Asia Water Techonology's Chairman's Message
Extracted from FY2009 annual report
Dear Valued Shareholders,
As Non-Executive Chairman of the Board of Directors (the "Board") of Asia Water Technology Ltd. ("Asia Water" or the "Company"; with subsidiaries the "Group"), I hereby present you the annual report for the financial year ended 31 December 2009 ("FY2009").
A Year in Review
FY2009 marked a year of extraordinary challenges for the Group. Still reeling from the effects of the global credit crisis and natural disasters within China, which have affected the supply of available projects and costs of funding in the preceding year, the Group stepped into the year on a sombre note.
On deteriorating economic conditions in the second half of 2008, the Group began to meet with challenges relating to US$30.0 million in convertible bonds issued in late-2007, sparked off initially by a breach of certain financial covenants. This led the Company to seek waivers and revision of the covenants, as well as renegotiate an early redemption schedule with the bondholders. However, a highly competitive operating landscape, coupled with significantly increased expenses, greatly affected Asia Water's ability to repay its bondholders according to the agreed schedule. Despite subsequent extensions in the scheduled repayment period, and also austerity measures put in place, the Group continued to face serious difficulties in meeting its obligations.
By June 2009, it became evident that Asia Water did not appear to be in a position to fulfil such obligations in the near-term. Instead of exercising their rights to seize the Company's assets, the bondholders agreed to a standstill period and worked with the Group to restructure its convertible debt. This process led to the identification of S.I. Infrastructure Holdings Limited ("SII") and Litebay Pte. Ltd. ("Litebay") as potential investors. SII is a wholly-owned subsidiary of Shanghai Industrial Holdings Limited ("SIHL") which is the Hong Kong Stock Exchange-listed flagship subsidiary of Shanghai Industrial Investment (Holdings) Co., Ltd., a prominent Chinese investment group with diversified businesses in the infrastructure, real estate, pharmaceutical and consumer sectors. Litebay is an investment holding company related to the Anhui Guohua Investment Group Co., Ltd., another China-based investment group with businesses in the pharmaceutical, energy, coal and water treatment sectors.
Under the original proposed investment plan dated 16 June 2009, SII was to subscribe for up to approximately 1.67 billion new shares in Asia Water, infusing the Company with approximately US$23.0 million in fresh capital. The bondholders would in turn subscribe to fresh repayment bonds and warrants to make up the balance of the amount due to them, which included principal and all accrued interests and payments. Litebay was also to subscribe to approximately 197 million new shares at the same price, endowing the Group with US$2.9 million cash for general working capital purposes.
In July and September 2009 respectively, then-shareholder EGN Nominees Pte Ltd led the requisition to convene extraordinary general meetings to change the management of the Company, as well as express its desire for better terms in the restructuring plan. The original investment plan dated 16 June 2009 was subsequently vetoed by shareholders in September 2009, during which Asia Water also announced that it was served a receivership notice by the bondholders - an event which then triggered a series of demand notices from banks in China extending credit facilities to the Group's operating subsidiaries, further weakening Asia Water's precarious financial position.
The confluence of events led to the resignation and removal of members of the Company's board over August and September 2009. In its place, a new transitional board comprising a team of nonexecutive directors and an interim executive director was appointed on 23 September 2009 (the transitional Board). During its term, the transitional Board undertook an extensive search for alternative investors for the Company, and while a number of interested parties emerged, there was no one investor who could provide sufficient assurance of the ability to execute an investment in the Company within the required timeline, or to offer terms that were acceptable to the bondholders and its appointed receiver (the "Receiver"). Alongside this, the transitional Board also made several attempts to negotiate for a discharge of the Receiver, but to no avail.
In early October 2009, the Receiver sought to dispose of the Company's charged assets. As these assets comprised substantially the core operating assets of the Group, such a sale would have seriously disadvantaged all shareholders of Asia Water. In the face of severe time limitations and lack of alternative rescue plans, the transitional Board turned its focus to renegotiating an improved deal with the Receiver and the original proposed investors for the Company's shareholders. Talks were concluded in end-October 2009.
