Final Results

HaiKe Chemical Group Limited

Audited results for the year ended 31 December 2016

HaiKe Chemical Group Ltd. ("HaiKe" or the "Company", together with its subsidiaries as the "Group" or "HaiKe Group"), the AIM quoted (AIM: HAIK) specialty chemical company based in Shandong Province, China, announces its results for the period ended 31 December 2016.

The Company performed well and delivered sustainable profit growth in 2016, which was driven by the decision to focus on higher margin specialty chemical products, product innovation, customer relationships and cost controls.

Key Points

Financial*

· Turnover was CNY728.3 million / GBP81.0 million (2015: CNY727.5 million / GBP76.3 million)

· Profit for the year was CNY16.9 million / GBP1.9 million (2015: CNY4.1 million / GBP0.4 million)

· Earnings per share was CNY0.4 / GBP 0.05 (2015: CNY0.1 / GBP 0.01)

· Cash and cash equivalents balance as at 31 December 2016 was CNY55.0 million / GBP6.5 million (2015: CNY35.4 million / GBP3.7 million)

· Total borrowings at 31 December 2016 were CNY80 million / GBP9.4 million (2015: CNY80 million / GBP8.4 million)

· The Board does not recommend a final dividend

Operational

· Tightly controlled and managed inventory

· Maintained market share in face of strong competition

· Increased the proportion of high-end products to adjust the product mix to better position the business in the continued challenging environment

· Strengthened the marketing team and optimized internal business support functions to improve business development and customer relationships. This has resulted in a significant number of new customers

Outlook

· For the first four months of 2017 unaudited turnover of CNY302.8 million / GPB35.4 million (the first four months of 2016: CNY225.5 million / GPB24.2 million).

· For the first four months of 2017 unaudited net profit of CNY12.8 million / GPB1.5 million (the first four months of 2016: CNY7.3 million / GPB0.8 million).

· Provide specialist technical services to enhance product value and improve overall customer service

· Continue to increase marketing investment and develop high-end product offerings

· Further improve product quality through technical innovation

* as at 31 December 2016 the GBP/CNY exchange rate was 1:8.5094

the arithmetic average of the exchange rate for 2016 was 1:8.9855

Mr. Xiaohong Yang, Executive Chairman, said:

"We are pleased to be able to report a positive set of results for 2016 that reflects continued growth and progress, having seen improvements in trading performance across the business, with significant improvement in the underlying trading profits.

Our strategy to focus on higher margin products together with a strong emphasis on product innovation and value added customer services has enabled us to deliver sustainable growth and it is particularly pleasing that the first four months of the new financial year have seen the positive momentum continue. The Board remains mindful of a difficult trading environment but is confident in the delivery of the long term business objectives."

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Chairman's Statement

Review of 2016 Performance

Trading conditions were challenging in 2016. The domestic economy in mainland China continued to slow down with GDP growth falling to 6.7%.

The collapse in the crude oil price made conditions difficult for the specialty chemicals industry and the domestic economy had a negative impact on demand. Turnover was CNY728.3 million, slightly ahead of FY2015 (2015: CNY727.5 million).

The business performance was, however, supported by the decision to focus on higher margin specialty chemical products, product innovation and cost control, which resulted in the profit for the year increasing significantly to CNY16.9 million (2015: CNY4.1 million).

Gross margins increased to 15.8% (2015: 11.6%) as the Company continued to adjust its product mix. Sales of more profitable, high-end products accounted for 11.2% of main product sales in 2016 (2015: 3.0%).

People

Mr. George Zeng stepped down as Executive Director and resigned as Chief Financial Officer in July 2016. Mr. Jes Cui was appointed as Chief Financial Officer in February 2017 and joined the Board on 26 May 2017. Mr. Cui has more than a decade of experience working for Fortune 500 companies as Chief Financial Officer. Prior to joining the Company, he was Executive Vice President of ENN Group and President of ENN Solar Energy Group. On behalf of the Board, I would like to thank Mr. George Zeng for his significant contribution to HaiKe during his tenure, and take this opportunity to welcome Mr. Jes Cui on board.

Dividend

No dividend is proposed for 2016. The Company is accelerating its strategic transformation to become a high-end specialty chemical enterprise, and, as such, investment for research and development, quality growth and HSE is being prioritised and be increased. When the Group's free cash flow is further improved, the Board intends to consider the resumption of dividend payments.

Outlook

In the first four months of 2017, the Company recorded an unaudited turnover of CNY302.8 million (the first four months of 2016: CNY225.5 million). Unaudited net profit was CNY12.8 million, compared with CNY7.3 million in the first four months of 2016.

In order to continue to better position the business to withstand the current challenging trading environment, the Company intends to further improve and expand its offering by:

· Establishing a complete understanding of customer demands, actively manage customer relationships and establish strategic cooperation with customers

· Establishing an R&D Experiment Centre equipped with the capabilities of authoritative verification, analysis and formulation development for downstream industry solutions

· Optimizing the development process and increasing the degree of automation to meet the quality requirements of high-end products

· Promoting industry integration and synergy to conduct business model innovation

· Increasing our exposure to overseas markets

· Enhancing brand identity and recognition

Further, the Company intends to upgrade products and supply multiple types of supporting products, such as: upgrade industrial grade Dimethyl Carbonate to battery grade Dimethyl Carbonate, upgrade industrial Propylene Carbonate to battery grade Propylene Carbonate, produce battery grade Ethyl Methyl Carbonate and battery grade Diethyl Carbonate with industrial grade Dimethyl Carbonate as raw materials, produce battery grade Ethylene carbonate, and serve as a one-stop supplier of 50 thousand tonnes/year electrolyte solvent.

Product quality remains paramount and we will further enhance this, as well as continue to seek technical improvements within our manufacturing processes to drive operational efficiency and profitability.

We believe these actions will allow us to become a market-oriented innovative technology service provider of high-end specialty chemicals with a focus on strong customer relationships.

Chief Executive Officer's Report

For the year ended 31 December 2016, the Group sold 125,395 tons of specialty chemical products, which was comparable to FY2015.

The average realised price of specialty chemicals decreased by 1.7% year-on-year, in the face of continued strong competition.

One of our major products, Propylene glycol, faced severe competition from other producers during the period. Selling prices were impacted as a result of market overcapacity of Unsaturated Polyester Resin (UPR), the main downstream product of Propylene glycol.

In order to maintain market share we continued to suppress our selling prices over the period. Additionally, in order to address the oversupply of the mid to lower-end speciality chemicals market, we have continued to shift the Company's focus towards more high-end speciality chemical products. .

During the year, turnover was CNY728.3 million, slightly higher than the prior year (2015: CNY727.5 million). Gross profit was CNY114.9 million, 36.1% higher than 2015 (CNY84.4 million) driven by both the changing product mix and lower cost of sales. Gross margins increased to 15.8% from 11.6% in 2015, as a result of the altered product mix.

Reflecting the changing product mix, sales of high-end specialty chemicals accounted for 11.2% of main products sales in 2016, compared to 3.0% in 2015.

Profit after tax of CNY16.9 million was recorded for the reporting period, compared to CNY4.1 million in 2015.

Total borrowings at the year-end were CNY80.0 million, remaining unchanged from 31 December 2015

Raw material prices remained volatile over the period, but we have worked to manage this as best as possible, reducing inventory when the prices of raw materials were high and taking advantage of lower prices to increase stock.

The Company refocused the marketing team's efforts during the period, strengthening the core management level. This had a consequential impact on performance with 587 new customer wins during the year. The quality of service was also enhanced, with the reorganisation of the business support functions.

During the year under review, the Company successfully expanded applications for medical Propylene glycol and Dipropylene glycol. We increased sales volumes to high-end customers and strengthened cooperation with them. Pleasingly, the Company's increased emphasis on R&D has achieved scientific and technical innovations, which have resulted in improvements to product quality.

The trading of raw products, sold without processing, generated a profit of CNY1.9 million. This trading created an additional source of income.

Looking forward, we expect trading conditions to remain challenging especially in the mid to lower-end specialty chemical market. The Chinese government has implemented stricter environmental protection systems, which places greater emphasis on the need for innovative products and techniques. While this presents its challenges, the business is well placed to deliver to these new standards and also capitalise on the opportunities these stricter systems invite.

Our routine shutdown period for regular maintenance is expected to be shortened by a technical upgrade to reduce loss on production downtime.

We will continue to drive business performance by further optimising our product mix, supporting new product development and through our sustained focus on cost control.

Chief Financial Officer's Report

Turnover

Turnover was CNY728.3 million, slightly ahead of the previous year (2015: CNY727.5 million). Overall sales volumes were 141,360 tonnes. Main product sales volumes were 125,395 tonnes, comparable to FY2015 (2015: 125,098 tonnes). Average selling prices decreased by 1.7% to CNY5,532 / tonne (2015: CNY5,629 / tonne), in the face of strong competition. The table below sets out the external sales volumes and average realized prices for the major products sold by the Group in 2016 and 2015, and the corresponding percentage change year-on-year.

