Half-year Report

HAIKE CHEMICAL GROUP LIMITED

INTERIM CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2016

(UNAUDITED)

HaiKe Chemical Group Ltd. ("HaiKe" or "the Company" or "the Group"), the AIM quoted (AIM: HAIK) specialty chemical company based in Shandong Province, China, today announces its unaudited consolidated results for the six months ended 30 June 2016.

In order to better position the business in a fiercely competitive market, the Board in Q3 of 2015 took the decision to focus on higher margin speciality chemical products, product innovation and cost controls. These actions began to have a positive impact in Q4 2015 and have enabled the Group to deliver a satisfactory, profitable performance for the first half of 2016.

Financial highlights

· Total revenues decreased by 9.0% to CNY350.7million (H1 2015: CNY385.4 million)

· Gross profit increased by 47.6% to CNY61.2million (H1 2015: profit of CNY41.5 million)

· Profit for the period from continuing operations was CNY11.4 million (H1 2015: profit of CNY95,000)

· Cash and cash equivalents balance as at 30 June 2016 was CNY73.5 million (31 December 2015: CNY CNY35.4 million)

· Total borrowings as at 30 June 2016 were CNY80.0 million (31 December 2015: CNY80.0 million)

Operational highlights

· Move to focus on higher-end specialty chemical products has enhanced business performance

· Significant rise in gross margins enhanced by increased sales of higher margin product mix and decline in prices of raw materials

· Stringent cost controls and a reduction in the average balance of loans outstanding reduced interest expenses by 68.0% year-on-year to CNY1.9 million for H1 2016 (H1 2015: CNY5.9 million)

Outlook

· Trading conditions expected to remain challenging

· Optimization of product mix and new product development continues to be a core focus to drive business performance

· Focus on domestic and international marketing campaigns to grow revenue

· Trading in July has continued to be profitable, however an expected loss was recorded in August due to a planned shutdown of its DiMethyl Carbonate ("DMC") facility for routine annual maintenance

Mr. Xiaohong Yang, Executive Chairman, said:

 "I am pleased to report the satisfactory performance for the Group over the first half of 2016, especially given the challenging trading environment. The improvement in profitability was driven by the decisive actions taken by the Board last year to better position the business in the current environment and improve performance. We are pleased these are starting to bear fruit and we will continue our efforts in this area. The Group has entered the second half of the year in a strong position and while we believe market conditions will remain difficult, we are well-positioned and look to the future with confidence."

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CHAIRMAN'S STATEMENT

1. Review of operating results

In H1 2016, the Group sold 68,000 tons of specialty chemicals, representing a volume gain of 10.2% when compared to the same period in the previous year. Sales of high-end specialty chemicals accounted for 3.4% of total sales in H1 2016, compared to 2.7% in H1 2015. While both overall sales volumes and the proportion of high-end speciality chemicals sold in H1 2016 increased, when compared to the prior year period, the fall in crude oil prices over the same period had a negative effect on selling prices, as detailed below. This contributed to lower average realized prices for the period.

The price of crude oil fell significantly in H1 2016, achieving an average barrel price of $41.2 over the period, 30.6% lower than in H1 2015. This decline affected Group selling prices in two ways: depressing selling prices of downstream derivative products, which affected our specialty chemical products; and, by benefitting rival manufacturers of Isopropyl alcohol, who adopt a different production process which is more sensitive to oil price fluctuations. These rival manufacturers initiated a price war during 2015, as the oil price began to fall, and this continued into the first half of 2016 in an attempt to gain market share in what had become an oversupplied market of mid to lower-end specialty chemicals, chiefly due to the slowing Chinese economy.

In order to maintain market share we continued to suppress our selling prices over the period, with the shift towards more high-end speciality chemicals to address the oversupply of the mid to lower-end speciality chemicals market.

2. Financial Analysis

Turnover

The Group's turnover decreased by 9.0% to CNY350.7 million for the first half of 2016 (H1 2015: CNY385.4 million) as a result of a reduction in selling prices. Trading revenues from HaiKe Trading, the trading arm of the Company, decreased to CNY1.8 million in the period (H1 2015: CNY21.7 million).

Gross Profit

Gross profit was CNY61.2 million for H1 2016, up 47.6% compared with the same period in 2015 (H1 2015: CNY41.5 million). The growth in gross profit was mainly attributable to increased sales of higher margin product mix and a decline in sales cost. Sales of high-end specialty chemicals accounted for 3.4% of total sales in H1 2016, compared to 2.7% in H1 2015. The cost of sales decreased 15.8% compared to the same period in the previous year. Cost of materials accounted for 81% of total cost. The Company correctly judged price trends through analysis of the raw material market, reducing inventory when the price of raw materials was high and taking advantage of lower prices to increase stock. The price of Propylene Oxide and Propylene, the two main raw materials, deceased 24.7% and 31.6% respectively in the period under review.

Selling, General and Administrative Expenses

Selling and distribution expenses increased by 19.0% to CNY20.8 million in H1 2016 (H1 2015: CNY17.5 million) as we continued with aggressive sales and marketing efforts to counteract sluggish market conditions. General and administrative expenses increased to CNY25.2 million (H1 2015: CNY20.4 million) which was mainly attributable to an increase in labour cost as a result of an increase in domestic inflation.

Net Interest Expenses

Interest income decreased by 68.4% year-on-year to CNY0.9 million for H1 2016 (H1 2015: CNY2.9 million) due to exchange rate gains.

Interest expenses decreased by 68.0% year-on-year to CNY1.9 million for H1 2016 (H1 2015: CNY5.9million). This was mainly due to a decrease in the average balance of loans outstanding.

Profit Before Taxation

Profit before taxation was CNY13.8 million for H1 2016 (H1 2015: CNY666,000). In order to maintain market share the Company increased its sales volume. The Company improved earnings although the average realized price decreased. Interest expenses decreased as a result of a decrease in the average balance of loans outstanding compared with the same period in 2015.

Income Tax

Income tax charge was CNY2.4 million for H1 2016, as compared to CNY571,000 for the same period in the previous year.

Profit from Continuing Operations

Profit for the half year was CNY11.4 million (H1 2015: profit of CNY95,000).

Cash and Cash Equivalents

Cash and cash equivalents increased to CNY73.5 million as at 30 June 2016 compared to CNY35.4 million as at 31 December 2015. The increase in cash and cash equivalents was due to the decline of working capital and profit improvement.

Bank Loans

Bank loans were CNY80.0 million as at 30 June 2016, unchanged from31 December 2015 (CNY 80.0 million).

Cash Flow from Continuing Operations

Cash flow from operating activities was CNY68.0 million for the six months ended 30 June 2016, compared to CNY531.9 million for the same period in 2015. In H1 2015 working capital was used to repay a net loan of CNY 520.5 million.

3. Outlook

The Group recorded an unaudited profit of CNY1.4 million and loss of CNY3.0 million for July and August 2016 respectively. The expected loss incurred in August was due to a planned one-month shutdown of a production facility which manufactures DMC for routine annual maintenance, however we expect the improvement in product mix and cost saving initiatives will continue to drive profitability from September. We expect market conditions to remain challenging. The collapse in the crude oil price has made conditions difficult for the specialty chemicals industry in China and the domestic economy has had a negative impact on demand. At the industry level we are facing increasing competition, particularly at the mid to lower end of the market, and we believe companies will increasingly have to develop their own niche through technological innovation to deliver growth. To ensure the Group is well positioned to continue to deliver a profitable performance in a tough operating environment, management efforts will remain focused on:

· improving the product mix towards higher margin speciality chemical products

· continued stringent cost controls 

· strengthen sales efforts to speed up product inventory turnover

· developing and introducing new products to the domestic market to diversify our product offering

4. People

On behalf of the Board, I would like to sincerely thank Mr. George Zeng for his commitment and outstanding contribution to the business over the last five years. The Board has initiated a comprehensive search for a new Chief Financial Officer, who would be expected to join the Board, and a further announcement will be made in due course.

Xiaohong Yang

Executive Chairman

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2016

Condensed consolidated Statement of Financial Position

As at 30 June 2016

Condensed consolidated Statement of Changes in Equity

For the 6 months ended 30 June 2016

Condensed consolidated Statement of Cash Flow

For the 6 months ended 30 June 2016

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL INFORMATION

FOR SIX MONTHS ENDED 30 JUNE 2016

(UNAUDITED)

1. General information

HaiKe Chemical Group Ltd. ("the Company") is a public limited company, incorporated in the Cayman Islands on 20 June 2006, and is quoted on AIM. The address of the registered office is Scotia Center 4th Floor, P.O. Box 2804, George Town, Grand Cayman, Cayman Islands.

The Company's ultimate parent company is HiTech Chemical Investment Ltd, a company incorporated in the British Virgin Islands.

The principal activities of the Company are manufacturing of specialty chemical products.

The principal place of business of the Company is Shengli Industrial Park, Dongying City, Shandong Province, China.

The interim consolidated financial information of the Company for the six months ended 30 June 2016 comprises the Company and its subsidiary undertakings ("the Group").

2. Accounting policies

The consolidated financial statements of the Company have been prepared in accordance with those International Financial Reporting Standards and Interpretations in force ("IFRS"), as adopted by the European Union.

The principal accounting policies adopted in the preparation of the interim financial statements have been consistently applied in the Company's latest annual audited consolidated financial statements and are expected to be used for Company's annual consolidated financial statements for the year ending 31 December 2016.

Financial information for the six months ended 30 June 2016 and 30 June 2015 is unaudited and does not constitute the Company's financial statements for these periods.

Comparative financial information for the full year ended 31 December 2015 has been derived from the audited financial statements for that period. The Board of Directors approved the interim statements on 19 September 2015.

3. Related Party Transactions

The Company undertook a restructuring in 2014 which resulted in the divestment of the Group's refinery and biochemical assets to leave a smaller, more focused specialty chemicals business. The disposed companies and HaiKe are members of the group controlled by HiTech Chemical Investment Ltd. Therefore, in accordance with IAS24, the disposed companies and Haike are related parties.

On 20 July 2016 the Company announced an unaudited revenue figure of CNY 526.9 million for H1 2016, which did not incorporate a net-off of transactions between Haike and two companies, Shandong Hi-Tech Chemical Group Ltd. and Haiyuan Trading Pte. Ltd., which were disposed companies in the restructuring. Revenue recognition is applied in line with IAS 18 - transactions between Haike and related parties, where Haike acts in a capacity as an agent and gross inflows do not result in increases in equity are not recognised as revenue.  The Company made a corrective announcement on 6 September 2016.

The immediate and ultimate parent company is HiTech Chemical Investment Ltd., a company incorporated in British Virgin Islands. Related parties include companies that fall under the common control provisions of IAS24. Details of transactions with related parties are as follows:

Sales, purchase of goods and loans

In H1 2016, the Group made the following sales, purchase and funds transfer with related parties:

The sales of goods to the related parties are based on the market price.

4. Subsequent Event

No subsequent event occurred after the reporting period.

5. Capital commitments

Capital expenditure contracted for property, plant and equipment in continuing operations as at 30 June 2016, but not recognized in the financial statements, was CNY10.2 million (31 December 2015: CNY3.5 million).

6. Acquisitions and disposals of items of property, plant and equipment

Acquisitions of items of property, plant and equipment were CNY29.1 million (H1 2015: CNY2.0 million). Loss on disposals of items of property, plant and equipment was CNY472,000 (H1 2015: CNY28,000).

7. Taxation

Major components of income tax expense/(credit)

The major components of income tax expense are as follows:

Relationship between tax expense and accounting (loss)/profit

Reconciliation between tax expense and the accounting profit multiplied by the applicable corporate tax rate is as follows:

8.  Profit per share from continuing operations

Earnings for the purpose of basic and diluted earnings per share are the net profit for six months ended 30 June 2016 attributable to equity holders of the parent of CNY11,372,000 (for the six months ended 30 June 2015: profit of CNY94,000; for the year ended 31 December 2015: profit of CNY4,059,000).

The profit from continuing operations for the financial periods attributable to equity holders of the parent was as follows: