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China Grentech 20-F 2011 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 20-F
(Mark One)
OR
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
OR
For the transaction period from to
OR
Date of event requiring this shell company report
COMMISSION FILE NUMBER: 000-51839
CHINA GRENTECH CORPORATION LIMITED
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization) 15th Floor, Block A, Guoren Building
Keji Central 3rd Road Hi-Tech Park, Nanshan District Shenzhen 518057, People’s Republic of China (Address of principal executive offices) Rong Yu, Chief Financial Officer
15th Floor, Block A, Guoren Building Keji Central 3rd Road Hi-Tech Park, Nanshan District Shenzhen 518057, People’s Republic of China Telephone: (86 755) 2663-7600 Facsimile: (86 755) 2654-6999 ext. 0017
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class) Indicate the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report.
As of December 31, 2010, 563,244,750 ordinary shares, par value US$0.00002 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No þ
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This annual report filed on Form 20-F contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, cash flows, dividends, financing plans, business strategies,
capital and other expenditure, competitive positions, availability of capital, growth opportunities
for new and existing products, availability and deployment of new technologies, plans and
objectives of management, mergers and acquisitions, and other matters.
Statements in this Form 20-F that are not historical facts are hereby identified as
“forward-looking statements” for the purpose of the safe harbor provided by Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. The words “estimate,” “project,” “intend,”
“expect,” “believe,” “plan” and similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document. In addition, other written or oral statements
which constitute forward-looking statements have been made and may in the future be made by us or
on our behalf, including with respect to the matters referred to above. These forward-looking
statements are necessarily estimates reflecting the best judgment of senior management that rely on
a number of assumptions concerning future events, many of which are outside of our control, and
involve a number of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. These forward-looking statements should,
therefore, be considered in light of various important factors, including those set forth in this
annual report. Important factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include, without limitation:
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SUPPLEMENTAL INFORMATION
For the purposes of this annual report, all geographical and statistical references to “China”
and “PRC” in this annual report are to the People’s Republic of China and do not include the Hong
Kong Special Administrative Region, or Hong Kong, the Macau Special Administrative Region, or
Macau, and Taiwan. References to “provinces” of China are to the provinces, municipalities under
direct administration of the PRC central government and provincial-level autonomous regions of
China.
All references to “RMB” or “Renminbi” are to the legal currency of China, and all references
to “U.S. dollar” or “US$” are to the legal currency of the United States of America, or the United
States or the U.S. For your convenience, this annual report contains translations of Renminbi
amounts into U.S. dollars at the noon buying rate for U.S. dollars in effect on December 30, 2010
as set forth in the H.10 statistical release of the U.S. Federal Reserve Board, which was RMB6.6000
= US$1.00.
On June 17, 2011, the noon buying rate was RMB6.4700 = US$1.00. See “Exchange Rate
Information.” We make no representation that any amounts in Renminbi or U.S. dollars referred to
in this annual report could be or could have been converted into each other at any particular rate
or at all.
We have approximated all numbers in this annual report to their closest round numbers. Also
due to rounding, figures shown as totals in tables may not be an arithmetic aggregation of the
figures preceding them.
PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following tables present our selected consolidated financial data as of and for the years
ended December 31, 2006, 2007, 2008, 2009 and 2010.
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Our consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles, or U.S. GAAP, and our financial statements are reported
in Renminbi. The consolidated statement of operations information and selected cash flow
information for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated
balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated
financial statements included elsewhere in this annual report. The selected consolidated statement
of operations information for the years ended December 31, 2006 and 2007 and the selected
consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from our
audited consolidated financial statements which are not included in this annual report. Our
historical results do not necessary indicate the results that may be expected for any future
periods.
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Exchange Rate Information
We prepare our financial statements in Renminbi. Solely for the convenience of the reader,
this annual report contains translations of Renminbi amounts into U.S. dollars, and vice versa, at
RMB6.6000 = US$1.00, the noon buying rate in effect on December 30, 2010 as set forth in the H.10
statistical release of the U.S. Federal Reserve Board. You should not assume that Renminbi amounts
could actually be converted into U.S. dollars at these rates or at all. On June 17, 2011, the noon
buying rate was RMB6.4700 = US$1.00.
The following table sets forth, for the periods indicated, the noon buying rates for U.S.
dollars in Renminbi:
Source: Federal Reserve Statistical Release.
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B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use Of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Our Company
We derive a significant portion of our revenues from the three telecommunications operators in
China, and our revenues could decline significantly if any of them reduces its purchases of our
wireless coverage products and services.
We provide most of our wireless coverage products and services to the three telecommunications
operators in China, namely China Mobile Communications Corporation and its affiliates, or the China
Mobile group, China United Telecommunications Corporation and its affiliates, or the China Unicom
group, and China Telecom Corporation and its affiliates, or the China Telecom group. In 2008, 2009
and 2010, we derived 39.6%, 24.4% and 36.7%, respectively, of our revenues from China Mobile
group’s local affiliates, 24.8%, 32.3% and 28.1%, respectively, of our revenues from China Unicom
group’s local affiliates, and 7.7%, 15.0% and 13.3%, respectively, of our revenues from China
Telecom group’s local affiliates. In addition, as of December 31, 2008, 2009 and 2010, 36.2%,
32.0% and 38.5%, respectively, of our gross accounts receivable were attributable to China Mobile
group’s local affiliates, 39.1%, 37.3% and 31.6%, respectively, of our gross accounts receivable
were attributable to China Unicom group’s local affiliates, and 11.6%, 14.1% and 16.2%,
respectively, of our gross accounts receivable were attributable to China Telecom group’s local
affiliates.
Historically, we typically entered into contracts with individual local affiliates of our
major customers and treated these local affiliates as separate customers. Although it has been our
business practice to interact with each local affiliate individually, they are under the common
control of their parent company. Due to changes to the equipment procurement policies of our major
customers in 2007 and 2008, procurement decisions for equipment of
the three Chinese telecommunications operators are now made by the parent company and its
local affiliates through a centralized bidding process which has led to intensified industry-wide
pricing pressure. For more details, see “Risk Factors—Risks Relating to Our Company—Changes in
the procurement policies by our major customers may adversely affect our revenue and profit margin
on our wireless coverage products.”
We also experience delays in payments from the China Mobile group, the China Unicom group and
the China Telecom group during the ordinary course of our business. As explained in the next risk
factor, this is largely due to our limited bargaining leverage and the resulting lack of a specific
timetable in certain of our sale and purchase contracts to require our customers to issue
completion certificates and to perform preliminary inspections, which are pre-conditions to their
initiation of payments. Despite our constant attempts, we have not been able to significantly
change this prevalent practice in our industry due to our limited bargaining leverage, and we
expect this practice to continue in coming periods.
The restructuring of China’s telecommunications operators announced in May 2008 has been
completed, and licenses to operate third generation wireless communications, or 3G, networks were
granted in China in January 2009. This led to a significant increase in capital expenditure on 3G
network construction by the three telecommunications operators in China in 2009. However,
telecommunications operators reduced the pace of such capital expenditure in 2010 and may cease or
continue to reduce the pace of such capital expenditure in the future due to reasons beyond our
control. Additionally, the competitive situation in the wireless communication market in China may
be altered, or the newly restructured operators may change suppliers or sourcing policies in the
future. If any of the Chinese telecommunications operators decides to significantly change its
procurement methods for wireless coverage products and services, reduces or eliminates the purchase
of our products and services or becomes unable or refuses to pay for our products and services it
has purchased, our revenues could decline significantly.
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Because we have limited bargaining leverage with the three telecommunications operators in China,
some contractual terms and market practices are materially adverse to our interest.
The three telecommunications operators in China award contracts through competitive bidding.
According to BAYES (Beijing) Information Consulting Ltd., Co., or BAYES, a market research and
consulting firm focusing on innovative technologies, there are seven major entities, including our
company, competing in the wireless coverage market in China. According to BAYES, these seven major
players in aggregate accounted for approximately 47.3%, 52.5% and 57.4% of total market share of
the PRC wireless coverage market in 2008, 2009 and 2010, respectively. As the three
telecommunications operators were the only three licensed wireless operators in China after the
industry restructuring which was completed in 2008, we have limited negotiating leverage with these
key customers in the bidding process. As a result, many proposed contractual terms and market
practices subject to bidding are materially adverse to our interest, and we are required to finance
significant operating expenses before we recognize revenues and to finance significant accounts
receivable once we recognize revenues. Any worsening of these terms and conditions could have a
material adverse effect on our liquidity and cash flows from operations. Also see “—We have long
accounts receivable cycles and long collection periods, and our liquidity and cash flows from
operations will deteriorate if our accounts receivable cycles or collection periods continue to
lengthen” below for additional cash flow and liquidity risks resulting from these market practices.
Changes in the procurement policies by our major customers may adversely affect our revenue and
profit margin on our wireless coverage products.
Historically we have been awarded contracts by the local affiliates of our major customers
through bidding and negotiation, and these contracts covered wireless coverage equipment and
services. For more details on the bidding process conducted by wireless operators in China, please
see “Item 4. Information on the Company—Business—Our Wireless Coverage Products and Services—Our
Sales Cycle.” China Mobile group, in an effort to shift to a more centralized procurement model,
adopted a new procurement policy in 2007 whereby the bidding processes for wireless coverage
equipment and services would be separately conducted, and procurement decisions for wireless
coverage equipment and services would be made by the parent company and its local affiliates
respectively. In addition, China Unicom group and China Telecom group also adopted a similar
procurement policy starting in 2008. Under the new policy, even if we win the bid for wireless
coverage equipment, we may not win the bid for services, or vice versa. Consequently, we may lose
revenue with respect to any single wireless coverage project if we cannot win both equipment
contract and service contract for the project. Further, the change in
procurement policy aims to encourage more competitive pricing among providers of wireless
coverage equipment, which has led to a decrease selling price for equipment. As a result, our
profit margin may be adversely affected.
We have long accounts receivable cycles and long collection periods, and our liquidity and cash
flows from operations will deteriorate if our accounts receivable cycles or collection periods
continue to lengthen.
Our wireless coverage product revenues are derived from: (i) sale of equipment, (ii) provision
of integrated services and (iii) bundled sale contract which is comprised of both sales of
equipment and provision of integrated services.
On a typical standalone equipment sale project, after we win the bids for the sale of
equipment to the telecommunications operators and receive the purchase order, we begin our delivery
of equipment. When our customer issues a delivery certificate to confirm the acceptance of the
products we have delivered and signs a contract with us, we recognize our revenue from the sale of
equipment. According to the payment terms, the customer is required to pay 70% to 80% of our
equipment sale contract amount upon signing of the sale and purchase contract and issuance of the
delivery certificate, which is typically 30 to 60 days after delivery, and the remaining balance is
due upon issuance of final inspection certificate by the customer or the expiration of the warranty
period, as further discussed below.
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For a typical standalone integrated service project, after we win the integrated service bids
from the local operators, we begin the installation. The operator will issue a completion
certificate and sign a contract with us after we finish the installation. After the coverage
network operates for a certain period, the customer will issue a preliminary inspection certificate
to us and then we recognize our revenue for services. Some of our customers conduct two
inspections prior to the beginning of the warranty period. The final inspection usually occurs 6
to 12 months after the preliminary inspection. According to the payment terms, the customer is
required to pay 30% to 50% of our integrated service fees after we have completed the installation
service. The customer is required to pay 20% to 50% (cumulative contract amount of 70% to 80%) of
our integrated service fees (including the amount receivable upon completion of the installation
service) after preliminary inspection and the remaining balance is due for payment after final
inspection or the expiration of the warranty period.
Prior to the implementation of the centralized procurement policy commencing in 2007, we
mainly bid our wireless coverage equipment projects as a bundled sale contract, although following
the implementation of the centralized procurement policy we have significantly reduced our use of
bundled sale contracts. The customer is required to pay approximately 40% of the bundled sale
contract value upon signing of the contract and the issuance of the completion certificate, and the
remaining contract balance is due upon the issuance of a preliminary inspection certificate and
final inspection certificate similar to the integration service project mentioned above.
On a weighted average basis, our historical contractual payment schedule is approximately as
follows:
Because our contracts often do not stipulate when our customers must conduct the relevant
inspections, our customers may delay their payments. Even when a payment has become contractually
due, it may take a few months to a year for our customers to settle the balance. To the extent
revenue recognized under a contract is not yet paid, it is recorded as an account receivable. From
time to time, we sell a portion of our accounts receivable to third parties to meet our working
capital needs. Installment intervals range from six months to three years, and the amounts of
individual payments have varied and may continue to vary in the future. As of December 31, 2010,
we had in aggregate gross accounts receivable, including amounts not yet due pursuant to
contractual terms, of RMB1,604.6 million (US$243.1 million). Of this total amount, RMB828.3
million (US$125.5 million), or 51.6%, had been outstanding for less than 12 months from the time
the revenue was recognized, RMB374.9 million
(US$56.8 million), or 23.4%, had been outstanding for 12 to 24 months from the time the
revenue was recognized, RMB167.4 million (US$25.4 million), or 10.4%, had been outstanding for 24
to 36 months from the time the revenue was recognized, and RMB234.0 million (US$35.5 million), or
14.6%, had been outstanding for over 36 months from the time the revenue was recognized.
Our major customers, such as the three Chinese telecommunications operators, may delay in
paying their installments to us as they come due and, because of our limited bargaining leverage
and our need to maintain an ongoing relationship with these major customers, it is impracticable
for us to obtain a significant improvement in their payment patterns. As of December 31, 2010,
accounts receivable that became due under our contracts and remained unpaid amounted to RMB716.7
million (US$108.6 million), or 44.7%, of our gross accounts receivable of RMB1,604.6 million
(US$243.1 million), as compared to RMB622.2 million, or 46.1%, of our gross account receivable as of
December 31, 2009. As of December 31, 2010, our allowance for doubtful accounts amounted to
RMB39.6 million (US$6.0 million), which was mainly related to certain aged accounts receivable due
from operator customers, and our collection cost may outweigh the aggregate amount of those
outstanding account receivables. In addition, we wrote off RMB43.6 million in doubtful accounts in
2008, which was mainly related to aged receivable balances due from our non-operator customers who
experienced financial difficulties caused by a loss of market share due to changes in the
procurement policies by the three Chinese telecommunications operators and tightening of credit
controls by PRC banks. We made provisions for settlement discounts that we expected to be utilized
by our customers in 2008, 2009 and 2010 to operator customers in order to accelerate our collection
of account receivables which may have been affected by the telecommunication industry restructuring
in 2008. We cannot assure you that our past allowance practice will not change in the future or
that our allowance will be sufficient to cover defaults in our accounts receivable. In 2009, as a
result of the enhancement of our accounts receivable collection efforts, we were able to
significantly reduce our accounts receivable turnover days to 292 days from 469 days in 2008. We
continued our focus on improving our collections in 2010, and our accounts receivable turnover days
were 309 days in 2010. However, we cannot assure you that we will be able to maintain our
shortened collection cycle in future periods or if there will be any other factors beyond our
control that will continue to lengthen our accounts receivable cycles or collection periods. You
should refer to “Item 5. Operating and Financial Review and Prospectus—Key Factors Affecting Our
Results of Operations—Revenue Recognition Policy and Accounts Receivable Cycle” for further
details on our revenue recognition policy and collection periods. Our liquidity and cash flows
from operations will deteriorate if our accounts receivable cycles or collection periods continue
to lengthen.
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We often begin work on a project before we have a contract for our products and services, which may
materially and adversely affect our cash flows from operating activities and liquidity.
In line with industry practice in China, when a customer accepts our bid for our wireless
coverage products or integrated services or both, it does not immediately sign a contract with us.
Our customers sign the contract with us upon issuance of the delivery certificates or completion
certificates. Although we believe that our bidding documents, together with our customers’
acceptances of our bids, effectively constitute binding contracts under PRC law, our PRC counsel
has advised us that enforcement of our rights to payment in the PRC courts may be difficult. In
particular, it is unclear what terms and provisions need to be included in a bid and acceptance in
order for a payment obligation to exist under PRC law. As a result, we effectively assume the risk
of loss for our projects before the customer signs a contract with us. In addition, in line with
current industry practice in China, most of our bid documents do not specify a time period or date
by which our customers must issue delivery or completion certificates or sign a sale and purchase
contract, even though the equipment has been delivered. As a result, our sales and marketing staff
spend a significant amount of time persuading customers to conduct inspections, issue delivery or
completion certificates and sign contracts. These unfavorable practices are in large part
attributable to the market dominance of our customers and the competitive landscape of the wireless
coverage industry. We expect that this unfavorable industry practice in China will continue and
that it will continue to materially and adversely affect our cash flows from operating activities
and liquidity.
We historically recognized significantly lower revenues in the first quarter, which sometimes
resulted in net losses in the first quarter, and our revenues may fluctuate significantly from
quarter to quarter in the future, resulting in quarterly net losses.
Our customers typically set their annual budgets at the beginning for each year. Once the
annual budget is set, the customers will commence the bidding process for specific projects. As a
result, the amount of revenues we could recognize is typically lower during the earlier part of the
year, especially during the first quarter. In addition, for our standalone service contracts and
bundled sale contracts, our customers generally use the same team to manage different aspects of a
project, including bidding, contracting and payment. Their work is performed in accordance with
their internal annual and semi-annual project management process. As a result, our customers
prefer to perform completion and preliminary inspections and sign contracts for each batch of
installed projects at the same time. Under our revenue recognition policies, we recognize revenue
after we receive the preliminary inspection certificate for our standalone service contracts and
for the portion attributable to the provision of integrated services for our bundled sale
contracts. Accordingly, we typically recognize higher levels of revenue during the second and
third quarter than that of the first quarter, because more wireless coverage products are installed
and inspected, and for which completion and preliminary inspection certificates are issued, during
the second and the third quarter. During the fourth quarter, especially in December, our major
customers, being public companies and influenced by their semi-annual reporting obligations,
usually perform completion and preliminary inspections, issue completion and preliminary inspection
certificates and sign contracts for a majority of our standalone service contracts and bundled sale
contracts. Therefore, we typically recognize the highest level of revenue during the fourth
quarter. Nevertheless, as we recognize our revenue from the sale of equipment when delivery has
occurred and the customer has signed a contract with us and issued a delivery certificate to us
under our standalone equipment contracts, our increased sales of equipment on a standalone basis
following the implementation of the centralized billing process has slightly reduced the effect of
seasonality on our business.
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Despite the quarterly revenue fluctuations, our overall volume of contracts has increased,
resulting in increasing costs associated with servicing these contracts. Fluctuations in quarterly
revenue with expanding costs have resulted in net losses being incurred in certain quarters of
recent years, particularly in the first quarter. In 2008, 7.3%, 18.9%, 21.6% and 52.2% of our
annual revenues were generated in the first, second, third and fourth quarters of that year,
respectively, and we reported a net loss of RMB41.5 million in the first quarter. In 2009, 17.8%,
26.4%, 24.6% and 31.2% of our annual revenues were generated in the first, second, third and fourth
quarters of that year, respectively, and we reported a net income of RMB6.3 million in the first
quarter of 2009. In 2010, 9.3%, 21.5%, 23.1% and 46.1% of our annual revenues were generated in
the first, second, third and fourth quarters of that year, respectively, and we reported a net loss
of RMB22.9 million (US$3.5 million) in the first quarter. We believe that our first quarter 2009
performance was unusual due to the extraordinarily strong demand from the three Chinese
telecommunications operators primarily as a result of the issuance of 3G licenses in January 2009.
You should refer to “Item 5. Operating and Financial Review and Prospectus—Key Factors Affecting
Our Results of Operations—Revenue Recognition Policy and Accounts Receivable Cycle” and
“—Significant Quarterly Fluctuations of Our Results of Operations” for further details on our
revenue fluctuation and other quarterly financial information. However, past quarterly results may
not provide an accurate indication of future performance or fluctuation. Whether we continue to
recognize significantly lower revenues in the first quarter will depend largely upon the timing of
our customers’ project management processes. We anticipate that we may continue to experience
fluctuations in revenues on a quarterly basis and may continue to experience net losses as a
result, particularly in the first quarter.
We rely on bank financing, including issuing bills payable and sale of receivables, to finance our
operations; any expansion of our business will require further financing and will increase our
financial leverage.
We tend to collect more payments primarily in the fourth quarter than other quarters of each
year. In 2008, 2009 and 2010, 43.8%, 44.3% and 41.0%, respectively, of our total annual
collections were made in the fourth quarter. This is because our customers prefer to pay for the
projects toward the end of their budget year. However, we commence our production and arrange
installation of products for a significant number of projects beginning in the second quarter of
the year and typically complete and deliver a majority of the wireless coverage products and
services during the third and fourth quarters. As a result, we tend to generate more cash flow
from operating activities toward the end of the year and encounter increasing working capital needs
during the middle part of the year, especially the third quarter. We are therefore highly
dependent on bank financing, including issuing bills
payable and selling accounts receivable, to fund our working capital requirements and maintain
liquidity. Historically, we have relied on short-term bank loans to finance our working capital
needs. As of December 31, 2010, we had an aggregate of RMB638.2 million (US$96.7 million) of
short-term bank loans and RMB110.0 million (US$16.7 million) of long-term loans outstanding and
RMB121.7 million (US$18.4 million) in bills payable. As of December 31, 2010, interest rates on
our bank loans ranged from 4.6% to 5.9%, and interest rates on our bills payable financing ranged
from 3.5% to 5.1%. In 2008, 2009 and 2010, we sold an aggregate of RMB202.2 million, RMB371.6
million and RMB238.5 million (US$36.1 million), respectively, of our accounts receivable to third
party financial institutions. We expect external financing required for expanding our operations
will increase our financial leverage. See “—Our inability to access long-term working capital
financing due to the current regulatory conditions in China has adversely affected, and could
continue to have a negative impact on, our liquidity” below.
We may be unable to generate sufficient cash to pay the principal and interest due on our
indebtedness. Our ability to service our debts will largely depend on our ability to collect
accounts receivable from our customers and on our future operating performance. If we do not have
sufficient available sources of liquidity to repay our outstanding indebtedness, we may have to
refinance our obligations. However, we cannot assure you that financing or refinancing will be
available on terms acceptable to us or at all. If we encounter any difficulties in generating
sufficient cash to pay our outstanding indebtedness or in securing financing or refinancing or
receivable selling arrangements on terms satisfactory to us as and when required, our business and
liquidity will be materially and adversely affected, and we will be unable to expand our business.
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If the wireless communication sector in China does not maintain its current pace of growth, or if
the telecommunications operators reduce their investments for 2G and 3G network coverage in the
near future, the profitability and future prospects of our business and our liquidity could be
materially and adversely affected.
We generate most of our revenues from the provision of wireless coverage products and services
to telecommunications operators in China. Our future success depends on the continued growth of
the PRC wireless communication industry. Any slowdown in the development of the wireless
communication industry in China or reduction in our customers’ expenditure on wireless coverage
products and services may reduce market demand for our products and services. 2G and 3G network
enhancement and deployment require significant capital investment by PRC telecommunications
operators, including investments in wireless coverage products and services and base station RF
products. The enhancement of 2G networks and the issuance of 3G licenses to the three Chinese
telecommunications operators in general have had a positive impact on the growth of our business
thus far. Although telecommunications operators have been continuing their investment for 2G and
3G network enhancement and development, it is uncertain as to how long this investment trend would
continue, and any reduction of the capital expenditure for 2G or 3G network enhancement and
development will negatively impact our business growth and liquidity.
We may fail to offer products that meet industry standards or our customers’ specific requirements,
and as a result we may lose customers or orders or incur significant warranty or other costs, and
our revenue growth may be materially and adversely affected.
The development of our products is based upon a complex technology, and requires significant
time and expertise in order to meet industry standards and customers’ specifications. Our
customers also have their own sets of standards and criteria relating to their requirements for
wireless coverage or base station RF products, including standards and criteria issued by the
relevant governmental authorities. We must satisfy these standards and criteria in order to be
eligible to supply our products and services to those customers. If we are unable to continue to
meet these standards and criteria, we may become ineligible to provide our products and services
that have in the past generated most of our revenues and profitability. Furthermore, quality and
performance problems could damage our reputation and our relationships with existing and
prospective customers and could have a material and adverse effect on our revenue growth.
We customarily provide our customers with one to three years of warranty protection, under
which we agree to repair or replace defectively installed wireless coverage products at no
additional cost to our customers. Our contracts generally do not contain disclaimers or
limitations on product liabilities for special, consequential and incidental damages, nor do we
typically cap the amounts our customers may recover for damages. In addition, we do not currently
maintain any insurance for product liability or warranty claims. Our failure to offer products and
services that meet our customers’ specific requirements could give rise to substantial
liabilities under our warranties and otherwise.
Our research and development efforts may not lead to successful development of commercially viable
or acceptable products, which could cause a decline in customer use of our products.
The markets in which we compete are characterized by:
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To succeed, we must continually improve our current products and develop and introduce new or
enhanced products that adequately address the requirements of our customers and are competitive in
terms of functionality, performance, quality and price. We expend considerable efforts in the
development of new and enhanced RF technology and in its commercial applications, including the
development of products compatible with Time-Division Long-Term Evolution, or TD-LTE, a fourth
generation wireless communication, or 4G, protocol, and base station RF products. Although we have
successfully developed products that meet customers’ requirements in the past, there is no
assurance that any of our research and development efforts will necessarily lead to any new or
enhanced products or generate sufficient market share to justify commercialization. For example,
TD-LTE is a new and evolving technology. We cannot assure you that our research and development
efforts will yield new wireless coverage products that are readily deployable in TD-LTE networks or
that our customers will be satisfied with the performance of our TD-LTE coverage products. Under
those circumstances, we will not be able to recoup our research and development costs and expenses,
we may not be able to serve our customers’ TD-LTE needs, and customers may refuse to use our
products.
Gross profit margins for our products and services vary substantially, and any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations.
Gross profit margins for our products and services vary substantially. Although the gross
profit margin for our wireless coverage products and services has been on average higher than the
gross profit margin of our base station RF products, all of our wireless coverage products have
been subject to downward pricing pressure due to the fierce competition. In addition, the gross
profit margin of our products has fluctuated significantly from year to year. Further, due to the
rapidly changing technology and evolving industry standards and transmission protocols or changes
in the procurement policies of our major customers, our historical gross profit margin is not an
accurate measure for estimating our future gross profit margins. Any deterioration in the gross
profit margin for our principal products and services will have a material and adverse effect on
our results of operations.
Our industry is highly competitive, and our inability to compete effectively would hurt our current
business and future growth potential.
Our industry is extremely competitive and is characterized by rapid technological advancement,
frequent development of new products, evolving industry standards and a downward pricing trend over
the life cycle of a product. According to BAYES, there were seven major companies providing
wireless coverage products and services in China, which collectively held approximately 57.4%
market share in China as of December 31, 2010, and the top three providers, including our company,
accounted for approximately 38.9% of the total market share in 2010. We compete on the following
principal bases:
If we fail to compete effectively in the future, our current business and future growth
potential would be adversely affected.
We have limited experience in operating outside China, and failure to achieve our overseas
expansion strategy may have an adverse effect on our business growth in the future.
Our future growth depends, to a considerable extent, on our ability to expand our customer
base in both the domestic and overseas markets. We have been exploring new business opportunities
outside China for our wireless coverage products and services and base station RF products. In
2010, we had operations in Indonesia, India, the Philippines, Vietnam and Pakistan where we have
obtained local wireless service projects. However, we have limited experience in operating outside
China or with foreign regulatory environments and market practices, and cannot guarantee that we
will be able to penetrate any overseas market. In connection with our initial efforts to expand
overseas, we have encountered many obstacles, including cultural and linguistic differences,
difficulties in keeping abreast of market, business and technical developments in foreign
jurisdictions, and political and social disturbances. For example, our products and services sold
in China are tailored to the specifications of our domestic operators and their wireless systems
and are not readily deployable overseas. To meet the requirements of our potential overseas
customers, we have to adjust some of our technical parameters such as transmission frequencies and
make other modifications. Failure in the development of overseas markets may have an adverse
effect on our business growth in the future.
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We rely on key managerial and technical personnel, and failure to attract or retain such personnel
may compromise our ability to develop new products and to effectively carry on our research and
development and other efforts.
Our future growth and success depend largely on the efforts and abilities of our senior
management and senior technical staff, particularly Mr. Yingjie Gao, our chairman and chief
executive officer, and our other senior technicians and engineers. We have entered into employment
agreements with these individuals. These employment agreements have an initial term of three
years, subject to the right of termination under specified circumstances, such as a material breach
of their contractual obligations. If we lose the services of Mr. Gao or any other senior
technicians or engineers, our operations will be materially and adversely affected. We also
believe that our future success will depend in large part upon our ability to attract and retain
senior, experienced and highly qualified scientific and technical personnel.
The wireless coverage industry is characterized by a high level of employee mobility.
Competition in China for experienced RF technology experts is intense. In 2008, 2009 and 2010, our
employee turnover rate was 29.3%, 33.4% and 25.6%, respectively, as determined by dividing the
number of our employees departing during the year over the total number of employees at the end of
the year. There are few senior-level research and development or technical personnel available for
hire as the costs of hiring and retaining such individuals are high, and such personnel may not
remain with us once hired. If we are unable to successfully attract or retain senior-level
research and development employees, our ability to develop new technologies and products and to
effectively conduct our operations could be compromised and our ability to carry on our research
and development and other efforts could be materially and adversely affected.
For our standalone service contracts and bundled sale contracts, we hire third parties to carry out
some of the initial installation of the wireless coverage products. We are liable for the failure
or inadequacy of their services, and may be vulnerable to the loss and unavailability of their
services.
For our standalone service contracts and bundled sale contracts, we hire independent third
party contractors to carry out some of the initial installation of the wireless coverage products,
which include affixing the products to
the customers’ physical structure and interconnection of the products under the supervision of
engineers from our technical support team. Although Shenzhen Kaixuan Communication Technology Co.,
Ltd., one of our subsidiaries in China, is primarily responsible for our installation services, we
also outsource some of our initial installation work to independent third party contractors located
across China. Under our contracts, we are responsible to our customers for the quality of the
installation service. We therefore effectively take the credit and workmanship risks of these
independent contractors. To the extent our independent third party contractors fail to install the
products properly, we will be liable to cure the defects. We typically contract our initial
installation work to those contractors located near the project sites for cost efficiency reasons.
If any of the local contractors becomes unavailable and we are not able to find any suitable
replacement, we will be forced to use contractors located farther away from the project sites.
This is likely to delay our projects or increase our project costs. It is also possible that we
may not be able to find suitable replacements at all to complete our project installations on
schedule. In each case, our business would be harmed, and our reputation would be adversely
affected if we fail to find the appropriate third party contractors to carry out some of the
initial installation.
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We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
or misappropriation of, or disputes over, our intellectual property.
Our ability to compete successfully and to achieve future revenue growth will depend, in
significant part, on our ability to protect our proprietary technology and operate without
infringing upon the intellectual property rights of others. The legal regime in China for the
protection of intellectual property rights is still at its early stage of development. China
adopted its first statute on the protection of trademarks in 1979. Since then, China has adopted
its Patent Law, Trademark Law and Copyright Law and promulgated related regulations such as
Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of
Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various
international treaties and conventions in this area, such as the Paris Convention for the
Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol
Concerning the International Registration of Marks. In addition, when China became a party to the
World Trade Organization in 2001, China amended many of its laws and regulations to comply with the
Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and
regulations promulgated and other efforts made by China over the years with a view to enhancing its
regulation and protection of intellectual property rights, private parties may not enjoy
intellectual property rights in China to the same extent as they would in many Western countries,
including the United States, and enforcement of such laws and regulations in China has not achieved
the levels reached in those countries. Both the administrative agencies and the court system in
China are not well-equipped to deal with violations or handle the nuances and complexities between
compliant technological innovation and non-compliant infringement.
We rely on trade secrets and registered patents and trademarks to protect our intellectual
property. We have also entered into confidentiality agreements with our management and employees
relating to our confidential proprietary information. However, the protection of our intellectual
properties may be compromised as a result of:
Any of these events or occurrences may have a material adverse effect on our operations.
There is no assurance that the measures that we have put into place to protect our intellectual
property rights will be sufficient. As the number of patents, trademarks, copyrights and other
intellectual property rights in our industry increases, and as the coverage of these rights and the
functionality of the products in the market further overlap, we believe that business entities in
our industry may face more frequent infringement claims. Litigation to enforce our intellectual
property rights could result in substantial costs and may not be successful. If we are not able to
successfully defend
our intellectual property rights, we might lose rights to technology that we need to conduct
and develop our business. This may seriously harm our business, operating results and financial
condition, and enable our competitors to use our intellectual property to compete against us.
Furthermore, if third parties claim that our products infringe their patents or other
intellectual property rights, we might be required to devote substantial resources to defending
against such claims. If we are unsuccessful in defending against such infringement claims, we may
be required to pay damages, modify our products or suspend the production and sale of such
products. We cannot guarantee that we will be able to modify our products on commercially
reasonable terms.
If we lose certain government tax concessions, our profitability may be materially and adversely
affected.
Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. However, our
subsidiaries, Shenzhen GrenTech Co. Ltd., or Shenzhen GrenTech, Shenzhen Lingxian Technology Co.
Ltd., or Shenzhen Lingxian, Shenzhen Kaige Communication Technology Co., Ltd., or Shenzhen Kaige,
and Shenzhen Kaixuan Communication Technology Co. Ltd., or Shenzhen Kaixuan, were established in
the Shenzhen Special Economic Zone and were entitled to the preferential income tax rate of 15%.
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On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax
Law, which took effect as of January 1, 2008. The new tax law and its relevant regulations also
provide a 5-year transition period from its effective date for those enterprises which were
established before March 16, 2007 and were entitled to a preferential income tax rate of 15% under
the then effective tax laws and regulations. The transitional tax rates are 18%, 20%, 22%, 24% and
25% for 2008, 2009, 2010, 2011 and 2012 onward, respectively. Further, entities established before
January 1, 2008 which qualify as “Advance and New Technology Enterprises,” or ANTEs, under the new
tax law are entitled to a preferential income tax rate of 15%. Entities established in Special
Economic Zones after January 1, 2008 which qualify as ANTEs under the new tax law are entitled to a
two-year exemption from income tax and thereafter a 50% reduction in the standard 25% rate for the
succeeding three years.
Under the new tax law, Shenzhen Lingxian, Shenzhen Kaige and Shenzhen Kaixuan are subject to
the transitional tax rates of 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012
onward, respectively. In March 2009, Shenzhen GrenTech obtained the ANTE certificate entitling it
to a preferential income tax rate of 15% under the new tax law retroactively from January 1, 2008
to December 31, 2010. Thereafter, Shenzhen GrenTech will be subject to an income tax rate of 24%
for 2011 and 25% from 2012 onwards unless it can requalify as an ANTE in 2011 or thereafter.
Shenzhen GrenTech is in the process of applying for the requalification as an ANTE pursuant to the
relevant PRC laws and regulations. Shenzhen GrenTech RF was established in March 2008 and was
subject to income tax at a rate of 25% for 2008 and 2009. In September 2010, Shenzhen GrenTech RF
obtained the ANTE certificate entitling it to a preferential income tax rate of 12.5% under the new
tax law from January 1, 2010 to December 31, 2012. Shenzhen Lingxian Communication Company
Limited, or Shenzhen Lingxian Communication, Shenzhen GrenTech IOT Network Corporation Limited, or
Shenzhen GrenTech IOT Network, and Express (Shenzhen) Network Company Limited, or Express
(Shenzhen) Network, were established in 2010 and therefore are subject to income tax at a rate of
25%. The enactment of the new law could adversely affect our financial condition and results of
operations. Moreover, our historical operating results may not be indicative of our operating
results for future periods as a result of the expiration of the preferential tax treatment we
enjoy.
We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the
new enterprise income tax law on January 1, 2008, which may subject us to PRC income tax for our
global income and withholding income tax for any dividends we pay to our non-PRC shareholders on
profits earned after January 1, 2008.
Under the new PRC enterprise income tax law, enterprises established outside of China whose
“de facto management bodies” are located in China are considered “resident enterprises” and will
generally be subject to the uniform 25% enterprise income tax rate for their global income. The
“de facto management body” is defined as the organizational body that effectively exercises overall
management and control over production and business operations, personnel, finance and accounting,
and properties of the enterprise. On April 22, 2009, the PRC State Administration of Taxation
further issued a notice entitled “Notice Regarding Recognizing Offshore-Established
Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their Place of
Effective Management”. Under this notice, a foreign company controlled by a PRC company or a group
of PRC companies shall be deemed as a PRC resident enterprise, if (i) the senior management and the
core management departments in charge of its daily operations mainly function in the PRC; (ii) its
financial decisions and human resource decisions are subject to decisions or approvals of persons
or institutions in the PRC; (iii) its major assets, accounting books, company seals, minutes and
files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more
than half of the directors or senior management personnel with voting rights reside in the PRC.
All of our management is currently based in China, and will likely remain in China for the
foreseeable future. Accordingly, we may be considered a “resident enterprise” and may therefore be
subject to the enterprise income tax of 25% of our global income and as a result, the amount of
dividends we can pay to our shareholders could be reduced. We cannot confirm whether we will be
considered a “resident enterprise” as the implementation rules are unclear at the moment.
In addition, under the implementation rules of the new enterprise income tax law, dividends
paid to “non-resident enterprises” by “resident enterprises” on profits earned after January 1,
2008 are regarded as income from “sources within the PRC” and therefore subject to a 10%
withholding income tax, while dividends on profits earned before January 1, 2008 are not subject to
the withholding income tax. A lower withholding income tax rate of 5% may be applied if the
foreign holding company is registered in a jurisdiction that has a tax treaty arrangement with
China. Although our company is incorporated in the Cayman Islands, it remains unclear whether the
gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if
we are classified as a PRC resident enterprise. Any dividends paid to our shareholders which are
considered “non-resident enterprises” may be subject to withholding income tax and the value of the
investment in our shares or ADSs may be adversely and materially affected.
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If our idle or insufficient production capacity significantly increases during any particular
period, our results of operations for that period may be materially and adversely affected.
We plan the utilization of our production capacity primarily based on our projected orders
from our customers. We cannot guarantee the accuracy of our internal projections for demands of
our products and the effectiveness of our planning for production capacity utilization. We
currently have a monthly production capacity of 10,000 sets of wireless coverage products and
45,000 sets of base station RF products. Our actual average monthly production at the Shenzhen
facility in 2010 amounted to approximately 9,124 sets of wireless coverage products and 35,734 sets
of base station RF products. If our projections are inaccurate, there may be periods when we will
have idle or insufficient production capacity for all or some types of our products. Any
significant increase in our idle or insufficient production capacity during any particular period
may materially and adversely affect our results of operations for that period.
Our operations may be adversely affected by shortages of raw materials and the volatility in the
prices of raw materials.
We purchase raw materials such as various electronic components, metal cases for modules and
wireless coverage products, electronic cables, packaging materials and other accessories. In order
to meet our production delivery schedules, we must obtain sufficient quantities of high quality raw
materials in a timely manner. In this respect, we do not enter into long-term contracts with our
suppliers of raw materials. As a result, our operations are vulnerable to changes in the supply
and prices of raw materials. No assurance can be given that we will be able to obtain sufficient
quantities of raw materials in the future and no assurance can be given that our operations will
not be adversely affected by increases in prices of raw materials.
If we fail to acquire raw materials on time or on acceptable terms and consequently fail to fill
our customers’ orders in a timely and cost-effective manner, our business operations may be
materially and adversely affected.
We rely on third-party suppliers for our raw materials. Although we purchased raw materials
from over 400 suppliers in 2010, our ten largest suppliers in 2010 supplied approximately 32.0% of
our orders for raw materials. If any of our major suppliers fails to deliver our required raw
materials in time for our production, and we are unable to find the required raw materials from
other suppliers in a timely manner and on acceptable terms or we are unable to produce the required
raw materials ourselves, there will be a delay in our provision of products and
services to our customers. Such delays would damage our relationship with our customers and
may materially and adversely affect our business operations.
We maintain limited insurance coverage, and any significant product liability claim could have a
material and adverse effect on our financial condition.
We currently do not maintain any product liability insurance for our products and services,
nor do we carry any business interruption insurance, third-party liability insurance for personal
injuries, or environmental damage insurance for environmental emissions or accidents on our
properties or relating to our operations. There is no assurance that there will not be any product
liability claims against us in relation to our products. Furthermore, we cannot assure you that we
will not experience any major accidents in the course of our operations, which may cause
significant property damage and personal injuries. The occurrence of any such accidents and their
consequential losses may not be adequately covered, or at all, by our insurance policies. Losses
incurred, or payments we may be required to make, may have a material and adverse effect on our
financial condition.
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The interest of our principal shareholders may differ from your interest, and their vote may
disadvantage our minority shareholders.
Since the completion of our initial public offering in March 2006, several of our current
principal shareholders continue to be our largest shareholders with the following equity interest
in our company as of December 31, 2010:
The foregoing parties will be able to exercise substantial control over our business by voting
at shareholders’ meetings or board meetings on matters of significance, such as:
The interest of any of these principal shareholders may differ from your interest. There is
no assurance that any of these principal shareholders will vote in a way that benefits you. If
circumstances arise in which the interest of any of these principal shareholders conflicts with the
interest of other holders of our shares or ADSs, you as a minority shareholder could be
disadvantaged.
Our primary source of funds for dividends and other distributions from our operating subsidiary in
China is subject to various legal and contractual restrictions and uncertainties, and our ability
to pay dividends or make other distributions to our shareholders is negatively affected by those
restrictions and uncertainties.
We are a holding company established in the Cayman Islands and conduct our core business
operations through our principal operating subsidiary, Shenzhen GrenTech, in China. As a result,
our profits available for distribution to our shareholders are dependent on the profits available
for distribution from Shenzhen GrenTech and its subsidiaries. If Shenzhen GrenTech or its
subsidiaries incur debt on their own behalf, the debt instruments may restrict their ability to pay
dividends or make other distributions, which in turn would limit our ability to pay dividends on
our shares and ADSs. Under current PRC law, because we are incorporated in the Cayman Islands, our
PRC subsidiary, Shenzhen GrenTech, is regarded as a wholly foreign-owned enterprise in China.
Dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and
sino-foreign joint ventures, are subject to 10% PRC corporate withholding tax. For further
details, see “—We may be treated as a resident enterprise for PRC tax purposes following the
effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC
income tax for our global income and withholding income tax for any dividends we pay to our non-PRC
shareholders on profits earned after January 1, 2008” stated above. In addition, PRC law permits
payment of dividends only out of net income as determined in accordance with PRC accounting
standards and regulations. Determination of net income under PRC accounting standards and
regulations may differ from determination under U.S. GAAP in significant aspects, such as the use
of different principles for recognition of revenues and expenses. In addition, if any
undistributed profits of our PRC subsidiary, Shenzhen Grentech, are used to increase its registered
capital so that our equity interests in our PRC subsidiary are increased, approval of the PRC
government is required. Under PRC law, Shenzhen GrenTech, a wholly foreign-owned enterprise, and
our other PRC subsidiaries are required to set aside at least 10.0% of their respective after-tax
profit based on PRC accounting standards each year to their respective general reserves or
statutory capital reserve fund until the accumulative amount of such reserves reach 50.0% of their
respective registered capital. These reserves are not distributable as cash dividends. We have
been in compliance with such requirements and, as of December 31, 2010, the accumulated profits of
Shenzhen GrenTech and our other PRC subsidiaries, on a consolidated basis under PRC accounting
standards, that were unrestricted and were available for distribution amounted to RMB582.3 million
(US$88.2 million). As a result, our primary internal source of funds for dividend payments from
Shenzhen GrenTech is subject to these and other legal and contractual restrictions and
uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders.
Moreover, any transfer of funds from us to Shenzhen GrenTech, either as a shareholder loan or as an
increase in registered capital, is subject to registration with or approval by PRC governmental
authorities. These limitations on the flow of funds between us and Shenzhen GrenTech could
restrict our ability to act in response to changing market conditions.
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If we continue to have any material weakness in our internal control over financial reporting, we
may be unable to timely and accurately report our financial results, comply with disclosure
controls and procedures, internal control over financial reporting and other reporting obligations
or prevent fraud, which could harm our business and operating results, the trading price of our
stock and our access to capital.
We are subject to the reporting requirements of the U.S. Securities and Exchange Commission,
or SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules
requiring public companies such as ourselves, to include a report of management of their internal
control structure and procedures for financial reporting in their annual reports on Form 10-K or
Form 20-F, as the case may be, that contain an assessment by management of the effectiveness of
their internal control over financial reporting.
In connection with our evaluation of internal control over financial reporting, we identified
certain material weaknesses, and our management concluded that our company did not have effective
internal control over financial reporting as of December 31, 2008. We had taken various remedial
measures to address these material weaknesses, nevertheless, we have not been able to recruit
sufficient competent accounting personnel and continued to identify one material weakness in 2009
and 2010 with regard to our lack of competent accounting personnel in applying U.S. GAAP in our
financial reporting process, which has been a material weakness
identified since 2008. Accordingly, our
management concluded that our company did not have effective internal control over financial
reporting as of December 31, 2010. A material weakness is a control deficiency, or a combination
of control deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. In addition, our
management identified one significant deficiency for our internal
control over financial reporting in 2010 which we believe primarily resulted from our lack of competent accounting
personnel. Our efforts regarding internal control are discussed in detail in this annual report
under Item 15 “Controls and Procedures.”
Although we believe that the consolidated financial statements included in this Form 20-F
present fairly, in all material respects, our financial position, results of operations and cash
flow for the periods presented in conformity with U.S. GAAP, we cannot be certain that any remedial
measures we take will ensure that we design, implement, and maintain adequate controls over our
financial processes and reporting in the future or will be sufficient to address and eliminate this
material weakness. Our independent registered public accounting firm may also identify additional
weaknesses or deficiencies in the course of its ongoing assessment of our internal control.
Remedying the material weakness that has been identified, and any additional deficiencies,
significant deficiencies or material weaknesses that our independent registered public accounting
firm may identify in the future, could require us to incur additional costs, divert management
resources or make other changes. We have set up a project team, led by our internal audit manager,
to implement remedial plan for the material weakness after the issue was identified as discussed in
detail in this annual report under Item 15 “Remediation Plan.” Our management, including the chief
executive officer and chief financial officer, has approved such plan to address the material
weakness. Any delay or failure to design and implement new or improved controls, or difficulties
encountered in their implementation or operation, could harm our operating results, cause us to
fail to meet our financial reporting obligations, or prevent us from providing reliable and
accurate financial reports or avoiding or detecting fraud. Disclosure of our material weakness,
any failure to remediate such material weakness in a timely fashion or having or maintaining
ineffective internal control could cause investors to lose confidence in our reported financial
information, which could negatively impact the market price of our ADSs.
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We may be or become a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. investors.
We may be classified as a passive foreign investment company, or PFIC, by the U.S. Internal
Revenue Service, or IRS, for United States federal income tax purposes. Such characterization
could result in adverse United States federal income tax consequences to you if you are a U.S.
investor. For example, U.S. investors who owned our shares or ADSs during any taxable year in
which we were a PFIC generally are subject to increased U.S. tax liabilities and reporting
requirements for that taxable year and all succeeding years, regardless of whether we actually
continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be
available in certain circumstances.
The determination of whether or not we are a PFIC is made on an annual basis and depends on
the composition of our income and assets, including goodwill, from time to time. Specifically, we
will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of
our gross income for such taxable year is passive income, or (b) 50% or more of the average
percentage of our assets during such taxable year either produce passive income or are held for the
production of passive income. For such purposes, if we directly or indirectly own 25% or more of
the shares of another corporation, we generally will be treated as if we (a) held directly a
proportionate share of the other corporation’s assets, and (b) received directly a proportionate
share of the other corporation’s income.
We do not believe that we are currently a PFIC. However, because the PFIC determination is
highly fact intensive and made at the end of each taxable year, there can be no assurance that we
will not be a PFIC for the current or any future taxable year or that the IRS will not challenge
our determination concerning our PFIC status.
Under recently enacted U.S. legislation effective as of March 18, 2010 and subject to future
guidance, if we are a PFIC, U.S. Holders (as defined below) will be required to file an annual
information return with the IRS relating to their ownership of our shares or ADSs. Pursuant to
recent IRS guidance, this reporting requirement has been suspended until the IRS releases a revised
version of IRS Form 8621. Additional guidance is expected regarding the specific information that
will be required to be reported on the revised IRS Form 8621. Prior to filing their annual income
tax returns, U.S. Holders should consult their tax advisers regarding whether additional guidance
has been issued with respect to this reporting requirement, and if so, how to comply with such
guidance.
For further discussion of the adverse United States federal income tax consequences of our
possible classification as a PFIC, see Item 10 “Additional Information — Taxation — United States
Federal Income Taxation.”
A prolonged slowdown in the PRC economy may materially and adversely affect our results of
operations, financial conditions, prospects and future expansion plans.
Since the second half of 2008, global credit and capital markets, particularly in the United
States and Europe, have experienced difficult conditions. These challenging market conditions have
resulted in reduced liquidity, greater volatility, widening of credit spreads, lack of price
transparency in credit markets, a reduction in available financing and lack of market confidence.
These factors, combined with declining business and consumer confidence and increased unemployment
in the United States and elsewhere in the world, have precipitated a global economic slowdown,
including uneven rates of growth from quarter to quarter in China. Given the dramatic change in
the overall credit environment and economy, it is difficult to predict how long these conditions
will exist and the extent to which we may be affected. The uncertainty and volatility of credit
and capital markets and the overall slowdown in the PRC economy may have an adverse effect on our
business. Furthermore, there can be no assurance that measures implemented by governments around
the world to stabilize the credit and capital markets and new economic stimulus measures in China
will improve market confidence and the overall credit environment and economy. As a result,
prolonged disruptions to the global credit and capital markets and the global economy may
materially and adversely affect the Chinese economy, consumer spending in China and our business,
results of operations, financial condition, prospect and future expansion plans.
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Risks Relating to Our Industry
Our business might become subject to new regulatory restrictions, which may restrict the way in
which we conduct our business and subject us to severe penalties, and we may be materially and
adversely affected by any change in the composition of the primary telecommunications operators in
China.
We are subject to regulation by PRC law with respect to the products we manufacture and sell
in China. We must obtain regulatory approvals from the national and local government authorities
before we may manufacture and sell our products. The PRC Ministry of Industry and Information
Technology, or MIIT, which was created by the State Council of the PRC in March 2008 to assume,
among other things, the duties of the former Ministry of Information Industry, is the primary
central government agency responsible for regulating the PRC wireless communication industry and
has broad discretion and authority to regulate our industry in China. The introduction of any new
transmission protocol will require the approval of MIIT and other regulatory bodies. MIIT has
adopted, and may adopt in the future, regulations that impose stringent standards on the wireless
communication industry in China, with which we must comply. New regulations or readjustment of
previously implemented regulations could require us to change our business plan, increase our costs
or limit our ability to sell our products or services. Our failure to comply with these
regulations may subject us to various penalties, including fines and suspension or discontinuation
of our operations. Therefore, enactment by the PRC government of new laws or regulations or a
change in the interpretation of existing laws or regulations may also materially and adversely
affect our business.
The PRC government has considerable control over the structure and overall development of the
telecommunications industry in China. It also maintains substantial ownership in all major
telecommunications operators in China. Prior to 1994, PRC government-controlled entities held a
monopoly over the telecommunication networks across China. In order to introduce competition into
the telecommunications industry, the PRC government in 1994 separated China’s telecommunication
business into four independent sectors: fixed-line, wireless, satellite and paging. In 2002, the
PRC government further separated the then China Telecom group into two companies along geographical
boundaries, with the portion in southern China as the current China Telecom group and the northern
portion as the current China Network Communications Group Corporation and its affiliates, or the
China Netcom group. In May 2008, the PRC government announced a restructuring plan for the
country’s telecommunications operators. Under the restructuring plan, the nation’s largest mobile
phone operator, China Mobile, merged with fixed-line company, China Tietong. The GSM business of
China Unicom, a wireless mobile phone operator, merged with fixed-line company China Netcom Group.
China Telecom Corp., the country’s largest fixed-line phone operator, acquired China Unicom’s Code
Division Multiple Access, or CDMA, mobile network business. China Telecom also acquired China
Satcom, which offers satellite-based communications services. The
restructuring of China’s telecommunications operators was completed in 2008. In January 2009,
3G licenses were issued by MIIT to China Mobile, China Unicom and China Telecom. The restructuring
or any future significant restructuring of the telecommunications industry in China, however, may
disrupt our existing relationships with our customers and result in changes in supplier and
sourcing policies of these companies, all of which have been critical to our business growth and
profitability.
Risks Relating to Business Operations in China
Changes in China’s political and economic policies and conditions could cause a substantial decline
in the demand for our products and services.
Historically, we derived almost all of our revenues from a single market, China. We
anticipate that China will continue to be our primary production and sales base in the near future
and currently almost all of our assets are located in China and all of our services are performed
in China. While the PRC government has pursued economic reforms to transform its economy from a
planned economy to a market-oriented economy since 1978, a large part of the PRC economy is still
being operated under varying degrees of control by the PRC government. By imposing industrial
policies and other economic measures, such as restrictions on lending to certain sectors of the
economy, control of foreign exchange, taxation and restrictions on foreign participation in the
domestic market of various industries, the PRC government exerts considerable direct and indirect
influence on the development of the PRC economy. Many of the economic reforms carried out by the
PRC government are unprecedented or experimental and are expected to be refined and improved.
Other political, economic and social factors may also lead to further adjustments of the PRC reform
measures. This refining and adjustment process may not necessarily have a positive effect on our
operations and our future business development. For example, the PRC government has in the past
implemented a number of measures intended to slow down certain segments of the PRC economy that the
government believed to be overheating, including placing additional limitation on the ability of
commercial banks to make loans by raising bank reserve-against-deposit rates. Our operating
results may be materially and adversely affected by changes in the PRC economic and social
conditions and by changes in the policies of the PRC government, such as measures to control
inflation, changes in the rates or method of taxation and the imposition of additional restrictions
on currency conversion.
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Governmental control of currency conversion may affect our ability to pay dividends in foreign
currencies.
The PRC government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We currently receive
substantially all of our operating revenues in Renminbi. Under our current corporate structure,
our income is primarily derived from dividend payments from Shenzhen GrenTech and our other PRC
subsidiaries. Shortages in the availability of foreign currency may restrict the ability of
Shenzhen GrenTech and our other PRC subsidiaries to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency-denominated
obligations. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade related transactions,
can be made in foreign currencies without prior approval from the PRC State Administration of
Foreign Exchange, or SAFE, by complying with certain procedural requirements, including by
producing documents including but not limited to commercial documents evidencing dividend
allocation, provided that they are processed through PRC banks licensed to engage in foreign
currency transactions. However, approval from the SAFE or its local branch is required where
Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses
such as the repayment of loans denominated in foreign currencies. The PRC government may also, at
its discretion, restrict access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign
currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders, including holders of our ADSs.
Fluctuation in the value of Renminbi could adversely affect the value of, and dividends payable on,
our shares and ADSs in foreign currency terms.
The value of Renminbi is subject to changes in PRC government policies and depends to a large
extent on China’s domestic and international economic, financial and political developments, as
well as the currency’s supply and demand in the local market. For over a decade from 1994, the
conversion of Renminbi into foreign currencies,
including the U.S. dollar, was based on exchange rates set and published daily by the People’s
Bank of China, or PBOC, the PRC central bank, based on the previous day’s interbank foreign
exchange market rates in China and exchange rates on the world financial markets. The official
exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was
revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies,
including the U.S. dollar. Under the new policy, Renminbi was permitted to fluctuate within a band
against a basket of foreign currencies. As a result, as of December 31, 2010, the Renminbi has
appreciated significantly against the U.S. dollar since July 2005. There remains significant
international pressure on the PRC government to adopt a substantially more liberalized currency
policy, which could result in a further and more significant appreciation in the value of Renminbi
against the U.S. dollar. Further revaluations of Renminbi against the U.S. dollar may also occur
in the future. Since our income and profits are denominated in Renminbi, any appreciation of
Renminbi would increase the value of, and any dividends payable on, our shares and ADSs in foreign
currency terms. Conversely, any depreciation of Renminbi would decrease the value of, and any
dividends payable on, our shares and ADSs in foreign currency terms. In addition, we have U.S.
dollar-denominated bank deposits in our offshore bank account, which is subject to PRC foreign
exchange control regulations and could not be exchanged into Renminbi freely, any appreciation of
Renminbi could adversely affect the value of our U.S. dollar-denominated bank deposits.
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The uncertain legal environment in China could limit the legal protections available to you.
The PRC legal system is a civil law system based on written statutes. Unlike the common law
system, the civil law system is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws
and regulations to provide general guidance on economic and business practices in China and to
regulate foreign investment. Our PRC subsidiary, Shenzhen GrenTech, is a wholly foreign-owned
enterprise and is subject to laws and regulations applicable to foreign investment in China in
general and laws and regulations applicable to wholly foreign-owned enterprises in particular.
China has made significant progress in the promulgation of laws and regulations dealing with
economic matters such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation
of local regulations by national laws may have a negative impact on our business and prospects. In
addition, as these laws, regulations and legal requirements are relatively recent and because of
the limited volume of published cases and their non-binding nature, the interpretation and
enforcement of these laws, regulations and legal requirements involve significant uncertainties.
These uncertainties could limit the legal protections available to foreign investors, including
you. For example, it is not clear if a PRC court would enforce in China a foreign court decision
brought by you against us in shareholders’ derivative actions.
Moreover, the enforceability of contracts in China, especially with governmental entities, is
relatively uncertain. If counterparties repudiated our contracts or defaulted on their
obligations, we might not have adequate remedies. Such uncertainties or inability to enforce our
contracts could materially and adversely affect our revenues and earnings.
We may be subject to acts of God, acts of war and epidemics which are beyond our control and which
may cause damage, loss or disruption to our business.
Our business is subject to general economic and social conditions in the PRC. Natural
disasters, epidemics and other acts of God which are beyond our control may adversely affect the
economy, infrastructure and livelihood of the people in the PRC. Some cities in the PRC are under
the threat of flood, earthquake, sandstorm, snowstorm, fire or drought. For instance, a serious
earthquake and its successive aftershocks hit Sichuan province in May and June of 2008, resulting
in tremendous loss of lives and injury and destruction of assets in the region. In April 2009, a
swine influenza broke out in Mexico and spread globally, resulting in the loss of lives and
widespread fear. Our business, financial condition and results of operation may be materially and
adversely affected if such natural disasters occur. Certain areas of China are susceptible to
epidemics, such as Severe Acute Respiratory Syndrome, or SARS, or swine or avian influenza. A
recurrence of SARS, an outbreak of swine or avian influenza, or any epidemic, in China, could
result in material disruptions to our operations or a slowdown of China’s economy, which could
materially and adversely affect our business, financial condition and results of operation. Acts
of war and terrorism may also injure our employees, cause loss of lives, damage our facility and
destroy our markets, any of which could materially and adversely impact our business, financial
condition and results of operation. The
potential for war or terrorist attacks may also cause uncertainty and cause our business to
suffer in ways that we cannot predict. Our business, financial condition and results of operation
may be materially and adversely affected as a result.
PRC regulations relating to offshore investment activities by PRC residents may limit our ability
to acquire PRC companies and adversely affect our business and prospects.
In October 2005, SAFE issued a circular concerning foreign exchange regulations on investments
by PRC residents in China through special purpose companies incorporated overseas. The circular
states that, if PRC residents use assets or equity interests in their domestic entities as capital
contribution to establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, such PRC residents must register with
local SAFE branches with respect to their overseas investments in offshore companies and must also
file amendments to their registrations if their offshore companies experience material events, such
as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use
of assets in China to guarantee offshore obligations. Our shareholders have completed the relevant
SAFE registration procedures as currently required.
As it is uncertain how SAFE will interpret or implement its circular, we cannot predict how
this circular and other SAFE circulars will affect our business operations or future strategies.
For example, we may be subject to more stringent review and approval process with respect to our
foreign exchange activities, such as remittance of dividends and foreign currency-denominated
borrowings, which may adversely affect our business and prospects.
