China Art Financial : Interim Report 2020

Interim Report

2020

CORPORATE INFORMATION

BOARD OF DIRECTORS

Executive Directors

Mr. Fan Zhijun (Chairman and Chief Executive Officer) Mr. Li Cheng*

Independent Non-executive Directors

Mr. Leung Shu Sun Sunny

Mr. Liu Jian

Mr. Chu Xiaoliang**

Ms. Yin Xuhong*

COMPANY SECRETARY

Mr. Wong Hong Tak Hagan

AUTHORISED REPRESENTATIVES

Mr. Fan Zhijun

Mr. Wong Hong Tak Hagan

REGISTERED OFFICE

Cricket Square

Hutchins Drive

P.O. Box 2681

Grand Cayman KY1-1111

Cayman Islands

PRINCIPAL PLACE OF BUSINESS IN HONG KONG

Room A, 16/F,

Yue On Commercial Building,

385-387 Lockhart Road, Wan Chai,

Hong Kong

PRINCIPAL PLACE OF BUSINESS AND HEAD OFFICE IN THE PRC

Northern side of Jiefang East Road

Yicheng Street

Yixing City

Jiangsu Province

China

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

Codan Trust Company (Cayman) Limited

Cricket Square, Hutchins Drive

P. O. Box 2681

Grand Cayman, KY1-1111

Cayman Islands

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited

Shops 1712-1716, 17th Floor, Hopewell Center

183 Queen's Road East

Wanchai

Hong Kong

PRINCIPAL BANK IN HONG KONG

Bank of Communications (Hong Kong) Limited CMB Wing Lung Bank Ltd.

PRINCIPAL BANK IN CHINA

Jiangsu Yixing Rural Commercial Bank

AUDITORS

Ascenda Cachet CPA Limited

LEGAL ADVISERS AS TO HONG KONG

Deacons

Chiu & Partners

COMPANY'S WEBSITE

www.cnartfin.com.hk

STOCK CODE

The shares of the Company are listed

on the Main Board of The Stock Exchange of Hong Kong Limited

Stock Code 1572

• appointed on 22 July 2020
• resigned on 22 July 2020

China Art Financial Holdings Limited / Interim Report 2020

01

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

During the six months ended 30 June 2020 (the "Period Under Review"), the international and domestic markets experienced extreme challenging situation. Governments over the world had been implementing measurements to fight with the coronavirus disease 2019 (the "COVID-19") pandemic, restricting the mobility and enhancing the social distance of the public. Business activities have been inevitably affected. The Company and its subsidiaries (together, the "Group") adjusted the marketing strategy in response to the highly unstable environment.

Art and Asset Auction Business

Due to the COVID-19 pandemic, art museums, galleries and other art institutions closed for a long period of time, the public is restricted to maintain prolonged social distance. Business travels and meetings have been mostly suspended. We experienced difficulty in the solicitating artwork and meeting with the collectors as such activities will expose our staff in the medical risk. After taking into account the risks and benefits associated with auctions related activities, we decided to cancel all the auctions to protect our staff and business partners and fight with the pandemic.

During the Period Under Review, there was no revenue from the art auction segment of the Company, representing a decrease of 100% from RMB48.9 million for the same period in 2019. Profits of art auction segment was RMB4.3 million, representing a decrease of approximately 91% as compared with that for the same period last year. The significant drop was mainly due to the cancellation of all auctions during the Period Under Review.

Art and Asset Pawn Loan Business

During the Period Under Review, revenue from the pawn loan segment was approximately RMB24.7 million, representing a decrease of approximately 52% from approximately RMB51.4 million for the same period last year. The decrease is the result of the volume of art and asset pawn loans significantly reduced as the management adopted a prudent and conservative approach in granting loans amid the COVID-19 pandemic and adverse global financial market and reduced monthly composite administrative fee charged for pawn loan. Profits of pawn loan segment was RMB24.4 million, representing a decrease of approximately 51% from approximately RMB50.3 million for the same period last year.

The Group implemented a risk management system which we believe to be effective in reducing various risks involved in our art and asset pawn business. The Group established a multi-level internal approval system and an effective risk management system, and had a professional internal and external authentication team. The Group also hired third party authoritative authentication institutions as company's independent advisor. The Group's risk management achieved remarkable results, of which the art and asset pawn loan business did not experience any default in the first half of 2020.

Art and Asset Sales Business

During the Period Under Review, the Group launched a new line of service, namely art and asset sales business. Due to the outbreak of COVID-19 and the adverse market conditions, some of the collectors have not been able to sell their artworks through art auctions. The Group engaged in the business of solicitation and promotion of artwork for sales. The business is expected to generate additional trading and agency incomes to the Group.

Revenue from the art and asset sales segment of the Company was approximately RMB1.3 million. Profits of art and asset sales segment was RMB1.0 million.

02	China Art Financial Holdings Limited / Interim Report 2020

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

Revenue

Our revenue decreased by approximately 74% to approximately RMB25.9 million for the six months ended 30 June 2020, primarily due to (i) the cancellation of all art auctions in the first half of 2020, (ii) the reduced average loan balance during the first half of 2020 and (iii) the reduced monthly composite administrative fee charged for pawn loan.

Other income

Our other income increased by 233% to approximately RMB4.4 million for the six months ended 30 June 2020, primarily due to the interest income for artwork auction financing.

Other gains and losses

Our other gains and losses amounted to approximately RMB2.4 million for the six months ended 30 June 2020, primarily due to the exchange loss arisen from the depreciation of RMB.

Operating expenses

Our operating expenses decreased by approximately 36%, to approximately RMB1.3 million for the six months ended 30 June 2020, primarily due to the decrease in advertising expenses as a result of reduced promotion activities in the PRC for promotion of auction.

Net impairment losses reversed

For the six months ended 30 June 2020, the net impairment losses reversed was approximately RMB1.9 million, decreased by approximately RMB1.1 million.

Administrative expenses

Our administrative expenses decreased by approximately 60% to approximately RMB4.6 million for the six months ended 30 June 2020, primarily due to the decrease in staff cost, operating and administrative expenses as a result of the reduced operations of the Group.

Reportable segment profit

As a result of the foregoing, reportable segment profit decreased by approximately RMB71.7 million from approximately RMB101.4 million for the six months ended 30 June 2019 to approximately RMB29.7 million for the six months ended 30 June 2020.

Profit before tax

As a result of the foregoing, our profit before tax decreased by approximately 74% to approximately RMB23.9 million for the six months ended 30 June 2020, mainly due to the significant decrease in revenue.

Income tax expense

Our income tax expenses decreased by approximately 72% to approximately RMB7.0 million for the six months ended 30 June 2020, primarily due to the decrease in our Group's taxable income.

Profit for the period

As a result of the foregoing, profit for the period decreased by approximately 75% to approximately RMB16.9 million for the six months ended 30 June 2020.

China Art Financial Holdings Limited / Interim Report 2020

03

MANAGEMENT DISCUSSION AND ANALYSIS

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

Net Cash Flow

The Group maintains a strong and healthy financial position. The Group's principal sources of funds to finance the working capital, capital expenditure and other capital requirements were internally generated by cash flows.

The following table summarises the consolidated statement of cash flows for the six months ended 30 June 2020 and 2019:

	2020	2019
	RMB'000	RMB'000
Net cash from operating activities	166,674	23,940
Net cash from investing activities	2,140	1,306
Net cash from financing activities	2,340	86,007

As of 30 June 2020, the Group's total bank balances and cash increased by 29% to approximately RMB759.3 million from approximately RMB588.1 million as of 31 December 2019 mainly due to the reduction in loan receivables. As of 30 June 2020 and 31 December 2019, the Group did not have any bank borrowings and no significant assets were charged.

During the Period Under Review, the Group did not engage in any derivative activities or use any financial instruments to hedge its balance sheet exposures.

The Group principally focused on the operation in the PRC. Except for the certain amount due to immediate holding company denominated in foreign currencies, the Group was not subject to any other material risk directly relating to the foreign exchange fluctuation. For the six months ended 30 June 2020, despite the exchange rates of RMB fluctuated against USD and HKD, the Directors expected any fluctuation of the RMB exchange rate would not materially and adversely affect the operations of the Group. The management will continue to monitor foreign currency exchange exposure and will take prudent measures to minimize the currency translation risk.

Gearing Ratio

Since our Group did not have any interest-bearing borrowings, gearing ratio was not applicable.

Contingent Liabilities

As of the date of this report, the Group did not have any material contingent liabilities nor any other off-balance sheet commitments and arrangements.

Capital Expenditure

Our capital expenditures primarily comprised expenditures on property and equipment, which amounted to RMB13,000 and nil, for the six months ended 30 June 2020 and 2019, respectively.

Capital Commitment

As at 30 June 2020, the Group did not have material capital commitments.

Subsequent Event

No significant event took place after 30 June 2020.

04	China Art Financial Holdings Limited / Interim Report 2020

MANAGEMENT DISCUSSION AND ANALYSIS

Human Resources and Training

As of 30 June 2020, the Group had a total of 27 employees (as at 31 December 2019: 32 employees). The Group's employee remuneration policy is determined on the basis of their performance, qualifications, experience and prevailing market practice. Remuneration packages comprise salary, medical insurance, mandatory provident fund and year end discretionary bonus.

FOREIGN EXCHANGE RISKS

As most of the Group's monetary assets and liabilities are denominated in Renminbi and the Group conducts its business transactions principally in Renminbi and Hong Kong dollars, the exchange rate risk of the Group is not significant. The Group did not enter into any foreign exchange hedging instruments during the six months ended 30 June 2020.

USE OF NET PROCEEDS

On 8 November 2016 (the "Listing Date"), the Company issued 400,000,000 new shares of nominal value of HK$0.01 each in connection with the listing of its shares on the Stock Exchange (the "IPO"). The net proceeds after deducting the underwriting commission and issuing expenses arising from the IPO amounted to HK$237.7 million (equivalent to RMB212.6 million).

Change of use of proceeds

The Group provides art finance services under two business segments, namely (i) art and asset pawn business, and (ii) art and asset auction business. The Group has established good and stable relationship with artwork artists, agents, merchants, collectors and art galleries (collectively, the "Artwork Sellers") which enables the Group to source high-value artworks. The Group also has a professional authentication and appraisal team (the "Appraisal Team") to check the authenticity and assess the value of the artworks.

Due to the outbreak of COVID-19 and the adverse market conditions, some of the Artwork Sellers have not been able to sell their artworks and are willing to sell them at a significant discount. Leveraging on the Group's relationships with the Artwork Sellers and the expertise of the Appraisal Team, the Group believes that it will be able to identify suitable artworks for trading for the Group. The Group intends to sell the artworks acquired at its future auctions and/or private sales and expects that it will be able to generate profit for the Group through (i) gain on the difference between their acquisition price and sale price; and (ii) auction commissions when selling the artworks through its future auctions.

The Company noted that the outcomes of investment made in strengthening of online platform is below expectation and the high net worth buyers prefer viewing and inspecting the artworks in person to viewing the photos of the artworks online. The Board therefore considers that further investment in strengthening online auction platform and developing online loan financing platform may not be able to make a breakthrough in the Group's business and generate satisfactory financial results and return for the Group.

Having considered the above, the Board is of the view that the unutilised net proceeds originally allocated for strengthening online auction platform and developing online loan financing platform can be better utilised for generating profit for the Group by reallocating to trading of artworks.

On 29 July 2020 (the "Date of Reallocation"), the Board has resolved to reallocate the unutilised net proceeds, which were originally allocated for strengthening online auction platform and developing online loan financing platform, for trading of artworks.

China Art Financial Holdings Limited / Interim Report 2020

05

MANAGEMENT DISCUSSION AND ANALYSIS

The unutilised net proceeds as at 30 June 2020 and revised allocation of the net proceeds from the IPO on the Date of Reallocation are set out as follows:

				Unutilised net
			Utilisation as	proceeds as at
	Planned use of proceeds as	at 30 June	30 June
	disclosed in the prospectus	2020 and	2020 and
	of the Company dated	the Date of	the Date of	Revised allocation of the net
	27 October 2016	Reallocation	Reallocation	proceeds
		% of net				% of revised
	HK$ million	proceeds	HK$ million	HK$ million	HK$ million	allocation
Increase the registered capital of Hexin
Pawn	118.9	50	118.9	-	118.9	50
Strengthening online auction platform
and developing online loan financing
platform	47.5	20	2.0	45.5	2.0	1
Establishment of new loan offices in
other part of China and new auction
branches or subsidiaries in Beijing,
Shanghai and Hong Kong	47.5	20	47.5	-	47.5	20
Trading of artworks	-	-	-	-	45.5	19
Funding of general operations	23.8	10	23.8	-	23.8	10
Total	237.7	100	192.2	45.5	237.7	100

The unutilised net proceeds is intended to be fully utilised for trading of artworks by June 2021.

OUTLOOK AND PROSPECTS

We began our second half of 2020 with the COVID-19 basically controlled in mainland China. Our national GDP resumed its growth and recorded a 3.2% growth in second quarter of 2020. Our business activities are resuming to normal gradually. The Sino-American tension and COVID-19 pandemic around the globe continued to be the concerns of the market. Though the market is recovering, it is expected to be very volatile and tough.

Art and Asset Auction Business

With the gradually relaxing disease control measurements, we are continuously communicating with the PRC local government for the suitability of holding large scale auction and related activities. We are working to secure a safe environment to resume our art auction activities and host the autumn auction the fourth quarter 2020. However, the suitability of holding large scale auction is not certain at the moment.

Art and Asset Pawn Loan Business

In the rest of 2020, the Group would continue to adopt a conservative attitude in granting pawn loans to new customers. Credit risk is expected to rise and the Group's priority target is to minimize our credit exposure and secure our capital safety in the volatile market condition.

Art and Asset Sales Business

Since the second quarter of 2020, we launched the new line of service for artwork sales. Leveraging on the Group's relationships with the collectors and the expertise of the appraisal team, we believe that we will be able to identify suitable artworks for sales. We plan to sell the artworks acquired at future auctions and/or private sales and expects that it will be able to generate profit for the Group through (i) gain on the difference between their acquisition price and sale price; (ii) agency income for solicitation and promotion of artwork for sales and (iii) auction commissions when selling the artworks through our future auctions.

06	China Art Financial Holdings Limited / Interim Report 2020

OTHER INFORMATION

DIRECTORS' AND CHIEF EXECUTIVE'S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

1. Directors' Interests in the Company

As at 30 June 2020, the interests of the Directors and chief executive in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the "SFO")) which are required to be (i) notified to the Company and The Stock Exchange of Hong Kong Limited (the "Stock Exchange") pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he is taken or deemed to have taken under such provisions of the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") were as follows:

1. Long positions in the shares:

			Approximate
		Number of Shares	Percentage of
Name of Director	Capacity	(Note 1)	Shareholding
Fan Zhijun	Interest of controlled corporation	1,000,768,000 (L)	59.64%
		(Note 2)
		1,000,384,000 (S)	59.62%

Notes:

1. The letter "L" denotes the Director's long position in the shares/underlying shares. The letter "S" denotes the person's short position in the shares/underlying shares.
2. These shares are held by Intelligenesis Investment Co., Ltd (the "Intelligenesis Inv"), which is owned as to 69.5% by Golden Sand Investment Company Limited (the "Golden Sand Inv"), which is in turn held as to 74.1% by Mauve Jade Investment Limited (the "Mauve Jade Inv"), which is in turn held as to 67.2% by Mr. Fan Zhijun and 32.8% by Ms. Fan Qinzhi. Ms. Fan Qinzhi is the daughter of Mr. Fan Zhijun.

2. DIRECTORS' INTERESTS IN ASSOCIATED CORPORATIONS

			Approximate
	Name of		Percentage of
Name of Director	Associated Corporation	Capacity	Shareholding
Fan Zhijun	Hexin Pawn	Beneficial owner; interest of	15%
	(Note 1)	controlled corporation
Fan Zhijun	Hexin Auction	Beneficial owner	85%
	(Note 2)

China Art Financial Holdings Limited / Interim Report 2020

07

OTHER INFORMATION

Notes:

1. 15% of the registered capital in Hexin Pawn is beneficially owned by Mr. Fan Zhijun, among which, 10% of the registered capital is registered
   under the name of Mr. Fan Zhijun and 5% of the registered capital is registered under the name of Wuxi Hexin Culture and Art Company Limited (無錫和信文化藝術有限公司) ("Wuxi Culture"), which is wholly beneficially owned by Mr. Fan Zhijun. By virtue of the SFO, Mr. Fan Zhijun is deemed to be interested in the registered capital in Hexin Pawn held by Wuxi Culture. Mr. Fan Zhijun, Ms. Fan Qinzhi, Mr. Fan Yajun and Ms. Wu Jian are directly or indirectly interested in 38% of the registered capital of Hexin Pawn. Mr. Fan Zhijun, Ms. Fan Qinzhi, Mr. Fan Yajun, Ms. Wu Jian and Ms. Xu Min have entered into a confirmation ("Act-in-Concert Confirmation") dated 15 April 2016 according to which, among other things, they acknowledge and confirm that they shall act in concert and give unanimous consent, approval or rejection on any material issues and decisions in relation to the business of our Group and in the event of any contrary view within the concert group, the view of Mr. Fan Zhijun shall prevail. Solely by virtue of the Act-in-Concert Confirmation, Mr. Fan Zhijun may be deemed to be interested in 38% of the registered capital of Hexin Pawn.
2. 85% of the registered capital in Hexin Auction is beneficially owned by Mr. Fan Zhijun. Mr. Fan Zhijun, Ms. Wu Jian and Ms. Xu Min are directly interested in 100% of the registered capital of Hexin Auction. Solely by virtue of the Act-in-Concert Confirmation, Mr. Fan Zhijun may be deemed to be interested in 100% of the registered capital of Hexin Auction.

Save as disclosed above and in the "SHARE-BASED PAYMENTS" disclosure in notes to the condensed consolidated financial statements, as at 30 June 2020, none of the Directors and chief executive of the Company had any interest or short position in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which are required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he is taken or deemed to have taken under such provisions of the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code.

INTERESTS AND SHORT POSITIONS OF SUBSTANTIAL SHAREHOLDERS IN SHARES AND UNDERLYING SHARES

As at 30 June 2020, the following parties (other than the Directors and chief executive of the Company) had interests and short positions of 5% or more of the shares or underlying shares of the Company as recorded in the register of interests required to be kept by the Company pursuant to Section 336 of the SFO:

			Approximate
		Number of	percentage of
		Shares	Shareholding in
Name of Shareholder	Nature of interest/Capacity	(Note 1)	the Company
Ms. Zhang Xiaoxing	Interest of spouse (Note 2)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Intelligenesis Inv	Beneficial owner	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Golden Sand Inv	Interest of controlled corporation (Note 3)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Mauve Jade Inv	Interest of controlled corporation (Note 4)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Ms. Fan Qinzhi	Interests of controlled corporation and held	1,000,768,000 (L)	59.64%
	jointly with other persons (Notes 3 and 4)	1,000,384,000 (S)	59.62%
Mr. Fan Yajun	Interests held jointly with other persons (Note 5)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Ms. Zhou Jianyuan	Interest of spouse (Note 6)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Ms. Wu Jian	Interests held jointly with other persons (Note 5)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Mr. Xu Zhongliang	Interest of spouse (Note 7)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%

08	China Art Financial Holdings Limited / Interim Report 2020

OTHER INFORMATION

			Approximate
		Number of	percentage of
		Shares	Shareholding in
Name of Shareholder	Nature of interest/Capacity	(Note 1)	the Company
Ms. Xu Min	Interests held jointly with other persons (Note 5)	1,000,768,000 (L)	59.64%
		1,000,384,000 (S)	59.62%
Winwin International Strategic	Security interest (Note 8)	1,000,384,000 (L)	59.62%
Investment Funds SPC
("WIS")
Mr. Yuen Tsz Chun	Agent (Note 9)	1,000,384,000 (L)	59.62%
Ms. Ho Lai Ching	Interest of spouse (Note 10)	1,000,384,000 (L)	59.62%

Notes:

1. The letter "L" denotes the Director's long position in the shares/underlying shares. The letter "S" denotes the person's short position in the shares/ underlying shares.
2. Ms. Zhang Xiaoxing is the spouse of Mr. Fan Zhijun. By virtue of the SFO, Ms. Zhang Xiaoxing is deemed to be interested in the same parcel of shares in which Mr. Fan Zhijun is interested.
3. The said 1,000,768,000 shares is held in the name of Intelligenesis Inv. Intelligenesis Inv is held as to 69.5% by Golden Sand Inv. By virtue of the SFO, Golden Sand Inv is deemed to be interested in the same parcel of shares in which Intelligenesis Inv is interested.
4. Intelligenesis Inv is held as to 69.5% by Golden Sand Inv, which is in turn held as to 74.1% by Mauve Jade Inv, which is in turn held as to 67.2% by Mr. Fan Zhijun and 32.8% by Ms. Fan Qinzhi. By virtue of the SFO, Mauve Jade Inv and Ms. Fan Qinzhi are deemed to be interested in the same parcel of shares in which Intelligenesis Inv is interested.
5. Mr. Fan Zhijun, Ms. Fan Qinzhi, Mr. Fan Yajun, Ms. Wu Jian and Ms. Xu Min together control 1,000,768,000 shares representing approximately 59.64% interest of the total issued share capital of our Company through Mauve Jade Inv,.Golden Sand Inv and Intelligenesis Inv. By virtue of the Act-in-Concert Confirmation, each of Mr. Fan Zhijun, Ms. Fan Qinzhi, Mr. Fan Yajun, Ms. Wu Jian and Ms. Xu Min are deemed to be interested in such 1,000,768,000 shares representing 59.64% interest in the total issued share capital of our Company.
6. Ms. Zhou Jianyuan is the spouse of Mr. Fan Yajun. By virtue of the SFO, Ms. Zhou Jianyuan is deemed to be interested in the same parcel of shares in which Mr. Fan Yajun is interested.
7. Mr. Xu Zhongliang is the spouse of Ms. Wu Jian. By virtue of the SFO, Mr. Xu Zhongliang is deemed to be interested in the same parcel of shares in which Ms. Wu Jian is interested.
8. WIS, acting for and on behalf of Win Win Stable No.1 Fund SP, had security interest in 1,000,384,000 shares of the Company.
9. Mr. Yuen Tsz Chun was appointed as receiver over 1,000,384,000 shares of the Company.
10. Ms. Ho Lai Ching is the spouse of Mr. Yuen Tsz Chun. By virtue of the SFO, Ms. Ho Lai Ching is deemed to be interested in the same parcel of shares in which Mr. Yuen Tsz Chun is interested.

Save as disclosed above, as at 30 June 2020, no person or corporation had registered an interest or short position in the shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of the SFO.

China Art Financial Holdings Limited / Interim Report 2020

09

OTHER INFORMATION

SHARE OPTION SCHEME

A share option scheme (the "Share Option Scheme") was adopted by ordinary resolution passed by the then shareholders of the Company on 14 October 2016. Under the Share Option Scheme, the directors of the Company may grant options to subscribe for shares of the Company to eligible participants, including without limitation to employees of the Group, directors of the Company and its subsidiaries.

On 2 June 2017, the Company granted an aggregate of 79,000,000 share options to eligible grantees (the "Grantees"), primarily to provide incentives or rewards to the Grantees, enabling the Grantees to subscribe for an aggregate of 79,000,000 new ordinary shares of HK$0.01 each in the share capital of the Company. The details of the outstanding share options granted are as follows:

							NumberofOptions
				Weighted
		Closingprice		average				Exercised/
		immediately		closingprice			Granted	lapsed
		preceding		ofshares			duringthe	duringthe
		thedateof		immediately		Asat	6months	6months
		grant	Exercise	before	Exercise	1January	ended	ended	Asat
NameofGrantee	Dateofgrant	(ie.1/6/2017)	price	exercisedate	period	2020	30June2020	30June2020	30June2020
Otherparticipants	2/6/2017	0.76	0.80	N/A	2/6/2017to	8,000,000	-	-	8,000,000
					1/6/2022
	2/6/2017	0.76	0.80	N/A	2/12/2017to	8,000,000	-	-	8,000,000
					1/6/2022
	2/6/2017	0.76	0.80	N/A	2/6/2018to	7,000,000	-	-	7,000,000
					1/6/2022
Exercisableattheendof						23,000,000	-	-	23,000,000
theperiod

Save as disclosed above, no share option was granted, exercised, cancelled or had lapsed under the Share Option Scheme during the Period Under Review.

Further details of the Share Option Scheme are set out in the notes to the condensed consolidated financial statements.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S SHARES

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company's listed securities during the Period Under Review.

AUDIT COMMITTEE

The Company has established an audit committee in compliance with Rule 3.21 and 3.22 of the Listing Rules for the purpose, among other duties and functions, of reviewing and providing supervision over the financial reporting process and internal controls of the Group. The audit committee comprises three independent non-executive directors of the Company, namely Mr. Leung Shu Sun, Sunny (Chairman), Mr. Liu Jian and Ms. Yin Xuhong. The unaudited consolidated interim financial statements of the Group for the six months ended 30 June 2020 has been reviewed by the audit committee with the assistance of the Company's auditors, Ascenda Cachet CPA Limited. The audit committee has no disagreement with the accounting treatment adopted by the Company.

10	China Art Financial Holdings Limited / Interim Report 2020

OTHER INFORMATION

RIGHTS TO ACQUIRE THE COMPANY'S SECURITIES

Other than as disclosed above, during the six months ended 30 June 2020, none of the Company, or any of its subsidiaries, was a party to any arrangement to enable the Directors to have any right to subscribe for securities of the Company or to acquire benefits by means of acquisition of shares in, or debentures of, the Company or any other body corporate.

DIVIDEND

The Board did not recommend an interim dividend for the six months ended 30 June 2020.

DIRECTORS' SECURITIES TRANSACTIONS

The Company has adopted the Model Code in the code of conduct for Directors in their dealings in Company's securities. Having made specific enquiry of all Directors, all the Directors confirmed that they had complied with the required standard of dealings as set out in the Model Code during the six months ended 30 June 2020.

The Code sets out two levels of recommendations, namely, (a) code provisions that a listed company must either comply with or explain its non-compliance, and (b) recommended best practices that listed companies are encouraged to comply with but need not disclose in the case of non-compliance.

UPDATE ON DIRECTORS' INFORMATION

The following is updated information of the director and the chief executive officer required to be disclosed pursuant to Rule 13.51B(1) of the Listing Rules:

1. On 22 July 2020, Mr. Chu Xiaoliang has resigned as an independent non-executive Director, a member of the audit committee of the Company (the "Audit Committee") and the nomination committee of the Company (the "Nomination Committee"), and the chairman of the remuneration committee of the Company (the "Remuneration Committee") and the risk management committee of the Company (the "Risk Management Committee").
2. Ms. Yin Xu Hong ("Ms. Yin") has been appointed as an independent non-executive Director of the Company with effect from 22 July 2020. Ms. Yin has also been appointed as a member of the Audit Committee and the Nomination Committee, and the chairman of the Remuneration Committee and the Risk Management Committee on the same date.
3. Mr. Li Cheng has been appointed as an executive Director with effect from 22 July 2020.

COMPLIANCE WITH CORPORATE GOVERNANCE CODE AND CORPORATE GOVERNANCE REPORT

The Company has complied with the applicable code provisions set out in the Corporate Governance Code and Corporate Governance Report contained in Appendix 14 of the Listing Rules during the six months ended 30 June 2020 except that:

Code provision A.2.1

Code Provision A.2.1 provides that the roles of chairman and chief executive officer should be separate and should not be performed by the same individual.

The Company considers that having Mr. Fan Zhijun acting as both the chairman and chief executive officer will provide a strong and consistent leadership to the Group and allow for more effective strategic planning and management of the Group. In view of Mr. Fan's experiences in the art finance industry and his involvement in the management and operation of the Group since the establishment of the Group, the Board believes that he is the most suitable candidate to be the Chief Executive Officer and it is in the best interests of the Group for Mr. Fan to take up the dual roles of Chairman and Chief Executive Officer. As the Board is comprised of two executive Directors and three independent non-executive Directors, the Board is appropriately structured with balance of power to provide sufficient checks and balance to protect the interests of the Company and the Shareholders and the deviation from Code A.2.1 of the CG Code is appropriate in such circumstances.

China Art Financial Holdings Limited / Interim Report 2020

11

OTHER INFORMATION

CONTRACTUAL ARRANGEMENTS

Reasons for using and risks associated with the Contractual Arrangements

Reference is made to the prospectus dated 27 October 2016. We conduct our art and asset pawn business and art and asset auction business through our PRC Operating Entities: (i) Hexin Pawn is engaged in the provision of pawn loan services secured by artworks and assets as collaterals which are regulated under the Pawning Measures; and (ii) Hexin Auction focuses on auction of artworks. In addition to our traditional principal on-site art auctions, we commenced online auctions of artworks since 2015.

The operation of the pawn loan business of Hexin Pawn and online art auction operation of Hexin Auction are, to a certain extent, subject to foreign investment prohibition or restriction in PRC and there are practical difficulties in obtaining governmental approval for foreign investment (including but not limited to the requirement for a foreign investor intending to acquire any equity interest in a value-added telecommunication business (including our online auction operations) in PRC to demonstrate a "good track record and operating experience" in providing value-added telecommunication services overseas ("Qualification Requirements") in these businesses. For such reasons, we do not hold controlling equity interest in Hexin Pawn and Hexin Auction (collectively the "PRC Operating Entities"), and our Company through our three wholly owned enterprises established in PRC, namely Yixing Han Xin Information Technology Service Co., Ltd (the "WFOE-Pawn"), Yixing Zi Yu Information Technology Service Co., Ltd (the "WFOE-Auction") and Yixing Changxiang Materials Trading Company Limited ("YCMT"), control the PRC Operating Entities through two sets of agreements and direct shareholding. The first set was entered into between WFOE-Pawn, Hexin Pawn as well as Mr. Fan Zhijun, Wuxi Hexin Culture and Art Company Limited (the "Wuxi Culture"), Ms. Fan Qinzhi, Zisha Hotel, Mr. Fan Yajun and Ms. Wu Jian (collectively the "HP Equity-holders") (the "HP Structured Contracts") and the other set was entered into between WFOE- Auction, Hexin Auction as well as Mr. Fan Zhijun, Ms. Wu Jian and Ms. Xu Min (collectively the "HA Equity-holders") (the "HA Structured Contracts"), which constitute the contractual arrangements (the "Contractual Arrangements"). The Contractual Arrangements are narrowly tailored to achieve our business purpose and minimise the potential conflict with relevant PRC laws and regulations. The Contractual Arrangements are designed to provide the Group with effective control over the financial and operational policies of the PRC Operating Entity and, to the extent permitted by the PRC laws and regulations, the right to acquire the equity interests in and/or the assets of the PRC Operating Entity. Further, pursuant to the Contractual Arrangements, all economic benefits derived from the operation of the PRC Operating Entity are enjoyed by the Group and the financial results of the PRC Operating Entity are consolidated into the Group as if it were a wholly-owned subsidiary.

