Boer Power Issues a Clarification Announcement in Response to the Erroneous Article

Aug 09, 2015, 06:53 ET from Boer Power Holdings Limited

HONG KONG, Aug. 9, 2015 /PRNewswire/ -- Boer Power Holdings Limited ("Boer Power" or the "Group", Stock Code: 1685.HK) issued an announcement on 7 August 2015 to refute and clarify a personal opinion article on 31 July 2015 (the "Article"). The conclusion stated in the ending of the Article are based on unjust calculation and confusing logics, misleading subjective and biased conjectures. Estimations and valuations based on such wrongfully calculated figures are completely incorrect. The press release focused on the Company's response to four allegations raised in the Article including (a) The Company seriously exaggerated its gross profit margin level; (b) Factoring business has low gross profit margin and provides extremely long credit terms to non-factoring related business; (c) Unusually high trade receivables turnover days; (d) Falsely high revenue, with a view to helping interested persons understand the conclusion of the Article on the Company's valuation is erroneous. In addition, the Company has clarified in the announcement in response to each of the allegations concerning the Group's operation situation raised in the Article.

The announcement has been published on the website of The Stock Exchange of Hong Kong Limited:

http://www.hkexnews.hk/listedco/listconews/sehk/2015/0807/LTN20150807782.pdf

a.      The Article concluded that the Company has higher than industry average profit margin by comparing the Company's gross profit margin with a PRC company, based on which the Article alleged the Company seriously exaggerated its gross profit margin level.

The Group is a comprehensive integrated solution provider, covering hardware, software, system and consultation services. The Group utilizes self-owned cloud mega-data platform and abundant industry data and experience as basis, via real-time monitoring, remote controlling, data collection and analysis, provides one-stop high-end integrated intelligent electrical distribution systems and energy efficiency management solutions to clients globally. The other PRC companies in the industry may be engaged in certain aspects of the Group's business, but the Group is special in being a comprehensive one-stop solution provider in the industry.

The Company would like to clarify that most of the Group's competitors for projects are subsidiaries of foreign companies and not PRC companies. In particular, the Group rarely competes against the said PRC company for projects. Since 2011, the Company has repeatedly stated that the Group has been focusing on expanding its iEDS Solutions business segment for which the gross profit margins are higher than the other EDS and CSP segments, in order to improve its overall competitive advantage, market position and brand value. In order to fully appreciate the business of the Group, the gross profit margins of each business segments of the Group should be examined. The Group's business primarily consists of four business segments:

– Electrical Distribution System Solutions ("EDS Solutions");

– Intelligent Electrical Distribution System Solutions ("iEDS Solutions");

– Energy Efficiency Solutions ("EE Solutions"); and

– Components and Spare Parts Business ("CSP Business").

Since 2011, the Company has repeatedly stated that the Group has been focusing on expanding its iEDS Solutions business segment for which the gross profit margins are higher than the other EDS and CSP segments, in order to improve its overall competitive advantage, market position and brand value. The Group has also been seeking to use new technology to provide unique branded products and energy saving product solutions to further strengthen its development in the area of intelligent power management and control to meet the needs of its customers. As a result of the above stated business strategies, the contributions from business segments with higher gross profit margins have increased substantially over the years. In particular, sales in hardware accounts for around 60% of total sales (arising from EDS Solutions, iEDS Solutions, EE Solutions and CSP Business), while sales in software, system and services now accounts for around 40% of total sales (arising from EDS Solutions, iEDS Solutions, EE Solutions and CSP Business). The projects with hardware accounts for more than 50% of the project have a gross profit margin of approximately 30%, while the projects with hardware accounts for less than 50% of the project have a gross profit margin of approximately 40%. The high proportion of our non-hardware sales is one of our core competitive advantages. The contributions to the total turnover of the respective business segments and their gross profit margins for the years ended 31 December 2013 and 2014 were set out on pages 57 and 58 of the annual report of the Company for the financial year ended 31 December 2014 ("2014 Annual Report"). Some of the key figures are also reproduced in the table below:

Business segments


2013

% of

Total sales


2013

Gross

margin


2014

% of

Total sales


2014

Gross

margin

iEDS Solutions


67.5%


35.1%


56.5%


32.2%

EE Solutions


17.5%


47.8%


33.6%


41.8%

CSP Business


14.3%


26.0%


9.4%


31.2%

EDS Solutions


0.7%


30.0%


0.5%


25.7%

 

Total


 

100%


 

36.0%


 

100%


 

35.3%

For the above stated reasons, the Company believes its average gross profit margin would likely be higher than other PRC companies in the industry since these PRC companies mainly operate in the EDS Solutions business segment where gross profit margin is lower.

b.      The Article alleged the Group's factoring business has low gross profit margin and provides extremely long credit terms to non-factoring related business.

The statement which projects that factoring arrangements have lower gross profit margin is wrong. The Group commenced facilitation of factoring arrangement to its customers in 2012. The Group assigns the trade receivables from sellers of the relevant products to the banks, while the banks, based on the acquisition of such creditor's right, pay the corresponding amount of trade receivables to the Group before the date of maturity of such trade receivables, and the purchaser would settle such amount with the banks upon maturity of such trade receivables. Factoring arrangements are value-added financial services that the Group provides to qualified customers, which reduce the customers' time pressure of the payments under the relevant project contracts and at the same time reduce the Group's outstanding trade receivables. The Company would like to highlight that (i) the provision of factoring services is done in the normal course of the Group's business operation and in the interest of the shareholders of the Company (the "Shareholders") as a whole; (ii) there is internal risk control procedures in place to mitigate the Group's risks; and (iii) the provision of factoring services to our customers were done following due consideration of their ability to pay and independently reviewed by the relevant banks for which we have leveraged on to provide the factoring services. As such, the arrangement itself will not materially affect the gross profit of a project. Since the Company started to offer factoring arrangement to customers, the average trade receivables turnover days were reduced from 297 days in 2012 to 271 days in 2013 and further to 215 days in 2014.

The trade receivables that were assigned to banks under the factoring arrangements are derecognized from the Group's trade receivables balance. Moreover, the calculation of average trade receivables turnover days purportedly used by the Article is potentially misleading. The Article simply used the outstanding trade receivables at the end of a reporting period to divide the revenue of the same period. The Article did not consider the impact on trade receivables across financial years in the calculation of trade receivables of factoring business to further exaggerate the number of trade receivables of non-factoring related business. As a result, we calculate trade receivable turnover based on average balance of trade receivables, and not based on the year end balance of trade receivables as in the Article. We consider this better reflects our operating efficiency and that this is in line with the general practice of financial statement analysis. The annual financial statements of the Company for the year ended 31 December 2014 disclosed that the Group's aging analysis of trade receivables, retention receivables and bills receivable is approximately 82% current. The 2014 financial statements were audited by the Group's independent auditor.

The Group has established a credit policy under which each new customer is assessed individually for creditworthiness before the Group's payment and delivery terms and conditions are offered. The Group's review includes amongst other, credit history, market conditions, prior year's purchases and estimated purchases for the coming year, where available. The credit terms given to the customers vary which are based on the sales contracts signed with individual customers and are generally based on their financial strengths. The Group chases its customers to settle due balances and monitors the settlement progress on an ongoing basis. The Group would generally offer credit terms with an approximate range of six to twelve months to customers.

In order to prevent the adverse impact on the Group from bad debts, the Group will actively assess the level of trade receivables regularly and estimates the relevant provisions based on the relevant credit history and prevailing market. This would require estimation and judgment, if the event or change in circumstances shows that the balance is non-collectible, the Group will make provision for such trade receivables. In general, the Group would assess the status of trade receivables at least once in every six months.

c.       The Article stated that the credit terms given to the customers are unusually high.

Such allegation is groundless as the average trade receivables turnover days of the Group was 297 days in 2012, 271 days in 2013 and 215 days in 2014, representing a notable improvement. Given the nature of the Group as a product-based business and the characteristics of corporate accounts, the Company believes such trade receivables turnover days are within a reasonable range.

The table below sets forth the information related to the Group's trade receivables (including retention receivables and bills receivable) for the indicated periods:


Trade

receivables

at the

year end

Trade

receivables

turnover

days

Operating

cash flow

Cash

and cash

equivalents

at the

year end

Dividend

paid*

Dividend

payout

ratio












RMB'000


RMB'000

RMB'000

RMB'000


2012

1,034,372

297

347,938

382,007

73,638

25.0%

2013

978,102

271

548,870

851,690

191,184

55.4%

2014

1,432,749

215

509,868

1,287,182

230,467

50.3%

*Included dividends of approximately RMB1,978,000, RMB5,511,000 and RMB7,251,000 which are paid to the trustee under the Company's share award scheme in 2012, 2013 and 2014 respectively.

As illustrated by the table above, the Group's trade receivables turnover days has been decreasing from 2012 to 2014, and the Group's operating cash flow and cash and cash equivalents at the year end have been growing on a yearly basis. Meanwhile, the Company has maintained its dividend payout at 25% of net profit since its listing and paid special dividends respectively in 2013 and 2014. This shows the robust financial position and the healthy cash flow of the Group.

d.      The ending of the Article stated that the Group's revenue is falsely high.

The Group's consolidated financial statements of 2014 were audited by the Group's independent auditor, which issued an unqualified auditor's opinions in the auditor's report. The auditor of the Company has not withdrawn its audit report for the financial statements for the year ended 31 December 2014. The Company maintains that the revenue, gross profit margin, profit margin, and profit after tax reflect a true and fair view of the results of operations of the Group as at 31 December 2014, whereas the figures state in the ending of the Article are based on unjust calculation and confusing logics, misleading subjective and biased conjectures. Estimations and valuations based on such wrongfully calculated figures are completely incorrect.

The Company believes that the malicious and misleading allegations made in the Article are totally without merit and not accurately supported. The Company does not have any background information as to the identity of the author(s) of the Article, nor was there any meeting or contact from the author(s) of the Article with the Company before or after the issuance of the Article.

About Boer Power Holdings Limited (Stock code: 01685.HK)

Boer Power Holdings Limited provides high-end one-stop integrated electrical distribution system and solution design, manufacturing, sales and other value-added service. The company has nearly 30-years of professional experience and maintain a leading position in China's electrical distribution market with production bases in Wuxi, Yixing and Shanghai. The company's business covers EDS Solutions, iEDS Solutions, EE Solutions and CSP Business. The company focuses on self-developed intelligent and energy-saving products, and it collects data via Boer's "Smart Cloud" Mega Data Platform and develops comprehensive intelligent and energy saving solutions for various sectors, as well as provides long-term maintenance and consulting services for its customers, so as to further enhance their loyalty and the Group's business stability. Its target market includes industries of medical, telecommunications, data centres, infrastructure and new energy, etc. For further information, please refer to the Company's website at http://www.boer-power.com

SOURCE Boer Power Holdings Limited



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