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PRC regulation of direct investment and loans by offshore holdings companies to PRC entities may
delay or limit us from making additional contribution or loans to our PRC subsidiaries.
Any capital contribution or loans that we, as an offshore entity, make to our PRC subsidiaries
are subject to PRC regulations. For example, any of our loans to our PRC subsidiaries cannot
exceed the difference between the total amount of investment that our respective PRC subsidiaries
are approved to make under relevant PRC laws and their respective registered capital, and any such
loans must be registered with the local branch of SAFE. In addition, our additional capital
contributions to our PRC subsidiaries must be approved by the Ministry of Commerce of the PRC, or
the MOFCOM, or its local counterpart. We cannot give assurance that we will be able to obtain
these approvals on a timely basis, or at all. If we fail to obtain such approvals, our ability to
make equity contribution or provide loans to our PRC subsidiaries or to fund its operations may be
adversely affected, which could harm our PRC subsidiaries’ liquidity and their ability to fund
their working capital and expansion projects and meet their obligations and commitments.
In addition, in August 2008, SAFE promulgated Circular 142, a notice regulating the conversion
by a foreign-invested company of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. Circular 142 requires that Renminbi converted from the foreign
currency-denominated capital of a foreign-invested company may only be used for purposes within the
business scope approved by the applicable governmental authority and may not be used for equity
investments within the PRC unless otherwise specifically provided for. In addition, SAFE
strengthened its oversight over the flow and use of Renminbi funds converted from the foreign
currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be
changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of
such loans have not yet been used. Violations of Circular 142 may result in severe penalties,
including substantial fines as set forth in the Foreign Exchange Administration Regulations.
All participants in our existing equity compensation plan who are PRC citizens may be required to
register with SAFE. We may also face regulatory uncertainties that could restrict our ability to
adopt additional equity compensation plans for our directors, employees and other parties under PRC
law.
In December 2006, PBOC promulgated the Administrative Measures for Individual Foreign
Exchange, which set forth the respective requirements for foreign exchange transactions by PRC
individuals under either the current account or the capital account. The Implementation Rules of
the Administrative Measures for Individual Foreign Exchange, issued in January 2007 by SAFE,
specify the approval requirements for PRC citizens who are
granted shares or share options by an overseas listed company according to its employee stock
ownership plan or stock option plan.
In March 2007, SAFE promulgated the Processing Guidance on Foreign Exchange Administration for
Domestic Individuals Participating in Employee Stock Holding Plans or Stock Option Plans of
Overseas-Listed Companies, or the Share Option Rule. According to the Share Option Rule, PRC
citizens who are granted shares or share options by an overseas listed company according to its
employee share option or share incentive plan are required, through the PRC subsidiary of such
overseas listed company or other qualified PRC agents, to register with SAFE and complete certain
other procedures related to the share option or other share incentive plan. Foreign exchange
income from the sale of shares or dividends distributed by the overseas listed company may be
remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi. In
addition, the overseas listed company or its PRC subsidiary or other qualified PRC agent is
required to appoint an asset manager or administrator, appoint a custodian bank and open dedicated
foreign currency accounts to handle transactions relating to the share option scheme or other share
incentive plan. We and our PRC citizen employees who have been and will be granted share options,
or PRC option holders, are subject to these rules. If we or our PRC option holders fail to comply
with these rules, we or our PRC option holders may be subject to fines and legal or administrative
sanctions.
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We may incur substantial increases in labor cost due to the promulgation of the new labor contract
law.
In June 2007, the Standing Committee of the National People’s Congress enacted the Labor
Contract Law, which became effective on January 1, 2008. Compared to the Labor Law, the Labor
Contract Law establishes more restrictions and increases the cost to employers upon termination of
employees, including specific provisions related to fixed-term employment contracts, temporary
employment, probation, consultation with the labor union and employee general assembly, employment
without a contract, dismissal of employees, compensation upon termination and overtime work, and
collective bargaining. According to the Labor Contract Law, an employer is obligated to sign an
unlimited term labor contract with an employee if the employer continues to employ the employee
after two consecutive fixed term labor contracts. The employer also has to pay compensation to
employees if the employer terminates an unlimited term labor contract. Unless an employee refuses
to extend an expired labor contract, compensation is also required when the labor contract expires
and the employer does not extend the labor contract with the employee under the same terms or
better terms than those in the original contract. Further, under the Regulations on Paid Annual
Leave for Employees, which became effective on January 1, 2008, employees who have served more than
one year with an employer are entitled to a paid vacation ranging from five to 15 days, depending
on their length of service. Employees who waive such vacation time at the request of employers
shall be compensated at three times their normal salaries for each waived vacation day. As a
result of these new protective labor measures, our labor costs may increase. We cannot give
assurance that any disputes, work stoppages or strikes will not arise in the future.
Item 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT
Our legal and commercial name is China GrenTech Corporation Limited. Our principal executive
offices are located at 15th Floor, Block A, Guoren Building, Keji Central 3rd Road, Hi-Tech Park,
Nanshan District, Shenzhen 518057, People’s Republic of China. Our telephone number is (86-755)
2650-3007. Our registered offices are located at Cricket Square, Hutchins Drive, P.O. Box 2681,
Grand Cayman KY1-1111, Cayman Islands. We have appointed CT Corporation System, 111 Eighth Avenue,
13th Floor, New York, New York 10011, United States of America, with telephone number
1-212-894-8940, as our agent for service of processes for actions brought under the U.S. securities
laws.
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The diagram below illustrates our current corporate structure:
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We were incorporated on December 3, 2003 in the Cayman Islands as an exempted company with
limited liability under the Cayman Islands Companies Law. We hold, through our wholly owned
subsidiary, GrenTech (BVI) Limited, or GrenTech BVI, 100% of the equity interest of Shenzhen
GrenTech. Shenzhen GrenTech was formed on July 5, 1999 by Mr. Gao and Professor Zhuang, as a
domestic limited liability company in China. Subsequent to our incorporation, we converted
Shenzhen GrenTech into a wholly foreign-owned enterprise under PRC law in order to benefit from
various tax and other incentives available to foreign-invested enterprises in China. In June 2010,
we established another investment holding company, GrenTech RF Communication (BVI) Limited, under
the laws of the British Virgin Islands.
Since our inception in 1999, we have been focused on the development and application of our RF
technologies for commercial uses. In 2000, we produced and commercialized our first integrated
repeater. In 2001, we began the testing of CDMA repeaters, which we subsequently began selling to
the China Unicom group later that year. In 2003, we completed our first personal handy phone
system, or PHS, network coverage project. In March 2007, we were among the first PRC enterprises
to obtain relevant government approvals for the development and production of repeaters and trunk
amplifiers for use in TD-SCDMA networks, which is a domestically developed 3G standard. Commencing
in 2008, we have been producing and selling wireless coverage products that can support all current
3G transmission protocols. In 2010, we began selling wireless local area networks, or WLAN,
products in significant volume and became one of the principal WLAN equipment and installation
service providers to the three telecommunications operators in China, in particular the China
Mobile group. In October 2010, we won bids from the China Broadcasting Corporation to supply
equipment and integration services for the China Mobile Multimedia Broadcasting project.
Currently, we conduct our business in China through our indirect wholly-owned subsidiary,
Shenzhen GrenTech, and our other subsidiaries:
Shenzhen Lingxian
Shenzhen Lingxian was formed in February 2002 by Shenzhen GrenTech as a domestic limited
liability company in China. Shenzhen Lingxian primarily focuses on developing monitoring software
for wireless coverage equipment and selling such software to Shenzhen GrenTech. As of December 31,
2010, we owned 99% of the equity interest in Shenzhen Lingxian and Ms. Xiujun Zhang, one of our
employees, owned the remaining 1% equity interest.
Shenzhen Lingxian Communication
Shenzhen Lingxian Communication was formed in June 2010 by Shenzhen GrenTech and Shenzhen
Lingxian as a domestic limited liability company in China. Shenzhen Lingxian Communication
primarily focuses on researching and developing, manufacturing and selling WLAN products. As of
December 31, 2010, Shenzhen GrenTech and Shenzhen Lingxian owned 60% and 40% of the equity interest
in Shenzhen Lingxian Communication, respectively.
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Shenzhen GrenTech RF
Shenzhen GrenTech RF was established in March 2008 by Shenzhen GrenTech as a domestic limited
liability company in China. Shenzhen GrenTech RF primarily focuses on researching and developing,
manufacturing and selling base station RF products for base station equipment manufacturers. As of
December 31, 2010, we indirectly owned 100% of the equity interest in Shenzhen GrenTech RF.
Shenzhen Kaige
We, through Shenzhen GrenTech, acquired Shenzhen Kaige and its wholly owned subsidiary,
Shenzhen Kaixuan, from an independent third party for a total consideration of RMB57.9 million
(US$8.8 million) in December 2007. Shenzhen Kaige, through its subsidiary, Shenzhen Kaixuan,
primarily provides installation services of our wireless coverage products. As of December 31,
2010, we indirectly owned 100% of the equity interest in Shenzhen Kaige.
Shenzhen Kaixuan
Shenzhen Kaixuan is 100% owned by Shenzhen Kaige, which we acquired through Shenzhen GrenTech
in December 2007. Shenzhen Kaixuan primarily focuses on the research and development of
integration technology for information network systems and provides installation services of our
wireless coverage products. As of December 31, 2010, we indirectly owned 100% of the equity
interest in Shenzhen Kaixuan.
Shenzhen GrenTech IOT Network and Express (Shenzhen) Network
We established Shenzhen GrenTech IOT Network Corporation Limited, or Shenzhen GrenTech IOT
Network, a domestic limited liability company in China, with Shenzhen Tianfang Real Estate Agency
Corporation Limited, or Shenzhen Tianfang, in February 2010. We contributed RMB7 million as the
registered capital of Shenzhen GrenTech IOT Network and own 70% of the equity interest in Shenzhen
GrenTech IOT Network. Shenzhen Tianfang contributed RMB3 million as the registered capital of
Shenzhen GrenTech IOT Network and owned the remaining 30% equity interest in Shenzhen GrenTech IOT
Network. Shenzhen Tianfang is a PRC company beneficially owned by Mr. Wan Jing (as to 80% of its
equity interest), a minority shareholder of Heng Xing Yue Investments Limited which currently holds
6.0% of our shares, and Mr. Yingjie Gao (as to 20% of its equity interest), our chairman and chief
executive officer. In December 2010, Shenzhen Tianfang transferred its 30% equity interest in
Shenzhen GrenTech IOT Network to Shenzhen Xing Guang Investment Company Limited, or Shenzhen Xing
Guang. Shenzhen Xing Guang is a PRC company beneficially owned by Mr. Yingjie Gao (as to 66.7% of
its equity interest), our chairman and chief executive officer, and Mr. Wan Jing (as to 33.3% of
its equity interest), a minority shareholder of Heng Xing Yue Investments Limited which currently
holds 6.0% of our shares. Shenzhen GrenTech IOT Network primarily engages in the development and
sale of object network identification systems, communication systems and related electronic
component products, design and installation of network and automation related products, as well as
design and development of websites and software. To date, the operations of Shenzhen GrenTech IOT
Network have been limited and no revenue has been generated. The establishment and operation of
Shenzhen GrenTech IOT Network were approved by our independent directors.
In March 2010, Shenzhen GrenTech IOT Network established a wholly owned subsidiary, Express
(Shenzhen) Network Company Limited, or Express (Shenzhen) Network, a domestic limited liability
company in China. Express (Shenzhen) Network primarily engages in Internet and Internet-based real
estate agent businesses. To date, we have generated an insignificant amount of revenue from such
businesses.
Overseas Subsidiaries
We, through Shenzhen GrenTech and Shenzhen Lingxian, have established various overseas
subsidiaries in connection with our international operations. We obtained approval from the
relevant PRC governmental authorities for the establishment of PT. GrenTech Indonesia in January
2009. PT. GrenTech Indonesia is a company incorporated under the laws of the Republic of
Indonesia, or Indonesia, and was 90% owned by Shenzhen GrenTech
and 10% owned by Shenzhen Lingxian as of December 31, 2010. PT. GrenTech Indonesia is
responsible for our operations in Indonesia.
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We established GrenTech India Private Limited in January 2010. GrenTech India Private Limited
is a company incorporated under the laws of the Republic of India, or India, and was 99.999% owned
by Shenzhen GrenTech and 0.001% owned by Mr. Zhengyu You, a former employee of ours, as of December
31, 2010. Mr. You resigned from his position with us with effect from June 1, 2011. It is intended that such 0.001%
interest owned by Mr. You will be transferred to another employee of ours. GrenTech India Private
Limited is responsible for our operations in India.
We established GrenTech Singapore PTE. Ltd. in October 2010. GrenTech Singapore PTE. Ltd. is
a company incorporated under the laws of the Republic of Singapore, or Singapore, and was wholly
owned by Shenzhen GrenTech as of December 31, 2010. GrenTech Singapore PTE. Ltd. is responsible
for our operations in Singapore. To date, no revenue has been generated from our operations in
Singapore.
In December 2008, we divested two wholly-owned subsidiaries, Quanzhou Lake Communication
Company Limited, or Lake Communication, and Quanzhou Lake Microwave Company Limited, or Lake
Microwave. We sold Lake Communication to Mr. Haifan Zhuang, son of Professor Kunjie Zhuang who is
a technology consultant and former director of our company, as well as one of our major
shareholders, for a total consideration of RMB101.3 million (US$15.3 million), and sold Lake
Microwave to Mr. Haifan Zhuang and Lake (HK) Technology Company Limited, an affiliated company of
Professor Kunjie Zhuang, for a total consideration of RMB0.9 million (US$0.1 million).
Lake Communication was formed in August 1989 by Mr. Haifan Zhuang, as a collectively owned
enterprise in China and was subsequently converted and registered as a limited liability company in
1999. Lake Communication specializes in RF part and component production, and it has been
supplying base station RF products to our wholly-owned subsidiary, Shenzhen GrenTech, for
manufacturing wireless coverage products. Lake Microwave was formed in March 1993 by Lake
Microwave Communication Equipment Co., Ltd. as a Sino-foreign equity joint venture. Lake Microwave
focuses on the research and development of RF technologies, including the design and development of
RF integrated circuits and other new RF technologies.
As consideration for the acquisition, Shenzhen GrenTech was released from its account payable
obligations in the aggregate amount of RMB102.2 million (US$15.5 million) due to Lake Communication
and Lake Microwave, while Mr. Haifan Zhuang and Lake (HK) Technology Company Limited acquired Lake
Communication and Lake Microwave subject to their existing outstanding debt obligations. The terms
of the transaction were negotiated on an arms’ length basis and approved by our independent
directors. The transfer of the equity interest in Lake Communication and Lake Microwave were
completed in December 2008.
BUSINESS
Overview
We are a leading provider of wireless coverage products and services in China. We believe
that we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (i) wireless coverage products and services (including WLAN
products and services), which are mainly supplied to telecommunications operators, and (ii) base
station RF products, which are mainly supplied to base station equipment manufacturers.
We have a strong in-house RF technology research and development capability. Our team of 247
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen. As of April 30, 2011, we had 164 registered patents and 110 pending
patent applications with the Patent Office of the National Intellectual Property Office of China.
Our RF expertise has provided a platform from which we intend to further broaden our product
offerings. Our integrated development, engineering and production
capabilities provide us with a distinct competitive advantage over our competitors in China by
allowing us to quickly respond to customized design requests from our customers while keeping down
our production costs.
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Our wireless coverage products enable telecommunications operators to expand the reach of
their wireless communication networks to indoor and outdoor areas, such as buildings, highways,
railways, subways, tunnels and remote regions. Our wireless coverage products include indoor
coverage products and outdoor coverage products. To date, we have developed over 681 models of
wireless coverage equipment. In addition, our wireless coverage products include WLAN products
which we began selling in significant volume in 2010, and we became one of the principal WLAN
equipment and installation service providers to the three telecommunications operators in China, in
particular the China Mobile group, in 2010. We provide most of our wireless coverage products and
services to local affiliates of the three telecommunications operators in China, namely the China
Mobile group, the China Unicom Group and the China Telecom group. According to BAYES, in 2010, we
were the second largest provider of wireless coverage products and services in China. In recent
years, the wireless coverage market in China has benefited from increased capital expenditure by
the three telecommunications operators in China. Further, the capital expenditure of the wireless
coverage industry in China is expected to reach RMB19.7 billion in 2011, RMB22.8 billion in 2012
and RMB25.6 billion in 2013 according to BAYES. We believe that the increasing capital expenditure
will afford us an opportunity to grow our revenues in the wireless coverage market. In addition,
3G licenses were issued to the three telecommunications operators in January 2009 by the PRC
government. China Mobile received the TD-SCDMA license, China Unicom received the WCDMA license
and China Telecom received the CDMA2000 license. Following such license grants, these operators
started the construction of 3G networks and significantly increased their capital expenditure and
investment in wireless coverage products in 2009. These operators continued such capital expenditure and investment in 2010 in order to improve the network
coverage quality, which has driven the growth of our wireless coverage business in 2010,
although the rate of growth of such expenditure between 2010 and 2009 was lower than the rate between 2009 and 2008.
We believe that these operators in China will continue, at a relatively similar pace as in 2010, such
capital expenditure and investment in the foreseeable future, which we believe will continue to
contribute in part to the growth of our business.
Our base station RF products are mainly supplied to base station equipment manufacturers.
These customers use our base station RF products in their base station equipment manufacturing. To
date, we have become a qualified supplier of base station RF products to several major domestic and
foreign base station equipment manufacturers, such as Huawei Technologies Co., Ltd., ZTE
Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel
Shanghai Bell Co., Ltd., Nokia Siemens Network and Ericsson (China) Co., Ltd. We have developed
over 377 types of base station RF products. We have been supplying base station RF products in
bulk quantities to ZTE Corporation and Huawei Technologies Co., Ltd. since 2006, to Datang Mobile
Communications Equipment Co., Ltd. and China Potevio Co., Ltd. since 2007 and to Nokia Siemens
Network and Ericsson (China) Co., Ltd. since 2008. Following the grant of 3G licenses to the
three telecommunications operators in China in January 2009, these operators started the
construction of 3G networks and significantly increased their capital expenditure and investment in
base station RF products in 2009. With the relatively moderate pace of 3G network construction in
2010, demand for base station RF products has declined in 2010, and we expect such demand will
maintain at a similar level in 2011. Nevertheless, we believe such demand, together with the
commencement of our sales of base station RF products to overseas markets in 2010 and the
construction of TD-LTE trial networks by the China Mobile group in China which began in 2011, will
continue to contribute in part to the growth of our business.
Our revenues were RMB984.7 million in 2008, RMB1,602.9 million in 2009 and RMB1,721.0 million
(US$260.8 million) in 2010. Our gross profit was RMB233.3 million in 2008, RMB379.0 million in
2009 and RMB455.7 million (US$69.1 million) in 2010. Our operating income was RMB60.4 million in
2009 and RMB155.7 million (US$23.6 million) in 2010, and we had an operating loss of RMB130.1
million in 2008. Our net income was RMB32.7 million in 2009 and RMB98.1 million (US$14.9 million)
in 2010, and we had a net loss of RMB146.4 million in 2008.
Our Wireless Coverage Products and Services
Our principal business is the provision of wireless coverage products and services (including
WLAN products and services) in China with our self-developed RF technology. In 2008, 2009 and
2010, revenues
generated from the provision of wireless coverage products and services accounted for
approximately 77.5%, 74.6% and 82.7% of our revenues, respectively.
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Wireless Coverage Products
We produce a wide range of wireless coverage products, including repeaters, trunk amplifiers,
digital optic coverage products, WLAN products and other coverage products. The principal
functions of wireless coverage products are to extend wireless coverage and improve radio signal
quality. Our wireless coverage products support various transmission protocols, including GSM and
CDMA, which are 2G protocols, and TD-SCDMA, WCDMA and CDMA2000, which are 3G protocols. We are
also researching and developing products compatible with TD-LTE, which is a 4G protocol. We
participated in the formulation of TD-SCDMA and WCDMA repeater standards by the China
Communications Standards Association, or CCSA, and wireless coverage network management standard by
China Mobile group. In addition, we were selected as a provider of wireless coverage products and
services to the China Mobile group in the Guangzhou 2010 Asian Games in 2010, and were awarded
“Guangzhou 2010 Asian Games Communication and Network Support Team Outstanding Contribution Award”
by the China Mobile group. We were also selected by subway operators in Beijing, Shanghai,
Guangzhou and Shenzhen to construct large scale wireless network coverage systems. In
October 2010, we won bids from the China Broadcasting Corporation to supply equipment and
integration services for the China Mobile Multimedia Broadcasting project. The China Mobile
Multimedia Broadcasting project provides digital multimedia, in particular television, services to
end users through a wireless broadcasting television coverage network.
Our wireless coverage products support the 2G networks and 3G networks of the three
telecommunications operators in China and can be used for both indoor and outdoor coverage. The
operation of 2G networks remain the main business of the three telecommunications operators in
China. These operators have been focusing on the enhancement of their 2G networks, including
enhancing the coverage in rural areas and places such as subways, airports, tunnels and lifts.
Since the issuance of 3G licenses to the three telecommunications operators in China in January
2009, these operators have been investing in 3G network construction in both major cities and
second tier cities in China and have commenced commercialization of their 3G networks. We provide
a customized solution for each project, taking into account factors such as existing coverage of
the base stations, target coverage requirements, unique geographic and topographic features of the
vicinity and other project-specific conditions.
Indoor Coverage. In order to achieve effective coverage and distribution in indoor
environments, such as high-rise buildings, underground areas and elevators, we use antennas,
couplers, trunk amplifiers, repeaters and other accessories to construct a complete indoor coverage
distribution system that enables evenly distributed emissions of radio signals from the base
stations to cover the entire facility. Our indoor coverage products support various transmission
protocols, such as GSM networks (1,800 MHz and 900 MHz), CDMA, TD-SCDMA, CDMA2000 and WCDMA. We
also provide point of interface, or POI, products that are capable of supporting multiple protocols
simultaneously, which offers effective coverage platform solutions in subways, indoor stadiums and
other large indoor facilities.
Outdoor Coverage. We design our outdoor coverage products to provide wireless coverage in
specified geographic and topographic regions. Depending on the particular coverage requirements,
our outdoor coverage products may consist of antennas and repeaters and other accessories to
transmit and extend radio signals from base stations to blind and weak spots or areas where network
coverage does not exist or is weak. Our outdoor coverage products are typically used in areas such
as highways, railways, subways and tunnels.
In 2010, we began selling WLAN products in significant volume and became one of the principal
WLAN equipment and installation service providers to the three telecommunications operators in
China, in particular the China Mobile group, which significantly increased its investment in
building WLAN hotspots in major cities in China in 2010. WLAN is a network system which provides access
at any hotspots to broadband Internet connection and is based on the IEEE 802.11 standard where
access point devices in the network transmit and receive radio frequencies for wireless enabled
devices, such as mobile phones. We were selected to provide WLAN products to
the China Mobile group and China Telecom group in Expo 2010 Shanghai China in 2010, and were
awarded “Expo 2010 Shanghai China Cooperation Contribution Award” by the China Mobile group.
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Our Services
Our integrated design, engineering and production processes allow us to provide wireless
coverage services (including WLAN services) to our customers. The services we provide include:
Design Services. At the outset of each project, our design team implements a series of tests
to evaluate our customer’s specific network coverage on the project site and identify any network
deficiencies. These tests include magnetic environment, base station signals and coverage tests.
Once the testing is complete, our design team, working closely with our sales and marketing team,
which is familiar with the customer and its needs, prepares and submits a detailed design plan to
our customer for the proposed wireless coverage products and services. This process allows us to
develop solutions that are tailored to each specific customer’s requirements. Upon finalization of
our design plan, our customer confirms its instructions to proceed with the product development,
engineering and installation.
Installation of Wireless Coverage Products. Once we receive confirmation for the design plan
from our customer, we proceed with product development and engineering, and begin discussions with
the property owner or the manager of the building, in collaboration with our customer, to arrange
the installation of the wireless coverage products. After we engineer, produce and assemble the
products, we deliver them from our production facility to the project site. In general, one of our
subsidiaries, Shenzhen Kaixuan, is responsible for the installation of our wireless coverage
products. We also hire third-party contractors to carry out the initial installation under the
supervision of our project design and technical service team. We use more than 323 contractors
across China, all of whom are independent third parties.
Project Warranties. We provide service warranties to our wireless coverage customers for a
period typically ranging from one to three years following the final inspection of our wireless
coverage products. During the warranty period, we agree to repair or replace defectively installed
products and to provide other warranty services to our customers, such as a centralized
Internet-based system to monitor the performance of our wireless coverage products and regular
on-site inspections of our installed wireless coverage products. In addition, we provide other
warranty services such as online technical support and telephone hotline support to our customers.
Our objective is to respond to our customers within 24 hours after receipt of any technical support
request.
Our Sales Cycle
Our nationwide sales and marketing team actively pursues business opportunities across all
provinces and municipalities in China. All telecommunications operators, in an effort to shift to
a more centralized procurement model in order to encourage more competitive pricing, adopted a new
procurement policy commencing in 2007 whereby the bidding processes for wireless coverage equipment
and for services would be separately conducted, and procurement decisions would be made by the
parent company and local affiliates, respectively. Under the new policy, providers of wireless
coverage products such as ourselves may not win the bid for the servicing contracts even after
winning the bid for equipment contracts, or vice versa. As a result, since 2008 our contracts
mainly consist of standalone equipment contracts whereby we provide wireless coverage products only
or standalone service contracts whereby we provide wireless coverage integrated services only, with
the remaining being bundled sale contracts whereby we provide both wireless coverage products and
integrated services. The number of our bundled sale contracts decreased significantly since 2008
and are entered into occasionally for smaller scale and ad hoc projects.
Standalone equipment contracts
The sales cycle for our wireless coverage equipment under standalone equipment contracts can
be divided into the following phases:
Bidding Process. Our sales cycle for our wireless coverage products begins when a wireless
operator or one of its subsidiaries requests proposals from us. After we complete a preliminary
evaluation of the project, including its feasibility and profitability, we submit bids to the
potential customer.
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Wireless operators in China select the winning bid based on a number of factors and
considerations, including:
Typically, wireless operators in China request that bids also include the following terms:
Delivery. After we receive the purchase order from the regional customers, we will begin our
delivery of equipment and the customers will then provide us with delivery certificates after their
inspection and acceptance of the equipment at the time of delivery.
Contract Signing. Upon receipts of delivery certificate, we will enter into contracts with
our customers.
Payment. According to the payment terms, the customer is required to pay 70% to 80% of our
contract amount upon signing of the sale and purchase contract and issuance of the delivery
certificate, which is typically 30 to 60 days after delivery, and the remaining balance is due upon
issuance of final inspection certificate by the customer or the expiration of the warranty period.
All payment events are not contingent upon further performance and future installation services for
the equipment. However, customers may not promptly make the payments and generally take longer to
make the payments.
Warranty Period. Our warranty period generally begins after the issuance of final inspection
certificate by our customers.
Standalone service contracts
The sales cycle for our wireless coverage integrated services under standalone service
contracts can be divided into the following phases:
Bidding Process. The process begins when a wireless operator requests proposals from us for
wireless coverage integrated services. After we complete a preliminary evaluation of the project,
including its feasibility and profitability, we submit bids to the potential customer.
Wireless operators in China select the winning bid based on a number of factors and
considerations, including:
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If we win the bid, the operator generally issues a written letter of acceptance.
Occasionally, the operator gives us verbal notice only. The design, engineering, implementation
and installation stages begin after the operator confirms our winning bid. According to the PRC
Law on Invitation and Submission of Bids and the PRC Contract
Law, a letter of acceptance issued by the bid-inviting party or a verbal confirmation of
acceptance by the bid-inviting party, together with its bid invitation materials and our
bid-tendering materials, constitutes a legally binding contract between the bid-inviting party and
the winning bidder. We believe that, upon the acceptance of our bid by our customers, we have a
legally enforceable right against our customers as a matter of contract law; however, our PRC
counsel has advised us that enforcement of our rights to payment in the PRC courts may be
difficult. For more details, see Item 3. “Key Information—Risk Factors—Risks Relating to Our
Company—We often begin work on a project before we have a contract for our products and services,
which may materially and adversely affect our cash flows from operating activities and liquidity.”
To date, we have not had any material disputes with our customers in respect of any of our
successful bids confirmed verbally or in writing by our customers.
Design and Installation. When we win the bid, we begin to locate a site at the customer’s
premises which is suitable for installation according to the customer’s overall plan. We then
perform signal tests and design the installation plan. We begin our installation after the
customer accepts our installation plan. After completion of the installation process, we test the
system to evaluate its performance and make adjustments to optimize its functionality. We then
request our customer to issue a completion certificate to confirm that the installation has been
completed. We are often engaged in a number of projects with one customer at the same time. To
reduce the administrative burden of managing multiple projects, our customers often group projects
together and issue completion certificates for all the projects at the same time, resulting in the
delay of receipt of completion certificates until the completion of the installation of the last
project.
Contract Signing. In line with industry practice, after the completion of the installation
and upon receipts of completion certificates, we will enter into contracts with our customers.
Inspection and Warranty Period. After the issuance of the completion certificate, our
customers perform preliminary and final inspection of the installation. Our contracts often do not
specify the date by which an inspection must be performed. Sometimes, the inspection may be
delayed by as long as six to 12 months after issuance of the completion certificate, which delays
our revenue recognition for installation services. When our project passes the inspection, the
warranty period begins. Most of our customers conduct two inspections prior to the beginning of
the warranty period. The second inspection usually occurs six to 12 months after the preliminary
inspection. Some of our customers conduct one inspection before the warranty period begins.
Payment. Our contracts permit our customers to pay in installments upon the occurrence of
contractually stipulated payment events during the sales cycle. Contractual terms for the
installment payments vary between our customers. Typically, according to the payment terms, the customer is
required to pay 30% to 50% of our integrated service fees after we have completed the installation
service. The customer is required to pay 20% to 50% (cumulative contract amount of 70% to 80%) of
our integrated service fees (including the amount receivable upon completion of the installation
service) after preliminary inspection and the remaining balance is due for payment after final
inspection or the expiration of the warranty period. Although the typical payment terms are up to
30 days after the occurrence of each payment event, customers may not promptly pay the installment
and generally take longer to make the payment. For more details on payment from our customers,
please see Item 5. “Operating and Financial Review and Prospectus—Liquidity and Capital
Resources—Accounts Receivable and Receivable Selling.”
Bundled sale contracts
The sales cycle for our wireless coverage equipment and integrated services under bundled sale
contracts can be divided into the following phases:
Bidding Process. The process begins when a wireless operator invites us for single bidding of
wireless coverage equipment sales and the provision of integrated services. After we complete a
preliminary evaluation of the project, including its feasibility and profitability, we submit bids
(including price quotation and detailed breakdowns by equipment and services) to the potential
customer.
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Wireless operators in China select the winning bid based on a number of factors and
considerations, including:
Delivery and Installation. After we receive the purchase order from the customers, we will
begin our delivery of equipment and provide installation services. After the completion of the
installation services, we test the equipment to evaluate its performance and make adjustment to
optimize its functionality. We then request our customer to issue a completion certificate to
confirm the acceptance of the equipment delivered and the completion of the installation.
Contract Signing. Upon receipts of completion certificate, we will enter into contracts with
our customers.
Inspection and Warranty Period. After the issuance of the completion certificate, our
customers perform preliminary and final inspection of the installation. Our contracts often do not
specify the date by which an inspection must be performed. Sometimes, the inspection may be
delayed by as long as six to 12 months after issuance of the completion certificate, which delays
our revenue recognition for sale of equipment. When our project passes the inspection, the
warranty period begins. Most of our customers conduct two inspections prior to the beginning of
the warranty period. The second inspection usually occurs six to 12 months after the preliminary
inspection. Some of our customers conduct one inspection before the warranty period begins.
Payment. Our contracts permit our customers to pay in installments upon the occurrence of
contractually stipulated payment events during the sales cycle. Contractual terms for the
installment payments vary between our customers. Typical payment events include issuance of
completion certificates, preliminary inspection, final inspection and expiration of the warranty
period. At the occurrence of each payment event, customers are generally required to pay a
percentage of the contract price. Although the typical payment terms are up to 30 days after the
occurrence of each payment event, customers may not promptly pay the installment and generally take
longer to make the payment. For more details on payment from our customers, please see Item 5.
“Operating and Financial Review and Prospectus—Liquidity and Capital Resources—Accounts
Receivable and Receivable Selling.”
Selected Completed Projects
We completed 11,462 projects in 2008, 26,826 projects in 2009 and 17,633 projects in 2010.
The following list represents select wireless coverage projects for the year ended December 31,
2010. These projects demonstrate different applications of our wireless coverage products, such as
for office buildings, shopping centers, hotels, airports, highways, railways, subways, tunnels and
scenic areas, as well as different geographic locations.
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Our Base Station RF Products
In addition to the provision of wireless coverage products and services, since the fourth
quarter of 2005, we have focused on developing, manufacturing and supplying base station RF
products, including base station parts and components and subsystems, which are major building
blocks of base stations and also the most crucial step in the manufacturing of base stations.
Their costs account for more than 50% of the overall production costs of base stations.
Base Station RF Parts and Components
Base station RF parts and components are essential building blocks for all forms of wireless
communication products. They provide the fundamental channel for transmitting and receiving radio
signals. Base station RF parts and components can be classified into active and passive modules.
Active modules contain electronic components such as transistors and diodes and require external
power to operate. Their principal functions are to amplify and alter radio signals. Passive
modules do not contain any electronic components. They rely on a combination of integrated
circuits and magnetic fields emitted by their components to function. Their principal functions
are to filter, combine and split RF signals.
We mainly produce passive modules. Our passive modules include filters, duplexers,
multi-frequency splitters, combiners and couplers and antenna. Compared to traditional filters,
our patented filters are able to generate a more powerful electromagnetic force with which to
transmit microwave signals and are capable of significantly reducing the level of external and
internal interference that disrupts wireless transmissions.
The business cycle of RF parts and components involves the following phrases:
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Base Station RF Subsystems
Since 2007, we began to develop a series of remote RF unit, or RRU, which is a crucial part of
a 3G signal distribution system. Through this distribution system, we can locate RRU close to an
antenna and connect RRU and indoor baseband unit, or BBU, by the fiber. The distribution distance
between BBU and RRU by using fiber are longer than using coaxial cable. By using RRU, operators
will have flexibility in choosing their own location and network layout. Moreover, RRU is
reliable, easy to maintain and cost-saving.
Overseas Operations
We provide wireless coverage products and services to telecommunications operators in various
countries including Indonesia, India, the Philippines, Vietnam and Pakistan. We also began selling
base station RF products to these countries in 2010. We expect to commence our sales in Singapore
in the second half of 2011. To date, we have generated an insignificant amount of revenue from our
overseas operations. We will continue to explore new business opportunities outside China for our
wireless coverage products and services and base station RF products.
Production
Production Facilities
Our production facilities are located in Shenzhen. Prior to the divestiture of our two
wholly-owned subsidiaries in Quanzhou, namely, Lake Communication and Lake Microwave, in December
2008, we had a production facility in Quanzhou and an additional production facility in Shenzhen.
Since then, we have increased our main production lines and expanded our production capacity at our
production facilities in Shenzhen, including new production lines for wireless coverage and base
station RF products which we established in 2009. We plan the utilization of our production
capacity based on projected orders from customers for our wireless coverage products and base
station RF products.
As of December 31, 2010, the production capacity and average utilization rate of our Shenzhen
production facilities were as follows:
Production Process
Our integrated design, engineering, production and quality control capabilities enable us to
customize products to meet specific customer requirements and to increase production efficiencies.
To minimize component costs and enable us to implement our low cost strategy, we produce our base
station RF products with our own low-cost proprietary production process and rely on strict control of our production process. In
addition, our production personnel are intensively involved in product design to ensure that
production considerations are addressed early in the design process and to minimize the number of
products that fail to meet our quality control standards.
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Our production processes may be divided into two primary categories and consist of numerous
individual steps throughout the entire process. The categories include (i) production of our base
station RF products, and (ii) production of wireless coverage products with our own base station RF
products. The production process for our base station RF products may be generally divided into
the following steps:
Most of our completed base station RF products are used in the production of our wireless
coverage products. We also sell our base station RF products directly to base station equipment
manufacturers. The general steps for the production of our wireless coverage products are wiring,
assembly, functional testing and quality control. After the completion of the wireless coverage
products, we install the products according to the design plans approved by our customers.
Production is highly labor intensive as it involves manual labor to assemble the modules and
products. In order to produce high-quality and precise products that meet our customers’
specifications, we employ highly skilled labor. We combine various production equipment, such as
spectrum analyzers, signal generators and vector network analyzers, according to our manufacturing
process technologies to produce our modules and products. Only a small portion of our production
processes, including integrated circuit board processing and covering and welding, is automated.
Quality Control
We place considerable emphasis on quality control. We adhere to a strict system of quality
control over our operations, from sourcing of raw materials to production, packaging and inventory
storage to sale, delivery and installation. We have established various quality-control
checkpoints at different stages of our production process to closely monitor the quality of our
production and to ensure that our products meet all our internal benchmarks and customers’
specifications. In 2000, we were ISO9001-certified for our research and development, production
and quality control processes at our research and development facilities as well as at our
production facilities in Shenzhen. We have also developed and now bulk produce base station RF
products that are in compliance with the European Union’s ROHS national enforcement body, which
means that these products do not exceed specified levels of lead, cadmium, mercury and other
chemicals. These base station RF products are incorporated into base stations that are sold in
Europe.
Quality Control for Raw Materials. We purchase raw materials only from suppliers on our
approved vendor list, and only those suppliers that pass our assessment are admitted to our
approved vendor list. Our staff in the purchasing department assess various aspects of a supplier,
including its overall ability, technical capability, quality control over its production process
and its financial health. In some cases, our customers require us to purchase raw materials from
their approved list of suppliers. In such event, suppliers designated by our customers are also
subject to our assessment and approval. Raw materials, upon delivery, are subject to incoming
inspection by our quality control team. Raw materials that fail to pass our incoming inspection
are returned to the suppliers. Suppliers who experience repeated returns are removed from our
approved vendor list. Raw materials provided by our customers’ designated suppliers are also
subject to the same incoming inspection procedures.
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Quality Control During Production. At various stages of the production process, semi-finished
products are tested to ensure their quality and compliance with all internal production benchmarks
before proceeding to the next stage of the production process.
Final Testing Before Delivery. Following completion of the production process, our products
are inspected and tested thoroughly to ensure that all customers’ specifications are met before our
products are delivered.
Testing at Customer Site. After completion of the installation process, we test the wireless
coverage products to evaluate their performance and make adjustments to optimize their
functionality. Our customers will also perform further testing of our wireless coverage products
after installation.
Warranty. For our wireless coverage products, we usually provide warranties for one to three
years following the final inspection by our customers. During the warranty period, we are
responsible for any quality defects in our products. For our base station RF products, our
customers will examine our products and are entitled to return any base station RF products that do
not comply with their prescribed specifications at the time of delivery. We also provide
warranties ranging from one to three years during which period we provide free repairs for returned
products with quality defects.
We have established a dedicated technical service team that provides after-sale services
principally to our wireless coverage customers. Our goal is to ensure that we deal with inquiries
and complaints of our customers in a prompt and satisfactory manner. In cases where customers
report defects of our products during our warranty period, we send technical staff to our
customers’ sites to carry out repairs at no cost to the customers. We do not, however, maintain
any product liability insurance. For a discussion on the risks associated with our lack of product
insurance coverage, please refer to “Item 3. Key Information—Risk Factors—Risks Relating to Our
Company—We maintain limited insurance coverage, and any significant product liability claim could
have a material and adverse effect on our financial condition.”
Research and Development
We have strong in-house RF technology research and development capabilities. As of December
31, 2010, our in-house research and development team had 247 engineers and technicians from the
wireless communication industry in China. Our key research and development experts have over 10
years of experience each in the telecommunications industry. We have a research and development
facility in Shenzhen. Our research and development activities focus on new generation RF core
technology, new product development, functionality enhancement and manufacturing process
improvement.
RF Technology
RF is the fundamental technology that enables wireless telecommunications products to transmit
and receive signals. Our capabilities span a wide range of RF technologies, covering the complete
radio frequency from 350 MHz to 50 GHz. Our technology allows our RF-based wireless coverage
products to support a wide range of communication protocols including GSM, CDMA, TD-SCDMA,WCDMA,
CDMA2000 and digital trunk communications. We are also researching and developing products
compatible with TD-LTE, which is a 4G protocol. We have made significant innovations in a number
of core RF technologies, particularly those relating to filters and power amplifiers. Our filters
are able to generate a more powerful electromagnetic force with which to transmit microwave signals
and significantly reduce the level of external and internal interference that disrupts wireless
transmissions. Our RF power amplifiers are distinguished by their high linearity and power
efficiency standards.
In our efforts to commercialize our RF technology, we have formulated several of our own
design and development standards, including those relating to filters, power amplifiers, antennas
and next-generation RF integrated circuits and multiple chip module technologies. In response to
the industry demand for production of small volumes of a large variety of base station RF products,
we have developed our own production techniques, such as an automatic covering technique, which
manufactures these products in a more efficient manner. Furthermore, we are developing an
automatic testing platform that enables us to conduct various tests throughout
our production process. In addition, in the course of our research and development, we have
accumulated a database of basic testing data, and have established our own integrated circuit board
format, design technique, and testing and adjustment techniques.
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In addition, we achieved an important milestone in our digital technology platform in 2010 by developing a series of digital optic coverage products and solutions. In order to resolve
the problem of different networks sharing the same coverage system, we use high-speed data
transmission technology and pico-power distribution technology. This technology reduces signal
disturbances and improves efficiencies of signal transmission, while creating a suite of solutions
for indoor wireless coverage where GSM, CDMA, WCDMA, TD-SCDMA, WLAN and other signals can be used
simultaneously with minimal interference. We believe that this is an important breakthrough as the technology can
be used as a basis for the advancement of integration of telecom, broadcast television and Internet
networks in China.
Research and development expenditure for each of the three years ended December 31, 2010 were
RMB70.2 million, RMB59.9 million and RMB71.6 million (US$10.8 million), respectively, representing
approximately 7.1%, 3.7% and 4.2% of our revenues and 19.3%, 18.6% and 22.6% of our total operating
expenses, respectively.
Sales, Marketing and Key Customers
Sales and Marketing Team
As of December 31, 2010, we had 561 sales and marketing professionals located in 28 offices
covering 30 provinces and municipalities across China. We require our sales and marketing
professionals to undergo extensive and ongoing training to constantly refresh their product
knowledge and to keep them apprised of the latest trends and developments in the PRC wireless
communication industry. Through the efforts of our sales and marketing team over the past few
years, we were, as reported by BAYES, the second largest supplier of wireless coverage products and
services in China in 2010.
Because of the technical nature of our product offerings, we emphasize close collaboration
between our sales and marketing team and our project design and technical service team in order to
provide optimal service to our wireless coverage customers. As of December 31, 2010, we had 2,556
engineers and technicians on our project design and technical service team servicing these
customers. These professionals perform network testing and evaluation, formulation of design plan
and implementation of wireless coverage projects. We also rely on them for after-sale technical
services to our wireless coverage customers.
We also have a dedicated sales and marketing team for base station equipment manufacturer
customers of our base station RF products, all 11 members of which have extensive technical
knowledge and are familiar with customer specifications and demands. They are also responsible for
providing after-sale technical services to our equipment manufacturer customers.
In order to encourage our sales and marketing team to pursue new business opportunities, we
offer incentive bonus programs that pay performance-based, year-end cash bonuses.
Pricing
The PRC market for wireless coverage products and services and base station RF products is
highly price-sensitive. In our business, prices tend to vary based on a number of factors,
including:
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We typically participate in bidding to win orders for our products and services. We determine
our pricing primarily on the basis of the above listed factors, with appropriate consideration
given to the size of the transaction and the significance of the business opportunity to our
growth. We impose minimum requirements internally for gross profit margins in our bidding
processes. We believe that economies of scale in our operations, coupled with our proprietary RF
technologies and our integrated design, development, engineering and production processes, allow us
to price our products and services competitively.
Key Customers
The following table sets forth our revenues attributable to our sales to the China Mobile
group, the China Unicom group, the China Telecom group, the China Netcom group and base station
equipment manufacturers in absolute terms and as a percentage of our revenues for the periods
specified:
With the adoption of the centralized procurement policy by China Mobile group in 2007 and by
China Unicom group and China Telecom group in 2008, purchasing decisions for equipment providers
are made by the national headquarters of these entities. However, we will continue to contract
directly with their local operational units after the decisions are made for equipment procurement,
and will interact directly with the local operational units in our day-to-day business operations.
Although it has been our business practice to interact with local affiliates separately, they are,
nevertheless, under the common control of their parent company, and in our customer concentration
analysis, we consider the national group each as a single customer. There have also been instances
where decisions made by one local affiliate affect the decisions of other local affiliates within
the national group.
We intend to further strengthen our relationship with the China Mobile group and the China
Unicom group, and at the same time, maintain our relationship with the China Telecom group. To
accomplish that goal, we have identified specific members of our sales and marketing team as our
dedicated customer relationship contacts to service our existing and potential customers.
For further information about our reliance on the three telecommunications operators in China,
please refer to “Item 3. Key Information—Risk Factors—Risks Relating to Our Company—We derive a
significant portion of our revenues from the three telecommunications operators in China, and our
revenues could decline significantly if any of them reduces its purchases of our wireless coverage
products and services.”
In addition, we have become a qualified supplier of base station RF products to several major
domestic and foreign base station equipment manufacturers, which are Huawei Technologies Co., Ltd.,
ZTE Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel
Shanghai Bell Co., Ltd., and Nokia Siemens Network and Ericsson (China) Co., Ltd.
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Suppliers and Raw Materials
The raw materials used to produce our products mainly include various electronic components,
metal cases for modules and wireless coverage products, electronic cables, packaging materials and
other accessories. We source most of our raw materials inside China except for some electronic
components that are purchased from sales agents of foreign companies in China. We procure raw
materials from companies that have satisfied our supplier review and have been selected through a
competitive bidding process. Base on their products supplied to us, our suppliers are divided into
three categories: core suppliers, major suppliers and general suppliers. We have established
different performance criteria and scope of cooperation for each category of suppliers. All of our
suppliers are subject to stringent review procedures by our team of specialists in supplier
certification, which covers the areas of technology, quality, response time, pricing, environmental
protection and social responsibility. We also conduct periodic evaluations of our suppliers. We
currently have nine core suppliers for our core manufacturing processes of mechanical processing,
electronic plating and modules. All of these suppliers are leaders in their respective sectors and
have a proven track record of supplying to globally-renowned companies. In some cases, our
customers require us to purchase raw materials from their approved suppliers. Our raw material
purchases are paid in Renminbi and typically have a credit term of 90 days. As we have an
extensive list of suppliers, we do not rely on any single supplier or group of suppliers to provide
any of our raw materials. In 2008, 2009 and 2010, purchases from our top five raw material
suppliers accounted for approximately 28.0%, 32.3% and 20.4% of our total purchases of raw
materials, respectively.
Competition
The wireless coverage market in China is very competitive and is characterized by rapid
technological advancements, frequent development of new products, and downward pricing trends over
the life of a product. In their requests for proposals, PRC telecommunications operators typically
request a complete analysis and proposal for the design, installation and warranty. The provision
of wireless coverage products and services requires the skills and efforts of a large number of
technical personnel to put together the design plan, to supervise the installation by third parties
and to provide after-sale services. Compared with international providers, PRC domestic providers
have the advantage of having a lower cost base and, as such, currently dominate the market in
China. According to BAYES, there were seven major providers of wireless coverage products and
services, which collectively held approximately 57.4% market share in China as of December 31,
2010. Competition among these wireless coverage product and service providers over the past five
years has resulted in the emergence of a few dominant players. According to BAYES, the top three
providers of wireless coverage products and services in China were all PRC companies and included
Comba Telecom Systems Holdings Ltd., or Comba, Wuhan Hongxin Telecommunication Technologies Co.,
Ltd, or WHTT, and our company. Together, the top three industry participants accounted for
approximately 38.9% of the total market share in 2010, with Comba, our company and WHTT
representing 19.9%, 9.7% and 9.3% of the total market in terms of revenue, respectively.
The competitive environment of the PRC wireless coverage market has undergone the following
changes in recent years, and we expect will continue to experience similar trends:
We believe that the key factors considered by customers when choosing a vendor for wireless
coverage products and services include the vendor’s overall capabilities, such as ability to
provide integrated coverage solutions, research and development capability, products quality, scope
and flexibility of product offering, project design and installation capability, after-sale service
capability, pricing, financial strength, as well as the customer’s previous experience and
relationships with the vendor. We believe that our in-house RF technology research and development
capability, our fully integrated production capability and our ability to provide integrated
wireless
coverage solutions to our customers give us a competitive advantage over our main competitors,
Comba and WHTT. On the other hand, we have a shorter operating history than both Comba and WHTT
and, therefore, a shorter historical relationship with the three Chinese telecommunications
operators relative to them. In order to remain competitive and grow our business, we must
strengthen our relationships with our existing customers, develop relationships with new customers
and expand into new products and markets.
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The market for base station RF products is also competitive in China. We believe the entry
barrier for base station RF products is higher compared to the entry barrier for wireless coverage
products, because of higher capital requirements, longer development cycles and more stringent
technical requirements. Compared with international suppliers, PRC domestic suppliers have the
advantage of having a lower cost base and, as such, currently dominate the market in China. We
mainly compete with Wuhan Fingu Electronic Technology Co., Ltd., Shenzhen Tat Fook Technology Co.,
Ltd. and Mobi Antenna Technologies (Shenzhen) Co., Ltd. in China.
In the mid- to lower-end market for base station RF products, we and other suppliers tend to
compete on speed of supply largely because customers in this market sector generally require supply
on short notice. We have a competitive edge due to our strength in RF technology, our low
production cost and our relatively strong financial position. To date, we have become a qualified
supplier of base station RF products to seven major domestic and foreign base station equipment
manufacturers, which are Huawei Technologies Co., Ltd., ZTE Corporation, Datang Mobile
Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel Shanghai Bell Co., Ltd., Nokia
Siemens Network and Ericsson (China) Co., Ltd.
Property
Owned Property
In October 2007, we moved our research and development and production facilities in Shenzhen
to a property that we own inside Hi-Tech Park, Nanshan District, Shenzhen with a total site area of
approximately 19,570 square meters and a gross floor area of approximately 73,000 square meters,
namely our headquarters, Guoren Building. In July 2008, we also moved our principal executive
office to this property. We occupy the property in Shenzhen for manufacturing, research and office
purposes. In addition to our own usage, we have spare office space with a gross floor area of
approximately 16,345.7 square meters available for lease by third parties, all of which was
leased out to third parties in 2010.
In June 2007, we obtained the land use right to a parcel of land of a total site area of
approximately 124,925 square meters in Longgang District, Shenzhen from Shenzhen land bureau. We
plan to construct a property of a gross floor area of approximately 339,000 square meters on this
parcel of land and have commenced the construction of phase I in the second half of 2010 which is
expected to be completed in the second half of 2011. This property is planned primarily for
manufacturing facilities.
In addition, our wholly-owned subsidiary, Shenzhen Kaige, also owns an office premise with a
gross floor area of 1,476.4 square meters in Futian, Shenzhen, which was leased out to a third
party in February 2011.
Leased Property
We also lease properties for our sales offices and warehouses from time to time. Our leases
generally have a term of five to 36 months and are due to expire between June 2011 and December
2013. Under most of our leases, we have a right of first refusal to renew them on similar terms
and for similar periods as the previous contracts. Our total rental payments in 2010 were RMB10.7
million (US$1.6 million).
Intellectual Property Rights
We rely on copyright, patent, trademark and other intellectual property law, nondisclosure
agreements and technical know-how to protect our intellectual property and proprietary rights. We
have entered into confidentiality and licensing agreements with our employees, suppliers and
distributors. Our senior employees and employees who work in our research and development
department and other technical departments are required to sign agreements
acknowledging that we own the rights to all technology, inventions, trade secrets, works of
authorship, developments and other processes generated in connection with their employment with us
or their use of our resources or relating to our business or our property and that they must assign
any ownership rights that they may claim in those works to us.
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As of April 30, 2011, we had 164 registered patents and 110 pending patent applications with
the Patent Office of the National Intellectual Property Office of China, including our repeaters,
filters and antennas. Most of our patent applications only cover patent protection in China;
however, starting in 2008, we have applied for patent protection from Patent Cooperation Treaties
organizations in relation to certain parts of our patents.
We have 14 registered trademarks, 13 registered with China’s Trademark Office of the State
Administration for Industry and Commerce and one registered in Hong Kong. We have also filed
applications for registration of six trademarks in China. In addition, we are the registered owner
of the domain name, www.grentech.com.cn. We also own copyrights to 23 types of computer software
which are registered in China and related to our wireless coverage product monitoring and wireless
access system.
In 2008, 2009 and 2010, we generated revenues of RMB475.0 million, RMB707.5 million and
RMB636.6 million (US$96.5 million), respectively, from the sales of our patented products,
representing 48.2%, 44.1% and 37.0% of our revenues, respectively. We are not aware of any
infringement or unauthorized use of our intellectual property rights. We will take appropriate
legal actions to protect our rights if there is any unauthorized use or infringement of our rights
in the future. To date, we have not been sued for infringement of intellectual property rights by
any third party.
Insurance
We have casualty insurance coverage on our property, our goods in transit, and our employees’
personal risks. We do not have insurance coverage on our other assets, inventories, interruption
of business or product liabilities.
Employees
As of December 31, 2010, we had a total of 4,443 full-time employees. A breakdown of our
employees by function as of the same date is set forth below:
In order to maintain quality, knowledge and skill levels of our employees, we place a strong
emphasis on training. We provide training to our employees periodically, ranging from introductory
training for new employees, technical training, performance enhancement training, professional
enhancement training, team-building and communications training.
As required by PRC regulations, we participate in statutory retirement plans organized by the
respective PRC municipal governments in the areas where we operate. We have no obligation beyond
the monthly contributions of 10% to 11% of basic staff salaries. Our contributions to the
statutory retirement plans are charged to the consolidated statement of operations as and when
incurred. The total amount of contributions we made to employee benefit plans in 2008, 2009 and
2010 was RMB16.8 million, RMB18.9 million and RMB21.7 million (US$3.3 million), respectively.
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None of our employees are currently unionized, but they have the statutory right under PRC law
to join or organize workers’ unions in China. We have not experienced any significant difficulty
in recruiting employees nor
have had any significant staff compensation or labor disputes. We consider our relations with
our employees to be good.
We enter into employment contracts with most of our officers, managers and employees, which
contain a non-compete clause both for the period of their employment with our company and generally
for three years thereafter.
Legal Proceedings
We are not currently a party to any material litigation and are not aware of any pending or
threatened material litigation.
Industry Regulation in China
The PRC government regulates the various aspects of the research, development and production
of radio transmission equipment and installation of wireless coverage equipment in China. MIIT and
its counterparts in the local governments are the principal regulators of the telecommunication and
related industries in China.
Research, Development and Production of Radio Transmission Equipment
In order to engage in the research and development business for a new type of radio
transmission equipment in China, an entity must file with the Radio Management Bureau of MIIT. In
order to conduct a radio transmission with equipment under research and development, the entity
must set up a temporary station in accordance with relevant regulations for that purpose.
A manufacturer of radio transmission equipment in China must file a product type certificate
and a product type code for its radio transmission equipment with the Radio Management Bureau of
MIIT. The manufacturer must mark the product type approval code on the labels of its finished
equipment. Without prior authorization from the PRC government, manufacturers may not produce or
sell any model of radio transmission equipment with specifications lower than those required in the
approval certificate. Unless the type of radio transmission equipment has been approved by the
Radio Management Bureau, the manufacturer may not produce, sell, use or advertise such equipment in
China. The manufacturer may, however, produce radio transmission equipment for the export market
without such approval from the Radio Management Bureau.
Connection of Radio Communication Equipment with a Public Telecommunication Network
China has a network access license system to regulate the connection of radio communication
equipment with a public telecommunication network. Without a network access license issued by
MIIT, radio communication equipment may not be connected to a public telecommunication network or
sold in China. Network access licenses have a term of three years. A manufacturer that wishes to
continue production and sale of radio communication equipment beyond the three-year term may apply
to extend the license for an additional three-year term. The manufacturer must affix the network
access license marks on its radio communication equipment as well as on its packaging and
advertising materials. The manufacturer must apply for a new network access license if there is
any change to the equipment that is inconsistent with the scope of the network access license.
Installation of Wireless Coverage Equipment
Installation of wireless coverage equipment constitutes construction work under applicable
regulations in China. Construction companies are subject to various on-going qualification
requirements and must obtain a construction enterprise qualification certificate from the relevant
authorities in China.
China classifies construction companies into three categories, namely,
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A lead project contractor may carry out the entire project by itself and may subcontract
ancillary work to specialized contractors or service subcontractors. Specialized contractors may
carry out an entire project undertaking alone and may subcontract labor work to service
subcontractors. Service subcontractors may undertake labor work from lead project contractors and
specialized contractors. The PRC regulations impose different qualifications on lead project
contractors, specialized contractors and service subcontractors. Each qualification is further
divided into various grades in accordance with a set of specific criteria.
Qualification certificates of construction companies are subject to the annual review and
renewal. The administrative authorities have the authority to close down companies that undertake
construction projects without proper qualification certificates and to impose a fine of 2% to 4% of
the contract value so involved. Illegal gains so received are also subject to forfeiture. For
companies undertaking projects beyond the permitted scope of their respective quality grading, the
administrative authorities may stop such illegal activities and impose a fine of 2% to 4% of the
contract value so involved. The government may also order offending companies to suspend and
restructure their operations and downgrade their qualifications. Serious offenders may have their
construction enterprise qualification certificates revoked and any illegal gains forfeited.
Our Compliance with Regulations
Shenzhen GrenTech produces, sells and engages in research and development activities relating
to RF technology and other wireless coverage products. Accordingly, Shenzhen GrenTech is required
to obtain and has obtained product type approval certificate and product type approval code for
radio transmission equipment issued by MIIT.
Shenzhen Lingxian primarily develops monitoring software for wireless coverage equipment and
sells such software to Shenzhen GrenTech, which are not regarded as communication equipment under
PRC law.
Shenzhen Lingxian Communication primarily develops, manufactures and sells WLAN products.
Accordingly, Shenzhen Lingxian Communication is required to obtain and has obtained product type
approval certificate and product type approval code for radio transmission equipment issued by
MIIT.
Shenzhen GrenTech RF develops, manufactures and sells base station RF products, which are not
regarded as communication equipment under PRC law.
Other than holding 100% equity interest in Shenzhen Kaixuan and certain real property interest
in China, Shenzhen Kaige does not have any other business operation.
Shenzhen Kaixuan mainly provides installation services of our wireless coverage products, and
develops and sells integration technology for information network systems. Shenzhen Kaixuan is
required to obtain and has obtained a certificate for qualification issued by MIIT under PRC law.
Shenzhen Kaixuan has obtained a construction enterprise qualification certificate and is qualified
in China to engage in electronic engineering projects such as communication and integrated
information network projects. We also ensure that all contractors we select for our installation
work have proper construction enterprise qualification certificates.
Item 4A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our audited consolidated financial statements and related notes
included in this annual report
on Form 20-F. The audited consolidated financial statements have been prepared in accordance
with U.S. GAAP. The following discussion and analysis contain forward-looking statements that
involve risks and uncertainties.
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OVERVIEW
We are a leading provider of wireless coverage products and services in China. We believe
that we are also a leading developer of radio frequency, or RF, technology in China. RF is the
fundamental technology that enables wireless communication products to transmit and receive
signals. Our core research and development efforts in RF technology and our integrated design,
engineering and production processes have allowed us to design, develop and produce in-house our
two main product lines, namely, (i) wireless coverage products and services (including WLAN
products and services), which are mainly supplied to telecommunications operators, and (ii) base
station RF products, which are mainly supplied to base station equipment manufacturers.
We have a strong in-house RF technology research and development capability. Our team of 247
researchers and technicians with extensive experience in the wireless communication industry in
China are based in Shenzhen. As of April 30, 2011, we had 164 registered patents and 110 pending
patent applications with the Patent Office of the National Intellectual Property Office of China.
