Boe Varitronix : Interim Report 2017

United for Better Future Interim Report 2017

BOE Varitronix Limited

Stock Code 710

Chairman's Statement

Financial Highlights
HK$ million	Six months ended 30 June 2017	Six months ended 30 June 2016
Revenue	1,297	1,119
Profit attributable to shareholders	23	4
Basic earnings per share	3.07 HK cents	0.90 HK cents

On behalf of BOE Varitronix Limited (the "Company") and its subsidiaries (collectively referred to as "BOE Varitronix" or the "Group"), I present the Group's results for the period ended 30 June 2017.

During the period under review, the Group recorded a revenue of HK$1,297 million, representing an increase of 16% from the HK$1,119 million reported for the first half of 2016. Profit from operations of the Group was HK$28 million, a year-on-year increase of 115%. The Group's profit attributable to shareholders was HK$23 million, an increase of 429% compared to the same period in 2016. The net proceeds of approximately HK$1,392 million from the subscription of the Company's shares by BOE Technology Group Co., Ltd ("BOE") in 2016 (the "Subscription") has been utilised in accordance with the intended use of proceeds of the Subscription as disclosed in the circular of the Company dated 22 March 2016. The working capital, including inventories and accounts receivables, increased compared to 2016 under the expansion of Thin Film Transistors ("TFT") modules business.

The Group acquired a stable supply of TFT panels from its major shareholder BOE during the period under review, and its TFT modules business expanded rapidly. As the selling prices of TFT modules products were higher than those of monochrome displays, and the Group has been shifting to the production of medium- to-large-sized TFT modules, its average selling price of products increased. As a result, the revenue of the Group grew. However, the profitability of the Group was reduced due to the low gross profit margin of TFT modules products resulting from the intense competition in the TFT market and the consolidation of the Group's TFT business for development.

The Group considers that it is now under a period of transition for the TFT business development. The Group needs to adapt to the TFT products specifications in terms of design and production technology while facing the competition of market prices, so its profitability will be affected in the short term. Nevertheless, the Group is determined to develop its TFT business as its business strategy with specific goals. The Group remains optimistic about its TFT business.

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Chairman's Statement

DIVIDENDS

The Board of Directors (the "Board") resolved not to declare an interim dividend for the period ended 30 June 2017 (1H 2016: Nil).

GROUP

BUSINESS REVIEW

Automotive Display Business

For the six months ended 30 June 2017, the revenue generated by the automotive display business was HK$906 million, representing an increase of 24% compared to the first half of 2016. This business accounted for 70% of the Group's total revenue.

In the first half of the year, automotive TFT modules products recorded rapid revenue growth and had a tendency to the development of medium-to-large-sized products, which were mainly used on the automobile dashboard and for multimedia information display. As the automotive TFT modules market in Europe was very mature, European customers had high requirements for TFT technology. As the competition became more intense, the mid- to-low end automobiles were also equipped with TFT displays. On the one hand, the Group secured stable supply and improved product quality by leveraging the diversified TFT panels and technology resources of BOE. On the other hand, the Group also improved its production capacity and yield by strengthening its investment in production lines for TFT modules and team expansion. Therefore, European customers became more confident in the Group's TFT business, and the number of orders from some of the Group's strategic customers

increased, resulting in an increase in revenue of the TFT business. The Group had won more TFT projects during the period under review and commenced mass production for some of the projects. The Group strived to develop medium- to-large-sized products and seize more orders in the TFT modules market but the gross profit margin was under huge pressure due to the extremely intense competition faced by the TFT business.

The sales volume of monochrome automotive displays in Europe remained stable while the selling prices were still under pressure despite a slowdown in the magnitude of decline. The Group also took various measures to control the material and operating costs of the monochrome automotive display business in order to stabilise the gross profit margin of this business.

For the People's Republic of China ("PRC") market, the Group acquired a number of TFT medium-to-large-sized projects during the period. Those projects will gradually commence mass production in 2017 and 2018 and will act as a driver of the Group's revenue. In South Korea, the customers almost had no new demand for monochrome displays. The Group acquired some orders of TFT modules being exported to the PRC from its Korean customers in the first half of the year. However, the relationship between the PRC and Korea had become intense since the second quarter of the year, which affected the trade between the two countries and postponed these orders, and also obstructed the Group's TFT business development in South Korea.

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There is still room for growth of the Group's development in the automotive monochrome display market in Japan. The Group maintains solid business relationships with the major customers of monochrome display products in Japan. During the period under review, the business in Japan sustained stable growth. The Group also set up a subsidiary and expanded the local sales team in Tokyo, Japan in 2016. The local sales team had also gradually established business relationship with some Japanese customers with respect to TFT automotive displays with solid progress.

Industrial Display Business

In the first half of 2017, the revenue generated by the industrial display business was HK$391 million, representing an increase of 1% compared to the same period last year. This business accounted for 30% of the Group's total revenue.

During the period under review, the Group's industrial display business in Europe has maintained steady development. Industrial customers are still primarily using monochrome displays for electricity meter which accounted for major portion of industrial sales. Being recognised by its stable quality, the Group also attracted new customers for cooperation in respect of electricity meters in the first half of the year.

In the first half of the year, the Group was acknowledged by the white goods manufacturers in Europe who expected to enhance the image and price of their products with TFT modules installed on them. During the period, the Group recorded growth in the revenue from this sector.

The United States was a major market of industrial displays. However, some customers postponed their orders since the second half of last year. The transitional period was created upon the expiry of some production agreements not followed by the production of new products, which affected the revenue from the United States. The Group is now negotiating with customers on new product projects and beginning to conduct a study on reducing material costs so as to enhance its competitiveness while maintaining profitability.

PROSPECTS

Automotive Display Business

The orders for automotive displays have been shifting to TFT products. To this end, the automotive TFT production lines of the Group in Chengdu will commence operation stage by stage in the second half of the year. Customers are confident with the Group. In particular, some European automotive customers consider the Group as their strategic partner and have placed mass production orders to the Group. In addition to Europe, the TFT business also has rapid development in the PRC market. Leveraging the customer network of BOE, the Group enjoys more business opportunities. It is expected that the PRC will be a tower of strength of the automotive TFT modules business of the Group. Adhering to its strategic customer-based approach, the Group will consolidate its resources to seize TFT modules platform projects with more orders. The Group will also further strengthen its bargaining power for materials, place stringent control on operation costs and further improve production yield and quality so as to strive to improve the gross profit margin of these projects.

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