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UNAUDITED THIRD QUARTER RESULTS FOR THE PERIOD ENDED 30 SEPTEMBER 2018

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 third quarter and nine-month ended 30 September 2018

3Q2018 vs 3Q2017

Revenue

Group revenue increased by RMB281.2 million or 7.7% from RMB3,667.0 million in 3Q2017 to RMB3,948.2 million in 3Q2018. The increase in revenue was principally attributed to a significant increase in average selling prices of hot rolled coil (ďHRCĒ) amid tighter supplies following ongoing production curbs and growing demand from the construction and infrastructure sectors, despite a decrease in sales volume due to the cessation of operations at the Groupís subsidiary, Aoyu Steel Co., Ltd since August 2017.

In 3Q2018, the Group sold 1,038,845 tonnes of HRC as compared to 1,063,750 tonnes of HRC and 32 tonnes of steel billets in 3Q2017. Overall sales quantity decreased by 24,937 tonnes or 2.3%.

Cost of sales

Total cost of sales increased by RMB386.3 million or 13.9%, from RMB2,788.1 million in 3Q2017 to RMB3,174.4 million in 3Q2018. The increase was primarily due to a significant increase in raw material prices in particular coke and steel scrap for steel production, despite lower sales volume in 3Q2018 as compared to the corresponding period. This increase was also due to higher staff costs incurred in 3Q2018.

Coke prices rose to the highest level since mid November 2017 due to tightening supply as well as mining production cuts as part of the new measures implemented to curb pollution.

Gross profit

Gross profit decreased by RMB105.1 million or 12.0%, from RMB878.9 million in 3Q2017 to RMB773.8 million in 3Q2018.

Gross profit margin decreased by 4.4 percentage points from 24.0% in 3Q2017 to 19.6% in 3Q2018. The decrease was primarily due to the increase in production cost per tonne as mentioned above, which significantly outpaced the increase in average selling prices of HRC sold in 3Q2018.

Other gains (losses) net

Other gains decreased by RMB326.4 million, from RMB349.0 million in 3Q2017 to RMB22.6 million in 3Q2018, mainly due to the absence of a RMB377.4 million one-off gain arising fron the sale of production capacity licence of Aoyu Steel in 3Q2017.

Distribution and marketing expenses

Distribution and marketing expenses decreased by RMB14.5 million, from RMB20.7 million in 3Q2017, to RMB6.2 million in 3Q2018. The decrease was mainly to lower transportation costs associated with the delivery of Aoyu Steelís HRC products to customers in the PRC, amid the cessation of Aoyu Steelís operations in August 2017.

Administrative expenses

Administrative expenses increased by RMB93.8 million, from RMB95.7 million in 3Q2017 to RMB189.5 million in 3Q2018 primarily due to an increase in RMB88.0 million research and development expenses incurred on products development during the period under review.

Finance expenses

Finance expenses increased by RMB6.1 million from RMB29.4 million in 3Q2017 to RMB35.5 million in 3Q2018. The increase was mainly due to increase in bank borrowings drawdown for working capital purposes coupled with the increase in interest rates on bank borrowings in 3Q2018 as compared to the previous corresponding period.

Net profit

As a result of the foregoing, the Group reported a net profit of RMB521.8 million in 3Q2018, compared to RMB973.9 million in 3Q2017. The net profit margin was 13.2% and 26.6% in 3Q2018 and 3Q2017, respectively.

9M2018 vs 9M2017

Revenue

Group revenue increased by RMB806.3 million or 8.2%, from RMB9,852.8 million in 9M2017, to RMB10,659.1 million in 9M2018. The increase in revenue was principally attributed to a significant increase in average selling prices of hot rolled coil (ďHRCĒ) amid tighter supplies following production cuts and driven by infrastructure and construction activities in the PRC as compared to the previous corresponding period, despite a decrease in sales volume due to the cessation of operations at the Groupís subsidiary, Aoyu Steel Co., Ltd coupled with the temporary shut down of two out of Delong Steelís three blast furnaces due to the PRCís Governmentís environmental policies in 1Q2018.

In 9M2018, the Group sold 2,886,053 tonnes of HRC and 6,456 tonnes of steel billets as compared to 3,103,623 tonnes of HRC and 98 tonnes of steel billets in 9M2017. Overall sales quantity decreased by 211,212 tonnes or 6.8%.

Cost of sales

Total cost of sales increased by RMB909.6 million or 11.6%, from RMB7,870.4 million in 9M2017 to RMB8,780.0 million in 9M2018. The increase was primarily due to higher raw material prices (i.e., coke, coal and steel scrap) for production as compared to the corresponding period. The increase was also due to repair and maintenance expenses incurred on the Groupís production facilities in 9M2018.

Gross profit

Gross profit decreased by RMB103.3 million or 5.2%, from RMB1,982.4 million in 9M2017, to RMB1,879.1 million in 9M2018.

Gross profit margin decreased by 2.5 percentage points, from 20.1% in 9M2017 to 17.6% in 9M2018. The decrease was primarily due to the increase in production cost per tonne as mentioned above, which outpaced the increase in average selling prices of HRC sold in 9M2018.

Other gains (losses) net

Other gains decreased by RMB342.2 million, from other gains RMB340.0 million in 9M2017 to other losses RMB2.2 million in 9M2018, mainly due to the absence of a RMB377.4 million one-off gain arising fron the sale of production capacity licence of Aoyu Steel in 9M2017.

Distribution and marketing expenses

Distribution and marketing expenses decreased by RMB62.1 million, from RMB81.0 million in 9M2017, to RMB18.9 million in 9M2018. This was mainly due to a decrease in transportation costs associated with the delivery of Aoyu Steelís HRC products to customers in the PRC following the cessation of operations at Aoyu Steel since August 2017.

Administrative expenses

Administrative expenses increased by RMB138.9 million, from RMB234.4 million in 9M2017, to RMB373.3 million in 9M2018, primarily due to the increase in research and development expenses incurred on product development, higher staff welfare contribution as well as higher sewage and environmental impact assessment fee incurred in 9M2018 to comply with the increasingly stringent environmental regulations. The increase was partially offset by the cessation of operations at Aoyu Steel.

Finance expenses

Finance expenses increased by RMB5.8 million, from RMB85.7 million in 9M2017, to RMB91.5 million in 9M2018, mainly due to increase in bank borrowings drawdown for working capital purposes in 9M2018 as compared to the previous corresponding period.

Net profit

As a result of the foregoing, the Group reported a net profit of RMB1,286.9 million in 9M2018, compared to a net profit of RMB1,742.6 million in 9M2017. The net profit margin was 12.1% and 17.7% in 9M2018 and 9M2017, respectively.

(b) Review of balance sheet of the Group as at 30 September 2018

Current assets

Current assets increased by RMB1,556.9 million, from RMB7,040.6 million as at 31 December 2017 to RMB8,597.5 million as at 30 September 2018, primarily due to the increase in cash and cash equivalents (including bank balances pledged) generated from operating activities.

Higher bank balances pledged as security was in line with higher bank borowings drawdown during the period under review.

Current liabilities

Current liabilities increased by RMB745.1 million, from RMB5,026.9 million as at 31 December 2017 to RMB5,772.0 million as at 30 September 2018, primarily due to the drawdown of short term bank borrowings for working capital purposes during the period under review.

Working capital

The working capital position improved by RMB811.7 million, from RMB2,013.8 million as at 31 December 2017, to RMB2,825.5 million as at 30 September 2018.

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 rolledĖover by these financial institutions.

Non-current assets – Property, plant and equipment

Property, plant and equipment increased by RMB330.7 million, from RMB2,181.1 million as at 31 December 2017 to RMB2,511.8 million as at 30 September 2018, primarily due to the capital expenditure incurred for on-going technological and environmental enhancement programmes to the production facilities in the PRC. The increase was partially offset by depreciation charges for the period under review.

Non-Current liabilities

Non-current liabilities increased by RMB231.0 million, from RMB320.3 million as at 31 December 2017 to RMB551.3 million as at 30 September 2018, 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

3Q2018 vs 3Q2017

Net Cash Used In Operating Activities

Operating cashflow before working capital changes decreased by RMB534.2 million, from RMB1,207.6 million in 3Q2017 to RMB673.4 million in 3Q2018, primarily due to the decrease in operating profit. Cash from operating activities decreased by RMB1,529.4 million from positive postion RMB886.1 million in 3Q2017 to negative position RMB643.3 million in 3Q2018, attributable mainly to an overall decrease in trade and other payables and an increase in bank balances pledged as security for bank borrowings (including notes payable) for the period under review.

Net Cash Generated From Investing Activities

Net cash generated from investing activities was RMB643.0 million in 3Q2018. This comprised principally the proceeds of the disposal of held for trading investments and available-for-sale financial assets as well as interest received from the banks.

The increase was partially offset by the progress payments for the on-going technical enhancements to the upgrade production facilities in the PRC.

Net Cash Generated from Financing Activities

Net cash generated from financing activities was RMB902.4 million in 3Q2018. This was mainly attributable to the drawdown of bank borrowing of RMB1,328.5 million for working capital purposes, loan principal and interest repayments of RMB121.5 million. The increase was partially offset by RMB304.7 million dividend payment during the period under review.

9M2018 vs 9M2017

Net Cash Used In Operating Activities

Operating cashflow before working capital changes decreased by RMB554.0 million, from RMB2,269.9 million in 9M2017 to RMB1,715.9 million in 9M2018, primarily due to the decrease in operating profit. Net cash from operating activities decreased by RMB3,622.0 million from RMB3,118.4 million in 9M2017, to a negative position RMB503.6 million in 9M2018, attributable mainly to the increase in bank balances pledged as security for bank borrowings and the overall decrease in trade and other payables for the period under review.

Net Cash Generated From Investing Activities

Net cash generated from investing activities was RMB217.2 million in 9M2018. This comprised principally the proceeds of disposal of held for trading investments and held-to-maturity financial assets as well as interest received from the banks and capital contribution from non-controlling interest of Xingtai Degui Nano Material Technology Limited, the Groupís 80% owned subsidiary.

The increase was partially offset by the progress payments for the on-going technical enhancements to the upgrade production facilities in the PRC and payments for the purchases of available-for-sale financial assets.

Net Cash Generated From Financing Activities

Net cash generated from financing activities was RMB850.2 million in 9M2018. This was mainly attributable to the drawdown of bank borrowings of RMB2,525.7 million, loan principal and interest repayments of RMB1,370,8 million. This was partially offset by RMB304.7 million dividend payment during period under review.

Commentary

According to data from the National Bureau of Statistics, Chinaís economy grew 6.6% in the third quarter of 2018, marginally below the 6.7% year-on-year growth achieved in the previous quarter, attributable to ongoing financial deleveraging and global trade concerns. On the industry level, crude steel output rose 7.5% year-on-year in September 2018 to reach a record high of 80.85 million tonnes; and for the nine-month period ending 30 September 2018, was up 6.1% year-on-year to reach 699.42 million tonnes. Despite higher production levels, steel market sentiments remained broadly weak, due to the enforcement of tougher environmental standards by government and industrial bodies. The China Iron and Steel Association had also said that China will continue to ease overcapacity, with a view towards reducing domestic steel capacity to less than 1 billion tonnes by 2025.

Within Hebei Province, a three-year industry capacity reduction work plan for the period from 2018 to 2020 was also put in place. Aimed at keeping total annual provincial capacity within 200 million tonnes, the work plan targets a reduction of steelmaking capacity by 12 million tonnes in 2018, and by 14 million tonnes per year in 2019 and 2020 respectively.

In addition to capacity reductions, the following targets have also been put in place, to be achieved by 2020: (i) phase out blast furnaces with capacities lower than 1,000 cubic meters, (ii) phase out converters with capacities below 100 tonnes, (iii) relocation of steel mills from the cities, (iv) compliance with a tougher set of emission targets, (v) as well as further consolidation within the industry, reducing from 14 steel producers to just 5-6 producers.

To be in line with the industryís 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 strengthens the production efficiency of the Groupís facility, thereby reducing operating costs. Notwithstanding the Groupís efforts to meet all the ongoing tightening environmental standards, Delong remains subject to the risk of production capacity cuts by the government which will have a material adverse impact on the profitability of the Group.

The development of the Groupís 45%-owned joint-venture (JV) steel project in Indonesia remains on track for completion.

It remains Delongís strategy to explore and evaluate earnings-accretive acquisitions and/or investments for the long-term benefit of shareholders. Accordingly, to further diversify incomes streams, the Group may opportunistically 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 Group has obtained the type 9 Licence by the Securities and Futures Commission of Hong Kong and will diversify into asset management business in due course