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| CHPC > SEC Filings for CHPC > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Overview
The following discussion is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance and should be read in conjunction with the financial statements included in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth under the section entitled "Risk Factors" and elsewhere in this report.
Factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include without limitation:
1. Our ability to attract and retain management, and to integrate and maintain technical information and management information systems;
2. Our ability to generate customer demand for our products;
3. The intensity of competition; and
4. General economic conditions.
All written and oral forward-looking statements made in connection with this Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Our Business
We are engaged in the business of retail sales and wholesale of CNG and LPG, construction and operation of CNG and LPG filling stations.
We carry out three types of primary operations: (1) retail sales of CNG and operation of CNG filling stations; (2) retail sales of LPG and operation of LPG filling stations; (3) wholesale of LPG and CNG.
Results of Operations
The "Results of Operations" discussed in this section merely reflect the information and results of Origin Orbit for the year ended December 31, 2007 and for the year ended December 31, 2008.
Revenues
Historical Financial Information for the year ended December 31, 2007 and for
the year ended December 31, 2008 (in US Dollar)
For the period ended For the year Change in
December 31, 2007 ended December Percentage (%)
Items 31, 2008
Revenue 38,502,350 41,661,322 8.20%
Net (loss) income 1,242,327 1,053,818 (15.17%)
Net Income Margin 3.23% 2.53% (21.61%)
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As mentioned above, Origin Orbit acquired Anyang Prosperous and Anyang Top on April 4, 2007. Prior to these acquisitions, Origin Orbit does not have any business.
The Company's consolidated revenue rose to $41,661,322 for the year ended December 31, 2008, an 8.2% increase from $38,502,350 reported for the year ended December 31, 2007. The increase in revenue resulted primarily from the following three factors:
1) In 2007 the company acquired two companies in JIAOZUO and CHANGZHI and the number of our gas station increased three more, which lead to the increase of our market share;
2) National Development and Reform Commission (NDRC) issued "The Guideline Catalog of Industrial Structure Adjustment (2007)"; New energy vehicle is officially encouraged in production list, where CNG dual-fuel automobile is in its fully promoted stage by NDRC, which lead to the dramatic increase of our CNG retail business;
3) The blending of DME with LPG. DME is a colorless gas, safer than LPG in storage and transportation, better combustion performance. It can be mixed with LPG to improve the heating energy.
Our consolidated net income decreased 15.17% to $1,053,818 for the year ended December 31, 2008, as compared to $1,242,327 for the year ended December 31, 2007. This decrease was attributable to:
1) The increase in purchasing costs. Along with the increasing demand for natural gas, suppliers' mark-up lead to our increased CNG purchasing costs; while at the same time, our sell price to clients didn 't increase that much;
2) The increase in the costs which involved for the relevant listing activities, such as auditors fees, lawyer fees after our OTCBB listing on June 30, 2008.
Historical Revenues Breakdown by Region for the year ended December 31, 2007 and for the year ended December 31, 2008 (in US Dollar)
Year ended Year ended
Regions December 31,2007 Percentage December 31,2008 Percentage
Henan Province 21,570,165 56.02% 24,586,846 60.15%
Shanxi Province 455,452 1.18% 820,764 2.01%
Hebei Province 3,857,984 10.02% 1,425,842 3.49%
Shandong Province 4,289,360 11.14% 715,276 1.75%
Hunan Province 622,367 1.62% 0 0
Guangdong Province 7,707,022 20.02% 9,290,382 22.73%
Hubei Province 0 0 3,181,004 7.78%
Guangxi Province 0 0 858,769 2.10%
Total 38,502,350 100.00% 40,878,883 100.00%
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1) The local LPG production in Hunan refinery rose rapidly and can basically meet the local market demand, therefore the drop of local price made us lost the price advantage and lost existing clients;
2) Refineries in Hubei and Guangxi reduced their production, so the local markets were in short supply, we used our advantage to expand the market rapidly in both place and established client base firmly.
Historical Revenues Breakdown by Products for the year ended December 31, 2007 and for the year ended December 31, 2008 (in US Dollar)
Items Period ended Percentage Period ended Percentage Change Amount Change In
Dec 31, 2007 Dec 31, 2008 Percentage (%)
CNG retail 1,214,115 3.15% 3,108,501 7.60% 1,894,386 156%
CNG wholesale 169,685 0.44% 156,746 0.38% (12,939) (8%)
LPG retail 4,424,481 11.48% 2,735,849 6.69% (1,688,632) (38%)
LPG wholesale 31,756,431 82.37% 29,183,237 71.39% (2,573,194) (8%)
Others 987,638 2.56% 5,694,548 13.93% 4,706,910 477%
Total 38,552,350 100.00% 40,878,880 100% 2,326,530 6%
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The sales of CNG for the year ended December 31, 2008, increased 156% as compared to the year ended December 31, 2007. This was mainly due to:
1) In 2007 the company acquired two companies in JIAOZUO and CHANGZHI and the number of our gas station increased three more, which lead to the increase of our market share;
2) Existing CNG filling stations are operating at more experienced level , and sales rose through a series of marketing activities, which formed stable customer base;
3) National Development and Reform Commission (NDRC) issued "The Guideline Catalog of Industrial Structure Adjustment (2007)"; New energy vehicle is officially encouraged in production list, where CNG/petroleum dual-fuel automobile is in its fully promot ed stage by NDRC, which lead to the dramatic increase of our CNG retail business.
Comparing to last year, LPG business fell 38% in retail sales and 8% in wholesale. This was mainly due to:
1) In 2008, both the central and local governments changed their strategy from encourage the development of LPG dual-fuel vehicles to promote CNG dual-fuel vehicles. As a result, our main customers, taxis and city buses, have been converted to using CNG dual-fuel vehicles, which pressured our existing LPG of retail sales downward;
2) The global financial crisis in 2008 endangered the China economy. S ome of our clients even begin limited or stopped their production capacity, which lead to the decline of our wholesale business.
"Others" increased 477% comparing to last year. This is mainly due to the blending of DME with LPG. DME is a colorless gas, safer than LPG in storage and transportation, better combustion p erformance. It can be mixed with LPG to improve the heating energy.
Cost of Goods Sold (COGS)
COGS for the year ended December 31, 2008 was $37,085,144 which is 89.02% of total revenues and represents a 7.58% increase as compared to $34,471,783 and 89.53% of total revenues for the year ended December 31, 2007. The increase in COGS as a percentage of total revenue was primarily due to:
1) Financial accounting method changes. In compliance with "The Accounting Standard for Enterprises" by the Chinese Ministry of Finance, the transportation costs is counted into the purchasing costs in 2008, which lead to the increase of our COGS;
2) Along with the increasing demand for natural gas, suppliers' mark-up lead to our increased purchasing costs.
COGS as a percentage of revenue may fluctuate in the future. This fluctuation may primarily be due to changes in the price of our procurement price and selling price, which can have a significant impact on the COGS. The Company will adopt proper measures to reduce fluctuations in the COGS.
Gross Margin
For the fiscal years ended December 31, 2008 and 2007, the relevant portions of the statements of income are presented below:
2007 2008 Changes
Item Amount $ Percentage Amount $ Percentage Amount $ Percentage
of Revenue of Revenue
Revenues 38,502,350 100% 41,661,322 100% 3,158,972 8.20%
COGS 34,471,783 89.53% 37,085,144 89.02% 2,613,361 7.58%
Gross Profit 4,030,567 10.47% 4,576,178 10.98% 545,611 13.54%
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Table 7.4 Gross profit ratio of the leading products in 2007 and 2008
Items 2007 2008 Comparisons Gross Main 18% 10.98% (7.02%) CNG retail 49% 32.46% (16.54%) CNG wholesale 3% 6.23% 3.23% LPG retail 15% 5.34% (9.66)% LPG wholesale 7% 6.23% (0.77)% |
The gross profit margin for the year ended December 31, 2008 was 10.98%.
Gross profit margin of CNG retail decreased, this was mainly due to:
1) Financial accounting method changes. In compliance with "The Accounting Standard for Enterprises" by the Chinese Ministry of Finance, the transportation costs is counted into the purchasing costs in 2008, which lead to the increase of our COGS, the decreased of gross margin;
2) The increase in purchasing costs. Along with the increasing demand for natural gas, suppliers' mark-up lead to our increased CNG purchasing costs. Our CNG retail price is not adjusted with it, so gross margin decreased.
Gross profit margin of LPG retail decreased, this was mainly due to:
1) Financial accounting method changes. In compliance with "The Accounting Standard for Enterprises" by the Chinese Ministry of Finance, the transportation costs is counted into the purchasing costs in 2008, which lead to the increase of our COGS, the decreased of gross margin;
2) The international crude oil prices rose in the first half year of 2008, which lead to the increase of LPG purchasing cost and the decrease of gross margin; although the crude oil prices decreased during the second half of the year, LPG prices have also decreased. Because of our business transformation under local policy which encourage CNG vehicles, Jinan companies drop the LPG retail business gradually .
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the 12 months ended December 31, 2008 and 2007.
Historical Profit & Loss for the year ended December 31, 2007 and the year ended December 31, 2008
For the year ended For the year ended Changes
Dec 31 2008 Dec 31 2007
Item Amount Percentage of Amount Percentage Amount Percentage
Revenue of
Revenue
$ (%) $ (%) $ (%)
REVENUES 41,661,322 100.00% 38,502,350 100.00% 3,158,972 8.20%
COGS 37,085,144 89.02% 34,471,783 89.53% 2,613,361 7.58%
GROSS PROFIT 4,576,178 10.98% 4,030,567 10.47% 545,611 13.54%
Operating
Expenses 3,419,987 8.21% 2,400,453 6.23% 1,019,534 42.47%
Selling and
Distribution
Expenses 2,544,350 6.11% 1,762,422 4.58% 781,928 44.37%
General &
Administrative
Expenses 875,637 2.10% 638,031 1.65% 237,606 37.24%
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Income from
Operations 1,156,191 2.78% 1,630,114 4.23% (473,923) (29.07%)
Other Income
(Expenses) 263,648 0.63% 344,019 0.89% (80,371) (23.36%)
Investment
Income 0 0.00 % 214,290 0.56% (214,290) (100.00%)
Finance Cost,
net 0 0.00% (48,925) (0.13%) 48,925 100.00%
Dividend
Income 308,337 0.74% 0 0.00% 308,337 100.00%
Interest
Income 0 0.00% 0 0.00% 0 0.00%
Interest
Expenses (34,931) (0.08%) 0 0.00% (34,931) (100.00%)
Other Income
(expenses),
net (9,758) (0.02%) 178,654 0.46% (188,412) (105.46%)
Income before
Income Taxes
and Minority
Interest 1,419,839 3.41% 1,974,133 5.13% (554,294) (28.08%)
Provision for
Income Taxes 369,920 0.89% 731,269 1.90% (361,349) (49.41%)
Income before
minority
interests 1,049,919 2.52% 1,242,864 3.23% (192,945) (15.52%)
Minority
Interest (3,899) (0.01%) 537 0.00% (4,436) (826.07%)
NET INCOME 1,053,818 2.53% 1,242,327 3.23% (188,509) (15.17%)
Foreign
currency
translation
adjustment 372,194 0.89% 38,563 0.10% 333,631 865.16%
TOTAL
COMPREHENSIVE
INCOME 1,426,012 3.42% 1,280,890 3.33% 145,122 11.33%
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Raw Material Procurement
We were able to maintain relatively low purchase price even given the strong fluctuation of LPG price in 2008.
Year Retail LPG Wholesale LPG CNG
Selling Expenses
Selling expenses for the year ended December 31, 2008 mainly included the salary of sales personnel and transportation cost. In 2008, selling expenses amounted to $25,400,350, representing 6.11% of total revenue. The retail business sells its product through its own retail outlets whereas the wholesale business sells its product in the domestic market through direct distribution. The major component of selling expenses is transportation cost. The company mainly uses tank trucks to transport its products. In fiscal year 2008, the transportation cost increased 26.56% to approximately $1,550,300 compared with approximately $1,225,000 in fiscal year 2007.