Such an improved deal (the "Proposed Transactions") involved the following terms, which in summary are:
Although the renegotiated deal has not eliminated a dilutive impact to existing shareholders, the Board believes that shareholders' interests are better represented. More importantly, shareholders can be assured that the Group's business will continue to centre on its core competencies of wastewater treatment and water purification, and potentially reap synergies with SII and Litebay onboard as Asia Water's majority investors.
On the operational front, the Group halted investments on new projects in FY2009, focusing instead on optimising existing operations and enforcing internal management controls. As at end-FY2009, the Group had equity interests in ten water treatment projects located around Central China, unchanged from FY2008. Of the three projects in-progress as at end-FY2008, Huangshi Kaidi commenced operations on schedule in June 2009. Two others, namely Wuhan Dongxihu and Wuhan Huangpi, remain slated for formal commencement of operations in 2010 and 2012 respectively.
Group revenue for FY2009 decreased 16.8% year-on-year to RMB 321.9 million. Such a change was mainly attributable to a decrease in revenue from the Water Purification business segment, in which we saw yet lesser Engineering, Procurement and Construction ("EPC") work being undertaken relative to the previous year. In FY2009, this business segment recorded RMB 221.3 million, a decrease of 23.9%. On the other hand, revenue in the Wastewater Treatment business segment showed a healthy increase of 23.5% to RMB 83.0 million. Such results reflect the Group's shift in operational strategy to increase contribution from this segment, as it can bring about greater sustainability and stability in income stream from a long-term perspective. In FY2009, revenue from the Consultancy and Others segment declined 38.3% to RMB 17.6 million, as the Group took on less consultancy projects during the reporting year. The larger percentage decrease is also representative of the once-off nature of projects under this business segment.
For the year, the Group recorded a gross profit of RMB 54.5 million, representing a gross profit margin of 16.9%. While gross profit declined 5.7% year-on-year in absolute terms, in line with lower revenues, the Group's blended gross profit margin has improved by 20 percentage points. This was attributable to the profit margin contributed by Huangshi Kaidi project and also consultancy projects undertaken for an associate of the Group.
Further down the line, Asia Water posted a net loss of RMB 180.5 million in FY2009, compared to RMB 17.9 million in FY2008. The principal cause for the widened loss was significantly increased finance expenses, which rose from RMB 65.6 million in FY2008 to RMB 146.5 million in FY2009. There was also a doubtful debt provision of RMB 25.2 million made in FY2009, vis-à-vis a writeback of RMB 2.2 million in FY2008. These clearly reflect tightened liquidity conditions within the industry and the risk premiums being demanded by lenders.
As at 31 December 2009, the Group held RMB 1.4 billion in total assets, compared to RMB 1.5 billion as at 31 December 2008. The decrease arose principally from lower trade and other receivables, as well as cash and cash equivalents, in line with business volumes. As at the end of the reporting year, Asia Water had RMB 81.6 million in cash and cash equivalents.
The Group also had RMB 1.2 billion in liabilities as at the end of FY2009, over 60% of which are in interest-bearing loans and borrowings, including the US$30.0 million in convertible bonds issued. Such gearing is far from being sustainable, and even as the Group's debt restructuring is gathering pace, it is of grave imperative that the Group continues to rebalance its capital structure until satisfactory levels are met. The nature of the industry is such that the Group will continue to require leverage, but this should be achieved through a more optimised mix of long- and short-term debt, so as to reduce overall liquidity risks and financing expenses.
Events Subsequent to Year-End
On 5 February 2010, shareholders of the Company approved a series of resolutions at an extraordinary general meeting. These approvals have been critical to the execution of the Proposed Transactions, and also formally marked the beginning of the successful restructuring of the Group's debt.
I am pleased to inform that, consequentially, the Company was officially discharged from receivership on 12 February 2010. The Company was also able to resume trading of its stock on 17 February 2010, which had been in suspension since September 2009.
Additionally, on 7 April 2010, some of the transitional Board members stepped down to make way for a recomposed board of executive and independent directors, who will bring with them invaluable knowledge and expertise requisite in stewarding the Group's business going forward. On behalf of all, I wish to thank the out-going directors for having worked tirelessly on the restructuring plan and safeguarding the Group's assets in the months past. As the new Chairman to the Group, I look forward to bringing Asia Water to greater heights with our other new Board members.
Most importantly, we thank shareholders who voted in favour of the resolutions and have thus made the debt restructuring a possibility.
China remains a water-scarce country, and against rapid economic and population growth, the demand to maximise precious water resources - particularly through reuse technologies - is set to further expand. In its 11th Five Year Plan (2006-2010), the Chinese government has pledged RMB 1 trillion in expanding and improving the country's water supply infrastructure. In particular, one-third of this budget will be allocated towards wastewater treatment, reclamation and reuse projects. The long-term fundamentals of the water treatment industry are thus clearly intact, even when disregarding the near term boosts endowed by the Chinese government's RMB 4 trillion stimulus package.
While details of the 12th Five Year Plan have yet to be unveiled, it is certain that the government's going emphasis on water resource utilisation and environmental protection can only but further strengthen. Already, the government is expected to allocate approximately 1.5% of China's gross domestic product over the next five years to environmental protection, of which a key component will be founded on water recovery and wastewater treatment. Funding towards "green" investments, including wastewater treatment projects, should also remain available, in spite of recent tightening measures by the People's Bank of China. These imply significant opportunities for established players within the Chinese water treatment industry.
With the restructuring of the Company's debt obligations near completion, I am pleased to see Asia Water once again placed on track for growth. The Group can also look forward to harnessing operational synergies with its new anchor investors, who are putting in not merely financial resources, but also management expertise, to ensure that Asia Water continues to realise its potential to flourish.
In signalling its long term commitment to Asia Water, SII has procured its joint-venture partner, General Water of China Co., Ltd. ("GWC"), to grant Asia Water a right of first refusal in respect of GWC's water treatment projects. Asia Water will also have the first right to choose to provide EPC (Engineering, Procurement and Construction) and O&M (Operations and Management) services of such water treatment projects on terms GWC may offer. Only in the event that the Company decides not to exercise such rights will GWC be entitled to engage other vendors on terms equivalent or less favourable.
It is worth noting that GWC is highly experienced in water treatment project investment, capital management, engineering, construction and management, and has been voted the Ten Most Influential Water Treatment Companies in China for seven years running. With an aggregate daily water treatment capacity of 4.3 million tonnes located across Eastern China, GWC is a formidable partner for Asia Water, which itself has 4.3 million tonnes (including projects in-progress) of daily water treatment capacity located across Central China. The Board is optimistic that this newly forged relationship will bring about significant financial and operational benefits to both parties.
This year's annual report has been aptly themed "Renascence", signifying Asia Water's resuscitation from its past challenges, which were so extraordinary they had at times appeared insurmountable, as great uncertainty hung over the fate of the Group. It is thus of immense relief and consolation to see that the Group has since weathered the worst of the challenges - made possible only through the support, diligence and perseverance of numerous stakeholders.
On behalf of the Board of Directors, I formally extend our deepest gratitude to - first and foremost - all officials, bankers, investors, partners, past directors and professional parties both external and internal, for working relentlessly and oftentimes round the clock to resolve the Group's debt issues in the last twenty-four months. I must also thank our local management and staff, who have tried to the best of their abilities to keep operations going even as the Group was undergoing great challenges at the holding-company level. Lastly, we wish to thank Asia Water's many faithful shareholders, who have rendered the utmost patience and understanding as the Company fought to bring itself back onto the path of normalcy.
The Board also takes this opportunity to seek shareholders' continued patience in the months ahead, as we persist with resolving fundamental issues that underpinned the Group's past problems. Results will not appear overnight; but shareholders can be assured that everything necessary is being done to improve the Group's financial position, and hence its ability to capitalise on market opportunities as the Chinese water industry continues to blossom.
We now have reason to look ahead to the future with renewed confidence.