Half Yearly Report

HAIKE CHEMICAL GROUP LIMITED

INTERIM CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2013

(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, today announces its unaudited consolidated results for the six months ended 30 June 2013.

Financial highlights

· Total revenues increased to RMB14,408.4 million (H1 2012: RMB5,411.7 million)

· Turnover from refinery division increased by RMB6,220.9 million to RMB10,915.4 million (H1 2012: RMB4,694.5 million), representing 75.8% of total revenues (H1 2012: 86.7%)

· Turnover from the chemical division increased by RMB2,775.7 million to RMB3,493.0 million (H1 2012: RMB717.3 million), and accounted for 24.2% of total revenues (H1 2012: 13.3%)

· Gross profit decreased by 32.7% to RMB43.1 million (H1 2012: RMB64.0 million)

· Loss from operations was RMB198.8 million (H1 2012: - RMB79.0 million)

· As previously indicated, loss for the period was RMB326.6 million (H1 2012: -RMB212.8 million)

Operational highlights

· Refinery division incurred large losses due to low utilisation rate as a result of unfavorable feedstock prices

· To compensate for the shortfall in utilisation rates, the Group increased trading of refined products and speciality chemicals which increased the overall revenues

· The Company enhanced alternative financing on the back of increased trading which has reduced the overall effective interest rate

· Dongying Hebang Chemical Co., Ltd. ("Hebang") launched two new products, caustic soda and epichlorohydrin, and is considering launching additional new products to enhance profit

· Shandong Hi-Tech Shengli Electrochemical Co., Ltd. ("Hi-Tech Shengli") ceased production and began, as part of a fully funded Government initiative, to relocate to Dongying Port in May 2013. Part of its assets and business will be combined with Hebang

Outlook

· The prospect of a global economic recovery remain uncertain, whilst recovery of developed economies remains weak

· Supply of crude oil is expected to be sufficient in the second half of the year. Crude oil prices are expected to remain under pressure and geopolitical concerns will add to uncertainties on the oil price. Domestic demand for refined products varies: that of gasoline remains robust however diesel is under pressure

· Most speciality/salt chemical products remain in oversupply

· The biochemical industry continues to favour high-end products. New product developments are planned at Tiandong in order to maintain and further enhance the profitability of the business

· Earnings stabilised in Q3. The outlook for the remainder of the year remains uncertain and will be effected by the Q4 performance especially on that of the refineryindustry

Mr. Xiaohong Yang, Executive Chairman, said:

"The first half performance was disappointing. Unfavourable feedstock prices and oversupply have lowered overall utilisation and squeezed the profitability of most of our existing products. We expect the second half performance to improve following the launch of the new pricing mechanism and more aggressive sales and marketing efforts made across all business lines.

During this challenging period, we will continue to control costs and create intra-group synergies. Furthermore, we are evaluating the feasibility of restructuring in order to streamline the business and formulate a long-term and sustainable earnings model. The Board expect to make further announcements in this regard shortly. By doing so, we hope to deliver more value to our shareholders amid this tough market environment."

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CHAIRMAN'S STATEMENT

The global economy remained subdued during the first half of 2013. Oil prices hit a periodic high at the beginning of the year (Brent was at circa $119 per barrel) and dropped steadily during the first half (Brent fell to circa $109 at the end of June 2013) which reflected economic conditions. Meanwhile, the GDP growth of China slowed down to 7.6% year-on-year for the first half, and it is worth noting that Q1 growth was 7.7% while Q2 growth was 7.5%, indicating a continued slowdown.  

The Group's sales turnover in H1 2013 was RMB14.4 billion, which more than double that achieved in H1 2012. The trading of oil products accounted for the majority of the growth in sales. The chemical division accounted for 24.2% of total turnover (H1 2012: 13.3%) while the refinery division's contribution decreased to 75.8% from 86.7% in the previous year. This is consistent with our strategic move to focus on the downstream chemical industry.  

Net loss for the period was RMB326.6 million (H1 2012: loss of RMB212.8 million). The loss was mainly attributable to the disappointing performance of the refinery division, with a total of RMB334.6 million incurred. The Company's chemical division remained profitable, although profits decreased to RMB20.5 million (H1 2012: RMB25.4 million), which is primarily attributable to a substandard performance by Hebang.

1. Review of operating results

(1) Refinery

International oil prices weakened throughout much of the first half of 2013. 

According to information supplied by the State Statistics Bureau, in H1 2013, domestic crude oil output increased by 4.3% year-on-year to 103.6 million tons. Net imports of crude oil amounted to 137.3 million tons in H1 2013, representing a decrease of 1.1% as compared with H1 2012 year-on-year. Specifically, imports of crude oil decreased by 1.4% year-on-year while exports decreased by 32.1%. A total of 236.8 million tons of crude oil was processed, representing an increase of 4.1% year-on-year. 

On the demand side, according to the State Statistics Bureau, the apparent domestic consumption of refined products was 126.5 million tons in H1 2013, a 4.0% growth year-on-year. Specifically, domestic consumption of gasoline grew 12.4% year-on-year while that of diesel decreased by 1.7% in the same period. 

The National Development and Reform Commission ("NDRC") relaxed pricing controls over refined products in the domestic marketin March 2013. The pricing mechanism, which has been the major tool for the PRC Government to control the prices of oil related products, shortens the adjustment reference time period from 22 working days to 10 working days. The immediate effect of this new policy is that the transparency and predictability of the retail price of refined products will be improved and misalignment between the feedstock price and the retail price reduced. However, the mechanism itself does not guarantee a positive average industry margin. In any event, the impact upon the performance of each refinery will vary due to different cost structures in place at each refinery. The Company will continue to monitor the effects of the change in policy on its performance. 

During the period under review, the Company produced approximately 745,000 tons of gasoline, diesel, Liquefied Petroleum Gas ("LPG") and petroleum coke, a rise of 37.8% year-on-year. Average realised price grew by 1.9% year-on-year which was mainly driven by the increased sales volume of diesel and gasoline.

Turnover from the refinery division increased by 132.5% to RMB10,915.4 million for the six months ended 30 June 2013 (H1 2012: RMB4,694.5 million). Loss from the refinery division was RMB334.6 million, compared with a loss of RMB221.7 million in H1 2012. The loss was mainly attributable to a lower utilisation rate, lower selling price, and stagnant sales of diesel and LPG as a consequence of sluggish domestic and global market conditions.

(2) Speciality/salt chemical products

During the first half of 2013, the market for speciality chemical products fell in volume and price. The market for salt chemical products has grown in volume but fallen in price. Volume decrease/growth was driven by oversupply and strong domestic demand, while the reduction in price was the result of a decline in the price of crude oil.  

In H1 2013, the Group sold 57,000 tons of speciality chemicals and 338,000 tons of salt chemical products, representing a volume decrease of 0.4% in speciality chemicals and an increase of 35.0% in salt chemical products when compared to the same period in the previous year. The average price for speciality and salt chemical products fell by 3.2% and 10.7% respectively.

Hi-Tech Shengli ceased production and began relocating to Dongying Port on May 2013 as per the Group's planned schedule. Part of the assets and business will be combined into Hebang.

Hebang launched two additional products for its second phase, caustic soda and epichlorohydrin (both are chemical materials used in the production of aluminium and epoxy resin respectively), during H1 2013. Hebang is currently breaking even at the gross margin level.  

Turnover from speciality/salt chemical products was comparable at RMB3,379.9 million for the six months ended 30 June 2013 (H1 2012: RMB601.0 million). Operating margins improved to 0.2% from 0.1% in the previous year. Profit from speciality/salt chemical products in H1 2013 was RMB8.1 million (H1 2012: RMB3.4 million).

(3) Biochemical

The biochemical industry continued to favour high-end products, with enoxaparin sodium recording volume and price growth during the period, however Heparin sodium decreased in both volume and price. Sales volume of Enoxaparin sodium grew by 11.7% and the price grew 7.2% year-on-year. However, the price and the sales volume of Heparin sodium fell by 0.4% and 19.5% respectively year-on-year.

Turnover from biochemical products fell by 2.7% to RMB113.1 million in H1 2013 (H1 2012: RMB116.2 million). The operating margin fell to 11.0% (H1 2012: 18.9%). Profit from biochemical products decreased to RMB12.4 million (H1 2012: RMB22.0 million).

2. Financial Analysis

Turnover

The Group's sales turnover grew substantially by 166.24% in the first half of 2013 to RMB14,408.4 million (H1 2012: RMB5411.7 million) which was mainly driven by a sales volume increase in both the refinery and chemical divisions. Specifically, turnover of the refinery division grew by 132.5% year-on-year while that of chemicals grew 462.4% year-on-year.

Gross Profit

Gross profit was RMB43.1 million for the six months ended 30 June 2013, a 32.7% decrease compared with RMB64.0 million for the same period in 2012. The decrease was mainly attributable to a reduction in prices in both the refinery and speciality/salt chemical divisions.

Selling, General and Administrative Expenses

Selling and distribution expenses increased by 121.54% to RMB85.7 million for the six months ended 30 June 2013 (H1 2012: RMB38.7 million) due to more aggressive sales and marketing efforts in sluggish market conditions. General and administrative expenses increased by 61.62% to RMB171.8 million (H1 2012: RMB106.3 million) due to increased management expenses on the expanded businesses.

Net Interest Expenses

Interest income increased by 54.97% year-on-year to RMB19.1million for the six months ended 30 June 2013 (H1 2012: RMB12.3 million) due to higher investment return on cash management.

Interest expenses increased by 3.63% year-on-year to RMB141.5 million for the six months ended 30 June 2013 (H1 2012: RMB136.5 million). This was a compound result of (1) the increase in average bank loan balances; (2) a decrease in effective interest rates as additional lower-cost alternative financing tools were deployed.

Loss Before Taxation

Loss before taxation was RMB321.2 million for the six months ended 30 June 2013, compared to a loss of RMB203.2 million for the same period in the previous year.

Income Tax

Income tax charge was RMB5.4 million for the six months ended 30 June 2013 as compared to RMB9.5 million for the same period in the previous year. The decrease in tax charge was mainly due to lower taxable profits generated in Hi-tech Shengli.

Loss for the year

Loss for the year was RMB326.6 million for the six months ended 30 June 2013 (H1 2012: loss of RMB212.8 million).

Loss attributable to non-controlling interest of the Company

The loss attributable to minority interests was RMB40.1 million for the six months ended 30 June 2013 (H1 2012: loss of RMB42.6 million). This loss mainly arose from a minority interest at Hi-Tech Chemical.

Loss attributable to owners of the Company

Due to the composite effects described above, the loss attributable to the owners of the Company was RMB286.5 million for the six months ended 30 June 2013 (H1 2012: loss of RMB170.2 million).

Cash and cash equivalents

Cash and cash equivalents increased to RMB324.9 million as at 30 June 2013 compared to RMB286.4 million as at 31 December 2012. The increase in cash and cash equivalents mainly came from increased short-term finance.

Bank loans

Bank loans increased to RMB7,040.2 million as at 30 June 2013 compared to RMB6,487.1 million as at 31 December 2012. The short-term portion of bank loans increased by RMB573.0 million while the long-term portion decreased by RMB19.9 million. The increase in bank loans was mainly due to increased financing demand for operations as a result of further losses and negative operating cash flow in H1 2013.

Cash flow from operating activities

Cash flow from operating activities was negative at RMB300.2 million for the six months ended 30 June 2013 as compared to a negative cash flow of RMB373.0 million for the same period in the previous year. This was mainly attributable to earnings deterioration and negative movements of working capital.

3. Outlook

The Group's outlook is uncertain reflecting the sluggish global economic recovery and domestic market uncertainty.

(1) Refinery

The supply-demand analysis suggests that oil prices will remain under pressure in the second half of the financial year. On the supply side, the OPEC is approaching full production capacity, estimated at 30 million barrels per day, and the US output increased significantly to 7.3 million barrels per day, which is 1 million barrels higher than the previous year. On the demand side, economic recovery in the US, Europe and Japan remains weak and economic adjustments are expected to last for some time.

Domestically, some commentators expect China to open up crude oil imports to non-state owned refineries. Reuters reported that China will import an additional 10 million tons of crude oil in 2014 and the Company expects that a part of it will come from non-state owned refineries. This is in line with our previous expectation that China's oil processing capacity will continue to increase by circa 350 million tons in the next three years. Demand for gasoline continues to grow due to increasing demand for automobiles while demand for diesel shrank further due to an oversupply resulting from a sluggish industrial economy.

China has accelerated the pace of refined oil upgrade in response to the criticism of the deteriorating air quality and increased pollution. In H1 2013, the State Council published a route map and timetable for the refined oil upgrade: in addition to a deadline of end-2013 for gasoline to upgrade to National IV standard (sulphur containing below 50 ppm), diesel will be required to upgrade to National IV standards (the same as National IV for gasoline) by the end of 2014; both gasoline and diesel will be forced to upgrade to National V standard (sulphur containing below 10 ppm) by the end of 2017. We expect the effects on local refineries to be two-fold: firstly, new products tend to create niches for local refineries such as HaiKe to secure new business and enlarge market share; secondly, the cost associated with technological improvements and upgrade works (which are estimated to be CNY300 per ton) could increase the burden on some refineries.

(2) Speciality/salt chemical products

As a result of a sluggish domestic economy, most specialty and salt chemical products remain in oversupply while sales remain stagnant and prices are under pressure. To counter these difficulties, the Company will continue to focus on technological innovation to further reduce costs, improve product mix to increase the focus on higher-end products and strengthen sales and marketing efforts. 

In line with the strategic move to speciality chemicals, in addition to developing its second phase products, Hebang is evaluating the prospects of new products which will be launched in due course. We expect Hebang to break even at operating level in 2014.

(3) Biochemical products

Market demand for high-end products, e.g. enoxaparin sodium and related preparation, remains high despite marginal price fluctuation as a result of competition. Accordingly, the Company will continue to focus on the high-end products and accelerate the application process for GMP and FDA certification in order to enlarge its customer base and expand market share in the developed countries.  

Furthermore, HaiKe will strengthen its alliance with business partners and maintain a stable supply of raw materials. The Company will actively evaluate the feasibility of developing new biochemical products   to diversify its product range and create new sources of income.

(4) Prospects

The Group's performance improved in July and August 2013, with profit at operating level turning positive for both months. This was mainly attributable to a turnaround at Hi-Tech Chemical as a result of higher utilisation rate compared to the first half. However, as the utilisation rate at Hi-Tech Ruilin and Hebang remained low, consolidated profit was negative. 

The Company's performance remains sensitive to movements of feedstock prices (especially fuel and residual oil price) and retail prices for refined products, while Q4 remains key to the full year performance. Specifically, the Group's earnings performance remains largely dependent on the refinery division, which in turn is largely dependent on the utilisation rate of Hi-Tech Ruilin.

Xiaohong Yang

Executive Chairman

Consolidated statement of comprehensive income

For the six months ended 30 June 2013

Consolidated Statement of Financial Position

As at 30 June 2013

Consolidated Statement of Changes in Equity

For the 6 months ended 30 June 2013

Consolidated Statement of Cash Flow

For the 6 months ended 30 June 2013

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL INFORMATION

FOR SIX MONTHS ENDED 30 JUNE 2013

(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 2013 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 2013.

Financial information for the six months ended 30 June 2013 and 30 June 2012 is unaudited and does not constitute the Company's financial statements for these periods.

Comparative financial information for the full year ended 31 December 2012 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 2013 and 30 June 2012, and for the financial year ended 31 December 2012.

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.

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.