Fenghua Hi-Tech received an inquiry letter from the Shenzhen Stock Exchange, and the chief financial officer resigned

Fenghua High-Tech issued an announcement stating that the company's board of directors received a written resignation report from Mr. Lai Xu, the company's director, vice president and chief financial officer, on June 6, 2019. Mr. Lai Xu resigned from the positions of director, vice president and chief financial officer of the company for personal reasons.

Fenghua Hi-Tech said that Mr. Lai Xu's resignation will take effect from the date the resignation report is delivered to the board of directors. Mr. Lai Xu's resignation did not cause the number of members of the company's eighth board of directors to fall below the statutory minimum number, and will not affect the normal operation of the company's board of directors and the company's normal business activities. The company will appoint a new candidate as soon as possible in accordance with relevant regulations.

It is worth noting that on June 10, Fenghua High-Tech issued the "Announcement on the Reply to the Inquiry Letter Regarding the 2018 Annual Report", responding to the Shenzhen Stock Exchange's inquiry regarding the company's annual report.

On March 26 this year, Fenghua Hi-Tech released its 2018 annual report. Then on May 30, Fenghua Hi-Tech received an inquiry letter from the Shenzhen Stock Exchange's Corporate Management Department.

The Shenzhen Stock Exchange inquired about the significant increase in cash balance at the end of the reporting period at Fenghua High-Tech, interest income being lower than interest expenses, and the decline in performance of Naidian Technology .

The Shenzhen Stock Exchange noted that Fenghua Hi-Tech's annual report showed that the company's monetary funds balance at the end of the reporting period was 1.212 billion yuan, a year-on-year increase of 161.20%, accounting for 17.21% of total assets at the end of the period and 35.43% of current assets; the balance of interest-bearing liabilities (long-term and short-term loans and non-current liabilities due within one year) was 86.60 million yuan, and the coverage ratio of monetary funds to interest-bearing liabilities was 14 times. During the reporting period, the company recognized interest income and interest expenses of 6.8575 million yuan and 8.9397 million yuan respectively. As of the end of the reporting period, the company's deposit balance with its related party Guangdong Guangsheng Finance Co., Ltd. (hereinafter referred to as "Guangsheng Finance") was RMB 140 million.

For this reason, the Shenzhen Stock Exchange asked the company to explain the reasons why the cash balance increased significantly at the end of the reporting period and the interest income was lower than the interest expense.

Fenghua Hi-Tech responded that at the end of the reporting period, the company's monetary funds balance was 121,214.11 million yuan, an increase of 74,807.63 million yuan over the previous year, an increase of 161.20%. The reasons for the substantial increase in the company's monetary funds are mainly reflected in the following aspects. On the one hand, the company's operating income and net profit both achieved rapid growth in 2018. In 2018, the company achieved operating income of 458,020.06 million yuan, an increase of 36.51% over the previous year; in 2018, the company achieved a net profit of 102,882.09 million yuan, an increase of 292.62% over the previous year. On the other hand, while achieving a substantial increase in operating income and net profit, the company strictly controlled cash flow, and the collection of payments throughout the year was good, and the cash payment ratio increased to 60%. As of December 31, 2018, the book balance of the company's accounts receivable was RMB 110,180.76 million, an increase of only 2.90% over the previous year, and did not increase significantly with operating income; as of December 31, 2018, the book balance of the company's notes receivable was RMB 34,239.40 million, a decrease of 24.88% over the previous year, and the notes receivable due for collection at the end of the period increased significantly compared to the end of 2017.

Regarding the reason why interest income is lower than interest expense, Fenghua High-Tech stated in the above announcement that the company's consolidated financial statements showed interest income of 6.8575 million yuan for the whole year, with an average annual deposit interest rate of 1.04% for the whole year; the consolidated financial statements showed interest expense of 8.9397 million yuan for the whole year, with an average annual loan interest rate of 4.86% for the whole year. Due to the large difference between deposit and loan interest rates, interest income is lower than interest expense.

In 2015, Fenghua High-Tech acquired Naidian Technology. During the three-year performance betting period after the acquisition, Naidian Technology performed well. However, after the betting period, Naidian Technology's performance declined in 2018, with net profit suddenly falling by 79.08% year-on-year. Fenghua High-Tech therefore made a goodwill impairment provision of 148 million yuan. 

Regarding the reasons for the year-on-year decline in Naidian Technology's operating performance in 2018, Fenghua High-Tech stated in its reply letter that it was mainly due to the impact of product structure adjustments and price drops. 

As a professional manufacturer of flexible printed circuits (FPC), Naidian Technology's products are mainly used in smartphone camera modules, robots, LCD panels, wearable smart devices and other fields. According to the latest shipment data of the Chinese smartphone market in 2018 released by Canalys, the annual smartphone shipments fell by about 14% year-on-year, and the market size returned to the level before 2014. At the same time, affected by the overall economic environment and the adjustment of the consumer electronics market, industry competition has intensified. Naidian Technology has adjusted its product structure in a timely manner. At the same time, it has adopted proactive marketing strategies to expand its market share. The sales prices of its main products have fallen to varying degrees, and the price reduction of some products has exceeded 20%, resulting in a decline in the overall sales gross profit margin and a significant year-on-year decline in profits.