东光化工(01702) - 2019 - 年度财报

Company Overview Company Business and Products Dongguang Chemical Co., Ltd. is a leading coal-based urea producer in China, headquartered in Hebei, with an annual design capacity of approximately 1.1 million tonnes, also producing methanol and other by-products, strategically located to serve key markets - The company is a major coal-based urea producer in China, with an annual design capacity of approximately 1.1 million tonnes, headquartered in Hebei Province[4] - Its main product is urea, used in agriculture and industry, while also producing by-products such as methanol, liquid carbon dioxide, and liquid natural gas[4] - Production facilities are located in Cangzhou, Hebei, strategically positioned near Beijing, Tianjin, and major ports for efficient raw material procurement and product transportation[5] Company Information Key Personnel and Institutions This section outlines the company's core organizational structure, including board members, committee chairs, company secretary, authorized representatives, legal advisors, auditors, and key collaborating institutions such as principal banks and share registrars - The Chairman of the Board is Mr. Wang Zhihe[10] - The company's auditor is BDO Limited, Hong Kong[10] - The Hong Kong Share Registrar is Tricor Investor Services Limited[14] Financial Highlights FY2019 Performance Overview In FY2019, despite a 7% year-on-year revenue decrease to RMB 2.12 billion, the company achieved significant profitability improvements, with gross profit increasing by 8% to RMB 315 million and profit for the year surging by 62% to RMB 162 million, with urea remaining the primary revenue source at 87% of total revenue FY2019 Key Financial Performance | Metric | FY2019 | FY2018 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue (RMB million) | 2,121.6 | 2,285.6 | -7% | | Gross Profit (RMB million) | 315.4 | 292.6 | +8% | | Profit for the Year (RMB million) | 161.6 | 99.7 | +62% | | Basic Earnings Per Share (RMB cents) | 26.0 | 16.1 | +61.5% | - By product, urea revenue accounted for 87% of total revenue in 2019, methanol 6%, and other by-products 7%, with urea's share increasing from 85% in 2018[19] Chairman's Statement Business Review and Strategic Initiatives Despite a 7.2% revenue decrease in 2019 due to falling product prices, the Group achieved a significant 62.1% profit increase through effective cost control, expanded into automotive urea production, became a designated urea delivery warehouse, and upgraded energy-saving equipment, demonstrating commitment to green development - Despite revenue decreasing from RMB 2.29 billion to RMB 2.12 billion, profit for the year increased from approximately RMB 99.7 million to RMB 161.6 million, a 62.1% increase, driven by effective control over cost of sales, administrative expenses, and finance costs[22] - Strategically, the company capitalized on automotive urea market opportunities by establishing a joint venture in September 2019 for its production, simultaneously becoming a designated urea delivery warehouse for the Zhengzhou Commodity Exchange and planning to engage in futures hedging to mitigate price risks[23] - The company received multiple recognitions in environmental protection and production, including "Top 100 Private Manufacturing Enterprises in Hebei Province 2019" and "National Green Factory," and successfully upgraded new energy-saving power generation equipment[25] Outlook For 2020, despite initial COVID-19 logistics impacts, production remained normal, with prices and shipments recovering due to eased freight and national policies, anticipating a balanced urea market as the Group continues to invest in energy-saving technologies, optimize capacity, and expand into high-value-added products like automotive urea - The initial COVID-19 outbreak impacted product transportation, but company production remained normal, and the market has rebounded since mid-February with national policies supporting spring farming, positively affecting operations[26] - In 2020, the company will continue to optimize its growth strategy, including enhancing production capacity, improving efficiency, and extending its value chain to related products such as automotive urea[27] Management Discussion and Analysis Operations and Financial Review In FY2019, the Group's total revenue decreased by 7.2% to RMB 2.122 billion, primarily due to lower average selling prices of urea and methanol; however, gross profit increased by 7.8% to RMB 315 million with a margin improvement from 12.8% to 14.9% due to a 9.4% reduction in cost of sales, while administrative expenses and finance costs also significantly decreased by 21.6% and 37.8% respectively, collectively driving a 62.1% surge in profit for the year to RMB 162 million Key Financial Performance Summary | Financial Item | 2019 (RMB thousand) | 2018 (RMB thousand) | Change | | :--- | :--- | :--- | :--- | | Revenue | 2,121,592 | 2,285,619 | -7.2% | | Gross Profit | 315,413 | 292,636 | +7.8% | | Gross Profit Margin | 14.9% | 12.8% | +2.1pp | | Administrative Expenses | 61,440 | 78,331 | -21.6% | | Finance Costs | 33,432 | 53,784 | -37.8% | | Profit for the Year | 161,553 | 99,664 | +62.1% | - Cost of sales decreased by 9.4% to RMB 1.806 billion, primarily due to no longer requiring VAT provision (RMB 54 million in 2018) and reduced electricity costs from new energy-saving power generation equipment[39] - Administrative expenses decreased by 21.6%, mainly due to reduced directors' emoluments, consultancy fees, and impairment losses, while finance costs decreased by 37.8%, primarily due to a lower overall borrowing level[43][47] Revenue by Product In 2019, revenue from urea, methanol, and other by-products all declined, with urea revenue decreasing by 4.8% to RMB 1.856 billion primarily due to a 5.0% drop in average selling price, and methanol revenue falling by 23.1% to RMB 132 million due to a significant 22.7% decrease in average selling price Revenue Breakdown by Product | Product | 2019 Revenue (RMB thousand) | 2018 Revenue (RMB thousand) | Change | | :--- | :--- | :--- | :--- | | Urea | 1,855,794 | 1,948,553 | -4.8% | | Methanol | 131,785 | 171,377 | -23.1% | | Other By-products | 134,013 | 165,689 | -19.1% | | Total | 2,121,592 | 2,285,619 | -7.2% | - The average selling price of urea decreased by 5.0% from RMB 1,734 per tonne to RMB 1,648 per tonne[34] - The average selling price of methanol decreased by 22.7% from RMB 2,020 per tonne to RMB 1,561 per tonne[35] Gross Profit and Gross Profit Margin The Group's overall gross profit increased by 7.8%, with the gross profit margin improving from 12.8% to 14.9%, primarily driven by a 20.7% increase in urea's gross profit and a margin improvement from 11.6% to 14.7%, while methanol business turned from profit to loss due to falling selling prices, resulting in a significant decline in gross profit Gross Profit and Margin by Product | Product | 2019 Gross Profit (RMB thousand) | 2019 Gross Profit Margin | 2018 Gross Profit (RMB thousand) | 2018 Gross Profit Margin | | :--- | :--- | :--- | :--- | :--- | | Urea | 273,225 | 14.7% | 226,298 | 11.6% | | Methanol | (15,458) | (11.7%) | 6,954 | 4.1% | | Other By-products | 57,646 | 43.0% | 59,384 | 35.8% | | Total | 315,413 | 14.9% | 292,636 | 12.8% | Capital Structure, Liquidity and Financial Resources As of end-2019, the Group's financial position significantly improved, with net assets increasing to RMB 1.145 billion, cash and bank balances surging to RMB 432 million, and total interest-bearing bank borrowings decreasing to RMB 442 million, resulting in a substantial reduction in net gearing ratio from 0.43 at end-2018 to 0.01, indicating significant capital structure optimization and reduced financial risk - Net gearing ratio significantly decreased from 0.43 in 2018 to 0.01 at the end of 2019[53] Key Financial Indicators | Financial Indicator (As of December 31, 2019) | Amount (RMB million) | As of December 31, 2018 | | :--- | :--- | :--- | | Net Assets | 1,145.4 | 998.2 | | Cash and Bank Balances | 431.8 | 215.5 | | Total Interest-Bearing Bank Borrowings | 442.1 | 601.7 | | Net Debt | 10.3 | 431.0 | Use of Proceeds and Dividends As of end-2019, the company's net proceeds of HKD 147.7 million from global offering were fully utilized as planned, primarily for new equipment, energy-saving power generation, and environmental facilities, with the Board recommending a final dividend of HKD 0.06 per share for 2019, a 50% increase from HKD 0.04 per share last year, demonstrating commitment to shareholder returns - The net proceeds of HKD 147.7 million from the global offering have been fully utilized, primarily invested in new energy-saving power generation equipment, environmental facilities, and loan repayment[67][68] - The Board recommended a final dividend of HKD 0.06 per share, higher than HKD 0.04 per share in 2018, totaling approximately HKD 37.3 million[69] Human Resources and Risk Management As of end-2019, the Group employed 1,295 staff with total employee costs of approximately RMB 102 million, largely consistent with the prior year; in risk management, the Group primarily faces foreign exchange risk from HKD-denominated borrowings but currently has no hedging policy, with capital commitments of approximately RMB 23 million and no significant contingent liabilities - As of December 31, 2019, the Group had 1,295 employees, with total employee costs of approximately RMB 102 million[62] - The Group's primary foreign exchange risk arises from HKD-denominated borrowings, but currently, there is no formal foreign exchange hedging policy in place[58] - As of December 31, 2019, the Group's capital commitments amounted to approximately RMB 23 million, with no significant contingent liabilities[59][61] Directors and Management Board Members This section details the background and responsibilities of Board members, with the executive team comprising founders Mr. Wang Zhihe (Chairman), Mr. Sun Yi (Vice Chairman), Mr. Sun Zushan (Operations Director), and Mr. Xu Xijiang (Technical Director), all possessing decades of experience in the chemical industry, while non-executive and independent non-executive directors contribute diverse perspectives and independent judgment with extensive expertise in finance, investment, and the chemical sector - The executive director team