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Walcom Group LTD (WALG)

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Thursday 30 April, 2009

Walcom Group LTD

Final Results


                                                                  30 April 2009

                             Walcom Group Limited                              

                  ("Walcom" or the "Group" or the "Company")                   

               Final results for the year ended 31 December 2008               

CHAIRMAN'S STATEMENT

I have pleasure in presenting the final results for the year ended 31 December
2008.

Overview of Results

Having taken into account the results of extra investment in our Thailand
subsidiary, turnover and gross profit in the year under review showed
considerable improvement compared with 2007. However, owing to the aggregate
effect of escalating raw material and production costs and the appreciation in
value of the Renminbi, the gross profit margin has fallen to 56.5 per cent.
(2007: 64.8 per cent.). In view of the difficult operating environment ahead,
the Group has decided to focus its financial resources on business operations
and discontinue certain non-material patent applications. This has resulted in
a write off of HK$2.3 million of patent costs capitalised in previous years.
Share option expenses of HK$0.5 million were amortised during the year relating
to options issued in July 2008. Consequently, the loss before tax is
considerably higher than that of last year.

The results are summarised as follows:

                                            Year ended   Year ended      Change
                                                                               
                                           31 December  31 December            
                                                                               
                                                  2008         2007            
                                                                               
                                               HK$'000      HK$'000   per cent.
                                                                               
Turnover                                        26,027       18,454          41
                                                                               
Gross profit                                    14,707       11,966          23
                                                                               
Operating loss                                 (8,902)      (5,639)          58
                                                                               
Net finance income                                   2          367        (99)
                                                                               
Share of (loss)/profit of associates              (12)          507         n/a
                                                                               
Loss before tax                                (8,911)      (4,764)          87
                                                                               
Net asset value per share (HK$)                   0.27         0.33        (18)

Outlook

The global financial crisis and liquidity issues in credit markets have been
well documented and although world-wide financial conditions appear to have
shown a degree of improvement after the efforts of various central banks, we
are now facing a world-wide economic recession, recovery from which is still
uncertain. In view of the present economic climate and in order to be closer to
its operational base, which services its key market, the Group has relocated
its Hong Kong office to Shanghai. The move will cut administration costs and,
therefore, improve the Group's operating efficiency.

In the last annual report, we stated that we considered that there are new
opportunities for our business as the world is facing a crisis in food
production as well as the threat of avian influenza. This is still true despite
the fact that the world's attention has been drawn to the financial crisis.

  * In 2008, the Group reported that with the help of various sophisticated
    computer simulation models, some feed companies had started to use the
    Group's products to reformulate their own production mixes in order to
    reduce the level of corn consumption while maintaining the same energy
    utilisation and hence has lead to a reduction in manufacturing costs. This
    trend continued in the period under review and the Group's customer base in
    this category is growing. The Group is going to expand the scale of this
    sales strategy and a sales campaign named the Energy Saving Program (the
    "ESP") will be launched in the third quarter of 2009. By launching the ESP
    campaign successfully, the Board anticipates that demand for Walcom's
    products will increase significantly.
   
  * The threat of avian influenza to the world's population continues to be
    unresolved. Viral attacks on the swine population in Asia and China are
    still present and these threats may create greater demand for the Group's
    animal husbandry immunity enhancing products.
   
Recent Developments

  * Sales in Philippines have shown slight growth despite the global recession.
    The Board expects this to continue in 2009.
   
  * In addition to the effects of global economic conditions, Thailand's
    economy has been badly affected by the continuous political turmoil in the
    country. The Directors expect that sales demand will improve once the
    political situation has stabilised.
   
  * The Board believes that there is a potentially large market for the Group's
    products in Vietnam, as there is considerable room for technical
    improvement in its swine and prawn feed markets. We have started a local
    product registration process, after which product trials can take place and
    sales can be made into the market.
   
  * In order to further cut costs, the Group has changed its auditor to Lau and
    Au Yeung C.P.A. Limited, which is a highly reputable accounting firm in
    Hong Kong experienced in dealing with listed clients.
   
  * In October 2008, the Group acquired the entire issued share capital of
    Beijing New World Bio-Technology Company Limited, which is engaged in sales
    of Chinese herb and natural plant extracts. Unfortunately, its business has
    been severely affected by the global economic situation and the Directors
    have now decided to suspend its operations until signs of improvement are
    seen.
   
