Business News
China GrenTech Corporation Limited Announces Fourth Quarter and Fiscal Year 2007 Financial Results
Monday 21. April 2008 - 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 financial results for the fourth quarter and fiscal year ended December 31, 2007.
Fourth Quarter 2007 Highlights
— Total revenue increased 4.8% to RMB471.8 million (US$64.7 million)(1)
compared to the corresponding period in 2006.
Revenue from wireless coverage products and services was RMB442.3
million (US$60.6 million), an increase of 4.2% compared to the
corresponding quarter in 2006.
Revenue from base station RF products was RMB29.5 million (US$4.0
million), an increase of 14.5% compared to the corresponding quarter
in 2006.
— Gross profit decreased 21.3% to RMB164.7 million (US$22.6 million)
compared to the corresponding period in 2006.
— Operating profit was RMB91.3 million (US$12.5 million), a 31.6%
decrease compared to the corresponding period in 2006.
— Net income decreased 31.8% to RMB78.1 million (US$10.7 million)
compared to the corresponding period in 2006.
— Diluted earnings per ADS(2)were RMB3.12 (US$0.43).
Fiscal Year 2007 Highlights
— Total revenue increased 17.6% year-over-year to RMB979.3 million
(US$134.3 million).
— Revenue from wireless coverage products and services was RMB805.8
million (US$110.5 million), which was relatively stable compared to the
prior year.
— Revenue from base station RF products grew by 441.9% year-over-year to
RMB173.5 million (US$23.8 million).
— Gross profit decreased 7.0% year-over-year to RMB367.9 million
(US$50.4 million).
— Operating profit was RMB116.0 million (US$15.9 million), a decrease of
35.3% year-over-year.
— Net income decreased 44.6% year-over-year to RMB82.5 million (US$11.3
million).
— Diluted earnings per ADS were RMB3.30 (US$0.45).
(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, 2007 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=RMB7.2946. 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, 2007, or at any other date.
(2)Each ADS represents 25 of our ordinary shares.
“Building on our leadership position in the wireless coverage market in China, we have further strengthened our marketing efforts to book additional business and to capture opportunities from the two leading mobile operators in China, China Mobile and China Unicom, and their accelerated wireless coverage construction expenditures in the fourth quarter of 2007. As a result, our revenue from these two operators in the fourth quarter and fiscal year 2007 increased significantly. Conversely, China Telecom and China Netcom drastically reduced their PHS (personal handy-phone systems) network coverage expenditures in the fourth quarter of 2007, which had a negative impact on our fourth quarter and fiscal year 2007 revenue,” commented Mr. Yingjie Gao, Chairman and Chief Executive Officer of GrenTech.
“In 2007, the new centralized bidding policy adopted by China Mobile shifted the balance of our revenues toward that of wireless coverage integration services versus wireless coverage equipment sales. We completed a number of new integration service projects in the fourth quarter of 2007, and as a result, more integration service revenue will be deferred to the first and second quarter of 2008 as the revenue recognition cycle for integration services is longer than it is for equipment sales. The new centralized bidding policy, together with the maturing of the wireless coverage market, has led to intensified industry-wide pricing pressure, and we are not an exception. However, we have been able to partly mitigate the effect of this pressure through our core competitive differentiator: high performance yet low cost technology,” Mr. Gao continued.
“With respect to our base station RF business, we achieved solid year- over-year growth of 4.4 times 2006 revenue as we benefited from the two major domestic base station equipment manufacturers’ rapid business growth. During 2007, we became a major supplier of base station RF modules for Huawei and ZTE, and we made a breakthrough in developing international market opportunities. The completion of our new manufacturing facility in October 2007 enhanced our base station RF module production capacity and provides a strong foundation for continued rapid growth in 2008 and beyond,” said Mr. Gao.