comprises Mr. Wang Zhihe (Chairman), Mr. Sun Yi (Vice Chairman), Mr. Sun Zushan (Operations Director), and Mr. Xu Xijiang (Technical Director), all experienced founders of the Group[71][72][74][75] - Independent non-executive directors include Ms. Lin Xiuxiang (Professor of Financial Management and Accounting), Mr. Liu Jincheng (Senior Expert in the Chemical Industry), and Mr. Wu Shiliang (Investment Banking Expert), providing professional support for corporate governance[79][81][82] Senior Management Senior management consists of Mr. Guo Jianming and Mr. Zheng Chengxi; Mr. Guo Jianming serves as Group General Manager, overseeing overall production and operations since joining in 1998, while Mr. Zheng Chengxi is Chief Financial Officer and Company Secretary, responsible for finance and company secretarial functions with over 15 years of experience in finance, accounting, and auditing - Mr. Guo Jianming serves as the Group General Manager, responsible for overseeing overall production and operational management[86] - Mr. Zheng Chengxi is the Chief Financial Officer and Company Secretary, responsible for finance and company secretarial functions[87] Corporate Governance Report Corporate Governance Compliance Statement The company confirms full compliance with all code provisions of the Corporate Governance Code as set out in Appendix 14 of the Hong Kong Listing Rules for the year ended December 31, 2019, detailing practices in board operations, separation of Chairman and CEO roles, establishment and functions of various committees (Remuneration, Nomination, Audit, Corporate Governance), accountability and audit, and communication with shareholders, with no deviations from the code identified - The company confirms full compliance with all code provisions of the Corporate Governance Code during the reporting period[89] - The roles of Chairman and Chief Executive Officer are separate, with Mr. Wang Zhihe serving as Chairman and no CEO position established[97] - The company has established four committees: Audit, Remuneration, Nomination, and Corporate Governance, with clearly defined terms of reference and membership, all in compliance with code requirements[110][128][153][165] Internal Control and Risk Management The Board is responsible for the Group's overall internal control framework, confirming its aim to manage rather than eliminate risks; although no independent risk management committee exists, management regularly identifies and controls significant business risks, and an external professional firm was engaged to review internal control and risk management functions during the reporting period, with the Board and Audit Committee deeming the Group's internal control and risk management systems for financial, operational, and compliance risks adequate and effective as of end-2019 - The Board confirms its overall responsibility for the Group's internal control system and reviews its effectiveness at least annually[178][138] - The company engaged an external professional firm to review its internal control and risk management functions, with review results and recommendations reported to the Audit Committee[178][179] - The Board and Audit Committee consider the Group's risk management and internal control systems adequate and effective as of December 31, 2019[179] Details of Board and Committee Work This section provides supplementary corporate governance information, detailing the Board's responsibility for overall Group performance and its adoption of standard codes for securities transactions, including attendance records for directors at Board and committee meetings; Remuneration, Nomination, Audit, and Corporate Governance Committees, composed of professionally capable directors, fulfill their respective duties covering remuneration policies, director nominations, financial reporting and internal controls, and corporate governance practices, with the report also outlining shareholder rights and communication policies Committee Composition Summary | Committee | Chairman | Membership Summary | | :--- | :--- | :--- | | Remuneration Committee | Ms. Lin Xiuxiang (INED) | Majority Independent Non-Executive Directors | | Nomination Committee | Mr. Wang Zhihe (Chairman) | Majority Independent Non-Executive Directors | | Audit Committee | Mr. Wu Shiliang (INED) | All Independent Non-Executive Directors | | Corporate Governance Committee | Mr. Wu Shiliang (INED) | Majority Independent Non-Executive Directors | - The report discloses remuneration details for directors and senior management, with total emoluments for executive directors amounting to RMB 4.159 million and total fees for independent non-executive directors at RMB 0.477 million[198][522] - The company has adopted a Board Diversity Policy and established a Director Nomination Policy to ensure the Board possesses a balanced mix of skills, experience, and diverse perspectives[209][211] Directors' Report Business Review and Principal Risks The company's principal business is investment holding, with its subsidiaries primarily engaged in urea manufacturing and sales in China, experiencing no significant change in business nature during the reporting period; the Group's main risks and uncertainties stem from profit margins and profitability being highly susceptible to average selling prices of urea products and coal procurement costs, which the Group addresses by diversifying product categories and continuously improving production efficiency to reduce costs, while also committing to environmental protection and compliance with relevant laws and regulations - The Group's principal business is the production and sale of urea products, with no significant change in business nature during the year[250][251] - The main risk lies in profit margins being affected by fluctuations in urea selling prices and coal procurement costs, which the Group addresses through product diversification and enhanced production efficiency[255] - The Group maintains good relationships with employees, suppliers, and customers, and is committed to environmental protection efforts[256][260][261][262] Dividend Policy and Distribution The company has adopted a dividend policy aimed at balancing funding needs for business growth with shareholder returns, with the Board considering operating results, cash flow, capital expenditures, and economic conditions when determining dividends; for 2019, a final dividend of HKD 0.06 per share, totaling approximately HKD 37.3 million, was recommended, and as of year-end, the company's distributable reserves amounted to approximately RMB 599 million - The company's dividend policy aims to balance funding requirements for business growth with shareholder returns[264] - A final dividend of HKD 0.06 per share for 2019 is proposed, higher than HKD 0.04 per share in 2018[267] - As of December 31, 2019, the company's distributable reserves amounted to approximately RMB 599 million[274] Equity-Related Agreements During the reporting period, the company allotted and issued the final tranche of 472,000 remuneration shares to Chief Financial Officer Mr. Zheng Chengxi on July 15, 2019, in accordance with his letter of appointment; additionally, a share option scheme adopted on June 20, 2017, to incentivize contributors to the Group, remains valid for ten years with a total of 62 million shares available for issue, representing approximately 10% of the issued share capital, though no options have been granted under this scheme since its adoption - On July 15, 2019, 472,000 remuneration shares were issued to the Chief Financial Officer, completing the grant of related equity incentives[278] - The company has a share option scheme adopted in 2017, with a maximum of 62 million shares available for issue, but no options have been granted under the scheme as of the end of the reporting period[279][284] Disclosure of Directors' and Shareholders' Interests This section discloses the shareholding interests of directors and major shareholders in the company; Chairman Mr. Wang Zhihe indirectly holds 74.08% of the company's shares through controlled corporations, Vice Chairman Mr. Sun Yi indirectly holds 29.04% through controlled corporations, and Guofu (Hong Kong) Holdings Limited holds 5.01% of the shares, with all disclosures complying with the Securities and Futures Ordinance requirements Major Shareholders' Interests | Shareholder Name | Capacity/Nature of Interest | Number of Shares Held | Percentage of Shareholding | | :--- | :--- | :--- | :--- | | Mr. Wang Zhihe | Interest in controlled corporation | 460,000,000 (L) | 74.08% | | Mr. Sun Yi | Interest in controlled corporation | 180,320,000 (L) | 29.04% | | Guofu (Hong Kong) Holdings Limited | Beneficial owner | 31,132,000 (L) | 5.01% | Independent Auditor's Report Auditor's Opinion BDO Limited, Hong Kong, the auditor, believes the Group's consolidated financial statements fairly present its financial position as of December 31, 2019, and its financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards and properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance, issuing an unmodified opinion - The auditor issued an unmodified opinion on the Group's consolidated financial statements for the year 2019[331] Key Audit Matters The auditor highlighted two key audit matters: first, "Impairment Assessment of Recoverable Value Added Tax," concerning the recoverability judgment of approximately RMB 35.4 million in prepaid VAT; second, "Preparation of Consolidated Financial Statements on a Going Concern Basis," where the auditor focused on management's cash flow forecasts and going concern assumption given the Group's net current liabilities of approximately RMB 50 million at year-end, with appropriate review procedures performed for both matters - Key Audit Matter One: Impairment assessment of recoverable value-added tax, involving judgment on the recoverability of approximately RMB 35.4 million in prepaid VAT[335] - Key Audit Matter Two: Preparation of financial statements on a going concern basis; despite the Group having net current liabilities of RMB 50 million, management believes there are sufficient funds to continue operations, which the auditor assessed[337][338] Consolidated Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income In FY2019, the Group's revenue was RMB 2.122 billion, a 7.2% year-on-year decrease; however, gross profit increased to RMB 315 million, up 7.8%, due to effective cost of sales control, while profit before income tax grew by 32.8% to RMB 220 million driven by significant reductions in administrative expenses and finance costs, ultimately leading to a 62.1% surge in profit for the year (net profit) to RMB 162 million Consolidated Statement of Profit or Loss and Other Comprehensive Income Summary | Item (RMB thousand) | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 2,121,592 | 2,285,619 | | Gross Profit | 315,413 | 292,636 | | Profit before Income Tax | 220,165 | 165,806 | | Profit for the Year | 161,553 | 99,664 | | Basic Earnings Per Share (RMB cents) | 26.0 | 16.1 | Consolidated Statement of Financial Position As of end-2019, the Group's total assets were RMB 1.825 billion, largely consistent with the prior year, with an optimized asset structure showing reduced non-current assets and increased cash and bank balances from RMB 215 million to RMB 432 million; total liabilities decreased from RMB 830 million to RMB 679 million, primarily due to reduced bank borrowings, and net assets (shareholders' equity) grew by 14.7% to RMB 1.145 billion, indicating a more robust financial position Consolidated Statement of Financial Position Summary | Item (RMB thousand) | As of December 31, 2019 | As of December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Total Non-current Assets | 1,234,391 | 1,319,138 | | Total Current Assets | 590,199 | 508,638 | | Total Assets | 1,824,590 | 1,827,776 | | Liabilities and Equity | | | | Total Current Liabilities | 640,151 | 701,944 | | Total Non-current Liabilities | 39,057 | 127,604 | | Total Liabilities | 679,208 | 829,548 | | Net Assets | 1,145,382 | 998,228 | Consolidated Statement of Cash Flows In 2019, net cash generated from operating activities was RMB 419 million, a decrease from the prior year but still robust; investing activities shifted from a net outflow to a net inflow of RMB 53.72 million, primarily due to repayment of loans receivable; financing activities resulted in a net cash outflow of RMB 261 million, mainly for bank loan repayments and dividend payments, leading to a net increase in cash and cash equivalents of RMB 212 million at year-end, reaching RMB 432 million Consolidated Statement of Cash Flows Summary | Item (RMB thousand) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash generated from operating activities | 418,588 | 464,116 | | Net cash generated from/(used in) investing activities | 53,720 | (87,598) | | Net cash used in financing activities | (260,590) | (336,155) | | Net increase in cash and cash equivalents | 211,718 | 40,363 | | Cash and cash equivalents at end of year | 431,825 | 215,493 | Notes to the Consolidated Financial Statements (Selected) The notes to the financial statements provide detailed explanations, including the company's adoption of IFRS 16 Leases from January 1, 2019, impacting lease accounting and recognizing right-of-use assets and lease liabilities; revenue primarily derived from urea sales in the Chinese market; a decrease in total bank borrowings, reducing financial risk; and post-reporting period events noting that as of the report date, the COVID-19 pandemic had no significant impact on the Group, though future effects remain uncertain - The company adopted IFRS 16 Leases from January 1, 2019, using the modified retrospective approach to recognize right-of-use assets and lease liabilities for former operating leases, without restating comparative figures[382][400] - All of the Group's revenue is derived from China, with urea as the main product, and revenue is recognized when control of the goods is transferred to the customer[501][509] - As of end-2019, total bank and other borrowings significantly decreased to RMB 442 million from RMB 602 million in 2018, with secured borrowings accounting for the majority[579] - Post-reporting period events indicate that as of March 24, 2020, the COVID-19 pandemic had no significant impact on the Group, but future developments and effects remain uncertain[647] Financial Summary Five-Year Financial Data Review This section provides key performance and financial position data for the Group's past five fiscal years (2015-2019), showing that in 2019, the Group achieved its highest profit for the year (RMB 162 million) and highest net assets (RMB 1.145 billion) since 2015, while total liabilities reached their lowest level in five years (RMB 679 million), reflecting significant improvements in profitability and financial health in recent years Five-Year Financial Data Summary | Item (RMB thousand) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Results | | | | | | | Revenue | 2,121,592 | 2,285,619 | 1,858,955 | 1,457,523 | 1,859,300 | | Gross Profit | 315,413 | 292,636 | 190,211 | 149,754 | 452,979 | | Profit for the Year | 161,553 | 99,664 | 46,883 | 18,810 | 108,095 | | Assets and Liabilities | | | | | | | Total Assets | 1,824,590 | 1,827,776 | 1,967,616 | 1,787,682 | 1,868,212 | | Total Liabilities | 679,208 | 829,548 | 1,056,849 | 1,047,773 | 1,150,550 | | Net Assets | 1,145,382 | 998,228 | 910,767 | 739,909 | 717,662 |