Management Discusscion and Analysis

Management Discussion and Analysis

Management Discussion and Analysis Yearly Ending 31 December 2019

Management Discussion & Analysis

By overall the operation result of Chow Steel Industries Public Company Limited and its subsidiaries for the year ended 31 December 2019 can describe as followings:

Production and Distribution of Steel Billet Business:

In 2019, the Company has gradually started to provide OEM services to a customer since end of March 2019. However, due to factory Phase 2 revamping, including manufacturing process development, machinery improvement, since July 2019 and finished revamping process in November 2019. The Company started commissioning test over the new manufacturing process together with new machines development since then. The commissioning test is expected to be completed by February 2020 and the Company can start to provide full OEM service to a customer by end of Quarter 1’ 2020.

For industry outlook, price of steel billets in the domestics market, was decreased compare to prior year which resulting from excess supply in the market

Renewable Energy Business:

In 2019, the Group has successfully commercial operated a new solar power plant which located in Aomori, Japan. This project has capacity of electricity generation at 7.21 MWdc. As of 31 December 2019, the Company had total electricity generation capacity of 67.12 MWdc, which comprise of 6.62 MWdc and 60.50 MWdc in Thailand and Japan respectively. In comparison of 65.77 MWdc electricity generation capacity as at 31 December 2018. As a result, the revenue from sale electricity in current year was higher than prior year. In addition, the Company is continue looking for new investment opportunities on Solar Power business expansion in overseas. During 2019, the Company started the feasibility study for new projects and on process of requesting for Solar Power Plant development’s license in Australia.

During the current year, the Company continued to maximize its operational assets’ value through the strategic exit of 5 solar power plants projects, which had electricity generation capacity of 5.86 MWdc, to listed infrastructure fund in Japan. As a result, the Company recognized a gain on sales of solar plants of 97.71 million Baht.

A subsidiary company got mandate for several new projects, installation of solar cell panel system. As of 31 December 2019, the company was completely installed solar cell to customers. A subsidiary recognized service income into current year.

Transportation Service Business:

The objective of transportation business is to support sale billet of a parent company transactions. Since the price of steel billets in the domestic market was decreased. Therefore, the parent company slow-down of manufacturing billet and started providing OEM service to a customer. Furthermore, there were revamping factory Phase 2 in current year. As a result, the billet transaction by the parent company were significant decreased. In current year, the Company expanded there service to new customers in various type of businesses e.g. cements industry, fertilizer industry etc.

The Group Performance Analysis

The analysis and explanation of the Group’s performance for the year ended 31 December 2019 and 2018 were as follows;