The selling expenses in 2008 increased 44% as compare to $1,762,422 for the year ended December 31, 2007. The main reason is that the company's acquisition of Anyang top occurred in April of 2007, which made the selling expenses of Anyang top in 2008 three months more than in 2007.
General and Administrative Expenses
The general and administrative expenses for the year ended December 31, 2008, mainly included the salary and welfare of the management personnel and office related expenses, were $875,637, which accounted for 2.10% of total revenue. For the year ended December 31, 2007, the general and administrative expenses were $638,031, the reason of the increase were: costs involved for the relevant listing activities, such as auditors fees, lawyer fees after our OTCBB listing on June 30, 2008.
Finance Costs
The financial expenses mainly consisted of interest expenses and bank charges. For fiscal year 2008, it was $34,931 representing 0.08% of total revenue. For fiscal year 2007, it was $48,925 representing 0.13% of total revenue. As of December 31, 2007, Origin Orbit did not borrow money from any financial institution in China.
The main reason caused the drop of the $34,931 financial expenses, which accounted for 0.08% of total revenue, is that the People's Bank of China kept adjusting to lower interest rates in the year 2008.
Operating Income
The Company's consolidated operating income for the year ended December 31, 2008 decreased 29.07% to $1,156,191, from $1,630,114 reported for the year ended December 31, 2007. This was mainly due to the increase of costs such as below:
1) The costs involved for the relevant listing activities, such as auditors fees, lawyer fees after our OTCBB listing in 30 Jun, 2008;
2) The company's acquisition of Anyang top occurred in April of 2007, which made the selling expenses of Anyang top in 2008 three months more than in 2007;
3) The business model transition in Jinan city. As we gradually stopped our LPG stations and is planning to convert them to CNG stations;
4) The drop of international and domestic oil price negatively impacted our LPG wholesale business.
We believe operating income will show further improvements as we will continue building new CNG filling stations with further revenue source, aided by prudent cost controls on both the production and operating components of our business. We anticipate further improvements in cost of goods sold, increase of sales and expanding market share. Thus while management expects this factor to favorably benefit gross and operating income, we also anticipate that further increases in the internal management, enhance the management efficiency and reducing management costs, that will also improve margins.
Operating Expenses
Selling and distribution expenses
Selling and distribution expenses were $2,544,350 or 6.11% of revenues for the year ended December 31, 2008, as compared to $1,762,422, or 4.58% of revenues for the year ended December 31, 2007.
The main reason of the increase is that the company's acquisition of Anyang top occurred in April of 2007, which made the selling expenses of Anyang top in 2008 three months more than in 2007.
General and administrative expenses
General and administrative expenses were $875,637or 2.1% of our revenue for the year ended December 31, 2008, as compared to $638,031 or 1.66% of revenues for the year ended December 31, 2007. The reason of the increase was: costs involved for the relevant listing activities, such as auditors fees, lawyer fees after our OTCBB listing in 30 Jun, 2008.
Tax Rate
In accordance with the relevant tax laws and regulations of PRC, the corporation income tax ("CIT") rate was 33% until December 31, 2007 and 25% since January 1, 2008. The value added tax (VAT) rate in 2008 is 13%.
Foreign Currency T ranslation Adjustment
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
December 31, 2008 December 31, 2007
Balance sheet items, except for the US$1:RMB 6.8542 US$1:RMB 7.3046
registered and paid-up capital and
retained earnings
Amounts included in the statements of US$1:RMB 6.9623 US$1:RMB 7.5319
operations, changes in stockholders'
equity and cash flows
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Net Incomes
The net income for the year ended December 31, 2008 was $1,053,818 and the net income margin was 2.53% that was attributable by the low profit margin of the LPG wholesale business.
Account Receivable
Account receivable balance as of December 31, 2008 and 2007 was $747,985 and $520,116, respectively. The average turnover rate of account receivable is 3.6 times, or 100 days.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The policies discussed below are considered by management to be critical to an understanding of our financial statements.
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