Letter To Shareholder
Dear Shareholders,
With the financial and operational strengths of the Group, we were able to meet the challenges of implementing additional water treatment facilities as well as the high cost of wood pulp.
On behalf of the Board of Directors, I am pleased to present our Annual Report for the financial year ended 31 December 2007 (''FY2007'').
Paper Manufacturing Industry Scenario
2007 had been a challenging year as a whole for the paper manufacturing industry in the People's Republic of China (''PRC''). The local authorities had tightened their control on pollution, imposing more stringent standards for all industries including paper manufacturing. As a result, the Chemical Oxygen Demand (''COD'') index had to be lowered to 100 points compared to the previous COD index of 420 points by June 2007. This meant that most paper manufacturers have to install additional water treatment facilities as well as incur operational overheads due to the maintenance of additional water treatment processes.
At the same time, wood pulp prices had risen in FY2007 but the impact of this was less felt amongst certain manufacturers like China Paper because of our integrated manufacturing process which blend wood pulp and locally sourced wheat pulp. Nonetheless, the overall demand for paper continued to rise in the PRC last year, due to increasing consumption and industrial output across the country.
Meeting New Challenges
With the financial and operational strengths of the Group, we were able to meet the challenges of implementing additional water treatment facilities as well as the high cost of wood pulp.Operationally, our production lines were shut down for 35 days in the second quarter of FY2007, as part of the commissioning of the wastewater treatment plant. Since the third quarter of FY2007, the management had been taking active steps to monitor our utilisation and increase the pace of production. Due to the cautious pace of integrating the new wastewater treatment facilities with our production lines, we expect our utilisation to only return to its pre-existing level in the coming year.
Financially, we had invested substantially in the construction of the wastewater treatment plant to the tune of RMB96.6 million. In addition, this had translated into increased depreciation cost and higher operating overheads such as utilities and labour costs in the second half of FY2007.
The price of wood pulp, which is an essential raw material for the production of paper, had increased between 5% to 10% during FY2007. Nonetheless, the impact for us had been mitigated by our production process which uses a blend of wheat pulp and wood pulp to produce our paper products. Furthermore, we continued to source wheat pulp locally from our agricultural hinterland and this helped to cushion some of the impact of rising wood pulp prices.
Adopting A Prudent Approach
All in all, revenue declined 6.9% to RMB759.9 million in FY2007 due mainly to work stoppages relating to the installation of the water treatment facilities. Despite the additional costs relating to the wastewater treatment plant and higher raw material cost, we maintained a healthy gross margin of 22.9% and a net margin of 13.0% in FY2007.Our balance sheet remained as one of our key strengths. Our current cash position is strong and we believe that this would be critical in our future expansion strategy, given ongoing external factors such as the rising cost of financing and raw materials, as well as internal challenges such as the increasing cost of operations, utilities and depreciation.
We recognize the need to improve utilisation and this will remain as a key priority for the Group as we seek to return to a faster rate of growth, compared to the year before. We are confident of increasing our production output to meet the rising demand for our paper products in the coming year. A better utilisation rate and higher production output will partially mitigate the impact of the rising raw material cost and operating overheads.
Going forward, we believe that the demand for paper will continue to increase with the growth in consumer expenditure. Despite the challenges we faced in FY2007, the Group remains committed to maintaining sustained profitability and adopting a prudent approach to growth in FY2008 and beyond.
In Appreciation
At this juncture, I would like to take this opportunity to express our gratitude to all our staff, business partners, customers, advisors and shareholders, for your assistance and patience throughout FY2007. We hope that you will continue to support us as we work even harder to bring the company and its business to greater heights in FY2008 and beyond.