Zibao Metals Recycling said profit after tax decreased from HKD7.7 million to HKD0.6 million for the period to 31 March 2016.
Revenue increased by 23% from HKD 403.8 million to HKD497.0 million mainly due to increased sales through the Zhangbao stockyard acquired at the end of the previous year, which in turn was offset by a material reduction in back to back trading.
This refocusing of the business was undertaken in response to difficult market conditions. Gross margins fell significantly from HKD17.6 million to HKD8.4 million.
Although China's rapid economic growth slowed, it still remains a major consumer of both aluminium and copper with these metals accounting for approximately 70% of the group's turnover.
Prior to the acquisition of Zhengbao, the group imported unprocessed aluminium scrap (also known as Zorba) and copper wiring.
The Zorba which was already shredded, requires sorting and cleaning before smelting, and the copper wiring, needs to be stripped from its casing before refining.
These processes were typically undertaken by the group's customers which then sold the metals on. The Zorbas and copper wiring were purchased on a back-to-back basis under which the group purchased material overseas against orders from buyers in the PRC.
The risks to Zibao were largely the timing delays between shipping the goods and receiving payment from the buyer, which also involved a credit risk.
As a consequence of difficult trading conditions in the PRC, buyers had been applying pressure on Zibao to increase the credit terms from 30 days to 60 days.
In the light of the increased credit risk resulting from the longer cycle and the impact on capital requirements, particularly with a relatively restricted customer base, the directors considered it prudent to move to a more sustainable business model.
As a result back-to-back sales trading was significantly reduced and the business largely refocussed on stock holding, processing and direct sales from the Zhengbao Yard. This, together with a competitive pricing policy helped the group maintain market position at a time when competition is intense.
Sales from the Yard accounted for 89% of total group sales for the year ended 31 March 2016. The balance between back to-back and direct sales going forward will be kept under review in the light of customer demand and market conditions.
At 3:08pm: (LON:ZBO) Zibao Metals Recycling Holdings Plc share price was -0.38p at 0.75p