Financial Analysis for the Fourth Quarter and Fiscal Year 2007
Revenue
Revenue for the fourth quarter of 2007 was RMB471.8 million (US$64.7 million), an increase of RMB21.5 million (US$2.9 million), or 4.8%, over RMB450.3 million in the fourth quarter of 2006. Revenue from wireless coverage products and services increased 4.2% over the fourth quarter of 2006 to RMB442.3 million (US$60.6 million); of this, revenue from China Mobile and China Unicom increased by 16.8% and 92.3%, respectively, over the fourth quarter of 2006. The combined revenue from China Telecom and China Netcom decreased by 94.4% due to their reduced PHS expenditures in the fourth quarter of 2007. Revenue from the Company’s base station RF products increased by 14.5% over the fourth quarter of 2006.
Total revenue for fiscal year 2007 increased 17.6% over 2006 to RMB979.3 million (US$134.3 million). 2007 revenue from wireless coverage increased 0.6% over 2006 to RMB805.8 million (US$110.5million), accounting for 82.3% of total revenue, down from 96.2% in 2006. Revenue from the Company’s base station RF module business in 2007 was 4.4 times the amount in 2006, increasing to RMB173.5 million (US$23.8 million) and accounting for 17.7% of total revenue, up from 3.8% in 2006.
Revenue breakdown:
2006
Q4 FY
RMB’000 RMB’000
Wireless Coverage Products & Service
China Mobile 172,780 277,098
China Unicom 119,999 298,693
China Telecom 48,305 89,169
China Netcom 39,965 69,175
Overseas 1,708 10,026
Non-operators 41,813 56,607
Subtotal 424,570 800,768
RF Products
OEMs 25,724 32,027
Total 450,294 832,795
2007
Q4 FY
% of
RMB’000 US$’000 RMB’000 US$’000 Revenue
Wireless Coverage Products
& Service
China Mobile 201,794 27,657 317,735 43,558 32.4
China Unicom 230,699 31,626 377,785 51,790 38.6
China Telecom 3,374 463 49,636 6,804 5.1
China Netcom 1,550 212 20,515 2,812 2.1
Overseas 269 37 11,591 1,589 1.2
Non-operators 4,677 641 28,495 3,906 2.9
Subtotal 442,318 60,636 805,757 110,459 82.3
RF Products
OEMs 29,460 4,039 173,545 23,791 17.7
Total 471,778 64,675 979,302 134,250 100.0
Cost of Revenues
The cost of revenues for the fourth quarter of 2007 amounted to RMB307.1 million (US$42.1 million), an increase of 27.4% from RMB241.1 million in the fourth quarter of 2006.
The cost of revenues for fiscal year 2007 was RMB611.4 million (US$83.8 million), an increase of 39.9% from RMB437.0 million in 2006.
The increase was driven primarily by larger sales volume, this is because of the increased revenue and the decreased average selling price (“ASP”) for wireless coverage products in 2007. In addition, since the gross margin of base station RF products is lower than wireless coverage products, the increase in sales of RF products also led to the increase of cost of revenues.
Operating Expenses
Total operating expenses were RMB73.4 million (US$10.1 million) for the fourth quarter of 2007, a decrease of RMB2.5 million, or 3.3%, from RMB75.9 million in the fourth quarter of 2006.
Total operating expenses for fiscal year 2007 increased by RMB35.2 million, or 16.3%, from RMB216.6 million in 2006 to RMB251.8 million (US$34.5 million). The year-over-year increase was due to an increase in research and development costs, sales and distribution expenses and general and administrative expenses.
Research and development costs for the fourth quarter of 2007 were RMB15.7 million (US$2.2 million), a decrease of 8.2% from RMB17.1 million in the fourth quarter of 2006.
Research and development costs for fiscal year 2007 were RMB56.5 million (US$7.7 million), an increase of 18.4% from RMB47.7 million in 2006. R&D efforts in 2007 were focused on TD-SCDMA wireless coverage equipment and base station RF modules. The Company has already developed a number of TD-SCDMA trunk amplifier, repeater and Radio Remote Unit (RRU) products. In the base station RF module segment, the Company developed 41 RF modules and filed 86 technology and product patent applications in China in 2007. R&D costs accounted for 5.8% of total revenue in 2007, which is in line with the percentage for 2006.
