China Rerun Chemical : Half Yearly Report

CHINA RERUN CHEMICAL GROUP LTD

("China Rerun", "the Group" or "the Company")

Half year results for the period from 1 September 2013 to 28 February 2014

China Rerun Chemical Group Ltd (CHRR.L), the producer of lubricant products for the domestic automotive, industrial and agricultural markets in the People's Republic of China ("PRC"), today announces its unaudited half year results from 1 September 2013 to 28 February 2014 ("the period").

As part of the Group's restructuring in anticipation of its Admission to AIM, a new operating subsidiary was incorporated in May 2012 which took over and commenced trading activities in March 2013. As a result, for the period 1 September 2012 to 28 February 2013, there was no trade passing through the new operating subsidiary as it remained in the private Company. For the purposes of comparison therefore, pro-forma results including the six months audited figures of the private Company from 1 September 2012 to 28 February 2013, as detailed in the Admission Document, have been detailed below:

Financial Highlights

Operational Highlights

·     Like-for-like sales volume increased by 31.7% to 8.1 million litres compared with HY2013

·     Gross margin improved to 30.8% (HY2013: 27.3%) from selling higher quality products at higher prices while also benefitting from economies of scale associated with the higher volumes

·     Average selling prices increased by 2% to RMB20.2 in HY 2014 (HY2013: RMB19.8)

·     The wholesale distribution network increased to 42 distributors, with the addition of six new partners in line with the Group's  stated strategy of expanding its geographical presence and wholesale distribution network

·     Increase in demand for the Company's car petrol engine, construction and agricultural lubricant oils

·     Production of a greater variety of construction and agricultural oils to meet growing market demand, with three new products introduced in HY2014

·     The establishment of a ten year partnership with TianxiaRunyuan (Beijing) Technology Co., Ltd ("Tianxia") for the distribution of Rerun products to 300 new cities in the PRC

·     Testament to the Company's reputation as a producer of high quality lubricant products, China Rerun was credited as a training centre for an Executive Master of Business Administration by the Economic and Management College of China University of Petroleum.

Commenting on the results, Mr Xinghe Wu, Executive Chairman of China Rerun said:

"China Rerun has delivered a strong set of results in the first half of the financial year and the Board is confident that the results for the full year ended 31 August 2014 will remain in line with its expectations. We are focused on growing our sales network and driving economies of scale, whilst investing in research and development and developing our marketing activities. Our listing in London now provides a platform for organic growth which, coupled to the Group's robust financial base, also places it in a strong position to seek out acquisition opportunities within its highly fragmented domestic market. In this way, China Rerun will continue to expand its market share, increase brand awareness and enhance overall presence.  It remains our stated ambition to become a leading lubricant oil brand in the domestic marketplace."

For further enquiries, please visitwww.chinarerun.com/or contact:

* AM Capital Limited, a securities dealer and financial adviser registered in Hong Kong, has been engaged by the Group as a financial adviser

Notes to Editors

China Rerun Chemical Group Ltd is an established and profitable producer of lubricant products for the PRC's domestic automotive, industrial and agricultural markets.  Based in Daqing, northeastern China, it operates principally under the ''Runyuan'' and ''Black E'' brands. The Group's products are sold through a network of third party distributors to end users, some of whom operate branded automotive garages.

Chairman's Statement

I am pleased to present a positive set of results for the period under review. Our continued growth and recent Admission to AIM has helped secure new commercial partnerships, as was demonstrated by our joint ten year venture with Tianxia. This partnership enables China Rerun's products to be sold into 300 new cities previously not covered by the distribution network and take advantage of Tianxia's 15 years' experience in the lubricants industry, as well as its extensive network of over 600 new distributors. We continue to seek joint partnerships which will further expand our distribution network, and, in turn, enhance our presence in the domestic market.

Revenue for the six months to 28 February 2014 grew by 34.4% to RMB164.7m (HY2013: RMB122.6m). Pre-tax profit rose by 68.0% to RMB32.7m (HY2013: RMB19.4m). These increases stemmed from the rising demand for high quality lubricant oils in the domestic market, coupled with the growing recognition and popularity of our brands.

Like-for-like sales volumes amounted to 8.1 million litres, up 31.7% compared with HY2013. The rise in sales volumes has resulted in economies of scale, and for the period, gross margin improved to 30.8% (HY2013: 27.3%). The pricing of our products and our ability to pass these on to our customers, due to improved branding, product sophistication and quality control, also contributed to the rise in margins. In the period under review, average selling prices increased by RMB20.2, an increase of 2% (HY 2013: RMB19.8). The terms of the Company's contracts held with our distributors helped to insulate margins from inflationary pressures passed through price increases in raw materials.

The ongoing growth of the construction and agricultural industries within the PRC, coupled with the government's recently stated commitment to expand the domestic economy is expected to stimulate demand for construction and agricultural lubricant oils. In order to satisfy demand for these lubricant oil types, China Rerun has developed additional products specifically catering for the construction and agricultural industries. The ability of our production facility to react quickly to the market's evolving demands is proving a key strength for the business and we are pleased to have developed 11 new products since our AIM admission last October. 

At the period end, the Group's wholesale distribution network grew to 42 distributors (HY2013: 28).  The Company will continue to focus on engagement of additional high quality distributors. As expected, however, the transitionary period associated with the reorganisation of the sales network resulted in a reduction in average revenues per distributor to RMB3.9m (HY2013: 4.3m).  For the full year 2013, average revenues per distributor was RMB7.6m.

Encouragingly, China Rerun was awarded training centre status by the Economic and Management College of China University of Petroleum.  The training centre will offer an Executive Master of Business Administration programme for delegates in the oil and gas sectors. The Group believe that the accreditation will enhance the Company's reputation and raise brand awareness.

Strategy for Growth

The Company will continue with its strategy of organic growth and is exploring acquisition opportunities to generate value for shareholders and increase the Company's presence in its domestic marketplace.

Firstly, we intend to continue our emphasis on high quality branded products, upgrading the quality and specification of oil types which can achieve higher average selling prices and protect margins.

We are focused on maintaining high quality distribution, broadening our geographic representation in the PRC and positioning China Rerun to benefit from an anticipated, sustained increase in demand for lubricant oils.

We will also look to forge new partnerships, similar to the agreement with Tianxia, in order to increase our sales distribution network and support our initiatives to build brand awareness.

We are actively seeking acquisition opportunities and joint distribution partnerships to complement our existing business, broaden our representation in the PRC and benefit from the anticipated increase in demand for lubricant oils. Our recent listing and solid financial base provides a platform for our stated ambition to become a leading lubricant oil brand in the domestic marketplace. The PRC's highly fragmented market presently consists of over 4,000 lubricant producers, many of which are only able to provide a narrow or unsophisticated product offering to an increasingly demanding customer base. As such, their future is likely to be one of merger and/or consolidation into larger groupings. This represents an important opportunity for growth that China Rerun's management intends to exploit.

The Company is committed to investing in branding and advertising activity to strengthen the brand and increase awareness.

Financial Review

As part of the Group's restructuring in anticipation of its Admission to AIM, a new operating subsidiary was incorporated in May 2012 which took over and commenced trading activities in March 2013. As a result, for the period 1 September 2012 to 28 February 2013, there was no trade passing through the new operating subsidiary as it remained in the private company. For the purposes of comparison therefore, pro-forma results including the six months audited figures of the private Company from 1 September 2012 to 28 February 2013, as detailed in the Admission Document, have been included.

In the period under review, the Group generated revenue of RMB164.7m (HY 2013: RMB122.6m) representing growth of 34.4%. 

The Group achieved gross profit of RMB50.7m an increase of 51.7% compared to the prior year period (HY 2013:  RMB33.4m). Gross margin increased by 3.5 percentage points to 30.8% year-on-year (HY 2013: 27.3%). The improved gross profit was mainly driven by product upgrades as well as benefits from economies of scale as volumes increased by 31.7%.

Sales and distribution expenses increased to RMB11.2m (HY 2013: RMB7.5m).  This increase was mainly driven by increased sales commissions, distributors' rebates and distribution of goods, along with revenue growth. Advertising and marketing costs increased by 37%, accounting for 1.18% of revenue (HY 2013: 1.15%) as the Group continues to focus on building its brands through marketing initiatives, in line with the Company's strategy.

During the period under review, administrative expenses were RMB6.8m absorbing one-off listing costs of RMB3.9m. The Group achieved a pre-tax profit of RMB32.7m in HY 2014, up 67.98% (HY 2013: RMB 19.4m). Operating margin increased by 3.9 percentage points to 19.8% (HY 2013: 15.8%).

The Group's PRC operating subsidiary is subject to an income tax rate of 25%, which is in accordance with the PRC Enterprise Income Tax Law.

At 28 February 2014, inventories increased by RMB6.1m to RMB8.8m (HY 2013: RMB2.7m), due, in part, to seasonal factors. Historically, revenues and sales volumes are usually higher between the months of March and August, coinciding with increased fuel and lubricant oil consumption during the summer months.  There were no trade receivables as most of the Group's sales are on a cash basis. There was, however, an increase in RMB37.59m of other receivables at the period end including RMB37.5m of advance payment to suppliers to secure upstream suppliers in a stable manner and avoid an effect on costs from base oil price fluctuation.

This is a positive performance for the business and we have a sound financial base from which to further expand our customer base and grow our market presence.

Outlook

We are pleased with the progress made in the period under review and our management remains confident in its ability to secure long-term growth for China Rerun.

We continue to seek new commercial opportunities for joint distribution partnerships and target acquisitions with the intention to create long term shareholder value.

We are committed to expanding our sales presence to include new regions and to further strengthen our sales team with senior recruits. We will continue to invest in the future of our brands, in which we have confidence in the long-term potential, as we look forward to the next phase of development.

The macroeconomic environment is encouraging. We see an increase in consumption of lubricant oils in the PRC, led by strong demand from the automotive, construction and agricultural sectors. With such underlying growth, our expanding distribution network and rising brand awareness, the Board is confident that the results for the full year ended 31 August 2014 will be in line with its expectations.

Condensed consolidated statement of comprehensive income

for the six months ended 28 February 2014

Condensed c onsolidated statement of financial position

as at 28 February 2014

Condensed consolidated statement of cash flows

for the six months ended 28 February 2014

Condensed consolidated statement of changes in equity

for the period ended 28 February 2014

Notes to the condensed consolidated financial statement

1.         General information

China Rerun Chemical Group Limited ("China Rerun" or the "Company") was incorporated on 30 May 2012 in Cayman Islands. The registered office of the Company is located at 89 Nexus Way, Camana Bay, Grand Cayman Y1-9007 Cayman Islands

The principal activity of the Company is that of an investment holding company and the principal activities of the Group are production and distribution of lubricating oil for the automotive, agricultural and certain industrial markets in PRC. The principal place of business is at No 99, Zhongsan Road, Sa'ertu district, Daqing, Heilongjiang Province, PRC.

These condensed financial statements present information about the group and are set out in Renminbi (''RMB'') of the PRC, which is the functional currency of the group.

2.         Basis of preparation and accounting policies

These condensed financial statements have been prepared on the basis of the accounting policies set out in the last audited consolidated financial statements, which are in accordance with International Accounting Standard 34 Interim Financial Reporting.

The interim report is unaudited and does not constitute the company's statutory accounts for the six months ended 28February 2014. 

The preparation of the interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may subsequently differ from those estimates.

3.         Segmental analysis

The group's revenue and profit before taxation were all derived from only one segment which is its principal activity. All revenue originates in the PRC and assets are mainly held in the PRC. As a result of this, management considered that no segment reporting is required.

4.         Taxation

A company is deemed to be resident in PRC if it is established in PRC or its effective management is in PRC. Residents are taxed on their worldwide income. Non-residents are taxed on PRC source income and income effectively connected with their establishments in PRC.

China Rerun is regarded as resident for the tax purposes in Cayman Islands. There are no applicable taxes in the Cayman Islands for the company.

The Group is regarded as resident for the tax purposes in PRC and subject to national income tax at 25%.

The taxation charge is based upon the expected effective rate for the period ended 28 February 2014.

5.         Warrant charge

On 15 October 2013, the Company has granted 2,558,100 and 18,100 warrants to Cairn Financial advisers LLP and Beaufort International Associates Limited respectively in connection to their service during the Group's AIM admission process.

Judgements and estimates are required in determining the share based payment charge as an expense in the income statement.  The directors have used Black-Scholes model which has been widely used in valuing the share based payment charge. The directors are in the opinion that the model used has been adjusted to their best estimate in arriving at the charge.

6.         Property, plant and equipment

During the period, the group made additions of approximate RMB 11,000 to property, plant and equipment.

7.         Earnings per share

Basic loss per share

Basic loss per share is calculated by dividing the loss attributable to equity shareholders of the company by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The dilutive potential ordinary shares in the company are share options. A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the company's shares) based on the monetary rights attached to outstanding share options. The number of shares calculated above is compared with the number of shares that would have issued assuming the exercise of the share options.

Weighted average number of ordinary shares (diluted):

8.         Share capital

The issued share capital of the company as at 28February 2014 is RMB 12,126 fully paid.

On 12 September 2013, the Company issued and allotted 46 ordinary shares to an existing shareholder at par value.

On 6 October 2013, an ordinary and special solution passed to resolve that each issued Ordianry shares of US$1.00 each be divided into 127,000 ordinary shares of US$0.000007874 each.

On 16 October 2013, the Company has been admitted to trading on the AIM market of London Stock Exchange plc ("Admission"). The Company has raised approximately £181,000 before expenses through a subscription of 1,810,000 new ordinary shares at 10p per share.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the company.  All shares rank equally with regard to the company's residual assets.

At 28February 2014, the company had the following outstanding share options:

Date of grant:                          15 Oct 2013

Number of warrants:               2,576,200

Option price:                           10 pence

Exercise period:                      15.10.2013 - 15.10.2018

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