Dear Shareholders ,
The financial year ended 31 December 2011 ("FY2011"), has been an exciting and fulfilling year in many aspects for Asia Water Technology Ltd. ("Asia Water" or the "Company", together with its subsidiaries the "Group").
In FY2011, the Group's core businesses continued to strengthen and expand, in many ways, such as turnover, profitability, treatment capacity and geographical coverage. Revenue for FY2011 reached RMB519.5 million and the Group's net profit attributable to owners of the Company has increased from RMB22.1 million in the financial year ended 31 December 2010 ("FY2010") to RMB110.1 million in FY2011, including a one-off non-recurring and non-cash provisional negative goodwill and provisional fair value gain in relation to the acquisition of an additional 37% interest in Wuhan Hanxi Waste Water Treatment Co., Ltd. ("Wuhan Hanxi"), totalling approximately RMB50.6 million in FY2011. Equity attributable to owners of the Company has also strengthened from RMB405.0 million as at 31 December 2010 to RMB1.0 billion as at 31 December 2011. Earnings per share has also improved from RMB1.14 cents in FY2010 to RMB3.21 cents in FY2011. Likewise, net assets per share has also strengthened from RMB17.81 cents as at 31 December 2010 to RMB20.88 cents as at 31 December2011.
During FY2011, the Group's daily water treatment capacity has almost doubled to approximately 2 million tons/day, together with expanded project footprint beyond its traditional foothold - Hubei Province, to cover Shandong Province, Hunan Province, Henan Province, Guangxi Province and Guangdong Province in the PRC.
Business and Operations Overview
During FY2011 and to-date, the Group has successfully accomplished several key milestones, including
the completion of three significant acquisitions:-
Firstly, in July 2011, the Group has through its wholly-owned subsidiary, Thrive Bloom Limited, acquired a 50% effective equity interest in Wenling Hanyang Resources Power Co., Ltd ("Wenling Hanyang"). Wenling Hanyang is engaged in the business of waste incineration power generation, and it has entered into a contract and a supplemental agreement relating to a Build-Operate-Transfer project ("BOT Project") with Wenling City Government in relation to Phase 1 and Phase 2 of the BOT project respectively. The design capacity of Phase 1 is based on 700 tons/day of waste processing and can generate up to 15MW of electricity per year. Phase 1 of the Project is currently in operation. Phase 2 of the Project is designed with a capacity of 400 tons/day of waste processing and can generate up to 9MW of electricity per year. Tranche 1 and Tranche 2 of the acquisition were completed in July 2011 and September 2011 respectively. Completion of Tranche 3 of the acquisition is expected to take place on or before 30 June 2012. This acquisition is of great significance to the Group as it marked the Group's foray into the solid waste treatment and waste-to-power arena and therefore, providing the necessary platform for the Group to potentially garner more projects of such nature in the future.
Subsequently, the Group has successfully completed the acquisition of an additional 37% effective interest in its 43% associate company - Wuhan Hanxi in November 2011. Post-acquisition, the Group holds an effective equity interest of 80% in Wuhan Hanxi. Wuhan Hanxi is engaged in BOT wastewater treatment business and is one of the largest water plants held by the Group in terms of daily treatment capacity of approximately 400,000 tons/day.
On 27 October 2011, the Company has entered into a sale and purchase agreement ("SPA") with S.I. Infrastructure Holdings Limited ("SII") and another vendor to acquire a total of 75.5% effective interest in United Environment Co., Ltd. ("UE") and its subsidiaries (collectively, the "UE Group"), subjected to shareholders' approval at a general meeting. UE is engaged principally in the business of wastewater treatment, tap water and reclaimed water treatment, garbage treatment, project investment, management and consultation of refuse treatment in the PRC (the "Business") and holds more than 10 Build-Operate-Transfer ("BOT") or Transfer-Operate- Transfer ("TOT") projects, which are mainly located in Shandong Province, Hunan Province, Henan Province, Guangxi Province and Guangdong Province in the PRC. This acquisition is part of Shanghai Industrial Holdings Limited's ("SIHL") overall plan to restructure and streamline its business by consolidating its directly controlled water treatment business to be held under the Group as a unified platform. SIHL is the holding company of SII. Subsequently, shareholders' approval was obtained at the extraordinary general meeting held on 28 December 2011. On the same date, all conditions precedent for the acquisition were fulfilled and completion of the acquisition has taken place. The Board is thankful and appreciative of the support given by our shareholders in approving the proposed acquisition.
In addition to the three acquisitions above, the Group has completed the internal restructuring of the shareholding of Wuhan Huang-Pi Kaidi Water Services Co., Ltd. ("Wuhan Huang-Pi") by transferring its 80% equity interest held by the Group's wholly-owned, PRC incorporated subsidiary, Wuhan Kaidi Water Services Co., Ltd. to the Group's wholly-owned, Singapore incorporated investment holding subsidiary, Asia Water Investments Pte. Ltd..
Financial Review
The Group was able to achieve a remarkable improvement in total comprehensive income (attributable to owners of the Company) of RMB136.0 million in FY2011 as compared to RMB22.1 million recorded in FY2010, after taking into account a one-off non-recurring and noncash provisional negative goodwill and provisional fair value gain in relation to the acquisition of an additional 37% interest in Wuhan Hanxi, totalling approximately RMB50.6 million.
The Group's profit from continuing operations has also improved significantly from RMB33.4 million in FY2010 to RMB95.3 million in FY2011, representing an increase of about 185.3%. The increase was attributed mainly to higher gross profit ("GP") recorded in FY2011, offset partially by higher selling and distribution expenses and administrative expenses mainly due to contribution from newly acquired subsidiaries in FY2011, namely UE Group and Wuhan Hanxi. The Group recorded a higher GP of RMB188.2 million in FY2011, as compared to RMB77.4 million in FY2010, representing an increase of 143.2%. The higher GP was also mainly due to contribution from UE Group and Wuhan Hanxi.
The Group has elected to apply pooling of interest method for the business combination on acquisition of UE where its common control is established. As a result, the Group has consolidated 60.4% of UE's results from 1 April 2011, even though the completion of acquisition was only in December 2011.
The Group's profit before tax from continuing operations improved considerably from RMB32.6 million in FY2010 to RMB150.2 million in FY2011, representing an increase of more than 300%. In addition to the improvement in profit from operations in FY2011, the following items have also contributed to the increase in the Group's profit before tax:-
(i) finance income from service concession arrangements of RMB38.9 million (FY2010: RMB18.6 million);The Group's total equity as at 31 December 2011 amounted to RMB1.3 billion (31 December 2010: RMB434.3 million). The increase was mainly due to (i) RMB378.4 million raised through issuance of 1,217,789,975 Rights Shares; (ii) increase in RMB53.3 million of equity through issuance of 138,150,000 new ordinary shares to Triumph Power Limited following the conversion of convertible bonds ("Bonds 2012"); (iii) increase in RMB321.2 million of equity raised through issuance of 98,578,821, 375,951,078 and 827,092,375 new ordinary shares in relation to the acquisition of Lap Yin International Limited, Golden Bell Development Limited and S.I. United Water Holdings (BVI) Limited respectively; (iv) RMB24.2 million raised through warrants conversions; and (v) total comprehensive income of RMB162.1 million in FY2011. The increase was partially offset by RMB200.3 million of merger reserve and RMB26.5 million of premium paid on acquisition of non-controlling interest, in relation to acquisitions completed during the year under review.
During the 12 months ended 31 December 2011, net cash generated from the Group's operating activities amounted to RMB64.5 million. During the year under review, the Group's investing activities raised RMB10.9 million while its financing activities raised RMB204.8 million. RMB378.4 million was raised through the issuance of 1,217,789,975 Rights Shares. Drawdown of loans and borrowings amounted to RMB284.0 million while repayment of loans and borrowings amounted to RMB428.9 million. As at 31 December 2011, the Group's cash and cash equivalents stood at RMB458.5 million.
Shareholder Communications and Corporate Transparency
In the corporate governance and compliance space, the Group continued to work on enhancing our corporate transparency and disclosure practices. We are pleased that our continued efforts to embrace good corporate governance and disclosure practice were recognised by the investing community. On 27 October 2011, the Group was presented the Runner-up Award for "Most Transparent Company Award – Catalist Category" at Securities Investors Association of Singapore's ("SIAS") 12th Investors' Choice Awards 2011, for the fourth consecutive time
since year 2008. We are encouraged by the testament of our efforts and will continue to improve ourselves as a responsible corporate citizen.
Update on Utilisation of Rights Issue Proceeds
In March 2011, Asia Water completed a Rights Issue exercise of 1,217,789,975 Rights Shares that raised net proceeds of approximately S$72.0 million. To-date, approximately S$43.6 million of the net proceeds has been utilised for (i) acquisition of 50% effective equity interest of Wenling Hanyang (approximately S$15.8 million); (ii) internal restructuring of Wuhan Huang-Pi (approximately S$27.4 million); and (iii) initial capital injection into Dalian Xinya Hengji Environmental Co., Ltd. (approximately S$0.4 million). Unutilised Rights Issue proceeds currently amounted to approximately S$28.4 million. We will continue to update our shareholders as and when the net proceeds is being materially disbursed.
Looking Ahead
Moving forward, Asia Water will strive to strengthen its position not only as a key player in the water treatment industry but also in the bigger environmental protection space by steadily expanding its scale of operation, geographical coverage and recurring income base arising from the Group's concessionary rights projects. To achieve our objective, the Group will continue to explore potential investment, merger and acquisition opportunities to invest in and/or acquire quality assets in the water and waste treatment industry to further enhance our portfolio of assets so as to create and maintain long term shareholders' value.
Asia Water continues to see significant long term prospects in the water supply, water treatment, water purification industry as well as the waste treatment industry in the PRC as increasing tap and sewage water connectivity as well as the construction and upgrading of water infrastructure continue to be a priority task for the PRC Government.
In the recent 12th Five-Year Plan, the PRC Government has presented a massive investment plan of RMB4 trillion in water-related sectors over the next decade. The continued focus by the PRC Government on alleviating water crisis issue in the PRC not only point to the gravity of the water scarce situation in the PRC but also present tremendous opportunities and strong growth potential for the Group, especially in the water supply, water treatment and water purification arenas.
The PRC's solid waste treatment industry and its related waste-to-power industry are also key areas that present growth potential and opportunities for the Group. With large amounts of waste generated annually in the PRC as a result of rapid industrialisation, urbanisation and improvement in household spending, coupled with shortages of land sources and energy in many parts of the PRC, waste treatment business, in particular, waste-to-power business in the PRC represents one key industry with growth potential and prospects. In fact, under the 12th Five-Year Plan, waste treatment industry has been identified as one of the key targets for development and investments by the PRC Government.
In addition, while the Group is mindful of the challenges arising from the PRC's credit environment, the credit environment is also expected to present acquisition opportunities for the Group as many small and medium enterprises in the PRC were being affected. As such, the Group will also continue to seek opportunities from all sources to acquire and/or to invest in worthy projects and will consider investment opportunities being presented based on their individual merits, including those of related parties as well as unrelated third parties so as to further grow and expand the Group's market share in the environmental protection industry in the PRC. By drawing on our internal capabilities and riding on the continued wave of growth opportunities in the PRC, the Group hopes to deliver greater long term value and interests for our valued shareholders.
In Appreciation
On behalf of the Board of Directors (the "Board"), I would like to convey my appreciation to like-minded management and staff for their dedication and commitment over the past years. Special thanks go to my fellow Directors for their continued support and contributions in steering the Group to move steadily forward amidst the many challenges.
During the first quarter of FY2012, we also saw the appointment of a new Executive Director, Mr. Yang Changmin, the re-designation of Mr. Zhou Jun as our Executive Deputy Chairman, and the reconstitution of our Remuneration Committee and Nominating Committee to further strengthen the Board composite and effectiveness. We also would like to extend a warm welcome to Mr. Zhou in his new role as the Company's Executive Deputy Chairman and to Mr. Yang as the Company's Executive Director and we look forward to their contributions to the Group.
Lastly, on behalf of the Group, I would like to convey my sincere gratitude to our customers, suppliers, banks, agencies and business partners for their trust and support. Most importantly, my heartfelt gratitude to all our shareholders for the trust and faith in us.
Mr. Cai Yutian
Non-Executive Chairman