Patents

At the end of 2008 the Group had been granted 32 patents in respect of:

  * its core Cysteamine technology in China, Hong Kong, North Korea, New
    Zealand, Ukraine, Russia, South Africa, Australia, India and South Korea;
   
  * poultry feed in the UK, North Korea, Taiwan, Hong Kong, Russia, China and
    Australia;
   
  * dairy cow feed in New Zealand, the UK, Hong Kong, Europe, Mexico, India,
    China and Russia;
   
  * antibodies to adipose tissues in the UK;
   
  * fish feed in the UK, Hong Kong, Indonesia and Russia; and
   
  * shellfish feed in Europe.
   
The Directors expect further patents to be granted in the future in line with
the policy of the Group to pursue wide patent coverage in places where the
Board believes there will be significant demands for the Group's products.

Debt

In January 2009, the Group repaid in full the bank loan of HK$1,160,000 taken
out in 2007 for the purpose of the factory relocation in Shanghai. The Group is
free of debt and currently has a cash balance of HK$3.7 million.

Dividend

The Directors do not recommend any dividend payment for the year ended 31
December 2008.

Annual General Meeting

The Annual General Meeting will be held at the offices of the Company's
solicitors, Richards Butler in Hong Kong at 2:30pm on Friday 29 May 2009.

On behalf of the Board, I would like to express my sincere thanks to the
management team and staff, professional advisers and shareholders for their
continuous support during the year. Although the world economy is being hit by
the unprecedented financial crisis, the Directors are confident that the Group
can achieve success in its business and maximise the return for the
shareholders.

Eddie K.M. Chan

Chairman

30 April 2009

Consolidated income statement

For the year ended 31 December 2008

                                               Note           2008         2007
                                                                               
                                                               HK$          HK$
                                                                               
Revenue                                                 26,027,300   18,453,608
                                                                               
Cost of sales                                         (11,320,031)  (6,487,430)
                                                                               
Gross profit                                            14,707,269   11,966,178
                                                                               
Other income                                               204,964      788,166
                                                                               
Research and development expenses                      (1,418,445)  (1,207,926)
                                                                               
Selling and distribution expenses                      (7,705,042)  (5,590,529)
                                                                               
General and administrative expenses                   (14,690,786) (11,594,555)
                                                                               
Loss from operations                                   (8,902,040)  (5,638,666)
                                                                               
Net finance income                                           2,475      367,286
                                                                               
Share of (loss) / profit of associates                    (11,523)      507,362
                                                                               
Loss before income tax                                 (8,911,088)  (4,764,018)
                                                                               
Income tax expense                              2        (133,440)            -
                                                                               
Loss for the year                                      (9,044,528)  (4,764,018)
                                                                               
Attributable to:                                                               
                                                                               
Equity shareholders of the Company                     (9,297,050)  (4,764,018)
                                                                               
Minority interests                                         252,522            -
                                                                               
Loss for the year                                      (9,044,528) ( 4,764,018)
                                                                               
Loss per share - basic, HK cents                4          (14.16)       (7.34)
                                                                               
- diluted, HK cents                                        (14.16)       (7.34)

Consolidated balance sheet as at 31 December 2008

                                                              2008         2007
                                                                               
                                                               HK$          HK$
                                                                               
ASSETS                                                                         
                                                                               
NON-CURRENT ASSETS                                                             
                                                                               
Property, plant and equipment                            2,646,404    1,243,656
                                                                               
Patents                                                  5,558,118    6,967,172
                                                                               
Goodwill                                                   127,857            -
                                                                               
Investment in associates                                         -      718,078
                                                                               
                                                         8,332,379    8,928,906
                                                                               
CURRENT ASSETS                                                                 
                                                                               
Inventories                                              1,420,547    1,551,916
                                                                               
Trade and other receivables                              3,968,044    2,424,421
                                                                               
Amounts due from associates                              2,229,334    3,552,714
                                                                               
Tax recoverable                                            212,071            -
                                                                               
Cash and cash equivalents                                8,328,032    9,144,259
                                                                               
                                                        16,158,028   16,673,310
                                                                               
TOTAL ASSETS                                            24,490,407   25,602,216
                                                                               
EQUITY                                                                         
                                                                               
Share capital                                              688,344      649,109
                                                                               
Reserves                                                17,704,252   20,796,592
                                                                               
Total equity attributable to equity holders             18,392,596   21,445,701
of the Company                                                                 
                                                                               
Minority interests                                         375,868            -
                                                                               
TOTAL EQUITY                                            18,768,464   21,445,701
                                                                               
NON-CURRENT LIABILITIES                                                        
                                                                               
Bank borrowings                                                  -    1,160,000
                                                                               
CURRENT LIABILITIES                                                            
                                                                               
Trade and other payables                                 3,042,923    1,898,530
                                                                               
Tax payables                                                17,928            -
                                                                               
Bank overdrafts                                          1,501,092    1,097,985
                                                                               
Bank borrowings                                          1,160,000            -
                                                                               
                                                         5,721,943    2,996,515
                                                                               
TOTAL LIABILITIES                                        5,721,943    4,156,515
                                                                               
TOTAL EQUITY AND LIABILITIES                            24,490,407   25,602,216
                                                                               
NET CURRENT ASSETS                                      10,436,085   13,676,795
                                                                               
TOTAL ASSETS LESS CURRENT LIABILITIES                   18,768,464   22,605,701

Consolidated statement of changes in equity

For the year ended 31 December 2008

                   Share      Share     Merger  Share-based  Exchange   Accumulated       Total  Minority       Total
                                                                                                                     
                 capital    premium    reserve compensation   reserve        losses         HK$  interest      equity
                                                                                                                     
                     HK$        HK$        HK$      reserve       HK$           HK$                   HK$         HK$
                                                                                                                     
                                                        HK$                                                          
                                                                                                                     
At 1 January     649,109 89,842,770 23,852,469            -   125,768  (88,593,217)  25,876,899         -  25,876,899
2007                                                                                                                 
                                                                                                                     
Exchange               -          -          -            -   332,820             -     332,820         -     332,820
difference on                                                                                                        
translation of                                                                                                       
financial                                                                                                            
statements of                                                                                                        
overseas                                                                                                             
subsidiaries                                                                                                         
                                                                                                                     
Loss for the           -          -          -            -         -   (4,764,018) (4,764,018)         - (4,764,018)
year                                                                                                                 
                                                                                                                     
Total                  -          -          -            -   332,820   (4,764,018) (4,431,198)         - (4,431,198)
recognised                                                                                                           
loss for the                                                                                                         
year                                                                                                                 
                                                                                                                     
At 31 December   649,109 89,842,770 23,852,469            -   458,588  (93,357,235)  21,445,701         -  21,445,701
2007                                                                                                                 
                                                                                                                     
At 1 January     649,109 89,842,770 23,852,469            -   458,588  (93,357,235)  21,445,701         -  21,445,701
2008                                                                                                                 
                                                                                                                     
Exchange               -          -          -            -   248,363             -     248,363   (9,454)     238,909
difference on                                                                                                        
translation of                                                                                                       
financial                                                                                                            
statements of                                                                                                        
overseas                                                                                                             
subsidiaries                                                                                                         
                                                                                                                     
Loss for the           -          -          -            -         -   (9,297,050) (9,297,050)   252,522 (9,044,528)
year                                                                                                                 
                                                                                                                     
Total                  -          -          -            -   248,363   (9,297,050) (9,048,687)   243,068 (8,805,619)
recognised                                                                                                           
loss for the                                                                                                         
year                                                                                                                 
                                                                                                                     
Acquisition of         -          -          -            -         -             -           -   791,305     791,305
subsidiaries                                                                                                         
                                                                                                                     
Shares issued     39,235  5,455,874          -            -         -             -   5,495,109         -   5,495,109
                                                                                                                     
Recognition of         -          -          -      500,473         -             -     500,473         -     500,473
equity-settled                                                                                                       
                                                                                                                     
share-based                                                                                                          
payments                                                                                                             
                                                                                                                     
Dividends to           -          -          -            -         -             -           - (658,505)   (658,505)
minority                                                                                                             
interests                                                                                                            
                                                                                                                     
At 31 December   688,344 95,298,644 23,852,469      500,473   706,951 (102,654,285)  18,392,596   375,868  18,768,464
2008                                                                                                                 

Consolidated cash flow statement

For the year ended 31 December 2008

                                                               2008         2007
                                                                                
                                                                HK$          HK$
                                                                                
Cash flow from operating activities                                             
                                                                                
Loss for the year                                       (8,911,088)  (4,764,018)
                                                                                
Amortisation of patents                                     471,749      398,519
                                                                                
Interest received                                         (119,571)    (372,490)
                                                                                
Depreciation                                                456,822      354,968
                                                                                
Foreign exchange loss, net                                   85,767      261,730
                                                                                
Interest paid                                               117,096        5,204
                                                                                
(Gain) / loss on disposal of property, plant and           (47,850)        5,995
equipment                                                                       
                                                                                
Patent written off                                        2,307,615            -
                                                                                
Inventories written off                                     288,335            -
                                                                                
Impairment on goodwills                                       2,658            -
                                                                                
Impairment loss on trade receivables                              -      143,042
                                                                                
Issuance of share-based compensation                        500,473            -
                                                                                
Share of loss / (profit) of associates                       11,523    (507,362)
                                                                                
Operating loss before working capital changes           (4,836,471)  (4,474,412)
                                                                                
Decrease / (increase) in inventories                         38,140    (945,388)
                                                                                
Decrease in trade and other receivables                   1,125,234      209,873
                                                                                
Decrease / (increase) in amount due from associate        1,231,947    (181,536)
- trade related                                                                 
                                                                                
Decrease in trade and other payables                      (421,329)  (5,020,875)
                                                                                
Net cash used in operations                             (2,862,479) (10,412,338)
                                                                                
Corporate income tax paid                                 (327,583)            -
                                                                                
Interest paid                                             (117,096)      (5,204)
                                                                                
Net cash used in operating activities                   (3,307,158) (10,417,542)
                                                                                
Cash flow from investing activities                                             
                                                                                
Payment for patents                                     (1,370,310)  (1,802,439)
                                                                                
Purchases of property, plant and equipment              (1,184,614)   ( 534,855)
                                                                                
Proceeds from sales of property, plant and                   50,000        1,300
equipment                                                                       
                                                                                
Dividends received from an associate                              -      371,855
                                                                                
Acquisition of subsidiaries, net of cash acquired         4,698,585            -
                                                                                
Amounts due from associates - non-trade related              91,433      185,428
                                                                                
Interest received                                           119,571      372,490
                                                                                
Net cash generated from /(used in) investing              2,404,665  (1,406,221)
activities                                                                      
                                                                                
Cash flow from financing activities                                             
                                                                                
Increase in restricted balance of cash and cash                   -  (3,000,000)
equivalents                                                                     
                                                                                
Dividends paid to minority interests                      (439,004)            -
                                                                                
Proceeds from new bank borrowings                                 -    1,160,000
                                                                                

Net cash used in financing activities                     (439,004)  (1,840,000)
                                                                                
Net decrease in cash and cash equivalents               (1,341,497) (13,663,763)
                                                                                
Cash and cash equivalents at the beginning of the         5,046,274   18,704,238
year                                                                            
                                                                                
Exchange gains on cash and cash equivalents                 122,163        5,799
                                                                                
Cash and cash equivalents at the end of the year          3,826,940    5,046,274

Notes to the consolidated financial statements

For the year ended 31 December 2008

1. Publication of non-statutory accounts

The financial information set out in this preliminary announcement does not
constitute statutory accounts.

The financial information for the period ended 31 December 2008 has been
extracted from the Company's financial statements to that date which have
received an unqualified auditors' report.

2 Income tax expense

                                                           2008            2007
                                                                               
                                                            HK$             HK$
                                                                               
Current income tax                                                             
                                                                               
- Thailand corporate income tax                         133,440               -

(a) Taxation for the Company

No provision for profits tax has been made for the Company as it is exempted
from taxation in the British Virgin Islands.

No deferred taxation has been provided as the Company has no material
unprovided deferred tax assets or liabilities which are expected to be
crystallized in the foreseeable future (2007: HK$nil).

(b) Taxation for the Group

(i) Taxation on overseas profits has been calculated on the estimated
assessable profit for the year at the rate of taxation prevailing in the
countries in which the Group companies operate. The income tax expense stated
in consolidated income statement represented the corporate income tax arisen
from the business of a subsidiary operating in Thailand.

On 26 June 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008
which reduced corporate profits tax rate from 17.5 per cent. to 16.5 per cent.
effective from the year of assessment 2008/2009. Therefore, Hong Kong Profits
Tax is calculated at 16.5 per cent. (2007: 17.5 per cent.) of the estimated
assessable profit for the year. However, no provision for Hong Kong profits tax
has been made (2007: HK$nil) as the Group did not have assessable profit
subject to Hong Kong profits tax for the year.

No provision for foreign enterprise income tax ("FEIT") in the People's
Republic of China ("PRC") has been made (2007: HK$nil) as Shanghai Walcom
Bio-Chem Co., Ltd. ("Shanghai Walcom") and Beijing New World Bio-technology
Co., Ltd, wholly owned subsidiaries operating in Shanghai and Beijing,
respectively in the PRC, have agreed tax losses brought forward in excess of
the assessable profits for the FEIT purposes for the year.

Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai
Walcom is granted certain tax relief whereby it is exempted from FEIT for the
first two years and 50 per cent. reduction for the following three years
commencing from the first profitable year of operation after fully set off
against the accumulated losses brought forward.

On 16 March 2007, the National People's Congress approved the Corporate Income
Tax Law of the People's Republic of China ("the new tax law"), which will take
effect on 1 January 2008. Under the new tax law, the PRC income tax rate will
be gradually increased to a standard rate of 25 per cent. for all domestic and
foreign enterprises over the next five years with effective from 1 January
2008. According to the Circular 39 passed by the State Council on 26 December
2007, the tax exemption and reduction will be terminated latest by 2012.
Accordingly, Shanghai Walcom is exempted from PRC income tax for the years from
1 January 2008 to 31 December 2009, followed by a 50 per cent. reduction in the
tax rate for the remaining three years from 1 January 2010 to 31 December 2012.
The applicable income tax rate would be 11 per cent., 12 per cent. and 12.5 per
cent. for the year 2010, 2011 and 2012 respectively.

(b) Taxation for the Group (continued)

                                                             2008          2007
                                                                               
                                                              HK$           HK$
                                                                               
Loss before income tax                                (8,911,088)   (4,764,018)
                                                                               
Share of (loss)/ profits of associated companies         (11,523)       507,362
                                                                               
                                                      (8,899,565)   (5,271,380)
                                                                               
Notional tax credit on loss before income tax                                  
calculated                                                                     
                                                                               
at the rates applicable to profits in the countries   (1,470,328)     (995,942)
concerned                                                                      
                                                                               
Tax effect of:                                                                 
                                                                               
Different income tax rates in other countries              10,038             -
                                                                               
Expenses not deductible for tax purpose                 1,259,367       759,514
                                                                               
Income tax exemption                                    (259,081)             -
                                                                               
Non-taxable revenue                                             -      (83,997)
                                                                               
Temporary differences not recognised                          385         1,603
                                                                               
Prior years' tax losses utilised this year                      -     (460,680)
                                                                               
Unused tax losses not recognised                          593,059       779,502
                                                                               
Income tax charges                                        133,440             -

(iii) A deferred tax asset amounting to HK$7,511,190 (2007 : HK$8,465,000) in
respect of tax losses of a subsidiary incorporated in Hong Kong of
approximately HK$45,522,000 (2007 : HK$48,192,000) has not been recognised in
the financial statements as it is not certain that future taxable profit will
be available against which these losses can be utilised. Tax losses of a
subsidiary incorporated in the PRC of approximately HK$2,598,000 and
HK$2,337,000 will expire at the end of years 2010 and 2011 respectively. The
tax losses do not expire under the current tax legislation. Other temporary
differences are not material.

3 Dividends

The Company does not recommend the payment of any dividend for the year ended
31 December 2008 (2007: HK$nil).

4 Loss per share

(a) Basic loss per share is calculated by dividing the Group's loss
attributable to equity shareholders of the Group of HK$9,297,050 (2007: loss of
HK$4,764,018) by the weighted average number of 65,661,287 ordinary shares in
issue during the year (2007: 64,910,891 shares).

Weighted average number of ordinary shares

                                                            2008          2007
                                                                              
Issued ordinary shares at 1 January                   64,910,891    64,910,891
                                                                              
New issue during the year                                750,396             -
                                                                              
Weighted average number of ordinary share for the     65,661,287    64,910,891
year                                                                          

(b) Diluted loss per share

The diluted loss per share is calculated by dividing the Group's loss
attributable to ordinary equity shareholders of the Company of HK$9,297,050
(2007: HK$4,764,018) by the weighted average number of 65,661,287 ordinary
shares during the year adjusted for the number of dilutive potential shares
under the share option scheme (2007 : 64,910,891).

5. Copies of the Report and Accounts

Copies of the Report and Accounts will be sent to shareholders shortly and will
be available from the principal place of business of the Company, Part D,
Mingtai Bldg, No 351 Guo Shou Jing Road, ZJ Hi-Techn Park, Shanghai, 201203
China, and on the Company's website www.walcomgroup.com.

Enquiries:

Walcom Group Ltd                                                 +852 2494 0133
                                                                               
Francis Chi (Chief Executive Officer)                                          
                                                                               
Albert Wong (Chief Financial Officer)                                          
                                                                               
John East & Partners Limited                                   +44 20 7628 2200
                                                                               
Bidhi Bhoma                                                                    



                                   

                                                                                                                                                  

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