Operating Result – for the year ended 2019 2018 changes
Million Baht Million Baht Million Baht %
Revenue from sale and service – Steel Billet Business 572.08 3,077.84 (2,505.76) (81.41%)
Revenue from service income – Transportation Business 8.62 4.30 4.32 100.47%
Revenue from sale and service – Renewable Energy Business 753.29 981.84 (228.55) (23.28%)
Gain on sale of power plant project – Renewable Energy Business 97.71 214.51 (116.80) (54.45%)
Interest income 7.05 8.25 (1.20) (14.55%)
Gain (loss) on exchange rate 90.28 - 90.28 100%
Other income 25.16 23.00 2.16 9.39%
Total revenue 1,554.19 4,309.74 (2,755.55) (63.94)%
Cost of sale and service – Steel Billet Business 581.53 3,093.45 (2,511.92) (81.20%)
Cost of service – Transportation Business 16.37 27.53 (11.16) (40.54%)
Cost of sale and service – Renewable Energy Business 495.47 583.48 (88.01) (15.08%)
Total cost of sale and service 1,093.36 3,704.46 (2,611.10) (70.49%)
Gross profit margin 460.83 605.28 (144.45) (23.86%)
Selling and administrative express – Steel Billet Business 114.18 109.37 4.81 4.40%
Selling and administrative express – Transportation Business 5.91 3.20 2.71 84.60%
Selling and administrative express – Renewable Energy Business 106.95 146.85 (39.90) (27.17%)
Loss on exchange rate - 20.28 (20.28) (100%)
Finance cost – Steel Billet Business 130.48 129.25 1.23 0.95%
Finance cost – Transportation Business 0.74 1.03 (0.29) (28.25%)
Finance cost – Renewable Energy Business 288.83 284.12 4.71 1.66%
Total expenses 647.09 694.10 (47.01) (6.77%)
Profit (loss) from operation (186.26) (88.82) (97.44) 109.71%
Income tax (10.13) (19.02) 8.89 46.74%
Profit (loss) for the year – Steel Billet Business (249.79) (224.69) (25.10) 11.17%
Profit (loss) for the year – Transportation Business (14.78) (27.88) 13.10 (46.99%)
Profit (loss) for the year – Renewable Energy Business 68.18 144.73 (76.55) (52.89%)
Net loss for the year (196.39) (107.84) (88.55) (82.11%)
- Equity holders of the Company (198.26) (122.15) (76.11) 62.31%
- Non-controlling interest of the subsidiaries 1.87 14.31 (12.44) (86.93%)
Loss per share (0.25) (0.15) (0.10) 66.67%

Revenue from sale and service

Production and Distribution of Steel Billet Business:

Revenue from sale and service for the year ended 31 December 2019 was 572.08 million Baht which was decreased from prior year amount of 2,505.76 million Baht or 81% equivalent. The decreasing can describe as follows:

Revenue – Steel Billet Business 31 December 2019 31 December 2018 Change
Million Baht Million Baht Million Baht %
Sale 476.67 3,077.84 (2,601.17) (84.51%)
Service income 95.41 - 95.41 100%
Total 572.08 3,077.84 (2,505.76) (81.41%)

Revenue from the sale of steel billets amount of Baht 476.67 million; a decrease of Baht 2,601.17 million or 84.51% from previous year. The decreasing of sale volume due to temporary cease the manufacturing process for factory Phase 1 and Phase 2 in current year in order to reengineer production line and improve efficiency to support the service agreement (Original Equipment Manufacturer: OEM).

In current period, there was other OEM service incomes amount of 95.41 million Baht. Nonetheless, as aforementioned, The Company had stopped production line during July to November 2019 due to factory phase 2 revamping. The Company started commissioning test over the new manufacturing process together with new machines development on December 2019. The commissioning test is expected to be completed by February 2020 and the Company can start to provide full OEM service to a customer by end of Quarter 1’ 2020.

Transportation service business

Revenue from transportation business increase 4.32 million Baht from prior year. The subsidiary company provided more service to third parties during the current year.

Renewable energy business

The total revenue for current year was 753.29 million Baht; a decreased by Baht 228.55 million or 23% year on year, details as follows;

Revenue – Renewable Energy Business 31 December 2019 31 December 2018 Change
Million Baht Million Baht Million Baht %
Revenue from sale 746.57 980.07 (233.50) (23.82%)
- Sale electricity 746.57 702.28 44.29 6.31%
- Sale equipment - 277.79 (277.79) (100%)
Revenue from service 6.72 1.77 4.95 279.66%
Total 753.29 981.84 (228.55) (23.28%)

Revenue from Sales of Electricity amounted to 746.57 million Baht, an increasing from prior year at 44.29 million Baht. This was due to additional 1 solar power plant projects in current year and 4 solar power plants during prior year which are:

  • Aomori (7.21 MWdc) - this project has reached commercial operation in September 2019. As a result, the Company recognized revenue from sale electricity for 3 months in current year (October to December 2019).
  • Iwaki (26.68 MWdc) – this project has reached commercial operation in April 2018. As a result, the Company fully recognized revenue for 12 months in current year.
  • Fukui 1,5,6 (4.84 MWdc) – these projects has reached commercial operation in October 2018. The Company sold these 3 solar power plants in Q1’ 2019.

The company had no revenue from trading for construction materials for Solar power plants in current period.

In current period, the Company provide solar cells system installation service to customers. As a result, additional revenue from service amount of 4.78 million Baht in current year.

Gain on sale of power plant projects

Renewable Energy Business:

The company reported the gain from strategic exit of 5 solar power plants in Japan, in line with the Company’s business plan, amounted to 97.71 million Baht in current year. The total electricity generation capacity of five projects were 5.85 MWdc Four of five projects were exited in 1st quarter 2019 and another project was sold in 2nd quarter 2019. Meanwhile, the Company sold 2 solar power plants, which had electricity generation capacity at 4.02 MWdc and 12 MWdc, in 2018 and reported gain from sale amounting to 214.51 million Baht.

Gain on exchange rate

The group reported gain on exchange rate for current year amount of 90.28 million Baht which increased from prior year by 110.56 million Baht. Gain on exchange rate mostly occurred from conversion of long-term loan agreement for Solar Power Business.

Cost of sales and services

Cost of sales and services for 2019 was 1,093.36 million Baht; decreased from prior year amounting to 2,611.10 million Baht or 70.49%. The decreasing were following reasons:

Production and Distribution of Steel Billet Business:

Cost of sales and service for steel business in current year was 581.53 million Baht which significantly decreased from prior year by 2,511.92 million Baht or 81.2%. The lower cost is in line with the dropped in sales, which impacted by local price could not be adjusted and no significant production activities due to factory revamping. The Company started commissioning test over the new manufacturing process together with new machines development on December 2019. The commissioning test is expected to be completed by February 2020 and the Company can start to provide full OEM service to a customer by end of Quarter 1’ 2020.

Renewable Energy business

Total cost of sale and service for Solar Power Business was decreased from prior year by 88.01 million Baht or 15% equivalent. The reason for decreasing are as follows:

Cost of sale and service – Renewable Energy Business 31 December 2019 31 December 2018 Change
Million Baht Million Baht Million Baht %
Cost 491.36 580.23 (88.87) (15.32%)
- Cost of sale electricity 491.36 423.10 68.26 16.13%
- Cost of sale equipment - 157.13 (157.13) (100%)
Cost of services 4.11 3.25 0.86 26.46%
Total 495.47 583.48 (88.01) (15.08%)

Cost of sale, electricity, slightly increased from prior year mainly from new project’s operation cost and depreciation. Electricity generating capacity in current year was higher than prior year e.g.

  • Aomori - reached commercial operation on 30 September 2019
  • Iwaki - reached commercial operation in Quarter 2’ 2018. As a result, the Company recognized full operating cost for current year.

There was no cost of sale equipment in current period due to no sale of equipment transactions.

Cost of service was related to new projects of “installation of solar cell” of a subsidiary during the period.

Selling and administrative expenses

The Group’s selling and administrative expenses for the current year was 227.04 million Baht; decreasing from prior year by 32.38 million Baht. The decreasing were mainly came from:

Production and Distribution of Steel Billet Business:

In current year, the selling and administrative for steel business was 114.18 million Baht the most of expenditures in current year are mostly related to employee restructure cost and cost related to ceasing operation for preparing OEM service. The increasing mainly from:

  • re-organization manpower expenses amount of 19.65 million Baht
  • recognized additional provision for employee benefits expenses according to new Labor’s Law amount of 1.4 million Baht
  • temporary stopped the operation factory Phase 1 & 2 for machinery development and support OEM service. The depreciation of factory phase 1 & 2 and other cost amount of 36.97 million Baht was reclassified from cost of manufacturing to administrative expenses.

Renewable Energy business

Selling and administrative expense of Solar Power Business was decreased from prior year by 39.90 million Baht or 27.17%. Resulting from effective expenditures control in year e.g. professional legal fee, travelling expenses and staff cost.

Finance cost

The consolidated finance cost of the Group was 420.05 million Baht, increased from prior year by 5.65 million Baht or 1.36 % equivalent. The increasing mainly came from additional loan drawdown from new project, Aomori, which was reached the commercial operating date on 30 September 2019.

Consolidated Statements of Financial Position

ASSETS

Statement of financial position Consolidated financial statements
2019 2018 Change
Million Baht Million Baht Million Baht %
Assets
Current assets
Cash and cash equivalents 107.24 1,140.76 (1,033.52) (90.60%)
Restricted bank deposits 272.19 288.07 (15.88) (5.51%)
Current position of bang deposits pledged as collateral 570.32 627.92 (57.60) (9.17%)
Trade and other receivables 501.25 518.25 (17.00) (3.28%)
Inventories 409.79 765.98 (356.19) (46.50%)
Account receivable – Revenue Department 191.08 298.99 (107.91) (36.09%)
Other current assets 67.00 44.62 22.38 50.16%
  2,118.88 3,684.59 (1,565.71) (42.49%)
Non-current assets held for sale - 46.77 (46.77) (100.00%)
Total current assets 2,118.88 3,731.37 (1,612.49) (43.21%)
Non-current assets
Bank deposits pledged as collateral – net of current portion 286.10 715.97 (429.87) (60.04%)
Investment property 22.15 22.89 (0.74) (3.23%)
Property, plant and equipment 6,271.31 7,029.46 (758.15) (10.79%)
Intangible assets 1,483.75 1,591.33 (107.58) (6.76%)
Deferred tax assets 8.59 7.25 1.34 18.48%
Other non-current assets 90.23 106.19 (15.96) (15.03%)
Total non-current assets 8,162.12 9,473.10 (1,310.98) (13.84%)
Total assets 10,281.00 13,204.47 (2,923.47) (22.14%)

Total Assets

The consolidated total assets as at 31 December 2019 and 31 December 2018 was 10,281.00 million Baht and 13,204.47 million Baht respectively, a decrease of 2,923.46 million Baht or 28.14% were described as the below reasons:

Current Assets

As of 31 December 2019 total current assets decrease from prior year for 1,612 million Baht or 42.21% equivalent. The decreasing mainly came from:

Cash and cash equivalent; restricted bank deposit and current portion of bank deposits pledged as collateral

The aggregate of 3 components totally decreased from prior year by 1,106.99 million Baht due to paid up outstanding borrowing from financial institutions and third parties during the year.

Inventories

Production and Distribution of Steel Billet Business:

Decrease in inventories amount of 356.19 million Baht, due to sale of products during the year. And the company reversed allowance for net realizable value of inventories amount of 24.9 million Baht.

Account receivable - Revenue department

Revenue department receivable decreased from prior year by 107.91 million Baht mainly due to tax refund from the solar business in Japan amounting to 78 million Baht.

The rest of reduction from prior year came from input tax movement from time to times.

Other current assets

Other current assets as at 30 December 2019 increase by 22.37 million Baht when compare to balance as at 31 December 2018.

Renewable Energy Business:

  • There were professional fee related to specific projects which on process of feasibility study for 10 million Baht
  • There were prepaid tax which were increased from prior year for 5 million Baht
  • The Group paid for insurance premium for power plant project amounting to 3 million Baht

Non-current asset held for sale

The Group successfully sold 1 Solar Power Plant project to infrastructure fund in Japan in current year.

Non-Current Assets

Non-current assets amounting to Baht 8,162.12 million as of 31 December 2019, decreasing from prior year by 1,310.97 million Baht or 13.84%. The decreasing can explain as follow:

Bank deposits pledge as collateral

As at 31 December 2019, bank deposits pledge as collateral decrease by Baht 429.87 million. The Company sold of 5 solar power plants in Japan, in line with the Company’s business plan in current year. The Company repay all outstanding borrowing from financial institutions related to these projects.

Property, plant and equipment and Intangible assets

Property, plant and equipment and intangible assets decreased from prior year for 865.75 million Baht. The decreasing are as follow:

  • additional developing Solar Power Plants in Japan and cost of factory revamp, of total 361.68 million Baht
  • decrease of 423.97 million Baht due to the strategic exit of 5 Solar Power Plant in Japan
  • decrease of depreciate & amortization over the assets for 393.48 million Baht and translation of exchange rate 409.98 million Baht

Liabilities and Shareholders’ Equity

Statement of financial position Consolidated financial statement
2019 2018 Change
Million Baht Million Baht Million Baht %
Liabilities and shareholders’ equity
Current liabilities
Bank overdrafts and short-term loans 190.58 917.67 (727.09) (79.23%)
Short-term loans from unrelated parties 219.49 1,478.91 (1,259.42) (85.16%)
Trade and other payable 327.31 250.47 76.84 30.68%
Current portion of long-term loans 2,166.53 3,336.41 (1,169.88) (35.06%)
Income tax payable 5.38 10.48 (5.10) (48.66%)
Account payable – Revenue Department 58.31 67.11 (8.80) (13.11%)
Other current liabilities 5.68 36.91 (31.23) (84.61%)
Total current liabilities 2,973.29 6,097.97 (3,124.68) (51.24%)
Non-current liabilities
Long-term loans – net of current portion 6,087.72 5,604.74 482.98 8.62%
Provision for long-term employee benefits 14.10 11.65 2.45 21.03%
Provision for decommissioning costs of leased assets 7.16 5.29 1.87 35.35%
Deferred tax liabilities 30.90 32.19 (1.29) (4.01%)
Other non-current liabilities 19.74 4.04 15.70 388.61%
Total non-current liabilities 6,159.61 5,657.92 501.69 8.87%
Total liabilities 9,132.91 11,755.89 (2,622.98) (22.31%)
Shareholder’s equity
Share capital        
Issue and fully paid-up        
800,000,000 ordinary shares of Baht 1 each 800.00 800.00 - -
Share premium 380.85 380.85 - -
Differences from changes in the ownership interests in subsidiaries (5.52) (5.52) - -
Retained earnings (deficit)        
Appropriated - statutory reserve 15.40 15.40 - -
Unappropriated (31.58) 165.48 (197.06) (119.08%)
Other components of shareholder’s equity (123.35) (31.37) (91.98) 293.21%
Equity attributable to owners of the Company 1,035.79 1,324.84 (289.05) (21.82%)
Non-controlling interests of the subsidiaries 112.30 123.74 (11.44) (9.25%)
Total shareholders’ equity 1,148.10 1,448.58 (300.48) (20.74%)
Total liabilities and shareholders’ equity 10,281.00 13,204.47 (2,923.47) (22.14%)

The consolidated liabilities as at 31 December 2019 and 31 December 2018 was 9,132.91 million Baht and 11,755.88 million Baht respectively, a decrease by 2,622.98 million Baht because:

Current liabilities

Bank overdraft and short term loan from banks

The aggregate of 2 components totally decreased from prior year by 727.09 million Baht due to Steel business and Solar business have made loan repayment to financial institutions amount of 280.53 million Baht and 446.56 million Baht, respectively.

Short-term loans from unrelated parties

Production and Distribution of Steel Billet Business:

The Company made payment for short-term debentures, promissory notes and bill of exchange for 1,483 million Baht during the current year. However, the Company also issue new set of long-term debentures, maturity date more than 12 months, for 1,140 million Baht. The long-term debentures classify as long-term loans.

Renewable Energy Business:

During the year, the Group of company issued short term promissory notes and bill of exchange from third parties total of Baht 219.49 million.

Trade and other payable

Trade and other payable increased by 76.84 million Baht due to:

Production and Distribution of Steel Billet Business:

There was money received in advance from customer increased by 132.71 million Baht. The customer placed order for steel billet and fully paid up for products. Since the production activities at the factories were temporary stopped for revamping. As a result, other payable significant decreased from prior year by 45.3 million Baht e.g. payable for raw material, utilities expenses and other payable related to production.

Renewable Energy Business:

Trade payable decreased by 37 million Baht due to purchasing of equipment for solar power plant transaction in prior year.

There was no sale and purchase of equipment in current year.

In current year, there were increasing of other payable related to new solar power plant projects amount of Baht 15 million. There were accrued expenses related to fixed assets tax in Japan amount of Baht 10 million.

Other current liabilities

Renewable Energy Business:

Total current liabilities decrease from prior year for 31.23 million Baht. The decreasing mainly came from deposit received amounting to 21 million Baht (Yen 70 million) for purchasing a solar power plant in 2018. The Company completely sold a solar power plant in 2019.

There were undue output tax for sale of 4 solar power plant project (Gifu and Nihonmatsu 1, 2, 3 and 4).

Non-current liabilities

Long-term loan

Long-term loan decrease from prior year 686.9 million Baht which comprise of

Production and Distribution of Steel Billet Business:

The Company issue long-term debenture, the majority date was set up on 2021 total of Baht 1,140 million. And the Company made a repayment for long-term debenture total amount of 909.5 million Baht.

Renewable Energy Business:

The Company repayment loan from financial institutions total of Baht 459.85 million and there was impact from exchange rate total of Baht 447.19 million.

Other non-current liabilities

Renewable Energy Business:

In current year, the Company the customer paid deposit from OEM service agreement.

Shareholders’ equity

As at 31 December 2019 and 31 December 2018, total consolidated shareholders’ equity was 1,148.10 million Baht and 1,448.58 million Baht respectively; a decrease of 300.48 million Baht can described as follow:

  • An increase in non-controlling interest amount of 11.43 million Baht
  • A decrease in exchange differences on translating financial statements of foreign subsidiaries in Japan 91.8 million Baht and loss from operation amount of THB 197.06 million.

Consolidated Statements of cash flows as for the year ended 31 December 2019

At the beginning of the current period, the Company presented cash and cash equivalents of 1,140.76 million Baht. The net cash outflow from all activities of 1,033.52 million Baht, resulting from net cash inflows from operating activities, investing activities and cash outflow from financing activities. The Company reported cash and cash equivalents at the end of the period of 107.24 million Baht.

Cash flows from Operating activities

  • The company had cash inflow from operating activities of 360.33 million Baht

Cash flows from investing activities

  • The company had cash inflow from investing activities of 811.94 million Baht. The Company received cash from strategic exist 5 Solar Power Plant Projects during the current year and withdraw restricted cash deposit at bank for loan repayment.

Cash flows from Financing activities

  • The company had cash outflows from financing activities amount of 2,221.94 million Baht which mostly related to paid up transactions of long-term loan, debentures, promissory note and lease liabilities. The company paid up long term loan from bank and lease liabilities of the group during the current period.

Auditor’s Remuneration

The Company, by the Audit Committee, has reviewed the qualifications of external auditors, taking into account their independence, appropriateness, accountability, and absence of relationship or interest of conflict of interest with the Company, subsidiaries, executives, major shareholders or their related persons. Furthermore, the Audit Committee has annually reviewed and determined audit fee commensurate with the scope of audit work. The Audit Committee shall propose the qualified external auditors and audit fee to the Board of Directors, who shall propose the appointment of external auditors and determination of audit fee to the annual general meeting of shareholders for approval.

  • Auditor’s Remuneration
  • The Company paid auditor’s remuneration to EY Co., Ltd. for the year 2019 at the amount 1,680,000 Baht

  • Non-audit services
  • None