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UNAUDITED THIRD QUARTER RESULTS FOR THE PERIOD ENDED 30 SEPTEMBER 2016

Financials Archive

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Profit & Loss

Profit & Loss

Consolidated Statement of Comprehensive Income

Comprehensive Income

Balance Sheet

Balance Sheet

Review Of Performance

(a) Financial Review for the third quarter and nine-month ended 30 September 2016

3Q2016 vs 3Q2015

Revenue

Group revenue increased by RMB925.6 million or 57.5% from RMB1,608.6 million in 3Q2015 to RMB2,534.2 million in 3Q2016. The increase in revenue was principally attributed to a significant increase in average selling prices and sales volume of hot rolled coil (“HRC”) driven by increased infrastructure and construction activities in the PRC in 3Q2016.

The increase was also due to maiden contributions from Delong (Thailand) Co., Ltd (“Delong Thailand”) the Group’s 55% owned subsidiary, Delong Thailand contributed 7.7% to the Group’s revenue in 3Q2016. Delong Thailand commenced the sales of its first batch of HRC in September 2015 and is progressively ramping up its production capacity.

In 3Q2016, the Group sold 1,017,115 tonnes of HRC and 80 tonnes of steel billets as compared to 902,037 tonnes of HRC and 745 tonnes of steel billets in 3Q2015. Overall sales quantity increased by 114,413 tonnes or 12.7%.

Cost of sales

Total cost of sales increased by RMB532.2 million or 32.8%, from RMB1,621.7 million in 3Q2015 to RMB2,153.9 million in 3Q2016. The increase was primarily due to higher sales volume as mentioned above and higher raw material prices for steel production amid strong demand from steel mills in 3Q2016 as compared to the previous corresponding period.

Gross profit

Gross profit was RMB380.2 million in 3Q2016 compared to the gross loss of RMB13.1 million in 3Q2015.

Gross profit margin was 15.0% in 3Q2016, primarily due to the increase in average selling prices of products sold which significantly outpaced the increase in prices of raw materials in 3Q2016 as compared to the previous corresponding period.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB7.1 million, from RMB14.5 million in 3Q2015, to RMB21.6 million in 3Q2016. The increase in distribution and marketing expenses was primarily due to higher transportation costs associated with the delivery of HRC products in the PRC, in line with the higher sales volume recorded in 3Q2016.

Administrative expenses

Administrative expenses decreased by RMB5.4 million, from RMB73.9 million in 3Q2015 to RMB68.5 million in 3Q2016, primarily due to the overall decrease in general administrative expenses as a result of the Group’s cost cutting measures.

Finance expenses

Finance expenses increased by RMB4.2 million from RMB40.3 million in 3Q2015 to RMB44.5 million in 3Q2016. The increase was mainly due to the increase in bank borrowings (including notes payables) drawdown for working capital purposes in 3Q2016 as compared to the previous corresponding period.

Net profit

As a result of higher operating profit and after taking into account taxation and non-controlling interest, the Group reported a net profit of RMB229.3 million in 3Q2016, a reversal from a net loss of RMB107.0 million in 3Q2015. The net profit margin was 9.1% in 3Q2016.

9M2016 vs 9M2015

Revenue

Group revenue increased by RMB1,938.6 million or 37.1%, from RMB5,225.3 million in 9M2015, to RMB7,163.9 million in 9M2016. The increase in revenue was principally attributed to a significant increase in volume of HRC sold amid tighter supplies following production cuts in the PRC in 2015 and restocking by customers, and the increase in average selling prices of HRC sold.

The increase was also due to maiden contributions from Delong (Thailand) Co., Ltd (“Delong Thailand”), the Group’s 55% owned subsidiary, Delong Thailand contributed 7.5% to the Group’s revenue in 9M2016.

In 9M2015, the Group sold 3,053,708 tonnes of HRC and 426 tonnes of steel billets as compared to 2,490,854 tonnes of HRC and 1,096 tonnes of steel billets in 9M2015. Overall sales volume decreased by 562,184 tonnes or 22.6%.

Cost of sales

Total cost of sales increased by RMB1,078.8 million or 21.2%, from RMB5,089.3 million in 9M2015 to RMB6,168.1 million in 9M2016. The increase was primarily due to higher sales volume mentioned above, despite lower raw materials prices for production amid rising iron ore supplies in 9M2016 as compared to the previous corresponding period.

Gross profit

Gross profit increased by RMB859.8 million or 632.4%, from RMB136.0 million in 9M2015, to RMB995.8 million in 9M2016.

Gross profit margin increased by 11.3 percentage points, from 2.6% in 9M2015 to 13.9% in 9M2016. The increase was primarily due to the increase in average selling prices of products sold coupled with the decrease in in raw materials prices in 9M2016.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB4.4 million, from RMB52.7 million in 9M2015, to RMB57.1 million in 9M2016. The increase in distribution and marketing expenses was primarily due to higher transportation costs associated with the delivery of HRC products to customers in the PRC as compared to the previous corresponding period.

Administrative expenses

Administrative expenses increased by RMB14.5 million, from RMB205.3 million in 9M2015, to RMB219.8 million in 9M2016. The increase in administrative expenses was primarily due to higher sewage and environmental impact assessment fee incurred in 9M2016 to comply with the increasingly stringent environmental regulations, and the increase in provision for staff bonus in 9M2016.

