Business News

China GrenTech Corporation Limited Announces Fourth Quarter and Fiscal Year 2008 Financial Results

Wednesday 15. April 2009 - China GrenTech Corporation Limited (Nasdaq: GRRF, "the Company," or "GrenTech"), a leading China-based radio frequency ("RF") technology and product developer and a leading wireless coverage products and services provider, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2008.

Fourth Quarter 2008 Highlights
— Total revenue increased by 9.0% year-over-year to RMB514.4 million
(US$75.4 million)(1).
– Revenue from wireless coverage products and services decreased by
10.1% year-over-year to RMB397.7 million (US$58.3 million).
– Revenue from base station RF products tripled as compared to the
fourth quarter of 2007, and reached RMB116.8 million (US$17.1
million).
— Gross profit decreased by 47.6% year-over-year to RMB86.4 million
(US$12.7 million).
— Operating loss was RMB63.9 million (US$9.4 million), compared to an
operating profit of RMB91.3 million in the fourth quarter of 2007.
— Net loss was RMB51.8 million (US$7.6 million), compared to a net income
of RMB78.1 million in the corresponding period in 2007.
— Diluted loss per ADS(2) was RMB2.14 (US$0.31), compared to diluted
earnings per ADS of RMB3.13 in the fourth quarter of 2007.

Fiscal Year 2008 Highlights
— Total revenue increased by 0.5% year-over-year to RMB984.7 million
(US$144.3 million).
– Revenue from wireless coverage products and services decreased by
5.3% year-over-year to RMB763.1 million (US$111.8 million).
– Revenue from base station RF products increased by 27.7%
year-over-year to RMB221.6 million (US$32.5 million).
— Gross profit decreased by 36.6% year-over-year to RMB233.3 million
(US$34.2 million).
— Operating loss was RMB102.5 million (US$15.0 million), compared to
operating profit of RMB116.0 million in 2007.
— Net loss was RMB118.8 million (US$17.4 million), compared to net income
of RMB82.5 million in 2007.
— Diluted loss per ADS was RMB4.87 (US$0.71), compared to diluted
earnings per ADS of RMB3.30 in 2007.

(1) The Company’s reporting currency is Renminbi (”RMB”). The
translation of amounts from RMB to U.S. Dollars is solely for the
convenience of the reader. RMB numbers included in this press release
have been translated into U.S. Dollars at the noon buying rate for U.S.
Dollars in effect on December 31, 2008 in the City of New York for
cable transfers in RMB per U.S. Dollar as certified for customs
purposes by the Federal Reserve Bank of New York, which was
US$1.00=RMB6.8225. No representation is made that RMB amounts could
have been, or could be, converted into U.S. Dollars at that rate or at
any other rate on December 31, 2008, or at any other date.

(2) Each ADS represents 25 of our ordinary shares.



Mr. Yingjie Gao, Chairman and Chief Executive Officer of GrenTech, said, “In 2008, we met both challenges and opportunities. We benefited from the tremendous opportunities brought by the completion of the restructuring of China’s telecommunications operators and renewed network construction projects. These were, however, offset by challenges from uncertainties that arose during the restructuring process earlier in the year and the disruption of network construction projects during the Beijing Olympic Games.

“As announced last quarter, we committed to a set of strategic and operational initiatives to strengthen our cash flow position and work toward achieving long-term profitability. So far, results have been encouraging. We made improving cash flow position a priority in 2008. We increased the scrutiny of our order selection process and our settlement term improved significantly after the implementation of centralized procurement policies by our major operator customers. As a result, the collection of payments in 2008 increased by RMB276.8 million (US$40.6 million), or 34.9%, as compared to 2007 and accounts receivable came down by RMB35.9 million, resulting in an improved operating cash flow position. We made a provision for a settlement discount of RMB24.4 million as of December 31, 2008, which we offered to certain of our customers in order to accelerate collection of aged accounts receivable. Although these activities have slowed our revenue and profit in the short-term, the resulting accounts receivable and the operating cash flow improvement will strengthen our balance sheet over the long-term.

“We also divested two subsidiaries in Quanzhou to improve short-term liquidity and streamline the manufacturing process. We wrote-off RMB43.6 million (US$6.4 million) of bad debt incurred from wireless equipment sales to non-operator customers. We made a one-time provision of RMB42.0 million (US$6.2 million) for inventory that is no longer suitable for future network construction, due to rapid advancement in wireless coverage technology and the rollout of large-scale 3G network construction. This write-off is necessary so that we can align our stock with market demands, and capitalize on the growing network construction opportunities. Finally, we cut administration expenses by reducing our senior management team from eight to five positions and streamlining middle management.

“We strengthened our RF business development and made breakthroughs in key customer accounts in 2008. We boosted sales to certain leading domestic base station manufacturers, became a qualified supplier for two leading global base station manufacturers, and commenced bulk supply for one of these global base station manufacturers. The RF business contributed 22.5% of our revenue in 2008, as compared to 17.7% in 2007.

“While we are actively pursuing the opportunities presented by the resumption of network construction and expect strong top-line growth in the coming quarters, in light of global financial crises and softened economic conditions, we will continue to prepare for the possibility of further disruptions by continuing our focus on improving our customer mix, streamlining our cost base and operations, and strengthening our balance sheet. We believe the measures that we have implemented will effectively sharpen our competitive edge and enhance our ability to capture future 3G network construction opportunities. Most importantly, we are committed to steadily strengthening our cash flow position as we move toward profitability in the long-term,” concluded Mr. Gao.

Financial Analysis for the Fourth Quarter and Fiscal Year 2008

Revenue


Revenue for the fourth quarter of 2008 increased RMB42.7 million (US$6.3 million), or 9.0%, to RMB514.4 million (US$75.4 million) from RMB471.8 million in the fourth quarter of 2007. The primary driver was the telecommunications operator spending growth following the completion of the industry restructuring in the fourth quarter. China Telecom commenced CDMA equipment bidding immediately after the restructuring plan was announced, and China Mobile followed by opening the bid for its TD-SCDMA phase II network construction. Accelerated network expansion led to greater base station equipment demand and thus increased the Company’s sales from domestic base station manufacturers. As a result, fourth quarter of 2008 revenue from base station RF products tripled over the fourth quarter of 2007. Fourth quarter 2008 revenue from wireless coverage products and services decreased by 10.1% year-over-year, which was mainly due to the disruption of network construction projects during the Beijing Olympic Games and the operator restructuring process; the Company’s initiatives to attract higher quality orders also caused a decrease in its fourth quarter sales volume in the wireless coverage business.

Total fiscal year 2008 revenue was roughly in line with 2007 revenue; the 0.5% increase was the result of a 27.7% year-over-year RF revenue increase and a 5.3% year-over-year wireless coverage revenue decrease.

Revenue breakdown:

2007 2008
Q4 FY Q4 FY
% of
RMB’000 RMB’000 RMB’000 US$’000 RMB’000 US$’000 Revenue

Wireless Coverage Products & Service
China Mobile 201,749 317,735 171,523 25,141 390,266 57,203 39.6 %
China Unicom 230,699 377,785 136,180 19,960 244,455 35,831 24.8 %
China
Telecom 3,374 49,636 64,235 9,415 75,440 11,058 7.7 %
China Netcom 1,550 20,515 0 0 5,105 748 0.5 %
Overseas 269 11,591 3,300 484 8,128 1,191 0.8 %
Non-operators 4,677 28,495 22,431 3,288 39,697 5,818 4.1 %
Subtotal 442,318 805,757 397,669 58,288 763,091 111,849 77.5 %
RF Products
OEMs 29,460 173,545 116,780 17,117 221,566 32,476 22.5 %

Total 471,778 979,302 514,449 75,405 984,657 144,325 100.0 %


Cost of Revenues and Gross Profit


The cost of revenue for the fourth quarter of 2008 increased by RMB121.0 million, or 39.4%, to RMB428.1 million (US$62.7 million) from RMB307.1 million in the fourth quarter of 2007.

The cost of revenue for fiscal year 2008 increased by RMB139.9 million, or 22.9%, to RMB751.4 million (US$110.1 million) from RMB611.4 million in 2007.

The increase in cost of revenues was driven primarily by the increased sales volume. In addition, the management has made a one-time write-off of RMB42.0 million (US$6.2 million) for inventory in 2008, which was charged to cost of revenues.

Gross margin decreased from 37.6% in 2007 to 23.7% in 2008. The decrease in gross margin was mainly due to the inventory provision, declining wireless coverage equipment average selling price and the increased revenue contribution from RF base station products, which have a lower gross margin. Excluding the RMB42.0 million inventory provision, the Company’s gross margin in 2008 would have been 28.0%.

Gross profit for the fourth quarter of 2008 decreased by RMB78.3 million, or 47.6%, to RMB86.4 million (US$12.7 million) from RMB164.7 million in the fourth quarter of 2007.

Gross profit for fiscal year 2008 decreased by RMB134.6 million, or 36.6%, to RMB233.3 million (US$34.2 million) from RMB367.9 million in 2007.

Operating Expenses

Total operating expenses for the fourth quarter of 2008 increased by RMB76.9 million, or 104.8%, to RMB150.3 million (US$22.0 million) from RMB73.4 million in the fourth quarter of 2007.

Total operating expenses for fiscal year 2008 increased by RMB83.9 million, or 33.3%, from RMB251.8 million in 2007 to RMB335.8 million (US$49.2 million).

Research and development costs for the fourth quarter of 2008 increased 37.6% to RMB21.6 million (US$3.2 million) from RMB15.7 million in the fourth quarter of 2007.

Research and development costs for fiscal year 2008 increased 24.2% to RMB70.2 million (US$10.3 million) from RMB56.5 million in 2007. The year-over-year increase was mainly due to development initiatives for base station models and 3G wireless coverage products. In 2008, the Company filed a total of 235 technology and product patent applications in China. To date, the Company has developed a number of TD-SCDMA and WCDMA trunk amplifiers and repeaters, and has commenced bulk supply of Radio Remote Unit (RRU) products to one of the key domestic base station manufacturers. In the base station RF module segment, the Company developed RF modules for two leading global base station manufacturers, and has commenced trial supply for one of them. R&D costs accounted for 7.1% of total revenue in 2008, which represents a 1.4% year-over-year increase.

Sales and distribution expenses for the fourth quarter of 2008 increased 58.5% to RMB51.9 million (US$7.6 million) from RMB32.7 million in the fourth quarter of 2007.

Sales and distribution expenses for fiscal year 2008 increased 9.2% to RMB138.5 million (US$20.3 million) from RMB126.8 million in 2007. This was due to increased wireless coverage business travel and communications expenses as telecommunications operators revitalized investments in the fourth quarter 2008. Sales and distribution expenses accounted for 14.1% of total revenue in 2008, as compared to 12.9% in 2007.

General and administrative expenses for the fourth quarter of 2008 increased 207.7% to RMB76.8 million (US$11.3 million) from RMB25.0 million in the fourth quarter of 2007.

General and administrative expenses for fiscal year 2008 increased 85.4% to RMB127.0 million (US$18.6 million) from RMB68.5 million in 2007. The year-over-year increase was mainly attributable to the write-off of RMB43.6 million (US$6.4 million) of bad debt incurred from wireless equipment sales to non-operators. In addition, costs for stock option issuance and expenses associated with the Company’s new Sarbanes-Oxley compliance system each added RMB3.2 million (US$0.5 million) to the general and administrative expenses. General and administrative expenses accounted for 12.9% of total revenue in 2008, as compared to 7.0% in 2007.

Total Other Expenses/Income

Total other income for the fourth quarter of 2008 was RMB22.3 million (US$3.3 million), compared to total other expenses of RMB4.6 million in the same period last year. This change is due to an increased amount of grant income from government subsidies and a gain from the disposal of two subsidiaries.

Total other expenses for fiscal year 2008 decreased by 42.4% to RMB13.9 million (US$2.0 million) from RMB24.2 million in 2007. This year-over-year decrease is primarily due to increased interest income and grant income, a gain from the disposal of two subsidiaries and the decrease of foreign currency exchange loss, these factors were partially offset by an increase in interest expense.

Interest income for the fourth quarter of 2008 increased by 6.3% to RMB16.5 million (US$2.4 million) from RMB15.6 million in the fourth quarter of 2007.

Interest income for fiscal year 2008 increased by 40.1% to RMB31.3 million (US$4.6 million) from RMB22.3 million in 2007. The increase interest primarily arose from the amortization of discounted income from prior years’ accounts receivable.

Interest expense for the fourth quarter of 2008 decreased by 14.6% to RMB12.3 million (US$1.8 million) from RMB14.4 million in the fourth quarter of 2007.

Interest expense for fiscal year 2008 increased by 55.2% to RMB54.8 million (US$8.0 million) from RMB35.3 million in 2007, primarily due to an increased average bank loans balance and an increase in the effective interest rate.

The foreign currency exchange gain for the fourth quarter of 2008 was RMB0.5 million (US$0.1 million), compared to a foreign currency exchange loss of RMB8.7 million in the fourth quarter of 2007, primarily due to the slight depreciation of the RMB to U.S. dollar exchange compared to the fourth quarter of 2007.

The foreign currency exchange loss for fiscal year 2008 decreased by 44.6% to RMB10.4 million (US$1.5 million) from RMB18.8 million in 2007, primarily due to the lower foreign currency deposit and less appreciation of the RMB to U.S. dollar exchange rate compared to 2007.

