Revenue

The Group's revenue from continuing operations for the financial year ended 31 December 2011 ("FY2011") was RMB 463.4 million, an increase of RMB 89.0 million or 23.8%, from RMB 374.4 million in the financial year ended 31 December 2010 ("FY2010"). The increase in revenue was promoted by sales of domestic wall hung boilers, which increased by RMB 55.6 million or 24.7%, from RMB 224.9 million in FY2010 to RMB 280.5 million in FY2011. Liquefied Nature Gas ("LNG") business of the Group also contributed to the increase in revenue by RMB 27.9 million, from RMB 21.5 million in FY2010 to RMB 49.4 million in FY2011. Revenue from sales of industrial boilers for FY2011 reported RMB 133.5 million, increased by RMB 5.6 million from RMB 127.9 million in FY2010.

Cost of Sales & Gross Margin

The Group's gross profit from continuing operations increased by RMB 18.2 million or 21.5%, to RMB 103.0 million as compared with RMB 84.8 million in FY2010 in line with the increase in sales. Gross profit margin of the Group from continuing operations decreased slightly from 22.6% in FY2010 to 22.2% in FY2011, which was mainly due to the LNG business having an average gross profit margin of 20.1% in FY2011 as compared with that of 24.2% in FY2010 due to severer competition.

Marketing & Distribution, Administrative and Finance expenses

Marketing & Distribution costs increased by approximately RMB 5.9 million from RMB 31.1 million in FY2010 to RMB 37.0 million in FY2010, which was in tandem with the increase in sales. This is mainly due to the following reasons:

• advertising expenses increased by RMB 2.4 million;
• Staff cost for sales personnel increased by RMB 2.8 million mainly due to increments in wages.
• Increased by approximately RMB 1.3 million in travelling expenses and project bidding fees.

Administrative expenses increased by RMB 8.4 million from RMB 23.0 million in FY2010 to RMB 31.4 million in FY2011, which was mainly due to staff cost increasing by RMB 4.5 million and consultancy fees increasing by RMB 1.0 million. Chengdu Ke-Sheng Heat Exchanger Co., Ltd also contributed to the increase in administrative expenses by RMB 1.0 million in FY2011.

Financial cost of RMB 5.5 million in FY2011 increased by RMB 1.0 million compared with that of RMB 4.5 million in FY2010, which was due to increased bank borrowings and higher interest rate in FY2011.

Other operating income and other operating expenses

Other operating income in FY2011 increased by RMB 2.3 million from RMB 3.6 million in FY2010 to RMB 5.9 million, which was mainly due to the following factors: an increase of RMB 1.2 million grants received from local governments, interest income increased by RMB 0.7 million and a reversal of impairment loss of RMB 0.6 million on property, plant and equipment relating to EGC production line.

Other operating expenses increased by RMB 2.4 million from RMB 4.9 million in FY2010 to RMB 7.3 million in FY2011, which was due to a provision of inventories obsolescence of RMB 4.9 million in FY2011 as compared with that of RMB 0.6 million in FY2010.

Tax expense

Tax expense increased from RMB 3.2 million in FY2010 to RMB 5.5 million in FY2011, as the Group received a tax refund of RMB 1.3 million in 2010.

Statement of financial position

Property, plant and equipment of the Group as at 31 December 2011 increased by RMB 5.8 million as compared with RMB 58.8 million as at 31 December 2010, which was due to the construction of a new factory building with office space and new production line for domestic wall-hung boilers business.

Trade and other receivables increased by approximately RMB 56.6 million as compared with that as at 31 December 2010, which was mainly due to the following factors:

• Trade receivables for domestic wall hung boilers business increased by RMB 22.8 million, which included trade receivables from export sales of RMB 11.0 million to an overseas customer guaranteed by a letter of credit received in January 2012, export sales of RMB 6.7 million delivered in December 2011. Direct sales to property developers increased contributed to the increase in trade receivables by approximately RMB 3.0 million;
• Other receivables comprise of main bill receivables which increased by RMB 26.3 million, the Group is tightening its credit control over sales, and more Bills were accepted by the Group to secure the trade receivables; New incorporated subsidiary, Chengdu Ke-Sheng Heat Exchanger Co., Ltd contributed RMB 2.9 million in other receivables.

Inventories level as at 31 December 2011 increased by approximately RMB 12.6 million as compared with that as at 31 December 2010. This increase was mainly attributable to the increased sales orders of domestic wall hung boilers. Chengdu Ke-Sheng Heat Exchanger Co., Ltd also contributed inventories of RMB 4.9 million as at 31 December 2011.

Trade and other payables increased by approximately RMB 35.9 million, mainly due to following factors:

• trade payables for domestic wall hung boilers and industrial boilers increased by RMB 8.0 million and RMB 5.2 million respectively;
• customer advances for domestic wall hung boilers and industrial boilers increased by RMB 9.9 million and RMB 2.0 million respectively and
• an increase in accrued installation expenses by RMB 2.0 million for direct sales of domestic wall hung boilers.

Group's cash flow

The Group reported a net cash inflow of RMB 9.2 million for FY2011. There was a net cash outflow of RMB 0.7 million from operating activities resulting from higher level of inventories and trade and other receivables as at 31 December 2011.

The operating environment of the Group is challenging in 2012. The tightening macro-control of the PRC property market by the PRC government and rising staff costs have negative impact on the Group's operations, and the possible appreciation of Chinese Yuan will also affect the Group's export sales of domestic wall-hung boilers. The Group will endeavour to control operation costs through technical research & development and extending its industry supply chains.