Chairman Statement

2016 Annual Report

MANAGEMENT dIsCUssION
ANd ANALysIs
It is that time of the year again for a bit of reflection, for looking back and then forward to what is to come. The last several years really have not been great, with each successive year going from bad to worse, culminating to a scene of carnage for the Group in the financial year 2016.
It has not been a year to look back upon with much fondness. The China economy continued to be heading in a downward path, closing at a relatively poor average rate of 6.7% in 2016, the lowest ever recorded since 1990. In addition to the general lackluster landscape besetting the China economy, there were also numerous socioeconomic obstacles weighing down on the steel and coke industry during the year.
Firstly is the continued deceleration of the China economy. The continuous slowdown of the economy was primarily precipitated by the long and ongoing structural reform endeavors instituted by the China central government to revamp its economy, an effort deemed necessary to urgently address the impending socioeconomic ills that are seen to be beginning to threaten the well-being of its USD11 trillion economy. An element of the overall structural reform as mentioned above involved China’s attempt to shift away from an “old economy” anchored in heavy industry, manufacturing and investment-led growth to that of a “new economy” that is more efficient, light and service-based. Such change of economic direction and the inherent refocusing of engine of growth therefrom has led to an onslaught of predicaments hurled onto the steel industry (together with its supporting and peripheral industries such as that of coke) as well as that of other heavy industries, these of which have had been the key impetus to providing the double-digit growth the China economy enjoyed over the past three decades.
The abovementioned repositioning of the economy has inherently led to excess capacity in the various industries, particularly that of the steel and coke, following a decline in domestic demand stemming from a more restrained and selective public sector infrastructure spending and fixed asset investments as well as the burst of the real estate bubble and relatively slower construction activities. It is worth noting that presently China has built up a production capacity of about 1.2 billion tonnes of steel, of which more than 400 million tonnes are considered surplus. This led to steel manufacturers dumping their supply glut in foreign markets. As a result, global prices were seen falling and had been depressed in a significant part of 2016.
Following a symposium on steel organized by the Organisation for Economic Co-Operation and Development (OECD) in April 2016 where China recognized the fact of excess capacity in steel, it has proceeded to shut down a few factories and a global glut was temporarily averted. It also promised that in the Thirteenth Five-Year plan period from 2016 to 2020, China would further cut crude steel capacity by 100 million to 150 million tonnes.
Further to the developments within the China economy and circumstances plaguing the business dynamics of the steel and coke industry as described in the foregoing paragraphs, the steel and coke industry have to also contend with the sudden intensified enforcement by the Central Government in addressing its environmental problems. To put things in perspective, the annual average levels of PM2.5 in Beijing remains at 80 micrograms per cubic centimeter (µg/m3), still a long way from both the World Health Organisation (WHO)’s target of 35µg/m3 and Beijing’s own 2017 target of 60µg/m3. This is evidenced by the continuous smog and unhealthy air quality that ravaged China, particularly in its northern provinces and the much talked about “poison soil” in Changzhou early in the year.
Stemming from its present stronger resolve and tenacity in tackling the pollution issue in China, the government introduced in 2015 a new Environmental Protection standards which are considered by industrialist as the strictest ever and most stringent pollution and environmental protection standards, compared to the ones in place in the previous years.
In March 2015, during the sittings of China’s two leading legislative assemblies, namely the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) (colloquially known in China as.. “Liang-Hui” or “Two Assemblies”), one of the key agenda deliberated was related to pollution and environmental protection. Following thereof, the Ministry of Environmental Protection of the People’s Republic of China (MoEP) adopted a stringent stance and very swiftly enforced the newly introduced 2015 environmental protection standards. First to be targeted by MoEP are of course plants in industries which are perceived to be polluting situated at “hot-spot” areas such as the Hebei, Shandong, Liaoning, Jiangsu and Jiangxi provinces. Polluting industries identified comprises steel manufacturers, coke producers, cement plants, aluminum smelters, glass panel plants, chemical/ fertilizer plants, etc. Given the unprecedented heightened level of environmental protection standards so imposed a substantial majority of the plants in these areas appear to be unable to fully satisfy such elevated requirements and thus had to stop production temporarily. Our subsidiary, Linyi Yehua Coking Co. Ltd. (Yehua) which is situated in Linyi city, Shandong province was no exception and had to abide by the local government’s directive to temporarily cease production.
Management Discussion and analysis (Cont’d)
Notwithstanding the above, Yehua has since completed all the relevant and necessary rectification and improvement works and accordingly had recommenced operations in October 2015, albeit on a staggered basis. Given the fact that the steel and coke industry were fraught with excess capacity and cagey market sentiment due to the still unsettling oversupply situation, Yehua had made a strategic decision then to apply for approval from MoEP to run only half of its production capacity (ie oven #1, #2 and #3 with a total capacity of 900,000 tonnes). It was indeed unfortunate that the steel and coke industry continued to be in the doldrums over a protracted period of time, whereby prices of these commodities were faced with significant downward pressure rendering it unviable at that prevailing period of time. Such detrimental pricing dynamics were seen to continue into FY2016 and given that there were still many uncertainties and headwinds plaguing the industry, the Group has taken proactive steps to explore alternative avenues to mitigate the extent of the anticipated losses moving forward for the benefit of the shareholders. One such feasible opportunity that was available to the Group was to lease out some of the coke ovens (i.e. the already operationalized ovens #1, #2 and #3). This has not only substantially reduced the anticipated operational losses emanating from negative margin, it also gave the Group a fixed stream of income and relieved it of the burden of incurring costs and expenses directly attributed to the coke production operations. The lease arrangement was intended to be a temporary measure and that Yehua will take back the said ovens once a sustainable turnaround in the industry becomes visible. The tenure of the lease arrangement ended in January 2017 and accordingly Yehua has assumed back the coke manufacturing operations since February 2017 onwards.
In the meantime, Yehua had also attempted to commission the recommencement of commercial operations for its remaining coke ovens (ie ovens #4 and #5 with a production capacity of 900,000 tonnes). However up to this juncture, the MoEP has yet to have granted approval for it to do so as it is putting all such applications in abeyance following the advent of some policy developments within the industry under the general aspirations of the provincial government, albeit unofficial, which contemplates the reduction and/or relocation of some of the existing facilities of various industries away from highly populated zones. This appears to be an attempt on the part of the provincial government to address the continued excess capacity in the various industries as well as environmental pollution concerns. Notwithstanding the above however, the Group has not received any official written directive from any authorities on this matter nor has the local government produced any detailed specifics and logistics on how such plans are to be realised.
FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW
For the financial year 2016, the Group registered a consolidated Revenue of RM40.6 million. This represents a decrease of approximately 85% from RM270.8 million recorded in the preceding financial year. Such a large decline in revenue was primarily attributed to the temporary cessation of production and leasing out of some of its coke ovens, commencing 1 February 2016 over a period of one year. The rationale for entering into such a leasing arrangement at that material point of time was a strategically deliberate move undertaken by the management as explained in detailed in the foregoing paragraphs. In respect thereof, the Group therefore was only able to earn transactional revenue for one month period throughout the financial year in question.
In addition to the deliberate scaling down of production capacity and thus the ensuing relatively lower sales volume, the decline in consolidated Revenue of the Group was also caused by a 15% fall in the average price of coke from RMB795/tonne to RMB679/tonne recorded by the Group during the relevant month in the financial year under review. Concurrently, the dip in the net prices of the by-products experienced in this financial year further depressed the Group’s Revenue. With the exception of the price of ammonium sulfate and coal gas which saw an increase of 6% and 0.2% respectively, the other by-products namely tar oil and crude benzene suffered a decline of 15% and 5% respectively in their average prices during the relevant month in this financial year compared to those registered in the preceding year.
In tandem with the decrease in the average prices of metallurgical coke mentioned above, the average prices of coking coal, being the primary raw material for the production of metallurgical coke, had also declined during the relevant month in the financial year ended 31 December 2016. With a decrease of about 17% in the average price of coking coal, the Cost of Sales recorded by the Group dropped accordingly to RM45.4 million in this financial year under review, representing a decrease of 85% from RM306.7 million recorded in the preceding financial year.
Based on the foregoing, the Group turned in a Gross Loss of RM4.8 million for this financial year ended 31 December 2016.
Management Discussion and analysis (Cont’d)
FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW (CONT’D)
During the current financial year, the Group earned approximately RM15.2 million in Other Income compared to only approximately RM1.7 million acquired in the preceding year. Such an extensive increase in Other Income was primarily due to the lease rental received for those coke ovens that were leased out during the year.
The relatively high Operating Expenses of RM237.8 million incurred by the Group during the financial year was mainly due to an impairment made on some of the Trade Receivables which have been outstanding for a protracted period of time amounting to RM33.3 million, as well as the consequence of impairing the carrying value of the Group’s Property, Plant and Equipment (PPE) amounting to RM152.6 million to reflect the lower value of the said assets due to low utilization arising from a lack of demand precipitated by the continued challenging and unfavourable environment besetting the coke industry. The diminution in value of the PPE was further substantiated by an independent valuation commissioned on the said asset in an effort to ascertain its “Fair Value less Cost of Disposal” according to the prevailing adopted accounting policy.
Premised on the above, with the inclusion of the Group’s Other Income, Operating Expenses and Finance Costs, the Group recorded a Loss for the Year amounting to RM227.5 million. This translated to a Loss per Share of 20.27 sen.
Notwithstanding the dismal financial results as described above, the Group’s financial position is still intact during this financial year. Total Assets of the Group stood at RM359.9 million while its Total Liabilities accounted for only RM65.0 million. Accordingly, as at the financial year under review, the Group’s Shareholders’ Fund stood at RM294.9 million.
In comparison with the Group’s financial position in the preceding year, admittedly its Shareholders’ Fund had fallen by approximately 45.9% from RM545.6 million. This was mainly attributed to the impairment exercises made on some of the Trade Receivables and PPE as described above in addition to the Foreign Exchange Translation Loss.
Despite a challenging business environment during the financial year, the Group continues to maintain a surplus Cash position of RM21.2 million and has no external borrowings. The Net Assets per Share of the Group stood at RM0.26 per share as at 31 December 2016.
MOVING FORWARD
China economy continued its tepid growth at 6.8% in the fourth quarter of 2016 following its three consecutive prior quarters of 6.7%. Although prima-facie such growth rate appears to indicate that the China economy is slowly stabilizing, it is believed that such engine of growth were still heavily dependent on intermittent government spending and that private sector investment and exports still appear to remain weak. However, the International Monetary Fund (IMF) in its World Economic Outlook (WEO) update in January 2017 appeared to paint a relatively lesser than cheerful picture of the China economy, with a 6.3% growth in 2016 and a further deceleration to 6.0% in 2017. The general health of the economy and the direction in which the economy is heading in the foreseeable future can provide a good reference point in surmising the prospects of the steel and coke industry, moving forward.
On a micro level specific to the steel and coke industry in China, its steel mills which produce about half of the world’s output, are still battling against losses. Oversupply and sinking prices as local consumption shrinks as well as the slow recovery of the world economy is expected to cause continued sluggish demand for steel and by extension, in the coke industry as well. Steel demand in China is expected to slump to about 626 million tonnes in 2017 from 645 million tonnes consumed in 2016. According to a stipulation in the Thirteenth Five-Year Plan, the Chinese Government will start to reduce its domestic capacity by 100-150 million tonnes of crude steel in 5 year time. Strict prohibition of additional capacity and encouraged self-capacity reduction by steel mills, reduced capacity through various avenues such as amalgamation, mergers, transformation or relocation are amongst the various initiatives contemplated by the Chinese Government to address the issue on hand. This may be seen as China’s attempt to assuage the mounting pressure from the world for urgent action to address global steel overcapacity issue as well as its commitment in tackling its perennial environmental pollution problems.
Admittedly, these initiatives had brought about disruptions to the industries concerned in general and stifled economic growth at large as evidenced by the debacle in the steel and coke industry and the continued downward slide in its economy in the recent past years. The Chinese Government deems such temporary short-term “pains” as circumstantial outcomes that are unavoidable during its economic reform phase in the pursuit of restructuring its economic structure into one that is more sustainable and robust, moving forward.
Management Discussion and analysis (Cont’d)
MOVING FORWARD (CONT’D)
The abovementioned contemplated reduction of capacity in the steel industry will inherently necessitate capacity reduction in the coke industry as well. Consolidation in the coke industry and capacity reduction through natural attrition and closure of small, inefficient and indiscriminately polluting coke manufacturers are already taking place and will continue to do so until the industry-wide demand-supply equilibrium is achieved. Such a situation will be a boon to the coke industry and those coke manufacturers that have the financial tenacity to ride out these ensuing trying periods, however long it may be.
Further to the above, the fervor seen in recent times on the handling of environmental pollution policies by the Chinese Government is expected to further accentuate the reduction in capacity of the various industries. Going forward, state directives and environmental inspections may force some firms to improve efficiency, buck up or exit. So far this year, thousands of workers have been laid off, and there are many more to go. In addition, environmental inspections of the steel and coke industry will be on-going whereby requirements to improve energy efficiency will not only reduce carbon emissions and pollution but also improve business viability and thus profitability. Still, it is expected to take some time to really see robust and sustainable profits in this industry. Therefore, for China’s coke industry to have a more resolute manifestation of promising growth and sustainability, one needs to embrace a longer term horizon.
Further to the abovementioned developments contrived in addressing the overall environmental conservation front and on a more personal level, the Group’s business advancement may be faced with some speedbumps ahead. This is pursuant to the general aspirations of the Shandong provincial government in its efforts to address the continued excess capacity and environmental pollution concerns whereby it is contemplating a plan to reduce and/or relocate some of the existing facilities of the various industries away from highly populated areas. Be that as it may however, as of this juncture the Group has not received any official written directive from any authorities on this matter nor has the local government issued any detailed specifics and logistics on how such plans are to be realized.

 

 

2015 Annual Report

SINO HUA-AN
INTERNATIONAL BERHAD
AnnuAl RepoRt 2015 43
cHaIRMan’s

stateMent

 

Emerging from the aftermath of a rather bumpy ride in the preceding year, 2015 presented itself as yet another turbulent year for the Group. The Group was assailed on numerous fronts with domestic trials and tribulations besetting the industry as well as impeding external headwinds.
A dominant story in 2015 was the slowdown of the China economy, oversupply of steel and other commodities and the abruptly plummeting oil prices. These affliction had provided an impetus for the festering of numerous impediments towards the coke industry, the business environment in which the Group is operating in.
Based on the various economic and analysts reports/ publications, it is undeniable that the China economy has slowed down considerably in 2015. From an annual growth rate of 7.4% in 2014, the Chinese economy managed to register only an overall 6.9% growth in 2015, the slowest rate of growth since 1990. Such predicament was brought about primarily by the fact that persistent internal challenges and external headwinds continue

ON
BEHALF OF THE BOARD OF DIRECTORS OF SINO HUA-AN INTERNATIONAL BERHAD, I AM PLEASED TO PRESENT THE ANNUAL REPORT TOGETHER WITH THE AUDITED FINANCIAL STATEMENTS OF THE COMPANY AND THE GROUP FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2015.
to assail the China economy. From the domestic front, there is the softening of the property market, oversupply in hard commodities which resulted in unviable pricing mechanism, weaker than expected domestic demand and the government’s continued pursuit to reform its economic structure into one that can produce more reliable growth led by domestic consumer demand rather than the overheated exports and state investment funded by low cost debt of the past. Even though such move is seen to have negative impact on its economy, the pains of such “low growth” repercussion is tolerated and continually upheld by the China government for the sake of long term sustainability. On the external front, the fragility and unevenness of the global economic health remains a concern. The global economy is still languid with the exception of the US and certain parts of Europe, thus resulting in continuously lackluster export figures for China.

Chairman’s Statement (Cont’d)
As evidence to the abovementioned slowdown in the China economy, a closely watched gauge of China’s manufacturing activity in December 2015 contracted for the 10th consecutive month to 48.2 according to China Purchasing Manager Index (PMI). A figure below the 50.0 threshold level indicates a contraction to the manufacturing activities and such weak numbers have been registered consistently by China since August 2015. Additionally, the most reliable indicator of China’s economic activity remains the consumption of electricity, and for the first 11 months of the year, electricity consumption increased by only 0.7%, according to China’s National Energy Administration. Other statistics further confirm the considerably slow economic growth. For instance, imports, a sign of both manufacturing and consumption trends, fell 8.7% in November in dollar terms, marking a record thirteen straight months of decline. Exports were down 6.8%, the fifth straight month in the red. The six reductions in benchmark interest rates attempted in less than a year and five reductions of the bank reserve requirement ratio since February 2015 seemed to have no noticeable effect to lift the economy, according to Willem Buiter, Citigroup’s chief economist on 29 December 2015.
Whilst the steel and coke industries were reeling from the ramifications of the domestic economic downturn and oversupply situation as well as the need to face head-on with external headwinds as described above, the landscape of the steel and coke industry were further rattled by the somewhat vehement manner engaged by the China government in its pursuit of confronting the environmental pollution issue, a perennial problem faced by China for generations. As a result thereof, the China government through its Ministry of Environmental Pollution (“MoEP”) had issued an “across-the-board” directive in March 2015 to all heavy industries which are perceived to be polluting and having excess capacity to temporarily shutdown their operations in identified hot-spot areas which included amongst others, those in the Shandong and Hebei provinces. The affected plants included steel manufacturers, coke production plants, cement plants, aluminum smelters, glass panel plants, chemical/fertilizer plants, etc. As a consequence of the abovementioned shutdown which was abruptly ordered to be carried out by the MoEP, the Group’s coke ovens had suffered certain degree of damage (an unprecedented and unavoidable situation as experienced by all other coke manufacturing plants as well). This quagmire had rendered our coke manufacturing plant to be non-operational for approximately eight months. The Group has since recommenced its coke manufacturing operations in October 2015, albeit in phases, given the prevailing sluggish coke industry.
Premised on the above, it is evident that Group’s journey in 2015 has not been a smooth one as it was forced to navigate through various impediments as mentioned above, all of which were beyond its control. As a consequence, the Group’s financial performance for the financial year 2015 took a rather severe beating.
FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW
For the financial year 2015, the Group registered a consolidated revenue of RM270.8 million. This however represents a significant decrease of 75% from RM1.1 billion recorded in the preceding financial year. Such a severe decline in revenue was primarily attributed to the temporary suspension of the Group’s production plant from March to October 2015 as mentioned above. Additionally, as a result of the steel and coke industry being fraught with continually weak sentiment precipitating from excess capacity and oversupply situation in the market thus driving down prices of these commodities, the Group had made a strategic decision to run only part of its production capacity when it resumed its operations in October 2015. This endeavor was undertaken by the Group in its effort to mitigate the extent of the negative margin and losses anticipated under such an unfavourable business environment at that prevailing period of time.
Besides the deliberate scaling down of its production capacity and thus the ensuing sales volume, the decline in the consolidated revenue of the Group had also caused a 28% drop in the average price of metallurgical coke from RMB1,099/tonne recorded in the financial year 2014 to RMB795/tonne this financial year. Concurrently, the fall in the overall prices of the by-products experienced in this financial year further depressed the Group’s revenue. With the only exception of the price of ammonium sulphate which saw an increase of 19%, the rest of the by-products suffered a decline in their average prices compared to those of the preceding year, with tar oil, crude benzene and coal gas registering a pricing decline of 34%, 47% and 2% respectively.
FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW (CONT’D)
In tandem with the decrease in the average price of metallurgical coke mentioned above, the average prices of coking coal, being the primary raw material for the production of metallurgical coke, had also declined during the financial year ended 31 December 2015. With a decrease of about 52% in the average price of coking coal, the cost of sales recorded by the Group dropped accordingly to RM306.7 million in this financial year under review, representing a slump of 75% from RM1.08 billion recorded in the preceding financial year.
Based on the foregoing, the Group turned in a gross loss of RM35.8 million for this financial year ended 31 December 2015. With the inclusion of the Group’s other income, operating expenses and finance costs, the Group recorded a loss for the year amounting to RM279.2 million. This translated to a loss per share of 14.6 sen.
Notwithstanding the dismal financial results as described above, the Group still possess a relatively robust financial position during this financial year. Total assets of the Group stood at RM645.2 million while its total liabilities accounted for only RM99.6 million. The Group’s shareholders’ fund saw a decline of 25.5% from RM732.4 million to RM545.6 million in the financial year ended 31 December 2015. This was primarily attributed to the extensive loss the Group registered during the year which could not be adequately covered by the foreign exchange gain derived from the strengthening of the Yuan against the Ringgit during the year.
Despite a challenging business environment besetting the Group in the financial year 31 December 2015, the Group continues to be in a healthy net cash position with no external borrowings. The net assets per share of the Group stood at RM0.49 per share as at 31 December 2015.
INDUSTRY OVERVIEW AND FUTURE OUTLOOK
Consensus amongst economists still appear to point towards the continued presence of strong headwinds in the horizon for the year ahead. These will continue to impact adversely the health and growth of the China economy as well as further aggravating the already
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INTERNATIONAL BERHAD

AnnuAl RepoRt 2015 45

Chairman’s Statement (Cont’d)
dire situation besetting the steel and coke industries. While still being submerged in a slew of China domestic socioeconomic quandaries and governmental policy issues such as the housing market adjustment, decelerating credit growth and advancement of difficult economic structural reforms as described earlier, the China economy will still need to contend with the persistent external impediments. The global markets continue to be roiled by languid demand and the freefall in crude oil and commodity prices. Concerns are mounting whether tremors from plunging oil prices will turn into something more systemic.
A gloomy global outlook appears to be the main take­away from the IMF/World Bank Annual meeting in Lima, Peru in October 2015. Not surprisingly, it highlighted a downgrade in growth forecast, with grim warnings of financial risks overhanging the world economy. Global growth has settled at 3.1% in 2015, the lowest since the 2007/08 crisis and the recession that followed. The IMF has yet again cut the world economic growth by a further 0.2% of its last projection to 3.4% on concerns over a slowdown in economic growth in China. The downbeat view reflects new signs of anemic US economic activity, amid falling exports and industrial production in Germany
– dragged down by a significant growth downturn in emerging market economies, especially China. Japan is on the verge of recession and Europe faces the spectre of deflation, with renewed declines in prices in the face of barely any growth.
The devaluation of the Yuan as guided by the People’s Bank of China (China’s Central Bank) in the first week of January 2016 had caused economists to worry that the economy is weakening faster than previously expected. In an annual Central Economic Work Conference held in December 2015, near-term policies were laid out to which the government is committed to address the ills that have dragged down China’s growth for the last four years. A senior official however described the policies as “supply-side” remedies and said the government realistically expected an “L-shaped” recovery, rather than a “V-shaped” rebound. Given the above challenges besetting its economy and the economic difficulties ahead for China, the China government has recently set a modest growth target for 2016 at 6.5%, a level which would be the slowest pace in 25 years, according to The Wall Street Journal on 8 January 2016.

 

Chairman’s Statement (Cont’d)
INDUSTRY OVERVIEW AND FUTURE OUTLOOK (CONT’D)
Given the above seemingly gloomy economic outlook, the steel and metallurgical coke industries are not expected to rebound to a lively mood, plodding along at best. In the absence of any fiscal impetus from the China government to stimulate the industries and/or positive catalysts emanating from the external environment, crude steel production in China is expected to collapse by 23 million tonnes in 2016, according to nation’s leading industry group. That is equivalent to more than a quarter of annual output from the US. Supply from the top producer may drop by 2.9% to about 783 million tonnes from 806 million tonnes in 2015, according to the China Iron & Steel Association (“CISA”). The slump would be driven by a deepening downturn in local demand and as mills encounter stiffer opposition to exports. Property developments used to enjoy annual growth of 20% and now at best it is 5%. Infrastructure investments have not taken off due to lack of funds despite of all the planned numbers of projects. Manufacturing investments have also dropped as well, according to Li Xinchuang – Deputy Secretary General of CISA and president of the China Metallurgical Industry Planning & Research Institute.
China’s mills, which produce about half of the world’s output, are battling against losses. Oversupply and sinking prices as local consumption shrinks for the first time in a generation. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. has forecast that China’s steel production may eventually shrink 20%. Steel demand in China is expected to slump to about 654 million tonnes in 2016 from 668 million tonnes consumed in 2015. Accordingly, iron ore imports is expected to drop to 920 million tonnes in 2016 from about 930 million tonnes, according to Li Xinchuang – Deputy Secretary General of CISA and president of the China Metallurgical Industry Planning & Research Institute.
It is believed that the oversupply of steel in China is so acute that China would have to take a drastic step in shutting down and demolish unneeded and inefficient mills. Currently there is about 300 million tonnes of surplus capacity in China that needs to be wiped-out to address the supply overhang situation, according to
David Humphreys, a former chief economist at mining company Rio Tinto Group. Owing to the said oversupply situation, steel prices continue to slide under downward pressure. Futures for reinforcement bar, a benchmark product that is used in construction, fell as much as 1.1% to 1,733 yuan per tonne in Shanghai, a record low. On the same score, iron ore with 62% Fe content delivered to Qingdao lost 4.5% to USD45.58 per dry tonne, a four-month low. Premised on these pricing structures, producers in China are making losses of about USD50 on every tonne, thus forcing these companies into negative margin territory. For the month of October 2015, 101 members of the CISA (the peak industry body representing large and medium-sized steel producers) made a staggering loss of 14.8 billion yuan in the month, down 27.8% from the previous year. The cumulative loss recorded by these producers for ten months from January to October 2015 amounted to approximately 72 billion yuan. The problem is the mounting gap between supply and demand. During the first ten months of the year, the consumption of crude steel was 590 million tonnes, down 4.55% from last year. During the same period, Chinese steel mills produced 675 million tonnes of steel. So the industry created 85 million tonnes of excess supply. To put that into perspective, in 2014 the US produced 88.2 million tonnes of steel, Germany produced 42.9 million tonnes and Australia 4.6 million tonnes. The Chinese property sector, one of the most important consumers of steel, is struggling despite a recovery in prices in large cities. The sector is dealing with excess inventory, and it will take years for developers to burn off the supply glut, especially in third and fourth-tier cities. As a result, the price for steel construction material has dropped 33.9% this year. Apart from the housing sector, many other consumers of steel, namely the automobile, shipbuilding, machinery and whitegoods sector, are also facing strong headwinds. Orders at Chinese shipyards (the country is now world’s third largest shipbuilder) have fallen 77% in the first quarter from a year ago.
According to Shen Wenrong, Chairman of the Shagang Group, the country’s largest private steel mill, steel production is expected to fall further by at least 10%. Current production stands at an average of about 830 million tonnes a year. The Chairman of Shagang Group believes the country’s steel production should be in the range of between 600 million and 700 million tonnes. However, even at that reduced level of production, he believes the price will remain depressed for a sustained period of time due to continued subdued demand.
SINO HUA-AN
INTERNATIONAL BERHAD

AnnuAl RepoRt 2015 47

Chairman’s Statement (Cont’d)
INDUSTRY OVERVIEW AND FUTURE OUTLOOK (CONT’D)
Notwithstanding the above predicaments, it is not all gloom and doom for the China economy. There are still some positive attributes within the economy that might just provide a glimmer of hope. There were proponents that argue that so far, the labour market has remained resilient because of the shift towards a more labour-intensive service sector. Household consumption has remained fairly firm, whilst inflation has been flat, helped by lower commodity and energy prices. Unlike advance countries, China’s fiscal policy has much more room to manoeuvre, because total government debt was still less than 60% of GDP at the end of 2015. By allowing more interest rate and exchange rate flexibility, the room to use monetary policy by the People’s Bank of China has been strengthened. Despite concerns about the rising level of non-performing loans, the large state-owned China banking system has adequate capital to absorb these, and those of the shadow banks, which are slowly but surely being brought within the regulatory network. Up to the latest available data, credit and total social financing has decelerated, but there are no signs of abnormal illiquidity or debt deflation, since the property market has shown some signs of uptick in first-tier cities. On the external front, the balance of payments current account remained a surplus at 2.1% of GDP, which offset the capital outflows as indicated by the loss in foreign exchange reserves.
Because the economy is so large, looking at China requires a longer term perspective than normal. The “new normal” is that the China economy is slowing naturally as the economy grows larger and the median age increases. Under the 13th Five Year Plan, the economy is being re-tooled to become a domestic consumption driven, innovation and service driven, open economy that aspires for social inclusivity and environmental sustainability. The mantra on the supply-side adjustment is all about getting rid of excess manufacturing capacity moving to energy and resource efficiency. The AIIB, yuan joining SDR and Chinese aid to Africa and global climate change initiatives also imply that China will contribute towards global public goods. All these aspirations must be achieved within the context of social and financial stability. No economy in the world has attempted all these ambitious goals simultaneously without some trade-offs. In such a massive transformation in scale and short time frame, some economic, financial and political pain is inevitable.
MOVING FORWARD
Based on the foregoing and in adopting a strategic and prudent approach to address the anticipation of a worse-case scenario, the Board has taken timely and proactive steps to mitigate the extent of the negative financial impact to the Group moving forward for the benefit of our shareholders. Accordingly, the Group had explored opportunities to address the anticipated malaise by leasing out some of its coke ovens (ovens #1, #2 and #3) with a total production capacity of 900,000 tonnes to a third party for a period of one year. The remaining coke ovens (ovens #4 and #5) with a total production capacity of 900,000 tonnes shall continue to be retained within the Group’s stable to enable the Group to recommence production quickly should the situation warrants.
A NOTE OF APPRECIATION
Based on the foregoing and barring any unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the ensuing financial years. With the support from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders.
Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group.
A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success.
Y.A.M. TUNKU NAqUIYUDDIN IBNI TUANKU JA’AFAR
(DK, DKYR, SPNS, SPMP, PPT) Executive Chairman

 

2014 Annual Report

 

CHAIRMAN’S STATEMENT

 

To put it succinctly, it has been quite a bumpy ride for the Group for the .nancial year 2014. The landscape in which the Group was navigating was speckled with numerous challenges and tribulations.
As a start, the China economy had not been faring as well as we had hoped. From most economic indicators coming out of China and analysts’ reports/publications, they all point to a clear slowing-down of activity within the domestic economy, re.ecting poor exports and sluggish business performance, and increasing signs that credit-driven growth had run its course. Such a subdued economic situation in China stems primarily from the continuing efforts by the China government to reform its economic structure into one that is more sustainable in the long-term. In trying to achieve that, the new leadership has .agged its commitment to shift gear towards a more sustainable growth path moving forward, emphasising quality growth not reliant on extravagant investment funded by low cost debt but supported rather by rising consumption based on improved wages driven by productivity gains. In addition to what was happening domestically within China itself, the assault of a continuously depressed global environment throughout 2014 further stunted the growth path of the China economy.
Notwithstanding the above adversities, it is worthwhile to note that the China Government still possesses a massive reserve readily available to stimulate the required growth in its economy as and when necessary. To put things in perspective, China has in its treasury around USD4 trillion in foreign exchange reserves and this is more than the combined reserves of the four runners-up, namely Japan, the eurozone, Saudi Arabia and Switzerland. China is however steadfastly maintaining a very cautious stance when it comes to opening up the liquidity tap as it does not want indiscriminate .scal spending in the economy that will result in the structural reform it so painstakingly is trying to implement in recent times to go awry.

chairman’s statement (cont’d)
As a result of the China Government attempting to strike a balance between supporting growth and pushing forward reforms, what we have seen was a “stop-and-go” pattern in its economic momentum throughout the year 2014. The rebalancing from the structural transformation of the economy has admittedly not been smooth, causing a somewhat volatile quarterly economic growth. From 7.7% in the fourth quarter 2013, the China economy slowed down considerably to 7.4% in the .rst quarter 2014, such slow down re.ecting a combination of dissipating effects of earlier growth-support measures, subdued external environment and tighter credit especially for real estate activities. In realising the abrupt and worrisome deceleration of the economy in the .rst quarter 2014, the Government had swiftly introduced a series of mini stimulus measures to prop up the economy which amongst others included further expansion of rail network and highway connections to facilitate urbanisation, increased spending on public housing construction projects, tax cuts as well as reducing the amount of cash that some banks have to hold as reserves. With the knock-on effects emanating from these .scal policies, the economy in the second quarter recovered to 7.5%. However, in the third quarter the economy slumped again to 7.3%, caused primarily by lower property investment, dwindling credit growth and weakening industrial production. These predicaments continued into the fourth quarter and coupled with a severe correction in the property market which dampened investments further, weaker demand on manufacturing, de.ationary effects and lackluster exports and weak external demands all of which continued to take a toll on the economy, the fourth quarter turned in a similar dismal growth of 7.3%.
Similar trend of false-starts manifested in the global front as well. Within a period of half-a-year, the IMF revised its forecast from one that would elicit cheers to one that evoked feelings of melancholy. The IMF’s April 2014 had indicated i(MPCBMBDUJWJUZIBTCSPBEMZTUSFOHUIFOFEBOEJTFYQFDUFEUPJNQSPWFGVSUIFSJOw. Growth was expected to be strongest in the US, positive in Eurozone and growing in Japan. In the emerging markets, growth was projected to pick up. However, by the October 2014 update, IMF’s forecast had to be downgraded: i8PSME HSPXUIJTNFEJPDSFBOEBCJUXPSTFUIBOGPSFDBTUy’BDJOHBDMPVEZGVUVSFyUIFHMPCBMFDPOPNZIBTCFDPNFNPSF
differentiated”. By December, economic prospects were .agging across Europe, Japan and the big emerging markets, including China, India and Brazil – a turn of event that presents fresh challenges to the robust US economy just as the world needed a dependable growth engine.
Amid this forlorn backdrop, the growth rate of the China economy for the entire year 2014 fell short of the Government’s initial target of 7.5% and settled only at a disappointing 7.4%. While high compared with other nations, it is the country’s lowest in 15 years.
Much has been said about the China economy and that of the world and rightly so as the health of the global economy is the bellwether for the performance of the steel and metallurgical coke industries. As mentioned in my previous statements, the steel industry and by extension its supporting/peripheral industries including that of the metallurgical coke like ours, track very closely to and move in tandem with the general health of the economy. Thus, it is of no surprise that our Group’s business trend in .nancial year 2014 was taken on a roller-coaster ride, yielding .nancial results mirroring the trend of the prevailing health of the economy at those material points in time.
Financial Performance and Operational Review
Although the Group had to contend with the abovementioned challenges besetting the industry, we still managed to manoeuver ourselves out of the red and continue to register an overall modest pro.t for the year of approximately RM2.0 million.
For the .nancial year 2014, the Group registered a consolidated revenue of RM1.101 billion. This however represents a decrease of 15.1% from RM1.297 billion recorded in the preceding .nancial year. The decline in revenue was primarily attributed to a 23.6% decline in the average price of metallurgical coke from RMB1,439/tonne recorded in the .nancial year 2013 to RMB1,099/tonne this .nancial year. Concurrently, the fall in the overall prices of the by-products experienced in this .nancial year further depressed the Group’s revenue. The average prices of tar oil, crude benzene, ammonium sulphate and coal gas seen by the Group this .nancial year had eased off by approximately 6.7%, 10.3%, 28.6% and 7.2% respectively, compared to the prices in the preceding .nancial year. The modest increase of 2.2% enjoyed by the Group in the sales volume of its metallurgical coke during the current .nancial year 2014 compared to that last year was unfortunately not sizeable enough to stem the recession in the consolidated revenue registered by the Group.

chairman’s statement (cont’d)

In tandem with the decrease in the average price of metallurgical coke mentioned above, the average prices of coking coal, being the primary raw material for the production of metallurgical coke, had also declined during the .nancial year ended 31 December 2014. With a decrease of about 22.8% in the average price of coking coal, the cost of sales recorded by the Group declined accordingly to RM1.083 billion in this .nancial year under review, representing a drop of 14.4% from RM1.266 billion recorded in the preceding .nancial year.
Based on the foregoing, the Group turned in a modest gross pro.t of RM18.4 million for this .nancial year ended 31 December 2014. With the inclusion of the Group’s other income, operating expenses and .nance costs, the Group recorded a pro.t for the year amounting to RM2.0 million. This translates to earnings per share of 0.18 sen.
As for the Group’s .nancial position, it continues to show a relatively robust net assets position for the .nancial year ended 31 December 2014. Total assets of the Group stood at RM788.2 million while its total liabilities at only RM55.8 million. The Group’s shareholders’ fund saw a hike of 5.2% from RM696.5 million to RM732.4 million in the .nancial year ended 31 December 2014 and this resulted from the pro.t generated during the year as well as primarily a gain derived from foreign currency translation by virtue of the Yuan overall strengthening against the Ringgit during the year.
Despite a challenging business environment besetting the Group in the .nancial year 31 December 2014, the Group continues to be in a healthy net cash position with no external borrowings. The net assets per share of the Group stood at RM0.65 per share as at 31 December 2014.
Industry Overview and Future Outlook
It is widely envisaged that strong headwinds are still omnipresent on the horizon for the year ahead. While China is being assailed on multiple fronts with its domestic socio-economic predicaments such as the housing market adjustment, decelerating credit growth and advancement of dif.cult structural reforms in areas such as local government debt management and interest rate liberalization, the global markets continued to be roiled by languid demand and the freefall in crude oil price and commodity. Concerns are mounting whether tremors from plunging oil prices will turn into something more systemic. Western Europe and Russia is back in an economic rut, Japan’s recovery is faltering again, South America is a mess and China looks as if it is headed for its slowest growth since 1990.
China’s economic growth is widely expected to slow to 7% in 2015. The new leadership has proposed the concept of an economic “new normal”, which is understood to encompass slower but more balanced growth and increased reforms. With this, it is believed that the top leadership is willing to accept slower but more sustainable growth while at the same time cognizance is taken to ensuring economic growth is achieved within a reasonable range.
Notwithstanding the above, it is however not all doom and gloom on the horizon ahead. There are still some bright spots shining through these dark clouds. The US appears to have recovered from its doldrums and is emerging as the most likely candidate to take over the driving seat from China to spearhead global economic recovery and world growth moving forward. Overall, the US economy is better insulated from the global downturn because, among the world’s major economies, it is less reliant on overseas export demand.
Within China itself, the Government still acknowledges the importance of maintaining a certain level of economic growth amid its fervor to reform and rebalance the economic structure, one of the causes for the country’s declining economic growth. It is believed that China can still hold itself in good stead with the massive amount of liquidity at its disposal to execute the necessary .scal stimulus and/or monetary policies to spur its economy when needed. Already several policy reorientations have been made by the China government recently to stem further slackening of its economy. The People’s Bank of China (“PBOC”), China’s central bank, had carried out a surprise interest rate cut in late November and reduced benchmark borrowing cost for the .rst time in more than two years. Additionally, the PBOC has also instructed its banks to issue more loans in the .nal months of 2014 and has relaxed limits on their loan-to-deposit ratios to help hit a record new lending target as the government steps up efforts to lift .agging economic growth. The PBOC is also recently allowing banks to lend more than 75% of their deposits, injecting .exibility in a rule that was previously meant to control lending activity.

chairman’s statement (cont’d)

There will likely be similar steps taken in the near future as well as reducing the amount of cash that banks must keep on their books – the Reserve Requirement Ratio (“RRR”) – to free up money for lending. A cut in the said RRR could put an estimated 2.37 trillion yuan of new base money into the system. These recent policy adjustments can be seen as testimony that the central government has altered its tight stance by adopting greater credit loosening and that future government policies will not be as austere as they were. This would de.nitely provide an impetus to the domestic economy in the coming future and thus a boon to the steel industry and that of metallurgical coke.
On the .scal side, China is accelerating 300 infrastructure projects valued at 7 trillion yuan in 2015 as the government seeks to shore up growth that is in danger of slipping below 7% (a psychological bottom line that policymakers deemed must be maintained to ensure employment). This is part of the 400-venture, 10 trillion yuan grand plan to run from late 2014 through 2016.
Premised on the above, we are still convinced that the China economy will not experience a “hard landing” and will be guided assiduously and skillfully by the incumbent leadership to sail through the barriers in the dif.cult times as well as those anticipated ahead.
A Note of Appreciation
Based on the foregoing and barring any unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the ensuing .nancial years. With the support from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders.
Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and con.dence in the Group.
A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success.
Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR
(DK, DKYR, SPNS, SPMP, PPT)
Executive Chairman

 

 

2013 Annual Report

chairman’s statement

 

Berhad, I am pleased to present the Annual Report together with the Audited Financial Statements of the Company and the Group for the financial year ended 31 December 2013.

 

Financial year 2013 overall has been a relatively interesting year for the Group. A ray of hope appears to have emerged and manifestations of resurgence both in the global economy and that of our metallurgical coke industry are seen peeking from the horizon.
Notwithstanding the seemingly resplendent landscape, it was however not entirely smooth sailing throughout the year for the Group as we had to contend with some vacillation in the metallurgical coke industry. Headwinds from what seemed to be remnants of the economic and financial exigencies from 2012 appear to have scuttled, albeit slightly, the recovery trend in the Group’s financial performance. Such temporary setback stems primarily from China stepping up its efforts to remodel its economy by promoting domestic consumption at the expense of exports and investment as well as its intensifying initiative to rein in on its worrisome local government debt levels, runaway property prices, inflation and pollution, all of which have a stifling effect on the domestic economy. The anemic global demand for Chinese exports during the first half of 2013 aggravated the situation further. However, just as the engine of growth of the Chinese economy was appearing to be grinding to a halt, the Chinese Government launched a mini-stimulus in mid-2013 to jolt it back to life by way of injecting liquidity into the economy, re-loosening its monetary policies temporarily as well as heightening the spending on railway construction and other public and infrastructure works. Such measures have restored the Chinese domestic economy back in its track where growth accelerated to 7.8% and 7.5% in the third and fourth quarter respectively.
chairman’s statement
Despite contrasting fortunes, the overall global economy appears to be on a surer footing towards the end of 2013. Of course for many countries, it was still a struggle, with the Eurozone in recession for much of the year and living standards in most of the developed world still below their 2007 peak. But by the end of the year, even the laggards had started to catch up, and for these countries, the long nightmare of recession, financial quandary and their aftermaths have begun to recede. The concerted efforts of central banks, particularly that in the US, Japan and Europe that showered money onto their economies and held interest rates low appears to have begun yielding the desired results enticing a recovery that had remained tepid for almost five years after the worst recession since the Great Depression.
As a result of the above, global growth for 2013 as a whole stood at 2.9%, with China continuing to be the vanguard to lead economic growth with 7.7%. US grew with a modest 2.7% while Japan and the EU at 2.4% and -0.3% respectively.
If the world economy in 2013 is to be succinctly described, it can be epitomized in two worthwhile anecdotes, notably (i) the structural shift from developed world towards the emerging world; and (ii) the cyclical climb out of a nasty recession. The first continued from the previous year (where emerging economies were seen to be at the driving seat while the more advanced and developed economies were embroiled in their respective crises), but at a slightly slower pace than before. Growth in China, at 7.7% might seem breathtakingly fast, but actually it was the slowest for 23 years. The pace of economic activity also generally slowed, but was still commendable, in other parts of Asia, Africa and Middle East with growth averaging around 5% or less. As for the second part, in the developed world what had started as an uneven and patchy recovery began to strengthen. The US, despite having to cope with feuding over its budget, seems to have sped up a little. It has been creating jobs and its housing market and Wall Street have moved up. In Europe, there was a better story too, though an uneven one. The north, led by Germany, had a solid year, reducing unemployment and boosting living standards. Across the Mediterranean the pattern was a little more disappointing, with Italy, Spain, Portugal and Greece all enduring a year of rising unemployment and uncertainties. However, the numbers have started to improve towards the end of 2013. Although in 2013, Europe and the euro are not completely out of trouble as yet, but the acute phase of their difficulties may appear to have passed.
Financial Performance and Operational Review
With the metallurgical coke industry on the mend, the Group had a generally commendable year for the financial year ended 31 December 2013, raking in a profit of RM15.344 million.
The Group registered a consolidated revenue of RM1.297 billion for the financial year ended 31 December 2013. This however represents a decrease of 3.05% from RM1.338 billion recorded in the preceding financial year. The fall in revenue was primarily attributed to a 12.08% decline in the average price of metallurgical coke from RMB1,636/ tonne recorded in the financial year 2012 to RMB1,439/tonne this financial year as well as a slight decline in sales volume of approximately 2.83%. The extent of decline in the Group’s revenue resulting from the easing of average price of metallurgical coke and fall in sales volume as mentioned above was however partly obviated by a sizeable increase in the overall contribution from the by-products of approximately 32.31%, stemming from robust pricing experienced in the majority of those by-products.
In tandem with the decrease in the average price of metallurgical coke, the average price for coking coal, being the primary raw material for the production of metallurgical coke, had also declined during the financial year ended 31 December 2013. With a decrease of about 14.92% seen in the average price of coking coal, the cost of sales recorded by the Group decreased to RM1.266 billion in this financial year under review, representing a decline of 10.26% from RM1.411 billion registered in the preceding financial year.
Based on the foregoing, the Group turned in a gross profit of RM30.936 million for this financial year ended 31 December 2013. With the inclusion of the Group’s operating expenses (net of other income), the Group recorded a profit for the year amounting to RM15.344 million. This translates to an earnings per share of 1.37 sen.
As for the Group’s financial position, it continued to show a relatively robust net assets position for the financial year ended 31 December 2013. Total assets of the Group stood at RM769.237 million while its total liabilities at only RM72.733 million. The Group’s shareholders’ fund was boosted by 12.2% from RM620.887 million to RM696.504 million in the financial year ended 31 December 2013 and this resulted from the profit generated during the year as well as a gain derived from foreign currency translation by virtue of the Renminbi strengthening against the Ringgit during the period.
chairman’s statement
The Group continues to be in a net cash position with no external borrowings. The net assets per share of the Group stood at RM0.62 per share as at 31 December 2013.
Industry Overview and Future Outlook
Notwithstanding the fact that the Group managed to turn in an overall commendable financial performance in financial year 2013 as described above, we continue to adopt a cautiously optimistic stance moving forward. This is because there is a slew of contrasting views and interpretation of the seemingly capricious economic data being churned out periodically into the public domain.
On one side of the perspective, the World Bank reported that the storm clouds that have been hanging over the global economy in recent years are expected to gradually recede in 2014, with prospects improving for the US, European Union and the Asia Pacific. After years of recession, financial crisis, fiscal wars and a patchwork recovery, there remains only a few dark clouds on the horizon for the global economy. This was the conclusion of the World Bank’s global forecast which was released in mid-January 2014. The Bank’s economists expect growth to increase to 3.2% in 2014 from 2.9% in 2013 and to maintain that level for the next two years with economic growth showing some increase in all four of the world’s largest economies, notably the US, EU, China and Japan.
The economic performance of advanced economies is slowly gaining momentum and this should provide some support to developing countries to chart some growth themselves. Based on economic data (available at the time of writing), the beleaguered euro area seems to have turned a corner and policy and financial uncertainty in the region have significantly eased. Ireland (which has exited its bailout program), Portugal and Spain have started growing again, albeit modestly, and the pace of contraction seems to have slowed in Greece and Italy. The monthly Eurostat report shows that factories in the Eurozone have begun to ramp up output towards the end of last year and such trend appears to be continuing moving into 2014. In the US, federal budget cuts are expected to have a smaller effect on growth in the coming future and uncertainty stemming from Washington, capped last fall when the federal government shut down over a budget impasse, is expected to pose less of a problem too. Furthermore, even Japan has been jolted out of its long slump by aggressive monetary and fiscal stimulus, colloquially called “Abenomics”, that is helping to bring more balance to the global economy. China will again continue to be at the forefront leading the resurrection of the world economy in 2014 with its GDP expected growth of not less than 7.2%, helped by stronger growth in exports and continued robust domestic consumer demand. The outlook for a sustained strong Chinese economy is also supported by continued large-scale infrastructure spending on urban development and transportation networks, including a major new investment program for the development of “smart cities” in China. Two key megatrends that will support Chinese economic growth over the medium term are the sustained strong growth of Chinese consumer spending, assisted by growing household disposable incomes and the continued urbanization of China, with another 300 million people projected to live in urbanized areas by 2030.
On the contrasting side of the perspective however, there are reports which seem to suggest that it is not necessarily all clear sailing ahead. Although “green shoots” are seen sprouting, perceivably a manifestation of better times ahead, we take cognizance of the fact that there are still shadows of dark clouds hovering on the horizon. The US Federal Reserve’s much talked about tapering of QE poses one of the most significant risks for the global economy this year, according to World Bank. Some lower-income economies may suffer from capital flight, reduced inflows of investment should interest rates rise and this could lead to defaults and domestic economic turbulence. Already an article from the Wall Street Journal reported in February 2014 that there were signs of tumbling stock prices around the world, disappointing economic reports in the US and China, hasty interest rate increases in major developing countries including Turkey, India and South Africa and Argentina, and whispers of disappointment in corporate earnings. These may be a harbinger to the possibility that the global economy may be faltering and not as rosy as it seemed to be at the start of 2014.
Additional headwind is also seen to be emanating on the political front, particularly in the Asia-Pacific region with India, Indonesia and Thailand scheduled to face their respective national elections this year. However, economists at the World Bank as well as numerous other analysts share the view that the Fed’s so-called tapering and the geopolitical winds from Asia-Pacific will not be too potent a threat that will push global growth completely off its path.
chairman’s statement
Notwithstanding the emergence of several seemingly “disappointing” economic data of late describing the economy of China, we need to appreciate that such postulation is made in comparison to the decades of double digit growth charted by China in its recent prior years. The current leadership of China appreciates the need to continue maintaining a certain minimum level of economic growth domestically vis-à-vis its endeavour to remodel the structure of its economy, control pollution level as well as addressing its huge local government debts and shadow banking activities. Accordingly, the leadership of China has implied that an economic growth of around 7% for the immediate years ahead is a given.
China’s economy is huge and so is its liquidity reserves to keep its economy humming. China’s GDP currently stands at roughly USD9 trillion, making its economy comfortably more than half the size of the US. That is more than three times the size of France or the UK and surpassing Japan by half as well as that of Brazil, Russia and India combined. With GDP growth of around 7%, inflation running at about 3% and a currency that is rising moderately against the US dollar, China is adding about USD1 trillion a year to global GDP. China’s supposed economic slowdown to 7.5% in the final quarter of 2013 was not wholly unexpected, rather it was well sign-posted by a sharp slowdown in lending indicators. Those measures, including monetary growth and electricity usage however are no longer flashing red. Coincident indicators such as the Purchasing Managers’ Index have also picked up momentum. Broad based domestic consumption has also held up well despite the fall in the trend of industrial production. Analysts from Bloomberg have tracked the trend of retail sales and consumption, adjusted for inflation and relative to the trend of industrial production, and have found that although not moving in a straight line, this indicator has been generally rising for three years. This could be a testimony that the rebalancing of China’s economic structure is yielding the desired results. Another is the decline in the current account surplus to about 3% of GDP. Reducing the external surplus from more than 10% of GDP before 2008 to about 3% now – while limiting the fall in growth from 10% to about 7% – is quite a commendable balancing act.
As such, we are therefore inclined to believe that China will not experience any “hard landing”. Be that as it may, we are hopeful that the green shoots beginning to sprout at the moment do not turn into brown stubble, this time around.
A Note of Appreciation
Based on the foregoing and barring any unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the ensuing financial years. With the support from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders.
Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group.
A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success.
Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR
(DK, DKYR, SPNS, SPMP, PPT)
Executive Chairman

 

 

2012 Annual Report

chairman’s chairman’s statement
On behalf of the Board of Directors of Sino Hua-An International Berhad, I am pleased to present the Annual Report together with the Audited Financial Statements of the Company and the Group for the financial year ended 31 December 2012.
The financial year 2012 has been a tumultuous twelve months for the metallurgical coke industry as well as the  Group. Such unsettling business environment was primarily precipitated by weak macroeconomic conditions that had far reaching effect, thus affecting various domestic economies throughout the world.  China, the country in which the Group’s principal business undertakings are conducted in, unfortunately was unable to escape unscathed and avert itself completely from the wrath of the declining global economy which was mired with uncertainties. Recovery in major advanced economic regions was sputtering at best, if not lifeless.  In addition to inheriting the economic and financial exigencies originating from 2011, the global economy in 2012 was beset with continuously  unresolved economic uncertainty and sovereign debt crisis in the Eurozone. Relatively stronger economies therein like those of Germany and France appeared to buckle under the weight of the crisis overwhelming the weaker members of the bloc. Furthermore, the persistently high unemployment rates, inflation and fear of the US falling off the fiscal cliff (i.e. simultaneous tax increase and spending cuts mandated by law to rein in the budget deficit) created  apprehension and uncertainties among developing/emerging countries which are export dependent as Europe and the US are still the main trading partners.  Towards this end, these emerging economies respectively turned in rather dismal growth rates. The Chinese economy was not vastly different in that it recorded a rather languid growth rate of 7.8% in 2012, its slowest rate since 1999. Based on economic data, signs of deceleration of the Chinese economy was evident in the fourth quarter of 2011 which continued into and accentuated in 2012.  Such slowdown in the Chinese domestic economic activities was precipitated by external macroeconomic malaise as well as internally by government action in instituting tight monetary policies to rein in runaway inflation and ballooning real estate prices. chairman’s statement As a corollary to this, it is hardly surprising to see the steel industry and that of the metallurgical coke, both industries of which share a very close correlation and tending to move in tandem with the general direction of the economy, losing substantial amount of momentum in 2012. Both domestic and international demand plummeted on the back of overcapacity and oversupply circumstances. The situation was exacerbated by the dwindling fixed assets  investment growth from 23.8% in 2011 to 17% in 2012. According to the China Iron and Steel Association (CISA), the total crude steelmaking capacity in China stood at around 830 million tonnes as at the end of 2012 whilst production output was at 697 million tonnes.  Total demand, which included consumption from the Chinese domestic economy and exports, only accounted for an estimated 667 million tonnes that year. As a result, the pricing dynamics of raw materials vis-à-vis the finished products went into disarray, thus negatively impacting the entire industry’s profitability. Be that as it may, it is worthwhile noting that the steel and metallurgical coke industry are cyclical in nature.  Despite the seemingly gloomy state of affairs experienced in most parts of 2012, it is encouraging to note that matters are looking up for both industries from December 2012 onwards.  Such a welcome scenario is seen continuing into the early months of 2013. The turnaround being seen in the fortune of the metallurgical coke industry in the final one month ending financial  year 2012 was unfortunately meager in comparison to the misfortune befalling the metallurgical coke industry in the earlier eleven months of financial year 2012, culminating in the Group’s dreary financial showing.  FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW Faced with a very challenging business and industry landscape in 2012, the Group turned in rather dismal financial result for the financial year ended 31 December 2012 with a loss of RM82.9 million. The Group registered a revenue of RM1.338 billion for the financial year ended 31 December 2012. This represents a decrease of 12.3% from RM1.527 billion recorded in the preceding financial year. The fall in revenue was primarily attributed to a 15.4% decline in the average price of metallurgical coke from RMB1,935/tonne recorded in the financial year 2011 to RMB1,636/tonne this financial year. Additionally, the overall contribution from by-products had also  declined as a result of decreasing average prices of most by-products. Moving in tandem with the decrease in average price of metallurgical coke, the average price for coking coal, being the primary raw material for the production of metallurgical coke, had also declined during the financial year ended  31 December 2012. With the decrease of about 12.1% seen in the average price of coking coal, the cost of sales recorded by the Group eased to RM1.411 billion in this financial year under review, representing a decrease of 6.6%  from RM1.512 billion registered in 2011. Concomitant with the foregoing, the Group fell into loss-making territory by turning in a gross loss of RM72.9 million for this financial year ended 31 December 2012. With the inclusion of the Group’s operating expenses (net of other  income), the Group’s loss for the year was further accentuated to RM82.9 million.  This translated to a loss per share of 7.38 sen. As for the Group’s financial position, it continued to show a relatively robust net assets position for the financial year  ended 31 December 2012. The total assets of the Group stood at RM686.7 million. Stemming from the loss for the year from its business operations and the loss recorded in foreign exchange translation emanating from the effect of the weakening of RMB against the RM of approximately 3% during the financial year 2012, shareholders’ funds  of the Group were reduced by 13.9% to RM620.9 million. The Group continues to be in a net cash position with no external borrowings.  The net assets per share of the Group stood at RM0.55 per share as at 31 December 2012. chairman’s statement
INDUSTRY OVERVIEW AND FUTURE OUTLOOK The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw materials for the manufacturing of steel.  Over 70% of global steel production is by way of blast furnace and as such necessitates the use of metallurgical coke for the smelting of iron ore. As far as the steel and metallurgical coke industries are concerned, 2012 is largely regarded as a year filled with headwinds and challenges which had stifled their progress and profitability. Fortunately, that predicament appears  to have changed starting from December 2012 and moving on to 2013, as mentioned earlier. Based on a slew of economic data and information gathered from various sources, there appears to be convincing evidence that a sustainable upturn and restoration of the metallurgical coke industry is already on the horizon, albeit a modest one. Numerous evidence appears to support that optimism.  For example, China’s manufacturing started to accelerate rapidly in January (latest available data at the time of writing) on increased new orders, indicating positive momentum for the country’s economy for 2013.  The purchasing managers’ index (PMI) rose to 51.9 in January 2013 from 51.5 and 50.4 in December and November 2012 respectively, according to China’s Statistics Bureau and Logistics Federation. A reading above 50 indicates an expansion, while a reading below 50 indicates contraction.  The said stronger January 2013 PMI figure, which represents a 24-month high, provides satisfactory evidence that the  world’s second largest economy is rebounding and is in a recovery phase.  This is seen as a boon to the steel and metallurgical coke industries as they share a close correlation with the health and prospect of the economy. Further evidence of growing economic activity can be adduced from the rising oil consumption by China. In December 2012, China’s apparent oil demand started to rise to 10.6 million barrels a day, representing an additional 4.9% or 468,000 barrels a day from previous months. According to Deutsche Bank AG, amid a sustained economic recovery, China’s oil consumption will rise at a faster pace in 2013 as actual demand is expected to be underpinned by improving economic growth, derived from huge corporate and infrastructure investments scheduled for 2013. We continue to have an optimistic view of the strength of the Chinese economy. The reason is that we think the great force for China’s economic development is its cities and villages.  China’s urbanization rate is now standing at around 50%, with some areas like Guizhou and Tibet autonomous region registering a much lower rate of 35%. According to the Chinese government, it planned to increase the rate by 0.8 to 1.0 percentage point annually, meaning that 10 million to 13 million farmers/villagers will become urbanized. The Chinese government plans to achieve an urbanization rate of 70% by 2030 and in order to realize that target, it has drawn up a broad urban development and fixed-asset investments plan comprising the building of public infrastructures, amenities, affordable housing  projects, etc. According to the Ministry of Housing and Urban-Rural Development (MOHURD), the masterplan for social housing under the 12th 5-Year Plan has been set at 36 million new affordable houses.  Premised on the above, China will not be short of internal demand to spur its economic development and this urbanization initiative will spearhead the future of China’s economy for the next 15 to 20 years.  Needless to say, it is apparent that these ongoing projects will inherently create sustainable demand for steel (and thus metallurgical coke) in the domestic market over a prolonged period of time. Moving in parallel with the aforementioned urbanization aspiration and in pursuing the restructuring of its economy to be more internally driven, the Chinese government had declared (at the Communist Party of China’s Congress in November 2012) its intention to double per capita income by 2020, a move that will unleash 64 trillion yuan of purchasing power into the economy.  This will be the catalyst to boost domestic consumption. Indeed, with its total population of 1.3 billion and roughly 130 million middle-class consumers, China’s domestic market holds significant  potential to realize the plan of internalizing demand to support economic growth.  Additionally, the Chinese government has also instituted some fine-tuning in its monetary policies recently, including two interest rate cuts, three consecutive  cuts to the proportion of deposits that banks must keep as reserves thus freeing up an estimated 1.2 trillion yuan for lending and expeditious approvals for infrastructure projects worth USD157 billion. chairman’s statement Also, in ensuring counties, districts and townships particularly those situated in the third and fourth tiered cities are adequately connected, the Chinese government continues to place railroad network expansion high on its priority list. The government plans to invest 650 billion yuan in railroad construction in 2013 in addition to the equally massive allocation of funds for roads and expressway expansion.  In this respect, China’s railway and roadwork construction looks set to boom in 2013, all of which will translate to a heightened demand for steel and thus metallurgical coke. In January 2013, the Chinese government announced it has dispensed with the annual export quota in addition to abolishing the 40% export duty originally imposed on metallurgical coke exports. This is definitely a welcomed  move for domestic metallurgical coke manufacturers like Sino Hua-An as it will open up bigger demand channels for the metallurgical coke industry via perceivably larger exports volume, which prior to this was restricted by meager export quota allowance accompanied by hefty export duties. Accordingly, the metallurgical coke industry should see better times ahead. On the international front, governments of various countries have also started to make concerted effort to address the quagmire that has been besetting their economies.  For example, both the US and EU have introduced plans for open-ended pump priming activities to rouse their economies, with the former committing to buy some USD40 billion worth of mortgage-backed securities each month until its labor market improves, and the EU saying it would purchase, without quantitative limits, sovereign bonds on the open market.  Similarly, Japan had in January 2013, set out plans for indefinite monetary easing in an effort to end economic deflation that has been hounding its economy for decades. The US has also managed to avert itself from falling off the fiscal cliff with Congress approving, at the  eleventh hour, the raising of the debt ceiling. Although it is still too early to see what kind of impact these activities will bring to the respective economies, it cannot be denied that these are still positive actions for a weak global economy.
A NOTE OF APPRECIATION Based on the foregoing and barring any unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the ensuing financial years. With the support  from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders. Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group.  A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success. Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR (DK, DKYR, SPNS, SPMP, PPT) Executive Chairman

 

 

2011 Annual Report

CHAIRMAN’S CHAIRMAN’S
STATEMENT On behalf of the Board of Directors of Sino Hua-An International Berhad, I am pleased to present theAnnual Report together with the Audited Financial Statements of the Company and the Group for the
financial year ended 31 December 2011. 2011 has been a rather challenging year for the Group.  Just as economies around the world were emerging from the aftermath of the 2007 (Lehman Brothers-triggered) global financial crisis and gradually nursing itself back to health in those subsequent years, the world was beset yet again with socio-political unrests, economic and financial volatility  as well as ecological catastrophes in 2011. The trials and tribulations of 2011 begun with anti-government protests and upheavals in Tunisia and subsequently spread to the other Arab nations like Egypt, Libya, Bahrain, Yemen, Syria, etc. Uncertainty over the Libyan oil output caused crude oil prices to spike about 20% causing an energy crisis in the period of February/March.  Then came the devastating 9.1-magnitude earthquake and tsunami that hit the east of Japan which almost crippled the automotive, equipment and electronic manufacturing companies in and around that area as well as across the Japanese border.  This places the Japanese economy further in a bind as it is already struggling from decades of prolonged economic stagnation.  In July, Thailand was inundated with severe flooding with 58 of the country’s 77 provinces affected. The World Bank estimated damages at USD45 billion with  many factories forced to shut down and the Thai economy almost came to a standstill.  News of economic unsustainability and European sovereign debt crisis in the Eurozone began to unravel in the public sphere sometime in May with Greece, Ireland and Portugal facing impossibility of refinancing their debts.  These quandaries besetting the Eurozone continued to hog the limelight and watched over with bated breath by financial markets and business fraternities worldwide even till today as a comprehensive and complete resolution  to the issues at hand could not yet be seen in the horizon. A wave of downgrading of government debts of certain European countries ensued with relatively strong economies in the bloc such as France, Italy and Spain were not spared. Whilst the world was reeling from the pessimism exuding from the Eurozone financial fragility, we had to contend with the US economic slowdown and its persistently high unemployment rate. For the first time in history  CHAIRMAN’S STATEMENT the US was downgraded by S&P in August, sending the business world into frenzy. Fitch and Moody’s, the other international ratings agencies, though less drastic in their approach, had also issued respective warnings of a possible future downgrades of the US’ triple-A rating.  As the US is still the largest economy in the world and one of the most dominant and major trading blocs, the quagmire it faces causes far reaching negative repercussions. These episodes of slowdown in the US, Europe and Japan economies, inflationary pressures due to the hike in  commodity prices, the debt crisis in Europe and decline in global trade, all of which occurred in 2011, had caused industries and business communities, right up to the man in the street, to adopt a cautious and defensive stance thus putting the supposed recovery path of the global economy from the preceding years into disarray. In China, the local economy although still robust and resilient throughout 2011, was showing signs of deceleration towards the fourth quarter of 2011.  This was seen as a deliberate attempt by the Chinese government to rein in on the runaway inflation and skyrocketing property prices in China. As a result we saw China’s economic growth eased  to 8.9% in the fourth quarter, the slowest seen in 10 quarters. Given the consequential negative external factors and what was happening domestically within China itself as described above, it is hardly surprising to see the steel industry and that of metallurgical coke, both industries which are closely related and tending to move in tandem with the general direction of the economy, lose some momentum towards the insipid period at year end.  Demand slowed on the back of overcapacity and an oversupply situation in the domestic steel sector. According to China Iron and Steel Association (CISA), the total crude steelmaking capacity in China stood at over 800 million tonnes while the domestic consumption was estimated at approximately 673 million tonnes and net exports accounted for only 28.4 million tonnes in 2011 (from a peak of 48.3 million tonnes in 2007). Notwithstanding the above, it is worthwhile to appreciate that the steel and metallurgical coke industry is cyclical in nature and thus we would expect to see ups-and-downs over a period of time.  In the fourth quarter of 2011, the sector unfortunately happened to be at an unenviable position of the said cycle.  The Group’s relatively poor showing in its business performance stood in comparison with the general trend of the industry and should not be seen as an isolated case. It is an established fact that the entire sector worldwide was wrought with challenges and industry players are experiencing lackluster performances and falling profits. FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW Against the landscape of challenging business environment, especially in the fourth quarter of the financial year, the Group turned in a dismal financial result for the financial year ended 31 December 2011 with a loss of RM9.6 million.  Revenue wise, the Group however registered a relatively higher turnover of RM1.526 billion for the financial year  ended 31 December 2011. This represents an increase of 8.5% from RM1.407 billion recorded in the preceding financial year. The increase in revenue was primarily due to a higher average price of metallurgical coke of 6.5%  as well as the overall net price improvements seen in the by-products compared to those in the preceding year. Moving in a similar trend with the hike in the average price of metallurgical coke, the average price for coking coal, being the primary raw material for the production of metallurgical coke, had also risen during the financial year ended  31 December 2011.  With an increase of about 7.7% in the average price of coking coal, the cost of sales recorded by the Group escalated to RM1.512 billion, representing an increase of 9.5% from RM1.381 billion registered in 2010. Based on the foregoing, the Group managed to turn in a modest gross profit of RM14.9 million for this financial year ended 31 December 2011. However, with the inclusion of the Group’s operating expenses, the Groups profitability  fell into negative territory with a loss for the year amounting to RM9.6 million. This translates to a loss per share of 0.86 sen. As far as the Group’s financial position is concerned, it continued to show a relatively robust net assets position for the financial year ended 31 December 2011. The total assets of the Group stood at RM829.3 million. Notwithstanding the loss for the year as registered in this financial year, the Group still managed to show a 3.7% increase in  CHAIRMAN’S STATEMENT
Shareholders’ Funds to RM721.7 million.  This can be attributed to the strengthening of the Renminbi against the Ringgit of approximately 6% during the financial year 2011, the translation effect of which was reflected in an increase  in the foreign currency translation reserve. The Group continues to be in a net cash position with no external borrowings.  The net assets per share of the Group stood at RM0.64 per share as at 31 December 2011.
INDUSTRY OVERVIEW AND FUTURE OUTLOOK The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw materials for the manufacturing of steel. Over 70% of global steel production is by way of Blast Furnace and as such necessitates the use of metallurgical coke for the smelting of iron ore. As far as the steel and metallurgical coke industries are concerned, 2011 is largely regarded as a year filled with  headwinds which have stymied its progress from the promising earlier periods.  It may appear that the challenges, issues and uncertainties around the world will continue to hover like a dark cloud stifling the growth of the steel and  metallurgical coke industries in the near future. However, I hold steadfastly to a positive view that we should not read too much into the immediate earnings setbacks stemming from a temporary adversity in the industry but should instead adopt a longer term perspective. I am inclined to believe that a potential upturn and restoration of the whole steel/metallurgical coke industry may just be lurking in the horizon. There are numerous evidences that seem to support my optimism. For example, China’s manufacturing started to expand this year on increased new orders, suggesting the world second largest economy is withstanding Europe’s debt crisis and a government induced property slowdown at home. The Purchasing Managers’ Index (PMI) rose to 53.1 in March 2012 (latest available data at the time of writing) from 50.3 in December 2011, according to China’s Statistics Bureau and Logistics Federation. A reading of above 50 indicates an expansion. The stronger than expected PMI figures also provides compelling evidence that a hard landing for China’s economy is very unlikely. This is seen  and a boon to the steel industry and it shares a close correlation to the health and prospects of the economy. Apart from the above, there is evidence that the aggressive destocking activities by traders over the past months that had created an oversupply situation have come to an end and these traders will have to return to the market soon to replenish their inventories.  Monetary easing measures introduced recently by the Chinese policymakers may also provide the impetus for the steel industry in China to recover and flourish once again. Prices of metallurgical coke and coking coal are expected to stabilise at around RMB1,900-2,000 per tonne and RMB1,300-1,400 per tonne, respectively.  Such pricing circumstance is expected to reduce volatility in the raw material prices and production cost of both steel manufacturers and metallurgical coke producers, thus restoring some decent margin to those industry players. Although there is much talk in recent times about the perceived cooling of China’s economy, it should be seen as an effect of a subtle and astute deliberate measure by the Government to realize its broader underlying macro socio­economic objective.  Therefore one should not be merely reading the pure economic data in isolation but rather to rationalise and supplement it with other important relevant microeconomic and governmental policy considerations. The Chinese Government is now trying to restructure the country’s economy to drive growth from within and reduce reliance on exports.  While China’s 8.9% fourth quarter economic growth, the slowest in ten quarters, has stirred unnecessary fears, it has been welcomed by increasing number of analysts in China for heralding an important shift in how the country grows its economy. The relatively slower growth reflects the beginning of a difficult rebalancing  that the economy needs, i.e. to move growth away from the export-dependent, GDP-focused approach that has defined China’s rise over the past two decades. The Chinese Government has set the annual growth target for the next five-year plan (2011-15) at 7% (which is still an enviable robust rate), down from the 11.2% average in the previous five-year period. Also behind the slowing growth was a cooling housing market, which finally appeared to  yield to a series of curbs put in place over the past year as spiraling housing prices sparked both fears of a bubble and public anger. Real estate investment, which has been a key driver of growth, fell in the recent months, as did housing prices in 55 out of 70 cities.  This follows the introduction of new property taxes and curbs on buying second homes.  Such a move by the Government has achieved its objective of hindering speculation in the property market. CHAIRMAN’S STATEMENT China’s economy grew 9.2% in 2011, down from 10.3% in 2010.  An even lower 8.5% is forecasted for 2012, a key year for China as it embarks on a once-in-a-decade leadership transition.  Notwithstanding the perceived downward setting of the growth target rate, the Government is committed to maintain adequate economic activity to keep the country’s economy humming, an important prerequisite for job creation and social stability. In its efforts to rebalance the economy to be fueled primarily by domestic consumption and to cushion weaknesses in external demand, the Chinese Government continues to promote public and private sector fixed-assets investments  starting with the gradual easing of monetary policies.  Public infrastructures, amenities and affordable housing projects continue to be high on the priority list to further increase the urbanization rate in China.  These ongoing initiatives will inherently create sustainable demand for steel (and thus metallurgical coke) in the domestic market over a prolonged period of time. Based on China steel industry’s five-year plan unveiled in November 2011, the Raw Material Department of Ministry  of Industry and Information Technology (MIIT) projected that China’s annual steel consumption will increase from 683 million tonnes in 2011 to 750 million tonnes in 2015 with the peak of between 770 million – 820 million tonnes during the period 2015-2020.  It is therefore evident that the China economy still has the capacity to grow unabatedly and create voracious appetite from within to devour such huge quantity of steel. This is further supported by the compelling fact that China’s steel consumption per capita is still very low if compared with other developing and developed nations.  China’s steel consumption per capita currently stands at around 125kgs whilst the Korean and Taiwanese per capita steel consumption hovers around the 800kgs mark, Japan at 600kgs, Europe at 470kgs and US at 360kgs.  It is for this very reason that the Australian resource giants, namely BHP Billiton, Rio Tinto and Fortesque Metals, are still aggressively expanding their iron-ore production capacity based on their view that growth in China will remain strong over the long term. A NOTE OF APPRECIATION Based on the foregoing and barring any unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the ensuing financial years. With the support  from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders. Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group.  A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success. Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR (DK, DKYR, SPNS, SPMP, PPT) Executive Chairman

 

 

 

2010 Annual Report

CHAIRMAN’S CHAIRMAN’S
STATEMENT

Hua-An International Berhad, I am pleased to present the Annual Report together with the Audited Financial Statements of the Company and the Group for the financial year ended 31 December 2010. It appears that the worst is over and the flicker of light at the end of the tunnel is indeed getting brighter. Emerging from the trough of the recent global financial crisis the Group continued to remain steadfast and focused on its core competencies and has thus found a firmer footing for itself to ride alongside and benefit from the gradually recovering economic and industry environment. The year 2010 proved to be a much improved year as a whole for the Group as well as the industry in which it is operating in. Although challenges still loom in the western economies, in particular in the U.S. and Eurozone, countries in the Asia Pacific region have shown quite a robust and sustainable recovery phase with China leading the way.  As a result of the said economic revival and growth in these emerging markets, key strategic industries have begun to burgeon in tandem.  Riding on this crest, amongst others, are the steel and metallurgical coke industries, the two closely related industries that saw demand gradually returning (although admittedly still below the pre-crisis levels), especially in the Chinese domestic market. This circumstance was indeed a welcoming respite for the Group as well as the other industry players.  The average prices for metallurgical coke and by-products in 2010 have been trending upwards, albeit on a gradual pace, resulting in the Group turning in a relatively better financial performance compared to those of the preceding two years.  With the global economy generally on a recovery phase in 2010 (with the exception of a few still in a fragile state as mentioned above) the steel industry started to show 27 signs of improvement too given the strong correlations between GDP growth and the general demand for steel. China’s GDP expanded by a commendable 10.4% in 2010 from about 8.45% in 2009.  In tandem with the said robust economic growth, China’s fixed-asset investment rose 23.8% in 2010 to reach RMB27.81 trillion. Similarly, urban fixed-asset investment rose to RMB24.14 trillion, up 24.5% from a year earlier, while rural fixed-asset investment rose to RMB3.67 trillion, up 19.7% year-on-year.  Similar positive trend can also be observed on the international front, with economies generally exhibiting signs of improvement in 2010, albeit at differing pace.  Relatively robust economic growth were seen in the Asian countries.  To name a few, for example the Malaysian, Thailand, Indonesian and Indian economies expanded by 7.28%, 8.65%, 6.14% and 7.40% respectively compared to a lackluster -1.73%, -2.20%, 4.55% and 6.7% respectively in the preceding year, nursing the aftershocks of the global financial crisis. The western world however showed only modest growth, nevertheless still a growth, with the U.S. economy growing by a slight 2.8% in 2010, an improvement over a 0.25% recorded in 2009 whilst economies in the Eurozone grew by 0.45% from a contraction of 0.53% a year earlier. Notwithstanding the above, however the rebound in the steel industry was admittedly not as rapid as we hoped it to be but rather appeared to be on a steady and cautious mode. Annual Report 2010 CHAIRMAN’S STATEMENT Financial Performance and Operational Review Against the backdrop of improving economic and business environment in 2010 as mentioned above, I am pleased to say that the Group turned in a consolidated profit for the year of approximately RM6.4 million.  This is still a commendable figure judging from the fact that the Group had succumbed to registering a loss of RM20.6 million a year earlier. Revenue wise, the Group achieved a turnover of RM1.407 billion for the financial year ended 31 December 2010. This represents an increase of 9.9% from RM1.280 billion recorded in the preceding financial year.  Such increase in turnover can be attributed primarily to a higher average selling price of metallurgical coke and the by-products if compared to those in the preceding year. Moving in tandem with the hike in the average prices for metallurgical coke, the average prices for coking coal, being the primary raw material for coke production, had escalated as well in 2010.  As a consequence, the cost of sales recorded by the Group was pushed up to RM1.381 billion, representing an increase of 8.2% from RM1.276 billion registered in 2009. With the support from the strong rebound in the average prices of the by-products in 2010, the Group was able to turn in a modest gross and net margin of approximately 1.9% and 0.5% respectively.  These are translated to a gross and net profit of approximately RM26.1 million and RM6.4 million respectively, thus giving an earnings per share of 0.57 sen. The Group continues to show a relatively healthy and robust Balance Sheet for the financial year ended 2010. The total assets of the Group stood at RM836.5 million compared to RM827.3 million in 2009.  Notwithstanding the profit recorded by the Group for the financial year ended 2010, the shareholders’ fund saw a decline of 5.1% to RM696.0 million from RM733.5 million in the preceding financial year.  This is attributed primarily to the appreciation of Ringgit 28 (reporting currency) against the Renminbi (functional currency) during the financial year 2010 the translation effect of which was reflected in a reduction of the foreign currency translation reserve. The Group continues to be in a net cash position with no external borrowings.  The net assets per share of the Group stood at RM0.62 per share as at 31 December 2010. Industry Overview and Future Outlook The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw materials for the manufacturing of steel.  Over 70% of the global steel production is by way of Blast Furnace and as such necessitates the use of metallurgical coke for the smelting of iron ore.  As far as the steel and metallurgical coke industries are concerned, 2010 is largely seen as a year of steady and progressive recovery and is poised to make a comeback in the ensuing years, with China continuing to assume the leading role.  This point of view is arrived at premised on several considerations and circumstances which, directly or indirectly have an impression on the general health of the steel industry moving forward. From the perspective of the Chinese domestic market, there is strong credence that the Chinese government will endeavour to keep its economy humming.  While admittedly some quarters are concerned over the fading effects of China’s RMB4 trillion stimulus package and the end of the 11th Five-Year Plan, others point to signs of an overheating economy driving policy makers to possibly moderate economic growth.  Nonetheless, I am inclined to believe that the Chinese government will have the means to be able to keep a GDP growth target of above 8% for the medium term, especially as this rapid pace has been maintained over the past three decades.  Furthermore, notwithstanding the fact that China is already the second largest economy in the world, its GDP must continue to grow unabated in order to improve the nation’s purchasing power and narrow the gap between its low average nominal GDP per capita compared with that in the developed countries. In addition to the above, given the impending crucial leadership change for China in 2012, those concerned would want to see the country achieve sparkling economic numbers before the handover. Therefore, the Chinese government is expected to continue with its fiscal spending while spurring private spending to reduce the socio-economic disparity across China and improve the quality of life. This will inherently drive the domestic steel demand. Annual Report 2010 CHAIRMAN’S
STATEMENT Zooming in on the steel industry in China, I take comfort on the positive developments within the industry and government policies.  China is currently moving into the third phase of consumption upgrading and the accompanying robust demand for white goods and automotives.  The Chinese government’s efforts to promote industrial upgrading will also boost machinery demand, which will in turn bolster demand for steel, in particular steel plates and sheets. The housing euphoria in China is likely to continue but the momentum may soften, especially in the already developed coastal regions, where property prices have shot up, prompting measures by the government to cool things down. However, in the government’s effort to urbanise the rural areas, most of which are located in the western regions, continuous public sector spending and fixed-asset investments will be diverted and focused in these targeted less developed second and third tier provinces.  Recently, the National Development and Reform Commission (NDRC) announced that China will step up its efforts and implement more aggressive reforms by breaking down the dual urban-rural structure, with a target of achieving an urbanization rate of at least 50% or more in the next five to six years. Such efforts will compensate for the perceived slowdown in the over-developed coastal regions. In addition to that, the Chinese government has also set out an aggressive expansion plan for its existing railway network in view of the importance of such infrastructure to facilitate its socio-economic aspirations for the country. In 2010, a massive RMB823.5 billion was allocated to extend the country’s railway network to 90,000km.  The said railway network mileage is targeted to be raised to 120,000km by 2020.  This would imply that more than 3,000km of new tracks need to be paved annually for the next nine to ten years. As a consequence of the above, steel prices are expected to consolidate on a higher level, moving forward. This is the result of anticipated increase in demand from China’s continuous appetite for the said commodity coupled with the gradual economic expansion in other parts of the world. Already large steel manufacturers the world over such as ArcelorMittal, Nippon Steel, POSCO, U.S. Steel Corp., Hebei Iron & Steel Group, Baosteel, etc., have announced or gave indications of a higher steel price in 2011.  With the steel manufacturers poised to enjoying more reasonable margins, the positive impact will eventually trickle down to the peripheral industries such as the metallurgical coke industry in terms of higher price. The question is, how soon and at what quantum. 29 Be that as it may, I wish to stress that the general health of the world economy and thus the industries within and commodity markets, are largely subject to the vagaries of world events which may occur unexpectedly and/or abruptly. As such, notwithstanding evidences of a favourable landscape on the horizon, we need to be sensitive and take cognizance of the potential impact, negative or otherwise, from these unpredictable turn of events.  The unfolding of events such as the catastrophic flood in Queensland, the longstanding political tension in Thailand, civil unrests in Tunisia, Egypt, Libya and elsewhere in the wider Middle East and North Africa, the abrupt end of truce talk between North and South Korea, devastating earthquake in Christchurch and Japan, news on the downgrade of Japan’s debt rating outlook by Moody’s, etc. may cast a damper in the path of global economic recovery. A Note of Appreciation Based on the foregoing and barring unforeseen turn of events, the Board is looking forward to a more sustained and robust business environment in the metallurgical coke industry for the financial year 2011.  With the support from my fellow Board members and management team, we are optimistic that the Group will be able to continuously create value for our shareholders in the coming financial year. Towards this end, on behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group. A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success. Annual Report 2010
Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR (DK, DKYR, SPNS, SPMP, PPT) Executive Chairman

 

2009 Annual Report

CHAIRMAN’S CHAIRMAN’S
STATEMENT

On behalf of the Board of Directors of Sino Hua-An International Berhad, I am pleased to present the Annual Report together with the Audited Financial Statements of the Company and Group for the financial year ended 31 December 2009.
Emerging from the aftermath of the worst global financial crisis since the Great Depression, the Chinese economy has started sprouting green shoots and several of its key strategic industries have begun exhibiting signs of

improvement in 2009. Riding on this bandwagon, amongst others, are the steel and coke industries whereby these closely related industries have seen demand gradually returning within the Chinese domestic market principally from 
the re-stocking initiatives as well as churning of the domestic economic engine spurred by the implementation of the RMB4 trillion fiscal stimulus package in China and the anticipation of returning overseas demand. These have helped stem the massive operating losses incurred by steel and coke manufacturers during the untenable business environment towards the end of 2008.
Premised on the above, the Group saw gradual improving trend in the prices of coke and by-products in 2009, as evidenced by the significantly reduced losses registered in the first and second quarter and a profit in the third quarter of 2009, compared to the period during the peak of the crisis in the fourth quarter of 2008. This gradual recovery phase has however not been very consistent. As our coke business was charting its way towards an anticipated stronger recovery phase, there were unexpected shortcomings highlighted by perceived oversupply of steel in March 2009 (only to recover shortly thereafter) and again towards the end of September till mid October 2009, resulting in a negative spillover effect onto the coke market. These circumstances had thus resulted in the industry experiencing some pullbacks in coke prices during those periods. Prices of raw material, i.e. coking coal remained relatively high throughout 2009 primarily due to tight supply stemming from the closure of several deemed dangerous and inefficient coal mines that failed to meet stringent environmental and safety rules. Furthermore, the early arrival of winter in November 2009 further aggravated the situation as the extraction of thermal coal took priority over coking coal. While China’s economy started to turnaround in 2009 and gathering speed towards the end of the year with its economy charting an impressive 10.7% growth in the fourth quarter from a year earlier, picking up from 9.1% in the third quarter and bringing its full-year growth to 8.7%, a majority of other countries appeared to be more lethargic with minimal economic growth figures throughout 2009. As such, external demand for steel was thus still weak with the World Steel Association’s assessment of total global crude steel production (excluding China) in 2009 falling by 21% compared to 2008 and China’s steel exports falling by 60% during the same period. Additionally, ArcelorMittal, the world’s top steelmaker (in a recent press statement with Reuters) cautioned that the market will only recover in the early months of 2010. These facts, amongst others, explain the poor external demand for steel in 2009. Annual Report 2009

CHAIRMAN’S STATEMENT Financial Performance The financial results of the Group for the financial year 2009 have been rather vacillating whereby months of recoveries, albeit small and gradual, were met with periods of pullbacks. As a result, in the full year consolidated financial result, the Group had to succumb to registering a loss for the year of RM20.6 million. This loss came about as the operating profits generated from the later months of the year were not adequate to compensate for the losses sustained in the first half of the year. If we look at this result from a recovery standpoint, this RM20.6 million loss for the full twelve months is significantly lower in comparison to the RM83.6 million loss that was suffered just in the fourth quarter 2008 alone, the amount of which had the depth and intensity of wiping out almost the entire profits earned in the earlier nine months of 2008. Revenue wise, the Group achieved a turnover of RM1.280 billion for the financial year ended 31 December 2009. This represents a decrease of 12% from RM1.455 billion recorded in the preceding financial year. Such decrease in turnover can be attributed primarily to the relatively lower average selling price of coke and by-products compared to those of the preceding year.  Despite turnover easing downwards by 12% in the financial year 2009, the cost of sales dropped by a relatively lower quantum of about 10.6% during the same period. The cost of sales appeared to be still lofty at RM1.276 billion stemming primarily from the persistently high coking coal prices throughout the year in 2009.
The average price of metallurgical coke amounted to RMB1,583/tonne in 2009 compared to RMB2,183/tonne in 2008, representing a drop of 28%. On the other hand, the average price of coking coal was at RMB1,081/tonne in 2009 compared with RMB1,370/tonne in 2008, representing a comparatively smaller decline of only 21%. While the price of coal gas remained fairly consistent, the average prices of the other by-products, namely tar, crude benzene and ammonium sulphate saw a decline in prices in 2009 compared to those recorded in 2008. Given the capricious year experienced by the industry in 2009, the narrowed pricing gap between the price of metallurgical coke and that of coking coal continued to squeeze our margins further, resulting in the Group turning in its first full year loss of RM20.6 million, a situation which we hope will not be repeated. 0 Despite the abovementioned adverse result for the financial year 2009, the Group continues to have a relatively strong and healthy Balance Sheet. The total assets of the Group stood at RM827.3 million and shareholders’ funds at RM733.5 million. The Group continues to be in a net cash positive position with no external borrowings. The net assets per share of the Group stood at RM0.65 per share as at 31 December 2009. Operational Review and Industry Overview The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw materials for the manufacturing of steel in China.  Despite the somewhat fickle and unsettled nature of the steel and metallurgical coke industry as seen through the 2009 period, the landscape appears to be gradually turning around with more clarity and we are optimistic that the steel and metallurgical coke industry will, slowly and progressively, gravitate towards a more sustainable recovery in 2010. With evidence of economic recovery in the South East Asia region and countries therein forecasting improving growth rates, there appears to be an encouragingly positive light on the immediate future prospects for the economies and the industries in the region, given that these very economies were experiencing contractions in the preceding year. According to the IMF World Economic Outlook, newly industrialized and developing economies are expected to grow at about 4.7% in 2010. Leading the pack is China, the world’s third biggest economy. Its GDP growth is projected to expand at a faster pace in 2010 even as officials cool lending to restrain inflation and avert asset bubbles. Goldman Sachs Group Inc maintained its forecast of 11.4% growth for 2010 (from 8.7% in 2009) even after the China central bank raised reserve requirements for lenders whilst Merrill Lynch forecasts 10.1% growth and Capital Economics Ltd sees a 10% gain. Such confidence data and expectation of unabated economic growth shall continue to fuel the strong growth trajectory for China in the ensuing years.
Annual Report 2009 CHAIRMAN’S STATEMENT Rebounding exports seen in 2010 may boost a Chinese economy that last year depended on its own stimulus-fuelled investment and consumption growth. The Chinese economy is in good shape and exports will be the biggest swing factor this year.  China’s early surging of demand for steel in 2010 is expected to dominate the landscape of the steel industry. Already, the world’s largest producer by far, the country is expected to rev up production by nearly 10%. London-based Rio Tinto Group, the world’s second biggest iron-ore producer, said in Bloomberg (February) that China will continue to become its largest single market in 2010. It is widely expected that steel price will continue to be on an uptrend this year as governments in East Asia restart spending on major infrastructure related projects and restocking activities increases. Malaysia, Indonesia, Philippines, Singapore and Thailand are expected to spend a total of about RM102 billion on infrastructure projects, financed by their economic stimulus packages. Strong demand is also expected from the Middle East, Australia, Pakistan and Bangladesh. Future Outlook Corporate results earnings announced thus far this year in general reflect the tail-end of the impact from the global economic crisis in 2009 with companies feeling more optimistic over their prospects for the current year. By the same token, the Board is looking forward to a much steadier recovery path in the metallurgical coke industry and sustained business environment for the financial year 2010. Massive stimulus packages and infrastructure plans announced and initiated earlier by Governments in the region have started to churn the economic wheel for the respective countries, thus fuelling demand.
Premised on the foregoing and barring any unanticipated turn of events, we are hopeful of seeing prices for metallurgical coke gaining momentum throughout the remainder of 2010 on the back of gradually returning demand. Although the prices of coking coal may also increase in tandem, we are hopeful that the extent of its hike is less than that of metallurgical coke, thus enabling us to archieve better financial results for the financial year 2010. The Board is optimistic of Sino Hua-An creating better value for our shareholders in the coming financial year. With the support from my fellow Board members and capable management team, I believe we can steer the Group back to profitability and better prospects. A Note of Appreciation On behalf of the Board of Directors, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group. A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success. Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR (DK, DKYR, SPNS, SPMP, PPT) Executive Chairman

 

 

2008 Annual Report

Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JiltAFAR
{OK, DKYR, SPNS, SPMp, PPT}
Executive Chairman

The year 2008 has certainly been very dramatic and eventful. Aseemingly rosy first half year took a sudden adverse turn with a severity that unfolded in the latter part of the year that almost wiped out the profits enjoyed in the earlier six months of the year. We saw abrupt swings in commodity prices globally, financial losses stemming from the US subprime crisis, meltdown of financial markets and turmoil in the global economies in the fourth quarter, spiraling unemployment rates, failing governments, unprecedented colossal bailouts, collapse of big businesses, etc.
These socio-economic dramas that unfolded before us are rooted in the implosion of the US subprime crisis which very swiftly triggered capital withdrawals particularly from Asian equity and debt markets. Heightened risk aversion and continued deleveraging in developed nations had caused huge capital outflows, drastic currency depreciation and a surge in borrowing costs across developing Asian economies. The loss of confidence, sell-off in financial markets, asset price bubble bursts (especially in property markets) and tightening of bank lending have curtailed investments, external trade and production, causing economic growth and domestic demand to slow rapidly in the second half of 2008. Economic superpowers were literally brought down to their knees with the US, EU and Japan already grappling in the midst of recession in the concluding months of 2008, as with other relatively smaller economies worldwide.
Amidst all this financial and economic turmoil, how did Sino Hua-An fare? Admittedly, we are also not spared the wrath of global economic slowdown and the challenges besetting the steel industry, to which our business is closely related to, especially in the fourth quarter of 2008. We appeared at the outset to be en route to a commendable year by registering a sizeable profit after tax (unaudited as announced in our second quarter report on 22 August 2008) of approximately RM72.5 million for the first half of 2008. Our business dynamics and profitability however took an unexpected turn in September 2008, affected by a severe downturn in the whole of the steel and metallurgical coke industry in the month of October and November. In the said two months, the pricing structures of metallurgical coke and steel had changed in such a way that the industry’s cost of production was pushed up to such a high level rendering margins and profits of industry players to be significantly diminished. Many steel companies not only those in China but also throughout the world, have registered losses in the fourth quarter of 2008.
It was reported that Baosteel Group (the largest steel manufacturer in China) in June 2008 agreed to pay London­based Rio Tinto Group as much as US$127 a tonne of iron ore, a 97% increase from a year earlier. This abrupt hike in iron ore prices escalated to a great degree the cost of steel production making it an unviable business proposition. Subsequently prices of steel took a sudden reversal downwards stemming from the softening demand triggered by global economic slowdown. As a consequence, our coke industry was also affected as steel manufacturers (both in China and globally) cut production of between 15%-35% (amongst others, Baosteel was reported to have cut output by 20%, ArcelorMitlal by 35%, Severstal OAO by 30%, Nippon Steel by 15%) during this challenging period.
Despite the predicament besetting the industry, we are inclined to believe that such challenging times have passed and the industry has begun to pick up in December 2008, moving into 2009. This is evidenced by further improvements seen in metallurgical coke prices relative to the prices of coking coal as well as demand for coke creeping back up.
As far as developments within the Group are concerned in the financial year 2008, we have successfully commissioned our new coke oven in May 2008 (about a month ahead of schedule). Therefore our total coke production capacity has effectively increased from 1.2 million tonnes to 1.8 million tonnes per annum, rendering us by far the largest independent coke manufacturer in Shandong Province and the 4th largest coke manufacturer in Shandong Province behind (i) Shandong Laiwu Iron and Steel Corporation and (ii) Jinan Iron and Steel Corporation Coking Factory (both of which are actually steel manufacturer with their own supporting coke manufacturing facilities) and (iii) Shandong Yankuang International Coking Co., Ltd (which is a joint venture initiative between companies in China, Brazil and Japan producing grade-1 coke for export purposes). Based on an estimate of 45 independent coke manufacturers in the Shandong Province (soorcewww.custeelcom1, we garner an approximate market share of between 9%-10%.
SINO HUA-AN INTERNATIONAL BERHAD Annual Report 2008

Financial Perlormance
2008 was indeed an unusual and tumultuous year for Sino Hua-An. The financial results that we recorded were unprecedented in the history of the Group. The first six months of the year saw the Group registering a rather commendable result with profit after tax of approximately RM72.5 million. However, owing to the sudden turn of events that negatively impacted the steel/coke industry in the fourth quarter of 2008, Sino Hua-An turned in a rather dismal result in the fourth quarter wiping off a significant part of our earlier profits.
The Group achieved a turnover of approximately RM1A55 billion for the financial year ended 31 December 2008. This represents an increase of about 70.6% from RM852.7 million recorded in the preceding financial year. Such increase in turnover can be attributed to the relatively higher coke selling price as compared to that ofthe preceding year as well as the increased capacity from the successful commissioning of our new coke oven in May 2008.
Notwithstanding the above improvements in the Group’s turnover, we saw significant escalation in our cost of production as well, stemming primarily from the hike in coking coal prices throughout the year. The average price of coke amounted to RMB2, 183/tonne in 2008 as opposed to RMB1 ,266/tonne in 2007, representing an increase of 72%. On the other hand, the average price of coking coal was at RMB1 ,370/tonne in 2008 compared with RMB720/tonne in 2007, representing a hefty upsurge of about 90%.
Given the narrowing pricing gap between the price of coke and that of coking coal, our average margins in 2008 were squeezed considerably. Under such circumstances coupled with the anomalous fourth quarter loss, the Group managed to register a profit after tax of approximately RM545,000.
Despite the abovementioned reduced profits for the financial year 2008, the Group still has a strong and healthy Balance Sheet. The total assets of the Group stood at RM870A million, an increase of 14% from RM763.5 million in the preceding year. Shareholders’ funds rose by about 7% to RM763.8 million from RM713.9 million recorded in the preceding year. The Group continues to be in a net cash positive position with no external borrowings. The net assets per share of the Group stood at RMO.68 per share as at 31 December 2008.

