Final Results

HaiKe Chemical Group Limited

Results for the year ended 31 December 2013

HaiKe Chemical Group Ltd ("HaiKe" or the "Company", together with its subsidiaries as the "Group" or "HaiKe Group"), the AIM quoted (AIM: HAIK) specialty chemical business based in Shandong Province, China, today announces its unaudited preliminary results for the year ended 31 December 2013. The full Annual Report and Accounts will be available on the website and posted to shareholders shortly. 

Financial Highlights

· Total revenue increased by 43.4% to CNY24.6 billion (2012: CNY17.2 billion); revenue from the Continuing Operations increased by 2.4% to CNY981.5 million (2012: CNY958.8 million)

· Revenue from the sale of Petrochemical products grew by 46.4% to CNY22.9 billion (2012: CNY15.7 billion)

· Chemical products (including specialty, salt and biochemical) revenue comparable to previous year at CNY1.7 billion (2012: CNY1.5 billion)

· Loss for the year was CNY795.2 million (2012: loss of CNY317.4million); loss for the year from the Continuing Operations was CNY11.0 million (2012: profit of CNY13.1 million)

· Loss attributable to the Group was CNY709.5million (2012: loss of CNY282.4million)

· Loss per share was CNY18.500 (2012: loss of CNY7.362); loss per share from the Continuing Operations was CNY0.286 (2012: earnings per share of CNY0.340)

· Cash and cash equivalents balance as at the end of 2013 was CNY646.5 million (2012: CNY286.4 million); cash and cash equivalents balance of the Continuing Operations was CNY125.2 million (2012: 38.9 million)

· Total loans balance was CNY10.7 billion (2012: CNY6.5 billion); total loans balance of the Continuing Operations was CNY393.3 million (2012: CNY210.0 million). The increase in the loan balance was mainly due to capital expenditure in relation to the construction of the second phase of Dongying Hebang Chemical Co., Ltd. ("Hebang")

· The Board does not recommend a final dividend

Operational Highlights

· As previously indicated, the refinery division made a loss in 2013 due to a combination of low utilization rates and depressed selling prices

· Performance of the specialty and salt chemical businesses were mixed:

− Spring Chemical remained profitable

− Hebang did not break even in 2013 due to low utilization rates as a result of a sluggish domestic market;

− Shengli ceased trading after it was forced to relocate due to a government urban renewal plan. As a result of this, and poor performance, the Company recognized a one-off loss arising from asset disposition

· Biochemicals recorded modest growth despite further margin erosion

· A one-off fixed assets impairment was recognized across all divisions, when the fair market value was considered to fall below respective book value, as a result of the restructuring

Outlook

· Restructuring to strip out the heavy-debts and the loss-making refining business, as well as other non-core businesses, is now complete and is expected to have a positive effect on profitability going forward

· Developing a sustainable long-term strategy for specialty chemicals

· Hongkong trading company expanded to enhance overseas trading of specialty chemical products

· Strong emphasis on cost control and further optimization of product mix

Mr. Xiaohong Yang, Executive Chairman, said: "2013 was a challenging year for the Group, primarily as a result of depressed selling prices, higher operating costs and recognition of a one-off fixed assets impairment. However, with the support of our major shareholders, the restructuring process to strip out the majority of the historic Group's debt burden and the uncertainties of the refinery business is now complete. The restructuring was a strategic move and part of our long-term strategy of developing a sustainable business and improving profitability. 

"Going forward, we will develop the existing businesses, Spring Chemical and HaiKe Trading, and are looking for further opportunities in higher margin, profitable specialty chemical products."

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Chairman's Statement

Review of 2013 performance

The Group recorded a loss in 2013 as a result of depressed selling prices, higher operating costs and recognition of a one-off fixed assets impairment as a result of the restructuring. While the refinery business succeeded in volume gain, margins eroded further. Specialty chemical businesses were impacted by weak demand and margin erosion. 

During the year, the Group's total sales turnover grew by 43.4% year-on-year to CNY24.6 billion. Total loss for the year was CNY795.2million, compared with a loss of CNY317.4million in 2012. The net loss attributable to the owners of the Group was CNY709.5 million, compared with a loss of CNY282.4 million in 2012. Total loss per share was CNY18.5, compared with a loss per share of CNY7.4 in 2012

Refinery 

As a result of changes in the macroeconomic environment, geopolitics, US debt-ceiling negotiations and quantitative easing, among other factors, the international crude oil price remained volatile in 2013. The average price of North Sea Brent crude oil ("Brent") decreased slightly to approximately $108.7 per barrel from $111.6 per barrel in 2012. 

The Group's refineries procured a total of 5.5 million tons of feedstock, including crude oil, fuel oil and residual oil. Approximately 76.7% of the feedstock procured was sold without processing to generate a profit under the current pricing mechanism. The Group sold approximately 2.4 million tons of gasoline, diesel, Liquefied Petroleum Gas ("LPG"), petroleum coke and other products during the year, representing year-on-year growth of approximately 51.8%, of which 43.2% was derived from trading. 

The Group remained focused on high-end products in order to improve the overall profitability for the refinery division. During the year, 359,600 tons of high-end gasoline were produced and sold at a higher margin than in the previous year. This accounted for 33.1% of the total gasoline sold in 2013. 

Turnover from the refinery business grew by 46.4% to CNY22.9 billion for the 12 months ended 31 December 2013 (2012: CNY15.7 billion). The growth was derived mainly from the volume gain in the refinery division: during the year gasoline and diesel recorded a 71.0% and 66.3% increase in sales volumes respectively. Gross margin increased to 1.9% (2012: 1.1%) as a result of economies of scale on the back of volume gain, which partially compensated for depressed selling prices. The refinery division made a loss of CNY642.6 million in 2013, compared with a loss of CNY306.3 million in 2012.

Specialty and salt chemicals

In 2013, the market conditions remained sluggish, and as a result of a slowdown in the domestic economy, profitability of the Group's specialty and salt chemical division weakened further. 

The specialty chemical products recorded a slight 2.1% volume gain but the average price fell by 4.1% year-on-year. As a result, turnover was comparable but margins decreased. The Group continued to improve its product mix to focus more on higher margin products, for example, sales volume of the medical grade Propylene Glycol increased 18% year-on-year. These actions ensured the division remained profitable. 

Sales volumes of salt chemical products increased by 59.5% but the average price fell by 12.3% year-on-year. 

Turnover from the specialty and salt chemical division grew by 12.5% to CNY1.4 billion for the 12 months ended 31 December 2013. The gross margin decreased to 7.3% from 10.6% in the previous year due mainly to lower selling prices as a result of continued challenging market conditions. The division made a loss of CNY144.8 million, compared with profit of CNY6.1 million in 2012. This was mainly attributable to a one-off loss recognized during the year owing to the closure and relocation of Shengli.

Biochemical 

The performance of biochemical products were mixed in 2013. Sales volumes of heparin sodium grew strongly, increasing 47.7%, but enoxaparin sodiumonly grew by 7.2% year-on-year. The price of heparin sodium fell by 20.9% year-on-year due to oversupply in the domestic market and enoxaparin sodium fell by 7.9% year-on-year. Despite the margin erosion, the biochemical division remained profitable in 2013.

Turnover from the biochemical division grew by 6.1% to CNY215.9 million for the 12 months ended 31 December 2013, compared with CNY203.6 million in the preceding year, as a compound result of volume gain and price loss. Gross margin decreased to 24.5% from 29.1% compared to 2012 due to price fall. Profit for the year from the biochemical division was CNY15.8 million, a 17.6% increase compared with CNY13.4 million in 2012.

Restructuring

Since the year end, on 29 April 2014, the Group announced its intentions to restructure the business and divest the Group's historically unprofitable assets and a significant proportion of the Group's financial liabilities. As announced on 12 June 2014, further to shareholder approval at the General Meeting of the Company held on 15 May 2014, and following the necessary consents required under PRC law, the restructuring completed in H1 2014. The Group's operating businesses now comprise of Spring Chemical and HaiKe Trading.

The Group's losses in recent years have mostly been attributable to the disappointing performance of the refining division, which remains difficult to forecast as a result of fluctuations in oil prices and demand. Margins across the Group's refinery operations, inherently a high volume - low margin business, have come under further pressure due to the Company's lack of control over the price of refined products, which is determined by the Chinese National Development and Reform Commission and does not always reflect changes in feedstock price which have been subject to substantial price increases in recent years. It should be noted, however, that there have been some reforms made to the market for refined products in China during the last 12 months which may alter the market in the future. The near-term impact of these reforms on the Group remained unclear.

The restructuring process, which completed on 12 June 2014, included:

· Divestment of all of the Group's present assets and liabilities with the exception of HaiKe Trading and Spring Chemical

· The On-going Group acquired the approximately 74.9 percent of Spring Chemical previously owned by Shandong Hi-tech and approximately 25.0 percent of Spring Chemical previously owned by HaiKe Holding and, as a result, now owns approximately 99.9 percent of Spring Chemical. The On-going Group also acquired 100 per cent. of HaiKe Trading

· Spring Chemical now focuses on the production of high margin specialty chemicals, including dimethyl carbonate (DMC), pharmacy grade propylene glycol, cosmetic additives, blending agents and electronic grade chemical products

· The Company continues to be admitted to trading on AIM 

The restructuring allows Spring Chemical and HaiKe Trading to operate free of the majority of the historic Group's debt burden and the uncertainties of the refinery business. We believe Spring Chemical is now well placed to pursue its strategy of focusing on the production of higher margin specialty chemical products, in contrast to the high volume - low margin refinery business. We believe that the restructuring is consistent with the Group's long-held ambition to achieve sustainable profitability through the strategic move towards specialty chemicals with an initial focus on the retention, within the listed vehicle, of the historically profitable Spring Chemical. 

The completion of the restructuring is an important step in our stated strategy of focusing on our higher margin, profitable specialty chemical business. The refinery and associated debt has held back the development of the business and there continues to be uncertainty over the price of refined products. Therefore the transaction allows us to focus solely on developing the operations of HaiKe Trading and Spring Chemical and fulfil our long term ambition to generate sustainable profitability. 

Outlook

HaiKe incurred a total consolidated net loss of CNY236.0 million forthe first five months of 2014, compared with a loss of CNY363.4 million in the corresponding period in 2013. The continued loss was mainly attributable to a lower utilization rate on the refinery side as a result of unfavourable feedstock prices and depressed selling prices during the period. 

We will continue to enhance HaiKe's earnings performance by improving the product mix in chemical businesses in the short term. Meanwhile, we have engaged Boston Consulting Group to re-formulate the business strategy and earnings model, in order to achieve a sustainable growth in the medium to long term. Furthermore, the Group will also seek to continue to tighten costs and improve internal cashflow and treasury management, intra-Group synergies and technical innovations. 

In order to deal with the increasing challenges posed by the refinery business and mitigate the business risk, HaiKe has taken the following steps to improve the long term prospects of the Group:

· Divestment of refinery and other non-core business. By disposing a significant proportion of the Group's financial liabilities, loss-making refinery business and other non-core business, HaiKe has made significant progresses in the strategic move towards the specialty chemicals industry;

· Formulating a long-term sustainable strategy for specialty chemicals amid an increasingly competitive environment;

· Specialty chemical division to continue optimizing the product mix, improving the efficiency and tightening cost control;

· The Group expanded its operation in the Hongkong trading company with the aim of (1) broadening the procurement channel; (2) creating an additional source of income; and (3) taking the best advantage of the low financing costs in Hongkong.

We expect performance in H2 to improve following the divestment of the refinery assets, however this will not compensate for the losses made in H1 when the refinery division remained with the Group. We continue to work towards stabilizing earnings and striking an appropriate balance between short-term growth and long-term development.  

Dividend 

In view of the disappointing performance in 2013 and the ongoing difficulties that continued into H1 2014, the Board does not recommend any dividend for 2013, which is subject to approval at the forthcoming Annual General Meeting scheduled for July 2014.  

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013

Attributable to equity holders of the parent

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013

NOTES TO THE SUMMARISED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013

1. General information

HaiKe Chemical Group Ltd. (the "Company") was incorporated on 20 June 2006. The address of the registered office is at Scotia Center 4th Floor, P.O. Box 2804, George Town, Grand Cayman, Cayman Islands. The principal activity of the Company is that of investment holding. The Company's ultimate parent company is Hi-Tech Chemical Investment Limited, a company incorporated in the British Virgin Islands.

The principal activities of the Group were manufacturing and sale of petrochemical and chemical products during the reporting period. Following the trading update announced in December 2013, Board of Directors decided a major restructuring plan by disposing of all investments except for Spring Chemical and HaiKe Trading. The proposal of restructuring was approved in shareholder's meeting on 15 May 2014. The restructuring was completed in June 2014.

The principal place of business of the Company is West of Boxin Road, Shikou County, Dongying City, Shandong Province, China.

The financial statements present information about the Company and its subsidiaries (the "Group") as a consolidated group of companies.

2. Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with those International Financial Reporting Standards and Interpretations in force ("IFRS"), which comprise standards and interpretations issued by the International Accounting Standards Board ("IASB"), and International Accounting Standards ("IASs") and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRICs") that remain in effect, as adopted by the European Union. The parent company's income statement is not required to be presented under the laws of the Cayman Islands.

The Group's functional and presentational currency is the Chinese Yuan ("CNY"). All values are rounded to the nearest thousand (CNY'000) except when otherwise indicated.

The preparation of financial statements requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on finance being available for the continuing working capital requirements of the Group.

As at 31 December 2013, the Group had net liabilities of CNY976.7million (2012: CNY 181.0 million) and net current liabilities of CNY3.2 billion (2012: CNY2.2 billion).

The Directors have reviewed forecasts and budgets for the period ended 31 December 2015, which have been drawn up with appropriate regard for the current economic environment and the particular industry in which the Group operates. These were prepared with reference to historical and current industry knowledge, taking group restructuring and future strategy of the Group into account.

The continuing operations are funded through a mixture of cash generative operations and new short term bank loans (net proceeds of CNY 237.2 million).

The Directors consider that the Group and the subsidiaries remaining after group restructure have adequate resources and committed borrowing facilities to continue in operational existence for the foreseeable future.

However, the Group is reliant on the renewal of the short term bank loans. Although the Directors believe that the Group will be able to renew their facilities due to the Group's relationships with its banks, there is the risk that in the future, the Group may not be a going concern if the Group is unable to meet its debts as they fall due.

In approving the financial statements, the Board has recognized that these circumstances create a level of uncertainty. However, having made enquiries and considered the uncertainties outlined above, the directors have a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future. Accordingly, the Board believes it is appropriate to adopt the going concern basis in the preparation of the financial statements.

The directors do not propose a final dividend in respect of the year ended 31 December 2013 (2012: nil).

Copies of this financial information will be available on the Company's website.

3. Revenue

4. Taxation

The major components of income tax expense are as follows:

5. Loss per share

Loss per share was calculated by dividing the net loss for the year ended 31 December 2013 attributable to equity shareholders of the parent by the weighted average number of ordinary shares.

The loss for the financial year attributable to equity holders of the parent was as follows: