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UNAUDITED SECOND QUARTER RESULTS FOR THE PERIOD ENDED 30 JUNE 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 second quarter and six months ended 30 June 2018

2Q2018 vs 2Q2017

Revenue

Group revenue increased by RMB562.0 million or 17.6% from RMB3,199.0 million in 2Q2017 to RMB3,761.0 million in 2Q2018. The increase in revenue was principally attributed to a significant increase in average selling prices of hot rolled coil ("HRC") 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 Group's subsidiary, Aoyu Steel Co., Ltd since August 2017.

In 2Q2018, the Group sold 1,029,544 tonnes of HRC and 6,456 tonnes of steel billets as compared to 1,130,200 tonnes of HRC and 33 tonnes of steel billets in 2Q2017. Overall sales quantity decreased by 94,233 tonnes or 8.3%.

Cost of sales

Total cost of sales increased by RMB472.2 million or 18.0%, from RMB2,624.0 million in 2Q2017 to RMB3,096.2 million in 2Q2018. The increase was primarily due to higher raw material prices in particular coke for steel production as well as higher staff costs incurred in 2Q2018.

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 increased by RMB89.7 million or 15.6%, from RMB575.1 million in 2Q2017 to RMB664.8 million in 2Q2018.

Gross profit margin decreased marginally by 0.3 percentage points from 18.0% in 2Q2017 to 17.7% in 2Q2018. 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 2Q2018.

Distribution and marketing expenses

Distribution and marketing expenses decreased by RMB26.8 million, from RMB32.7 million in 2Q2017, to RMB5.9 million in 2Q2018. This was mainly due to a decrease in transportation costs associated with the delivery of Aoyu Steel's HRC products to customers in the PRC following the cessation of operations at Aoyu Steel in August 2017.

Administrative expenses

Administrative expenses increased by RMB15.5 million, from RMB69.2 million in 2Q2017 to RMB84.7 million in 2Q2018, primarily due to an increase in research and development expenses incurred on products development as well as higher staff costs including staff welfare contribution during the period under review.

The increase was partially offset by the cessation of operations at Aoyu Steel.

Finance expenses

Finance expenses increased by RMB1.0 million from RMB25.4 million in 2Q2017 to RMB26.4 million in 2Q2018. The increase was mainly due to increase in bank borrowings drawdown for working capital purposes in 2Q2018 as compared to the previous corresponding period.

Net profit

As a result of higher operating profit, the Group reported a net profit of RMB484.3 million in 2Q2018, compared to RMB380.8 million in 2Q2017. The net profit margin was 12.9% and 11.9% in 2Q2018 and 2Q2017, respectively.

1H2018 vs 1H2017

Revenue

Group revenue increased by RMB525.2 million or 8.5%, from RMB6,185.7 million in 1H2017, to RMB6,710.9 million in 1H2018. The increase in revenue was principally attributed to a significant increase in average selling prices of hot rolled coil ("HRC") 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.

The Group recorded lower production volume in 1H2018 mainly due to the cessation of operations at the Group's subsidiary, Laiyuan County Aoyu Steel Co., Ltd since August 2017 coupled with the shut down of two out of Delong Steel's three blast furnaces due to PRC's Government's enviromental policies. Please refer to the Company's announcement dated 5 December 2017 for further details.

In 1H2018, the Group sold 1,847,208 tonnes of HRC and 6,456 tonnes of steel billets as compared to 2,039,873 tonnes of HRC and 66 tonnes of steel billets in 1H2017. Overall sales quantity decreased by 186,275 tonnes or 9.1%.

Cost of sales

Total cost of sales increased by RMB523.3 million or 10.3%, from RMB5,082.3 million in 1H2017 to RMB5,605.6 million in 1H2018. 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 Group's production facilities as well as higher wages in 1H2018.

Gross profit

Gross profit increased by RMB1.9 million or 0.2%, from RMB1,103.5 million in 1H2017, to RMB1,105.4 million in 1H2018.

Gross profit margin decreased marginally by 1.3 percentage points, from 17.8% in 1H2017 to 16.5% in 1H2018. 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 1H2018.

Distribution and marketing expenses

Distribution and marketing expenses decreased by RMB47.6 million, from RMB60.3 million in 1H2017, to RMB12.7 million in 1H2018. This was mainly due to a decrease in transportation costs associated with the delivery of Aoyu Steel's HRC products to customers in the PRC following the cessation of operations at Aoyu Steel since August 2017.

Administrative expenses

Administrative expenses increased by RMB45.2 million, from RMB138.6 million in 1H2017, to RMB183.8 million in 1H2018, 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 1H2018 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 decreased by RMB0.3 million, from RMB56.3 million in 1H2017, to RMB56.0 million in 1H2018, mainly due to a reduction in bill discounting charges following the cessation of operations at Aoyu Steel compared to previous corresponding period.

Net profit

As a result of the foregoing, the Group reported a net profit of RMB765.1 million in 1H2018, compared to a net profit of RMB768.6 million in 1H2017. The net profit margin was 11.4% and 12.4% in 1H2018 and 1H2017, respectively.

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

Current assets

Current assets increased by RMB497.6 million, from RMB7,040.6 million as at 31 December 2017 to RMB7,538.2 million as at 30 June 2018, primarily due to the increase in bank balances pledged as security as a result of higher utilization of the credit facilities within the Group.

Current liabilities

Current liabilities decreased by RMB223.5 million, from RMB5,026.9 million as at 31 December 2017 to RMB4,803.4 million as at 30 June 2018, primarily due to a decrease in notes payables issued to suppliers during the period under review.

The decrease was partially offset by the increase in the drawdowm of bank borrowings for working capital purposes during the period under review.

Working capital

The working capital position improved by RMB721.0 million, from RMB2,013.8 million as at 31 December 2017, to RMB2,734.8 million as at 30 June 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 rolled–over by these financial institutions.

Non-current assets - Property, plant and equipment

Property, plant and equipment increased by RMB195.5 million, from RMB2,181.1 million as at 31 December 2017 to RMB2,376.6 million as at 30 June 2018. primarily due to the capital expenditure incurred for ongoing 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 RMB242.0 million, from RMB320.3 million as at 31 December 2017 to RMB562.3 million as at 30 June 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

2Q2018 vs 2Q2017

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB125.1 million, from RMB538.0 million in 2Q2017 to RMB663.1 million in 2Q2018, primarily due to the increase in operating profit. Net cash from operating activities decreased by RMB1,170.3 million from RMB1,242.1 million in 2Q2017 to RMB71.8 million in 2Q2018, attributable mainly to the increase in bank balances pledged as a result of higher utilization of the credit facilities within the Group as well as the decrease in the utilization of letters of credit during the period under review.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB122.1 million in 2Q2018. This comprised principally the progress payments for on-going technical enhancements to the upgrade production facilities in the PRC and payments for the purchase of available-for-sale financial assets.

The decrease was partially offset by the proceeds from the disposal of held for trading investments, interest received from banks and capital contribution from non-controlling interest of Xingtai Degui Nano Material Technology Limited, the Group's 80% owned subsidairy.

Net Cash Generated From Financing Activities

Net cash generated from financing activities was RMB303.2 million in 2Q2018. This was mainly attributable to the drawdown of bank borrowing of RMB1,322.9 million for working capital purposes, loan principal and interest repayments of RMB1,019.7 million

1H2018 vs 1H2017

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes decreased by RMB19.8 million, from RMB1,062.2 million in 1H2017 to RMB1,042.4 million in 1H2018, primarily due to the decrease in operating profit. Net cash from operating activities decreased by RMB2,092.6 million from RMB2,232.3 million in 1H2017, to RMB139.7 million in 1H2018, attributable mainly to the increase in bank balances pledged as security to banks for the issuance of notes payable within the Group.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB425.9 million in 1H2018. This comprised principally the progress payments for the 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 incease was partially offset by the proceeds from the disposal of held-to-maturity financial assets, interest received from the banks and capital contribution from non-controlling interest of Xingtai Degui Nano Material Technology Limited, the Group's 80% owned subsidairy.

Net Cash Used In Financing Activities

Net cash used in financing activities was RMB52.1 million in 1H2018. This was mainly attributable to the drawdown of bank borrowings of RMB1,777.9 million, loan principal and interest repayments of RMB1,830.1 million.

Commentary

China's national economy remained healthy in the first half of 2018, with a gross domestic product of RMB41.9 trillion, up 6.8% year-on-year3. On the industry front, crude steel output also saw increase in 1H2018, rising by 6% to 451.2 million tonnes. While overall output increased, domestic steel market sentiments remained soft, sentiments towards the PRC steel industry remains generally weak, amidst efforts by the PRC authorities and industrial bodies to reduce capacity. The China Iron and Steel Association has said in May 2018 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 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.

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. Notwithstanding the Group's efforts in meeting 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 Group's 45%-owned joint-venture (JV) steel project in Indonesia remains on track for completion.

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.

The Group has obtained the type 9 Licence issued by the Securities and Futures Commission of Hong Kong on 4 June 2018 and will diversify into asset management business in due course.

3 National Bureau of Statistics, 16 July 2018