Grant income from government subsidies for the fourth quarter of 2008 increased by RMB10.1 million to RMB13.0 million (US$1.9 million) from RMB2.9 million in 2007.

Grant income for fiscal year 2008 increased by RMB7.9 million to RMB15.2 million (US$2.2 million) from RMB7.4 million in 2007. This increase was the result of additional projects for which the Company received government grants in 2008 compared to 2007.

Earnings

The fourth quarter 2008 operating loss was RMB63.9 million (US$9.4 million), as compared to an operating profit of RMB91.3 million in the fourth quarter of 2007.

Operating loss for fiscal year 2008 was RMB102.5 million (US$15.0 million), as compared to an operating profit of RMB116.0 million in 2007.

Net loss for the fourth quarter of 2008 was RMB51.8 million (US$7.6 million), as compared to a net income of RMB78.1 million in the fourth quarter of 2007.

Net loss for fiscal year 2008 was RMB118.8 million (US$17.4 million), as compared to a net income of RMB82.5 million in 2007.

Diluted loss per ADS for the fourth quarter of 2008 was RMB2.14 (US$0.31), as compared to diluted earnings per ADS for the fourth quarter of 2007 of RMB3.13.

Diluted loss per ADS for fiscal year 2008 was RMB4.87 (US$0.71), as compared to diluted earnings per ADS for fiscal year 2007 of RMB3.30.

Balance Sheet

Cash and cash equivalents and pledged time deposits as of December 31, 2008 decreased by RMB160.8 million, or 27.9%, to RMB415.7 million (US$60.9 million) from RMB576.6 million as of December 31, 2007, mainly attributable to higher cash outlays for raw material purchases, as well as increased operating expenses, R&D expenses and construction expenses for the manufacturing and research facility.

Total accounts receivable as of December 31, 2008 decreased by RMB35.9 million, or 2.7%, to RMB1.279 billion (US$187.5 million) from RMB1.315 billion as of December 31, 2007. This decrease was mainly attributable to the Company’s efforts to obtain sales orders from higher quality customers and initiatives to improve collection time.

Inventories as of December 31, 2008 decreased by RMB21.5 million, or 4.0%, to RMB520.6 million (US$76.3 million) from RMB542.1 million as of December 31, 2007.

Total assets as of December 31, 2008 decreased by RMB130.7 million, or 4.4%, to RMB2.867 billion (US$420.2 million) from RMB2.997 billion as of December 31, 2007. The decrease was mainly due to the write-off of uncollectible accounts receivable and inventories that were considered obsolete.

Total liabilities as of December 31, 2008 were RMB1.401 billion (US$205.4 million), which was in line with RMB1.405 billion as of December 31, 2007. Current liabilities as of December 31, 2008 increased by RMB17.5 million, or 1.4%, to RMB1.267 billion (US$185.7 million) from RMB1.249 billion as of December 31, 2007, primarily due to a long-term bank loan in the amount of RMB20 million that will be due in 2009 and thus became a portion of current liabilities in the fourth quarter of 2008.

Business Outlook

Wireless Coverage Products and Services


While the Chinese government’s economic stimulus plan accelerated large scale 3G network construction projects, the management believes that the continued and increasing 3G network investments by China’s leading telecommunications operators will present the Company with new market opportunities. At the same time, management believes that the 2G network will remain a key income source for operators in the near term. Under the new competitive landscape created by the restructuring, the three operators must also continue to improve network quality, investing in 2G networks to remain competitive. With its leading market position, management plans to vigorously develop 3G network coverage products in order to increase its 3G market share, while maintaining market share in the traditional 2G market. At the same time, management will continue to evolve its revenue mix to increase contribution from integration and maintenance services to offset the impact of declining equipment prices, and therefore drive further growth and profitability in 2009 and beyond.

Base Station RF Products

As operators accelerate large-scale 3G network construction, base station demand has strengthened. During the WCDMA and CDMA network construction projects, the Company’s two key customers, which are leading base station manufacturers in China, have picked up substantial market share for base station products. As their major supplier for the WCDMA and CDMA modules, GrenTech believes it will benefit from their rapid business growth.

With respect to the development of international customers, GrenTech is now a qualified supplier for two leading global base station manufacturers and has commenced bulk supply for one of them, and provided trial supply to the other. Management believes that revenue from overseas customers will increase considerably over the medium-term.

Guidance for First Quarter 2009

Management estimates that revenue for the first quarter of 2009 will range between RMB280 million and RMB310 million.