RESPONSE TO SGX QUERIES ON ANNUAL REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2010

Transcription

1 CHINA SKY CHEMICAL FIBRE CO., LTD. (THE COMPANY ) RESPONSE TO SGX QUERIES ON ANNUAL REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2010 The Board of Directors of the Company (together with its subsidiaries, the Group ) wishes to announce its response to the queries raised by the Singapore Exchange Securities Trading Limited ( SGX ) in connection with the annual report for the financial year ended 31 December 2010 (the Annual Report ). Query 1 (1) We note on page 26 of the Annual Report that the aggregate value of interested person transactions ( IPT ) entered into for FY2009 and FY2010 was RMB1.5 mil (approximately S$300K) and RMB866K (approximately S$173K) respectively. Please provide the name of the interested person and present the information in the table format as set out in Rule 907 of the Listing Manual. Response to Query 1 The IPT for FY 2009 are as follows:- Name of Interested Person SK Lai & Co. Aggregate value of all interested person transactions during the financial year under review (excluding transactions less than $100,000 and transactions conducted under shareholders mandate pursuant to Rule 920) RMB 929,843.30* (approximately S$183,000.00) Aggregate value of all interested person transactions conducted under shareholders mandate pursuant to Rule 920 (excluding transactions less than $100,000) RMB - *Note: The Company regrets to state that there are errors in the aggregate value of all interested person transactions for FY2009, where the aggregate value shall be RMB929,843.30, instead of RMB1,500, as disclosed in the FY2009 and FY2010 Annual Report.

2 The IPT for FY 2010 are as follows:- Name of Interested Person SK Lai & Co. Aggregate value of all interested person transactions during the financial year under review (excluding transactions less than $100,000 and transactions conducted under shareholders mandate pursuant to Rule 920 RMB 358,903.80** (approximately S$72,000.00) Aggregate value of all interested person transactions conducted under shareholders mandate pursuant to Rule 920 (excluding transactions less than $100,000) RMB - ** Note: The Company regrets to state that there are errors in the aggregate value of all interested person transactions for FY2009, where the aggregate value shall be RMB358,903.80, instead of RMB866, as disclosed in the FY2010 Annual Report. Query 2 (2) The Company disclosed in the 2009 Annual Report that there were no IPT in FY2009. However, in the 2010 Annual Report, we note that in the comparative figures for the FY2010 IPT figures, and amount of RMB1.5 mil was transacted with a firm which a director has an interest in. In view of this, please (i) (ii) (iii) Explain the statement made in the FY2009 Annual Report that there were no IPT in FY2009; Explain why although the Company disclosed on page 26 of the 2009 Annual Report that it had established procedures to ensure that all transactions with interested persons are reported in a timely manner to the AC and that these transactions are conducted at arm s length, why the procedure did not detect the FY2009 IPT; and Disclose the nature of the services by the interested person, justify why such services were necessary and demonstrate how the Company and the AC determined that these services had been transacted at arm s length. Response to Query 2 (2)(i) The professional fees of RMB1.5 mil paid was disclosed in Note 5 of the Notes to Financial Statements at page 53 of the 2009 Annual Report. However this was inadvertently omitted in the Corporate Governance section during the final print of the 2009 Annual Report, which contributed to the discrepancy of the disclosure. Please also note that there are errors in the aggregate value of all interested person transactions for FY2009, where the aggregate value shall be RMB929,843.30, instead of RMB1,500, as disclosed in the FY2009 and FY2010 Annual Report. Section F of the Corporate Governance section at page 26 of the 2009 Annual Report should therefore, read as follows:- The Company has established procedures to ensure that all transactions with interested persons are reported in a timely manner to the AC and that these transactions are conducted at arm s length. Each member of our AC will abstain from voting in respect of matters in which he is interested.