Sales and distribution expenses for the fourth quarter of 2007 were RMB32.7 million (US$4.5 million), a decrease of 9.9% from RMB36.3 million the fourth quarter of 2006.
Sales and distribution expenses for fiscal year 2007 were RMB126.8 million (US$17.4 million), an increase of 12.3% over RMB112.9 million in 2006. This was primarily due to increased sales efforts to boost revenue from China Mobile and China Unicom and to develop the WLAN market. Additionally, the Company increased its sales and marketing activities in 2007 to develop the international base station RF market. Sales and distribution expenses accounted for 12.9% of total revenue in 2007, as compared to 13.6% in 2006.
General and administrative expenses for the fourth quarter of 2007 were RMB25.0 million (US$3.4 million), an increase of 11.0% from RMB22.5 million the fourth quarter of 2006.
General and administrative expenses for fiscal year 2007 were RMB68.5 million (US$9.4 million), an increase of 22.4% from RMB55.9 million in 2006. The year-over-year increase was mainly attributable to the RMB16.2 million increase in allowance for accounts receivable. However, the other expenses, such as business entertainment and traveling expenses, office expenses, decreased due to tighter controls. General and administrative expenses accounted for 7.0% of total revenue in 2007, a slight increase as compared to 6.7% in 2006.
Total Other Expenses/Income
Total other expenses for the fourth quarter of 2007 were RMB4.6 million (US$0.6 million), an increase of RMB3.2 million as compared to total other expenses of RMB1.4 million in the same period in the prior year.
Total other expenses for fiscal year 2007 were RMB24.2 million (US$3.3 million), an increase of 123.5% from RMB10.8 million in 2006. This year-over- year increase is primarily due to the increase in interest expenses and foreign currency exchange losses.
Interest income for the fourth quarter of 2007 increased 246.7% to RMB15.6 million (US$2.1 million) from RMB4.5 million in the fourth quarter of 2006.
Interest income for fiscal year 2007 increased 16.1% to RMB22.3 million (US$3.1 million) from RMB19.2 million in 2006. The increase was primarily due to the increased interest arising from the amortization of discounted income from the prior years’ account receivable.
Interest expense for the fourth quarter of 2007 increased 65.5% from RMB8.7 million in the fourth quarter of 2006 to RMB14.4 million (US$2.0 million).
Interest expense for fiscal year 2007 increased 26.1%, from RMB28.0 million in 2006 to RMB35.3 million (US$4.8 million), primarily due to additional bank loans and higher interest rates. The Company used these loans to build a facility to enhance its R&D and production capacity and to purchase land use rights for another facility.
The foreign currency exchange loss for the fourth quarter of 2007 increased 89.1% to RMB8.7 million (US$1.2 million) from an exchange loss of RMB4.6 million in the fourth quarter of 2006, primarily due to the Chinese government’s foreign exchange controls, which restricted the Company from transferring offshore deposits savings into a domestic RMB account. In addition, the Company has kept a portion of its foreign currency in offshore accounts to pay service fees such as auditing fees, legal fees and other related expenses. Therefore, the foreign currency exchange loss increased as the RMB appreciated. The Company plans to transfer its excess cash reserves to RMB denominated accounts to the extent allowed under Chinese regulations in order to minimize losses.
For the same reason, the foreign currency exchange loss for fiscal year 2007 increased by 90.0% to RMB18.8 million (US$2.6 million), as compared to an exchange loss of RMB9.9 million in 2006.
Grant income from government subsidies for the fourth quarter of 2007 decreased by RMB4.5 million to RMB2.9 million (US$0.4 million). Grant income for fiscal year 2007 was RMB7.4 million (US$1.0 million), as compared to RMB7.7 million in 2006.
Earnings
Gross profit for the fourth quarter of 2007 decreased to RMB164.7 million (US$22.6 million) from RMB209.2 million in the fourth quarter of 2006, representing a decrease of RMB44.5 million (US$6.1 million), or 21.3%. The gross margin was 34.9% in the fourth quarter of 2007, as compared to 46.5% in the corresponding period in 2006.