The Company engaged our PRC legal counsel to review the Contractual Arrangements. Based on our PRC legal opinion, the Contractual Arrangements are valid, legal binding and enforceable under the current PRC laws.

APPRECIATION

As a final note, I wish to take this opportunity to thank the Directors and staff for their contributions and good performance during the period.

By Order of the Board

China Art Financial Holdings Limited

Fan Zhijun

Chairman

Hong Kong, 27 August 2020

12	China Art Financial Holdings Limited / Interim Report 2020

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the six months ended 30 June 2020
		Six months ended 30 June
		2020	2019
	Notes	RMB'000	RMB'000
		(unaudited)	(unaudited)
Revenue	3
Interest revenue		24,672	51,359
Service revenue		1,274	48,932
Total revenue		25,946	100,291
Other income		4,375	1,315
Other gains and losses		(2,351)	217
Operating expenses		(1,276)	(2,003)
Net impairment losses reversed	4	1,934	3,070
Administrative expenses		(4,644)	(11,232)
Finance costs		(107)	(172)
Profit before tax		23,877	91,486
Income tax expenses	5	(6,950)	(24,962)
Profit for the period attributable to owners of the Company	6	16,927	66,524
Other comprehensive income/(expense)
Item that may be subsequently reclassified to profit or loss:
Exchange differences arising on translation of foreign operations		1,608	(698)
Total comprehensive income for the period attributable to
owners of the Company		18,535	65,826
Earnings per share (RMB cents)	8
Basic		1.01	4.11
Diluted		1.01	4.08

China Art Financial Holdings Limited / Interim Report 2020

13

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2020
		As at	As at
		30 June	31 December
		2020	2019
	Notes	RMB'000	RMB'000
		(unaudited)	(audited)
Non-current assets
Property, plant and equipment	9	106	2,025
Right-of-use assets	9	4,705	5,110
Deferred tax asset		835	1,262
		5,646	8,397
Current assets
Loan receivables	10	367,711	533,832
Trade and other receivables	11	6,729	74,142
Bank balances and cash		759,272	588,113
		1,133,712	1,196,087
Current liabilities
Accruals and other payables	12	2,338	86,524
Amount due to immediate holding company	13	100,817	95,238
Lease liabilities		1,022	1,150
Tax payable		3,486	7,743
		107,663	190,655
Net current assets		1,026,049	1,005,432
Total assets less current liabilities		1,031,695	1,013,829
Non-current liabilities
Lease liabilities		3,365	4,034
Net assets		1,028,330	1,009,795
Capital and reserves
Share capital	14	14,679	14,679
Reserves		1,013,651	995,116
Total equity		1,028,330	1,009,795

14	China Art Financial Holdings Limited / Interim Report 2020

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2020

					Share
	Share	Share	Statutory	Capital	option	Translation	Retained
	capital	premium	reserve	reserve	reserve	reserve	profits	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000
			(Note)
At 1 January 2019 (audited)	13,995	126,055	59,965	172,301	5,560	(1,912)	452,126	828,090
Profit for the period	-	-	-	-	-	-	66,524	66,524
Exchange differences arising on
translation of foreign operations	-	-	-	-	-	(698)	-	(698)
Total comprehensive income
for the period	-	-	-	-	-	(698)	66,524	65,826
Appropriation to statutory reserve	-	-	7,501	-	-	-	(7,501)	-
Dividend paid (note 7)	-	(14,394)	-	-	-	-	-	(14,394)
Issue of shares on placing of shares
(note 14)	684	88,264	-	-	-	-	-	88,948
Direct expenses on issue of shares
(note 14)	-	(1,131)	-	-	-	-	-	(1,131)
At 30 June 2019 (unaudited)	14,679	198,794	67,466	172,301	5,560	(2,610)	511,149	967,339
At 1 January 2020 (audited)	14,679	198,794	71,954	172,301	5,560	(1,157)	547,664	1,009,795
Profit for the period	-	-	-	-	-	-	16,927	16,927
Exchange differences arising on
translation of foreign operations	-	-	-	-	-	1,608	-	1,608
Total comprehensive income
for the period	-	-	-	-	-	1,608	16,927	18,535
Appropriation to statutory reserve	-	-	1,823	-	-	-	(1,823)	-
At 30 June 2020 (unaudited)	14,679	198,794	73,777	172,301	5,560	451	562,768	1,028,330

Note: The statutory reserve is non-distributable and the appropriation to this reserve is determined by the board of directors of the Company's subsidiaries established in the People's Republic of China (the "PRC") in accordance with the Articles of Association of these subsidiaries by way of appropriations from their net profits. Statutory reserve can be used to make up for previous year's losses or convert into additional capital of these subsidiaries.

China Art Financial Holdings Limited / Interim Report 2020

15

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 30 June 2020
	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
OPERATING ACTIVITIES
Cash generated from operations	177,456	54,911
Income tax paid	(10,782)	(30,971)
NET CASH GENERATED FROM OPERATING ACTIVITIES	166,674	23,940
INVESTING ACTIVITIES
Bank interest received	1,268	1,306
Proceeds from disposal of property, plant and equipment	885	-
Payment for purchase of property, plant and equipment	(13)	-
NET CASH GENERATED FROM INVESTING ACTIVITIES	2,140	1,306
FINANCING ACTIVITIES
Advance from immediate holding company	6,189	12,493
Repayment of advance from immediate holding company	(2,523)	(12,536)
Settlement of lease liabilities	(1,326)	(1,767)
Proceeds from placing of shares	-	88,948
Payment for transaction costs on issue of shares	-	(1,131)
NET CASH GENERATED FROM FINANCING ACTIVITIES	2,340	86,007
NET INCREASE IN CASH AND CASH EQUIVALENTS	171,154	111,253
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD	588,113	571,596
EFFECT OF FOREIGN EXCHANGE RATE CHANGES	5	70
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
AND REPRESENTED BY BANK BALANCES AND CASH	759,272	682,919

16	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

1. GENERAL AND BASIS OF PREPARATION

1. General
   The condensed consolidated financial statements of China Art Financial Holdings Limited (the "Company") and its subsidiaries (collectively referred to as the "Group") have been prepared in accordance with Hong Kong Accounting Standard 34 "Interim Financial Reporting" issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA") as well as with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
   The Group's condensed consolidated financial statements are presented in Renminbi ("RMB"), which is the same as the functional currency of the Company.
2. Basis of preparation
   The Company's wholly-owned subsidiaries established in the PRC, 宜興市漢信信息技術服務有限公司 Yixing Hanxin Information Technology Service Co., Ltd. ("WFOE-Pawn") and 宜興市紫玉信息技術服務有限公司Yixing Ziyu Information Technology Service Co., Ltd. ("WFOE-Auction"), entered into two series of agreements with 江 蘇和信典當有限公司 Jiangsu Hexin Pawn Co., Ltd. ("Hexin Pawn") and 江蘇和信拍賣有限公司 Jiangsu Hexin Auction Co., Ltd. ("Hexin Auction"), respectively, which constitute the contractual arrangements (the "Contractual Arrangements") for art and asset pawn business, art and asset auction business, and art and asset sales business. The Contractual Arrangements effectively transfer the controls over economic benefits and pass the risks associated therewith of Hexin Pawn and Hexin Auction to WFOE-Pawn and WFOE-Auction respectively. The Contractual Arrangements with Hexin Pawn include: (i) Hexin Pawn composite services agreement, (ii) Hexin Pawn option agreement, (iii) Hexin Pawn proxy agreement, and (iv) Hexin Pawn equity pledge agreement; and the Contractual Arrangements with Hexin Auction include: (i) Hexin Auction composite services agreement, (ii) Hexin Auction option agreement, (iii) Hexin Auction proxy agreement, and (iv) Hexin Auction equity pledge agreement. Details of the Contractual Arrangements are set out in the section headed "Contractual Arrangements" of the prospectus of the Company dated 27 October 2016.
   The Contractual Arrangements are irrevocable and enable the Group to:
3. • exercise effective financial and operational control over Hexin Pawn and Hexin Auction;
   • exercise equity holders' voting rights of Hexin Pawn and Hexin Auction;
   • receive all economic returns generated by Hexin Pawn and Hexin Auction in consideration for the exclusive technical services, management support services and consultancy services provided by the Group;
   • obtain an irrevocable and exclusive right to purchase the entire equity interests in Hexin Pawn and Hexin Auction from all the equity holders of Hexin Pawn and Hexin Auction; and
   • obtain a pledge over the entire equity interests of Hexin Pawn and Hexin Auction from all the equity holders of Hexin Pawn and Hexin Auction as collateral security under the Contractual Arrangements.

Pursuant to the Contractual Arrangements entered into between the Group and all the equity holders of Hexin Pawn and Hexin Auction, the Contractual Arrangements effectively transfer the controls over economic benefits and pass the risks associated therewith of Hexin Pawn and Hexin Auction to WFOE-Pawn and WFOE-Auction, respectively. Accordingly, Hexin Pawn and Hexin Auction are considered as indirect wholly-owned subsidiaries of the Company.

China Art Financial Holdings Limited / Interim Report 2020

17

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

2. PRINCIPAL ACCOUNTING POLICIES

The Group's condensed consolidated financial statements have been prepared on the historical cost basis.

Other than additional accounting policies resulting from application of amendments to Hong Kong Financial Reporting Standards ("HKFRSs"), the accounting policies and methods of computation used in the condensed consolidated financial statements for the six months ended 30 June 2020 are the same as those presented in the Group's annual financial statements for the year ended 31 December 2019.

Application of amendments to HKFRSs

In the current interim period, the Group has applied the Amendments to References to the Conceptual Framework in HKFRS Standards and the following amendments to HKFRSs issued by the HKICPA, for the first time, which are mandatorily effective for the annual period beginning on or after 1 January 2020 for the preparation of the Group's condensed consolidated financial statements:

Amendments to HKAS 1 and HKAS 8	Definition of Material
Amendments to HKFRS 3	Definition of a Business
Amendments to HKFRS 9, HKAS 39 and HKFRS 7	Interest Rate Benchmark Reform
Amendments to HKFRS16	COVID-19 - Related Rent Concessions

Except as described below, the application of the Amendments to References to the Conceptual Framework in HKFRS Standards and amendments to HKFRSs in the current period has had no material impact on the Group's financial positions and performance for the current and prior periods and/or on the disclosures set out in these condensed consolidated financial statements.

Impacts of application on Amendments to HKAS 1 and HKAS 8 "Definition of Material"

The amendments provide a new definition of material that states "information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity." The amendments also clarify that materiality depends on the nature or magnitude of information, either individually or in combination with other confirmation, in the context of the financial statements taken as a whole.

The application of the amendments in the current interim period had no impact on the condensed consolidated financial statements. Changes in presentation and disclosures on the application of the amendments, if any, will be reflected on the Group's consolidated financial statements for the year ending 31 December 2020.

18	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION

Revenue

An analysis of the Group's revenue is as follows:

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
Interest revenue:
Interest revenue from art and asset pawn business	24,672	51,359
Service revenue:
Auction revenue from art and asset auction business	-	48,932
Agency service revenue from art and asset sales business	1,274	-
	1,274	48,932
Total	25,946	100,291

Interest revenue on loans to customers for art and asset pawn business is recognised using the effective interest method.

Auction revenue from art and asset auction business represents primarily buyer's and seller's commission from provision of art and asset auction services which is calculated at a percentage of hammer prices of the auction sales. Such revenue constitutes revenue from contracts with customers and is recognised at a point in time upon the fall of hammer when the Group transfers the promised auction services to the customers.

Agency service revenue from art and asset sales business is recognised at the fees agreed in the contracts with the customers. Such revenue constitutes revenue from contracts with customers and is recognised when the Group transfers the promised agency services to the customers.

Disaggregation of revenue from contracts with customers for auction revenue from art and asset auction business

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
By types of artwork
Zisha artwork	-	21,887
Calligraphies and paintings	-	22,977
Jewel artwork	-	4,068
Total	-	48,932
By geographical location
The PRC, excluding Hong Kong	-	48,932

China Art Financial Holdings Limited / Interim Report 2020

19

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION (Continued)

Revenue (Continued)

Disaggregation of revenue from contracts with customers for agency service revenue from art and asset sales business

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
By type of artwork
Zisha artwork	1,274	-
By geographical location
The PRC, excluding Hong Kong	1,274	-

The Group has no unsatisfied performance obligations as at the end of the reporting period.

Segment information

The segment information reported externally was analysed based on (i) art and asset pawn business, (ii) art and asset auction business, and (iii) art and asset sales business, which is consistent with the internal information that is regularly reviewed by the chief executive officer of the Company, being the chief operating decision maker, for the purposes of resource allocation and assessment of segment performance. This is also the basis of organisation in the Group, whereby the management has chosen to organise the Group by these business activities.

The accounting policies of the operating and reportable segments are the same as the Group's accounting policies. Segment result represents the profit earned by each segment without allocation of certain other income, other gains and losses, central administrative costs and finance costs. Segment assets and liabilities are allocated to each segment excluding deferred tax asset, bank balances and cash, tax payable, unallocated corporate assets and liabilities, and amount due to immediate holding company. This is the measure reported to the chief operating decision maker for the purposes of resources allocation and assessment of segment performance.

20	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION (Continued)

Segment information (Continued)

Segment revenues and results

The following is an analysis of the Group's revenue and results by operating and reportable segment:

	Art and asset	Art and asset	Art and asset
	pawn	auction	sales
	business	business	business		Total
	RMB'000	RMB'000	RMB'000		RMB'000
Six months ended 30 June 2020 (unaudited)
Segment revenue	24,672	-	1,274	25,946
Interest income for artwork auction financing
from art and asset auction business	-	3,107	-	3,107
Segment costs	(967)	(32)	(277)	(1,276)
Net impairment losses reversed	669	1,265	-	1,934
Segment results	24,374	4,340	997	29,711
Other income				1,268
Other gains and losses				(2,351)
Central administrative expenses				(4,644)
Finance costs					(107)
Profit before tax					23,877
		Art and asset	Art and asset
		pawn	auction
		business	business		Total
		RMB'000	RMB'000		RMB'000
Six months ended 30 June 2019 (unaudited)
Segment revenue		51,359	48,932	100,291
Segment costs		(933)	(1,070)	(2,003)
Net impairment losses (recognised)/reversed		(90)	3,160	3,070
Segment results		50,336	51,022	101,358
Other income				1,315
Other gains and losses				217
Central administrative expenses				(11,232)
Finance costs				(172)
Profit before tax				91,486

China Art Financial Holdings Limited / Interim Report 2020

21

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION (Continued)

Segment information (Continued)

Segment assets and liabilities

The following is an analysis of the Group's assets and liabilities by operating and reportable segment:

	Art and asset	Art and asset	Art and asset
	pawn	auction	sales
	business	business	business	Total
	RMB'000	RMB'000	RMB'000	RMB'000
As at 30 June 2020 (unaudited)
Assets	369,813	2,524	6,000	378,337
Segment assets
Unallocated assets
Deferred tax asset				835
Bank balances and cash				759,272
Corporate assets				914
Consolidated total assets				1,139,358
Liabilities	2,864	2,828	-	5,692
Segment liabilities
Unallocated liabilities
Amount due to immediate holding
company				100,817
Tax payable				3,486
Corporate liabilities				1,033
Consolidated total liabilities				111,028

22	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION (Continued)

Segment information (Continued)

Segment assets and liabilities (Continued)

	Art and asset	Art and asset
	pawn	auction
	business	business	Total
	RMB'000	RMB'000	RMB'000
As at 31 December 2019 (audited)
Assets
Segment assets	462,646	150,661	613,307
Unallocated assets
Deferred tax asset			1,262
Bank balances and cash			588,113
Corporate assets			1,802
Consolidated total assets			1,204,484
Liabilities
Segment liabilities	3,490	84,465	87,955
Unallocated liabilities
Amount due to immediate holding company			95,238
Tax payable			7,743
Corporate liabilities			3,753
Consolidated total liabilities			194,689

China Art Financial Holdings Limited / Interim Report 2020

23

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

3. REVENUE AND SEGMENT INFORMATION (Continued)

Other segment information
		Art and asset	Art and asset	Art and asset
		pawn	auction	sales
		business	business	business	Total
		RMB'000	RMB'000	RMB'000	RMB'000
Six months ended 30 June 2020 (unaudited)
Segment information included in the measure
of segment results or assets:
Additions to right-of-use assets		-	410	-	410
Additions to property, plant and equipment		13	-	-	13
Loss on disposal of property, plant and
equipment		157	-	-	157
Loss on write-off of property, plant and
equipment		-	222	-	222
Depreciation of property, plant and
equipment		118	55	-	173
Depreciation of right-of-use assets		184	218	-	402
Six months ended 30 June 2019 (unaudited)
Segment information included in the measure
of segment results or assets:
Depreciation of property, plant and
equipment	248	68	-	316
Depreciation of right-of-use assets	184	1,053	-	1,237

Geographical information

The following table sets out information about the geographical locations of the Group's revenue from external customers and specified non-current assets. The geographical location of the Group's revenue from external customers is based on the location of the Group's operations for art and asset pawn business, and the location of services rendered for art and asset auction business, and art and asset sales business. The Group's specified non-current assets comprise property, plant and equipment, and right-of-use assets, and the geographical location of these specified non-current assets is based on the physical location of these assets.

	Revenue from external	Non-current assets
	customers	As at	As at
	Six months ended 30 June	30 June	31 December
	2020	2019	2020	2019
	RMB'000	RMB'000	RMB'000	RMB'000
	(unaudited)	(unaudited)	(unaudited)	(audited)
The PRC, excluding Hong Kong (place of domicile)	25,946	100,291	4,147	5,687
Hong Kong	-	-	664	1,448
	25,946	100,291	4,811	7,135

Information about major customers

All external customers individually accounted for less than 10% of the Group's total revenue for the six months ended 30 June 2020 and 2019.

24	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

4. NET IMPAIRMENT LOSS REVERSED

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
Net impairment losses (reversed)/recognised:
Loans to customers for art and asset pawn business	(670)	90
Loans to customers for artwork auction financing from art and
asset auction business	(654)	-
Net impairment losses on loan receivables	(1,324)	90
Trade receivables for art and asset auction business	(122)	(323)
Other receivables from customers in respect of art and asset auction business	(488)	(2,837)
	(1,934)	(3,070)

The basis of determining the inputs and assumptions and the estimation techniques used for expected credit losses on financial assets in the condensed consolidated financial statements for the six months ended 30 June 2020 are the same as those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2019.

5. INCOME TAX EXPENSES

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
Current tax
PRC Enterprise Income Tax ("EIT")	6,523	23,992
Hong Kong Profits Tax	-	-
	6,523	23,992
Deferred tax charge	427	970
	6,950	24,962

Under the PRC EIT Law, the tax rate of the Company's subsidiaries established in the PRC was 25% for the six months ended 30 June 2020 and 2019.

No provision for Hong Kong Profits Tax was made during the six months ended 30 June 2020 and 2019 as the Group did not have assessable profits arising in Hong Kong during both periods.

China Art Financial Holdings Limited / Interim Report 2020

25

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

6. PROFIT FOR THE PERIOD

Six months ended 30 June

20202019

RMB'000 RMB'000

(unaudited) (unaudited)

	Profit for the period has been arrived at after charging/(crediting):
	Directors' remuneration	305	647
	Other staffs salaries and allowances	1,739	3,258
	Retirement benefits scheme contributions, excluding those of directors	34	211
	Total staff costs	2,078	4,116
	Net foreign exchange losses/(gains)	1,943	(217)
	Bank interest income	(1,268)	(1,306)
	Depreciation for property, plant and equipment	634	316
	Depreciation of right-of-use assets	828	1,237
	Interest income for artwork auction financing from art and asset auction business	(3,107)	-
	Interest on lease liabilities	107	172
	Loss on disposal of property, plant and equipment	157	-
	Loss on write-off of property, plant and equipment	263	-
7. DIVIDEND
		Six months ended 30 June
		2020	2019
		RMB'000	RMB'000
		(unaudited)	(unaudited)
	2018 final dividend of HK1.0 cent per ordinary share
	(six months ended 30 June 2020: Nil)	-	14,394

The Board of Directors did not recommend the payment of an interim dividend for the six months ended 30 June 2020 (six months ended 30 June 2019: Nil).

26	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

8. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to owners of the Company is based on the following data:

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
Earnings:
Profit for the period for the purpose of calculating basic and
diluted earnings per share	16,927	66,524
	Six months ended 30 June
	2020	2019
	'000	'000
	(unaudited)	(unaudited)
Number of shares:
Weighted average number of ordinary shares for the purpose of
calculating basic earnings per share	1,678,000	1,619,392
Effect of dilutive potential ordinary shares from share options	-	10,088
Weighted average number of ordinary shares for the purpose of
calculating diluted earnings per share	1,678,000	1,629,480

No dilutive potential ordinary shares from share options was presented for the six months ended 30 June 2020 as the exercise prices of the Company's outstanding share options were higher than the average market price of the Company's ordinary shares during the period.

9. MOVEMENTS IN PROPERTY, PLANT AND EQUIPMENT AND RIGHT-OF-USE ASSETS

During the six months ended 30 June 2020, the Group acquired office equipment of RMB13,000 (six months ended 30 June 2019: Nil).

The Group disposed of a motor vehicle with a net book value of RMB1,042,000 during the six months ended 30 June 2020 (six months ended 30 June 2019: Nil).

During the six months ended 30 June 2020, the Group entered into a lease agreement for leasing an office premise, and therefore recognised addition to right-of-use assets of RMB410,000 (six months ended 30 June 2019: Nil).

China Art Financial Holdings Limited / Interim Report 2020

27

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

10. LOAN RECEIVABLES

	As at	As at
	30 June	31 December
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(audited)
Art and asset pawn loans to customers	371,051	463,222
Less: Impairment allowances	(3,340)	(4,010)
	367,711	459,212
Loans to customers for artwork auction financing	-	75,262
Less: Impairment allowances	-	(642)
	-	74,620
Total	367,711	533,832

1. Art and asset pawn loans to customers
   The art and asset pawn loans to customers are arising from the Group's art and asset pawn business. The loan periods granted to customers are normally within three months. At the maturity of the loan period, a borrower has the obligation to repay the principal amount of the loan or, alternatively, a borrower may make an application for a renewal of the loan prior to or within five days after, the maturity date of the loan period. The loans granted to customers carried fixed interest rates ranging from 12% to 37% (For the year ended 31 December 2019: 25% to 45%) per annum during the six months ended 30 June 2020. Art and asset pawn loans to customers were all denominated in RMB.
   All art and asset pawn loans granted are backed by collateral as security. The principal collateral types for loans to customers are the artwork and other assets, mainly Zisha artworks, paintings and calligraphies. The Group is not permitted to sell or repledge the pawn assets in the absence of default by the customers. There have not been any significant changes in the quality of the collateral held.
   Aging analysis of art and asset pawn loans to customers
   The aging analysis of art and assets pawn loans to customers (net of impairment allowances) by issue date of initial pawn tickets upon granting of the pawn loans is set out below:

	As at	As at
	30 June	31 December
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(audited)
Within 1 month	161,493	250,355
1-3 months	190,066	194,009
3-6 months	16,152	14,848
Total	367,711	459,212

28	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

10. LOAN RECEIVABLES (Continued)

1. Loans to customers for artwork auction financing
   The loans to customers for artwork auction financing are arising from the Group's art and asset auction business. During the year ended 31 December 2019, the Group granted certain secured loans in an aggregate principal amount of HK$90,100,000 (equivalent to RMB79,885,000) to certain independent third parties, and the borrowers repaid part of the principal and interest in an aggregate amount of HK$12,500,000 (equivalent to RMB11,019,000) to the Group during the same year. During the six months ended 30 June 2020, the Group received all outstanding principal and interests for the loans to customers for artwork auction financing.
   The loans were carried at a fixed interest rate of 12% per annum and were due for repayment of twelve months from the first drawdown date. The Group had the overriding right to demand immediate repayment of all outstanding principal, interest and other amounts from the borrowers. The borrowers had undertaken not to create or permit to subsist any mortgage, pledge, lien, charge, assignment or other security interest over the collateral without the Group's prior written consent. The borrowers will also indemnify the Group against any cost, loss or liability incurred by the Group as a result of breach of the facility letters or occurrence of any event of defaults as stated in the facility letters.
   Loans to customers for artwork auction financing were all denominated in Hong Kong dollars. These loans were backed by collateral as security and the major type of collateral was Zisha artwork. There had not been any significant changes in the quality of the collateral held.
   Ageing analysis of loans to customers for artwork auction financing
   The ageing analysis of loans to customers for artwork auction financing (net of impairment allowances) is prepared based on contractual due date and is set out below:

			As at	As at
			30 June	31 December
			2020	2019
			RMB'000	RMB'000
			(unaudited)	(audited)
		Not yet past due	-	74,620
11. TRADE AND OTHER RECEIVABLES
			As at	As at
			30 June	31 December
			2020	2019
			RMB'000	RMB'000
			(unaudited)	(audited)
	Trade receivables for art and asset auction business	-	14,828
	Less: Impairment allowances	-	(122)
			-	14,706
	Other receivables from customers in respect of art and asset auction business	-	58,823
	Other receivables and deposits	6,729	613
			6,729	59,436
	Total	6,729	74,142

China Art Financial Holdings Limited / Interim Report 2020

29

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

11. TRADE AND OTHER RECEIVABLES (Continued)

As at 30 June 2020, trade receivables for art and asset auction business arose from contracts with customers which amounted to zero (31 December 2019: RMB14,706,000).

Buyers of artworks are required to settle the entire purchase price of the artworks within 7 days after the date of auction. The artwork will only be delivered to its buyer after full payment is settled. Net sale proceeds (being the hammer price after deducting the seller's commission and the personal income tax) will be paid to the seller subsequently. The commission income from buyer is recognised as trade receivables for art and asset auction business and the unsettled hammer price is recognised as other receivables from customers in respect of art and asset auction business.

The following is the ageing analysis of trade receivables for art and asset auction business (net of impairment allowances) presented based on the invoice dates.

		As at	As at
		30 June	31 December
		2020	2019
		RMB'000	RMB'000
		(unaudited)	(audited)
Less than 60 days	-	14,706
12. ACCRUALS AND OTHER PAYABLES
		As at	As at
		30 June	31 December
		2020	2019
		RMB'000	RMB'000
		(unaudited)	(audited)
Payables on behalf of customers in respect of art and asset auction business	-	72,512
Other payables for art and asset auction business	-	351
Accrued expenses	1,818	3,807
Other tax payables	492	4,138
Security deposits received for auctions	-	5,400
Others	28	316
		2,338	86,524

For the payables of art and asset auction business, after the purchase cost and all outstanding commission receivable from the buyer are fully settled, net sale proceeds (being the hammer price after deducting the seller's commission and the personal income tax) will be paid to the seller within 60 days from date of auction or receipt of settlement from buyer, whichever is later. The Group has financial risk management policies in place to ensure that all payables are settled within the credit time frame.

The Group's payables on behalf of customers in respect of art and asset auction business were aged within 60 days as at 31 December 2019 based on the dates of relevant auction services rendered.

13. AMOUNT DUE TO IMMEDIATE HOLDING COMPANY

The amount is non-trade nature, unsecured, interest-free and repayable on demand.

30	China Art Financial Holdings Limited / Interim Report 2020

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

14. SHARE CAPITAL

	Number of
	shares	Nominal value
			Equivalent to
	'000	HK$'000	RMB'000
Ordinary shares of HK$0.01 each
Authorised
At 1 January 2019, 30 June 2019,
31 December 2019 and 30 June 2020	5,000,000	50,000	43,420
Issued and fully paid
At 1 January 2019	1,600,000	16,000	13,995
Issue of shares on placing of shares (Note)	78,000	780	684
At 30 June 2019, 31 December 2019 and 30 June 2020	1,678,000	16,780	14,679

Note: On 17 May 2019, the Company completed a placing of 78,000,000 new ordinary shares of the Company at HK$1.3 per share to certain independent third parties. The net proceeds (after deduction of transaction costs of RMB1,131,000) of approximately RMB87,817,000 are used for development of the artwork auction financing in Hong Kong and for general working capital purpose. These shares rank pari passu with the then existing shares of the Company in all respects.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to the Company's residual assets.

15. SHARE-BASED PAYMENTS

The Company's share option scheme (the "Scheme") was adopted pursuant to a resolution passed by the Company on 14 October 2016 for the primary purpose of providing incentives to directors and eligible participants, and will expire on 13 October 2026.

The table below discloses movement of the Company's share options held by the Group's employees:

				Number of share
				options under
				the Scheme
				outstanding as at
				1 January 2019,
				30 June 2019,
				31 December 2019
Date of grant	Exercise price	Vesting date	Exercisable period	and 30 June 2020
2 June 2017	HK$0.8	2 June 2017	2 June 2017 to 1 June 2022	8,000,000
2 June 2017	HK$0.8	2 December 2017	2 December 2017 to 1 June 2022	8,000,000
2 June 2017	HK$0.8	2 June 2018	2 June 2018 to 1 June 2022	7,000,000
				23,000,000

China Art Financial Holdings Limited / Interim Report 2020

31

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

For the six months ended 30 June 2020

15. SHARE-BASED PAYMENTS (Continued)

No equity-settled share option expense was recognised for the six months ended 30 June 2020 and 2019 as all share options were vested in previous periods.

When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in share option reserve will be transferred to retained profits.

16. RELATED PARTY DISCLOSURES

1. At the end of the reporting period, the Group had the following outstanding balance with Mr. Fan Zhijun, a director of the Company:

	At	At
	30 June	31 December
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(audited)
Lease liabilities due to Mr. Fan Zhijun	3,770	4,528

1. During the period, the Group entered into the following transactions with Mr. Fan Zhijun, a director of the Company:

Six months ended 30 June

20202019

RMB'000 RMB'000

(unaudited) (unaudited)

Interest expenses on lease liabilities	99	116

1. Compensation of key management personnel
   The remuneration of key management personnel during the period is as follows:

	Six months ended 30 June
	2020	2019
	RMB'000	RMB'000
	(unaudited)	(unaudited)
Salaries and other benefits	935	1,964
Retirement benefit scheme contributions	20	65
	955	2,029

The remuneration of key management personnel is determined by reference to the performance of individuals and market trend.

32	China Art Financial Holdings Limited / Interim Report 2020