7th Apr 2008 07:01
HaiKe Chemical Group Ltd.07 April 2008 7 April 2008 HaiKe Chemical Group Ltd. PRELIMINARY UNAUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 HaiKe Chemical Group Ltd ("HaiKe" or the "Company"), the AIM quoted (AIM: HAIK)petrochemical, speciality chemical and biochemical business based in China, ispleased to announce its preliminary unaudited results for the financial yearended 31 December 2007. Highlights - Total revenues increased 41% to US$ ("$") 359.0m (2006: $254.7m) - Petrochemical revenues increased 39% to $280.6 m (2006: $202.3m) - Speciality chemical revenues increased 47% to $75.3m (2006: $51.2m) - Biochemical revenues increased 158% to $3.1m (2006: $1.2m) - Gross profit margin improved to 9.8% (2006: 9.1%) - Profit before tax and AIM Admission expenses increased 70% to $20.4m (2006: $12.0m) - Profit after tax and AIM Admission expenses increased 77% to $18.2m (2006: $10.3m) - Profit after minority interests increased 57% to $12.7m (2006: $8.1m) - The construction of the 800,000 metric tonne ("MT") heavy oil catalytic cracking facility has been completed and is now fully operational - Appointment of Evolution Securities Limited as nominated adviser and Evolution Securities China Limited as the financial adviser and broker Mr. Yang Xiaohong, Executive Chairman, said: "I am pleased to present our preliminary results for 2007, which furtherdemonstrates the strength and resilience of our business in spite of thechallenging market conditions experienced both domestically and internationally.We have continued to generate strong revenue and profit growth across all areasof the business and are confident that we will continue to deliver furthergrowth and value to our shareholders." For further information please contact: HaiKe Johnson Lau, Chief Finance Officer +86 (0) 546 8289173Evolution Securities Limited Stuart Andrews / Tim Worlledge +44 (0) 20 7071 4300(Nominated adviser) Evolution Securities Barry Saint / Esther Lee +44 (0) 20 7220 4850China Limited (Financial adviser and broker) Cardew Group Rupert Pittman / Shan Shan Willenbrock +44 (0) 20 7930 0777 /Emma Consett CHAIRMAN'S STATEMENT____________________ We are pleased to present our results for the 12 months to 31 December 2007. Ithas been an exciting year for HaiKe and excellent progress has been made acrossall areas of the business. The funds raised at the time of admission to AIM, inFebruary 2007, were invested to significantly enhance and improve theperformance of the business and, during the period under review, we havecontinued to deliver on the strategy stated at the time of the IPO. These results demonstrate a robust performance by the Company, with overallrevenues increasing by 41% while speciality chemical revenues increased by 47%.Revenues generated from the petrochemical business have grown at an annual rateof 39% from 2006 to 2007, compared with 19% in the previous year. This is as aresult of increasing domestic demand for diesel and other oil-refined productsand increased selling price for all products. The improvement in the grossprofit margin for the speciality chemical products from 16% in 2006 to 21% in2007, and the strong overall revenue growth, have contributed to improvements of77% in profit for the year and of 57% in net profit attributable to HaiKeshareholders. Production capacity has been expanded and sales increased through a sequence ofcarefully planned investment projects. This amounted to an aggregate of $46.2min both the petrochemical and speciality chemicals sectors. In the petrochemicalsector, the new heavy oil catalytic cracking equipment has been installed andoperations have begun to increase the output of higher value products. In thespeciality chemical sector, the growth and expansion of production facilitiesfor dimethyl carbonate and caustic soda remain on track. We have continued to see strong growth in both revenues and profits within thespeciality chemicals business, the price of crude oil increased globallythroughout the past year. The PRC National Development and Reform Commission("NDRC") froze the price of oil products in the wake of inflationary concerns inthe Chinese economy, which impacted the margins generated from our petrochemicalbusiness by approximately 1 percentage point of gross profit ratio in 2007compared with 2006. Crude oil prices have continued to rise in 2008 and, inresponse to the absence of further price adjustment notices for oil products inthe year, HaiKe has adopted a number of countermeasures in order to offsetmargin pressure in its petrochemical business. In particular, the company hasshifted production to higher margin products and restricted production ofproducts affected by price controls, such as diesel. In addition, the managementhas instigated aggressive cost control measures. While the current marketenvironment and margins in the petrochemical business remain very difficult, webelieve that this is an industry wide situation. In this respect, in October 2007, we were reassured by a statement from theNDRC, announcing that it was allowing price adjustments for certain refinedpetrochemical products. This partially offset the impact of rising crude oilprices in the last two months of the period. We expect the NDRC to continuemaking adjustments to enhance the pricing mechanism, in order to balance outsupply and demand within the domestic market and expect that there may befurther changes in the future. During the period, we have invested approximately $46.2m into capitalexpenditure in our business which was funded by the proceeds from the issuanceof shares on AIM and additional bank borrowings. The construction of the 800,000 MT heavy oil catalytic cracking facility wascompleted in November 2007 and is now generating a positive return for theCompany, as expected. This facility, constructed using funds raised at the timeof the Company's admission to AIM in February 2007, has enabled the Company tofocus on producing higher margin products. Going forward, the Company willcontinue to focus on these higher margin products as they predominantly useresidual oil and petrolatum oil feedstock, the prices of which are considerablyless volatile than crude oil. In addition, the construction of our environmentally friendly and energy savingwater treatment facility was completed and put into operation. This has helpedto reduce the cost of waste management by approximately $1m per annum. Byimplementing such on-going cost controls, we are confident that the gross marginfor the current year will continue to improve as the Company increasesoperational efficiency and lowers overall processing costs. HaiKe's speciality chemical and biochemical business continue to trade stronglyand the capacity expansion projects for dimethyl carbonate and caustic soda,which were announced in September 2007, remain on track to provide furthergrowth during 2008. We believe that HaiKe is on course to achieve its goals and that growth willcontinue to be driven by strong demand for our products. Going forward, we willalso continue to focus on the high-margin areas of the speciality chemical andbiochemical businesses, where we see considerable opportunity to deliver furthergrowth and value. We are also pleased to announce the appointment of Evolution Securities Limitedas the Company's nominated adviser and Evolution Securities China Limited asfinancial adviser and broker to the Company with immediate effect.The Annual General Meeting of HaiKe will be held at 10:30 am on Friday 20 June2008 at the meeting room of Paul, Hastings, Janofsky & Walker LLP, 19th Floor,Yintai Center Office Tower, 2 Jianguomenwai Avenue, Chaoyang District, Beijing,100022, China. Yang XiaohongExecutive Chairman7 April 2008 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 toboth the domestic and overseas markets. We are confident that we have identifiedopportunities to produce high quality products. Our challenge is to continue togrow our market share and to meet the increasing demands of our customers. Weare confident that, with continued improvement in production efficiency and thereduction of production costs, we are well positioned to take advantage of theincreasing demand for our products. While we believe that a significant proportion of the markets for our existingproducts remain untapped, we are also actively exploring other potentialapplications and revenue streams both through our own research and developmentand through commercial collaborations. Our markets Petrochemical market Revenue increased 39% from $202.3m in 2006 to $280.6m in 2007. Crude oil is the fundamental raw material for the petrochemical industry. It isrefined to create gasoline, diesel and other derivatives. In 2007, China's GrossDomestic Product ("GDP") growth rate was 11.4% (2006: 10.7%). It has been thiseconomic expansion and the growth of petroleum consuming transport inparticular, that has driven the increase in demand for such products. Withforecasts provided by the People's Bank of China estimating that China's GDPwill grow by approximately 10.8% in 2008, this domestic demand for petrochemicalproducts looks set to continue. Crude oil prices rose globally in 2007 and have continued to do so into 2008,causing downward pressure on our overall petrochemical margins. In 2008, thesehave not yet been balanced by increases in our selling prices of dieselproducts. However, in addition to the increase in demand for petrochemicalproducts in the country, we believe that the Company should benefit from changesin the Chinese government's domestic oil pricing policy in future. At thepresent time, downstream petrochemical companies in China purchase crude oil atworld market prices and sell certain refined products at domestic market priceswhich 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 may then choose 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 October 2007, theChinese government raised the prices of gasoline and diesel in response tomovements in world market prices. Following commitments to the World TradeOrganisation, the Chinese government is generally expected to relax certainrules on the adjustment of the prices of gasoline and diesel with a view toestablishing a more market orientated pricing mechanism in China. We believethat, should this occur, the Company will be able to sell its principal productsat prices which are closer to world market prices than they have beenhistorically. Speciality chemical market Revenues increased 47% from $51.2m in 2006 to $75.3m in 2007. With the rapid growth of the Chinese economy continuing to drive demand forspeciality chemicals and with the strong support of the Chinese government, themarket for speciality chemicals has the potential for substantial growth. The Chinese government's "Science & Technology Development Outlines for theChemical Industry" and "The State's 11th Five-Year Plan" which was laid out in2005, classified speciality chemicals as a major priority area for development.The government has set a target for speciality chemicals to comprise 48% of thetotal chemical production in China between 2006 and 2010. Domestic production continues to expand to achieve this target, however, demandalso continues to increase at pace. As a result, demand still significantlyoutweighs supply. Therefore, a market with considerable growth potential existsand we believe we are well positioned to capitalise upon this. Biochemical market Revenues increased 158% from $1.2m in 2006 to $3.1m in 2007. The ageing populations in Europe and the United States, and the associatedincrease in blood clot related afflictions, has continued to drive the marketfor our particular biochemical products. Despite the significant growth in thismarket, it is believed that further growth has been restrained due to the highcosts associated with such afflictions, restricting their widespreadavailability. With Dongying Tiandong Biochemical Industry Co., Ltd. ("Tiandong Biochemical")continuing to experience increased sales demand for its blood clot products, webelieve the Company is well positioned to exploit the growth opportunities thatexist in this market. Outlook Despite the challenging environment, particularly in relation to high crude oilprices, the Company continued to demonstrate its ability to successfully deliveron its objectives and achieve substantial growth in revenue and profit acrossall business activities. In 2007, the focus was on the construction of the800,000 MT heavy oil catalytic cracking facility. This has enabled the Companyto concentrate on producing higher margin products. The focus for 2008 is theexpansion of the dimethyl carbonate and caustic soda production facilities, toallow the Company's speciality chemical businesses also to concentrate onproducing higher margin products. Market conditions remain challenging but barring any unforeseen circumstances,we are confident of achieving further growth in revenues and profitability in2008. We anticipate that this growth will be driven principally by our existingareas of business, supported primarily by increased domestic demand for ourproducts. We continue to explore a number of capacity expansion projects, inaddition to those that have already been announced, together with otherpotential applications and revenue streams both in our existing and related newmarkets. Zhang ZaizhongChief Executive Officer7 April 2008 CHIEF FINANCE OFFICER'S REPORT Financial Review________________ Results Total revenue increased by 41% from $254.7m in 2006 to $359.0m in 2007. On asegmental basis, the sales of petrochemical products in 2007 increased by 39%from $202.3m to $280.6m and the sales of speciality chemicals in 2007 grew by47% from $51.2m to $75.3m. The growth in biochemical revenue is significant inpercentage terms, if not in absolute terms, having increased by 158% from $1.2mto $3.1m in 2007. Cost of sales increased by 40% from $231.6m in 2006 to $323.8m in 2007,reflecting the increase in sales volume and crude oil price throughout the year.The incremental selling prices for the petrochemical products were higher andthe profit contribution from the speciality chemical business increased, both ofwhich contributed to an improved overall gross profit margin of 9.8% in 2007(2006: 9.1%). Sales and distribution expenses increased by 15% from $2.7m in 2006 to $3.1m in2007. This slight increase was a result of higher freight charges and promotioncosts relating to the increased sales of speciality chemical products.Administrative expenses increased by 57% from $6.7m in 2006 to $10.5m in 2007.The increase included a non-recurring share-based (non-cash) payment to theChief Finance Officer which amounted to $0.2m and a one-off cost of $1.8m as aresult of the Company's Admission to AIM in February 2007. The finance costs increased from $3.8m in 2006 to $6.3m in 2007, due to theincreased average loan balance and increase in interest rates in 2007. Duringthe year, the Company acquired additional inventories and increased prepaymentsto secure oil supplies and other materials at favourable prices, which resultedin an increase in short-term loans. Profit from operations increased by 54% from $15.3m in 2006 to $23.5m in 2007,which is in line with the growth in profit before income tax by $6.6m or 55%. Tax exemptions were granted for three subsidiaries, Shandong Hi-Tech ChemicalGroup Co., Ltd ("Hi-Tech Chemical"), Dongying Hi-Tech Spring Chemcial IndustryCo., Ltd ("Hi-Tech Spring"), Shandong Hi-Tech Shengli Electrochemical Co., Ltd("Hi-Tech Shengli"), as a result of the restructuring exercise into a foreignowned entity during 2006. This resulted in income tax falling by 65% from $1.7min 2006 to $0.6m in 2007. Further details of these exemptions are provided inthe notes to the consolidated financial statements. Net profit attributable to equity holders of the parent company increased by 57%from $8.1m in 2006 to $12.7m in 2007. Basic earnings per share increased from US32.0 cents in 2006 to US 34.5 cents in 2007 and the diluted earnings per shareincreased from US 32.0 cents in 2006 to US 34.2 cents in 2007. Capital expenditure Investment in property, plant and equipment increased from $7.5m in 2006 to$46.2m in 2007, resulting from the construction works for the heavy oilcatalytic cracking facility and the capacity expansion projects of dimethylcarbonate and caustic soda (in the speciality chemical segment). Cash flows In 2007, cash generated from operating activities amounted to $25.6m. Cash used for capital expenditure was increased from $7.5m in 2006 to $46.2m in2007, mainly funded from the net proceeds raised at the time of admission to AIMin February 2007 and operating cash inflow. Bank borrowings increased from $52.5m to $86.1m from December 2006 to December2007, which primarily financed the working capital requirement for the expandedoperations and construction of the sewage treatment system. Within Chinesebanking system, it is common to provide bank borrowings on a short-term renewalbasis to most privately-owned enterprises. Barring no changes in the Chinesebank loan policies, it is expected that the facilities will be renewed when theyfall due. Cash and cash equivalents increased from $2.5m at 31 December 2006 to $24.3m at31 December 2007. Liquidity and financial risk In view of the Company's strong cash position, growth and cash generation andunutilised banking facilities of approximately $40m, we believe that the Companyhas sufficient funds to meet foreseeable business requirements. Any surplusfunds may be used for further investments, although we will not undertake anyspeculative treasury transactions. Johnson LauChief Finance Officer7 April 2008 CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2007 2007 2006 ---------- ---------- US$'000 US$'000 Unaudited Audited Revenue 359,035 254,690Cost of sales (323,823) (231,626) ---------- ----------Gross profit 35,212 23,064Other operating income 1,872 1,668Selling and distribution expenses (3,102) (2,739) ------------------------------------------------------------------------------| AIM admission expenses (1,772) - || Other administrative expenses (8,727) (6,700) | ------------------------------------------------------------------------------Total administrative expenses (10,499) (6,700) ---------- ----------Profit from operations 23,483 15,293Finance income 1,381 533Finance costs (6,255) (3,833)Share of results of associates 64 49 ---------- ----------Profit before income tax 18,673 12,042Income tax expense (469) (1,731) ---------- ----------Profit for the year 18,204 10,311 ========== ========== Attributable to:Equity holders of the parent 12,688 8,109Minority interest 5,516 2,202 ---------- ---------- 18,204 10,311 ========== ========== Earnings per shareBasic $0.345 $0.320 ========== ==========Diluted $0.342 $0.320 ========== ========== CONSOLIDATED BALANCE SHEETFor the year ended 31 December 2007 2007 2006 --------- ---------- US$'000 US$'000 Unaudited AuditedASSETSNon-current assetsProperty, plant and equipment 105,162 54,220Intangible assets 3,099 1,886Investments in equity-accounted associates 354 352Available-for-sale investments 496 464Deferred tax assets 661 1,074 --------- ---------- 109,772 57,996 --------- ----------Current assetsInventories 44,858 17,024Trade and other receivables 30,169 25,344Amounts due from related parties - 839Financial assets at fair value through profit or loss 274 -Cash and cash equivalents 24,319 2,528 --------- ---------- 99,620 45,735 --------- ----------Total assets 209,392 103,731 ========== ========== LIABILITIESCurrent liabilitiesShort-term loan 86,093 49,836Trade and other payables 56,763 30,260Deferred income 185 128Income tax payable 1,630 3,078Amounts due to related parties 7,223 189 --------- ---------- 151,894 83,491 --------- ----------Non-current liabilitiesLong-term loan - 2,638Deferred income 1,412 1,046 --------- ---------- 1,412 3,684 --------- ----------Total liabilities 153,306 87,175 ========== ========== 2007 2006 --------- ---------- US$'000 US$'000 Unaudited AuditedCAPITAL AND RESERVESShare capital 77 50Share premium 18,338 -Other reserve 4,510 4,259Statutory reserve 3,996 2,351Foreign currency translation reserve 2,911 433Retained earnings 16,196 5,105 --------- ----------Equity attributable to equity holders of the parent 46,028 12,198Minority interest 10,058 4,358 --------- ----------Total equity 56,086 16,556 --------- ----------Total liabilities and equity 209,392 103,731 ========== ========== CONSOLIDATED STATEMENT OF CHANGES IN EQUITY < --------------------Attributable to equity holders of the parent-------------- > Share Share Other Statutory Retained Foreign Total Minority Total capital premium reserve reserve earnings currency interests equity translation reserve US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000AuditedBalance asat1 January 2006(Audited) - - 4,259 1,319 (816) 113 4,875 2,915 7,790Foreigncurrencytranslation - - - - - 320 320 141 461 ------ ------ ------ ------ ------ ------- ------- ------ ------Net incomerecogniseddirectly inequity - - - - - 320 320 141 461 ------ ------ ------ ------ ------ ------- ------- ------ ------Net profitfor the financial year - - - - 8,109 - 8,109 2,202 10,311 ------ ------ ------ ------ ------ ------- ------- ------ ------Totalrecognisedincome andexpense forthe financial year - - - - 8,109 - 8,109 2,202 10,311 ------ ------ ------ ------ ------ ------- ------- ------ ------Dividenddeclared toshareholders - - - - (1,353) - (1,353) (703) (2,056)Issue ofshare capital 50 - - - - - 50 - 50Transfer tostatutoryreserve - - - 1,032 (1,032) - - - -Transferfromminority interest - - - - 197 - 197 (197) - ------ ------ ------ ------ ------ ------- ------- ------ ------Balance asat31 December 2006 50 - 4,259 2,351 5,105 433 12,198 4,358 16,556 ------ ------ ------ ------ ------ ------- ------- ------ ------ < ------------------Attributable to equity holders of the parent----------------- > Share Share Other Statutory Retained Foreign Total Minority Total capital premium reserve reserve earnings currency interests equity translation reserve US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000UnauditedBalance asat 1 January2006 50 - 4,259 2,351 5,105 433 12,198 4,358 16,556Foreigncurrencytranslation - - - - - 2,478 2,478 510 2,988 ------ ------ ------ ------ ------ ------- ------- ------ ------Net incomerecogniseddirectly inequity - - - - - 2,478 2,478 510 2,988 ------ ------ ------ ------ ------ ------- ------- ------ ------Net profitfor the financial year - - - - 12,688 - 12,688 5,516 18,204 ------ ------ ------ ------ ------ ------- ------- ------ ------Totalrecognisedincome andexpense forthefinancial year - - - - 12,688 2,478 15,166 6,026 21,192 ------ ------ ------ ------ ------ ------- ------- ------ ------Dividenddeclared toshareholders - - - - - - - (278) (278)Issue ofshare capital 27 20,154 - - - - 20,181 - 20,181Share issuecosts - (1,816) - - - - (1,816) - (1,816)Expenses offloatation - - 251 - - - 251 - 251Transfer tostatutoryreserve - - - 1,645 (1,645) - - - -Transferfromminority interest - - - - 48 - 48 (48) - ------ ------ ------ ------ ------ ------- ------- ------ ------Balance asat31 December2007 (unaudited) 77 18,338 4,510 3,996 16,196 2,911 46,028 10,058 56,086 ====== ====== ====== ====== ====== ======= ======= ====== ====== Other reserves comprise the consolidation reserves and the options issued. CONSOLIDATED CASH FLOW STATEMENTSFor the year ended 31 December 2007 Note 2007 2006 -------- -------- US$'000 US$'000 Unaudited AuditedCash flow from operating activities a 25,584 11,792 -------- --------Cash flow from investing activitiesPurchase of property, plant and equipment (46,181) (7,501)Purchase of intangible assets (1,340) -Government grant received 461 -Purchase of available-for-sale investments (1,582) -Proceeds from disposal of available-for-sale investments 1,689 155Dividend income from available-for-sale investments 93 -Purchase of shares in subsidiary from minorities (15) -Proceeds from disposal of property, plant and equipment 618 258 -------- --------Cash flow used in investing activities (46,257) (7,088) -------- -------- Cash flow from financing activitiesIssuance of ordinary shares for public offering 20,181 -Share issue expenses (1,816) -Increase in long-term loan - 2,588Repayment of long-term loan (79) -Net increase in/(repayment of) short-term loan 28,963 (3,717)Interest paid (5,715) (3,833)Dividends paid to shareholders - (1,036)Dividends paid to minorities (278) (488) -------- --------Cash flow from/(used in) financing activities 41,256 (6,486) -------- --------Net increase/(decrease) in cash and cash equivalents 20,583 (1,782)Cash at beginning of year 2,528 4,203Foreign currency translation differences 1,208 107 -------- --------Cash at end of year 24,319 2,528 -------- -------- NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTS(a) Cash from operating activities 2007 2006 -------- -------- US$'000 US$'000 Unaudited Audited Profit before income tax 18,673 12,042Adjustments for:Amortisation of intangible assets 291 254Provisions for doubtful debts (22) (6)Allowance for non-trade debts (221) 136Depreciation of property, plant and equipment 7,158 6,385Loss on disposal of property, plant and equipment 245 260Amortisation of deferred capital grants (132) (105)Share-based payment 439 -Gain from debt restructuring b (535) (426)Share of result of associate (64) (49)Dividend income from available-for-sale investments (93) -Gain on disposal of available-for-sale investments (371) (31)Interest income (382) (76)Finance expense 5,715 3,833 -------- --------Operating cash flows before working capital changes 30,701 22,217 Working capital changes:(Increase)/decrease in:Inventories (25,669) 1,932Trade and other receivables 1,848 (7,589)Amounts due from related parties 909 3,383Increase/(decrease) in:Trade and other payables 12,251 (6,281)Amounts due to related parties 6,760 170 -------- --------Cash generated from operations 26,800 13,832 Interest received 382 76Foreign currency translation differences - 9Income tax paid (1,598) (2,125) -------- --------Net cash generated from operating activities 25,584 11,792 -------- -------- (b) Non-cash flow transactions On 30 March 2007, Hi-Tech Shengli, a subsidiary of the Company, entered into adebt restructuring agreement with Shengli Oil Field Company Limited ('theCreditor'), under which the Creditor agreed to reduce the debt. The carryingamount of the debt at 30 March 2007 was $958,000. The debt was satisfied by acash payment of $423,000. Therefore, the difference between the carrying amountof debt before and after it was restructured has been recognised as financeincome. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND AND BASIS OF PREPARATION 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's ultimate parent company is Hi-Tech Chemical InvestmentLimited, a company incorporated in the British Virgin Islands. The principal activities of the Company and its subsidiaries (the "Group") aremanufacturing of petrochemical and chemical products. The principal place ofbusiness of the Company is West of Boxin Road, Shikou County, Dongying City,Shandong Province, China. The financial information is prepared on the basis of the Group's full draftconsolidated financial statements and the financial information does notconstitute statutory accounts. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Group have been prepared inaccordance with those International Financial Reporting Standards andInterpretations in force ("IFRS"), which comprise standards and interpretationsissued by the International Accounting Standards Board ("IASB"), andInternational Accounting Standards ("IASs") and Interpretations issued by theInternational Financial Reporting Interpretations Committee ("IFRICs") thatremain in effect, as adopted by the European Union. 2.1 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 for the same reporting date as theparent company. Consistent accounting policies are applied for like transactionsand events in similar circumstances. All inter-group balances, transactions, income, expenses, profits and lossesresulting from inter-group transactions that are recognised as assets, areeliminated in full. 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. Acquisitions of subsidiaries are accounted for using the purchase method. Thecost of an acquisition is measured as the fair value of the assets given, equityinstruments issued and liabilities incurred or assumed at the date of exchange,plus cost directly attributable to the acquisition. Identified assets acquiredand liabilities and contingent liabilities assumed in a business combination aremeasured initially at their fair value at the acquisition date, irrespective ofthe extent of any minority interest. Any excess of the cost of the business combination over the Group's interest inthe 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 businesscombination is recognised in the income statement on the date of acquisition. Minority interests represent the portion of profit or loss and net assets insubsidiaries not held by the Group. These are presented in the consolidatedbalance sheet within equity, separately from the parent shareholder's equity,and are separately disclosed in the consolidated income statement. 2.2 Functional currency The directors have determined the currency of the primary economic environmentin which the Group operates, to be Renminbi ("RMB"). Sales and major costs ofthe providing goods and services including major operating expenses areprimarily influenced by fluctuations in RMB against US$. 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 rates31 December 2006 $1=RMB7.809 $1=RMB7.96031 December 2007 $1=RMB7.305 $1=RMB7.587 The results and financial position are translated into US$ using the followingprocedures: 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 recognised in the currency translation reserve, a separate component ofequity. Goodwill and fair value adjustments arising on the acquisition of foreignoperations are treated as assets and liabilities of the foreign operations andare recorded in the functional currency of the foreign operations and translatedat the closing rate at the balance sheet date. Exchange differences arising ontranslating the opening net assets at opening rate and the results of overseasoperations at actual rate are recognised directly in equity. 2.3 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 recognised 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 remainingcarrying value may not be recoverable. The gain or loss arising on the disposal or retirement of an item of property,plant and equipment is determined as the difference between the sales proceedsand the carrying amount of the asset and is recognised in profit or loss. 2.4 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 units whichare 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 amortisation and any accumulatedimpairment losses. Intangible assets are amortised 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 amortisation period and amortisation method for intangible assetsare reviewed at least annually. The estimated useful economic lives of the Group's intangible fixed assets areas follows: Land use rights - 20-50 yearsIndustry rights - 4-10 yearsSoftware - 2-5 years 2.5 Cash and Cash Equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short term highly liquid investments with original maturities ofthree months or less and bank overdrafts. Bank overdrafts are shown within loansand borrowings in current liabilities on the balance sheet. 2.6 Revenue Recognition Revenue is recognised 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 isrecognised. a) Sales of goods Revenue is recognised 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 recognised where there aresignificant uncertainties regarding recovery of the consideration due,associated costs or the possible return of goods. b) Interest income Interest income is accrued on a time apportioned basis, by reference to theprincipal outstanding and at the interest rate applicable, on an effective yieldbasis. c) Dividends Dividend income is recognised when the Group's right to receive payment isestablished. 2.7 Taxation Income tax for the financial year comprises deferred tax. Income tax isrecognised in the income statement except to the extent that is relates to itemsrecognised directly in equity, in which case such tax is recognised directly inequity. 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 tax assets and liabilities are recognised where the carrying amount ofan asset or liability in the balance sheet differs from its tax base, except fordifferences arising on: • the initial recognition of goodwill; • 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 isprobable that taxable profit will be available against which the difference canbe utilised. The amount of the asset or liability is determined using tax rates that havebeen enacted or substantively enacted by the balance sheet date and are expectedto apply when the deferred tax liabilities/(assets) are settled/(recovered). Deferred tax assets and liabilities are offset when the group has a legallyenforceable right to offset current tax assets and liabilities and the deferredtax assets and liabilities relate to taxes levied by the same tax authority oneither: • 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 realise 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. 2.8 Segment Information A business segment is a distinguishable component of an enterprise that isengaged in providing an individual product or service or a group of relatedproducts or services and that is subject to risks and returns that are differentfrom those of other business segments. A geographical segment is adistinguishable component of an enterprise that is engaged in providing productsor services within a particular economic environment and that is subject torisks and returns that are different from those of components operating in othereconomic environments. a) Business segments The petrochemical segment provides the diesel oil, gasoline as well as othersimilar commercial oil by processing crude oil. The chemical segment is a diverse supplier of methyl carbonate, propylene andrelating products which used in the areas of medical, agriculture, food andtextile industry. b) Geographical segments The Group's operations are all located in Shandong Province, People's Republicof China (the "PRC"), so the geographical segments are based on the location ofthe Group's customers, which located in Europe, United States of America andsouth-east Asia. 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 in amanner similar to transactions with third parties. Segment revenue, expense andresults include the transfers between business segments. These transfers areeliminated on consolidation. 2.9 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 financial statements and thereported amount of revenue and expenses 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 goodwill is impaired at least on an annual basis.This requires an estimation of the value in use of the cash-generating unit towhich the goodwill is allocated. Estimating the value in use requires the Groupto make an estimate of the expected future cash flows from the cash-generatingunit and also to choose a suitable discount rate in order to calculate thepresent value of those cash flows. The carrying amount of the Group's goodwillat 31 December 2007 is $952,000 (2006: $890,000). b) Depreciation of property, plant and equipment The cost of plant and equipment used for the manufacturing process isdepreciated on a straight line basis over its estimating useful life.Managements' estimate of the useful life of plant and equipment is within 2 to30 years. Management believes that these are common life expectancies applied inthe chemical industry. Changes in the expected level of usage and technologicaldevelopments could impact the economic use life and the residual value of theseassets, therefore, future depreciation charges could be revised. c) Provisions for impairment of accounts receivables The Group makes sales on credit. A proportion of the outstanding credit salesmay prove uncollectible in due course. An estimate is made of the uncollectibleportion of accounts receivables using a percentage based on the aging profile ofthe amounts outstanding. Although these estimates are based on management's best knowledge of currentevents and actions, actual results may differ from these estimates. d) Share based payment The Group has an equity-settled share-based remuneration with Hanson WesthouseLimited and Shanghai Riemann Investment Advisory Ltd., for their servicesprovided. The services received, and the corresponding increase in equity, aremeasured by reference to the fair value of the equity instruments at the date ofgrant, excluding the impact of any non-market vesting conditions. The fair valueof share options is estimated by using valuation models, such as Black-Scholes,on the date of grant based on certain assumptions. 3. TAXATION Major components of income tax expense The major components of income tax expense are as follows: 2007 2006 --------- -------- US$'000 US$'000 Unaudited Audited Current income tax - 1,046Deferred income tax:Originating reversal of temporary differences 469 158Tax rate reduction - 527 --------- --------Income tax recognised in income statement 469 1,731 --------- -------- Relationship between tax expense and accounting profit A reconciliation between tax expense and the accounting profit multiplied by theapplicable corporate tax rate is as follows: 2007 2006 --------- -------- US$'000 US$'000 Unaudited Audited Accounting profit before income tax 18,673 12,042 --------- --------Tax at respective companies' domestic income tax rate 5,148 2,239Effect of partial tax exemption (4,578) (1,645)Effect of reduction in tax rate - 527Deferred tax not recognised - 24Non-deductible expenses - 593Utilisation of previously unrecognised tax loss (86) -Share of results of associate (15) (7) --------- --------Income tax expense recognised in income statement 469 1,731 --------- -------- Deferred tax assets Deferred income tax assets relates to the following: 2007 2006 --------- -------- US$'000 US$'000 Unaudited Audited Provision for doubtful debts 632 1,038Allowance for long-term investment 29 21Pre-trading expenses - 15 --------- -------- 661 1,074 --------- -------- Unrecognised tax losses As at 31 December 2007, the Group has tax losses of approximately $1,425,000(2006: $1,783,000) that are available to offset against future taxable profitsof the companies in which the losses arose and for which no deferred tax assetis recognised due to uncertainty of its recoverability. The use of these taxlosses is subject to the agreement of the tax authorities and compliance withcertain provisions of the tax legislation of the country in which the companiesoperate. Other tax matters As at 31 December 2007, income tax payable amounting to $1,630,000 (2006:$3,078,000) has been approved by the tax authorities to be paid in the future.The deferred payment is 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 Its applicable tax rate is nil. b) Hi-Tech Chemical In March 2006, the company changed to be a foreign enterprise in 2006, accordingto the taxation laws, its applicable tax rate is 24% and the company is entitledto exemptions from PRC income tax for two years the first profit-making year andto a 50% relief from PRC income tax for another three years thereafter.Therefore, it is fully tax exempted for 2006 and 2007, and subject to 50% relieffor the preferential tax rate of 12% from 2008 to 2010. After the tax holiday,its applicable tax rate will be 25% according to the new income taxation lawwhich will come into effect on 1 January 2008. c) Hi-Tech Spring and Hi-Tech Shengli In September 2006, each company registered as a foreign enterprise. According tothe taxation laws, the applicable income tax rate is 24% and each company isentitled to exemptions from PRC income tax for two years since October 2006 anda 50% relief from PRC income tax for another three years thereafter. In 2006,the company started to generate profit and utilising the tax holiday. Therefore,it is fully tax exempted for 2006 and 2007, and subject to 50% relief for thepreferential tax rate of 12% from 2008 to 2010. After the tax holiday, itsapplicable tax rate will be 25% according to the new income taxation law whichwill come into effect on 1 January 2008. d) Tiandong Biochemical The current applicable tax rate is 24%. According to the new income tax lawspassed imposed on 1 January 2008, the applicable tax rate of the company willbecome 25% since 1 January 2012. The tax charge for the year is close to nil due to the tax exemptions andavailability of tax losses. The income tax expense shown in the income statementis arising from the recognition of deferred tax assets. 4. SEGMENTAL ANALYSIS (a) Business segments The following table presents information about the Company's revenues andresults by business segment for the financial years ended 31 December 2007 and2006, respectively: 2007 2006 --------- -------- US$'000 US$'000 Unaudited AuditedSales to external customersPetrochemical 280,635 202,330Chemical products 78,400 52,360 --------- -------- 359,035 254,690 ========= ========= Profit for the yearPetrochemical 10,192 7,825Share of results of associate 64 49 --------- -------- 10,256 7,874Chemical products 11,277 4,168Unallocated expenses (2,860) - --------- --------Profit from operation before income tax 18,673 12,042Income tax benefit (expense) (469) (1,731) --------- --------Profit for the year 18,204 10,311 ========= ========= 2007 2006 --------- -------- US$'000 US$'000 Unaudited AuditedSegment assetsPetrochemical 163,205 73,984Investment in associate 179 188 --------- -------- 163,384 74,172Chemical products 81,368 50,060Unallocated assets 1,206 -Less: Intragroup balance (36,566) (20,501) --------- -------- 209,392 103,731 ========= ========= Segment liabilitiesPetrochemical 133,981 59,743Chemical products 52,322 47,933Unallocated liabilities 3,569 -Less: Intragroup balance (36,566) (20,501) --------- -------- 153,306 87,175 ========= ========= Other segment informationCapital expenditure on property, plant and equipment and intangible assetsPetrochemical 51,633 2,706Chemical products 3,206 6,014 --------- -------- 54,839 8,720 ========= ========= Depreciation and amortisationPetrochemical 2,657 2,177Chemical products 4,792 4,462 --------- -------- 7,449 6,639 ========= ========= (b) Geographical segments The following table provides an analysis of the Company's sales by geographicalmarket. 2007 2006 --------- -------- US$'000 US$'000 Unaudited AuditedSales to external customersPeople's Republic of China 346,998 227,577Exports 12,037 27,113 --------- -------- 359,035 254,690 ========= ========= 5. EARNINGS PER SHARE Earnings per share has been calculated on the basis of the net profit after taxattributable to equity shareholders of the parent of $12,688,000 (2006:$8,109,000). The weighted average number of ordinary shares used in the calculation ofearnings per share has been derived as follows: 2007 2006 --------- -------- Unaudited Audited Weighted average number of ordinary shares-basic 36,804,099 25,500,000Dilutive effect of share options 324,314 - --------- --------Weighted average number of ordinary shares-diluted 37,128,413 25,500,000 ========= ========= 6. SHARE CAPITAL The Company was incorporated on 20 June 2006 with an authorised share capital of50,000 US$1 ordinary shares. One US$1 ordinary share was issued at par onincorporation, and a further 49,999 US$1 ordinary shares were issued on the sameday as the acquisition of the Company's interest in the Group. Details of changes in share capital during the year ended 31 December 2007 areas follows: - On 14 February 2007, the authorised share capital was increased to $51,000 by the creation of an additional 1,000 US$1 ordinary shares, and the 51,000 authorised ordinary shares were subdivided into 25,500,000 ordinary shares of US$0.002 each. All such shares are fully paid. - On 14 February 2007, the authorised share capital of the Company was further increased from $51,000 to $86,100 by the creation of an additional 17,550,000 ordinary shares of US$0.002 each. - On 14 February 2007, 12,738,854 ordinary shares of US$0.002 each were issued on the Company's Admission to AIM. All such shares are fully paid. - On 14 February 2007, the Company issued 114,717 ordinary shares of US$0.002 each to JSL Consulting Co., a company controlled by Mr. Johnson Lau, as part of Mr. Lau's remuneration. Pursuant to the option agreements dated 5 February 2007, Hanson WesthouseLimited and Shanghai Riemann Investment Advisory Ltd., have each been grantedoptions to subscribe for up to 383,536 ordinary shares of $0.002 each within 24months of the Admission to AIM, exercisable at the admission price of $1.57. Thefair value attributed to these options in accordance with IFRS 2 is $251,000(GBP 0.17 per option), which has been expensed. 7. CONTINGENCIES Up to 31 December 2007, as a warrantor, the Group has guaranteed the bank loansof third parties to an aggregate amount of $33,580,000 (2006: $25,010,000). Itis unlikely that any significant liability will arise because the financialstatements of the warrantees indicate that the debtors are able to pay theirdebts as they mature. 8. 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 consolidated financial statements. The Group's consolidated financialstatements will be posted to shareholders shortly. 9. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at 10:30 am on Friday 20June 2008 at the meeting room of Paul, Hastings, Janofsky & Walker LLP, 19thFloor, Yintai Center Office Tower, 2 Jianguomenwai Avenue, Chaoyang District,Beijing, 100022, China. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Haike Chemical Group