("China Shoto" or "the Company" or "the Group")

 

 

 

China Shoto plc (AIM:CHNS), a leading Chinese producer of industrial batteries and power supply systems, announces its Final Results for the year ended 31 December 2006.

 

 

 

Commenting on the Final Results, Cao Guifa, Executive Chairman, said: "We believe that our expanded and improved range of products and sharply increasing output underpin the prospects for a successful 2007, and that the Group will continue to deliver impressive results and create significant long term value for shareholders.  We believe that, building on the strong foundations that have been established, the Group is well positioned to achieve further substantial growth.  We look forward to the future with confidence and enthusiasm."

 

 

 

 

 

 

 

Chairman's Statement

 

 

Our strategy is to focus on growth segments in our core markets by positioning China Shoto as a leading Chinese producer of lead acid batteries.  We are taking and shall continue to take advantage of the favourable opportunities in our strongly growing markets.

 

 

2006 has been another successful year for China Shoto.  The Group raised £5.0 million before expenses in a secondary placing of new shares which were admitted to trading on AIM on 12 June 2006.  The proceeds of the placing have been mainly used to increase AGM battery production capacity, to provide working capital for the Group, to extend the current AGM product portfolio through an investment in Yangzhou Zhenghe, and to purchase the power type battery production line of Jiangsu Electrical Appliance and Cable Co., Ltd. ("Cable Co.").

 

 

Revenue increased by 134% to £66.45 million in 2006 (2005: £28.41 million).  Operating profit increased by 30% to £5.79 million (2005: £4.42 million).

 

Basic earnings per share in 2006 are 18.30 pence (2005: 19.80 pence), which was affected by the significant increase in raw material prices during the year. An interim dividend in relation to 2006 of 1.5 pence per share was paid in November 2006.  The Directors recommend the payment of a final dividend for 2006 of 3 pence per share.

 

 

The sales revenue of the back up battery business in 2006 was £39.22 million, an increase of 38% compared with £28.41million in 2005.  Sales to five major telecommunication service providers constitute 74% of total back up battery business revenues.

 

The power type battery ("PTB") business was newly added in 2006, and will become an important business sector for the Group in the future.  Best Co. constructed a new production facility of 28,000 sq. meters in less than nine months with £3.25 million of the funds raised during 2006.  The Group also purchased the PTB production line from Cable Co.  The aggregate PTB revenue for the year is 30% of the total revenues of the Group.  According to market forecasts, the PTB business will be the main growth highlight for the Group in 2007.

 

In the turbine business, the Company acquired an additional 21% stake to take its controlling position in Beijing Full Three Dimension Power Engineering Co., Ltd ("FTD") to 51% in 2006.  For the year ended 31 December 2006, FTD's revenue and net profit were £6.91 million and £0.51 million respectively.  The revenue is 10% of the total revenues of the Group.

 

Global telecommunications expansion and Chinese 3G network construction both offer considerable opportunities.  China Shoto is confident of the quality and competitiveness of its products which have already successfully challenged foreign suppliers in the Chinese domestic market.  Furthermore, the Group continues to establish an international distribution network.

 

 

 

The Company is committed to the welfare of its employees and its social and community responsibilities.  We are dedicated to offering our customers quality products and excellent services.  China Shoto will continue to strive towards best practice standards consistent with profitability, and at the same time will seek to deliver attractive shareholder returns.  The Company offers employees career development opportunities and is supportive of their family life and goals outside work.

 

 

The Group passed the certification of ISO14001 and GB/T18001 vocation health and safety management system.  In June 2006, the battery products passed the EU RoHS test.

 

 

We believe that our expanded and improved range of products and sharply increasing output underpin the prospects for a successful 2007, and that the Group will continue to deliver impressive results and create significant long term value for shareholders.  We believe that, building on the strong foundations that have been established, the Group is well positioned to achieve further substantial growth.  We look forward to the future with confidence and enthusiasm.

 

 

 

 

 

 

I am delighted to report China Shoto¡¯s results for 2006.  In June 2006 we raised £5.0 million (before expenses) in a secondary placing, and the new shares were admitted to trading on AIM on 12 June 2006.  These funds enabled China Shoto to undertake a significant expansion of its production facilities and laid a strong foundation for the performance growth in 2006.

 

 

The revenue from back up battery sales was £39.22 million in 2006, an increase of 38% compared with £28.41 million in 2005.

