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UNAUDITED SECOND QUARTER RESULTS FOR THE PERIOD ENDED 30 JUNE 201 7

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 second quarter and six months ended 30 June 2017

2Q2017 vs 2Q2016

Revenue

Group revenue increased by RMB655.6 million or 25.8% from RMB2,543.4 million in 2Q2016 to RMB3,199.0 million in 2Q2017. The increase in revenue was principally attributed to a significant increase in average selling prices of hot rolled coil ("HRC") coupled with an increase in sales volume of HRC driven by infrastructure and construction activities in the PRC in 2Q2017 as compared to previous corresponding period.

In 2Q2017, the Group sold 1,130,200 tonnes of HRC and 33 tonnes of steel billets as compared to 1,038,809 tonnes of HRC and 346 tonnes of steel billets in 2Q2016. Overall sales quantity increased by 91,078 tonnes or 8.8%.

Cost of sales

Total cost of sales increased by RMB482.0 million or 22.5%, from RMB2,142.0 million in 2Q2016 to RMB2,624.0 million in 2Q2017. The increase was primarily due to higher raw material prices for steel production coupled with higher sales volume in 2Q2017 as mentioned above as compared to the previous corresponding period.

Gross profit

Gross profit increased by RMB173.7 million or 43.2%, from RMB401.4 million in 2Q2016 to RMB575.1 million in 2Q2017.

Gross profit margin increased by 2.2 percentage points from 15.8% in 2Q2016 to 18.0% in 2Q2017. The increase was primarily due to the increase in average selling prices of products sold which slightly outpaced the increase in raw materials prices in 2Q2017.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB12.7 million, from RMB20.0 million in 2Q2016, to RMB32.7 million in 2Q2017. The increase was mainly to higher transportation costs associated with the delivery of Aoyu Steel's HRC products to customers in the PRC, in line with higher sales recorded by Aoyu Steel in 2Q2017.

Administrative expenses

Administrative expenses decreased by RMB4.2 million, from RMB73.4 million in 2Q2016 to RMB69.2 million in 2Q2017, primarily due to the disposal of the Group's 55% owned subsidiary, Delong Thailand as well as lower provision for staff bonus in 2Q2017 as compared to previous corresponding period.

Finance expenses

Finance expenses decreased by RMB29.9 million from RMB55.3 million in 2Q2016 to RMB25.4 million in 2Q2017, primarily due to the significant decrease in notes payables, which in turn reduced the interest espenses in 2Q2017.

Net profit

As a result of higher operating profit, the Group reported a net profit of RMB380.8 million in 2Q2017, compared to RMB284.8 million in 2Q2016. The net profit margin was 11.9% and 11.2% in 2Q2017 and 2Q2016, respectively.

1H2017 vs 1H2016

Revenue

Group revenue increased by RMB1,556.0 million or 33.6%, from RMB4,629.7 million in 1H2016, to RMB6,185.7 million in 1H2017. The increase in revenue was principally attributed to a significant increase in average selling prices of HRC sold amid tighter supplies following production cuts and increased infrastructure and construction activities in the PRC.

In 1H2017, the Group sold 2,039,873 tonnes of HRC and 66 tonnes of steel billets as compared to 2,036,591 tonnes of HRC and 575 tonnes of steel billets in 1H2016. Overall sales quantity increased by 2,773 tonnes or 0.1%.

Cost of sales

Total cost of sales increased by RMB1,068.2 million or 26.6%, from RMB4,014.1 million in 1H2016 to RMB5,082.3 million in 1H2017. The increase was primarily due to higher raw materials prices for production amid rising iron ore demand from mills in 1H2017 as compared to the previous corresponding period.

Gross profit

Gross profit increased by RMB487.9 million or 79.3%, from RMB615.6 million in 1H2016, to RMB1,103.5 million in 1H2017.

Gross profit margin increased by 4.5 percentage points, from 13.3% in 1H2016 to 17.8% in 1H2017. The increase was primarily due to the increase in average selling prices of products sold which outpaced the increase in raw materials prices in 1H2017 coupled with production efficiency amid continued improvement to the production facilities.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB24.7 million, from RMB35.6 million in 1H2016, to RMB60.3 million in 1H2017. 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 decreased by RMB12.6 million, from RMB151.2 million in 1H2016, to RMB138.6 million in 1H2017, primarily due to the disposal of the Group's 55% owned subsidiary, Delong Thailand, coupled with lower provision for staff bonus during the period under review.

Finance expenses

Finance expenses decreased by RMB48.9 million, from RMB105.2 million in 1H2016, to RMB56.3 million in 1H2017, mainly due to reduction in notes payables in 1H2017 compared to 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 RMB768.6 million in 1H2017, compared to a net profit of RMB380.5 million in 1H2016. The net profit margin was 12.4% and 8.2% in 1H2017 and 1H2016, respectively.

(b) Review of balance sheet of the Group as at 30 June 2017

Current assets

Current assets increased by RMB221.2 million, from RMB5,430.3 million as at 31 December 2016 to RMB5,651.5 million as at 30 June 2017, primarily due to the increase in held for trading investments, higher inventories as well as higher notes receivable which was in line with higher revenue in 1H2017.

Current liabilities

Current liabilities decreased by RMB724.6 million, from RMB5,103.0 million as at 31 December 2016 to RMB4,378.4 million as at 30 June 2017, primarily due to repayments of bank borrowings and notes payables during the period under review. The decrease was partially offset by the increase in the utilization of letter of credit (classified under trade and other payables) for payments to creditors and suppliers.

The higher utilization of letter of credit was due to the lower security requirement as compared to notes payables.

Working capital

The working capital position improved by RMB945.8 million, from RMB327.3 million as at 31 December 2016, to RMB1,273.1 million as at 30 June 2017.

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 RMB27.2 million, from RMB2,229.3 million as at 31 December 2016 to RMB2,202.1 million as at 30 June 2017. 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 increased by RMB181.7 million, from RMB228.2 million as at 31 December 2016 to RMB409.9 million as at 30 June 2017, primarily due to the drawdown of long term bank borrowings for working capital purposes during the period under review.

(c) Review of cash flow statement of the Group

2Q2017 vs 2Q2016

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB64.9 million, from RMB425.3 million in 2Q2016 to RMB490.2 million in 2Q2017, primarily due to the increase in operating profit. Cash from operating activities increased by RMB648.0 million from RMB619.2 million in 2Q2016 to RMB1,267.2 million in 2Q2017, attributable mainly to the increase in the issuance of letters of credit in place of notes payables for the period under review.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB415.8 million in 2Q2017. This comprised principally the progress payments for the on-going technical enhancements to the upgrade production facilities in the PRC and payments for the purchase of held for trading investments and available-for-sale financial assets.

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

Net Cash Used In Financing Activities

Net cash used in financing activities was RMB933.4 million in 2Q2017. This was mainly attributable to the drawdown of bank borrowing of RMB802.4 million for working capital purposes, loan principal and interest repayments of RMB1,735.8 million.

1H2017 vs 1H2016

Net Cash Used In Operating Activities

Operating cashflow before working capital changes increased by RMB375.1 million, from RMB687.1 million in 1H2016 to RMB1,062.2 million in 1H2017, primarily due to the increase in operating profit. Net cash from operating activities increased by RMB1,785.1 million from RMB447.2 million in 1H2016, to RMB2,232.3 million in 1H2017, attributable mainly to the decrease in bank balances pledged as security to banks for the issuance of notes payable as well as the increase in trade and other payables including letters of credit during the period under review.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB266.1 million in 1H2017. This comprised principally the progress payments for the 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 generated from financing activities was RMB1,595.4 million in 1H2017. This was mainly attributable to the drawdown of bank borrowings of RMB1,266.6 million, loan principal and interest repayments of RMB2,861.9 million.

Commentary

While steel prices enjoyed a buoyant first half in 2017 driven by strong infrastructure and property construction spending, the operating outlook for the PRC steel industry is expected to remain challenging as steel prices remained volatile, as well as continued government efforts to reduce excess capacity in the steelmaking industry.

The PRC Government has also announced plans to reduce steelmaking capacity in Hebei Province by 31.86 million tonnes in 2017, and will accelerate production cuts in Hebei's Langfang, Baoding and Zhangjiakou cities. The Company's subsidiary, Laiyuan County Aoyu Steel Co., Ltd. ("Aoyu Steel"), is located in Baoding, one of the affected cities under the Capacity Reduction Plans. Based on the latest discussions between the Company and the relevant regulatory authorities in the PRC, Aoyu Steel will be required to cease steelmaking operations by 4Q2017, which will adversely impact the Group's financial position.

Further, as part of government efforts to control pollution, steel producers are required to reduce output by least half during the peak pollution season over the winter months and/or smoggy days.

Industrial pollution also remains a primary concern in the PRC and the ongoing haze issue is also expected to have impacts on the steel industry in terms of production and steel transportation. To be in line with the industry's rising environmental standards, the Group, continually invests in technological upgrades and enhancements to reduce emission, improve energy efficiency and recycling of waste material. Such technological enhancements, undertaken from time to time, also strengthen the production efficiency of the Group's facility, thereby reducing operating costs.

To diversify, the Group will also continue to selectively engage in opportunities to invest in quoted and/or unquoted securities, as well as the provision of seed and mezzanine capital to private companies with growth potential and undertaking business incubation. The Board and Management will also continue to explore and evaluate earnings-accretive acquisitions and/or investments for the long-term benefit of shareholders. The Group will also diversify into asset management business in due course, subject to obtaining the Type 9 Licence by the Securities and Futures Commission of Hong Kong.