Chairman's Message

(Extracted from Annual Report 2010)

On behalf of the Board of Directors, I am pleased to present the Annual Report and audited financial statements of Asia Silk Holdings Limited and its subsidiaries (the "Group") for the financial year ended 31 December 2010 ("FY2010").

OVERVIEW

Since FY2009, we continue to align our business strategies and as a result, we reduced our losses suffered in FY2010 as compared with FY2009.

External demand for silk and garment products is not expected to recover in the near future. We focus on the production of non-silk based garments for the export mass market and higher value added products targeting the mass markets for export and aligning with the market demand. Consequently, the Group achieved an increase in sales by 4% to RMB86,736,000 in FY2010. Gross margin had also improved to 13% during FY2010.

Moving forward, the Board will continue to strategise the Group's operations to meet the challenges facing the Group. While improving on operational efficiency, the management will closely monitor costs and expenses and working capital requirements so as to remain competitive in the industry. The Group will also explore opportunities for expansion through acquisitions, such as the proposed acquisition of Chaswood Resources Sdn Bhd, as announced on 25 March 2011.

FINANCIAL PERFORMANCE

Revenue

The Group's revenue increased by RMB3,402,000 from RMB83,334,000 in FY2009 to RMB86,736,000 in FY2010. The increase in revenue was due mainly to the increases in sales of garment and spun silk yarn, partially offset by decrease in sales of spun silk fabrics. Sales of garment and spun silk fabrics accounted for 50% and 47% of total revenue for FY2010, respectively, which was comparable to the sales mix of 48% and 52%, respectively, in FY2009.

The increase in garment sales was the Group's continuous marketing efforts in the export markets and to benefit from the government's support on export sales in terms of export tax rebates.

Sales of spun silk fabric and yarn products in FY2010 were comparable to those of FY2009. The demand for spun silk products remained stable but challenging. With the exit of industry players and lesser competition, the Group is able to increase the selling price of spun silk products to maintain the revenue generated.

Despite the increases in raw materials and labour costs, the Group remained competitive in the industry by focusing on market and customer stability and improving asset utilisation rates at the plants. Gross profit increased by RMB3,592,000 from RMB7,819,000 in FY2009 to RMB11,411,000 in FY2010 and gross profit margin improved from 9% in FY2009 to 13% in FY2010 due mainly to reversal of inventories written down in FY2010.

Other Income

Other income decreased by RMB104,000 from RMB3,037,000 in FY2009 to RMB2,933,000 in FY2010 due mainly to decrease in amortisation of deferred government grant pertaining to cocoon production as the Group exited the business in 2009; and decrease in interest income from banks as a result of lower bank and cash balances and term deposits. These were partially offset by an increase in government subsidy on export sales.

Distribution Costs

Distribution costs decreased by RMB530,000 from RMB3,143,000 in FY2009 to RMB2,613,000 in FY2010 due mainly to reallocation of staff from sales to administration division and decline in direct shipping costs as the Group made fewer shipments of larger quantities each time.

Administrative Expenses

Administrative expenses increased by RMB438,000 from RMB8,659,000 in FY2009 to RMB9,097,000 in FY2010. These were due mainly to reclassification of production and sales salaries for divisions that were not operating to administrative expenses and partially offset by biological assets which were fully written off in FY2009 as the Group exited from the cocoon business in 2009 and therefore there were no such write-off in FY2010.

Other Expenses

Other expenses decreased by RMB8,114,000 from RMB16,061,000 in FY2009 to RMB7,947,000 in FY2010. This was due mainly to lower allowance for doubtful receivables and lower impairment loss on property, plant and equipment; offset partially by property, plant and equipment written off during FY2010 and increase in foreign exchange loss. Allowance for doubtful receivables was adjusted according to assessment of the carrying value of the receivables. Property, plant and equipment that were no longer in production and not in use during FY2010 were written off.

Finance Costs

Finance costs decreased by RMB1,425,000 from RMB2,155,000 in FY2009 to RMB730,000 in FY2010. In FY2009, costs associated with a loan from a related party were fully amortised in FY2009 and therefore there was no such amortised cost in FY2010. In addition, the Group incurred lower interest expenses on bank loans incurred as a result of repayment of bank borrowings during FY2010.

FINANCIAL POSITION

Non-Current Assets

Non-current assets of the Group comprised property, plant and equipment and long-term land use rights. As at 31 December 2010, non-current assets were RMB18,024,000, a decrease of RMB5,153,000 from RMB 23,177,000 as at 31 December 2009 which was attributed by depreciation charges, amortisation of long-term land use rights and impairment loss on property, plant and equipment arising from impairment assessment on the valuation of these assets.

Current Assets

Current assets as at 31 December 2010 were RMB60,104,000 and comprised inventories, trade and other receivables, bank-guaranteed transferable notes receivables, amounts due from related parties, pledged term deposits and bank and cash balances. Current assets decreased by RMB19,018,000 from RMB79,122,000 as at 31 December 2009 as a result of decreases in pledged term deposits and bank balances mainly to repay creditors, receipt from transferable notes receivables matured during the year and decrease in trade and other receivables after allowance for doubtful receivables was made. These were offset partially by increases in inventories and amounts due from related parties.

Current Liabilities

Current liabilities as at 31 December 2010 amounted to RMB64,872,000 and comprised trade and other payables, transferable notes payables, amounts due to related parties and interest-bearing bank loans. The decrease in current liabilities of RMB18,181,000 from RMB83,053,000 as at 31 December 2009 was due to faster repayment of trade and other payables and repayments of transferrable notes and bank loans that matured during the year.

Shareholders' Equity

Shareholders' equity of the Group was RMB13,256,000 as at 31 December 2010. This was a decrease of RMB5,990,000 from RMB19,246,000 as at 31 December 2009, due mainly to loss attributable to shareholders for FY2010 of RMB6,043,000.

CASH FLOWS

The Group had cash and cash equivalents of RMB4,254,000 as at 31 December 2010, a decrease of RMB5,708,000 from RMB9,962,000 as at 31 December 2009. The decrease was due to net cash used in operating activities of RMB8,992,000 and net cash used in investing activities of RMB686,000, partially offset by net cash inflow from financing activities of RMB3,970,000.

Net cash used in operating activities was due to payment to trade and other creditors, partially offset by receipts from receivables.

Net cash used in investing activities arose from purchase of plant and equipment.

Net cash inflow from financing activities was mainly contributed by release of term deposits pledged to banks for banking facilities partially offset by repayment of bank loans and interest paid on bank loans.

DIVIDEND

In the face of the current challenges facing the Group, the Board is not recommending any dividend distribution to the shareholders for FY2010.

CORPORATE SOCIAL RESPONSIBILITY

The Group believes that effective corporate responsibility can deliver benefits to its businesses and, in turn, to its Shareholders.

Every employee of the Group is expected to maintain the highest standards of propriety, integrity and conduct in all their business relationships and the Group is held to the same standard in its compliance with all applicable legal and regulatory requirements.

ACKNOWLEDGEMENTS AND APPRECIATION

Despite the challenges, the Group's results are made possible through the hard work and efforts put in by everyone.

As the Group embarks on another challenging year, the Board would like to thank our investors, customers, business associates and the regulatory authorities for their continued support.

On behalf of the Board, I would like to take this opportunity to thank Mr Ding Zhigang, Mr Zhou Huajie, Mr Cheung Hok Fung, Alexander and Mr Ng Poh Khoon for their past contribution to the Group.

I would also like to express my sincere appreciation and gratitude to my fellow Directors for their guidance, assistance and support going forward.

Lastly, I wish to thank our management and staff for their continued dedication and commitment to the Group.

Edwin Sugiarto
Non-Independent Non-Executive Chairman