HaiKe Chemical Group Limited : Final Results

HaiKe Chemical Group Ltd.

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HaiKe Chemical Group Limited

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

HaiKe Chemical Group Ltd ("HaiKe" or the "Company", together with its subsidiaries as the "Group" or "HaiKe Group"), the AIM quoted (AIM: HAIK) petrochemical, speciality chemical and biochemical business based in China, today announces its unaudited preliminary results for the year ended 31 December 2012. The full Annual Report and Accounts will be available on the website and posted to shareholders shortly.

Financial Highlights

l Total revenue increased by 49.7% to CNY20.4 billion (or £2.0 billion, 2011: CNY13.6 billion or £1.3 billion)

l Petrochemical products revenue grew by 55.9% to CNY18.9 billion (or £1.9 billion, 2011: CNY12.1billion or £1.2 billion)

l Chemical products (including speciality, salt and biochemical) revenue comparable to previous year at CNY1.5 billion (or £149.0 million, 2011: CNY1.5 billion or £149.0 million)

l Loss for the year was -CNY317.4 million (or -£32.0 million, 2011: profit of CNY41.9 million, or £4.1 million)

l Loss attributable to the Group was -CNY282.4 million (or -£28.2 million, 2011: loss of -CNY7.1 million or -£0.7 million)

l Loss per share  was -CNY8.3(or -£0.83, 2011: -CNY0.19 or -£0.018)

l The Board does not recommend a final dividend

l Cash and cash equivalents balance as at the end of 2012 was CNY286.4million (or £28.7million, 2011: CNY210.0 million or £21.0 million)

l Total loans balance was CNY6.5 billion (or £0.6 billion, 2011: CNY3.9 billion or £0.4 billion). The increase in the loan balance was mainly due to capital expenditure in relation to the construction of the second phase of Dongying Hebang Chemical Co., Ltd. ("Hebang")

Operational Highlights

l As previously indicated, the refinery division made a loss in 2012 due to low utilisation rates combined with unfavourable feedstock prices

l Hebang made a small loss during its first operational year in 2012

l Other divisions, including speciality chemical, salt chemical and biochemical, were profitable in 2012.

l Pro-active sales and marketing efforts and a rise in borrowings increased operational costs

l Continued focus on internal management, cost controls and intra-Group synergies to generate cost savings

Outlook

l Procurement of feedstock at favourable prices remains key

l Domestic price controls for refined products eased, however the operating environment for domestic refineries is
likely to remain challenging

l The speciality chemicals business likely to continue to experience price pressures. Two new products, caustic soda and epichlorohydrin, were launched at Hebang in April this year and this initiative is expected to enhance profitability of the chemical business in the long term

l In line with the Group's strategy to diversify to higher margin chemical business', capital expenditure is
expected to rise in the short to medium term

l  Borrowings will need to increase to meet operational and capex requirements

l Demand for biochemical products is expected to remain strong 

Mr. Xiaohong Yang, Executive Chairman, said:

"2012 was a difficult year for most refineries in China. Our refinery division was impacted by the unfavourable feedstock price and incurred a loss as a result of low utlisation. The Speciality/salt and biochemicals divisions continue to grow and delivered a profitable performance in the period under review, however the refinery business remains the determining factor in overall Group performance. The beginning of 2013 has continued to be difficult operationally although the board will carefully monitor whether the recent policy changes will benefit the Group's financial performance."

For further information please contact:

HaiKe Chemical Group	George Zeng, Chief Financial Officer [e-mail]	[phone]
Westhouse Securities	Martin Davison / Jonathan Haines	[phone]
Cardew Group	Shan Shan Willenbrock / Tom Horsman [e-mail]	[phone]

Review of 2011 performance

The Group experienced further turnover growth in 2012, although, disappointingly, incurred substantial losses. During the year, unaudited sales turnover grew substantially by 49.7% to CNY20.4 billion as compared with CNY13.6 billion in the previous year. The loss for the year amounted to CNY317.4million, compared with a profit of CNY41.9 million in 2011. The net loss attributable to owners of the Group was CNY282.4 million, compared with a loss of CNY7.1 million in 2011. The loss per share was CNY8.3, compared with a loss per share of CNY0.19 in 2011.

