UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
one)
FORM
20-F
|
£
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
|
R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009.
OR
|
£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
|
£
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
Date of
event requiring this shell company report:
for the
transition period from __________ to ___________
Commission
file number 000-52275
China
Ceramics Co., Ltd.
(Exact
name of the Registrant as specified in its charter)
British
Virgin Islands
(Jurisdiction
of incorporation or organization)
c/o
Jinjiang Hengda Ceramics Co., Ltd.
Junbing
Industrial Zone
Anhai,
Jinjiang City
Fujian
Province, PRC
Telephone:
+86 (595) 8576 5051
(Address
of principal executive offices)
Huang
Jia Dong
c/o
Jinjiang Hengda Ceramics Co., Ltd.
Junbing
Industrial Zone
Anhai,
Jinjiang City
Fujian
Province, PRC
Telephone:
+86 (595) 8576 5051
Facsimile:
+86 (595) 8576 5053
(Name,
Telephone, E-mail and/or Facsimile Number and Address of Company Contact
Person)
with a
copy to:
Stuart
Management Company
33
Riverside Avenue
5
th
Floor
Westport,
CT 06880
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
None
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
UNITS,
EACH CONSISTING OF ONE SHARE AND ONE WARRANT
SHARES,
NO PAR VALUE
WARRANTS
TO PURCHASE ONE SHARE
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None.
On
December 31, 2009, the issuer had 8,950,171 shares outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
£
No
T
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes
£
No
T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
T
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
£
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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£
Large
Accelerated filer
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£
Accelerated
filer
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T
Non-accelerated
filer
|
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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£
US
GAAP
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T
International
Financial Reporting
Standards
as issued by the International
Accounting
Standards Board
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£
Other
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
£
Item
17
£
Item
18
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes
£
No
T
(APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of the securities under a plan confirmed
by a court.
Yes
£
No
£
TABLE
OF CONTENTS
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Page
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||||||
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PART
I
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2
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|||||
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ITEM
1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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2
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||||
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ITEM
2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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2
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||||
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ITEM
3.
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KEY
INFORMATION
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2
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||||
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A.
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Selected
financial data
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2
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||||
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B.
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Capitalization
and Indebtedness
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4
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||||
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C.
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Reasons
for the Offer and Use of Proceeds
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4
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||||
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D.
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Risk
factors
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4
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||||
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ITEM
4.
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INFORMATION
ON THE COMPANY
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15
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||||
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A.
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History
and Development of the Company
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15
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||||
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B.
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Business
Overview
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16
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||||
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C.
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Organizational
Structure
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28
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||||
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D.
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Property,
plant and equipment
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29
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||||
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ITEM
4A.
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UNRESOLVED
STAFF COMMENTS
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29
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||||
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ITEM
5.
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OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
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29
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ITEM
6.
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DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
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43
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||||
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A.
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Directors
and senior management
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43
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||||
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B.
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Compensation
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46
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||||
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C.
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Board
Practices
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48
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||||
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D.
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Employees
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49
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||||
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E.
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Share
Ownership
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50
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||||
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ITEM
7.
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MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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50
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||||
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A.
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Major
shareholders
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50
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||||
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B.
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Related
Party Transactions
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51
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||||
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C.
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Interests
of Experts and Counsel
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51
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||||
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ITEM
8.
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FINANCIAL
INFORMATION
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51
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||||
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A.
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Consolidated
Statements and Other Financial Information.
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51
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||||
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B.
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Significant
Changes
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52
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||||
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ITEM
9.
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THE
OFFER AND LISTING
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53
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||||
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A.
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Offer
and Listing Details
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53
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||||
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B.
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Plan
of Distribution
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53
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||||
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C.
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Markets
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53
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||||
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D.
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Selling
Shareholders
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54
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||||
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E.
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Dilution
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54
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||||
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F.
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Expenses
of the Issue
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54
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ITEM
10.
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ADDITIONAL
INFORMATION
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54
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||||
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A.
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Share
Capital
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54
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||||
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B.
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Memorandum
and Articles of Association
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54
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||||
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C.
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Material
Contracts
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55
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||||
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D.
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Exchange
controls
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55
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||||
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E.
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Taxation
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55
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||||
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F.
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Dividends
and paying agents
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67
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||||
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G.
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Statement
by experts
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67
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||||
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H.
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Documents
on display
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67
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||||
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I.
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Subsidiary
Information
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67
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i
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ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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67
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||||
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ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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68
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||||
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PART
II
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69
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|||||
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ITEM
13.
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DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
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69
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||||
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ITEM
14.
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MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
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69
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||||
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ITEM
15.
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CONTROLS
AND PROCEDURES
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69
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||||
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ITEM
16.
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[RESERVED]
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70
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||||
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ITEM
16A.
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AUDIT
COMMITTEE FINANCIAL EXPERT.
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70
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||||
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ITEM
16B.
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CODE
OF ETHICS.
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70
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||||
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ITEM
16C.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
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70
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||||
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ITEM
16D.
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EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
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71
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||||
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ITEM
16E.
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PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
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71
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||||
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ITEM
16F.
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CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT.
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71
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||||
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ITEM
16G.
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CORPORATE
GOVERNANCE.
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71
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PART
III
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72
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|||||
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ITEM
17.
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FINANCIAL
STATEMENTS
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72
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||||
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ITEM
18.
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FINANCIAL
STATEMENTS
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72
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||||
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ITEM
19.
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EXHIBITS
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72
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||||
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SIGNATURES
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73
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ii
CERTAIN
INFORMATION
In
this Annual Report on Form 20-F (the “Report”), unless otherwise indicated,
“we,” “us,” “our,” and “China Ceramics” refers to China Ceramics Co., Ltd., a
British Virgin Islands company, and its subsidiaries, including Success Winner
Limited (“Success Winner”), a subsidiary of China Ceramics,
Stand
Best Creation Limited (“Stand Best”), a wholly owned subsidiary of Success
Winner
and the entity through which the operating business is held, and
Jinjiang Hengda Ceramics Co., Ltd. (“Hengda”).
On
November 20, 2009, China Holdings Acquisition Corp. (“CHAC”), our predecessor,
merged with and into China Ceramics, its wholly owned British Virgin Islands
subsidiary, resulting in the redomestication of CHAC to the British Virgin
Islands as “China Ceramics Co., Ltd.” Immediately following the merger and
redomestication (the “Redomestication”), China Ceramics acquired all of the
outstanding securities of Success Winner (the “Business Combination”).
Unless the context indicates otherwise, the “Company” refers to CHAC prior to
the Business Combination and China Ceramics following the Business
Combination.
Unless
the context indicates otherwise, all references to “China” or “PRC” refer to the
People’s Republic of China. All references to “provincial-level regions” or
“regions” include provinces as well as autonomous regions and directly
controlled municipalities in China, which have an administrative status equal to
provinces, including Beijing.
All
references to “Renminbi,” “RMB” or “yuan” are to the legal currency of the
People’s Republic of China and all references to “U.S. dollars,” “dollars,” “$”
are to the legal currency of the United States. This Report contains
translations of Renminbi amounts into U.S. dollars at specified rates solely for
the convenience of the reader. We make no representation that the Renminbi or
U.S. dollar amounts referred to in this Report could have been or could be
converted into U.S. dollars or Renminbi, as the case may be, at any particular
rate or at all. On May 7, 2010, the buying rate announced by the Federal
Reserve Statistical Release was RMB6.8254 to $1.00.
FORWARD-LOOKING
STATEMENTS
This
Report contains “forward-looking statements” that represent our beliefs,
projections and predictions about future events. All statements other than
statements of historical fact are “forward-looking statements” including any
projections of earnings, revenue or other financial items, any statements of the
plans, strategies and objectives of management for future operations, any
statements concerning proposed new projects or other developments, any
statements regarding future economic conditions or performance, any statements
of management’s beliefs, goals, strategies, intentions and objectives, and any
statements of assumptions underlying any of the foregoing. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”,
“expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”
and similar expressions, as well as statements in the future tense, identify
forward-looking statements.
These
statements are necessarily subjective and involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements described in or implied by such
statements. Actual results may differ materially from expected results described
in our forward-looking statements, including with respect to correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of the publicly available
information with respect to the factors upon which our business strategy is
based or the success of our business.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of whether, or the times by
which, our performance or results may be achieved. Forward-looking statements
are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, those factors discussed under the headings
“Risk Factors”, “Operating and Financial Review and Prospects,” “Information on
the Company” and elsewhere in this Report.
1
This
Annual Report should be read in conjunction with our audited financial
statements and the accompanying notes thereto, which are included in Item 18 of
this Annual Report.
ITEM
1.
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
required.
ITEM
2.
OFFER
STATISTICS AND EXPECTED TIMETABLE
Not
required.
ITEM
3.
KEY
INFORMATION
A.
Selected
financial data
The
following selected consolidated financial data as of and for the years ended
December 31, 2009, 2008 and 2007 have been derived from the audited consolidated
financial statements of China Ceramics included in this Annual
Report. The following summary consolidated financial data as of
December 31, 2006 and 2005 have been derived from the audited/unaudited combined
financial statements of Success Winner and its
subsidiaries. This information is only a summary and should be read
together with the consolidated financial statements, the related notes, the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations of China Ceramics” and other financial information
included in this Annual Report.
The
consolidated financial statements are prepared and presented in accordance with
International Financial Reporting Standards, or IFRS, as issued by the
International Accounting Standards Board ("IASB"). The results of operations of
China Ceramics in any period may not necessarily be indicative of the results
that may be expected for any future period. See “Risk Factors” included
elsewhere in this Annual Report.
CHINA
CERAMICS CO., LTD. AND SUBSIDIARIES
Selected
Consolidated Financial Data
(RMB
in Thousands Except per Share and Operating Data)
|
As
of December 31,
|
||||||||||||||||||||
|
2009
Audited
|
2008
Audited
|
2007
Audited
|
2006
Audited
|
2005
Unaudited
|
||||||||||||||||
|
Consolidated
Statements of Financial Position Data
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
150,121 | 51,606 | 18,507 | 12,593 | 4,902 | |||||||||||||||
|
Total
current assets
|
684,887 | 382,380 | 359,351 | 270,927 | 216,211 | |||||||||||||||
|
Total
assets
|
749,236 | 454,720 | 440,289 | 361,676 | 308,124 | |||||||||||||||
|
Total
current liabilities
|
244,139 | 201,269 | 209,417 | 276,410 | 264,063 | |||||||||||||||
|
Total
liabilities
|
244,139 | 201,269 | 209,417 | 276,410 | 264,063 | |||||||||||||||
|
Total
equity
|
505,097 | 253,451 | 230,872 | 85,266 | 44,061 | |||||||||||||||
2
|
For
the Years Ended December 31,
|
||||||||||||||||||||
|
2009
Audited
|
2008
Audited
(Restated)
|
2007
Audited
(Restated)
|
2006
Audited
(Restated)
|
2005
Unaudited
|
||||||||||||||||
|
Consolidated
Statement of Comprehensive Income Data
|
||||||||||||||||||||
|
Revenues
|
835,747 | 737,182 | 617,863 | 470,010 | 375,439 | |||||||||||||||
|
Gross
profit
|
253,217 | 203,852 | 175,923 | 123,741 | 93,234 | |||||||||||||||
|
Profit
before taxation
|
212,148 | 189,060 | 165,469 | 115,079 | 86,718 | |||||||||||||||
|
Profit
attributable to shareholders
|
152,861 | 165,033 | 145,606 | 101,254 | 86,718 | |||||||||||||||
|
Earnings
per share –
|
||||||||||||||||||||
|
Basic
|
24.47 | 28.73 | 25.35 | 17.63 | 15.10 | |||||||||||||||
|
Diluted
|
23.65 | 28.73 | 25.35 | 17.63 | 15.10 | |||||||||||||||
|
Weighted
average shares outstanding –
|
||||||||||||||||||||
|
Basic
|
6,246,820 | 5,743,320 | 5,743,320 | 5,743,320 | 5,743,320 | |||||||||||||||
|
Diluted
|
6,462,424 | 5,743,320 | 5,743,320 | 5 ,743,320 | 5,743,320 | |||||||||||||||
3
The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated. On May 7, 2010, the buying rate
announced by Federal Reserve Statistical Release was RMB
6.8254
to $1.00.
|
Spot
Exchange Rate
|
||||||||||||||||
|
Period
|
Period
Ended
|
Average
(1)
|
Low
|
High
|
||||||||||||
|
(RMB
per US$1.00)
|
||||||||||||||||
|
2005
|
8.0702 | 8.1826 | 8.2765 | 8.0702 | ||||||||||||
|
2006
|
7.8041 | 7.9579 | 8.0702 | 7.8041 | ||||||||||||
|
2007
|
7.2946 | 7.5806 | 7.8127 | 7.2946 | ||||||||||||
|
2008
|
6.8225 | 6.9477 | 7.2946 | 6.7800 | ||||||||||||
|
2009
|
6.8259 | 6.8295 | 6.8180 | 6.8395 | ||||||||||||
|
October
|
6.8264 | 6.8267 | 6.8292 | 6.8248 | ||||||||||||
|
November
|
6.8265 | 6.8271 | 6.8300 | 6.8255 | ||||||||||||
|
December
|
6.8259 | 6.8275 | 6.8299 | 6.8244 | ||||||||||||
|
2010
|
||||||||||||||||
|
January
|
6.8268 | 6.8269 | 6.8295 | 6.8258 | ||||||||||||
|
February
|
6.8258 | 6.8285 | 6.8330 | 6.8258 | ||||||||||||
|
March
|
6.8258
|
6.8262
|
6.8270
|
6.8254
|
||||||||||||
|
April
|
6.8247
|
6.8256
|
6.8265
|
6.8229
|
||||||||||||
|
May
(to May 7)
|
6.8254 | 6.8257 | 6.8265 | 6.8245 | ||||||||||||
Source:
Federal Reserve Statistical Release
|
(1)
|
Annual
averages, lows, and highs are calculated from month-end rates. Monthly
averages, lows, and highs are calculated using the average of the daily
rates during the relevant period.
|
B.
Capitalization
and Indebtedness
Not
required.
C.
Reasons
for the Offer and Use of Proceeds
Not
required.
D.
Risk
factors
You
should carefully consider the following risk factors, together with all of the
other information included in this annual report.
Risk
Factors Relating to China Ceramics’ Business
China
Ceramics is reliant on its major customers.
China
Ceramics’ major customers, namely Foshan City Jundian Ceramics Co., Ltd.,
Chengdu Dehui Building Material Co., Ltd., Xiamen Tongying Trading Co., Ltd.,
Liaoning Yatong Logistics Co., Ltd., and Shanxi Guanghe Industry Co., Ltd.
accounted for an aggregate of 31.8%, 29.1%, and 25.4% of its sales in fiscal
years 2007, 2008, and 2009, respectively. China Ceramics’ agreements with its
major customers are general in nature and do not impose legal obligations on its
customers to purchase from the Company and do not specify sales volume or price.
There is no assurance that China Ceramics will continue to retain these
customers or that they will continue to purchase its products at their current
levels in the future. If there is any reduction or cancellation of purchase
orders by these customers, or a termination of relationship with these
customers, China Ceramics’ revenues will be negatively impacted.
4
China
Ceramics provides credit to its customers and defaults of its customers would
have a significant impact on its cash flows and results.
China
Ceramics’ financial position and profitability is dependent on the
creditworthiness of its customers. China Ceramics is exposed to the credit risks
of its customers and this risk increases the larger the orders are. China
Ceramics usually offers its customers credit terms of approximately 90 days.
Although there has not been any material collection problem for trade
receivables or bad debts in the last three fiscal years, there is no assurance
that China Ceramics will not encounter doubtful or bad debts in the future.
Should China Ceramics experience any unexpected delay or difficulty in
collecting receivables from its customers, its cash flows and financial results
may be adversely affected.
China
Ceramics major customers such as Foshan City Jundian Ceramics Co., Ltd., Chengdu
Dehui Building Material Co., Ltd., Xiamen Tongying Trading Co., Ltd., Liaoning
Yatong Logistics Co., Ltd., and Shanxi Guanghe Industry Co., Ltd. accounted for
an aggregate of 31.8%, 29.1%, and 25.4% of its total revenue in fiscal years
2007, 2008, and 2009, respectively. China Ceramics is particularly exposed to
the credit risks of these customers, as defaults in payment by its major
customers would have a significant impact on its cash flows and financial
results.
China
Ceramics is dependent on the property and construction sector in the PRC and may
experience a decline in business if the demand for construction materials
decreases.
China
Ceramics businesses are closely related to the property and construction
industries in the PRC. China Ceramics’ products are sold to end users of its
downstream industries, the property and construction industry. If the property
and construction industry falls into a recession in the future, the demand for
construction materials, such as ceramic tiles, may consequently decrease and
have a significant adverse effect on China Ceramics’ business.
If
China Ceramics’ suppliers are unable to fulfill its orders for raw materials,
China Ceramics may lose business.
China
Ceramics’ suppliers are all located in the PRC. Its purchase of raw materials is
based on expected production levels, after taking into consideration, amongst
other factors, forecast and actual orders from its customers. To ensure that
China Ceramics is able to deliver quality products at competitive prices, China
Ceramics needs to secure sufficient quantities of raw materials at acceptable
prices and quality on a timely basis. Typically, China Ceramics does not enter
into any long-term supply agreements with its suppliers. As such, there is no
assurance that these suppliers will continue to supply China Ceramics in the
future. In the event China Ceramics’ suppliers are unable to fulfill its orders
or meet its requirements, China Ceramics may not be able to find timely
replacements at acceptable prices and quality, and this will in turn adversely
affect the fulfillment of its customers’ orders. Consequently, China Ceramics
reputation may be negatively affected, leading to a loss of business and
affecting its ability to attract new businesses.
Increases
in the price of raw materials will negatively impact China Ceramics’
profitability.
In fiscal
years 2007, 2008, and 2009, China Ceramics’ cost of raw materials, which consist
of clay (comprising mainly of kaolin, flint and feldspar), coal (used to heat
its kilns), coloring materials and glazing materials, accounted for 68.9%,
59.8%, and 53.7% of its total cost of sales, respectively. The price of clay,
coal, coloring materials and glazing materials may fluctuate due to factors such
as global demand and supply conditions for such raw materials and changes in
global economic conditions. Any shortages or interruptions in the supply of
clay, coal, coloring materials or glazing materials will result in an increase
in the cost of production, thus increasing the Company’s cost of sales. If China
Ceramics is not able to pass on such an increase to its customers or is unable
to find alternative sources of clay, coal, coloring materials, or glazing
materials or appropriate substitute raw materials at comparable prices, it will
have an adverse effect on China Ceramics operations and financial
performance.
5
China
Ceramics is dependent on its management team and any loss of China Ceramics’ key
management personnel without timely and suitable replacements may reduce its
revenues and profits.
China
Ceramics attributes its success to the experience, leadership and contributions
of its management team and is therefore dependent to a large extent on its
ability to retain its key management personnel, in particular its executive
directors who are responsible for formulating and implementing growth, corporate
development and overall business strategies. China Ceramics’ business is also
dependent on its executive officers who are responsible for implementing its
business plans and driving growth. Please refer to “Directors, Senior Management
and Employees” in this Annual Report for more information. The demand for such
experienced personnel is intense and the search for personnel with the relevant
skills set can be time consuming. The loss of China Ceramics’ key management
personnel without timely and suitable replacements may reduce its revenue and
profits.
Failure
to compete successfully with its competitors and new entrants to the ceramics
industry in the PRC may result in China Ceramics losing market
share.
China
Ceramics operates in a competitive industry. Given the growth potential of its
industry, there is no assurance that China Ceramics will not face competition
from its existing competitors and new entrants. China Ceramics competes with a
variety of companies, some of which have advantages that include; longer
operating history, larger clientele base, superior products, better access to
capital, personnel and technology, or are better entrenched. China Ceramics’
competitors may be able to respond more quickly to new and emerging technologies
and changes in customer requirements or succeed in developing products that are
more effective or less costly than China Ceramics’ products. Any increase in
competition could have a negative impact on China Ceramics’ pricing (thus
eroding its profit margins) and reduce its market share. If China Ceramics is
unable to compete effectively with its existing and future competitors and does
not adapt quickly to changing market conditions, it may lose market
share.
China
Ceramics has not purchased product liability insurance and any product liability
claims must be paid by China Ceramics.
Accidents
may arise as a result of defects in China Ceramics’ products. If there are any
defects in the products designed and/or manufactured by China Ceramics, China
Ceramics may face claims from its customers or third parties for the damages
suffered as a result of such defects. China Ceramics has not purchased insurance
coverage for product liability or third party liability and is therefore not
covered or compensated by insurance in respect of losses, damages, claims and
liabilities arising from or in connection with product liability or third party
liability.
China
Ceramics’ production facilities may be affected by power shortages which could
result in a loss of business.
China
Ceramics’ production facilities consume substantial amounts of electrical power,
which is the principal source of energy for its manufacturing operations.
Although China Ceramics has a back-up generator at both its production
facilities, it may experience occasional temporary power shortages disrupting
production due to power rationing activities conducted by the authorities,
thunderstorms or other natural events beyond its control. Accordingly, these
production disruptions could result in a loss of business.
China
Ceramics’ research and development efforts may not result in marketable
products.
China
Ceramics’ research and development (“R&D”) team develops products which
China Ceramics has identified as having good potential in the market. There is
no assurance that China Ceramics will not experience delays in future product
developments. There is also no assurance that the products which China Ceramics
is currently developing or may develop in the future will be successful or that
China Ceramics will be able to market these new products to its customers
successfully. If its new products are unable to gain the acceptance of its
customers or potential customers, China Ceramics will not be able to generate
future sales from its investment in R&D.
6
China
Ceramics may not be able to ensure the successful implementation of its future
plans and strategies, resulting in reduced financial performance.
China
Ceramics intends to expand its production capacity, expand its market presence
and explore opportunities in strategic investments or alliances and
acquisitions. These initiatives involve various risks including, but not limited
to, the investment costs in setting up new production facilities, offices and
sales offices and working capital requirements. There is no assurance that any
future plan can be successfully implemented as the successful execution could
depend on several factors, some of which are not within its control. Failure to
successfully implement China Ceramics’ future plans or to effectively manage
cost, may lead to a material adverse change in its operating environment or
affect its ability to respond to market or industry changes, resulting in
reduced financial performance.
China
Ceramics may lose revenue if its intellectual property rights are not protected
and counterfeit HD or Hengda brand products are sold in the market.
China
Ceramics believes its intellectual property rights are important to its success
and competitive position. A portion of its products are manufactured and
marketed under its “HD” or “Hengda” label. China Ceramics has filed its “HD” and
“Hengda” labels as trademarks in the PRC. China Ceramics cannot assure you that
there will not be any unauthorized usage or misuse of its trademarks or that its
intellectual property rights will be adequately protected as it may be difficult
and costly to monitor any infringements of its intellectual property rights in
the PRC. If China Ceramics cannot adequately protect its intellectual property,
it may lose revenue.
In
addition, China Ceramics believes the branding of its products and the brand
equity in its “HD” and “Hengda” trademarks is critical to its expansion effort
and the continued success of its business. Its efforts to build its brand may be
undermined by the sale of counterfeit goods. The counterfeiting of its products
may increase if its products become more popular.
In order
to preserve and enforce its intellectual property rights, China Ceramics may
have to resort to litigation against the infringing or counterfeiting parties.
Such litigation could result in substantial costs and diversion of management
resources which may have an effect on its financial performance.
China
Ceramics may inadvertently infringe third-party intellectual property rights,
which could negatively impact its business and financial results.
China
Ceramics is not aware of, nor has China Ceramics received any claims from third
parties for, any violations or infringements of intellectual property rights of
third parties by it. Nevertheless, there can be no assurance that as China
Ceramics develops new product designs and production methods, China Ceramics
would not inadvertently infringe the intellectual property rights of others or
others would not assert infringement claims against China Ceramics or claim that
China Ceramics has infringed their intellectual property rights. Claims against
China Ceramics, even if untrue or baseless, could result in significant costs,
legal or otherwise, cause product shipment delays, require it to develop
non-infringing products, enter into licensing agreements or may be a distraction
to its management. Licensing agreements, if required, may not be available on
terms acceptable to China Ceramics or at all. In the event of a successful claim
of intellectual property rights infringement against China Ceramics and its
failure or inability to develop non-infringing products or to license the
infringed intellectual property rights in a timely or cost-effective basis, its
business and/or financial results will be negatively impacted.
China
Ceramics may become subject to foreign exchange risk.
China
Ceramics currently does not have any foreign exchange exposure as its sales and
purchases are predominantly denominated in RMB. However, in the future, a
proportion of its sales may be denominated in other currencies as China Ceramics
expands into overseas markets. In such circumstances, China Ceramics may be
subject to foreign currency fluctuations in the future.
7
China
Ceramics manufacturing activities are dependent upon availability of skilled and
unskilled labor, a deficiency of which could result in a reduction in
profits.
China
Ceramics manufacturing activities are relatively labor intensive and dependent
on availability of skilled and unskilled labor in large numbers. Large labor
intensive operations call for good monitoring and maintenance of cordial
relations. Non-availability of labor and/or any disputes between the labor and
management may result in a reduction in profits. Further, China Ceramics relies
on contractors who engage on-site laborers for performance of many of its
unskilled operations. The scarcity or unavailability of contract laborers may
affect China Ceramics’ operations and financial performance.
China
Ceramics faces increasing labor costs and other costs of production in the PRC,
which could materially adversely affect its profitability.
The
ceramic tile manufacturing industry is labor intensive. Labor costs in China
have been increasing in recent years and China Ceramics’ labor costs in the PRC
could continue to increase in the future. If labor costs in the PRC continue to
increase, China Ceramics’ production costs will likely increase which may in
turn affect the selling prices of China Ceramics’ products. China Ceramics may
not be able to pass on these increased costs to consumers by increasing the
selling prices of its products in light of competitive pressure in the markets
where it operates. In such circumstances, its profit margin may
decrease.
Compliance
with Foreign Corrupt Practices Act could subject China Ceramics to penalties and
other adverse consequences.
China
Ceramics is subject to the United States Foreign Corrupt Practices Act, which
generally prohibits United States public companies from engaging in bribery of
or other prohibited payments to foreign officials to obtain or retain business.
While China Ceramics takes precautions to educate its employees about the
Foreign Corrupt Practices Act, there can be no assurance that China Ceramics or
the employees or agents of its subsidiaries will not engage in such conduct, for
which China Ceramics might be held responsible. If that were to occur, China
Ceramics could suffer penalties that may have a material adverse effect on its
business, financial condition and results of operations.
Risk
Factors Relating to Operations In China
China
Ceramics is dependent on political, economic, regulatory and social conditions
in the PRC.
Approximately
94% of China Ceramics’ revenue in each of the last three fiscal years was
derived from the PRC market and we anticipate that the PRC market will continue
to be the major source of revenue for the foreseeable future. Accordingly, any
significant slowdown in the PRC economy or decline in demand for its products
from its customers in the PRC will have an adverse effect on its business and
financial performance. Furthermore, as China Ceramics’ operations and production
facilities are located in the PRC, any unfavorable changes in the social and/or
political conditions may also adversely affect its business and
operations.
While the
current policy of the PRC government seems to be one of imposing economic reform
policies to encourage foreign investments and greater economic decentralization,
there is no assurance that such a policy will continue to prevail in the future.
There is no assurance that China Ceramics’ operations will not be adversely
affected should there be any policy changes.
China
Ceramics is subject to risks related to the laws and regulations of the PRC and
the interpretation and implementation thereof.
China
Ceramics business and operations, as well as those of its customers and
suppliers in the PRC are subject to the laws and regulations promulgated by
relevant PRC governmental authorities. The PRC government is still in the
process of developing a comprehensive set of laws and regulations in the course
of the PRC’s transformation from a centrally planned economy to a more free
market oriented economy. As the legal system in the PRC is still in flux, laws
and regulations or their interpretation may be subject to change. Furthermore,
any change in the political and economic policy of the PRC government may also
result in similar changes in the laws and regulations or the interpretation
thereof. Such changes may adversely affect China Ceramics’ operations and
business in the PRC.
8
The PRC
legal system is a codified legal system comprising written laws, regulations,
circulars, administrative directives, and internal guidelines as well as
judicial interpretations. Decided cases do not form part of the legal structure
of the PRC and thus have no binding effect. As such, the administration of PRC
laws and regulations may be subject to a certain degree of discretion by the
authorities. This has resulted in the outcome of dispute resolutions not having
the level of consistency or predictability as in other countries with more
developed legal systems. Due to such inconsistency and unpredictability, if
China Ceramics should be involved in any legal dispute in the PRC, China
Ceramics may experience difficulties in obtaining legal redress or in enforcing
its legal rights.
From time
to time, changes in law, registration requirements, and regulations or the
implementation thereof may also require China Ceramics to obtain additional
approvals and licenses from the PRC authorities for carrying out its operations
in the PRC which would incur additional expenses in order to comply with such
requirements and in turn affect its financial performance with the increase in
its business costs. Furthermore, there can be no assurance that approvals,
registrations, or licenses will be granted to China Ceramics promptly or at all.
If China Ceramics experiences delays in obtaining or are unable to obtain such
required approvals, registrations, or licenses, its operations and business in
the PRC, and hence its overall financial performance will be adversely
affected.
China
Ceramics’ business activities are subject to certain PRC laws and
regulations.
As its
production and operations are carried out in the PRC, China Ceramics is subject
to certain PRC laws and regulations. In addition, being a wholly foreign-owned
enterprise, China Ceramics is required to comply with certain laws and
regulations. Pursuant to PRC laws and regulations, the breach or non-compliance
with such laws and regulations may result in the PRC authorities suspending,
withdrawing or terminating its business license, causing China Ceramics to cease
production of all or certain of its products, and this would materially and
adversely affect its business and financial performance.
The
corporate affairs of China Ceramics in the PRC are governed by its articles of
association and the corporate and foreign investment laws and regulations of the
PRC. The principles of the PRC laws relating to matters such as the fiduciary
duties of directors and other corporate governance matters and foreign
investment laws in the PRC are relatively new. Hence, the enforcement of
investors or shareholders’ rights under the articles of association of a PRC
company and the interpretation of the relevant laws relating to corporate
governance matters remain largely untested in the PRC.
PRC
foreign exchange control may limit its ability to utilize its profits
effectively and affect its ability to receive dividends and other payments from
its PRC subsidiary.
Jinjiang
Hengda Ceramics Co., Ltd. is a foreign investment enterprise (“FIE”) and is
subject to the rules and regulations in the PRC on currency conversion. In the
PRC, State Administration of Foreign Exchange, or SAFE, regulates the conversion
of the RMB into foreign currencies. Currently, FIEs are required to apply to
SAFE for “Foreign Exchange Registration Certificates for Foreign Investment
Enterprise”. With such registration certifications (which need to be renewed
annually), FIEs are allowed to open foreign currency accounts including the
“current account” and “capital account”. Currently, conversion of currency
within the scope of the “current account” (e.g. remittance of foreign currencies
for payment of dividends, etc.) can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE.
On
October 21, 2005, SAFE promulgated the “Notice on Issues concerning Foreign
Exchange Management in Financing by PRC Residents by Overseas Special Purpose
Vehicle and Return Investments” (the “No. 75 Notice”). The No. 75 Notice came
into effect on November 1, 2005 and requires the following matters, among
others, to be complied with: Every PRC domestic resident who establishes or
controls an overseas special purpose vehicle (“SPV”) must apply to the local
bureau of SAFE for an “overseas investment foreign exchange
registration.”
9
Every PRC
domestic resident of an SPV who has completed the “overseas investment foreign
exchange registration” (the “Registrant”) must make an application to the local
bureau of SAFE to amend their registration particulars upon (i) the injection of
any PRC domestic assets or the equity interests of any PRC domestic company
owned by the PRC domestic resident into the SPV, and (ii) the implementation of
any overseas equity fund-raising by the SPV following an injection of PRC
domestic assets or the equity interests of a PRC domestic company; every
Registrant must apply to the local bureau of SAFE for change of registration
particulars or recordation within 30 days after the occurrence of any capital
increase or reduction, changes in shareholdings or share swap, merger, long-term
investment in equities or debentures, guarantee of foreign indebtedness and
other major capital changes not involving “return investment”, undertaken by an
SPV; and every Registrant must repatriate, within 180 days, dividends or profits
which he receives from an SPV and/or income derived from changes in the
shareholding of an SPV.
There can
be no assurance that SAFE will not continue to issue new rules and regulations
and/or further interpretations of the No. 75 Notice that will strengthen the
foreign exchange control. As China Ceramics is located in the PRC and a
significant portion of China Ceramics’ sales are denominated mainly in RMB, the
ability of China Ceramics to pay dividends or make other distributions may be
restricted by PRC foreign exchange control restrictions. There can be no
assurance that the relevant regulations will not be amended to its detriment and
that the ability of China Ceramics to distribute dividends will not be adversely
affected.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect its business.
The PRC
legal system is based on the PRC Constitution and is made up of written laws,
regulations, circulars and directives. With the PRC’s entry into the WTO, the
PRC government is in the process of developing its legal system so as to
encourage foreign investments and to meet the needs of investors. As the PRC
economy is developing at a generally faster rate than its legal system, some
degree of uncertainty exists in connection with whether and how existing laws
and regulations will apply to certain events or circumstances. Some of the laws
and regulations, and the interpretation, implementation and enforcement thereof,
are still at the experimental stage and therefore subject to policy changes.
This in turn, may have an adverse impact on China Ceramics’ sales and
profitability. There is no assurance that the introduction of new laws or
regulations, changes to existing laws and regulations and the interpretation or
application thereof or the delays in obtaining approvals from the relevant PRC
authorities will not have an adverse impact on China Ceramics’ business or
prospects.
In
particular, on August 8, 2006, the Ministry of Commerce, the China Securities
Regulatory Commission, the State-owned Assets Supervision and Administration
Commission, the State Administration of Taxation, the State Administration of
Industry and Commerce and the State Administration of Foreign Exchange
promulgated the “Rules on the Mergers and Acquisition of Domestic Enterprises by
Foreign Investors” which came into effect on September 8, 2006 (the “M&A
Rules”). Foreign investors should comply with the rules when they purchase
shareholding equities of a PRC domestic non-foreign-funded enterprise (“Domestic
Company”) or subscribe to the increased capital of a Domestic Company, and thus
changing the nature of the Domestic Company into a foreign investment
enterprise. The rules stipulate, inter alia, (i) that the acquisition of a
Domestic Company by an affiliated foreign enterprise established or controlled
by PRC entities or individuals must be approved by the Ministry of Commerce;
(ii) that the incorporation of a special purpose vehicle, which is directly or
indirectly controlled by PRC entities for the purpose of an overseas listing of
the equity interest of a Domestic Company, must be subject to the approval of
the Ministry of Commerce; (iii) that the acquisition of a Domestic Company by a
special purpose vehicle shall be subject to approval of the Ministry of Commerce
and (iv) the offshore listing of a special purpose vehicle shall be subject to
the prior approval from China Securities Regulatory Commission.
As
Jinjiang Hengda Ceramics Co., Ltd. was incorporated as a FIE and China Ceramics
does not fall within the scope of being classified as a special purpose vehicle
directly or indirectly established or controlled by PRC entities or individuals,
the M&A Rules do not apply to the Business Combination, and China Ceramics
will not be required to obtain the approval from the Ministry of Commerce, the
approval from the China Securities Regulatory Commission and/or any other
approvals from PRC government authorities as stipulated by the M&A Rules.
There is however no assurance that the PRC authorities will not issue further
directives, regulations, clarifications or implementation rules, which may
require China Ceramics or other relevant parties to obtain further approvals
with respect to the Business Combination. If new laws are promulgated or the
existing laws are reinterpreted, China Ceramics’ structure could be determined
to be in violation of such laws and subject to sanction by applicable government
authorities.
10
Environmental,
health and safety laws could impose material liabilities on China Ceramics and
could require China Ceramics to incur material capital and operational
costs.
China
Ceramics is subject to environmental, health and safety laws and regulations in
the PRC that impose controls on its air, water and waste discharges, on its
storage, handling, use, discharge and disposal of chemicals, and on exposure of
its employees to hazardous substances. These laws and regulations could require
China Ceramics to incur costs to maintain compliance and could impose liability
to remedy the effects of hazardous substance contamination. Although China
Ceramics does not believe that it has violated any of such laws and regulations
and therefore has not incurred any significant liabilities under these laws and
regulations in the past, the environmental laws and regulations are constantly
evolving and becoming stricter in the PRC. The adoption of new laws or
regulations or China Ceramics’ failure to comply with these laws or regulations
in the future could cause China Ceramics to incur material liabilities and could
require China Ceramics to incur additional expenses, curtail operations and/or
restrict China Ceramics’ ability to expand.
Risks
to China Ceramics’ Shareholders
If
outstanding warrants are exercised, the underlying shares will be eligible for
future resale in the public market. “Market overhang” from the warrants results
in dilution and could reduce the market price of the shares.
Outstanding
warrants to purchase an aggregate of 15,550,000 shares issued in connection with
China Ceramics’ initial public offering and the private placement that took
place immediately prior to the initial public offering became exercisable after
China Ceramics’ acquisition of Success Winner on November 20, 2009. If they are
exercised, a substantial number of additional shares of China Ceramics’ shares
will be eligible for resale in the public market, which may reduce the market
price.
Because
China Ceramics does not intend to pay dividends on its shares, shareholders will
benefit from an investment in China Ceramics’ shares only if it appreciates in
value.
China
Ceramics has never declared or paid any cash dividends on its shares. China
Ceramics currently intends to retain all future earnings, if any, for use in the
operations and expansion of the business. As a result, China Ceramics does not
anticipate paying cash dividends in the foreseeable future. Any future
determination as to the declaration and payment of cash dividends will be at the
discretion of China Ceramics’ Board of Directors and will depend on factors
China Ceramics’ Board of Directors deems relevant, including among others, China
Ceramics’ results of operations, financial condition and cash requirements,
business prospects, and the terms of China Ceramics’ credit facilities and other
financing arrangements. Accordingly, realization of a gain on shareholders’
investments will depend on the appreciation of the price of China Ceramics’
shares. There is no guarantee that China Ceramics’ shares will appreciate in
value.
China
Ceramics’ securities are quoted on the Over-the-Counter Bulletin Board, which
may limit the liquidity and price of its securities more than if the securities
were quoted or listed on a national securities exchange.
China
Ceramics’ securities are quoted on the Over-the-Counter Bulletin Board, a
NASDAQ-sponsored and operated inter-dealer automated quotation system. Quotation
of China Ceramics’ securities on the Over-the-Counter Bulletin Board will limit
the liquidity and price of its securities more than if the securities were
quoted or listed on a national securities exchange.
11
China
Ceramics may choose to redeem its outstanding warrants at a time that is
disadvantageous to the warrant holders.
Subject
to there being a current prospectus under the Securities Act of 1933, as
amended, China Ceramics may redeem all of its outstanding warrants at any time
at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice
of redemption if, and only if, the last sale price of China Ceramics’ shares
equals or exceeds $14.25 per share for any 20 trading days within a 30 trading
day period ending three business days before China Ceramics sends the notice of
redemption. Calling all of China Ceramics’ outstanding warrants for redemption
could force the warrant holders:
|
·
|
to
exercise the warrants and pay the exercise price for such warrants at a
time when it may be disadvantageous for the holders to do
so;
|
|
·
|
to
sell the warrants at the then current market price when they might
otherwise wish to hold the warrants;
or
|
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·
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to
accept the nominal redemption price which, at the time the warrants are
called for redemption, is likely to be substantially less than the market
value of the warrants.
|
China
Ceramics’ warrant holders may not be able to exercise their warrants, which may
create liability for China Ceramics.
Holders
of the warrants China Ceramics issued in its initial public offering and private
placement will be able to receive shares upon exercise of the warrants only if
(i) a current registration statement under the Securities Act of 1933, as
amended, relating to the shares of its shares underlying the warrants is then
effective and (ii) such shares are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of warrants reside. Although China Ceramics has agreed to use
its best efforts to maintain a current registration statement covering the
shares underlying the warrants to the extent required by federal securities
laws, and China Ceramics intends to comply with such agreement, China Ceramics
cannot assure you that it will be able to do so. In addition, some states may
not permit China Ceramics to register the shares issuable upon exercise of its
warrants for sale. The value of the warrants will be greatly reduced if a
registration statement covering the shares issuable upon the exercise of the
warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of warrants reside.
Holders of warrants who reside in jurisdictions in which the shares underlying
the warrants are not qualified and in which there is no exemption will be unable
to exercise their warrants and would either have to sell their warrants in the
open market or allow them to expire unexercised. If and when the warrants become
redeemable by China Ceramics, China Ceramics may exercise its redemption right
even if China Ceramics is unable to qualify the underlying securities for sale
under all applicable state securities laws. Since China Ceramics’ obligations in
this regard are subject to a “best efforts” standard, it is possible that, even
if China Ceramics is able to successfully assert a defense to a claim by warrant
holders due to the impossibility of registration, a court may impose monetary
damages on China Ceramics to compensate warrant holders due to the change in
circumstances that led to China Ceramics being unable to fulfill its
obligations.
There
is a risk that China Ceramics could be treated as a U.S. domestic corporation
for U.S. federal income tax purposes after the Redomestication and Business
Combination, which could result in significantly greater U.S. federal income tax
liability to China Ceramics.
Section
7874(b) of the Code generally provides that a corporation organized outside the
United States that acquires, directly or indirectly, pursuant to a plan or
series of related transactions substantially all of the assets of a corporation
organized in the United States will be treated as a domestic corporation for
U.S. federal income tax purposes if shareholders of the acquired corporation, by
reason of owning shares of the acquired corporation, own at least 80% (of either
the voting power or the value) of the stock of the acquiring corporation after
the acquisition. Under temporary regulations recently promulgated under Section
7874, a warrant holder of either the acquired corporation or the acquiring
corporation generally is treated for this purpose as owning stock of the
acquired corporation or the acquiring corporation, as the case may be, with a
value equal to the excess of the value of the shares underlying the warrant over
the exercise price of the warrant. If Section 7874(b) were to apply to the
Redomestication, then, among other things, China Ceramics, as the surviving
entity, would be subject to U.S. federal income tax on its worldwide taxable
income following the Redomestication and Business Combination as if China
Ceramics were a domestic corporation.
12
Although
Section 7874(b) should not apply to treat China Ceramics as a domestic
corporation for U.S. federal income tax purposes, due to the absence of full
guidance on how the rules of Section 7874(b) apply to the transactions completed
pursuant to the Redomestication and Business Combination, this result is not
entirely free from doubt. Shareholders and warrant holders are urged to consult
their own tax advisors on this issue. See the discussion in the section entitled
“Taxation—Tax Treatment of China Ceramics After the Redomestication and the
Business Combination.” The balance of this discussion assumes that China
Ceramics will be treated as a foreign corporation for U.S. federal income tax
purposes.
There
is a risk that China Ceramics will be classified as a passive foreign investment
company, or “PFIC,” which could result in adverse U.S. federal income tax
consequences to U.S. holders of shares or warrants of China
Ceramics.
In
general, China Ceramics will be treated as a PFIC for any taxable year of China
Ceramics in which either (1) at least 75% of its gross income (including the
gross income of certain 25% or more-owned corporate subsidiaries) is passive
income or (2) at least 50% of the average value of its assets (including the
assets of certain 25% or more-owned corporate subsidiaries) produce, or are held
for the production of, passive income. Passive income generally includes
dividends, interest, rents, royalties, and gains from the disposition of passive
assets. If China Ceramics is determined to be a PFIC for any taxable year (or
portion thereof) of China Ceramics that is included in the holding period of a
U.S. Holder (as defined in the section entitled “Taxation–United States Federal
Income Taxation–General”) for China Ceramics’ shares or warrants, the U.S.
Holder may be subject to increased U.S. federal income tax liability upon a sale
or other disposition of China Ceramics shares or warrants or the receipt of
certain excess distributions from China Ceramics and may be subject to
additional reporting requirements. Based on the composition of the assets
and income of China Ceramics and its subsidiaries during China
Ceramic’s 2009 taxable year, China Ceramics does not believe
that it will be treated as a PFIC for such year. However, since China
Ceramics has not performed a definitive analysis as to its PFIC status for its
2009 taxable year, there can be no assurance with respect to its PFIC status for
its 2009 taxable year. There also can be no assurance with respect to the status
of China Ceramics as a PFIC for its current taxable year or any future taxable
year. U.S. Holders of China Ceramics shares and warrants are urged to consult
their own tax advisors regarding the possible application of the PFIC rules. See
the discussion in the section entitled “Taxation—United States Federal Income
Taxation–U.S. Holders—Passive Foreign Investment Company
Rules.”
Under
the PRC EIT Law, China Ceramics, Success Winner and/or Stand Best may be
classified as a “resident enterprise” of the PRC. Such classification could
result in PRC tax consequences to China Ceramics, its non-PRC resident
shareholders and warrant holders, Success Winner and/or Stand
Best.
On
March 16, 2007, the National People’s Congress approved and promulgated a new
tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on
January 1, 2008. Under the EIT Law, enterprises are classified as resident
enterprises and non-resident enterprises. An enterprise established outside of
China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the EIT
Law define “de facto management bodies” as a managing body that in practice
exercises “substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of the enterprise;
however, it remains unclear whether the PRC tax authorities would deem China
Ceramics’ managing body as being located within China. Due to the short history
of the EIT Law and lack of applicable legal precedents, the PRC tax authorities
determine the PRC tax resident treatment of a foreign (non-PRC) company on a
case-by-case basis.
If the
PRC tax authorities determine that China Ceramics, Success Winner and/or Stand
Best is a “resident enterprise” for PRC enterprise income tax purposes, a
number of PRC tax consequences could follow. First, China Ceramics, Success
Winner and/or Stand Best may be subject to the enterprise income tax at a rate
of 25% on China Ceramics’, Success Winner’s and/or Stand Best’s worldwide
taxable income, as well as PRC enterprise income tax reporting obligations.
Second, under the EIT Law and its implementing rules, dividends paid between
“qualified resident enterprises” are exempt from enterprise income tax. As a
result, if China Ceramics, Success Winner and Stand Best are treated as
“qualified resident enterprises,” all dividends from Hengda to China Ceramics
(through Success Winner and Stand Best) should be exempt from PRC
tax.
13
If
Stand Best were treated as a PRC “non-resident enterprise” under the EIT Law,
then dividends that Stand Best receives from Hengda (assuming such dividends
were considered sourced within the PRC) (i) may be subject to a 5% PRC
withholding tax, provided that Stand Best owns more than 25% of the registered
capital of Hengda continuously within 12 months immediately prior to obtaining
such dividend from Hengda, and the Arrangement between the Mainland of China and
the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the
“PRC-Hong Kong Tax Treaty”) were otherwise applicable, or (ii) if such treaty
does not apply (i.e., because the PRC tax authorities may deem Stand Best to be
a conduit not entitled to treaty benefits), may be subject to a 10% PRC
withholding tax. Similarly, if Success Winner were treated as a “non-resident
enterprise” under the EIT Law and Stand Best were treated as a “resident
enterprise” under the EIT Law, then dividends Success Winner receives from Stand
Best (assuming such dividends were considered sourced within the PRC) may be
subject to a 10% PRC withholding tax. A similar situation may arise if China
Ceramics were treated as a “non-resident enterprise” under the EIT Law, and
Success Winner were treated as a “resident enterprise” under the EIT Law. Any
such taxes on dividends could materially reduce the amount of dividends, if any,
China Ceramics could pay to its shareholders.
Finally,
the new “resident enterprise” classification could result in a situation in
which a 10% PRC tax is imposed on dividends China Ceramics pays to its
enterprise, but not individual, investors that are not tax residents
of the PRC (“non-resident investors”) and gains derived by them from
transferring China Ceramics’ shares or warrants, if such income is considered
PRC-sourced income by the relevant PRC tax authorities. In such event, China
Ceramics may be required to withhold a 10% PRC tax on any dividends paid to
China Ceramics’ non-resident investors. China Ceramics’ non-resident investors
also may be responsible for paying PRC tax at a rate of 10% on any gain realized
from the sale or transfer of China Ceramics’ shares or warrants in certain
circumstances. China Ceramics would not, however, have an obligation to withhold
PRC tax with respect to such gain under the PRC tax laws.
Moreover,
the State Administration of Taxation (“SAT”) released Circular Guoshuihan No.
698 (“Circular 698”) on December 10, 2009 that reinforces the taxation
of certain equity transfers by non-resident investors through overseas
holding vehicles. Circular 698 addresses indirect equity transfers as well
as other issues. Circular 698 is retroactively effective from January 1, 2008.
According to Circular 698, where a non-resident investor who indirectly
holds an equity interest in a PRC resident enterprise through a non-PRC offshore
holding company indirectly transfers an equity interest in the PRC resident
enterprise by selling an equity interest in the offshore holding company, and
the latter is located in a country or jurisdiction where the actual tax
burden is less than 12.5% or where the offshore income of its residents is not
taxable, the non-resident investor is required to provide the PRC tax authority
in charge of that PRC resident enterprise with certain relevant information
within 30 days of the transfer. The tax authorities in charge will evaluate the
offshore transaction for tax purposes. In the event that the tax authorities
determine that such transfer is abusing forms of business organization and a
reasonable commercial purpose for the offshore holding company other than the
avoidance of PRC income tax liability is lacking, the PRC tax authorities will
have the power to re-assess the nature of the equity transfer under the doctrine
of substance over form. A reasonable commercial purpose may be established when
the overall international (including U.S.) offshore structure is set up to
comply with the requirements of supervising authorities of international
(including U.S.) capital markets. If the SAT’s challenge of a transfer is
successful, it may deny the existence of the offshore holding company that is
used for tax planning purposes and subject the seller to PRC tax on the capital
gain from such transfer. Since Circular 698 has a short history, there is
uncertainty as to its application. China Ceramics (or a non-resident investor)
may become at risk of being taxed under Circular 698 and may be required to
expend valuable resources to comply with Circular 698 or to establish that China
Ceramics (or such non-resident investor) should not be taxed under Circular 698,
which could have a material adverse effect on China Ceramics’ financial
condition and results of operations (or such non-resident investor’s investment
in us).
If any
PRC tax applies to a non-resident investor, the non-resident investor may be
entitled to a reduced rate of PRC tax under an applicable income tax treaty
and/or a deduction for such PRC tax against such investor’s domestic taxable
income or a foreign tax credit in respect of such PRC tax against such
investor’s domestic income tax liability (subject to applicable conditions and
limitations). Investors should consult with their own tax advisors regarding the
applicability of any such taxes, the effects of any applicable income tax
treaties, and any available deductions or foreign tax credits.
For a
further discussion of these issues, see the section of this prospectus captioned
“Taxation–PRC Taxation.”
14
ITEM
4.
INFORMATION
ON THE COMPANY
A.
History
and Development of the Company
China
Ceramics’ History
China
Ceramics Co., Ltd. is a British Virgin Islands limited liability company
operating under the British Virgin Islands Companies Act (2004) whose
predecessor, CHAC was incorporated in Delaware on June 22, 2007, and was
organized as a blank check company for the purpose of acquiring, through a stock
exchange, asset acquisition or other similar business combination, or
controlling, through contractual arrangements, an operating business, that has
its principal operations in Asia.
On
November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned
British Virgin Islands subsidiary, and, pursuant to the terms of a merger and
stock purchase agreement dated August 19, 2009 (the “acquisition agreement”),
China Ceramics acquired all of the outstanding securities of Success
Winner.
Pursuant
to the agreement, China Ceramics acquired all of the issued and outstanding
shares of Success Winner held by Mr. Wong Kung Tok (the “Seller”) in exchange
for $10.00 and 5,743,320 shares of China Ceramics shares. In addition, 8,185,763
shares of the China Ceramics shares were placed in escrow (the “Contingent
Shares”) and will be released to the Seller in the event certain earnings and
stock price thresholds are achieved. Of the Contingent Shares, up to 5,185,763
Contingent Shares will be released based on achieving growth in either net
earnings before tax or net earnings after tax, depending on the year, following
the completion of an audit in accordance with International Financial Reporting
Standards (IFRS). Additionally, 3,000,000 Contingent Shares will be released if
China Ceramics shares close at or above certain share price targets for any
twenty trading days within a thirty trading day period prior to April 30,
2012.
Concurrent
with the Business Combination, China Ceramics redeemed and repurchased an
aggregate of 11,193,149 shares of its common stock from its public stockholders
for an aggregate purchase price of approximately $109.6 million in transactions
intended to assure the successful completion of the Business Combination.
Prior to
the Business Combination with Success Winner, neither CHAC nor China Ceramics
had an operating business.
Success
Winner was incorporated as a company with limited liability under the laws of
the British Virgin Islands on May 29, 2009 as the holding company for its
business operations in China. Success Winner has one indirect operating
subsidiary in China: Hengda. Success Winner holds 100% of the interests in
Hengda’s parent, Stand Best, which owns a 100% interest in
Hengda.
Hengda
was incorporated as a company with limited liability under the laws of the PRC
on September 30, 1993.
Hengda is
principally engaged in the manufacture and sale of ceramic tiles used for
exterior siding and for interior flooring and design in residential and
commercial buildings.
On
November 19, 2009, China Ceramics initiated the acquisition of a new production
facility in Gaoan, China (the “Gaoan Facility”). Success Winner had entered into
a definitive acquisition agreement for the Gaoan Facility with a group of
investors (the “Investors”) prior to the closing of its Business Combination
with China Ceramics on November 20, 2009. China Ceramics paid cash of RMB145.4
million (approx. US$21.3 million) to the Investors. The closing of the
acquisition of the Gaoan Facility was subject to the Gaoan City Administration
for Industry and Commerce transferring the registration and business license for
the Gaoan Facility from the Investors to China Ceramics. China Ceramics
announced on January 22, 2010 that the Gaoan City Administration for Industry
and Commerce had transferred to China Ceramics the registration and business
license for the Gaoan Facility on January 8, 2010 and that China Ceramics
had made a final cash payment of RMB39 million (US$5.7 million), and assumed
loans of RMB60 million (approx. US$8.8 million). China Ceramics expects to spend
approximately RMB27 million (US$4.0 million) in the first half of 2010 to
complete the first phase of the Gaoan facility. The total cost for the first
phase of Gaoan facility was approximately RMB271 million (US$39.7
million).
15
Currently,
the Gaoan Facility has three production lines installed and China Ceramics
anticipates adding another four production lines in 2010 and five in 2011. The
first three production lines are currently manufacturing finished products and
are expected to contribute an additional 10 million square meters of production
capacity of exterior ceramics tiles per year. The addition of production lines
in 2010 and 2011 are expected to cost approximately US$20 million for each year.
Together with the current production capacity at China Ceramics’ Jinjiang, China
plant, the expected production capacity in 2010 will be approximately 38 million
square meters.
Since
December 2009, China Ceramics has also signed agreements with four new exclusive
distributors in Guangdong province, Hainan province, Zhejiang province and Anhui
province that will begin distributing China Ceramics’ products in January 2010.
Including its four newly signed distributors, China Ceramics has a network of 35
exclusive distributors.
China
Ceramics’ registered office is c/o Harneys Corporate Services Limited of
Craigmuir Chambers, P.O. Box 71, Road-Town, Tortola, British Virgin
Islands.
B.
Business
Overview
History
and Current Business
Overview
China
Ceramics is a leading Chinese manufacturer of ceramic tiles used for exterior
siding and for interior flooring and design in residential and commercial
buildings. The ceramic tiles, sold under the “HD” or “Hengda” brand are
available in over two thousand styles, colors and size combinations. Currently,
China Ceramics has five principal product categories: (i) porcelain tiles, (ii)
glazed tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v)
ultra-thin tiles. Porcelain tiles are China Ceramics’ major products and
accounted for over 79.4% of China Ceramics’ total revenue in 2009. The market
for China Ceramics’ products has been growing rapidly, due to the increasing
demand for construction materials in the PRC attributable to population growth,
population urbanization and an increasing standard of living.
China
Ceramics’ manufacturing facilities are located in Jinjiang, Fujian Province and
Gaoan, Jiangxi Province with an aggregate annual production capacity of
approximately 38 million square meters. The company manufactures its five
principal product categories using twelve production lines; each production line
is optimized to manufacture specific size ranges to maximize efficiency and
output.
China
Ceramics primarily sells its products through an exclusive distributor network
and directly to property developers. The company has long-term relationships
with its customers; nine of its top ten customers in 2009 have been purchasing
from the company for over ten years. China Ceramics has been in discussions with
some large property developers in China to be their exclusive or primary
provider of ceramic tiles and, although no arrangements or agreements have been
entered into, China Ceramics expects to enter into arrangements of that type in
the foreseeable future.
China
Ceramics focuses its research and development efforts on developing innovative
and environmentally- friendly products. China Ceramics owns or has the exclusive
right to use 33 design patents and four utility model patents. China Ceramics’
stringent quality management and marketing efforts have created a strong
business reputation and high brand awareness as demonstrated by the company
receiving recognition from the Intermediate People’s Court of Xiangtan City of
the “Chinese Well-Known Trademark” award.
16
China
Ceramics’ Products
China
Ceramics produces five types of ceramic tiles:
Porcelain
tiles
: Porcelain tiles are fired at extreme temperatures and
are therefore stronger and harder than other types of ceramic tiles. The
material and the color is the same throughout and porcelain tiles are extremely
wear-resistant. Although porcelain tiles have a matte surface, they absorb less
water than other ceramic tiles, and as such, they are a superior solution for
exterior tiling where there is frequent exposure to moisture.
Glazed
tiles
: Glazed tiles have a glossy finish and color patterns
may be added to the exterior surface of the tile. The glaze does not go beyond
the exterior surface of the tile and the interior color will show if the tile is
chipped. Although glazed tiles are less water-resistant than matte porcelain
tiles, they are easier to clean due to their glossy surface.
Glazed porcelain
tiles
: Glazed porcelain tiles combine the advantages of
porcelain tiles and glazed tiles, thus enabling the tiles to have a porcelain
body with a stain-proof and glossy finish.
Rustic
tiles
: Rustic tiles have greater versatility in their design
as textures and colors can be added to their exterior surfaces and therefore can
be used in more decorative situations. In addition to being used on exterior
walls, rustic tiles are also used for interior walls and flooring.
Ultra-thin
tiles
: Ultra-thin tiles are only 4.0 mm thick, about half the
thickness of traditional tiles. Due to their thinness, these tiles are more
environmentally-friendly as the production process requires fewer raw materials
and less energy. When used in combination with a specialized insulating
material, the combination enables greater heat retention in the winter and keeps
buildings cool in the summer with less load bearing stress on exterior building
walls. Ultra-thin tiles were commercialized in 2008.
Ceramic
tiles can be manufactured in differing sizes according to customer
specifications, with the largest sized tiles measuring 600 mm by 600 mm. China
Ceramics can provide over 2,000 different combinations of products, colors,
textures and sizes to meet the various demands of its customers.
China
Ceramics’ Competitive Strengths
China
Ceramics believes the company can capitalize on the growth in the ceramics tile
industry in the PRC because of the following strengths:
Leading
exterior ceramic tile manufacturing company in the PRC
China
Ceramics is a leading exterior ceramic tile manufacturer in Fujian Province and
possesses economies of scale and scope that give the company an advantage over
its competitors. China Ceramics has an established track record of more than 15
years in the ceramics industry.
China
Ceramics is strategically located in the regions of Jinjiang and Gaoan. The
Jinjiang region is a ceramic and construction material hub in the PRC. The Gaoan
region is a newly developing ceramic production area supported by the local
government and is expected to be a new ceramic and construction material center
in the PRC. Both of these areas are strategically located near the raw materials
required to produce ceramic tiles. As distributors and direct
customers come to these areas to procure construction materials for sale,
construction projects or export, these locations provide a regular flow of
customers and demand to China Ceramics. These centralized industry locations
allow China Ceramics to respond quickly to customer demands and react rapidly to
emerging market trends. The Jinjiang facility is located
approximately 7 miles from the Jinjiang Airport, 40 miles from the Xiamen
Airport and Xiamen Railway Station and 4 miles from the Shenhu Port. The Gaoan
facility is located approximately 2 miles from the Gaoan railway station and 50
miles from the Nanchang Airport. There are major highways located near both
facilities for transportation by truck. The proximity and ease of access to
major ports and transportation infrastructure enables China Ceramics to leverage
geographical convenience and decrease transportation and logistics
costs.
17
Leading
brand with a strong market reputation
China
Ceramics’ strong brand recognition allows it to market itself as a leader in the
exterior ceramic tile industry to property developers and distributors to the
construction industry. The “Hengda” and “HD” brands are well recognized and
highly regarded in markets where China Ceramics’ products are sold. In 2005
China Ceramics was certified as a “Famous Brand of Fujian Province,” and was
recognized as a “Chinese Well-known Trademark” in 2005.
China
Ceramics focuses on strengthening its brands by attending national fairs and
promoting its products through inclusion in strategic or high-profile projects.
As a result, their products are being used for the 16th Asian Games, the 11th
National Chinese Games Village and the Chinese Academy of Sciences. China
Ceramics intends to further build on its brand’s market position in the
future.
Modern
and international-standard manufacturing facilities
To
further China Ceramics’ corporate strategy of producing high quality products,
the company has invested in modern, international-standard manufacturing
facilities. China Ceramics has imported, from Italy and Germany, advanced
equipment for its production lines and has implemented an overall stringent cost
and quality control management system. Since 2006, China Ceramics has spent over
RMB20 million to upgrade its current production lines in Jinjiang and achieved
recovery and recycle of waste water, waste dust, exhaust and kiln after-heat,
which enabled it to decrease energy costs by 20%. China Ceramics was honored
with an Energy Conservation Advance Enterprise in 2008 from the Jinjiang City
Government.
In July
2002, China Ceramics was granted an ISO 9001:2000 accreditation, an
international standard that acknowledged their quality control process. Quality
control procedures begin at the receipt of raw materials and continue throughout
the manufacturing process ending with a final quality check prior to packaging.
China Ceramics’ employees are required to undergo internal training regarding
its quality control policies, targets and procedures, as well as production and
processing techniques. To date, China Ceramics has not received material claims
for defects against its products.
China
Ceramics’ new production facility in Gaoan incorporates the latest ceramic tile
manufacturing technology and will allow the company to maintain its leadership
position. The new production lines were built using what China Ceramics believes
is the most advanced equipment in the industry and incorporates similar recovery
and recycle of waste water, waste dust, exhaust and kiln after-heat as the
existing lines in Jinjiang, but at a higher efficiency rate. Additionally, the
production line architecture optimizes throughput by eliminating conveyer feeds
between each step of the production process, helping to reduce production costs.
China Ceramics’ management believes that the two facilities will yield economic
benefits by allowing China Ceramics to share resources and enable it to optimize
its supply and distribution chain thereby enhancing efficiency.
Strong
research and development and design capabilities
China
Ceramics has devoted substantial resources to establishing research and
development capabilities in an effort to improve its products and diversify its
product mix. As of December 31, 2009, China Ceramic has obtained 13 design
patents and 4 utility model patents. Another 20 design patent applications were
submitted and are pending approval. In addition, China Ceramics was awarded a
“High-tech Enterprise Certificate” in 2007 from Fujian Provincial Department of
Science and Technology, affirming its innovations in the industry.
China
Ceramics’ research and development team focuses on new products as well as
developing energy and resource efficient production methods. As of December 31,
2009 the team had 81 employees and its supervisor has more than 15 years of
experience in the ceramics industry. China Ceramics’ research and development
team also works with the Jingdezhen Ceramic Institute in the PRC to innovate and
develop new production processes and products.
18
Through
its efforts in research and development, China Ceramics believes that it is well
positioned to further expand its market share and widen its customer base by
continuing to develop technological advances in anticipation of, or in response
to, customer requirements and evolving government standards.
Experienced,
professional and dedicated management team
China
Ceramics’ experienced, professional and dedicated management team brings a
wealth of knowledge to China Ceramics’ day-to-day operations and provides
strategic direction to the company. China Ceramics’ Chief Executive Officer and
founder, Huang Jia Dong, has more than 20 years of experience in the ceramics
industry and is Vice-Chairman of the Fujian Province Ceramic Industry
Association. The senior management team comprised of five members has more than
80 combined years of experience in the ceramic industry. China Ceramics believes
that the extensive industry related experience among the senior management team
allows the company to better anticipate market opportunities.
China
Ceramics’ Strategy
China
Ceramics intends to continue to build on its competitive strengths to increase
its market share and profitability. To achieve this, it plans to implement the
following business strategies:
Increase
production capacity through the acquisition of a new manufacturing
facility
China
Ceramics acquired a new facility in Gaoan, Jiangxi Province in January 2010.
Currently the Gaoan facility has three production lines installed and China
Ceramics anticipates adding another four production lines in 2010 and five in
2011. The first three production lines are currently manufacturing finished
products and are expected to contribute an additional 10 million square meters
of production capacity of exterior ceramics tiles per year. The capital
expenditure is expected to be approximately US$20 million in 2010 and
approximately an additional US$20 million in 2011. The 12 production lines in
Gaoan are expected to increase China Ceramics’ production capacity by 42 million
square meters to a total of 70 million square meters in 2012. In addition to a
more efficient manufacturing process, labor and raw materials costs are also
expected to be lower.
Further
enhance China Ceramics’ brand awareness
China
Ceramics plans to further enhance brand awareness of the “Hengda” and “HD” brand
in the PRC, in particular, to strengthen the recognition of China Ceramics as a
leader in the PRC exterior ceramic tile industry. China Ceramics plans on
strengthening its brands by continuing to market its products to property
developers and the construction industry, working with distributors on local
marketing, attending national fairs and promoting its products through inclusion
in strategic high-profile projects.
Expand
sales distribution network and increase exports
China
Ceramics sells its products mainly to distributors located in major cities such
as Shanghai, Beijing, Tianjin, Wuhan, Chengdu and Shenyang and other locations
in the PRC. China Ceramics intends to expand its distribution network to cover
regions within the PRC where it currently does not have a presence or does not
have a strong presence. In particular, China Ceramics plans to increase its
distribution network by establishing and increasing its presence in Zhejiang,
Anhui, Heilongjiang, Guizhou, Henan, Hebei, Shangdong, Shanxi, Shaanxi, and
Yunnan Provinces within the PRC.
China
Ceramics believes that its new production facility in Gaoan will better position
the company to expand into new markets and reach additional end customers as
transportation and logistical costs of delivering products to these areas will
be reduced.
19
Currently
China Ceramics exports approximately 6% of its products through PRC trading
companies. China Ceramics intends to increase the exported volume of its
products by establishing relationships with additional PRC trading companies and
by promoting its products in regional and international trade
shows.
Develop
advanced products that meet evolving building construction
requirements
China
Ceramics is focusing its research and development initiatives on developing new
products that address market demand for advanced building materials that meet or
exceed evolving Government policies for energy efficiency. Specifically the
research and development effort is focused on tiles which:
|
·
|
Reduce
raw materials and energy consumption in the production
process;
|
|
·
|
Have
a density less than half of other
tiles;
|
|
·
|
Reduce
load bearing stress on exterior walls of buildings and tile shedding;
and
|
|
·
|
Utilize
a honeycomb structure which optimizes insulation
performance.
|
China
Ceramics will continue to invest in research and development to maintain its
competitive position in the industry.
Expansion
through mergers, acquisitions and strategic alliances
China
Ceramics may seek to further increase its market share through select
acquisitions. Management believes that it has sufficient expertise to find and
acquire suitable ceramic production facilities and/or companies to increase its
scale and geographic diversification within the PRC. China Ceramics management
intends to only pursue acquisitions where it believes that it will be able to
continue to provide cost competitive, high quality ceramic tiles to its
customers.
Production
Process and Facilities
A typical
production line for ceramic tiles is comprised of preparation equipment (which
typically includes a miller and a spray dryer), a press (which is used for
shaping raw ceramic material), a glazing line (used to supply glazed materials
to the pressed tiles), a kiln (used to harden the soft mixture of clay and
minerals into a hard ceramic body by subjecting the mixture to high temperature)
and packaging.
20
The
following chart sets out the major steps involved in the production
process:
The
procedures involved in the production of ceramic tiles are summarized
below:
(i)
Inspecting
Raw
materials for ceramic products consist mainly of clay (comprised of inorganic
materials such as kaolin, flint and feldspar) obtained mostly from areas
adjacent to China Ceramics facilities, such as Dehua county of Quanzhou city.
Raw materials are inspected by quality control staff upon receipt. Batch
calculations that take into consideration both physical properties and chemical
compositions of the raw materials are performed to ensure that the right amounts
are mixed.
(ii)
Mixing
and Grinding
After
stringent checks on the quality of the clay and weighing, the raw material
department mixes the clay as determined during inspection. The mixture is then
sent to a ball mill where water is added to form a slurry for finer grinding.
This process takes approximately 12 hours to complete. The slurry is then
filtered and metallic particles are removed magnetically. The slurry is
inspected at this stage for density, flow speed and water ratio. Compared with
many competitors who use stone ball millers, China Ceramics uses aluminum ball
millers to grind materials. Aluminum ball millers have a higher initial cost,
but have higher grinding speed and can better process stone chips existing in
the slurry. The slurry is then moved to a 1,200 ton slurry pool. Based on
production scheduled, portions of the slurry may be moved to smaller slurry
pools where coloring materials can be added. The mixture in smaller slurry pools
are churned for approximately 24 hours to keep quality and color consistent in
the end product.
(iii)
Spray
Drying
A spray
dryer is then used to remove most of the water content in the slurry to obtain
granules with the required moisture level for processing. The slurry is pumped
into an atomizer, consisting of a rapidly rotating disk or nozzle where droplets
are formed. The droplets of the slurry spray are then dried by a rising hot air
column, forming small free-flowing granules of a standard size and specific
moisture content which is used in the next stage. The stream of gases used to
dry the slurry can be at temperatures as high as 1,100°C. The granules are then
moved to and held in steel containers (“hoppers”) for over 24 hours to ensure
consistency and uniformity of granule size and color.
21
(iv)
Molding
The
granules flow from a hopper into the mold die where they are compressed by steel
plungers and then ejected by the bottom plunger in varying sizes based on
specifications. The automated presses used operate at pressures as high as 1,600
tons. The ceramic bisque, a shaped non-fired ceramic tile, is then passed
through to the dryer to remove most of the remaining water content present in
preparation for the firing and/or glazing stages. The tiles are fed into the
dryer and conveyed horizontally on rollers, at temperatures of 250°C for
approximately 15 to 25 minutes based on tile type.
(v)
Glazing
Glazing
involves applying one or more coats of glaze, comprised mainly of silica and
other coloring agents such as iron, chromium, cobalt or manganese, onto the tile
surface. The dried ceramic bisque is then sent to the glazing station where a
design and/or color is added. The glaze concentration and glazing quantity is
controlled by computers to avoid chromatic aberration and lack of uniformity.
Not all products, such as porcelain tiles, require glazing.
(vi)
Firing
After
molding and/or glazing, the ceramic bisque is fired in a kiln. Typically, the
temperature in a kiln is about 1,200°C and the firing process takes less than
one hour. The entire firing process is monitored and controlled by computers.
China Ceramics currently has twelve firing lines, nine located in the Jinjiang
facility and three located in the Gaoan facility.
(vii)
Packaging
After the
firing process, tiles are inspected for quality. Tiles which pass inspection are
packaged and moved to the storage facility.
Quality
Control & Assurance
The
quality of China Ceramics’ products is critical to its continued growth and
success. In July 2002, China Ceramics received ISO 9001:2000 accreditation, an
international certification certificate, acknowledging their quality control
process. Quality control procedures begin at the receipt of raw materials and
continue throughout the manufacturing process ending with a final quality check
prior to packaging. China Ceramics’ employees are required to undergo internal
training regarding its quality control policies, targets and procedures, as well
as production and processing techniques. As of December 31, 2009, China
Ceramics’ quality assurance team consisted of 105 members.
Notable
Awards & Certificates
China
Ceramics has received numerous awards and certificates for its branding, product
quality and R&D achievements. Select awards include:
|
Year
Initially
Received
|
Award
& Certificate Name
|
Issuer
|
||
|
2002
|
ISO
9001:2000 Quality Management System Certificate
|
China
Certification Center for Quality Mark
|
||
|
2004
|
China
Compulsory Certification
|
Guojian
Lianxin Certification Center
|
22
|
Received
|
Award
& Certificate Name
|
Issuer
|
|
2005
|
ISO
14001:2004 Environmental Management Standards Certificate
|
Fujian
Branch of Beijing World Standards Certification Centre
|
||
|
2005
|
Fujian
Well-known Trademark
|
Fujian
Well-known Trademark Award Commission
|
||
|
2005
|
Chinese
Well-known Trademark
|
Intermediate
People’s Court of Xiangtan City
|
||
|
2006
|
Inspection
Exempted Products Certificate
|
National
Bureau of Quality and Technical Supervision
|
||
|
2007
|
High-tech
Enterprise Certificate
|
Fujian
Provincial Department of Science and Technology
|
||
|
2008
|
Energy
Conservation Advanced Enterprise
|
Jinjiang
City Government
|
||
|
2009
|
Fujian
100 Important Industrial Enterprise
|
Fujian
Economic and Trading Commission
|
Customer,
Sales & Marketing
China
Ceramics primarily sells its products through an exclusive distributor network
and directly to property developers. Distributors are located in major cities
such as Shanghai, Beijing, Tianjin, Wuhan, and Shenyang and second and third
tier cities such as Chengdu, Hainan, Anhui and other rural areas in the PRC. The
company has long-term relationships with its customers; nine of its top ten
customers in 2009 have been purchasing from the company for over ten
years.
China
Ceramics’ major customers accounting for 5% or more of Hengda’s total revenue
for the last three years are: Foshan City Jundian Ceramics Co., Ltd., Chengdu
Dehui Building Material Co., Ltd., Xiamen Tongying Trading Co., Ltd., Liaoning
Yatong Logistics Co. Ltd., Shanxi Guanghe Industry Co., Ltd., Beijing Zhihe
Construction Industry Trading Co., Ltd., Fuzhou Yuanteng Construction Decoration
Co., Ltd. and Chendu City Dehui Construction Materials Co., Ltd. None of these
customers accounted for more than 10% of China Ceramics’ total revenue in
2009.
China
Ceramics’ business and profitability is not materially dependent on any
industrial, commercial or financial contract with any of its customers. None of
China Ceramics’ directors or executive officers or their respective affiliates
has any interest, direct or indirect, in any of China Ceramics’
customers.
Sales
and Marketing
The sales
and marketing department is responsible for formulating sales policies and
pricing based on market analysis, surveys and forecasts, developing and
implementing China Ceramics’ sales and marketing campaigns, and promoting China
Ceramics’ products and brand. Additionally, the sales department is responsible
for cultivating new customers and business relationships, as well as servicing
existing accounts.
China
Ceramics participates in a variety of sales and marketing activities including
trade shows, in-house sales and marketing seminars, factory tours, outdoor
advertising, B2B catalogs and customer calls. China Ceramics believes that these
techniques allow it to gather and better understand customers’ needs and
requirements and to obtain feedback on its products and services and intends to
continue utilizing these techniques.
In the
future China Ceramics intends to participate in international trade fairs and
seminars from time to time to promote its brand and products, and to establish a
network with industry professionals outside the PRC. To augment its plan to
expand its markets internationally, China Ceramics’ products will also be
advertised on and available to purchase on the Internet. As of December 31,
2009, China Ceramics’ Sales and Marketing Department had 23 employees whose
salaries are commission-based.
23
Backlog
China
Ceramics typically receives orders from customers two months in advance of
production on a rolling basis. As of December 31, 2009, China Ceramics’ backlog
was RMB156.3 million which represents approximately the next two months of
revenue at the time, compared to a backlog of approximately RMB114.8 million on
December 31, 2008, a year over year increase of 36.1%.
Major
Suppliers
Clay and
coal are the two main raw materials required to manufacture ceramic tiles. China
Ceramics purchases these raw materials from at least two independent suppliers
respectively. Other major sourced materials include coloring and packaging.
China Ceramics is not dependent on any one of its PRC based suppliers as it is
able to source raw materials from alternative vendors should the need
arise.
China
Ceramics suppliers are selected by its purchasing department and are assessed on
criteria such as the quality of materials supplied, duration of their business
relationship with China Ceramics, pricing, delivery reliability and response
time to orders placed by China Ceramics. China Ceramics has sufficient raw
materials on-hand to support, on average, three weeks of production at any point
in time to minimize any potential production delays that could arise due to a
delay in raw material delivery.
China
Ceramics has not experienced significant production disruptions due to a supply
shortage from its suppliers, nor has it had a major dispute with a
supplier.
China
Ceramics’ major suppliers accounting for 5.0% or more of China Ceramics’ total
purchases in fiscal years 2007, 2008, and 2009 are: Fujian Province Dehua County
Jiaxin Mining Industry Co., Ltd., Fujian Province Dehua County Shangdi Guoshan
Ceramic Mine, Foshan City Nanhai Zhongtai Glaze Production Plant and Quanzhou
Furen Trading Co., Ltd. None of these major suppliers accounted for
more than 10% of China Ceramics’ total raw material purchases in 2009. China
Ceramics’ business or profitability is not materially dependent on any
industrial, commercial or financial contract with any of its
suppliers.
None of
China Ceramics’ officers or directors or their respective affiliates has any
interest, direct or indirect, in any of the above major suppliers. There are no
arrangements or understanding with any suppliers pursuant to which any of China
Ceramics’ directors and executive officers were appointed.
Research
and Development
China
Ceramics has devoted substantial resources to establishing research and
development capabilities in an effort to improve its products and diversify its
product mix. China Ceramics’ research and development (“R&D”) team focuses
on new products as well as developing energy and resource efficient production
methods.
China
Ceramics focuses its research and development efforts on the
following:
|
|
(a)
|
Improving
and developing new production and processing
techniques;
|
|
|
(b)
|
Improving
the use and selection of raw materials to lower costs;
and
|
|
|
(c)
|
Developing
new products and designs to address changing market
demands.
|
China
Ceramics’ research and development expenses were approximately RMB14.9 million,
RMB14.6 million, and RMB14.3 million for fiscal years 2007, 2008, and 2009,
respectively. From time to time, China Ceramics may enter into collaboration
with other research institutes to develop new products or improve its production
process. As of December 31, 2009 the R&D department had 81
employees.
24
Competition
China
Ceramics operates in a competitive environment and it expects to face more
intense competition from its existing competitors. Its competitors are privately
owned companies that are located mainly in the PRC. China Ceramics’ principal
competitors are Guangdong White Rabbit Ceramics, Guangdong New Pearl Ceramics,
Foshan Shiwan Yulong Ceramics Co., Ltd, Jiangxi Apollo Ceramics Co., Ltd.,
Jianjiang Haoyuan Ceramics, Co., Ltd, Jinjiang Wanli Ceramics Co., Ltd, Jinjiang
Tengda Ceramics Co., Ltd and Jinjiang Haoshan Construction Materials Co.,
Ltd.
Intellectual
Property
China
Ceramics’ brand name distinguishes its products from that of its competitors and
increases consumer awareness of its products. China Ceramics has registered the
following trademarks in the PRC:
Registered
Trademarks
Patents
As of
December 31, 2009, China Ceramics owns four utility model patents in the PRC for
exterior wall tiles, which were applied for in November of 2007. The terms of
such patents are for ten years from the application date.
Pursuant
to a Patent Licensing Contract dated May 8, 2009 between China Ceramics and
Huang Jia Dong, Huang Jia Dong has licensed to China Ceramics, for no
consideration, the exclusive right to use PRC design patents owned by Huang Jia
Dong during the terms of each of the patents. There are a total of thirteen
design patents for ceramic tiles which were applied for between August 2000
through November 2002. The terms of such patents are for ten years from the
application date.
According
to a letter issued by Huang Jia Dong on May 10, 2007, China Ceramics is
authorized by Huang Jia Dong to use designs for 20 ceramic tiles which have had
patent applications submitted by Huang Jia Dong to the State Intellectual
Property Office (SIPO) for the granting of design patents on December 7, 2006,
on its products under the trademarks No. 669884 and No. 1716827 in the PRC. The
applications are currently being processed by SIPO.
25
Except as
disclosed above, as of December 31, 2009, China Ceramics’ business or
profitability is not materially dependent on any other trademarks, copyrights,
registered designs, patents, grant of licenses from third parties, new
manufacturing processes or other intellectual property rights.
Legal
Proceedings
There are
no material lawsuits currently pending against China Ceramics, Hengda, Success
Winner or Stand Best.
Capital
Expenditures
China
Ceramics’ capital expenditures primarily consist of expenditures on property,
plant and equipment. Capital expenditures on property, plant and equipment was
RMB8.0 million in fiscal year 2009 and RMB7.0 million in 2008. China Ceramics
financed its capital expenditure requirements primarily through its cash flows
from operating activities.
In
connection with the acquisition of the Gaoan facility, China Ceramics expects to
incur capital expenditures in excess of RMB402 million over the next three
years. Approximately RMB145 million was incurred during 2009.
Seasonality
The
second and third calendar quarters are the peak season of the property
developing industry, and, therefore, China Ceramics’ quarterly sales are usually
highest from May to September compared to the rest of the year. China Ceramics
has lower sales between the months of January and March due to the effects of
cold weather and the PRC Spring Festival.
The
seasonality information above is based on its turnover trend in the last three
years and may slightly vary from year to year depending on the demand by its
customers and end customers for its products. However, management believes that
the seasonality information for the last three years is representative of the
seasonality trend going forward.
Governmental
Regulations
Environmental
Protection Regulations
In
accordance with the PRC Environmental Protection Law adopted on December 26,
1989, the Administration Supervisory Department of Environmental Protection of
the State Council sets the national guidelines for the discharge of pollutants.
The People’s Governments of provinces, autonomous regions and municipalities may
also set their own guidelines for the discharge of pollutants within their own
provinces or districts in the event that the national guidelines are inadequate.
A company which causes environmental pollution and discharges other polluting
materials which endanger the public should implement environmental protection
methods and procedures into their business operations. This may be achieved by
setting up a system of accountability within the company’s business structure
for environmental protection, adopting effective procedures to prevent
environmental hazards such as waste gases, water and residues, dust powder,
radioactive materials and noise arising from production, construction and other
activities from polluting and endangering the environment. The environmental
protection system and procedures should be implemented simultaneously with the
commencement of and during the operation of construction, production and other
activities undertaken by the company. Any company which discharges environmental
pollutants should report and register such discharge with the Administration
Supervisory Department of Environmental Protection and pay any fines imposed for
the discharge. A fee may also be imposed on the company for the cost of any work
required to restore the environment to its original state. Companies which have
caused severe pollution to the environment are required to restore the
environment or remedy the effects of the pollution within a prescribed time
limit. If a company fails to report and/or register the environmental pollution
it caused, it will receive a warning or be penalized. Companies that fail to
restore the environment or remedy the effects of the pollution within the
prescribed time will be penalized or have their business licenses terminated.
Companies that have polluted and endangered the environment must bear the
responsibility for remedying the danger and effects of the pollution, as well as
to compensate any losses or damages suffered as a result of such environmental
pollution.
26
Government
Regulations Relating to Foreign Exchange Controls
The
principal regulation governing foreign exchange in the PRC is the Foreign
Currency Administration Rules and a series of implementing rules and
regulations, as amended. Under these rules, the Renminbi, the PRC’s currency, is
freely convertible for trade and service related foreign exchange transactions
(such as normal purchases and sales of goods and services from providers in
foreign countries), but not for direct investment, loan or investment in
securities outside of China unless the prior approval of the State
Administration for Foreign Exchange, or SAFE, of the PRC is obtained. Foreign
investment enterprises, or FIEs, are required to apply to the SAFE for Foreign
Exchange Registration Certificates for FIEs. With such registration
certificates, which need to be renewed annually, FIEs are allowed to open
foreign currency accounts including a basic account and capital account.
Currency translation within the scope of the basic account, such as remittance
of foreign currencies for payment of dividends, can be effected without
requiring the approval of the SAFE. Such transactions are subject to the consent
of PRC banks which are authorized by the SAFE to review basic account currency
transactions. However, conversion of currency in the capital account, including
capital items such as direct investment, loans and securities, still require
approval of the SAFE. On November 21, 2005, the SAFE issued Circular No. 75 on
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose
Vehicles. Circular No. 75 confirms that the use of offshore special purpose
vehicles as holding companies for PRC investments are permitted, but proper
foreign exchange registration applications are required to be reviewed and
accepted by the SAFE.
Regulation
of Foreign Currency Exchange
Foreign
currency exchange in the PRC is governed by a series of regulations, including,
without limitation, the Foreign Currency Administrative Rules (1996), as
amended, and the Administrative Regulations Regarding Settlement, Sale and
Payment of Foreign Exchange (1996), as amended. Under these regulations, the
Renminbi is freely convertible for trade and service-related foreign exchange
transactions, but not for direct investment, loans or investments in securities
outside China without the prior approval of the SAFE. Pursuant to the
Administrative Regulations Regarding Settlement, Sale and Payment of Foreign
Exchange, foreign-invested enterprises in China may purchase foreign exchange
without the approval of the SAFE for trade and service-related foreign exchange
transactions by providing commercial documents evidencing these transactions.
They may also retain foreign exchange, subject to a cap approved by SAFE, to
satisfy foreign exchange liabilities or to pay dividends. However, the relevant
Chinese government authorities may limit or eliminate the ability of
foreign-invested enterprises to purchase and retain foreign currencies in the
future. In addition, foreign exchange transactions for direct investment, loan
and investment in securities outside China are still subject to limitations and
require approvals from the SAFE. On August 29, 2008, SAFE issued Circular No.
142 on Relevant Business Operations Issues Concerning Improving the
Administration of the Payment and Settlement of Foreign Exchange Capital of
Foreign-Invested Enterprises, with respect to the administration of conversion
of foreign exchange capital contributions of FIEs into Renminbi, unless
otherwise permitted by PRC laws or regulations, Renminbi converted from foreign
exchange capital contributions can only be applied to activities within the
approved business scope of FIEs and cannot be used for domestic equity
investment or acquisitions.
Regulation
of Dividend Distribution
The
principal laws and regulations in China governing distribution of dividends by
foreign-invested companies include:
|
·
|
The
Sino-foreign Equity Joint Venture Law (1979), as
amended;
|
27
|
·
|
The
Regulations for the Implementation of the Sino-foreign Equity Joint
Venture Law (1983), as amended;
|
|
·
|
The
Sino-foreign Cooperative Enterprise Law (1988), as
amended;
|
|
·
|
The
Detailed Rules for the Implementation of the Sino-foreign Cooperative
Enterprise Law (1995), as amended;
|
|
·
|
The
Foreign Investment Enterprise Law (1986), as amended;
and
|
|
·
|
The
Regulations of Implementation of the Foreign Investment Enterprise Law
(1990), as amended.
|
Under
these regulations, foreign-invested enterprises in China may pay dividends only
out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve funds unless such
reserve funds have reached 50% of their respective registered capital. These
reserves are not distributable as cash dividends.
C.
Organizational
Structure
On
November 20, 2009, China Ceramics acquired all of the outstanding securities of
Success Winner, as a result of which Success Winner became China Ceramics’
wholly owned subsidiary. The following chart illustrates China Ceramics’
organizational structure as of December 31, 2009:
Corporate
Structure and Background
Hengda
was established on September 30, 1993 under the laws of PRC.
All of
the interests in Hengda are
100% owned by Stand Best as of December 31,
2009. Hengda is a wholly foreign-owned enterprise in China.
Stand
Best was established on January 17, 2008 under the laws of Hong
Kong. Stand Best acquired the entire shareholding of Hengda on April
1, 2008 for consideration of RMB58,980,000. As a result of this acquisition,
Hengda became the wholly owned subsidiary of Stand Best. Success Winner was
established on May 29, 2009 under the laws of British Virgin
Islands.
On
June 30, 2009, pursuant to the capitalization agreement dated June 30, 2009,
Success Winner was issued the 9,999 shares allotted by Stand Best as per the
capitalization exercise of a shareholder’s loan of HK$ 67.9 million (RMB58.9
million). On the same date, the shareholder of Stand Best, Mr. Wong Kung Tok
transferred all his shareholdings in Stand Best to Success Winner. Therefore,
Mr. Wong Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned
100% of Stand Best and in turn, 100% of Hengda.
28
China
Holdings Acquisition Corp. (“CHAC”) was incorporated in Delaware on June 22,
2007 and was organized as a blank check company for the purpose of acquiring,
through a stock exchange, asset acquisition or other similar business
combination, or controlling, through contractual arrangements, an operating
business that had its principal operations in Asia, with a focus on potential
acquisition target in China.
On
November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned
British Virgin Islands subsidiary, and, pursuant to the terms of a merger and
stock purchase agreement dated August 19, 2009, China Ceramics acquired all of
the outstanding securities of Success Winner.
Prior
to China Ceramics’ acquisition of Success Winner, neither CHAC nor China
Ceramics’ had any operations.
D.
Property,
plant and equipment
China
Ceramics owns land-use rights at two locations in Jinjiang, Fujian Province in
the PRC for an office building and workshop, and has pre-paid all amounts
relating to these properties. The land-use rights for these two locations expire
in 2055 and covers approximately 10,023 sq meters.
China
Ceramics currently leases 18 properties in Jinjiang, Fujian Province in the PRC
for various uses including warehouses, office space, workshops, staff quarters
and stock yards. The lease terms range from one to six years.
As of
December 31, 2009, China Ceramics’ production facility in Jinjiang City, Fujian
Province in the PRC, had a total gross floor area of approximately 120,000
square meters and employed 1,715 production personnel. The Jinjiang facility
consists of nine production lines with an annual production capacity of 28
million square meters. Historically, China Ceramics has not experienced any form
of disruption in its production facility.
China
Ceramics acquired a new facility in Gaoan, Jiangxi Province in January 2010.
Currently the Gaoan facility has three production lines producing ceramic tiles
and China Ceramics anticipates adding four production lines in 2010 and five in
2011. The first three production lines are currently manufacturing finished
products and are expected to contribute an additional 10 million square meters
of production capacity of exterior ceramics tiles per year. The capital
expenditures in connection with the additional lines are expected to be
approximately US$20 million in 2010 and approximately an additional US$20
million in 2011. Once completed, 12 production lines in Gaoan are expected to
increase China Ceramics’ production capacity by 42 million square meters to a
total of 70 million square meters by the end of 2011.
China
Ceramics believes that its current property rights are sufficient for its
current operations. However, to continue growth, China Ceramics believes it
needs to expand its production capacity at its new facility in Gaoan, Jiangxi
Province.
Not
applicable.
ITEM
5.
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
Overview
China
Ceramics is a British Virgin Islands limited liability company whose
predecessor, CHAC, was incorporated in Delaware on June 22, 2007 and was
organized as a blank check company for the purpose of acquiring, through a stock
exchange, asset acquisition or other similar business combination, or
controlling, through contractual arrangements, an operating business that had
its principal operations in Asia, with a focus on potential acquisition target
in China.
29
On
November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned
British Virgin Islands subsidiary, and, pursuant to the terms of a merger and
stock purchase agreement dated August 19, 2009, China Ceramics acquired all of
the outstanding securities of Success Winner.
China
Ceramics, through its operating subsidiaries, is a leading Chinese manufacturer
of ceramic tiles used for exterior siding and for interior flooring and design
in residential and commercial buildings. The ceramic tiles, sold under the “HD”
or “Hengda” brand are available in over two thousand styles, colors and size
combinations. Currently, China Ceramics has five principal product categories:
(i) porcelain tiles, (ii) glazed tiles, (iii) glazed porcelain tiles, (iv)
rustic tiles, and (v) ultra-thin tiles. Porcelain tiles are China Ceramics’
major products and accounted for over 79.4% of China Ceramics’ total revenue in
2009. The market for China Ceramics’ products has been growing rapidly, due to
the increasing demand for construction materials in the PRC attributable to;
population growth, population urbanization and an increasing standard of
living.
China
Ceramics’ manufacturing facilities are located in Jinjiang, Fujian Province and
Gaoan, Jiangxi Province. The facilities currently have an aggregate annual
production capacity of approximately 38 million square meters including
approximately 10 million square meters production capacity of the Gaoan
Facility. The company manufactures its five principal product categories using
twelve production lines; each production line is optimized to manufacture
specific size ranges to maximize efficiency and output. China Ceramics intends
to install four new production lines at the Gaoan facility in 2010 and an
additional five new production lines in 2011. Once these additional
production lines are installed, China Ceramics expects to have an annual
production capacity of 70 million square meters (an increase of 32 million
square meters).
Basis
of Presentation
The
following discussion and analysis of China Ceramics’ financial condition and
results of operations is based on the selected financial information at and for
the years ended December 31, 2007, 2008, and 2009 and has been prepared based on
the consolidated financial statements of China Ceramics Co., Ltd. and its
subsidiaries.
The
consolidated financial statements of China Ceramics Co., Ltd. and its
subsidiaries have been prepared in accordance with International Financial
Reporting Standards (“IFRSs”) which collective term
includes
all applicable individual International Financial Reporting Standards,
International Accounting Standards and Interpretations issued by the
International Accounting Standard Board (“IASB”). The consolidated
financial statements have been prepared on the historical cost
basis.
The
acquisition on November 20, 2009 has been accounted for as a reverse
recapitalization. The acquisition agreement resulted in the former owner of
Success Winner obtaining effective operating and financial control of the
combined entity. Prior to the acquisition, China Ceramics had no operating
business. Accordingly, the acquisition does not constitute a business
combination for accounting purposes and is accounted for as a capital
transaction. That is, the transaction is in substance a reverse
recapitalization, equivalent to the issuance of equity interests by Success
Winner for the net monetary assets of China Ceramics accompanied by a
recapitalization. The consolidated financial statements are a continuation of
the financial statements of Success Winner. The assets and liabilities of China
Ceramics are recognized at their carrying amounts at the date of acquisition
with a corresponding credit to the consolidated equity and no goodwill or other
intangible assets are recognized. The equity of the combined entity recognized
at the date of acquisition represents the equity balances of Success Winner
together with the deemed proceeds from the reverse recapitalization determined
as described above. However, the equity structure presented in the consolidated
financial statements (number and values of equity instruments issued) reflects
the equity structure of the legal parent, China Ceramics. Costs directly
attributable to the transaction have been debited to equity to the extent of net
monetary assets received.
30
The
following table sets forth China Ceramics’ financial results for the years ended
December 31, 2007, 2008, and 2009.
|
Year
Ended December 31
|
||||||||||||
|
RMB
(‘000)
|
2007
(Restated)
|
2008
(Restated)
|
2009
|
|||||||||
|
Revenue
|
617,863 | 737,182 | 835,747 | |||||||||
|
Cost
of sales
|
(441,940 | ) | (533,330 | ) | (582,530 | ) | ||||||
|
Gross
profit
|
175,923 | 203,852 | 253,217 | |||||||||
|
Other
income
|
2,339 | 2,701 | 3,735 | |||||||||
|
Selling
and distribution expenses
|
(6,059 | ) | (6,620 | ) | (6,912 | ) | ||||||
|
Administrative
expenses
|
(6,158 | ) | (9,932 | ) | (10,088 | ) | ||||||
|
Merger
costs
|
- | - | (26,429 | ) | ||||||||
|
Finance
costs
|
(576 | ) | (941 | ) | (1,375 | ) | ||||||
|
Profit
before taxation
|
165,469 | 189,060 | 212,148 | |||||||||
|
Income
tax expense
|
(19,863 | ) | (24,027 | ) | (59,287 | ) | ||||||
|
Profit
attributable to shareholders
|
145,606 | 165,033 | 152,861 | |||||||||
Description
of Selected Consolidation Statement of Comprehensive Income Items
Revenue
. China
Ceramics generates revenue from the sales of ceramic tiles, including porcelain
tiles, glazed porcelain tiles, glazed tiles, rustic tiles and ultra-thin tiles,
net of rebates and discounts. For the past three fiscal years, the second and
third calendar quarters are the peak season of the property developing industry,
and, therefore, China Ceramics’ quarterly sales are usually highest from May to
September compared to the rest of the year. In addition, China Ceramics has
observed lower sales between the months of January to March. This is because
property developing activities are low due to the effects of cold weather and
the PRC Spring Festival.
Cost of
sales
. Cost of sales consists of costs directly attributable
to production, including the cost of clay, color materials, glaze materials,
coal, salaries for staff engaged in production activity, electricity,
depreciation, packing materials, and related expenses.
The most
significant factors that directly or indirectly affect China Ceramics’ cost of
sales are as follows:
|
·
|
Availability
and price of clay; and
|
|
·
|
Availability
and price of coal.
|
Clay is
the key materials for making ceramic tiles, which accounted for approximately
22% of China Ceramics’ cost of sales in the fiscal year 2009. The price of clay
is relatively stable as it is widely available since Fujian Province, where
China Ceramics has one of its production facilities, is one of the largest clay
production areas in China. China Ceramics has long-term relationships with its
coal suppliers. Prices of coal have experienced fluctuations in the past few
years. The average price for coal was approximately RMB922 per ton in fiscal
year 2008, compared to approximately RMB917 per ton during fiscal year
2009.
Other
income
. Other income consists of sales of waste parts such as
the exhausted metals, gears and transportation belts from equipment and
moldings.
Selling and distribution
expenses
. Selling and distribution expenses consist of
payroll, traveling expenses, transportation and advertising expenses incurred by
China Ceramics' selling and distribution team.
Administrative
expenses
. Administrative expenses consist primarily of
employee remuneration, payroll taxes and benefits, general office expenses and
depreciation. China Ceramics expects administrative expenses to continue to
increase in absolute amounts. China Ceramics also incurs additional expenses
related to costs of compliance with securities laws and other regulations,
including audit and legal fees and investor relations expenses.
31
Merger costs.
Merger costs of
RMB26.4 million refer to the transaction costs incurred by Success Winner
Limited during the reverse recapitalization transaction that exceeded the
net monetary assets received. For accounting purposes, the Company
treats these costs as the costs Success Winner Limited paid to obtain a public
listing in the United States.
Finance
Costs
. Finance costs consist of interest expense on bank
loans. As of December 31, 2009, China Ceramics’ total outstanding bank loans
amounted to RMB26.5 million with interest rates in the range of 5.84% to 6.90%
per annum and maturity dates in the range of February 18, 2010 to September 4,
2010.
Income
taxes
. Income taxes for the years ended December 31, 2009,
2008 and 2007 were RMB59.3 million, RMB24.0 million and RMB19.9 million,
respectively. The increase in PRC taxes paid was primarily due to the increase
in assessable profits of China Ceramics’ subsidiaries in the PRC as a result of
business expansion and revenue growth, and the increase of the applicable income
tax rate.
According
to the Income Tax Law of the PRC for Foreign Investment Enterprises and Foreign
Enterprises and as approved by relevant PRC tax authorities, Hengda, a
foreign-invested enterprise, was exempt from the PRC corporate income tax for
its first two profitable years, which were 2004 and 2005. Thereafter, it was
entitled to a 50% reduction in the PRC corporate income tax for the subsequent
three years. Pursuant to the PRC Corporate Income Tax Law and its Implementation
Rules effective from January 1, 2008, and the Notice of the State Council on the
Implementation of the Transitional Preferential Policies in respect of
Enterprise Income Tax and its implementation rules, in the fiscal year of 2008,
the applicable tax rate for China Ceramics was 12.5%, and the effective tax rate
became 25% as of 2009.
Results
of Operations
Year
ended 2009 compared to the year ended 2008
Revenue
. The
following table sets forth the breakdown of revenue, by product segment, for
fiscal years 2008 and 2009:
|
December
31,
|
||||||||||||||||
|
Revenue
RMB (‘000)
|
2008
(Restated)
|
%
|
2009
|
%
|
||||||||||||
|
Porcelain
|
592,150 | 80.3 | % | 663,794 | 79.4 | % | ||||||||||
|
Glazed
Porcelain
|
19,791 | 2.7 | % | 32,387 | 3.9 | % | ||||||||||
|
Glazed
|
89,321 | 12.1 | % | 83,294 | 10.0 | % | ||||||||||
|
Rustic
|
33,135 | 4.5 | % | 41,993 | 5.0 | % | ||||||||||
|
Ultra-thin
|
2,785 | 0.4 | % | 14,279 | 1.7 | % | ||||||||||
|
Total
|
737,182 | 100 | % | 835,747 | 100 | % | ||||||||||
Revenue grew by RMB98.5 million, or
13.4%, to RMB835.7 million in the year ended December 31, 2009, from RMB737.2
million for the year ended December 31, 2008. Although the average selling price
for ceramic tiles decreased by 2.4% to RMB24.9 per square meter for the year
ended December 31, 2009 from an average selling price of RMB25.5 per square
meter for the year ended December 31, 2008, the sales volume increased by 4.7
million square meters to approximately 33.6 million square meters for the year
ended December 31, 2009 from 28.9 million square meters for the same period in
2008. In the second half of 2008, China experienced a slow-down in its
construction industry due to the global financial crisis. In order to gain more
market share and maintain ceramic tile productions volumes, China Ceramics
reduced selling prices during the second half of 2008. Due to the recovery of
the PRC construction industry in the second quarter of 2009, China Ceramics
increased the average selling price for its ceramic tiles at the beginning of
the second half of 2009.
Porcelain
tiles
. Revenue from porcelain tiles increased 12.1% from
RMB592.2 million for the year ended December 31, 2008 to RMB663.8 million for
the same period in 2009. Porcelain tiles have the largest market of all of our
tiles.
32
Glazed porcelain
tiles
. Revenue from glazed porcelain tiles increased 63.6%
from approximately RMB19.8 million for the year ended December 31, 2008 to
RMB32.4 million for the same period in 2009. Glazed porcelain tiles are a
relatively new product (introduced in 2006) and the demand for this product has
been strong.
Glazed
tiles
. Revenue from glazed tiles decreased 6.7% from RMB89.3
million for the year ended December 31, 2008 to RMB83.3 million for the same
period in 2009. The selling price decreased in the year ended December 31, 2009
compared to the same period in 2008 though the sales volumes were about at the
same levels in both periods. Glazed tiles have a lower selling price than China
Ceramics’ other products.
Rustic tiles.
Revenue from
rustic tiles increased 26.9% from RMB33.1 million for the year ended December
31, 2008 to RMB42.0 million for the same period in 2009 due to an increase in
sales volume.
Ultra-thin
tiles.
Revenue from ultra-thin tiles increased 410.7% from
RMB2.8 million for the year ended December 31, 2008 with 88,818 square meters to
RMB14.3 million for the same period in 2009 with 436,762 square meters.
Ultra-thin tiles are a new product and were commercialized in June 2008. As the
demand for this type of product is strong, ultra-thin tiles are expected to
become a larger portion of China Ceramics’ product mix.
Cost of sales.
The
following table sets forth the breakdown of cost of sales, by product segment,
for December 31, 2008 and 2009:
|
December
31,
|
||||||||||||||||
|
Cost
of sales RMB (‘000)
|
2008
|
%
|
2009
|
%
|
||||||||||||
|
Porcelain
|
415,410 | 77.9 | % | 454,153 | 78.0 | % | ||||||||||
|
Glazed
Porcelain
|
15,367 | 2.9 | % | 23,654 | 4.1 | % | ||||||||||
|
Glazed
|
79,703 | 14.9 | % | 71,185 | 12.2 | % | ||||||||||
|
Rustic
|
21,176 | 4.0 | % | 26,246 | 4.5 | % | ||||||||||
|
Ultra-thin
|
1,674 | 0.3 | % | 7,292 | 1.3 | % | ||||||||||
|
Total
|
533,330 | 100 | % | 582,530 | 100 | % | ||||||||||
Cost of
sales was RMB582.5 million for the year ended December 31, 2009 compared to
RMB533.3 million for the same period in 2008, representing an increase of
RMB49.2 million, or 9.2%. The increase in cost of sales was primarily due to
higher sales volume as the price of raw materials such as coal decreased in the
fiscal year 2009.
Gross profit.
The
following table sets forth the breakdown of China Ceramics’ gross profit and
gross profit margin, by product segment, for December 31, 2008 and
2009:
|
December
31,
|
||||||||||||||||
|
2008
|
2009
|
|||||||||||||||
|
RMB
(‘000)
|
Gross
profit
(Restated)
|
Profit
margin
|
Gross
profit
|
Profit
margin
|
||||||||||||
|
Porcelain
|
176,740 | 29.8 | % | 209,641 | 31.6 | % | ||||||||||
|
Glazed
Porcelain
|
4,424 | 22.4 | % | 8,733 | 27.0 | % | ||||||||||
|
Glazed
|
9,618 | 10.8 | % | 12,109 | 14.5 | % | ||||||||||
|
Rustic
|
11,959 | 36.1 | % | 15,747 | 37.5 | % | ||||||||||
|
Ultra-thin
|
1,111 | 39.9 | % | 6,987 | 48.9 | % | ||||||||||
|
All
products
|
203,852 | 27.7 | % | 253,217 | 30.3 | % | ||||||||||
China
Ceramics’ gross profit increased 24.2% from RMB203.9 million for the year ended
December 31, 2008 to RMB253.2 million for the same period in 2009. Its gross
profit margin increased 2.6% from 27.7% for the year ended December 31, 2008 to
30.3% for the same period in 2009.
Porcelain
tiles
. Gross profit for porcelain tiles increased 18.6% from
RMB176.7 million for the year ended December 31, 2008 to RMB209.6 million for
the same period in 2009. Its gross profit margin was 31.6% for the year ended
December 31, 2009 compared to 29.8% for the same period in 2008. The increase in
gross margin was due to the decrease in costs resulting from the decline in raw
material prices.
33
Glazed porcelain
tiles
. Gross profit for glazed porcelain tiles increased 97.7%
from approximately RMB4.4 million for the year ended December 31, 2008 to RMB8.7
million for the same period in 2009. Its gross profit margin was 27.0% for the
year ended December 31, 2009 compared to 22.4% for the same period in 2008. The
increase in gross margin was due to the decrease in costs resulting from the
decline in raw material prices.
Glazed
tiles.
Gross profit for glazed tiles increased 26.0% from
RMB9.6 million for the year ended December 31, 2008 to RMB12.1 million for the
same period in 2009. Its gross profit margin was 14.5% for the year ended
December 31, 2009 compared to 10.8% for the same period in 2008. The increase in
gross margin was mostly driven by the growth in revenue and the decrease in
costs resulting from the decline in raw material prices.
Rustic
tiles.
Gross profit for rustic tiles increased 30.8% from
RMB12.0 million for the year ended December 31, 2008 to RMB15.7 million for the
same period in 2009. Its gross profit margin increased 1.4% from 36.1% for the
year ended December 31, 2008 to 37.5% for the same period in 2009. The increase
in gross margin was mostly driven by the growth in revenue and the decrease in
costs resulting from the decline in raw material prices.
Ultra-thin
tiles.
Gross profit for ultra-thin increased 536.4% from
RMB1.1 million for the year ended December 31, 2008 to RMB7.0 million for the
year ended December 31, 2009. Ultra-thin tiles were a new product line which
began production in June 2008.
Other
income.
Other income increased 37.0% from RMB2.7 million for
the year ended December 31, 2008 to RMB3.7 million for the same period in 2009.
Other income mainly consist of the sale of waste parts such as the exhausted
metals, gears and transportation belts from equipment and moldings of RMB3.2
million in 2009.
Selling and distribution
expenses.
Selling and distribution expenses were RMB6.9
million for the year ended December 31, 2009 compared to RMB6.6 million for the
same period in 2008, representing an increase of RMB0.3 million or
4.5%.
Administrative
expenses.
Administrative expenses were RMB10.1 million for the
year ended December 31, 2009, compared to RMB9.9 million for the same period in
2008, representing an increase of RMB0.2 million, or 2%.
Merger costs.
The
merger costs of RMB26.4 million were incremental transaction costs directly
attributable to the reverse recapitalization transaction which exceeded the net
monetary assets received. China Ceramics treats these costs as the costs Success
Winner incurred to obtain a public listing in the United States of
America.
Finance
costs.
Finance costs increased 55.6% from RMB0.9 million for
the year ended December 31, 2008 to RMB1.4 million for the same period in 2009.
The increase of interest expenses for the year ended December 31, 2009 was
mainly due to an increase in bank loans.
Profit before
taxation.
Profit before taxation increased 12.2% from RMB189.1
million for the year ended December 31, 2008 to RMB212.1 million for the same
period in 2009. The increase of the profit before taxation was mainly due to the
increase of sales volume of China Ceramics’ products for the year ended December
31, 2009.
Income
taxes.
China Ceramics incurred an income tax expense of
RMB59.3 million for the year ended December 31, 2009 compared to RMB24.0 million
for the same period in 2008, representing an increase of RMB35.3 million or
147.1%, due to the aforementioned different tax rate applied between the
periods. China Ceramics’ effective enterprise income tax rate was 25.0% for the
year ended December 31, 2009 compared to a 12.5% effective enterprise income tax
rate for the same period in 2008.
34
Profit attributable to
shareholders.
Profit attributable to shareholders decreased by
7.3% from RMB165.0 million for the year ended December 31, 2008 to the RMB152.9
million for the same period in 2009 as a result of the factors described
above.
Year
ended December 31, 2008 compared to the year ended December 31,
2007
Revenue
. Revenue
grew 19.3% from RMB617.9 million for 2007 to RMB737.2 million for 2008. The
increase in China Ceramics’ revenue was primarily the result of strong demand
created by the continued growth of the real estate construction market in China.
Per square meter sales volume increased from approximately 23.9 million square
meters for 2007 to approximately 28.9 million square meters for 2008,
representing a 20.9% volume growth rate. China Ceramics’ average selling price
decreased 2.3% from approximately RMB26.1 for 2007 to RMB25.5 for 2008. China
Ceramics proactively decreased its average selling price in the second half of
2008 in response to the global financial crisis.
Cost of
sales
. Cost of sales was RMB533.3 million in the year ended
December 31, 2008, compared to RMB441.9 million in the year ended December 31,
2007, representing an increase of RMB91.4 million, or 20.7%. The increase in
cost of sales was mainly due to the increase in sales volume and a corresponding
increase in cost of raw materials to manufacture products. Following an increase
in the market price of coal because the demand to coal surpassed the supply in
2008, China Ceramics began paying its coal suppliers in advance in order to have
a stable supply of coal.
Gross
profit
. China Ceramics gross profit grew 15.9% from RMB175.9
million for 2007 to RMB203.9 million for 2008. Our gross profit margin decreased
0.8% from 27.7% for 2007 to 28.5% for 2008.
Other
income
. Other income increased 17.4% from approximately RMB2.3
million for 2007 to RMB2.7 million for 2008. Other income from selling waste
parts grew 4.5% from approximately RMB2.2 million for 2007 to RMB2.3 million for
2008. Interest income was RMB394 thousand for 2008 compared to RMB168 thousand
for 2007, representing an increase of RMB226 thousand or 134.5%.
Selling and distribution
expenses
. Selling and distribution expenses were RMB6.6
million for 2008, compared to RMB6.1 million for 2007, representing an increase
of RMB0.5 million or 8.2%.
Administrative
expenses
. General and administrative expenses were RMB9.9
million for 2008, compared to RMB6.2 million for 2007, representing an increase
of RMB3.7 million, or 59.7%. The increase was mainly attributable to (i) the
costs relating to the company preparing to list on a foreign exchange in 2008,
which did not continue due to the financial crisis and resulted in expenses of
RMB1.7 million in 2008 and (ii) the increase in salaries to RMB3.7 million for
2008 compared to RMB2.3 million for 2007, representing an increase of RMB1.4
million, or 60.9%, due to the increase in the number of employees in the
administration department by 30 positions during the year of 2008.
Finance
costs
. Finance costs increased RMB0.36 million to RMB0.94
million for 2008 from RMB0.58 million for 2007. The increased interest expense
was mainly attributable to an increase in bank loans of RMB2.8 million in the
year 2008 and multiples raises of the average interest rates by the Chinese
government several times during 2008.
Profit before
taxation
. Profit before taxation grew 14.2% from RMB165.5
million for 2007 to RMB189.0 million for 2008. The increase was mainly due to
the increase in revenue in 2008.
Income
taxes
. China Ceramics incurred an income tax expense of
RMB24.0 million for 2008 compared to RMB19.9 million for 2007, representing an
increase of RMB4.1 million or 21.0%. China Ceramics was entitled to the
effective tax rate of 12% in 2007 and 12.5% in 2008.
Profit attributable to
shareholders
. Profit attributable to shareholders grew 13.3%
from RMB145.6 million for 2007 to RMB165.0 million in 2008 as a result of the
factors described above.
35
Cash
Flow Analysis
The
following table presents a summary of China Ceramics’ cash flows and beginning
and ending cash balances for the years ended December 31, 2007, 2008, and
2009:
|
Year
Ended December 31,
|
||||||||||||
|
RMB
(‘000)
|
2007
|
2008
|
2009
|
|||||||||
|
Net
cash provided by operating activities
|
107,262 | 155,230 | 159,620 | |||||||||
|
Net
cash used in investing activities
|
(4,156 | ) | (6,625 | ) | (152,294 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
(97,192 | ) | (115,506 | ) | 91,100 | |||||||
|
Net
cash flow
|
5,914 | 33,099 | 98,426 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
12,593 | 18,507 | 51,606 | |||||||||
|
Effect
of foreign exchange rate differences
|
- | - | 89 | |||||||||
|
Cash
and cash equivalents at end of year
|
18,507 | 51,606 | 150,121 | |||||||||
China
Ceramics has historically financed its liquidity requirements mainly through
operating cash flow and short-term bank loans.
Cash flows from operating
activities
. China Ceramics’ net cash inflow provided by
operating activities was RMB159.6 million for the year ended December 31, 2009,
an increase of RMB4.4 million, or 2.8% from the RMB155.2 million net cash
provided by operating activities for the same period in 2008. China Ceramics’
net cash flow provided from operating activities for the year ended December 31,
2009 was primarily attributable to profit before tax of RMB212.1 million, a
decrease in inventories of RMB16.9 million due to increased deliveries of China
Ceramics’ products and decreased inventory level and an increase in trade
payables of RMB32.0 million due to increased procurement from suppliers, and an
increase in trade receivables of RMB75.0 million. Trade receivables increased
due to an increase in product deliveries to its distributors. Accrued
liabilities and other payables decreased by RMB7.7 million because certain sales
discount payable from 2008 were paid in the first half of 2009. Income tax paid
increased by RMB23.5 million due to China Ceramics starting to pay tax at a
25.0% enterprise income tax rate in 2009, as opposed to 12.5% in
2008.
For
the year ended December 31, 2008, China Ceramics’ net cash inflow from operating
activities was RMB155.2 million and was primarily attributable to profit before
tax of RMB189.1 million, a decrease in inventories of RMB24.7 million due to
increased deliveries of China Ceramics’ products during the fourth quarter of
2008 and an increase in accrued liabilities and other payables of RMB10.3
million due to an increase in sales discount payable, partially offset by an
increase in trade receivables of RMB14.6 million due to increased deliveries to
distributors in the fourth quarter and a decrease in trade payables of RMB45.1
million due to the fact that China Ceramics’ coal suppliers have required
payment in advance since the second quarter of 2008, and an adjustment for
income tax paid of RMB24.3 million due to the commensurate growth of the
business.
For the
year ended December 31, 2007, China Ceramics’ net cash inflow from operating
activities was RMB107.3 million and was primarily attributable to profit before
tax of RMB165.5 million and an increase in trade payables of RMB27.4 million due
to increased purchases of raw materials from its suppliers, partially offset by
an increase in inventories of RMB41.2 million due to a relative proportional
increase in output in 2007, an increase in trade receivables of RMB40.8 million
due to sales volume increased in the second half of the year and an adjustment
for income tax paid of RMB17.6 million due to the commensurate growth of the
business.
36
Cash flows from investing
activities
. China Ceramics’ cash flows provided by/used in
investing activities were primarily payments related to the acquisition/sale of
property, plant and equipment and interest.
Net cash
used in investing activities in the year ended December 31, 2009 was RMB152.3
million, compared to RMB6.6 million of net cash outflow used in investing
activities in the same period of 2008. The increase was mainly due to an
increase in acquisition of property, plant and equipment to RMB8.0 million and a
prepayment of a portion of the acquisition cost of the Gaoan facility of
RMB145.4 million during the year ended December 31, 2009.
For the
year ended December 31, 2008, China Ceramics’ net cash used in investing
activities was RMB6.6 million and was mainly attributable to purchase of
property, plant, and equipment of RMB7.0 million, partially offset by RMB0.4
million in interest received.
For the
year ended December 31, 2007, China Ceramics’ net cash used in investing
activities was RMB4.2 million and was mainly attributable to purchase of
property, plant, and equipment of RMB4.3 million, partially offset by RMB0.1
million in interest received.
Cash flows from financing
activities
. Net cash generated in financing activities was
RMB91.1 million for the year ended December 31, 2009, representing an increase
of approximately RMB206.6 million, as compared to approximately RMB115.5 million
cash used in financing activities in the same period of 2008. During the year
ended December 31, 2009, China Ceramics’ net cash generated in financing
activities was primarily attributable to a RMB760.3 million of cash acquired in
the reverse recapitalization, which was almost fully offset by the redemption
and repurchase of shares subsequent to the closing of the reverse
recapitalization of RMB655.8 million.
For the
year ended December 31, 2008, China Ceramics’ net cash used in financing
activities was RMB115.5 million and was primarily attributable to a RMB120.0
million dividend paid to the shareholders.
For the
year ended December 31, 2007, China Ceramics’ net cash used in financing
activities was RMB97.2 million and was primarily attributable to a RMB91.2
million dividend paid to the shareholders and a RMB10.5 million repayment to a
director.
Inventory and Accounts
Receivable
. China Ceramics’ inventory turnover rate grew from
3.26 times in 2007 to 3.70 times in 2008 due to an increase in the delivery of
China Ceramics’ products during the fourth quarter of 2008. The annual inventory
turnover rate grew to 4.73 times for the year ended December 31, 2009 because
the rate of China Ceramics’ delivery of products increased. Based on its
historical experience, China Ceramics believes that the value of its current
inventories is realizable.
The
average number of days in which China Ceramics received payment on its trade
receivables was 90 days for the year ended December 31, 2007. The average number
of days in which it received payment on its trade receivables was 93 days in
2008 and grew to 102 days for the year ended December 31, 2009 due to the
increase in sales to distributors in the second quarter of 2009. Based on its
historical experience, China Ceramics believes that its trade receivables are
collectable.
Liquidity
and Capital Resources.
The
major sources of China Ceramics’ liquidity for the fiscal years 2007, 2008 and
2009, were cash generated from operations and short term borrowings. China
Ceramics does not use off-balance sheet finance as a source of liquidity or for
other financing purposes. In additon, China Ceramics further increased its
liquidity in 2009 by obtaining access to RMB104.5 million in cash
through the Business Combination.
China
Ceramics’ working capital was RMB440.7 million at December 31, 2009 as compared
to RMB181.1 million at December 31, 2008, which was primarily due to an increase
in trade receivables of RMB75.0 million. China Ceramics’ working capital was
RMB181.1 million at December 31, 2008 as compared to RMB149.9 million at
December 31, 2007, which was primarily due to a decrease in trade payables of
RMB45.1 million.
37
Cash and
bank balances were RMB150.1 million as of December 31, 2009, as compared to
RMB51.6 million at December 31, 2008 and RMB18.5 million at December 31,
2007.
As of
December 31, 2009, China Ceramics’ total outstanding bank loans amounted to
RMB26.5 million with interest rates in the range of 5.84% to 6.90% per annum and
maturity dates in the range of February 18, 2010 to September 4,
2010.
Operating
lease commitments totaled RMB9.8 million as of December 31, 2009.
In China
Ceramics’ opinion, its working capital, including its cash, income and cash
flows from operations, and financing from the Investors of the Gaoan facility,
is sufficient for its present requirements.
However,
China Ceramics may sell additional equity or obtain credit facilities to enhance
its liquidity position or to increase its cash reserve for future acquisitions
and capital equipment expenditures. The sale of additional equity would result
in further dilution to its shareholders. The incurrence in indebtedness would
result in increased fixed obligations and could result in operating covenants
that would restrict its operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
Inventory
Management
China
Ceramics’ inventory is comprised of raw materials purchased from its suppliers
located in Fujian, Guangdong and Jiangxi Provinces. These are comprised mainly
of:
|
|
(i)
|
Clay;
|
|
|
(ii)
|
Coal;
|
|
|
(iii)
|
Colorings;
and
|
|
|
(iv)
|
Glazing
materials.
|
China
Ceramics has sufficient raw materials to support, on average, three weeks of
production at any point in time. This helps to minimize any potential delays in
its production process which may arise due to insufficient raw materials. China
Ceramics’ production of ceramic tiles is based on customers’ orders. In doing
so, China Ceramics minimizes storage space and maintains a relatively low
inventory level of finished products. Its inventory turnover based on the year
end closing inventory balances and allowance for inventory obsolescence charged
to the Consolidation Statement of Comprehensive Income for the years ended 2007,
2008 and 2009 are as follows:
|
FY2007
|
FY2008
|
FY2009
|
||||||||||
|
Inventories
(RMB ‘000)
|
156,244 | 131,562 | 114,658 | |||||||||
|
Inventory
turnover (days)
(1)
|
112 | 98 | 77 | |||||||||
|
(1)
|
The
average inventory turnover is computed based on the formula: (simple
average of the opening and closing inventories balance in a financial year
/ cost of goods sold) × 365 days.
|
There
were no provision for inventory obsolescence, inventory written off or inventory
written down to net realizable value in the last four years ended December 31,
2009.
Credit
Management
Credit
terms to its customers
China
Ceramics typically extends credit terms of approximately 90 days to its
customers; credit terms can vary from customer to customer. China Ceramics will
grant credit terms based on the reputation, creditworthiness, size of orders,
payment records and number of years China Ceramics has done business with the
customer. China Ceramics does not have a goods return policy.
38
Personnel
from China Ceramics’ sales and marketing department typically conduct visits to
new customers to evaluate their credit worthiness before entering into any
arrangements with them. In addition, China Ceramics will usually request a
deposit of RMB400,000 from new distributors upon signing a distributorship
agreement.
China
Ceramics’ average trade receivables’ turnover days in the last three years ended
December 31, 2009 were as follows:
|
FY2007
|
FY2008
|
FY2009
|
||||||||||
|
Trade
receivables (RMB ‘000)
|
181,236 | 195,848 | 270,840 | |||||||||
|
Trade
receivables turnover (days)
(1)
|
95 | 93 | 102 | |||||||||
|
(1)
|
The
average trade receivables’ turnover is computed based on the formula:
(simple average of the opening and closing trade receivables balance in a
financial year / revenue) × 365
days.
|
Credit
terms from its suppliers
China
Ceramics’ suppliers typically extend credit periods of three to five months for
China Ceramics purchases of clay while its suppliers for the other materials
including: coloring, glazing and packaging generally extend a credit period of
approximately three to six months and coal suppliers generally extend China
Ceramics credit periods of about one month.
China
Ceramics’ average trade and bills payables’ turnover days in the last three
years ended December 31, 2009 were as follows:
|
FY2007
|
FY2008
|
FY2009
|
||||||||||
|
Trade
payables
|
137,948 | 92,888 | 126,251 | |||||||||
|
Trade
payables turnover (days)
(1)
|
118 | 105 | 97 | |||||||||
|
(1)
|
The
average trade payables’ turnover is computed based on the formula: (simple
average of the opening and closing trade balances in a financial year /
purchases of raw materials and outsourcing services) × 365
days.
|
The fall
in trade payables turnover days from 118 days in 2007 to 97 days in 2009 was due
primarily to the fact that the price of major raw materials have decreased and
that China Ceramics started paying coal suppliers in advance in
2009.
Capital
Expenditures
China
Ceramics’ capital expenditures primarily consist of expenditures on property,
plant and equipment. Capital expenditures on property, plant and equipment was
RMB8.0 million for the year ended December 31, 2009 compared to RMB7.0 million
for the same period in 2008.
China
Ceramics’ capital expenditures on property, plant and equipment were RMB7.0
million in 2008. China Ceramics financed its capital expenditure requirements
primarily through its cash flows from operating activities.
In
connection with the acquisition of the Gaoan facility, China Ceramics expects to
incur capital expenditures in excess of RMB402 million over the next three
years. Approximately RMB145 million was incurred during 2009.
Contractual
Obligations
China
Ceramics’ contractual obligations consist mainly of short-term debt obligations
and operating lease obligations. The following table sets forth a breakdown of
China Ceramics’ contractual obligations as of December 31, 2009:
39
|
Payment
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||||||||||||||
|
(RMB
in Thousands)
|
||||||||||||||||||||
|
Short-term
debt obligations
(1)
|
26,500 | 26,500 | - | - | - | |||||||||||||||
|
Operating
lease obligations
(2)
|
9,797 | 7,366 | 2,431 | - | - | |||||||||||||||
|
Total
|
36,297 | 33,866 | 2,431 | - | - | |||||||||||||||
|
(1)
|
attributed
to bank loans.
|
|
(2)
|
includes
lease obligations for China Ceramics’ offices, dormitories, plants, stacks
and warehouses.
|
Off-Balance
Sheet Arrangements
China
Ceramics does not have any outstanding off-balance arrangements and does not
enter into any transactions that are established for the purpose of facilitating
off-balance sheet arrangements.
Restatement to Prior Year Financial
Statements
In the
financial years ended December 31, 2006, 2007 and 2008, China Ceramics
recognized cash consideration that Hengda gave to its distributors to promote
sales and timely collection as selling and distribution expenses. China Ceramics
and its independent auditor revisited the contractual relationship between
Hengda and its distributors in 2009. It was determined that China Ceramics has
incorrectly applied
IAS 18,
Revenue
in recognizing this cash consideration as selling and
distribution expenses.
IAS 18
requires revenue be measured at the fair value of the consideration received or
receivable, which is normally the price specified in the sales contracts taking
into account the amount of any trade discounts and volume rebates allowed by the
vendors. China Ceramics now believes that revenue should be reduced since the
cash considerations Hengda paid to its distributors are a combination of volume
rebates and settlement discounts in substance. As a result, China Ceramics
restated the comparative revenue, gross profit, and selling and distribution
expense figures in the Statements of Comprehensive Income for the financial
years ended December 31, 2007 and 2008, and reclassified RMB32,107,000 and
RMB39,388,000 from selling and distribution expenses to sales rebates and
discounts (a contra revenue account) to reflect China
Ceramics’ revenue at the fair value of the consideration received or
receivable for the sales of goods, net of rebates and discounts. This
reclassification reduced revenue, gross profit, and selling and distribution
expenses by RMB32,107,000 and RMB39,388,000 for the financial years of 2007 and
2008, respectively. There was no effect over the profit attributable to
shareholders and earnings per share (basic and diluted).
Critical
Accounting Policies and Judgment
China
Ceramics consolidated financial statements are prepared in accordance with IFRS
including related interpretations as issued by IASB, and have been consistently
applied throughout the years ended December 31, 2007, 2008, and 2009. The
preparation of these financial statements requires China Ceramics to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Estimates and judgments are continually
evaluated and are based on historical experiences and other factors, including
expectations of future events that are believed to be reasonable under the
circumstances. Actual results may materially differ from these estimates under
different assumptions or conditions.
Critical
Accounting Estimates and Assumptions
Depreciation
of Property, Plant and Equipment
Changes
in expected level of usage and technological developments could impact the
economic useful lives and the residual values of property, plants and equipment,
therefore future depreciation charges could be revised.
Income
Tax
China
Ceramics recognizes liabilities for expected taxes based on estimates of whether
additional taxes will be due. When the final tax outcome of these matters is
different from the amounts that were initially recognized, such differences will
impact the income tax and deferred tax provisions in the period in which such
determination is made.
Impairment
of trade receivables
China
Ceramics assesses the collectablility of trade receivables, which estimate is
based on the credit history of China Ceramics’ customers and the current market
condition. Management assesses the collectablility of trade receivables at the
balance sheet date and makes provision for non-collectability, if
any.
Net
realizable value of inventories
Net
realization value of inventories is the management’s estimation of future
selling price in the ordinary course of business, less estimated costs of
completion and selling expenses. These estimates are based on the current market
condition and the historical experience of selling products of similar nature.
It could change significantly as a result of various market
factors.
Critical
judgments in applying the entity's accounting policies
Accounting
for the Success Winner Acquisition
China
Ceramics has accounted for its acquisition of Success Winner as a reverse
recapitalization. The management believes the acquisition agreement resulted in
the former owner of Success Winner obtaining effective operating and financial
control of the combined entity through 1) the owner's majority shareholder
interest in the combined entity immediately after the acquisition, 2) his
significant representation on the Board of Directors and 3) Success Winner’s
management being named to all the senior executive positions.
40
Prior to
the acquisition China Ceramics had no operating business. Accordingly,
management believes the acquisition does not constitute a business combination
and treats it as a capital transaction for accounting purposes.
Accounting
for the equity-settled share-based payment to financial advisors
The
management has measured its equity-settled share-based payment to some financial
advisors indirectly at the cost of the equity instruments granted as the fair
value of the services could not be estimated reliably.
The
management believes this equity-settled share-based payment, together with the
audit, legal and consulting fees incurred for China Ceramics’ acquisition of
Success Winner, were all incremental transaction costs directly related to the
reverse recapitalization transaction and has charged these costs directly to
equity to the extent of net monetary assets received and charged the incremental
transaction costs in excess of the net monetary assets received to
expense.
Determining
the date when China Ceramics obtained control of the Gaoan
Facility
The
management has regarded January 8, 2010, the date when the registration and
business license was officially transferred from the Gaoan Facility's former
shareholders to China Ceramics and when an executive officer was appointed by
China Ceramics to take over control over the Gaoan Facility's operating and
financing activities, as the date China Ceramics obtained control of the Gaoan
Facility. As a result, the acquisition of the facility has been disclosed as a
subsequent event.
No known
trends, demand, commitments, events or uncertainties that are reasonably likely
to occur materially affect the methodology or the assumptions
described.
The
selection of critical accounting policies, the judgments and other uncertainties
affecting application of those policies and the sensitivity of reported results
to changes in conditions and assumptions are factors that should be considered
when reviewing our financial statements.
Foreign
Currency Fluctuations
China
Ceramics currently does not have any foreign exchange exposure as its sales and
purchases are predominantly denominated in RMB. However, in the future, a
proportion of its sales may be denominated in other currencies as China Ceramics
expands into overseas markets. In such circumstances, China Ceramics may be
subject to foreign currency fluctuations in the future.
Revenue
recognition
Revenue
comprises the fair value of the consideration received or receivable for the
sale of goods, net of rebates and discounts. Provided it is probable that the
economic benefits will flow to China Ceramics and the revenue and costs, if
applicable, can be measured reliably, revenue is recognized as
follows:
|
|
(i)
|
Sales
of goods are recognized upon transfer of the significant risks and rewards
of ownership to the customer. This is usually taken as the time when the
goods are delivered and the customer has accepted the
goods.
|
|
|
(ii)
|
Interest
income is recognized on a time-proportion basis using the effective
interest method.
|
41
Inventories
Inventories
are carried at the lower of cost and net realizable value. Net realizable value
is the estimated selling price in the ordinary course of business less the
estimated cost of completion and applicable selling expenses.
Cost
is determined using the weighted average basis, and in the case of work in
progress and finished goods, comprises direct materials, direct labor and an
appropriate proportion of overhead.
Property,
plant and equipment
Buildings
held for own use which are situated on leasehold land, where the fair value of
the building could be measured separately from the fair value of the leasehold
land at the inception of the lease, and other items of plant and equipment are
stated at cost less accumulated depreciation and impairment
losses.
Buildings
held under leasing agreements are depreciated over their expected useful lives
of 40 years.
Depreciation
on other assets is provided to write off the cost less their residual values
over their estimated useful lives, using the straight-line method, at the
following rates per annum:
|
Renovation
|
10 | % | ||
|
Plant
and
machinery
|
10%-20 | % | ||
|
Motor
vehicles
|
10 | % | ||
|
Office
equipment
|
10%-20 | % |
The
assets’ residual values, depreciation methods and useful lives are reviewed, and
adjusted if appropriate, at each reporting date.
The
gain or loss arising on retirement or disposal is determined as the difference
between the sales proceeds and the carrying amount of the asset and is
recognized in profit or loss. Any revaluation surplus remaining in equity is
transferred to retained earnings on the disposal of land and
building.
Subsequent
costs are included in the asset’s carrying amount or recognized as a separate
asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to China Ceramics and the cost of the item
can be measured reliably. All other costs, such as repairs and maintenance, are
charged to profit or loss during the financial period in which they are
incurred.
Financial
assets
China
Ceramics’ accounting policies for financial assets are set out
below.
Financial
assets are classified into the following category: loans and
receivables.
Management
determines the classification of its financial assets at initial recognition
depending on the purpose for which the financial assets were acquired and where
allowed and appropriate, re-evaluates this designation at every reporting
date.
All
financial assets are recognized when, and only when, China Ceramics becomes a
party to the contractual provisions of the instrument. Regular way purchases of
financial assets are recognized on trade date. When financial assets are
recognized initially, they are measured at fair value, plus, in the case of
investments not at fair value through profit or loss, directly attributable
transaction costs.
Derecognition
of financial assets occurs when the rights to receive cash flows from the
investments expire or are transferred and substantially all of the risks and
rewards of ownership have been transferred.
At
each reporting date, financial assets are reviewed to assess whether there is
objective evidence of impairment. If any such evidence exists, impairment loss
is determined and recognized based on the classification of the financial
asset.
42
Loans and
receivables
Loans
and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Loans and receivables are
subsequently measured at amortized cost using the effective interest method,
less any impairment losses. Amortized cost is calculated taking into account any
discount or premium on acquisition and includes fees that are an integral part
of the effective interest rate and transaction cost.
Impairment of financial
assets
At
each reporting date, financial assets are reviewed to determine whether there is
any objective evidence of impairment. Objective evidence of impairment of
individual financial assets includes observable data that comes to the attention
of China Ceramics about one or more of the following loss
events:
|
|
·
|
Significant
financial difficulty of the
debtor;
|
|
|
·
|
A
breach of contract, such as a default or delinquency in interest or
principal payments;
|
|
|
·
|
It
becoming probable that the debtor will enter bankruptcy or other financial
reorganization;
|
|
|
·
|
Significant
changes in the technological, market, economic or legal environment that
have an adverse effect on the debtor;
and
|
|
|
·
|
A
significant or prolonged decline in the fair value of an investment in an
equity instrument below its
cost.
|
If any
such evidence exists, the impairment loss is measured and recognized as
follows:
|
|
(i)
|
Financial
assets carried at amortized
cost
|
If
there is objective evidence that an impairment loss on loans and receivables or
held-to-maturity investments carried at amortized cost has been incurred, the
amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows (excluding future
credit losses that have not been incurred) discounted at the financial asset’s
original effective interest rate (i.e. the effective interest rate computed at
initial recognition). The amount of the loss is recognized in profit or loss of
the period in which the impairment occurs.
If, in
subsequent period, the amount of the impairment loss decreases and the decrease
can be related objectively to an event occurring after the impairment was
recognized, the previously recognized impairment loss is reversed to the extent
that it does not result in a carrying amount of the financial asset exceeding
what the amortized cost would have been had the impairment not been recognized
at the date the impairment is reversed. The amount of the reversal is recognized
in profit or loss of the period in which the reversal occurs.
For
financial assets other than trade receivables that are stated at amortized cost,
impairment losses are written off against the corresponding assets directly.
Where the recovery of trade receivables is considered doubtful but not remote,
the impairment losses for doubtful receivables are recorded using an allowance
account. When China Ceramics is satisfied that recovery of trade receivables is
remote, the amount considered irrecoverable is written off against trade
receivables directly and any amounts held in the allowance account in respect of
that receivable are reversed.
Subsequent
recoveries of amounts previously charged to the allowance account are reversed
against the allowance account. Other changes in the allowance account and
subsequent recoveries of amounts previously written off directly are recognized
in profit or loss.
Financial
liabilities
China
Ceramics’ financial liabilities include bank loans, trade and other payables and
accrued liabilities. They are included in line items in the statement of
financial position as borrowings under current or non-current liabilities,
accrued liabilities or trade and other payables.
Financial
liabilities are recognized when China Ceramics becomes a party to the
contractual provisions of the instrument. All interest related charges are
recognized in accordance with China Ceramics’ accounting policy for borrowing
costs.
A
financial liability is derecognized when the obligation under the liability is
discharged or cancelled or expires.
Where
an existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and the recognition of a new liability,
and the difference in the respective carrying amount is recognized in profit or
loss.
ITEM
6.
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors
and senior management
China
Ceramics’ current directors and executive officers are:
|
Name
|
Age
|
Position
|
||
|
Huang
Jia Dong
|
52
|
Director
and Chief Executive Officer
|
||
|
Su
Pei Zhi
|
56
|
Director
and Sales Deputy General Manager
|
||
|
Paul
K. Kelly
(2)(3)
|
70
|
Director
and Non-Executive Chairman
|
||
|
Cheng
Yan Davis
(1)(2)(3)
|
68
|
Director
|
||
|
Hen
Man Edmund
|
37
|
Chief
Financial Officer
|
||
|
Ding
Wei Dong
(1)(2)(3)
|
70
|
Director
|
||
|
Bill
Stulginsky
(1)
|
59
|
Director
|
||
|
Su
Wei Feng
|
29
|
Director
and Corporate Secretary
|
|
|
(1)
|
Member
of audit committee
|
|
|
(2)
|
Member
of compensation committee
|
|
|
(3)
|
Member
of nominations committee
|
43
Huang Jia
Dong
has served as a director of the Board of China Ceramics since
November 20, 2009 and Chief Executive Officer since April 4, 2010. Mr. Huang was
Chairman of the Board from November 20, 2005 until April 4, 2010. Mr. Huang
founded Jinjiang Hengda Ceramics Co., Ltd. in 1993 and served as the chairman.
Mr. Huang was previously involved in the construction material distribution
business. Mr. Huang has been appointed as the vice chairman of Fujian Province
Ceramic Industry Association since 2006 and the executive director of Jinjiang
City Chamber of Import and Export Trade since 2007. Mr. Huang has a diploma in
corporate management from Xiamen University.
Mr. Huang Jia
Dong is a second cousin of Mr. Su Pei Zhi’s wife.
Su Pei Zhi
has served as a director of China Ceramics since November 20, 2009. Mr.
Su joined Hengda in 1993 and served as the sales deputy general manager. He is
the head of China Ceramics’ sales and marketing team. Under the leadership of
Mr. Su, China Ceramics has established a nationally covered sales network
including both distribution customers and property developer customers. Mr Su
Pei Zhi is the father of Mr. Su Wei Feng, a director and the Secretary of the
Company and Mr. Su Pei Zhi’s wife is a second cousin of Mr. Huang Jia Dong, the
Chief Executive Officer of the Company.
Hen Man
Edmund
has served as Chief Financial Officer of China Ceramics since
November 20, 2009. Mr. Hen joined Hengda in 2008 as the Chief Financial Officer.
Prior to joining Hengda, Mr. Hen was a Financial Controller of a switchgear
manufacturer in Sichuan PRC. Prior to that, Mr. Hen was the accountant of
Dickson Concepts (International) Ltd., a public listed company in Hong Kong. He
also worked at a variety of international accountancy firms, including Deloitte
Touche Tohmatsu, in assurance and advisory services during the period from 1995
to 2001. Mr. Hen graduated from the University of East Anglia, United Kingdom,
with a Bachelor Degree in Science in 1995. He is an associate of the Institute
of Chartered Accountants in England and Wales and an associate of the Hong Kong
Institute of Certified Public Accountants.
Ding Wei
Dong
has served as a director of China Ceramics since November 20, 2009.
From 1997 to 2008, Mr. Ding served as the president of China Building Ceramics
& Sanitaryware Association (CBCSA), the largest industrial association of
the building ceramics and sanitaryware industry in China. Mr. Ding is now the
honorary president of CBCSA. From 1991 to 2000, Mr. Ding served as the executive
vice president of China Building Material Industry Association (CBMIA), a
national organization of the building material industry in China. From 1985 to
1991, Mr. Ding was the chief of Manufacturing and Management Department of
Building Material Bureau of China where he was responsible for the quality
management of building materials. Mr. Ding graduated from Nanjiing University of
Science and Technology in 1965 with a Bachelor Degree, and he has the
professional title of Senior Engineer of Professor Scale.
Paul K.
Kelly
has been a director of China Ceramics since August 18, 2009 and its
Chairman since April 4, 2010. He was also Chairman of the Board and Chief
Executive Officer of China Ceramics’ predecessor, CHAC, from its inception.
Since February 1992, Mr. Kelly has been the President and Chief Executive
Officer of Knox & Co., an investment banking firm specializing in mergers
and acquisitions, corporate restructuring and international financial advisory
services for clients in the U.S., Asia, and throughout the world. In 2004, Mr.
Kelly formed the Westgate Group, Inc., a strategic advisory firm focusing upon
identifying and implementing cross-border business opportunities for clients
with an emphasis on Asia and the Pacific Basin, for which he acts as Chairman,
CEO, and is the majority shareholder. Mr. Kelly is also the President, Chief
Executive Officer and sole shareholder of PH II, Inc., a privately held
investment company which has investments in the United States and New Zealand.
He has held these positions with PH II since 1988. Mr. Kelly also serves as
Chairman and Chief Executive Officer of Knox Enterprises, Inc., successor to THT
Inc., a privately held diversified manufacturing company. In 1996, Mr. Kelly
founded the Carrington Club, a golf resort and karikari estate and winery in New
Zealand for which he is the owner and Edgewater Developers, a real estate
development company in New Zealand. From 1985 to 1990 Mr. Kelly served as
President and Chief Executive Officer of Peers & Co., an international
investment banking firm. From 1984 to 1985 Mr. Kelly was the President and a
director of Quadrex Securities Corp. From 1982 to 1984 he was an Executive Vice
President and Director of Dean Witter Reynolds, Inc., responsible for all
investment banking activities for financial institutions. Mr. Kelly also served
as Managing Director and a member of the Management Committee of Merrill Lynch
White Weld Capital Markets Group from 1980 to 1982 where he was responsible for
all investment banking activities for financial institutions on a worldwide
basis, and was also senior banker to Merrill Lynch & Co., the holding
company for all Merrill Lynch interests. From 1978 to 1980 Mr. Kelly was
Executive Vice President, Director and member of the Executive Committee of
Blyth Eastman Dillon, where he was co-head of the Corporate Finance Department.
He was responsible for all new business activities for the firm and headed the
Financial Institutions Group. Among the other positions held by Mr. Kelly prior
to 1978 include his positions from 1968 to 1975 as Vice President of The First
Boston Corporation where he established the commercial paper department and was
responsible for all corporate finance new business activities and as a partner,
member of the management committee and head of investment banking for Prescott,
Ball & Turbin from 1975 to 1978. Mr. Kelly is a member of the Board of
Trustees of the University of Pennsylvania, a member of the Business School
Advisory Board of the University of Auckland (NZ), and a member of the New
Zealand Business Roundtable. In addition, he is a member of the Director’s
Advisory Board of the Yale Cancer Center. He is a past director of American Life
and Health Insurance Company of New York, The Chicago Sun-Times Corporation,
Hydrox Corporation, Ltd. (New Zealand), MCR Corporation, and Porta Systems
Corporation (ASE). He graduated from the University of Pennsylvania in 1962 and
received an MBA in Finance from the Wharton School in 1964.
44
Cheng Yan
Davis
has been a director of China Ceramics since November 20, 2009 and
was a board member of China Ceramics’ predecessor, CHAC, since its inception.
Since 1993, Ms. Davis has been the Vice Dean of International Programs and
Development at the University of Pennsylvania Graduate School of Education (GSE
International). GSE International was established by Ms. Davis in 1993, and was
the first international programs office among Ivy League graduate schools of
education in the U.S. Ms. Davis also serves as a Special Advisor to the
President of the University of Pennsylvania on internationalization efforts. GSE
International has developed many specialized training programs for groups
ranging from government officials and university presidents to finance
executives and corporate CEOs. Among these programs are training programs for
Chief Executive Officers and leading executives in the Chinese securities and
mutual fund industries, created in conjunction with the Wharton School. Over the
past three years, the Penn-Securities Association of China Program and the
Penn-China Mutual Fund CEO Leadership Program have trained over one hundred
Chinese executives in the latest theories and practices of the U.S. finance
sector. Since 1998, Ms. Davis has worked with Morgan Stanley on the
International Conference on Higher Education Management in Shanghai, the
establishment of the China Center, which focuses on management training for U.S.
— China joint ventures, and the China Pension Program, which works with the
state council of China in designing the architecture and training of a senior
workforce in comprehensive pension management. Ms. Davis has also worked with
CIGNA and Lucent Technologies on various professional education projects since
1997, designing a variety of training and professional development programs. Ms.
Davis also serves as an advisor on quality workforce standards for the Shanghai
Municipal Government and the Shanghai Foreign Trade Commission. Since 1997, Ms.
Davis has been invited to the Shanghai’s Mayor’s International Advisory Council
as a special observer and to offer suggestions on Shanghai human resource
development and workforce training. Ms. Davis has also been invited to custom
design new programs for China Telecom and China Industrial Commercial Bank.
These programs were designed in preparation of China’s entry into the World
Trade Organization. Ms. Davis initiated former President Jiang Zemin’s visit to
the University of Pennsylvania in 1997. Ms. Davis is a board member of the New
York Film Academy, Senior Advisor to Motorola and Oracle on international
government relations, and Advisor Professor to East China Normal University. In
addition, she has served as the Senior Observer for the Shanghai International
Business Leaders Advisory Council for the past fifteen years. She has received
numerous recognitions for her many contributions, including the first-ever
PennGSE Alumni Pioneers Award. Ms. Davis has a degree in Russian and English
from Shichuan Foreign Language University in China and an Ed D in Education from
the Graduate School of Education at the University of Pennsylvania.
Bill Stulginsky
has been a director of China Ceramics since April 1, 2010.
Mr.
Stulginsky retired as Partner from PricewaterhouseCoopers LLP in September
2009. He has over thirty six years of public accounting experience and was
a partner at PricewaterhouseCoopers and predecessor firms for twenty-four years
prior to his retirement. His background includes serving public and
private clients in the higher education, healthcare, electric and gas utilities,
pharmaceutical and manufacturing industries. He has a Bachelor of
Science degree in Accounting from LaSalle University. Mr. Stulginsky
is also on the Board of Directors of Fox Chase Cancer Center in Philadelphia and
the Visiting Nurse Association of Greater Philadelphia (Board Chairman), both of
which are nonprofit organizations.
45
Su Wei Feng
has been a director of China Ceramics since April 1, 2010.
Mr. Su joined
China Ceramics in March 2007. He currently acts as general legal
counsel and Secretary for the Company. Prior to working at China
Ceramics, Mr. Su worked as a lawyer at Fujian Minrong Law Firm from 2005 to
2007. He graduated from the School of Law of Xiamen University in
2004. Mr. Su Wei Feng is the son of Mr. Su Pei Zhi, a director of the
Company.
The term
of each director is until their resignation or removal. For information
regarding the term of China Ceramics’ officers, please refer to the section
entitled “Directors, Senior Management and Employees–Compensation–China
Ceramics’ Executive Officers, Shareholders and Employees–Executive Officers” in
this annual report.
Pursuant
to the merger and stock purchase agreement dated August 19, 2009, Huang Jia
Dong, Sue Pei Zhi, and Ding Wei Dong were nominated as members of China
Ceramics’ board of directors by the Seller (as defined in the merger and stock
purchase agreement), and Paul K. Kelly and Cheng Yan Davis were nominated as
members of China Ceramics’ board of directors by the Purchaser (as defined in
the merger and stock purchase agreement).
The
Business address of each party described above is c/o Jinjiang Hengda Ceramics
Co., Ltd., Junbing Industrial Zone, Anhai, Jinjiang City, Fujian Province,
People’s Republic of China
B.
Compensation
China
Ceramics Director Compensation
Starting
April 1, 2010, China Ceramics’
Board of Directors
determined to provide its non-employee members annual compensation of US$40,000.
Mr. Bill Stulginsky, as the Chairman of the Audit Committee, received $45,000.
Prior to April 1, 2010 there was no compensation provided to any director of
China Ceramics.
China
Ceramics’ Executive Officers and Employees
Executive
Officers
Since the
Company did not have an operating business prior to the acquisition on November
20, 2009, its officers did not receive any compensation for their services; and,
since it had no other employees, the Company did not have any compensation
policies, procedures, objectives or programs in place.
Upon
consummation of the acquisition of Success Winner, China Ceramics entered into
employment agreements with certain of its executive officers. The following
discussion summarizes the material terms of employment agreements entered into
between China Ceramics and its executive officers:
|
·
|
China
Ceramics entered into employment agreements with the following officers:
Huang Jia Dong, Chief Executive Officer, Su Pei Zhi, Vice General Manager
of Sales, Hen Man Edmund, Chief Financial Officer, and Su Wei Feng,
Corporate Secretary.
|
|
·
|
The
term of the employment agreements is three years (February 1, 2009 to
January 31, 2012 for Su Peizhi, Huang Jia Dong and Su Wei Feng and August
1, 2008 to July 31, 2011 for Hen Man
Edmund).
|
|
·
|
Huang
Jia Dong will received compensation of RMB10,000 per month, Su Pei Zhi,
Hen Man Edmund will receive compensation of RMB8,000 per month, Su Wei
Feng will receive compensation of RMB7,000 per
month
|
46
|
·
|
China
Ceramics may dismiss any of the above officers if any of the following
events occurs with respect to the officer: (1) failure to show up for
work, (2) failure to provide required documents, (3) falsification of
documents, criminal record, etc., (4) serious violation of such officers’
labor rules and of regulations, (5) serious lapse of duties and
responsibilities, (6) traffic law violation if the officer is a vehicle
operator, (7) activities that violate regulations, resulting in loss of
more than RMB4,000, (8) operation of his own business during the term of
his employment, (9) criminal prosecution and labor punishment, (10)
request by the officer to resign, (11) causing China Ceramics to sign or
change any contract through fraud, coercion and other fraudulent means, or
(12) other situations stipulated by law and
statutes.
|
|
·
|
Each
officer is subject to the non-compete provisions of the agreement for a
period of three years following termination of the employment agreement
and non-solicitation provisions of the agreement for a period of two years
following termination of the employment
agreement.
|
Other
Employees
China
Ceramics will adopt appropriate compensation policies, procedures, objectives or
programs after China Ceramics’ management team has had the opportunity to fully
understand the operations of the business. However, it is anticipated that the
compensation for senior executives of China Ceramics will be comprised of four
elements: a base salary, an annual performance bonus, equity and
benefits.
In
developing salary ranges, potential bonus payouts, equity awards and benefit
plans, it is anticipated that the Compensation Committee will take into account:
1) competitive compensation among comparable companies and for similar positions
in the market, 2) relevant ways to incentivize and reward senior management for
improving shareholder value while building China Ceramics into a successful
company, 3) individual performance, 4) how best to retain key executives, 5) the
overall performance of China Ceramics and its various key component entities, 6)
China Ceramics’ ability to pay and 7) other factors deemed to be relevant at the
time.
China
Ceramics’ senior management have discussed China Ceramics’ above mentioned
planned process for executive compensation and the four compensation components.
Specific compensation plans for China Ceramics’ key executives will be
negotiated and established by the Compensation Committee. This will include, but
may not be limited to, the four Success Winner executives who currently have
employment contracts (which will be modified, if necessary, to reflect any
additions to or changes in compensation).
China
Ceramics Director and Executive Officer Compensation
The
follow chart displays compensation received by Success Winner’s directors and
executive officers during fiscal year 2009.
|
Name
and Principal Position
|
Salary
RMB
|
Bonus
RMB
|
Total
RMB
|
|||||||||
|
Huang
Jia Dong
|
||||||||||||
|
Chief
Executive Officer
|
120,000 | - | 120,000 | |||||||||
|
Su
Pei Zhi
|
||||||||||||
|
Sales
Deputy General Manager
|
96,430 | - | 96,430 | |||||||||
|
Hen
Man Edmund
(1)
|
||||||||||||
|
Chief
Financial Officer
|
96,000 | 1,364,000 | 1,460,000 | |||||||||
|
Su
Wei Feng
Corporate
Secretary
|
84,060 | - | 84,060 | |||||||||
|
(1)
|
Mr.
Hen Man Edmund received a bonus of US$200,000 relating to services
rendered in 2009.
|
47
Retirement
Benefits
As of
December 31, 2009, China Ceramics has contributed to the government-mandated
employee welfare and retirement benefit plan and provided pension, retirement or
similar benefits to its employees. The PRC regulations require China Ceramics to
pay the local labor administration bureau a monthly contribution at a stated
contribution rate based on the monthly basic compensation of qualified
employees. The local labor administration bureau, which manages various
investment funds, will take care of employee retirement, medical and other
fringe benefits. Success Winner has no further commitments beyond its monthly
contribution.
China
Ceramics’ does not accrue pension, retirement or similar benefits.
Compensation
Committee Interlocks And Insider Participation
No member
of China Ceramics’ compensation committee has at any time been an officer or
employee of China Ceramics, or its subsidiaries. No interlocking relationship
exists between China Ceramics’ board of directors or compensation committee and
the board of directors or compensation committee of any other company, nor has
any interlocking relationship existed in the past.
During
the last fiscal year, no officer and employee of China Ceramics, and no former
officer of China Ceramics participated in deliberations of China Ceramics’ Board
of Directors concerning executive officer compensation.
C.
Board
Practices
China
Ceramics’ board of directors has established an audit committee, a compensation
committee and a nominating and corporate governance committee.
Audit
Committee
. The audit committee consists of Bill Stulginsky,
Ding Wei Dong and Cheng Yan Davis. Mr. Stulginsky will be the chair of the audit
committee, and the board of directors believe that Mr. Stulginsky qualifies as
an “audit committee financial expert”, as such term is defined in the rules of
the Securities and Exchange Commission.
The board
of directors has adopted an audit committee charter, providing for the following
responsibilities of the audit committee:
|
·
|
retaining
and terminating China Ceramics’ independent auditors and pre-approving all
auditing and non-auditing services permitted to be performed by the
independent auditors;
|
|
·
|
discussing
the annual audited financial statements with management and the
independent auditors;
|
|
·
|
annually
reviewing and reassessing the adequacy of China Ceramics’ audit committee
charter;
|
|
·
|
such
other matters that are specifically delegated to our audit committee by
China Ceramics’ board of directors after the business combination from
time to time;
|
|
·
|
meeting
separately and periodically with management, the internal auditors and the
independent auditors; and
|
|
·
|
reporting
regularly to the board of
directors.
|
Compensation
Committee
. The compensation committee consists of Ding Wei
Dong, Paul K. Kelly and Cheng Yan Davis. Ding Wei Dong is the chair of China
Ceramics’ compensation committee. Ding Wei Dong, Paul K. Kelly and Cheng Yan
Davis do not have any direct or indirect material relationship with China
Ceramics other than as a director.
China
Ceramics’ board of directors adopted a compensation committee charter, providing
for the following responsibilities of the compensation committee:
48
|
·
|
reviewing
and making recommendations to the board regarding China Ceramics’
compensation policies and forms of compensation provided to China
Ceramics’ directors and officers;
|
|
·
|
reviewing
and making recommendations to the board regarding bonuses for China
Ceramics’ officers and other
employees;
|
|
·
|
reviewing
and making recommendations to the board regarding share-based compensation
for China Ceramics’ directors and
officers;
|
|
·
|
administering
our share option plans, if they are established in the future, in
accordance with the terms thereof;
and
|
|
·
|
such
other matters that are specifically delegated to the compensation
committee by China Ceramics’ board of directors after the business
combination from time to time.
|
Nominating and
Corporate Governance Committee
. The nominating and corporate
governance committee consists of Ding Wei Dong, Paul K. Kelly and Cheng Yan
Davis. Ding Wei Dong is the chair of our nominating and corporate governance
committee. Ding Wei Dong, Paul K. Kelly and Cheng Yan Davis do not have any
direct or indirect material relationship with China Ceramics other than as a
director.
China
Ceramics’ board of directors adopted a nominating and corporate governance
committee charter, providing for the following responsibilities of the
nominations committee:
|
·
|
overseeing
the process by which individuals may be nominated to China Ceramics’ board
of directors after the Business
Combination;
|
|
·
|
identifying
potential directors and making recommendations as to the size, functions
and composition of China Ceramics’ board of directors after the Business
Combination and its committees;
|
|
·
|
considering
nominees proposed by our
shareholders;
|
|
·
|
establishing
and periodically assessing the criteria for the selection of potential
directors; and
|
|
·
|
making
recommendations to the board of directors on new candidates for board
membership.
|
In making
nominations, the nominating and corporate governance committee is required to
submit candidates who have the highest personal and professional integrity, who
have demonstrated exceptional ability and judgment and who shall be most
effective, in conjunction with the other nominees to the board, in collectively
serving the long-term interests of the shareholders. In evaluating nominees, the
nominating and corporate governance committee is required to take into
consideration the following attributes, which are desirable for a member of the
board: leadership, independence, interpersonal skills, financial acumen,
business experiences, industry knowledge, and diversity of
viewpoints.
Director
Independence
China
Ceramics’ Board of Directors has determined that Messrs. Bill Stulginsky, Ding
Wei Dong and Paul K. Kelly and Ms. Cheng Yan Davis qualify as independent
directors under the rules of the Nasdaq Stock Market because they are not
currently employed by China Ceramics, and do not fall into any of the enumerated
categories of people who cannot be considered independent in the Nasdaq Stock
Market Rules.
D.
Employees
The table
below provides information as to the total number of employees at the end of the
last three fiscal years. China Ceramics has no contracts or collective
bargaining agreements with labor unions and has never experienced work
stoppages. China Ceramics considers its relations with its employees to be
good.
|
2007
|
2008
|
2009
|
||||||||||
|
Number
of Employees
|
1,541 | 1,551 | 1,715 | |||||||||
49
E.
Share
Ownership
See Item
7, below.
ITEM
7.
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major
shareholders
The
following table sets forth, as of May 13, 2010, certain information regarding
beneficial ownership of China Ceramics’ shares by each person who is known by
China Ceramics to beneficially own more than 5% of China Ceramics’ shares. The
table also identifies the share ownership of each of China Ceramics’ directors,
each of China Ceramics’ named executive officers, and all directors and officers
as a group. Except as otherwise indicated, the shareholders listed in the table
have sole voting and investment powers with respect to the shares indicated.
China Ceramics’ major shareholders do not have different voting rights than any
other holder of China Ceramics’ shares.
Shares
which an individual or group has a right to acquire within 60 days pursuant to
the exercise or conversion of options, warrants or other similar convertible or
derivative securities are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown in the table.
|
Name
|
Number
of Shares Beneficially Owned
|
Percentage
of Ownership
|
||||||
|
Paul
K. Kelly
|
1,370,100 | (2) | 13.9 | % | ||||
|
Cheng
Yan Davis
|
144,000 | (3) | 1.6 | % | ||||
|
Huang
Jia Dong
|
0 | — | ||||||
|
Su
Pei Zhi
|
0 | — | ||||||
|
Ding
Wei Dong
|
0 | — | ||||||
|
Hen
Man Edmund
|
0 | — | ||||||
|
Bill
Stulginsky
|
0 | — | ||||||
|
Su
Wei Feng
|
0 | — | ||||||
|
All
directors and executive officers as a group (8
individuals)
|
1,514,100 | 15.0 | % | |||||
|
James
D. Dunning, Jr.
|
1,370,100 | (2) | 13.9 | % | ||||
|
Wong
Kung Tok
|
4,221,792 | (4) | 47.2 | % | ||||
|
Dorset
Management Corporation
(5)
|
1,495,425 | (6) | 16.4 | % | ||||
|
Alan
G. Hassenfeld
|
719,905 | (7) | 7.6 | % | ||||
|
Surmount
Investments Group Limited
|
1,074,020 | (8) | 12.0 | % | ||||
|
QVT
Financial LP
|
594,877 | (9) | 6.2 | % | ||||
| Taylor Asset Management, Inc. (10) | 642,900 | 6.7 | % | |||||
|
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals is
1000 N. West Street, Suite 1200, Wilmington, DE
19801.
|
|
(2)
|
Includes
warrants to purchase 941,875
shares.
|
|
(3)
|
Includes
warrants to purchase 99,000 shares.
|
|
(4)
|
Mr.
Wong is entitled to receive 8,185,763 of our shares if certain conditions
contained in the merger and stock purchase agreement dated August 19, 2009
(the “acquisition agreement”) are met. Such securities are not
beneficially owned because Mr. Wong does not have voting or dispositive
power over such shares and it is not yet known if he will be entitled to
receive any such shares. Pursuant to the terms of the acquisition
agreement, the 8,185,763 shares held in escrow may be issued to Mr. Wong
if the following events occur:
|
50
|
Event
|
Number
of Shares
|
|||
|
From
escrow at the close of 2009 audit, if certain earnings thresholds are
met
|
1,214,127 | |||
|
From
escrow at the close of 2010 audit, if certain earnings thresholds are
met
|
1,794,800 | |||
|
From
escrow at the close of 2011 audit, if certain earnings thresholds are
met
|
2,176,836 | |||
|
From
escrow if the closing price of China Ceramics’ common stock is at or above
$20.00 per share for twenty trading days in a thirty trading day period
prior to April 30, 2012
|
2,000,000 | |||
|
From
escrow if the closing price of China Ceramics’ common stock is at or above
$25.00 per share for twenty trading days in a thirty trading day period
prior to April 30, 2012
|
1,000,000 | |||
|
(5)
|
The
controlling person of Dorset Management Corporation is David M.
Knott.
|
|
(6)
|
Includes
warrants to purchase 145,425 shares. Based on a Schedule 13G filed on
February 5, 2010.
|
|
(7)
|
Includes
warrants to purchase 495,000
shares.
|
|
(8)
|
Includes
(i) 537,010 shares held by Surmount Investments Group Limited, (ii)
268,505 shares held by Top Plenty International Limited, and (iii) 268,505
shares held by Park Rise Holdings
Limited.
|
|
(9)
|
Consists
of warrants to purchase 594,877 shares. QVT Financial LP (“QVT Financial”)
is the investment manager for QVT Fund LP (the “Fund”), which beneficially
owns 536,556 shares underlying warrants, and for Quintessence Fund L.P.
(“Quintessence”), which beneficially owns 58,321 shares underlying
warrants. QVT Financial has the power to direct the vote and disposition
of the Shares held by the Fund and Quintessence. Accordingly, QVT
Financial may be deemed to be the beneficial owner of an aggregate amount
of 594,877 Shares, consisting of the shares owned by the Fund and
Quintessence. In addition, QVT Financial GP LLC, as General Partner of QVT
Financial, may be deemed to beneficially own the same number of Shares
reported by QVT Financial. QVT Associates GP LLC, as General Partner of
the Fund and Quintessence, may be deemed to beneficially own the aggregate
number of Shares owned by the Fund and Quintessence, and accordingly, QVT
Associates GP LLC may be deemed to be the beneficial owner of an aggregate
amount of 594,877 Shares. Each of QVT Financial and QVT Financial GP LLC
disclaims beneficial ownership of the Shares owned by the Fund and
Quintessence. QVT Associates GP LLC disclaims beneficial ownership of all
Shares owned by the Fund and Quintessence, except to the extent of its
pecuniary interest therein. The business address of each of the entities
referenced in this footnote is 1177 Avenue of the Americas, 9th Floor; New
York, New York 10036. Based on a Schedule 13G/A filed on February 16,
2010.
|
|
(10)
|
Includes
632,900 shares underlying warrants. Based on a Schedule 13G filed on April
8, 2010 by Taylor Asset Management, Inc. (“TAM”) and Mr. Stephen S.
Taylor, its President. TAM is an Illinois corporation located
at 714 S. Dearborn Street, 2nd Floor Chicago, IL 60605. Mr.
Taylor has a business address at 714 S. Dearborn Street, 2nd Floor
Chicago, IL 60605.
|
B.
Related
Party Transactions
Related
Party Transactions of CHAC and China Ceramics
CHAC
paid Stuart Management Co., an affiliate of Paul K. Kelly, a total of $10,000
per month for administrative services and secretarial support for a period
commencing on the date of the closing of the initial public offering and ending
on the consummation of the Business Combination. This arrangement was agreed to
by Stuart Management Co. for our benefit and was not intended to provide Stuart
Management Co. compensation in lieu of a management fee. We believe that such
fees were at least as favorable as we could have obtained from an unaffiliated
third party.
Pursuant
to an administrative services agreement dated as of December 1, 2009 between
China Ceramics and Stuart Management Co., an affiliate of Paul K. Kelly, China
Ceramics will pay $7,000 a month plus out-of-pocket expenses to Stuart
Management Co. for administrative services beginning on December 1, 2009 for a
term of one year, and the agreement shall automatically renew for successive one
year terms unless either party notifies the other of its intent not to renew.
This agreement was agreed to by Stuart Management Co. for our benefit and is not
intended to provide Stuart Management Co. compensation in lieu of a management
fee. We believe that such fees were at least as favorable as we could have
obtained from an unaffiliated third party.
Related
Party Transactions of Success Winner
China
Ceramics has not had any transactions with any related person in fiscal year
2009.
C.
Interests
of Experts and Counsel
Not
required.
ITEM
8.
FINANCIAL
INFORMATION
A.
Consolidated
Statements and Other Financial Information.
See Item
18.
51
B.
Significant
Changes
None
52
ITEM
9.
THE
OFFER AND LISTING
A.
Offer
and Listing Details
The
following tables set forth, for the calendar quarter indicated and through March
31, 2010, the quarterly high and low sale prices for China Ceramics’ units,
shares and warrants, respectively, as reported on the Over-the-Counter Bulletin
Board or the NYSE Amex, as applicable. (See Item 9C for the dates that the
securities were traded on each market).
|
Units
|
Shares
|
Warrants
|
||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
|
Annual
Highs and Lows
|
||||||||||||||||||||||||
|
2007
|
10.10 | 9.65 | 9.00 | 8.77 | 0.92 | 0.84 | ||||||||||||||||||
|
2008
|
11.65 | 6.00 | 9.40 | 8.20 | 1.00 | 0.01 | ||||||||||||||||||
|
2009
|
11.50 | 7.80 | 10.01 | 7.00 | 3.00 | 0.02 | ||||||||||||||||||
|
2010
|
n/a | n/a | 9.95 | 5.45 | 1.80 | 0.60 | ||||||||||||||||||
|
Quarterly
Highs and Lows
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
First
Quarter
|
9.85 | 9.17 | 9.10 | 8.85 | 0.95 | 0.45 | ||||||||||||||||||
|
Second
Quarter
|
10.00 | 9.24 | 9.20 | 8.86 | 1.00 | 0.35 | ||||||||||||||||||
|
Third
Quarter
|
11.65 | 8.00 | 9.40 | 8.70 | 0.78 | 0.18 | ||||||||||||||||||
|
Fourth
Quarter
|
8.96 | 6.00 | 9.00 | 8.20 | 0.29 | 0.01 | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
First
Quarter
|
9.50 | 8.21 | 9.34 | 8.83 | 0.19 | 0.02 | ||||||||||||||||||
|
Second
Quarter
|
9.65 | 9.20 | 9.58 | 9.29 | 0.14 | 0.03 | ||||||||||||||||||
|
Third
Quarter
|
10.15 | 9.56 | 9.75 | 9.52 | 0.50 | 0.07 | ||||||||||||||||||
|
Fourth
Quarter
|
11.50 | 7.80 | 10.01 | 7.00 | 3.00 | 0.12 | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
First
Quarter
|
n/a | n/a |
9.95
|
|
5.50
|
1.80
|
0.60
|
|||||||||||||||||
| Second Quarter (to May 13) | n/a | n/a | 9.20 | 6.61 | 1.65 | 0.85 | ||||||||||||||||||
|
Monthly
Highs and Lows
|
||||||||||||||||||||||||
|
October
2009
|
9.81 | 9.77 | 9.76 | 9.62 | 0.51 | 0.12 | ||||||||||||||||||
|
November
2009
|
11.50 | 7.80 | 10.01 | 8.40 | 1.85 | 0.36 | ||||||||||||||||||
|
December
2009
|
9.51 | 9.51 | 9.95 | 7.00 | 3.00 | 1.00 | ||||||||||||||||||
|
January
2010
|
n/a | n/a | 8.15 | 7.00 | 1.25 | 1.01 | ||||||||||||||||||
|
February
2010
|
n/a | n/a | 7.40 | 5.45 | 1.03 | 0.60 | ||||||||||||||||||
|
Marc
h 2010
|
n/a | n/a |
9.95
|
5.50
|
1.80
|
0.66
|
||||||||||||||||||
|
April 2010
|
n/a
|
n/a
|
9.20
|
8.02
|
1.65
|
1.16
|
||||||||||||||||||
| May 2010 (to May 13) | n/a | n/a | 9.00 | 6.61 | 1.32 | 0.85 | ||||||||||||||||||
Holders
of our shares, warrants and units (sometimes referred to herein as “securities”)
should obtain current market quotations for their securities. There can be no
assurance that a trading market will develop for these securities.
B.
Plan
of Distribution
Not
Applicable.
C.
Markets
China
Ceramics’ shares, warrants and units are quoted on the Over-the-Counter Bulletin
Board under the symbols CCLTF, CCLWF and CCLUF, respectively. The units have
been quoted on the Over-the-Counter Bulletin Board since December 29, 2009.
Prior to December 29, 2009, China Ceramics’ shares, warrants and units were
traded on NYSE Amex, under the symbols “HOL”, “HOL.WS” and “HOL.U,”
respectively. CHAC’s units commenced to trade on NYSE Amex on November 16, 2007.
CHAC’s shares and warrants commenced to trade separately from its units on
December 17, 2007.
53
D.
Selling
Shareholders
Not
Applicable.
E.
Dilution
Not
Applicable.
F.
Expenses
of the Issue
Not
Applicable.
ITEM
10.
ADDITIONAL
INFORMATION
A.
Share
Capital
Not
Applicable.
B.
Memorandum
and Articles of Association
Registered
Office
. Under the Company’s Amended and Restated Memorandum of
Association, the Registered Office of the Company is at Craigmuir Chambers, Road
Town, Tortola, British Virgin Islands, or at such other place as the directors
or shareholders may by resolution from time to time decide.
Objects and
Purposes
. Under Article 5 of the Company’s Amended and Restated
Memorandum of Association, there are no limitations on the business that the
Company may carry on.
Directors
.
Under Article 13 of the Company’s Amended and Restated Articles of Association,
the Company may not enter into a related party transaction unless the
transaction is approved by a majority of the disinterested directors of the
board of directors or the audit committee. No interested director may
participate in the review or approval of a transaction. However, a transaction
which does not satisfy these requirements shall not be set aside only due to it
being a related party transaction if (i) the material facts as to the interested
director’s relationship with the transaction are disclosed or known to the board
of directors or the audit committee, and the board of directors or audit
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum, (ii) the material facts as to the
interested director’s relationship with the transaction are disclosed or known
to the shareholders, and the shareholders in good faith authorize the contract
or transaction by the affirmative votes of a majority of the shareholders, or
(iii) if the transaction is fair as to the Company. The board of directors has
determined that a transaction involving compensation of the directors is not a
related party transaction. The directors may exercise all powers of the Company
to incur or incur indebtedness, liabilities or obligations. The Company’s
Amended and Restated Articles of Association specify that a director is not
required to hold any shares in the Company as a qualification to office. There
are no provisions mandating retirement or non-retirement of directors under a
certain age limit.
Rights,
Preferences and Restrictions Attaching to the Company’s Shares
. The
Company is authorized to issue 51,000,000 shares of a single class. As of
December 31, 2009, 8,950,171 shares were issued and outstanding. Each share has
the right to one vote at a meeting of shareholders or on any resolution of
shareholders, the right to an equal share in any dividend paid by the Company,
and the right to an equal share in the distribution of surplus assets of the
Company on its liquidation. All dividends declared but unclaimed for three years
after having been declared may be forfeited by resolution of the board of
directors for the benefit of the Company. The Company may by a resolution of the
board of directors redeem, purchase or otherwise acquire all or any of the
shares in the Company subject to Regulation 3 of the Articles of
Association.
54
Alteration of
Rights
. If at any time the Company’s shares are divided into different
classes, the rights attached to any class may only be varied, whether or not the
Company is in liquidation, with the consent in writing of or by a resolution
passed at a meeting by the holders of not less than 50% of the issued shares in
that class.
Meetings
.
Written notice of annual or special meetings stating the place, date and hour of
the meeting shall be given to each shareholder entitled to vote at such meeting
not less than 10 days nor more than 60 days before the date of the meeting.
Written notice of special meetings must also state the purpose of the
meeting.
Limitations on
the Right to Own Securities
. There are no limitations on the rights to
own securities of the Company, or limitations on the rights of non-resident or
foreign shareholders to hold or exercise voting rights on the Company’s
securities, contained in the Company’s Amended and Restated Memorandum and
Articles of Association or under British Virgin Islands law.
C.
Material
Contracts
On August
19, 2009, the Company entered into a merger and stock purchase agreement,
pursuant to which, on November 20, 2009, the Company acquired all of the
outstanding securities of Success Winner, resulting in Success Winner becoming a
wholly owned subsidiary of the Company.
Pursuant
to an administrative services agreement dated as of December 1, 2009 between
China Ceramics and Stuart Management Co., an affiliate of Paul K. Kelly, China
Ceramics will pay $7,000 a month plus out-of-pocket expenses to Stuart
Management Co. for administrative services beginning on December 1, 2009 for a
term of one year, and the agreement shall automatically renew for successive one
year terms unless either party notifies the other of its intent not to
renew.
On
December 18, 2009, China Ceramics initiated the acquisition of a new production
facility in Gaoan, China (the “Gaoan Facility”). Success Winner had entered into
a definitive acquisition agreement for the Gaoan Facility with a group of
investors (the “Investors”) prior to the closing of the Business Combination.
China Ceramics paid cash of RMB145.4 million (approx. US$21.3 million) to the
Investors. The closing of the acquisition of the Gaoan Facility was subject to
the Gaoan City Administration for Industry and Commerce transferring the
registration and business license for the Gaoan Facility from the Investors to
China Ceramics. China Ceramics announced on January 22, 2010 that the Gaoan City
Administration for Industry and Commerce had transferred to China Ceramics the
registration and business license for the Gaoan Facility and that China Ceramics
had made a final cash payment of RMB39 million (US$5.7 million), and assumed
loans of RMB60 million (approximately US$8.8 million). The Company expects to
spend approximately RMB27 million (US$4.0 million) in the first half of 2010 to
complete the first phase of the Gaoan facility. The total cost for the first
phase of Gaoan facility was approximately RMB271 million (US$39.7 million). The
Gaoan Facility is 100% owned by China Ceramics.
Since
December 2009, China Ceramics has also signed agreements with four new exclusive
distributors in Guangdong province, Hainan province, Zhejiang province and Anhui
province that will begin distributing China Ceramics’ products in January
2010.
Except
for above, the Company did not enter into any other material contracts during
fiscal year 2009.
D.
Exchange
controls
Under
British Virgin Islands law, there are currently no restrictions on the export or
import of capital, including foreign exchange controls or restrictions that
affect the remittance of dividends, interest or other payments to nonresident
holders of our shares.
E.
Taxation
The
following summary of the material PRC and U.S. federal income tax consequences
of the acquisition, ownership and disposition of China Ceramics’ shares and
warrants, sometimes referred to collectively as “securities” is based upon laws
and relevant interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. This summary does not
deal with all possible tax consequences relating to an investment in China
Ceramics’ shares and warrants, such as the tax consequences under state, local
and other tax laws. For purposes of this discussion, references to “China
Ceramics,” “we” or “our” refer only to China Ceramics Co., Ltd.
55
PRC
Taxation
The
following discussion summarizes the material PRC income tax considerations
relating to the acquisition, ownership and disposition of China Ceramics’
securities.
You
should consult with your own tax adviser regarding the PRC tax consequences of
the acquisition, ownership and disposition of China Ceramics’
securities.
Resident
Enterprise Treatment
On
March 16, 2007, the Fifth Session of the Tenth National People’s Congress passed
the Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on
January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its
implementing rules, enterprises established outside China whose “de facto
management bodies” are located in China are considered “resident enterprises”
and subject to the uniform 25% enterprise income tax rate on their worldwide
taxable income. According to the implementing rules of the EIT Law, “de facto
management body” refers to a managing body that in practice exercises
substantial and overall management control over the production and operations,
personnel, accounting and properties of an enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice on the Issues
Regarding Recognition of Enterprises that are Domestically Controlled as PRC
Resident Enterprises Based on the De Facto Management Body Criteria, which was
retroactively effective as of January 1, 2008. This notice provides that an
overseas incorporated enterprise that is controlled domestically will be
recognized as a “tax-resident enterprise” if it satisfies all of the following
conditions: (i) the senior management responsible for daily production/business
operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii)
strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties,
accounting ledgers, company seals and minutes of board meetings and stockholder
meetings, etc., are maintained in the PRC; and (iv) 50% or more of the board
members with voting rights or senior management habitually reside in the
PRC.
Given the
short history of the EIT Law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the resident enterprise
status of a company organized under the laws of a foreign (non-PRC)
jurisdiction, such as China Ceramics, Success Winner and Stand Best. If the PRC
tax authorities determine that China Ceramics, Success Winner and/or Stand Best
is a “resident enterprise” under the EIT Law, a number of tax consequences could
follow. First, China Ceramics, Success Winner and/or Stand Best could be subject
to the enterprise income tax at a rate of 25% on their worldwide taxable income,
as well as PRC enterprise income tax reporting obligations. Second, the EIT Law
provides that dividend income between “qualified resident enterprises” is exempt
from income tax. As a result, if China Ceramics, Success Winner and Stand Best
are each treated as a “qualified resident enterprise,” all dividends paid from
Hengda to China Ceramics, through Success Winner and Stand Best, should be
exempt from PRC tax.
As of
the date of this prospectus, there has not been a definitive determination by
China Ceramics, Success Winner, Stand Best or the PRC tax authorities as to the
“resident enterprise” or “non-resident enterprise” status of China Ceramics,
Success Winner and Stand Best.
However,
since it is not anticipated that China Ceramics, Succes
s Winner
and/or Stand Best would receive dividends or generate other income in the near
future,
China Ceramics, Success Winner and Stand Best are not expected to
have any income that would be subject to the 25% enterprise income tax on
worldwide taxable income in the near future. China Ceramics, Success Winner and
Stand Best will make any necessary tax payment if China Ceramics, Success Winner
or Stand Best (based on future clarifying guidance issued by the PRC), or the
PRC tax authorities, determine that China Ceramics, Success Winner or Stand Best
is a resident enterprise under the EIT Law, and if China Ceramics, Success
Winner or Stand Best were to have income in the future.
56
Dividends
From Hengda
If Stand
Best is not treated as a resident enterprise under the EIT Law, then dividends
that Stand Best receives from Hengda may be subject to PRC withholding tax. The
EIT Law and the implementing rules of the EIT Law provide that (A) an income tax
rate of 25% will normally be applicable to investors that are “non-resident
enterprises” which (i) have an establishment or place of business inside the
PRC, and (ii) have income in connection with their establishment or place of
business that is sourced from the PRC or is earned outside the PRC but has an
actual connection with their establishment or place of business inside the PRC,
and (B) a PRC withholding tax at a rate of 10% will normally be applicable to
dividends payable to non-resident enterprises that (i) do not have an
establishment or place of business in the PRC or (ii) have an establishment or
place of business in the PRC, but the relevant income is not effectively
connected with such establishment or place of business, to the extent such
dividends are derived from sources within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions on a
case-by-case basis. China Ceramics, Success Winner and Stand Best are holding
companies and substantially all of China Ceramics’, Success Winner’s and Stand
Best’s income may be derived from dividends. Thus, if China Ceramics, Success
Winner and/or Stand Best are considered a “non-resident enterprise” under the
EIT Law and the dividends paid to China Ceramics, Success Winner and/or Stand
Best are considered income sourced within the PRC, such dividends received may
be subject to PRC withholding tax as described in the foregoing
paragraph.
The State
Council of the PRC or a tax treaty between China and the jurisdiction in which
the non-resident enterprise resides may reduce such income or withholding tax,
with respect to a non-resident enterprise. Pursuant to the Arrangement between
the Mainland of China and the Hong Kong Special Administrative Region for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income (the “PRC-Hong Kong Tax Treaty”), if the Hong Kong resident
enterprise that is not deemed to be a conduit by the PRC tax authorities owns
more than 25% of the equity interest in a PRC resident enterprise, the 10% PRC
withholding tax on the dividends the Hong Kong resident enterprise receives from
such PRC resident enterprise is reduced to 5%.
China
Ceramics is a British Virgin Islands holding company, and it has a British
Virgin Islands subsidiary (Success Winner), which owns a 100% equity interest in
a subsidiary in Hong Kong (Stand Best), which in turns owns a 100% equity
interest in Hengda, a PRC company. As a result, if Stand Best were treated as a
“non-resident enterprise” under the EIT Law, then dividends that Stand Best
receives from Hengda (assuming such dividends were considered sourced within the
PRC) (i) may be subject to a 5% PRC withholding tax, if the PRC-Hong Kong Tax
Treaty were applicable, or (ii) if such treaty does not apply (i.e., because the
PRC tax authorities may deem Stand Best to be a conduit that is not entitled to
treaty benefits), may be subject to a 10% PRC withholding
tax. Similarly, if Success Winner were treated as a PRC “non-resident
enterprise” under the EIT Law and Stand Best were treated as a PRC “resident
enterprise” under the EIT Law, then dividends that Success Winner receives from
Stand Best (assuming such dividends were considered sourced within the PRC) may
be subject to a 10% PRC withholding tax. A similar situation may arise if China
Ceramics were treated as a “non-resident enterprise” under the EIT Law, and
Success Winner were treated as a “resident enterprise” under EIT Law. Any such
taxes on dividends could materially reduce the amount of dividends, if any,
China Ceramics could pay to its shareholders.
As of
the date of this prospectus, there has not been a definitive determination by
China Ceramics, Success Winner, Stand Best or the PRC tax authorities as to the
“resident enterprise” or “non-resident enterprise” status of China Ceramics,
Success Winner and Stand Best.
As
described above, however, Hengda is not expected to pay any dividends in the
near future. China Ceramics, Success Winner and Stand Best will make
any
necessary tax withholding if, in the future, Hengda were to pay any
dividends
and China Ceramics, Success Winner or Stand Best (based on
future clarifying guidance issued by the PRC), or the PRC tax authorities,
determine that China Ceramics, Success Winner or Stand Best is a non-resident
enterprise under the EIT Law.
57
Dividends
that Non-PRC Resident Enterprise Investors Receive From China Ceramics;
Gain on the Sale or Transfer of China Ceramics’ Securities
If
dividends payable to (or gains realized by) China Ceramics’ enterprise, but not
individual, investors that are not tax residents of the PRC (“ non-resident
investors”) are treated as income derived from sources within the PRC, then the
dividends that non-resident investors receive from us and any such gain derived
by such investors on the sale or transfer of China Ceramics’ securities may be
subject to tax under the PRC tax laws.
Under the
PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends
payable to non-resident investors that (i) do not have an establishment or place
of business in the PRC or (ii) have an establishment or place of business in the
PRC but the relevant income is not effectively connected with the establishment
or place of business, to the extent that such dividends have their sources
within the PRC. Similarly, any gain realized on the transfer of China Ceramics’
securities by such investors also is subject to 10% PRC income tax if such gain
is regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors with respect to China Ceramics’
securities, or gain non-resident investors may realize from the sale or transfer
of China Ceramics’ securities, may be treated as PRC-sourced income and, as a
result, may be subject to PRC tax at a rate of 10%. In such event, China
Ceramics may be required to withhold a 10% PRC tax on any dividends paid to
non-resident investors. In addition, non-resident investors in China Ceramics’
securities may be responsible for paying PRC tax at a rate of 10% on any gain
realized from the sale or transfer of China Ceramics’ securities if such
non-resident investors and the gain satisfy the requirements under the PRC tax
laws. However, under the PRC tax laws, China Ceramics would not have an
obligation to withhold PRC income tax in respect of the gains that non-resident
investors (including U.S. investors) may realize from the sale or transfer of
China Ceramics’ securities.
If China
Ceramics were to pay any dividends in the future, and if China Ceramics (based
on future clarifying guidance issued by the PRC), or the PRC tax authorities,
determine that China Ceramics must withhold PRC tax on any dividends payable by
China Ceramics under the PRC tax laws, China Ceramics will make any necessary
tax withholding on dividends payable to its non-resident investors. If
non-resident investors as described under the PRC tax laws (including U.S.
investors) realize any gain from the sale or transfer of China Ceramics’
securities and if such gain were considered as PRC-sourced income, such
non-resident investors would be responsible for paying 10% PRC income tax on the
gain from the sale or transfer of China Ceramics’ securities. As indicated
above, under the PRC tax laws, China Ceramics would not have an obligation to
withhold PRC income tax in respect of the gains that non-resident investors
(including U.S. investors) may realize from the sale or transfer of China
Ceramics’ securities.
On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”)
that reinforces the taxation of certain equity transfers by non-resident
investors through overseas holding vehicles. Circular 698 addresses
indirect equity transfers as well as other issues. Circular 698 is
retroactively effective from January 1 2008. According to Circular 698, where a
non-resident investor who indirectly holds an equity interest in a PRC resident
enterprise through a non-PRC offshore holding company indirectly transfers an
equity interest in the PRC resident enterprise by selling an equity interest in
the offshore holding company, and the latter is located in a country or
jurisdiction where the actual tax burden is less than 12.5% or where the
offshore income of its residents is not taxable, the non-resident investor
is required to provide the PRC tax authority in charge of that PRC resident
enterprise with certain relevant information within 30 days of the transfer. The
tax authorities in charge will evaluate the offshore transaction for tax
purposes. In the event that the tax authorities determine that such transfer is
abusing forms of business organization and a reasonable commercial purpose for
the offshore holding company other than the avoidance of PRC income tax
liability is lacking, the PRC tax authorities will have the power to re-assess
the nature of the equity transfer under the doctrine of substance over form. A
reasonable commercial purpose may be established when the overall international
(including U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital markets. If
the SAT’s challenge of a transfer is successful, it may deny the existence of
the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since Circular 698
has a short history, there is uncertainty as to its application. China Ceramics
(or a non-resident investor) may become at risk of being taxed under Circular
698 and may be required to expend valuable resources to comply with Circular 698
or to establish that China Ceramics (or such non-resident investor) should not
be taxed under Circular 698, which could have a material adverse effect on China
Ceramics’ financial condition and results of operations (or such non-resident
investor’s investment in China Ceramics).
58
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of China Ceramics’ securities if such
non-resident investors and the gain satisfy the requirements under the PRC tax
laws, as described above.
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by a
non-resident investor from the sale or transfer of China Ceramics’ securities is
subject to any income tax in the PRC, and such non-resident investor fails to
file any tax return or pay tax in this regard pursuant to the Tax Related Laws,
such investor may be subject to certain fines, penalties or punishments,
including without limitation: (1) if a non-resident investor fails to file a tax
return and present the relevant information in connection with tax payments, the
competent tax authorities shall order it to do so within the prescribed time
limit and may impose a fine up to RMB 2,000, and in egregious cases, may impose
a fine ranging from RMB 2,000 to RMB 10,000; (2) if a non-resident investor
fails to file a tax return or fails to pay all or part of the amount of tax
payable, the non-resident investor shall be required to pay the unpaid tax
amount payable, a surcharge on overdue tax payments (the daily surcharge is
0.05% of the overdue amount, beginning from the day the deferral begins) and a
fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if a
non-resident investor fails to file a tax return or pay the tax within the
prescribed time limit according to the order by the PRC tax authorities, the PRC
tax authorities may collect and check information about the income items of the
non-resident investor in the PRC and other payers (the “Other Payers”) who will
pay amounts to such non-resident investor, and send a “Notice of Tax Issues” to
the Other Payers to collect and recover the tax payable and impose overdue fines
on such non-resident investor from the amounts otherwise payable to such
non-resident investor by the Other Payers; (4) if a non-resident investor fails
to pay the tax payable within the prescribed time limit as ordered by the PRC
tax authorities, a fine may be imposed on the non-resident investor ranging from
50% to 500% of the unpaid tax payable, and the PRC tax authorities may, upon
approval by the director of the tax bureau (or sub-bureau) of, or higher than,
the county level, take the following compulsory measures: (i) notify in writing
the non-resident investor’s bank or other financial institution to withhold from
the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s
commodities, goods or other property in a value equivalent to the amount of tax
payable; or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable or surcharge for overdue tax payment, and can not provide
a guarantee to the tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or its legal representative
from leaving the PRC.
United States Federal Income
Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of
the acquisition, ownership and disposition of China Ceramics’ securities.
Because the components of a unit of China Ceramics are separable at the option
of the holder, the holder of a unit should be treated, for U.S. federal income
tax purposes, as the owner of the underlying share and warrant components of the
unit. As a result, the discussion below of the U.S. federal income tax
consequences with respect to actual holders of shares and warrants should also
apply to holders of units (as the deemed owners of the shares and warrants
underlying the units).
The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to a beneficial owner of China Ceramics securities that is for U.S.
federal income tax purposes:
|
·
|
an
individual citizen or resident of the United
States;
|
|
·
|
a
corporation (or other entity treated as a corporation) that is created or
organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of
Columbia;
|
59
|
·
|
an
estate whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source;
or
|
|
·
|
a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
|
If a
beneficial owner of China Ceramics securities is not described as a U.S. Holder
and is not an entity treated as a partnership or other pass-through entity for
U.S. federal income tax purposes, such owner will be considered a “Non-U.S.
Holder.” The material U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders is described below under the heading “Non-U.S.
Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended, or the
“Code,” its legislative history, Treasury regulations promulgated thereunder,
published rulings and court decisions, all as currently in effect. These
authorities are subject to change or differing interpretations, possibly on a
retroactive basis.
This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to any particular holder of China Ceramics securities based on such
holder’s individual circumstances. In particular, this discussion considers only
holders that own and hold China Ceramics securities as capital assets within the
meaning of Section 1221 of the Code. This discussion also does not address the
alternative minimum tax. In addition, this discussion does not address the U.S.
federal income tax consequences to holders that are subject to special rules,
including:
|
·
|
financial
institutions or financial services
entities;
|
|
·
|
broker-dealers;
|
|
·
|
taxpayers
who are subject to the mark-to-market accounting rules under Section 475
of the Code;
|
|
·
|
tax-exempt
entities;
|
|
·
|
governments
or agencies or instrumentalities
thereof;
|
|
·
|
insurance
companies;
|
|
·
|
regulated
investment companies;
|
|
·
|
real
estate investment trusts;
|
|
·
|
certain
expatriates or former long-term residents of the United
States;
|
|
·
|
persons
that actually or constructively own 5% or more of China Ceramics voting
shares;
|
|
·
|
persons
that acquired China Ceramics securities pursuant to an exercise of
employee share options, in connection with employee share incentive plans
or otherwise as compensation;
|
|
·
|
persons
that hold China Ceramics securities as part of a straddle, constructive
sale, hedging, conversion or other integrated transaction;
or
|
|
·
|
persons
whose functional currency is not the U.S.
dollar.
|
This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, state, local or non-U.S. tax laws, or, except as
discussed herein, any tax reporting obligations of a holder of China Ceramics'
securities. Additionally, this discussion does not consider the tax treatment of
partnerships or other pass-through entities or persons who hold China Ceramics
securities through such entities. If a partnership (or other entity classified
as a partnership for U.S. federal income tax purposes) is the beneficial owner
of China Ceramics securities, the U.S. federal income tax treatment of a partner
in the partnership will generally depend on the status of the partner and the
activities of the partnership. This discussion also assumes that any
distribution made (or deemed made) in respect to the China Ceramics securities
and any consideration received (or deemed received) by a holder in consideration
for the sale or other disposition of such securities will be in U.S.
dollars.
60
China
Ceramics has not sought, and will not seek, a ruling from the Internal Revenue
Service, or “IRS,” or an opinion of counsel, as to any U.S. federal income tax
consequence described herein. The IRS may disagree with the description herein,
and its determination may be upheld by a court. Moreover, there can be no
assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements in this
discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS’
SECURITIES. EACH HOLDER OF CHINA CERAMICS SECURITIES IS URGED TO CONSULT ITS OWN
TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS SECURITIES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NON-U.S. TAX
LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Tax
Treatment of China Ceramics After the Redomestication and the Business
Combination
Section
7874(b) of the Code generally provides that a corporation organized outside the
United States that acquires, directly or indirectly, pursuant to a plan or
series of related transactions, substantially all of the assets of a corporation
organized in the United States will be treated as a domestic corporation for
U.S. federal income tax purposes if shareholders of the acquired corporation, by
reason of owning shares of the acquired corporation, own at least 80% of either
the voting power or the value of the stock of the acquiring corporation after
the acquisition. Under temporary regulations recently promulgated under Section
7874, a warrant holder of either the acquired corporation or the acquiring
corporation is treated for this purpose as owning stock of the acquired
corporation or the acquiring corporation, as the case may be, with a value equal
to the excess of the value of the shares underlying the warrant over the
exercise price of the warrant. If Section 7874(b) were to apply to the
Redomestication, then, among other things, China Ceramics, as the surviving
entity, would be subject to U.S. federal income tax on its worldwide taxable
income following the Redomestication and Business Combination as if it were a
domestic corporation.
After the
completion of the Business Combination, which occurred immediately after and as
part of the same plan as the Redomestication, the former stockholders of CHAC
(including warrant holders treated as owning stock of CHAC pursuant to the
temporary regulations under Section 7874) should be considered as owning, by
reason of owning (or being treated as owning) stock of CHAC, less than 80% of
the voting power and the value of the shares of China Ceramics (including any
warrants treated as shares of China Ceramics pursuant to the temporary
regulations promulgated under Section 7874). Accordingly, Section 7874(b) should
not apply to treat China Ceramics as a domestic corporation for U.S. federal
income tax purposes. However, due to the absence of full guidance on how the
rules of Section 7874(b) apply to the transactions completed pursuant to the
Redomestication and Business Combination, this result is not entirely free from
doubt. If, for example, the Redomestication were ultimately determined for
purposes of Section 7874(b) as having occurred prior to, and separate from, the
Business Combination for U.S. federal income tax purposes, the share ownership
threshold for applicability of Section 7874(b) generally would be satisfied (and
China Ceramics would be treated as a domestic corporation for U.S. federal
income tax purposes) because the former stockholders of CHAC (including warrant
holders treated as owning stock of CHAC), by reason of owning (or being treated
as owning) stock of CHAC, would own all of the shares (including any warrants
treated as shares) of China Ceramics immediately after the Redomestication.
Although normal “step transaction” tax principles support the view that the
Redomestication and the Business Combination should be viewed together for
purposes of determining whether Section 7874(b) is applicable, because of the
absence of guidance under Section 7874(b) directly on point, this result is not
entirely free from doubt. The balance of this discussion assumes that China
Ceramics will be treated as a foreign corporation for U.S. federal income tax
purposes.
61
U.S.
Holders
Taxation
of Distributions Paid on Shares
Subject
to the passive foreign investment company, or “PFIC,” rules discussed below, a
U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on the shares of China Ceramics. A
cash distribution on such shares generally will be treated as a dividend for
U.S. federal income tax purposes to the extent the distribution is paid out of
current or accumulated earnings and profits of China Ceramics (as determined
under U.S. federal income tax principles). Such dividend generally will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations in respect of dividends received from other U.S. corporations. Such
distributions in excess of such earnings and profits generally will be applied
against and reduce the U.S. Holder’s basis in its shares in China Ceramics and,
to the extent in excess of such basis, will be treated as gain from the sale or
exchange of such shares.
With
respect to non-corporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be subject to U.S. federal income tax at the lower
applicable long-term capital gains tax rate (see “–Taxation on the Disposition
of Shares and Warrants” below) provided that (1) the shares of China Ceramics
are readily tradable on an established securities market in the United States
or, in the event China Ceramics is deemed to be a Chinese “resident enterprise”
under the EIT Law, China Ceramics is eligible for the benefits of the Agreement
between the Government of the United States of America and the Government of the
People’s Republic of China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income, or the “U.S.-PRC Tax
Treaty,” (2) China Ceramics is not a PFIC, as discussed below, for either the
taxable year in which the dividend was paid or the preceding taxable year, and
(3) certain holding period requirements are met. Under published IRS authority,
shares are considered for purposes of clause (1) above to be readily tradable on
an established securities market in the United States only if they are listed on
certain exchanges, which presently do not include the Over-the-Counter Bulletin
Board. Because the shares of China Ceramics currently are quoted only on the
Over-the-Counter Bulletin Board and will not, therefore, be treated as readily
tradable on an established securities market in the United States, any dividends
paid on the shares of China Ceramics currently will not qualify for the lower
rate unless China Ceramics is deemed to be a Chinese “resident enterprise” under
the EIT Law and is eligible for the benefits of the U.S.-PRC Tax Treaty. U.S.
Holders should consult their own tax advisors regarding the availability of the
lower rate for any dividends paid with respect to the shares of China
Ceramics.
If a PRC
tax applies to dividends paid to a U.S. Holder on the shares of China Ceramics,
such tax should be treated as a foreign tax eligible for a deduction from such
holder’s U.S. federal taxable income or a foreign tax credit against such
holder’s U.S. federal income tax liability (subject to applicable conditions and
limitations). In addition, such U.S. Holder should be entitled to certain
benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident
of the United States for purposes of the U.S.-PRC Tax Treaty. U.S. Holders
should consult their own tax advisors regarding the deduction or credit for any
such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.
Possible
Constructive Distributions
The terms
of a warrant provide for an adjustment to the number of shares for which the
warrant may be exercised or to the exercise price of the warrant in certain
events. If an adjustment is made to the number of shares for which a warrant may
be exercised or to the exercise price of a warrant, the adjustment may, under
certain circumstances, result in a constructive distribution that could be
taxable as a dividend to the U.S. Holder of the warrant. Conversely, the absence
of an appropriate anti-dilution adjustment (e.g., not adjusting the exercise
price and number of shares issuable on exercise of the warrant for issuances of
shares at a price below the warrant exercise price and below market) may result
in a constructive distribution that could be taxable as a dividend to the U.S.
Holders of the shares of China Ceramics.
Taxation
on the Disposition of Shares and Warrants
Upon a
sale or other taxable disposition of the shares or warrants in China Ceramics,
and subject to the PFIC rules discussed below, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized and the U.S. Holder’s adjusted tax basis in the shares or
warrants. See “–Exercise or Lapse of a Warrant” below for a discussion regarding
a U.S. Holder’s basis in shares acquired pursuant to the exercise of a
warrant.
62
The
regular U.S. federal income tax rate on capital gains recognized by U.S. Holders
generally is the same as the regular U.S. federal income tax rate on ordinary
income, except that long-term capital gains recognized by non-corporate U.S.
Holders are generally subject to U.S. federal income tax at a maximum regular
rate of 15% for taxable years beginning before January 1, 2011 (and 20%
thereafter). Capital gain or loss will constitute long-term capital gain or loss
if the U.S. Holder’s holding period for the shares or warrants exceeds one year.
The deductibility of capital losses is subject to various
limitations.
If a PRC
tax applies to any gain from the disposition of the shares or warrants in China
Ceramics by a U.S. Holder, such tax should be treated as a foreign tax eligible
for a deduction from such holder’s U.S. federal taxable income or a foreign tax
credit against such holder’s U.S. federal income tax liability (subject to
applicable conditions and limitations). In addition, such U.S. Holder should be
entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is
considered a resident of the United States for purposes of the U.S.-PRC Tax
Treaty. U.S. Holders should consult their own tax advisors regarding the
deduction or credit for any such PRC tax and their eligibility for the benefits
of the U.S.-PRC Tax Treaty.
Additional
Taxes After 2012
For
taxable years beginning after December 31, 2012, certain U.S. Holders that are
individuals, estates or trusts and whose income exceeds certain thresholds
generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, among other things, dividends on, and capital gains from the
sale or other taxable disposition of, China Ceramics securities, subject to
certain limitations and exceptions. U.S. Holders should consult their own
tax advisors regarding the effect, if any, of such tax on their ownership and
disposition of China Ceramics securities.
Exercise
or Lapse of a Warrant
Subject
to the PFIC rules discussed below, a U.S. Holder generally will not recognize
gain or loss upon the exercise of a warrant for cash. Shares acquired pursuant
to the exercise of a warrant for cash generally will have a tax basis equal to
the U.S. Holder’s tax basis in the warrant, increased by the amount paid to
exercise the warrant. The holding period of such shares generally would begin on
the day after the date of exercise of the warrant. If a warrant is allowed to
lapse unexercised, a U.S. Holder generally will recognize a capital loss equal
to such holder’s tax basis in the warrant.
Passive
Foreign Investment Company Rules
A foreign
(i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income
in a taxable year of the foreign corporation, including its pro rata share of
the gross income of any corporation in which it is considered to own at least
25% of the shares by value, is passive income. Alternatively, a foreign
corporation will be a PFIC if at least 50% of its assets in a taxable year of
the foreign corporation, ordinarily determined based on fair market value and
averaged quarterly over the year, including its pro rata share of the assets of
any corporation in which it is considered to own at least 25% of the shares by
value, are held for the production of, or produce, passive income. Passive
income generally includes dividends, interest, rents and royalties (other than
certain rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets.
Based
on the expected composition of the assets and income of China Ceramics and its
subsidiaries for China Ceramics’ 2009 taxable year, China Ceramics does
not believe that it will be treated as a PFIC for such year.
However,
since China Ceramics has not performed a definitive analysis as to its PFIC
status for its 2009 taxable year, there can be no assurance with
respect to its PFIC status for its 2009 taxable year.
There also can
be no assurance with respect to the status of China Ceramics as a PFIC for its
current taxable year or any future taxable year.
If China
Ceramics is determined to be a PFIC for any taxable year (or portion thereof)
that is included in the holding period of a U.S. Holder of China Ceramics’
shares or warrants and, in the case of China Ceramics’ shares, the U.S. Holder
did not make either a timely qualified electing fund (“QEF”) election for China
Ceramics’ first taxable year as a PFIC in which the U.S. Holder held (or was
deemed to hold) shares, or a mark-to-market election, as described below, such
holder generally will be subject to special rules with respect to:
63
|
·
|
any
gain recognized by the U.S. Holder on the sale or other disposition of its
shares or warrants; and
|
|
·
|
any
“excess distribution” made to the U.S. Holder (generally, any
distributions to such U.S. Holder during a taxable year of the U.S. Holder
that are greater than 125% of the average annual distributions received by
such U.S. Holder in respect of the shares of China Ceramics during the
three preceding taxable years of such U.S. Holder or, if shorter, such
U.S. Holder’s holding period for the
shares).
|
Under
these rules:
|
·
|
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
the U.S. Holder’s holding period for the shares or
warrants;
|
|
·
|
the
amount allocated to the U.S. Holder’s taxable year in which the U.S.
Holder recognized the gain or received the excess distribution or to the
period in the U.S. Holder’s holding period before the first day of the
first taxable year of China Ceramics in which China Ceramics was a PFIC
will be taxed as ordinary income;
|
|
·
|
the
amount allocated to other taxable years (or portions thereof) of the U.S.
Holder and included in its holding period will be taxed at the highest tax
rate in effect for that year and applicable to the U.S. Holder;
and
|
|
·
|
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such other
taxable year of the U.S.
Holder.
|
In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to its shares in China Ceramics by making a timely QEF election to
include in income its pro rata share of China Ceramics’ net capital gains (as
long-term capital gain) and other earnings and profits (as ordinary income), on
a current basis, in each case whether or not distributed, in the taxable year of
the U.S. Holder in which or with which China Ceramics’ taxable year ends. A U.S.
Holder may make a separate election to defer the payment of taxes on
undistributed income inclusions under the QEF rules, but if deferred, any such
taxes will be subject to an interest charge.
A U.S.
Holder may not make a QEF election with respect to its warrants. As a result, if
a U.S. Holder sells or otherwise disposes of a warrant to purchase shares of
China Ceramics (other than upon exercise of a warrant), any gain recognized
generally will be subject to the special tax and interest charge rules treating
the gain as an excess distribution, as described above, if China Ceramics were a
PFIC at any time during the period the U.S. Holder held the warrants. If a U.S.
Holder that exercises such warrants properly makes a QEF election with respect
to the newly acquired shares in China Ceramics (or has previously made a QEF
election with respect to its shares in China Ceramics), the QEF election will
apply to the newly acquired shares, but the adverse tax consequences relating to
PFIC shares, adjusted to take into account the current income inclusions
resulting from the QEF election, will continue to apply with respect to such
newly acquired shares (which generally will be deemed to have a holding period
for the purposes of the PFIC rules that includes the period the U.S. Holder held
the warrants), unless the U.S. Holder makes a purging election. The purging
election creates a deemed sale of such shares at their fair market value. The
gain recognized by the purging election will be subject to the special tax and
interest charge rules treating the gain as an excess distribution, as described
above. As a result of the purging election, the U.S. Holder will have a new
basis and holding period in the shares acquired upon the exercise of the
warrants for purposes of the PFIC rules.
The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the tax year to which the election relates.
Retroactive QEF elections generally may be made only by filing a protective
statement with such return and if certain other conditions are met or with the
consent of the IRS.
64
In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from China Ceramics. Upon request from a U.S. Holder, China
Ceramics will endeavor to provide to the U.S. Holder, no later than 90 days
after the request, such information as the IRS may require, including a PFIC
annual information statement, in order to enable the U.S. Holder to make and
maintain a QEF election. However, there is no assurance that China Ceramics will
have timely knowledge of its status as a PFIC in the future or of the required
information to be provided.
If a U.S.
Holder has made a QEF election with respect to its shares in China Ceramics, and
the special tax and interest charge rules do not apply to such shares (because
of a timely QEF election for China Ceramics’ first taxable year as a PFIC in
which the U.S. Holder holds (or is deemed to hold) such shares or a purge of the
PFIC taint pursuant to a purging election, as described above), any gain
recognized on the appreciation of such shares generally will be taxable as
capital gain and no interest charge will be imposed. As discussed above, U.S.
Holders of a QEF are currently taxed on their pro rata shares of the QEF’s
earnings and profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously included in
income generally should not be taxable as a dividend to those U.S. Holders who
made a QEF election. The tax basis of a U.S. Holder’s shares in a QEF will be
increased by amounts that are included in income, and decreased by amounts
distributed but not taxed as dividends, under the above rules. Similar basis
adjustments apply to property if by reason of holding such property the U.S.
Holder is treated under the applicable attribution rules as owning shares in a
QEF.
Although
a determination as to China Ceramics’ PFIC status will be made annually, an
initial determination that it is a PFIC generally will apply for subsequent
years to a U.S. Holder who held shares or warrants of China Ceramics while it
was a PFIC, whether or not it met the test for PFIC status in those subsequent
years. A U.S. Holder who makes the QEF election discussed above for China
Ceramics’ first taxable year as a PFIC in which the U.S. Holder holds (or is
deemed to hold) shares in China Ceramics, however, will not be subject to the
PFIC tax and interest charge rules discussed above in respect to such shares. In
addition, such U.S. Holder will not be subject to the QEF inclusion regime with
respect to such shares for any taxable year of China Ceramics that ends within
or with a taxable year of the U.S. Holder and in which China Ceramics is not a
PFIC. On the other hand, if the QEF election is not effective for each of the
taxable years of China Ceramics in which China Ceramics is a PFIC and the U.S.
Holder holds (or is deemed to hold) shares in China Ceramics, the PFIC rules
discussed above will continue to apply to such shares unless such holder makes a
purging election, as described above, and pays the tax and interest charge with
respect to the gain inherent in such shares attributable to the pre-QEF election
period.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that
are treated as marketable stock, the U.S. Holder may make a mark-to-market
election with respect to such shares for such taxable year. If the U.S. Holder
makes a valid mark-to-market election for the first taxable year of the U.S.
Holder in which the U.S. Holder holds (or is deemed to hold) shares in China
Ceramics and for which China Ceramics is determined to be a PFIC, such holder
generally will not be subject to the PFIC rules described above in respect to
its shares. Instead, in general, the U.S. Holder will include as ordinary income
each year the excess, if any, of the fair market value of its shares at the end
of its taxable year over the adjusted basis in its shares. The U.S. Holder also
will be allowed to take an ordinary loss in respect of the excess, if any, of
the adjusted basis of its shares over the fair market value of its shares at the
end of its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s
basis in its shares will be adjusted to reflect any such income or loss amounts,
and any further gain recognized on a sale or other taxable disposition of the
shares will be treated as ordinary income. Currently, a mark-to-market election
may not be made with respect to warrants.
The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission or on a foreign exchange or market that the IRS determines
has rules sufficient to ensure that the market price represents a legitimate and
sound fair market value. The Over-the-Counter Bulletin Board currently is not
considered to be a national securities exchange that would allow a U.S. Holder
to make a mark-to-market election. Because the shares of China Ceramics are
currently quoted only on the Over-the-Counter Bulletin Board, such shares
currently may not qualify as marketable stock for purposes of the election. U.S.
Holders should consult their own tax advisors regarding the availability and tax
consequences of a mark-to-market election in respect to the shares of China
Ceramics under their particular circumstances.
65
If China
Ceramics is a PFIC and, at any time, has a foreign subsidiary that is classified
as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares
of such lower-tier PFIC, and generally could incur liability for the deferred
tax and interest charge described above if China Ceramics receives a
distribution from, or disposes of all or part of its interest in, the lower-tier
PFIC. Upon request, China Ceramics will endeavor to cause any lower-tier PFIC to
provide to a U.S. Holder no later than 90 days after the request the information
that may be required to make or maintain a QEF election with respect to the
lower- tier PFIC. However, there is no assurance that China Ceramics will have
timely knowledge of the status of any such lower-tier PFIC or will be able to
cause the lower-tier PFIC to provide the required information. U.S. Holders are
urged to consult their own tax advisors regarding the tax issues raised by
lower-tier PFICs.
If a
U.S. Holder owns (or is deemed to own) shares in a PFIC during any taxable year
of the U.S. Holder, such holder may have to file an IRS Form 8621 (whether or
not a QEF election or mark-to-market election is made).
The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of shares and warrants in China Ceramics should
consult their own tax advisors concerning the application of the PFIC rules to
such shares and warrants under their particular circumstances.
Tax
Consequences to Non-U.S. Holders of Shares and Warrants of China
Ceramics
Dividends
(including constructive dividends) paid or deemed paid to a Non-U.S. Holder in
respect to its securities in China Ceramics generally will not be subject to
U.S. federal income tax, unless the dividends are effectively connected with the
Non-U.S. Holder’s conduct of a trade or business within the United States (and,
if required by an applicable income tax treaty, are attributable to a permanent
establishment or fixed base that such holder maintains in the United
States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of shares or
warrants in China Ceramics unless such gain is effectively connected with its
conduct of a trade or business in the United States (and, if required by an
applicable income tax treaty, is attributable to a permanent establishment or
fixed base that such holder maintains in the United States) or the Non-U.S.
Holder is an individual who is present in the United States for 183 days or more
in the taxable year of sale or other disposition and certain other conditions
are met (in which case, such gain from United States sources generally is
subject to tax at a 30% rate or a lower applicable tax treaty
rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to
U.S.
federal income tax (but not the Medicare contribution tax) at the same regular
U.S. federal income tax rates applicable to
a U.S. Holder and, in the
case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, may also be subject to an additional branch profits tax at a 30% rate
or a lower applicable tax treaty rate.
The U.S.
federal income tax treatment of a Non-U.S. Holder’s exercise of a warrant, or
the lapse of a warrant held by a Non-U.S. Holder, generally will correspond to
the U.S. federal income tax treatment of the exercise or lapse of a warrant by a
U.S. Holder, as described under “U.S. Holders–Exercise or Lapse of a Warrant,”
above.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes should apply
to distributions made on the shares of China Ceramics within the United States
to a non-corporate U.S. Holder and to the proceeds from sales and other
dispositions of shares or warrants of China Ceramics by a non-corporate U.S.
Holder to or through a U.S. office of a broker. Payments made (and sales and
other dispositions effected at an office) outside the United States will be
subject to information reporting in limited circumstances.
In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28%, generally will apply to dividends paid on the shares of China Ceramics to a
non-corporate U.S. Holder and the proceeds from sales and other dispositions of
shares or warrants of China Ceramics by a non-corporate U.S. Holder, in each
case who (a) fails to provide an accurate taxpayer identification number; (b) is
notified by the IRS that backup withholding is required; or (c) in certain
circumstances, fails to comply with applicable certification
requirements.
66
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular
circumstances.
F.
Dividends
and paying agents
Not
required.
G.
Statement
by experts
Not
required.
H.
Documents
on display
Documents
concerning us that are referred to in this document may be inspected at Junbing
Industrial Zone, Anhai, Jinjiang City, Fujian Province, PRC.
In
addition, we will file annual reports and other information with the Securities
and Exchange Commission. We will file annual reports on Form 20-F and submit
other information under cover of Form 6-K. As a foreign private issuer, we are
exempt from the proxy requirements of Section 14 of the Exchange Act and our
officers, directors and principal shareholders will be exempt from the insider
short-swing disclosure and profit recovery rules of Section 16 of the Exchange
Act. Annual reports and other information we file with the Commission may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or any
part thereof may be obtained from such offices upon payment of the prescribed
fees. You may call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms and you can request copies of the
documents upon payment of a duplicating fee, by writing to the Commission. In
addition, the Commission maintains a web site that contains reports and other
information regarding registrants (including us) that file electronically with
the Commission which can be assessed at http://www.sec.gov.
I.
Subsidiary
Information
Not
required.
ITEM
11.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk
China
Ceramics’ exposure to interest rate risk primarily relates to its outstanding
debts and interest income generated by excess cash, which is mostly held in
interest-bearing bank deposits. China Ceramics’ has not used derivative
financial instruments in its investment portfolio. Interest-earning instruments
carry a degree of interest rate risk. As of December 31, 2009, China Ceramics’
total outstanding loans for the continuing operations amounted to RMB26.5
million with interest rates in the range of 5.84% to 6.90% per annum. China
Ceramics has not been exposed, nor does it anticipate being exposed, to material
risks due to changes in market interest rates.
67
Foreign
Currency Risk
China
Ceramics currently does not have any foreign exchange exposure as its sales and
purchases are predominantly denominated in RMB. However, in the future, a
proportion of its sales may be denominated in other currencies as China Ceramics
expands into overseas markets. In such circumstances, China Ceramics anticipates
its primary market risk, if any, to be related to fluctuations in exchange
rates. Exchange rate risk may arise if the China Ceramics is required
to use different currencies for various aspects of its operations.
The
Renminbi’s exchange rate with the U.S. dollar and other currencies is affected
by, among other things, changes in China’s political and economic conditions.
The exchange rate for conversion of Renminbi into foreign currencies is heavily
influenced by intervention in the foreign exchange market by the People’s Bank
of China. From 1995 until July 2005, the People’s Bank of China intervened in
the foreign exchange market to maintain an exchange rate of approximately 8.3
Renminbi per U.S. dollar. On July 21, 2005, the PRC government changed this
policy and began allowing modest appreciation of the Renminbi versus the U.S.
dollar. However, the Renminbi is restricted to a rise or fall of no more than
0.5% per day versus the U.S. dollar, and the People’s Bank of China continues to
intervene in the foreign exchange market to prevent significant short-term
fluctuations in the Renminbi exchange rate. Nevertheless, under China’s current
exchange rate regime, the Renminbi may appreciate or depreciate significantly in
value against the U.S. dollar in the medium to long term. There remains
significant international pressure on the PRC government to adopt a substantial
liberalization of its currency policy, which could result in a further and more
significant appreciation in the value of the Renminbi against the U.S.
dollar.
Very
limited hedging transactions are available in China to reduce China Ceramics’
exposure to exchange rate fluctuations. While China Ceramics may decide to enter
into hedging transactions in the future if it is exposed to foreign currency
risk, the availability and effectiveness of these hedging transactions may be
limited and it may not be able to successfully hedge its exposure at all. In
addition, China Ceramics’ currency exchange losses may be magnified by PRC
exchange control regulations that restrict its ability to convert Renminbi into
foreign currency.
ITEM
12.
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
required.
68
ITEM
13.
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
There has
been no default of any indebtedness nor is there any arrearage in the payment of
dividends.
ITEM
14.
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On
November 20, 2009, pursuant to the terms of a merger and stock purchase
agreement dated August 19, 2009, China Holdings Acquisition Corp. (“CHAC”), our
predecessor, merged with and into China Ceramics, resulting in the
Redomestication of China Holdings to the British Virgin Islands as China
Ceramics. At the time of the merger, each outstanding ordinary share of CHAC
converted automatically into one ordinary share of China Ceramics, and each
right to purchase ordinary shares in CHAC automatically converted into an
equivalent right to purchase shares in China Ceramics. Accordingly, the shares
and warrants became governed by China Ceramics’ Amended and Restated Memorandum
and Articles of Association. The rights and duties attaching to each ordinary
share remained substantially equivalent. Immediately following the merger and
Redomestication, China Ceramics acquired all of the outstanding securities of
Success Winner.
There are
no restrictions on working capital and no removal or substitution of assets
securing any class of our registered securities.
ITEM
15.
CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
regarding the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the December 31, 2009. Based on that
evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, have concluded that our disclosure controls and procedures as
of December 31, 2009 were effective.
Disclosure
controls and procedures are designed to provide that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Management’s
annual report on internal control over financial reporting
Our
internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by our board of directors to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that in
reasonable detail accurately reflect the transactions and dispositions of our
assets; provide reasonable assurance that transactions are recorded as necessary
to permit preparation of our financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with the authorization of our board of directors and
management; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation under the criteria established in Internal Control – Integrated
Framework, our management concluded that our internal control over financial
reporting was not effective as of December 31, 2009 because of the material
weakness in our internal control over financial reporting described
below.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
Although
we have recently engaged an external accounting advisory company to assist us in
handling certain nonroutine transactions and consolidations, management believes
that our corporate accounting personnel does not have adequate in-house
knowledge and experience of International Financial Reporting Standards (“IFRS”)
to identify, handle and review complex accounting and reporting issues, which,
in management's view, constitute a material weakness in our internal control
over financial reporting.
This
material weakness resulted in our inability to detect an accounting error where
we incorrectly recorded sales rebates and discounts as selling and distribution
expenses in the financial years ended December 31, 2009, 2008 and
2007. The identification of this error resulted in an adjustment of
RMB44,380,000 in revenues for the year ended December 31, 2009 and restatement
adjustments of RMB32,107,000 and RMB39,388,000 in revenues for the years ended
December 31, 2007 and 2008, respectively. This error was not detected
by our internal control procedures.
We
believe that the appointment of Mr. Bill Stulginsky, who has over thirty-six
years of public accounting experience and was a partner at
PricewaterhouseCoopers and predecessor firms for twenty four years prior to his
retirement, as the chairman of China Ceramics' audit committee will help
China Ceramics to strengthen its governing controls over financial
reporting.
In
addition, we plan to remediate the material weakness by providing relevant IFRS
trainings to the current corporate accounting team. The training
sessions will be organized to help our corporate accounting team become more
cognizant of the differences between IFRS and the generally accepted accounting
principles in the PRC, and enhance their awareness of new and emerging IFRS
pronouncements with potential impact over our financial
reporting.
Furthermore,
we plan to strengthen the information-sharing process between us and our
external accounting advisory consultants, with the goal of improving the
consultants' knowledge of our business and their capability to help us identify
accounting issues as they arise and make informed financial reporting
decisions.
We
will also implement more formal review procedures and documentation standards
for the accounting and monitoring of non-routine and complex transactions and
will continue to evaluate other measures to enhance the effectiveness of our
internal control over financial reporting.
69
Attestation
report of the registered public accounting firm
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.
Changes
in Internal Controls over Financial Reporting
Other
than the changes described above under the section entitled “–Management’s
annual report on internal control over financial reporting,” there were no
changes in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the year ended December 31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
It
should be noted that while our management believes that our disclosure controls
and procedures provide a reasonable level of assurance; our management does not
expect that our disclosure controls and procedures or internal financial
controls will prevent all errors or fraud. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
ITEM
16.
[RESERVED]
The
Company’s Board of Directors has determined that Mr. Bill Stulginsky is an audit
committee financial expert, and “independent” as that term is defined in the
NASDAQ listing standards.
China
Ceramics has adopted a Code of Business Conduct and Ethics that applies to its
directors, officers and employees, including China Ceramics’ principal executive
officer, principal financial officer, and principal accounting officer. A copy
of the Code of Business Conduct and Ethics is filed as an exhibit herewith, and
t
he
Company expects that the Code of Ethics will be available on its
new website,
http://www.cceramics.com,
in mid-June.
The
following table represents the approximate aggregate fees for services rendered
by Grant Thornton, PRC and Foo Kon Tan Grant Thornton
LLP, Singapore and McGladrey & Pullen, LLP for fiscal years ended
December 31, 2009 and 2008:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
RMB
|
RMB
|
|||||||
|
Audit
Fees
|
4,311,204 | 822,070 | ||||||
|
Audit
Related Fees
|
- | - | ||||||
|
Tax
Fees
|
41,045 | 48,736 | ||||||
|
All
Other Fees
|
- | - | ||||||
|
Total
Fees
|
4,352,249 | 870,806 | ||||||
70
Audit
Fees
Audit
fees paid to Foo Kon Tan Grant Thornton LLP, Singapore, consist of fees for the
USGAAS audit of Success Winner and its subsidiaries for the years ended December
31, 2006, 2007 and 2008, and fees for the review of Success Winner and its
subsidiaries' interim financial statement for the six-month period ended June
30, 2009.
Audit
fees paid to Grant Thornton, PRC, consist of fees for the PCAOB audit of Success
Winner and its subsidiaries for the years ended December 31, 2006, 2007 and
2008.
Audit
fees paid to McGladrey & Pullen, LLP for 2008 and 2009 consist of fees for
the audit for the year ended December 31, 2008 and for the period from June 22,
2007 (inception) to December 31, 2008 and fees for the review of interim
financial statements including 10-Q filings for 2008 and
2009.
Audit
Related Fees
There
were no audit related fees.
Tax
Fees
The
aggregate fees billed by McGladrey & Pullen, LLP for professional services
rendered for tax compliance and tax advice for China Ceramics’ Consolidation of
Financial Position at December 31, 2008, and 2009 were $7,000 and $6,000,
respectively.
All
Other Fees
There
were no fees billed by Grant Thornton for other professional services rendered
during fiscal years ended December 31, 2009 and 2008.
Pre-Approval
of Services
Our audit
committee evaluated and approved in advance the scope and cost of the engagement
of an auditor before the auditor rendered its audit and non-audit
services.
None.
Issuer
Purchases of Equity Securities
|
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price Paid Per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
Purchased Under the Plans or Programs
|
||||||||||||
|
November
20, 2009
(1)
|
8,813,300 | $ | 9.79 | 8,813,300 | 0 | |||||||||||
|
November
20, 2009
(2)
|
2,379,849 | $ | 9.79 | 2,379,849 | 0 | |||||||||||
(1) On
November 20, 2009, in connection with the acquisition by China Ceramics of
Success Winner, CHAC closed on certain agreements which had been publicly
announced in Current Reports on Form 8-K filed by CHAC on November 17, 2009,
November 19, 2009, November 20, 2009 to purchase 8,813,300 shares for a purchase
price of $9.97 per share (an aggregate purchase price of approximately $86.3
million) in transactions intended to assure the successful completion of the
Business Combination.
(2) On
November 20, 2009, in connection with the Business Combination, 2,379,849 shares
were redeemed for a pro rata portion of the CHAC’s trust account, as publicly
announced in a Proxy Statement/Prospectus dated November 10, 2009 and filed by
China Ceramics on November 13, 2009.
Not
applicable
Not
applicable.
71
ITEM
17.
FINANCIAL
STATEMENTS
We have
elected to provide financial statements pursuant to Item 18.
ITEM
18.
FINANCIAL
STATEMENTS
The
financial statements are filed as part of this annual report beginning on page
F-1.
ITEM
19.
EXHIBITS
|
Exhibit
No.
|
Description
|
|
|
1.1
|
Amended
and Restated Memorandum and Articles of Association of China
Ceramics Co., Ltd.
(1)
|
|
|
1.2
|
Memorandum
and Articles of Association of Success Winner Limited
(2)
|
|
|
1.3
|
Memorandum
and Articles of Association of Stand Best Creation Limited
(2)
|
|
|
1.4
|
Operation
Charter of Jinjiang Hengda Ceramics Co., Ltd.
(2)
|
|
|
2.1
|
Specimen
Unit Certificate
(3)
|
|
|
2.2
|
Specimen
Common Stock Certificate
(3)
|
|
|
2.3
|
Specimen
Public Warrant Certificate
(3)
|
|
|
2.4
|
Warrant
Agreement, dated as of November 15, 2007, by and between CHAC and
Continental Stock Transfer & Trust Company
(4)
|
|
|
3.1
|
Form
of Voting Agreement
(2)
|
|
|
4.1
|
Merger
and Stock Purchase Agreement among CHAC, China Ceramics Co., Ltd., Hengda,
Success Winner and the Seller
(2)
|
|
|
4.2
|
Form
of Registration Rights Agreement among CHAC and the founders
(3)
|
|
|
4.3
|
Form
of Earn-Out Escrow Agreement
(2)
|
|
|
4.4
|
Form
of Indemnity Escrow Agreement
(2)
|
|
|
4.6
|
Form
of Lock-Up Agreement for CHAC founders
(2)
|
|
|
4.7
|
Form
of Lock-Up Agreement
(2)
|
|
|
4.8
|
Acquisition
Agreement dated November 19, 2009
|
|
|
4.9
|
Administrative
Services Agreement by and between China Ceramics Co., Ltd. and Stuart
Management Co., dated December 1, 2009
|
|
|
8.1
|
List
of Subsidiaries
(5)
|
|
|
11.1
|
Code
of Business Conduct and Ethics
|
|
|
12.1
|
Certification
of the Chief Executive Officer (Principal Executive Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
|
|
12.2
|
Certification
of the Chief Financial Officer (Principal Financial Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
|
|
13.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 80
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
(1)
|
Incorporated
by reference to Annexes C and D of China Ceramics’ Prospectus on Form
424B3 filed with the SEC on November 13,
2009.
|
|
(2)
|
Incorporated
by reference to China Ceramics’ Registration Statement on Form F-4 (File
No. 333-161557).
|
|
(3)
|
Incorporated
by reference to exhibits of the same number filed with CHAC’s Registration
Statement on Form F-1 or amendments thereto (File No.
333-145085).
|
|
(4)
|
Incorporated
by reference to CHAC’s Form 8-K, dated November 21,
2007.
|
|
(5)
|
Incorporated
by reference to exhibits of the same number filed with China Ceramics’
Registration Statement on Form F-1 (File No.
333-164784).
|
72
SIGNATURES
The
Registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
| CHINA CERAMICS CO., LTD | |||
|
May
17, 2010
|
By:
|
/s/ Huang Jia Dong | |
| Name: Huang Jia Dong | |||
| Title: Chief Executive Officer (Principal Executive Officer) | |||
|
May
17, 2010
|
By:
|
/s/ Hen Man Edmund | |
| Name: Hen Man Edmund | |||
| Title: Chief Financial Officer (Principal Financial Officer) | |||
73
China
Ceramics Co., Ltd. and Its Subsidiaries
Index
to Consolidated Financial Statements
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2009,
2008 and 2007
|
F-2
|
|
|
Consolidated
Statements of Financial Position as of December 31, 2009, 2008 and
2007
|
F-3
|
|
|
Consolidated
Statements of Changes in Equity for the years ended December 31, 2009,
2008 and 2007
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
F-5
|
|
|
Notes
to the Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Shareholders
China
Ceramics Co., Ltd.
We
have audited the accompanying consolidated statements of financial positions of
China Ceramics Co., Ltd and its subsidiaries as of December 31, 2009, 2008 and
2007, and the related consolidated statements of comprehensive income, changes
in equity and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial positions of China Ceramics Co., Ltd.
and its subsidiaries as of December 31, 2009, 2008 and 2007, and the results of
its operations and cash flows for each of the years then ended in conformity
with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
As
discussed in Note 4, the accompanying consolidated statements of comprehensive
income for 2008 and 2007 have been restated.
/s/
GRANT THORNTON
Shanghai,
PRC
May
17, 2010
F-1
China
Ceramics Co., Ltd. and Its Subsidiaries
Consolidated
Statements of Comprehensive Income
|
For
the year ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
(restated)
|
(restated)
|
|||||||||||||||
|
Revenue
|
6
|
835,747 | 737,182 | 617,863 | ||||||||||||
|
Cost
of sales
|
(582,530 | ) | (533,330 | ) | (441,940 | ) | ||||||||||
|
Gross
profit
|
253,217 | 203,852 | 175,923 | |||||||||||||
|
Other
income
|
6
|
3,735 | 2,701 | 2,339 | ||||||||||||
|
Selling
and distribution expenses
|
(6,912 | ) | (6,620 | ) | (6,059 | ) | ||||||||||
|
Administrative
expenses
|
(10,088 | ) | (9,932 | ) | (6,158 | ) | ||||||||||
|
Merger
costs
|
7
|
(26,429 | ) | - | - | |||||||||||
|
Finance
costs
|
8
|
(1,375 | ) | (941 | ) | (576 | ) | |||||||||
|
Profit
before taxation
|
9
|
212,148 | 189,060 | 165,469 | ||||||||||||
|
Income
tax expense
|
10
|
(59,287 | ) | (24,027 | ) | (19,863 | ) | |||||||||
|
Profit
attributable to shareholders
|
152,861 | 165,033 | 145,606 | |||||||||||||
|
Other
comprehensive income
|
||||||||||||||||
|
Exchange
loss on translation of financial statements of foreign
operations
|
(238 | ) | - | - | ||||||||||||
|
Total
comprehensive income for the year
|
152,623 | 165,033 | 145,606 | |||||||||||||
|
Earnings
per share for profit attributable to shareholders during the
year
|
||||||||||||||||
|
-
Basic (RMB)
|
11
|
24.47 | 28.73 | 25.35 | ||||||||||||
|
-
Diluted (RMB)
|
11
|
23.65 | 28.73 | 25.35 | ||||||||||||
The
annexed notes form an integral part of and
should be
read in conjunction with these Consolidated Financial Statements
F-2
China
Ceramics Co., Ltd. and Its Subsidiaries
|
As
at December 31,
|
||||||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
ASSETS
AND LIABILITIES
|
||||||||||||||||
|
Non-current
assets
|
||||||||||||||||
|
Property,
plant and equipment
|
12
|
64,184 | 72,172 | 80,766 | ||||||||||||
|
Land
use rights
|
13
|
165 | 168 | 172 | ||||||||||||
| 64,349 | 72,340 | 80,938 | ||||||||||||||
|
Current
assets
|
||||||||||||||||
|
Inventories
|
14
|
114,658 | 131,562 | 156,244 | ||||||||||||
|
Trade
receivables
|
15
|
270,840 | 195,848 | 181,236 | ||||||||||||
|
Other
receivables
|
16
|
149,268 | 3,364 | 3,364 | ||||||||||||
|
Cash
and bank balances
|
17
|
150,121 | 51,606 | 18,507 | ||||||||||||
| 684,887 | 382,380 | 359,351 | ||||||||||||||
|
Current
liabilities
|
||||||||||||||||
|
Trade
payables
|
18
|
126,251 | 92,888 | 137,948 | ||||||||||||
|
Accrued
liabilities and other payables
|
19
|
74,749 | 90,948 | 56,526 | ||||||||||||
|
Interest-bearing
bank borrowings
|
20
|
26,500 | 12,300 | 9,500 | ||||||||||||
|
Income
tax payable
|
16,639 | 5,133 | 5,443 | |||||||||||||
| 244,139 | 201,269 | 209,417 | ||||||||||||||
|
Net
current assets
|
440,748 | 181,111 | 149,934 | |||||||||||||
|
Net
assets
|
505,097 | 253,451 | 230,872 | |||||||||||||
|
EQUITY
|
||||||||||||||||
|
Share
capital
|
21
|
61 | 0 | * | 58,980 | |||||||||||
|
Reserves
|
22
|
505,036 | 253,451 | 171,892 | ||||||||||||
|
Total
shareholder’s equity
|
505,097 | 253,451 | 230,872 | |||||||||||||
* Amount less than RMB 1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Consolidated Financial Statements
F-3
China
Ceramics Co., Ltd. and Its Subsidiaries
Consolidated
Statements of Changes in Equity
|
Share
capital
|
Share
premium
|
Reverse
recapitalization reserve
|
Merger
reserve
|
Share-based
payment reserve
|
Statutory
reserve
|
Retained
earnings
|
Currency
translation reserve
|
Total
Equity
|
||||||||||||||||||||||||||||
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
RMB
’
000
|
||||||||||||||||||||||||||||
|
(Note 21)
|
(Note
22
(e))
|
(Note
22
(c))
|
(Note
22
d))
|
(Note
22
(a))
|
(Note
22
(b))
|
|||||||||||||||||||||||||||||||
|
Balance
at January 1, 2007
|
58,980 | - | - | - | - | 26,286 | - | - | 85,266 | |||||||||||||||||||||||||||
|
Total
comprehensive income for the year
|
- | - | - | - | - | - | 145,606 | - | 145,606 | |||||||||||||||||||||||||||
|
Transfer
to statutory reserve
|
- | - | - | - | - | 3,204 | (3,204 | ) | - | - | ||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
58,980 | - | - | - | - | 29,490 | 142,402 | - | 230,872 | |||||||||||||||||||||||||||
|
Total
comprehensive income for the year
|
- | - | - | - | - | - | 165,033 | - | 165,033 | |||||||||||||||||||||||||||
|
Arising
from Reorganisation
|
(58,980 | ) | - | - | 58,980 | - | - | - | - | - | ||||||||||||||||||||||||||
|
Dividends
(Note 23)
|
- | - | - | - | - | - | (142,454 | ) | - | (142,454 | ) | |||||||||||||||||||||||||
|
Transactions
with owners
|
(58,980 | ) | - | - | 58,980 | - | - | (142,454 | ) | - | (142,454 | ) | ||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
0 | * | - | - | 58,980 | - | 29,490 | 164,981 | - | 253,451 | ||||||||||||||||||||||||||
|
Arising
from Reorganisation
|
- | - | - | 9 | - | - | - | - | 9 | |||||||||||||||||||||||||||
|
Recapitalization
of Company
|
61 | 592,088 | (507,235 | ) | - | - | - | - | - | 84,914 | ||||||||||||||||||||||||||
|
Equity-settled
share-based payment
|
- | (84,200 | ) | - | - | 98,300 | - | - | - | 14,100 | ||||||||||||||||||||||||||
|
Transactions
with owners
|
61 | 507,888 | (507,235 | ) | 9 | 98,300 | - | - | - | 99,023 | ||||||||||||||||||||||||||
|
Net
profit for the year
|
- | - | - | - | - | - | 152,861 | - | 152,861 | |||||||||||||||||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||||||||||||||
|
- Exchange
loss on translation of financial statements of foreign
operations
|
- | - | - | - | - | - | - | (238 | ) | (238 | ) | |||||||||||||||||||||||||
|
Total
comprehensive income for the year
|
- | - | - | - | - | - | 152,861 | (238 | ) | 152,623 | ||||||||||||||||||||||||||
|
Transfer
to statutory reserve
|
- | - | - | - | - | 10,242 | (10,242 | ) | - | - | ||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
61 | 507,888 | (507,235 | ) | 58,989 | 98,300 | 39,732 | 307,600 | (238 | ) | 505,097 | |||||||||||||||||||||||||
* Amount
less than RMB 1,000
The
annexed notes from an integral part of and
should be
read in conjunction with these Consolidated Financial Statements
F-4
China
Ceramics Co., Ltd. and Its Subsidiaries
|
For
the year ended December 31,
|
||||||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Profit
before taxation
|
212,148 | 189,060 | 165,469 | |||||||||||||
|
Adjustments
for
|
||||||||||||||||
|
Amortization
of land use rights
|
9 /
13
|
3 | 4 | 3 | ||||||||||||
|
Depreciation
of property, plant and equipment
|
9 /
12
|
15,628 | 15,613 | 14,792 | ||||||||||||
|
Gain
on disposal of property, plant and equipment
|
(328 | ) | - | - | ||||||||||||
|
Merger
costs by share-based payment
|
14,100 | - | - | |||||||||||||
|
Finance
costs
|
8
|
1,375 | 941 | 576 | ||||||||||||
|
Interest
income
|
6
|
(402 | ) | (394 | ) | (168 | ) | |||||||||
|
Foreign
exchange gains
|
- | (16 | ) | - | ||||||||||||
|
Operating
profit before working capital changes
|
242,524 | 205,208 | 180,672 | |||||||||||||
|
(Increase)/decrease
in inventories
|
16,904 | 24,682 | (41,213 | ) | ||||||||||||
|
Increase
in trade receivables
|
(74,992 | ) | (14,612 | ) | (40,847 | ) | ||||||||||
|
Decrease
in other receivables
|
70 | - | - | |||||||||||||
|
Increase/(decrease)
in trade payables
|
31,956 | (45,060 | ) | 27,378 | ||||||||||||
|
Increase/(decrease)
in accrued liabilities and other payables
|
(7,686 | ) | 10,290 | (535 | ) | |||||||||||
|
Cash
generated from operations
|
208,776 | 180,508 | 125,455 | |||||||||||||
|
Interest
paid
|
(1,375 | ) | (941 | ) | (576 | ) | ||||||||||
|
Income
tax paid
|
(47,781 | ) | (24,337 | ) | (17,617 | ) | ||||||||||
|
Net
cash generated from operating activities
|
159,620 | 155,230 | 107,262 | |||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Prepayment
for the Gaoan facility acquisition
|
29
|
(145,384 | ) | - | - | |||||||||||
|
Proceed
from disposal of property, plant and equipment
|
729 | - | - | |||||||||||||
|
Acquisition
of property, plant and equipment
|
12
|
(8,041 | ) | (7,019 | ) | (4,324 | ) | |||||||||
|
Interest
received
|
402 | 394 | 168 | |||||||||||||
|
Net
cash used in investing activities
|
(152,294 | ) | (6,625 | ) | (4,156 | ) | ||||||||||
F-5
|
China
Ceramics Co., Ltd. and Its Subsidiaries
Consolidated
Statement of Cash flows
|
||||||||||||||||
|
For
the year ended December 31,
|
||||||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||||||
|
Notes
|
RMB’000
|
RMB’000
|
RMB’000
|
|||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Bank
borrowings obtained
|
42,300 | 17,300 | 9,500 | |||||||||||||
|
Repayments
of bank borrowings
|
(28,100 | ) | (14,500 | ) | (4,500 | ) | ||||||||||
|
Cash
acquired in reverse recapitalization
|
104,491 | - | - | |||||||||||||
|
Payment
of underwriter fee
|
(8,500 | ) | - | - | ||||||||||||
|
Repayments
to a related party
|
- | - | (450 | ) | ||||||||||||
|
Advances
from/(repayments to) a director
|
3,364 | 1,694 | (10,500 | ) | ||||||||||||
|
Increase
in paid up capital
|
0 | * | 0 | * | - | |||||||||||
|
Dividend
paid
|
23
|
(22,455 | ) | (120,000 | ) | (91,242 | ) | |||||||||
|
Net
cash generated / (used) in financing activities
|
91,100 | (115,506 | ) | (97,192 | ) | |||||||||||
|
Net
increase in cash and cash equivalents
|
98,426 | 33,099 | 5,914 | |||||||||||||
|
Cash
and cash equivalents at January 1
|
51,606 | 18,507 | 12,593 | |||||||||||||
|
Effect
of foreign exchange rate differences
|
89 | - | - | |||||||||||||
|
Cash
and cash equivalents at December 31
|
17
|
150,121 | 51,606 | 18,507 | ||||||||||||
* Amount less than RMB 1,000
The
annexed notes form an integral part of and
should be
read in conjunction with these Consolidated Financial Statements
F-6
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
1.
|
GENERAL
INFORMATION
|
China
Ceramics Co., Ltd. (“the Company” or “China Ceramics”) is a British Virgin
Islands limited liability company operating under the British Virgin Islands
Companies Act (2004). Its predecessor company, China Holdings Acquisition Corp.
(“CHAC”) was incorporated in Delaware on June 22, 2007, and was organized as a
blank check company for the purpose of acquiring, through a stock exchange,
asset acquisition or other similar business combination, or controlling, through
contractual arrangements, an operating business, that has its principal
operations in Asia.
On
November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned
British Virgin Islands subsidiary, with China Ceramics surviving the merger (the
“Redomestication”). On the same day, pursuant to the terms of a merger and stock
purchase agreement dated August 19, 2009 (the “acquisition agreement”), China
Ceramics acquired all of the outstanding securities of Success Winner Limited
(“Success Winner”) held by Mr. Wong Kung Tok in exchange for $10.00
and 5,743,320 shares of China Ceramics (the “Success Winner
Acquisition”). The total number of issued and outstanding shares of
China Ceramics immediately after the acquisition was 8,950,171 (Note
21).
Prior to
the Success Winner Acquisition on November 20, 2009, neither CHAC nor China
Ceramics had an operating business.
Jinjiang
Hengda Ceramics Co., Ltd. (“Hengda”), who becomes the operating entity of China
Ceramics (the “Group”) with the Success Winner Acquisition, was established on
September 30, 1993 under the laws of PRC with 15% of its equity interest owned
by Fujian Province Jinjiang City Anhai Junbing Hengda Construction Material
Factory (“Anhai Hengda”) and 85% owned by Chi Wah Trading Import and Export
Company (“Chi Wah”). Chi Wah is a sole proprietor under the laws of Hong Kong
with its legal and equitable interest solely owned by Mr. Wong Kung Tok. Anhai
Hengda was owned by Mr. Wong Kung Tok’s family, which was considered an
act-in-concert party of Mr. Wong Kung Tok.
Hengda is
principally engaged in the manufacture and sale of ceramic tiles used for
exterior siding and for interior flooring and design in residential and
commercial buildings.
Hengda’s
owners reorganized the corporate structure in 2008 and 2009 (the “Hengda
Reorganisation” or the “Reorganisation”), as follows:
Stand
Best Creation Limited (“Stand Best”) was established on January 17, 2008 under
the laws of Hong Kong with its paid-up share capital being HK$1.00 divided into
1 ordinary share solely owned by Mr. Wong Kung Tok. The company acquired 100% of
Hengda’s equity interest from Anhai Hengda and Chi Wah on April 1, 2008 at the
consideration of RMB58,980,000.
Success
Winner Limited (“Success Winner”) was incorporated in British Virgin Islands on
May 29, 2009 as a limited liability company. The paid-up and issued capital of
the company is US$1 divided into 1 ordinary share solely owned by Mr. Wong Kung
Tok.
On June
30, 2009, through a capitalization agreement between Mr. Wong Kung Tok and Stand
Best, Stand Best capitalized a shareholder loan due to Mr. Wong Kung Tok in the
amount of HK$67.9 million (equivalent to approximately RMB58.9 million) through
the issuance of an aggregate of 9,999 ordinary shares of HK$1.00 par value which
Mr. Wong Kung Tok allotted to Success Winner.
On
the same date, Mr. Wong Kung Tok transferred his ownership of the remaining
1 ordinary share of Stand Best to Success Winner, thus making Success Winner the
sole parent company of Stand Best.
F-7
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
1.
|
GENERAL
INFORMATION (continued)
|
China
Ceramics’ holding structure immediately after the acquisition and as at December
31, 2009 is as follows:
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
2.1
|
Basis
of preparation
|
The
consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards, (“IFRSs”) which collective term
includes all applicable individual International Financial Reporting Standards,
International Accounting Standards and Interpretations issued by the
International Accounting Standard Board (“IASB”).
The
significant accounting policies that have been used in the preparation of these
consolidated financial statements are summarised below. These
policies have been consistently applied to all the years presented unless
otherwise stated. The adoption of new or amended IFRSs and the impacts on the
Group’s financial statements, if any, are disclosed in Note 3.
The
consolidated financial statements have been prepared on the historical cost
basis. The measurement bases are fully described in the accounting policies
below.
It should
be noted that accounting estimates and assumptions are used in preparation of
the consolidated financial statements. Although these estimates are
based on management’s best knowledge and judgement of current events and
actions, actual results may ultimately differ from those
estimates. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are significant to the
financial statements, are disclosed in Note 5.
F-8
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.1
|
Basis
of preparation (continued)
|
The
consolidated financial statements were approved and authorised for issue by the
Board of Directors on May 13, 2010
.
|
2.2
|
Basis
of consolidation
|
The
Success Winner Acquisition has been accounted for as a reverse recapitalisation.
The acquisition agreement resulted in the former owner of Success Winner
obtaining effective operating and financial control of the combined entity.
Prior to the acquisition, China Ceramics had no operating business. Accordingly,
the acquisition does not constitute a business combination for accounting
purposes and is accounted for as a capital transaction. That is, the transaction
is in substance a reverse recapitalisation, equivalent to the issuance of equity
interests by Success Winner for the net monetary assets of China Ceramics
accompanied by a recapitalisation. The consolidated financial statements are a
continuation of the financial statements of Success Winner. The assets and
liabilities of China Ceramics are recognised at their carrying amounts at the
date of acquisition with a corresponding credit to the consolidated equity and
no goodwill or other intangible assets are recognised. The equity of the
combined entity recognised at the date of acquisition represents the equity
balances of Success Winner together with the deemed proceeds from the reverse
recapitalisation determined as described above. However, the equity structure
presented in the consolidated financial statements (number and values of equity
instruments issued) reflects the equity structure of the legal parent, China
Ceramics. Costs directly attributable to the transaction have been debited to
equity to the extent of net monetary assets received.
Success
Winner and its subsidiaries as a group is regarded as a continuing entity
resulting from the Hengda Reorganisation since the management of all the
entities which took part in the Reorganisation was controlled by the same
director and shareholder before and immediately after the Reorganisation.
Consequently, immediately after the Reorganisation, there was a continuation of
the control over the entities’ financial and operating policy decision and risk
and benefits to the ultimate shareholders that existed prior to the
Reorganisation. Accordingly, the reorganization has been accounted for as a
reorganization under common control and the financial statements of Success
Winner, Stand Best and Hengda have been combined on the basis of merger
accounting for all periods presented.
The
assets and liabilities of the combining entities or businesses are combined
using the existing book values from the controlling party’s perspective. No
amount is recognised as consideration for goodwill or excess of the acquirer’s
interest in the net fair values of the acquiree’s identifiable assets,
liabilities and contingent liabilities over cost at the time of the common
control combination. The consolidated statement of comprehensive income includes
the results of each of the combining entities or businesses from the earliest
date presented or the date of their incorporation/establishment or since the
date when the combining entities or businesses first came under common control,
where this is a shorter period, regardless of the date of the common control
combination.
F-9
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.3
|
Foreign
currency translation
|
The
functional currency of China Ceramics is the United States dollar (“US dollar”
or “US$”). The functional currency of Success Winner, Stand Best and Hengda is
Renminbi (“RMB”), as their principal operations are predominantly conducted in
the People’s Republic of China (PRC) where the group generate most of its
revenue and incur most of expenses. The financial statements are presented in
Renminbi (to the nearest thousand), being the currency that best reflects the
economic substance of the underlying events and circumstances relevant to the
Group.
In the
individual financial statements of the consolidated entities, foreign currency
transactions are translated into the functional currency of the individual
entity using the exchange rates prevailing at the dates of the
transactions. At the reporting date, monetary assets and liabilities
denominated in foreign currencies are translated at the foreign exchange rates
ruling at that date. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the reporting date retranslation of
monetary assets and liabilities are recognised in profit or loss
.
Non-monetary
items carried at fair value that are denominated in foreign currencies are
retranslated at the rates prevailing on the date when the fair value was
determined and are reported as part of the fair value gain or
loss. Non-monetary items that are measured in terms of historical
cost in a foreign currency are not retranslated.
In the
consolidated financial statements, all individual financial statements of
foreign operations, originally presented in a currency different from the
Group’s presentation currency, have been converted into
Renminbi. Assets and liabilities have been translated into Renminbi
at the closing rates at the reporting date. Income and expenses have
been converted into Renminbi at the exchange rates ruling at the transaction
dates, or at the average rates over the reporting period provided that the
exchange rates do not fluctuate significantly. Any differences
arising from this procedure have been recognised in other comprehensive income
and accumulated separately in the translation reserve in equity.
When a
foreign operation is sold, such exchange differences are reclassified from
equity to profit or loss as part of the gain or loss on sale.
|
2.4
|
Property,
plant and equipment
|
Buildings
held for own use which are situated on leasehold land, where the fair value of
the building could be measured separately from the fair value of the leasehold
land at the inception of the lease, and other items of plant and equipment are
stated at cost less accumulated depreciation and impairment losses.
Buildings
held under leasing agreements are depreciated over their expected useful lives
of 40 years.
F-10
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.4
|
Property,
plant and equipment (continued)
|
Depreciation
on other assets is provided to write off the cost less their residual values
over their estimated useful lives, using the straight-line method, at the
following rates per annum:
|
Renovation
|
10 | % | ||
|
Plant
and machinery
|
10%-20 | % | ||
|
Motor
vehicles
|
10 | % | ||
|
Office
equipment
|
10%-20 | % |
The
assets’ residual values, depreciation methods and useful lives are reviewed, and
adjusted if appropriate, at each reporting date.
The gain
or loss arising on retirement or disposal is determined as the difference
between the sales proceeds and the carrying amount of the asset and is
recognised in profit or loss. Any revaluation surplus remaining in
equity is transferred to retained earnings on the disposal of land and
building.
Subsequent
costs are included in the asset’s carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Group and the cost of the item can be
measured reliably. All other costs, such as repairs and maintenance,
are charged to profit or loss during the financial period in which they are
incurred.
|
2.5
|
Land
use rights
|
Upfront
payments made to acquire land held under an operating lease are stated at cost
less accumulated amortization and any accumulated impairment losses.
Amortization is calculated on a straight line basis over the leasing period of
50 years.
|
2.6
|
Research
and development activities
|
Costs
associated with research activities are expensed in profit or loss as they
occur. Costs that are directly attributable to development activities
are recognised as intangible assets provided they meet the following recognition
requirements:
|
(i)
|
demonstration
of technical feasibility of the prospective product for internal use or
sale;
|
|
(ii)
|
there
is intention to complete the intangible asset and use or sell
it;
|
|
(iii)
|
the
group’s ability to use or sell the intangible asset is
demonstrated;
|
|
(iv)
|
the
intangible asset will generate probable economic benefits through internal
use or sale;
|
|
(v)
|
sufficient
technical, financial and other resources are available for completion; and
the expenditure attributable to the intangible asset can be reliably
measured.
|
Direct
costs include employee costs incurred on development activities along with an
appropriate portion of relevant overheads. The costs of development
of internally generated products or knowhow that meet the above recognition
criteria are recognised as intangible assets. They are subject to the
same subsequent measurement method as acquired intangible assets.
F-11
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.7
|
Financial
assets
|
The
Group’s accounting policies for financial assets are set out below.
Financial
assets are classified into the following category:
|
-
|
loans
and receivables
|
Management
determines the classification of its financial assets at initial recognition
depending on the purpose for which the financial assets were acquired and where
allowed and appropriate, re-evaluates this designation at every reporting
date.
All
financial assets are recognised when, and only when, the Group becomes a party
to the contractual provisions of the instrument. Regular way
purchases of financial assets are recognised on trade date. When financial
assets are recognised initially, they are measured at fair value, plus, in the
case of investments not at fair value through profit or loss, directly
attributable transaction costs.
Derecognition
of financial assets occurs when the rights to receive cash flows from the
investments expire or are transferred and substantially all of the risks and
rewards of ownership have been transferred.
At each
reporting date, financial assets are reviewed to assess whether there is
objective evidence of impairment. If any such evidence exists,
impairment loss is determined and recognised based on the classification of the
financial asset.
Loans and
receivables
Loans and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Loans and
receivables are subsequently measured at amortised cost using the effective
interest method, less any impairment losses. Amortised cost is
calculated taking into account any discount or premium on acquisition and
includes fees that are an integral part of the effective interest rate and
transaction cost.
Impairment of financial
assets
At each
reporting date, financial assets are reviewed to determine whether there is any
objective evidence of impairment.
Objective
evidence of impairment of individual financial assets includes observable data
that comes to the attention of the Group about one or more of the following loss
events:
F-12
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(continued)
|
|
2.7
|
Financial
assets (continued)
|
|
-
|
Significant
financial difficulty of the debtor;
|
|
-
|
A
breach of contract, such as a default or delinquency in interest or
principal payments;
|
|
-
|
It
becoming probable that the debtor will enter bankruptcy or other financial
reorganisation;
|
|
-
|
Significant
changes in the technological, market, economic or legal environment that
have an adverse effect on the debtor;
and
|
|
-
|
A
significant or prolonged decline in the fair value of an investment in an
equity instrument below its
cost.
|
Loss
events in respect of a group of financial assets include observable data
indicating that there is a measurable decrease in the estimated future cash
flows from the group of financial assets. Such observable data includes but not
limited to adverse changes in the payment status of debtors in the group and
national or local economic conditions that correlate with defaults on the assets
in the group.
If any
such evidence exists, the impairment loss is measured and recognised as
follows:
|
(i)
|
Financial
assets carried at amortized cost
|
If there
is objective evidence that an impairment loss on loans and receivables or
held-to-maturity investments carried at amortized cost has been incurred, the
amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows (excluding future
credit losses that have not been incurred) discounted at the financial asset’s
original effective interest rate (i.e. the effective interest rate computed at
initial recognition). The amount of the loss is recognised in profit
or loss of the period in which the impairment occurs.
If, in
subsequent period, the amount of the impairment loss decreases and the decrease
can be related objectively to an event occurring after the impairment was
recognized, the previously recognized impairment loss is reversed to the extent
that it does not result in a carrying amount of the financial asset exceeding
what the amortized cost would have been had the impairment not been recognized
at the date the impairment is reversed. The amount of the reversal is
recognized in profit or loss of the period in which the reversal
occurs.
For
financial assets other than trade receivables that are stated at amortized cost,
impairment losses are written off against the corresponding assets directly.
Where the recovery of trade receivables is considered doubtful but not remote,
the impairment losses for doubtful receivables are recorded using an allowance
account. When the Group is satisfied that recovery of trade receivables is
remote, the amount considered irrecoverable is written off against trade
receivables directly and any amounts held in the allowance account in respect of
that receivable are reversed.
Subsequent
recoveries of amounts previously charged to the allowance account are reversed
against the allowance account. Other changes in the allowance account and
subsequent recoveries of amounts previously written off directly are recognized
in profit or loss.
F-13
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.8
|
Inventories
|
Inventories
are carried at the lower of cost and net realizable value. Net
realizable value is the estimated selling price in the ordinary course of
business less the estimated cost of completion and applicable selling
expenses.
Cost
is determined using the weighted average basis, and in the case of work in
progress and finished goods, comprises direct materials, direct labor and an
appropriate proportion of overhead.
|
2.9
|
Cash
and cash equivalents
|
Cash and
cash equivalents include cash at bank and in hand, demand deposits with banks
and short term highly liquid investments with original maturities of three
months or less that are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value. For the purpose of the
statement of cash flows presentation, cash and cash equivalents include bank
overdrafts which are repayable on demand and form an integral part of the
Group’s cash management.
|
2.10
|
Financial
liabilities
|
The
Group’s financial liabilities include bank loans, trade and other payables and
accrued liabilities. They are included in line items in the statement of
financial position as borrowings under current or non-current liabilities,
accrued liabilities or trade and other payables.
Financial
liabilities are recognized when the Group becomes a party to the contractual
provisions of the instrument. All interest related charges are recognized in
accordance with the Group’s accounting policy for borrowing costs (see Note
2.17).
A
financial liability is derecognized when the obligation under the
liability is discharged or cancelled or expires.
Where an
existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and the recognition of a new liability,
and the difference in the respective carrying amount is recognized in
profit or loss.
Borrowings
Borrowings
are recognized initially at fair value, net of transaction costs incurred.
Borrowings are subsequently stated at amortized cost; any difference between the
proceeds (net of transaction costs) and the redemption value
is recognized in profit or loss over the period of the borrowings
using the effective interest method.
Borrowings
are classified as current liabilities unless the Group has an unconditional
right to defer settlement of the liability for at least twelve months after the
balance sheet date.
F-14
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.10
|
Financial
liabilities (continued)
|
Trade and other payables and
accrued liabilities
Trade and
other payables and accrued liabilities are recognized initially at their fair
value and subsequently measured at amortized cost, using the effective interest
method.
|
2.11
|
Leases
|
Leases
which do not transfer substantially all the risks and rewards of ownership to
the Group are classified as operating leases.
Where the
Group has the right to use of assets held under operating leases, payments made
under the leases are charged to the income statement on a straight line basis
over the lease terms except where an alternative basis is more representative of
the time pattern of benefits to be derived from the leased assets. Lease
incentives received are recognized in profit or loss as an integral part of the
aggregate net lease payments made. Contingent rental are charged to
profit or loss in the accounting period in which they are incurred.
|
2.12
|
Provisions
|
Provisions
are recognized when the Group has a present obligation (legal or constructive)
as a result of a past event, and it is probable that an outflow of economic
benefits will be required to settle the obligation and a reliable estimate of
the amount of the obligation can be made. Where the time value of
money is material, provisions are stated at the present value of the expenditure
expected to settle the obligation.
All
provisions are reviewed at each reporting date and adjusted to reflect the
current best estimate.
Where it
is not probable that an outflow of economic benefits will be required, or the
amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow of economic benefits is
remote. Possible obligations, whose existence will only be confirmed
by the occurrence or non-occurrence of one or more future uncertain events not
wholly within the control of the group are also disclosed as contingent
liabilities unless the probability of outflow of economic benefits is
remote.
|
2.13
|
Share
capital
|
Ordinary
shares are classified as equity. Share capital is determined using the nominal
value of shares that have been issued.
Any
transaction costs associated with the issuing of shares are deducted from share
premium (net of any related income tax benefit) to the extent they are
incremental costs directly attributable to the equity transaction.
F-15
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.14
|
Revenue
recognition
|
Revenue
comprises the fair value of the consideration received or receivable for the
sale of goods, net of rebates and discounts. Provided it is probable
that the economic benefits will flow to the Group and the revenue and costs, if
applicable, can be measured reliably, revenue is recognized as
follows:
Sales of
goods are recognized upon transfer of the significant risks and rewards of
ownership to the customer. This is usually taken as the time when the
goods are delivered and the customer has accepted the goods.
Interest
income is recognized on a time-proportion basis using the effective interest
method.
|
2.15
|
Impairment
of non-financial assets
|
Impairment
testing is made on the Group’s Property, plant and equipment and land use
rights.
An
impairment loss is recognized as an expense immediately for the amount by which
the asset’s carrying amount exceeds its recoverable amount. Recoverable amount
is the higher of fair value, reflecting market conditions less costs to sell,
and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate
that reflects current market assessment of time value of money and the risk
specific to the asset.
An
impairment loss is reversed if there has been a favorable change in the
estimates used to determine the asset’s recoverable amount and only to the
extent that the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized.
|
2.16
|
Employee
benefits
|
Retirement
benefits
The
employees of the Group’s PRC subsidiary are required to participate in a central
pension scheme operated by the local municipal government.
Contributions
are recognized as an expense in profit or loss as employees render services
during the year. The Group’s obligation under these plans is limited to the
fixed percentage contributions payable.
F-16
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.17
|
Borrowing
costs
|
Borrowing
costs incurred for the acquisition, construction or production of any qualifying
asset are recognized during the period of time that is required to complete and
prepare the asset for its intended use. A qualifying asset is an asset which
necessarily takes a substantial period of time to get ready for its intended use
or sale. Other borrowing costs are expensed when
incurred.
Borrowing
costs are recognized as part of the cost of a qualifying asset when expenditure
for the asset is being incurred, borrowing costs are being incurred and
activities that are necessary to prepare the asset for its intended use or sale
are being undertaken. Capitalization of borrowing costs ceases when
substantially all the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
|
2.18
|
Accounting
for income taxes
|
Income
tax comprises current tax and deferred tax.
Current
income tax assets and/or liabilities comprise those obligations to, or claims
from, fiscal authorities relating to the current or prior reporting period, that
are unpaid at the reporting date. They are calculated according to
the tax rates and tax laws applicable to the fiscal periods to which they
relate, based on the taxable profit for the year. All changes to
current tax assets or liabilities are recognized as a component of tax expense
in profit or loss.
Deferred
tax is calculated using the liability method on temporary differences at the
reporting date between the carrying amounts of assets and liabilities in the
financial statements and their respective tax bases. Deferred tax
liabilities are generally recognized for all taxable temporary
differences. Deferred tax assets are recognized for all deductible
temporary differences, tax losses available to be carried forward as well as
other unused tax credits, to the extent that it is probable that taxable profit,
including existing taxable temporary differences, will be available against
which the deductible temporary differences, unused tax losses and unused tax
credits can be utilized.
Deferred
tax assets and liabilities are not recognized if the temporary difference arises
from goodwill or from initial recognition (other than in a business combination)
of assets and liabilities in a transaction that affects neither taxable nor
accounting profit or loss.
Deferred
tax liabilities are recognized for taxable temporary differences arising on
investments in subsidiaries, associates and joint ventures, except where the
Group is able to control the reversal of the temporary differences and it is
probable that the temporary differences will not reverse in the foreseeable
future.
Deferred
tax is calculated, without discounting, at tax rates that are expected to apply
in the period the liability is settled or the asset realized, provided they are
enacted or substantively enacted at the reporting date.
F-17
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.18
|
Accounting
for income taxes (continued)
|
Changes
in deferred tax assets or liabilities are recognized in profit or loss, or in
other comprehensive income or directly in equity if they relate to items that
are charged or credited to other comprehensive income or directly in
equity.
Current
tax assets and current tax liabilities are presented in net if, and only
if,
|
(a)
|
the
Group has the legally enforceable right to set off the recognized amounts;
and
|
|
(b)
|
intends
either to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
|
The Group
presents deferred tax assets and deferred tax liabilities in net if, and only
if,
|
(a)
|
the
entity has a legally enforceable right to set off current tax assets
against current tax liabilities;
and
|
|
(b)
|
the
deferred tax assets and the deferred tax liabilities relate to income
taxes levied by the same taxation authority on
either:
|
|
(i)
|
the
same taxable entity; or
|
|
(ii)
|
different
taxable entities which intend either to settle current tax liabilities and
assets on a net basis, or to release the assets and settle the liabilities
simultaneously, in each future period in which significant amounts of
deferred tax liabilities or assets are expected to be settled or
recovered.
|
|
2.19
|
Segment
reporting
|
The
Group identifies operating segments and prepares segment information based on
the regular internal financial information reported to the Chief Executive
Officer and executive directors, who are the Company's chief operating decision
maker, for their decisions about resources allocation to the Group’s business
components and for their review of the performance of those
components.
Business
segment
The
Company operates principally in the manufacture and sale of medium to high-end
ceramic tiles. The Chief Executive Officer and executive directors regularly
review the Group's business as one business segment.
Geographical
segment
The
business of the Group is engaged entirely in the PRC. The Chief Executive
Officer and executive directors regularly review the Group's business as one
geographical segment.
|
2.20
|
Related
parties
|
For the
purposes of these financial statements, a party is considered to be related to
the group if:
|
(i)
|
the
party has the ability, directly or indirectly through one or more
intermediaries, to control the group or exercise significant influence
over the group in making financial and operating policy decisions, or has
joint control over the group;
|
|
(ii)
|
the
group and the party are subject to common
control;
|
F-18
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
|
2.20
|
Related
parties (continued)
|
|
(iii)
|
the
party is an associate of the group or a joint venture in which the group
is a venturer;
|
|
(iv)
|
the
party is a member of key management personnel of the group or the group’s
parent, or a close family member of such an individual, or is an entity
under the control, joint control or significant influence of such
individuals;
|
|
(v)
|
the
party is a close family member of a party referred to in (i) or is an
entity under the control, joint control or significant influence of such
individuals; or
|
|
(vi)
|
the
party is a post-employment benefit plan which is for the benefit of
employees of the group or of any entity that is a related party of the
group.
|
Close
family members of an individual are those family members who may be expected to
influence, or be influenced by, that individual in their dealings with the
entity.
|
2.21
|
Equity-settled share based
payments
|
The Group
has received services from financial advisors related to the Success Winner
Acquisition (Note 1) as consideration for transfer of shares by a shareholder.
Since financial advisory services are predominantly compensated by contingent
shares in the market, the fair value of these service could not be estimated
reliably. Therefore, the services were measured indirectly at the cost of the
equity instruments granted.
|
3
|
ADOPTION
OF NEW OR AMENDED IFRSs
|
In the
current year, the Group has applied for the first time the following new
standards, amendments and interpretations (the “new IFRSs”) issued by
the IASB, which are relevant to and effective for the Group’s financial
statements for the annual period beginning on 1 January 2009:
|
IAS 1 (Revised
2007)
|
Presentation of financial statements |
|
IAS 23 (Revised
2007)
|
Borrowing costs |
|
IFRS 2
(Amendments)
|
Share-based payment – vesting conditions and cancellations |
|
IFRS 7
(Amendments)
|
Improving disclosures about financial instruments |
|
IFRS
8
|
Operating segments |
Various –
Annual improvements to IFRSs 2008
Other
than as noted below, the adoption of the new IFRSs had no material impact on how
the results and financial position for the current and prior periods have been
prepared and presented.
IAS 1 (Revised 2007)
Presentation of financial statements
The
adoption of IAS 1 (Revised 2007) makes certain changes to the format and titles
of the primary financial statements and to the presentation of some items within
these statements. An additional statement of financial position as at the
beginning of the earliest comparative period is required when an entity applies
an accounting policy retrospectively or makes a retrospective restatement of
items in its financial statements or when it reclassifies items in its financial
statements. It also gives rise to additional disclosures.
F-19
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
3
|
ADOPTION
OF NEW OR AMENDED IFRSs
(continued)
|
The
measurement and recognition of the Group’s assets, liabilities, income and
expenses is unchanged. However, some items that were recognised directly in
equity are now recognised in other comprehensive income, for
example, exchange loss on translation of financial statements of foreign
operations. IAS 1 affects the presentation of owner changes in equity and
introduces a ‘Statement of comprehensive income’. Comparatives have been
restated to conform with the revised standard. The Group has applied changes to
its accounting polices on presentation of financial statements and segment
reporting retrospectively. However, the changes to the comparatives have not
affected the consolidated statement of financial position at January 1, 2007 and
accordingly an additional statement of financial position as at January 1, 2007
is not presented.
IFRS 8 Operating
segments
The
adoption of IFRS 8 has not affected the identified and reportable operating
segments for the Group. However, reported segment information are is now based
on internal management reporting information that is regularly reviewed by the
chief operating decision maker. In the previous annual financial
statements, segments were identified by reference to the dominant source and
nature of the Group’s risks and returns.
Annual improvements to IFRSs
2008
In
October 2008, the IASB issued its first
Annual improvements to
I
FRSs
which set out amendments
to a number of IFRSs. There are separate transitional provisions for each
standard.
The management
anticipates that all of the pronouncements will be adopted in the Group’s
accounting policy for the first period beginning after the effective date of the
pronouncement. Information on new and amended IFRSs that are expected to have
impact on the Group’s accounting policies is provided below. Certain other new
and amended IFRSs have been issued but are not expected to have a material
impact of the Group’s financial statements.
IFRS 3 Business combinations
(Revised 2008)
The
standard is applicable in reporting periods beginning on or after July 1, 2009
and will be applied prospectively. The new standard still requires the use of
the purchase method (now renamed the acquisition method) but introduces material
changes to the recognition and measurement of consideration transferred and the
acquiree’s identifiable assets and liabilities, and the measurement of
non-controlling interests (previously known as minority interest) in the
acquiree. The new standard is expected to have a significant effect on business
combinations occurring in reporting periods beginning on or after July 1,
2009.
IFRS 9 Financial
instruments
The
standard is effective for accounting periods beginning on or after January 1,
2013 and addresses the classification and measurement of financial assets. The
new standard reduces the number of measurement categories of financial assets
and all financial assets will be measured at either amortised cost or fair value
based on the entity’s business model for managing the financial assets and the
contractual cash flow characteristics of the financial asset. Fair value gains
and losses will be recognised in profit or loss except for those on certain
equity investments which will be presented in other comprehensive income. The
Group do not expect the standard to have a material effect on its consolidated
financial statements.
F-20
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
3
|
ADOPTION
OF NEW OR AMENDED IFRSs
(continued)
|
Annual improvements
2009
The IASB
has issued
Improvements to
International Financial Reporting Standards 2009
. Most of the amendments
become effective for annual periods beginning on or after January 1, 2010. The
Group is currently assessing the possible impact of the amendment on its results
and financial position in the first year of application.
|
4
|
RESTATEMENT
OF PRIOR YEAR FINANICAL
STATEMENTS
|
In the
financial years ended December 31, 2006, 2007 and 2008, the Group recognized
cash consideration that Hengda gave to its distributors to promote sales and
timely collection as selling and distribution expenses. The Group and its
independent auditor revisited the contractual relationship between Hengda
and its distributors in 2009. It was determined that the Group has incorrectly
applied IAS 18,
Revenue
in recognising this cash consideration as selling and distribution
expenses.
IAS 18
requires revenue be measured at the fair value of the consideration received or
receivable, which is normally the price specified in the sales contracts taking
into account the amount of any trade discounts and volume rebates allowed by the
vendors. The Group now believes that revenue should be reduced since the
cash considerations Hengda paid to its distributors are a combination of volume
rebates and settlement discounts in substance. As a result, the Group restated
the comparative revenue, gross profit, and selling and distribution expense
figures in the Statements of Comprehensive Income for the financial years ended
December 31, 2007 and 2008, and reclassified RMB 32,107,000 and RMB 39,388,000
from selling and distribution expenses to sales rebates and discounts (a contra
revenue account) to reflect the company’s revenue at the fair value of the
consideration received or receivable for the sales of goods, net of rebates and
discounts. This reclassification reduced revenue, gross profit, and selling and
distribution expenses by RMB 32,107,000 and RMB 39,388,000 for the financial
years of 2007 and 2008 respectively. There was no effect over the profit
attributable to shareholders and earnings per share (basic and
diluted).
|
5
|
CRITICAL
ACCOUNTING ESTIMATES AND
JUDGEMENTS
|
Estimates
and judgements are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed to
be reasonable under the circumstances.
|
5.1
|
Critical
accounting estimates and
assumptions
|
The Group
makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk
of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below:
F-21
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
5
|
CRITICAL
ACCOUNTING ESTIMATES AND JUDGEMENTS
(continued)
|
|
5.1
|
Critical
accounting estimates and assumptions
(continued)
|
Depreciation of property,
plant and equipment
Property,
plant and equipment are depreciated on a straight-line basis over their
estimated useful lives. Management estimates the useful lives of property, plant
and equipment to be within 5 to 40 years. The carrying amounts of the Group’s
property, plant and equipment as at December 31, 2009, 2008 and 2007 were RMB
64,184,000, RMB 72,172,000 and RMB 80,766,000 respectively. Changes in the
expected level of usage and technological developments could impact the economic
useful lives and the residual values of these assets, therefore future
depreciation charges could be revised.
Income
tax
The Group
has exposure to income taxes in the PRC. Significant judgement is required in
determining the provision for income taxes. There are certain transactions and
computations for which the ultimate tax determination is uncertain during the
ordinary course of business. The Group recognises liabilities for expected tax
issues based on estimates of whether additional taxes will be due. When the
final tax outcome of these matters is different from the amounts that were
initially recognised, such differences will impact the income tax and deferred
tax provisions in the period in which such determination is made.
Impairment of trade
receivables
The
Group’s management assesses the collectability of trade receivables. This
estimate is based on the credit history of the Group’s customers and the current
market condition. Management assesses the collectability of trade receivables at
the balance sheet date and makes the provision, if any.
Net realizable value of
inventories
Net
realizable value of inventories is the management’s estimation of future selling
price in the ordinary course of business, less estimated costs of completion and
selling expenses. These estimates are based on the current market condition and
the historical experience of selling products of similar nature. It could change
significantly as a result of various market factors.
|
5.2
|
Critical
judgements in applying the entity's accounting
policies
|
Accounting for the Success
Winner Acquisition
The
Company has accounted for the Success Winner Acquisition (Note 1) as a reverse
recapitalisation. The management believes the acquisition agreement resulted in
the former owner of Success Winner obtaining effective operating and financial
control of the combined entity through 1) the owner's majority shareholder
interest in the combined entity immediately after the acquisition, 2) his
significant representation on the Board of Directors and 3) Success Winner
management being named to all the senior executive positions in the combined
entity.
Prior
to the acquisition, China Ceramics had no operating business. Accordingly, the
management believes the acquisition does not constitute a business combination
and treats it as a capital transaction for accounting purposes.
F-22
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
5.
|
CRITICAL
ACCOUNTING ESTIMATES AND JUDGEMENTS
(continued)
|
|
5.2
|
Critical
judgements in applying the entity's accounting policies
(continued)
|
Accounting for the
equity-settled share-based payment to financial advisors
The
management has measured its equity-settled share-based payment to some financial
advisors indirectly at the cost of the equity instruments granted as the fair
value of the services could not be estimated reliably.
The
management has determined this equity-settled share-based payment, together with
the audit, legal and consulting fees incurred for the Success Winner Acquisition
(Note 1), were all incremental transaction costs directly related to the reverse
recapitalization transaction and has charged these costs directly to equity to
the extent of net monetary assets received and charged the incremental
transaction costs in excess of the net monetary assets received to expense.
Determining the date when
the Company obtained control of the Gaoan Facility (Note
29)
The
management has regarded January 8, 2010, the date when the registration and
business license was officially transferred from the Gaoan Facility's former
shareholders to the Group and when an executive officer was appointed by the
Group to take over controls over the Facility's operating and financing
activities, as the date the Group obtained control of the Gaoan
Facility. As a result, the acquisition of the facility has been disclosed as a
subsequent event in Note 29.
|
6.
|
REVENUE
AND OTHER INCOME
|
Revenue
comprises the fair value of the consideration received or receivable for the
sale of goods. An analysis of the Group's revenue and other income is as
follows:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
(restated)
|
(restated)
|
|||||||||||
|
Revenue
|
||||||||||||
|
Sale
of goods
|
835,747 | 737,182 | 617,863 | |||||||||
|
Other
income
|
||||||||||||
|
Sale
of scrap materials
|
3,211 | 2,291 | 2,171 | |||||||||
|
Interest
income
|
402 | 394 | 168 | |||||||||
|
Foreign
exchange gains
|
122 | 16 | - | |||||||||
| 3,735 | 2,701 | 2,339 | ||||||||||
F-23
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
7.
|
MERGER
COSTS
|
The
merger costs of RMB 26.4 million were legal fees, audit fees, and other
professional advisors’ costs directly attributable to the reverse
recapitalization transaction which exceeded the net monetary assets
received. The Group treats these incremental transaction costs
exceeding the net monetary assets received as the expenses Success Winner
incurred to obtain a public listing in the United States of America (Note
5.2).
|
8.
|
FINANCE
COSTS
|
Finance
costs comprise interest expense on the Group’s short-term bank
borrowings:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Interest
on bank borrowings
|
1,375 | 941 | 576 | |||||||||
|
9.
|
PROFIT
BEFORE TAXATION
|
The
Group's profit before taxation is arrived at after charging:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Amortisation
of land use rights
|
3 | 4 | 3 | |||||||||
|
Cost
of inventories recognised as expense
|
417,191 | 364,532 | 273,532 | |||||||||
|
Depreciation
expense charged to
|
||||||||||||
|
-
cost of sales
|
15,119 | 15,102 | 14,385 | |||||||||
|
-
administrative expenses
|
509 | 511 | 407 | |||||||||
|
Directors'
remuneration
|
||||||||||||
|
-
salaries and related cost
|
216 | 142 | 124 | |||||||||
|
-
retirement scheme contribution
|
5 | 5 | 3 | |||||||||
|
Key
management personnel
(other
than directors)
|
||||||||||||
|
-
salaries and related cost
|
1,638 | 596 | 494 | |||||||||
|
-
retirement scheme contribution
|
7 | 15 | 13 | |||||||||
|
Research
and development personnel
|
||||||||||||
|
-
salaries and related cost
|
851 | 877 | 1,523 | |||||||||
|
-
retirement scheme contribution
|
12 | 14 | 24 | |||||||||
|
Other
personnel
|
||||||||||||
|
-
salaries and related cost
|
35,557 | 32,910 | 29,553 | |||||||||
|
-
retirement scheme contribution
|
597 | 526 | 462 | |||||||||
|
Operating
lease expenses
|
12,899 | 13,192 | 13,192 | |||||||||
F-24
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
10.
|
INCOME
TAX EXPENSE
|
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Current
year provision:
|
||||||||||||
|
PRC
income tax
|
59,287 | 24,027 | 19,863 | |||||||||
No
deferred tax has been provided as the Group did not have any significant
temporary differences which gave rise to a deferred tax asset or liability at
December 31, 2007, 2008 and 2009.
Reconciliation
between tax expense and profit before taxation at applicable tax rates is as
follows:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Profit
before taxation
|
212,148 | 189,060 | 165,469 | |||||||||
|
Tax
calculated at a tax rate of 25% (2009), 25% (2008) and 27%
(2007)
|
53,037 | 47,261 | 44,677 | |||||||||
|
Tax
effect of tax exemption and concession
|
- | (23,631 | ) | (24,820 | ) | |||||||
|
Tax
effect on non deductible expenses
|
3,525 | 397 | 6 | |||||||||
|
Tax
effect on different tax rate of group entities operation in other
jurisdictions
|
2,725 | - | - | |||||||||
| 59,287 | 24,027 | 19,863 | ||||||||||
British Virgin Islands
Profits Tax
The Group
has not been subject to any taxation in this jurisdiction for the year ended
December 31, 2009 (2007 and 2008: Nil).
Hong Kong Profits
Tax
No Hong
Kong profits tax has been provided as the Group has no assessable profit arising
in Hong Kong for the year ended December 31, 2009 (2007 and 2008:
Nil).
PRC Income
Tax
In 2007,
pursuant to the “Income Tax Law of the PRC for Enterprises with Foreign
Investments and Foreign Enterprises”, the provision for PRC income tax for the
foreign investment enterprises of production nature established in the Coastal
Economic Open Zone is calculated based on a statutory income tax rate of 27% for
the relevant period, which included a 24% enterprise income tax and a 3% local
income tax.
Pursuant
to the “PRC Enterprise Income Tax Law” passed by the Tenth National People’s
Congress on March 16, 2007, the new enterprise income tax rates for
domestic enterprises and foreign investment enterprises are unified at 25% and
was effective from January 1, 2008.
Based
on the “Income Tax Law of the PRC for Enterprises with Foreign Investments and
Foreign Enterprises”, Hengda was entitled to full exemption from income tax for
the first two years and a 50% reduction in income tax for the next three years
starting from its first profitable year of operations. The first profitable year
of Hengda was the calendar year ended December 31, 2004 for the purpose of
determining the tax holiday period.
F-25
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
10.
|
INCOME
TAX EXPENSE (continued)
|
Any
dividend paid by a PRC entity to an overseas parent made out of profits earned
after January 1, 2008 will be subject to up to 10% withholding tax. Hengda, the
Group's PRC subsidiary, has cumulative undistributed earnings of RMB 166,656,000
and RMB 334,275,000 as of December 31, 2008 and 2009, which are
included in consolidated retained earnings and will continue to be indefinitely
reinvested in the PRC subsidiary's operations. Accordingly, no provision
has been made for deferred taxes related to future repatriation of these
earnings. If the Group were to distribute these cumulated earnings in the
foreseeable future, the deferred tax liabilities of RMB 16,666,000 and RMB
33,428,000 would be recognised as of December 31, 2008 and 2009,
respectively.
|
11.
|
EARNINGS
PER SHARE (“EPS”)
|
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the periods. Diluted EPS is
computed similar to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earning per share is based on the
assumption that all dilutive warrants were exercised. Dilution is computed by
applying the treasury stock method. Under this method, the warrants are assumed
to be exercised at the date of the reverse recapitalization, and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period. The following table presents a reconciliation of basic and
diluted earnings per share:
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
(numerator):
|
||||||||||||
|
Income
attributable to holders of ordinary shares (RMB):
|
152,861,000 | 165,033,000 | 145,606,000 | |||||||||
|
|
||||||||||||
|
Shares
(denominator):
|
||||||||||||
|
Weighted
average ordinary shares outstanding used in computing basic income per
share
|
6,246,820 | 5,743,320 | 5,743,320 | |||||||||
|
Plus
incremental weighted average ordinary shares from assumed conversions of
warrants using treasury stock method
|
215,604 | - | - | |||||||||
|
Weighted
average ordinary shares outstanding used in computing diluted income per
share
|
6,462,424 | 5,743,320 | 5,743,320 | |||||||||
|
|
||||||||||||
|
Earnings
per share-basic (RMB)
|
24.47 | 28.73 | 25.35 | |||||||||
|
|
||||||||||||
|
Earnings
per share-diluted (RMB)
|
23.65 | 28.73 | 25.35 | |||||||||
F-26
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
12.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
Buildings
RMB'000
|
Plant
and
machinery
RMB'000
|
Motor
vehicles RMB'000
|
Office
equipment
RMB'000
|
Total
RMB'000
|
||||||||||||||||
|
Cost
|
||||||||||||||||||||
|
At
January 1, 2007
|
2,913 | 147,507 | 4,003 | 976 | 155,399 | |||||||||||||||
|
Additions
|
450 | 3,750 | 621 | 163 | 4,984 | |||||||||||||||
|
At
December 31, 2007
|
3,363 | 151,257 | 4,624 | 1,139 | 160,383 | |||||||||||||||
|
Additions
|
- | 6,281 | 512 | 226 | 7,019 | |||||||||||||||
|
At
December 31,2008
|
3,363 | 157,538 | 5,136 | 1,365 | 167,402 | |||||||||||||||
|
Additions
|
- | 7,750 | - | 291 | 8,041 | |||||||||||||||
|
Disposals
|
- | (7,767 | ) | - | (248 | ) | (8,015 | ) | ||||||||||||
|
At
December 31, 2009
|
3,363 | 157,521 | 5,136 | 1,408 | 167,428 | |||||||||||||||
|
Accumulated
depreciation
|
||||||||||||||||||||
|
At
January 1, 2007
|
565 | 63,009 | 915 | 336 | 64,825 | |||||||||||||||
|
Depreciation
charge
|
69 | 14,124 | 407 | 192 | 14,792 | |||||||||||||||
|
At
December 31, 2007
|
634 | 77,133 | 1,322 | 528 | 79,617 | |||||||||||||||
|
Depreciation
charge
|
112 | 14,802 | 472 | 227 | 15,613 | |||||||||||||||
|
At
December 31, 2008
|
746 | 91,935 | 1,794 | 755 | 95,230 | |||||||||||||||
|
Depreciation
charge
|
112 | 14,805 | 488 | 223 | 15,628 | |||||||||||||||
|
Disposals
|
- | (7,379 | ) | - | (235 | ) | (7,614 | ) | ||||||||||||
|
At
December 31, 2009
|
858 | 99,361 | 2,282 | 743 | 103,244 | |||||||||||||||
|
Net
book amount
|
||||||||||||||||||||
|
At
December 31, 2007
|
2,729 | 74,124 | 3,302 | 611 | 80,766 | |||||||||||||||
|
At
December 31, 2008
|
2,617 | 65,603 | 3,342 | 610 | 72,172 | |||||||||||||||
|
At
December 31, 2009
|
2,505 | 58,160 | 2,854 | 665 | 64,184 | |||||||||||||||
All
property, plant and equipment held by the Group are located in the
PRC.
The
Group’s building including renovation with a carrying value of approximately RMB
2,729,000, RMB 2,617,000 and RMB 2,505,000 was pledged as securities to secure
the Group’s interest-bearing bank borrowings at December 31,
2007, 2008 and 2009 respectively (Note 20).
F-27
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
13.
|
LAND
USE RIGHTS
|
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
At
beginning of the year
|
||||||||||||
|
Cost
|
180 | 180 | 180 | |||||||||
|
Accumulated
amortisation
|
(12 | ) | (8 | ) | (5 | ) | ||||||
|
Net
book amount
|
168 | 172 | 175 | |||||||||
|
For
the year
|
||||||||||||
|
Opening
net book amount
|
168 | 172 | 175 | |||||||||
|
Amortisation
|
(3 | ) | (4 | ) | (3 | ) | ||||||
|
Net
book amount
|
165 | 168 | 172 | |||||||||
|
At
end of the year
|
||||||||||||
|
Cost
|
180 | 180 | 180 | |||||||||
|
Accumulated
amortisation
|
(15 | ) | (12 | ) | (8 | ) | ||||||
|
Net
book amount
|
165 | 168 | 172 | |||||||||
The land
use rights of the Group refer to lands located in PRC which were pledged to the
banks as securities for the Group’s interest-bearing bank borrowings at December
31, 2007, 2008 and 2009 respectively (Note 20).
|
14.
|
INVENTORIES
|
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
At
cost
|
||||||||||||
|
Raw
materials
|
15,825 | 26,400 | 33,408 | |||||||||
|
Work
in progress
|
5,050 | 5,024 | 5,431 | |||||||||
|
Finished
goods
|
93,783 | 100,138 | 117,405 | |||||||||
| 114,658 | 131,562 | 156,244 | ||||||||||
There has
been no inventory write-off or allowance for inventory obsolescence for the
years ended December 31, 2007, 2008, and 2009.
F-28
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
15.
|
TRADE
RECEIVABLES
|
The
Group’s trade receivables are denominated in Renminbi and non-interest bearing,
and generally have credit terms within 90 days.
The aging
analysis of the Group’s trade receivables is as follows:
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Current
(within 90 days)
|
270,840 | 195,848 | 180,197 | |||||||||
|
Past
due 0-3 months
|
- | - | 1,039 | |||||||||
|
Past
due 3-6 months
|
- | - | - | |||||||||
|
Past
due over 6 months
|
- | - | - | |||||||||
| 270,840 | 195,848 | 181,236 | ||||||||||
As at
December 31, 2007, 2008 and 2009, trade receivables of RMB 180,197,000, RMB
195,848,000 and RMB 270,840,000 were neither past due nor impaired. These
related to a large number of diversified customers for whom there was no recent
history of default.
The
RMB 1,039,000 trade receivables that were past due but not impaired as at
December 31, 2007 related to customers who had a good track record of
credit with the Group. Management believed that no impairment allowance was
necessary in respect of these past due balances as there had not been a
significant change in credit quality and the balances were still considered to
be fully recoverable. All of the past due balances were subsequently received.
The Group does not hold any collateral in respect of trade receivables past due
but not impaired.
|
16.
|
OTHER
RECEIVABLES
|
|
|
As
at December 31,
|
|||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
|
RMB'000
|
RMB'000
|
RMB'000
|
|||||||||
|
|
||||||||||||
|
Amount
due by Anhai Hengda
|
- | 3,364 | 3,364 | |||||||||
|
Prepayment
of acquisition cost for the Gaoan facility
|
145,384 | - | - | |||||||||
|
Other
|
3,884 | - | - | |||||||||
| 149,268 | 3,364 | 3,364 | ||||||||||
The
amount due by Anhai Hengda related to purchase of property, plant and
equipment that the Group had paid on Anhai Hengda’s behalf and
was denominated in Renminbi. These amounts were interest free, unsecured and
repayable on demand. Anhai Hengda ceased to be a related party of the
Group from April 23, 2008. The amount has been fully repaid on August 3,
2009.
The
prepayment of acquisition cost in the amount of RMB 145.4 million is the payment
made by the Group for acquisition of the Gaoan Facility by December
31, 2009 (Note 29).
As at
December 31, 2007, 2008 and 2009, other receivables of RMB 3,364,000, RMB
3,364,000 and RMB 149,268,000 were neither past due nor impaired.
F-29
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
17.
|
CASH
AND BANK BALANCES
|
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Cash
on hand
|
38 | 49 | 97 | |||||||||
|
Cash
at bank
|
150,083 | 51,557 | 18,410 | |||||||||
| 150,121 | 51,606 | 18,507 | ||||||||||
Cash and
bank balances are denominated in the following currencies:
|
As at
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Renminbi
|
78,316 | 51,603 | 18,507 | |||||||||
|
Hong
Kong dollar
|
13 | 3 | - | |||||||||
|
US
dollar
|
71,792 | - | - | |||||||||
| 150,121 | 51,606 | 18,507 | ||||||||||
Bank
balances denominated in Renminbi are deposited with banks in the PRC and are not
freely convertible to foreign currencies. The conversion of these RMB
denominated balances into foreign currencies is subject to the foreign exchange
control rules and regulations promulgated by the PRC Government.
As at
December 31, 2009, bank balances denominated in US dollars with an amount of RMB
equivalent 5,147,000 were deposited with banks in the United States of America,
and held by China Ceramics whose functional currency is US
dollars.
The cash
at bank bears interest ranging from 0.72% to 0.81%, 0.36% to 0.81% and at 0.36%
per annum during the years ended December 31, 2007, 2008 and 2009
respectively.
|
18.
|
TRADE
PAYABLES
|
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Trade
payables
|
126,251 | 92,888 | 137,948 | |||||||||
Trade
payables are denominated in Renminbi and generally have credit terms ranging
from 30 days to 180 days.
F-30
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
19.
|
ACCRUED
LIABILITIES AND OTHER PAYABLES
|
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Dividend
payable
|
- | 22,455 | - | |||||||||
|
Amount
owing to related parties
|
3,380 | 3,118 | 1,439 | |||||||||
|
Sales
rebates and discounts payable
|
44,380 | 40,891 | 33,219 | |||||||||
|
Accrued
liabilities
|
10,843 | 8,636 | 6,792 | |||||||||
|
Deposits
payables
|
12,400 | 12,400 | 11,200 | |||||||||
|
Other
payables for acquisition of property, plant and
equipment
|
- | - | 660 | |||||||||
|
VAT
payable
|
3,746 | 3,448 | 3,216 | |||||||||
| 74,749 | 90,948 | 56,526 | ||||||||||
Accrued
liabilities and other payables are denominated in the following
currencies:
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Renminbi
|
71,117 | 89,270 | 56,526 | |||||||||
|
Hong
Kong dollar
|
1,941 | 1,678 | - | |||||||||
|
US
dollar
|
1,691 | - | - | |||||||||
| 74,749 | 90,948 | 56,526 | ||||||||||
Amount
owing to related parties relate to 1) payments made by a director on Hengda’s
behalf for the purchase of motor vehicles used by the Group and 2) advances
from a shareholder to the Group for working capital purposes. The amount is
interest free, unsecured and repayable on demand.
Accrued
liabilities consist mainly of accrued rental, wages, repair, maintenance and
utility expenses.
F-31
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
20.
|
INTEREST-
BEARING BANK BORROWINGS
|
|
As
at December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Current
|
||||||||||||
|
Short-term
ban borrowings
|
||||||||||||
|
Secured
and repayable within one year
|
26,500 | 12,300 | 9,500 | |||||||||
The
Group's interest-bearing bank borrowings are pledged by the Group's buildings
and land use rights (Note 12 and 13). Short-term bank borrowings bear effective
interests rates ranging from approximately 6.39% to 7.96%, 9.34% to 9.71% and
5.84% to 9.71% per annum during the years ended December 31, 2007, 2008 and 2009
respectively.
The
carrying amounts of interest-bearing bank borrowings are denominated in
Renminbi.
|
21.
|
SHARE
CAPITAL
|
As the
Success Winner Acquisition
(Note
1)
was accounted for as a reverse recapitalization transaction, the
equity structure (i.e. the number and type of equity interests issued) in the
consolidated financial statements as of December 31, 2009 reflects the equity
structure of China Ceramics (the legal parent and accounting acquiree),
including the equity interests China Ceramics issued to effect the
combination.
The
movement of the equity structure is as follows:
|
2009
(China
Ceramics)
|
2008
(Stand
Best)
|
2007
(Hengda)
|
||||||||||||||||||||||
|
Number
of
shares
|
US$
'000
|
Number
of shares
|
HK$
'000
|
Number
of shares
|
RMB
'000
|
|||||||||||||||||||
|
Authorised
|
||||||||||||||||||||||||
|
At
January 1
|
41,000,000 | 41 | N/A | N/A | N/A | (1) | 58,980 | |||||||||||||||||
|
Issuance
of ordinary share for Stand Best’s incorporation
|
- | - | 1 | 0 | (2) | - | - | |||||||||||||||||
|
Increase
of authorised shares in connection with CHAC’s
Redomestication
|
10,000,000 | 10 | - | - | - | - | ||||||||||||||||||
|
At
December 31
|
51,000,000 | 51 | 1 | 0 | (2) | N/A | (1) | 58,980 | ||||||||||||||||
(1)
Hengda's registered and paid-in capital is not delineated by
shares.
(2)
Amount less than HK$ and RMB equivalent 1,000
F-32
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
21.
|
SHARE
CAPITAL (continued)
|
|
2009
(China
Ceramics)
|
2008
(Stand
Best)
|
2007
(Hengda)
|
||||||||||||||||||||||
|
Number
of
shares
|
US$
'000
|
Number
of shares
|
HK$
'000
|
Number
of shares
|
RMB
'000
|
|||||||||||||||||||
|
Issued
and fully paid:
|
||||||||||||||||||||||||
|
At
January 1
|
16,000,000 | 16.0 | N/A | N/A | N/A | (1) | 58,980 | |||||||||||||||||
|
Issuance
of ordinary shares in Stand Best’s incorporation
|
- | - | 1 | 0 | (2) | - | - | |||||||||||||||||
|
Issuance of ordinary
shares to Mr. Wong Kung Tok
in
connection with the reverse
recapitalization
|
5,743,320 | 5.7 | - | - | - | - | ||||||||||||||||||
|
Redemption and
repurchase of
shares
in connectio
n
with the reverse recapitalization
|
(11,193,149 | ) | (11.2 | ) | - | - | - | - | ||||||||||||||||
|
Cancellation of CHAC
founders' shares
in
connection with the reverse
recapitalization
|
(1,600,000 | ) | (1.6 | ) | - | - | - | - | ||||||||||||||||
|
At
December 31
|
8,950,171 | 8.9 | (3) | 1 | 0 | (2) | N/A | (1) | 58,980 | |||||||||||||||
(1)
Hengda's registered and paid-in capital is not delineated by
shares.
(2)
Amount less than HK$ and RMB equivalent 1,000
(3)
RMB equivalent 61,000
On
November 21, 2007, CHAC consummated its initial public offering, or IPO, of
12,800,000 units, including 800,000 units subject to an over-allotment option,
with each unit consisting of one ordinary share, US$ 0.001 par value per share,
and one warrant to purchase one ordinary share at an exercise price of US$7.50
per share. The units were sold at an offering price of US$10.00 per unit,
generating total gross proceeds of US$128,000,000. Simultaneously with the
consummation of the IPO, CHAC consummated the private sale of 2,750,000 warrants
to CHAC’s founders at a price of US$1.00 per warrant, generating total proceeds
of US$2,750,000. CHAC’s founders had 3,200,000 ordinary shares as founding
shares.
All
ordinary shares are equally eligible to receive dividends and represent one vote
at shareholders’ meetings of the Company.
Each
warrant entitles the holder to purchase shares at US$7.50 per share, subject to
adjustment in the event of stock dividends and splits, reclassifications,
combinations and similar events for a period commencing on the later of: (a)
completion of the business combination and (b) one year from the closing date of
IPO, and ending November 16, 2012. China Ceramics may call the warrants for
redemption, in whole and not in part at a price of $0.01 per warrant at any time
after the warrants become exercisable, upon not less than 30 days’ prior written
notice of redemption to each warrant holder, and if, and only if, the reported
last sale price of the shares equals or exceeds $14.25 per share, for any 20
trading days within a 30 trading day period ending on the third business day
prior to the notice of redemption to warrant holders.
F-33
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
21.
|
SHARE
CAPITAL (continued)
|
On
November 20, 2009, pursuant
to the acquisition agreement, China Ceramics
acquired all of the issued and outstanding shares of Success Winner held by Mr.
Wong Kung Tok in exchange for $10.00 and 5,743,320 shares of China Ceramics
shares. In addition, 8,185,763 shares of the China Ceramics shares were placed
in escrow (the “Contingent Shares”) and will be released to Mr. Wong Kung Tok in
the event certain earnings and stock price thresholds are achieved. Of the
Contingent Shares, up to 5,185,763 Contingent Shares will be released based on
achieving growth in either net earnings before tax or net earnings after tax,
depending on the year, following the completion of an annual audit.
Additionally, 3,000,000 Contingent Shares will be released if China Ceramics
shares close at or above certain share price targets for any twenty trading days
within a thirty trading day period prior to April 30, 2012. The Contingent
Shares will be released without regard to continued employment and are only
contingent on future earnings and the stock price of China
Ceramics.
Also,
concurrent with the Success Winner Acquisition, the Company purchased an
aggregate of 11,193,149 ordinary shares from the public stockholders for an
aggregate purchase price of approximately RMB
752.2
million in transactions intended to assure the successful completion of the
business combination. In connection with the closing of the Success Winner
Acquisition, the CHAC’s founders forfeited 1,600,000 of their founders’ shares
to CHAC for cancellation.
Immediately after the
reverse recapitalization and as at December 31, 2009, China Ceramics' issued and
outstanding equity instruments included 8,950,171 ordinary shares, US$ 0.001 par
value per share, and 15,550,000 warrants
with the
carrying value of US$8,900 and RMB equivalent
61,000.
|
22.
|
RESERVES
|
|
a)
|
Statutory
reserve
|
In
accordance with the relevant laws and regulations of the PRC, the Group’s PRC
subsidiary is required to transfer 10% of its profit after taxation
prepared in accordance with the accounting regulation of the PRC to the
statutory reserve until the reserve balance reaches 50% of the respective
registered capital. Such reserve may be used to offset accumulated losses or
increase the registered capital of these subsidiaries, subject to the approval
from the Board of Directors, and are not available for dividend distribution to
the shareholders.
|
b)
|
Currency
translation reserve
|
The
reserve comprises all foreign exchange differences arising from the translation
of the financial statements of China Ceramics whose functional currency is US
dollars.
F-34
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
22.
|
RESERVES
(continued)
|
|
c)
|
Merger
reserve
|
The
merger reserve of the Group represents the difference between the nominal value
of the shares of the subsidiaries acquired in the Hengda Reorganization (Note 1)
over the nominal value of the shares of the Group issued in exchange
thereof.
|
d)
|
Share-based
payment reserve
|
After
the successful consummation of the reverse recapitalization, Mr. Wong Kung Tok,
the former sole shareholder of Success Winner, allotted a total of 1,521,528
China Ceramics' ordinary shares to two financial advisors for their financial
advisory services related to the recapitalization activities. The shared-based
payment reserve represents the fair value of these allotted shares measured
based on the average market price over the service periods (Note
5.2).
|
e)
|
Reverse
recapitalization reserve
|
The
reverse recapitalization reserve arises as a result of the method of accounting
for the Success Winner Acquisition. In accordance with IFRSs, the
acquisition has been accounted for as a reverse
recapitalization.
|
23.
|
DIVIDENDS
|
Dividends
disclosed during the report periods represented dividends declared by Hengda to
its equity owners. The rate of dividend and the number of shares ranking for
dividends are not presented as such information is not meaningful.
|
24.
|
SIGNIFICANT
RELATED PARTY TRANSACTIONS
|
Other
than the related party information disclosed elsewhere in the Consolidated
Financial Statements, the following are significant related party transactions
entered into between the Group and its related parties at agreed
rates:
|
Year ended
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Rental
expense paid to Anhai Hengda
|
- | 522 | 1,566 | |||||||||
|
Service
fee paid to Stuart Management Co.
|
48 | - | - | |||||||||
Hengda
has entered into non-cancellable operating lease arrangements to lease plant
buildings from Anhai Hengda. Anhai Hengda ceased to be a related party of the
Group from April 23, 2008.
Pursuant
to an administrative services agreement dated as of December 1, 2009 between
China Ceramics and Stuart Management Co,, an affiliate of Paul K. Kelly,
Chairman of the board of directors, China Ceramics will pay US dollar
7,000 a month to Stuart Management Co. for administrative services beginning on
December 1, 2009 for a term of one year, and the agreement shall automatically
renew for another successive year unless either party notifies the other of its
intent not to renew.
F-35
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
25.
|
COMMITMENTS
|
|
(a)
|
Operating
lease commitments
|
As
mentioned in Note 24, Hengda leases plant buildings from Anhai Hengda under
non-cancellable operating lease arrangements. The Group also leases production
factories, warehouses and employees’ hostel from non-related parties under
non-cancellable operating lease arrangements. The leases have varying terms and
the total future minimum lease payments of the Group under non-cancellable
operating leases for assets are as follows:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Not
later than one year
|
7,366 | 13,192 | 13,192 | |||||||||
|
Later
than one year and not later than five years
|
2,431 | 8,734 | 21,926 | |||||||||
| 9,797 | 21,926 | 35,118 | ||||||||||
|
(b)
|
Other
commitments
|
The Group
had the following commitments:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
RMB'000
|
RMB'000
|
RMB'000
|
||||||||||
|
Advertising
expenditure contracted but not
provided
for in the financial statements
|
6,900 | 1,800 | 2,700 | |||||||||
|
26.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES -
POLICIES
|
The
Group’s overall financial risk management programme seeks to minimise potential
adverse effects of financial performance of the Group. Management has in place
processes and procedures to monitor the Group’s risk exposures while balancing
the costs associated with such monitoring and management against the costs of
risk occurrence. The Group’s risk management policies are reviewed periodically
for changes in market conditions and the Group’s operations.
The Group
is exposed to financial risks arising from its operations and the use of
financial instruments. The key financial risks included credit risk, liquidity
risk, interest rate risk, foreign currency risk and market price
risk.
The
Group does not hold or issue derivative financial instruments for trading
purposes or to hedge against fluctuations, if any, in interest rates and foreign
exchange rates.
There has
been no change to the Group’s exposure to these financial risks or the manner in
which it manages and measures the risk.
F-36
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
26.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES – POLICIES
(continued)
|
|
(i)
|
Credit
risk
|
Credit
risk is the risk that one party to a financial instrument will fail to discharge
an obligation and cause the Group to incur a financial loss. The Group’s
exposure to credit risk arises primarily from bank balances and trade
receivables. For trade receivables, the Group adopts the policy of dealing only
with customers of appropriate credit history to mitigate credit risk. For other
financial assets, the Group adopts the policy of dealing only with high credit
quality counterparties.
As the
Group does not hold any collateral, the maximum exposure to credit risk for each
class of financial assets is the carrying amount of that class of financial
assets presented on the consolidated statements of financial
position.
Bank
balances
The
Group’s bank deposits are placed with reputable banks in the PRC, Hong Kong and
the United States.
Trade
receivables
The
Group’s objective is to seek continual growth while minimising losses incurred
due to increased credit risk exposure.
The Group
has significant concentration of credit risk as the Group’s top three largest
trade receivables represent approximately 24%, 20% and 16% of the trade
receivable balance as at December 31, 2007, 2008 and 2009
respectively.
The
Group’s exposure to credit risks is influenced mainly by the individual
characteristics of each customer. The Group typically gives the existing
customers credit terms of approximately 90 days. In deciding whether credit
shall be extended, the Group will take into consideration factors such as the
relationship with the customer, its payment history and credit worthiness. In
relation to new customers, the sales and marketing department will prepare
credit proposals for approval by the Chief Executive Officer.
The Group
performs ongoing credit evaluation of its customers’ financial condition and
requires no collateral from its customers. The provision for impairment loss for
doubtful debts is based upon a review of the expected collectability of all
trade and other receivables.
Further
details of credit risks on trade receivables are disclosed in Note
15.
|
|
(ii)
|
Liquidity
risk
|
Liquidity
risk is the risk that the Group will encounter difficulty in raising funds to
meet commitments associated with financial instruments. Liquidity risk may
result from an inability to sell a financial asset quickly at close to its fair
value.
The
Group’s exposure to liquidity risk arises primarily from mismatches of the
maturities of financial assets and liabilities. The Group’s objective is to
maintain a balance between continuity of funding and flexibility through the use
of stand-by credit facilities.
The
Group’s financial liabilities, including trade payables, accrued liabilities and
other payables and bank borrowings, for the years ended December 31, 2007, 2008
and 2009 have maturity period of less than 1 year or on demand from the
respective statement of financial position dates.
The
Group intends to ensure that there are adequate funds to meet all its
obligations in a timely and cost-effective manner. The Group intends to maintain
sufficient level of cash and cash equivalents and have available
an adequate amount of committed credit facilities from financial
institutions to meet its working capital requirements.
F-37
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
26.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES – POLICIES
(continued)
|
|
|
(iii)
|
Interest
rate risk
|
Interest
rate risk is the risk that the fair value or future cash flows of the Group’s
financial instruments will fluctuate because of changes in market interest
rates.
The
Group’s exposure to interest rate risk arises primarily from short-term bank
borrowings. The Group does not have investment in other financial assets. The
Group’s policy is to maintain all its borrowings on a fixed rate basis. The
interest rates and terms of repayment of the bank borrowings are disclosed in
Note 20.
Bank
borrowings subject to fixed interest rates are contractually repriced at
intervals of 12 months. The other financial instruments of the Group are not
subject to significant interest rate risk.
|
|
(iv)
|
Foreign
currency risk
|
Currency
risk is the risk that the value of a financial instrument will fluctuate due to
changes in foreign exchange rates. Currency risk arises when transactions are
denominated in foreign currencies.
The
Group’s operations are primarily conducted in the PRC. All the sales and
purchases transactions are denominated in RMB. As such, the operations are not
exposed to exchange rate fluctuation.
As at
December 31, 2007, 2008 and 2009, all of the Group’s monetary assets
and monetary liabilities were denominated in RMB except for certain
insignificant amount of bank balances (Note 17) and other payables (Note 19)
which were denominated in foreign currencies.
In the
opinion of the management, the Group does not have any significant currency
exposure. Accordingly, the Group has not used any financial instrument to hedge
its foreign currency risk as its risk exposure is considered to be
minimal.
The
management monitors its exposure to currency risk on an on-going basis and
endeavors to keep the net exposure at an acceptable parameter.
|
|
(v)
|
Price
risk
|
Price
risk is the risk that the value of a financial instrument will fluctuate due to
changes in market prices.
The Group
does not hold any quoted or marketable financial instrument, hence is not
exposed to any movement in market prices.
|
27.
|
CAPITAL
MANAGEMENT
|
The
Group’s objectives when managing capital are:
|
|
(i)
|
To
safeguard the Group’s ability to continue as a going concern and to be
able to service its debts when they are
due;
|
|
|
(ii)
|
To
maintain an optimal capital structure so as to maximize shareholder value;
and
|
|
|
(iii)
|
To
maintain a strong credit rating and healthy capital ratios in order to
support the Group’s stability and
growth.
|
F-38
China
Ceramics Co., Ltd. and Its Subsidiaries
Notes
to the Consolidated Financial Statements
|
27.
|
CAPITAL
MANAGEMENT (continued)
|
The Group
actively and regularly reviews and manages its capital structure to ensure
optimal capital structure and shareholder returns, taking into consideration the
future capital requirements of the Group and capital efficiency, prevailing and
projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities.
The Group
is not subject to externally imposed capital requirements, except for, as
disclosed in Note 22(a), the Group’s PRC subsidiary is required by the Foreign
Enterprise Law of the PRC to contribute to and maintain a non-distributable
statutory reserve fund whose utilisation is subject to approval by the Board of
Directors. This externally imposed capital requirement has been complied with by
the PRC subsidiary for the financial years ended December 31, 2007, 2008 and
2009.
In order
to maintain or adjust the capital structure, the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders, increase share
capital, obtain new borrowings or sell assets to reduce debt.
There
were no changes in the Group’s overall approach to capital management during the
report periods.
|
28.
|
FINANCIAL
INSTRUMENTS
|
As at
December 31, 2007, 2008 and 2009, the Group's financial instruments mainly
consisted of cash and bank balances, trade receivables, other receivables, trade
payables, accrued liabilities, other payables and bank borrowings.
Fair
value
The
carrying amounts of financial assets and financial liabilities with a maturity
of less than one year approximate their fair values.
The
Group does not anticipate that the carrying amounts recorded
at the statement of financial position date would be
significantly different from the values that would eventually be received or
settled.
As at
December 31, 2009, the Group's financial instruments also included the ordinary
shares and warrants issued by China Ceramics (Note 21). Both are considered
equity instruments and were recorded at the net proceeds from the issuance of
these instruments. They are not remeasured after initial
recognition.
|
29.
|
SUBSEQUENT
EVENTS
|
On November
19, 2009, Hengda entered into a definitive acquisition agreement to acquire a
new production facility in Gaoan, Jiangxi Province, PRC (the “Gaoan Facility”).
The closing of the acquisition of the Gaoan Facility was subject to the Gaoan
City Administration for Industry and Commerce transferring the registration and
business license of the Gaoan Facility from the facility's former
shareholders to the Group. The transfer occurred on January 8, 2010. The
Group appointed an executive officer to take control over the facility's
operating and financing activities on the same day.
In total,
Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB185.5
million for the acquisition, of which RMB 145.4 million was advanced to the
Gaoan facility's former shareholders by December 31, 2009. The
facility's long-lived assets primarily comprise property, plant and equipment,
and land use rights. The fair value evaluation of these long-lived
assets has not been completed as of the report date.
F-39
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosure About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Changes in Registrant S Certifying AccountantItem 16G. Corporate GovernancePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits