On behalf of the Board of Directors (the “Board”) of Delong Holdings Limited (“Delong” or the “Company”, together with its subsidiaries, the “Group”), it is my pleasure to present you our Annual Report for the financial year ended 31 December 2017 (“FY2017”).
Delong, with a core business in the production of steel products, continued to experience challenges in 2017 as steel market sentiments remained weak in the People's Republic of China (the “PRC”) and the rest of the world. Nevertheless, despite challenges in our business environment, the year 2017 marked a significant year of investment and progress for Delong. Our commitment to growth paid off, with the Group delivering an eight-fold jump in profit attributable to equity holders of the Company to RMB2.1 billion for FY2017, from RMB0.2 billion a year ago (“FY2016”).
With our core operations firmly rooted in Delong's steel manufacturing core competencies, we actively sought opportunities to deploy our capital for growth-generative opportunities, both domestically and overseas. A key highlight for the review year was our successful entry into a joint-venture agreement with two partners to invest in and construct a steel plant in Indonesia, which I believe will usher in new growth and greater opportunities for Delong's steel business.
The Group registered revenue growth of 29.9% to RMB12.8 billion in FY2017, from RMB9.9 billion in the preceding financial year. The strong revenue growth was attributed to a significant increase in average selling prices of our key Hot-rolled Coil (“HRC”) products, as supplies tightened following the PRC Government's supply-side reform measures mooted in 2016, which has to-date eliminated some 115 million tons of steel capacity as well as an additional 140 million tons of substandard steel capacity (steel scrap)1. From a demand viewpoint, heightened levels of infrastructure and construction activities in the PRC were key contributors to the price increase.
Overall sales volume increased marginally by 0.2% to 3.93 million tonnes in FY2017, due mainly to the cessation of operations at the Group's subsidiary, Laiyuan County Aoyu Steel Co., Ltd. (“Aoyu Steel”) since August 2017, and partially due to routine maintenance exercises at Delong's blast furnaces. For FY2017, the Group sold 3.93 million tonnes of its higher-grade HRC products and just 486 tonnes of steel billets, compared to 3.92 million tonnes of HRC and 456 tonnes of steel billets in FY2016.
On the costs front, total cost of sales rose 20.1% to RMB10.1 billion in FY2017, from RMB8.4 billion a year ago, largely driven by higher iron ore prices during the review period. Accordingly, the Group reported a higher gross profit of RMB2.7 billion for FY2017, an 86.3% increase from RMB1.5 billion a year ago. Gross profit margins correspondingly rose 6.5 percentage points to 21.3% in FY2017, from 14.8% in FY2016.
Distribution and marketing expenses rose 14.9% to RMB88.0 million in FY2017, from RMB76.6 million previously, primarily due to higher transportation costs associated with the delivery of HRC products to customers. Administrative expenses increased by 43.8% to RMB374.3 million in FY2017, from RMB260.4 million in FY2016, as additional research and development expenses were incurred for product development, payment of applicable exit fees following the cessation of Aoyu Steel's operations in August 2017 as well as higher legal and professional fees incurred for the Group's projects.
Finance expenses were 33.6% lower at RMB153.1 million in FY2017, from RMB230.4 million in FY2016, due mainly to lower interest expenses incurred on notes payables and notes redemption in FY2017 as compared to the previous corresponding period.
As a result of the above, the Group delivered a higher net profit after tax of RMB2.1 billion in FY2017 compared to RMB209.3 million in FY2016. Net profit margin was healthy at 16.1% for FY2017.
The year 2017 saw the PRC Government progress unabated in promulgating its supply-side structural reforms, which translated into continuing capacity-side reductions for the steel sector. This inevitably affected Delong, being a major domestic steel manufacturer, which resulted in the forced shutdown of our Aoyu Steel production facility in August 2017, as well as an extended production hiatus at two blast furnaces at our Xingtai facility, stretching from 1 December 2017 to mid-March 2018.
As outlined at the start of my letter, it remains our firm commitment to source growth-generative opportunities for the benefit of Delong's shareholders, and to this end, I am pleased to share that the development of the Group's first steel facility in Indonesia – a 45%-owned joint-venture steel project - is currently underway, and is expected to complete and be operational by late 2018. This latest development is the result of a joint-venture partnership with established partners – Shanghai Decent Group from the PRC and PT. Indonesia Morowali Industrial Park (“Morowali”) from Indonesia. The new facility, which will have an annual production capacity of 3.5 million tonnes, is located at Tsingshan Park, an industrial park developed by Morowali, situated at Bahadopi Village, Morowali County, Central Sulawesi Province, Indonesia, with full auxiliary facilities for nickel mining and smelting, as well as stainless steel manufacturing.
To enable our pursuit of the joint-venture project in Indonesia, and to further expand our growing investment and asset management businesses, the Group had on 18 December 2017 convened an EGM to seek shareholders' approval for these growth initiatives. I must thank our shareholders for their unyielding support, granting us the necessary mandates to pursue these opportunities.
It remains our strategy to explore and evaluate earnings-accretive acquisitions and/or investments for the long-term benefit of shareholders.
To further diversify our earnings stream and expand Delong's business, we 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.
As a major private steel producer, we are cognizant of the direct and indirect impacts of our business operations to the environment. Accordingly, environmentally responsible behavior is an essential part of Delong's philosophy, and forms an important cornerstone of our business strategies. To this end, and also to align with the steel industry's rising environmental standards, we have continually invested in technological upgrades and enhancements, which are directed at reducing emissions, improving energy efficiencies and the recycling/reuse of waste materials. Such technological enhancements, undertaken from time to time, also strengthen the production efficiency of the Group's facility, thereby reducing operating costs.
In closing, to our customers, suppliers and business associates, I would like to extend my sincere appreciation for your continuing support. I must express immense gratitude to our Board of Directors for their guidance and counsel, their collective experience and invaluable knowledge continues to enable us to seize the best opportunities for sustainable growth. I am also grateful to Delong's management team and employees for your hard work and dedication.
I would like to also extend heartfelt gratitude and thanks to Mr. Zuo Shuowen, who had stepped down as an Executive Director of the Group in July 2017. Mr. Zuo had contributed much to the Group during his tenure as a director. Also, I warmly welcome Mr. Wu Yujie as an Executive Director to our Board, and am confident that he will bring meaningful value to the Group.
I look forward to working with each and every one of you in the many years to come. Last but not least, to our valued shareholders, thank you for the confidence and belief in us. We are committed to striving for stronger growth and delivering long-term value to all our stakeholders.