Haike Chemical Group Regulatory News (HAIK)

24 Sep 2009 07:00



24 September 2009

HaiKe Chemical Group Ltd.

INTERIM RESULTS FOR THE SIX MONTHS ENDED 

30 JUNE 2009 (UNAUDITED)

HaiKe Chemical Group Ltd. ("HaiKe" or the "Company"), the AIM quoted (AIM: HAIK) petrochemical, speciality chemical and biochemical business based in China, is pleased to announce its unaudited results for the six months ended 30 June 2009.

Highlights

Mr. Yang Xiaohong, Executive Chairman, said:

"I am pleased to present our results for the first six months of 2009, during which time the Company returned to profitability, following a loss reported in the same period in 2008. This was largely due to increased profit margins in the oil refinery business. In early 2009, the PRC Government implemented a new pricing mechanism for refined products and made five successive adjustments to the prices of domestic refined products in order to align the price trends of domestic refined products to international crude oil prices. As a result, the Company's petrochemical division recorded an impressive $12.4m profit in the first six months of 2009. This compares with  a loss of $6.2m in the first half of last year.

With the background of the global financial crisis, there has been a slowdown in the real economy and a decline in demand for chemical products. In response, the PRC government successfully launched a RMB4 trillion stimulus plan and implemented a series of policies aimed at recovery. These included substantially raising tax refunds on the export of chemical products and their related finished products. I believe this will have a positive impact on overall economic activity, which in turn will improve the prospects for the Company's speciality chemical division. 

While we recognise the volatile nature of most of the markets we operate in, the Company will continue to focus on the market development of our speciality chemical products and on improving the flexibility of our petrochemical business model."

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First Half 2009 Results

Operating profit increased significantly by 185% from $5.5m in the first half of 2008 to $15.7m in 2009, and profit after tax was $10.8m (H1 2008: loss after tax of $1.0m). The gross margin improved significantly from 3.6% in 2008 to 8.8% in 2009.The improvement in the Company's profitability was largely due to the relatively stable oil prices experienced in the first half of 2009. 

Total revenue decreased by 17.6% from $317.5m in 2008 to $261.5m in 2009. On a divisional  basis, revenue from petrochemical products decreased from $266.8m in 2008 to $218.2m in 2009 as a result of an average 28%  decrease in selling price, although sales volume increased by 8%. Revenue from speciality chemical products decreased by 14.4% from $50.7m in 2008 to $43.4m in 2009 as a result of an average 31% decrease in selling  price. Trading volume increased by 68%.

Cost of sales decreased by 22.1% from $306.2m in 2008 to $238.4m in 2009, reflecting decreasing raw material  prices and the Company's effective control on costs. The overall refinery utilisation rate was at 72%, giving a yield of approximately 98%. This helped to decrease the cost of final product production. In the speciality chemical  division, the Company has undertaken a series of strict cost control measurements to minimise its electricity consumption and to improve raw material yield. 

Sales and distribution expenses were marginally reduced from $2.2m in 2008 to $2.1m in 2009. Other administrative expenses increased slightly from $4.5m in 2008 to $5.3m in 2009, as a result of increased salary and employee benefit costs. Finance costs decreased from $5.6m in 2008 to $4.6m in 2009 due to a decrease in the prime interest rate in China from 6.57% to 5.58% during the period.

The income tax expenses decreased from $0.7m in 2008 to $0.1m in 2009 due to the carried forward taxable loss recorded in 2008. The carried forward loss will be available to offset against future taxable profit of HaiKe's subsidiaries companies.

The profit attributable to the shareholders of HaiKe in the first half of 2009 was $10.0m compared with a loss of $3.0m in 2008.

Basic and diluted earnings per share were both US 26 cents in 2009, compared with a loss per share of US 7.8 cents in 2008.

Capital expenditure

Investment in property, plant and equipment increased from $25.5m in the first half of 2008 to $51.5m in the same period in 2009, mainly due to the construction work for various expansion projects. These projects are: 1) the  construction of Ruilin refinery facilities which will be completed in the first half of 2010; and 2) the construction of a new production and a research and development facility for Tiandong Biochemical which will be finished in the second half of 2009. 

To continue to meet the increasing environmental requirements, HaiKe's refinery division is building a sulphur collection system and a hydrogenisation system to achieve a cleaner gasoline output. Construction costs for the two facilities in 2009 were $9.7m; they are expected to be commissioned in the fourth quarter of 2009. 

Cash flows

In the first half of 2009, cash used for operating activities amounted to $25.7m comparing to $2.5m in 2008 due to increased refinery feedstock inventory.

Cash outflow for investment in property, plant and equipment of $41.5m was mainly funded from an increase in bank  facilities, from $156.4m as at 31 December 2008 to $208.1m as at 30 June 2009, in which long term project financing increased from $2.9m in 2008 to $17m. Within the Chinese banking system, it is common to provide bank borrowings on a short term renewal basis to most non-government controlled enterprises. It is expected that all HaiKe's short term facilities will be renewed when they fall due.

Cash and cash equivalents marginally increased from $34.7m as at 31 December 2008 to $37.1m as at 30 June 2009.

Liquidity and financial risk

We believe that the Company has sufficient funds to meet foreseeable business requirements due to a number of factors. These include raw material costs, which are currently stable and marginally decreasing, resulting in an anticipated improvement in overall market demand in both the petrochemical and speciality chemical sectors.

Operational Review

During the first half of 2009, the petrochemical division continued to experience slowing market conditions in the industrial sector, especially as the sales price of diesel dropped by 28% and sales volume dropped by 12%  compared to the same period last year. Sales volume of gasoline increased by 59%, as a result of the growing number of family vehicles, although the sales price dropped by 18% compared to the first half of 2008. This has contributed to the overall decrease in the group revenue in the period. However, we believe with the PRC government's stimulus plan, the overall market demand for diesel will recover in the second half of 2009. 

The Company believes that the pricing mechanism of refined products implemented in May this year will help the Company to respond to the movement of global crude and fuel oil markets more quickly. Under the current pricing mechanism and the relatively stable crude oil price, the Company has better visibility for the selling prices of refined products, which provides the Company with better flexibility and forward planning to source feedstock into the refinery facilities.

In the speciality chemical division, as a result of the ongoing challenging market conditions, a difficult period was experienced in the first six months of 2009. The price for DMC, our major speciality chemical product, dropped by 32%, with the sales volume dropping by 42% due to a slowdown in the overseas demand for this product. Raw material prices for DMC decreased during the first half of 2009, but the reduction in the production costs was unable to offset the fall in revenue. This resulted in the division contributing negatively to the group in terms of profit. However, we believe that the situation will be reversed in the second half of 2009 with general global economic recovery and with the benefit of the local economic stimulus plan for mid industrials. In the first half of 2009, demand for the chloral-alkali business increased from the domestic basic industries such as cement, glass and automobile manufacturing.

The biochemical business, being part of the speciality chemical division, remains the Company's smallest contributor to group revenue, although revenue increased by 307% to $6.9m with gross profit growing by 256% compared to 2008. Both the selling price and the price of heparin raw materials increased compared to the same period last year. Most of the demand was from new markets such as South America and Russia. In addition, the biochemical business successfully passed the quality assurance audit from Brazil in 2009. This will help the Company access the strong growth of the Brazilian market. By the end of June 2009, the biochemical business has already obtained quality assurance certificates in Brazil, the European Union, and India.

Outlook

Since the beginning of 2009 we have seen the petrochemical market both recover and stabilise. The crude oil price has seen less volatility and the PRC government has been more active in response to crude oil price fluctuations. However, the Chinese petrochemical market itself remains volatile and small changes in the market dynamics can have a material effect on the Company's profitability. This was particularly apparent in July and August when losses were made on the Company's refining activities, due to a relatively high priced fuel oil feedstock inventory, coupled with relatively low yields of gasoline and diesel. This situation has improved since the PRC government mandated price rise for refined products earlier this month and the outlook for the remainder of the year is more positive.