Finance expenses

Finance expenses increased by RMB13.5 million, from RMB136.1 million in 9M2015, to RMB149.6 million in 9M2016. The increase was mainly due to the increase in bank borrowings drawdown for working capital purposes in 9M2016 compared to the previous corresponding period.

Net profit

As a result of higher operating profit and after taking into account taxation and non-controlling interest, the Group reported a net profit of RMB609.8 million in 9M2016, a reversal from a net loss of RMB157.0 million in 9M2015. The net profit margin was 8.5% in 9M2016

(b) Review of balance sheet of the Group as at 30 September 2016

Current assets

Current assets increased by RMB1,285.8 million, from RMB4,041.3 million as at 31 December 2015 to RMB5,327.1 million as at 30 September 2016, primarily due to the increase in the purchase of held for trading investments, an increase in notes receivable which was in line with higher revenue recorded in 9M2016, and higher bank balances pledged as security for the issuance of notes payables during the period under review.

Current liabilities

Current liabilities increased by RMB256.8 million, from RMB5,115.1 million as at 31 December 2015 to RMB5,371.9 million as at 30 September 2016, primarily due to the increase in notes payables issued for the payments to creditors and an overall increase in trade and other payables. The increase was partially offset by the repayments of bank borrowings during the period under review.

Working capital

The negative working capital position was RMB44.8 million as at 30 September 2016. The Group’s negative working capital position was mainly due to the use of short-term bank loans to finance its capital expenditure and working capital purposes.

Although the Group was in a negative working capital position, it was able to service all of its debt obligations primarily through cash generated from operations.

The Group has satisfactorily maintained its credit facilities with financial institutions in PRC during the period under review and the credit facilities have constantly been renewed and/or rolled–over by these financial institutions..

Non-current assets – Property, plant and equipment

Property, plant and equipment decreased by RMB245.4 million, from RMB3,374.4 million as at 31 December 2015 to RMB3,129.0 million as at 30 September 2016. The decrease was primarily due to depreciation charges for the period under review.

The decrease was partially offset by the capital expenditure incurred for on-going technological and environmental enhancement programmes to the production facilities in the PRC.

Non-Current liabilities

Non-current liabilities decreased by RMB0.7 million, from RMB365.9 million as at 31 December 2015 to RMB365.2 million as at 30 September 2016, primarily due to the classification of deferred tax liabilities to income tax charges for the period under review.

(c) Review of cash flow statement of the Group

3Q2016 vs 3Q2015

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB336.4 million, from RMB52.1 million in 3Q2015 to RMB388.5 million in 3Q2016, primarily due to the increase in operating profit. Due to better working capital management, cash from operating activities increased by RMB928.3 million from a negative position RMB283.1 million in 3Q2015 to a positive position RMB645.2 million in 3Q2016.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB447.7 million in 3Q2016. This comprised principally the payments for the purchase of held for trading investments and available-for-sale financial assets, and partially offset by the proceeds from the interest received from banks.

Net Cash Used in Financing Activities

Net cash used in financing activities was RMB145.1 million in 3Q2016. This was mainly attributable to the drawdown of bank borrowing of RMB561.5 million for working capital purposes, loan principal and interest repayments of RMB706.6 million.

9M2016 vs 9M2015

Net Cash Used In Operating Activities

Operating cashflow before working capital changes increased by RMB814.6 million, from RMB261.0 million in 9M2015 to RMB1,075.6 million in 9M2016, primarily due to the increase in operating profit. After taking into consideration cash used for working capital purposes, net cash from operating activities increased by RMB806.8 million from RMB187.8 million in 9M2015, to RMB994.6 million in 9M2016.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB675.9 million in 9M2016. This comprised principally the progress payments for on-going technical enhancements to the upgrade production facilities in the PRC and payments for the purchases of available-for-sale financial assets and held for trading investments.

The decrease was partially offset by the proceeds from the disposal of held-to-maturity financial assets and interest received from the banks.

Net Cash Generated From Financing Activities

Net cash used in financing activities was RMB45.5 million in 9M2016. This was mainly attributable to the drawdown of bank borrowings of RMB2,202.5 million, loan principal and interest repayments of RMB2,248.0 million.

Commentary

The Group’s business grew in the first nine months of 2016, mainly due to industry-wide output cuts and higher steel demand arising from increased infrastructure and construction activities in the PRC.

While the PRC Government’s stimulus measures to boost infrastructure, residential construction and auto manufacturing have supported steel demand, concerns remain over the sustainability of the rebound as well as a competitive business environment, given the persistent production glut.

In view of the current positive market environment for steel production, the Group has decided to postpone the scheduled maintenance of one of its blast furnaces. The Group confirms that the operation of the blast furnace remains stable and believes that the furnace can continue to function within safety parameters during this period.

Industrial pollution in the PRC and the ongoing haze issue continue to be key factors that will lead to restrictive government policy that will affect the steel industry in terms of production and steel transportation. To be in line with the industry’s rising environmental standards, the Group has continually invested in technological upgrades and enhancements to reduce emission, improve energy efficiency and recycling of waste resource.

Following a strategic review undertaken by the Board, the Group had in late August 2016 announced a diversification of its core business to include investing in quoted and/or unquoted securities, as well as the provision of seed and mezzanine capital to private companies with growth potential. Initial investments proposed by the Group include an e-commerce apparel and clothing company and two private equity funds. The abovementioned diversification and investments are subject to the approval of shareholders at an EGM to be convened on 16 November 2016.

The Board and Management will also continue to explore and evaluate earnings-accretive acquisitions and/or investments for the long-term benefit of shareholders.