Final Results

HaiKe Chemical Group Limited 

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2010

HaiKe Chemical Group Ltd ("HaiKe" or the "Company", together with its subsidiaries as the "Group" or "HaiKe Group"), the AIM quoted (AIM: HAIK) petrochemical and specialty chemical business based in China, is pleased to announce its audited results for the year ended 31 December 2010.

Mr. Xiaohong Yang, Executive Chairman, said: "This has been a pivotal year for the Group and despite an uncertain economy and higher feedstock prices, I am delighted to announce a return to profitability following the substantial changes we made to the business to improve efficiency and cost controls. Our confidence in the future is reflected in the recommendation of a full year maiden dividend of US$0.043 per share.

The Group is focused on the long term growth of the business and to this end is taking further actions to improve technology and optimise intra group operational synergies to mitigate higher feedstock prices. We will continue to grow our refinery business and focus on the development of new specialty, salt and bio-chemical products in order to take advantage of increasing demand, and further enhance profitability. We expect the PRC economic growth will be sustained and the refinery business to benefit from the NDRC's future plan to shorten the adjustment interval period for the price of refined products which will improve our margins. We are, however, mindful that the global economic and political environment together with threat of inflation and tightening monetary policy in the PRC could have some impact on the business, but remain confident that the positive steps we are taking will place us in a stronger position to weather external issues and create long term growth and value for our shareholders."

Notice of AGM

The Group's Annual General Meeting will be held at 10:00 am (China time) on 22 June 2011 at the conference room of HaiKe Chemical Group Ltd., 11th Floor, HaiKe Mansion, No. 726 Beiyi Road, Dongying City, China.

AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2010 ARE AS FOLLOWS: 

HaiKe Chemical Group Ltd ("HaiKe" or the "Company", together with its subsidiaries as the "Group" or "HaiKe Group"), the AIM quoted (AIM: HAIK) petrochemical and specialty chemical business based in China, is pleased to announce its audited results for the year ended 31 December 2010.

Financial Highlights

l Total revenue increased substantially by 132% to $1,373.1 million (2009: $591.3m)

l Petrochemical products revenue grew by 151% to $1,221.5 million (2009: $486.3m)

l Chemical products (including speciality, salt and biochemical) revenue increased by 44% to $151.6 million (2009: $105.0m)

l Profit after tax (including non-controlling interest) was $1.8 million (2009: loss of $1.8 million)

l Profit excluding non-controlling interest was $6.3 million (2009: $0.2 million)

l EPS was $0.164 (2009: $0.005)

l Recommended final dividend of ($0.043 per share) (2009: nil)

Operational Highlights

l Increasing prices and new contribution from Ruilin increased sales

l Streamlined internal management team, tightened cost control and technical improvements and innovations generated significant cost savings

l Correlation of feedstock requirements and end product output provided intra-Group buying synergies

l Emphasis on energy conservation and reduction in exhaust emissions enhanced awareness of corporate responsibility on energy and environmental issues

Outlook  

l Increase in feedstock prices and scheduled repair and maintenance at major subsidiaries will impact profitability and as a consequence we expect to break even in Q2 2011

l Further actions to improve cost control and efficiency by improving product mix, technology innovation and optimising intra-group operational synergies to mitigate higher feedstock prices

l Crude oil price continues to be volatile in coming years as the global geo-politics is being re-aligned. Margins of refinery business remain cyclic in 2011. However, Haike's refining business will benefit from reduced government regulation and industry consolidation in China

l Evaluation of new chemical products with higher margins will continue to diversify the group business from the uncertain low margin refining to the downstream chemical area. Selection of viable projects to enhance HaiKe's feedstocks position with high return remains challenging. New chemical projects will be launched after thorough evaluations

CHAIRMAN'S STATEMENT

2010 was a pivotal year for HaiKe Group. Faced with fluctuating macroeconomic conditions and increasing feedstock prices in 2010, the Group successfully turned around to make a profit. Sales turnover reached a historic high of $1.4 billion and margins improved as a result of economies of scale and improved cost control measures. By improving the business development model, the Group achieved steady growth in production and marketing in 2010, resulting in a substantial turnaround in the overall operating results as compared with 2009. Reflecting a stronger year and our confidence in the future performance, we are recommending a maiden dividend of $0.043 per ordinary share.

1. Review of operating results

In 2010, the Group continued to streamline internal management which contributed to the improvement in efficiency and our ability to cope with the global financial turmoil and the shifts in the economic environment.  

The Group continued to develop new sources of income, improved product mix and tightened cost control in 2010 which helped to enhance the Group's overall profitability. HaiKe found niches in refined chemical products, such as crude isopropyl ether. Our hydrogenation techniques upgraded the quality of gasoline and improved the margins therein. Approximately 40% of the processed gasoline and diesel was sold to direct clients in 2010 which enhanced the Group's overall profitability. The newly established Dongying Hi-Tech Ruilin Chemical Co., Ltd ("Ruilin") has different feedstock requirements from the Group's existing refinery operation which creates buying synergies and its advantageous location enhanced the Group's overall sales and marketing strategy. In addition, a number of technical improvements and innovations generated significant cost savings for the Group.

Through improvements in the production process and business development model, tightening of cost controls and emphasis on health and safety, energy conservation and reduction of emissions, the Group not only turned around its core businesses but also showed potential in sustainable development. In 2010, the Group's audited sales turnover grew substantially by 132% to $1.4 billion as compared with the previous year. Net profit attributable to owners of the Company was $6.3 million compared with $0.2 million in the previous year. Basic earnings per share was $0.164 compared with $0.005 in the previous year.

2. Prospects

In 2011, we expect the global economy to continue to recover and steady growth of the PRC's economy to be sustained. As such, we expect energy demand to remain high and the increasing energy consumption should benefit refineries such as HaiKe. However, uncertainties such as geopolitics and market speculation will impact market conditions and make feedstock prices more difficult to forecast. In addition, the threat of inflation and tightening monetary policy in the PRC is likely to affect the Group's operation.

The National Development and Research Commission ("NDRC") made adjustments to domestic refined product prices four times in 2010 and twice in Q1 2011. This "peg" pricing mechanism aligned the price relationships between crude oil and refined products and at least partially offset the effects of crude oil price fluctuation. The adjustment interval period is expected to shorten and the price of refined products will eventually be decided by the market which will benefit HaiKe in the long run.

We expect the Group's performance to be further enhanced by increasing our focus on chemical products and cost control measures. In addition to continued steady growth of the existing refinery business, the Group will focus more on specialty, salt and bio-chemical products in order to further enhance profitability. A number of new projects in this regard are under review and will be launched in due course. In addition, intra-group synergies will be further enhanced and technical improvements will continue to contribute to operational efficiency and profitability. Furthermore, we will enhance co-operation with other players in the industry to improve the Group's internal management and increase our exposure to overseas markets. Finally, we will aim to decrease major operating expenses, by improving internal cash flow and treasury management and seeking alternative sources of funding. 

According to China's twelfth "Five-year Plan" (2011-2015), the petrochemical industry will benefit from entry barrier and industry consolidation. Currently there are 150 refinery plants with average annual capacity of 3 million tons, 14 out of which have a capacity of over 10 million tons. During this five-year period, the entry barrier has been set to 10 million tons, i.e. new refinery projects with less than 10 million tons are not permitted to be built. As at 2015, the average annual capacity will be doubled to 6 million tons through mergers and acquisitions and the number of refinery plants will be reduced to 90. We expect the entry barriers and likely industry consolidation to improve economies of scale and reduce competition in the refinery industry and benefit existing players such as HaiKe. 

In addition, worldwide energy consumption is showing a move towards energy-saving, efficient, clean and low-carbon energy. The Group intends to take this opportunity to achieve further growth and to develop into a technically advanced and integrated chemical company.

Xiaohong YangExecutive Chairman19 May 2011

CHIEF EXECUTIVE OFFICER'S REPORT

We reached a milestone in 2010 as group turnover achieved a historic high of $1.4 billion, 132% growth year-on-year, and we returned to profit despite the severe market conditions and sharp fluctuations.

1. Operational review

(1) Refinery

In 2010, the international crude oil price fluctuated significantly with an upward trend. The average crude oil price was approximately $79 per barrel, a 39% increase year-on-year from $57 per barrel in previous year. The Group maintained its market-oriented strategy which provided flexibility to adjust processing loads on a timely basis. The Group optimized its refined products output and mix by an increase in the overall yield and upgraded the quality of refined products through innovations in technology.

The Group continues to optimize production, refining and marketing operations. HaiKe has focused on co-ordinating production, transportation and sales and strengthened the search for new strategic customers and provision of technical services thereby reinforcing our development in more mature markets.

Feedstock supply remains the key concern for China's refineries. In order to secure the supply and hedge for price fluctuation, the Group established a trading subsidiary in Singapore, Haiyuan Trading Pte Ltd., in 2010 which acts as a purchase arm for the Group and is responsible for procuring fuel oil from overseas market. The trading activity in Singapore was successful in 2010 when it not only secured thousands of tons of fuel oil but also locked in purchase prices by hedging through forward contracts. 

In 2010, the Group's refineries processed 1.3 million tons of crude oil and fuel oil. The oil processing load exceeded 90% of capacity for the existing facilities in HaiKe Chemical and over 50% in the new Ruilin facilities. The Group produced approximately 1.33 million tons of gasoline, diesel, Liquefied Petroleum Gas ("LPG"), petroleum coke and other products, 230% growth year-on-year.   

Turnover from the refinery business grew 151% to $1.2 billion for the twelve months ended 31 December 2010 (2009: $486 million). The significant rise in revenue is due to the contribution from Ruilin and increased selling prices of refined products. Gross margin decreased to 3.73% (2009: 4%) as growth in refined product prices fell behind that of feedstock prices. Net loss from the refinery business was $1.8 million, compared with a profit of $1.1 million in 2009.

(2) Specialty/salt chemical products

In the first half of 2010, the Group faced difficult market conditions caused by weakened demand for chemical products in the domestic market. In response to this, the Group strengthened market analysis and developed direct customer sales. For the second half of 2010, there was a quick turnaround in the market which the Group was able to capitalise upon due to our efficient organisation and management of resources. Both sales volume and average selling price recovered significantly, resulting in enhanced profitability. The Group also adopted various trading methods to explore diversified import channels in order to expand the scale of operation and secure high quality feedstock. 

In 2010, the Group sold 79,876 tons and 482,808 tons of specialty and salt chemical products respectively, representing increases of 233% and 110% compared with those in the previous year.

Turnover from specialty/salt chemical products grew by 259% to $129 million for the twelve months ended 31 December 2010 compared with $36 million in the previous year due to increases in both selling prices and sales volumes of chemical products. Gross margin improved to 13.6% from 6.8% in the previous year due to faster growth in the price of chemical products compared with that of the feedstock price. Net profit from chemical products was $7.3 million, compared with a loss of $0.9 million in 2009.

(3) Biochemical

Demand for sodium heparin and crude heparin remained strong in 2010. The heparin injection production line is about to complete and will start operating in 2011. HaiKe's major biochemical products recorded modest growth in 2010 as compared with 2009 due to sales slowdown following a suspension of production for rectification for several months in the second half as a result of a product quality accident in Q2. The accident was caused by off-specification water which damaged several batches of biochemical products. The Group has since improved quality assurance.

Turnover from biochemical products grew by 209% to $21.0 million for the twelve months ended 31 December 2010 compared with $7.6 million in the preceding year as prices of biochemical products more than doubled in 2010. However, gross margin fell to 8.9% from 21.3% in the preceding year due to larger costs incurred arising from the production accident. Net loss from biochemical products was $0.7 million, compared with profit of $0.9 million in 2009.

2. Market review

(1) Feedstock

Further to the increased price in 2009, the crude oil price continued to climb in 2010 due to uncertainties in the global economy and imbalance of supply and demand in the global oil market. The average prices per barrel for West Texas Intermediate ("WTI") and North Sea Brent crude oil ("Brent") were $79.53 and $79.47 respectively, representing a year-on-year increase of 28.7% and 29.2% respectively from that in 2009. The fluctuation of the oil prices continues on an upward trend. Domestic crude oil prices fluctuated substantially in line with the international market.  

According to information from the State Statistics Bureau, domestic crude oil output increased steadily and reached 202 million tons in 2010, representing an increase of 6.9% as compared with 2009. Net crude oil imports amounted to 236 million tons in 2010, representing an increase of 18.6% as compared with 2009.

(2) Refined products

The domestic demand for refined products remained strong in 2010. According to information from the State Statistics Bureau, the apparent consumption of domestic refined products was 230 million tons in 2010, representing an increase of 11.3% as compared with that in 2009. In particular, the growth for gasoline products and diesel products in 2010 was 7.6% and 12.6% respectively as compared with that in 2009. The average daily consumption of refined products for the fourth quarter of 2010 was a historic high at approximately 660,000 tons. The domestic refined products output was 237 million tons in 2010, representing an increase of 10.3% when compared with that in 2009 and the growth for gasoline products and diesel products sales in 2010 were 6.4% and 11.7% respectively as compared with that in 2009.

The NDRC made adjustments to the domestic prices of refined products four times in 2010, and twice in Q1 2011, among which five were upside and one was downside. The domestic pricing mechanism for refined products aligned the price relationship between crude oil and refined products and partially offset the effects of crude oil price fluctuation. The adjustment interval period is expected to shorten which will further benefit refinery enterprises including HaiKe.

(3) Specialty/salt chemical products market review

In 2010, the domestic market for chemical products experienced a turnaround when the price fell in the first half but rebounded sharply in the second half. In the first half of 2010, due to market uncertainty resulting from the European debt crisis, domestic consumer demand and export demand fell, which depressed chemical products prices. With respect to the second half of 2010, thanks to the continuing growth of the domestic economy and the gradual relaxation of the European debt situation, domestic demand from the manufacturing sector recovered steadily. The easing monetary policies of the developed economies triggered global inflation expectations and the rise of speculative demand resulted in a short supply of chemical products which in turn boosted prices upwards.

(4) Biochemical products market review

The heparin sodium market continued to grow robustly in 2010. Price of crude and refined heparin sodium grew 40% and 70% respectively year-on-year in 2010 as compared to that in 2009. Elsewhere, the price spread between crude and refined heparin sodium widened significantly to $132 per billion unit in 2010 from just $6 per billion unit in 2009. This provided a substantial opportunity in procuring crude heparin and processing into refined heparin.

3. People

During this financial year, there were some changes to the Board and announced the departure of Mr. Johnson Lau, Mr. Chunming Xu and Mr. Eugene Wong. Additionally Mr. Nick Su resigned from the CFO's office in November 2010. On behalf of the Board, I would like to express our sincere thanks for their contribution and commitment during their time with HaiKe and wish them well for the future.

We welcome Dr. James Kwanglin Yuann as Non-executive Director and Chairman of the Audit Committee and a member of the Remuneration Committee, and Mr. George Zeng who was appointed as CFO in January 2011 and Executive Director in April 2011.

Finally I would like to take this opportunity to thank all our employees for their dedication and hard work without which this year could not have been a milestone.

4. Outlook

During the first quarter of 2011, the Group recorded unaudited turnover of $532 million, up 250% year-on-year. Gross profit amounted to $23 million, compared to $1.1 million in Q1 2010. Net profit was $9.5 million, compared with loss of $9.5 million in Q1 2010. The better than expected performance was mainly attributable to improved margins of refined products following NDRC's price adjustment in Q1 2011.

