3rd Apr 2007 07:01
HaiKe Chemical Group Ltd.03 April 2007 HaiKe Chemical Group Ltd. PRELIMINARY UNAUDITED RESULTSFOR THE YEAR ENDED 31 DECEMBER 2006 HaiKe Chemical Group Ltd ("HaiKe" or the "Company"), the AIM quotedpetrochemical and speciality chemical business based in China, is pleased toannounce its maiden preliminary results for the financial year ended 31 December2006. The Company was admitted to AIM in February 2007. Highlights • Total revenues increased 27% to $254.7m (2005: $201.3m)• Petrochemical revenues increased by 19% to $202.3m (2005: $169.7m)• Speciality chemical revenues increased by 64% to $51.2m (2005: $31.2m)• Biochemical revenues increased by 193% to $1.2m (2005: $0.4m)• Gross margin improved to 9.1% (2005: 7.9%)• Net profit after tax increased by 123% to $10.3m (2005: $4.6m)• Net profit (after minority interests) increased by 125% to $8.1m (2005: $3.6m)• Successful admission to AIM in February 2007 raising $17.0m net cash Mr. Yang Xiaohong, Executive Chairman, said: "We are delighted to present our maiden preliminary results for HaiKe. It hasbeen a busy year for the business and in addition to our successful admission toAIM in February 2007, we have delivered a strong performance across thebusiness, with particularly significant growth in the petrochemical andspeciality chemical divisions. The new financial year has started well and weare confident that we will continue to deliver further growth and value to ourshareholders." ENDS For further information please contact: +------------------+------------------------------+---------------------+|HaiKe |Johnson Lau, Chief Financial |+86 546 8289173 || |Officer | |+------------------+------------------------------+---------------------+|HansonWesthouse |Tim Metcalfe / Anita Ghanekar |+44 (0) 20 7601 6100 |+------------------+------------------------------+---------------------+|Cardew Group |Rupert Pittman / Shan Shan |+44 (0) 20 7930 0777 || |Willenbrock | |+------------------+------------------------------+---------------------+ CHAIRMAN'S STATEMENT I am delighted to present the maiden preliminary results for HaiKe for the yearended 31 December 2006. This follows our successful admission to AIM in February2007. Admission was a significant step which facilitated the planned developmentof the business, enabling us to grow through the enhancement of our productionfacilities and the expansion of our business geographically. HaiKe, the holding company of the Group, was incorporated on 20 June 2006 in theCayman Islands with two wholly-owned Hong Kong subsidiaries, Synergy CapitalGroup Limited ("Synergy Capital") and Profit United Investment CompanyLimited ("Profit United"). Synergy Capital and Profit United own majorityinterests in the Group's four key operating subsidiaries, all of which areincorporated in China and consist of Hi-Tech Chemical Group Co., Ltd. ("Hi-Tech Chemical"), Dongying Hi-Tech Spring Chemical Industry Co., Ltd. ("Hi-Tech Spring"), Shandong Hi-Tech Shengli Electrochemical Co., Ltd. ("Hi-Tech Shengli") and Dongying Tiandong Biochemical Industry Co., Ltd. ("Tiandong Biochemical"), as well as a minority ownership interest in DongyingHi-Tech Propylene Co., Ltd. These results for the full year 2006 show strong growth in the Group'sperformance compared to 2005, with overall revenues increasing by 27% andspeciality chemical revenues increasing by 64%. The improvement in the profitmargin for the speciality chemical products, and the strong revenue growth, hascontributed to improvements of 56% in the profit before income tax and 125% innet profit attributable to HaiKe equity holders. Merger accounting principles have been used for the consolidation of thefinancial statements which has required the current and previous year'sinformation to be presented as if the four operational subsidiaries had beenowned by the Company throughout the current and comparative accounting periods. We believe that HaiKe is on course to achieve its goals and foresee a continuedstrong growth in the demand for our products. Admission to AIM has given us avery solid platform to expand our business and deliver significant value to ourshareholders. I would like to take this opportunity to thank everyone at HaiKe all for theirgreat dedication and effort in developing the business to this point. I wouldalso like to use this first formal announcement to shareholders since Admissionas an opportunity to welcome all new shareholders to the Company. The Annual General Meeting of HaiKe will be held at 2pm on Wednesday 20 June2007 at the offices of the Group, West of Boxin Road, Shikou County, DongyingCity, Shandong Province, China. Yang XiaohongExecutive Chairman3 April 2007 CHIEF EXECUTIVE OFFICER'S REPORT Operating Review HaiKe primarily focuses on the Chinese domestic market for its petrochemicalbusiness, while the speciality chemical and biochemical products are sold bothdomestically and to overseas markets. We are confident that, particularly in thespeciality and biochemical markets, we have identified opportunities to producehigh quality products in expanding markets. Our challenge is to continue growingour market share and to meet the increasing demands of our customers. We areconfident that by improving production efficiency and reducing production costs,we are well positioned to take advantage of the increasing demand for ourproducts. While we believe that a significant proportion of the markets for our existingproducts remains untapped, we are also actively exploring other potentialapplications and revenue streams through both our own research and development,and through commercial collaborations. Our markets Petrochemical sectorOur revenues within this sector grew 19% from $169.7m in 2005 to $202.3m in2006. Crude oil is the fundamental raw material for the petrochemical industry. It isrefined to create gasoline, diesel and other derivatives. In 2006, China'sGross Domestic Product ("GDP") growth rate was 10.7% (2005: 10.3%). Forecasts provided by the People's Bank of China estimate that China's GDP will grow by approximately 9.8% in 2007. China's economic expansion and the growth of petroleum consuming transport in particular, have led to an increase in domestic consumer demand for energy. Until 2003, China had sufficient capacity to refine all of its domesticconsumption. In the last three years however, consumption has exceeded refiningcapacity. As it is generally more expensive to import refined products than tobuy them in the domestic market, we believe that the Chinese refining industrybenefits from competitive advantages and a growing demand in the domesticmarket. In addition to the increase in demand for petrochemical products, we believethat the Group may benefit from anticipated changes in the Chinese governmentdomestic oil pricing policy. At the present time, downstream petrochemicalcompanies in China purchase crude oil at world market prices and sell refinedproducts at domestic market prices which are set by the Chinese government. These prices are expected to change in certain circumstances. If, for example,the weighted average international price of refined oil products fluctuates upor down by a certain magnitude, the Chinese government can then decide to adjustthe domestic market price for refined products. In these circumstances, Chinesepetrochemical companies, such as HaiKe, are permitted to adjust the sellingprice for their own refined products in China provided that it is within a bandof 8% of the original determined domestic market price. In 2006, the ChineseGovernment twice raised the prices of gasoline and diesel, although on 14January 2007 the price of gasoline was reduced by approximately 4% in responseto movements in world market prices. Following commitments to the World TradeOrganization, the Chinese government is generally expected to relax certainrules on the adjustment of the prices of gasoline and diesel during 2007 with aview to establishing a more market orientated pricing mechanism in China. Webelieve that, should this occur, the Group will be able to sell its principalproducts at prices which are closer to world market prices than they have beenhistorically. Speciality chemical marketOur revenues within this sector grew 64% from $31.2m in 2005 to $51.2m in 2006. The Chinese government put forward "The Science & Technology DevelopmentOutlines for the Chemical Industry" and "The State's 11th Five-Year Plan"in 2005, which classified speciality chemicals in China as one of the majorareas prioritized for development. The rapid growth in the Chinese economy hasled to an increase in demand for speciality chemicals. In recent years,speciality chemicals have comprised 40% of the total chemical production inChina, up from 23.1% in 1985. China is targeting a ratio of 48% during theperiod from 2006 to 2010 under the State's 11th Five-Year Plan. Despite theexpansion in the domestic production of speciality chemicals in recent years,total supply still lags behind total demand in China. We believe that as a result of strong government support, robust market demand,together with the anticipated increase in the level of investment in China, thedemand for speciality chemicals products will continue to grow. Biochemical marketOur revenues within this sector grew 193% from $0.4m in 2005 to $1.2m in 2006. The global market for biochemical products has grown significantly. For example,according to International Medical Science, sales of anti-thrombus (blood clot)drugs exceeded $6.5 billion in 2000 and we believe that the market for suchdrugs has continued to grow, driven by an ageing population in Europe and theUnited States and the resultant increase in blood clot related afflictions, suchas thrombosis. However, we believe that growth in the market has been constrained by the highprice of such drugs, which has restricted widespread availability. The continuedincrease in sales demand for our blood clot products suggests that TiandongBiochemical is well placed to take advantage of this market in the future. Outlook We are in a strong position to grow our business through a sequence of carefullyplanned investment projects in both the petrochemical and speciality chemicalsectors, and our admission to AIM in February 2007, together with our trackrecord of sales and profitability, has provided us with an excellent platformfor future growth. In 2006, we consolidated our position in the Chinesepetrochemical markets and also focused more attention on growing our specialitychemical business. In 2007, we will continue to invest in the expansion of heavyoil catalytic cracking production facilities (for the petrochemical business)and isopropyl alcohol production facilities (for the speciality chemicalbusiness) using the funds raised at Admission. The new financial year has started well. Trading for the first two months of theyear is in line with our expectations, and on a like for like basis, theperformance of both the petrochemical and speciality chemical business areshowing improvements on the comparable period last year. We are confident of achieving further growth in revenues and profitability in2007. We anticipate that this growth will be driven principally by our existingareas of business and supported by the increased domestic demand for ourproducts. Zhang ZaizhongChief Executive Officer3 April 2007 CHIEF FINANCIAL OFFICER'S REPORT Financial Review To rationalize the corporate structure, streamline operations and prepare forAdmission to AIM, the Group carried out a restructuring exercise during 2006.This exercise included the incorporation of the Company in Cayman Islands, theestablishment of two subsidiaries in