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Profit & Loss
Consolidated Statement of Comprehensive Income
Review Of Performance
(a) Financial Review for the fourth quarter and year ended 31 December 2016
1Q2017 vs 1Q2016
Group revenue increased by RMB900.5 million or 43.2% from RMB2,086.2 million in 1Q2016 to RMB2,986.7 million in 1Q2017. The increase in revenue was principally attributed to a significant increase in average selling prices of HRC amid tighter supplies following production cuts and increased infrastructure and construction activities in the PRC during the period under review.
In 1Q2017, the Group sold 909,673 tonnes of HRC and 32 tonnes of steel billets, compared to 998,023 tonnes of HRC and 229 tonnes of steel billets in 1Q2016. Overall sales quantity decreased by 88,547 tonnes or 8.9%.
The Group recorded lower sales volume in 1Q2017 mainly due to the maintenance exercise carried out at one of its three blast furnaces in Delong Steel Limited coupled with deconsolidation of sales from Delong (Thailand) Co., Ltd ("Delong Thailand"). Delong Thailand was divested in 4Q2016.
Cost of sales
Total cost of sales increased by RMB586.1 million or 31.3%, from RMB1,872.2 million in 1Q2016 to RMB2,458.3 million in 1Q2017. The increase was primarily due to higher iron ore prices for production amid strong demand from mills in 1Q2017 as compared to the corresponding period.
Gross profit increased by RMB314.3 million from RMB214.1 million in 1Q2016 to RMB528.4 million in 1Q2017.
Gross profit margin increased by 7.4 percentage points from 10.3% in 1Q2016 to 17.7% in 1Q2017. The increase was primarily due to the increase in average selling prices of products sold, which significantly outpaced the increase in prices of raw materials in 1Q2017.
Distribution and marketing expenses
Distribution and marketing expenses increased by RMB12.2 million, from RMB15.5 million in 1Q2016, to RMB27.7 million in 1Q2017. This was due 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 1Q2017.
Administrative expenses decreased by RMB8.4 million, from RMB77.8 million in 1Q2016 to RMB69.4 million in 1Q2017. The decrease was primarily due to the disposal of the Group's 55% owned subsidiary, Delong Thailand, coupled with the Group's cost containment measures during the period under review.
Finance expenses decreased by RMB19.0 million from RMB49.9 million in 1Q2016 to RMB30.9 million in 1Q2017. The decrease was mainly due to reduction in bank borrowings including notes payables in 1Q2017.
As a result of higher operating profit and after taking into account taxation and non-controlling interest, the Group reported a net profit of RMB387.8 million in 1Q2017, compared to RMB95.7 million in 1Q2016. The net profit margin was 13.0% in 1Q2017, compared to 4.5% in 1Q2016.
(b) Review of balance sheet of the Group as at 31 March 2017
Current assets increased by RMB29.2 million, from RMB5,430.3 million as at 31 December 2016 to RMB5,459.5 million as at 31 March 2017, primarily due to the increase in notes receivable which was in line with higher revenue aw well as higher inventories in 1Q2017.
Current liabilities decreased by RMB414.3 million, from RMB5,103.0 million as at 31 December 2016 to RMB4,688.7 million as at 31 March 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 trade payables.
The working capital position improved by RMB443.5 million, from RMB327.3 million as at 31 December 2016, to RMB770.8 million as at 31 March 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 rolledľover by these financial institutions.
Non-current assets - Property, plant and equipment
Property, plant and equipment decreased by RMB44.5 million, from RMB2,229.3 million as at 31 December 2016 to RM2,184.8 million as at 31 March 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 increased by RMB14.8 million, from RMB228.2 million as at 31 December 2016 to RMB243.0 million as at 31 March 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
1Q2017 vs 1Q2016
Net Cash Used In Operating Activities
Operating cashflow before working capital changes increased by RMB310.2 million, from RMB261.8 million in 1Q2016 to RMB572.0 million in 1Q2017, primarily due to the increase in operating profit. Cash from operating activities increased by RMB1,220.2 million from a negative position RMB182.1 million in 1Q2016 to a positive position RMB1038.1 million in 1Q2017, attributable mainly to a decrease in bank balances pledged as security for the issuance of notes payables during the period under review.
Net Cash Generated From Investing Activities
Net cash generated from investing activities was RMB149.7 million in 1Q2017. This was mainly attributable to proceeds from the disposal of held for trading investments and held-to-maturity investments in 1Q2017.
This was partially offset by payments for on-going technological and environmental enhancement programmes to the production facilities in the PRC.
Net Cash Used In Financing Activities
Net cash used in financing activities was RMB661.9 million in 1Q2017. This was mainly attributable to the drawdown of bank borrowings of RMB464.2 million for working capital, loan principal and interest repayments of RMB1,126.1 million.
While the overall outlook for the PRC steel industry remains challenging, steel prices enjoyed a buoyant first quarter in 2017 driven by strong infrastructure and property construction spending and a renewed push by the PRC Government to cut 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 latest discussions between the Company and the relevant regulatory authorities in the PRC, Aoyu Steel will be required to cease steelmaking operations by 3Q2017, which will adversely impact the Group's financial position.
As part of the ongoing efforts to control pollution, steel producers are also required to reduce output by at least half during the peak winter heating months and/or smog days in 2017.
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 has continually invested in technological upgrades and enhancements to reduce emission, improve energy efficiency and recycling of waste material.
Nevertheless, the Group's will 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.