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UNAUDITED FULL YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 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 fourth quarter and year ended 31 December 2016

4Q2016 vs 4Q2015

Revenue

Group revenue increased by RMB984.1 million or 57.0% from RMB1,727.0 million in 4Q2015 to RMB2,711.1 million in 4Q2016. The increase in revenue was principally attributed to a significant increase in average selling prices of HRC driven by strong demand from steel traders in anticipation of higher steel prices in 2017 amid increased infrastructure and construction activities in the PRC.

In 4Q2016, the Group sold 865,455 tonnes of HRC and 30 tonnes of steel billets as compared to 900,987 tonnes of HRC in 4Q2015. Overall sales quantity decreased by 35,502 tonnes or 3.9%. The decrease in volume of HRC sold was due to the maintenance programme carried out at one of its three blast furnaces during the period under review.

Cost of sales

Total cost of sales increased by RMB400.7 million or 21.8%, from RMB1,842.0 million in 4Q2015 to RMB2,242.7 million in 4Q2016. The increase was primarily due to higher raw material prices for steel production amid strong demand from steel mills in 4Q2016 as compared to the previous corresponding period.

Gross profit

Gross profit was RMB468.4 million in 4Q2016 compared to the gross loss of RMB115.0 million in 4Q2015.

Gross profit margin was 17.3% in 4Q2016, primarily due to the increase in average selling prices of products sold which significantly outpaced the increase in prices of raw materials in 4Q2016 as compared to the previous corresponding period.

Other losses-Net

Other losses increased by RMB683.2 million, from RMB16.3 million in 4Q2015, to RMB699.5 million in 4Q2016, primarily due to the impairment charges of RMB600.0 million provided on Aoyu Steel's production facilities, allowance for impairment for available-for-sale financial assets of RMB45.0 million and write-down of inventory to net realizable value of RMB37.9 million. Please refer to note 2- other losses on page 3 of the results announcement for details.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB3.2 million, from RMB16.2 million in 4Q2015, to RMB19.4 million in 4Q2016. The increase was primarily due to higher transportation costs associated with the delivery of Aoyu Steel's HRC products to customers in the PRC, in line with the higher sales volume recorded by Aoyu Steel in 4Q2016.

Administrative expenses

Administrative expenses decreased by RMB20.5 million, from RMB61.1 million in 4Q2015 to RMB40.6 million in 4Q2016, primarily due to the reversal of RMB25.5 million of sewage and environmental impact assessment fee over-recognised in 1Q2016.

Finance expenses

Finance expenses increased by RMB38.3 million from RMB42.4 million in 4Q2015 to RMB80.7 million in 4Q2016. The increase was mainly due to the provision for interest on bank borrowings under-recognised in the first nine-months of 2016.

Net profit

As a result of the foregoing and after taking into account taxation and non-controlling interest, the Group reported a net loss of RMB396.8 million in 4Q2016, compared to the net loss of RMB235.9 million in the corresponding period.

Excluding the impairment charge of RMB600.0 million on property, plant and equipment in respect of the Aoyu Steel's production facilities, net profit after tax in 4Q2016 would have been RMB203.2 million. The net profit margin was 7.5% in 4Q2016.

FY2016 vs FY2015

Revenue

Group revenue increased by RMB2,922.7 million or 42.0%, from RMB6,952.3 million in FY2015, to RMB9,875.0 million in FY2016. 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.

In FY2016, the Group sold 3,919,163 tonnes of HRC and 456 tonnes of steel billets as compared to 3,391,841 tonnes of HRC and 1,096 tonnes of steel billets in FY2015. Overall sales volume increased by 526,682 tonnes or 15.5%.

Cost of sales

Total cost of sales increased by RMB1,479.4 million or 21.3%, from RMB6,931.3 million in FY2015 to RMB8,410.7 million in FY2016. The increase was primarily due to higher sales volume mentioned above as compared to the previous corresponding period.

Gross profit

Gross profit increased by RMB1,443.2 million, from RMB21.0 million in FY2015, to RMB1,464.2 million in FY2016.

Gross profit margin increased by 14.5 percentage points, from 0.3% in FY2015 to 14.8% in FY2016. The increase was primarily due to the increase in average selling prices of products sold coupled with lower raw materials prices in FY2016.

Other losses-Net

Other losses increased by RMB661.3 million, from RMB15.5 million in 4Q2015, to RMB676.8 million in 4Q2016, primarily due to the impairment charges of RMB600.0 million provided on Aoyu Steel's production facilities, allowance for impairment for available-for-sale financial assets of RMB45.0 million and write-down of inventories of RMB37.9 million. Please refer to note 2- other losses on page 3 of the results announcement for details.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB7.6 million, from RMB69.0 million in FY2015, to RMB76.6 million in FY2016. 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 RMB5.9 million, from RMB266.3 million in FY2015, to RMB260.4 million in FY2016, primarily due to the overall decrease in general administrative expenses as a results of the Group's cost cutting measures.