Gross profit for fiscal year 2007 decreased by RMB27.9 million, or 7.0%, to RMB367.9 million (US$50.4 million), from RMB395.8 million in 2006. The gross margin was 37.6% in 2007, as compared to 47.5% in 2006.
The foregoing gross margin reduction is the result of a lower ASP for wireless coverage products due to intensified pricing pressure as the industry matures and China Mobile’s new centralized bidding policy. The increased proportion of revenues derived from lower margin RF products also contributed to the reduction in gross margin.
The fourth quarter 2007 operating profit decreased by RMB42.0 million, or 31.5%, from RMB133.3 million in the fourth quarter of 2006 to RMB91.3 million (US$12.5 million). Operating margin was 19.3% in the fourth quarter of 2007, as compared to 29.6% in the fourth quarter of 2006.
Operating profit for fiscal year 2007 decreased by RMB63.2 million, or 35.3%, to RMB116.0 million (US$15.9 million) from RMB179.2 million in 2006. The operating margin was 11.8% in 2007, as compared to 21.5% in 2006.
Net income for the fourth quarter of 2007 decreased by RMB36.3 million, or 31.8%, to RMB78.1 million (US$10.7 million) from RMB114.4 million in the fourth quarter of 2006. Net margin was 16.5% in the fourth quarter of 2007, as compared to 25.4% in the fourth quarter of 2006.
Net income for fiscal year 2007 decreased by RMB66.3 million, or 44.6%, from RMB148.8 million in 2006 to RMB82.5 million (US$11.3 million). Net margin was 8.4% in 2007, as compared to 17.9% in 2006.
Diluted earnings per ADS for the fourth quarter of 2007 were RMB3.12 (US$0.43).
Diluted earnings per ADS for fiscal year 2007 were RMB3.30 (US$0.45).
Balance Sheet
Cash, cash equivalents and pledged time deposits decreased from RMB706.0 million as of December 31, 2006 to RMB576.6 million (US$79 million) as of December 31, 2007, a decrease of RMB129.4 million, or 18.3%, which was mainly attributable to new facility construction and land use right purchases, as well as working capital requirements.
Total accounts receivable increased by 29.3% from RMB1.0168 billion as of December 31, 2006 to RMB1.3153 billion (US$180.3 million) as of December 31, 2007. This increase was mainly attributable to increased revenues recognized in 2007 that have not yet fell into the collection period.
Inventories increased from RMB434.4 million as of December 31, 2006 to RMB542.1 million (US$74.3 million) as of December 31, 2007, an increase of 24.8%. The increase was mainly due to increased inventory of finished base station RF modules and the increased corresponding raw materials for their production.
Total assets increased by RMB581.5 million, or 24.1%, from RMB2.4158 billion as of December 31, 2006 to RMB2.9973 billion (US$410.9 million) as of December 31, 2007. The increase was mainly due to increased inventory and accounts receivable.
Total liabilities increased by RMB538.6 million, or 62.2%, from RMB866.4 million as of December 31, 2006 to RMB1.4050 billion (US$192.6 million) as of December 31, 2007. Current liabilities increases by RMB388.6 million, or 44.9%, from RMB866.4 million as of December 31, 2006 to RMB1.2550 billion (US$172.0 million) as of December 31, 2007, primarily due to increased in working capital requirements. Long-term debt as of December 31, 2007 was RMB150.0 million (US$20.6 million) due to a long-term bank loan for the construction of a new facility. There was no long-term debt as of December 31, 2006.
Business Outlook
The Company’s management believes that the markets for both the wireless coverage products and services and base station RF products will present growth opportunities in 2008. In addition to continued spending on 2G networks by telecom providers, we expect the approaching restructuring of the Chinese telecom industry, 3G license issuances and WLAN construction to enhance demand for wireless coverage products and services. At the same time, the Company’s management expects that the major Chinese base station manufacturers will maintain their strong growth momentum for at least the near-term, which management anticipates will cause the Company’s base station RF business to continue to grow rapidly.