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UNAUDITED FIRST QUARTER RESULTS FOR THE PERIOD ENDED 31 MARCH 2019

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) Review of income statement of the Group

1Q2019 vs 1Q2018

Revenue

Group revenue increased by RMB503.3 million or 17.1% from RMB2,950.0 million in 1Q2018 to RMB3,453.3 million in 1Q2019. The increase in revenue was principally attributed to an increase in the volume of hot rolled coil ("HRC") sold amid growing demand from the construction and infrastructure sectors, despite a decrease in average selling prices.

In 1Q2019, the Group sold 941,316 tonnes of HRC, compared to 817,663 tonnes of HRC in 1Q2018. Overall sales quantity increased by 123,653 tonnes or 15.1%.

Cost of sales

Total cost of sales increased by RMB598.6 million or 23.9%, from RMB2,509.4 million in 1Q2018 to RMB3,108.0 million in 1Q2019. The increase was primarily due to higher volume of products sold as mentioned above, as well as increased raw material prices (i.e., coke, coal and steel scrap) for production, compared to the corresponding period.

Gross profit

Gross profit decreased by RMB95.3 million, from RMB440.6 million in 1Q2018 to RMB345.3 million in 1Q2019.

Gross profit margin decreased by 4.9 percentage points from 14.9% in 1Q2018 to 10.0% in 1Q2019. The decrease was primarily due to the decrease in average selling prices of products sold, coupled with higher cost of sales per tonne.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB8.4 million, from RMB6.9 million in 1Q2018, to RMB15.3 million in 1Q2019. This was mainly due to an increase in transportation costs associated with the delivery of products to customers of Xingtai Delong Machinery and Mill Roll Co., Ltd (the "Mill Roll") and expenses incurred in relation to the customer sourcing for Mill Roll. The increase is in line with the higher sales volume recorded in Mill Roll.

Administrative expenses

Administrative expenses increased by RMB7.9 million, from RMB99.1 million in 1Q2018 to RMB107.0 million in 1Q2019, primarily due to higher headcounts in Xingtai Degui Nano Material Technology Limited ("Degui Nano"), the Group's newly set up 80% owned subsidiary in the PRC. The increase was also due to an overall increase in staff costs for the financial year ending 2019.

Finance expenses

Finance expenses increased by RMB52.6 million from RMB29.6 million in 1Q2018 to RMB82.2 million in 1Q2019, primarly due to an increase in bank borrowings (including notes payable) drawdown for working capital purposes.

Net profit

As a result of the above, the Group reported a net profit of RMB151.0 million in 1Q2019, compared to RMB280.8 million in 1Q2018. The net profit margin was 4.4% in 1Q2019, compared to 9.5% in 1Q2018.

(b) Review of balance sheet of the Group as at 31 March 2019

Current assets

Current assets increased by RMB1,967.3 million, from RMB8,933.7 million as at 31 December 2018 to RMB10,901.0 million as at 31 March 2019, primarily due to the increase in cash and cash equivalents generated from operating activities and proceeds from the disposal of FVTPL.

Current liabilities

Current liabilities increased by RMB1,776.0 million, from RMB6,316.3 million as at 31 December 2018 to RMB8,092.3 million as at 31 March 2019, primarily due to higher utilization in notes payables during the period under review. The Company has also increasingly utilised its letters of credit facilities to finance its purchase of raw materials.

Working capital

The working capital position improved by RMB191.3 million, from RMB2,617.4 million as at 31 December 2018 to RMB2,808.7 million as at 31 March 2019.

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 increased by RMB394.9 million, from RMB2,743.9 million as at 31 December 2018 to RMB3,138.8 million as at 31 March 2019, 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 RMB640.1 million, from RMB748.3 million as at 31 December 2018 to RMB1,388.4 million as at 31 March 2019, 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

1Q2019 vs 1Q2018

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes decreased by RMB122.0 million, from RMB379.4 million in 1Q2018 to RMB257.4 million in 1Q2019, primarily due to the decrease in operating profit. Cash from operating activities increased by RMB1.6 million from RMB571.7 million in 1Q2018 to RMB573.3 million in 1Q2019, attributable mainly to better working capital management during the period under review.

Net Cash From Investing Activities

Net cash from investing activities was RMB1,081.9 million in 1Q2019. This was mainly attributable to the proceeds from the disposal of financial assets at FVTPL of RMB1,685.8 million and interest received from the banks.

The increase was partially offset by progress payments for on-going technological and environmental enhancement programmes to the production facilities in the PRC. The Group has also advanced an aggregate sum of RMB201.2 million to P.T. Dexin Steel Indonesia-a 45%-owned joint-venture company, during the period under review.

Net Cash From Financing Activities

Net cash from financing activities was RMB1,149.6 million in 1Q2019. This was mainly attributable to the drawdown of bank borrowings (net off against bank balances pledged) of RMB1,802.8 million for working capital, loan principal and interest repayments of RMB653.2 million.

Commentary

China's GDP grew by a stable 6.4% in the first quarter of 2019, lifted by strong manufacturing production and greater domestic consumer spending, while market watchers expect the ongoing trade war with the United States and the government's efforts to rein in risky lending may continue to weigh on overall growth.

For the steel industry, the risk of oversupply remains a core concern as steel production climbed almost 10% year-on-year to 231 million tonnes for the January to March quarter, with the higher production levels backed by expectations of improving steel demand driven by stable levels of investment infrastructure and real estate, as well as rising manufacturing activity. However, the overall business environment for steel players has remained challenging, as authorities push forward with efforts to curb 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 continues unabated. With the purpose of keeping total annual provincial capacity within 200 million tonnes, the work plan targets a reduction of steelmaking capacity 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 1 million tonnes, (iii) relocation of steel mills from the cities, (iii) compliance with a tougher set of emission targets, (iv) as well as further consolidation within the industry, reducing from 14 steel producers to just 5-6 producers.

While the abovementioned measures have not affected Delong's operations, the Group is not able to rule out the possibility that the implementation any further tightening measures may invariably impact its operations and commercial viability.

To be in line with the industry's 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 Group's facility, thereby reducing operating costs.

The Group's 45%-owned joint-venture (JV) steel project in Indonesia remains on track to be operational by end-June 2019.

It remains Delong's 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.