Our RF expertise has provided a platform from which we intend to further broaden our product
offerings. Our integrated development, engineering and production capabilities provide us with a
distinct competitive advantage over our competitors in China by allowing us to quickly respond to
customized design requests from our customers while keeping down our production costs.
Our wireless coverage products enable telecommunications operators to expand the reach of
their wireless communication networks to indoor and outdoor areas, such as buildings, highways,
railways, subways, tunnels and remote regions. Our wireless coverage products include indoor
coverage products and outdoor coverage products. To date, we have developed over 681 models of
wireless coverage equipment. In addition, our wireless coverage products include WLAN products
which we began selling in significant volume in 2010, and we became one of the principal WLAN
equipment and installation service providers to the three telecommunications operators in China, in
particular the China Mobile group, in 2010. We provide most of our wireless coverage products and
services to local affiliates of the three telecommunications operators in China, namely the China
Mobile group, the China Unicom Group and the China Telecom group. According to BAYES, in 2010, we
were the second largest provider of wireless coverage products and services in China. In recent
years, the wireless coverage market in China has benefited from increased capital expenditure by
the three telecommunications operators in China.
Our base station RF products are mainly supplied to base station equipment manufacturers.
These customers use our base station RF products in their base station equipment manufacturing. To
date, we have become a qualified supplier of base station RF products to several major domestic and
foreign base station equipment manufacturers, such as Huawei Technologies Co., Ltd., ZTE
Corporation, Datang Mobile Communications Equipment Co., Ltd., China Potevio Co., Ltd., Alcatel
Shanghai Bell Co., Ltd., Nokia Siemens Network and Ericsson (China) Co., Ltd. We have developed
over 377 types of base station RF products.
Our revenues were RMB984.7 million in 2008, RMB1,602.9 million in 2009 and RMB1,721.0 million
(US$260.8 million) in 2010. Our gross profit was RMB233.3 million in 2008, RMB379.0 million in
2009 and RMB455.7 million (US$69.1 million) in 2010. Our operating income was RMB60.4 million in
2009 and RMB155.7 million (US$23.6 million) in 2010, and we had an operating loss of RMB130.1
million in 2008. Our net income was RMB32.7 million in 2009 and RMB98.1 million (US$14.9 million)
in 2010, and we had a net loss of RMB146.4 million in 2008.
KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
The following are key factors that affect our financial condition and results of operations.
They are important to the understanding of our business:
Expenditure by Wireless Operators and Base Station Equipment Manufacturers
Our business is largely dependent on the demand for our wireless coverage products and
services from wireless operators in China. Accordingly, the amount of wireless network capital
expenditure by our customers, especially the three telecommunications operators in China has had
and will continue to have a material impact on our revenues. Following the grant of 3G licenses
to the three telecommunications operators in China in January 2009, these operators started the
construction of 3G networks and significantly increased their capital expenditure and investment in
wireless coverage products in 2009. These operators continued such
capital expenditure and investment in 2010 in order to improve the
network coverage quality, although the rate of growth of such expenditures between 2010 and 2009 was lower than the rate between 2009 and 2008. We
believe that these operators in China will continue, at a relatively similar pace as in 2010, such
capital expenditure and investment in the foreseeable future.
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In addition, revenues from the sales of our base station RF products have accounted for the
remaining portion of our sales in 2008, 2009 and 2010, and we expect the growth in the
demand for these products will continue to be an important contributor to our revenue growth.
Similar to sales of wireless coverage products and services, sales of base station RF products have
recently been affected by construction of 3G networks in China, with expenditures increasing significantly
in 2009 and increasing again in 2010, though at a more moderate rate
of growth in comparison to 2009.
Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition
and Results of Operations
We generally begin working on a wireless coverage project upon winning a bid but before
signing a formal contract. Our customers are not required to pay for our products and installation
services until after the signing of the formal contract, which typically takes place when we
deliver the wireless coverage products and our customers issue a delivery certificate under
standalone equipment contracts or when we complete the initial installation of the wireless
coverage products and our customer issue a completion certificate under standalone service
contracts and bundled sale contracts. Furthermore, our contracts with wireless operators generally
provide a fixed price and permit them to pay the purchase price in installments upon the occurrence
of various payment events, such as issuance of delivery certificates or completion certificates,
preliminary inspection, final inspection and/or expiration of the warranty period. Our
arrangements with our wireless operator customers are consistent with industry practices in China.
As a result of these practices, an understanding of our revenue recognition policy and accounts
receivable cycle is critical to the understanding of our results of operations.
Revenue Recognition Policy and Accounts Receivable Cycle
We derive revenues principally from the provision and sale of wireless coverage products and
services and, to a lesser extent, from the sale of base station RF products.
We recognize revenues when:
For our sale of wireless coverage equipment under standalone equipment contracts, we only
begin to recognize revenues when delivery has occurred, and the customer has signed a sale and
purchase contract with us and issued a delivery certificate to us, which indicates the customer’s
acceptance of the equipment delivered.
For our provision of wireless coverage integrated services under standalone service contracts,
we recognize revenues when we complete the installation and the customer has signed a contract with
us and performed preliminary inspection and issued a preliminary inspection certificate.
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For our sale of wireless coverage equipment and provision of wireless coverage integrated
services under bundled sale contracts, we recognize revenue attributable to the delivery of
equipment when delivery has occurred and after the customer has issued a completion certificate,
which indicates the customer’s acceptance of the equipment delivered, and we recognize revenue
attributable to the provision of integrated services when we complete the installation and the
customer has signed a contract with us and performed preliminary inspection and issued a
preliminary inspection certificate.
Under the payment terms of our contracts and as a customary practice of the wireless coverage
industry in China, we allow our customers to pay the contract amount in installments upon the
occurrence of certain events, such as the issuance of the delivery or completion certificate, the
issuance of the preliminary inspection certificate, the issuance of the final inspection
certificate, and/or the expiration of the warranty period. The installment terms of our contracts
range from six months to three years. On a weighted average basis, historically under our
contracts, approximately 41% of the contract value is due upon the issuance of the delivery or
completion certificate, approximately 38% is due upon the issuance of the preliminary inspection
certificate, approximately 17% is due upon the issuance of the final inspection certificate and
approximately 4% is due upon the expiration of the warranty period. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable. We record the
portion of the amounts due under our contract payment terms in excess of the revenue recognized as
deferred income, which is included in other payables. We classify amounts due beyond one year
determined by contractual terms and customers’ payment history as long-term accounts receivable and
we discount them at the prevailing interest rate as published by the People’s Bank of China, the
PRC central bank. We make provisions for estimated settlement discounts that we expect to be
utilized by the customers and record them as a reduction in revenues. The settlement discount is
our best estimate based on our past billing and collection experience with our customers and our
negotiation with customers. We determine such discount separately on a contract by contract basis.
In addition, we will review our settlement discounts periodically to ascertain that these
settlement discounts are sufficient but not excessive.
We made provisions for settlement discounts of RMB13.8 million, RMB55.5 million and RMB23.9
million (US$3.6 million) in 2008, 2009 and 2010, respectively, in order to accelerate the
collection of account receivables which may have been affected by the telecommunication industry
restructuring in 2008. We sold an aggregate of RMB202.2 million, RMB371.6 million and RMB238.5
million (US$36.1 million) of our accounts receivable to banks in 2008, 2009 and 2010, respectively.
Our sale of accounts receivable was with limited-recourse where we receive 100% of the face value
of accounts receivable sold, net of bank fees. We must, however, keep at the bank a time deposit
as a pledge in the amount of 10% of the aggregate accounts receivable we sold to the bank that
remain unsettled by our customers at all times. See “— Liquidity and Capital Resources —
Accounts Receivable and Receivable Selling” for additional information on our accounts receivable
position and our receivable selling arrangements. See “— Revenues — Provision of Wireless
Coverage Products and Services” for additional discussions on our policy of recognizing wireless
coverage products and services revenues. The gap of time between our recognition of revenues and
the occurrence of various payment events has created a long accounts receivable cycle. The time
difference between payment events typically ranges from six months to three years. In addition,
our accounts receivable cycle can be further lengthened if our customers do not promptly make
installment payments upon the occurrence of the related payment events. In 2009, as a result of
the enhancement of our accounts receivable collection efforts, we were able to significantly reduce
our accounts receivable turnover days to 292 days from 469 days in 2008. We continued our focus on
improving our collections in 2010, and our accounts receivable turnover days were 309 days in 2010.
However, we cannot assure you that we will be able to maintain
our shortened collection cycle in future periods or if there will be any other factors beyond
our control that will continue to lengthen our accounts receivable cycles or collection periods.
We recognize revenues from the sale of standalone base station RF products when the risk and
reward of ownership and title of these parts and components and products have been transferred to
our customers, which typically coincide with delivery and acceptance of these parts and components
and products by our customers.
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Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle
Our contract practice described above has resulted in a significant working capital demand for
the operation of our business. This includes, among other things, a substantial build-up of
inventories, in particular, finished goods, and long accounts receivable cycle. Our revenue cycle
also impacts our liquidity needs. We tend to recognize more revenues and collect most of them
during the fourth quarter of the year. In 2008, 2009 and 2010, our collections in the fourth
quarter constituted 43.8%, 44.3% and 41.0% of our total collections during the respective years.
However, we commence our production and arrange installation of products for a significant number
of projects beginning in the second quarter of a year and typically deliver and install much more
during the third and fourth quarters. As a result of our revenue cycle and our long accounts
receivable cycle, we tend to have more working capital toward the end of the year and the first
part of the subsequent year and tend to have less working capital during the middle part of the
year, especially the third quarter. Our ability to rely on cash generated from our operations to
finance our working capital and other needs of our operations is therefore substantially limited.
Accordingly, we are highly dependent on bank financing and the sale of accounts receivable to fund
our working capital requirements and to support our liquidity. Historically, we have principally
relied on bank loans to finance our working capital needs. As of December 31, 2008, 2009 and 2010,
we had an aggregate of RMB480.2 million, RMB613.4 million and RMB638.2 million (US$96.7 million),
respectively, of short-term bank loans outstanding. As of December 31, 2010, we had an aggregate
of RMB1.4 billion (US$216.7 million) in short-term bank loans and bills payable facilities, of
which RMB591.0 million (US$89.5 million) in short-term bank loans had been drawn and RMB109.3
million (US$16.6 million) in bills payable had been utilized. As of December 31, 2010, RMB394.0
million (US$59.7 million) in short-term bank loans and RMB329.0 million (US$49.8 million) in bills
payable remained committed but not yet drawn or utilized. As of December 31, 2010, we had an
aggregate of RMB110.0 million (US$16.7 million) in long-term bank loans outstanding, of which
RMB20.0 million (US$3.0 million) are due for repayment within one year. In addition, we had
accounts receivable selling arrangements in the aggregate of RMB500.0 million (US$75.8 million), of
which RMB436.4 million (US$66.1 million) had been drawn and
RMB63.6 million (US$9.6 million)
remained committed but not yet utilized as of December 31, 2010. Utilization of the unutilized
bill payables facilities requires pledge of bank deposit in the amount of approximately 20% to 30%
of the utilized facilities, and utilization of account receivable selling arrangements requires
pledge of bank deposit in the amount of approximately 10% of the utilized facilities. We expect to
continue to rely on bank loans, including bills payable, and the sale of our accounts receivable to
finance our working capital needs as we grow our business. See “— Liquidity and Capital Resources
— Accounts Receivable and Receivable Selling” for a discussion on our accounts receivable position
and our bank borrowing and receivable selling arrangements.
Significant Quarterly Fluctuations of Our Results of Operations
We have historically generated a majority of our revenues from our wireless coverage products
and services, and we have typically generated substantially less revenues in the first quarter of
each year. For our standalone service contracts and bundled sale contracts, our customers usually
perform completion inspections, issue completion certificates and sign sale and purchase contracts
with us in June and December each year. This is because our customers generally use the same team
to manage different aspects of a project, including bidding, contracting and payment, and their
work is performed in accordance with their internal annual and semi-annual project management
processes. As a result, our customers prefer performing completion inspections and signing
contracts for all installed projects at the same time. Our principal customers are publicly traded
companies, and their project management process is also influenced by their semi-annual reporting
obligations. As a result, our revenues in the first quarter are typically much less than the
second quarter, and our revenues in the third quarter are typically much less than the fourth
quarter. We recognize our revenue from the sale of our products when delivery has occurred and the
customer has signed a contract with us and issued a delivery certificate which indicates the
customers’ acceptance of the equipment delivered. We have historically reported net losses in the
first quarter, reflecting a combination of (1) the increased costs of performing our ongoing
wireless coverage contracts as a result
of the growth in volume of contracts and (2) lower levels of revenues generated during the
first and third quarters. In 2008, 7.3%, 18.9%, 21.6% and 52.2% of our annual revenues were
generated in the first, second, third and fourth quarters, respectively, and we reported a net loss
of RMB41.5 million in the first quarter. In 2009, 17.8%, 26.4%, 24.6% and 31.2% of our annual
revenues were generated in the first, second, third and fourth quarters of that year, respectively,
and we reported a net income of RMB6.3 million in the first quarter. In 2010, 9.3%, 21.5%, 23.1%
and 46.1% of our annual revenues were generated in the first, second, third and fourth quarters,
respectively, and we reported a net loss of RMB22.9 million (US$3.5 million) in the first quarter.
We believe that our first quarter 2009 performance was unusual due to the extraordinarily strong
demand from the three Chinese telecommunications operators primarily as a result of the issuance of
3G licenses in January 2009. As the volume of our contracts grows, we anticipate that we may
continue to experience fluctuations in revenues on a quarterly basis and may continue to experience
net losses as a result, particularly in the first quarter. You should read “Item 3. Key
Information—Risk Factors—Risks Relating to Our Company—We historically recognized significantly
lower revenues in the first quarter, which sometimes resulted in net losses in the first quarter,
and our revenues may fluctuate significantly from quarter to quarter in the future, resulting in
quarterly net losses” for additional disclosure.
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The following table sets forth our unaudited consolidated statements of operations and
selected consolidated balance sheet data for each of the 12 quarters ended December 31, 2010:
We anticipate that we will continue to experience significant fluctuations in revenues, cost
of revenues and other results of operations from quarter to quarter during any year if our
telecommunications operator customers continue their current contract practice in the future. This
quarterly fluctuation of revenues and operating results has affected and is likely to continue to
affect our cash flow and working capital positions.
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FINANCIAL OVERVIEW
Revenues
We derive our revenues from the provision of wireless coverage products and services, and, to
a lesser extent, the sale of base station RF products.
The following table sets forth our revenue contribution by revenue source and as a percentage
of our revenues for the periods indicated:
Wireless Coverage Products and Services. Our wireless coverage products and services have
historically been the single largest contributor to our revenues, and we expect this trend to
continue for the foreseeable future. In 2010, we increased our sales of higher-profit margin
installation services, with revenue from such services accounting for 36.8% of our revenue in
2010. We expect to maintain our sales of installation services, as a percentage of our revenue, at
a relatively similar level for the foreseeable future. Our wireless coverage products include
repeaters, trunk amplifiers, digital optic coverage products and other coverage products, as well
as WLAN products, all of which we develop and manufacture in-house. Our wireless coverage products
also include various accessories such as coaxial cables and antennas for installation. These
accessories are purchased from third-party vendors. We provide most of our wireless coverage
products and services to the China Mobile group, the China Unicom group and the China Telecom
group.
Base station RF products. During the fourth quarter of 2005, we began to develop base station
RF products. We consume a substantial portion of our base station RF products internally for
incorporation into our wireless coverage products. In addition, we are the qualified supplier of
base station RF products to seven major domestic and foreign base station equipment manufacturers.
Our sales of base station RF products amounted to RMB221.6 million in 2008, RMB407.0 million in
2009 and RMB297.0 million (US$45.0 million) in 2010.
Cost of Revenues
Our cost of revenues
consists of costs related to our sales of wireless coverage products, wireless coverage installation services and base station RF products. Our cost
of revenues increased from RMB751.4 million in 2008 to RMB1.2 billion in 2009 and RMB1.3 billion
(US$191.7 million) in 2010. Our cost of revenues as a percentage of revenues was 76.3%, 76.4% and
73.5% in 2008, 2009 and 2010, respectively. We expect cost of revenues to continue to increase, in
line with our increase in production and sales. We expect our gross profit margin to remain
relatively stable primarily due to the fact that the decrease in unit pricing of our products as
result of intense market competition and, with respect to our wireless coverage products, the
adoption of centralized bidding process by the wireless network operators, and the downward pricing
trend over the life of our maturing products, is expected to be partially offset by the moderate
decrease in unit production cost and an increasing percentage of higher-profit margin new products
and installation services in our overall product mix.
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The following table sets forth our cost of revenues contribution by category and as a
percentage of total cost of revenues for the periods indicated:
Wireless Coverage Products and Services. Cost of revenues for sales of wireless coverage products primarily
includes our direct cost in manufacturing wireless coverage products, depreciation and amortization, purchase
costs of raw materials and outsourced ancillary products from suppliers and manufacturers, as well as overhead
such as compensation, bonuses and travel expenses of our own engineers and technicians engaged in the production process
of our wireless coverage products. Cost of revenues for sales of wireless coverage products also includes provision for
warranties. We accrue estimated warranty costs that we expect to incur during the warranty periods when we are required to
provide free repair and replacement for defectively installed products. Our warranties generally extend for a period of 12
months to three years. Our provision for warranties charged to cost revenues for sales of wireless coverage products in 2008,
2009 and 2010 amounted to 0.9%, 1.5% and 1.8% of our revenues, respectively. Our actual warranty expenditure in 2008, 2009 and
2010 was RMB8.7 million, RMB 24.4 million and RMB30.2 million (US$4.6 million), respectively.
Cost of revenues for wireless coverage installation services primarily includes overhead such as salaries and travel
expenses of our own installation staff, installation materials and related expenses, and costs that we incur to hire
third parties to install our wireless coverage products. Certain installation costs are deferred and charged to expenses
when the relevant sales revenues are recognized.
Base Station RF Products. Cost of revenues for base station RF products primarily includes our direct cost in manufacturing
base station RF products, depreciation and amortization, purchase costs of raw materials and outsourced ancillary products
from suppliers and manufacturers, as well as overhead such as compensation, bonuses and travel expenses of our own engineers
and technicians engaged in the production process of our base station RF products.
Operating Expenses
Our operating expenses primarily consist of research and development costs, sales and
distribution expenses and general and administrative expenses. The following table sets forth our
operating expenses contribution by category and as a percentage of our total operating expenses for
the periods indicated:
Research and Development Costs. These include the remuneration of our research and
development staff, depreciation and maintenance expenses for research and development equipment and
raw material costs used for our research and development activities. Our research and development
costs are expensed as incurred. We incur research and development costs primarily in connection
with the development of base station RF products and wireless coverage products, including
3G-related and TD-LTE-related products and RF technology. Our research and development costs
accounted for 7.1%, 3.7% and 4.2% of our revenues in 2008, 2009 and 2010, respectively. We expect
to increase our research and development costs in the future to enhance our product offerings.
Sales and Distribution Expenses. These include marketing and promotion expenses, remuneration
and expenses of our sales staff, the operational expenses of our marketing offices and a portion of
our freight costs. Our sales and distribution expenses accounted for 14.1%, 11.3% and 9.7% of our
revenues in 2008, 2009 and 2010, respectively. We expect our sales and distribution expenses as a
percentage of our revenues will continue to decrease moderately in the near future due to the
changes of our major customers’ centralized bidding and procurement policy commencing in 2007,
which has caused a reduction in the number of contract bids in which we participate, that in turn
lowers our sales and marketing expenses, as well as the continuous implementation of our internal
cost control and reduction measures. Our current sales and marketing plans continue to focus on
the PRC wireless operators. We are also expending a portion of our marketing resources, including
hiring of additional marketing staff, to increase our sales of base station RF products to base
station equipment manufacturers.
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General and Administrative Expenses. This expense category includes the remuneration of
administrative staff, daily operational expenses, depreciation of fixed assets and allowance for
accounts receivable. Our general and administrative expenses accounted for 12.9%, 5.1% and 4.6% of
our revenues in 2008, 2009 and 2010, respectively. We make allowance for accounts receivable to
the extent that we consider the collection of such accounts receivable to be doubtful. Our bad
debt expenses amounted to RMB57.6 million, RMB11.3 million and RMB3.0 million (US$0.5 million) in
2008, 2009 and 2010, respectively. The significant amount of bad debt expenses in 2008 was mainly
due to the write-off of aged accounts receivable balances due from our non-operator customers.
These customers experienced financial difficulties caused by a loss of market share due to changes
in the procurement policies by the telecommunications operators and tightening of credit controls
by PRC banks. We plan to continue to implement internal cost control and reduction measures and
expect our general and administration expenses to decrease moderately as a percentage of our
revenues in the future.
Impairment of Goodwill. We recognized a goodwill impairment loss of RMB27.6 million in 2008
due to the fact that the global economic downturn and other factors had adversely affected the
market value of our ADSs as of the end of 2008, which value is used as a basis by us for the
determination of fair value of the reporting unit used to identify and measure impairment of
goodwill in accordance with the provisions of Statement of Financial Accounting Standards, or ASC
350 Intangibles-Goodwill and Other.
Interest Expense
Our interest expense primarily consists of (i) interest that we incur in bank borrowings, (ii)
fees and discount charges incurred in connection with the sale of our accounts receivable, and
(iii) finance charges we incur on bills financing. Our interest expense remained relatively stable
during 2008, 2009 and 2010.
Our bills financing includes bills payable and acceptance drafts issued by our financing banks
in favor of our vendors and suppliers as payments for goods and services we purchase from them and
bills receivable discount facilities. Our bills payable allow our vendors and suppliers to receive
payments in cash from our banks upon presentation in 30 to 180 days. Pursuant to our financing
arrangements with banks in China, we must pay the amount outstanding under each bill payable to the
bank on or prior to the stipulated presentation date. The aggregate amount of bills payable that
may be outstanding to our credit from time to time is subject to the total line of credit
established in our credit facility agreements with our banks. We negotiate and renew our bank
credit facility agreements with our banks on an annual basis in line with the current banking
industry practice in China.
The table below sets forth the components of our interest expense for the periods indicated:
Income Tax Expense
Prior to January 1, 2008, the PRC’s statutory income tax rate was 33%. However, Shenzhen
GrenTech, Shenzhen Lingxian, Shenzhen Kaige, Shenzhen Kaixuan and Shenzhen GrenTech RF were
established in the Shenzhen Special Economic Zone and were entitled to the preferential income tax
rate of 15%.
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On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax
Law, which took effect as of January 1, 2008. The new tax law and its relevant regulations also
provide a 5-year transition period from its effective date for those enterprises which were
established before March 16, 2007 and were entitled to a preferential income tax rate of 15% under
the then effective tax laws and regulations. The transitional tax rates are 18%, 20%, 22%, 24% and
25% for 2008, 2009, 2010, 2011 and 2012 onward, respectively. Further, entities established before
January 1, 2008 which qualify as ANTEs under the new tax law are entitled to a preferential income
tax rate of 15%. Entities established in Special Economic Zones after January 1, 2008 which
qualify as ANTEs under the new tax law are entitled to a two-year exemption from income tax and
thereafter a 50% reduction in the standard 25% rate for the succeeding three years.
Under the new tax law, Shenzhen Lingxian, Shenzhen Kaige and Shenzhen Kaixuan are subject to
the transitional tax rates of 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012
onward, respectively.
In March 2009, Shenzhen GrenTech obtained the ANTE certificate entitling it to a preferential
income tax rate of 15% under the new tax law retroactively from January 1, 2008 to December 31,
2010. Thereafter, Shenzhen GrenTech will be subject to an income tax rate of 24% for 2011 and 25%
from 2012 onwards unless it can requalify as an ANTE in 2011 or thereafter. Shenzhen GrenTech is
in the process of applying for the requalification as an ANTE pursuant to the relevant PRC laws and
regulations. Shenzhen GrenTech RF was established in March 2008 and was subject to income tax at a
rate of 25% for 2008 and 2009. In September 2010, Shenzhen GrenTech RF obtained the ANTE
certificate entitling it to a preferential income tax rate of 12.5% under the new tax law from
January 1, 2010 to December 31, 2012. Shenzhen Lingxian Communication, Shenzhen GrenTech IOT
Network, and Express (Shenzhen) Network were established in 2010 and therefore are subject to
income tax at a rate of 25%. For more details, see “Item 3. Key Information—Risk Factors—Risks
Relating to Our Company—If we lose certain government tax concessions, our profitability may be
materially and adversely affected.”
Non-controlling Interest
Non-controlling interest represents the portion of our income or loss that is attributable to
the non-controlling interest in our consolidated subsidiaries during the year. These subsidiaries
include Shenzhen Lingxian, Shenzhen Lingxian Communication, Shenzhen GrenTech IOT Network, Express
(Shenzhen) Network, PT. GrenTech Indonesia, GrenTech India Private Limited and Lake Microwave. In
December 2008, we divested Lake Microwave. The terms of the divestiture were negotiated on an
arms’ length basis and approved by our independent directors. The transfer of the equity interest
in Lake Microwave was completed in December 2008. For details, please refer to “Item 4.
Information on the Company.”
Critical Accounting Policies
We prepare financial statements in accordance with U.S. GAAP, which requires us to make
estimates and assumptions that affect the reported amounts of our assets and liabilities, to
disclose contingent assets and liabilities on the date of the financial statements, and to disclose
the reported amounts of revenues and expenses incurred during the financial reporting period. We
continue to evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be
reasonable under the circumstances. We rely on these evaluations as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies discussed below to
be critical to an understanding of our financial statements as their application assists management
in making their business decisions.
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Revenue Recognition. We derive revenue from the provision of wireless coverage products and
installation services, and, to a lesser extent, the sale of base station RF products. We recognize
revenue when we consider the following criteria met:
For equipment sales, we recognize revenue when delivery has occurred and the customer has
signed a sale and purchase contract with us and issued an acceptance document (delivery or
completion certificate), which indicates the customer’s acceptance of the equipment delivered. For
installation services, we recognize revenue
when the installation has been completed, the customer has signed a contract with us and
issued a preliminary inspection certificate. For our bundled sale contracts, the equipment sales
and the provision of installation services are accounted for as separate accounting units. The
bundled sale contract consideration is allocated to each deliverable in the arrangement based on
their relative fair values. Revenue attributable to the sale of equipment element is recognized
when the revenue recognition criteria for equipment sales specified above are met. Revenue
attributable to the installation service element of the contract is recognized when the revenue
recognition criteria for the provision of installation services specified above are met. We
generally use our contracts to determine the existence of an arrangement. Our sale and purchase
contracts are generally fixed-fee arrangements although they permit our customers to settle the
contract sum in installments upon occurrence of various payment events. We assess collectibility
based primarily on the creditworthiness of the customer as determined by our credit checks and
analysis as well as by the customer’s payment history.
When we recognize our revenues from the sale of wireless coverage products and installation
services, we also deduct an estimated settlement discount that we expect to be utilized by our
customers in the future to encourage prompt payment. The settlement discount is based on our past
billing and collection experience with our customers and our negotiation with customers. We
determine such discount separately on a contract by contract basis. If actual settlement discounts
made differ from our estimates, an additional provision or write back is made upon settlement. We
made provisions for settlement discounts of RMB13.8 million, RMB 55.5 million and RMB23.9 million
(US$3.6 million) in 2008, 2009 and 2010, respectively, in order to accelerate the collection of
account receivables which may be affected by the telecommunication industry restructuring in 2008.
The following table sets forth an analysis of the settlement discount accounts for 2008, 2009 and
2010:
Allowance for Doubtful Accounts. Our wireless coverage customers pay by installments,
creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based
on our best estimate of the amount of losses that could result from the inability or intention of
our existing customers not to make the required payments. We generally review the allowance by
taking into account factors such as historical experience, age of the accounts receivable balances
and economic conditions. As of December 31, 2010, our allowance for doubtful accounts amounted to
RMB39.6 million (US$6.0 million), which was mainly related to certain aged individual account
receivables due from operator customers, and our collection cost may outweigh the aggregate amount
of those outstanding account receivables. In addition, we wrote off RMB43.6 million in doubtful
accounts in 2008, which was mainly related to aged receivable balances due from certain customers
who experienced financial difficulties caused by a loss of market share due to changes in the
procurement policies by major telecommunications operators and tightening of credit controls by PRC
banks. The following table sets forth an analysis of the allowance for doubtful accounts for 2008,
2009 and 2010:
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Inventories. Our inventories comprise raw materials, work in progress and finished goods. We
state our inventories at the lower of cost or market value. We determine the cost of our
inventories by using the weighted average cost method. Cost of work in progress and finished goods
consists of direct materials, direct production cost and a proportional allocation of our
production overhead. We determine the net realizable value of our
inventories on the basis of anticipated sales proceeds less estimated selling expenses. At
each balance sheet date, we identify inventories that are worth less than cost and write them down
to their net realizable value and the difference is charged to our cost of revenues of that year.
The amounts of write-down of inventories to net realizable value as of December 31, 2008, 2009 and
2010 were RMB42.2 million, RMB58.2 million and RMB61.4 million (US$9.3 million), respectively. The
write-down of inventory in the amount of RMB42.0 million, RMB16.1 million and RMB3.2 million (US$0.5
million) in 2008, 2009 and 2010, respectively, was mainly related to inventories that are no longer
suitable for future network construction due to rapid advancement in wireless coverage technology
and the rollout of large-scale 3G network construction.
Finished goods make up the majority of our inventories. Our high level of finished goods is
primarily the result of the way we recognize our revenues from our provision of wireless coverage
products and services. Our revenue recognition policy requires us to expense our finished goods in
inventory at the point when the sale of products has been recognized as revenue. A considerable
portion of our finished goods represents wireless equipment products delivered to customers’ sites
which have not been accepted by the customers. Also included in finished good are deferred
installation costs related to costs incurred for installation of wireless coverage products for
which the related preliminary inspection certificates have not been issued at the respective
balance sheet dates. We deliver our finished goods to our customers’ sites in accordance with
successful bids and project designs approved by our customers. Finished goods delivered to
customers’ sites which have not been accepted by the customers and deferred installation costs
amounted to RMB187.0 million, RMB398.2 million and RMB365.7 million (US$55.4 million) as of
December 31, 2008, 2009 and 2010, respectively. You should read “Business—Our Wireless Coverage
Products and Services—Our Sales Cycle” for additional information and analysis on our bidding and
contracting practice. In addition, we control our installation costs by entering into fixed-price
contracts with our installation contractors for wireless coverage products.
Provision for Warranties. We account for estimated warranty cost as part of our cost of
revenues at the time we recognize related revenues. We accrue estimated warranty costs that we may
incur during the warranty periods when we are required to provide free repair and replacement for
defectively installed products. Our warranties generally extend for a period of 12 months to three
years. We determine our provision for warranties primarily based on historical trends of warranty
costs adjusted for specific conditions that may arise under each contract and the number of
contracts under warranty at each financial year-end. Although we believe that the level of our
provision for warranties is appropriate, actual claims incurred in the future could differ from our
estimates.
Impairment of Long-lived Assets. We review periodically the carrying amounts of long-lived
assets, including property, plant and equipment and intangible assets with finite useful lives, to
assess whether they are impaired. We test these assets for impairment whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable, such as change of
business plan, obsolescence, and continuous loss suffered. When such a decline has occurred, we
adjust the carrying amount to the estimated fair value. We measure the recoverability of assets by
comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected
to be generated by the asset, or, for identifiable intangibles with finite useful lives, by
determining whether the amortization of the intangible asset balance in the remaining life can be
recovered through undiscounted future cash flows. In determining estimates of future cash flows,
significant judgment in terms of projection of future cash flows and assumptions is required. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Fair value is measured by discounting forecasted operating cash flow or market value if
readily determinable. Changes in estimates could have a major impact on the assessment of the
value of our assets and could require us to book additional impairments.
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Recoverability of the carrying amount of goodwill. Goodwill is evaluated for impairment at
least annually. We have determined that our company and our subsidiaries together is a reporting
unit for testing goodwill impairment. The first step screens for potential impairment of goodwill
to determine if the fair value of the reporting unit is less than its carrying value, while the
second step measures the amount of goodwill impairment, if any, by comparing the implied fair value
of goodwill to its carrying value.
In accordance with ASC 350 Intangibles-Goodwill and Other, we use our market capitalization as
a basis for determination of fair value of the reporting unit. Adjustments to market
capitalization are made with consideration of factors such as control premium of our shares,
volatility and transaction volume of our share price.
These adjustments require significant judgment and may affect our conclusion on whether or not
an impairment charge should be recognized.
We performed goodwill impairment testing annually. In 2008, the economic downturn has
adversely affected our market capitalization. Based on the step two of our impairment test
performed, we determined that our goodwill of RMB27.6 million was fully impaired. Accordingly, we
recognized impairment loss of goodwill amounting to RMB27.6 million in 2008.
Results of Operations
The following table sets forth our results of operations as a percentage of our revenues for
the periods indicated:
2010 compared to 2009
Revenues. Our revenues increased by RMB118.0 million, or 7.4%, to RMB1.7 billion (US$260.8
million) in 2010 from RMB1.6 billion in 2009. The overall increase in 2010 was primarily
attributable to continued investment and expenditure in network construction, in particular 3G
networks, by the three Chinese telecommunications operators in 2010 in order to improve the network
coverage quality, as well as an increase in sales of WLAN products, in particular to the China
Mobile group.
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Our sales of wireless coverage products increased by RMB32.1 million, or 4.1%, to RMB814.0
million (US$123.3 million) in 2010 from RMB781.9 million in 2009, and our sales of installation
services increased by RMB164.4 million, or 35.0%, to RMB633.9 million (US$96.0 million) in 2010
from RMB469.5 million in 2009, primarily due to 3G network deployment by the three
telecommunications operators in China which increased customer demand, an increase in sales of WLAN
products and services, in particular to the China Mobile group, our efforts to focus on increasing
sales of installation services, as well as our expansion of product portfolio
and services.
Our sales of base station RF products decreased by RMB110.0 million, or 27.0%, to RMB297.0
million (US$45.0 million) in 2010 from RMB407.0 million in 2009, primarily due to the relatively
moderate pace of 3G network construction in 2010 which reduced the demand for base station RF
products in 2010.
Cost of Revenues. Cost of revenues increased by RMB41.3 million, or 3.4%, to RMB1.3 billion
(US$191.7 million) in 2010 from RMB1.2 billion in 2009, primarily as a result of increased provision of wireless coverage
installation services and sales of wireless coverage products, offset in part by reduced costs for base station RF products due to reduced
sales volume of such products in 2010. The increase in cost of revenues was smaller than the increase in revenues,
mainly resulting from our efforts to focus on increasing sales of higher-profit margin new products
(including WLAN products, digital optic coverage products and subway coverage products) and
installation services.
Gross Profit. As a result of the foregoing, gross profit increased by RMB76.8 million, or
20.3%, to RMB455.7 million (US$69.1 million) in 2010 from RMB379.0 million in 2009. Gross profit
margin was 26.5% and 23.6% in 2010 and 2009, respectively.
Research and Development Costs. Our research and development costs increased by RMB11.7
million, or 19.5%, to RMB71.6 million (US$10.8 million) in 2010 from RMB59.9 million in 2009. The
increase was mainly due to increased remuneration of our research and development staff and raw
material costs in connection with our expanded research and development activities in 2010 for the
development of new products. Research and development costs accounted for 4.2% of total revenues
in 2010, as compared to 3.7% in 2009.
Sales and Distribution Expenses. Sales and distribution expenses decreased by RMB13.9
million, or 7.7%, to RMB166.6 million (US$25.2 million) in 2010 from RMB180.5 million in 2009. The
decrease was primarily attributable to the implementation of our internal cost control and
reduction measures, partially offset by an increase in remuneration and expenses of our sales staff
resulting primarily from an increase in the number of our sales staff. Sales and distribution
expenses accounted for 9.7% of total revenue in 2010, as compared to 11.3% in 2009.
General and Administrative Expenses. General and administrative expenses decreased by RMB3.0
million, or 3.7%, to RMB78.5 million (US$11.9 million) in 2010 from RMB81.5 million in 2009. The
decrease was mainly due to a reduction in bad debt expense of RMB8.3 million in 2010 which was
partially offset by an increase of RMB4.3 million in remuneration of administrative staff resulting
primarily from an increase in the number of our administrative staff. General and administrative
expenses accounted for 4.6% of total revenue in 2010, as compared to 5.1% in 2009.
Operating Income. As a result of the foregoing, operating income increased significantly by
RMB95.3 to RMB155.7 million (US$23.6 million) in 2010 from RMB60.4 million in 2009.
Other Income/Expenses. Our interest income decreased to RMB27.8 million (US$4.2 million) in
2010 from RMB41.0 million in 2009 primarily due to decreased interest income arising from the
amortization of discounted income from prior years’ accounts receivable. Our interest expense
increased to RMB58.1 million (US$8.8 million) in 2010 from RMB56.8 million in 2009 primarily
resulting from increased short-term bank loan balances and average borrowing rate. We also
reported a foreign currency exchange loss of RMB0.6 million (US$0.09 million) in 2010 compared to
RMB0.2 million in 2009. Grant income decreased to RMB2.2 million (US$0.3 million) in 2010 from
RMB6.3 million in 2009, which was caused by fewer projects for which we received government grants
in 2010 compared to 2009.
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Income Tax Expense. In 2010, we recognized an income tax expense of RMB29.7 million (US$4.5
million) as compared to RMB18.1 million in 2009. Our income tax expense increased by RMB11.6
million from 2009 to 2010 mainly due to an increase in income before income tax expense. Our
effective tax rate, however, decreased from 35.6% in 2009 to 23.4% in 2010 primarily due to an
additional income tax expense of RMB4.1 million charged in 2009 as a result of a change in tax rate
on deferred tax assets recognized after Shenzhen Grentech obtained the ANTE certificate in March
2009.
Net Loss Attributable to Non-controlling Interest. Net loss attributable to non-controlling
interest was RMB1.0 million (US$0.2 million) in 2010, as compared to RMB0.01 million in 2009.
Net Income. As a result of the foregoing, net income increased significantly by RMB65.5
million to RMB98.1 million (US$14.9 million) in 2010 from RMB32.7 million in 2009.
2009 compared to 2008
Revenues. Our revenues increased by RMB618.3 million, or 62.8%, to RMB1.6 billion in 2009
from RMB984.7 million in 2008. The overall increase in 2009 was primarily attributable to
increased investment and expenditure in large-scale network construction, in particular 3G
networks, by the three Chinese telecommunications operators in 2009 primarily as a result of the
issuance of 3G licenses to these operators in January 2009.
Our sales of wireless coverage products increased by RMB282.9 million, or 56.7%, to RMB781.9
million in 2009 from RMB499.0 million in 2008, and our sales of installation services increased by
RMB191.6 million, or 68.9%, to RMB469.5 million in 2009 from RMB277.9 million in 2008, primarily
due to 3G network deployment by the three telecommunications operators in China which increased
customer demand, as well as our expansion of product portfolio and services.
Our sales of base station RF products increased by RMB185.4 million, or 83.7%, to RMB407.0
million in 2009 from RMB221.6 million in 2008, primarily due to 3G network construction by the
three telecommunications operator in China which increased procurement demand from domestic base
station equipment manufacturers, as well as our successful bids from various original equipment
manufacturers and increased demand from overseas base station equipment manufacturers.
Cost of Revenues. Cost of revenues increased by RMB472.6 million, or 62.9%, to RMB1.2 billion
in 2009 from RMB751.4 million in 2008, compared to an increase of 62.8% in our overall revenues.
The increase in cost of revenues was in line with the increase in our revenues in 2009.
Gross Profit. As a result of the foregoing, gross profit increased by RMB145.7 million, or
62.4%, to RMB379.0 million in 2009 from RMB233.3 million in 2008. Gross profit margin was 23.6%
and 23.7% in 2009 and 2008, respectively.
Research and Development Costs. Our research and development costs decreased by RMB10.3
million, or 14.7%, to RMB59.9 million in 2009 from RMB70.2 million in 2008. The decrease was
mainly due to our relatively stable pipeline of research and development projects in 2009 and the
enhancement of our research and development efficiency and effectiveness in 2009. Research and
development costs accounted for 3.7% of total revenues in 2009, as compared to 7.1% in 2008.
Sales and Distribution Expenses. Sales and distribution expenses increased by RMB42.0
million, or 30.3%, to RMB180.5 million in 2009 from RMB138.5 million in 2008. The increase was
primarily attributable to an increase in sales activities and distribution expenses driven by
higher sales volume. Sales and distribution expenses accounted for 11.3% of total revenue in 2009,
as compared to 14.1% in 2008.
General and Administrative Expenses. General and administrative expenses decreased by RMB45.5
million, or 35.8%, to RMB81.5 million in 2009 from RMB127.0 million in 2008. The decrease was
mainly due to a reduction in bad debt expense of RMB45.7 million in 2009 and the implementation of
our internal cost control and reduction measures. In addition, we had significant bad debt expense
in 2008 mainly due to the write-off of aged accounts receivable balances due from our non-operator
customers. These customers experienced financial difficulties caused by a loss of market share due
to changes in the procurement policies by the telecommunications operators and tightening of credit
controls by PRC banks. General and administrative expenses accounted for 5.1% of total revenue in
2009, as compared to 12.9% in 2008.
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Impairment of Goodwill. We recognized an impairment of goodwill of RMB27.6 million in 2008.
No impairment of goodwill was recognized in 2009. This impairment resulted from the fact that the
global economic downturn and other factors had adversely affected the market value of our ADSs as
of the end of 2008, which value is used as a basis by us for the determination of fair value of the
reporting unit used to identify and measure impairment of goodwill in accordance with the
provisions of ASC 350 Intangibles-Goodwill and Other.
Operating Income. As a result of the foregoing, we had an operating income of RMB60.4 million
in 2009 compared to operating loss of RMB130.1 million in 2008.
Other Income/Expenses. Our interest income increased to RMB41.0 million in 2009 from RMB31.3
million in 2008 primarily due to the amortization of discounted income from prior years’ accounts
receivable. Our interest expense increased to RMB56.8 million in 2009 from RMB54.8 million in 2008
primarily resulting from increased bank loan balances, the impact of which was partially offset by
the decrease in average borrowing rate. We did not have investment income in 2009. Our investment
income of RMB4.9 million in 2008 was mainly due to gain recognized from the disposal of Lake
Communication and Lake Microwave. We also reported a foreign currency exchange loss of RMB0.2
million in 2009 compared to RMB10.4 million in 2008 primarily due to a decrease in foreign currency
deposits and the relatively stable exchange rate of RMB to U.S. dollar in 2009. Grant income
decreased to RMB6.3 million in 2009 from RMB15.2 million in 2008, which was caused by fewer
projects for which we received government grants in 2009 compared to 2008.
Income Tax Expense. In 2009, we recognized an income tax expense of RMB18.1 million as
compared to RMB3.2 million in 2008. Our income tax expense increased by RMB14.9 million from 2008
to 2009 mainly due to the fact that we were in a net income position in 2009 as compared to a net
loss position in 2008.
Net Loss Attributable to Non-controlling Interest. Net loss attributable to non-controlling
interest was RMB0.01 million in 2009, as compared to RMB0.8 million in 2008.
Net Income. As a result of the foregoing, we had a net income of RMB32.7 million in 2009
compared to a net loss of RMB146.4 million in 2008.
Liquidity and Capital Resources
In line with the industry practice, we typically have a long receivable collection cycle. As
a result, our cash provided by our sales in any given year may not be sufficient to fully meet our
operating cash requirements in that year. We anticipate that our operations may continue to
encounter such timing differences in cash flows in the near term. We used and will continue to use
available financing means, including bank loans and receivable selling arrangements, to provide
sufficient cash inflows to balance such timing differences in our cash flows. We believe that we
maintain a good relationship with our major lending banks, and the limits of our bank borrowing
facilities have been raised by the lending banks from time to time. We do not expect any
difficulty in obtaining bank borrowing facilities to provide cash inflows to balance these timing
differences in our cash flows. We also anticipate that near-term working capital and other capital
requirements will increase due to our increased sales activities, increased research and
development efforts related primarily to 3G and TD-LTE products as well as base station RF
products. We anticipate meeting such increase in our near-term working capital and other capital
requirements primarily through our internally generated cash and financing means available to us,
including short-term bank loans and sales of accounts receivable.
We have procured bank borrowing facilities sufficient for our business operations from various
banks, and we may obtain additional bank borrowing facilities. These bank borrowing facilities are
generally short-term facilities. We may procure long-term bank borrowing facilities if there are
material capital requirements and we anticipate we will have sufficient cash resources to repay the
loans. We budget our capital periodically to manage our operational cash flow and meet our bank
loan repayments. We believe that our cash flows from operations and current levels of cash,
combined with fund available to us through financing, will be sufficient to meet our anticipated
cash needs for at least the next 12 months.
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As of December 31, 2010, we had available undrawn bank borrowing facilities in the aggregate
of RMB394.0 million (US$59.7 million), unutilized bill payables facilities in the aggregate of
RMB329.0 million (US$49.8 million) and unutilized accounts receivable selling arrangements in the
aggregate of RMB63.6 million (US$9.6 million). Utilization of the unutilized bill payables
facilities and accounts receivable selling arrangements requires pledges of bank deposits in an
amount equal to 20% to 30% and 10%, respectively, of the amount to be utilized.
In the event that we may be required to raise additional funds to meet any currently
unanticipated working capital or capital expenditure requirements, we expect to rely on the same
sources of funding, together with capital markets financings.
The following table summarizes our cash flows for the periods indicated:
Operating Activities
Net cash of RMB10.2 million (US$1.5 million) was provided by operating activities in 2010, as
compared to net cash provided by operating activities of RMB90.7 million and RMB5.1 million in 2009
and 2008, respectively.
For the year ended December 31, 2010, net cash provided by operating activities was mainly
attributable to (i) net income of RMB97.1 million (US$14.7 million), (ii) changes in inventories of
RMB128.0 million (US$19.4 million), (iii) changes in accounts payable of RMB38.5 million (US$5.8
million), (iv) changes in accrued expenses and other payables of RMB34.0 million (US$5.1 million),
(v) depreciation of property, plant and equipment of RMB33.2 million (US$5.0 million), (vi) changes
in income tax payable of RMB24.2 million (US$3.7 million) and (vii) changes in prepaid expenses and
other current assets of RMB11.9 million (US$1.8 million), partially offset by (A) changes in
accounts receivable of RMB256.9 million (US$38.9 million) and (B) changes in bills payable of
RMB98.7 million (US$15.0 million).
For the year ended December 31, 2009, net cash provided by operating activities was mainly
attributable to (i) net income of RMB32.7 million, (ii) changes in accounts payable of RMB129.4
million, (iii) changes in bills payable of RMB109.7 million, (iv) changes in accrued expenses and
other payables of RMB62.2 million, (v) changes in income tax payable of RMB35.7 million, (vi)
depreciation of property, plant and equipment of RMB30.7 million, (vii) changes in amounts due to
related parties of RMB24.4 million and (viii) changes in prepaid expenses and other current assets
of RMB15.8 million, partially offset by (A) changes in inventories of RMB250.6 million and (B)
changes in accounts receivable of RMB103.0 million.
For the year ended December 31, 2008, net cash provided by operating activities was mainly
attributable to (i) changes in accounts payable of RMB196.0 million, (ii) allowance for doubtful
accounts of RMB57.6 million, (iii) changes in bills payable of RMB36.5 million, (iv) depreciation
of property, plant and equipment of RMB32.3 million and (v) impairment of goodwill of RMB27.6
million, partially offset by (A) net loss of RMB147.2 million, (B) changes in accounts receivable
of RMB132.1 million and (C) changes in prepaid expense and other current assets of RMB64.2 million.
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Investing Activities
Net cash of RMB91.7 million (US$13.9 million) was used in investing activities in 2010, as
compared to net cash used in investing activities of RMB45.3 million in 2009 and net cash provided
by investing activities of RMB28.1 million in 2008.
For the year ended December 31, 2010, net cash used in investing activities was mainly
attributable to purchase of property, plant and equipment of RMB105.0 million (US$15.9 million).
For the year ended December 31, 2009, net cash used in investing activities was mainly
attributable to purchase of property, plant and equipment of RMB64.7 million.
For the year ended December 31, 2008, net cash provided by investing activities was mainly
attributable to a decrease in restricted cash of RMB132.7 million, partially offset by purchase of
property, plant and equipment of RMB100.1 million.
Financing Activities
Net cash of RMB7.3 million (US$1.1 million) was used in financing activities in 2010, as
compare to net cash provided by financing activities of RMB130.9 million in 2009 and net cash used
in financing activities of RMB52.1 million in 2008.
For the year ended December 31, 2010, net cash used in financing activities was mainly
attributable to principal payments of short-term bank loans of RMB890.0 million (US$134.8 million),
partially offset by proceeds from short-term bank loans of RMB876.0 million (US$132.7 million).
For the year ended December 31, 2009, net cash provided by financing activities was mainly
attributable to proceeds from short-term bank loans of RMB945.0 million, partially offset by
principal payments of short-term bank loans of RMB805.0 million.
For the year ended December 31, 2008, net cash used in financing activities was mainly
attributable to (i) principal payments of short-term bank loans of RMB930.6 million and (ii)
remittance of collection of sold accounts receivable on behalf of financial institutions of RMB48.9
million, partially offset by proceeds from short-term bank loans of RMB937.5 million.
Accounts Receivable and Receivable Selling
We generally begin working on a wireless coverage project upon winning a bid but before the
signing of a formal contract. Our sale and purchase contracts generally permit our customers to
pay their purchase price in installments upon the occurrence of stipulated payment events, such as
the issuance of delivery or completion certificate, preliminary inspection, final inspection and/or
the expiration of our warranty period under the sale and purchase contract. To the extent revenue
recognized under a contract is not yet paid, we record it as an account receivable, net of any
accounts receivable we sold to third parties. As a result, a long accounts receivable cycle
results from the length of time between our recognition of revenues and the occurrence of various
payment events. The period between each payment installment varies and typically ranges from six
months to three years and the portion of the purchase price in each installment also varies.
The following table describes the concentration of our gross accounts receivable by customers
and as a percentage of our gross accounts receivable balance as of December 31, 2010:
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The following table sets forth an aging analysis for our gross accounts receivable balances,
determined from the time that the revenue is recognized, as of the dates indicated:
The following table sets forth the classification of our gross accounts receivable balances
into two categories, contractually due and non-contractually due, determined from due date of the
installment payment:
To the extent revenues recognized under a contract are not yet paid, they are recorded as
accounts receivable in our balance sheet, net of amounts sold to third parties. Out of our gross
accounts receivable of RMB1,249.2 million, RMB1,350.5 million and RMB1,604.6 million (US$243.1
million) outstanding as of December 31, 2008, 2009 and 2010, respectively, RMB632.1 million,
RMB622.2 million and RMB716.7 million (US$108.6 million), or 50.6%, 46.1% and 44.7% of our gross
accounts receivable, represented gross accounts receivable that had passed the contractual payment
dates in the respective periods and were subject to payment by our customers. Our gross accounts
receivable that had not passed the relevant payment events represented 49.4%, 53.9% and 55.3% of
our gross accounts receivable outstanding as of December 31, 2008, 2009 and 2010, respectively.
We calculate our accounts receivable turnover days as the average beginning and ending
accounts receivable balance for the year, divided by revenues during the year, multiplied by 360.
Our accounts receivable turnover days are long in absolute terms, approximately 469 day, 292 days
and 309 days for 2008, 2009 and 2010, respectively. We believe that they are typical of industry
standards with respect to wireless coverage projects in the PRC market. During the early stages of
our company, we were restrained from aggressive collection efforts in order to remain competitive
with the incumbents in the market. Since the beginning of 2004, however, we have taken measures,
including expansion of our sales team, to facilitate our accounts receivable collection process.
In particular, in 2009, as a result of the enhancement of our accounts receivable collection
efforts, our accounts receivable turnover days decreased by 177 days to 292 days in 2009 from 469
days in 2008. We continued our focus on improving our collections in 2010, and our accounts
receivable turnover days were 309 days in 2010. However, we cannot assure you that we will be able
to maintain our shortened collection cycle in future periods or if there will be any other factors
beyond our control that will continue to lengthen our accounts receivable cycles or collection
periods.
Within our sales team, we have also established monitoring procedures on our accounts
receivable. Compensation of sales personnel has also been linked to collection efforts, with
strong collection efforts rewarded and poor collection efforts penalized. As a result of our
enhanced collection efforts, our customers settled RMB944.7 million, RMB1,447.1 million and
RMB1,457.4 million (US$220.8 million) in accounts receivable due to us in 2008, 2009 and 2010,
respectively.
Based on our major customers’ centralized procurement policies implemented commencing in 2007,
under which contractual payment terms are generally more favorable to us than before, the amounts
of first installment we receive are typically higher than those collected before the adoption of
such centralized procurement policies. As a result, our accounts receivable cycle may be shortened
in the future.
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As a measure to further reduce our level of accounts receivable and to alleviate the
associated risks, we have sold some of our accounts receivable to PRC domestic banks in China. We
expect to continue to sell our accounts receivable in the future at terms acceptable to us to meet
our working capital needs and to improve our liquidity. As of December 31, 2010, we had accounts
receivable selling facilities in the aggregate amount of RMB63.6 million (US$9.6 million) that were
committed but not yet utilized.
In June 2004, we entered into our first limited recourse receivable selling agreement with an
independent PRC domestic bank for the sale of our accounts receivable. Subsequently, we entered
into additional limited-recourse receivable selling agreements with other independent PRC domestic
banks. Most of these agreements have a term of no more than one year. Pursuant to these limited
recourse receivable selling agreements, we agree to use our reasonable efforts to persuade our
customers to settle the accounts receivable we sold to these banks. In addition, we are
responsible for servicing the accounts receivable sold until the maturity of these accounts
receivable, which in general is 12 months from their sale under the receivable selling agreements.
We are also required to place with the banks a pledged time deposit in an amount of not less than
10% of the accounts receivable
sold as security for payment of the relevant accounts receivable by our customers. The banks
are entitled to offset from our pledged time deposits up to 10% of any uncollectible accounts
receivable that we sold to the banks. The banks would release any balance of our pledged time
deposits to us upon expiration of the receivable selling agreement or upon settlement of the
accounts receivable that we sold to the banks. For accounts receivable sold under these receivable
selling agreements, we are required to pay discount charges, commission fees or interest calculated
on a monthly basis and a one-time handling or service fee. The monthly discount charges represent
the interest calculated on a daily basis in respect of the balance of accounts receivable we sold
to the banks by reference to the base rate published by the People’s Bank of China, the PRC central
bank, on the date of the receivable selling agreement. The one-time handling or service fees range
from 0.4% to 1.5% of the amount of accounts receivable that we sold to the banks. The banks did
not encounter any significant default in repayments by customers on the account receivables that we
sold to the banks in the past few years.
Inventories
Our inventories comprise raw materials, work in progress and finished goods. Finished goods
make up the majority of our inventories. Our high level of finished goods results primarily from
the way we recognize revenues from the provision of wireless coverage products and services.
Because we recognize our revenues only after satisfaction of relevant revenue recognition criteria,
such as signing of sale and purchase contracts and issuance of certificates indicating customer
acceptance of the products or services, we do not expense our finished goods in our inventory until
we recognize the relevant revenues. Our work in progress inventory is generally minimal as we
typically have a short production lead time. We use raw materials primarily in the production of
our wireless coverage products and base station RF products. We manage raw materials according to
our production plan. Our inventories increased from RMB520.6 million in 2008 to RMB771.2 million
in 2009 which was in line with our increase in revenue. Our inventories decreased from RMB771.2
million in 2009 to RMB643.3 million (US$97.5 million) in 2010 primarily due to enhance inventory
management.
The following table sets forth an inventory balance breakdown by category as of the dates
indicated:
A considerable portion of our finished goods represents wireless equipment products delivered
to customers’ sites which have not been accepted by the customers and related deferred installation
costs. Finished goods delivered to customers’ sites which have not been accepted by the customers
and deferred installation costs amounted to RMB187.0 million, RMB398.2 million and RMB365.7 million
(US$55.4 million) as of December 31, 2008, 2009 and 2010, respectively.
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The following table shows the aging analysis of our inventory by major category as of December
31, 2010:
Borrowings
As of December 31, 2010, we had total short-term credit facilities of RMB1.4 billion (US$216.7
million) from ten domestic banks, of which we had drawn RMB591.0 million (US$89.5 million) in bank
loans and RMB121.7 million (US$18.4 million) in bills payable. As of December 31, 2010, we had an
aggregate of RMB110.0 million (US$16.7 million) in long-term bank loans outstanding, of which
RMB20.0 million (US$3.0 million) are due for repayment within one year. As of December 31, 2010,
we had available undrawn bank-committed facilities in the aggregate of RMB723.0 million (US$109.5
million) and unutilized accounts receivable selling arrangements in the aggregate of RMB63.6
million (US$9.6 million). Our bills payable allow our vendors and suppliers to receive payment in
cash from our banks upon presentation in 30 to 180 days. Pursuant to our financing arrangements
with banks in China, we must pay the amount under each bill payable to the bank on or prior to the
stipulated presentation date. We negotiate and renew our bank credit facility agreements with our
banks on an annual basis in line with the current banking industry practice in China. The weighted
average interest rate for our bank borrowings was 5.46% as of December 31, 2010. Of the total
outstanding amount of RMB591.0 million (US$89.5 million) drawn in bank loans under these
facilities, RMB495.0 million (US$75.0 million) was uncollateralized and RMB96.0 million (US$14.5
million) was collateralized by a pledge of part of our bank deposits and accounts receivable and
the land use right of a parcel of land we own. The total outstanding amount of RMB121.7 million
(US$18.4 million) used in bills payable under these facilities was collateralized by RMB28.4
million (US$4.3 million) as pledged time deposits.
Part of our short-term loans are revolving facilities with a term of one year, which may be
extended for terms of one year each with lender consent.
Apart from the above, we have not granted any security interest or entered into any guarantees
or similar commitments to secure or guarantee payment obligations of any third parties. In
addition, we do not have any other written options on financial or non-financial assets. We expect
to continue to rely on bank loan financing and receivable selling arrangements to finance our
capital expenditure and working capital needs as we grow our business.
Under the terms of one of our short-term loan agreements, we are required to maintain certain
financial ratios and minimum amount of consolidated net worth. We have been in compliance with
these covenants and do not expect that these covenants will limit our ability to finance our
working capital.
Capital Expenditure and Contractual Commitments
Our capital expenditure consists of purchases of property, plant and equipment, such as
equipment and machinery, motor vehicles and office equipment. In 2008, 2009 and 2010, our capital
expenditure was RMB100.1 million, RMB64.7 million and RMB105.0 million (US$15.9 million),
respectively. Our capital expenditure in 2008 and 2010 primarily consisted of expenditure incurred
on the construction of Guoren Building and our property in Longgang District, Shenzhen,
respectively. Our capital expenditures have been and are expected to be funded by our internally
generated cash and financing means available to us.
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The following table sets forth our obligations and commitments to make future payments under
contracts and commitments as of December 31, 2010:
Off-Balance Sheet Arrangements and Contingent Liabilities
As of December 31, 2010, our accounts receivable sold to banks but not yet settled by our
customers amounted to RMB388.6 million (US$58.9 million). We were subject to a limited recourse
obligation for these accounts receivable pursuant to which we pledged to the banks deposits of 10%
of the accounts receivable sold as guarantee for payment by our customers. As of December 31,
2010, these pledged deposits amounted to RMB39.4 million (US$6.0 million).
As of December 31, 2010, our commitments under operating leases for operating premises
amounted to RMB9.0 million (US$1.3 million), of which RMB7.4 million, RMB1.5 million and RMB0.1
million is due for payment in 2011, 2012 and 2013, respectively.
As of December 31, 2010, our commitments for future purchase of property, plant and equipment
amounted to RMB1.8 million (US$0.3 million), which is predominately related to the purchase of
additional machinery and equipment for our production.
As of December 31, 2008, Shenzhen GrenTech provided guarantees for bank loans amounting to
RMB22.3 million and RMB12.0 million to Lake Communication and Lake Microwave, respectively. These
guarantees were entered into in October 2006 which was prior to the disposition of the equity
interest in the Lake Communication and Lake Microwave. These guarantees expired in August 2009 and
September 2009 respectively.
We do not have any other off-balance sheet guarantees, any other outstanding derivative
financial instruments, interest rate swap transactions or foreign currency forward contracts. We
do not engage in trading activities involving non-exchange traded contracts.
Inflation
Inflation in China has not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in the consumer price index in
China was 5.9% in 2008, -0.7% in 2009 and 3.3% in 2010.
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Quantitative and Qualitative Disclosure about Market Risk
Foreign Exchange Risk. Virtually all of our revenues and expenses are denominated in
Renminbi. However, we have U.S. dollar cash deposits (including a portion of the proceeds from our
initial public offering) which amounted to US$1.1 million as of December 31, 2010. Any
appreciation in Renminbi exchange rate against U.S. dollars would result in a foreign exchange loss
to us. For the year ended December 31, 2010, we recorded a foreign exchange loss of RMB0.6 million
(US$0.09 million) predominately related to such U.S. dollar bank deposits.
Interest Rate Risk. All of our short-term bank loans accrue interest at fixed rates, and we
may be offered different interest rates for our short-term bank loans upon renewal. Our long-term
bank loan accrues interest at variable interest rate, which is adjusted annually based on changes
in market interest rates. However, we believe our exposure to fluctuations in interest rates is
not significant.
Credit Risk. We have long accounts receivable cycles and long collection periods, and certain
of our long aged receivable balances are subject to default risk for which allowance has been made.
For a further discussion of these issues, please refer to “Item 3. Key Information—Risk
Factors—Risks Relating to Our Company—We often begin work on a project before we have a contract
for our products and services, which may materially and adversely affect our cash flows from
operating activities and liquidity” and “—We have long accounts receivable cycles and long
collection periods and our liquidity and cash flows from operations will deteriorate if our
accounts receivable cycles or collection periods continue to lengthen.”
Corporate Structure
We are a holding company, and we rely principally on dividends and other distributions on
equity paid by our PRC operating subsidiaries for our cash requirements, including the funds
necessary to service any debt we may incur, financing we may need for operations other than through
our PRC subsidiaries and the payment of dividends by us. Under PRC law, Shenzhen GrenTech, as a
wholly foreign-owned enterprise, and Shenzhen Lingxian, Shenzhen Lingxian Communication, Shenzhen
GrenTech RF, Shenzhen Kaige, Shenzhen Kaixuan, Shenzhen GrenTech IOT Network and Express (Shenzhen)
Network, as domestic limited liability companies in China, must allocate at least 10% of their
after-tax profit to their statutory general reserve fund until the balance of the fund has reached
50% of their registered capital. Shenzhen GrenTech, as a wholly foreign owned enterprise, has
complete discretion in allocating its after-tax profit to its employee welfare reserve fund. These
reserve funds are not distributable as cash dividends. Any limitation on the payment of dividends
by our PRC subsidiaries could materially and adversely limit our ability to grow, make investments
or acquisitions that could be beneficial to our businesses, pay dividends, and otherwise fund and
conduct our businesses, as discussed in “Item 3. Key Information—Risk Factors—Risks Relating to
Our Company—Our primary source of funds for dividend and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and
our ability to pay dividends or make other distributions to our shareholders is negatively affected
by those restrictions and uncertainties.” In addition, any dividends we pay to our shareholders
may be subject to a 10% withholding income tax. For further details, see “Item 3. Key
Information—Risk Factors—Risks Relating to Our Company—We may be treated as a resident
enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on
January 1, 2008, which may subject us to PRC income tax for our global income and withholding
income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1,
2008.”
Taxation
Our company was incorporated in the Cayman Islands and is not subject to tax on income or
capital gain under the current laws of the Cayman Islands. GrenTech BVI and GrenTech RF
Communication (BVI) Limited were incorporated in the British Virgin Islands and are not subject to
tax on income or capital gain under the current laws of the British Virgin Islands. See “Income
Tax Expense” above for a discussion of income tax of our PRC subsidiaries.
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Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or the FASB, issued an amendment to
the accounting and disclosure requirements for the consolidation of variable interest entities.
This amendment eliminates exceptions of the previously issued pronouncement related to
consolidation of qualifying special purpose entities, contains new criteria for determining the
primary beneficiary, and increases the frequency of required reassessments to determine whether a
company is the primary beneficiary of a variable interest entity. This accounting standard also
contains a new requirement that any term, transaction, or arrangement that does not have a
substantive effect on an entity’s status as a variable interest entity, a company’s power over a
variable interest entity, or a company’s obligation to absorb losses or its right to receive
benefits of an entity must be disregarded in applying the provisions of the previously issued
pronouncement. This accounting standard is effective for our fiscal year beginning January 1,
2010. We adopted this amendment at the beginning of our fiscal year 2010, and the adoption does
not have significant impact on our consolidated financial statements.
In August 2009, the FASB issued an amendment to the fair value measurement and disclosures of
liabilities. It provides clarification that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is required to measure the
fair value using (1) a valuation technique that uses the quoted price of the identical liability
when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded
as assets or (2) another valuation technique that is consistent with the principles of fair value
measurement. It also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs relating to the
existence of a restriction that prevents the transfer of the liability. In addition, both a quoted
price in an active market for the identical liability at measurement date and the quoted price for
the identical liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value measurements. The provisions of this
amendment are effective for the first reporting period (including interim periods) beginning
after August 28, 2009. Early application is permitted. We adopted this amendment at the beginning
of our fiscal year 2010, and the adoption does not have significant impact on our consolidated
financial statements.
In October 2009, the FASB issued revenue recognition guidance for arrangements that involve
the delivery of multiple-elements. This guidance addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria for separating
consideration in multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on: (a)
vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also
eliminates the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the relative selling price
method. In addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. This accounting standard will be effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. We do not expect the adoption
will have a significant impact on our consolidated financial statements.
In October 2009, the FASB issued revenue recognition guidance for arrangements that include
software elements. This guidance changes the accounting model for revenue arrangements that
include both tangible products and software elements and provides additional guidance on how to
determine which software, if any, relating to tangible product would be excluded from the scope of
the software revenue guidance. In addition, it provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes both tangible products
and software. This accounting standard is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We do not expect the adoption will have a significant impact on our consolidated
financial statements.
In January 2010, the FASB issued an amendment to improve the disclosures about fair value
measurements. It adds new requirements for disclosures about (1) the different classes of assets
and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the
activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The
amendment is effective for the first reporting period beginning after December 15, 2009, except for
the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. In the period of initial adoption, entities will not be
required to provide the amended disclosures for any previous periods presented for comparative
purposes. However, those disclosures are required for periods ending after initial adoption.
Early adoption is permitted. We have adopted the amendments for the period beginning January 1,
2010 except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis. We will adopt the requirement to provide the Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis for the period beginning January 1,
2011 and expect the adoption will not have significant impact on our consolidated financial
statements.
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In April 2010, the FASB issued an accounting standards update on the effect of denominating
the exercise price of share-based payment awards in the currency of the market in which the
underlying equity security trades. This updates the guidance in stock compensation to clarify that
share-based payment awards with an exercise price denominated in the currency of a market in which
a substantial portion of the underlying equity security trades should not be considered to meet the
criteria requiring classification as a liability. The updated guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2010.
Early adoption is permitted. We will adopt this update for the period beginning January 1, 2011
and expect the adoption will not have significant impact on our consolidated financial statements.
In July 2010, ASU 2010-20 was issued to require enhanced disclosures about the credit quality
of financing receivables and allowance for credit losses. This update requires an entity to
provide greater level of disaggregated information about credit quality of its financing
receivables and allowance for credit losses. In addition, it requires disclosures of credit
quality indicators, past due information and modifications of its financing receivables. The
disclosure requirement, except for the disclosure of reporting period activity, is effective for
interim and annual reporting periods ending on or after December 15, 2010 for public companies. We
adopted this update for our annual reporting period ended December 31, 2010. The adoption did not
have a significant impact to our financial
statements. We will adopt the disclosure requirements for reporting period activity beginning
January 1, 2011 and expect the adoption will not have significant impact on our consolidated
financial statements.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and senior management
The following table sets forth information regarding our directors and executive officers as
of June 1, 2011.
Yingjie Gao has served as the chairman of our board of directors and our chief executive
officer since our inception in 1999. Mr. Gao has over ten years of experience in management in the
wireless communication network coverage industry and has over 18 years of experience in corporate
operations and management in China. Prior to co-founding Shenzhen GrenTech in 1999, Mr. Gao was
the chairman and general manager of Shenzhen Tomorrow Image Design Company Limited, a company that
provides corporate image consultancy services to corporations, from 1993 to 1999. Mr. Gao
graduated from Jilin Correspondence College in 1983.
Rong Yu has served as a director of our company since December 2001. Ms. Yu was the manager
of our finance and accounting department when she joined our company in 1999. In 2003, she became
our financial controller and vice president in charge of our financial management and accounting
matters. In August 2005, she became our chief financial officer. Before joining us in 1999, Ms.
Yu taught industrial accounting at Anhui Textiles School after receiving a bachelor’s degree in
industrial accounting from Anhui College of Trade and Finance in 1987, and she also served as a
finance manager for two other companies in her previous career.
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Qi Wang has served as a director of our company since September 2009 and has been a vice
president of our company, responsible for wireless coverage business, since 2010. Prior to that,
Mr. Wang was a vice president of our company responsible for base station RF business operations.
Between 1988 and 1999, Mr. Wang was a department head of China Shenzhen Foreign Trade Group Corp.
Ltd. and an assistant to the general manager of Shenzhen Baoren Marketing Co., Ltd. He joined our
company in July 1999. Mr. Wang graduated with a bachelor’s degree in economics from Beijing
University of International Economics and Business in 1988.
Jing Fang has served as a director of our company since October 2010 and has been a vice
president of our company, responsible for research and development, since January 2010. Dr. Fang
joined our company in 2001 and has served as a deputy chief engineer, the manager of RF technology
center and the director of technology development center of our company prior to 2010. Dr. Fang
has 20 years of experience in RF technology research and product development. Dr. Fang received
her bachelor’s degree in electromagnetic field and microwave technology, master’s degree in
electromagnetic field and microwave technology, and Ph.D. degree in electromagnetic field and
microwave technology from Beijing Institute of Technology, Xi’an Jiaotong University, and Xi’an
Jiaotong University in 1985, 1993, and 2000, respectively.
Cuiming Shi has served as a director of our company since March 2006. Mr. Shi graduated in
1963 from the Department of Management Engineering at the Beijing University of Posts and
Telecommunications. From 1981 to 1987, Mr. Shi served as Deputy Director of the Department of
Postal Economic Research and as Deputy
Director General of the Bureau of Finance of the Ministry of Posts and Telecommunications.
From 1987 to 1997, he was Director General of the Bureau of Finance, Director General of the
Department of Operations and Finance, and Director General of the Department of Finance of the
Ministry of Posts and Telecommunications. He was previously the Chairman of the board of directors
and the chief executive officer of China Mobile (Hong Kong) Limited, a company listed on The Stock
Exchange of Hong Kong Limited and the New York Stock Exchange, and an executive director and
executive vice-president of China Unicom Limited, a company listed on The Stock Exchange of Hong
Kong Limited and the New York Stock Exchange. He is currently a consultant to CITIC Pacific
Limited and the chairman of CITIC Telecom 1616 Ltd.
Xiaohu You has served as a director of our company since November 2004. He has been the
director of the radio engineering department of Southeast University since 1996. Mr. You currently
also serves as the head of National 3G Mobile Communications General Group, the head of National
Fourth Generation Mobile Communications General Research Group and Director of Mobile
Communications Laboratory, each at Southeast University in China. Professor You received his
bachelor’s, master’s and doctorate degrees from Southeast University in 1982, 1985 and 1988,
respectively.
Kin Kwong Mak has served as a director of our company since November 2004. Mr. Mak has been
the managing director of Venfund Investment Management Limited, a Shenzhen based mid-market M&A
investment banking firm, since 2002. Prior to that, Mr. Mak spent 17 years at Arthur Andersen
Worldwide where he was a partner and served as the managing partner of Arthur Andersen Southern
China in his last position with the firm. Mr. Mak also serves as an independent director and audit
committee chairman of China Security and Surveillance Technology, Inc. and Trina Solar Limited,
both of which are companies listed in the U.S. Mr. Mak is a graduate of the Hong Kong Polytechnic
University and a fellow member of the Association of Chartered Certified Accountants, UK, and the
Hong Kong Institute of Certified Public Accountants, and a member of the Institute of Chartered
Accountants, in England and Wales.
Qingchang Liu
has been a vice president of our company, responsible for corporate finance activities, since January
2011, and he served the same position from 2005 to 2009. Mr. Liu served as a vice president of our
company responsible for RF business operation during 2010.
Mr. Liu has 18 years of experience in finance,
securities trading and corporate reorganizations and was involved in the corporate restructuring
of, and capital raisings of, a number of companies listed on the PRC domestic stock exchanges and
the Hong Kong Stock Exchange. Mr. Liu graduated from China College of Finance in July 1991 with a
bachelor’s degree in economics. He obtained a master’s degree in economics from the Shenzhen
University in June 2003. Mr. Liu joined our company in June 2000.
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Kaichang Zou has been a vice president of our company, primarily responsible for human
resources and administration management, since January 2010. Mr. Zou has 13 years of experience in
human resources and organizational management. Prior to join our company in 2005 as the director
of human resources, Mr. Zou served as the director of human resources and administration in Yulong
Computer Telecommunication Co., Ltd. from 2002 to 2005, the head of human resources in Tianyin
Telecommunication Co. Ltd. from 2001 to 2002, and human resources manager in Huawei Technologies
Co., Ltd. from 1997 to 2001. Mr. Zou majored in human resources management and received his
bachelor’s degree in management from Renmin University of China in 1997.
The business address of our directors and executive officers is 15th Floor, Block A, Guoren
Building, Keji Central 3 rd Road, Hi-Tech Park, Nanshan District, Shenzhen 518057, People’s
Republic of China.
Board of Directors
Our board of directors currently consists of seven directors. A director is not required to
hold any shares in our company by way of qualification. Following a declaration of interests
pursuant to the provisions of our amended and restated articles of association, any separate
requirement for audit committee approval under the applicable law or the relevant NASDAQ rules, a
director may vote with respect to any contract, proposed contract or arrangement in which he or she
is interested unless he or she is disqualified by the chairman of the relevant board meeting. Our
board of directors may exercise all the powers of our company to borrow money, mortgage its
undertaking, property and uncalled capital, and issue debentures or other securities whenever money
is borrowed or as security for any obligation of our company or of any third party. We approved
the establishment of three committees of the board of directors: the audit committee, the
compensation committee and the corporate
governance and nominating committee. We have also adopted a charter for each committee in
compliance with the Sarbanes-Oxley Act of 2002 and the NASDAQ corporate governance rules. Each
committee’s members and functions are described below.
Audit Committee
Our audit committee consists of our three independent non-executive directors, namely Mr. Kin
Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. All of them satisfy the “independence”
requirements of the NASDAQ Listing Rules and meet the criteria for independence set forth in
Section 10A(m)(3)(B)(i) of the Exchange Act. Such committee composition was established by our
board of directors by reference to similarly situated issuers and is in line with Rule 5605(c) of
the NASDAQ Listing Rules that requires the audit committees of listed companies to have a minimum
of three independent directors. There are, however, no specific requirements under Cayman Islands
law on the composition of our audit committee. The audit committee oversees our accounting and
financial reporting processes and the audits of our financial statements. The audit committee is
responsible for, among other things:
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Compensation Committee
Our compensation committee consists of Mr. Yingjie Gao, Ms. Rong Yu, Mr. Kin Kwong Mak, Mr.
Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You satisfy the “independence”
requirements of the NASDAQ Listing Rules and meet the criteria for independence set forth in
Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice of ours was established by
our board of directors by reference to similarly situated issuers and differs from Rule
5605(d)(1)(B) and (2)(B) of the NASDAQ Listing Rules that requires the compensation committees of
listed companies to be comprised solely of independent directors. There are, however, no specific
requirements under Cayman Islands law on the composition of our compensation committee. Our
compensation committee assists our board in reviewing and approving the compensation structure of
our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. The compensation committee is responsible for, among other
things:
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Yingjie Gao, Ms. Rong Yu,
Mr. Kin Kwong Mak, Mr. Cuiming Shi and Professor Xiaohu You. Mr. Mak, Mr. Shi and Professor You
satisfy the “independence” requirements of the NASDAQ Listing Rules and meet the criteria for
independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. This home country practice
of ours was established by our board of directors by reference to similarly situated issuers and
differs from Rule 5605(e)(1)(B) of the NASDAQ Listing Rules that requires the nominating committees
of listed companies be comprised solely of independent directors. There are, however, no specific
requirements under Cayman Islands law on the composition of our corporate governance and nominating
committee. The corporate governance and nominating committee assists the board in identifying
individuals qualified to become our directors and in determining the composition of the board and
its committees. The corporate governance and nominating committee is responsible for, among other
things:
Duties of Directors
Under Cayman Islands law, our directors have a common law duty of loyalty to act honestly in
good faith with a view to our best interests. Our directors also have a duty to exercise the skill
they possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association. A shareholder has the right to seek
damages if a duty owed by our directors is breached.
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Employment and Service Agreements
Each of our executive directors has entered into an employment agreement and a service
agreement with us for an initial term of three years. The employment agreement relates to the
relevant executive position and the service agreement relates to the directorship. Each agreement
will continue after the initial term from year to year until terminated by such director or removed
by our shareholders as to the directorship or by our board of directors as to the relevant
executive position with three to six months’ notice in writing served on the other party. Our
employment agreements with our executive management members also prohibit our management members
from illegally trading securities, restrict their use of our confidential information to their
employment with us and require them not to compete with us within two years after their employment
terminates. Our employment agreements also provide that any intellectual property created by our
management members during their employment belong to us and remain the property of our company.
Each independent director is appointed for an initial term of three years commencing from his
or her date of appointment and will continue after the initial term from year to year until
terminated (i) with immediate effect upon, among other things, removal of such director by our
shareholders or (ii) with one month prior written notice given by either us or such director.
Officers are appointed by and serve at the discretion of our board of directors. Each
executive officer has entered into an employment agreement with us without a fixed term. Such
employment will continue in force until terminated by either party with three to six months’ notice
in writing served on the other party.
Compensation
All directors receive reimbursements from us for expenses which are necessarily and reasonably
incurred by them for providing services to us or in the performance of their duties. Our directors
who are also our employees receive compensation in the form of salaries, housing allowances, other
allowances and benefits in kind in their capacity as our employees. Our executive directors do not
receive any compensation in their capacity as directors apart from their salaries and other
remunerations as members of our management team. We pay their expenses related to attending board
meetings and participating in board functions. Our independent directors receive HK$300,000 per
person each year in office as compensation, plus reimbursement of all reasonable out-of-pocket
expenses incurred in discharging their duties, including attending board meetings and participating
in board functions.
The aggregate cash compensation and benefits that we paid to our directors and executive
officers for the year ended December 31, 2010 are approximately RMB10.4 million (US$1.6 million).
Under our current arrangements, the aggregate remuneration and benefits in kind which our directors
and executive officers are entitled to receive in 2011 is expected to be approximately RMB9.5
million (US$1.4 million), excluding any discretionary bonuses which may be paid to our directors.
No executive officer is entitled to any severance benefits upon termination of his or her
employment with our company.
Indemnification
Cayman Islands law does not limit the extent to which a company’s articles of association may
provide for indemnification of officers and directors, except to the extent any such provision may
be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Pursuant to our
memorandum and articles of association, our directors and officers, as well as any liquidator or
trustee for the time being acting in relation to our affairs, will be indemnified and secured
harmless out of our assets and profits from and against all actions, costs, charges, losses,
damages and expenses that any of them or any of their heirs, executors or administrators may incur
or sustain by reason of any act done, concurred in or omitted in or about the execution of their
duties in their respective offices or trusts. Accordingly, none of these indemnified persons will
be answerable for the acts, receipts, neglects or defaults of each other; neither will they be
answerable for joining in any receipts for the sake of conformity, or for any bankers or other
persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe
custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging
to us may be placed out or invested, or for any other loss, misfortune or damage which may happen
in the execution of their respective offices or trusts. This indemnity will not, however, extend
to any fraud or dishonesty which may attach to any of said persons.
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In addition, all of our independent directors have entered into indemnification agreements in
which we agree to indemnify, to the fullest extent allowed by Cayman Islands law and our charter
documents, those directors from any expenses, liability and loss, unless the expenses, liability
and loss arise from the director’s own willful negligent or default. The indemnification
agreements also specify the procedures to be followed with respect to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been
informed that the SEC views such indemnification against public policy as expressed in the
Securities Act and is therefore unenforceable.
Share Option Scheme
Our share option scheme is a share incentive scheme which was adopted by our board of
directors and approved by our shareholders on August 25, 2005. The purpose of this share option
scheme is to recognize and acknowledge the contributions the eligible participants had or may have
made to our company. The share option
scheme provides the eligible participants an opportunity to have a personal stake in our
company with the view to achieving the following objectives:
We did not grant any share options to our directors and executive officers under our share
option scheme during 2010. As of April 30, 2011, the latest practicable date, all options granted
under the share option scheme were vested and exercisable for an aggregate of 33,780,000 ordinary
shares. No option has been exercised as of April 30, 2011.
Eligible Participants
Under the share option scheme, our board of directors may, at its discretion, offer to grant
an option to subscribe for such number of our ordinary shares at an exercise price as our directors
may determine to:
Maximum Number of Shares
The maximum number of ordinary shares in respect of which options may be granted (including
ordinary shares in respect of which options, whether exercised or still outstanding, have already
been granted) under the share option scheme must not in aggregate exceed 10% of the total number of
ordinary shares in issue immediately following the completion of our initial public offering, being
625,000,000 ordinary shares. Such maximum number of ordinary shares available under the share
option scheme will be reduced by the number of ordinary shares which have been issued pursuant to
the exercise of an option under the share option scheme or any other equity compensation plans we
may adopt and by the number of shares which were subject to options that were subsequently
cancelled.
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In addition, the total number of ordinary shares issued and which may be issued upon exercise
of the options granted under the share option scheme and any other share option schemes of ours
(including both exercised and outstanding options) to each individual eligible participant, and
ordinary shares cancelled which were the subject of options under the share option scheme and any
other share option schemes of ours which had been granted to and accepted by that eligible
participant, in any 12-month period up to the date of grant may not exceed 1% of our shares in
issue as of the date of grant.
Our board of directors may subject to the approval of our shareholders in a general meeting,
(i) renew this 1% limit at any time, and/or (ii) grant options beyond the limit to eligible
participant(s) specifically identified by our board of directors. Also, the maximum number of
ordinary shares available under the share option scheme may be increased to 10% of the ordinary
shares in issue at the time of such shareholder approval. However, no options may be granted under
any schemes (including the share option scheme) if the number of our shares issuable upon exercise
of all outstanding options will exceed 30% of our shares in issue from time to time.
Price of Shares
Our board of directors may, in its discretion, determine the exercise or subscription price of
an ordinary share in respect of any particular option granted under the share option scheme.
However, such exercise or subscription price cannot be less than the highest of (i) the closing
price of the shares as quoted in the NASDAQ Global Select Market on the date of grant, (ii) the
average of the closing prices of the shares as quoted in the NASDAQ Global Select Market for five
business days immediately preceding the date of grant, and (iii) the nominal value of a share.
Restrictions on the Times of Grant of Options
A grant of options may not be made after a price sensitive event has occurred or a price
sensitive matter has been the subject of a decision until such price sensitive information has been
disclosed to the public. In particular, no options may be granted during the one-month period
before (i) the date of the board meeting for the approval of our results for any year, half-year,
quarterly or other interim period, and (ii) our deadline to publish our results for any year, or
half-year, or quarterly or other interim period.
Transferability
An option is personal to the grantee and may be exercised or treated as exercised, as the case
may be, in whole or in part. Under the share option scheme, no grantee may, in any way, sell,
transfer, charge, mortgage, encumber or create any interest (legal or beneficial) in favor of any
third party over or in relation to any option or attempt so to do.
Exercise of Option and Duration of the Share Option Scheme
The period during which an option may be exercised will be determined by our board of
directors, in its absolute discretion. However, no option may be exercised more than 10 years
after it has been granted and accepted.
In addition, a grantee may be required to achieve any performance targets, as our board of
directors may then specify in the grant, before any options granted under the share option scheme
can be exercised.
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Rights on Ceasing Employment or Death of an Employee
If the grantee of an option ceases to be an eligible participant:
In addition, if such grantee of an option ceases to be employed by our company and/or any of our
subsidiaries within 12 months following the date when the option is deemed to be granted to and
accepted by him, such option shall lapse automatically and not be exercisable.
Rights on Takeover/Winding-Up
If a general offer is made to all of our shareholders and such offer becomes or is declared
unconditional during the option period of the relevant option, then the grantee of an option is
entitled to exercise the option in full (to the extent not already exercised) at any time within 14
days after the date on which the offer becomes or is declared unconditional.
In the event of a voluntary winding-up of our company, we will give notice to all grantees
before a general meeting of the shareholders, and each grantee is entitled to exercise all or any
of his/her options (to the extent not already exercised), at any time not later than two business
days prior to the proposed general meeting, by giving a written notice to us together with a
remittance for the full amount of the aggregate subscription price for the shares.
Alteration of the Share Option Scheme
Our board of directors has the authority to amend the terms and conditions of the share option
scheme to the extent it is not inconsistent with the share option scheme, provided that any
material alteration to the terms and conditions of the share option scheme or any change to the
terms of options granted shall be made with the prior approval of our shareholders in general
meeting. No alteration shall operate to affect adversely the terms of issue of any option granted
or agreed to be granted prior to such alteration or to reduce the proportion of the equity capital
to which any grantee was entitled pursuant to such option prior to such alteration.
Employees
Please refer to Item 4. “Information on the Company—Business—Employees.”
Share Ownership
The following table sets forth information with respect to beneficial ownership of our
ordinary shares as of April 30, 2011, the latest practicable date, by:
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As of April 30, 2011, 563,244,750 of our ordinary shares were outstanding. Except as
otherwise indicated, we believe each shareholder named in this table has sole voting and investment
power with respect to the shares shown as beneficially owned. None of our shareholders listed
below has voting rights that are different from any of our other shareholders.
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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
Please refer to Item 6. “Directors, Senior Management and Employees—Share Ownership.”
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RELATED PARTY TRANSACTIONS
Share-based compensation
Please refer to Item 6. “Directors, Senior Management and Employees—Compensation—Share
Option Scheme” for a description of ordinary shares and share options we granted to our directors,
officers and other individuals as a group.
Our Related-Party Transaction Policies
We have conducted our related-party transactions on normal commercial terms that are fair and
reasonable and in the interests of our shareholders as a whole. We believe that the terms of our
related-party transactions are comparable to the terms we could obtain from independent third
parties. Our related-party transactions are subject to the review and approval of the audit
committee of our board of directors. The charter of our audit committee as adopted by our board of
directors provides that we may not enter into any related-party transaction unless and until it has
been approved by the audit committee.
Divestiture of Network Coverage Module Manufacturing Subsidiaries, Lake Communication and Lake
Microwave
In December 2008, we entered into a sale and purchase agreement with Mr. Haifan Zhuang and
Lake (HK) Technology Ltd., to dispose of the entire equity interest in Lake Communication and Lake
Microwave for consideration of RMB101.3 million (US$15.3 million) and RMB0.9 million (US$0.1
million), respectively. In connection with this sale and purchase, in December 2008, we entered
into debt transfer agreement with Mr. Haifan Zhuang (son of Professor Kunjie Zhuang who is a
technology consultant and former director of our company, as well as one of our major
shareholders), Lake Communication, Lake Microwave and Lake
(HK) Technology Ltd. in which Mr. Haifan Zhuang would assume the accounts payable obligation that Shenzhen GrenTech owed to Lake
Communication, amounting to RMB102.2 million (US$15.5 million), as full payment of the purchase
price. In addition, Shenzhen GrenTech agreed to waive the right to receive a dividend receivable
from Lake Communication, amounting to RMB15.2 million (US$2.3 million), which has been included in
the calculation of the gain on disposal. As part of the acquisition, Mr. Haifan Zhuang also
assumed the net liabilities (excluding the net receivable due from Shenzhen GrenTech of RMB87.0
million (US$13.2 million)) of Lake Communication and Lake Microwave totaling RMB4.6 million (US$0.7
million).
Following such sale and purchase, we have continued to purchase certain base station RF
products from Lake Communication for the manufacturing of our wireless coverage products. Such
purchases totaled RMB24.6 million (US$3.7 million) in 2010. We have no commitment to purchase
products from Lake Communication after the disposal.
Establishment of Shenzhen GrenTech IOT Network Corporation Limited
We established Shenzhen GrenTech IOT Network Corporation Limited, or Shenzhen GrenTech IOT
Network, a domestic limited liability company in China, with Shenzhen Tianfang Real Estate Agency
Corporation Limited, or Shenzhen Tianfang, in February 2010. We contributed RMB7 million as the
registered capital of Shenzhen GrenTech IOT Network and own 70% of the equity interest in Shenzhen
GrenTech IOT Network. Shenzhen Tianfang contributed RMB3 million as the registered capital of
Shenzhen GrenTech IOT Network and owned the remaining 30% equity interest in Shenzhen GrenTech IOT
Network. Shenzhen Tianfang is a PRC company beneficially owned by Mr. Wan Jing (as to 80% of its
equity interest), a minority shareholder of Heng Xing Yue Investments Limited which currently holds
6.0% of our shares, and Mr. Yingjie Gao (as to 20% of its equity interest), our chairman and chief
executive officer. In December 2010, Shenzhen Tianfang transferred its 30% equity interest in
Shenzhen GrenTech IOT Network to Shenzhen Xing Guang Investment Company Limited, or Shenzhen Xing
Guang. Shenzhen Xing Guang is a PRC company beneficially owned by Mr. Yingjie Gao (as to 66.7% of
its equity interest), our chairman and chief executive officer, and Mr. Wan Jing (as to 33.3% of
its equity interest), a minority shareholder of Heng Xing Yue Investments Limited which currently
holds 6.0% of our shares. Shenzhen GrenTech IOT Network primarily engages in the development and
sale of object network identification systems, communication systems and related electronic
component products, design and installation of network and automation related products, as well as
design and development of websites and software. To date, the operations of Shenzhen GrenTech IOT
Network have been limited and no revenue has been generated. The establishment and operation of
Shenzhen GrenTech IOT Network were approved by our independent directors.
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In March 2010, Shenzhen GrenTech IOT Network established a wholly owned subsidiary, Express
(Shenzhen) Network Company Limited, or Express (Shenzhen) Network, a domestic limited liability
company in China. Express (Shenzhen) Network primarily engages in Internet and Internet-based real
estate agent businesses. To date, we have generated an insignificant amount of revenue from such
businesses.
Interests of Experts and Counsel
Not Applicable.
Item 8. FINANCIAL INFORMATION
Our audited consolidated financial statements are set forth beginning on page F-1. Other than
as disclosed elsewhere in this annual report, no significant change has occurred since the date of
the annual financial statements.
Legal Proceedings
We are involved in legal proceedings in the ordinary course of our business. We are not
involved in any litigation, arbitration or administrative proceedings that could have a material
adverse effect on our financial condition or results of operations, taken as a whole. So far as we
are aware, no such material litigation, arbitration or administrative proceedings are threatened.
Dividend Policy
We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future.
We intend to retain most, if not all, of our available funds and any future earnings for use in the
operation and expansion of our business. Our board of directors has complete discretion as to
whether we will pay dividends in the future, subject to the approval of our shareholders. Any
future dividend declaration will be subject to various factors, including:
In addition, we are a holding company, and our cash flow depends on dividends from our
operating subsidiaries in China. The ability of our subsidiaries in China to pay dividends to us
is subject to various restrictions, including legal restrictions in China that permit payment of
dividends only out of net income determined in accordance with PRC accounting standards and
regulations. Under PRC law, Shenzhen GrenTech, as a wholly foreign-owned enterprise, and Shenzhen
Lingxian, Shenzhen Lingxian Communication, Shenzhen GrenTech RF, Shenzhen Kaige, Shenzhen Kaixuan,
Shenzhen GrenTech IOT Network and Express (Shenzhen) Network, as domestic limited liability
companies in China, must allocate at least 10% of their after-tax profit to their statutory general
reserve fund until the balance of the fund has reached 50% of their registered capital. Shenzhen
GrenTech, as a wholly foreign owned enterprise, has complete discretion in allocating its after-tax
profit to its employee welfare reserve fund. These reserve funds are not distributable as cash
dividends. Any limitation on the payment of dividends by our PRC subsidiaries could materially and
adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our businesses, pay dividends, and otherwise fund and conduct our businesses, as discussed in “Item
3. Key Information—Risk Factors—Risks Relating to Our Company—Our primary source of funds for
dividend and other distributions from our operating subsidiary in China is subject to various legal
and contractual restrictions and uncertainties, and our ability to pay dividends or make other
distributions to our shareholders is negatively affected by those restrictions and uncertainties.”
In addition, any dividends we pay to our shareholders may be subject to a 10% withholding income
tax. For further details, see “Item 3. Key Information—Risk Factors—Risks Relating to Our
Company—We may be treated as a resident enterprise for PRC tax purposes following the
effectiveness of the new enterprise income tax law on January 1, 2008, which may subject us to PRC
income tax for our global income and withholding income tax for any dividends we pay to our non-PRC
shareholders on profits earned after January 1, 2008.”
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The depositary has agreed to distribute to the holders of our American depositary shares, or
ADSs, any dividend we declare and pay on our ordinary shares that are evidenced by ADSs to the
holders of our ADSs, subject to the terms of the deposit agreement, to the same extent as holders
of our ordinary shares, less its fees and expenses payable under the deposit agreement. The
depositary may send to you anything else we distribute on deposited securities by means it
considers lawful and reasonably practical. If it cannot make the distribution that way, the
depositary may decide to sell what we distributed and distribute the net proceeds in the same way
as it does with cash or hold what we distributed if it cannot be sold. Cash dividends on our
ordinary shares will be paid in U.S. dollars.
Item 9. THE OFFER AND LISTING
In connection with our initial public offering, our ADSs, each representing 25 ordinary
shares, have been trading on the NASDAQ Global Select Market (formerly the NASDAQ National Market)
since March 29, 2006 under the symbol “GRRF.” Prior to our initial public offering, there was no
public market for our equity securities. The NASDAQ Global Select Market is the principal trading
market for our ADSs, which are not listed on any other exchanges in or outside the United States.
As of December 31, 2010, we had a total of 563,244,750 ordinary shares issued and outstanding,
which included one registered holder of American depositary receipts evidencing 15,707,180 ADSs.
As of April 30, 2011, there were 563,244,750 ordinary shares issued and outstanding, which included
one registered holder of American depositary receipts evidencing 15,707,180 ADSs. Since certain of
the ADSs are held by nominees, the above number may not be representative of the actual number of
U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. The
depositary for the ADSs is Citibank, N.A.
The high and low market prices of the ADSs on the NASDAQ Global Select Market for the periods
indicated are as follows.
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Item 10. ADDITIONAL INFORMATION
SHARE CAPITAL
Not applicable.
MEMORANDUM AND ARTICLES OF ASSOCIATION
The section entitled “Description of Share Capital” contained in our registration statement on
Form F-1 (File No. 333-132381) filed with the U.S. Securities and Exchange Commission is hereby
incorporated by reference,
except for the description under “Description of Share Capital
— Differences in Corporate Law — Mergers and Similar
Arrangements” therein which is set forth below.
Mergers and Similar Arrangements
There are statutory provisions which facilitate reconstructions and amalgamations approved by
a majority in number representing 75 per cent. in value of shareholders or creditors, depending on
the circumstances, as are present at a meeting called for such purpose and thereafter sanctioned by
the Grand Court of the Cayman Islands. Whilst a dissenting shareholder would have the right to
express to the Grand Court his view that the transaction for which approval is sought would not
provide the shareholders with a fair value for their shares, the Grand Court of the Cayman Islands
is unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud
or bad faith on behalf of management.
Under the laws of the Cayman Islands, two or more companies may merge or consolidate in
accordance with Part XVI of the Companies Law. A merger means the merging of two or more
constituent companies and the vesting of their undertaking, property and liabilities in one of such
constituent companies as the surviving company, and a consolidation means the combination of two or
more constituent companies into a consolidated company and the vesting of the undertaking, property
and liabilities of such companies in the consolidated company.
The directors of each constituent company must approve a written plan of merger or
consolidation, which must be authorized by each constituent company by either (a) a special
resolution of the shareholders voting together as one class or (ii) such other authorization, if
any, as may be specified in such constituent company’s articles of association. A proposed merger
between a Cayman parent company and its Cayman subsidiary or subsidiaries (i.e., companies where
issued shares that together represent at least ninety per cent (90%) of the votes cast at a general
meeting of such company are owned by the parent company) will not require authorization by
shareholder resolution if every shareholder of each subsidiary company to be merged is given a copy
of the plan of merger or consolidation unless that shareholder agrees otherwise. The consent of
each holder of a fixed or floating security interest of a constituent company in a proposed merger
or consolidation is required unless the Grand Court (upon the application of the constituent
company that has issued the security) waives the requirement for consent. A provision is made for
a dissenting shareholder of a Cayman constituent company to be entitled to payment of the fair
value of his shares upon dissenting to the merger or consolidation. Where the parties cannot agree
on the price to be paid to the dissenting shareholder, either party may file a petition to the
Grand Court to determine fair value of the shares. These rights are not available where an open
market exists on a recognized stock exchange for the shares of the class held by the dissenting
shareholder.
MATERIAL CONTRACTS
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in this annual report on Form 20-F.
EXCHANGE CONTROLS
We receive substantially all of our revenues in Renminbi, which is not a freely convertible
currency. Although central government’s policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
security, requires the approval of SAFE and other relevant authorities.
The People’s Bank of China, or PBOC, sets and publishes daily a base exchange rate with
reference primarily to the supply and demand of Renminbi against a basket of currencies in the
market during the prior day. The PBOC also takes into account other factors, such as the general
conditions existing in the international foreign exchange markets. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, has been based on
rates set by the PBOC, which are set daily based on the previous day’s interbank foreign exchange
market rates and current exchange rates in the world financial markets. From 1994 to July 20,
2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally
stable. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on
the convertibility of Renminbi into foreign currency for current account items, conversion of
Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or
securities, requires the approval of the State Administration for Foreign Exchange and other
relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange
rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market
supply and demand and by reference to a basket of currencies. As a result, as of April 30, 2011,
the Renminbi has appreciated significantly against the U.S. dollar since July 2005. The PRC
government in the future may make further adjustments to the exchange rate system.
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TAXATION
The following summary of the material Cayman Islands, PRC and United States federal income tax
consequences relevant to the purchase, ownership or sale of our shares and ADSs is based upon laws
and relevant interpretations thereof in effect as of the date of this annual report, all of which
are subject to change. The summary does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares or ADSs should consult their own tax
advisers regarding the application of the considerations discussed below to their particular
situations and the consequences, including United States federal estate or gift tax laws, foreign,
state, or local laws, and tax treaties.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or
estate duty. There are no other taxes likely to be material to us levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party
to any double tax treaties. There are no exchange control regulations or currency restrictions in
the Cayman Islands.
PRC Taxation
Under the implementation rules of the new enterprise income tax law, dividends paid to
“non-resident enterprises” by “resident enterprises” on profits earned after January 1, 2008 are
regarded as income from “sources within the PRC” and therefore subject to a 10% withholding income
tax, while dividends on profits earned before January 1, 2008 are not subject to the withholding
income tax. A lower withholding income tax rate of 5% may be applied if the foreign holding
company is registered in a jurisdiction that has a tax treaty arrangement with China. Although our
company is incorporated in the Cayman Islands, it remains unclear whether the gains our foreign ADS
holders may realize will be regarded as income from sources within the PRC if we are classified as
a PRC resident enterprise. Any dividends paid to our shareholders which are considered
“non-resident enterprises” may be subject to withholding income tax and the value of the investment
in our shares or ADSs may be adversely and materially affected.
United States Federal Income Taxation
The following discussion is a summary of certain United States federal income tax consequences
applicable to the ownership and disposition of shares or ADSs by a U.S. Holder (as defined below),
but does not purport to be a complete analysis of all potential United States federal income tax
effects. This summary is based on the Internal Revenue Code of 1986, as amended, or the Code,
United States Treasury regulations promulgated thereunder, Internal Revenue Service, or IRS,
rulings and judicial decisions in effect on the date hereof. All of these are subject to change,
possibly with retroactive effect, or different interpretations.
This summary does not address all aspects of United States federal income taxation that may be
relevant to particular U.S. Holders in light of their specific circumstances (for example, U.S.
Holders subject to the alternative minimum tax provisions of the Code) or to holders that may be
subject to special rules under United States federal income tax law, including:
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This summary also does not discuss any aspect of United States federal estate or gift tax
laws, United States state or local laws, foreign laws and tax treaties as applicable to U.S.
Holders. In addition, this discussion is limited to U.S. Holders holding shares or ADSs as capital
assets. Prospective purchasers are urged to consult their tax advisers about the United States
federal, state and local tax consequences to them of the purchase, ownership and disposition of
shares or ADSs.
For purposes of this summary, “U.S. Holder” means a beneficial holder of shares or ADSs who or
that for United States federal income tax purposes is:
If a partnership or other entity or arrangement classified as a partnership for United States
federal income tax purposes holds shares or ADSs, the United States federal income tax treatment of
a partner generally will depend on the status of the partner and the activities of the partnership.
This summary does not address the tax consequences of any such partner. If you are a partner of a
partnership holding shares or ADSs, you should consult your tax advisers.
The discussion below is written on the basis that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any related agreement will
be performed in accordance with the terms. If you hold ADSs, you generally will be treated as the
owner of the underlying shares represented by those ADSs for United States federal income tax
purposes. Accordingly, deposits or withdrawal of shares for ADSs will not be subject to United
States federal income tax.
U.S. Holders
Taxation of Dividends and Other Distributions on the Shares or ADSs
Subject to the passive foreign investment company, or PFIC, rules discussed below,
distributions paid by our company out of current or accumulated earnings and profits (as determined
for United States federal income tax purposes) generally will be taxable to a U.S. Holder as
foreign source dividend income, and will not be eligible for the dividends received deduction
generally allowed to corporations. Distributions in excess of current and accumulated earnings and
profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s
adjusted tax basis in the shares or ADSs and thereafter as capital gain. However, our company does
not maintain calculations of its earnings and profits in accordance with United States federal
income tax accounting principles. U.S. Holders should therefore assume that any distribution by
our company with respect to the shares or ADSs will constitute dividend income. U.S. Holders
should consult their own tax advisers with respect to the appropriate United States federal income
tax treatment of any distribution received from our company.
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For taxable years beginning before January 1, 2013, dividends paid by our company should be
taxable to a non-corporate U.S. Holder at the special reduced rate normally applicable to long-term
capital gains, provided that certain conditions are satisfied. A U.S. Holder will not be able to
claim the reduced rate for any year in which our company is treated as a PFIC. See “Passive
Foreign Investment Company Considerations,” below. Dividends may be taxed at the lower applicable
capital gains rate provided that (1) our shares or ADSs, as applicable, are readily
tradable on an established securities market in the United States, (2) our company is not a
PFIC (as discussed below) for either our taxable year in which the dividends were paid or the
preceding taxable year, and (3) certain holding period requirements are met. Since our ADSs are
listed on the NASDAQ Global Select Market, they are considered for purposes of clause (1) above to
be readily tradable on an established securities market in the United States.
In the event that dividends from our company are subject to withholding by the PRC, a U.S.
Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit
in respect of any foreign withholding taxes imposed on dividends received on the shares or ADSs. A
U.S. Holder who does not elect to claim a foreign tax credit for foreign income tax withheld, may
instead claim a deduction, for United States federal income tax purposes, in respect of such
withholdings, but only for a year in which such holder elects to do so for all creditable foreign
income taxes. Dividends will constitute foreign source income for United States foreign tax credit
purposes.
Taxation of Disposition of Shares or ADSs
Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale
or exchange of a share or ADS in an amount equal to the difference between the amount realized (in
U.S. dollars) for the share or ADS and your tax basis (in U.S. dollars) in the share or ADS. The
gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if
you have held the share or ADS for more than one year. Long-term capital gains of non-corporate
U.S. Holders currently are eligible for reduced rates of taxation. The deductibility of a capital
loss may be subject to limitations. Any gain or loss that you recognize generally will be treated
as United States source gain or loss for United States foreign tax credit purposes.
Passive Foreign Investment Company
A foreign corporation will be classified as a PFIC for any taxable year in which, after taking
into account the income and assets of the corporation and certain subsidiaries pursuant to
applicable “look-through rules,” either (i) at least 75% of its gross income is “passive income” or
(ii) at least 50%of the average value of its assets is attributable to assets which produce passive
income or are held for the production of passive income.
For this purpose, cash and investment securities are categorized as passive assets and our
company’s unbooked intangibles are taken into account. We will be treated as owning our
proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
We do not believe that we are currently a PFIC for United States federal income tax purposes
and do not expect to become a PFIC in the future. However, the determination of whether we will be
classified as a PFIC is made annually and may involve facts that are not within our control. In
particular, the fair market value of some of our company’s assets may be determined in large part
by the market price of the shares, which is likely to fluctuate. In addition, the composition of
our company’s income and assets will be affected by how, and how quickly, our company spends any
cash that is raised. Thus, no assurance can be provided that our company would not be classified
as a PFIC for the current or any future taxable year. Furthermore, while we believe our valuation
approach is reasonable, it is possible that the IRS could challenge our determination concerning
our PFIC status.
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If our company is classified as a PFIC for any taxable year during which a U.S. Holder owns
shares or ADSs, the U.S. Holder, absent certain elections (including a mark-to-market election),
will generally be subject to adverse rules (regardless of whether our company continues to be
classified as a PFIC) with respect to (i) any “excess distributions” (generally, any distributions
received by the U.S. Holder on the shares or ADSs in a taxable year that are greater than 125% of
the average annual distributions received by the U.S. Holder in the three preceding taxable years
or, if shorter, the U.S. Holder’s holding period for the shares or ADSs) and (ii) any gain realized
on the sale or other disposition of shares or ADSs.
Under these adverse rules (a) the excess distribution or gain will be allocated ratably over
the U.S. Holder’s holding period, (b) the amount allocated to the current taxable year and any
taxable year prior to the first taxable year in which our company is classified as a PFIC will be
taxed as ordinary income, and (c) the amount allocated to
each of the other taxable years during which our company was classified as a PFIC will be
subject to tax at the highest rate of tax in effect for the applicable category of taxpayer for
that year and an interest charge will be imposed with respect to the resulting tax attributable to
each such other taxable year.
Alternatively, a U.S. Holder may be eligible to make a mark-to-market election. A U.S. Holder
that makes a mark-to-market election must include in ordinary income, rather than capital gain, for
each year an amount equal to the excess, if any, of the fair market value of the shares or ADSs, as
applicable, at the close of the taxable year over the U.S. Holder’s adjusted basis in the shares or
ADSs. Additional complex rules apply and the election cannot be revoked without the consent of the
IRS unless the shares or ADSs cease to be marketable.
If we are a PFIC in any year with respect to a U.S. Holder, such U.S. Holder will be required
to file an annual return on IRS Form 8621 regarding distributions received on our shares or ADSs
and any gain realized on the disposition of our shares or ADSs.
In addition, under recently enacted U.S. legislation effective as of March 18, 2010 and
subject to future guidance, if we are a PFIC, U.S. Holders will be required to file an annual
information return with the IRS relating to their ownership of our shares or ADSs. Pursuant to
recent IRS guidance, this reporting requirement has been suspended until the IRS releases a revised
version of IRS Form 8621. Additional guidance is expected regarding the specific information that
will be required to be reported on the revised IRS Form 8621. Prior to filing their annual income
tax returns, U.S. Holders should consult their tax advisers regarding whether additional guidance
has been issued with respect to this reporting requirement, and if so, how to comply with such
guidance.
U.S. Holders should consult their tax advisers regarding the potential application of the PFIC
regime, including eligibility for and the manner and advisability of making a mark-to-market
election.
Information Reporting and Backup Withholding
The proceeds of a sale or other disposition, as well as dividends paid with respect to shares
or ADSs by a United States payor (including any payments received from a U.S. financial
intermediary), generally will be reported to the IRS and to the U.S. Holder as required under
applicable regulations. Backup withholding tax may apply to these payments if the U.S. Holder
fails to timely provide an accurate taxpayer identification number or otherwise fails to comply
with, or establish an exemption from, such backup withholding tax requirements. Certain U.S.
Holders (including, among others, corporations) are not subject to the information reporting or
backup withholding tax requirements described herein. U.S. Holders should consult their tax
advisers as to their qualification for exemption from backup withholding tax and the procedure for
establishing an exemption.
In addition, under recently enacted U.S. legislation effective for taxable years beginning
after March 18, 2010, and subject to specified exceptions and future guidance, a U.S. Holder that
is an individual or, to the extent provided in future guidance, a U.S. entity, will be required to
report to the IRS such U.S. Holder’s interests in stock or securities issued by a non-U.S. person.
Pursuant to recent IRS guidance, this reporting requirement has been suspended until the IRS
releases IRS Form 8938. Additional guidance is expected regarding the specific information that
will be required to be reported on IRS Form 8938. Prior to filing their annual income tax
returns, U.S. Holders should consult their tax advisers regarding whether additional guidance has
been issued with respect to this reporting requirement, and if so, how to comply with such
guidance.
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U.S. Holders should consult their tax advisers regarding the information reporting obligations
that may arise from their acquisition, ownership or disposition of our shares or ADSs.
DIVIDENDS AND PAYING AGENTS
Not applicable.
STATEMENT BY EXPERTS
Not applicable.
DOCUMENTS ON DISPLAY
You can read and copy documents referred to in this annual report that have been filed with
the SEC at the SEC’s public reference room located at 100 F Street, N.E., Room 1580 Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms and their copy charges. The SEC also maintains a website at http://www.sec.gov that contains
reports and other information that we have filed electronically with the SEC.
SUBSIDIARY INFORMATION
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 5. Operating and Financial Review and Prospects—Market Risk and Risk Management.”
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and charges our ADS holders may have to pay
Citibank, N.A. is our depositary. The depositary collects its fees for delivery and surrender
of ADSs directly from investors depositing ordinary shares or surrendering ADSs for the purpose of
withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for
depositary services by deducting from cash distributions or by directly billing investors or by
charging the book-entry system accounts of participants acting for them. The depositary may
generally refuse to provide services for which fees are chargeable until such fees are paid.
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Fees and other payments made by the depositary to us
The depositary has agreed to reimburse us for any investor relations and other expenses
directly related to our ADS program, including fees of professional investor relations firms or
expenses of relevant investor relations tools, surveys, or studies, expenses in respect of our
staff attending ADS and investor relations training programs and/or conferences, and website and
web casting services. For the year ended December 31, 2010, the depositary made payments on our
behalf to third parties of US$419,936 for legal, account maintenance and proxy expenses.
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
Item 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, the end of the period covered by this annual report, our management
performed, under the supervision and with the participation of our chief executive officer and
chief financial officer, an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act. Disclosure controls and procedures are those controls and procedures designed to provide
reasonable assurance that the information required to be disclosed in our Exchange Act filings is
(i) recorded, processed, summarized and reported within the time periods specified in Securities
and
Exchange Commission’s rules and forms, and (ii) accumulated and communicated to management,
including our chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure. Based on that evaluation, our chief executive officer and
chief financial officer have concluded that, as of December 31, 2010, our disclosure controls and
procedures were not effective because of the material weakness described below under
“—Management’s Report on Internal Control over Financial Reporting.”
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We performed additional analyses and other post-closing procedures to ensure our consolidated
financial statements are prepared in accordance with U.S. GAAP. Accordingly, our management
believes that the consolidated financial statements included in this annual report fairly present,
in all material respects, our financial condition, results of operations and cash flows for the
periods presented.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of a company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that a company’s receipts and
expenditures are being made only in accordance with authorizations of a company’s management and
directors, and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of a company’s assets that could have a material
effect on the consolidated financial statements. Our management has completed its assessment of
the effectiveness of our internal control over financial reporting as of December 31, 2010, and has
concluded that our internal control over financial reporting as of December 31, 2010 was not
effective. In performing our assessment of internal control over financial reporting, management
is using the criteria described in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or COSO.
Our management has identified certain control deficiencies which represent a material weakness
based on the criteria described in Internal Control — Integrated Framework issued by the COSO. A
material weakness is a control deficiency, or a combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. We have identified the following material weakness
during our assessment of our internal control over financial reporting as of December 31, 2010:
We do not have sufficient competent accounting personnel with sound U.S. GAAP knowledge and
experience for our financial reporting process to ensure our financial statements are
prepared in compliance with U.S. GAAP.
In addition, our management identified one significant deficiency for our internal control
over financial reporting in 2010 which we believe primarily resulted from our lack of competent accounting
personnel. This significant deficiency has been reported to our audit committee.
Due to its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to consolidated financial statement preparation and
presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
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Remediation Plan
We have set up a project team, led by our internal audit manager, to implement remedial plans
for the foregoing material weakness as follows:
The aforementioned remedial plan and results were presented to the audit committee. The
management, including the chief executive officer and chief financial officer, has approved the
remedial course of action to address the material weakness. Such plan may also be modified or
expanded if additional material weaknesses are identified by management or our independent
registered public accounting firm.
This annual report does not include an attestation report of the company’s independent
registered public accounting firm regarding internal control over financial reporting because we
are a non-accelerated filer.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15 or 15d-15 of the Exchange Act that occurred
during the period covered by this annual report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Kin Kwong Mak qualifies as an audit committee
financial expert in accordance with the terms of Item 16.A of Form 20-F. For Mr. Mak’s
biographical information, see “Item 6. Directors, Senior Management and Employees—Directors and
Senior Management.”
Item 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our chief executive officer, chief financial
officer, and other designated members of senior management of our company. We have filed this code
of ethics as an exhibit to this annual report.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our
principal accountants and all other fees billed for products and services provided by our principal
accountants, KPMG (from 2005 to July 9, 2010) and PricewaterhouseCoopers Zhong Tian CPAs Limited
Company (from August 10, 2010 to present), for 2009 and 2010:
Before our principal accountants may be engaged by our company or our subsidiaries to render
audit or non-audit services, the engagement was approved by our audit committee as required by
applicable rules and regulations of the U.S. Securities and Exchange Commission.
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Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
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Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On November 10, 2010, we announced the appointment of PricewaterhouseCoopers Zhong Tian CPAs
Limited Company, or PwC, as our independent registered public accounting firm for the fiscal year
ended December 31, 2010. PwC replaces our previous independent auditors, KPMG. PwC was appointed
by us on August 10, 2010, and the appointment of PwC in replacement of KPMG was approved by our
audit committee and was ratified by our shareholders at our annual general meeting of shareholders
held on October 29, 2010.
We dismissed KPMG on July 9, 2010. During the years ended December 31, 2008 and 2009 and the
subsequent interim period through July 9, 2010, there were no (i) disagreements between KPMG and us
on any matter of accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have
caused KPMG to make reference to the subject matter of the disagreement in their reports on the
financial statements for such years, or (ii) “reportable events” requiring disclosure pursuant to
Item 16F(a)(1)(v) of Form 20-F, except as described in the next paragraph.
The audit reports of KPMG on the consolidated financial statements of China GrenTech
Corporation Limited and subsidiaries as of and for the years ended December 31, 2008 and 2009 did
not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. The audit report of KPMG on the effectiveness
of internal control over financial reporting as of December 31, 2009 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope,
or accounting principles, except that KPMG’s report indicates that China GrenTech Corporation
Limited did not maintain effective internal control over financial reporting as of December 31,
2009 because of the effect of a material weakness on the achievement of the objectives of the
control criteria and contains an explanatory paragraph that states a material weakness related to
insufficient competent accounting personnel in applying U.S. generally accepted accounting
principles in the financial reporting process has been identified and included in management’s
assessment.
During the years ended December 31, 2008 and 2009 and the subsequent interim period through
August 10, 2010, neither our company nor anyone on our behalf has consulted with PwC with respect
to either (a) the application of accounting principles to a specified transaction, either completed
or proposed, or the type of audit opinion that might be rendered on the company’s consolidated
financial statements, and neither a written report nor oral advice was provided to the company that
PwC concluded was an important factor considered by the company in reaching a decision as to any
accounting, auditing or financial reporting issue; or (b) any matter that was either the subject of
a disagreement, as defined in Item 16F (a)(1)(iv) of Form 20-F and the related instructions to Item
16F, or a reportable event, as defined in Item 16F (a)(1)(v) of Form 20-F.
We provided a copy of this disclosure to KPMG and requested that KPMG furnish us with a letter
addressed to the Securities and Exchange Commission stating whether or not it agrees with the
statements made above. A copy of KPMG’s letter dated June 30, 2011 is attached herewith as Exhibit
15.3.
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Item 16G. CORPORATE GOVERNANCE
NASDAQ Listing Rule 5615(a)(3) permits foreign private issuers like our company to follow
“home country practice” in certain corporate governance matters.
NASDAQ Listing Rules 5605(d)(1)(B) and (2)(B) and 5605(e)(1)(B) generally require the
compensation committees and nominating committees of listed companies to be comprised solely of
independent directors as defined in Rule 5605(a)(2). We follow home country practice with respect
to the composition of our compensation committee and corporate governance and nominating committee
which differs from the NASDAQ Listing Rules. See Item 6. “Directors, Senior Management and
Employees — Board of Directors.”
In addition, NASDAQ Listing Rule 5605(b)(1) generally requires that a majority of the board of
directors of listed companies must be comprised of independent directors as defined in Rule
5605(a)(2). There are, however, no specific requirements under Cayman Islands law on the
composition of our board of directors. We follow home country practice with respect to the
composition of our board of directors and have seven directors, three of which, namely Cuiming Shi,
Xiaohu You and Kin Kwong Mak, are independent directors as defined in Rule 5605(a)(2).
Other than the above, we have followed and intend to continue to follow the applicable
corporate governance standards under NASDAQ Listing Rules.
In accordance with NASDAQ Listing Rule 5250(d)(1), we will post this annual report on Form
20-F on our company website www.grentech.com.cn. In addition, we will provide hardcopies of our
annual report free of charge to shareholders and ADS holders upon request.
PART III
Item 17. FINANCIAL STATEMENTS
We have elected to provide the financial statements and related information specified in Item
18 in lieu of Item 17.
Item 18. FINANCIAL STATEMENTS
See Index to Financial Statements for a list of all financial statements filed as part of this
annual report.
Item 19. EXHIBITS
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
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INDEX TO THE FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of China GrenTech Corporation Limited
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements
of operations, shareholders’ equity and cash flows present fairly, in all material respects, the
financial position of China GrenTech Corporation Limited and its subsidiaries at December 31, 2010,
and the results of their operations and their cash flows for the year ended December 31, 2010 in
conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit of
these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers
Zhong Tian CPAs Limited Company
Shenzhen, the PRC June 30, 2011
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of China GrenTech Corporation Limited:
We have audited the accompanying consolidated balance sheet of China GrenTech Corporation Limited
and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements
of operations, shareholders’ equity and cash flows for the years ended December 31, 2008 and 2009.
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China GrenTech Corporation Limited and subsidiaries as
of December 31, 2009, and the results of their operations and their cash flows for the years ended
December 31, 2008 and 2009, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG
Hong Kong, China June 30, 2010
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China GrenTech Corporation Limited and Subsidiaries
Consolidated Balance Sheets
as of December 31, 2009 and 2010
(RMB and USD expressed in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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China GrenTech Corporation Limited and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 2008, 2009 and 2010 (RMB and USD expressed in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
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China GrenTech Corporation Limited and Subsidiaries
Consolidated Statements of Shareholders’ Equity
for the years ended December 31, 2008, 2009 and 2010
(RMB and USD expressed in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
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China GrenTech Corporation Limited and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2009 and 2010
(RMB and USD expressed in thousands)
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