Financials

Revenue

The Group's revenue for the financial year ended 31 December 2009 ("FY09") was RMB 270.5 million, a decline of RMB 70.1 million, or 20.6%, from RMB 340.5 million in financial year 2008 ("FY08"). Adversely affected by the global economic crisis, revenue from export sales of domestic wall hung boilers was RMB 27.4 million, a decrease of RMB 77.3 million, or 73.8%, as compared with RMB 104.7 million in FY08, while domestic wall hung boilers sales in PRC market was RMB 101.1 million, an increase of 11.7%, from RMB 90.5 million in FY08.

Cost of Sales & Gross Margin

The Group's gross profit declined by RMB 11.4 million, or 16.7%, to RMB 56.8 million as compared with RMB 68.2 million in FY08, as a result of lower sales. Under-utilised production capacity and high fixed production cost in the Group's energy business resulted in a negative gross profit margin in energy sector. The Group's industrial boiler sector also reported a lower gross profit margin due to severe competition. However, this was offset by increased sales volume of domestic wall hung boilers with higher gross profit margin, resulting in the gross profit margin of the Group marginally increasing from 20.0% in FY08 to 21.0% in FY09.

Distribution, Administrative and Finance expenses

Distribution costs increased by approximately RMB 3.1 million from RMB 21.3 million in FY08 to RMB 24.4 million in FY09. This is due mainly to the following reasons:

• After sales installation cost increased by RMB 2.6 million for domestic wall hung boilers in PRC market as the Group entered into more direct sale projects in addition to distributor sales;
• Advertising and overseas exhibition expenses, incurred to promote the Group's product brand name and market awareness, increased by RMB 0.86 million.

Administrative expenses decreased by RMB 4.5 million from RMB 24.4 million in FY08 to RMB 19.9 million in FY09, which was due mainly to reduction in travelling and consultancy expenses, as part of cost savings exercise.

Financial cost decreased by RMB 4.2 million from RMB 8.9 million in FY08 to RMB 4.7 million in FY09, which was mainly due to lower bank borrowing interest rate and favourable exchange difference in FY09.

Other operating expense

Other operating expense in FY09 increased by RMB 23.1 million from RMB 6.3 million in FY08 to RMB 29.4 million, which was due to additional provisions for doubtful debts of the Group of RMB 7.3 million and impairment loss of property, plant and equipment of RMB 19.6 million in energy sector of the Group.

Income tax expense

Income tax expense increased from RMB 2.2 million in FY08 to RMB 4.3 million in FY09, as Guangzhou Devotion Domestic Boiler Manufacturing Co., Ltd, the main earning contributor of the Group, was subject to a tax rate of 20% in FY09 compared to 9% in FY08.

Statement of financial position

Property, plant and equipment of the Group as at 31 December 2009 reduced by RMB 29.1 million as compared with RMB 96.0 million as at 31 December 2008, which was due to impairment loss of property, plant and equipment of RMB 19.6 million incurred in relation to the energy business of the Group.

Cash and cash equivalents increased to RMB 90.6 million from RMB 52.3 million as at 31 December 2008, which was due to strong cash inflow from operating activities.

The increase in trade and other payables was due to the Group introducing stricter cash management policies.

The operating environment of the Group's energy business is challenging in 2010. Due to severe competition and under-utilisation of production capacity, the energy business of the Group suffered losses in last two years and its prospect is uncertain. The Company is reviewing development strategy of its energy business and will make further announcement in due course when there is any material development. The Group will continue to tighten its working capital and cash flow managements, and focus on its core domestic wall-hung boiler business.