3 The aggregate value of interested person transactions entered into for the financial year 2008 and 2009 are as follows: Name of interested person Fees paid and payable for provision of professional services to a firm which a director has an interest in RMB929,843.30* RMB594, *Note: The Company regrets to state that there are errors in the aggregate value of all interested person transactions for FY2009, where the aggregate value shall be RMB929,843.30, instead of RMB1,500, as disclosed in the FY2009 and FY2010 Annual Report. The AC has reviewed the fees paid and payable for the provision of professional services, such fees having been levied with reference to the market hourly charge out rates charged by a comparable accounting firm and the resources and experience deployed, and the AC is of the opinion that the professional fees have been charged on an arm s length basis. (2)(ii) The discrepancy in reporting was explained in our response to Query (2)(i) above. The omission of the disclosure is the result of an inadvertent error and is not a result of any lapse in the Company s procedures to ensure that all transactions with interested persons are reported in a timely manner to the AC and that such IPT are conducted at arm s length basis. (2)(iii) SK Lai & Co., a firm of certified public accountants has rendered professional services to the Company. These services relate to assist in the review and recommendations of the Company s internal, accounting and reporting controls, reviewing quarterly financial statements and the results announcements and providing consultancy and advisory services for the accounting and consolidation of Qingdao Zhongda Chemical Fibre Company Limited. Mr. Lai Seng Kwoon who is an Independent Director of the Company, is a partner of SK Lai & Co. The Board considers Mr Lai Seng Kwoon to be an independent director, notwithstanding his relationship with the Company, which falls under Guidance Note 2.1(d) of the Code of Corporate Governance, by virtue of his position as a partner of SK Lai & Co., which renders professional services to the Group. Despite this relationship, the Board assesses him to be an independent director due to his unequivocal ability to exercise strong independent judgment in his deliberations which are always in the interests of the Company. Mr Lai Seng Kwoon acts professionally and maintains a high standard of duty and care as is required of his profession. He observes the ethical standards of his profession with care and is quick to disclose any conflict of interests which may arise from his other engagements. The provision of the professional services has been approved by the Board after considering the adequacy of resources and experience of SK Lai & Co. and the professional fees charged to the Company are based on normal commercial terms (i.e. such fees having been levied with reference to the market hourly charge out rates charged by a comparable accounting firm and the resources and experience deployed).

4 Query 3 We note that two of the Independent Directors of the Company had each received 1 million options in the Company in FY2009 and share based expenses for directors amounted to approximately RMB2.7 mil and RMB1.3 mil in FY2010 and FY2009 respectively. In addition, an amount of RMB866K and RMB1.5 mil was paid to director in FY2009 and FY2010 respectively for professional services rendered. Please disclose the total value of benefits paid to or are payable to each Independent Directors. Principal 2.1 of the Code of Corporate Governance provides that there should be a strong and independent element on the Board. The Code also provides that an independent director is one who has no relationship with the company, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director s independent business judgement with a view to the best interests of the company. One examples of such relationships which would deem a director not to be independent is set out in Principal 2.1 (d) of the Code as follows:- If a director, or an immediate family member, being a substantial shareholder of or a partner in (with 5% or more stake), or an executive officer of, or a director of any for-profit business organisation to which the company or any of its subsidiaries made, or from which the company or any of its subsidiaries received, significant payments in the current or immediate past financial year. As a guide, payments aggregated over any financial year in excess of S$200,000 should generally be deemed significant. In view of the above, please explain how the Company has complied with the Code of Corporate Governance and provide explanations to justify any non-compliance. Response to Query 3 (3)(i) The Company is of the view that the options granted to the Independent Directors are not considered as benefits paid to or are payable to the Independent Directors. The exercise price of the options granted to the Independent Directors was at a premium above the prevailing share price at the date of issue. Throughout 2010, the listed prices of the Company s shares have not risen above the exercise price. Additionally, none of the Independent Directors has exercised their options after they were granted. As for the professional fees paid to SK Lai & Co., the professional fees charged to the Company are based on normal commercial terms (to refer to response (2)(iii) above), after due consideration and approval given by the Nominating Committee ( NC ) and the AC. Kindly refer to responses (2)(i) and (2)(iii) for further details. (3)(ii) Although SK Lai & Co. has received payments amounting to RMB1.5 mil (however, as explained above, the correct amount should be RMB929, and RMB866,000 (however, as explained above, the correct amount should be RMB358,903.80) for the professional services rendered to the Company in FY2009 and FY2010, the NC considers Mr. Lai Seng Kwoon as an independent director. Kindly refer to response (2)(iii).

5 Query 4 We note on page 27 of the Annual Report that Certain directors received remuneration from related corporations in their capacity as directors and/or executives of those related corporations. Please disclose details of the amounts received by each director, their name, the name of the related corporations and the reasons for such payments. Response to Query 4 Name of Director Name of Related Corporations Reasons for such payment Huang Zhong Xuan Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited Being remunerated as Chief Executive Officer of Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited Cheung Wing Lin Song Jian Sheng Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited Contribution to the pension fund of Cheung Wing Lin in his capacity as Non-executive chairman of Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited Being remunerated as Director of Quanzhou TianYu Chemical Fibre & Weaving Industrial Company Limited The above payments were consistent with the arrangements in prior years. Note: Related Corporations refer to subsidiaries of the Company. Query 5 We note on page 28 of the Annual Report that a total of 26,045,000 options were granted to employees of related corporations. Please advise which related corporations these employees are in and whether the rules of the Chine Sky ESOS provide for the participation of these employees. Response to Query 5 The total 26,045,000 options were granted to the employees of Quanzhou Tianyu Chemical Fiber & Weaving Industry Company Limited and Qingdao Zhongda Chemical Fibre Company Limited. Given that both companies are within the Group Company, the options granted were therefore in line with the rules of the China Sky ESOS, which had provided that Group Employees are eligible to participate in the China Sky ESOS. Note: Related Corporations refer to subsidiaries of the Company.