Gross Profit

Gross profit was CNY114.9 million for 2016, up 36.1% compared with 2015 (2015: CNY84.4 million). The growth in gross profit was mainly attributable to increased sales of higher margin products and a decline in cost of sales. Sales of high-end specialty chemicals accounted for 11.2% of main products sales in 2016 (2015: 3.0%). Cost of sales decreased 4.6% compared to the same period in the previous year. The price of Propylene Oxide and Methanol, the two main raw materials, deceased 14.7% and 2.0% respectively in the period under review. The Company correctly judged prices trends through analysis of the raw material market, reducing inventory when the prices of raw materials were high and taking advantage of lower prices to increase stock.

Staff Remuneration Costs

Staff remuneration costs were CNY27.9 million, representing a 16.8% increase year-on-year (2015: CNY23.9 million). The increase mainly arose from the appointment of new marketing personnel, brought in to enhance the sales and marketing campaign, as well as overall salary adjustments to compensate for inflation.

Depreciation and Amortization

Depreciation and amortization decreased to CNY27.2 million (2015: CNY25.2 million) as a result of equipment scrapping.

Selling, General and Administrative Expenses

Selling expenses rose by 16.7% to CNY40.5 million (2015: CNY34.7 million) due to more aggressive sales and marketing activities in restrained market conditions, which has resulted in an improvement to customer service and profit growth. General and administrative expenses increased by 24.0% to CNY51.1 million (2015: CNY41.2 million). This was attributable to increases in labour costs and R&D expenses of 16.8% and 35.6% respectively. Social Security and Public Accumulation Funds increased by19.2% and 9.6%, respectively, as a result of increased labour costs. During the period, the Company introduced a DuPont safety management system and increased investment in safety and environmental protection by 27.9%, including pollution control, smoke monitoring and device monitoring. 

Net Exchange Gain

The Group recorded a net exchange gain of CNY2.4 million, compared with CNY4.7 million in 2015.

Net Interest Expenses

Interest income decreased to CNY11.1 million (2015: CNY12.8 million), representing a decrease of 13.5%, mainly attributable to a reduction in deposits to letters of credit.

Interest expenses decreased 27.5% to CNY15.0 million (2015: CNY20.7 million) following repayment of bank loans during 2015.

Net interest expenses decreased to CNY4.0 million (2015: CNY8.0 million), representing a decrease of 49.9%.

Profit Before Taxation

Profit before taxation was CNY20.7 million for 2016 (2015: CNY5.8 million). The Company generated better earnings, by focusing on a higher margin product mix, although the average realized price decreased. Meanwhile, cost of sales decreased 4.6% because reduction of price of two main raw materials: Propylene Oxide and Methanol.

Tax Expense

Tax expenses increased to CNY3.8 million (2015: CNY1.7 million) as a result of higher taxable income.

Profit for the Financial Period

Profit for the year was CNY16.9 million (2015: CNY 4.1 million)

Cash and Cash Equivalents

Cash and cash equivalents increased to CNY55.0 million as at 31 December 2016, compared to CNY35.4 million for the same period in 2015 due to a decrease in working capital. The restricted cash was CNY4.2 million as at 31 December 2016 (31 December 2015: CNY13.3 million). The decrease in restricted cash was attributable to the reduction of letters of credit at the end of 2016.

Bank Loans

Bank loans remained unchanged of CNY80 million compared to FY 2015.

Cash Flow from Operating Activities

Cash flow from operating activities was CNY110.7 million for the 12 months ended 31 December 2016, compared to cash flow of CNY639.2 million for the prior year. In 2015 working capital was used to repay bank loan.

Going Concern

The positive net asset position, positive earnings and cash flow from operating activities for the reporting period, together with the reduction in gearing ratio, have ensured that the Group is able to operate as a going concern.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE YEAR ENDED 31 DECMEBER 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2016

NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2016

(a) Cash flow from operating activities

COMPANY INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2016

COMPANY STATEMENT OF FINANCIAL POSITION

FOR THE YEAR ENDED 31 DECEMBER 2016

COMPANY STATEMENT OF CHANGE IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2016

COMPANY STATEMENT OF CASH FLOW

FOR THE YEAR ENDED 31 DECEMBER 2016

NOTES TO FINANCIAL STATEMENTS

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 HiTech Chemical Investment Ltd., a company incorporated in the British Virgin Islands.

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

The financial statements present information about the Company and its subsidiaries (the "Group") 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 Company's functional and presentational currency is the Chinese Yuan ("CNY"). All values are rounded to the nearest thousand (CNY'000) except when otherwise indicated.

