The Group will be dedicated to maintaining our competitiveness through continuous improvement of our product mix and reduction of various production costs.
REVIEW OF YEAR 2013
In 2013, the global economy remained volatile and the Mainland China domestic economic growth rate declined as compared with that of the previous year. The weak demand for steel in Mainland China led to a significant decrease in the price of steel products of the Group for the year ended 31 December 2013 as compared with the previous year. On the other hand, the sluggish steel market resulted in the impairment and provisions to be made against certain assets of the Group. As a result, the Group recorded revenue and net profit of approximately RMB 32.5 billion and approximately RMB 63.0 million respectively in 2013, a decrease of 10.0% and 57.0% as compared with those of the prior year respectively. The profit attributable to owners of the Company amounted to RMB 101.6 million, a decrease of 19.4% as compared with that of prior year.
With respect to the steel business, the Group has been actively taking measures to enhance our competitiveness in this sector. With our endeavor to the research and development of new products, the Group has successfully launched the steel pile sheet products by end of 2013 and applied the products to the major projects along the coastal area of certain provinces of the PRC. Such product was received a high appraisal with its application to the projects. It is believed that such new products will contribute a significant revenue to the Group in 2014. In addition, the Group has sold approximately 3,084,000 tonnes of self-manufactured H-section steels products in 2013 and continued to be a market leader in the PRC for H-section steels. The Development Plan for the Steel Industry of the PRC clearly stipulates that steel plates and H-section steel with high intensity, shock resistance, fire resistance and weather-proof as well as the high-intensity rebar would be the major elements contributing to the improvement of construction sector, which in turn provided a favorable opportunity for the product development of the Group.
Furthermore, after upgrading the production facilities of the Group by Oriental Green Energy-Saving Environmental Protection Engineering Co. Ltd., an indirect non-wholly owned subsidiary of the Company, which has obtained high recognition in the industry in terms of energy-saving and environmental protection technologies, the self- generated electricity of the Group has reached 30% in 2013 which highly improved our operational efficiency. After the change of the senior management of Foshan Jin Xi Jin Lan Cold Rolled Sheet Company Limited (“Jinxi Jinlan”) and further enhancing its internal control, the operating performance of Jinxi Jinlan has improved slightly as compared with that of 2012. Jinxi Jinlan is now undergoing a series of upgrading work which the Group believed that Jinxi Jinlan will achieve better performance soon.
In view of the current tough operating environment in the steel making industry, the Group considers that cautious involvement in other industries will support the return to the shareholders of the Company (the “Shareholders”). Therefore, the Group started to explore other potential business opportunities in order to promote the long-term growth of the Group’s results.
With respect to the real estate business, the Group had completed gross floor area (“GFA”) of 19,646 m2 of the second phase of the property development project namely “Donghu Bay” which is located in Tangshan City, Hebei Province, the PRC and recorded revenue and operating profit from real estate business of approximately RMB 112.9 million and RMB 3.4 million respectively for the year ended 31 December 2013. The whole of the second phase of the Donghu Bay project is expected to be completed in 2014. In addition, the Group had commenced the preliminary development of the parcels of land namely “Xintiandi” which are located in Suzhou City, the PRC with total construction GFA of approximately 105,000 m2. The residential and basement part and the commercial and office part of the Xintiandi project is expected to be completed in October 2015 and December 2016 respectively.
The Group will also actively promote the usage of environmental friendly construction and to develop, introduce and utilise the upgraded H-section steel which can be used in the property development.
For the year ended 31 December 2013, the revenue and gross profit arising from trading of steel products and iron ore were approximately RMB 5,735.9 million (2012: approximately RMB 4,131.2 million) and approximately RMB 100.2 million (2012: approximately RMB 79.1 million) respectively.
The Group also engages in financing industry through its subsidiaries, Oriental Evertrust Finance Leasing Co., Ltd. (“Oriental Evertrust”) and Tianjin Oriental Huitong Microcredit Company Limited (“Oriental Huitong”). As at 31 December 2013, Oriental Evertrust and Oriental Huitong provided loans amounting RMB 404.5 million to independent third parties at interest rates ranged from 12.0% to 24.0% per annum.
Since the Group introduced the world’s largest steel corporation ArcelorMittal as its strategic shareholder in 2008, collaboration between the Group and ArcelorMittal has grown considerably. ArcelorMittal not only appointed experienced executives to the Board of the Group to participate in decision making for the Group’s business development but also sent technicians and management staff to our production sites to inspect our operations and provide professional advice.
On 6 November 2013, the Company was informed by Wellbeing Holdings Limited, Chingford Holdings Limited and Mr. HAN Jingyuan (together, the “Plaintiffs”) that a Writ of Summons has been issued by the Plaintiffs against ArcelorMittal, pursuant to which, the Plaintiffs sought an order that ArcelorMittal procure that ArcelorMittal Holdings AG (formerly known as Mittal Steel Holdings AG) (“AM Holdings AG”) sell a sufficient number of shares of the Company such that the Company’s 25% minimum public float requirement pursuant to Rule 8.08 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) (the “Minimum Public Float”) is restored. Further details of the above have been disclosed in the announcement of the Company dated 7 November 2013.
Based on the current information available, the Company is of the view that the Writ of Summons should not have any material adverse impact on the Company’s operation or financial position.
Sales analysis from sale of self-manufactured steel products
In 2013, the total sales volume was 8,665,000 tonnes (2012: 9,418,000 tonnes), representing a decrease of approximately 8.0%.
The sales volume breakdown during the year was as follows:
Revenue in 2013 was RMB 26,466.2 million (2012: RMB 31,329.9 million), representing a decrease of approximately 15.5%.
The sales breakdown and average selling price by product (excluding value added tax) during the year were as follows:
The decrease in revenue was mainly due to the slowdown of the investment in steel related industries and the imbalance between the demand and the supply of the steel production capacity in Mainland China which led to a decrease in the Group’s average selling price by 8.2% to RMB 3,054 per tonne in 2013 from RMB 3,327 per tonne in 2012.
Cost of Sales and Gross Profit
The consolidated gross profit in 2013 was RMB 867.8 million (2012: RMB 932.5 million), representing a decrease of 6.9%.
Average unit cost per tonne, gross profit per tonne and gross profit
margin during the year were as follows:
The gross profit per tonne in 2013 was RMB 100 representing an increase of approximately 1.0% as compared to that of RMB 99 in 2012. Gross profit margin increased to 3.3% in 2013 from 3.0% in 2012. Increase in gross profit margin was primarily because the Group produced more percentage of high gross margin products in 2013 as compared with that of 2012.
In 2013, the Group had completed GFA of 19,646 m2. The status of the completed GFA by project is set out in the following table.
For the year ended 31 December 2013, the revenue from real estate business of the Group amounted to approximately RMB 112.9 million. The GFA of properties delivered was 17,481 m2. The average selling price of properties delivered was approximately RMB 6,458 per m2.
As at 31 December 2013, the Group had the following projects under construction with a GFA of approximately 240,000 m2:
The above projects are expected to be completed from 2014 to 2016 and will contribute stable revenue and profits to our Group.
Liquidity and Financial Resources
In order to sustain a stable financial status, the Group closely monitors its liquidity and financial resources.
As at 31 December 2013, the Group had unutilised banking facilities of approximately RMB 12.5 billion (2012: RMB 10.5 billion).
As at 31 December 2013, the current ratio of the Group, representing current assets divided by current liabilities, was 1.5 (2012: 1.3) and the gearing ratio, representing total liabilities divided by total assets, was 59.1% (2012: 61.4%).
As at 31 December 2013, the cash and cash equivalents of the Group amounted to approximately RMB 968.1 million (2012: approximately RMB 879.0 million).
After considering its cash and cash equivalents as well as the banking facilities currently available to the Group, it is believed that the Group has sufficient capital to fund its future business operations and for general business expansion and development.
As at 31 December 2013, borrowings of RMB 6,249.8 million of the Group bore fixed interest rates ranged from 1.2% to 8.0% per annum and borrowings of RMB 1,469.7 million of the Group bore floating rates ranged from 1.5% to 7.7% per annum. The Group’s exposure to changes in market interest rates was considered to be limited. The Group did not use any derivatives to hedge its exposure to interest rate risk for the year ended 31 December 2013 and 2012.
Moreover, majority of the borrowings of the Group as at 31 December 2013 were non-current borrowings.
The Group monitors its capital on the basis of the debt-to-capital ratio. This ratio is calculated as total debt divided by total capital. Total debt includes current and non-current borrowings, finance lease obligations and borrowings from related parties. The Group regards its non-current borrowings, non-current portion of its finance lease obligations and borrowings from related parties and its equity attributable to owners of the Company as its total capital. As at 31 December 2013, the debt-to-capital ratio of the Group was 58.9% (2012: 63.2%).
The consolidated interest expenses and capitalised interest in 2013 amounted to RMB 495.3 million (2012: RMB 571.3 million). The interest coverage (divide profit for the year before finance cost – net, income tax expenses, non-recurring item and share-based payment by total interest expenses) was 1.1 times (2012: 1.1 times).
As at 31 December 2013, the Group had capital commitments of RMB 743.5 million (2012: RMB 563.0 million). It is estimated the capital commitments will be financed by the Group’s internal resources and unutilised banking facilities.
Guarantee and Contingent Liabilities
As at 31 December 2013, the Group’s contingent liabilities amounted to approximately RMB 21.2 million (2012: RMB 30.0 million), which was the provision of guarantee for bank borrowings in favor of a third party.
Pledge of Assets
As at 31 December 2013, the net book value of the Group’s inventories amounting to approximately RMB 283.2 million (2012: approximately RMB 122.0 million), notes receivable amounting to approximately RMB 1,297.4 million (2012: approximately RMB 2,200.3 million) and restricted bank balances amounting to approximately RMB 1,582.8 million (2012: approximately RMB 1,087.0 million) had been pledged as security for issuing notes payable of the Group and the Group’s banking facilities.
As at 31 December 2013, the net book value of the Group’s inventories amounting to approximately RMB 40.5 million (2012: nil) and restricted bank balances amounting to approximately RMB 33.2 million (2012: RMB 22.8 million) were withheld by and in custody of the courts.
Foreign exchange risk is the risk to the Group’s financial conditions and results of operations arising from movements of foreign exchange rates. The Group mainly operates in the Mainland China with most of the transactions denominated and settled in RMB. The Group’s foreign exchange risk primarily arises from the procurement of iron ores and the relevant products from overseas suppliers and the Group’s senior notes, which is denominated and settled in USD. Foreign exchange rates fluctuates in reaction to the macro-economic performance of different countries and fund flows between countries arising from trade or capital commitments. The Group has not used any derivatives to hedge its exposure to foreign exchange risk for the years ended 31 December 2013 and 2012.
Iron Ore Swaps
In view of the significant fluctuation of iron ore price in 2013, the Group has entered into iron ore swap contracts so as to reduce the impact of the volatility of the iron ore price on the Group. The Group uses a combination of iron ore derivatives to achieve the above purpose.
The Board did not recommend the payment of any final dividend for the year ended 31 December 2013.
Post Balance Sheet Events
Save as disclosed in this report, there are no events to cause material impact on the Group from the balance sheet date to the date of this report.
ACCREDITATION FOR THE COMPANY AND ITS MANAGEMENT
For the year ended 31 December 2013, Hebei Jinxi Iron and Steel Group Company Limited (“Jinxi Limited”), the subsidiary of the Company, was awarded as “PRC Famous Trademark”, and awarded as “Standard Research and Development Base of Section Steel” by National Technical Committee for Steel Standardization.
The Company plans to distribute not less than 20% of the Group’s distributable profit as dividend after its listing. However, the actual amount of dividend and as a percentage to profit will be at the discretion of the Board and will depend upon the Company’s future operation and earnings, capital requirement and surplus, general financial condition, contractual restrictions, and other factors that the Board considers relevant. In addition, pursuant to the relevant PRC laws, the distributable profit of the PRC respective subsidiaries of the Company should not be higher than its net profit, after appropriation to the statutory reserve as determined by the generally accepted accounting principles in the PRC.
The Company maintained close contact with its investors during the year of 2013. The Company not only made timely disclosures of the Company’s information through the website of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) for increasing the transparency of the Company, but also held meetings with investors, updating them on the Group’s business development and industrial trend.
This helped to promote investors’ understanding of the Group while allowing us to understand more about the opinions and expectations of investors. In future, the Group will further its effort to maintain close contact and effective interactive communication with investors.
HUMAN RESOURCES AND REMUNERATION POLICIES
As at 31 December 2013, the Group had a workforce of approximately 13,700 and temporary staff of approximately 4,100. The staff cost included basic salaries and benefits. Staff benefits included discretionary bonus, medical insurance plans, pension scheme, unemployment insurance plan, maternity insurance plan and the fair value of the share options, etc.. Effective from July 2008, the Group implemented a workers’ injury insurance scheme and contributed 1.5% of the workers’ wages to the Social Insurance Bureau. According to the Group’s remuneration policy, employees’ package is based on productivity and/or sales performance, and is consistent with the Group’s quality control and cost control targets.
In 2014, it is expected that the economic policies of the PRC government will remain in the same direction and focus on the stable growth. Following the strict national restrictions on environmental protection and safety policy, the obsolete steel and iron production capacity will be eliminated and the excess production of steel and iron will be reduced in the near future. As the Group has previously invested substantial resources to work on upgrading its production facilities with the targets to reduce energy consumption and emission, this will provide a favorable condition for the future development of the Group. The Group will be dedicated to maintaining our competitiveness through continuous improvement of its production efficiency, adjustments made to the steel and iron product mix and reduction of various production costs.
With the contributions of increased income from new developed business sectors, the Directors believe that the past strategy of developing new business is on the right track and the Group will continue to increase its resources allocated to these new developed business prudently in order to maintain its competitiveness and increase its profit margin.
The Directors are also optimistic that the demand of steel products will stabilise in 2014 along with the growth in the construction projects by the PRC government such as the low-income housing and urbanisation planning. The Group will continue to tackle the challenges amidst uncertain economic environment and optimise its efficiency and profit margins through effective management and the continued collaboration of its customers.
Since its listing in 2004, the Group has continued to expand its business, diversify its steel product categories and business portfolio. During the last ten years (since being listed), the Group’s overall crude steel production capacity has reached 11.0 million tonnes per annum from 3.1 million tonnes per annum at the time of the listing. Its product portfolio has grown from billets to a variety of steel product series – each in a comprehensive range of products and is available in different specifications. These product series include H-section steel products, steel pile sheet products, strips and strip products, billets, cold rolled sheets and galvanised sheets and rebar. Moreover, the H-section steel products of the Group commands a leading position in China. The Group has been gradually diversifying its business. In addition to expanding its supply chain through upstream and downstream integration, the Group has also expanded horizontally by tapping into other business sectors. The Group will strive to take full advantage of the current solid financial condition and efficient management to intensify the continuous development of the Group and to maximise the Shareholders’ value.
The Board would like to extend its heartfelt gratitude to all of our staff for their hard work and dedication to the Group, and to our Shareholders for their continuous support and trust in the Company.