Half Yearly Report

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ASIAN CITRUS HOLDINGS LIMITED

亞洲果業控股有限公司*

(Incorporated in Bermuda with limited liability)

(Stock Code: HKSE: 73; AIM: ACHL)

ANNOUNCEMENT OF THE INTERIM RESULTS

FoR THE SIX MONTHS ENDED 31 DECEMBER 2015

The board of directors (the "Board") of Asian Citrus Holdings Limited (the "Company" or "Asian Citrus") announces the unaudited consolidated results of the Company and its subsidiaries (collectively, the "Group") for the six months ended 31 December 2015 together with its comparative figures for the six months ended 31 December 2014.

Results Highlights

* For identification purpose only

** Conversion at £1 = RMB9.71 and RMB9.66 for the six months ended 31 December 2015 and 2014 respectively for reference only.

# Adjusted core financial information refers to activities for the period excluding change in fair value of biological assets, impairment of biological assets, impairment of property, plant and equipment, impairment of intangible assets and share-based payments.

RESULTS HIGHLIGHTS (Continued)

l Results of operations for the first half year are as follows:

- Total orange production decreased by 86.0% to 15,565 tonnes due to (i) the dramatic impact of the Huanglongbing disease infection at Xinfeng Plantation; and (ii) the impact of poor weather in Hepu area (six months ended 31 December 2014: 110,993 tonnes).

- Revenue down by 33.7% to RMB387.2 million (six months ended 31 December 2014: RMB584.4 million).

- Adjusted core loss attributable to shareholders of RMB522.1 million (six months ended 31 December 2014: RMB193.0 million) reflecting (i) the reduction in production volume and average selling price of winter oranges; (ii) the additional cost of pesticides to prevent the spread of the Huanglongbing disease and protect the unaffected orange trees; and (iii) the reduction in profit margin of the processed fruit business.

- Net operating activities cash outflow of RMB223.8 million (six months ended 31 December 2014: RMB70.5 million) and cash and cash equivalents of RMB521.4 million as at 31 December 2015 (31 December 2014: RMB1,528.2 million).

l Xinfeng Plantation is no longer economically productive due to the massive infection of Huanglongbing disease and the present uncertainties over the effectiveness of the control measures to prevent the spread of Huanglongbing disease. It ceased operations permanently after completion of the winter orange harvest in December 2015.

l In view of the Group's net loss for the period, the Board does not recommend the payment of any interim dividend for the six months ended 31 December 2015 (six months ended 31 December 2014: Nil).

CHAIRMAN'S STATEMENT

On behalf of the Board, I wish to report to you the developments of the Group for the six months ended 31 December 2015, as well as our plan and outlook for the year ending 30 June 2016 and beyond.

The operating environment of the Group has been difficult in the past few years with adverse weather conditions and the devastating effects of Huanglongbing disease posing significant challenges to the business and financial operations of the Group. We suffered significant losses resulting from decreasing production yields and increasing margin pressures in our Hepu Plantation and Xinfeng Plantation during the six months ended 31 December 2015. Xinfeng Plantation was shut down after the winter harvest in December 2015 as a consequence of the widespread Huanglongbing disease suffered at the plantation leading to substantial impairment losses and provisions relating to the cessation of operation.

The processed fruit business, which involves the manufacture and sale of fruit juice concentrates, purees and frozen fruit and vegetables also reported a loss for the first half year as a result of lower utilisation rates and the increased cost of materials.

While it is still early in the financial year to fully judge the full impact of the challenges highlighted above on the Group's likely full year performance, we anticipate that conditions in the second half will continue to be demanding.

With that in view, we have promptly adjusted our business strategies and will actively consolidate our business. We shall focus on improving efficiency and utilisation of all our assets as well as the implementation of the cost control program to reduce the operating costs of the Group. All these measures will enable the Group to reallocate its resources to strengthen its core operations and improve its operational efficiency and profitability.

Moving forward, the Group will seek to identify attractive investment and acquisition opportunities, so as to enhance profitability and maximise our shareholders' value. We keep an open mind when exploring new opportunities, but will only invest in high potential projects on a selective and prudent basis, without compromising the financial stability of the Group.

Given the result of the first half year, the Board has decided not to pay an interim dividend. Our existing dividend policy, which stipulates a dividend of not less than 30% of our adjusted core net profit, remains unchanged.

Finally, I would like to take this opportunity to express my heartfelt gratitude to my fellow directors, management and all staff for the hard work and dedication in supporting the development of the Group, and the shareholders for their continuing support and confidence in the Group.

Ng Ong Nee

Chairman

26 February 2016

MANAGEMENT DISCUSSION AND ANALYSIS

OPERATING PERFORMANCE

Revenue

The breakdown of revenue by type is as follows:

Sales of oranges

Revenue from the sale of oranges decreased by approximately 89.2% to RMB36.8 million for the six months ended 31 December 2015. This was mainly due to a decrease of approximately 86.0% in the production yield to 15,565 tonnes (six months ended 31 December 2014: 110,993 tonnes) and an approximate decrease in average selling price of 23.0%.

The production yield from Hepu Plantation decreased by approximately 34.6% from 7,146 tonnes for the corresponding period of last year to 4,671 tonnes for the six months ended 31 December 2015. The decrease in production was mainly due to the impact of poor weather.

The production yield from Xinfeng Plantation decreased by approximately 89.5% from 103,847 tonnes for the corresponding period of last year to 10,894 tonnes for the six months ended 31 December 2015, reflecting the dramatic impact of the Huanglongbing disease infection. As previously announced, Xinfeng Plantation ceased operation permanently after completion of the winter orange harvest in December 2015.

The following table sets out the average selling prices of winter oranges in different plantations:

The average selling price of the winter orange crop in Hepu Plantation increased by approximately 3.0% for the six months ended 31 December 2015. However, the average selling price at Xinfeng Plantation was approximately 23.6% lower than the corresponding period of last year, reflecting the poor quality of oranges infected by Huanglongbing disease.

All of the Group's oranges were sold on the domestic market. The Group's customers can be classified into three categories, namely supermarket chains, corporate customers and wholesale customers. The breakdown of sales revenue by type of customer is as follows:

For the six months ended 31 December 2015, the proportion of oranges sold to wholesalers reflected the poor quality of oranges at both Hepu Plantation and Xinfeng Plantation.

The Group sells two types of oranges to customers, namely ungraded oranges and graded oranges. Ungraded oranges are packaged and customers are required to arrange for the transportation at their own expense. Generally, ungraded oranges are sold to wholesale customers. Graded oranges are oranges that the Group grades, packages and delivers to customers at the Group's cost, usually to supermarket chains and some corporate customers. The graded oranges are branded under our label "Royal Star", at a premium price compared to the ungraded oranges. The sales breakdown of the types of oranges is as follows:

Sales of processed fruit

The table below sets out the volume and revenue from the sales of processed fruit:

The Group has three fruit processing plants in the People's Republic of China (the "PRC"), which are located in Beihai City, Hepu County and Baise City, Guangxi ("BPG"). BPG processes over 22 different types of tropical fruit, including pineapples, passion fruit, lychees, mangoes and papayas (only products that account for over 10% of the revenue from the sales of processed fruit are shown in the table above).

Revenue derived from the sales of processed fruit increased by approximately 36.1% to approximately RMB331.2 million for the six months ended 31 December 2015, mainly due to increased sales of pineapple juice concentrates, frozen mango and fruit juice trading. The sales volume of processed fruit increased by approximately 18.3% from 23,952 tonnes for the corresponding period of last year to 28,329 tonnes for the six months ended 31 December 2015.

The average utilisation rate of BPG was approximately 70.4% for the six months ended 31 December 2015 (six month ended 31 December 2014: 82.9%).

Sales of bananas

The first crop of banana trees was harvested in the third quarter of 2015. The production yield and the average selling price of bananas were 5,931 tonnes and RMB3,146 per tonne respectively for the six months ended 31 December 2015.

Sales of self-bred saplings

For the six months ended 31 December 2015, approximately RMB564,000 was generated from the sales of 50,484 self-bred saplings to local farmers (six months ended 31 December 2014: nil).

Cost of sales

The breakdown of the Group's cost of sales is as follows:

Cost of sales of oranges consists of raw materials such as fertilisers, packaging materials, pesticides and other direct costs such as direct labour, depreciation and production overheads. Cost of sales was RMB485.5 million and the unit cost of production in Hepu Plantation and Xinfeng Plantation increased significantly to approximately RMB20.74 per kg and RMB35.67 per kg respectively for the six months ended 31 December 2015 (six months ended 31 December 2014: RMB12.02 per kg and RMB4.03 per kg respectively) as impacted by the significant drop in production yield in both plantations and the need to apply additional pesticides to prevent the spread of the Huanglongbing disease and protect the unaffected orange trees. 

Cost of sales of processed fruit mainly includes the costs of raw material fruit and packaging materials and other direct costs such as direct labour and production overheads. For the six months ended 31 December 2015, the cost of sales of processed fruit increased by approximately 53.0% from approximately RMB213.0 million to RMB325.8 million, mainly due to the increase in sales volume of processed fruit and juice trading.

Cost of bananas mainly includes the fertilisers, packaging materials, pesticides and other direct costs such as direct labour, depreciation and production overheads. The cost of sales of bananas and unit cost were RMB15.6 million and RMB2.62 per kg respectively for the six months ended 31 December 2015.

Gross loss

The Group recorded an overall gross loss of approximately RMB440.7 million for the six months ended 31 December 2015 compared to the gross loss of approximately RMB132.9 million for the last corresponding period. The overall gross loss margin was 113.8% for the six months ended 31 December 2015 compared to the gross loss margin of 22.7% for the last corresponding period.

The following table sets out a breakdown of the Group's gross loss margin by plantation:

The increase in gross loss margin was mainly due to (i) the increase in unit cost of production as a result of approximately 86.0% decrease of the total production yield of the winter orange crop and the increase in costs of additional pesticides for the prevention of the spread of the Huanglongbing disease in Xinfeng Plantation; and (ii) the average selling price of the winter orange crop in Xinfeng Plantation decreasing by approximately 23.6%.

The following table sets out a breakdown of the Group's gross (loss)/profit margin by business:

For BPG, the gross profit margin for the six months ended 31 December 2015 decreased to approximately 1.6% compared to 12.5% for the corresponding period of last year. The decrease was mainly due to (i) increased cost of raw materials, such as the increase in average purchase costs of mango by 17.8% to RMB2.52 per kg (six months ended 31 December 2014: RMB2.14 per kg) and (ii) increased labour costs.

Change in fair value of biological assets

The Group recognised a loss of RMB190.0 million from an adjustment in the fair value of biological assets for the six months ended 31 December 2015, compared to a loss of RMB40 million for the corresponding period of last year. The loss was mainly due to the decrease in production yield and increased cost of sales of both winter and summer oranges. The Board wishes to emphasise that the change in fair value of biological assets is non-operational and does not have any effect on the cash flow of the Group for the six months ended 31 December 2015. Further details regarding the valuation of the biological assets are set out on pages 14 to 16.

Selling and distribution expenses

Selling and distribution expenses comprise mainly advertising, staff commission, salaries and welfare of sales personnel, traveling and transportation expenses. The selling and distribution expenses of the Group decreased by 55.5% from approximately RMB19.7 million for the corresponding period of last year to approximately RMB8.8 million for the six months ended 31 December 2015, mainly due to a decrease in advertising expenses, sales commission and transportation costs resulting from a decrease in revenue from sales of oranges.

General and administrative expenses

General and administrative expenses comprise mainly salaries, office administration expenses, depreciation, amortisation, and research costs. The general and administrative expenses of the Group increased by 59.7% from approximately RMB59.8 million for the corresponding period of the year to approximately RMB95.5 million for the six months ended 31 December 2015, mainly due to the write off of inventories caused by the deterioration of juice concentrates in cold storage induced by a temporary suspension of the electricity supply, research costs incurred by the processed fruit business and the loss on disposal of plant and machinery for the period.

Other operating expenses

For the six months ended 31 December 2015, the Group's other operating expenses included impairment losses of (i) approximately RMB851.9 million on the property, plant and equipment and biological assets relating to the closure of Xinfeng Plantation and; (ii) approximately RMB45.2 million on intangible assets in respect of the capitalised development costs incurred for both Hepu Plantation and BPG (six months ended 31 December 2014: RMB488,000 relating to write off of inventories resulting from the damage caused by Typhoon Rammasun in July 2014).

Loss attributable to shareholders for the period

The loss attributable to shareholders for the six months ended 31 December 2015 was approximately RMB1,616.3 million, compared to a loss of approximately RMB236.4 million for the previous year's corresponding period, representing an increase of approximately 583.7%.

The adjusted core loss attributable to shareholders, which refers to the loss for the period excluding the change in fair value of biological assets, impairment losses on biological assets, impairment losses on property, plant and equipment, impairment losses on intangible assets and share-based payments for the six months ended 31 December 2015 was approximately RMB522.1 million, compared to the adjusted core loss of approximately RMB193.0 million for the corresponding period of last year, representing an increase of approximately 170.5%.

DIVIDENDS

In view of the Group's net loss for the period, the Board does not recommend the payment of any dividend for the six months ended 31 December 2015 (six months ended 31 December 2014: Nil). Our existing dividend policy, which stipulates a dividend of not less than 30% of our adjusted core net profit, remains unchanged.

CAPITAL STRUCTURE

As at 31 December 2015 there were 1,249,637,884 shares in issue. Based on the closing price of HK$0.89 as at 31 December 2015, the market capitalisation of the Company was approximately HK$1,112.2 million (approximately GBP97.1 million).

HUMAN RESOURCES

The Group had a total of 1,073 employees (excluding directors) as at 31 December 2015 (31 December 2014: 1,865 employees), and staff costs for the six months ended 31 December 2015 were approximately RMB67.8 million (six months ended 31 December 2014: RMB83.0 million). The Group aims to attract, retain and motivate high calibre individuals with competitive remuneration packages. Remuneration packages are performance-linked and business performance, market practices and competitive market conditions are all taken into consideration in calculating remuneration. Remuneration packages, which are reviewed annually, include salaries/wages and other employee benefits, such as discretionary bonuses, mandatory provident fund contributions and share options.

Liquidity

The current ratio and quick ratio were 6.48 and 4.78 respectively. Despite the fall in these ratios from the prior year, the liquidity of the Group remained healthy with sufficient reserves for both current operations and future development.

Profitability

The asset turnover of the Group for the six months ended 31 December 2015 was approximately 0.11 (six months ended 31 December 2014: 0.10).

The basic loss per share for the six months ended 31 December 2015 was approximately RMB1.29 (six months ended 31 December 2014: RMB0.19).

The adjusted core net loss per share for the six months ended 31 December 2015 was approximately RMB0.42 (six months ended 31 December 2014: RMB0.15).

Debt ratio

The net cash position of the Group was approximately RMB521.4 million as at 31 December 2015 (30 June 2015: 937.6 million).

Internal cash resource

The Group's funding resource is internal cash and cash equivalents. The Group did not have any outstanding borrowings as at 31 December 2015.

Charge on assets and contingent liabilities

Except for certain farmland infrastructure and machinery of RMB665,000 as disclosed in note 12 to the condensed consolidated financial statements, none of the Group's assets were pledged as security. The Group did not have any material contingent liabilities as at 31 December 2015.

Capital commitments

As at 31 December 2015, the Group had capital commitments of approximately RMB10.9 million, mainly in relation to the acquisition of plant and machinery of BPG.

Foreign exchange risk

The Group is exposed to currency risk, primarily through its cash and cash equivalents that are denominated in a currency other than the functional currency of the operation to which they relate. The currencies giving rise to this risk are primarily Hong Kong dollars, United States dollars and British pounds.

The Group has limited transactions denominated in foreign currencies, hence exposure to exchange rate fluctuation is minimal. The Group currently does not use any derivative contracts to hedge against its exposure to currency risk. Management manages its currency risk by closely monitoring the movement of the foreign currency rate.

PLANTATIONS

Xinfeng Plantation ceased operation permanently due to widespread of Huanglongbing disease after completion of the winter orange harvest in December 2015.

Following the closure of Xinfeng Plantation, the Group has two orange plantations in the PRC occupying approximately 99,000 mu (equivalent to approximately 66 sq.km.) of land in total, with (i) approximately 46,000 mu (equivalent to approximately 30.7 sq.km.) located in the Hepu County of the Guangxi Zhuang Autonomous Region, Hepu Plantation, and (ii) approximately 53,000 mu (equivalent to approximately 35.3 sq.km.) in the Dao County of the Hunan province, Hunan Plantation.

Hepu Plantation

Hepu Plantation is fully planted and comprises of approximately 1.2 million orange trees and 221,769 banana trees.

Hunan Plantation

Hunan Plantation is fully planted and comprises approximately 1.05 million summer orange trees and approximately 750,320 grapefruit trees.

The tables below set out the age profile as at 31 December 2015 and the production yield of the plantations for the six months ended 31 December 2015:

Summer orange trees

Grapefruit trees

Note: Grapefruit is a type of citrus fruit and is harvested during the winter period in the PRC.

Banana trees

Winter orange trees

# Xinfeng Plantation is no longer economically productive due to the massive infection of Huanglongbing disease and has been shut down with operations ceasing permanently after completion of the winter orange harvest in December 2015; 1,284,724 citrus trees therein were then fully impaired.

The tables below set out the age profile as at 31 December 2014 and the production yield of the plantations for the six months ended 31 December 2014:

Summer orange trees

Grapefruit trees

Note: Grapefruit is a type of citrus fruit and is harvested during the winter period in the PRC.

Banana trees

Winter orange trees

VALUATION OF BIOLOGICAL ASSETS

Qualification of valuer

The Group engaged LCH (Asia-Pacific) Surveyors Limited (the "Valuer"), an independent valuer, to perform a valuation on the fair value of the orange trees less costs to sell as at 31 December 2015.

The Valuer is a firm of qualified professional surveyors and international valuation consultants with over 20 years of valuation experience. The Valuer has staff who are members of the Hong Kong Institute of Surveyors ("HKIS") with recent experience in the valuation of biological assets. The project leader of the Valuer (the "Project Leader") in charge of this valuation exercise has been involved in the provision of similar services for over 8 years and is a member of the HKIS. The Project Leader is also a valuer on the "List of Property Valuers for Undertaking Valuation for Incorporation of Reference in Listing Particulars and Circular and Valuations in Connection with Takeovers and Mergers" published by the HKIS. After due consideration of the experience and credentials of the Valuer, the Directors of the Company are satisfied that the Valuer is competent to assess the valuation of the Group's biological assets. Further, after reasonable enquiry with the Directors of the Company, the Directors of the Company are satisfied that the Valuer is independent from the Directors of the Company.

Physical inspection of biological assets

The Valuer has not conducted physical field inspection at Hepu Plantation for the valuation of the orange trees as at 31 December 2015, but has relied on the previous field inspection records in relation to the biological assets in July 2015 to verify the physical existence and quality of the biological assets. In the previous inspection, random sampling on every subzone has been conducted to check the reasonableness of the quantities in the subzone. The Valuer measured the tree spacing and counted the tree numbers on an area of, on a when and where appropriate basis, 50m x 50m in the sampling points. In every subzone, 3 to 8 sampling points (depending on the area of the subzone) were selected while in each sampling point, 10 to 20 trees were selected for detailed tree study. A total of 315 sample trees in Hepu Plantation have been studied.

Valuation methodology

The valuations of the Group's orange trees were calculated using the discounted cash flow technique. The market-derived discount rate applied to the discounted cash flow model is based on the Capital Asset Pricing Model. The Valuer began with the appraised value of the Group's orange trees by discounting the future income streams attributable to the Group's orange trees to arrive at a present value and then deducted the value of machinery and equipment and other assets (including plantation related machinery and equipment and land improvements) from the appraised value which are employed in the operation of Hepu Plantation to arrive at a fair value of the orange trees.

Major assumptions

The discounted cash flow method adopted a number of key assumptions, which include the discount rate, market prices of oranges, production yield per tree and related production costs. The values of such variables were determined by the Valuer using information supplied by the Group, as well as proprietary and third-party data, as follows:

1) The discount rate applied for the six months ended 31 December 2015 was 18.0% (31 December 2014: 18.0%). The discount rate reflected the expected market return on the asset and can be affected by the interest rate, market sentiments and risk of the asset versus the general market risk. Comparable listed companies which engage in similar agricultural or fruit businesses have been referred to when determining the risk of the asset versus the general market risk.

2) The yield per tree variables represent the harvest level of the orange trees. The yield of orange trees is affected by the age, species and health of the orange trees, the climate, location, soil conditions, topography and infrastructure. In general, yield per tree increases from age 3 to 15, remains stable for about 10 years, and then starts to decline from age 25 to 35.

3) The market prices variables represent the assumed market price for the summer oranges and winter oranges produced by the Group. The Valuer adopted the historical market sales prices for each type of orange produced by the Group as the basis of sales price estimate. The wholesale prices per tonne of winter and summer oranges from Hepu Plantation prevailing as at 31 December 2015 were RMB2,380 and RMB3,620 respectively (31 December 2014: RMB2,310 and RMB5,150 respectively); the supermarket selling prices per tonne of winter and summer oranges from Hepu Plantation prevailing as at 31 December 2015 were RMB5,320 and RMB7,030 respectively (31 December 2014: RMB5,320 and RMB7,030 respectively). The market prices are assumed to increase by 3.0% per annum, taking into account to the historical inflation rate in the PRC.

4) The direct production cost variables represent the direct costs necessary to bring the oranges to their sales form, which mainly include raw material costs and direct labour costs. The direct production cost variables are determined by reference to actual costs incurred for areas that have been previously harvested, and have taken into account the projected long-term inflation rate of 3.0% per annum.

Sensitivity analysis

1) Changes in the discount rate applied result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to an increase or decrease of 1.0% in the discount rate of 18.0% applied by the Valuer for the six months ended 31 December 2015:

2) Changes in the yield per orange tree can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the yield per tree applied for the six months ended 31 December 2015:

3) Changes in assumed market prices of the oranges can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the assumed market prices of oranges used to calculate the changes in fair value of orange trees less costs to sell for the six months ended 31 December 2015:

4) Changes in the assumed cost of sales can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the Group's assumed cost of sales used to calculate the changes in fair value of orange trees less costs to sell for the six months ended 31 December 2015:

The above sensitivity analyses are intended for illustrative purposes only, and any variation could exceed the amounts shown above.

Valuation

According to the valuation report of the Valuer, the aggregate value of the orange trees in Hepu Plantation as at 31 December 2015 was estimated to be approximately RMB320 million (30 June 2015: RMB780 million, included the orange trees in Hepu Plantation and Xinfeng Plantation).

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the six months ended 31 December 2015

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the six months ended 31 December 2015