 

The revenue from the newly added PTB business was £20.33 million in 2006, representing 30% of the total Group revenue.

 

The revenue from the turbine business in 2006 was £6.91 million, representing 10% of the total Group revenue.

 

The Group continues to supply start-up batteries to the locomotive industry, and back-up batteries for both the power plant and broadcasting markets.

 

The export refund policy has been cancelled by the Chinese government, impacting the overseas revenues in 2006.  As a result, export sales only rose by 5% in 2006.  China Shoto¡¯s main export products are gel and flooded batteries.

 

More than 80% of the total exports of gel and flooded batteries are distributed to the European, American and Russian markets.  Marketing and sales breakthroughs have also been made in South-East Asia and South America.

 

The 12V front-access battery which is used in the telecommunications and power industries is exported to Russia and Italy.

 

 

China Mobile, China Unicom, China Netcom, China Telecom and China Tietong continued to be the key customers of the Group in 2006.  Sales to these five major telecommunication service providers amounted to 74% of total back up battery business revenues, amongst which sales to China Mobile have increased by 97%.

 

The key customers of the PTB business are Beijing Xinri, Tianjin Taimei and Tianjin Taifeng.  The total PTB supply to the three key customers was £7.61 million, which is more than 50% of their purchases and accounts for 39% of the Group¡¯s total PTB sales.

 

 

The key customers of the turbine business are Minjiang Thermal Power Generation Co., Ltd., Panzhihua Three Dimension Power Generation Co., Ltd., and Yibin Power Generation Co., Ltd.

 

 

The sales network has been improved further; seven new sales offices have been set up in 2006.

 

In 2006, the Group further developed the strategy of expanding PTB production and sales.  This included setting up sales and service networks in Tianjin, Zhejiang and Jiangsu provinces, key areas for the manufacture of electric bicycles.  So far to date, 43 sales offices have been set up, and 138 sales staffs have been employed.

 

 

The Group has further strengthened its reputation as a leading brand in China, by participating in industry seminars and by providing technical training to our customers.  The Group attended the 2006 Hanover Information and Telecommunication Technology Fair (CeBIT 2006) in March 2006, and the Singapore Telecommunication Exhibition in June 2006.

 

 

 

China Shoto manufactures batteries according to IEC and German DIN standards, and ensures the highest quality control using advanced manufacturing equipment and production procedures.  All of the 2V and 12V series of batteries have been recognised as "State-designated Product Exempt from Quality Inspection"' by the General Administration of Quality Supervision, Inspection and Quarantine of P. R. China.

 

The product quality has been effectively guaranteed through strict monitoring in the manufacturing process and detailed checks.  Production capacity has also increased through the installation of new equipment and the recruitment of additional labour.

 

The transportation costs have decreased by 12% per KVAh through obtaining timely transportation information, reducing one way transportation and focused tendering based on specific areas or major projects.

 

 

 

The Company now holds over 90 patents.  Fourteen patents were granted in 2006, among which there are four invention patents.

 

 

In order to meet some particular requirements for high power batteries, the GFM (G) series of AGM batteries with high power performance has been developed.  At the same time, four new specifications of 12V/80Ah, 12V/85Ah, 12V/100Ah and 12V/165Ah front access batteries have been developed to meet international market requirements.

 

GFMJ series, GFX (2V) series and 6-GFMJ (12V) series energy storage batteries particularly used for photovoltaic systems have been developed according to BS EN61427-2002 Standard; these batteries can meet the long-term cycle requirement of photovoltaic solar storage systems.

 

11 types of 2V, 6V and 12V series were developed in 2006.

 

Several new models of 12V14Ah, 12V20Ah and 16V18Ah PTB have been successfully developed, the performances of which have been significantly improved with the application of nanometer additives.

 

 

As announced during 2006, the Group now has a controlling stake in FTD after increasing its shareholding from 30% to 51% in January 2006.  Sales generated by FTD were £6.91 million and net profit was £0.51 million in 2006.  This revenue is 10% of the total Group revenue.

 

FTD has continued the successful introduction of its 150MW turbine.  Four have been installed and are now in operation.  In 2006, three new orders were taken, one for the 150MW turbine design and two for refurbishment of three turbines.

 

The design of a steam control valve for the CC150-8.83/(4.2)/1.27 type turbine has been accomplished with FTD technology.