Operational Review and Industry Overview
The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw materials for the manufacturing of steel in China.
Despite the challenging landscape affecting the steel and metallurgical coke industries, especially in the fourth quarter of 2008, the scene appears to be gradually improving currently and we are optimistic that the steel and metallurgical coke industries will continue in its momentum, albeit gradually, towards the path of recovery in 2009.
It will be relevant at this stage to elaborate on the developments of the Chinese economy as our metallurgical coke business is located in China and our business dealings conducted therein. On the RMB4 trillion fiscal stimulus package aimed at spurring consumer spending and bolstering the domestic economy, a substantial amount is earmarked for infrastructure spending and housing development, both of which would require huge amounts of steel. An estimated RMB1 trillion will go towards infrastructure spending and another RMB800 billion allocated for low income housing. This amounts to approximately 25% and 20% respectively of the RMB4 trillion into both the key areas which will have positive direct spin-off effects on the steel industry and thus that of coke. The spending has already commenced in tranches, with the Central Government already releasing about RMB100 billion in the fourth quarter of 2008 and the second batch of investment of another RMB130 billion released into the economy in January 2009, according to the National Development and Reform Commission (“NDRC”). The balance will be delivered over the course of 2009 and 2010. Projects such as the building of RMB3.5 billion of public housing in Shaanxi province and Shanghai began in December, while Shandong province started work on three new railway lines the same month.
In an effort to further support the steel industry, the Chinese Government has scrapped export duties on 67 flat-steel products effective 1 December 2008. This move will certainly encourage export of more steel products, which will directly increase the demand for coke.

SINO HUA-AN INTERNATIONAL BERHAD Annual Report 2008

 

In conjunction with its colossal RMB4 trillion stimulus package, the Chinese Government has also pressured state­owned banks to increase lending, reduce export taxes and agreed to provide support in ten areas, through tax cuts and subsidies for the steel and auto industries. The Central Bank has dropped quotas limiting annual lending by banks in the fourth quarter of 2008. The Chinese Government also urged banks, most of which are state-owned, to lend more to small and medium-size companies, all with the objective of sustaining and stimulating the economy. According to the People’s Bank of China, a record US$237 billion of new loans were approved in January 2009, more than double the record set a year earlier.
Premised on the above aggressive roll-out of initiatives and policy measures, China’s GOP is expected to maintain a growth rate of about 8%, according to Premier Wen Jiabao in his speech at the National People’s Congress on 5 March 2009. The said expectation of the economic growth in China could be further supported by other socio­economic projects intended to be implemented by the Chinese Government prior to the economic and financial turmoil. Amongst others, there is the urgency forthe reconstruction of the disaster areas, particularly in the southern part of China which were affected by the massive earthquake in May 2008. It is estimated that an amount of RMB1.6 trillion will be required for such efforts.
Future Outlook
Based on the above review of the industry and indications on where the China economy is heading, the Board is optimistic and hopeful of better economic and market conditions in China going forward into the new financial year. We have started to see demand for metallurgical coke gradually coming back in December 2008 with further signs of improvement shown moving into 2009. Notwithstanding the positive change, the Group, as a matter of prudence, has instituted cash management to ensure adequate liquidity.
Barring unforeseen circumstances, the Board is optimistic of Sino Hua-An creating better value for our shareholders in the coming financial year. With the support of my fellow Board members and capable management team, I believe we can steer the Group out of troubled waters and subsequently to greater heights.
A Note of Appreciation
On behalf of the Board, I would like to record my gratitude to our loyal customers, suppliers, business partners and shareholders for their continuous support and confidence in the Group.
A special note of appreciation goes to the management team and employees of the Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success.
YAM. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR
(DK, DKYR, SPNS, SPMp, PPT)
Executive Chairman
SINO HUA-AN INTERNATIONAL BERHAD Annual Report 2008

 

 

2007 Annual Report

CHAIRMAN’S STATEMENT

On behalf of the Board of Directors of Sino Hua An International Berhad (“Hua An”), I am pleased to present the Annual Report together with the Audited Financial Statements of the Company and Group for the for the year ended 31 December 2007.
During the year, the Group continued to pursue its objective of maximizing stakeholders’ value by embarking on several strategic initiatives geared towards sustainable growth and improved performance. Being listed on Bursa Malaysia for only about a year, we have managed to meet investors’ high expectations of us by delivering a strong and creditable financial performance in the financial year 2007 with both robust revenue and pre-tax profits. Some of the significant initiatives that were rolled out during the year include our commissioning of the coal washing facility in May 2007. With such facility, we can now purchase raw coal which is relatively cheaper as opposed to pre-washed coal. Additionally, the coal washing facility also produces two new by-products, namely coal slime and middlings. The coal washing facility enables us to enjoy an overall cost savings on raw materials of approximately 3-5%. In mid 2007, we have also commenced the construction of our additional metallurgical coke ovens to increase our annual production capacity from 1.2 million tonnes to 1.8 million tonnes. The construction of the said new metallurgical coke ovens have been completed and are expected to be fully commissioned in June 2008. This introduction of additional 600,000 tonnes production capacity can be viewed as an acceleration of our initial intended expansion plan of building the 1st batch of 300,000 tonnes metallurgical coke oven capacity plant in October 2007 followed by the 2nd batch of 300,000 tonnes metallurgical coke oven capacity plant in 2009, as disclosed in our submission to the Securities Commission in May 2006. However, taking cognizance of the promising prevailing coke market condition experienced by the Company whereby the demand for our metallurgical coke has been exceeding supply (which is constrained by our existing 1.2 million tonnes capacity) as well as the increasing trend of the prices of metallurgical coke and the by-products, we have made a concerted decision to bring forward the timing for the construction of the 2nd batch metallurgical coke oven and construct the entire 600,000 tonnes capacity in 2007. These initiatives were a few of Hua-An’s continued pursuits to consistently create and deliver value to our shareholders. Hua-An, as the first “red-chip” company to be listed on Bursa Malaysia on 26 March 2007 is indeed well placed to benefit from the booming steel industry in one of the fastest growing economies in the world.  Annual Report 2007

 

CHAIRMAN’S STATEMENT
Financial Performance 2007 was indeed a good year for Hua-An. The Group achieved a turnover of RM852.7 million (inclusive of revenue from discontinued operations of RM1.3 million) for the financial year ended 31 December 2007. This represents an increase of about 16.7% from RM730.7 million recorded in the preceding financial year. Profit for the year rose to RM127.5 million for the financial ended 31 December 2007, up by RM12.5 million or 10.9% from RM115.0 million in the preceding financial year. The profit for the year of RM127.5 million for the financial year ended 31 December 2007 could have been even higher compared to that in 2006 if the effect of the one-off restructuring expenses of RM8.8 million and tax expense of RM24.4 million were to be disregarded, as these two expenses were not incurred in the financial year 2006. The abovementioned good financial performance recorded in the financial year 2007 was mainly attributed to the continued robust and positive pricing trend of metallurgical coke and the by-products enjoyed by the Group. The average prices of metallurgical coke, coal gas, ammonium sulphate and crude benzene during the financial year ended 2007 have increased by approximately 16%, 17%, 22% and 8% respectively compared with those of the preceding year.    As a result of the above financial position, the total assets of the Group was recorded at RM763.5 million and shareholders’ fund of RM713.9 million for the financial year ended 31 December 2007. These represented a commendable increase of 107.3% and 165.9% respectively when compared with the total assets and shareholders’ fund of RM368.3 million and 268.5 million respectively for the preceding financial year. Operational Review and Industry Overview The metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as metallurgical coke is one of the critical raw material for the manufacturing of steel in China. It is expected that the steel demand in China will continue to grow for the next 5-10 years and the distinctive growth drivers are the Beijing Summer Olympic 2008, Shanghai Expo 2010, the Three Gorges Dam project and more importantly the massive infrastructure and urbanization programmes initiated by the Chinese Government to rapidly urbanise and develop the inner cities of China. Additionally, the rate of progress and development in the automobile and shipbuilding sectors in China also will continue to provide the impetus for the demand of steel moving forward, thus the demand for metallurgical coke. China is the largest crude steel producer in the world and its production accounted for 36.4% of global crude steel production. In 2007, China produced approximately 489 million tonnes of crude steel, an increase of 15.7% from 2006. According to China Iron and Steel Association, in 2008 the crude steel production is expected to grow between 6.3% to 10.4%. Although on 1 January 2008, the Chinese government has increased the steel export duty for billet from 15% to 25%, situation of oversupply of steel products in China is not expected to be significant as China’s domestic demand is still expected to be increasingly high, thus would be able to absorb the additional steel supply into the domestic market. Additionally, the Government’s effort to encourage consolidation in the fragmented steel industry and its endeavour of closing down the inefficient and highly polluting plants will serve as an avenue to keep the demand and supply dynamics in check. China is the world’s largest metallurgical coke producer in the world. In 2007, China produced approximately 328 million tonnes of metallurgical coke which depicted a growth of 16.3% against its previous year. China is also the largest consumer and exporter of metallurgical coke. In view of the Chinese Government’s effort to reduce indiscriminate exports of energy consuming resources so as to ensure the availability of sufficient supply in the domestic market only 5% of total production is allowed for the export market. Accordingly, as of 1 January 2008, the Chinese Government has increased the export duty of metallurgical coke from 15% to 25%.  China’s economy expanded 11.4% in 2007, the fifth consecutive year that economic growth is at or above 10%. China’s economic growth last year was driven primarily by private consumption, investment and exports. Retail sales, which account for about 95% of household consumption, expanded 16.8% in 2007. In comparison, retail sales grew by an average 12.3% from 2003 to 2006. Household consumption is estimated to have contributed 30% to 35% to China’s economic growth in 2007. Supporting the robust private consumption growth is the double-digit increase in household income. Urban households’ per capita disposable income surged 17.2% in 2007, while that for rural households expanded 15.4%. Investment has been a major contributor to China’s economic growth in the last few years, with its share in the economy surpassing 40%.

Annual Report 2007 0

 

CHAIRMAN’S STATEMENT
However, due to the implementation of measures to curb investment activities, investment growth has slowed down, albeit only slightly. Last year, urban fixed asset investment increased 25.8%. In comparison, urban fixed asset investment expanded by an average 26.4% from 2004 to 2006. Similarly, exports played a significant role in China’s robust growth in the past few years, expanding by an average of 31.4% from 2003 to 2006. To reduce the country’s reliance on exports as a major source of growth, the Chinese government has taken steps to slow down export growth. As a result, export growth moderated to 25.7% in 2007, which is still relatively strong. China’s trade surplus hit a record high of US$262.2bil in 2007. For 2008, it is widely believed that the broad economic environment in China is still favourable for consumer spending. The urban unemployment rate fell to 4% at the end of 2007. Urban employees’ compensation increased 17.6% in 2006 and accelerated to 22% in 2007. The new Labour Law is expected to further enhance the welfare of China’s workers. The greatest risk to China’s private consumption growth is rising inflationary pressures. The inflation rate jumped to 8.7% in February. The severe snowstorms in January and February that paralysed the transportation system have played a big part in the surge in inflation. However, with income rising generally faster than the inflation rate, a low savings deposit rate, and the Olympics effect, iCapital (an independent investment advisor in Malaysia) expects retail sales to continue growing at double-digits this year. Investment growth is also widely believed to continue posting double-digit growth. While slowing external demand for China’s exports and the conclusion of the Olympics are expected to slow down investment expenditure, planned infrastructure investment under the 11th Five-Year Programme plus investment in the services sector to enhance China’s services capacity and to upgrade her technological capability, are expected to sustain investment activities in 2008 and the years to come. The rebuilding after the destruction caused by the snowstorms will also give a boost to investment activities. Although interest rates were raised six times last year and banks have been ordered to lend more discreetly, China’s companies should have no difficulty in financing their investment endeavours due to impressive profitability enjoyed in the last few years. Therefore, investment is expected to remain an important source of growth in 2008. From the above analysis, iCapital expects China’s economy to grow in the range of 9.0% to 10.5% in 2008. (The Star, 1/5/08, China’s Growing Pains) Future Outlook The Board is optimistic and hopeful of better economic and market conditions in China going forward into the new financial year. With the availability of additional 600,000 tonnes (representing 50% added capacity from our existing 1.2 million tonnes) of metallurgical coke coming on stream by mid-2008, we would be able to register a further increase our annual earnings in the coming financial year, assuming coal-coke pricing dynamics and the prospects of the steel industry in China remained largely unchanged. The full-years effect of the additional 600,000 tonnes of metallurgical coke capacity would be experienced in the ensuing financial year, 2009. Barring unforeseen circumstances, the Board is optimistic of Hua-An creating better value for our shareholders in the coming financial year. With the support of my fellow board members and capable management team, I believe we can continue to grow the Company to greater heights in the future by virtue of our continuous effort to source for viable opportunities for strategic diversification in line with our aspiration to grow the Group into a serious heavy industry player in China as well as in the region. Dividend The Board proposes a final dividend of 4.55%, tax exempt, amounting to RM25,504,410 in respect of the current financial year. The proposed final dividend is subject to the shareholders’ approval at the forthcoming annual general meeting.  Annual Report 2007

 

CHAIRMAN’S STATEMENT
A Note of Appreciation On behalf of the Board of Directors, I would like to record my gratitude to our customers, suppliers, business partners and shareholders for their continuous support and confidence they place on the Hua-An Group. A special note of appreciation goes to the management team and employees of the Hua-An Group for their relentless commitment, dedication, hard work and unwavering loyalty in ensuring the Group’s continued success. Y.A.M. TUNKU NAQUIYUDDIN IBNI TUANKU JA’AFAR (DK, DKYR, SPNS, SPMP, PPT) Executive Chairman
Annual Report 2007 

 

 

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