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

As at 31 December 2016, the Group had net assets of CNY129.1 million (2015: CNY112.2 million) and net current liabilities of CNY60.8million (2015: net current liabilities CNY32.8 million).

The Directors have reviewed forecasts and budgets for the period ended 31 December 2016, which have been drawn up with appropriate regard for the current economic environment and the particular industry in which the Group operates. These were prepared with reference to historical and current industry knowledge, taking group restructuring and future strategy of the Group into account.

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

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

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

1.3 Changes in Accounting Policies

Except as noted, the implementation of these standards is not expected to have a material effect on the Group.

2. Significant Accounting Policies

2.1 Significant management judgment and estimation uncertainty

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 judgments and estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the reporting period are disclosed below:

2.1.1 Significant management judgment

In the process of applying the Company's accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial statements:

Research and development costs

Charge all research cost to expense.

Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits.

2.1.2 Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

a) 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.

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 estimated useful life. Managements' estimate of the useful life of plant and equipment is within 3 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) 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.

d) Fair value measurement

Management uses valuation techniques to determine the fair value of financial instruments (where active market quotes are not available) and non-financial assets. This involves developing estimates and assumptions consistent with how market participants would price the instrument. Management bases its assumptions on observable data as far as possible but this is not always available. In that case management uses the best information available. Estimated fair values may vary from the actual prices that would be achieved in an arm's length transaction at the reporting date (see Note 23).

2.2 Functional and Presentation Currency

a) Functional currency

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

b) Foreign currency transactions

Transactions in foreign currencies are measured in the respective functional currencies of the consolidated 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 reporting 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 reporting date are recognized in the statement of comprehensive income except for exchange differences arising on monetary items that form part of the Company and the Group's net investment in foreign subsidiaries, which are recognized initially in a separate component of equity as foreign currency translation reserve in the consolidated statement of financial position and recognized in the consolidated statement of comprehensive income on disposal of the subsidiary.

c) Foreign currency translation

The presentation currency of the Company and the Group is CNY, financial information denominated in other currencies have been translated into CNY.

Assets and liabilities for each reporting are presented at the closing rate ruling at that reporting date; and income and expenses for statement of comprehensive income 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 recognized 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 reporting date.

2.3 Subsidiaries and Principles of Consolidation

a) Subsidiaries

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. Subsidiaries are deconsolidated from the date on which control ceases.

b) Principles of consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at the reporting 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 intra-group balances, transactions, income, expenses, profits and losses resulting from inter-group transactions that are recognized 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.

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 recognized in the statement of comprehensive income 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 statement of comprehensive income within equity, separately from the parent shareholder's equity, and the share of profit or loss is separately disclosed in the consolidated statement of comprehensive income.

2.4 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 recognized 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 5 - 30 years

Machinery equipment 5 - 19 years

Electronic equipment, furniture and fixtures 3 - 10 years

Motor vehicles 3 - 10 years

Land use rights 18.75 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 up-front payments made for land use rights are expensed in the consolidated statement of comprehensive income on a straight-line basis over the period of the lease, which is 18.75 years, or where there is impairment, the impairment is expensed in the consolidated statement of comprehensive income.

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 recognized in the consolidated statement of comprehensive income.

At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated.

Indications of impairment

External sources:

l market value declines

l negative changes in technology, markets, economy, or laws

l increases in market interest rates

l net assets of the company higher than market capitalization

Internal sources:

l obsolescence or physical damage

l asset is idle, part of a restructuring or held for disposal

l worse economic performance than expected

l for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investee

There is no indication in the above items that any asset may be impaired for the year ended 31 December 2016. 

2.5 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 to ensure that the method and period of amortisation are consistent with previous estimates.

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

patented technology 10 years

The gain or loss arising on the disposal of the assets is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated statement of comprehensive income.

2.6 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 recognized impairment losses recognized 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 recognized 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 recognized. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Reverse of an impairment loss is recognized in the statement of comprehensive income. 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 recognized for goodwill.

2.7 Financial Assets

The Group holds its investments in financial assets in the category of financial assets as loans and receivables.

Loans and receivables 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 recognized 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 recognized 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 recognized within administrative expenses in the statement of comprehensive income. 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.

2.8 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 recognized at fair value and subsequently carried at amortized cost using the effective interest method.

All loans and borrowings are initially recognized 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 statement of financial position. 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.

2.9 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.

2.10 Revenue Recognition

Revenue is recognized 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 recognized.

a) Sales of goods

Revenue is recognized upon the transfer of significant risk and rewards of ownership of the goods to the customer, which 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.