Refinery

The international crude oil price fluctuated in 2012, with the average price of North Sea Brent crude oil ("Brent") rising to approximately $111.6 per barrel from $110.9 per barrel in 2011. The international fuel oil price remained high due to strong demand from Japan and China.

In 2012, the Group adopted a more flexible strategy on trading of both feedstock and refined products. The Group's refineries procured a total of three million tons of feedstock, including crude oil, fuel oil and residual oil. In order to cope with the fast changing market conditions in 2012, approximately 54% of the feedstock procured was sold without processing to generate a profit under the current pricing mechanism. The Group sold approximately 1.6 million tons of gasoline, diesel, Liquefied Petroleum Gas ("LPG"), petroleum coke and other products during the year, representing year-on-year growth of approximately 14.3%, 15% of which was derived from trading.

The Group continued to improve the product mix in order to increase the overall profitability for the refinery division. During the year, 310,000 tons of high-end gasoline were produced and sold at a higher margin than in the previous year. This accounted for 16.6% of total sales volume in 2012.

Turnover from the refinery business grew 55.9% to CNY18.9 billion for the 12 months ended 31 December 2012 (2011: CNY12.1 billion). The growth was derived mainly from the trading of feedstock and refined products and selling price appreciation during the year. Gross margin was 0.9% (2.5% in 2011) due to lower utilisation rates and narrow margins on trading. The refinery division made a loss of CNY317.0 million in 2012, compared with a profit of CNY13.4 million in 2011.

Speciality/salt chemicals

In 2012, due to sluggish market conditions on the back of a slowdown in the domestic economy, the profitability of the Group's speciality and salt chemical division decreased.

The speciality chemical products recorded a 7.7% volume gain but the average price fell by 9.8% year-on-year. As a result, turnover was comparable but margins fell. The Group continued to improve its product mix to focus more on higher margin products, for example, sales volume of the medical grade Propylene Glycol increased 18% year-on-year. These actions ensured the division remained profitable.

Sales volumes of salt chemical products increased by 0.6% but the average price fell by 7.0% year-on-year.

Turnover from the speciality/salt chemical division decreased slightly by 1.2% to CNY1.3 billion for the 12 months ended 31 December 2012, broadly in-line with the preceding year. The gross margin fell to 10.6% from 12.3% in the previous year due mainly to lower selling prices as a result of continued challenging market conditions. Profit for the year from the chemical division fell by 81.8% year-on-year to CNY12.3million, compared with CNY67.7million in 2011.

Biochemical

The biochemical division grew modestly in 2012. Sale volumes of heparin sodium and enoxaparin sodium grew by 16.2% and 28.3% respectively year-on-year. The Group further enhanced its marketing efforts in specific markets during the year to improve the division's overall performance. For instance, sales in India increased by 33% year-on-year following a successful sales and marketing campaign. The price of heparin sodium fell by 20.1% year-on-year due to oversupply in the domestic market, while that of enoxaparin sodium fell by 5.1% year-on-year. Despite the margin squeeze, the biochemical division remained profitable in 2012.

Turnover from biochemical division grew by 0.8% to CNY203.6million for the twelve months ended 31 December 2012, compared with CNY202.1 million in the preceding year, due to volume gains. Gross margins increased to 29.1% from 23.6% compared to last year due to higher utilisation rates. Profit for the year from biochemical products was CNY13.4 million, a 24.6% decrease compared with CNY17.8 million in 2011 due in part to higher financial costs as a result of an increase in working capital requirements.

Outlook

HaiKe incurred a net loss of CNY172.8 million forthe first three months of 2013, compared with a loss of CNY83.5 million in the corresponding period in 2012. The poor performance was mainly attributable to a lower utlisation rate on the refinery side as a result of unfavourable feedstock prices and the scheduled annual overhaul at Hi-Tech Chemical and Hi-Tech Ruilin.

Looking forward, geopolitical uncertainty and market speculation will make it increasingly difficult to forecast the oil price.

Management expect the relaxation of pricing controls over refined products in the domestic market (announced in March 2013) to benefit independent refineries such as HaiKe. The initiative, among other things, shortens the time period to 10 working days (from 22 working days) under which the PRC Government adjusts the prices of oil related products. The effects of the change in policy on the Company's performance are as yet untested and the Board will keep shareholders appraised of   developments. In any event the impact upon the performance of each refinery will vary due to different cost structures prevailing at that refinery.

The forecast GDP growth for China in 2013 is more conservative at 7.5%, compared with actual growth of 7.8% in 2012. Inflation is expected to grow in 2013. Moreover, oversupply remains a challenging issue for most chemical products.

The Board intends to enhance HaiKe's earnings performance by improving the product mix in both the refinery and chemical businesses in the short term. In the medium to long term, we will continue to strategically focus on the more profitable chemical division although at present the Group performance is still strongly weighted towards the more volatile refinery division. The Group will also seek to continue to tighten costs and improve internal cashflow and treasury management, intra-Group synergies and technical innovations.

Construction of the second phase of Hebang is now complete and production of two products, caustic soda and epichlorohydrin, began in April this year.

People

Mr. Raymond Wong, Mr. Derek Marsh and Mr. James Yuann stepped down as Non-executive Directors in September 2012, February 2013 and April 2013 respectively. Mr Xiucheng Dong joined the Board in February 2013 and Mr. Dongsheng Yan and Ms. Julie Wilson joined the Board in April 2013 as Independent Non-executive Directors. Mr Dong is a leading authority in the energy sector in China and will assist us formulate a long-term development strategy for the refinery division. Mr. Yan is the Chairman and President of Tianjin Bohai Commodity Exchange Corporation in China and is able to advise on the strategic expansion of our business divisions. Ms. Julie Wilson is an audit partner at UHY Hacker Young LLP who will enhance our internal control and transparency. On behalf of the Board, I would like to thank Mr. Wong, Mr. Marsh and Mr. Yuann for their significant contribution to HaiKe during their tenure, and take this opportunity to welcome Mr. Dong, Mr. Yan and Ms. Wilson on board.

Dividend

We recognise the importance of the payment of dividends to our shareholders, however, in view of the disappointing performance in 2012 and the likelihood of a challenging period ahead, the Board is unable to recommend a final dividend for 2012, which is subject to approval at the forthcoming Annual General Meeting scheduled in June 2013. 

	Note	2012		2011
		CNY'000		CNY'000
Revenue	3	20,385,289		13,618,395
Cost of sales		(20,015,830)		(13,120,246)
Gross profit		369,459		498,149
Other operating expense/ income	3	(4,683)		20,809
Administrative expenses		(232,933)		(173,926)
Selling and distribution expenses		(124,411)		(65,635)
Profit from operations		7,432		279,397
Finance expense		(328,631)		(242,150)
Finance income	3	24,007		26,823
(Loss)/profit before tax		(297,192)		64,070
Tax expense	4	(20,228)		(22,203)
(Loss)/profit for the year		(317,420)		41,867
Other comprehensive income
Exchange difference arising from consolidation		-		-
Total comprehensive (loss)/ income		(317,420)		41,867
(Loss)/profit for the year attributable to:
Owners of parent		(282,363)		(7,099)
Non-controlling interest		(35,057)		48,966
		(317,420)		41,867
Total comprehensive income attributable to:
Owners of parent		(282,363)		(7,099)
Non-controlling interest		(35,057)		48,966
		(317,420)		41,867
Earnings per share for (loss)/profit attributable to the
ordinary equity holders of the parent during the year
Basic	5	(CNY8.276)		(CNY0.185)
Diluted	5	(CNY8.276		(CNY0.185)

		2012		2011
		CNY'000		CNY'000
ASSETS
Non-current assets
Property, plant and equipment		2,516,471		2,188,773
Intangible assets		11,597		9,793
Deferred tax assets		8,783		10,155
		2,536,851		2,208,721
Current assets
Inventories		1,170,104		815,136
Trade and other receivables		3,584,539		702,564
Amounts due from related parties		1,621		1,975
Income tax receivable		33,295		29,105
Restricted cash		1,536,850		853,192
Cash and cash equivalents		286,398		210,002
		6,612,807		2,611,974
Total assets		9,149,658		4,820,695
LIABILITIES
Current liabilities
Short-term loan		6,007,424		3,239,182
Trade and other payables		2,679,803		615,675
Amounts due to related parties		125,292		85,947
		8,812,519		3,940,804
Non-current liabilities
Long-term loan		479,641		614,073
Deferred income		38,544		3,796
		518,185		617,869
Total liabilities		9,330,704		4,558,673
CAPITAL AND RESERVES
Share capital		598		598
Share premium		142,312		142,312
Other reserves		1,743		1,818
Statutory reserves		29,323		26,129
Accumulated losses		(349,087)		(26,224)
Equity attributable to equity holders of the parent		(175,111)		144,633
Non-controlling interest		(5,935)		117,389
Total equity		(181,046)		262,022
Total liabilities and equity		9,149,658		4,820,695

Attributable to equity holders of the parent

	Share capital CNY'000		Share premium CNY'000		Other reserves CNY'000		Statutory reserves CNY'000		Accumulated losses CNY'000		Total CNY'000		Non-controlling interest CNY'000		Total equity CNY'000
Balance as at 1 January 2011	598		142,312		46,565		26,563		(47,489)		168,549		229,872		398,421
Total comprehensive income for the year	-		-		-		-		(7,099)		(7,099)		48,966		41,867
Transfer to statutory reserves	-		-		-		173		(173)		-		-		-
Dividends	-		-		-		-		(10,487)		(10,487)		(5,597)		(16,084)
Acquisition of non-controlling interests	-		-		(10,554)		-		-		(10,554)		(156,515)		(167,069)
Other total transfer	-		-		(34,193)		(607)		39,024		4,224		663		4,887
Balance as at 31 December 2011	598		142,312		1,818		26,129		(26,224)		144,633		117,389		262,022
	Share capital CNY'000		Share premium CNY'000		Other reserves CNY'000		Statutory reserves CNY'000		Accumulated losses CNY'000		Total CNY'000		Non-controlling interest CNY'000		Total equity CNY'000
Balance as at 1 January 2012	598		142,312		1,818		26,129		(26,224)		144,633		117,389		262,022
Total comprehensive income for the year	-		-		-		-		(282,363)		(282,363)		(35,057)		(317,420)
Transfer to statutory reserves	-		-		-		3,194		(3,194)		-		-		-
Dividends	-		-		-		-		(4,566)		(4,566)		-		(4,566)
Acquisition of non-controlling interests	-		-		-		-		(32,740)		(32,815)		(88,267)		(121,082)
Foreign currency translation	-		-		(75)		-		-		(75)		-		(75)
Balance as at 31 December 2012	598		142,312		1,743		29,323		(349,087)		(175,111)		(5,935)		(181,046)

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012 (AUDITED)

		2012		2011
		CNY'000		CNY'000
Cash flow used in operating activities		(1,600,834)		(146,531)
Cash flow from investing activities
Purchase of property, plant and equipment		(584,192)		(479,005)
Purchase of intangible assets		(1,675)		(48,438)
Interest received		24,007		26,823
Government grant received		51,298		6,121
Purchase of shares in subsidiary from minorities		(121,006)		(167,129)
Cash flow used in investing activities		(631,568)		(696,027)
Cash flow from financing activities
Proceeds from bank borrowings		11,359,213		4,665,018
Repayment of bank borrowings		(8,725,402)		(3,574,801)
Loans from/(to) related parties		8,259		(1,539)
Interest paid		(328,631)		(242,150)
Dividends paid to shareholders		(4,566)		(10,487)
Cash flow generated  from financing activities		2,308,873		836,041
Net increase  in cash and cash equivalents		76,471		28,294
Cash at beginning of year		210,002		181,708
Foreign currency translation differences		(75)		-
Cash at end of year		286,398		210,002

NOTES TO THE PRELIMINARY ANNNOUNCEMENT OF THE RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

1.   General information

The Company is a public limited company in Cayman Islands incorporated on 20 June 2006, and is quoted on the AIM Market. The address of the registered office 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 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 Group are the manufacturing of petrochemical and chemical products.

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

The preliminary consolidated financial information of the Company for the year ended 31 December 2012 comprises HaiKe Chemical Group Ltd. and its subsidiary undertakings.

2.   Basis of preparation

The consolidated financial information has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("EU IFRS") issued by the International Accounting Standards Board ("IASB") including related interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and using accounting policies which are consistent with those adopted in its financial statements for the year ended 31 December 2011 with the following comment in respect of going concern in note 1.2 to the financial statements:

The preparation of financial statements requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on finance being available for the continuing working capital requirements of the Group.

As at 31 December 2012, the Group had net liabilities of CNY181.0 million (2011: net assets of CNY 262.0 million) and net current liabilities of CNY2,195.9 million (2011: CNY1,329.0 million).

