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Profit & Loss
Consolidated Statement of Comprehensive Income
Review Of Performance
(a) Review of income statement of the Group
1Q2018 vs 1Q2017
Group revenue decreased by RMB36.7 million or 1.2% from RMB2,986.7 million in 1Q2017 to RMB2,950.0 million in 1Q2018. The decrease in revenue was principally attributed to a significant decrease in sales volume during the period under review, despite a significant increase in average selling prices of HRC sold.
The Group recorded lower production volume in 1Q2018 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.
Delong Steel has since fully resumed its operations in early April 2018.
In 1Q2018, the Group sold 817,663 tonnes of HRC, compared to 909,673 tonnes of HRC and 32 tonnes of steel billets in 1Q2017. Overall sales quantity decreased by 92,042 tonnes or 10.1%.
Cost of sales
Total cost of sales increased by RMB51.1 million or 2.1%, from RMB2,458.3 million in 1Q2017 to RMB2,509.4 million in 1Q2018. The increase was primarily due to higher raw material prices (i.e., coke, coal and steel scrap) for production, despite lower sales volume in 1Q2018 as compared to the corresponding period. The increase was also due to higher repair and maintenance expenses incurred on the Group's production facilities as well as higher wages in 1Q2018.
Gross profit decreased by RMB87.8 million from RMB528.4 million in 1Q2017 to RMB440.6 million in 1Q2018.
Gross profit margin decreased by 2.8 percentage points from 17.7% in 1Q2017 to 14.9% in 1Q2018. 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 1Q2018.
Distribution and marketing expenses
Distribution and marketing expenses decreased by RMB20.8 million, from RMB27.7 million in 1Q2017, to RMB6.9 million in 1Q2018. 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 increased by RMB29.7 million, from RMB69.4 million in 1Q2017 to RMB99.1 million in 1Q2018, primarily due to RMB20.9 million research and development expenses incurred on product development, staff welfare contribution of RMB10.0 million as well as RMB5.3 million sewage and environmental impact assessment fee incurred in 1Q2018 to comply with the increasingly stringent environmental regulations. The increase was partially offset by the cessation of operations at Aoyu Steel.
Finance expenses decreased by RMB1.3 million from RMB30.9 million in 1Q2017 to RMB29.6 million, primarly due to a decrease in bank borrowings drawdown for working capital purposes following the cessation of operations at Aoyu Steel.
As a result of the foregoing, the Group reported a net profit of RMB280.8 million in 1Q2018, compared to RMB387.8 million in 1Q2017. The net profit margin was 9.5% in 1Q2018, compared to 13.0% in 1Q2017.
(b) Review of balance sheet of the Group as at 31 March 2018
Current assets remainly constant at RMB7.0 billion as at 31 December 2017 and 31 March 2018, respectively. The decrease in cash and cash equivalents was mainly due to the Company deploying part of its cash and cash equivalent towards purchasing held for trading investments. The increase in bank balances pledged was due to higher utilization of the credit facilities within the Group.
Current liabilities decreased by RMB279.5 million, from RMB5,026.9 million as at 31 December 2017 to RMB4,747.4 million as at 31 March 2018, primarily due to a reduction in notes payables during the period under review. The Company has increasingly utilized its letters of credit facilities to finance its purchase of raw materials.
The higher utilization of letter of credit was due to lower security requirement as compared to notes payables.
The working capital position improved by RMB271.1 million, from RMB2,013.8 million as at 31 December 2017 to RMB2,284.9 million as at 31 March 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 rolledľover by these financial institutions.
Non-current assets – Property, plant and equipment
Property, plant and equipment increased by RMB60.4 million, from RMB2,181.1 million as at 31 December 2017 to RMB2,241.5 million as at 31 March 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 increased by RMB70.2 million, from RMB320.3 million as at 31 December 2017 to RMB390.5 million as at 31 March 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
1Q2018 vs 1Q2017
Net Cash Generated From Operating Activities
Operating cashflow before working capital changes decreased by RMB192.6 million, from RMB572.0 million in 1Q2017 to RMB379.4 million in 1Q2018, primarily due to the decrease in operating profit. Cash from operating activities decreased by RMB970.1 million from RMB1,038.1 million in 1Q2017 to RMB68.0 million in 1Q2018, attributable mainly to an increase in bank balances pledged as a result of higher utilization of the credit facilities within the Group during the period under review.
Net Cash Used in Investing Activities
Net cash used in investing activities was RMB303.8 million in 1Q2018. This was mainly attributable to the increase in held-for-trading investments coupled with progress payments for on-going technological and environmental enhancement programmes to the production facilities in the PRC .
Net Cash Used In Financing Activities
Net cash used in financing activities was RMB355.3 million in 1Q2018. This was mainly attributable to the drawdown of bank borrowings of RMB455.0 million for working capital, loan principal and interest repayments of RMB810.3 million.
The World Steel Association reported that global crude steel output rose to 148 million tonnes in March 2018, with output from China rising 4.5% year-on-year to 74.0 million tonnes following the lifting of winter production restrictions3. Notwithstanding the increased production output, sentiments towards the PRC steel industry remains generally weak, due to rising inventories and uncertainty over the level of domestic construction activity as a result of the PRC government implementing a series of measures to cool the property market. The ongoing efforts by the PRC authorities to control supply and to protect the environment will also continue to impact the wider steel sector.
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 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 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.