Dear Shareholders,
I am pleased to present to you the annual report of Tonic Industries Holdings Limited and its subsidiaries (the "Group") for the year ended 31 March 1998. This is the first report of the Group after its listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") last October and the Group has made encouraging progress during the year.
RESULTS
Summary of the financial results of the Group for the year ended 31 March 1998 are as follows:
- Turnover was HK$1,524.4 million, represented an increase of approximately 76%;
- Profit before taxation was HK$44.6 million, represented an increase of approximately 63%;
- Profit attributable to shareholders was HK$41.5 million, represented an increase of approximately 76%; and
- Earnings per share was HK16.7 cents, represented an increase of approximately 53%.
DIVIDEND AND DISTRIBUTIONS
The Directors have recommended the payment of a final dividend of HK3 cents per share for the year ended 31 March 1998 to shareholders whose names appear on the Company's Register of Members on 16 September 1998 (the "Proposed Final Dividend"). Together with the interim dividend of HK1 cent per share already paid in January 1998, the Company's total dividends for the whole year will be HK4 cents. The Proposed Final Dividend will be paid on or before 30 September 1998.
The Directors have also recommended a bonus issue of new shares (the "Proposed Bonus Share Issue") and a bonus issue of warrants (the "Proposed Bonus Warrant Issue") to shareholders whose names appear on the Register of Members on 16 September 1998.
The Proposed Bonus Share Issue will be made on the basis of two bonus shares for every five existing shares held by the shareholders. The bonus shares will be credited as fully paid at par and will rank pari passu with the existing shares in all respects, except that they will not rank for the Proposed Final Dividend, the Proposed Bonus Share Issue and the Proposed Bonus Warrant Issue for the year ended 31 March 1998.
The Proposed Bonus Warrant Issue will be made on the basis of one bonus warrant for every five existing shares to the shareholders. Each bonus warrant will entitle the holder to subscribe in cash for a new share of the Company at an initial subscription price of HK$0.65 per share, subject to adjustments, at any time from the date of issue to 30 September 2000 or such earlier date as provided in the instrument constituting the warrants. The shares to be issued on exercise of the Proposed Bonus Warrant Issue will not rank for the Proposed Final Dividend and the Proposed Bonus Share Issue.
The Proposed Bonus Share Issue and the Proposed Bonus Warrant Issue are conditional upon:
(a) the passing of the relevant ordinary resolutions to approve the Proposed Bonus Share Issue and the Proposed Bonus Warrant Issue respectively at the annual general meeting of the Company; and
(b) the Listing Committee of the Stock Exchange granting listings of, and permission to deal in, on the Stock Exchange, the bonus shares, the bonus warrants and any new shares which may be issued upon the exercise of the subscription rights attaching to the bonus warrants.
Subject to fulfillment of the above conditions, certificates for the bonus shares and bonus warrants are expected to be despatched to shareholders on 30 September 1998. A circular setting out further details of the Proposed Bonus Share Issue and Proposed Bonus Warrant Issue will be despatched to shareholders of the Company.
CLOSURE OF REGISTER OF MEMBERS
The Register of Members of the Company will be closed from Monday, 14 September 1998 to Wednesday, 16 September 1998, both days inclusive, during which period no transfer of shares will be effected. All transfer documents accompanied by the relevant share certificates must be lodged with the Company's Branch Registrars in Hong Kong, Tengis Limited at 1601 Hutchison House, 10 Harcourt Road, Hong Kong not later than 4:00 p.m. on Friday, 11 September 1998 in order to qualify for the Proposed Final Dividend, the Proposed Bonus Share Issue and the Proposed Bonus Warrant Issue.
BUSINESS REVIEW AND OUTLOOK
The Group has been able to achieve a record high result for the year ended 31 March 1998, despite the instability of the Asian financial markets and the downturn of the economic condition in Hong Kong.
During the year under review, the Group has successfully expanded its market share despite severe competition in the audio products industry. Sales to customers such as Kenwood, Sanyo, Emerson, GPX, Bush, Thomson and RCA are widely diversified in the markets over the world. Demand for products from countries in Americas and Europe was strong and contributed to about 80% of the Group's turnover.
The financial turmoil in the Asian countries has so far had little effect on the business of the Group. Instead we note that as a result of the instability of these Asian countries, buyers from Europe and Americas have favoured the Group for its timely delivery and product quality. On the other hand, many Asian factories are tight in working capital and short of bank credit. Thus, although the currencies of these Asian countries have devalued, they may not be able to enjoy a lower production cost because major components of audio products are mainly imported overseas.
The Group was able to expand its production capacity and invested in capital expenditure like plants and machineries as well as factory premises in Dongguan, the PRC to meet the continuous growth in production demand from our customers. The construction of the two new factory blocks in the Dongguan factory complex completed earlier this month had generated 70% additional production area. The factory complex now provided more than 1,000,000 square feet production area. The expanded facilities would be able to reinforce our expansion plan to increase the production capacity as well as to leave room for our development of new product ranges and collections.
The Group has also maintained a team of experienced staff who has been with the Group for years, and operated under the supervision of a team of senior and knowledgeable Japanese consulting engineers who designed and developed models for mass production to cater for changes in consumer trends as well as technical innovations.
The Group's development of the next generation audio product, the Mini-Disc ("MD"), is approaching completion. Orders from large OEM customers have been secured and production is expected to commence by the end of 1998. The particular features of a MD are its small size, its recordable and random access function, no shock proof problem and its edit function. We believe the demand for MD products will increase rapidly, starting from Japan, Europe and finally in the Americas when the price of the products is lowered to an attractive level as a result of mass production. The Group has also acquired an office unit just adjacent to the design and engineering department in the Hong Kong Head Office as a new product development and research center for the development and research of MD products. It is believed that it can bring to the Group a successful product line to complement the CD type products.
Egana International (Holdings) Limited ("Egana"), a company listed on the Stock Exchange holding an 18.75% interest in the Company, is primarily engaged in the design, assembly and distribution of timepieces and jewellery. The Group has been benefiting from and will continue to benefit from its association with Egana. The synergy and anticipated benefits include the possibility of enjoying the use of the extensive brandname portfolio, global distribution network, and access to the advanced technology possessed by the partners/associates of Egana.
THE FUTURE
Looking ahead, the Group will continue to expand its production capacity in order to secure a larger market share. This will be done, however, in a cautious and steady manner together with constant review of the changing market situation . The Group will further strengthen its vertical manufacturing process by looking into opportunities for producing more components in-house in order to improve the profit margin and product quality. Finally, the Group will continue to develop on its already widely diversified customers portfolio and to research new audio products in order to sustain a healthy growth in its business.
ACKNOWLEDGEMENT
On behalf of the Board, I would like to take this opportunity to extend my sincere thanks and express appreciation to my fellow directors and staff for their valuable support and devotion to the Group for the past years, which enabled the Group to be listed on the Stock Exchange, a milestone of the Group.
Ling Siu Man, Simon
Chairman
5 August 1998, Hong Kong
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