Finance expenses

Finance expenses increased by RMB51.9 million, from RMB178.5 million in FY2015, to RMB230.4 million in FY2016. The increase was mainly due to the increase in bank borrowings (including notes payables) drawdown for working capital purposes in FY2016 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 RMB213.0 million in FY2016, a reversal from a net loss of RMB392.8 million in FY2015. The net profit margin was 2.2% in FY2016

Excluding the impairment charge of RMB600.0 million on property, plant and equipment in respect of the Aoyu Steel's production facilities, net profit after tax in FY2016 would have been RMB813.0 million. The net profit margin was 8.2% in FY2016.

(b) Review of balance sheet of the Group as at 31 December 2016

Current assets

Current assets increased by RMB1,366.3 million, from RMB4,041.3 million as at 31 December 2015 to RMB5,407.6 million as at 31 December 2016, primarily due to the increase in the purchase of held for trading investments and held-to-maturity investments, and higher bank balances pledged as security for the issuance of notes payables during the period under review.

Current liabilities

Current liabilities decreased by RMB12.1 million, from RMB5,115.1 million as at 31 December 2015 to RMB5,103.0 million as at 31 December 2016, primarily due to overall decrease in trade and other payables during the period under review. The reduction in trade payables was primarily due to the increased usage of notes payables for payment to creditors and suppliers.

Working capital

The working capital position improved by RMB1,378.4 million, from a negative position RMB1,073.8 million as at 31 December 2015, to a positive position RMB304.6 million as at 31 December 2016.

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 RMB1,145.1 million, from RMB3,374.4 million as at 31 December 2015 to RMB2,229.3 million as at 31 December 2016. The decrease was primarily due to depreciation and impairment 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 RMB137.7 million, from RMB365.9 million as at 31 December 2015 to RMB228.2 million as at 31 December 2016, primarily due to the maturity of non current portions of the borrowings now reclassified to current liabilities.

(c) Review of cash flow statement of the Group

4Q2016 vs 4Q2015

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB644.6 million, from a negative position RMB108.4 million in 4Q2015, to a positive position RMB536.2 million in 4Q2016, primarily due to the increase in operating profit. After taking into consideration cash used for working capital purposes and tax paid, net cash from operating activities increased by RMB516.2 million from RMB7.8 million in 4Q2015, to RMB524.0 million in 4Q2016.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB121.1 million in 4Q2016. This comprised principally the payments for the purchase of investments held-to-maturity and available-for-sale financial assets, and partially offset by the proceeds from the disposal of investments held for trading investments and interest received from banks.

Net Cash Used in Financing Activities

Net cash used in financing activities was RMB218.9 million in 4Q2016. This was mainly attributable to the drawdown of bank borrowing of RMB698.5 million for working capital purposes, loan principal and interest repayments of RMB917.4 million.

FY2016 vs FY2015

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB1,462.0 million, from RMB152.5 million in FY2015 to RMB1,614.5 million in FY2016, primarily due to the increase in operating profit. After taking into consideration cash used for working capital purposes and tax paid, net cash from operating activities increased by RMB1,354.6 million from RMB195.7 million in FY2015, to RMB1,550.3 million in FY2016.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB828.7 million in FY2016. 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 interest received from the banks.

Net Cash Used in Financing Activities

Net cash used in financing activities was RMB264.3 million in FY2016. This was mainly attributable to the drawdown of bank borrowings of RMB2,901.1 million, loan principal and interest repayments of RMB3,165.4 million.

Commentary

The Group's core steel production business recorded growth in 2016, lifted by consumption-driven steel demand from the infrastructure, residential construction, automobiles and railway sectors.

Nonetheless, the operating environment is expected to remain challenging. The PRC government had recently unveiled plans to reduce steelmaking capacity in Hebei Province by 31.86 million tonnes in 2017, and will accelerate steelmaking capacity reduction efforts targeting the cities of Langfang, Baoding and Zhangjiakou in Hebei Province. As part of the capacity reduction exercises, steel producers in other provinces may also be required to reduce their steelmaking output.

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 current discussions between the Company and the relevant regulatory authorities in the PRC, Aoyu Steel may be required to cease its steelmaking operations, which will adversely impact the Group's financial position.

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 resource.

Operationally, the Group is also pleased to report that the maintenance exercise carried out at one of its three blast furnaces in Delong Steel Limited was completed in January 2017. Accordingly, the Group's production capacity is now back to normal operating levels. The divestment of the Group's entire equity interest in its Thailand production facility - Delong (Thailand) Co., Ltd., - was also successfully completed on 3 February 2017. The Sale Consideration and Shareholder Loan were fully received on 3 February 2017.

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