2.11 Government Grants

Government grants are not recognized in other operating income until there is reasonable assurance that the Group will comply with the conditions for their receipt and that the grant will be received. In the event that a grant that has been recognized appears likely to have to be repaid, provision is be made for the estimated liability.

When a grant relates to an expense item, it is recognized in the consolidated statement of comprehensive income 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 statement of comprehensive income in equal annual installments over the expected useful life of the relevant asset.

2.12 Employee Benefits

Obligations for contributions to defined contribution pension plans are recognized as an expense in the statement of comprehensive income 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.

2.13 Share-based Payments

Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognized over the vesting period is based on the number of options that eventually vest. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received.

The Group also operates a phantom share option scheme (a cash settled share-based payment). An option pricing model is used to measure the Group's liability at each reporting date, taking into account the terms and conditions on which the bonus is awarded and the extent to which employees have rendered service. Movements in the liability (other than cash payments) are recognized in the consolidated statement of comprehensive income.

2.14 Taxation

Current income tax assets and liabilities comprise those obligations to fiscal authorities in the countries in which the Group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the fiscal period and the country to which they relate. Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or 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 reporting date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability in the statement of financial position 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 reporting 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.

2.15 Segment Reporting

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

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.

The trading segment is a Hong Kong company trades specialty chemicals.

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.

3. Revenue and other income

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 loss/profit from the Group's operating segments for the financial years ended 31 December 2016 and 2015

Capital expenditures include additions to property, plant and equipment and intangible assets.

b) Geographical Information

The following table provides an analysis of the Group's sales in operations by geographical market.

5 Profit from Operations

6. Finance Expenses

7. Earnings per Share

Profit per share has been calculated on the basis of the net profit attributable to equity shareholders of the parent of CNY16,920,954 (2015: CNY4,059,000).

The profit for the financial year that is attributable to equity holders of the parent was as follows:

The weighted average number of ordinary shares used in the calculation of earnings per share has been derived as follows:

The effect of the ESOP discussed in note 7 was anti-dilutive for the year 2015 and 2016.

8. Share-based Payment

The Company operates two share based remuneration schemes for employees: an equity-settled Employee Share Ownership Plan ("ESOP") and a cash-settled Phantom Employee Share Ownership Plan ("Phantom ESOP"). All Directors and part of the management team are eligible to participate in the ESOP/Phantom ESOP scheme. The only vesting condition is that the individual remains an employee of the Group over the 3-year period and the options will lapse if the individual leaves within 1 year of satisfying this criterion.

The exercise price of options is 58.25p (2011: 58.25p) and contractual life was 10 years (2011: 10 years). The options are exercisable in the following installments: 40% on the first anniversary of the Grant Date; 30% on the second anniversary of the Grant Date; and the remaining 30% on the third anniversary of the Grant Date. The Grant Date for the issued Options and Phantom Options is 1 February 2011.

The fair value of each option at grant date was 25p.

For the Phantom ESOP, the intrinsic value was zero at end of 2016 and 2015 as the market value of the Group's shares was below the exercise price of the options.

The following information is relevant in the determination of the fair value of options granted during the period under the equity- and cash-settled share based remuneration schemes operated by HaiKe.

The volatility assumption, measured at the standard deviation of expected share price returns, is based on a statistical analysis of daily share prices over the last two years. (2015: two years).

The share-based remuneration expense comprises:

The Group did not enter into any share-based payment transactions with parties other than employees and Directors during the current or previous period. 

9. Property, Plant and Equipment

Land use rights have been reclassified to property, plant and equipment from intangible assets as in the opinion of the Directors this better reflects the underlying nature of the asset.

Building with carrying value of CNY15.8million had not yet registered for property certificates as at 31 December 2016.

Assets under Construction

Included in machinery equipment of the Group at 31 December 2016 was an amount of CNY20,708,796 (2015: CNY3,024,401) relating to expenditure for equipment in the course of construction.

10. Intangible Assets

Land use rights have been reclassified to property, plant and equipment from intangible assets as in the opinion of the Directors this better reflects the underlying nature of the asset.

11. Investment in Subsidiaries

The companies comprised in the Group are as follows:

12. Inventories

13. Trade and Other Receivables

All trade and other receivables are current. Management considers the carrying amounts recognized in the statement of financial position to be a reasonable approximation of their fair value due to the short term duration.

Trade and other receivables are mainly receivables owed by customers for goods or services and loans to third parties. Loans are non-interest bearing and will be paid on demand. The Group does not hold any collateral as security.

As at 31 December 2016, the ageing analysis of trade and other receivables is as followings:

Trade receivables are generally on 90 days' terms.

Movements on the group provision for impairment of trade and other receivables are as follows: