Zhejiang Narada Power Source Co.Ltd(300068)
Feasibility analysis report on developing futures hedging business
1、 Purpose of Futures Hedging
The futures hedging business carried out by Zhejiang Narada Power Source Co.Ltd(300068) (hereinafter referred to as “the company”) and its subsidiaries is limited to the products and raw materials related to the company’s production and operation. The purpose is to reasonably avoid the adverse impact of commodity price fluctuations on the company’s raw material procurement and product sales and control the company’s operating risks with the help of the price discovery and hedging function of the futures market, Achieve the goal of stable operation of the company.
2、 Basic information of hedging
(I) trading varieties
The futures hedging business of the company and its subsidiaries is limited to the main futures varieties related to production and operation traded in domestic futures exchanges, and any speculative trading for the purpose of profit is strictly prohibited.
(II) proposed investment amount and business period
According to the actual production and operation of the company and its subsidiaries, the quantity and scale of hedging shall be determined based on the existing sales orders in the current period. With a certain risk fluctuation fund, the total amount of margin to be invested by the company and its subsidiaries shall not exceed 120 million yuan for futures hedging business. It can be recycled within the limit, and the business term is valid within one year after the deliberation and approval of the board of directors.
(III) source of funds
The company and its subsidiaries will use their own funds for hedging operations.
(IV) accounting policies and assessment principles
The relevant accounting policies and accounting principles for the company’s futures hedging business will be implemented in strict accordance with the relevant provisions of the accounting standards for Business Enterprises No. 22 – recognition and measurement of financial instruments and the accounting standards for Business Enterprises No. 24 – hedging issued by the Ministry of finance of the people’s Republic of China. The changes in the fair value of futures products used in futures hedging business will be included in the current profits and losses of the company, which will increase or decrease the profits of the company.
3、 Feasibility of developing futures hedging business
The company has established a futures leading group to supervise and manage the futures hedging business; A futures operation team is set up to be responsible for the specific implementation of matters related to futures business. The company will organize special personnel with good quality to be responsible for the trading of futures business.
The company has formulated the management system of futures hedging business as the internal control and risk management system for futures hedging business, which clearly stipulates the amount of hedging business, the variety and scope of hedging business, the approval authority, the responsible department and person, the internal risk reporting system and risk handling procedures, It can effectively ensure the smooth progress of futures business and effectively control risks.
The company’s current self owned capital scale can support the total amount of margin engaged in lead futures hedging business. 4、 Risk analysis of futures hedging business
The company does not carry out hedging business for the purpose of speculation, which is mainly to reasonably avoid the impact on the company caused by the fluctuation of raw material purchase price and product sales price in the company’s production and operation, but there will also be certain risks:
1. Price fluctuation risk: the futures market changes greatly, which may lead to price fluctuation risk and investment loss.
2. Capital risk: futures trading adopts the margin and mark to market system. If the investment amount is too large, it may cause capital liquidity risk, and even be forced to close the position because it is too late to supplement the margin, resulting in actual losses.
3. Internal control risk: futures trading is highly professional and complex, which may cause risks due to imperfect internal control system.
4. Customer default risk: when the futures price fluctuates unfavourably, the customer may violate the relevant provisions of the contract and cancel the product order, resulting in losses to the company.
5. Technical risk: from trading to capital setting and risk control, to the link with futures companies, the stability of internal system and the matching of futures trading, there are risks that the transaction may not be concluded due to system crash, program error, information risk, communication failure and so on.
5、 Risk control measures taken by the company
1. Match the hedging business with the production and operation of the company and its subsidiaries to hedge the risk of price fluctuation to the greatest extent;
2. The company and its subsidiaries will reasonably allocate their own funds for hedging business, strictly control the capital scale of hedging, and reasonably plan and use margin;
3. In accordance with the futures hedging business management system, the hedging business quota, variety range, approval authority, internal audit process, responsible department and person, information isolation measures, internal risk report and handling procedures, information disclosure, etc. shall be clearly stipulated. The company will control all links in strict accordance with the provisions of the futures hedging business management system.
4. The company will establish a customer’s credit management system, review the credit of the counterparty before the transaction, and determine that the counterparty is capable of performing relevant contracts.
5. Set up computer systems and related facilities that meet the requirements to ensure the normal operation of transactions. In case of abnormal faults, corresponding treatment measures shall be taken in time to reduce losses.
6、 Impact Analysis on the company
1. The impact of futures hedging business on the company’s production and operation
When carrying out futures hedging business, the company and its subsidiaries can make full use of the hedging function of the futures market, reasonably avoid the adverse impact of commodity price fluctuations on the company’s raw material procurement and product sales, control the company’s operating risks and achieve the goal of stable operation of the company.
2. The impact of futures hedging business on the company’s finance
The company will conduct accounting treatment in accordance with the relevant provisions of the accounting standards for Business Enterprises No. 22 – recognition and measurement of financial instruments and the accounting standards for Business Enterprises No. 24 – hedging issued by the Ministry of finance of the people’s Republic of China.
7、 Conclusion of feasibility analysis
For commodity futures hedging business, the company can use the price discovery and risk hedging functions of the futures market, use hedging tools to avoid the risk of market price fluctuation, prevent and resolve the market risk caused by the price fluctuation of raw materials, reduce the product cost fluctuation caused by the price fluctuation of raw materials, and reduce the impact of the price fluctuation of raw materials on the normal operation of the company.
To sum up, it is beneficial and feasible for the company to carry out commodity futures hedging business.
Zhejiang Narada Power Source Co.Ltd(300068)
Board of directors
January 26, 2022
