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Public company info - China Baofeng (International) Limited , 03966.HK
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China Baofeng (International) Limited, 03966.HK - Company Profile
Chairman Dang Yanbao
Share Issued (share) 664,000,000
Par Currency Hong Kong Dollar
Par Value 0.01
Industry Alternative Energy
Corporate Profile Business Summary: The principal activities of the Group are photovoltaic power generation and design and supply chain of lightings and home furnishing products. Performance for the year: The profit attributable to the owners of the Company for the financial year ended 31 December 2019 (the “current year”) decreased by approximately 32.8% to approximately RMB296.9 million from RMB442.0 million for the year ended 31 December 2018. Business Review For the year ended 31 December 2019, the business of the Group has been integrated into two segments, which are Photovoltaic Power Generation Business and Lighting Products Business. For the year ended 31 December 2019, while the Group’s revenue decreased by approximately 3.6% to approximately RMB885.4 million, profit attributable to the owners of the Company decrease by approximately 32.8% to approximately RMB296.9 million. The decline in profit was mainly due to an increase in depreciation expenses and finance costs after the acquisition of the Equipment (defined below) and an increase in income tax expenses as a result of increased taxation in connection with the interim dividends distributed during the year ended 31 December 2019 and the expiry of a tax holiday of 3-year full exemption that was enjoyed by a subsidiary of the Company. These negative impacts were partially offset by an increase in other income. Photovoltaic Power Generation Business During the year under review, the Photovoltaic Power Generation Business continued to bring profits to the Group. At the end of 2019, the photovoltaic power generation output capacity of the Yinchuan Project had been increased from 350 megawatt in 2017 to 390 megawatt. In respect of the 350 megawatt photovoltaic power generation output capacity of the Group’s photovoltaic project in Yinchuan City (the “Yinchuan Project”), Ningxia Hui Autonomous Region (“Ningxia”), the PRC, after completion of the sale and purchase agreement entered into between Ningxia Baofeng Photovoltaic Power Generation Company Limited* (寧夏寶豐光伏發電有限公司) (“Baofeng Photovoltaic”), a subsidiary of the Company, as purchaser and Yinchuan Binhe New Energy Investment Development Co., Ltd* (銀川濱河新能源投資開發有限公司) (the “Vendor”) dated 23 March 2019 (“Sale and Purchase Agreement”) in May 2019, Baofeng Photovoltaic purchased the 350-megawatt photovoltaic power generation equipment, the ancillary facilities, the materials in stock, products and accessories of the Yinchuan Project (the “Equipment”) at a consideration of approximately RMB2,398.2 million (tax inclusive), which was subsequently reduced to approximately RMB2,336.1 million (tax inclusive) in July 2019 due to the reduction of the VAT rate from 16% to 13% effective on 1 April 2019 pursuant to the Announcement on Relevant Policies for Deepening Value-Added Tax Reform (《關於深化增值稅改革有關政策的公告》) promulgated by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs of the PRC. The Equipment is a set of photovoltaic power generation equipment which was leased to Baofeng Photovoltaic by the Vendor since its acquisition of the Equipment and has been used by the Group in the Yinchuan Project for the photovoltaic business operations of the Group since the commencement of the Yinchuan Project in 2016. In addition, in May 2019, the finance lease arrangement commenced between Baofeng Photovoltaic as lessee and Huaxia Financial Leasing Co., Ltd. (華夏金融租賃有限公司) as lessor (the “Lessor”) pursuant to the finance lease agreement dated 23 March 2019 (“Finance Lease Agreement”), under which the Lessor paid RMB1,700.0 million of the consideration under the Sale and Purchase Agreement to the Vendor, upon which it takes ownership of the Equipment. The Lessor then leases back the Equipment to Baofeng Photovoltaic for a principal lease amount of RMB1,700.0 million to be paid by monthly instalments (plus interests) commencing after a grace period which will expire by 28 January 2021, with the last payment to be made by 28 January 2031. From the lease commencement date up to the end of the grace period, Baofeng Photovoltaic only has to pay interests on the principal lease amount but does not have to make repayments of the principal lease amount. The indebtedness and obligations of Baofeng Photovoltaic under the Finance Lease Agreement are guaranteed by the Company and secured by a charge over the entire equity interest in Baofeng Photovoltaic, by a charge over all receivables arising from the income of the Yinchuan Project from time to time (other than the amount of tariff adjustment receivables already assigned by Baofeng Photovoltaic), and by a charge over all power generation equipment and ancillary facilities used in the Yinchuan Project, in favour of the Lessor. As an ancillary arrangement to the acquisition under the Sale and Purchase Agreement, in May 2019, the Vendor has paid an amount of RMB300.0 million to Baofeng Photovoltaic in cash, and in return Baofeng Photovoltaic has assigned the tariff adjustment receivables in the amount of RMB300.0 million to the Vendor effective on the date Baofeng Photovoltaic received the aforesaid cash payment pursuant to the an assignment agreement dated 23 March 2019 entered into between Baofeng Photovoltaic and the Vendor (the “Assignment Agreement”). For details of the Sale and Purchase Agreement, the Finance Lease Agreement and the Assignment Agreement, please refer to the announcements of the Company dated 25 March 2019 and 30 July 2019, respectively. As at 31 December 2019, the fair value of the Equipment amounted to approximately RMB1,997.2 million and was approximately 46.1% of the total assets of the Group. The Directors consider that it is beneficial for the Group to purchase the Equipment pursuant to the Sale and Purchase Agreement and the Finance Lease Agreement and the ancillary security documents for, among others, the following reasons and on the following bases: (a) the lease agreement between the Vendor and Baofeng Photovoltaic (the “Existing Lease”) was due to expire in May 2019. Under the Group’s operation arrangement of leasing the Equipment for its Photovoltaic Power Generation Business, such business is subject to the commercial risks and uncertainties that the Existing Lease may not be renewed upon expiry or that the rental may be increased upon renewal of the Existing Lease. If the Group becomes the owner of the Equipment, such commercial risks and uncertainties in relation to the rental of the Equipment can be eliminated; (b) in the event that the Existing Lease could not be renewed, the operation and profitability of the Yinchuan Project will be severely hindered without the Equipment, and will result in written-down value of the infrastructure in relation to the Yinchuan Project owned by the Group. Since the Photovoltaic Power Generation Business has become the main driver of growth of the Group and the Equipment is of primary significance to such business, in order to maintain the Group’s profitability, it is important for the Group to ensure sustainable and stable operation of the Yinchuan Project in the long run by securing the continued full operation of the Equipment; (c) although there will be finance costs during the lease term, the Group will at the same time no longer have to bear rental expenditure on the Equipment as well as the risks associated with the renewal of the Existing Lease as mentioned above. Considering that the Equipment has a useful life of 25 years, after deducting the three years of use by the Group itself since leasing in May 2016 and following the completion of the lease term, the Group expects to further enjoy about 10 years of useful life of the Equipment without any further payment of finance payments or rent, which will be conducive to profitability of the Group in the long run. As confirmed by the State Grid Corporation of China, for the year ended 31 December 2019, the Group has generated an aggregate of 720.5 million kWh power and the Photovoltaic Power Generation Business continued to be the main source of the revenue of the Group, accounting for approximately 60.0% (31 December 2018: 59.8%) of the Group’s total revenue for the year ended 31 December 2019. The aggregated power generated for the year ended 31 December 2019 dropped by approximately 5.7% to 720.5 million kWh (31 December 2018: 763.8 million kWh) due to a decrease in number of sunny days. Nevertheless, such impact was offset by an increase in average unit selling price (tax exclusive) as a result of a reduction of VAT rate. In addition, the Photovoltaic Power Generation Business was the sole contributor to the profit of the Group, contributing to approximately 100.3% of the Group’s total segment profit for the year ended 31 December 2019 (31 December 2018: 98.7%). The Group’s revenue from the Photovoltaic Power Generation Business for the year ended 31 December 2019 was approximately RMB531.4 million, representing a decrease of approximately 3.2% from the revenue generated for the corresponding year in 2018 (31 December 2018: RMB549.1 million). The segment profit margin of the Photovoltaic Power Generation Business was approximately 66.5% for the year ended 31 December 2019 (31 December 2018: 84.5%), and the segment profit decreased by approximately 23.9% to approximately RMB353.2 million (31 December 2018: RMB464.2 million) which was mainly due to an increase in depreciation expenses and finance costs after acquisition of the Equipment. Lighting Products Business The Group’s revenue from the Lighting Products Business for the year ended 31 December 2019 was approximately RMB354.0 million (31 December 2018: RMB369.4 million), contributing to approximately 40.0% (31 December 2018: 40.2%) of the Group’s total revenue, and representing a decrease of 4.2% from the revenue generated in the corresponding year in 2018. Excluding the effect of RMB depreciation against HK$ during the year ended 31 December 2019, the revenue decreased by 9.6% compared to the corresponding year in 2018. The segment profit margin of Lighting Products Business turned negative to approximately -0.3% for the the year ended 31 December 2019 (31 December 2018: +1.6%) and there was a segment loss of approximately RMB1.0 million (31 December 2018: a segment profit of approximately RMB6.1 million). The segment loss was due to the additional tariff imposed by the United States, and continuous keen competition in the principal market of the lighting products of the Group. Prospects: In 2020, the Board believes that the Photovoltaic Power Generation Business will continue to be the Group’s main profit contributor. Nonetheless, given that less favourable policies issued by the government of the PRC in relation to the photovoltaic power generation industry, the Group will continue to implement costs control measures in the Photovoltaic Power Generation Business in order to maintain reasonable returns to the shareholders of the Company (the “Shareholders”). The Board may conduct a strategic review on the operations of the Group, identify and evaluate business opportunities in the other sectors with positive outlook such as elderly care industry and health care industry in order to diversify the income stream of the Group for the benefit of the Shareholders as a whole. Photovoltaic Power Generation Business Further to the issue of the 2020 Opinion and the 2020 Administrative Measures, the Board of directors of the Company (the “Directors”) expects the Yinchuan Project to be included in the list of subsidized projects. It is expected that the Group will receive settlements of tariff adjustment receivables from the PRC government (in which part of them will be paid to the Lessor under the Finance Lease Agreement). Lighting Products Business In 2020, it is expected that the Lighting Products Business may continue to be adversely affected by the additional tariffs imposed by the United States due to uncertainty arising from the United States-PRC trade war and intensified competition in its principal markets. In case the market competition continues to intensify, the Group would deploy its resources efficiently and shift the focus on other segments of the Group so that the Group will generate long term return to the Shareholders.

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