Shandong Mining Machinery (SZ:002526)2018-04-16 16:00Important Notice, Table of Contents, and Definitions This section provides important disclaimers, the report's table of contents, and definitions of key terms Important Notice The company's board of directors, supervisory board, and senior management ensure the truthfulness, accuracy, and completeness of the annual report, which highlights policy, industry, and transformation risks, and proposes a capital reserve capitalization plan of 7 shares for every 10 shares - The company faces three main risks: - Policy Risk: Adjustments in national macroeconomic, coal industry, and environmental policies may impact the company's performance - Industry Risk: The company's performance is significantly affected by the development and price fluctuations in the coal industry - Transformation Risk: The company's transition to a "coal machinery + gaming" dual-main business model faces technology, market, and management risks in new areas6 - The company's 2017 profit distribution plan is to capitalize 7 shares for every 10 shares held by all shareholders from capital reserves, with no cash dividends or bonus shares6 Company Profile and Key Financial Indicators This section presents the company's basic information and a summary of its key financial performance and position Company Basic Information Shandong Mining Machinery Group Co., Ltd. (stock code: 002526) is listed on the Shenzhen Stock Exchange, with Zhao Huatao as its legal representative, and its registered and operational addresses are in Changle County Economic Development Zone, Shandong Province Key Company Information | Item | Content | | :--- | :--- | | Stock Abbreviation | Shandong Mining Machinery | | Stock Code | 002526 | | Listing Exchange | Shenzhen Stock Exchange | | Legal Representative | Zhao Huatao | Key Accounting Data and Financial Indicators In 2017, the company achieved significant performance growth, with operating revenue increasing by 61.35% and net profit attributable to shareholders soaring by 567.47%, while total assets and net assets also grew steadily Key Financial Indicators | Key Financial Indicators | 2017 (CNY) | 2016 (CNY) | YoY Change | | :--- | :--- | :--- | :--- | | Operating Revenue | 1,382,049,961.49 | 856,527,703.61 | 61.35% | | Net Profit Attributable to Shareholders of Listed Company | 71,335,180.60 | 10,687,413.19 | 567.47% | | Net Profit Attributable to Shareholders of Listed Company After Non-Recurring Items | 48,820,839.92 | -89,440,441.76 | 154.58% | | Net Cash Flow from Operating Activities | 156,483,965.52 | 139,077,066.73 | 12.52% | | Basic Earnings Per Share (CNY/share) | 0.1336 | 0.0200 | 568.00% | | Total Assets | 3,060,713,254.65 | 2,663,596,850.86 | 14.91% | | Net Assets Attributable to Shareholders of Listed Company | 2,278,644,256.93 | 1,701,584,258.19 | 33.91% | Non-Recurring Gains and Losses Items and Amounts In 2017, the company's non-recurring gains and losses totaled 22.51 million Yuan, a significant decrease from 100.13 million Yuan in 2016, primarily due to reduced gains/losses on disposal of non-current assets and government grants Non-Recurring Gains and Losses | Item | 2017 Amount (CNY) | 2016 Amount (CNY) | | :--- | :--- | :--- | | Gains/Losses on Disposal of Non-Current Assets | 3,171,059.69 | 50,063,690.24 | | Government Grants Recognized in Current Profit/Loss | 2,315,449.29 | 27,440,524.15 | | Other Non-Operating Income and Expenses | 19,144,606.09 | 23,473,017.53 | | Total | 22,514,340.68 | 100,127,854.95 | Company Business Overview This section outlines the company's principal businesses and analyzes its core competitive advantages Principal Businesses The company established a dual-main business model of "coal machinery production, coal sales, and mining services" alongside "online gaming and internet services" during the reporting period, with traditional coal machinery benefiting from market recovery and new gaming business enhancing overall strength - The company's original principal businesses were coal machinery production, coal sales, and mining services, which remained stable, with mining services contributing strong performance30 - In 2017, the company acquired gaming operator Beijing Linyou Interactive Technology Co., Ltd., initiating a diversified operating model with dual main businesses encompassing traditional and emerging sectors30 Analysis of Core Competencies The company's core competitiveness stems from its seven major advantages: management, team, technology, equipment, products, brand, and platform, supported by decades of experience, strong R&D, and comprehensive equipment supply capabilities - The company possesses seven core advantages: management, team, technology, equipment, products, brand, and platform323334 - Technologically, the company is the Shandong Coal Machinery Engineering Technology Research Center, holding 24 patents and possessing comprehensive complete set supply capabilities for "three machines and one support" in fully mechanized mining faces33 Management Discussion and Analysis This section provides a comprehensive discussion and analysis of the company's operational performance, financial condition, and future outlook Overview of Operations In 2017, the company significantly improved its overall performance by leveraging the coal industry recovery to boost traditional coal machinery and mining profits, while also acquiring Beijing Linyou Interactive to establish a "coal machinery + gaming" dual-main business model - Traditional segment: Benefiting from the coal industry recovery, coal machinery and mining services significantly improved, leading to a substantial increase in profits37 - Emerging segment: The acquisition of Beijing Linyou Interactive Technology Co., Ltd. was completed, initiating a dual-main business development model of "coal machinery production, coal sales, and mining services" plus "online gaming and internet services," which enhanced the company's overall performance3738 Analysis of Principal Business During the reporting period, the company's operating revenue increased by 61.35%, driven by the machinery industry and coal sales/mining services, with coal mining equipment revenue growing by 94.86% and a new online gaming business contributing 25.37 million Yuan Operating Revenue Composition | Operating Revenue Composition | 2017 Amount (CNY) | Proportion | YoY Change | | :--- | :--- | :--- | :--- | | By Industry | | | | | Machinery Industry | 899,236,271.61 | 65.07% | 74.47% | | Coal Sales and Mining Services | 389,854,692.27 | 28.21% | 59.88% | | IT Industry | 25,374,397.34 | 1.84% | - | | By Product | | | | | Coal Mining Machinery and Equipment | 745,747,108.08 | 53.96% | 94.86% | | Printing Equipment | 141,396,974.12 | 10.23% | 36.96% | Key Segment Gross Profit Margins | Key Segment Gross Profit Margin | 2017 Gross Profit Margin | YoY Change in Gross Profit Margin | | :--- | :--- | :--- | | Machinery Industry | 23.78% | 3.86% | | Coal Sales and Mining Services | 14.38% | 4.78% | | Coal Mining Machinery and Equipment | 24.51% | 5.82% | Key Expense Items | Expense Item | 2017 (CNY) | 2016 (CNY) | YoY Change | Explanation of Change | | :--- | :--- | :--- | :--- | :--- | | Selling Expenses | 79,878,365.68 | 53,420,904.47 | 49.53% | Increase due to higher sales revenue of principal products | | Financial Expenses | 12,127,288.35 | 25,141,771.23 | -51.76% | Decrease due to repayment of some bank loans, reducing interest expenses | R&D Investment | R&D Investment | 2017 | 2016 | Change Ratio | | :--- | :--- | :--- | :--- | | R&D Investment Amount (CNY) | 21,175,049.26 | 18,414,698.13 | 14.99% | | R&D Investment as % of Operating Revenue | 1.53% | 2.15% | -0.62% | Key Cash Flow Items | Cash Flow Item | 2017 (CNY) | 2016 (CNY) | YoY Change | | :--- | :--- | :--- | :--- | | Net Cash Flow from Operating Activities | 156,483,965.52 | 139,077,066.73 | 12.52% | | Net Cash Flow from Investing Activities | 257,224,511.76 | 11,696,105.80 | 2,099.23% | | Net Cash Flow from Financing Activities | -306,822,078.78 | -175,650,223.61 | -74.68% | | Net Increase in Cash and Cash Equivalents | 106,886,398.50 | -24,877,051.08 | - | Analysis of Assets and Liabilities As of year-end 2017, the company's total assets reached 3.06 billion Yuan, growing by 14.91%, with a significant increase in goodwill to 438 million Yuan due to the Linyou Interactive acquisition, while short-term borrowings substantially decreased, optimizing the debt structure - Due to the acquisition of Beijing Linyou Interactive Technology Co., Ltd., the company's goodwill increased from 0 to 438 million Yuan, accounting for 14.30% of total assets58 - Short-term borrowings significantly decreased from 395 million Yuan to 100 million Yuan, with its proportion of total assets falling from 14.83% to 3.27%, indicating reduced debt pressure for the company58 Analysis of Investment Status The most significant investment activity during the reporting period was the acquisition of 100% equity in Beijing Linyou Interactive Technology Co., Ltd. for 518 million Yuan through share issuance, aiming to expand into online gaming and internet services for new profit growth Major