Half Yearly Report

HAIKE CHEMICAL GROUP LIMITED

INTERIM CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

(UNAUDITED)

HaiKe Chemical Group Ltd. ("HaiKe" or "the Company" or "the Group"), the AIM quoted (AIM: HAIK) petrochemical, speciality chemical and biochemical business based in China, is pleased to announce its unaudited consolidated results for the six months ended 30 June 2012.

Financial highlights

·; Delivered revenue level with last year at RMB5,411.7 million (H1 2011: RMB5,441.0 million)

·; Turnover from refinery division decreased by RMB53.8 million to RMB4,694.5 million (H1 2011: 4,748.3 million), representing 86.7% of total revenues (H1 2011: 87.3%)

·; In line with our strategy to grow our chemical business, turnover from the chemical division increased by RMB24.6 million to RMB717.3 million (H1 2011: RMB692.7 million), and accounted for 13.3% of total revenues (H1 2011: 12.7%).

·; Gross profit decreased by 74.2% to RMB64.0 million (H1 2011: RMB248.3 million)

·; Loss from operations was RMB79.0 million (H1 2011: profit of RMB153.9 million)

·; Loss for the period was RMB212.8 million (H1 2011: profit of RMB46.2 million)

Operational highlights

·; Continued buyout of minority interests in Shandong Hi-Tech Ruilin Chemical Co., Ltd ('Hi-Tech Ruilin') at end of H1 2012 to further improve intra-group synergies and enhance medium to long term performance

·; Dongying Hebang Chemical Co., Ltd. ("Hebang"), which produces speciality and salt chemical products, commenced commercial operation in late March of this year and is breaking even at gross margin level

·; The Company continues to improve internal efficiency. Several key departments were centralised and managerial staff of several key subsidiaries were rotated in order to enhance control and improve efficiencies

·; HaiKe maintains its commitment to technological innovation. A new technology introduced at Hi-Tech Ruilin in H1 2012 has delivered a one-off government subsidy of RMB7.6 million and is expected to generate cost savings of RMB20 million per annum for the Company

Outlook

·; The global crude oil price is expected to remain under pressure in H2 as a result of oversupply. Domestic demand for refined products is expected to recover and help to improve the earnings of refineries

·; Recovery of the refining industry will benefit the downstream speciality chemicals business. The performance of the salt chemicals business is expected to remain strong in H2

·; Market demand for biochemical preparations is expected to increase. Demand for heparin sodium and Enoxaparin sodium is expected to remain strong despite the price fall

·; Performance stabilised in Q3. Full year earnings are largely dependent on the recovery of the refinery industry and Q4 performance

Mr. Xiaohong Yang, Executive Chairman, said:

"The first half performance was disappointing. Weakness in the global and domestic economy has presented us with a challenge and squeezed the profitability of most of our existing products. We expect the second half performance to recover following stabilisation of the macro economies and a rebound in cyclical industries.

Our core focus has been to tighten costs and improve intra-group synergies. The buyout of Hi-Tech Ruilin was a positive step towards enhancing synergies between our two refineries as well as consolidating the existing operations. In addition, our strategy of moving to the less regulated and more profitable chemicals business continues. By growing the higher margin business, our overall performance can be further improved."

For further information please contact:

CHAIRMAN'S STATEMENT

2012 is proving to be a tough year for the refining industry. A sudden drop in the price of crude oil in Q2 dampened the selling price of refined products but had no effect on the existing feedstock cost. This has made the cost of existing feedstock relatively more expensive, and as a consequence, many Chinese refineries made a loss in H1 2012.

HaiKe's turnover in H1 2012 was RMB5,411.7 million, comparable to that in H1 2011. Turnover mix changed slightly: the Chemical division accounted for 13.3% of total turnover (H1 2011: 12.7%) while the refinery division's proportion decreased to 86.7% from 87.3% last year. This is consistent with our strategic move to the downstream chemical industry. Net loss for the period was RMB212.8 million (H1 2011: profit of RMB46.2 million). The loss came from the refinery division with a total of RMB221.7 million incurred. On the other hand, HaiKe's chemical division remained profitable although profits decreased to RMB25.4 million (H1 2011: RMB50.4 million).

HaiKe continues to make progress in its strategic move towards speciality chemicals, as well as in improving intra-group synergies. The new subsidiary, Hebang, which commenced commercial operation in late March of this year, is currently breaking even at gross margin level in line with expectations and the contribution from the second phase projects is expected to improve its earnings. The buyout of Hi-Tech Ruilin is likely to deliver further intra-group synergies and enhance medium to long term performance.

1. Review of operating results

(1) Refinery

During the first half of 2012, due to the weakening global economy and geopolitical concerns, the international crude oil price continued to fluctuate significantly, increasing in Q1 and decreasing in Q2. During the six months period, Brent crude oil price averaged approximately $100 per barrel, a 9% decrease year-on-year, while WTI crude oil price averaged approximately $84 per barrel, a 14% decrease year-on-year.

According to information supplied by the State Statistics Bureau, in H1 2012 domestic crude oil output increased by 1.6% year-on-year to 100.6 million tons. Net crude oil imports amounted to 140 million tons in H1 2012, representing an increase of 11.1% as compared with H1 2011; value reached US$118.4 billion, a 24.4% increase year-on-year. A total of 228.9 million tons of crude oil was processed, an increase of 1.7% year-on-year.

Domestic demand for refined products continued to grow in H1 2012, but at a lower rate. According to the State Statistics Bureau, consumption of domestic refined products was 135.3 million tons in H1 2012, a 4.8% growth year-on-year, however, H1 2011 showed a growth rate of 10.0%. Consumption of gasoline grew 10.4% year-on-year while diesel grew 2.1% year-on-year.

The National Development and Reform Commission ("NDRC") made adjustments to the domestic prices of refined products four times in H1 2012, two upward adjustments in Q1 and two downward adjustments in Q2, with a net increase of RMB40 and RMB80 per ton for gasoline and diesel respectively. The slight increase in selling price was unable to compensate for the shortfall of the utilisation rate, and as a consequence, many Chinese refineries incurred a loss in H1 2012.

During the period under review, the Company produced approximately 540,000 tons of gasoline, diesel, Liquefied Petroleum Gas ("LPG") and petroleum coke, a decline of 8.7% year-on-year. Average realised price grew by 7.1% year-on-year which was mainly driven by the price of diesel and gasoline.

Turnover from the refinery division fell slightly by 1.1% to RMB4,694.5 million for the six months ended 30 June 2012 (H1 2011: RMB4,748.3 million). Loss from the refinery division was RMB221.7 million, compared with a profit of RMB8.7 million in H1 2011. The loss was mainly attributable to a lower utilisation rate, lower selling price and depressed sales of refined products, especially diesel, as a consequence of sluggish domestic and global market conditions.

During the period, the Company bought out the remaining 26% minority interest in one of its major subsidiaries, Hi-Tech Ruilin, for a total consideration of RMB121 million. This acquisition enables HaiKe to enhance its intra-group synergies, further improve the operational efficiencies and the Board expects this to benefit the Company's overall performance in the medium to long term.

There were breakthroughs on technological innovation in H1 2012: Hi-Tech Ruilin's "Dry Gas Recovery" technique, which substitutes fuel coal outsourced with self-generated dry gas, was rewarded a one-off government subsidy of RMB7.6 million by the National Development and Reform Commission. This new technique is expected to generate cost savings of RMB20 million per annum for the Company.

(2) Speciality/salt chemical products

During the first half of 2012, the market for speciality and salt chemical products has grown in volume but fallen in price. Volume growth was driven by strong domestic demand while the price drop was the result of a crude oil price decrease.

In the first half of 2012, the Group sold 57 thousand tons of speciality chemicals and 250 thousand tons of salt chemical products, representing a volume increase of 8.9% and 3.4% respectively compared to the same period in the previous year. Meanwhile, the average price for speciality and salt chemical products fell by 11.4% and 10.0% respectively.

Dongying Hebang Chemical Co., Ltd. ("Hebang"), which produces speciality and salt chemical products, commenced commercial operations in late March of this year. The sale of its first product, Trichloroethylene ("TCE"), was disappointing in Q2 due to a sluggish market demand. Hebang is currently breaking even at the gross margin level.

Turnover from speciality/salt chemical products was comparable at RMB601.0 million for the six months ended 30 June 2012 (H1 2011: RMB605.9 million). Operating margins decreased dramatically to 0.6% from 7.6% in the previous year as a result of price drops and a negative contribution from Hebang. Profit from speciality/salt chemical products in H1 2012 was RMB3.4 million (H1 2011: RMB46.3 million).

(3) Biochemical

Heparin sodium and Enoxaparin sodium continued to record volume growth however prices fell during the period. Sales volume of heparin sodium doubled in H1 2012 while that of Enoxaparin sodium grew nearly 50% year-on-year. The price of heparin sodium and Enoxaparin sodium fell by 14.7% and 17.4% respectively year-on-year.

Turnover from biochemical products grew by 33.9% to RMB116.2 million in H1 2012 (H1 2011: RMB86.8million). The operating margin surged to 18.9% (H1 2011: 4.6%). Profit from biochemical products increased substantially to RMB22.0 million (H1 2011: RMB4.0million).

2. Financial Analysis

Turnover

The Group's sales turnover fell slightly by 0.5% in the first half of 2012 to RMB5,411.7 million (H1 2011: RMB5,441.0 million) which was mainly driven by a sales volume decrease in the refinery division. Specifically, turnover of the refinery division fell by 1.1% year-on-year while that of chemicals grew 3.5% year-on-year.

Gross Profit

Gross profit was RMB64.0 million for the six months ended 30 June 2012, compared with RMB248.3 million for the same period in 2011. The significant decrease was mainly attributable to a volume drop in the refinery division and price loss in the speciality and salt chemical division.

Selling, General and Administrative Expenses

Selling and distribution expenses increased by 50.4% to RMB38.7 million for the six months ended 30 June 2012 (H1 2011: RMB25.7 million) due to more aggressive sales and marketing efforts under sluggish market conditions. General and administrative expenses increased by 38.1% to RMB106.3 million (H1 2011: RMB77.0 million) due to increased expenses on payroll and a one-off internal departmental restructuring expense.

Net Interest Expenses

Interest income decreased by 44.0% year-on-year to RMB12.3 million for the six months ended 30 June 2012 (H1 2011: RMB22.0 million) due to lower income from investment of cash surplus as a consequence of lower average cash reserves.

Interest expenses increased by 11.3% year-on-year to RMB136.5 million for the six months ended 30 June 2012 (H1 2011: RMB122.7 million). The increase in interest expenses was mainly attributable to (1) the increase in average bank loan balances; (2) increase in bank charges on discounting bank notes etc.

Loss Before Taxation

Loss before taxation was RMB203.2 million for the six months ended 30 June 2012, compared to a profit of RMB53.2 million for the same period in the previous year.

Income Tax

Income tax charge was RMB9.5 million for the six months ended 30 June 2012 as compared to RMB7.0 million for the same period in the previous year. The increase in tax charge was mainly driven by higher profits made in Tiandong.

Loss for the year

Loss for the year was RMB212.8 million for the six months ended 30 June 2012 (H1 2011: profit of RMB46.2 million).

Loss attributable to non-controlling interest of the Company

The loss attributable to minority interests was RMB42.6 million for the six months ended 30 June 2012 (H1 2011: profit of RMB22.5 million). The loss attributable to minority interests was due to the loss made in Hi-Tech Ruilin in H1 2012.

Loss attributable to owners of the Company

Due to the composite effects described above, the loss attributable to the owners of the Company was RMB170.2 million for the six months ended 30 June 2012 (H1 2012: profit of RMB23.7 million).

Cash and cash equivalents

Cash and cash equivalents increased to RMB525.0 million as at 30 June 2012 compared to RMB210.0 million as at 31 December 2011. The increase in cash and cash equivalents was mainly due to the decrease in restricted cash as a result of more alternative financing measures (i.e. bank notes etc) employed.

Bank loans

Bank loans increased to RMB4,842.5 million as at 30 June 2012 compared to RMB3,853.3 million as at 31 December 2011. The short-term portion of bank loans increased by RMB1,043.6 million while the long-term portion decreased by RMB54.3 million. The increase in bank loans was mainly due to increased financing demand for capital expenditure in constructing Hebang.

Cash flow from operating activities

Cash flow from operating activities was negative at RMB373.0 million for the six months ended 30 June 2012 as compared to a negative cash flow of RMB89.2 million for the same period in the previous year. This was mainly attributable to deteriorated earnings.

3. Outlook

(1) Refinery

We do not anticipate an immediate rebound in the global economy. Furthermore we believe the crude oil price will remain under pressure in H2 but that prices of feedstock and refined products will bottom out. Based on these assumptions, we expect the performance of the refinery division in H2 to be marginally better than that in H1.

Concerns over the European sovereign debt crisis and China's economic growth rate, as well as global crude oil oversupply, has depressed oil prices since Q2. Despite the sluggish global economy, OPEC continued to raise its output. It is estimated that for the time being, supply has exceeded demand by 1 million barrels per day. Meanwhile commercial stock in the US has been built up and reached a historic 385 million barrels during the five years period to 2012. Our research indicates that as a consequence, most institutions anticipate the oil price to fluctuate between $110-120 for Brent and $90-110 for WTI in H2 2012.

Domestically, China's oil processing capacity reached 560 million tons at the end of 2011, ranking it second in the world. It is expected to expand by a further 350 million tons in the next three years. On the other hand, we expected demand for refined products to recover in H2 2012 as the Chinese economy bottoms out or stabilises and major indicators, e.g. the unemployment rate, consumer price index and purchase manager index etc, are expected to outperform previous market forecasts.

(2) Speciality/salt chemical products

The recovery of the petrochemical industry will benefit downstream speciality chemicals. In addition to taking advantage of the industry cyclical rebound, the Company continues to focus on technological innovation to further reduce costs; improving product mix to focus more on higher-end products, e.g. medical grade propylene glycol and electronic grade isopropyl alcohol etc; enhancing profitability; and strengthening our sales and marketing efforts.

The performance of salt chemicals is expected to remain strong in H2. The Group is in the second phase of constructing Hebang, which will see the introduction of other products, one of which will be caustic soda. This historically has been a profitable product for the Group, and has the potential to improve Hebang's earnings performance, and deliver intra-group synergies, e.g. the hydrogen generated during production of caustic soda can be used in the hydrogenation of refined oil.

(3) Biochemical products

Market demand for the preparation of biochemical products is set to increase whilst fierce competition has forced the price of preparation to fall. Lower prices have increased market demand. Additionally it is expected that biochemicals demand is estimated to show a CAGR of 30% in the domestic market and 10% in the global market.

Market demand for heparin sodium and Enoxaparin sodium is expected to remain strong despite the fall in price. Strong demand is driven by increased capacity of the downstream preparation sector while the price fall is mainly due to fierce competition from both domestic and global rivals.

The Group continues to actively seek a stable supply of raw materials, to expand its customer base, and to accelerate the application process for GMP and FDA certification in order to strengthen the encouraging performance of biochemicals.

(4) Prospects

The Group's performance stabilised in July and August. The Group showed a small profit in each month. This was mainly attributable to a turnaround at Hi-Tech Chemical which was profitable in July and August compared with losses incurred in H1 2012. This followed a major managerial staff rotation during the recent intra-group restructuring with a view to adopting a more streamline approach.

In addition, we expect continued technological innovation and more aggressive marketing measures, together with the newly launched ERP system, to benefit the Group in H2. 

The Group's earnings performance remains largely dependent on the refinery division, while Q4 remains key to the full year performance. The performance remains sensitive to the movements of feedstock prices (especially fuel and residual oil price) and retail prices for refined products.

4. Dividend policy

We recognise the importance of the payment of dividends to our shareholders and the need for a transparent policy which is fair and reflects the Company's financial position. We intend to make dividend payments which reflect the net profit attributable to the shareholders of the Company. The new dividend policy adopted by the Board is intended to be a progressive one and is expected to be declared on an annual basis.

Xiaohong Yang

Executive Chairman

Consolidated statement of comprehensive income

For the six months ended 30 June 2012

Consolidated Statement of Financial Position

As at 30 June 2012

Consolidated Statement of Cash Flow

For the 6 months ended 30 June 2012

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL INFORMATION

FOR SIX MONTHS ENDED 30 JUNE 2012

(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 principal activity of the Company is that of investment holding. The Company's ultimate parent company is Hi-Tech Chemical Investment Limited, a company incorporated in the British Virgin Islands.

The principal activities of the Company are manufacturing of petrochemical and chemical products.

The principal place of business of the Company is West of Boxin Road, Shikou County, Dongying City, Shandong Province, China.

The interim consolidated financial information of the Company for the six months ended 30 June 2012 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 2012.

Financial information for the six months ended 30 June 2012 and 30 June 2011 is unaudited and does not constitute the Company's financial statements for these periods.

Comparative financial information for the full year ended 31 December 2011 has been derived from the audited financial statements for that period. The Board of Directors approved the interim statements on 6 September 2012.

3. Segmental information

a) Operating segment

The following table presents revenue and profit or loss from the Group's operating segments for the financial periods ended 30 June 2012 and 30 June 2011, and for the financial year ended 31 December 2011.

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

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

3. Segmental information (Cont'd)

b) Geographical information

The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods or services.

4. 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: