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Financials

UNAUDITED FULL YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

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 fourth quarter and year ended 31 December 2017

4Q2017 vs 4Q2016

Revenue

Group revenue increased by RMB267.4 million or 9.9% from RMB2,711.1 million in 4Q2016 to RMB2,978.5 million in 4Q2017. The increase in revenue was principally attributed to continued increase in average selling prices of hot rolled coil ("HRC") driven by increased infrastructure and construction activities in the PRC, despite lower sales volume in 4Q2017.

The decrease in sales volume was mainly due to the cessation of Aoyu Steel's operations in August 2017 coupled with the shut down of Delong Steel's blast furnaces amid the maintenance exercise and the Environmental Policies. Please refer to the Company's announcement dated 5 December 2017 for further details.

In 4Q2017, the Group sold 822,841 tonnes of HRC and 60 tonnes of steel billets as compared to 865,455 tonnes of HRC and 30 tonnes of steel billets in 4Q2016. Overall sales quantity decreased by 42,584 tonnes or 4.9%.

Cost of sales

Total cost of sales decreased slightly by RMB10.3 million or 0.5%, from RMB2,242.7 million in 4Q2016 to RMB2,232.4 million in 4Q2017. The decrease was primarily due to lower sales volume as mentioned above, partially offset by higher raw material prices in 4Q2017.

Gross profit

Gross profit increased by RMB277.7 million or 59.3%, from RMB468.4 million in 4Q2016 to RMB746.1 million in 4Q2017.

Gross profit margin increased by 7.8 percentage points from 17.3% in 4Q2016 to 25.1% in 4Q2017. The increase was primarily due to the significant increase in average selling prices of products sold which outpaced the increase in raw materials prices in 4Q2017.

Other (losses)/gains-Net

Other losses decreased by RMB662.2 million, from RMB699.5 million in 4Q2016, to RMB37.3 million in 4Q2017, primarily due to the one-off impairment charge of RMB600.0 million provided on Aoyu Steel's production facilities in 4Q2016.

Distribution and marketing expenses

Distribution and marketing expenses decreased by RMB12.4 million, from RMB19.4 million in 4Q2016, to RMB7.0 million in 4Q2017. The decrease was mainly to lower transportation costs associated with the delivery of Aoyu Steel's HRC products to customers in the PRC, amid the cessation of Aoyu Steel's operations in August 2017.

Administrative expenses

Administrative expenses increased by RMB99.3 million, from RMB40.6 million in 4Q2016 to RMB139.9 million in 4Q2017, primarily due to RMB63.3 million research and development expenses incurred for product development coupled with approximately RMB50.0 million payment of applicable exit fees following the cessation of Aoyu Steel's operations in August 2017.

The increase was partially offset by the deconsolidation of administrative expenses of Delong Thailand.

Finance expenses

Finance expenses decreased by RMB13.3 million from RMB80.7 million in 4Q2016 to RMB67.4 million in 4Q2017, primarily due to the significant decrease in bank borrowings and notes payables, which in turn reduced the interest expenses in 4Q2017.

Net profit

As a result of higher operating profit, the Group reported a net profit of RMB327.3 million in 4Q2017, compared to the net loss of RMB401.9 million in the corresponding period.

The net profit margin was 11.0% in 4Q2017.

FY2017 vs FY2016

Revenue

Group revenue increased by RMB2,956.3 million or 29.9%, from RMB9,875.0 million in FY2016, to RMB12,831.3 million in FY2017. The increase in revenue was principally attributed to a significant increase in average selling prices of HRC amid tighter supplies following production cuts and increased infrastructure and construction activities in the PRC.

In FY2017, the Group sold 3,876,549 tonnes of HRC and 486 tonnes of steel billets as compared to 3,919,163 tonnes of HRC and 456 tonnes of steel billets in FY2016. Overall sales quantity decreased by 42,584 tonnes or 1.1%.

As mentioned earlier, the decrease in sales volume was mainly due to the cessation of Aoyu Steel's operations in August 2017 coupled with the shut down of Delong Steel's blast furnaces amid the maintenance exercise and the Environmental Policies.

Cost of sales

Total cost of sales increased by RMB1,692.1 million or 20.1%, from RMB8,410.7 million in FY2016 to RMB10,102.8 million in FY2017. The increase was primarily due to higher raw materials prices for production amid rising iron ore demand from mills in FY2017 as compared to the previous corresponding period.

Gross profit

Gross profit increased by RMB1,264.3 million or 86.3%, from RMB1,464.2 million in FY2016, to RMB2,728.5 million in FY2017.

Gross profit margin increased by 6.5 percentage points, from 14.8% in FY2016 to 21.3% in FY2017. The increase was primarily due to the increase in average selling prices of products sold which outpaced the increase in raw materials prices in FY2017 coupled with increased production efficiency amid continued improvement to the production facilities.

Distribution and marketing expenses

Distribution and marketing expenses increased by RMB11.4 million, from RMB76.6 million in FY2016, to RMB88.0 million in FY2017. The increase in distribution and marketing expenses was primarily due to higher transportation costs associated with the delivery of HRC products to customers in 1H2017 as compared to the previous corresponding period.

Administrative expenses

Administrative expenses increased by RMB113.9 million, from RMB260.4 million in FY2016, to RMB374.3 million in FY2017, primarily due to RMB63.3 million research and development expenses incurred for product development, payment of applicable exit fees of approximately RMB50.0 million following the cessation of Aoyu Steel's operations in August 2017 as well as higher legal and professional fees incurred for the Company's projects.

Finance expenses

Finance expenses decreased by RMB77.3 million, from RMB230.4 million in FY2016, to RMB153.1 million in FY2017, mainly due to lower interest expenses incurred on notes payables and notes redemption in FY2017 as compared to previous corresponding period.

Net profit

As a result of the foregoing, the Group reported a net profit after tax of RMB2,069.9 million in FY2017, compared to a net profit of RMB209.3 million in FY2016. The net profit margin was 16.1% and 2.1% in FY2017 and FY2016, respectively.

(b) Review of balance sheet of the Group as at 31 December 2017

Current assets

Current assets increased by RMB1,610.3 million, from RMB5,430.3 million as at 31 December 2016 to RMB7,040.6 million as at 31 December 2017, primarily due to the increase in cash and cash equivalents generated from operating activities and higher notes receivable recorded which was in line with higher revenue in FY2017 .

Current liabilities

Current liabilities decreased by RMB76.1 million, from RMB5,103.0 million as at 31 December 2016 to RMB5,026.9 million as at 31 December 2017, primarily due to repayments of bank borrowings and notes payables during the period under review. The decrease was partially offset by the increase in the utilization of letter of credit (classified under trade and other payables) for payments to creditors and suppliers as well as an increase in advances from customers.

The higher utilization of letter of credit was due to lower security requirement as compared to notes payables.

Working capital

The working capital position improved by RMB1,686.5 million, from RMB327.3 million as at 31 December 2016, to RMB2,013.8 million as at 31 December 2017.

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 decreased by RMB48.2 million, from RMB2,229.3 million as at 31 December 2016 to RMB2,181.1 million as at 31 December 2017, primarily due to depreciation charges for the period under review.

The decrease was partially offset by the capital expenditure incurred for on-going technological and environmental enhancement programmes to the production facilities in the PRC.

Non-Current liabilities

Non-current liabilities increased by RMB92.1 million, from RMB228.2 million as at 31 December 2016 to RMB320.3 million as at 31 December 2017, 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

4Q2017 vs 4Q2016

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB207.6 million, from RMB536.1 million in 4Q2016 to RMB743.7 million in 4Q2017, primarily due to the increase in operating profit. Net cash from operating activities decreased by RMB24.4 million from RMB523.9 million in 4Q2016 to RMB499.5 million in 4Q2017, attributable mainly to the increase in notes receivables which was in line with higher revenue in 4Q2017.

Net Cash Generated From Investing Activities

Net cash generated from investing activities was RMB255.6 million in 4Q2017. This comprised principally the proceeds from the disposal of held for trading investments and held-to-maturity financial assets during the period under review.

The increase was partially offset by RMB446.4 million capital contribution to the Group's 45%-owned joint-venture steel project in Indonesia, PT Dexin Steel Indonesia, and the progress payment for on-going technical enhancements to upgrade production facilities in the PRC.

Net Cash Used In from Financing Activities

Net cash used in financing activities was RMB1.1 million in 4Q2017. This was mainly attributable to the drawdown of bank borrowing of RMB284.4 million for working capital purposes, loan principal and interest repayments of RMB285.5 million.

FY2017 vs FY2016

Net Cash Generated From Operating Activities

Operating cashflow before working capital changes increased by RMB1,399.2 million, from RMB1,614.4 million in FY2016 to RMB3,013.6 million in FY2017, primarily due to the increase in operating profit. Net cash from operating activities increased by RMB2,067.7 million from RMB1,550.2 million in FY2016, to RMB3,617.9 million in FY2017, attributable mainly to the increase in trade and other payables including letters of credit and advances from customers during the period under review and a decrease in bank balances pledged as security to banks for the issuance of notes payable.

The increase was partially offset by higher inventories and notes receivables during the period under review.

Net Cash Used in Investing Activities

Net cash used in investing activities was RMB851.8 million in FY2017. This comprised principally the progress payments for the technical enhancements to upgrade production facilities in the PRC, RMB446.4 million capital contribution to the Group's 45%-owned joint-venture in Indonesia, PT Dexin Steel Indonesia as well as an increase in the Group's investment in available-for-sale financial assets and held for trading investments.

The decrease was partially offset by the proceeds from the disposal of held-to-maturity financial assets and interest received from the banks.

Net Cash Used in Financing Activities

Net cash used in financing activities was RMB1,566.6 million in FY2017. This was mainly attributable to the drawdown of bank borrowings of RMB1,732.0 million, loan principal and interest repayments of RMB3,298.6 million.

Commentary

According to China Iron and Steel Association (CISA), domestic demand for steel is expected to remain stable in 2018 amid the steadily-growing national economy, with a focus on quality over quantity1. Even as market watchers forecast China's GDP growth to be in the mid-6% range in 2018, the operating outlook for the PRC steel industry is expected to remain challenging amid ongoing efforts by the PRC authorities to control supply and to protect the environment.

Environmental issues remain high on the agenda of the PRC Government, with continued efforts and resources directed towards the tightening of its environmental protection rules to control pollution sources. Initiatives include requiring steel producers to reduce output by at least half during the peak pollution season over the winter months and/or smoggy days, among other. Accordingly, pursuant to the Xingtai City 2017/2018 policies on the comprehensive management of air pollution in autumn and winter (邢台 2017 年-2018 年秋冬季节大气污染综合治理) (the "Environmental Policies"), production was halted at two of the Group's blast furnaces, with operations expected to resume in mid-March 2018. For details, please refer to the Group's announcement dated 5 December 2017.

Nonetheless, according to the latest public consultation paper, the PRC government is expected to prolong restrictions on steel mills' operations upon expiry of the Environmental Policies in mid-March 2018, as part of the country's continuing efforts to combat air pollution. Based on the latest discussions, steel mills will be ordered to cut output by up to 15% (During smoggy days, subject to the proximity of the mills to the cities, further output cuts may also be ordered). This policy may adversely affect the Group's performance.

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 development of the Group's 45%-owned joint-venture (JV) steel project in Indonesia is also well underway, and is scheduled to be completed and operational by late 2018.

To diversify, the Group 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. The Board and Management will also continue to explore and evaluate earnings-accretive acquisitions and/or investments for the long-term benefit of shareholders. The Group will also diversify into asset management business in due course, subject to obtaining the type 9 Licence by the Securities and Futures Commission of Hong Kong.

1https://www.mysteel.net/article/full-4002586.html


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