Investments | Investee Company | Principal Business | Investment Method | Investment Amount (CNY) | Shareholding Percentage | Investment Gain/Loss for the Period (CNY) | | :--- | :--- | :--- | :--- | :--- | :--- | | Beijing Linyou Interactive Technology Co., Ltd. | Online Gaming and Internet Services | Acquisition | 517,719,558.40 | 100.00% | 4,125,122.49 | Significant Asset and Equity Disposals On June 29, 2017, the company sold 85% of its equity in Changle County Wutu Coal Mine Co., Ltd. to Guizhou Taifengyuan Mining Resources Co., Ltd. for 22 million Yuan, which helped revitalize funds, accelerate transformation, and added approximately 5.05 million Yuan to current net profit - The company sold 85% of its equity in Changle County Wutu Coal Mine Co., Ltd. for a transaction price of 22 million Yuan, increasing the company's net profit by approximately 5.05 million Yuan66 Analysis of Major Holding and Participating Companies During the reporting period, Yulin City Tianning Mining Services Co., Ltd. was a key profit contributor with 31.20 million Yuan in net profit, while the newly acquired Beijing Linyou Interactive Technology Co., Ltd. contributed 4.13 million Yuan, and the company also divested 85% of Wutu Coal Mine equity Major Holding and Participating Companies | Company Name | Type | Principal Business | Operating Revenue (CNY) | Net Profit (CNY) | | :--- | :--- | :--- | :--- | :--- | | Yulin City Tianning Mining Services Co., Ltd. | Subsidiary | Mining Services, etc. | 149,378,688.56 | 31,195,820.09 | | Shandong Xinchuan Machinery Co., Ltd. | Subsidiary | Printing Machinery, etc. | 145,591,568.28 | 6,034,429.31 | | Beijing Linyou Interactive Technology Co., Ltd. | Subsidiary | Online Gaming, etc. | 25,374,397.34 | 4,125,122.49 | Company's Future Development Outlook The company plans to deepen its "coal machinery + gaming" dual-main business strategy, focusing on "four modernizations" for traditional manufacturing and seeking new opportunities for online gaming, while integrating quality resources through M&A and managing risks from policy, industry, and business transformation - Company Development Strategy: - Traditional Manufacturing Segment: Strengthen the "four modernizations" strategy: refinement, complete sets, automation, and service-oriented - Online Gaming and Internet Services Segment: Seek new opportunities and projects, strengthen diversified development - Capital Operations: Integrate resources through investments and M&A, focusing on opportunities in coal machinery, mining, and gaming industries7071 - The company faces risks including policy and industry risks related to the coal sector, as well as technology, market, and management risks associated with transitioning into new business areas7273 Significant Events This section details important corporate events, including profit distribution plans, fulfillment of commitments, and other major announcements Profit Distribution and Capital Reserve Capitalization Due to negative distributable profit at year-end 2017, the company decided against profit distribution but proposed a capital reserve capitalization plan of 7 shares for every 10 shares based on a total share capital of 616,883,681 shares, with no cash dividends in the past three years - 2017 profit distribution plan: No cash dividends will be distributed, and 7 shares for every 10 shares will be capitalized from capital reserves to all shareholders7881 - The reason for no profit distribution is that as of year-end 2017, the parent company's distributable profit to shareholders was -2.57 million Yuan7881 Fulfillment of Commitments During the reporting period, the company and related parties strictly fulfilled all commitments made during the Linyou Interactive acquisition, including share lock-up, performance pledges (2017 net profit not less than 42 million Yuan), and commitments to avoid horizontal competition and regulate related party transactions - Linyou Interactive's original shareholders committed that the net profit attributable to the parent company after non-recurring items for Linyou Interactive in 2017-2019 would be no less than 42 million Yuan, 54 million Yuan, and 69 million Yuan, respectively86 - Linyou Interactive's transaction counterparts (Zhou Lifei, Liao Peng, etc.) made phased share lock-up commitments, with the longest lock-up period being 36 months82 Explanation of Other Significant Matters The most significant event during the reporting period was the company's share issuance to acquire 100% equity of Beijing Linyou Interactive Technology Co., Ltd. and raise supporting funds, which was conditionally approved by the CSRC on August 30, 2017, completed asset transfer on December 12, and saw new shares listed on January 2, 2018, marking the formal entry into a "coal machinery + gaming" dual-main business model - The company's share issuance for asset acquisition (Linyou Interactive) and raising supporting funds was conditionally approved by the CSRC on August 30, 2017131 - The target asset, 100% equity in Linyou Interactive, was transferred on December 12, 2017, making it a wholly-owned subsidiary of the company132 - The newly issued shares for the asset acquisition were listed on January 2, 2018132 Changes in Share Capital and Shareholder Information This section reports on changes in the company's share capital structure and provides details about its shareholders and actual controller Changes in Share Capital During the reporting period, the company's total share capital increased from 534 million shares to 615 million shares due to a non-public offering for the Linyou Interactive acquisition, adding 80,893,681 new shares that were listed on January 2, 2018, altering the shareholder structure Changes in Share Capital | Item | Before Change (shares) | Increase/Decrease (shares) | After Change (shares) | | :--- | :--- | :--- | :--- | | Restricted Shares | 74,988,146 | +16,757,138 | 91,745,284 | | Unrestricted Shares | 459,011,854 | +64,136,543 | 523,148,397 | | Total Shares | 534,000,000 | +80,893,681 | 614,893,681 | - The change in share capital was due to the company's non-public offering of 80,893,681 new shares for the acquisition of assets (Linyou Interactive)137 Shareholders and Actual Controller Information As of year-end 2017, the company had 46,030 shareholders, with Mr. Zhao Duxue remaining the controlling shareholder and actual controller holding 20.86% of shares, while Zhou Lifei and Liao Peng became major shareholders due to the Linyou Interactive acquisition - The company's controlling shareholder and actual controller is Zhao Duxue, with a shareholding ratio of 20.86% at the end of the reporting period148151152 Top Five Shareholders | Top Five Shareholders | Shareholder Nature | Shareholding Percentage | | :--- | :--- | :--- | | Zhao Duxue | Domestic Natural Person | 20.86% | | Zhou Lifei | Domestic Natural Person | 5.66% | | Liao Peng | Domestic Natural Person | 4.21% | | Zhang Yizhen | Domestic Natural Person | 1.55% | | Pan Yueran | Domestic Natural Person | 1.32% | Directors, Supervisors, Senior Management, and Employees This section provides information on the company's directors, supervisors, senior management, including their shareholdings and overall employee structure Changes in Shareholdings of Directors, Supervisors, and Senior Management During the reporting period, there were no changes in the shareholdings of the company's directors, supervisors, and senior management - During the reporting period, there were no increases or decreases in the shareholdings of any directors, supervisors, or senior management personnel157 Company Employee Information As of the end of the reporting period, the company had a total of 1,740 employees, with production personnel constituting the largest group at 1,201, followed by technical personnel at 245, and the majority of employees holding college degrees or lower Employee Professional Composition | Professional Composition | Number of People | | :--- | :--- | | Production Personnel | 1,201 | | Sales Personnel | 154 | | Technical Personnel | 245 | | Financial Personnel | 87 | | Administrative Personnel | 53 | | Total | 1,740 | Corporate Governance This section describes the company's corporate governance framework and the effectiveness of its internal control systems Basic Status of Corporate Governance During the reporting period, the company operated in strict compliance with relevant laws and regulations, ensuring its corporate governance practices, including shareholder meetings, board and supervisory board operations, information disclosure, and insider information management, were consistent with CSRC regulations - The company's actual corporate governance situation largely complies with the requirements of relevant laws, regulations, and rules, with no significant discrepancies175177 - The company strictly implements the "Insider Information Registrant Management System" and diligently carries out the registration and filing of insider information registrants176 Internal Control Evaluation Report The company's board of directors affirmed that as of December 31, 2017, the company maintained effective internal controls over financial reporting in all material aspects, with no significant or material weaknesses identified in financial or non-financial reporting during the period, and the accounting firm issued a standard unqualified internal control audit opinion - No significant or material weaknesses in internal control were identified during the reporting period187188 - The accounting firm issued a standard unqualified audit opinion on the effectiveness of the company's internal controls over financial reporting as of December 31, 2017189 Financial Report This section presents the audited financial statements, including the balance sheet, income statement, cash flow statement, and notes to the financial statements Audit Report Beijing Yongtuo Certified Public Accountants issued a standard unqualified audit opinion on the company's 2017 financial statements, with key audit matters focusing on goodwill impairment for the 438 million Yuan goodwill from Beijing Linyou Interactive acquisition and impairment provisions for accounts receivable - The audit opinion type is a standard unqualified opinion193 - Key audit matters include: - Goodwill Impairment: Primarily refers to the impairment test conducted on the 438 million Yuan goodwill arising from the acquisition of Beijing Linyou Interactive Technology Co., Ltd - Allowance for Doubtful Accounts: The estimation of the recoverable amount of accounts receivable involves significant management judgment195196 Financial Statements In 2017, the company's financial position remained stable, with total assets growing to 3.06 billion Yuan and equity attributable to the parent company increasing to 2.28 billion Yuan, while operating revenue reached 1.38 billion Yuan, a 61.35% increase, and net profit attributable to the parent company was 71.34 million Yuan, up 567.47% Key Items from Consolidated Balance Sheet | Key Items from Consolidated Balance Sheet | December 31, 2017 (CNY) | December 31, 2016 (CNY) | | :--- | :--- | :--- | | Total Assets | 3,060,713,254.65 | 2,663,596,850.86 | | Total Liabilities | 725,237,479.48 | 887,207,946.76 | | Equity Attributable to Parent Company Owners | 2,278,644,256.93 | 1,701,584,258.19 | Key Items from Consolidated Income Statement | Key Items from Consolidated Income Statement | 2017 (CNY) | 2016 (CNY) | | :--- | :--- | :--- | | Total Operating Revenue | 1,382,049,961.49 | 856,527,703.61 | | Operating Profit | 85,481,295.98 | -40,620,629.88 | | Total Profit | 103,724,244.29 | 10,482,795.49 | | Net Profit Attributable to Parent Company Owners | 71,335,180.60 | 10,687,413.19 | Key Items from Consolidated Cash Flow Statement | Key Items from Consolidated Cash Flow Statement | 2017 (CNY) | 2016 (CNY) | | :--- | :--- | :--- | | Net Cash Flow from Operating Activities | 156,483,965.52 | 139,077,066.73 | | Net Cash Flow from Investing Activities | 257,224,511.76 | 11,696,105.80 | | Net Cash Flow from Financing Activities | -306,822,078.78 | -175,650,223.61 | | Net Increase in Cash and Cash Equivalents | 106,886,398.50 | -24,877,051.08 | Notes to Consolidated Financial Statements The notes to the financial statements provide detailed explanations of account balances and changes, highlighting the 438 million Yuan goodwill from the Linyou Interactive acquisition, accounts receivable of 891 million Yuan with 203 million Yuan in bad debt provisions, inventory of 460 million Yuan, and a significant reduction in short-term borrowings from 395 million Yuan to 100 million Yuan - The book balance of accounts receivable at period-end was 891 million Yuan, with an allowance for doubtful accounts of 203 million Yuan, resulting in a carrying value of 687 million Yuan338 - Goodwill increased by 437,606,559.67 Yuan due to the acquisition of Beijing Linyou Interactive Technology Co., Ltd421 - The period-end balance of short-term borrowings was 100 million Yuan, a significant decrease from 395 million Yuan at the beginning of the period436 Catalogue of Documents for Reference This section lists all documents available for public inspection, including the original annual report and audited financial statements Documents for Reference Documents available for reference include the original annual report signed by the legal representative, financial statements signed and sealed by the responsible persons, the original audit report, and all legally disclosed documents from the reporting period - Documents available for inspection include: - Original text of the 2017 Annual Report - Signed financial statements - Original audit report - All publicly disclosed documents during the reporting period642