CHAIRMANíS STATEMENT FOR THE YEAR ENDED 31/3/96
I am pleased to present my review of the results and operations of the Herald Group ("the Group") for the year ended 31st March, 1996.
The Group's turnover ("Turnover"') and
profit attributable to shareholders (
The Group's turnover ("Turnover"') and profit attributable to shareholders ("Net Profit") for the year under review amounted to HK$1,247 million and HK$11.8 million respectively. Compared to last year, the Turnover has dropped slightly by 1% while the Net Profit has a significant increase of 145%. The weighted earnings per share for the year increased to 1.92 cents. an increase of 146% from last year's 0.78 cent.
The increase of profitability of the Group
has mainly been contributed by the higher turnover in the toy
division and the timepiece division as well as the successful
implementation of cost control and reduction programs throughout
(2) Hong Kong taxation is calculated at the rate of 16.5% on the estimated profits chargeable to Hong Kong Profits Tax for the year. Overseas taxation is provided on the profits of the overseas subsidiaries in accordance with the tax laws of the countries in which these subsidiaries operate.
(3) The calculation of earnings per share is based on the profit attributable to shareholders of HK$ 11,794,000 (1995:HK$ 4,816,000) and the weighted average number of shares in issue during the year of 614,341,000 (1995:6l4,637,000). Fully diluted earnings per share in respect of unexercised share options is not shown as the dilution is not material.
The Net Profit is stated after accounting for exceptional items amounting to HK$11.4 million, details of which are described below. Before these exceptional items the Net Profit represents an increase of 10% as compared with that of the previous year.
REVIEW OF OPERATIONS
During the year under review, the sales of radio-controlled toy cars continued to grow in the toy division. Despite a drop in the sales of plastic toys, the division recorded growth in both turnover and profit. The improved results can also be attributed to more stable material and labour costs. The toy retail shop in Shanghai was closed down in June, 1995 resulting in a loss on closure of HK$4.3 million. As a provision of HK$7 million was made in the previous financial year, the overprovision of HK$2. 7 million was written back as an exceptional item.
The computer head division's turnover and profit declined as compared to the prior year. Expectations of increased demand for thin-film heads in the second half of the financial year did not materialize and the market for these products has yet to mature. During the year, the division successfully transferred all testing and quality control operations to its China plants resulting in a downsizing of the Hong Kong operation and substantial overhead savings to be realized in the next financial year. A provision of HK$9 million was made in respect of the relocation. Such provision was shown as an exceptional item.
The timepiece division maintained its market share and substantial new business has been developed with key customers. Zeon, our UK based wholly-owned subsidiary reported much improved turnover and profitability in spite of challenging trading conditions at its German and French offices. During the year, Zeon received a very positive response to its licensed character timepiece business. In particular, our "Barbie" timepieces have done well and we have recently licensed the "Head" trademark, an outstanding sports name. Zeon also owns the "Ingersoll" trademark, one of Britain's best-known watch brands and this business continues to grow nicely.
Both the houseware division and the shoes division still reported losses due to poor market conditions. The cookware sales to the United States and Japan, the two major markets for this division, have both dropped. The division's efforts to widen both its customer base and product range in the UK market has resulted in a satisfactory increase in business volume. As part of the cost reduction program, the weaving facilities in the Shenzhen factory of the shoes division have been transferred and combined with the facilities in its Shanghai factory to achieve a higher production efficiency.
In our interim report, I stated that we would be concentrating our efforts and energies on our core activities where we have demonstrated expertise. With this in mind, we have terminated the activities of Motivasia Ltd where performance had been very disappointing. During the year, the Group also disposed of its interests in an associated company resulting in a loss of approximately HK$ 5.1million which is shown as an exceptional item in the accounts.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31st March, 1996 the Group had total assets of HK$ 710 million which were financed by current liabilities of HK$ 168 million deferred taxation ofHK$5 million, minority interests of HK$77 million and shareholders' equity of HK$460 million
Compared to last year, the Group has a much stronger liquidity position. As at 31st March, 1996 the working capital ratio was 2.12, as compared with 1.27 last year and the quick ratio was 0.79, as compared with last year's 0.50. During the year under review the Group has significantly reduced its borrowings partly from the proceeds realised from long term investments and partly from the reduction of stocks. As a result, at the end of the financial year the Group had a net cash resources of HK$3.7million as compared to net bank and financial institution borrowings of HK$124.2 million as at 31st March, 1995.
PROSPECTS AND GENERAL OUTLOOK
Despite the achievement of a satisfactory result in the last financial year, it is anticipated that the current financial year is going to be a difficult one for the toy division. Facing severe competition from other toy manufacturers, the division has further lowered its profit margins to its customers.
In the computer head division, demand for ferrite heads remains steady while shipments of metal heads are declining as the market begins to need higher capacity tape drives. As a result of this, the division expects that there will soon be a transition in demand from metal heads to thin film heads, and is well positioned to take advantage of this. As mentioned earlier, the market for thin film heads did not mature the way it was expected to during the year, and it is anticipated that this will occur in the coming financial year.
In the timepiece division, we expect further improvement in both profitability and turnover. Our cost reduction exercise on this division continues to show benefits and management changes within the division have improved efficiency. At Zeon, we continue to look out for interesting opportunities. Zeon's consumer electronics unit is increasing its product range and we look forward to further growth in the year ahead.
The Group will continue its efforts to streamline its operations. In particular, efforts are being made to improve the performances of those divisions which contribute negatively to the results of the Group.
In view of the difficult market conditions as above-mentioned the Directors will not recommend any dividend at the forthcoming Annual General Meeting.
On behalf of the board of directors and shareholders, I should like to extend my sincere thanks to all the Groupís employees for their efforts and hard work.
Hongkong, 31st July, 1996
Hongkong, 31st July, 1996
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