The Groupís turnover ("Turnover") and profit attributable to shareholders ("Net Profit") for the year under review amounted to HK$1,026 million and HK$14 million respectively. As compared to last year, the Turnover dropped by 18% while the Net Profit had an increase of 16%. The weighted earnings per share for the year increased to 2.25 cents, an increase of 17% from last yearís 1.92 cents.
The declines of turnover in both the toy division and the computer head division are the main factors contributing to the drop in the Groupís turnover and operating profit. Notwithstanding the unsatisfactory results of these divisions, the Group had an increase in the net profit attributable to our shareholders as compared to last year. This was due in part to our ability to stem losses of the associated companies which we had experienced in previous years.
REVIEW OF OPERATIONS
The year under review was a difficult one for the toy division which experienced a significant drop in its turnover and profitability. Over the year, the sales of radio-controlled toys and plastic figures dropped 40% and 17.5% respectively. As mentioned in the interim report, the division started the year with a lower sales order book than the previous year. In the second-half of the year, the order position for plastic toys rose to a more satisfactory level while the business of radio-controlled toys remained weak.
The computer head division experienced declines in both turnover and profits due to a sharp drop in demand for low-end metal heads and a decrease in shipments of thin-film heads. In the case of low-end metal heads, the worldwide demand for these heads no longer exists as computer storage capacity exceeds the capability of metal heads. For thin-film heads, market share was difficult to gain due to over-capacity and intense price competition. During the year, the division successfully transferred most of the balance of its operations to China, maintaining only a small team in Hong Kong concentrating on research and new process development.
Both the timepiece division and the houseware division made improvements in their results. The timepiece division had respectable growth in both its turnover and profit. Our Zeon division, based in London, is one of Britainís leading importers of timepieces with its own distribution offices in France and Germany. It is a market leader in licensed childrenís timepiece character watches, sports watches and consumer electronics. During the year the houseware division experienced better margins due to more stable aluminium prices which enabled the division to operate profitably after two loss-making years.
The results of the shoes division were disappointing. With a second year of decreasing turnover, the division had even larger losses than the previous year. The directors decided to close down the division and in May, 1997 the Group disposed of all its interests in Emper Industrial Ltd., the operating company of the shoes division in Hong Kong and Shenzhen. Subsequently the weaving production facilities in the Shanghai factory were also shut down. A provision of HK$8.1 million, which is shown as an exceptional item in the accounts, has been made relating to the closure of the division.
During the year under review, the Group reduced the total interests in associated companies by HK$11 million to HK$12 million (1996: HK$23 million). The associated companies generated positive contributions for the year compared to losses of HK$7 million in last year.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31st March, 1997 the Group had total assets of HK$700 million which were financed by current liabilities and deferred taxation of HK$178 million, minority interests of HK$72 million and shareholdersí equity of HK$450 million.
At the end of the financial year the Group had a strong balance sheet with a healthy liquidity position. The working capital ratio was 2.19, similar to that of last year. The quick ratio has improved to 0.94 from 0.79. At the balance sheet date the Groupís net cash resources increased significantly to HK$41.4 million from HK$3.7 million last year.
PROSPECTS AND GENERAL OUTLOOK
The toy division started the current financial year with a strong sales order book. Currently the division is manufacturing and selling ranges of toys, the characters of which originate from two of the yearís blockbuster movies. The directors anticipate that the division will have a strong recovery in its profitability compared to last year, despite the lower profit margin for its products.
In the computer head division, much effort has been placed on research and development in higher-end head products (half-inch vs. quarter-inch) which are enjoying high demand due to high storage capacity and limited head availability. The computer head division has successfully developed such heads and is, at this time, in the midst of customer qualification with the largest user for these heads. This business could result in substantial prospects for the division in the second half of the coming financial year. Furthermore, subcontracting arrangements have been established with a major European organization, to which the computer head division will supply new generation thin-film heads made from multi-channel wafers supplied by the European firm. Similar subcontracting arrangements are being discussed with a large U.S. firm.
In the timepiece division and the houseware division, we expect further improvement in terms of their profitability and turnover. This year Zeon has negotiated a Pan-European license for Disney flip-top digital watches as well as the well-known "Head" trademark for sports watches, both of which are expected to further boost growth in turnover and profitability of the division. The houseware division has gradually migrated from low-priced products to higher-priced products on which the division can earn a better profit. In the current year, the division will launch a series of new cookware lines in Japan and the UK.
After two years of continuous efforts to streamline its operations, the Group is now focused on its four core businesses i.e. toys, computer heads, timepieces and housewares. The directors believe that better results can be achieved in the current year.
Last year, in view of difficult market conditions the company did not pay a dividend. The Directors believe that the current conditions have become more stable and are pleased that the company can now resume the declaration of dividends to its shareholders. The Directors will recommend a final dividend of 1.5 cents per share at the forthcoming Annual General Meeting to be held on 15th September, 1997. Together with the interim dividend of 1 cent per share, total dividends for the year under review will amount to 2.5 cents per share.
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.
Hong Kong, 28th July, 1997
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