China XD Plastics Co Ltd - Quarter Report: 2015 September (Form 10-Q)

2

 

3

See accompanying notes to unaudited condensed consolidated financial statements.

4

5

The Company sells its products primarily through approved distributors in the People's Republic of China (the "PRC"). To a lesser extent, the Company also sells its products to an overseas customer in the Republic of Korea (the "ROK"). The Company's sales are highly concentrated.  Sales to distributors and end customer, which individually exceeded 10% of the Company's revenues for the three-month and nine-month periods ended September 30, 2015 and 2014, are as follows:

		Three-Month Period Ended September 30,
		2015								2014
		US$				%				US$				%
Distributor A			47,064,784				20	%			47,591,686				15	%
Distributor B			35,836,733				15	%			35,451,116				11	%
Distributor C			32,860,363				14	%			35,788,387				11	%
Distributor D			30,305,169				13	%			33,419,979				11	%
Distributor E			26,810,505				11	%			28,144,454				9	%
Direct Customer F, located in the ROK			7,294,500				3	%			59,332,290				19	%
Total			180,172,054				76	%			239,727,912				76	%

 

The Company expects revenues from these distributors and the customer to continue to represent a substantial portion of its revenue in the future. Any factor adversely affecting the automobile industry in the PRC, electronic application industry in the ROK or the business operations of these customers will have a material effect on the Company's business, financial position and results of operations.

 

Purchase concentration of raw materials and equipment

 

The principal raw materials used for the Company's production of modified plastics products are plastic resins, such as polypropylene, ABS and nylon. Company purchased its raw materials through seven and eight distributors, which individually exceeded 10% of the Company's total raw material purchases, accounted for approximately 88.3% and 68.1% of the Company's total raw materials purchases for the three-month periods ended September 30, 2015 and 2014, respectively, and 86.7% and 76.1% of the Company's total raw materials purchases for the nine-month periods ended September 30, 2015 and 2014, respectively.  Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.

 

The Company purchased equipment from two major equipment distributors, which accounted for 96.0% and 88.7% of the Company's total equipment purchases for the three-month periods ended September 30, 2015 and 2014, respectively, and accounted for 97.2% and 99.8% of the Company's total equipment purchases for the nine-month periods ended September 30, 2015 and 2014.  Management believes that other suppliers could provide similar equipment on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations. The majority owner of one of the major equipment distributors, that supplied approximately nil and 67.8% of the Company's total equipment purchases for the three-month periods ended September 30, 2015 and 30.8% and 67.8% of the Company's total equipment purchases for the nine-month periods ended September 30, 2015 and 2014, respectively, is also the majority owner of sales Distributor D presented above.

 

 

---

 

The bank deposits with financial institutions in the PRC are insured by the government authority up to RMB500,000. The bank deposits with financial institutions in the HK SAR are insured by the government authority up to HK$500,000. The bank deposits with financial institutions in the Macau SAR are insured by the government authority up to MOP$500,000. The bank deposits with financial institutions in UAE are not insured by any government authority. To limit exposure to credit risk, the Company primarily places bank deposits with large financial institutions in the PRC, HK SAR, Macau SAR and Dubai, UAE with acceptable credit rating.

Cash deposits in bank that are restricted as to withdrawal or usage for up to 12 months are reported as restricted cash in the condensed consolidated balance sheets and excluded from cash in the condensed consolidated statements of cash flows. Cash deposits that are restricted for period beyond 12 months from the balance sheet date are included in other non-current assets in the condensed consolidated balance sheets.

Short-term bank deposits that are pledged as collateral for bills payable relating to purchases of raw materials are reported as restricted cash and amounted to US$11,473,299 and US$11,868,855 as of September 30, 2015 and December 31, 2014, respectively. Upon maturity and repayment of the bills payable, which is generally within 6 months, the cash becomes available for use by the Company. Short-term bank deposits that are pledged as collateral for letter of credit relating to purchases of raw materials are reported as restricted cash and amounted to nil and US$676,917 as of September 30, 2015 and December 31, 2014, respectively. The cash will be available for use by the Company 90 days from the issuance of the letter of credit. The cash flows from the pledged bank deposits, which relate to purchases of raw materials, are reported within cash flows from operating activities in the condensed consolidated statements of cash flows.

 

Short-term bank deposits that are pledged as collateral for short-term bank borrowings are reported as restricted cash and amounted to US$16,998,759 and nil as of September 30, 2015 and December 31, 2014, respectively. Short-term bank deposits that are pledged as collateral for long-term bank borrowings are reported as restricted cash and amounted to US$15,701,792 and nil as of September 30, 2015 and December 31, 2014, respectively. Long-term bank deposits that are pledged as collateral for issuance of letter of guarantee are reported as other non-current assets and amounted to US$17,271,971 and US$17,728,782 as of September 30, 2015 and December 31, 2014, respectively. The cash flows from such bank deposits are reported within cash flows from financing activities in the condensed consolidated statements of cash flows.

Long term bank deposits in the amount of US$7,852,575 were restricted relating to the government grant as of September 30, 2015 (note 12), and included in other non-current assets.  The cash flows from the pledged bank deposits, which relate to government grant for construction of assets, are reported within cash flows from investing activities in the condensed consolidated statements of cash flows.

Management concludes that no additional provision is necessary for overdue balances, taking into consideration the historical collection experience, customer specific facts and current economic conditions.

There was a reversal of provision of accounts receivable in the amount of US$68,405 for the three-month and nine-month periods ended September 30, 2015 while no accrual of additional provision or write-off of accounts receivable for the three-month and nine-month periods ended September 30, 2014.

8

Inventories consist of the following:

 

 

There were no write down of inventories for the three-month and nine-month periods ended September 30, 2015 and 2014.

Note 4 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

		September 30, 2015				December 31, 2014
		US$				US$
Receivables due from a customer in the ROK (i)			69,368,889				-
Advances to suppliers			306,624				168,614
Value added taxes receivables			2,825,971				6,407,547
Interest receivable			3,524,070				3,351,672
Others (ii)			2,484,723				1,325,995
Total prepaid expenses and other current assets			78,510,277				11,253,828

(i)

As of September 30, 2015, receivables due from a customer in the ROK represents the amount the Company paid to purchase raw materials on behalf of the customer in the ROK.

Property, plant and equipment consist of the following:

		September 30, 2015				December 31, 2014
		US$				US$
Machinery, equipment and furniture			258,626,545				209,509,700
Motor vehicles			1,967,484				1,854,985
Workshops and buildings			77,532,030				79,009,346
Construction in progress			60,923,832				93,970,716
Total property, plant and equipment			399,049,891				384,344,747
Less accumulated depreciation			(83,992,406	)			(66,020,147	)
Property, plant and equipment, net			315,057,485				318,324,600

9

 

 

 

(i)

In December 2013, the Company entered into an equipment purchase contract with Harbin Jiamu Import & Export Trading Co., Ltd ("Jiamu Trading") for a total consideration of RMB1,629.3 million (equivalent to US$255.8 million) to purchase 70 production lines and RMB89.7 million (equivalent to US$14.1 million) to purchase testing equipment. In August 2015, the Company signed a supplemental contract with Harbin Jiamu Science and Technology Co., Ltd. (together with Jiamu Trading as "Jiamu") to purchase equipment in the amount of RMB16.3 million (equivalent to US$2.6 million). As of September 30, 2015 and December 31, 2014, the Company has paid RMB1,277.4 million (equivalent to US$200.6 million) and RMB1,130.9 million (equivalent to US$182.3 million) for production lines and testing equipment, respectively.

(ii)

On January 5, 2015, AL Composites Materials FZE ("AL Composites") entered into an equipment purchase contract with Peaceful Treasure Limited ("Peaceful") for a total consideration of US$271.2 million to purchase certain production and testing equipment. Pursuant to the contract with Peaceful, the Company has paid US$85.7 million as prepayments as of September 30, 2015.

10

Short-term financial instruments, including cash and cash equivalents, restricted cash, time deposits, accounts receivable, receivables due from a customer in the ROK, short-term bank loans, bills payable, accounts payable, amounts due to related parties, income taxes payable and accrued expenses and other current liabilities - carrying amounts approximate fair values because of the short maturity of these instruments.

Long-term bank loans - fair value is based on the amount of future cash flows associated with each loan discounted at the Company's current borrowing rate for similar debt instruments of comparable terms. The carrying value of the long-term bank loans approximate their fair values as the long-term bank loans carry interest rates which approximate rates currently offered by the Company's banks for similar debt instruments of comparable maturities.

Notes payable - fair values of the Company's notes payable are estimated based on quoted market prices which are categorized as Level 1 measurement in the fair value hierarchy. As of September 30, 2015, the carrying amount and estimated fair value of the notes payable were US$148,820,175 and US$125,157,000, respectively.

Derivative assets on foreign currency forward contract fair value is determined using a discount cash flow model, which discounts the difference between the forward contract exchange rate from the quoted curve and the contract rate multiplied by the notional amounts. It considers the following significant inputs: risk-free rate and foreign exchange rate.

(1)

Current

 

 

As of September 30, 2015 and December 31, 2014, the Company's short-term bank loans bear a weighted average interest rate of 4.0% and 5.7% per annum, respectively. All short-term bank loans mature at various times within one year and contain no renewal terms.

 

(i)

In January 2015, the Company obtained a one-year secured loan of US$12.0 million from HSBC Middle East at an annual interest rate of three-month LIBOR (0.3266% as of September 30, 2015) plus 1.8%. These loans were secured by restricted cash of RMB16.5 million (equivalent to US$2.6 million) by the HSBC Bank in Harbin, China.

 

In February 2015, the Company obtained a one-year secured loan of US$16.6 million from HSBC Middle East at an annual interest rate of three-month LIBOR (0.3266% as of September 30, 2015) plus 1.8%. These loans were secured by restricted cash of RMB22.8 million (equivalent to US$3.6 million) by the HSBC Bank in Harbin, China.

 

In June 2015, the Company obtained a one-year secured loan of US$7.0 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (0.8549% as of September 30, 2015) plus 0.8%. These loans were secured by restricted cash of RMB45.9 million (equivalent to US$7.2 million) by the Bank of China in Harbin, China.

 

In July 2015, the Company obtained a one-year secured loan of US$3.5 million from Bank of China Luxemburg Branch at an annual interest rate of one-year LIBOR (0.8549% as of September 30, 2015) plus 0.75%. These loans were secured by restricted cash of RMB23.0 million (equivalent to US$3.6 million) by the Bank of China in Harbin, China.

11

(2)	Non-current

 

 

During March and April 2014, the Company obtained two 15-month unsecured loans of RMB50 million at an interest rate of 6.15% per annum from the Bank of Heilongjiang. The Company repaid these loans in advance by the end of March 2015.

On December 11, 2014, the Company obtained a two-year unsecured loan of RMB199 million (equivalent to US$31.2 million) from Bank of Communication at an annual interest rate of 6.60%.

On December 16, 2014, the Company obtained a one and a half-year unsecured loan of US$76.4 million from Bank of China Macau Branch at an interest of three-month LIBOR (0.3266% as of September 30, 2015) plus 1.7%.  The interest rate is reset every three months.

On June 12, 2014, the Company obtained a three-year secured loan of US$70 million from Bank of China Paris Branch at interest rate of 3-month LIBOR (0.3266% as of September 30, 2015). The loan is secured by restricted cash of RMB 110 million (equivalent to US$17.3 million). The Company has repaid US$2 million on June 9, 2015.

On January 23, 2015, the Company obtained a two-year unsecured loan of RMB100 million (equivalent to US$15.7million) at an annual interest rate of 6.0% from Agriculture Bank of China.

On January 27, 2015, the Company obtained a one and half year secured loan of US$15.2 million from Bank of China Macau Branch, at an interest rate of three-month LIBOR (0.3266% as of September 30, 2015) plus 1.5%. The interest rate is reset every three months. The loan is secured by restricted cash of RMB100 million (equivalent to US$15.7 million).

On April 22, 2015, the Company obtained a two-year unsecured loan of RMB40 million (equivalent to US$6.3 million) at an annual interest rate of 5.75% from Agriculture Bank of China.

On July 30, 2015, the Company obtained a thirteen-month unsecured loan of RMB50 million (equivalent to US$7.9 million) at an annual interest rate of 5.25% from Harbin Longjiang Bank.

As of September 30, 2015, the Company had total lines of credit of RMB3,906.9 million (equivalent to US$613.5 million). As of September 30, 2015, the Company has unused lines of credit of RMB1,222.0 million (equivalent to US$192.0 million) with remaining terms less than 12 months and RMB267.0 million (equivalent to US$41.9 million) with remaining terms beyond 12 months.

Certain lines of credit contain financial covenants such as total stockholders' equity, debt asset ratio, current ratio, contingent liability ratio and net profit. As of September 30, 2015, the Company has met these financial covenants.

12

Note 9 – Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following:

		September 30, 2015				December 31, 2014
		US$				US$
Payables for purchase of property, plant and equipment			9,283,669				7,234,607
Accrued freight expenses			2,381,239				1,688,431
Accrued interest expenses			5,840,701				9,031,741
Deferred income			3,268,152				-
Others			6,399,095				6,529,804
Total accrued expenses and other current liabilities			27,172,856				24,484,583

Others mainly represent accrued payroll and employee benefits, non-income taxes payables and other accrued miscellaneous operating expenses.

 

Note 10 – Related party transactions

The Company entered into related party transactions with Harbin Xinda High-Tech Co., Ltd. ("Xinda High-Tech"), an entity controlled by the wife of Mr. Han, the chief executive officer and controlling stockholder of the Company, and Mr. Han's son.  The significant related party transactions are summarized as follows:

 

 

The related party balances are summarized as follows:

 

 

 

The Company rents the following plant and office buildings in Harbin, Heilongjiang province from Xinda High-Tech:

 

 

The Company rents the following facilities in Harbin, Heilongjiang province from Mr. Han's son:

 

 

 

---

 

Note 11– Income taxes

 

 

Note 12 – Deferred Income

Note 13 – Stockholders' equity

The changes of each caption of stockholders' equity for the nine-month period ended September 30, 2015 are as follows:

 

 

 

 

---

 

Note 14 – Stock based compensation

A summary of the nonvested shares activity for the nine-month ended September 30, 2015 is as follows: 

 

Note 15 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and nine-month periods ended September 30, 2015 and 2014 because their effects are anti-dilutive:

 

 

 

---

 

Note 16 - Commitments and contingencies

(1)    Lease commitments

 

Future minimum lease payments under non-cancellable operating leases agreements as of September 30, 2015 were as follows. 

 

Rental expenses incurred for operating leases of plant and office spaces were US$439,793 and US$479,269 for the three-month periods ended September 30, 2015 and 2014, respectively, and US$1,168,442 and US$1,099,977 for the nine-month periods ended September 30, 2015 and 2014, respectively. There are no step rent provisions, escalation clauses, capital improvement funding requirements, other lease concessions or contingent rent in the lease agreements. The Company has no legal or contractual asset retirement obligations at the end of leases. The Company's leases do not contain any contingent rent payments terms.

(2)   Sichuan plant construction and equipment

On March 8, 2013, Xinda Holding (HK) Company Limited ("Xinda Holding (HK)") entered into an investment agreement with Shunqing Government, pursuant to which Xinda Holding (HK) will invest RMB1.8 billion (equivalent to US$282.6 million) in property, plant and equipment and approximately RMB0.6 billion (equivalent to US$94.2 million) in working capital, for the construction of Sichuan plant.  As of September 30, 2015, the Company has a remaining commitment of RMB240.2 million (equivalent to US$37.7 million) mainly for facility construction, and RMB460.1 million (equivalent to US$72.2 million) for the acquisition of equipment.
 

On January 5, 2015, AL Composites entered into an equipment purchase contract with Peaceful for a total consideration of US$271.2 million to purchase certain production and testing equipment.  As of September 30, 2015, the Company has a remaining commitment of US$185.5 million for the remaining equipment acquisition. On January 25, 2015, AL Composites entered into a facility purchase contract with Zettachem International Limited for a total consideration of AED12.5 million (equivalent to US$3.4 million). As of September 30, 2015, the Company has a remaining commitment of US$0.3 million. On April 28, 2015, AL Composites entered into a warehouse construction contract with Falcon Red Eye Contracting Co. L.L.C. for a total consideration of AED6.7 million (equivalent to US$1.8 million). As of September 30, 2015, the Company has a remaining commitment of US$1.7 million.

 

(4)    Contingencies

---

  

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China, and to a lesser extent, in Dubai, UAE. We develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 350 certifications from manufacturers in the automobile industry as of September 30, 2015. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team consists of 388 professionals and 14 consultants, including one consultant who is a member of Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 243 patents, ten of which we have obtained the patent rights and the remaining 233 of which we have applications pending in China as of September 30, 2015.

 

Our products include eleven categories: Modified Polypropylene (PP), Modified Acrylonitrile Butadiene Styrene (ABS), Modified Polyamide 66 (PA66), Modified Polyamide 6 (PA6), Plastic Alloy, Modified Polyoxymethylenes (POM), Modified Polyphenylene Oxide (PPO), Modified Polyphenylene Sulfide (PPS), Modified Polyimide (PI), Modified Polylactic acid (PLA) and Poly Ether Ether Ketone (PEEK). 

The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 27 automobile brands and 80 automobile models manufactured in China, including Audi, Mercedes Benz, BMW, Buick, Chevrolet, VW Passat, Golf and Jetta, Mazda, and Toyota. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing bases in Harbin, Heilongjiang in the PRC, with the construction of Sichuan plant underway. In addition, we completed and run the trial production in the plant in Dubai, UAE with additional 2,500 metric tons ("Phase 1") targeting high-end products for the overseas markets.  As of September 30, 2015, in domestic market, we had approximately 390,000 metric tons of production capacity across 84 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwanese conveyer systems. In December 2013, we broke ground on the construction of our fourth production base in Nanchong City, Sichuan Province, with additional 300,000 metric tons of annual production capacity, expecting to bring total installed production capacity to 690,000 metric tons with additional 70 new production lines at the completion of the construction of our fourth production base. Sichuan Xinda Group has supplied to its customers since 2013, backed by production capacity in our Harbin production base. To streamline the management in Sichuan, the Company completed a restructuring in July 2015 by merging its subsidiary in Nanchong City, the entire registered capital (US$99.99 million) of which was owned by Xinda (Heilongjiang) Investment Co., Ltd, into Sichuan Xinda Group.  The Company expects Sichuan facility to be completed around the end of 2015 and early 2016. In order to meet the increasing demand from our customer in the ROK and to develop potential overseas markets, on January 25, 2015, AL Composites Materials FZE obtained a leased property of approximately 10,000 square meters from Jebel Ali Free Zone Authority ("JAFZA") in Dubai, UAE with constructed building comprising a warehouse, office and service block with lease term granted 15 years. The Company is planning to complete installing 75 production lines with additional 16,200 metric tons ("Phase 2") of annual production capacity in that property by later half of 2016, bringing total production capacity in Dubai to 18,700 metric tons.

 

 

---

 

Highlights for the three months ended September 30, 2015 include:

● Revenues were $239.1 million, a decrease of 24.3% from $315.7 million in the third quarter of 2014

● Gross profit was $29.3 million, a decrease of 55.2% from $65.4 million in the third quarter of 2014

● Gross profit margin was 12.3%, compared to 20.7% in the third quarter of 2014

● Net income was $6.0 million, compared to $43.2 million in the third quarter of 2014

● Total volume shipped was 81,663 metric tons, down 14.2% from 95,204 metric tons in the third quarter of 2014

Results of Operations

 

The following table sets forth, for the periods indicated, statements of income data in millions of USD:

 

Three months ended September 30, 2015 compared to three months ended September 30, 2014

Revenues

 

Revenues were US$239.1 million in the third quarter ended September 30, 2015, an decrease of US$76.6 million, or 24.3%, compared to US$315.7 million in the same period of last year, due to approximately 14.2% decrease in sales volume and 9.8% decrease in the average RMB selling price of our products.

Vehicle sales in China grew by 0.3% in the first nine months of 2015, the slowest rate in approximately 24 years, amid which the State-backed auto association indicated possible decline of auto sales in 2015 amid the economy slowdown in the world's largest car market. The Chinese government's anti-monopoly probe against luxury automobile manufacturers and dealers by the state backlashed against automakers. Both contributed to the lower-than-expected growth rate. Further, both automakers and parts manufacturers in China experienced pricing pressure from 2014 to the present. The unusual volatility of the Chinese stock market since June 2015 also seemed to have certain negative impact on consumer sentiments. As a result, plastic fabricators have been seeking newer products utilizing lower cost raw materials and more cost-efficient formulations. The pricing of the majority of our existing products remained stable while our newly launched products have relatively lower average selling price in response to customer demand in China. As previously disclosed, the Company has started marketing its higher-end products to customers overseas since early 2014 to better allocate its limited production capacity, diversify its business and reduce its concentration in the Chinese market. In addition, there was a negative impact from the ceasing supply for 60 days to our ROK customer as previously announced in its press release.

 

(i) Domestic market

For the three months ended September 30, 2015, revenue from domestic market decreased by US$24.6 million as a result of  a decrease of 10.0% in sales volume and an increase of 2.7% in the average RMB selling price of our products, as compared with those of last year.  However more sales were achieved in Southwest China because of our marketing efforts to develop new customers. As for the selling price, the increase was mainly due to the shift of product mix to higher end product categories with higher selling price.

(ii) Overseas market

The following table summarizes the breakdown of revenues by categories in millions of US$:

 

 

The following table summarizes the breakdown of metric tons (MT) by product mix:

(in MTs, except percentage)		Sales Volume For the Three–Month Period Ended September 30,
		2015								2014								Change in				Change in
		MT				%				MT				%				MT				%
Modified Polyamide 66 (PA66)			13,467				16.5	%			7,636				8.0	%			5,831				76.4	%
Modified Polyamide 6 (PA6)			14,629				17.9	%			13,446				14.1	%			1,183				8.8	%
Plastic Alloy			26,176				32.1	%			34,015				35.7	%			(7,839	)			(23.0	)%
Modified Polypropylene (PP)			21,994				26.9	%			33,625				35.3	%			(11,631	)			(34.6	)%
Modified Acrylonitrile butadiene styrene (ABS)			4,264				5.2	%			3,383				3.6	%			881				26.0	%
Polyoxymethylenes (POM)			329				0.4	%			240				0.3	%			89				37.1	%
Polyphenylene Oxide (PPO)			490				0.6	%			720				0.8	%			(230	)			(31.9	)%
Raw Materials			314				0.4	%			2,139				2.2	%			(1,825	)			(85.3	)%
Total Sales Volume			81,663				100	%			95,204				100	%			(13,541	)			(14.2	)%

The Company continued to shift production mix from traditional Modified Polypropylene (PP) to higher-end products such as PA66, PA6, primarily due to (i) the greater growth potential of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand as a result of promotion by the Chinese government for clean energy vehicles and (iii) better quality from and consumer recognition of higher-end cars made by automotive manufacturers from Chinese and Germany joint ventures, and U.S. and Japanese joint ventures, which manufacturers tend to use more and higher-end modified plastics in quantity per vehicle in China. 

 

---

Gross Profit and Gross Profit Margin

General and Administrative Expenses

	Three–Month Period Ended September 30,								Change
(in millions, except percentage)	2015				2014				Amount					%
General and Administrative Expenses		$	5.8			$	5.4			$	0.4				7.4	%
as a percentage of revenues			2.4	%			1.9	%							0.5	%

 

General and administrative (G&A) expenses were US$5.8 million in the quarter ended September 30, 2015 compared to US$5.4 million in the same period in 2014, representing an increase of 7.4%, or US$0.4 million. This increase is primarily due to the increase of (i) US$0.5 million of salary and welfare due to the increase in the number of management staff; (ii) US$0.4 million of transportation expenses in connection with our business expansion; (iii) US$0.5 million of other miscellaneous expenses; partially offset by the decrease of (iv) US$1.0 million of taxation expense. 

 

Research and Development Expenses

 

 

Research and development expenses were US$5.8 million during the quarter ended September 30, 2015 compared with US$5.1 million during the same period in 2014, an increase of US$0.7 million, or 13.7%, reflecting the Company's efforts to adjust research and development activities on new products primarily for industrialized applications from automotive to other advanced fields such as ships, airplanes, high-speed rail, 3D printing materials, biodegradable plastics, and medical devices, etc.

 

As of September 30, 2015, the number of ongoing research and development projects was 198. We expect to complete and commence to realize economic benefits on approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period.

 

 

---

 

Operating Income

 

Total operating income was US$17.3 million in the third quarter ended September 30, 2015 compared to $54.7 million in the same period of 2014, representing a decrease of 68.4% or US$37.4 million. This decrease is primarily due to lowered gross profit, higher research and developed expenses and general and administrative expenses.

Interest Income (Expenses)

 

Net interest expense was $8.3 million for the three-month period ended September 30, 2015, compared to net interest expense of $8.8 million in the same period of 2014, primarily due to (i) the decrease in the average loan interest rate to 5.2% for the three months ended September 30, 2015 compared to 5.5% for the three months ended September 30, 2014, and (ii) the decrease of average balance of short-term and long-term loans in the amount of $368.0 million for the three months ended September 30, 2015 compared to $431.0 million of the prior year.  

Income Taxes