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Second Half Financial Statement And Dividend Announcement 2020

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) For the Second Half Year ended 31 December 2020

Balance Sheet

Review of Performance

Review for the Second Half year ended 31 December 2020 (2H'20)

Turnover (2H'20 vs 2H'19)

The Group's revenue for the July-to-December 2020 half year ("2H'20") increased S$6.1 million or 6.3% to S$103.5 million from S$97.4 million in 2H'19. The higher revenue was mainly due to:

  1. Higher revenue for TV and Display products mainly due to higher demand for larger-sized TV bezels on the back of increased demand for home entertainment as a result of enforced home staying and shut-down of sport and entertainment facilities due to COVID-19 related restrictions across the globe.
  2. Higher revenue for Auto products in line with the increase in automotive sales in China. Aggressive lockdowns to contain the COVID-19 hit the auto industry hard in the first half of 2020 but sales have since rebounded as China bought the domestic outbreak under control. There are also clear indications of growing usage in China of new energy vehicles (including all-electric and hybrids). According to the China association of Automobile Manufacturer, China domestic sales of such new energy vehicles grew 10.9% from a year ago amid a post-pandemic economic recovery. The overall automotive sales in China for 2020 was 25.31 million units which was only 1.9% lower than 2019

  3. Increase in revenue was offset by decreased revenue from Office Automation ("OA") products mainly due to reduction in global demand as a result of the global economic slowdown caused by the COVID-19 pandemic.

Net Profit ((2H'20 vs 2H'19))

The Group 2H'20 profit was S$10.1 million, an increase of S$1.2 million compared to 2H'19 mainly due to:

Unfavourable variance

  1. Gross profit ("GP") margin increased from S$20.8 million in 2H'19 to S$27.9 million mainly due to lower material ratio for certain products, production contracting incentive scheme and reduce outsourcing by increasing in-house production. Increase in sales and social security and utilities expenses subsidies granted by PRC government due to COVID-19 also contribute to the better GP margin but was offset by higher rental cost reflected under depreciation of right-of-use assets under SFRS(I)16 Lease accounting treatment.
  2. Lower general and administrative expenses mainly from reduction of social security and utilities expense from government subsidies for COVID-19, lower local and overseas travelling expense amid COVID-19 pandemic and reversal of bonus over-provision.
  3. Higher gain from InnoTek investment portfolio
  4. Reversal of impairment loss relating to a PRC subsidiary leasehold building
  5. Offset by favourable variance

  6. Exchange loss of S$2.8 million in 2H'20 compared to exchange gain of S$0.6 million in 2H'19 due to the weakening of HK$ and US$ vs RMB for HK$ and US$ intercompany receivables from and RMB intercompany payable by HK subsidiaries. Besides the exchange loss was also due to the weakening of US$ against the S$ for InnoTek US$ fixed deposit.
  7. Higher finance cost mainly due to interest on operating lease liabilities under SFRS(I)16 Lease accounting treatment.
  8. Higher tax expense.

Review for 12 months ended 31 December 2020 (12M'20)

Turnover (12M'20 vs 12M'19)

The Group's revenue for the January-to-December 2020 period ("12M'20") decreased slightly by S$3.5 million or 1.9% to S$183.2 million from S$186.7 million in 12M'19, mainly due to the reduction of revenue of OA products, offset by the increase in revenue for TV and display and Auto products.

In line with the recovery of the Chinese auto industry post COVID-19 pandemic, demand for auto products increased in 2H'20 compared to 1H'20. However, demand for OA products remains weak despite higher revenue in 2H'20 compared to 1H'20. Demand for TV and display products continued to be strong in 2H'20, as earlier explained in in section (A) above. As a result, net overall FY20 revenue for the three businesses was slightly lower compared to FY19.

Net Profit (12M'20 vs 12M'19)

The InnoTek Group recorded a profit of S$13.9 million for 12M'20, lower by S$2.8 million from the profit of S$16.7 million in 12M'19, due mainly to:

    Unfavourable variance

  1. Exchange loss of S$2.3 million in FY20 compared to an exchange gain of S$0.7 million in FY19.
  2. Higher finance cost mainly due to interest on operating lease liabilities under SFRS(I)16 Lease accounting treatment.
  3. Income tax expense of S$5.4 million in FY20, higher by S$2.7 million compared to FY19.
  4. Loss from InnoTek Investment Portfolio of S$0.4 million in FY20 compared to a gain of S$1.1 million in FY19.
  5. Offset by favourable variance

  6. Despite lower sales, gross profit ("GP") in FY20 was S$45.0 million, S$4.2 million higher than S$40.8 million in FY19 due mainly to lower material ratio , production contracting incentive scheme and reduce outsourcing by increasing in-house plating services , and social security and utilities expense subsidies from government for COVID-19 pandemic but was offset by higher rental cost reflected under depreciation of right-of-use assets under SFRS(I)16 Lease accounting treatment.
  7. Lower general and administrative expenses mainly from reduction of social security expense from government subsidies for COVID-19, lower local and overseas travelling expense amid COVID-19 pandemic and lower bonus provision.
  8. Write-back of impairment loss relating to the Suzhou plant leasehold building.

Commentary

The COVID-19 outbreak at the beginning of 2020 had impacted the Group's 1H'20 financial performance. For 2H'20, the Group's end customers in Europe, United States and Japan were still affected by COVID-19. However, due to the recovery of China's auto market and increase in demand for TV/Display products which was lifted by stay-at-home restrictions amid the pandemic. Together with team efforts of the Group's employees to overcome difficulties, the Group's 2H'20 performance has improved compared to 1H'20.

China's economy is expected to continue to recover in 2021 in line with its ability to control COVID-19. However countries outside China have not effectively controlled the pandemic to date. Hence, the global economy is expected to continue to be unfavourable in 2021, affecting the global supply chain. Due to ongoing supply chain issues, the Group expects prices for raw materials to rise, while delays or disruptions in import and export are expected to translate into higher logistics-related costs.

Despite the decrease in demand for OA products in 2020, the Group looks forward to market recovery in 2021, and will remain committed to improving Quality, Cost, Delivery and Services ("QCDS") to ensure continual trust from customers. We will also seek to move up the value chain from single-part manufacturing to offer parts assembly.

The Group expects its Auto segment – the main revenue contributor - to continue growing in view of domestic demand in the world's largest car market. This sector is undergoing major changes which include a shift towards electric vehicles, increased digitalization and charging stations. The China Automobile Manufacturers Association has forecast that China's car sales are expected to increase by up to 4% year-on-year to exceed 26 million units in 2021. In particular, 1.8 million new energy vehicles, representing a 40% increase y-o-y, are expected to be added to the market this year. The Group will intensify focus on the Auto business in 2021. We will continue to find new customers while deepening our relationships with current ones as they adapt to the changing operating environment.

For the TV/Display products business, the Group expects the demand in 2020 brought about by stay-at-home restrictions amid the pandemic to weaken in 2021. It will continue to work closely with customers to support their TV bezel requirements and will actively serve and develop new customers, domestically and globally.

Our Thailand factory commenced commercial production in 2020 but production volume has been affected by decrease in global demand for OA products due to the pandemic. Besides OA, it also plans to develop and support automotive customers in Thailand.

Anticipating volatility in the coming months, the Group will continue to implement cost control measures and invest in production automation to remain competitive in the face of rising operational costs in China. As domestic competition remains intense, the Group continues to improve quality, service excellence while striving to move up the value chain. The Group is also looking to expand its customer base, both domestically and overseas, and to diversify its range of products.