Despite the encouraging performance in Q1 2011, we expect Q2 performance to weaken due to the combined effect of feedstock price increase and scheduled repair and maintenance at major subsidiaries including Shandong Hi-Tech Chemical Group Co., Ltd. ("Hi-tech Chemical"), Ruilin and Dongying Hi-Tech Spring Chemical Industry Co., Ltd. ("Hi-tech Spring")for one to two months. We expect to break even at Group level in Q2 2011.

We will continue to focus on our market-oriented and profitability-focused strategy, enhance the competitiveness of our products, further optimize resource allocation, improve product mix and technology innovation and continue to leverage on our integrated and intensive refinery and chemicals operations.

The Group will further streamline the internal control system by restructuring the existing hierarchy and centralizing the strategic development, financing and treasury, corporate finance and human resources functions, which will enhance overall efficiency. A new custom-tailored Enterprise Resources Planning and management consulting system will be launched in 2011 which will help to improve management efficiency and accuracy and in turn contribute to overall profitability.

Costs are expected to be trimmed further in 2011. The Group has identified a number of areas of cost savings through innovative technologies and taking advantage of intra-group operational synergies.

A number of new projects are under evaluation and will be launched in due course. The new projects will benefit the Group not only by contributing new sources of income but also by helping to obtain Government support which will enhance overall profitability and maintain our long term leadership status in the domestic market.

The business environment remains challenging in 2011. The Group aims to achieve a more balanced sales volume, price and profitability by adopting a flexible approach for different products, improving product mix, strengthening market research and analysis and making best use of existing resources. With the efforts of our staff and management executives and support from shareholders, we are confident that the targets for 2011 can be met.

Zaizhong ZhangChief Executive Officer19 May 2011

CHIEF FINANCIAL OFFICER'S REPORT

1. Summary

Consolidated revenue grew by 132% to $1,373.1 million for the year ended 31 December 2010 compared with $591.3 million for the year ended 31 December 2009. This was mainly due to the contribution from Ruilin which started operating in May 2010. Excluding the contribution from Ruilin, Group revenue would have grown 87% year-on-year. In addition, both sales volume and average selling prices increased for both refinery and chemical products.

The Group recorded net profit of $1.8m in 2010 compared with a loss of $1.8m in 2009 which was mainly attributable to improved margins as a result of increased selling prices and economies of scale.

2. Consolidated Operating Results

Turnover 

Group turnover surged by 132% year-on-year to $1,373.1 million for the twelve months ended 31 December 2010 (2009: $591.3 million). Ruilin contributed $268 million of sales turnover in 2010 after commencing operations in May 2010. The selling prices and sales volumes of major products including gasoline, diesel and chemical goods recorded significant improvements in 2010. The table below sets out the external sales volumes and average realised prices for major products sold by the Group in 2010 and 2009, and percentage of changes year-on-year in the sales volume and average realised prices.

Profit from operations

Profit from operations increased by 285% to $27.3 million for the twelve months ended 31 December 2010 from $7.1 million for the twelve months ended 31 December 2009.

Staff Remuneration Costs 

Staff remuneration costs of the Group were $12.4 million for the twelve months ended 31 December 2010, representing an increase of $2.8 million or 29% growth compared with that of last year. This was mainly attributable to (1) 12% salary adjustment in March 2010 in line with domestic inflation and to enhance the Group's competitiveness in human resource management; and (2) incentive bonus granted to senior management of profitable subsidiaries.

Depreciation, Depletion and Amortisation 

Depreciation, depletion and amortisation increased by 41% to $19.5 million for the twelve months ended 31 December 2010 (2009: $13.8 million). This was mainly attributable to an increase in the average carrying amount of fixed assets as a result of continued capital expenditure in 2010.

Selling, General and Administrative Expenses 

Selling, general and administrative expenses increased 39% to $27.9million for the twelve months ended 31 December 2010 (2009: $20.1 million). This was mainly attributable to (i) increases in both the freight volume of products and the unit freight cost resulted in an increase in freight expenses; (ii) land use tax rate doubled in 2010 and stamp duty increased due to the higher sales turnover; and (iii) increased amortisation expense following Ruilin's commercial operation.

Loss on disposal of property, plant and equipment 

Loss on disposal of property, plant and equipment doubled to $0.6 million for the twelve months ended 31 December 2010 (2009: loss of $0.3 million). This was mainly attributable to a series of upgrades and innovations of existing production facilities in order to improve efficiency and productivity.

Gain on disposal of investment securities 

Gain on disposal of investment securities dropped to $0.04 million for the twelve months ended 31 December 2010 (2009: $0.5 million) due to conditions in the securities market.

Profit from Operations 

As a result of the above, profit from operations for the Group grew significantly to $27.3 million for the twelve months ended 31 December 2010 (2009: $7.1m), representing a significant increase of 285% year-on-year.

Net Exchange Loss 

The Group recorded a net exchange loss of $3.9 million for the twelve months ended 31 December 2010 compared with a net exchange gain of $0.4 million for the twelve months ended 31 December 2009. This was mainly attributable to the depreciation of bank deposits denominated in foreign currencies as a result of RMB appreciation in 2010.

Net Interest Expenses 

Interest income increased by $1.2 million to $2.8 million for the twelve months ended 31 December 2010 (2009: $1.6 million), representing growth of 75%. The increase in interest income was mainly attributable to increased interest rates due to tightening monetary policies and higher average cash balances as a result of HaiKe's improved cash flow.

Interest expense increased by $12.1 million to $23.9million for the twelve months ended 31 December 2010 as compared to $11.8 million for the twelve months ended 31 December 2009, representing an increase of 103%. The increase in interest income was mainly attributable to (1) the increase in interest rates due to tightening monetary policies; (2) the increase in long-term bank loans amounting to $34 million which bore a higher interest rate; and (3) increase in bank charges on discounting bank notes as the Group effectively increased its banking facilities by using more bank notes to settle intra-group transactions.

As a result, net interest expenses increased by $10.9million to $21.1million for the twelve months ended 31 December 2010 as compared to $10.2 million for the twelve months ended 31 December 2009, representing an increase of 107%.

Profit Before Taxation 

Profit before taxation increased by $3.8 million to $1.8 million for the twelve months ended 31 December 2010 (2009: loss of $2.0 million).

Income Tax

Income tax charge was $23,000 for the twelve months ended 31 December 2010 as compared to a tax credit of $123,000 for the twelve months ended 31 December 2009. The increase in tax charge was mainly attributable to that in some subsidiaries the taxable income generated in 2010 were more than enough to offset the accumulated losses in previous years.

Profit for the year 

Profit for the year increased by $3.6 million to $1.8 million for the twelve months ended 31 December 2010 (2009: net loss of $1.8m)..

Loss attributable to non-controlling interest of the Company

The loss attributable to minority interests grew by $2.5 million to $4.5 million for the twelve months ended 31 December 2010 (2009: loss of $2.0 million). The increase in loss attributable to minority interests was mainly attributable to the loss incurred by Ruilin in 2010.

Net profit attributable to owners of the Company 

Due to the composite effects described above, net profit attributable to the owners of the Company grew by 33 times to $6.3 million for the twelve months ended 31 December 2010 (2009: $187,000).

Dividend

Subject to approval at the forthcoming AGM, the Company is pleased to announce a final dividend of $0.043 per ordinary share. The dividend will be paid on 15 July 2011 to shareholders on the register on 1 July 2011.

Cash and cash equivalents 

Cash and cash equivalents decreased by $24.4 million to $27.4 million as at 31 December 2010 compared to $51.8 million as at 31 December 2009. The decrease in cash and cash equivalents was mainly due to the increase in working capital.

Bank loans

Bank loans increased by $40.5 million to $417.2 million as at 31 December 2010 compared to $376.7 million as at 31 December 2009. The short-term portion of bank loans increased by $8.2 million while the long-term portion increased by $32.3 million. The more long-term bank loans secured will benefit the Group by improving the structure and security of bank loans, but at a higher cost.

Cash flow from operating activities

Cash flow from operating activities turned positive to $16.3 million for the twelve months ended 31 December 2010 as compared to a negative $105.1 million for the twelve months ended 31 December 2009. This was mainly attributable to positive movement in working capital as a result of improved treasury management.

3. Segment Information

(1) Refinery

Turnover

Turnover increased by 151% to $1,221 million for the twelve months ended 31 December 2010 as compared to $486.3 million for the twelve months ended 31 December 2009. The increase was mainly attributable to an increase in both sales volume, due to growing demand, and average realised selling prices following NDRC's price adjustment during the year.

Operating Expenses

Operating expenses increased comparably by 152% to $1,223 million for the twelve months ended 31 December 2010 as compared to $485.2 million for the twelve months ended 31 December 2009. The increase was mainly attributable to (i) increased feedstock costs during the period; and (ii) increased SG&A expenses.

Profit from Operations

The refinery business recorded an operating loss of $1.8 million for the twelve months ended 31 December 2010 as compared to an operating profit of $1.1 million for the twelve months ended 31 December 2009. This was mainly attributable to higher initial cost incurred at Ruilin during its first operating year in 2010.

(2) Specialty chemicals

Turnover

Turnover increased by 44% to $151.6 million for the twelve months ended 31 December 2010 as compared to $105.0 million for the twelve months ended 31 December 2009. The increase was mainly attributable to the increase in both sales volume due to growing demand and average realised selling prices as a result of the market recovery during the year.

Operating Expenses

Operating expenses increased by 37% to $143.4 million for the twelve months ended 31 December 2010 as compared to $104.4 million for the twelve months ended 31 December 2009. The increase was mainly attributable to (i) increased feedstock costs during the period; and (ii) increased selling and distribution expenses.

Profit from Operations

The increase in sales turnover helped to improve the economies of scale, and therefore, profit from operations increased sharply by 12.3 times to $8.2 million for the twelve months ended 31 December 2010 as compared to $615,000 for the twelve months ended 31 December 2009.

4. Liquidity and financial risk

The Group has shown significant improvement in profitability, has sufficient funds to meet its financial obligations and maintains an excellent repayment record and good relationship with local banks, therefore no special attention shall be drawn and brought to the Board of directors on liquidity and financial risk for the time being.

George Zeng

Chief Financial Officer

19 May 2011

DIRECTORS AND SENIOR MANAGEMENT PROFILE

Executive Directors

Mr. Xiaohong Yang, Executive Chairman, aged 45

Mr. Yang has been involved in the petrochemical and chemical industries for over 22 years. He started his career as a technician in the Dongying Chemical factory (the predecessor to Hi-Tech Chemical Group) in 1988 and was subsequently promoted to director of Dongying Chemical in 1990. From 1991 to 1996, he served as a director in the production department of the Dongying Chemical factory and later as deputy factory director. In 2000, Mr. Yang was appointed as the Chairman of Hi-Tech Chemical Co., Ltd, now known as Hi-Tech Chemical, before he became the Chairman of HaiKe in 2006. Mr. Yang is a senior engineer and holds MBA certificates from Beijing University and Tsinghua University.

Mr. Zaizhong Zhang, Chief Executive Officer, aged 44

Mr. Zhang, a senior engineer, has nearly 22 years' experience in technology management. After graduating in 1988, Mr. Zhang started his career as a technician in the Dongying Chemical factory in 1988. From 1990 to 1995, he served as a plant manager for the Dongying Chemical factory and was promoted to vice president in 2000. In 2000, Mr. Zhang was appointed as the Chief Executive Officer. He holds an MBA certificate from Tsinghua University.

Mr. George Zeng, Chief Financial Officer, aged 39

Mr. Zeng has over 17 years' experiences in accounting and finance. Prior to joining the Company, Mr. Zeng was the Chief Financial Officer of Hong Kong Jinshi Holdings, a private conglomerate and Hong Kong Stock Exchange IPO candidate. From 2006 to 2008, he was the Qualified Accountant and Company Secretary at Eyang Holdings Group, a publicly quoted company on the Hong Kong Stock Exchange. From 1994 to 2001, he worked for Arthur Andersen and ABN AMRO as an auditor and investment analyst respectively. Mr. Zeng holds a Master's degree in Economics, and is a fellow of Association of Chartered Certified Accountants and member of Hong Kong Institute of Certified Public Accountants.

Non-Executive Directors

Raymond Wong, Non-Executive Director, aged 39

Raymond Wong is 39 years old and is a qualified solicitor of the Supreme Court of England & Wales and of the High Court of Hong Kong. Raymond has over 12 years of experience in corporate finance, mergers and acquisitions, securities regulatory and compliance and general corporate work gained within investment banking and various international law firms.  

Raymond has a B.Eng. (Electrical Engineering) ACGI from Imperial College, University of London, a Postgraduate Diploma in Legal Practice from Oxford University, a MA (Law) from City University, London and an LL.M. (Chinese law) from the University of Hong Kong. Raymond is a Director of Jetion Solar Holdings Limited and Forever Rise Group Limited, and a board member of the China-Britain Business Council. He is also a committee member of the British Chinese Law Association, a member of the Institution of Engineering and Technology (MIET) and an associate of the Chartered Institute of Bankers (ACIB).

Mr. Jim Yuann, Non-Executive Director, aged 64

Dr. Yuann, age 64 and a US national, is the Chair of Chief Executive Advisory Board of Vistage, a US based global CEO coaching firm. He is also an adjunct professor in lectures in Fudan University, Shanghai where he lectures 'Leadership' and 'Business Models Comparison Between Multinational and Local Companies in China' in the IMBA program collaboration between MIT (Sloan School of Management) and Fudan . Prior to joining Vistage China, Dr. Yuann was the President of Asia - Specialty Materials for Honeywell International. From 1995 to 2004, he was the General Manager of Asia for PolyOne Corporation. Prior to joining PolyOne Corporation, Dr. Yuann held various positions with Monsanto and Standard Oil Company (later acquired by BP). Dr. Yuann has been involved in Asian business since 1984 and was relocated to Hong Kong as Director of Asia by BP Chemical in 1989. He is currently resident in Shanghai. He is the author of the recently published book 'Super Trends of Future China'.

Dr. Yuann holds a D.Sc. degree in Chemical Engineering from Washington University in St. Louis, Missouri, a M.S. in Materials Science from University of Cincinnati and a B.S. degree in Chemical Engineering from National Taiwan University. He is an Asia Council member of AMA (American Management Association) and a lifetime member of AIChE (American Institute of Chemical Engineers).

Mr. Derek Marsh CVO, Non-Executive Director, aged 64

Mr. Marsh has 39 years' Government experience, including a number of years in the British Diplomatic Service in East Asia. He specialised in: Government to Government relations, export promotion, trade policy, the aerospace industry, large-scale information business, defence procurement and military operations. Mr. Marsh has also been a Non-Executive Director of Bovis Homes Ltd and Felixstowe Dock and Railway Company. Currently, he is a Non-Executive Director of China Food Company Plc, a company quoted on AIM since 2007. Mr. Marsh graduated from the Royal College of Defence Studies, London and the NATO Defence College, Rome; and has an MA from The Queen's College, Oxford.

Senior Management Team

Mr. Dongguang Liu, Group Deputy General Manager, aged 41

Mr. Liu has over 20 years' experience in finance and accounting. From 1990 to 1993, he worked as an accountant in the Guangyao Food Bureau and from 1994 to 1996, he was an accountant at the Guanyao Beer Company. From 1997 to 1999, he was the financial officer of Shandong Dongying Petrochemical Group. From 2000 to 2004, he was the vice General Manager of Hi-Tech Chemical and, from 2005 to the present, he has been serving as the Group Finance Manager of Hi-Tech Chemical. Mr. Liu is the associate secretary of the Dongying Audit Committee.

Mr. Desong Wan, General Manager of Hi-tech Chemical, aged 34

Mr. Wan holds a master's degree from Zhongnan University of Economics and Law. From 1997 to 2000, he worked as a Workshop Director in Hi-TechChemical. In 2001, he was promoted to the Assistant to General Manager, and further to the Deputy General Manager in 2006. From 2007 onwards, he has been serving as the General Manager of Hi-TechChemical.

Mr. Hualan Zhang, General Manager of Hi-Tech Spring, aged 45

Mr. Zhang holds a master's degree in engineering from China Petroleum University. He began his career as an engineer in the design and development department of China Petrochemical Shengli Oil Management Bureau. He then became the vice president and engineer of Hai Tong Group Company and Dongying Petrochemical Technology Developing Ltd. Co. In May 2004, he joined Hi-Tech Chemical as a senior engineer and in April 2005 he was appointed to the position of deputy manager. He was appointed General Manager of Hi-Tech Spring in 2006.

Mr. Hailun Zhang, General Manager of Hi-Tech Shengli, aged 38

Mr. Zhang holds a bachelor's degree in engineering from Tianjin University of Technology. He was a director of Yellow River Chlor - Alkali factory from 1996 to 1998 before he joined Shengli Galvanic in 1999. In 2002, he was appointed as an associate manager, followed by promotion to General Manager in 2006.

Mr. Guo Lin, General Manager of Tiandong Biochemical, aged 38

Mr. Guo is an associate engineer. He began his career as a technician in Dongying Shengli Electrochemical Co., Ltd after he graduated from Shandong Salt Industry School in 1994. From 1996 to 1999, he worked as a plant director in that company and was promoted to the vice General Manager in 2000. He was appointed as the general manager of Tiandong Biochemical in May 2006.

DIRECTORS' REPORT

The Directors present their report on the affairs of the Company, together with the financial statements and auditors' report, for the year ended 31 December 2010.

Principal Activities

The Company was incorporated in the Cayman Islands on 20 June 2006. The address of the registered office is at c/o Scotia Centre, 4th Floor, P.O. Box 2804, George Town, Grand Cayman, Cayman Islands. The principal activity of the Company is that of a holding company. The principal activities of the Company's subsidiaries (hereinafter, together with the Company, collectively referred to as the "Group") are the manufacturing of petrochemical, specialty and biochemical products in China.

Review of Business

Detailed reviews of activities, business development and projects are included within the Chairman's Statement, the Chief Executive Officer's Report and the Chief Financial Officer's Report.

Results and Dividend

The profit attributable to shareholders for the year is set out in the Consolidated Statement of Comprehensive Income.  

No dividend has been declared since inception. The Directors proposed to pay a final dividend of GBP1 million or US$1.65 million, equivalent to GBP0.026 or US$0.043 per share, subject to approval at the Annual General Meeting scheduled in June 2011. The proposed dividend will be paid to shareholders on the register on 1 July 2011. The Company's shares will trade Ex-dividend on 29 June 2011 and the proposed payment date is 15 July 2011.

Directors and Officers

The names of the Directors are set out below (as of 19 May 2011):

Mr. Eugene Wong resigned from the Board on 28 October 2010. 

The Company does not have a company secretary nor is one required under Cayman Islands law.

Retiring Directors

In accordance with the articles 84 and 85 of the Company's Articles of Association, at each Annual General Meeting, one third of the Directors (or if their number is not a multiple of three, then the number nearest to but not greater than one third) will retire from office by rotation. The Directors to retire every year will be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot. 

This year, Mr. Raymond Wong and Mr. Derek Marsh will retire at the forthcoming Annual General Meeting of the Company and all of them, being eligible, offer themselves for re-election.

Directors' Interests

The Directors' interests in Company shares were as follows:

(1) At 31 December 2009 and 19 May 2011, Mr. Xiaohong Yang owned 1.62% of the issued share capital of Dongying Hi-Tech Spring Chemical Industry Co., Ltd, a subsidiary of the Company. Further, Mr. Xiaohong Yang owns 6,120 ordinary shares (12.24% of the issued share capital) in HiTech Chemical Investment Limited ("BVICo"), the majority shareholder of the Company. In addition, Mr. Xiaohong Yang acquired 19,108 ordinary shares from Mr. Junping Bai, an existing shareholder of the Company, upon the Admission and 21,658 ordinary shares on 17 December 2007.

(2) At 31 December 2009 and 19 May 2011, Mr. Zaizhong Zhang owned 1.35% of the issued share capital of Dongying Hi-Tech Spring Chemical Industry Co., Ltd and 13% of the issued share capital of Dongying Hi-Tech Propylene Co., Ltd., an associate entity of the Company which holds 11.44% of the equity interest. Further, Mr. Zaizhong Zhang owns 2,921 ordinary shares (5.84% of the issued share capital) in BVICo. In addition, Mr. Zaizhong Zhang acquired 19,108 ordinary shares from Mr. Junping Bai, upon the Admission and 21,658 ordinary shares on 17 December 2007.

(3) At 31 December 2009 and 19 May 2011, Mr. Derek Marsh held 45,054 shares under the joint brokerage account with his spouse.

(4) On 1 February 2011, two Directors, Mr. Xiaohong Yang and Mr. Zaizhong Zhang were awarded phantom share options and the other Directors were awarded share options, which are exercisable in three instalments in the next three years.

Full details of Directors' service contracts and letters of appointment and remuneration can be found in the Report of the Remuneration Committee.

Related Party Transactions

Details of related party transactions are provided in Note 22 to the Financial Statements.

Substantial Shareholdings

As at 19 May 2011, the latest practicable date prior to the publication of this report, the Company's share registrar recorded the following shareholdings in excess of 3% of the ordinary share capital:

(1) The current issued share capital of BVICo is held by an aggregate of 44 employees of the Group, including Mr. Xiaohong Yang and Mr. Zaizhong Zhang, directors of the Company.

(2) Mr. Junping Bai is a former director of Hi-Tech Chemical, an indirect subsidiary of the Company.

Financial Risk Management

Details of the Group's financial risk management policies are provided in Note 23 to the Financial Statements.

Donations

The Company made no charitable donations during the year.

Post-Balance Sheet Events

There is no post-balance sheet event that would require an adjustment to the carrying value of the Group's assets and liabilities or that would need to be disclosed.

Annual General Meeting

The notice of the Company's Annual General Meeting will be distributed to shareholders together with the Annual Report. Full details of the resolutions proposed at the meeting can be found in the Notice of Annual General Meeting.

Auditors

The financial statements were audited by BDO LLP who will retire at the conclusion of the forthcoming Annual General Meeting and offer itself for re-appointment.  

A resolution for the re-appointment of BDO LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting.

Disclosure of Information to Auditors

All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company's auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. 

On behalf of the Board 

CORPORATE GOVERNANCE

The Board of Directors is accountable to the Company's shareholders for the good corporate governance of the Group. The Directors acknowledge the importance of the Combined Code and will comply with all aspects of the Code's requirement so far as is practicable and appropriate given the size of the Group and the constitution of the Board. In addition, the Group also intends to comply with the principles of the Corporate Governance Guidelines for AIM Companies published by the Quoted Companies Alliance.

The Company has adopted a model code for dealing in Ordinary Shares by its Directors and employees which is appropriate for an AIM quoted company.

The Board and its Committees

The composition of the Board is set out in the section entitled Directors and Advisers. The Board comprises an executive Chairman, Chief Executive Officer, Chief Financial Officer and three non-executive Directors. The non-executive Directors are independent of management and free from any business or other relationship, which could materially interfere with the exercise of their independent judgment. 

The Audit and Remuneration Committees consist exclusively of non-executive Directors under the chairmanship of Mr. James Yuann and Mr. Raymond Wong, respectively.

The Audit and Remuneration Committees have both been formally delegated duties and responsibilities by the Board of Directors.

The Audit Committee, which meets at least twice a year, receives and reviews reports from management and the auditors relating to the annual and interim accounts and the accounting and internal control systems. The Audit Committee has unrestricted access to the Company's auditors. Executive Directors' attendance is required where appropriate.

The Remuneration Committee, which also meets at least twice a year, sets and reviews the scale and structure of the executive directors' and the senior management's remuneration and the terms of their service contracts with due regard to the interests of the shareholders. The remuneration and terms and conditions of appointment of the non-executive Directors are set by the Remuneration Committee. The relevant Director or member of the senior management is consulted by the Remuneration Committee, where appropriate, in discussions or decisions concerning his or her own remuneration.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.  

The Directors are required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the AIM. The Directors have elected to prepare the Group and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

In preparing these financial statements, the directors are required to:

l select suitable accounting policies and then apply them consistently;

l make judgements and accounting estimates that are reasonable and prudent;

l state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and

l prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Website publication

The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Internal Control

The Board is responsible for the Group's system of internal financial controls, which is designed to provide reasonable, but not absolute, assurance against material misstatement or loss. The Group's system of internal controls includes, but is not limited to:

l the Board, which now includes three non-executive Directors, has overall responsibility for the decision making in the Group, including the review and approval of major capital expenditure and treasury policies;

l an annual budget is prepared in advance of the start of the financial year against which the Group's actual performance is monitored by the Directors;

l the Directors have put in place an organisational structure with clearly defined lines of responsibility and delegation of authority;

l the Group's management has a clear responsibility for identifying risks facing the business and for putting in place procedures to mitigate and monitor those risks;

l there are clearly defined control policies; and

l procedures for all transactions including appropriate authorisation levels; and the Directors review the monthly and quarterly management accounts.

The Group has an internal audit department that reports to the Board and Audit Committee.

The Directors have reviewed the effectiveness of the Group's internal control systems for the year ended 31 December 2010.  

Steps continue to be taken to embed internal control and risk management further into the operations of the business and to deal with areas of improvement which come to management's and the Board's attention.

Relations with shareholders

The Board supports the principle of clear reporting of financial performance to the Company's shareholders. All shareholders receive copies of the Annual Report and Interim Report which provide information on operations and financial positions. Shareholders are given opportunities to stay informed and involved with the Company's decisions by speaking and voting on the Annual General Meeting's resolutions in person or by proxy. The proxy vote results of each resolution will be made available by the Chairman after the meeting. All Directors attending the Annual General Meeting will be available to answer questions from shareholders present or via proxy votes. The Board actively encourages feedback and shareholder dialogue, whether verbal or written.

Going concern

After making enquiries and reviewed the Company's profit and cash flow forecast for the next 12 months, the Directors consider that the Group has adequate resources and support from its banks to continue in operational existence for the foreseeable future. Consequently, they have continued to adopt the going concern basis in preparing the financial statements.  

By order of the Board 

Yuan Xu

Secretary to the Board

19 May 2011

REPORT OF THE REMUNERATION COMMITTEE

The Remuneration Committee (the "Committee") comprises Mr. Raymond Wong, Mr. Derek Marsh and Mr. James Yuann. Mr. Raymond Wong took the position as Chairman of Remuneration Committee. Executive Directors may also be invited to attend meetings but may not vote and are not involved in any matter relating to themselves.

Remuneration policy

The policy of the Committee is to ensure that the remuneration packages offered to the executive Directors are competitive and designed to attract, retain and motivate executive Directors and senior executives of a high calibre. These packages are reviewed regularly and independent advice is taken when appropriate. They are structured to include both short and longer term incentives. No member of the Committee has any personal financial interest (other than as shareholders), conflicts of interest or day-to-day involvement in running the business. No Director plays a part in deciding his own remuneration.

The remuneration of the non-executive Directors is determined by the Committee. The non-executive Directors do not participate in the bonus scheme, nor do they receive any other benefits.

There are two main elements of the remuneration package for executive Directors:

l basic salary (including retirement benefit); and

l bonuses.

Basic salary

The basic salaries of the executive Directors are determined after a review of the performance of the individual. It is the aim of the Committee to reward Directors competitively and commensurate with their responsibilities and experience.

Bonuses

The basis of bonus payments is at the discretion of the Committee and is based on financial performance targets. The bonuses are paid annually in arrears.

Service Contracts

The Company and/or its subsidiaries entered into service contracts with two executive Directors dated 15 January 2007, and subsequently entered into further service contracts dated 15 February 2009. The Company entered into service contracts with Mr. George Zeng dated 10 January 2011. The Company entered into letters of appointment dated 15 February 2009 and 01 July 2009 with Mr. Johnson Lau and Mr. Raymond Wong to appoint them as non-executive Directors with an initial term of one year. The Company has further entered into a letter of appointment with Mr. Raymond Wong on 1 July 2010 for a further term of one year.

The Company also had entered into letters of appointment dated 15 January 2007 concerning the appointment of Mr. Eugene Wong and Mr. Derek Marsh as non-executive Directors of the Company, which had an initial term of one year from Admission. Mr. Eugene Wong resigned from the Company on 28 October 2010 and Mr. James Yuann joined the Company on 22 September 2010. The Company entered into new letters of appointment with Mr. James Yuann with effect from 22 September 2010 and Mr. Derek Marsh with effect from 15 February 2011, which are capable of being terminated by either the Company or the Director giving three months' notice. The Company will reimburse each non-executive Director, in full, for all reasonable out of pocket expenses which he properly incurs in the course of performing his duties as a non-executive Director.

The remuneration per annum of the Directors in 2011 is as follows:

The emoluments of Directors serving during the year ended 31 December 2010 are disclosed below:

(Note 1): Mr. George Zeng is paid in Hong Kong Dollar. For the purposes of comparison, an exchange rate of US$1: HKD7.8 is applied.

(Note 2): Mr. Derek Marsh is paid in Sterling. For the purposes of comparison, an exchange rate of £1: US$1.543 is applied.

(Note 3): Professor Chunming Xu retired from his position as a non-executive director in February 2010 and received his non-executive director fee from January to February 2010.

(Note 4): Mr. Johnson Lau retired from his position as a non-executive director in February 2010 and received his non-executive director fee from January to February 2010. Mr. Johnson Lau was paid in RMB. For the purposes of comparison, an exchange rate of US$1: RMB6.6 is applied.

(Note 5): Mr. Eugene Wong retired from his position as a non-executive director in October 2010 and received his non-executive director fee from January to October 2010. Mr. Eugene Wong was paid in RMB and Singapore Dollar. For the purposes of comparison, exchange rates of US$1: RMB6.6 and US$1: SG$1.23 are applied.

(Note 6): Mr. James Yuann was appointed as on 22 September 2010 and received his non-executive director fee from September to December 2010.

Share options/phantom share options

On 1 February 2011, the Group awarded the Directors, senior management and employees a total of 536,950 options and 3,298,407 phantom options with an exercise price of 58.25p per share. Details of the option scheme were set out in the announcement dated 2 February 2011.

The Option Scheme aimed to retain and attract qualified and experienced professionals with the necessary capabilities to ensure that the Group remains a leader in its field. We believe the Option Scheme will give the Group added flexibility in structuring more competitive remuneration packages to reward and retain personnel whose services are vital to the well-being, growth and success of the Group. 

Raymond Wong

Chairman of the Remuneration Committee

19 May 2011

DIRECTORS AND ADVISERS

Directors

Mr. Xiaohong Yang, Executive Chairman

Mr. Zaizhong Zhang, Chief Executive Officer

Mr. George Zeng, Chief Financial Officer

Mr. Raymond Wong, Non-Executive Director

Mr. Derek Marsh, Non-Executive Director

Mr. James Yuann, Non-Executive Director

Audit Committee

Mr. James Yuann, Chairman

Mr. Derek Marsh

Mr. Raymond Wong

Remuneration Committee

Mr. Raymond Wong, Chairman

Mr. Derek Marsh

Mr. James Yuann

Registered Office and Place of Domicile

c/o Scotia Centre

4th Floor, P.O. Box 2804

George Town

Grand Cayman

Cayman Islands

Secretary to the Board

Mr. Yuan Xu

Nominated Adviser and Broker

Westhouse Securities Limited

1 Angel Court,

London EC2R 7HJ

Auditors

BDO LLP

Emerald House

East Street

Epsom

Surrey KT17 1HS

Bankers

ICBC (London) Limited, London

36 King Street

London EC2V 8BB

Registrars

Capita Registrars (Jersey) Limited

Victoria Chambers

Liberation Square

1/3 The Esplanade

St Helier

Jersey JE4 0FF

INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS OF HAIKE CHEMICAL GROUP LTD. 

We have audited the group and company financial statements (the "financial statements") of HaiKe Chemical Group Ltd. for the year ended 31 December 2010 which comprise the consolidated statement of comprehensive income, the consolidated and parent balance sheet, the consolidated and parent cash flow statement, the consolidated and parent statement of changes in equity and the related notes. These financial statements have been prepared under the accounting policies set out therein.

Respective responsibilities of directors and auditors

The directors' responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the statement of directors' responsibilities.

Our responsibility is to audit and express an opinion on the financial statements in accordance with relevant regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the information given in the Directors' Report is consistent with those financial statements. We also report to you if, in our opinion, the company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises the Chairman's Statement, the Chief Executive Officer's Report, the Chief Financial Officer'sReport, the Directors and Senior Management Profile, the Director's report, the Corporate Governance Statement and the Report of the Remuneration Committee. We consider the implications for our report if we became aware of any apparent misstatement or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Our report has been prepared pursuant to the terms of our engagement letter with the Company and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of the engagement letter or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group's and company's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion:

·; the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group's affairs as at 31 December 2010 and of its profit for the year then ended;

·; the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by European Union, of the state of the parent company's affairs as at 31 December 2010; and

·; the information given in the Directors' Report is consistent with the financial statements.

BDO LLP

Chartered Accountants and Registered Auditors

EpsomUnited Kingdom19 May 2011 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

HAIKE CHEMICAL GROUP LTD. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2010

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010

The financial statements were approved and authorised for issue by the Board of Directors on 19 May 2011 and were signed on its behalf by:

Xiaohong Yang

George Zeng

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2010

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2010

(a) Cash flow from operating activities

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. COMPANY STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010

The financial statements were approved and authorised for issue by the Board of Directors on 19 May 2011 and were signed on its behalf by:

Xiaohong Yang

George Zeng

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. COMPANY STATEMENT OF CHANGE IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010

The accompanying policies and explanatory notes form an integral part of the financial statements.

HAIKE CHEMICAL GROUP LTD. COMPANY STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2010

The accompanying policies and explanatory notes form an integral part of the financial statements.

NOTES TO FINANCIAL STATEMENTS

For the year ended 31 December 2010

1. Background and Basis of Preparation

1.1 The Company

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 are manufacturing of petrochemical and chemical products. 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 as a consolidated group of companies.

1.2 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 financial statements are presented in US Dollars ("US$ or $") and all values are rounded to the nearest thousand ($'000) except when otherwise indicated.  

After making enquiries and reviewed the Company's profit and cash flow forecast for the next 12 months, the Directors consider that the Group has adequate resources and support from its banks to continue in operational existence for the foreseeable future. Consequently, they have continued to adopt the going concern basis in preparing the financial statements.

1.3 Standards effective but not yet adopted

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the group's accounting periods beginning on or after 1 January 2011 or later periods and which the group has decided not to adopt early and are not expected to have a material impact on the group's accounts. These are:

2.1 Management Estimates

The preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying the Group's accounting policies and requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amount of revenue and expenses during the reporting period. 

The following estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within this financial year are disclosed below:

a) Impairment of goodwill 

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details are given in Note 9.

b) Depreciation of plant and equipment

The cost of plant and equipment used for the manufacturing process is depreciated on a straight line basis over its estimating useful life. Managements' estimate of the useful life of plant and equipment is within 2 to 30 years. Management believes that these are common life expectancies applied in the chemical industry. Changes in the expected level of usage and technological developments could impact the economic use life and the residual value of these assets, therefore, future depreciation charges could be revised. More details including carrying values are included in Note 8.

c) Provision for impairment of account receivables

The Group makes sales on credit. A proportion of the outstanding credit sales may prove uncollectible in due course. An estimate is made of the uncollectible portion of accounts receivables using a percentage based on the aging profile of the amounts outstanding.  

Although these estimates are based on management's best knowledge of current events and actions, actual results may differ from these estimates.

d) Inventory

The Group reviews the net realizable value of, and demand for its inventory on a monthly basis to provide assurance that recorded inventory is stated at lower of cost and net realizable value. Factors that could impact estimated demand and selling prices include the timing and success of future technological innovations, competitor actions, suppliers' prices and economic trends. Changes of the expected net realizable value of inventory could potentially result in an increase or reduction in the profit for the year.

a) Functional currency

The directors have determined the currency of the primary economic environment in which the Group operates, to be Renminbi ("RMB"). Sales and major costs of the providing goods and services including major operating expenses are primarily influenced by fluctuations in RMB against US$. 

b) Foreign currency transactions

Transactions in foreign currencies are measured in the respective functional currencies of the combined entities and are recorded on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the closing rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the date of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair values are determined. 

Exchange differences arising on the settlement of monetary items or on translating monetary items at the balance sheet date are recognised in the income statement except for exchange differences arising on monetary items that form part of the Group's net investment in foreign subsidiaries, which are recognised initially in a separate component of equity as foreign currency translation reserve in the consolidated balance sheet and recognised in the consolidated income statement on disposal of the subsidiary.

c) Foreign currency translation

The presentation currency of the Group is US$, being the currency in which the international oil market operates, and therefore that financial information has been translated from RMB to US$.  

The results and financial position are translated into US$ using the following procedures:

Assets and liabilities for each balance sheet are presented at the closing rate ruling at that balance sheet date; and income and expenses for income statements are translated at average exchange rates for the year, which approximates to the exchange rates at the date of transactions.

All resulting exchange differences are recognised in the currency translation reserve, a separate component of equity. Goodwill and fair value adjustments arising on the acquisition of foreign operations are treated as assets and liabilities of the foreign operations and are recorded in the functional currency of the foreign operations and translated at the closing rate at the balance sheet date.

2.3 Subsidiaries and Principles of Consolidation

a) Subsidiaries 

A subsidiary is an entity over which the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities. The Group generally has such power when it directly or indirectly, holds more than 50% of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors.In the parent company's financial statements, its investments in subsidiaries are held at cost and are reviewed annually for impairment. 

b) Principles of consolidation 

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at the balance sheet date. The financial statements of the subsidiaries are prepared for the same reporting date as the parent company. Consistent accounting policies are applied for like transactions and events in similar circumstances.

All inter-group balances, transactions, income, expenses, profits and losses resulting from inter-group transactions that are recognised and eliminated in full.  

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases. 

Acquisitions of subsidiaries are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. For acquisitions prior to 1 January 2010, costs directly to the acquisition were included as part of the cost of an acquisition, thereafter cost directly attributable have been expensed. Identified assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest.

Any excess of the cost of the business combination over the Group's interest in the net fair value of the identified assets, liabilities and contingent liabilities represents goodwill. The goodwill is accounted for in accordance with the accounting policy for goodwill stated below.

Any excess of the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of business combination is recognised in the income statement on the date of acquisition.

Non-controlling interests represent the portion of net assets in subsidiaries not held by the Group. These are presented in the consolidated balance sheet within equity, separately from the parent shareholder's equity, and the share of profit or loss is separately disclosed in the consolidated income statement.

2.4 Investments in Associates

An associate is an entity, not being a subsidiary or a joint venture, in which the Group has significant influence. This generally coincides with the Group having 20% or more of the voting power, or has representation on the board of directors. 

The Group's investments in associates are accounted for using the equity method. Under the equity method, the investment in associate is carried in the balance sheet at cost plus post-acquisition changes in the Group's share of net assets of the associate. The Group's share of the profit or loss of the associate is recognised in the consolidated income statement. Where there has been a change recognised directly in the equity of the associate, the Group recognised its share of such changes. After application of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to the Group's net investment in the associate. The associate is equity accounted for from the date the Group obtains significant influence until the date the Group ceases to have significant influence over the associate.

Goodwill relating to an associate is included in the carrying amount of the investment. Any excess of the Group's share of the net fair value of the associate's identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the Group's share of the associate's profit or loss in the period in which the investment is acquired.

When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligation or made payment on behalf of the associate.

2.5 Property, Plant and Equipment

Property, plant and equipment are recorded at historic cost, less accumulated depreciation and any impairment loss where the recoverable amount of the asset is estimated to be lower than its carrying amount.

Property, plant and equipment in the course of construction for production or administrative purposes is carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.

Depreciation is charged so as to write off the cost of the assets over their estimated useful lives, using the straight-line method, as follows:

Buildings 20 - 30 years

Machinery equipment 2 - 18 years

Electronic equipment, furniture and fixtures 5 - 12 years

Motor vehicles 8 - 12 years

The residual values, useful life and depreciation method are reviewed at each financial year-end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. 

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the consolidated income statement.

2.6 Intangible Assets

a) Goodwill

Goodwill arising in a business combination is initially measured at cost being the excess of the cost of the business combination over the fair value of the Group's interest in the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, and any impairment loss arising is charged to administrative expenses in the consolidated income statement.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the Group's cash generating units which are expected to benefit from the synergies of the combination.

b) Other intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. 

Intangible assets are amortized through administrative expenses on a straight-line basis over their estimated useful economic lives and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and amortization method for intangible assets are reviewed at least at each financial year-end.

The estimated useful economic lives of the Group's intangible fixed assets are as follows:

Land use rights - 20-50 years

Industry rights - 4-10 years

Software - 2-5 years

c) Land use rights

The up-front prepayments made for the land use rights are expensed in the consolidated income statement on a straight-line basis over the period of the lease, which ranges from 20 to 50 years, or where there is impairment, the impairment is expensed in the consolidated income statement.  

2.7 Impairment of Non-financial Assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or an annual impairment test for an asset is required, the Group makes an estimate of the asset's recoverable amount.

An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In assessing value in use, the estimated future cash flow are discounted to their present value using a pre-tax discount rate that reflects current market assessments of

the time value of money and the risk specific to the asset. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.  

As assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses recognised for an asset other than goodwill may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss is recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount can not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Reverse of an impairment loss is recognised in the income statement. After such a reversal, the depreciation charge is adjusted for future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic base over its remaining useful life. The Group does not reverse in a subsequent period, an impairment loss recognised for goodwill.

2.8 Financial Assets

a) Classification 

The Group classifies its investments in financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets.  

b) Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category "financial assets at fair value through profit or loss". Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognised in the income statement.

c) Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortized cost using the effective interest rate method, less provision for impairment.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate.

Cash and cash equivalents comprise cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2.9 Financial Liabilities and Equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangement entered into. Significant financial liabilities include interest-bearing short-term bank loans, trade and other payables.

Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortized cost using the effective interest method.

All loans and borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortized cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

2.10 Inventories

Inventories are valued at the lower of cost and net realizable value. Cost incurred in bringing the inventories to their present location and condition is accounted for as follows:

Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale.

2.11 Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. 

a) Sales of goods

Revenue is recognised upon the transfer of significant risk and rewards of ownership of the goods to the customer, which generally coincides with delivery and acceptance of the goods sold.

b) Interest income

Interest income is accrued on a time apportioned basis, by reference to the principal outstanding and at the interest rate applicable, on an effective yield basis. 

c) Dividends

Dividend income is recognised when the Group's right to receive payment is established.

2.12 Profit from Operation

Profit from operation is arrived at after charging all items of operating expenditure and before crediting all items of operating income.

2.13 Government Grants

Government grants are recognised at their fair value.When a grant relates to an expense item, it is recognised in the consolidated income statement over the period necessary to match it on systematic basis to the costs that it is intended to compensate. Where a grant relates to an asset, it is included in deferred income and amortized to the consolidated income statement in equal annual installments over the expected useful life of the relevant asset.

2.14 Employee Benefits

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statements as incurred.

Bonuses for staff are accrued when the Group has an obligation to settle the liability for staff's past performance at the financial year end. The bonus accrual is stated at the present value of the discounted cash flows based upon the expected timing of bonus payments.

2.15 Borrowing Costs

With effect from 1 January 2009, borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Other borrowing costs are expensed as incurred. Capitalization of borrowing costs commences when the activities to prepare the asset to its intended use or sell are in process and the expenditures or borrowing costs are incurred. Other borrowing costs are capitalised until the assets are ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Prior to 1 January 2009, borrowing costs were expensed as incurred.

2.16 Derecognition of Financial Assets and Liabilities

a) Financial assets

A financial asset is derecognised where:

² The contractual rights to receive cash flows from the assets have expired;

² The Group retains the contractual rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or

² The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

b) Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

2.17 Taxation

Income tax for the financial year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that is relates to items recognised directly in equity, in which case such tax is recognised directly in equity.

Current tax assets and liabilities for the current and prior period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. 

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base, except for differences arising on:

² the initial recognition of goodwill;

² the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. 

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilized.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). 

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: the same taxable Group company; or different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

2.18 Segment reporting

The Group's report segments reflect the internal format provided to the chief operating decision maker and are as follows:

l The petrochemical segment provides the diesel oil, gasoline as well as other similar commercial oil by processing crude oil. This segment contributes 89% (2009: 82%) to Group turnover.

l The chemical segment is a diverse supplier of methyl carbonate, propylene and relating products which used in the areas of medical, agriculture, food and textile industry. This segment contributes 11% (2009: 18%) to Group turnover.

Measurement of operating segment profit or loss, assets and liabilities

The accounting policies of the operating segments are the same as those described in the summary of significant policies. The Group evaluates performance and operating segment profit or loss from operations before tax not including non-recurring losses, such as restructuring costs and goodwill impairment. 

Inter-segment sales are priced along the same lines as sales to external customers. The policy was applied consistently throughout the current and prior period.

Segment assets exclude tax assets and assets used primarily for corporate purposes. Segment liabilities exclude tax liabilities. Even though loans and borrowings arise from finance activities rather than operating activities, they are allocated to the segments based are relevant factors (e.g. funding requirements). Details are provided in the reconciliations from segment assets and liabilities to the Group position.

2.19 Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analyzed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "Operating lease"), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

3. Revenue

Sale of goods represents the invoiced amount of delivered goods net of discounts, returns and valued added tax. All intra-group transactions are excluded from the revenue of the consolidated Group.

4. Segmental information

a) Operating segment 

The following table presents revenue and profit from the Group's operating segments for the financial years ended 31 December 2010 and 2009.

Reconciliation of reportable segment revenues, profit or loss, assets and liabilities to the Group's corresponding amounts: