
Since the establishment of the joint venture in 1998, shareholders of Guangzhou Honda have been well preparing for the entry of China into the WTO by emphasizing on the four key aspects of product quality management, cost control, after-sales service and technology innovation. They set their targets not just on existing local competitors but also on major international automobile manufacturers for the reason that competition in China sedan market is in effect coming from famous automobile manufacturers around the world.
In 2000, Guangzhou Honda will revamp and expand certain production processes and facilities, and by adhering to the principle of "revamping, producing and planning at the same time", it will gradually attain the annual production target of 50,000 - 80,000 vehicles with two working shifts. The company plans to set up 80 - 100 "four-in one" franchisee shops within the year, so that its sales system can match with internationally advanced sales system, thus ensuring the realization of systemized management of sales network and taking the lead among domestic counterparts. Before the end of 2000, at least two further car models will be launched for realizing diversification of product varieties to satisfy users' demand. While maintaining steady quality standards of domestic parts, the domestic content level will further be increased to over 50 per cent, yielding higher profits at an annual production target of 30,000 vehicles.
Guangzhou Honda aims to increase the annual production output capacity of the Accord series and its modified models to 80,000 vehicles in 3-5 years time. Concurrently, by fully utilizing its available resources to expand and revamp the existing production facilities, the company plans to spend 5 years to establish and develop economy cars with the target of achieving an annual production capacity of 100,000-150,000 vehicles, so that based on the revamp of the existing production plant and facilities, the total annual sedan production capacity can reach 200,000 vehicles in year 2006. We estimate that as soon as duties for imported cars are reduced to 25 per cent, not only are we competitive in quality and sales services, but we also have an absolute edge in the product prices over similar models of imported cars. We are confident that the entry of China into the WTO is both a challenge as well as an opportunity for Guangzhou Honda.
The Company will endeavor to seek the injection of Guangzhou Automobile's 51 per cent interest in the "Guangzhou Coach Project" joint ventured with Isuzu Japan into the Company. Also, in future the Company will consider increasing the investment weighting of car sales and servicing and spare-parts manufacturing businesses. In order to reflect the specialties of the businesses of the Company more precisely, the Company intends to be rename itself as "Denway Motors Limited 
" and such proposal will be submitted to the forthcoming Annual General Meeting for approval.
The Board believes that the outlook of the development of the Guangzhou automobile industry, which leds by Guangzhou Honda, is promising. We shall endeavor to make satisfactory returns to shareholders in the year 2000 so as to live up to the expectations of the great number of investors over the years.
YEAR 2000 ("Y2K") ISSUE
Details of the Group's assessment and progress of the compliance of the Y2K issue have been disclosed in the interim report dated 21st September 1999. The system of a subsidiary of the Company with non-core business not having achieved Y2K readiness in September last year became Y2K compliant in December 1999. All computer hardware and software installed by the Group are in full compliance with the Y2K standard.
The Group had performed a back up of its computer software, including systems and data, with a Y2K compliant machine in 1999. A contingency plan was also implemented to cater for probable disruptions to business due to the Y2K issue. However, up to the date of this announcement, has Group did not experience any problems related to the Y2K issue.
Approximately HK$600,000 had been spent on the project of Y2K compliance and the Group has no further commitments in respect of Y2K project.
PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES
During the year, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed securities.
CODE OF BEST PRACTICE
In the opinion of the Board, the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited throughout the accounting year covered by the annual accounts. The independent non-executive directors of the Company are not appointed for a specific term as they are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Company's Articles of Association.
By order of the Board
Zhang Fangyou
Chairman and Managing Director
Hong Kong, 18th May 2000
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