Hong Kong, and the acquisitions of equityinterests of the subsidiaries in China (Hi-Tech Chemical, Hi-Tech Spring,Hi-Tech Shengli and Tiandong Biochemical). The consolidated financial statements of the Group for the financial year ended31 December 2006 were prepared using the historical cost method under mergeraccounting principles, as if the restructuring exercise had been completed andthe relevant companies were already under the Company's control prior to thebeginning of the comparative period. Results Total revenue increased by 27% from $201.3m in 2005 to $254.7m in 2006. On asegmental basis, the sales of petrochemical products in 2006 increased by 19%from $169.7m to $202.3m and the sales of speciality chemicals in 2006 grew by64% from $31.2m to $51.2m. The growth in biochemical revenue is significant inpercentage terms, if not yet in overall terms, having increased by 193% from$0.4m to $1.2m in 2006. Cost of sales increased by 25% from $185.4m in 2005 to $231.6m in 2006, due tothe high price of crude oil in 2006 particular in the first half of the year.However, the incremental selling price of the petrochemical products was higherand this contributed to an improved margin in the fourth quarter of 2006. Salesand distribution expenses increased by 69% from $1.6m in 2005 to $2.7m in 2006as a result of increased freight charges for the speciality chemical products.Administrative expenses increased by 19% from $5.1m in 2005 to $6.1m in 2006.The average employee numbers increased slightly from 1,209 to 1,290, whichresulted in an increase in payroll and staff benefit costs from $2.6m to $3.3min 2006. Operating profit increased by 60% from $9.9m in 2005 to $15.8m in 2006, which isin line with the growth in profit before income tax of $4.3m or 56%. The grossmargin improved from 7.9% in 2005 to 9.1% in 2006. Tax exemptions were granted for three subsidiaries, Hi-Tech Chemical, Hi-TechSpring, Hi-Tech Shengli, as a result of the restructuring exercise into aforeign owned entity during 2006. They resulted in income tax falling by 44%from $3.1m in 2005 to $1.7m in 2006. Further details of these exemptions areprovided in the notes to the financial information. Net profit attributable to equity holders increased by 125% from $3.6m in 2005to $8.1m in 2006. Capital expenditure Investment in property, plant and equipment dropped from $20.6m in 2005 to $7.5min 2006, $18.0m of capital expenditure in 2005 resulted from the acquisition ofHi-Tech Shengli, part of the speciality chemical business. Cash flows In 2006, cash generated from operating activities amounted to $11.8m Cash capital expenditure was $7.5m in 2006, mainly funded from the operatingcash inflow. The Group was admitted to AIM in February 2007, and so this did notaffect cash flows in 2006. Cash and cash equivalents decreased from $4.2m at 31 December 2005 to $2.5m at31 December 2006. Liquidity and financial risk In view of the Group's strong cash generation, unutilized banking facility ofapproximately $12m and the net proceeds of $17m raised from Admission, webelieve that the Company has sufficient funds to meet foreseeable businessrequirements and to carry out its investment plans as detailed at Admission. Anysurplus funds may be used for further investments, although we will notundertake any speculative treasury transactions. Johnson LauChief Financial Officer3 April 2007 HaiKe Chemical Group Ltd.CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2006 Notes 2006 2005 US$'000 US$'000 _______________________________ (unaudited) Revenue 254,690 201,303Cost of sales -231,626 -185,446 ____________ ____________Gross profit 23,064 15,857 Other operating income 2,125 2,476Selling and distribution expenses -2,739 -1,648Administrative expenses -6,097 -5,134Other operating expense -603 -1,639 ____________ ____________Profit from operations 15,750 9,912 Finance income 76 194Finance costs -3,833 -2,351Share of results of associates 49 -19 ____________ ____________Profit before income tax 12,042 7,736 Income tax expense -1,731 -3,106 ____________ ____________Profit for the year 10,311 4,630 ____________ ____________ Attributable to:Equity holders of the parent 8,109 3,616Minority interest 2,202 1,014 ____________ ____________ 10,311 4,630 ____________ ____________ Basic and diluted earnings per share 5 $0.32 $0.14 ____________ ____________ HaiKe Chemical Group Ltd.CONSOLIDATED BALANCE SHEETFor the year ended 31 December 2006 2006 2005 US$'000 US$'000 _______________________________ (unaudited)ASSETSNon-current assetsProperty, plant and equipment 54,220 50,823Intangible assets 1,886 1,959Investments in associates 188 134Other investments 628 608Deferred tax assets 1,074 1,716 ____________ ____________ 57,996 55,240 ____________ ____________Current assetsInventories 17,024 18,379Trade receivables 2,779 1,974Notes receivables 2,408 227Other receivables and prepayments 20,157 16,442Amounts due from related parties 839 3,982Short-term investment - 148Cash and cash equivalents 2,528 4,203 ____________ ____________ 45,735 45,355 ____________ ____________Total assets 103,731 100,595 ============ ============ LIABILITIESCurrent liabilitiesShort-term loan 49,836 50,341Trade payable 14,166 25,430Other payables and accruals 16,094 10,267Deferred income 128 109Income tax payable 3,078 4,043Amounts due to related parties 189 15 ____________ ____________ 83,491 90,205 ____________ ____________Non-current liabilitiesLong-term loan 2,638 1,470Deferred income 1,046 1,130 ____________ ____________ 3,684 2,600 ____________ ____________Total liabilities 87,175 92,805 ============ ============ CAPITAL AND RESERVESPaid-up capital 50 -Consolidation reserve 4,259 4,259Statutory reserves 2,351 1,319Foreign currency translation reserve 433 113Retained earnings 5,105 -816 ____________ ____________Equity attributable to equity holders of the parent 12,198 4,875Minority interest 4,358 2,915 ____________ ____________Total equity 16,556 7,790 ____________ ____________Total liabilities and equity 103,731 100,595 ============ ============ HaiKe Chemical Group Ltd.STATEMENTS OF CHANGES IN EQUITYFor the year ended 31 December 2006 Foreign currency Share Consolidation Statutory Retained translation Minority Total capital reserve reserve earnings reserve interests equityUnaudited $'000 $'000 $'000 $'000 $'000 $'000 $'000 Balance as at 1 January 2005 - 3,544 566 -1,891 - 1,453 3,672Net profit for the financial year - - - 3,616 - 1,014 4,630Transfer to statutory reserves - - 753 -753 - - -Capitalisation of reserves - 715 - -715 - - -Dividend paid to shareholders - - - -1,073 - -346 -1,419Acquisition of subsidiary - - - - - 747 747Foreign currency translation - - - - 113 47 160 ________ ________ ________ ________ ________ ________ ________Balance as at 31 December 2005 - 4,259 1,319 -816 113 2,915 7,790Shares issued in the year 50 - - - - - 50Net profit for the financial year - - - 8,109 - 2,202 10,311Transfer to the statutory reserves - - 1,032 -1,032 - - -Transfer from minority interest - - - 197 - -197 -Dividend paid to shareholders - - - -1,353 - -703 -2,056Foreign currency translation - - - - 320 141 461 ________ ________ ________ ________ ________ ________ ________Balance as at 31 December 2006 (unaudited) 50 4,259 2,351 5,105 433 4,358 16,556 ________ ________ ________ ________ ________ ________ ________ HaiKe Chemical Group Ltd.CONSOLIDATED CASH FLOW STATEMENTSFor the year ended 31 December 2006 Notes 2006 2005 US$'000 US$'000 _______________________________ (unaudited) Cash flow from operating activities a 11,792 4,178 ____________ ____________Cash flow from investing activitiesPurchase of property, plant and equipment -7,501 -20,592Purchase of subsidiary - 425Purchase of long-term investment - -436Purchase of short-term investment - -146Proceeds from disposal of short-term investment 155 -Proceeds from disposal of property, plant and equipment 258 483 ____________ ____________Cash flow used in investing activities -7,088 -20,266 ____________ ____________ Cash flow from financing activitiesCapital injection - 815Capital injection from minorities - 160Increase in / (repayment of) long-term loan 2,588 -4,987 (Repayment of) / increase in short-term loan -3,717 24,924Interest paid -3,833 -2,246 Dividends paid to shareholders -1,036 -2,038 Dividends paid to minority shareholders -488 -197 ____________ ____________Cash flow from financing activities -6,486 16,431 ____________ ____________ Net increase in cash and cash equivalents -1,782 343Cash at beginning of year 4,203 3,758Foreign currency translation differences 107 102 ____________ ____________Cash at end of year 2,528 4,203 ____________ ____________ HaiKe Chemical Group Ltd.NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTSFor the year ended 31 December 2006 (a) Cash from operating activities Profit before income tax 12,042 7,736Adjustments for:Amortization of intangible assets 254 242Allowance for doubtful trade receivables -6 -40Allowance for non-trade receivables 136 572Provision for impairment of investments 0 54Depreciation of property, plant and equipment 6,385 4,139Loss on disposal of property, plant and equipment 260 231Amortization of deferred capital grants -105 -Loss/(gain) from debt restructuring b -426 -Share of results of associates -49 -45(Gain)/loss on disposal of short-term investment -31 -Finance Income -76 -194Finance expense 3,833 2,351 ____________ ____________Operating cash flows before working capital changes 22,217 15,046 Working capital changes:(Increase)/decrease in:Inventories 1,932 -7,053 Trade receivables -719 425Other receivables and prepayments -4,737 -1,223 Amounts due from related parties 3,383 -3,376 Notes receivable -2,133 1,906Increase/(decrease) in:Trade payables -11,661 -3,824 Other payables and accruals 5,380 3,878Amounts due to related parties 170 11 ____________ ____________ 13,832 5,790Cash generated from/(used in) operationsInterest received 76 194Foreign currency translation differences 9 28Income tax paid -2,125 -1,834 ____________ ____________Net cash generated from operating activities 11,792 4,178 ____________ ____________ (b) Non-cash flow transactions On 19 June 2006, Hi-Tech Shengli, a subsidiary of the Company, entered into adebt restructuring agreement with China Orient Asset Management Corporation ("the Creditor"), under which the Creditor agreed to reduce the debt principaland exempt it from interest. The carrying amount of the debt as at 19 June 2006was $914,000, comprising $788,000 principal and $126,000 accrued interest. Thedebt will be satisfied by cash payment of $488,000. Therefore, the differencebetween the carrying amount of the debt before and after it was restructured hasbeen recognized in income. NOTES TO THE FINANCIAL STATEMENTS 1. BACKGROUND AND BASIS OF PREPARATION 1.1 The Company The Company was incorporated on 20 June 2006. The address of the registeredoffice 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 investmentholding. The Company was incorporated for the purpose of acquiring the shares in theexisting companies of the Group which is primarily engaged in the manufactureand sale of petrochemicals and chemical products. The principal place ofbusiness of the Group is West of Boxin Road, Shikou County, Dongying City,Shandong Province, China. At the date of incorporation, the authorized share capital of the Company was$50,000 divided into 50,000 ordinary shares of $1.00 each. One $1 ordinary sharewas issued at par on incorporation and 49,999 $1 ordinary shares were issued onthe same day as consideration for the acquisition of the Company's interestin the Group. The financial information is prepared on the basis of the Group's full draftfinancial statements and the financial information does not constitute statutoryaccounts. 1.2. Significant Accounting Policies The consolidated financial statements of the Group and the individual financialstatements of the Company have been prepared in accordance with thoseInternational Financial Reporting Standards and Interpretations in force ("IFRS"), as adopted by the European Union. 1.3 Principles of consolidation The consolidated financial statements comprise the financial statements of theCompany and its subsidiaries as at the balance sheet date. The financialstatements of the subsidiaries are prepared to the same reporting date as theparent company. Consistent accounting policies are applied for like transactionsand events in similar circumstances. Subsidiaries are fully consolidated from the date of acquisition, being the dateon which the Group obtains control, and continue to be consolidated until thedate such control ceases. Other than as set out below, acquisitions of subsidiaries are accounted forusing the purchase method. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identified assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair value at the acquisition date, irrespective of the extent of any minorityinterest. Any excess of the cost of the business combination over the Group's interestin the net fair value of the identified assets, liabilities and contingentliabilities represents goodwill. The goodwill is accounted for in accordancewith the accounting policy for goodwill stated below. Any excess of the Group's interest in the net fair value of the identifiableassets, liabilities and contingent liabilities over the cost of a businesscombination is recognized in the income statement on the date of acquisition. Minority interests represent the portion of profit or loss for the period andnet assets in subsidiaries not held by the Group. These are presented in theconsolidated balance sheet within equity, separately from the parentshareholder's equity, and are separately disclosed in the consolidated incomestatement. Changes in the Group's stake in a subsidiary are dealt withdirectly in equity where the investee company is a subsidiary both before andafter the change in stake. 1.4 Basis of Preparation The acquisitions by Profit United and Synergy Capital, respectively, of a 68.7per cent. and a 19.08 per cent. interest in Hi-Tech Chemical, and theacquisition by HaiKe of a 100 per cent. interest in Profit United and SynergyCapital, involved the addition to the group of newly created shell companies,which did not have any trades or operations of their own, above Hi-TechChemical. These transactions did not represent business combinations as definedin IFRS 3 'Business Combinations', and there is no precise guidanceelsewhere in IFRS which covers the accounting for such transactions. In the absence of an international Standard or Interpretation that specificallyapplies to a transaction, paragraphs 10 to 12 of IAS 8 "Accounting Policies,Changes in Accounting Estimates and Errors" set out the approach to befollowed. This requires, inter alia, that where IFRS does not include guidancefor a particular issue, the Directors may also consider the most recentpronouncements of other standard setting bodies that use a similar conceptualframework to develop accounting standards. In that regard, it is noted that UKGAAP uses a similar conceptual framework to IFRS. In contrast to IFRS 3, the UK GAAP accounting standard FRS 6 'Acquisitions andmergers' includes guidance for transactions that meet the definition of agroup reconstruction. The transactions involving HaiKe, Profit United andSynergy Capital meet that definition. Accordingly, these transactions have beenaccounted for as contemplated by FRS 6, and merger accounting has been followed.In consequence, no goodwill arises in respect of these transactions. Thecomparative consolidated net assets, results and cash flows represent those ofHi Tech Chemical. It is noted that in this case, the application of merger accounting results inthe amounts reported in the Group's consolidated income statement,consolidated balance sheet and consolidated cash flow statement being the sameas if the principles of reverse acquisition accounting, as set out in IFRS 3,were followed other than in respect of the allocation of amounts in the Capitaland Reserves section of the balance sheet. 1.5 Management Estimates The preparation of financial statements in conformity with IFRS requiresmanagement to exercise judgment in the process of applying the Group'saccounting policies and requires the use of accounting estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amount of revenue and expenses arising during the reporting period. The following estimates that have a significant risk of causing a materialadjustment to the carrying amount of assets and liabilities within the nextfinancial year are disclosed below: a) Impairment of goodwill The Group determines whether the goodwill is impaired at least on an annualbasis. This requires an estimation of value in use of the cash-generating unitto which the goodwill is allocated. Estimating the value in use requires theGroup to make an estimate of the expected future cash flows from thecash-generating unit and also to choose a suitable discount rate in order tocalculate the present value of those cash flows. The carrying amount of theGroup's goodwill at 31 December 2006 is $890,000. b) Depreciation of property, plant and equipment The cost of property, plant and equipment is depreciated on a straight linebasis over the estimated useful economic lives of the assets concerned.Management estimate the useful lives of property, plant and equipment to bewithin the range 2 to 30 years. These are common life expectancies applied inthe industries in which the Group operates. Changes in the expected level ofusage and technological developments could impact the useful economic lives andresidual values of these assets, therefore, future depreciation charges could berevised. c) Provisions for impairment of accounts receivable The Group makes sales on credit. A proportion of the outstanding credit salesmay prove uncollectible in due course. An estimate is made of the uncollectibleportion of accounts receivable using a percentage based on the ageing profile ofthe amounts outstanding. Although these estimates are based on management's best knowledge of currentevents and actions, actual results may differ from these estimates. 2. SIGNIFICANT ACCOUNTING POLICIES 2.1 Functional currency The directors have determined the currency of the primary economic environmentin which the Group operates, to be Renminbi ("RMB"). Sales and major costsof providing goods and services including major operating expenses are primarilyinfluenced by fluctuations in RMB. The presentation currency of the Group is US$, being the currency in which theinternational oil market operates, and therefore the financial information hasbeen translated from RMB to US$ at the following rates: Period end rates Average rates 31 December 2005 $1=RMB8.070 $1=RMB8.205 31 December 2006 $1=RMB7.809 $1=RMB7.960 The results and financial position of foreign operations are translated into US$using the following procedures: Assets and liabilities for each balance sheet are presented at the closing rateruling at that balance sheet date; and income and expenses for income statementsare translated at average exchange rates for the year, which approximates to theexchange rates at the date of transactions. All resulting exchange differencesare recognized in the foreign currency translation reserve, a separate componentof equity. Goodwill and fair value adjustments arising on the acquisition offoreign operations are treated as assets and liabilities of the foreignoperations and are recorded in the functional currency of the foreign operationsand translated at the closing rate at the balance sheet date. Transactions in foreign currencies are measured in the respective functionalcurrencies of the Company and its subsidiary undertakings and are recorded oninitial recognition in the functional currencies at exchange rates approximatingthose ruling at the transaction dates. Monetary assets and liabilitiesdenominated in foreign currencies are translated at the closing rate of exchangeruling at the balance sheet date. Non-monetary items that are measured in termsof historical cost in a foreign currency are translated using the exchange ratesas at the date of the initial transactions. Non-monetary items measured at fairvalue in a foreign currency are translated using the exchange rates at the datewhen the fair values are determined. Exchange differences arising on the settlement of monetary items or ontranslating monetary items at the balance sheet date are recognized in theincome statement except for exchange differences arising on monetary items thatform part of the Group's net investment in foreign subsidiaries, which arerecognized initially in a separate component of equity as foreign currencytranslation reserve in the consolidated balance sheet and recognized in theconsolidated income statement on disposal of the subsidiary. 2.2 Property, Plant and Equipment Property, plant and equipment are recorded at historic cost, less accumulateddepreciation and any impairment loss where the recoverable amount of the assetis estimated to be lower than its carrying amount. Property, plant and equipment in the course of construction for production oradministrative purposes is carried at cost, less any recognized impairment loss.Depreciation of these assets commences when the assets are ready for theirintended use. Depreciation is charged so as to write off the cost of the assets over theirestimated useful lives, using the straight-line method, as follows: Property - 20-30 yearsMachinery equipment - 2-18 yearsElectronic equipment, furniture and fixtures - 5-12 yearsMotor vehicles - 8-12 years The residual values, useful lives and depreciation method are reviewed at eachfinancial year-end to ensure that the amount, method and period of depreciationare consistent with previous estimates and the expected pattern of consumptionof the future economic benefits embodied in the items of property, plant andequipment. The carrying values of property, plant and equipment are reviewed forimpairment when events or changes in circumstances indicate that the carryingvalue 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 proceedsand the carrying amount of the asset and is recognized in profit or loss. 2.3 Intangible Assets a) Goodwill Goodwill arising in a business combination is initially measured at cost beingthe excess of the cost of the business combination over the fair value of theGroup's interest in the identifiable assets, liabilities and contingentliabilities acquired. Following initial recognition, goodwill is measured atcost less any accumulated impairment losses. Goodwill is reviewed forimpairment, annually or more frequently if events or changes in circumstancesindicate that the carrying value may be impaired, and any impairment lossarising is charged to administrative expenses in the income statement. For thepurpose of impairment testing, goodwill acquired in a business combination is,from the acquisition date, allocated to the Group's cash generating unitswhich are expected to benefit from the synergies of the combination. b) Other intangible assets Intangible assets acquired separately are measured on initial recognition atcost. The cost of intangible assets acquired in a business combination is theirfair value at the date of acquisition. Following initial recognition, intangibleassets are carried at cost less any accumulated amortization and any accumulatedimpairment losses. Intangible assets are amortized through administrative expenses on astraight-line basis over their estimated useful economic lives and assessed forimpairment whenever there is an indication that the intangible assets may beimpaired. The amortization period and amortization method for intangible assetsare reviewed at least at each financial year-end. The estimated useful economic lives of the Group's intangible fixed assetsare as follows: Land use rights - 20 yearsIndustry rights - 4-10 yearsSoftware - 2-5 years 2.4 Cash and Cash Equivalents Cash and cash equivalents comprises cash on hand, bank deposits and short term,highly liquid investments that are readily convertible to known amounts of cashand which are subject to an insignificant rise of changes in value. 2.5 Revenue Recognition Revenue is recognized to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured. Thefollowing specific recognition criteria must also be met before revenue isrecognized. a) Sales of goods Revenue is recognized upon the transfer of significant risk and rewards ofownership of the goods to the customer, which generally coincides with deliveryand acceptance of the goods sold. Revenue is not recognized to the extent thatthere are significant uncertainties regarding recovery of the consideration due,associated costs or the possible return of goods. b) Rendering service Revenue from rendering services is recognized when the services are rendered andrelated revenue can be measured reliably. c) Finance income Finance income is accrued on a time basis, by reference to the principaloutstanding and at the interest rate applicable, on an effective yield basis. d) Dividends Dividend income is recognized when the Group's right to receive payment isestablished. 2.6 Taxation Income tax for the financial year comprises current and deferred tax. Income taxis recognized in the income statement except to the extent that is relates toitems recognized directly in equity, in which case such tax is recognizeddirectly in equity. Current tax assets and liabilities for the current and prior period are measuredat 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 enactedor substantively enacted by the balance sheet date. Deferred income tax is provided using the liability method on temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for taxable temporary differences,except: - Where the deferred tax liability arises from the initial recognition ofgoodwill or of an asset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neither the accountingprofit nor taxable profit or loss; and - In respect of taxable temporary differences associated with investments insubsidiaries, associates and interests in joint ventures, where the timing ofthe reverse of the temporary difference can be controlled by the Group and it isprobable that the temporary difference will not reverse in the foreseeablefuture. Deferred income tax assets are recognized for all deductible temporarydifferences, carried forward unused tax credits and unused tax losses, to theextent that it is probable that taxable profits will be available against whichthe deductible temporary differences and the carried-forward unused tax creditsand unused tax losses can be utilized except: - Where the deferred income tax asset relating to the deductible temporarydifference arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss;and - In respect of deductible temporary differences associated with investment insubsidiaries, associates and interests in joint ventures, deferred tax assetsare recognized only to the extent that it is probable that the temporarydifference will reverse in the foreseeable future and taxable profits will beavailable against which the temporary differences can be utilized. Deferred income tax assets and liabilities are measured at the tax rates thatare expected to apply to the year when the asset is realized or the liability issettled, based on the tax rates and tax laws that have been enacted orsubstantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset if a legallyenforceable right exists to set off current tax assets against current taxliabilities and the deferred taxes relate to income taxes levied by the sametaxation authority. The carrying amount of deferred income tax assets is revised at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profits will be available to allow all or part of thedeferred income tax asset to be utilized. Unrecognized deferred income taxassets are reassessed at each balance sheet date and are recognized to theextent that it has become probable that future taxable profits will allow thedeferred tax asset to be recovered. 2.7 Segment Information The primary segment reporting format is determined to be by business segment asthe Group's risks and rates of return are affected predominantly bydifferences in the products. Secondary information is reported in respect ofgeographical segments. The operating business are organized and managedseparately according to the nature of the products, with each representing astrategic business unit that offers different products. a) Business segments The petrochemical segment provides diesel oil, gasoline and other similarcommercial oil by processing crude oil. The chemical segment is a diverse supplier of methyl carbonate, propylene, related products and Biochemical products which are used in the medical, agriculture,food and textile industries. b) Geographical segments The Group's operations are all located in Shandong Province, People'sRepublic of China ("PRC"), so the geographical segments are based on thelocation of the Group's customers. c) Allocation basis and transfer pricing Segment results include items directly attributable to a segment as well asthose that can be allocated on a reasonable basis. Unallocated items comprisemainly the items which can not reasonably be allocated. Transfer prices between business segments are set on an arm's length basis ina manner similar to transactions with third parties. Segment revenue, expenseand results include the transfers between business segments. These transfers areeliminated on consolidation. 3. SEGMENTAL ANALYSIS a) Business segments The following table presents revenue and results information regarding theGroup's business segments for the financial years ended 31 December 2006 and2005: Group _____________________________ 2006 2005 $'000 $'000 _____________________________Sales to external customersPetrochemical 202,330 169,667Chemical products 52,360 31,636 _________ _________ 254,690 201,303 _________ _________(Loss)/profit for the yearPetrochemical 7,825 6,225Share of results of associate 49 45 _________ _________ 7,874 6,270Chemical products 4,168 1,466 _________ _________Profit from operations before tax 12,042 7,736Income tax -1,731 -3,106 _________ _________Profit for the year 10,311 4,630 _________ _________ b) Geographical segments The following table provides an analysis of the Group's sales by geographicalmarket. Group _____________________________ 2006 2005 $'000 $'000 _____________________________Sales to external customersPRC: 227,577 191,934Exports 27,113 9,369 _________ _________ 254,690 201,303 _________ _________ 4. INCOME TAX EXPENSE Major components of income tax expense The major components of income tax expense are as follows: Group _____________________________ 2006 2005 $'000 $'000 _____________________________ Current income tax 1,046 3,144Deferred income tax:Current year 158 -38Change in applicable tax rate 527 - _________ _________Income tax recognized in income statement 1,731 3,106 _________ _________ Relationship between tax expense and accounting profit A reconciliation between tax expense and the product of accounting profitmultiplied by the applicable corporate tax rate is as follows: Group _____________________________ 2006 2005 $'000 $'000 _____________________________ Accounting profit before income tax 12,042 7,736Tax at respective companies' domestic income tax rate 2,239 2,640Effect of partial tax exemption -1,645 -Effect of reduction in tax rate 527 -Deferred tax not recognized 24 132Non-deductible expenses 593 402Income not subject to income tax - -53Share of results of associate -7 -15 _________ _________Income tax expense recognized in income statement 1,731 3,106 _________ _________ Deferred tax assets Deferred income tax assets relates to the following: Group _____________________________ 2006 2005 $'000 $'000 _____________________________ Allowance for bad and doubtful debts 1,038 1,465Allowance for long-term investment 21 35Impairment of property, plant and equipment - 99Pre-trading expenses 15 117 _________ _________ 1,074 1,716 _________ _________ Unrecognized tax losses As at 31 December 2006, the Group has tax losses of approximately $428,000 thatare available to offset against future taxable profits of the companies in whichthe losses arose and for which no deferred tax asset is recognized due touncertainty of its recoverability. The use of these tax losses is subject to theagreement of the tax authorities and compliance with certain provisions of thetax legislation of the country in which the companies operate. Other tax matters As at 31 December 2006, income tax payable amounting to $3,078,000 has beenapproved by the tax authorities to be paid in the future. The deferred paymentis free of any penalties and interest. The Company and the significant subsidiaries are subject to income tax on thefollowing bases and at the following rates: a) HaiKe The applicable tax rate is nil. b) Hi-Tech Chemical The applicable tax rate in 2005 is 33%. In March 2006, the company registered asa foreign enterprise and, according to applicable taxation laws, thecorresponding tax rate changes to be 15% and the company is entitled toexemptions from PRC income tax for two years since the first profit-making yearand to a 50% relief from PRC income tax for another three years thereafter. In2006, the income tax rate is nil. c) Hi-Tech Spring and Hi-Tech Shengli The applicable tax rate between 2005 and September 2006 is 33%. In September2006, each company registered as a foreign enterprise. The applicable income taxrate changes to be 24% consequently and each company is entitled to exemptionsfrom PRC income tax for two years since October 2006 and a 50% relief from PRCincome tax for another three years thereafter. d) Tiandong Biochemical The applicable tax rate is 24%. 5. EARNINGS PER SHARE Earnings per share has been calculated on the basis of net profit after taxattributable to equity shareholders of the parent company of $8,109,000 (2005:$3,616,000). The weighted average number of ordinary shares used in thecalculation is 25,000,000, for both the current and the preceding year, beingthe $50,000 share capital in issue at the end of the year adjusted for thesub-division of the 50,000 $1 ordinary shares into $0.002 shares after the yearend. There is no difference between the basic and the diluted earnings per sharein either the current or the preceding year. 6. FINANCIAL INFORMATION The foregoing statements do not constitute the Group's statutory accounts andare unaudited. The financial information is prepared on the basis of the Group'sfull draft financial statements. The Group's statutory accounts will be posted to shareholders shortly. 7. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at 2pm on Wednesday 20June 2007 at the offices of the Group, West of Boxin Road, Shikou County,Dongying City, Shandong Province, China. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Haike Chemical Group