Financial Information

Financial Statements

(Extracted from Annual Report 2022)

Consolidated Statement of Profit or Loss

For the year ended 31 December 2022 (Expressed in Renminbi (“RMB”))

2022
RMB’000

2021
RMB’000

Revenue

2,039,583

1,625,775

Cost of sales

(1,664,058)

(1,329,217)

Gross profit

375,525

296,558

Other operating income

48,023

37,927

Selling and distribution expenses

(118,387)

(103,736)

Administrative expenses

(60,610)

(46,829)

Impairment loss on trade receivables

(3,370)

Other operating expenses

(155,717)

(99,751)

Profit from operations

88,834

80,799

Interest expense

(11,881)

(7,142)

Profit before taxation

76,953

73,657

Income tax

(8,871)

(10,733)

Profit for the year

68,082

62,924

Attributable to:

Equity shareholders of the Company

63,602

71,303

Non-controlling interest

4,480

(8,379)

Profit for the year

68,082

62,924

Earnings per share (RMB)

Basic

0.164

0.184

Diluted

0.164

0.184

Consolidated Statement of Profit or Loss and Other Comprehensive Income

For the year ended 31 December 2022 (Expressed in Renminbi (“RMB”))

2022
RMB’000

2021
RMB’000

Profit for the year

68,082

62,924

Other comprehensive income for the year
    (after tax and reclassification adjustments)

Item that will not be reclassified to profit or loss:

Equity investments at fair value through other comprehensive income – net movement in fair value reserves (non-recycling)

(1,071)

(1,670)

Item that may be reclassified subsequently to profit or loss:

Exchange differences on translation of

    – financial statements of entities with functional currencies other than RMB

1,161

(367)

Other comprehensive income for the year

90

(2,037)

Total comprehensive income for the year

68,172

60,887

Attributable to:

Equity shareholders of the Company

63,692

69,266

Non-controlling interest

4,480

(8,379)

Total comprehensive income for the year

68,172

60,887

Consolidated Statement of Financial Position

At 31 December 2022 (Expressed in Renminbi (“RMB”))

31 December
2022
RMB’000

31 December
2021
RMB’000

Non-current assets

Property, plant and equipment

212,359

168,189

Intangible assets

56,416

Goodwill

155,116

Interest in an associate

Equity securities designated at fair value through other comprehensive income (FVOCI)

5,622

6,882

Financial assets measured at fair value through profit or loss (FVTPL)

15,321

Deferred tax assets

20,244

11,123

465,078

186,194

Current assets

Inventories and other contract costs

151,587

254,145

Trade and other receivables

743,657

982,958

Time deposits with original maturity more than 3 months

300,000

506,000

Cash and cash equivalents

881,561

546,919

Derivative financial asset

456

1,238

Current liabilities

2,077,261

2,291,260

Trade and other payables

387,960

337,975

Short-term loans

228,634

330,293

Derivative financial liability

2,781

4,227

Lease liabilities

3,709

703

Income tax payable

9,414

4,330

632,498

677,528

Net current assets

1,444,763

1,613,732

Total assets less current liabilities

1,909,841

1,799,926

Non-current liabilities

Deferred income

2,460

4,786

Lease liabilities

2,906

107

Deferred tax liabilities

15,645

7,862

21,011

12,755

NET ASSETS

1,888,830

1,787,171

CAPITAL AND RESERVES

Share capital

295,000

295,000

General reserves

293,265

278,893

Special reserve

(6,017)

(6,017)

Fair value reserve

(4,271)

(3,200)

Translation reserves

(1,859)

(3,020)

Retained profits

1,280,996

1,231,766

Total equity attributable to equity shareholders of the Company

1,857,114

1,793,422

Non-controlling interest

31,716

(6,251)

TOTAL EQUITY

1,888,830

1,787,171

Review of the Performance

Material fluctuations of the consolidated statement of profit or loss items are explained below:

Revenue

The Group’s revenue for the financial year ended 31 December 2022 (“FY2022” or the “Reporting Period”) increased by approximately RMB413.8 million, or approximately 25.5% from approximately RMB1,625.8 million in the previous financial year ended 31 December 2021 (“FY2021”) to approximately RMB2,039.6 million in FY2022.

Part of the increase in revenue for FY2022 comparing FY2021 is due to the completion of the acquisition of Nanjing Zhangyu Information Technology Co., Ltd. (“Nanjing Zhangyu”) and Shanghai Zhangyu Information Technology Co., Ltd. (“Shanghai Zhangyu”) (collectively, the “Zhangyu Companies”) in July 2022, the Zhangyu Companies have contributed approximately RMB94.2 million in revenue in the second half of FY2022. The revenue of Zhangyu Companies formed the new business segment, Digital Technology and Digital Security, of the Group.

By separating the revenue contribution by the Zhangyu Companies in the second half of FY2022, the telecommunications business segment recorded an increase in revenue of approximately RMB319.6 million or 19.7% from FY2021’s approximately RMB1,625.8 million to FY2022’s approximately RMB1,945.4 million. Below is an analysis of revenue according to the categories of business segments.

Radio Frequency Coaxial Cables

Revenue generated from the segment of Radio Frequency Coaxial Cables increased by approximately RMB174.0 million or approximately 21.5% from approximately RMB810.8 million in FY2021 to approximately RMB984.8 million in FY2022, of which the revenue from feeder cables increased by approximately RMB290.1 million or 47.5% from approximately RMB611.2 million in FY2021 to approximately RMB901.3 million in FY2022. The increase in the sales of feeder cables was driven by the Group’s higher effort on market exploration and the more competitive pricing strategy resulting in the higher winning percentage of tender. In particular, there was more demand for feeder cables than ever before in terms of product formats due to the investment in the China Mobile 700MHz project, therefore revenue has increased accordingly.

Included in the segment revenue of Radio Frequency Coaxial Cables are the revenue from leaky cables of approximately RMB83.6 million for FY2022, representing a decrease of approximately RMB116.0 million or 58.1% from approximately RMB199.6 million in FY2021. Leaky cables are special coaxial cables commonly used for the tunnels and underground mobile communication in mass transit railways and thus normally have higher gross profit margins than other Radio Frequency Coaxial Cables products. The decrease in revenue for leaky cables is because demand from customers of railways operator was weak during FY2022.

Telecommunication Equipment and Accessories

Revenue generated from the segment of Telecommunication Equipment and Accessories increased by approximately RMB40.4 million or approximately 10.4% from approximately RMB387.5 million in FY2021 to approximately RMB427.9 million in FY2022. The significant increase in the revenue from Telecommunication Equipment and Accessories is in line with the general increase in the revenue of feeder cables.

Antennas

Revenue generated from the segment of Antennas during FY2022 was approximately RMB451.0 million, representing an increase of approximately RMB113.1 million or approximately 33.5% from approximately RMB337.9 million in FY2021. Such increase in the revenue from sales of Antennas was mainly attributable to the Group’s successful tender for the China Mobile 700 MHz project.

Digital Technology and Digital Security

With the completion of the acquisition of the Zhangyu Companies in July 2022, a new business segment of Digital Technology and Digital Security comprising the Zhangyu Companies was formed. During the second half of FY2022, Zhangyu Companies have recorded revenue of approximately RMB94.2 million (representing an increase of approximately RMB58.1 million or 160.9% from approximately RMB36.1 million (unaudited) for the second half of FY2021), of which revenue from (i) design services was approximately RMB17.2 million; (ii) tape-out service was approximately RMB35.5 million; (iii) digital security was approximately RMB16.5 million; (iv) revenue from IP authorization was approximately RMB28.0 million; and (v) intercompany eliminations and others of approximately minus RMB3.0 million.

Others (HTRC and antennas testing services)

Revenue generated from this segment decreased by approximately RMB7.9 million or approximately 8.8% from approximately RMB89.5 million during FY2021 to approximately RMB81.6 million during FY2022, of which the decrease was mostly attributable to the decrease in revenue for high temperature resistant cables.

Gross profit margin

The Group achieved an overall gross profit margin of approximately 18.4% for FY2022 compared to approximately 18.2% for FY2021, representing a slight increase of approximately 0.2 percentage point year-on-year. By separating the Digital Technology and Digital Security segment, the rest of the telecommunications business segments achieved a combined gross profit margin of approximately 17.1%, representing a decrease of approximately 1.1 percentage point. The Digital Technology and Digital Security segment has achieved a gross profit margin of 45.7% during the second half of FY2022.

Although the Group achieved significant revenue growth in the telecommunications business segment in FY2022, due to the sluggish investment in fixed assets of telecommunications operators in China and fierce market competition, the Group has to secure sales orders with a more competitive pricing policy, coupled with the more stringent epidemic prevention and control measures, high temperature, power cuts, etc. have had a considerable impact on normal production and supply chains, resulting in a significant increase in transportation costs and labor costs. As compared with FY2021, major products have recorded a lower gross profit margin in FY2022.

The impact of the above unfavorable factors on the gross profit margin is mainly reflected in the feeder cables products. The overall gross margin of RF coaxial cables decreased by approximately 2.9 percentage points from approximately 16.9% in FY2021 to approximately 14.0% in FY2022. The decrease in gross profit margin has offset the positive contribution brought by the increase in revenue, overall gross profit contribution of Radio Frequency Coaxial Cables remained relative stable comparing FY2022 (approximately RMB137.4 million) and FY2021 (approximately RMB137.2 million).

As for Telecommunication Equipment and Accessories, gross profit margin has remained stable in FY2022 and decreased slightly by approximately 0.1 percentage point from approximately 25.2% in FY2021 to approximately 25.1% in FY2022. The higher revenue of FY2022 as compared with FY2021 has led to a higher gross profit contribution by approximately RMB9.9 million or 10.1% year-on-year.

As for Antennas, gross profit margin has recorded an increase of approximately 1.5 percentage point from approximately 15.4% in FY2021 to approximately 16.9% in FY2022. Such increase was mainly because the Group has entered into the second year of production for the China Mobile 700 MHz project, with higher production efficiency, Antennas has achieved higher gross profit margin in FY2022.

As a result of the combined effects of the above changes in gross profit margin for the various telecommunications products of the Group, the overall gross profit margin of the telecommunications business segment of the Group during FY2022 decreased accordingly.

For the Digital Technology and Digital Security business segment, overall gross profit margin was approximately 45.7% during the second half of FY2022. Due to the nature of digital security and IP authorization businesses, gross profit margins are generally higher than the other business segments of the Group, amid the lower gross profit margin of the telecommunications business segment in FY2022, the Group achieved an overall slight increase in gross profit margin of approximately 0.2 percentage point year-on-year and an increase in gross profit contribution of approximately RMB79.0 million or 26.6% year-on-year.

On the one hand, the Group will enhance product profitability by increasing investment in new product research and development and the application of new technologies. On the other hand, the Group will continue to promote intelligent, information-based and lean development. In addition to micro-innovation and micro-operating activities, the Group will also identify gaps by benchmarking against Fortune 500 companies to improve output efficiency, reduce labor and materials consumption, control procurement costs and strengthen inventory management, thereby breaking through the bottleneck of costs improvement and maintaining an appropriate gross margin to cope with market competition pressure. As the Digital Technology and Digital Security business segment further develops and contribute to the Group on a full year basis after FY2022, the Group will be able to achieve higher overall gross profit margin.

Other operating income

Other operating income increased by approximately RMB10.1 million or approximately 26.6% from approximately RMB37.9 million in FY2021 to approximately RMB48.0 million in FY2022. The increase is primarily due to:

  1. a decrease in government grants and subsidies of approximately RMB6.7 million;
  2. a decrease in net gain on commodity future contracts of approximately RMB2.5 million from approximately RMB4.7 million in FY2021 to approximately RMB2.2 million in FY2022;
  3. during FY2021, there was a net foreign exchange loss of approximately RMB5.7 million which was classified as other operating expenses as compared with the net foreign exchange gain of approximately RMB17.0 million for FY2022 that was classified as other operating income; and
  4. a net increase in other items of approximately RMB2.3 million.

Selling and distribution expenses

Selling and distribution expenses increased by approximately RMB14.7 million or approximately 14.2% from approximately RMB103.7 million in FY2021 to approximately RMB118.4 million in FY2022. This was due to a combination of various factors including the increase in salary expenses under selling and distribution expenses, the increase in transportation costs, and the increase in marketing expenses due to increased efforts in business promotion.

Administrative expenses

Administrative expenses increased by approximately RMB13.8 million or approximately 29.4% from approximately RMB46.8 million in FY2021 to approximately RMB60.6 million in FY2022. The increase is mainly due to the increase in staff related costs and legal and profession fees related to the acquisition of the Zhangyu Companies during FY2022.

Impairment loss on trade receivables

No additional impairment loss on trade receivables was required in FY2022 as compared with the impairment loss of approximately RMB3.4 million for FY2021.

Other operating expenses

Other operating expenses increased by approximately RMB55.9 million or approximately 56.1% from approximately RMB99.8 million in FY2021 to approximately RMB155.7 million in FY2022. Such change is mainly due to:

  1. an increase in research and development (“R&D”) expenses by approximately RMB24.7 million year-on-year, of which approximately RMB104.3 million (representing an increase of approximately RMB14.5 million or 16.1%) is attributable to the continuing R&D activities undertaken for the modifications and improvements to the Group’s telecommunications products during FY2022 and approximately RMB10.2 million is due to the R&D undertaken by the Zhangyu Companies during the second half of FY2022;
  2. an increase in the net loss on derivative financial instruments of approximately RMB4.3 million in FY2022;
  3. a net loss on financial assets measured at FVTPL of approximately RMB32.4 million in FY2022; and
  4. during FY2021, there was a net foreign exchange loss of approximately RMB5.7 million which was classified as other operating expenses as compared with the net foreign exchange gain of approximately RMB17.0 million for FY2022 that was classified as other operating income.

Interest expense

Interest expense increased by approximately RMB4.8 million or approximately 67.6% from approximately RMB7.1 million in FY2021 to approximately RMB11.9 million in FY2022, mainly because of the increase in average interest rates of short-term loans during FY2022.

Profit before taxation

Profit before taxation increased by approximately RMB3.3 million or approximately 4.5% from approximately RMB73.7 million in FY2021 to approximately RMB77.0 million in FY2022. During the second half of FY2022, the Zhangyu Companies have made positive profit contribution to the Group, forming a new driver for the Group’s growth.

Income tax

The Group’s main subsidiary, Jiangsu Hengxin Technology Co., Ltd. (“Jiangsu Hengxin”), has been subject to an incentive tax rate of 15% as it has been awarded as a high-tech enterprise in the PRC since 2008. It had been awarded the same status until December 2023. Income tax expense decreased by RMB1.8 million or 17.3% from approximately RMB10.7 million in FY2021 to approximately RMB8.9 million in FY2022. The decrease is mainly due to (i) the increase in profit from operations and the new profit center after the acquisition of the Zhangyu Companies in the second half of FY2022; and (ii) the deferred tax expense arising from the origination of temporary difference mainly from contingent consideration and put option and intangible assets identified in business combination.

Profit Attributable to Equity Shareholders of the Company

In view of the above, after taking into account of the effect of non-controlling interests, profit attributable to equity shareholders of the Company decreased by approximately RMB7.7 million or approximately 10.8% from approximately RMB71.3 million in FY2021 to approximately RMB63.6 million in FY2022.

Material fluctuations of the consolidated statement of financial position items are explained below:

Property, plant and equipment

As at 31 December 2022, Property, plant and equipment amounted to approximately RMB212.4 million, representing an increase of approximately RMB44.2 million or 26.3% from approximately RMB168.2 million as at 31 December 2021. The increase is mainly due to the construction in progress relating to the high performance servers purchased in the fourth quarter of FY2022 for the setting up of the provision of cloud computing and cloud storage business commencing on 1 January 2023.

Intangible assets

Intangible assets amounting to approximately RMB56.4 million as at 31 December 2022 (as at 31 December 2021: Nil) is due to the acquisition of the Zhangyu Companies during FY2022 and mainly represent customer relationship, patents and intellectual property resources. The Group has engaged an external valuation firm to perform fair value assessments on these intangible assets of customer relationship and patents in accordance with IAS 38 Intangible Assets and IFRS 3 Business Combination.

Goodwill

Goodwill amounting to approximately RMB155.1 million as at 31 December 2022 (as at 31 December 2021: Nil) is due to the acquisition of the Zhangyu Companies during FY2022. Based on the independent valuation performed by an external valuation firm engaged by the Group, no impairment is required for FY2022.

Inventories and other contract costs

Inventories and other contract costs (comprising raw mterials, work-in-progress, finished goods and other contract costs) decreased by approximately RMB102.6 million or approximately 40.3% from approximately RMB254.1 million as at 31 December 2021 to approximately RMB151.6 million as at 31 December 2022. The decrease was mainly due to the continuous consumption of inventories during FY2022 and the Group’s continued effort to downsize the scale of its inventories during the year to enhance its working capital structure.

Trade and other receivables

  1. Net trade and bills receivables decreased by approximately RMB236.7 million or approximately 26.2% from approximately RMB902.8 million as at 31 December 2021 to approximately RMB666.1 million as at 31 December 2022. Average trade and bills receivables turnover days was approximately 143 days as at 31 December 2022 as compared to approximately 161 days as at 31 December 2021. The improvement in trade and bills receivables turnover days by approximately 18 days was mainly because the Group has applied stricter control and management on receivables in order to control the credit risk exposure during FY2022.

    During FY2022, customers have speeded up their settlement arrangement. Thus, although the Group has recorded higher revenue during FY2022, turnover days for trade and bills receivables has recorded an improvement and most of the trade and bills receivables were recent sales which were within the average credit period given to the Group’s customers.

    As at 31 December 2022, based on the invoice date and net of allowance for impairment, approximately 69.3% of the trade receivables are within the credit period given as compared with that of approximately 83.5% as at 31 December 2021. For long aged trade receivables, as at 31 December 2022, approximately 9.7% were overdue by more than six months (as compared with 8.1% as at 31 December 2021). The trade receivables that were overdue by more than six months were mostly non-operator customers. The Group does not foresee any issue in the collection of these receivables. The Group will continue to endeavour in its collection efforts on the outstanding balances.

  2. Net prepayments and nontrade receivables decreased by approximately RMB2.6 million or approximately 3.2% from approximately RMB80.1 million as at 31 December 2021 to approximately RMB77.6 million as at 31 December 2022. The decrease was mainly due to (i) the increase in advances to suppliers by approximately RMB32.1 million attributable to the increase from Zhangyu Companies; and (ii) decrease in tax recoverable of approximately RMB31.2 million.

Trade and other payables

  1. Trade and bills payables decreased by approximately RMB42.6 million or approximately 16.4% from approximately RMB259.8 million as at 31 December 2021 to approximately RMB217.2 million as at 31 December 2022. The decrease is mainly in line with the decrease in inventories in response to the Group’s measures on controlling inventories level.
  2. Other payables increased by approximately RMB92.6 million or approximately 118.5% from approximately RMB78.2 million as at 31 December 2021 to approximately RMB170.8 million as at 31 December 2022. The increase is mainly due to (a) the increase in contract liabilities by approximately RMB34.3 million; (b) the increase in accrued operating expenses of approximately RMB15.5 million; and (c) the contingent consideration payables relating to the second (last) payment for the acquisition of the Zhangyu Companies of RMB45.0 million.

Short-term loans

Short-term loans were raised with an aim to enhance the working capital position of the Group. Short-term loans as at 31 December 2022 with fixed interest rates will become due for repayment on or before the third quarter of year 2023. Due to the improvement in working capital position during FY2022, part of the short-term loans were repaid and decreased by approximately RMB101.7 million or 30.8% from approximately RMB330.3 million as at 31 December 2021 to approximately RMB228.6 million as at 31 December 2022.

Cash and cash equivalents and time deposits

Cash and cash equivalents and time deposits increased by approximately RMB128.6 million or approximately 12.2% from approximately RMB1,052.9 million as at 31 December 2021 to approximately RMB1,181.6 million as at 31 December 2022. The increase is mainly due to the decrease in inventories and trade and bills receivables comparing 31 December 2022 and 31 December 2021 and the cash paid for the acquisition of the Zhangyu Companies of RMB180.0 million during FY2022.

SUBSIDIARIES

The subsidiaries of the Company are Jiangsu Hengxin, Jiangsu Hengxin Wireless Technology Co., Ltd, Hengxin Technology (India) Pvt Ltd, Hengxin Technology International Co., Limited, HODL PCC Limited, Jiangsu Hengxin Zhonglian Communications Technology Co., Ltd., Hengxin Metaverse Limited, Yixing Tianyue Enterprise Management Consulting Partnership (Limited Partnership), Nanjing Zhangyu Information Technology Co., Ltd., Shanghai Zhangyu Information Technology Co., Ltd. and Wuxi Sihai Technology Co., Ltd..

FOREIGN CURRENCY EXPOSURE

Renminbi (“RMB”) is the functional currency of the Group. Currencies other than RMB expose the Group to foreign currency risk. The Group has foreign currency sales and its revenue and costs are denominated in RMB, India Rupees (“INR”) and United States dollars (“USD”). Some of the Group’s bank balances are denominated in USD, Singapore dollars (“SGD”), Hong Kong dollars (“HKD”) and INR, whilst some costs may be denominated in HKD, SGD and INR. The Group has implemented a hedging policy to strike a balance between the uncertainty and the risk of opportunity loss in light of the growing significance of its exposure to the fluctuations in foreign currency, under which policy foreign exchange forward contracts may be used to eliminate the currency exposure. The Group has entered into certain forward contracts as at the end of the Reporting Period on hedging the expected fluctuations of the exchange rate of USD and will continue to monitor foreign exchange exposure and consider hedging other significant foreign currency exposure should the need arise.

DONATION AND CAPITAL COMMITMENTS

As at 31 December 2022, the capital commitments of the Group in respect of the purchase of property, plant and equipment were approximately RMB189,000 (31 December 2021: approximately RMB24,000).

The Group’s PRC subsidiary has signed an intention letter to donate RMB500,000 per annum from 2007 for a period of 20 years to a charitable organization in the PRC when making profit in the year. As at 31 December 2022, the donation commitment was approximately RMB2,000,000 (31 December 2021: approximately RMB2,500,000).

CHARGE OR PLEDGE OF ASSETS

As at 31 December 2022, deposits amounting to RMB39,671,000 (2021: RMB9,842,000) were pledged to banks as guarantees for bidding of customer contracts and issuing letter of guarantee. Pledged bank deposits bear interest at an average effective interest rates at 1.0878% (2021: 1.317%) per annum and for a tenure of approximately 4 to 60 months (2021: 4 to 60 months). Remaining pledged deposits is pertaining to the security deposit for the commodity future contracts entered to hedge the purchase of raw materials during the year.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 December 2022, the Group’s total assets were approximately RMB2,542,339,000 (2021: RMB2,477,454,000) (of which current assets were approximately RMB2,077,261,000 (2021: approximately RMB2,291,260,000) and non-current assets were approximately RMB465,078,000 (2021: approximately RMB186,194,000)), the total liabilities were approximately RMB653,509,000 (2021: approximately RMB690,283,000) (of which current liabilities were approximately RMB632,498,000 (2021: approximately RMB677,528,000) and non-current liabilities were approximately RMB21,011,000 (2021: approximately RMB12,755,000)), and shareholder’s equity attributable to equity shareholders of the Company reached approximately RMB1,857,114,000 (2021: approximately RMB1,793,422,000). As at 31 December 2022, the Group’s cash and cash equivalents and time deposits were approximately RMB1,181,561,000 (31 December 2021: approximately RMB1,052,919,000). The Group’s time deposits were all due more than three months. As at 31 December 2022, the Group has short-term bank borrowings due within one year of approximately RMB228,634,000 (2021: approximately RMB330,293,000) carrying fixed interest rate. At 31 December 2022, the Group had approximately RMB2,454,000,000 (2021: approximately RMB1,625,700,000) of unutilised bank borrowing facilities.

The Group generally finances its operations from cash flows generated internally and short-term bank borrowings.

The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to shareholders through the optimization of debt and equity balance.

Management monitors capital based on the Group’s gearing ratio, which is the Group’s debt-to-assets ratio. This ratio is calculated as total liabilities divided by total assets.

As at the end of the Reporting Period, the Group is in compliance with all capital requirements on its external
borrowings.

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