6 Query 6 We noted on page 28 of the Annual Report that while no options had been granted to Mr. Song Jian Sheng for FY2010, a total of 7.5 mil options had been granted to him since the commencement of the China Sky ESOS. In the FY2009 Annual Report, there was no disclosure on any options that were granted to Mr. Song under the China Sky ESOS. Please provide details on when these options were granted to him, whether any announcement was made at the time of the grant and why such grant was not disclosed in the FY2009 Annual Report. Response to Query 6 The options were granted to Mr Song in The Company regrets to state that an SGXNet announcement should have been made at the material time when the options were granted to Mr. Song Jian Sheng and further that details of the same was omitted from the FY2009 Annual Report. As rectification, the Company disclosed the same in the FY2010 Annual Report Query 7 We note on page 57 of the Annual Report that the Group paid a deposit of approximately RMB149 mil as an advance to a Third Party under an agreement signed in 2006, whereby the Third Party will acquire the land use rights from the relevant PRC authority for a piece of land in the PRC and transfer such rights to the Group for a total consideration of approximately RMB169 mil. The Company disclosed it has not yet obtained the land use right certificate in respect of this piece of land. We also note that the Company had paid a deposit of RMB114 mil for construction work on this piece of land. We further note that the Company had announced on 7 March 2011 its intention to defer its plan for the development of this land. In view of this, please:- (i) disclose the identity, the background and financial standing of the Third Party; (ii) provide details on the land, including the size, location and current utilization; (iii) disclose the date the application for the acquisition for the land use rights was made, the date the latest response by the relevant PRC authority was received and the reason for the delay in obtaining the land use right certificate; (iv) explain why the deposit of RMB149 mil representing approximately 88% of the consideration for the purchase of land has not been refunded despite the delay in obtaining such land use rights and the Company s intention to defer its development of the land; (v) advise how likely the Third Party is able to obtain the land use rights, the basis for this view and the timeline set by the Company for the Third Party to obtain the land use rights; (vi) advise what legal rights the Company and/or the Third Party currently has to this piece of land. In the event that the Third Party is unable to obtain the land use rights, what is the Company s right to any refund of the deposit paid; (vii) explain why an amount of RMB114 mil was paid for the construction work on this piece of land when the land use rights had not been obtained. Please also disclose the identity of this counterparty, its financial standing, when this deposit was paid and explain why the deposit has not been refunded since the Company intends to defer its plans to develop the land. Please also disclose the Company s right to any refund of the deposits paid.

7 Response to Query 7: (7)(i) The Third Party referred to is Fujian Fuyuan Chemical Fiber Co., Ltd. ( 福建富源化学纤维科技有限公司 ) ( Fujian Fuyuan ). Fujian Fuyuan is a PRC company incorporated in Quanzhou in 2005 (the shareholder being an individual third party who is independent and is not related to the Group). Fujian Fuyuan is presently dormant but solvent. (7)(ii) The details of the land as extracted from a valuation report dated 7 March 2011 prepared by an independent valuer are as follows:- Property Description and Tenure Particular of Occupancy An industrial site situated at Xiazhu Village, Jieshan Town, Quangang District, Quanzhou City, the People s Republic of China The property comprises three parcels of contiguous land with a total site area of approximately 401, square metres The property is a vacant site pending for development (7)(iii) In 2006, the Group was desirous of venturing upstream to produce raw material for its ongoing business operations where it was then anticipated that such production business would generate profit for the Group. In view of the expansion plan, the Company s subsidiary, Mega Force Investments Limited ( Mega Force ) had entered into an agreement with Fujian Fuyuan in 2006, to acquire the land (more particularly described in response (7)(ii) above) at a total consideration of RMB149 million¹. As part of the expansion plan, the Group had also engaged 广西第二建筑工程公司厦门分公司 as the contractor to develop the land. The payment for the first stage of construction was valued at RMB114 million². As Mega Force is a foreign entity incorporated in British Virgin Islands, the transfer of land use rights is subject to approval being obtained from the People s Government of Quanzhou Municipality ( 泉州市人民政府 ). As the transfer of land use rights is from a local entity to a foreign entity, the turnaround time in obtaining such approval is very extensive. As such, the land is still under the name of Fujian Fuyuan. Prior to the completion of the transfer of land use rights, the global economy was hit by the global financial crisis in 2008/2009. In light of the financial crisis, the Company decided to defer its expansion plans as well as the completion of the acquisition of land (where 12% of total consideration remains outstanding). This has been consistently announced on 7 March 2011, in response to SGX queries to the Company s announcement of full year results for the financial year ended 31 December 2010 ( March Announcement ). As previously responded in our March Announcement, based on the latest assessment, the recoverable value of the land would not be less than the amounts invested to date. Further, the Company is of the view that if they do pay up the total consideration, amortisation of the land would commence upon receipt of the certificate of land use rights, which would be a financial burden to the Company, considering that the expansion plan had been deferred and the land would not be utilised. The Company wishes to confirm that it would not be in breach of any terms of the agreement if payment is deferred.