The Company continues to maintain good relationships with Sinopec, PetroChina and CNOOC, in particular, as this can benefit the Company in terms of further stabilising its oil supplies. In addition, the Company has already started to look at various options including hedging in order to protect the Company from oil price volatility. 

The speciality chemical division had a difficult period in the first half of 2009, impacted by the global economic crisis. The focus for the second half of 2009 is to continue to market the specialty chemical products domestically. This, along with the government's stimulus plan and the gradual recovery in the global economy, should see trading conditions for the speciality business improve.

In the biochemical business, the Company is looking to complete the construction of the new facilities later this year. The additional production facilities, coupled with the new research and development capability will assist with the development of the biochemical business and will ensure that it continues its significant growth.

Consolidated statement of comprehensive income 

For the 6 months ended 30 June 2009

  Consolidated balance sheet

As at 30 June 2009 

Consolidated statement of changes in equity 

For the six months ended 30 June 2009

Notes to the interim consolidated financial information 

For the six months ended 30 June 2009 

1. General information 

Haike Chemical Group Ltd. (the "Company") was incorporated on 20 June 2006. 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 manufacturing of petrochemical and chemical products. The principal place of business of the Company is West of Boxin Road, Shikou Country, Dongying City, Shandong Province, China.

The financial statements present information about the Company and its subsidiaries as a consolidated group of companies.

2. Accounting policies

Basis of presentation

The financial information has been prepared using the recognition and measurement principles of International Accounting Standards, International Financial Reporting Standards and interpretations adopted for the use in the European Union. The principle Accounting Policies used in preparing the interim statements are those the group expects to apply in its financial statements for the year ended 31 December 2009 and are unchanged from those disclosed in the group's report and financial statements for the year ended 31 December 2008, except that the requirements of IAS 1(revised), Presentation of Financial Statements, have been adopted, resulting in the presentation of a consolidated statement of changes in owners' equity. This presentation has been applied to comparative information in this report. Financial information for the six months ended 30 June 2009 and for the six months ended 30 June 2008 is unaudited and does not constitute the group's financial statements for those periods. Comparative financial information for the full year ended 31 December 2008 has, however, been derived from the audited financial statements for that period. The Board of Directors approved this interim statement on 24 September 2009.

3. Business divisions 

The following tables present certain sales, profit regarding the Group's business divisions for the periods ended 30 June 2008 and 2009. 

   Business divisions（Cont'd）

 Geographical divisions 

 Six months to 30 June 2009 (Unaudited)

 Twelve months to 31 Dec 2008 (Audited) 

3. Taxation 

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:

Deferred tax assets

Deferred income tax assets relates to the following:

Unrecognised tax losses

As at 30 June 2009, the Group has tax losses of approximately $5.1m (30 June 2008: $5,8m; 31 December 2008: $8.6m) that are available to offset against future taxable profits of the companies in which the losses arose and 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 China. 

4. Earnings per share from continuing operations

Earnings for the purpose of basic and diluted earnings per share are the net profit/(loss) for six months ended 30 June 2009 attributable to equity holders of the parent of $9,903,494 (for six months ended 30 June 2008: $2,975,000 of loss, for the year ended 31 December 2008: $29,234,000 of loss)

The profit/(loss) from continuing operations for the financial period attributable to equity holders of the parent is as follows: 

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

5. Contingencies 

As at 30 June 2009, as a warrantor, the Group has guaranteed the bank loans of third parties to an aggregate amount of $125.8m (30 June 2008: $50.0m; 31 December 2008:$57.5m). It is unlikely that any significant liability will arise because the financial statements of the warrantees indicate that the debtors are able to pay their debts as they mature.