Haike Chemical Group Regulatory News (HAIK)

9 Jun 2009 07:00



9 June 2009

HaiKe Chemical Group Ltd.

PRELIMINARY RESULTS FOR THE YEAR ENDED 

31 DECEMBER 2008

HaiKe Chemical Group Ltd ("HaiKe" or the "Company"), the AIM quoted (AIM: HAIK) petrochemical, speciality chemical and biochemical business based in China, announces its unaudited results for the financial year ended 31 December 2008.

Highlights

Total revenues increased by 76% to US$ ("$") 631.5m (2007: $359.0m)

Petrochemical revenues increased by 88% to $527.0m (2007: $280.6m)

Speciality chemical revenues increased by 29% to $97.2m (2007: $75.3m)

Biochemical revenues increased by 135% to $7.3m (2007: $3.1m)

Loss after tax of $30.7m (2007: profit of $18.2m)

Loss after minority interests of $29.2m (2007: profit of $12.7m)

Construction of the speciality chemical facilities completed

Mr. Yang Xiaohong, Executive Chairman, said: 

"2008 was a challenging year for many petrochemical companies worldwide on account of oil price volatility. This was accentuated in China where there are strict controls on the selling prices of refined products. However, the purchase price of crude oil is currently enjoying a period of relative stability notwithstanding recent price increases. In addition, at the beginning of 2009, some favourable opportunities have emerged, including the Chinese government's economic stimulus plans and improved flexibility in the pricing mechanism for refined products. We are confident that this, coupled with the capacity expansion at HaiKe's petrochemical facility, will have a positive impact on our margins going forward. 

In 2008, the speciality chemical division remained profitable generating a profit before tax of $8.3m, despite volatile prices for raw materials throughout the year. Although we have seen some slow-down in demand for certain specialty chemical products in the first five months of this year, we are confident that this area of business will continue to generate profits for the Company. With the Company's fundamentals remaining unchanged, we are confident that HaiKe will return to profitability this year." 

For further information please contact:

HaiKe	Nick Su, Chief Finance Officer	+86 (0) 546 8289175
Hanson Westhouse	Tim Metcalfe / Martin Davison / Christine Zhang	+44 (0) 20 7601 6100
Cardew Group	Rupert Pittman / Shan Shan Willenbrock / Catherine Maitland	+44 (0) 20 7930 0777

 

CHAIRMAN'S STATEMENT 

Introduction

2008 was a challenging year for many petrochemical businesses worldwide with volatile oil prices which reached a record high of $147 per barrel in July. This was accentuated in China, where there are strict controls on the selling prices of refined products, and this was the most significant factor in a disappointing financial performance by the Company. However, I am confident that the Company will be able to return to profitability this year given the relatively stable crude oil price which, together with the successful increase in capacity and revenue implemented during 2008, will be of great benefit to the Company's performance in the future. The speciality chemical division remained profitable despite the volatile prices for raw materials throughout the year. We expect this division to continue to deliver positive results in the coming period.

Performance review

Our investments in production capacity in recent years have delivered positive returns and as a result, Group revenue increased by 76% in the period under review. However, unprecedented oil price volatility, coupled with rigid price controls of refined products and generally difficult trading conditions, culminated in a group loss before minority interests of $30.7m (2007: profit $18.2m). In particular, the Company's petrochemical business suffered as a result of the adverse trading conditions during the year. Despite an 88% increase in revenues, the division registered an operating loss before minority interests of $36.8m (2007: profit $10.1m). In 2008, demand for our speciality chemicals remained strong but our profit margins were adversely impacted by lower selling prices. Revenues from the speciality chemical business increased by 33% and the division generated an operating profit before minority interests of $8.3 m (2007: profit $11.3m).

Outlook

As the global downturn continues, we have noted a decrease in demand for our chemical products although we are hopeful that this will return during the current year. Demand for our gasoline, diesel and biochemical products has held up firmly and the management believes this demand will be further supported by the Chinese government's economic stimulus measures.

The Company is looking at ways to take advantage of this increased demand and domestic growth. As previously announced, one such initiative is that the Company, in partnership with local investors, has committed to a new integrated petrochemical plant in a new developing port area, which is approximately 100 kilometres from the Company's existing refinery operations. The new plant will provide HaiKe with an additional facility for oil refining, thereby increasing production capacity as well as providing access to cheap and convenient transportation. 

On 7 May 2009, the Chinese National Development and Reform Commission ("NDRC") announced a new refined products pricing mechanism for gasoline and diesel. In the announcement, the NDRC indicated that the Chinese government would continue to control fuel prices at the present time due to insufficient market competition and imperfect market mechanisms. Fuel prices would eventually be determined by market forces, but only in the long term. 

The Company understands that under the new mechanism when global crude oil prices report a 4% movement that is sustained for 22 days, the government will have the discretion to adjust domestic selling prices. The Company believes this may lead to a closer tracking of global prices. It remains to be seen the extent to which prices will be adjusted in the event that crude oil prices reach and pass $80 per barrel. In this event, the Company anticipates more restricted price movements. 

The new pricing mechanism for refined products is encouraging as the government plans to liberalise controls on domestic retail prices of refined products, although we understand that this is a long term objective. Following the new pricing regime, we have seen a small number of price increases in gasoline and diesel this year, in line with crude oil price rises, which has benefited HaiKe. 

The Company is working hard to implement internal measures to continue developing the business. This combined with recent government policies and favourable oil prices, should provide a solid foundation for the Company's further growth and a return to profitability. We have made a positive start to the new financial year. We remain determined to grow our capacity and position ourselves to emerge from the economic downturn in a strong position. 

Yang Xiaohong

Executive Chairman

9 June 2009

CHIEF EXECUTIVE OFFICER'S REPORT

Despite the difficult operating environment, the Company was successful in implementing significant capacity expansion and associated revenue growth in both its oil refinery and speciality chemical businesses during 2008. While this growth was not sufficient to offset the impact of higher raw material costs experienced during the year, we are confident that, with continued improvements in production efficiency and the reduction in production costs, we are well positioned to take advantage of the increasing demand for our products and look to the future with confidence.

Our market

Refinery business

Revenue increased by 88% from $280.6m in 2007 to $527.0m. Operating loss before minority interests was $36.8m (2007: profit $10.1m).

Despite the division delivering a significant increase in revenue in 2008, the profitability of the refinery business suffered due to unprecedented volatility in oil prices during the year, particularly in the second half. The crude oil price reached its historic high of $147 per barrel in July before it slumped to $38 per barrel in a short period of four months. The high volatility, particularly in the third quarter, largely contributed to the Company's losses, as the Company had purchased feedstock at higher prices, which it was unable to pass down to customers as a result of the Chinese government's controls on selling prices. 

Crude oil and fuel oil are the fundamental raw material for the refinery industry. These are refined into gasoline, diesel, coke and other derivatives. In the first five months of 2009, crude oil prices have been relatively stable, from which HaiKe has benefited.  

In 2008, China's Gross Domestic Product ("GDP") grew by 9%, down from 11.4% growth in 2007. The Chinese government recently implemented certain economic stimulus measures, including infrastructure investment and national expenditure programs. As a result, we have seen both automotive sales and transportation traffic increasing in the first quarter of 2009 in comparison with the fourth quarter of 2008. We believe the domestic demand for refined oil products in China will continue to grow.

The strict price controls for refined products set by the Chinese government negatively affected our refinery business in the period under review. In May 2009, the government announced a new refined oil products pricing mechanism, under which the government is expected to adjust prices for refined products if the crude oil price moves up or down by 4%. Under the new mechanism, the more frequent price adjustments will allow Shandong Hi-tech Chemical Group Co., Ltd. ("Hi-tech Chemical"), our refinery subsidiary, to respond more quickly to the changes in international oil prices. 

Speciality chemical business

Revenue increased by 29% from $75.3m in 2007 to $97.2m in 2008. Operating profit before minority interests was $8.3m (2007: profit $11.3m). The Company operates the following two subsidiaries in the speciality chemical business.

Dongying Hi-Tech Spring Chemical Industrial Co., Ltd. ("Hi-Tech Spring")

Revenue increased by 30% from $51.0m in 2007 to $66.3m in 2008.

Hi-Tech Spring focuses on the production of dimethyl carbonate ("DMC") and pharmacy grade propylene glycol. DMC is widely used in medical applications, agricultural pesticides and for the manufacture of synthetic materials. The DMC produced by the Group is sold primarily in the Guangdong and Jiangsu provinces of China and exported to key markets in Europe. In the period under review, the Company had an annual production capacity of circa 45 thousand tonnes of DMC, an increase of 200% on 2007. 

Propylene glycol is used in the medical industry as well as the food industry for flavours and fragrances. This production is largely for Chinese domestic consumption. In the period under review, the annual production capacity of propylene glycol was 36 thousand tonnes, an increase of 200% on 2007. Hi-Tech Spring also manufactures isopropyl alcohol for the food, medical and electronics sectors. 

Shandong Hi-Tech Shengli Electrochemical Co., Ltd. ("Hi-Tech Shengli")

Revenue increased by 27% from $24.3m in 2007 to $30.9m in 2008. 

Hi-Tech Shengli's main products are sodium hydroxide based products, such as caustic soda, and a range of chlorine based chemical products. In the period under review, the Company had an annual production capacity of 300 thousand tonnes chlor-alkali chemicals and 60 thousand tonnes chlorine, an increase of 58% and 20% on 2007 respectively. 

Although domestic demand for certain speciality products such as DMC had slowed at the beginning of this year, the Chinese government has since implemented a number of economic stimulus measures which we believe will increase the domestic demand for specialty chemical products during the course of the current year. In addition, the Company has made a substantial investment in new infrastructure and production capacity which is expected to provide a positive contribution to future earnings.

Biochemical business

Revenue of Dongying Tiandong Biochemical Industry Co., Ltd, ("Tiandong Biochemical") increased by 135% from $3.1m in 2007 to $7.3m in 2008.

Tiandong Biochemical continues to experience strong demand for sodium heparin in the export market. In order to meet demand, the Company is building a new production facility to produce high margin products. The new plant will produce an injectable version of low-molecular-weight heparin and will include a state of the art research and development centre. The facility will be a US FDA and Chinese SFDA approved plant for both the export and domestic markets.

 

Outlook

 

As a result ofthe global economic slowdown, the growth of the Chinese economy has to a certain degree been adversely affected. However, the Chinese economic fundamentals remain unchanged with continued strong demand for refined oil products and speciality chemical products. The Chinese government has undertaken a proactive economic policy, adopting a series of measures aimed at expanding domestic demand and promoting economic growth.

The Company will continue to capitalise on the increasing demand for its refinery products and to apply strict cost controls. In addition, the Company will review and adjust product mix on an on-going basis to increase the production of high margin products. 

Zaizhong Zhang

Chief Executive Officer

9 June 2009

CHIEF FINANCIAL OFFICER'S REPORT

Results

Total revenue increased by 76% from $359m in 2007 to $631.5m in 2008. On a segmental basis, sales of petrochemical products increased from $280.6m in 2007 to $526.9m in 2008, as a result of an increased selling price coupled with increased sales volume. Sales of speciality chemicals (including biochemical) grew from $78.4m in 2007 to $104.6m in 2008, due to increased market demand and capacity.

 

Cost of sales increased by 96% from $323.8m in 2007 to $633.5m, reflecting the significant increase in material costs and sales volume in the year. As a result, the Company made a loss of $16.4m at the operating level, compared with a profit of $23.9m in 2007. Loss after tax, before minority interests was $30.7m (2007: profit after tax of $18.2m).

In the petrochemical business, the increase in the selling price was not sufficient to offset the rapid increase in crude oil prices, which contributed a loss before tax of $36.8m to the Group.

The higher-margin speciality chemical and biochemical products resulted in a narrowed gross margin and a decrease in profit for the chemical side of the business, with combined profit before tax for the speciality chemical and biochemical businesses decreasing by 26.8% to $8.3m (2007: $11.3m). The gross margin for these divisions decreased from 21.3% to 17.4%. 

Sales and distribution expenses increased by 12.9%, from $3.1m in 2007 to $3.5m in 2008, as a result of increased freight charges and promotion costs due to the increase in sales of the speciality chemical products compared to the previous year. Other administrative expenses increased by 31.0% from $8.7m in 2007 to $11.8m in 2008 as a result of additional personnel costs. Finance costs increased by 142.9% from $6.3m in 2007 to $15.3m in 2008 due to the increase in the average loan balance.

 

Operating profit decreased from a profit of $23.9m in 2007 to an operating loss of $16.4m in 2008. In the period under review, the Company made a loss of $29.7m after minority interest (2007: profit $18.7m). 

The two-year full PRC income tax exemptions granted to three operating subsidiaries, Hi-Tech Chemical, Hi-Tech Spring and Hi-Tech Shengli, expired in January 2008. These three operating subsidiaries now remain entitled to a three-year 50% income tax exemption from January 2008 to December 2010. This change in tax exemptions resulted in an income tax increase to $1.0m in 2008 from $0.5m in 2007. 

The loss attributable to HaiKe's shareholders in 2008 was $29.2m compared with a profit of $12.7m in 2007.

Basic and diluted loss per share was both US 76.2 cents in 2008, as compared with basic and diluted earnings per share of US 34.5 cents and US 34.2 cents respectively in 2007.

Capital expenditure

Investment in property, plant and equipment decreased from $46.2m in 2007 to $39.8 m in 2008, which was mainly used in the capacity expansion projects for DMC and caustic soda (in the speciality chemical segment) undertaken in the first half of 2008. The Company also incurred costs of $12.8m on the construction of the additional refinery and biochemical heparin facilities which are expected to be completed by the end of 2009. Whilst it continues to expand, given the current economic climate, the Company is closely monitoring its levels of expenditure.

In April 2009, the Company announced that it has entered into a joint venture with Xindu Group, an investment company focused on the oil and gas sector, and Jindayuan, an oil and gas infrastructure developer, for the formation of a joint venture company, Dongying Hi-Tech Ruilin Chemical Co., Ltd ("Hi-tech Ruilin"). HaiKe's subsidiary, Hi-tech Chemical, which has a 49% stake in Hi-tech Ruilin, will initially invest an aggregate of RMB196m in cash in the joint venture. The investment will be used for construction of new oil refinery facilities, purchase of production equipments and infrastructures. The additional production capacity will enable the Company to increase the production and sale of its petrochemical products in the near future.

Cash flows

In 2008, cash used for operating activities amounted to $14.4m whereas the cash generated from operating activities amounted to $6.9m in 2007. 

The capital expenditure of $39.8m was mainly funded from bank borrowings, which increased from $86.1m as at 31 December 2007 to $156.4m as at 31 December 2008. Within the Chinese banking system, it is common to provide bank borrowings on a short-term renewal basis to most non-government controlled enterprises. HaiKe's facilities are of this type but it is expected that the facilities will be renewed when they fall due.

Cash and cash equivalents increased from $5.6m as at 31 December 2007 to $34.7m as at 31 December 2008.

 

Liquidity and financial risk

The board believes that the Company has sufficient funds to meet its foreseeable business requirements. While closely monitoring its levels of expenditure, the Company continues to commit considerable resources to capital expenditure and growth. The Company enjoys good relationships with banks in the region which have been historically supportive to the Company. 

Nick Su

Chief Financial Officer

9 June 2009

  

CONSOLIDATED INCOME STATEMENT 

For the year ended 31 December 2008

		2008		2007
		$'000		$'000
		Unaudited		Audited
Revenue		631,533		359,035
Cost of sales		(633,494)		(323,823)
Gross (loss)/profit		(1,961)		35,212
Other operating income		868		2,243
Selling and distribution expenses		(3,510)		(3,102)
AIM admission expenses		-		(1,772)
Other administrative expenses		(11,770)		(8,727)
Total administrative expenses		(11,770)		(10,499)
(Loss)/profit from operations		(16,373)		23,854
Finance income		2,104		1,010
Finance costs		(15,349)		(6,255)
Share of results of associates		(77)		64
(Loss)/profit before income tax		(29,695)		18,673
Income tax expense		(992)		(469)
(Loss)/profit for the year		(30,687)		18,204
Attributable to:
Equity holders of the parent		(29,234)		12,688
Minority interest		(1,453)		5,516
		(30,687)		18,204
(Loss)/earnings per share
Basic		($0.762)		$0.345
Diluted		($0.762)		$0.342

  CONSOLIDATED BALANCE SHEET

As at 31 December 2008

		2008		2007
		$'000		$'000
		Unaudited		Audited
ASSETS
Non-current assets
Property, plant and equipment		145,545		105,162
Intangible assets		5,082		3,099
Investments in equity-accounted associates		204		354
Available-for-sale investments		544		496
Deferred tax assets		791		661
		152,166		109,772
Current assets
Inventories		38,887		44,858
Trade and other receivables		25,240		30,169
Amounts due from related parties		299		-
Financial assets at fair value through profit or loss		-		274
Restricted cash		56,313		18,734
Cash and cash equivalents		34,728		5,585
		155,467		99,620
Total assets		307,633		209,392
LIABILITIES
Current liabilities
Short-term loan		153,475		86,093
Trade and other payables		74,991		56,763
Deferred income		202		185
Income tax payable		1,385		1,630
Amounts due to related parties		43,637		7,223
		273,690		151,894
Non-current liabilities
Long-term loan		2,926		-
Deferred income		1,739		1,412
		4,665		1,412
Total liabilities		278,355		153,306

 

 

		2008		2007
		$'000		$'000
		Unaudited		Audited
CAPITAL AND RESERVES
Share capital		77		77
Share premium		18,338		18,338
Other reserves		6,145		4,510
Statutory reserves		2,722		3,996
Foreign currency translation reserve		6,272		2,911
(Accumulated losses)/retained earnings		(13,834)		16,196
Equity attributable to equity holders of the parent		19,720		46,028
Minority interest		9,558		10,058
Total equity		29,278		56,086
Total liabilities and equity		307,633		209,392

  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the year ended 31 December 2008

 

 

	Attributable to equity holders of the parent ______________________________________________________________
	Share capital		Share premium		Other  reserves		Statutory reserve		Retained earnings		Foreign currency translation reserve		Total		Minority interests		Total equity
	$'000		$'000		$'000		$'000		$'000		$'000		$'000		$'000		$'000
Balance as at 1 January 2007 (Audited)	50		-		4,259		2,351		5,105		433		12,198		4,358		16,556
Foreign currency translation	-		-		-		-		-		2,478		2,478		510		2,988
Net income recognised directly in equity	-		-		-		-		-		2,478		2,478		510		2,988
Net profit for the financial year	-		-		-		-		12,688		-		12,688		5,516		18,204
Total recognised income and expense for the financial year	-		-		-		-		12,688		2,478		15,166		6,026		21,192
Dividend declared to shareholders	-		-		-		-		-		-		-		(278)		(278)
Issue of share capital	27		20,154		-		-		-		-		20,181		-		20,181
Share issue costs	-		(1,816)		-		-		-		-		(1,816)		-		(1,816)
Expenses of flotation	-		-		251		-		-		-		251		-		251
Transfer to statutory reserve	-		-				1,645		(1,645)		-		-		-		-
Transfer from minority interest	-		-		-		-		48		-		48		(48)		-
Balance as at 31 December 2007 (Audited )	77		18,338		4,510		3,996		16,196		2,911		46,028		10,058		56,086

 

 

	Attributable to equity holders of the parent _________________________________________________________________
	Share capital		Share premium		Other reserves		Statutory reserve		Retained earnings/ (accumulated losses)		Foreign currency translation reserve		Total		Minority interests		Total equity
	$'000		$'000		$'000		$'000		$'000		$'000		$'000		$'000		$'000
Balance as at 1 January 2008	77		18,338		4,510		3,996		16,196		2,911		46,028		10,058		56,086
Foreign currency translation	-		-		-		-		-		3,361		3,361		-		3,361
Capital injection to subsidiary from minority shareholders	-		-		-		-		518		-		518		-		518
Net income recognised directly in equity	-		-		-		-		518		3,361		3,879		-		3,879
Net loss for the financial year	-		-		-		-		(29,234)		-		(29,234)		(1,453)		(30,687)
Total recognised income and expense for the financial year	-		-		-		-		(28,716)		3,361		(25,355)		(1,453)		(26,808)
Transfer from/(to) statutory reserve	-		-		1,635		(1,195)		(440)		-		-		-		-
Transfer from minority interest	-		-		-		(79)		(874)		-		(953)		953		-
Balance as at 31 December 2008 (Unaudited)	77		18,338		6,145		2,722		(13,834)		6,272		19,720		9,558		29,278

Other reserves comprise the consolidation reserves and options issued.   CONSOLIDATED CASH FLOW STATEMENTS

For the year ended 31 December 2008

	Note		2008		2007
			$'000		$'000
			Unaudited		Audited
Cash flow (utilised )/generated from operating activities	a		(14,436)		6,850
Cash flow from investing activities
Purchase of property, plant and equipment			(39,775)		(46,181)
Purchase of intangible assets			(1,894)		(1,340)
Government grant received			425		461
Purchase of financial assets held for trading			-		(1,582)
Purchase of available-for-sale financial assets			(13)		-
Sales of available-for-sale financial assets			308		1,689
Dividend income from available-for-sale financial assets			62		93
Purchase of shares in subsidiary from minorities			-		(15)
Proceeds from disposal of property, plant and equipment			115		618
Cash flow used in investing activities			(40,772)		(46,257)
Cash flow from financing activities
Issuance of ordinary shares for public offering			-		20,181
Share issue expenses			-		(1,816)
Capital injection from minority shareholders in subsidiaries			518		-
Proceeds from bank borrowings			270,524		146,250
Repayment of bank borrowings			(207,184)		(117,366)
Loans from related parties			35,333		-
Interest paid			(15,349)		(5,715)
Dividends paid to minorities			-		(278)
Cash flow from financing activities			83,842		41,256
Net increase in cash and cash equivalents			28,634		1,849
Cash at beginning of year			5,585		2,528
Foreign currency translation differences			509		1,208
Cash at end of year			34,728		5,585

 

 

 

 

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTS

For the year ended 31 December 2008

(a) Cash flow from operating activities 

			2008		2007
			$'000		$'000
			Unaudited		Audited
(Loss)/profit before income tax			(29,695)		18,673
Adjustments for:
Amortisation of intangible assets			153		291
Provisions for doubtful debts			(231)		(243)
Depreciation of property, plant and equipment			15,422		7,158
Loss on disposal of property, plant and equipment			227		245
Amortisation of deferred capital grants			(195)		(132)
Share-based payment expense			-		439
Gain from debt restructuring			-		(535)
Share of result of associate			77		(64)
Dividend income from available-for-sale investments			(62)		(93)
Gain on disposal of available-for-sale investments			(20)		(371)
Foreign exchange gains			(1,237)		-
Interest income			(804)		(382)
Finance expense			15,349		5,715
Operating cash flows before working capital changes			(1,016)		30,701
Working capital changes:
Decrease/(increase) in:
Inventories			8,909		(25,669)
Trade and other receivables			531		1,848
Amounts due from related parties			(294)		909
Restricted cash			(35,701)		(18,734)
Increase/(decrease) in:
Trade and other payables			13,960		12,251
Amounts due to related parties			-		6,760

 

Cash (utilised in)/generated from operations			(13,611)		8,066
Interest received			804		382
Foreign currency translation differences			-		-
Income tax paid			(1,629)		(1,598)
Net cash (utilised in)/generated from operating activities			(14,436)		6,850

  NOTES TO THE AUDITED CONSOLIDATED FINANCIAL INFORMATION

1. Basis of preparation

The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 31 December 2008 or 2007. The financial information for the year ended 31 December 2007 is derived from the audited accounts for that year. 

The auditor's reported on the statutory accounts 2007 and their report was unqualified and did not include references to any matters to which the auditors drew attention to by way of emphasis without qualifying their report.

The audit of the statutory accounts for the year ended 31 December 2008 is not yet complete. The annual report will be finalised on the basis of the financial information presented by the directors in this preliminary announcement. 

The accounting policies applied in the preparation of this financial information are consistent with those that will be set out in the annual report for the year ended 31 December 2008. However, while the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS.

2. SIGNIFICANT ACCOUNTING POLICIES

2.1 Principles of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at the balance sheet date. The financial statements of the subsidiaries are prepared for the same reporting date as the parent company. Consistent accounting policies are applied for like transactions and events in similar circumstances.

All inter-group balances, transactions, income, expenses, profits and losses resulting from inter-group transactions that are recognised as assets, are eliminated in full. 

  Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases.

Acquisitions of subsidiaries are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus cost directly attributable to the acquisition. Identified assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest.

Any excess of the cost of the business combination over the Group's interest in the net fair value of the identified assets, liabilities and contingent liabilities represents goodwill. The goodwill is accounted for in accordance with the accounting policy for goodwill stated below.

Any excess of the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of business combination is recognised in the income statement on the date of acquisition.

Minority interests represent the portion of profit or loss and net assets in subsidiaries not held by the Group. These are presented in the consolidated balance sheet within equity, separately from the parent shareholder's equity, and are separately disclosed in the consolidated income statement.

2.2 Functional currency

The directors have determined the currency of the primary economic environment in which the Group operates, to be Renminbi ("RMB"). Sales and major costs of providing goods and services including major operating expenses are primarily influenced by fluctuations in RMB against US$.

The presentation currency of the Group is US$, being the currency in which the international oil market operates, and therefore the financial information has been translated from RMB to US$.

  The results and financial position are translated into US$ using the following procedures:

Assets and liabilities for each balance sheet are presented at the closing rate ruling at that balance sheet date; and income and expenses for income statements are translated at average exchange rates for the year, which approximates to the exchange rates at the date of transactions.

All resulting exchange differences are recognised in the currency translation reserve, a separate component of equity. Goodwill and fair value adjustments arising on the acquisition of foreign operations are treated as assets and liabilities of the foreign operations and are recorded in the functional currency of the foreign operations and translated at the closing rate at the balance sheet date.

2.3 Property, Plant and Equipment

Property, plant and equipment are recorded at historic cost, less accumulated depreciation and any impairment loss where the recoverable amount of the asset is estimated to be lower than its carrying amount.

Property, plant and equipment in the course of construction for production or administrative purposes are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.

Depreciation is charged so as to write off the cost of the assets over their estimated useful lives, using the straight-line method, as follows:

 

Buildings	-20-30 years
Machinery equipment	-2-18 years
Electronic equipment, furniture and fixtures	-5-12 years
Motor vehicles	-8-12 years

 The residual values, useful life and depreciation method are reviewed at each financial year-end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the consolidated income statement.

2.4 Intangible Assets

a) Goodwill

Goodwill arising in a business combination is initially measured at cost being the excess of the cost of the business combination over the fair value of the Group's interest in the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, and any impairment loss arising is charged to administrative expenses in the consolidated income statement. 

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the Group's cash generating units which are expected to benefit from the synergies of the combination.

b) Other intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

  Intangible assets are amortised through administrative expenses on a straight-line basis over their estimated useful economic lives and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortisation period and amortisation method for intangible assets are reviewed at least at each financial year-end.

The estimated useful economic lives of the Group's intangible fixed assets are as follows:

Land use rights	- 20-50 years
Industry rights	- 4-10 years
Software	- 2-5 years

c) Land use rights

The up-front prepayments made for the land use rights are expensed in the consolidated income statement on a straight-line basis over the period of the lease, which ranges from 20 to 50 years, or where there is impairment, the impairment is expensed in the consolidated income statement. 

2.5 Cash and Cash Equivalents

Cash and cash equivalents comprise cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2.6 Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

a) Sales of goods

Revenue is recognised upon the transfer of significant risk and rewards of ownership of the goods to the customer, which generally coincides with delivery and acceptance of the goods sold. Revenue is not recognised to the extent where there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods.

  b) Interest income

Interest income is accrued on a time apportioned basis, by reference to the principal outstanding and at the interest rate applicable, on an effective yield basis.

c) Dividends

Dividend income is recognised when the Group's right to receive payment is established.

2.7 Taxation

Income tax for the financial year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that is relates to items recognised directly in equity, in which case such tax is recognised directly in equity.

Current tax assets and liabilities for the current and prior period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base, except for differences arising on:

- the initial recognition of goodwill;

-the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

- investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).

Deferred tax assets and liabilities are offset when the group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:

 - the same taxable group company; or

- different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

2.8 Segment Information

 

A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments

a) Business segments

The petrochemical segment provides the diesel oil, gasoline as well as other similar commercial oil by processing crude oil.

The speciality chemical segment is a diverse supplier of methyl carbonate, propylene and relating products which used in the areas of medical, agriculture, food and textile industry.

b) Geographical segments 

The Group's operations are all located in Shandong Province, People's Republic of China ("PRC"), so the geographical segments are based on the location of the Group's customers, which are located in China and aboard.

  c) Allocation basis and transfer pricing

Segment assets, liabilities and results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly the items, which can not be allocated reasonably. 

Transfer prices between business segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment revenue, expense and results include the transfers between business segments. These transfers are eliminated on consolidation.

2.9 Management Estimates

The preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying the Group's accounting policies and requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amount of revenue and expenses during the reporting period.

The following estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are disclosed below: 

a) Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of the Group's goodwill at 31 December 2008 is $1.0m (2007: $0.9m). 

  b) Depreciation of plant and equipment

The cost of plant and equipment used for the manufacturing process is depreciated on a straight line basis over its estimating useful life. Managements' estimate of the useful life of plant and equipment is within 2 to 30 years. Management believes that these are common life expectancies applied in the chemical industry. Changes in the expected level of usage and technological developments could impact the economic useful life and the residual value of these assets, therefore, future depreciation charges could be revised.

c) Provision for impairment of account receivables

The Group makes sales on credit. A proportion of the outstanding credit sales may prove uncollectible in due course. An estimate is made of the uncollectible portion of accounts receivables using a percentage based on the aging profile of the amounts outstanding. 

Although these estimates are based on management's best knowledge of current events and actions, actual results may differ from these estimates. 

d) Share-based payments

The Group has an equity-settled share-based remuneration for Hanson Westhouse Limited and Shanghai Riemann Investment Advisory Ltd., for their services. The services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using Black-Scholes valuation model, on the date of grant based on certain assumptions.

e) Inventory

The Group reviews the net realisable value of, and demand for its inventory on a monthly basis to provide assurance that recorded inventory is stated at lower of cost or net realisable value. Factors that could impact estimated demand and selling prices include the timing and success of future technological innovations, competitor actions, suppliers' prices and economic trends. If total inventory losses differ from management estimates by 1%, the Group's consolidated net income in 2008 would have declined by an estimated of $388,870. 

  3. TAXATION

Major components of income tax expense

The major components of income tax expense are as follows:

		2008		2007
		$'000		$'000
		Unaudited		Audited
Current income tax		1,075		-
Deferred income tax:
Originating and reversal of temporary differences		(83)		469
Income tax recognised in income statement		992		469

Relationship between tax expense and accounting profit

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

		2008		2007
		$'000		$'000
		Unaudited		Audited
Accounting (loss)/profit before income tax		(29,695)		18,673
Tax at respective companies' domestic income tax  Rate		(7,071)		5,148
Effect of partial tax exemption		(922)		(4,578)
Non-deductible expenses		(274)		-
Utilisation of previously unrecognised tax loss		828		(86)
Unrecognised tax loss		8,397		-
Share of results of associate		34		(15)
Income tax expense recognised in income statement		992		469

  Deferred tax assets

Deferred income tax assets relates to the following:

		2008		2007
		$'000		$'000
		Unaudited		Audited
Provision for doubtful debts		635		632
Allowance for long-term investment		26		29
Depreciation		130		-
		791		661

Unrecognised tax losses

As at 31 December 2008, the Group has tax losses of approximately $8.6m (2007: $1.4m) that are available to offset against future taxable profits of the companies in which the losses arose for which no deferred tax asset is recognised due to uncertainty of its recoverability. The use of these tax losses is subject to the agreement of the tax authorities and compliance with certain provisions of the tax legislation of the country in which the companies operate.

The Company and the significant subsidiaries are subject to income tax on the following bases and at the following rates:

a) HaiKe Chemical Group

Its applicable tax rate is nil.

  b) Hi-Tech Chemical 

In March 2006, the company changed to be a foreign invested enterprise. According to the taxation laws, the applicable tax rate is 24% and the company is entitled to exemptions from PRC income tax for two years starting with the first profit-making year and to a 50% relief from PRC income tax for another three years thereafter. Therefore, it was fully tax exempted for 2006 and 2007. As a result of the application of new taxation laws since 1 January 2008 that introduced the new tax rate of 25%. The 50% relief income tax rate for the company must be based on the new tax rate of 25%, so the effective tax rate from 2008 to 2010 is 12.5%, the company will be subject to the applicable tax rate of 25% after the tax holiday. 

c) Hi-Tech Spring and Hi-Tech Shengli

In September 2006, each company registered as a foreign invested enterprise. According to the taxation laws, the applicable income tax rate is 24% and each company is entitled to exemptions from PRC income tax for two years since October 2006 and a 50% relief from PRC income tax for another three years thereafter. In 2006, the two companies started to generate profit and utilizing the tax holiday. Therefore, it was fully tax exempted for 2006 and 2007. As a result of the application of new income taxation laws since 1 January 2008 that introduced the new tax rate of 25%, accordingly, the 50% relief income tax rate for the two companies must be based on the new tax rate of 25%, so the effective tax rate from 2008 to 2010 is 12.5%. After the tax holiday, its applicable tax rate will be 25%.

d) Tiandong Biochemical

Its applicable tax rate is nil.

4. SEGMENTAL ANALYSIS

(a) Business segments

The following table presents information about the Company's revenues and results by business segment for the years ended 31 December 2008 and 2007, respectively.

  

		2008		2007
		$'000		$'000
		Unaudited		Audited
Sales to external customers
Petrochemical		526,939		280,635
Speciality chemical		104,594		78,400
		631,533		359,035

(Loss)/profit for the year
Petrochemical		(36,761)		10,192
Share of results of associate		(77)		64
		(36,838)		10,256
Speciality chemical		8,254		11,277
Unallocated expenses		(1111)		(2,860)
(Loss)/profit from operation before income tax		(29,695)		12,042
Income tax benefit (expense)		(992)		(469)
(Loss)/profit for the year		(30,687)		18,204

 

		2008		2007
		$'000		$'000
		Unaudited		Audited
Segment assets
Petrochemical		247,981		163,205
Investment in associate		61		179
		248,042		163,384
Speciality chemical		113,781		81,368
Unallocated assets		239		1,206
Less: Intersegment balance		(54,429)		(36,566)
		307,633		209,392
Segment liabilities
Petrochemical		242,040		133,981
Speciality chemical		86,904		52,322
Unallocated liabilities		3,840		3,569
Less: Intersegment balance		(54,429)		(36,566)
		278,355		153,306

Other segment information
Capital expenditure on property, plant and equipment and intangible assets
Petrochemical		17,821		51,633
Speciality chemical		32,449		3,206
		50,270		54,839
Depreciation and amortization
Petrochemical		9,568		2,657
Speciality chemical		6,007		4,792
		15,575		7,449

(b) Geographical segments

The following table provides an analysis of the Company's sales by geographical market.

		2008		2007
		$'000		$'000
		Unaudited		Audited
Sales to external customers
People's Republic of China		614,427		346,998
Exports		17,106		12,037
		631,533		359,035

5. (LOSS)/EARNING PER SHARE

(Loss)/earnings for the purpose of basic and diluted loss per share are the net loss attributable to equity holders of the parent of $29,234,000 (2007: net profit of $12,688,000).

The weighted average number of ordinary shares used in the calculation of earnings per share has been derived as follows:

 

  

		2008		2007
		Unaudited		Audited
Weighted average number of ordinary shares-basic		38,353,571		36,804,099
Dilutive effect of share options		-		324,314
Weighted average number of ordinary shares-diluted		38,353,571		37,128,413

6. SHARE CAPITAL

The Company has an authorised share capital of 43,050,000 ordinary shares at $0.002 each. It has issued and fully paid share capital of $38,353,571 ordinary shares at $0.002 each.

There is no change in share capital during the year ended 31 December 2008.

7. CONTINGENCIES

As at 31 December 2008, as a warrantor, the Group has guaranteed the bank loans of third parties to an aggregate amount of $57.5m (2007: $33.6m). As the financial statements of the warrantees indicate that the debtors are able to pay their debts as they mature, the Company's risk of bearing significant warranty liabilities is considered low. 

8. ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at 11:00 am (China Time) on Friday, 24 July 2009 at the Company premise in Dongying, China.

ENDFR SSMFWASUSEFM