The Directors have reviewed forecasts and budgets for the coming year, which have been drawn up with appropriate regard for the current economic environment and the particular industry in which the Group operates. These were prepared with reference to historical and current industry knowledge, taking future strategy of the Group into account.  In undertaking this review, the Directors have reviewed the position of the guarantees given on bank loans of third parties which totalled CNY3,993.2 million as at 31 December 2012 as disclosed further in note 21 and 2.1a.

The existing operations are funded through a mixture of cash generative operations and new short term bank loans (net proceeds of CNY 2,365 million).  

The Directors consider that the Group and the trading subsidiaries have adequate resources and committed borrowing facilities to continue in operational existence for the foreseeable future.

However, the Group is reliant on the renewal of the short term bank loans.  Although the Directors believe that the Group will be able to renew their facilities due to the Group's relationships with its banks, there is the risk that in the future, the Group, may not be a going concern if the Group is unable to meet its debts as they fall due.

In approving the financial statements, the Board have recognised that these circumstances create a level of uncertainty. However, having made enquiries and considered the uncertainties outlined above, the directors have a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future. Accordingly, the Board believes it is appropriate to adopt the going concern basis in the preparation of the financial statements.

The financial information set out in this preliminary announcement does not constitute audited financial statements for the year ended 31 December 2012. The financial information for the year ended 31 December 2012 is derived from draft financial statements.  The audit of the accounts for the year ended 31 December 2012 is not yet complete.  These accounts are expected to be finalised on the basis of the financial information presented by the directors in this preliminary announcement. The auditors are currently anticipating an unqualified opinion, but will draw attention to the going concern basis in the following emphasis of matter:

"In forming our opinion on the non-statutory financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1.2 to the non-statutory financial statements concerning the Group's ability to continue as a going concern. The financial statements have been prepared on the going concern basis, which depends on the ability of the Group to renew its short term loan facilities. These conditions, along with the other matters explained in note 1.2 to the non-statutory financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern.  This note indicates that the Group had net liabilities of CNY181.0 million and net current liabilities of CNY2,195.9 million. The non-statutory financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern."

The financial information for the year ended 31 December 2011 set out in this interim financial information does not comprise the Group's financial statements. The financial information for the year ended 31 December 2011 is derived from the accounts for that year. The auditors reported on those accounts: their report was unqualified.

The financial information set out in this announcement was approved and authorised for issue by the board of directors on 20 May 2013.

The directors do not propose a final dividend in respect of the year ended 31 December 2012 (2011: £0.012 per share).

Copies of this financial information will be available on the Company's website.

3.   Revenue

	2012		2011
	CNY'000		CNY'000
Sale of goods	20,385,289		13,618,395
Other operating income
Waste disposal and sale of by-products	-		-
Government grant income	51,298		3,490
Amortisation of deferred capital grants	6,652		12,029
Other income	16,146		5,290
Net gain on disposal of investment securities	(8,835)		-
	65,261		20,809
Finance income
Interest income	21,961		19,604
Exchange gain	2,046		7,219
	24,007		26,823
Total income	20,474,557		13,666,027

4.   Taxation

The major components of income tax expense are as follows:

	2012		2011
	CNY'000		CNY'000
Current income tax	18,856		19,768
Deferred tax:
Originating and reversal of temporary differences	1,372		2,435
Income tax recognised in income statement	20,228		22,203

5.   Loss per share

Loss per share was calculated by dividing the net loss for the year ended 31 December 2012 attributable to equity shareholders of the parent of CNY253,726,844 by the weighted average number of ordinary shares.

The loss for the financial year attributable to equity holders of the parent was as follows:

Loss for the year	2012		2011
	CNY'000		CNY'000
Loss for the year
attributable to equity holders of the parent	(282,363)		(7,099)

	2012		2011
Weighted average number of ordinary shares - basic & diluted	38,353,571		38,353,571

6.   Contingencies

Up to 31 December 2012, as a warrantor, the Group has guaranteed the bank loans of third parties to aggregate amount of CNY3,993 million (31 December 2011: CNY1,980 million). It is unlikely that any significant liability to the Group will arise because the financial statements of the warrantees indicate that they are able to pay their debts as they mature. The directors are of the view that they do not expect any liability to arise in the future in respect of the guarantees at the date of these financial statements.

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