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Financials

UNAUDITED SECOND QUARTER RESULTS FOR THE PERIOD ENDED 30 JUNE 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) Financial Review for the second quarter and six months ended 30 June 2019

2Q2019 vs 2Q2018

Revenue

Group revenue decreased by RMB306.2 million or 8.1% from RMB3,761.0 million in 2Q2018 to RMB3,454.8 million in 2Q2019. The decrease in revenue was principally attributed to a decrease in the average selling price of hot rolled coil ("HRC") in 2Q2019, despite an increase in the volume of HRC sold.

In 2Q2019, the Group sold 1,058,268 tonnes of HRC as compared to 1,029,544 tonnes of HRC and 6,456 tonnes of steel billets in 2Q2018. Overall sales quantity increased by 22,268 tonnes or 2.1%.

Cost of sales

Total cost of sales decreased by RMB101.4 million or 3.3%, from RMB3,096.2 million in 2Q2018 to RMB2,994.8 million in 2Q2019, primarily due to the RMB66.0 million provision for staff bonus provided in 2Q2018. The decrease also due to the reversal of repair and maintenance expenses overprovided in 1Q2019.

Gross profit

Gross profit decreased by RMB204.8 million or 30.8%, from RMB664.8 million in 2Q2018 to RMB460.0 million in 2Q2019.

Gross profit margin decreased by 4.4 percentage points from 17.7% in 2Q2018 to 13.3% in 2Q2019. The decrease was primarily due to the decrease in average selling prices of products sold, which significantly outpaced the decrease in production cost per tonne during the period under review .

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB2.6 million, from RMB5.9 million in 2Q2018, to RMB8.5 million in 2Q2019. 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 the Mill Roll. The increase is in line with the higher sales volume recorded in Mill Roll.

Administrative expenses

Administrative expenses increased by RMB25.2 million, from RMB84.7 million in 2Q2018 to RMB109.9 million in 2Q2019, primarily due to an increase in research and development expenses incurred on products development as well as higher headcounts in Xingtai Degui Nano Material Technology Limited ("Degui Nano"), the Group's newly set up 80% owned subsidiary in the PRC.

Finance expenses

Finance expenses increased by RMB37.6 million, from RMB26.4 million in 2Q2018 to RMB64.0 million in 2Q2019. The increase was primarily due to an increase in bank borrowings (including notes payable) as well as higher bill discounting charges during the period under review.

Net profit

As a result of the above, the Group reported a net profit of RMB300.3 million in 2Q2019, compared to RMB484.3 million in 2Q2018. The net profit margin was 8.7% and 12.9% in 2Q2019 and 2Q2018, respectively.

1H2019 vs 1H2018

Revenue

Group revenue increased by RMB197.3 million or 2.9%, from RMB6,710.9 million in 1H2018, to RMB6,908.2 million in 1H2019. 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 price.

In 1H2019, the Group sold 1,999,584 tonnes of HRC as compared to 1,847,208 tonnes of HRC and 6,456 tonnes of steel billets in 1H2018. Overall sales quantity increased by 145,920 tonnes or 7.9%.

Cost of sales

Total cost of sales increased by RMB497.2 million or 8.9%, from RMB5,605.6 million in 1H2018 to RMB6,102.8 million in 1H2019. The increase was primarily due to higher volume of products sold as mentioned above, as well as higher raw material prices (i.e., coke, coal and steel scrap) for production, compared to the corresponding period.

Gross profit

Gross profit decreased by RMB300.1 million or 27.1%, from RMB1,105.4 million in 1H2018, to RMB805.3 million in 1H2019.

Gross profit margin decreased by 4.8 percentage points, from 16.5% in 1H2018 to 11.7% in 1H2019. 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 RMB11.1 million, from RMB12.7 million in 1H2018, to RMB23.8 million in 1H2019. 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 the Mill Roll. The increase is in line with the higher sales volume recorded in Mill Roll.

Administrative expenses

Administrative expenses increased by RMB33.1 million, from RMB183.8 million in 1H2018, to RMB216.9 million in 1H2019, primarily due to an increase in research and development expenses incurred on products development as well as 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 RMB90.2 million, from RMB56.0 million in 1H2018, to RMB146.2 million in 1H2019, primarly due to an increase in bank borrowings (including notes payable) as well as higher bill discounting charges during the period under review.

Net profit

As a result of the above, the Group reported a net profit of RMB451.3 million in 1H2019, compared to a net profit of RMB765.1 million in 1H2018. The net profit margin was 6.5% and 11.4% in 1H2019 and 1H2018, respectively.

(b) Review of balance sheet of the Group as at 30 June 2019

Current assets

Current assets increased by RMB1,908.3 million, from RMB8,933.7 million as at 31 December 2018 to RMB10,842.0 million as at 30 June 2019, primarily due to the increase in FVTPL. The Group deploying part of its cash and cash equivalents (generated from operating activities and the drawdown of credit facilities) towards purchasing FVTPL during the period under review..

Current liabilities

Current liabilities increased by RMB1,511.3 million, from RMB6,316.3 million as at 31 December 2018 to RMB7,827.6 million as at 30 June 2019, primarily due to an overall increase in trade and other payables (including notes payables) during the period under review.

Working capital

The working capital position improved by RMB396.9 million, from RMB2,617.4 million as at 31 December 2018, to RMB3,014.3 million as at 30 June 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 rolled-over by these financial institutions.

Non-current assets – Property, plant and equipment

Property, plant and equipment increased by RMB446.4 million, from RMB2,743.9 million as at 31 December 2018 to RMB3,190.3 million as at 30 June 2019. 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 RMB685.1 million, from RMB748.3 million as at 31 December 2018 to RMB1,433.4 million as at 30 June 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

2Q2019 vs 2Q2018

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes decreased by RMB216.5 million, from RMB663.1 million in 2Q2018 to RMB446.6 million in 2Q2019, primarily due to the decrease in operating profit. Net cash from operating activities decreased by RMB410.1 million from RMB564.8 million in 2Q2018 to RMB154.7 million in 2Q2019, attributable mainly to an overall increase in trade and other receivable (including advance payment to suppliers for the purchase of raw materials, loan to PT Dexin Steel Indonesia and entrusted loan to a third party) during the period under review.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB4,445.4 million in 2Q2019. This comprised principally the payment for the purchase of financial aseets at FVTPL and the progress payments for on-going technical enhancements to the upgrade production facilities in the PRC

The decrease was partially offset by interest received from banks.

Net Cash Generated From Financing Activities

Net cash generated from financing activities was RMB371.8 million in 2Q2019. This was mainly attributable to the drawdown of bank borrowing (including bank balances pledged) of RMB1,418.8 million for working capital purposes, loan principal and interest repayments of RMB1,046.9 million.

1H2019 vs 1H2018

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes decreased by RMB338.4 million, from RMB1,042.4 million in 1H2018 to RMB704.0 million in 1H2019, primarily due to the decrease in operating profit. Net cash from operating activities decreased by RMB408.4 million from RMB1,136.4 million in 1H2018, to RMB728.0 million in 1H2019, attributable mainly to the overall increase in trade and other receivables, and inventories.

Net Cash Used In Investing Activities

Net cash used in investing activities was RMB3,363.4 million in 1H2019. This comprised principally the progress payments for the technical enhancements to the upgrade production facilities in the PRC, payments for the purchases of FVTPL, unquoted equity shares and other financial assets at amortised cost.

The Group has also advanced an aggregate sum of RMB218.5 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 RMB1,521.5 million in 1H2019. This was mainly attributable to the drawdown of bank borrowings (net off against bank balances pledged) of RMB3,221.6 million, loan principal and interest repayments of RMB1,700.1 million.

Commentary

According to the National Bureau of Statistics, China's economic growth slowed to 6.2% in the second quarter of 2019, below the 6.4% reported in the preceding quarter. While this remains rangebound of China's target growth rate of 6.0% to 6.5%, market watchers expect the ongoing trade war with the United States may continue to pressure on China's economic growth.

The overall business environment for steel players remains highly uncertain, 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 does not discount the possibility that the implementation of 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.

In relation to the Group's 45%-owned joint-venture (JV) steel project in Indonesia, the Group expects the facility to be operational by end-October 2019 instead of end-June 2019 as previously anticipated. The delay is due to a shortage of steel-related skilled labour in Sulawesi Indonesia, as well as disruption in construction activities due to a recent earthquake in Sulawesi and the 2019 Indonesian general election.


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