Rechi Precision : Annual Report

Table of Contents
	Letter to Shareholders]	1
	[Company History]	4
I.	Date of establishment:	4
II.	Organization and operations	4
	Corporate Governance Report]	5
I.	Organization	5

1. Information on Directors, President, Vice Presidents, Asst. VP, and the chiefs of all the company's

	divisions and branch units	7
III.	Remuneration paid to directors, the President, and the Vice Presidents in the most recent year	18
IV.	Status of Corporate Governance	23
V.	Disclosure of the accountant's fee:	72
VI.	Change of CPA	73
VII.	The Chairman, president, or manager responsible for finance or accounting holding a position at a firm
	belonging to a certifying CPA firm or any affiliated enterprise within the preceding year	74
VIII.	The transfer of shares and changes in pledges of the Directors, managerial officers, and shareholders
	holding more than 10% of the shares in the most recent year and as of the printing date of this annual
	report	75
IX.	The top ten shareholders who are spouses or relatives within the second degree of kinship of one another
	....................................................................................................................................................................	76

1. The total number of shares and total equity stake held in any single enterprise by the company, its directors, managerial officers, and any companies controlled either directly or indirectly by the company

	....................................................................................................................................................................	77
	Capital Overview]	78
I.	Shares and Dividends	78
II.	Corporate bond	85
III.	Preferred shares	85
IV.	Global depository shares	85
V.	The status of employee share option	85
VI.	New restricted employee shares	85
VII. M&A (include merger and acquisition, consolidation, and division)	85
VIII. Implementation of the funds allocation plan	85
	Operating Highlights]	86
I.	Business Activities	86
II.	Analysis of the market as well as production and marketing situation	90

1. Employee information in the last two years up to the publication date of this annual report (consolidated)

	....................................................................................................................................................................	94
IV.	Information on spending on environmental protection	94
V.	Work environment and employee safety protection measures	95
VI.	Labor-management Relations	96
VII.	Cyber security management	99
VIII.	Important Contracts	102
IX.	Management of Intellectual Property	102
	Financial Information]	105
I.	Condensed Balance Sheet and Income Statement of the last five years	105
II.	Financial Analysis of the Past Five Years	111
III.	Audit Committee's Review Report on the Most Recent Fiscal Year's Financial Statement	115
IV.	Most Recent Financial Reports	116

1. The Company's individual financial statements audited and certified by a certified public accountant in

	the most recent fiscal year	209
VI.	Financial insolvency incidents encountered by the Company and affiliates for the most recent years, up
	till the publication date of this annual report. The impact on the company's financial situation shall be
	specified	292
	Review of financial position, business performance and risk issues]	293
I.	Financial position	293
II.	Financial performance	294
III.	Cash flow	295
IV.	Impacts of Major Capital Expenditures in the Most Recent Year to Financial Performance	296

1. The major causes for profits or losses incurred by investments during the most recent year; rectifications

	and investment plans for the next year:	296
VI.	Risk disclosure	297
VII.	Other important notes	298
	Specific Notes]	299
I.	Information on the affiliates (as of Dec. 31, 2022)	299

1. The status of private placement of securities in the most recent year to the date this report was printed

..................................................................................................................................................................309

1. Holding or disposal of shares in the company by the company's subsidiaries during the most recent fiscal

	year or during the current fiscal year up to the date of publication of the annual report	309
IV.	Other matters that require additional description	309
	If the result of incidents set forth in Subparagraph 2 Paragraph 3, Article 36 of the Securities and
Exchange Act that could have a material effect on shareholder equity or securities prices during the most
recent fiscal year or during the current fiscal year up to the publication date of the annual report]	309

Letter to Shareholders]

Dear Shareholders,

In 2022, the global economy and financial markets were affected by inflation and interest rate hikes, coupled with the Ukrainian-Russian war and geopolitical risks in the Middle East, which triggered trade sanctions and boosted global raw material and energy prices; China's zero COVID-19 policy and lockdowns were gradually lifted at the end of the year. The overall economic performance declined, costs of livelihood increased and consumers' rigid demand decreased sharply. According to the comprehensive reports and the Company's statistical analysis, the sales volume of air conditioners in China reached 150 million units in 2022, representing a decrease of 1.7% year-on-year. Among them, the sales volume in the domestic market decreased by 0.5%, the export volume decreased by 3.2% and industrial inventory slowed down to approximate 18 million units.

In 2022, the sluggish end demand in Europe and the U.S. and China's zero COVID-19 policy and lockdowns affected the pace of industrial demand and export, air conditioning inventory rose, and the supply for compressors exceeded the demand. In order to ensure shareholders' interests and sustainable operation, the Company adjusted its operational strategies to receive policy-based orders at the beginning of the year. The sales volume of compressors this year was 15.15 million units, a year-on-year decrease of 25.2%; the consolidated revenue was NT $18,370,990 thousand, a year-on-year decrease of 18.7%.

1. Review of business operation results in 2022:
   1. Profitability:

Consolidated Financial Statements

			Unit: NT$ thousand
			Increase	Growth rate
Item	2022	2021	(decrease) in
%
			amount
Operating revenue - net	18,370,990	22,601,601	(4,230,611)	-18.7%
Operating costs	16,125,298	20,249,123	(4,123,825)	-20.4%
Gross profit	2,245,692	2,352,478	(106,786)	-4.5%
Net Operating Income	582,145	586,790	(4,645)	-0.8%
Consolidated profit before	943,577	695,989	247,588	35.6%
tax
Consolidated net income	702,383	518,114	184,269	35.6%
Net income attributable to	688,281	542,921	145,360	26.8%
the company

1. Research & Development:
2. • According to the 2022 annual development plan, the Company completed the development of unit type new refrigerant compressor with low GWP for North American, 2.0HP low-cost, highly efficient inverter compressor for domestic air conditioning applications in China, highly efficient inverter compressor for Top Runner 4.0~8.0KW air conditioning applications in Japan, and horizontal and variable frequency compressor for parking air conditioning. At the same time, the Company also completed the preliminary research for compressors with air supply and enthalpy gain to reserve the technology required for low-temperature and heating applications.
3. Sales:
4. • The sales volume of compressors in Southeast Asia increased by 2.4% year on year;

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competitiveness of all-in-one machines in North American was lower than expected with a decline of 50% to 60% year-on-year; the sales volume in the European market was affected by the Russia-Ukraine War and terminal destocking, resulting in a decline of 32.7% in the sales volume year-on-year; the aluminum wire compressors were promoted, and the clothes dryers were successfully expanded in the Chinese market, with an achievement rate of 113.2% compared with the budget.

1. • The sales volume of application products increased significantly in new fields on a year- on-year basis, especially in China, North America, East Asia and Europe.
2. Summary of 2023 Business Plan:

As to the prospects of 2023, the environment affecting the Company's operations is illustrated as follows:

1. Global economic environment
2. • The IMF forecasted that global economic growth will slow down to 2.7% in 2023. It is forecasted that developed economies, such as the United States and Europe, will slow down their economic growth rates to 1.0% and 0.5%, respectively; Japan will maintain the growth rate of approximate 1.6%. The growth of developing countries and emerging markets in Asia is mainly driven by China's forecasted growth rate of 4.4%, and it is forecasted that India will maintain the growth rate of over 6%.
   • With the implementation of monetary tightening policies in major countries, the inflation rate is expected to slow down to 6.5%.
3. Industry status
4. • Air conditioning industry
     In 2023, the global air-conditioning terminal market grew steadily, benefiting from the global air-conditioning destocking, the acceleration of China's economic recovery and the growth momentum of emerging markets and developing countries. In the world, the energy efficiency standards of air conditioners have been improved year by year and the awareness of environmental protection has risen, which have continuously driven the industry to accelerate the frequency conversion.
   • Compressor industry
     The sales volume of compressors with local brands in China accounted for more than 75% and the capacity of compressors was oversupplied, and the price competition in the market was intense.
     The awareness of energy transformation in Europe is high and the demand for heat pumps (hot water/heating) in the market is warming up. The heat pumps are expected to become the main application product other than air conditioning.
   • Raw materials
     Copper: for the LME copper price, supply and demand situation is favorable to the trend of international copper price due to the lifting of lockdown in China and the weakening of the US dollar. Driven by the transformation of green energy and new energy vehicles, consumption demand for copper is expected to be supported, and the global trend of carbon reduction continues to warm up.
     Steel: the World Steel Association (worldsteel) forecasts that the consumption of steel will slightly increase by 1% to 1.8147 billion tons due to infrastructure demand. In addition, the China Iron and Steel Association states that because the lifting of lockdown caused by the COVID-19 pandemic in China and implementation of multiple revitalization policies support steel consumption, the steel supply and demand in the market are expected to remain stable and upward.
     Rare earths: Shanghai Metals Market (SMM) estimates that the overall price of rare earths in China will return to a market situation of price and volume equilibrium, and the growth momentum of rare earths consumption comes from maintaining a high

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level of prosperity in new energy vehicles, wind power and energy-saving consumption.

The operating challenges brought about by the changes in the overall environment in the future will be greater than in previous years. Grasping and quickly responding to changes in the external environment are essential to the operations of the Company. Therefore, the Company formulated its operational strategies for 2023, which are summarized as follows:

1. The annual compressor sales target is 16.45 million units and more.
2. In response to the market competition of frequency conversion products, we will continue to promote inverter compressors to increase the market share.
3. In response to the global trend of carbon neutrality, we will grasp medium and long- term low-carbon business opportunities and develop new customers and new fields.
4. Make effective product development and focus on product competitiveness, response speed and forward-looking development.
5. Strengthen cost control and improve asset utilization efficiency.
6. Accelerate the rationalization, automation and intelligentization of production, reduce the impact of disappearance of demographic dividends and improve the consistency of the Group's product quality.
7. Strengthen the analysis ability for defective products, shorten the time of processing customers' complaints for products and improve customer satisfaction.
8. Attach importance to ESG and strive for energy conservation and carbon reduction.

Looking forward to 2023, the Company adheres to the concept of sustainable operation and honest operation, and still focuses on pursuing customer satisfaction as the primary goal. Under the future development prospect of the air conditioning market, the Company will be customer-oriented, quickly respond to market demand, continuously expand sales volume, reduce marginal costs, break through technical bottlenecks, and strengthen product competitiveness, to achieve the maximization of enterprise value.

Chairman: CHEN, SHENG TIEN

President: FENG, MING FA Accounting Supervisor: WU, CHIN MEI

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