8 In view of the foregoing, the application for the acquisition of the land use rights will be made once the remaining balance of the total consideration is fully paid up. The Company plans to settle the remaining balance of RMB19 mil within the 2Q of FY2011. However, the timeline for Fujian Fuyuan to obtain the land use rights is beyond the Company or the Group s control. Note 1: To date, the Company has paid up to 88% of the total consideration of RMB149 million. It was expressly indicated in the letter of confirmation issued by Fujian Fuyuan on 10 February 2011 that the deposit of RMB149 mil representing approximately 88% of the consideration for the purchase of land will be refunded to Mega Force Investments Limited, a wholly owned subsidiary of the Company if Fujian Fuyuan fails to obtain the land use rights from the People s Government of Quanzhou Municipality ( 泉州市人民政府 ). Note 2: The RMB114 mil was paid to 广西第二建筑工程公司厦门分公司 as fees paid for construction work rendered towards the development of land. 广西第二建筑工程公司厦门分公司 is a state owned enterprise in the PRC which has been incorporated more than 30 years. Do note that the payment of RMB114 million is non-refundable. (7)(iv) Kindly refer to response (7) (iii). (7)(v) Kindly refer to response (7) (iii). (7)(vi) Kindly refer to response (7) (iii). (7)(vii) Kindly refer to response (7) (iii). Query 8: We note on page 25 of the Annual Report that the statement that The Group has adopted and implemented its policies in line with the rules of the Listing Manual in relation to dealing of shares of the Company. Rule 1207 (18) of the Listing Manual states that the Annual Report must include at least a statement whether and how the issuer has complied with the following best practices on dealing in securities: (i) a listed issuer should devise and adopt its own internal compliance code to provide guidance to its officers with regard to dealing by the listed issuer and its officer in its securities; (ii) an officer should not deal in his company s securities on short-term considerations; and (iii) a listed issuer and its officer should not deal in the listed issuer s securities during the period commencing two weeks before the announcement of the company financial statements for each of the first three quarters of its financial year and one month before the announcement of the company s full year financial statements (if required to announce quarterly financial statements), or one month before the announcement of the company s half year and full year financial statements (if not required to announce quarterly financial statements). We note that the Company has not complied with the above requirements. Please disclose the necessary information to enable investors to understand how the company has complied with Rule 1207 (18) of the Listing Manual.

9 Response to Query 8: The Company has adopted and implemented policies in line with the Rule 1207(18) of the SGX- ST Listing Manual in relation to the dealing of shares of the Company. The policies have been made known to directors, executive officers and any other persons as determined by the management of the Company who may possess unpublished material price-sensitive information of the Company. The Company has procedures in place prohibiting directors and officers from dealing in the Company s shares during the two weeks before the announcement of the Company s financial statements for each of the first three quarters of its financial year and the one month before the announcement of the Company s full year financial statements ( Prohibited Periods ), or if they are in possession of unpublished material price-sensitive information of the Company. Directors and officers are required to comply with and observe the laws on insider trading even if they trade in the Company s securities outside the Prohibited Periods. Directors and executives are expected and reminded to observe insider-trading laws at all times even when dealing in securities within permitted trading periods. The Group has further reminded its Directors and officers not to deal in the Company s securities on short-term considerations. The Board confirms that for the FY2010, the Company has complied with Listing Rule 1207(18). The Company will incorporate Rule 1207(18) and disclose this statement in all subsequent annual reports. By Order of the Board Huang Zhong Xuan Chief Executive Officer and Executive Director 22 April 2011