 

The Group acquired Yangzhou Zhenghe in 2006.  This company mainly produces AGM batteries, and has a production capacity of 25,000 KVAh of batteries (1.0 KVAh is equivalent to one back up battery).  The cost of the acquisition was £216,000.

 

The Group purchased the PTB production line from Cable Co. in 2006.

 

China Shoto has established a strong reputation as a provider of high quality products and services in its markets.  The Group has clearly demonstrated its ability to grow in the domestic market.  The Company views the future with optimism.

 

 

 

 

 

The sales revenues of the Group have increased by 134% to £66.45 million (2005: £28.41 million).

 

The operating profit of the Group is £5.79 million, an increase of 30% (2005: £4.42 million).

 

The pre-tax profit of the Group is £5.06 million, an increase of 40% (2005: £3.63 million).

 

The net profit of the Group attributable to equity holders of the parent is £4.0 million, an increase of 29% (2005: £3.11 million).

 

 

China Shoto¡¯s subsidiaries were subject to different tax treatments in 2006 based on the enterprise, technology and location rules.  Set out below are the applicable treatments and the major changes anticipated in the next few years.

 

Incorporated as a foreign enterprise on 10 May 2005, the company has been entitled to exemptions from PRC income tax for the last two years (2005 to 2006) and 50% relief for another three years thereafter (2007 to 2009).

 

The company is recognised as a "technology and knowledge concentrated enterprise" and has been and continues to be entitled to a 15% PRC income tax rate.

 

The company is located in an area designated as an Economic Development Coastal Region in accordance with PRC tax regulations and is entitled to an applicable tax rate of 24%.  As an industry enterprise with foreign capital invested, it is entitled to 50% income tax relief from 2006 to 2008.

 

The company is located in an area designated as an Economic Development Coastal Region. In accordance with PRC tax regulations the company is entitled to an applicable tax rate of 24%.  As a production enterprise in accordance with the PRC tax legislation applicable to foreign investment enterprises, the company is also entitled to exemptions from PRC income tax for the two years commencing from 2006, being its first profit-making year of operation, and for three years thereafter it is entitled to a 50% relief from PRC income tax.

 

In 2005 the Nanjing operations were reregistered as both a foreign investment enterprise and an industry enterprise located in a development zone in accordance with PRC income tax legislation. It is therefore entitled to exemptions from PRC income tax for two years commencing from its first profit-making year of operation and 50% relief for another three years thereafter.  The applicable tax rate is 24%.

 

Beijing FTD is a foreign invested enterprise located in Zhongguancun High-New Tech. Ind. Zone Haidian District Beijing City. Its enterprise income tax rate is 15% since 2004.

 

Yangzhou Zhenghe is a production type foreign invested enterprise located in Xiaoji Town Jiangdu City, which has been entitled to exemptions from PRC income tax for the first two years and 50% relief for another three years thereafter from the first profit making year.  Its applicable tax rate is 24%.

 

Basic earnings per share in 2006 are 18.30 pence (2005: 19.80 pence), which was affected by the significant increase in raw material prices during the year.  An interim dividend of 1.5 pence per share was paid in November 2006 (2005: nil).  The Directors recommend the payment of a final dividend for 2006 of 3 pence per share (2005: nil).

 

During the year the operations of a subsidiary, Jiangsu Longyuan Shuangdeng Power Supply Co., Ltd. were amalgamated into another subsidiary, Jiangsu Shuangdeng Power Supply Co., Ltd, and Jiangsu Longyuan Shuangdeng Power Supply Co., Ltd has subsequently been wound up. 

 

The Company acquired Yangzhou Zhenghe in 2006 for £216,000.  Yangzhou Zhenghe mainly produces AGM batteries and has a production capacity of 25,000 KVAh of batteries (1.0 KVAh is equivalent to one back up battery).

 

The Group purchased the PTB production line from Cable Co. in 2006.

 

Shareholders' funds have increased to £23.44 million (2005: £16.06 million).  The retained earnings were £6.77 million (2005: £3.84 million).

 

The Group achieved good results in its cash flow from operating activities in 2006.  Debt management has also been extremely effective in 2006.  Interest paid was £822,000 (2005: £864,000) and tax payments were £607,000 (2005: £496,000).

 

Debtor days fell from 121 days in 2005 to 75 days in 2006.

 

In the back up battery business, debtor days fell from 121 days in 2005 to 91 days in 2006.

 

In the power type battery business, debtor days were 38 days in 2006.

 

In the turbine business, debtor days are 152 days in 2006.

 

The Group entered into short-term credit agreements with Jiangyan Branch of Bank of China, Jiangyan Branch of China Construction Bank, Jiangyan Branch of Agricultural Bank of China and Nanjing Branch of Shenzhen Development Bank.

 

At 31 December 2006, the Group had outstanding bank loans of £12.24 million (2005: £12.08 million).

 

The Group has limited exposure to currency risk.  Raw materials are purchased in Chinese Renminbi ("RMB") and export sales are currently relatively small.  In developing an international market, the Group will need to take account of the negative effect of appreciation of the RMB.

 

The interest rate risk is the fluctuation of interest rates both at the present time and in the future.  The interest rates payable under the Group's bank facilities are generally variable with the fluctuation of the Central Bank¡¯s base interest rate.  Changes in this rate have been modest.  For certain bank borrowing arrangements, the interest rate is fixed.

 

 

 

 

 

All amounts relate to continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On 30 November 2005, the shareholders of Leadstar Enterprises Limited and China Shoto plc entered into a share exchange agreement.  China Shoto plc issued 15,384,615 10 pence ordinary shares at 130 pence each to the shareholders of Leadstar Enterprises Limited in exchange for the entire share capital of Leadstar Enterprises Limited.

 

A subsidiary undertaking, Hong Kong Wealth Source Development Co. Ltd, declared a dividend of £34.50 per ordinary share amounting to £345,000 on 30 June 2005 to its shareholders at that date.  All the dividend was set against the debt due from those shareholders.

 

 

 

 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2006 or 2005.  The financial information for the year ended 31 December 2005 is derived from the Company¡¯s statutory accounts for that year and those statutory accounts have been delivered to the Registrar of Companies.  The auditors have reported on those accounts; their report was unqualified and did not contain any statements under the Companies Act 1985, s237(2) or (3).  The statutory accounts for the year ended 31 December 2006 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. 

 

China Shoto plc is a company incorporated in the United Kingdom under the Companies Act 1985.  The financial information presents information about the Company and its subsidiaries (together 'the Group') on a consolidated basis. 

 

 

The financial information set out in this announcement has been prepared on the basis of the accounting policies to be adopted in the Group's annual financial statements for the year ended 31 December 2006. The accounting policies are consistent with those that were applied in the Group's financial statements for the year ended 31 December 2005 and there have been no changes to accounting policies during 2006.

 

The consolidated financial information of China Shoto plc and its subsidiary undertakings (the 'Group') has been prepared in accordance with those International Financial Reporting Standards and Interpretations in force ('IFRS'), as adopted by the European Union. The preparation of financial statements in conformity with IFRSs requires management to make assumptions that affects the application of accounting policies and the amounts of assets, liabilities, income and expenditure.  The estimates and associated assumptions are based on historical experience and other relevant factors, the results of which form the basis for the judgements that underlie the carrying value of the assets and liabilities.  Actual results may differ from these estimates. The most significant areas in which judgements are required relate to the evaluation of fair values in the application of acquisition accounting, the estimate of useful economic lives and residual values of non-current assets and the recoverable amount of current and non-current assets.  The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognised in the period in which the estimates are revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both the current and future periods.  For the years ended 31 December 2006, the Group is comprised of three business segments and one geographic segment (2005: one business and geographic segment).

 

 

The acquisition of Leadstar Enterprises Limited by China Shoto plc on 30 November 2005 has been accounted for using the principles of reverse acquisition accounting, , in acco, rdance with IFRS 3 'Business Combinations', on the basis that the management, who are the former majority shareholders of Leadstar Enterprises Limited, retained effective control of the Group.  The fair value of the assets of China Shoto plc at the date of the business combination were equivalent to the fair value of the company and the fair value of the notional number of equity instruments which would have been issued by Leadstar Enterprises Limited to acquire China Shoto plc, and therefore no goodwill arose in respect of this transaction. The comparative financial statements and the results up to the date of the business combination represent those of the Leadstar Enterprises Limited group.

 

 

 

The functional currency of the subsidiary undertakings is Renminbi ("RMB"), and the audited financial statements of the subsidiary undertakings have been drawn up in RMB. As sales and purchases are denominated primarily in RMB and receipts from operations are usually retained in RMB, the directors are of the opinion that RMB reflects the economic substance of the underlying events and circumstances relevant to the Group. Monetary assets and liabilities maintained in currencies other than RMB are translated into the RMB at the approximate rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are translated at rates ruling on the transaction dates. All resulting exchange differences are dealt with in the income statements.

 

The presentation currency of the Group is pounds sterling and therefore the financial information has been translated from RMB to pounds sterling at the following exchange rates:

 

 

 

Assets and liabilities are translated into sterling at the closing rate, and all income and expenses are translated at the average rate during the financial period, being an approximation for the actual rates at the date of the transactions.  All resulting exchange differences are taken to the Exchange reserve within equity.

 

 

 

 

The primary segment reporting format is determined to be business segments as the Group¡¯s risks and rates of return are affected predominantly by differences in the products and services produced. The operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets.

 

 

The Group is comprised of the following business segments:

 

The Power Type Batteries ('PTB') business segment is comprised of power-aided bicycle batteries.

 

The Back up batteries business segment included Value Regulated Lead Acid Batteries and Flooded and Gel Batteries.

 

The Turbine business segment includes the development and construction of new turbines and the refurbishment and reconstruction of existing turbines.

 

 

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

 

 

 

The following table presents certain sales, profit asset, liability and other information regarding the Group¡¯s business segments for the years ended 31 December 2006 and 2005.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China Shoto plc declared a dividend of 1.5p per ordinary share amounting to £350,000 on 3 November 2006 to its shareholders at that date.  No dividends were paid or declared by the Company in the year ended 31 December 2005.

 

The directors recommend the payment of a final dividend of 3 pence per share for 2006 (2005: nil).  This dividend has not been accrued in these financial statements.

 

A subsidiary undertaking, Hong Kong Wealth Source Development Ltd. declared a dividend of £34.50 per ordinary share amounting to £345,000 on 30 June 2005 to its shareholders at that date.  All the dividend was set against the debt due from those shareholders.

 

 

Earnings for the purpose of basic and diluted earnings per share are the net profit for the financial year attributable to equity holders of the parent of £4,003,000 (2005: £3,111,000).

 

The weighted average number of ordinary shares used in the calculation of earnings per share has been derived as follows:

 

 

 

 

 

FTD became an associated undertaking of the Group on 23 June 2005. On 6 January 2006, the Group increased its interest in FTD from 30% to 51%. Accordingly it has been treated as a subsidiary undertaking from that date. In calculating the goodwill arising on acquisition the fair value of the net assets of FTD have been assessed and adjusted from book values where necessary.  The principal adjustments reflect the Group¡¯s assessment of the fair values of construction contracts. No profits were generated by FTD in the 6 day period from 1 January 2006 to 6 January 2006. In the financial year ended 31 December 2006, FTD contributed £259,000 to consolidated profit after tax and minority interests.

 

The fair value of the net assets acquired and the goodwill arising are as follows:

 

 

 

 

On 31 March 2006, the Group acquired 59% of YZP.  It has been treated as a subsidiary undertaking from that date. In calculating the goodwill arising on acquisition the fair value of the net assets of YZP have been assessed and adjusted from book value where necessary. In the nine months to 31 December 2006, YZP contributed £7,000 to consolidated profit after tax and minority interests. Included within other operating income is £277,000, which represents, the excess of the Group¡¯s interest in the net fair value of YZP¡¯s identifiable assets, liabilities and contingent liabilities over cost, arising on this acquisition.  In accordance with IFRS 3 this has been recognised immediately in the consolidated income statement, within other operating income.  The fair value of the net assets acquired are as follows:

 

 

 

 

 

The Company was incorporated on 10 May 2005 with authorised share capital of £1,000 divided into 1,000 ordinary shares of £1 each.  On incorporation, 2 ordinary shares of £1 each were issued for cash at £1 per share.

 

On 30 November 2005 the authorised share capital was sub-divided into 10,000 ordinary shares of 10p each, and the authorised share capital was increased to £10,000,000 by the creation of a further 99,990,000 ordinary shares of 10p each, and 15,384,615 shares were issued in consideration for the entire issued share capital of Leadstar Enterprises Limited.

 

On 5 December 2005, 4,615,385 ordinary shares of 10p were issued in connection with the placing.

 

On 3 April and 5 May 2006, 200,000 ordinary shares of 10p  were issued in respect of the exercise of share options granted to the Company¡¯s advisers at the time of the flotation.

 

On 12 June 2006, 3,143,750 ordinary shares of 10p were issued in connection with the placing.