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(Extracted from Annual Report 2007)

Since 2007, the People's Bank of China has intensified the adjustment and control over the monetary policies, in order to hedge the excess liquidity and hold back the excessively rapid growth of financial credit. With structural adjustments to energy saving and pollutant reduction as well as discharge reducing that have impacts on the quality of economic growth and the sustainable growth, the government has especially focused on the control and regulation of inflation risk and the asset bubbles in the real estate and stock markets in the second half of the year. Influenced by the credit squeeze and the accelerated repayment pressure from the bank, our Group faced great challenges in terms of capital, and therefore made some adjustments to the Group strategies accordingly.

In the middle of June, 2007, senior management adjustment was carried out in the Group's subsidiary companies. Mr. Yeo Choon Tat received his appointment as Executive General Manager in charge of administrative management of Shanghai Fortune, Shanghai ASA and Shandong ASA. In December 2007, Mr Jeng Ming-Kung, President of Shanghai Fortune, Shanghai ASA and Shandong ASA was once again appointed Executive General Manager as a concurrent post, and took charge of overall management of production, administration and sales of the three subsidiary companies.

Due to the increasing demand for raw materials, higher labor costs and more requirements for environmental protection, our production and operation costs continuously went up. According to our fixed objectives based on the adjustment of strategies, the entire production base in Shanghai was moved to Shandong. From June, the production equipment of subsidiary Shanghai Fortune Ceramic Co., Ltd. (“Shanghai Fortune” for short) was progressively dismantled and transferred to subsidiary Shandong ASA Ceramic Co., Ltd. (“Shandong ASA” for short). In November, Shanghai ASA Ceramic Co., Ltd. (“Shanghai ASA” for short) also stopped production, and has currently embarked on disposal of its assets. Shanghai Fortune Ceramic Co., Ltd. was being transformed gradually into a pure sales company. During this period of time, some production workers failed to understand the removal of production base from Shanghai to Shandong and lodged a protest against such decision in July. Though the protest was later defused through the efforts of officers at various levels of Shanghai Fortune, the Group decided to stop production earlier in November 2007 to avoid the occurrence of other unexpected events to minimise losses.

In response to intensification of the market competition and constant increase of selling expense, Shanghai Fortune made corresponding adjustments to its sales management system and distribution channels. In 2007, the company decided to close about 20 branch offices and integrate and retain the other 7 branch offices. By the end of December, Shanghai Fortune had successfully signed with 12 regional agencies and fully handed over its market to those agencies to give them more autonomy and profit margins, whereby the company could make use of the rich experience of those agencies in selling building materials in order to maintain and increase the market share of ASA tiles while reducing the selling expense of the Group.

In line with the retrenchment strategy of the Group, the Shanghai subsidiary has executed policies for streamlining the administrative structure and reducing the headcount in 2007. After the implementation of these policies, the number of personnel of subsidiaries Shanghai Fortune and Shanghai ASA has been reduced from 951 as at 30 June 2007 to 525 as at 31 January 2008.

In order to relieve the pressure from the tightening of funds and clear up the overstocked products, Shanghai Fortune resorted to a series of marketing activities including: firstly, before the branch offices was closed, all the local stocks were sold one-off to the regional agencies to increase the cash flow; secondly, from April to June, a sales promotion with a theme of “Good Festival Good Appetite, Better Price Better Buy” was launched as a token of our appreciation to consumers for their trust in and loyalty to ASA Ceramic, as well as a thrust of improving sales performance in Shanghai; thirdly, from July to August, a nationwide sales promotion was launched with a theme of “Your Exclusive Choice in Summer”; fourthly, from October to December, a nationwide sales campaign was carried out to promote the sales of three kinds of overstocked products. In addition, as it did in previous years, the company continued to put up commercial advertisements of the latest projects in a couple of magazines and newspapers as well as on TV broadcasting repeatedly. It also retained the outdoor billboards in the various markets of building materials and on the main roads as well. The company adopted a comprehensive sales promotion and advertising offensive to ensure that its quality products and advanced techniques were well known to and accepted by a large number of target consumers in order to foster the image of ASA as a China famous brand in consumers' mind.

In view of the poor performance and continuous losses of subsidiary Shanghai ASA Laticrete Adhesive Co., Ltd. ("Shanghai ASA Laticrete" for short), the Board of Directors decided to terminate the cooperation between Shanghai ASA Laticrete and its US counterpart, and preparation is still being under way for liquidation.

Performance of the Group of Companies (excluding the performance of discontinued operating companies) is as follows:

The annual sales revenue of the Group reached S$66.5 million in 2007, dropping by 27% as compared to that of last year (S$89.33 million); the gross profit ratio of the Group was down to 14% from 22% of last year; the total administrative and selling expenses were S$36.32 million, decreasing by 6% as compared to that of last year (S$38.56 million); the total profit fell by S$2.36 million to negative S$34.87 million from the last year's negative S$32.51 million. Details are shown as follows:

  • Corresponding to the decline in sales revenue, cost of sales dropped by 18% from S$69.65 million in FY2006 to S$57.07 million in FY2007. This is mainly caused by the decline in sales, which was offset by the two factors below:
    • Clearing up obsolete inventory at a low price;
    • The output rate was reduced as a result of some production lines being removed to Shandong from Shanghai, thus leading to a hike in sales cost:
  • Drop in gross profit ratio: due to decrease in the unit sales price and increase in the unit price for cost of sales, the gross profit of the Group fell from S$19.68 million in FY2006 to S$9.40 million in FY2007.
  • Drop in selling expense: the selling expense decreased by S$6.06 million after the cost-cutting plan was carried out during the year.
  • Increase in administration expense: the administration expense increased from S$6.7 million in FY2006 to S$10.53 million in FY2007. Such increase was caused due to the reasons as follows:
    • The shut-down due to the removal of production base from Shanghai to Shandong during the year incurred a loss of S$1.9 million;
    • The write-off of bad debts added up S$0.6 million;
    • A dismissing compensation of S$500,000 was paid to the laid-off workers of Shanghai plant;
    • This was partially offset by reduction in payroll costs of S$400,000.
  • Drop in financial cost: the financial cost declined by 33% to S$3.03 million in FY2007 after repayment of the bank loan that was due in the current year.
  • Income tax: the net tax credit of the Group in FY2007 was S$179,000 and the tax expense in FY2006 was S$1.2 million.
  • Decline in other operating expense: declined by S$3.82 million from S$7.26 million in 2006 to S$3.44 million in 2007, including S$6.3 million of additional impairment in the plant and machinery of Shanghai ASA and Shanghai Fortune as well as S$3.3 million of one-off write-off for the charges incurred in the improvement of leasehold property. It was offset by the S$9.3 million generated from disposing the property of Shanghai Fortune and Shanghai ASA.
  • Discontinued operating loss: there was a discontinued operating loss of S$1.7 million in FY2007 that was caused by the liquidation of Shanghai ASA Laticrete.

On the basis of gradually implementing the strategy constantly adjusted according to market conditions, top management of the Group will, in the year 2008, further sum up the experiences and lessons derived from the business process over the past year. By means of cutting cost, improving quality of products and expanding business proactively, we will make every effort to improve sales performance and make up deficits and get surpluses in order to come up to stockholders' expectations.