On behalf of the Board of Directors of Delong Holdings Limited ("Delong" or the "Company", together with its subsidiaries, the "Group"), we are pleased to present to you the Annual Report of the Group for the financial year ended 31 December 2016 ("FY2016").
FY2016 was a watershed year for Delong, as we closed the year with a profit attributable to equity holders of the Company ("net profit") of RMB213.0 million, turning around from a loss of RMB392.8 million a year ago ("FY2015"). The Group's business and financial performance in FY2016 is commendable, reflective of Delong's ability to stay competitive even as economic growth in the People's Republic of China (the "PRC") remained unexciting with a full-year GDP of 6.7%, the slowest in 26 years, and conditions in the steel industry continues to be challenging and competitive.
For FY2016, Group revenue increased by approximately 42.0% from approximately RMB7.0 billion for FY2015 to approximately RMB9.9 billion in FY2016, backed mainly by an increase in the sales and average selling prices of our core HRC products.
Despite stiff competition, overall sales volume of the Group's steel products grew 15.5% to 3.9 million tonnes for FY2016, from 3.4 million tonnes a year ago, due in part to tighter supplies following production cuts by the government and restocking demand by customers for our quality hot-rolled coil ("HRC") steel products. On a breakdown basis, the Group sold 3.9 million tonnes of HRC and 456 tonnes of steel billets in FY2016 compared to 3.4 million tonnes of HRC and 1,096 tonnes of steel billets in FY2015.
Cost of sales increased by 21.3% from approximately RMB6.9 billion for FY2015 to approximately RMB8.4 billion for FY2016, which is in tandem with higher sales achieved. Resultantly, the Group turned in a gross profit of approximately RMB1.5 billion in FY2016, a significant improvement from RMB21.0 million in the preceding year. Gross profit margin was 14.5 percentage points higher at 14.8% in FY2016, from 0.3% in FY2015, which was due mainly to higher product average selling prices coupled with lower raw materials prices.
Distribution and marketing expenses rose 11.0%, from RMB69.0 million in FY2015, to RMB76.6 million in FY2016, which was due mainly to higher transportation costs associated with the delivery of HRC products to customers in the PRC. The Group registered a 2.2% decrease in administrative expenses, from RMB266.3 million in FY2015, to RMB260.4 million in FY2016, mainly as a result of the Group's continued cost reduction efforts.
Finance expenses for the review year was 29.1% higher at RMB230.4 million compared to RMB178.5 million in FY2015, due mainly to an increase in bank borrowings drawdown for working capital purposes in FY2016.
For FY2016, the Group recognised an impairment charge of RMB600.0 million, based on an independent valuation carried out on its wholly-owned subsidiary, Laiyuan County Aoyu Steel Co., Ltd. ("Aoyu Steel"). This was in relation to plans by the PRC Government to reduce steelmaking capacity in Hebei Province, which may require Aoyu Steel to cease its steelmaking operations. In view of this ongoing development, the Group had engaged an independent external valuer to perform a valuation of Aoyu Steel's property, plant and equipment based on the replacement cost method.
As a result of the above, the Group achieved a net profit attributable to shareholders of RMB213.0 million in FY2016 and a net profit margin of 2.2%, reversing from a net loss of RMB392.8 million in FY2015. If not for the impairment charge of RMB600.0 million, the Group's net profit in FY2016 would have been higher at RMB813.0 million, with a net profit margin of 8.2%.
FY2016 was marked by several corporate and operational developments. These include the completion of our five-for-one share consolidation exercise in February and the diversification of our business mandate to include the investment business, both of which were approved by shareholders at Extraordinary General Meetings ("EGMs") held in 2016. I must express appreciation to Delong's valued shareholders for casting their vote of support, enabling us to proceed with the developments outlined above.
With a widened business scope that now includes investing in quoted and/or unquoted securities, as well as providing seed and mezzanine capital to private companies with growth potential and undertaking business incubation and angel investments, we will selectively pursue investment opportunities with growth potential and undertaking business incubation and angel investments with a view towards long-term value generation.
Operationally, the Group also carried out a major maintenance exercise at one of our blast furnaces, which was completed in January 2017. Subsequent to the year end in February 2017, the Group also undertook and completed the disposal of its entire equity interest in the Thailand production facility.
Moving into 2017, while demand in the PRC for steel and steel-related products will still see support from the construction, infrastructure, automobile and railway industries, the Board remains of the view that the outlook for PRC steel manufacturers remains highly uncertain.
On the macroeconomic front, the International Monetary Fund (IMF) has forecast a lower 6.5% growth rate for the PRC economy for 2017, and industrial pollution as well as steel oversupply also remain major factors that will impede steel sector growth. The PRC government had also in January 2017 unveiled plans to reduce steelmaking capacity in Hebei Province by 31.86 million tonnes in 2017, and steel producers in other provinces may also be required to reduce their steelmaking output, which may impact the Group and its two production facilities.
The Group is taking a prudent position on the future of its steel manufacturing operations and will concurrently explore new business opportunities locally and abroad while undertaking initiatives to manage its costs and risks.
In closing, on behalf of the Board of Directors, I would like to take this opportunity to extend my appreciation to the Board of Directors for their invaluable guidance and support, and Delong's management and staff for their unwavering loyalty, commitment and support in overcoming challenges. Their collective efforts were instrumental in achieving the turnaround in FY2016.
Mr. Hee Theng Fong, who has served on Delong's Board for over 9 years as an independent director, will not be seeking re-election at the forthcoming Annual General Meeting. Over the years, Delong has benefited significantly from his wisdom and counsel, and on behalf of the Board, I would like to record our sincere appreciations to Mr. Hee for his important contributions. We wish him all the very best in his future endeavours.
To our customers, suppliers and business associates, I must express our sincere appreciation for their continuing support. Finally, I would like to specially thank our shareholders for your commitment, continued support and loyalty to the Group.
While the Group may continue to face challenges given the prevailing sectoral weaknesses, I believe that Delong has a strong foundation and the right strategies to drive long-term sustainable growth for our shareholders, and I look forward to your renewed support in 2017 and beyond.