Dragon Mining Limited — Interim / Quarterly Report 2006

Dec 19, 2005

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SAMSON PAPER HOLDINGS LIMITED 森信紙業集團有限公司

(Incorporated in Bermuda with limited liability) Stock Code: 731

ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005

The board of directors (the “Board”) of Samson Paper Holdings Limited (the “Company”) is pleased to announce the unaudited condensed consolidated interim results of the Company and its subsidiaries (the “Group”) for the six months ended 30 September 2005 together with comparative figures for the corresponding period in 2004, and the unaudited condensed consolidated balance sheet of the Group as at 30 September 2005 with audited comparative figures as at 31 March 2005. The unaudited interim financial report has been reviewed by the Company’s audit committee, and the Company’s auditors, PriceWaterhouseCoopers, in accordance with the Statement of Auditing Standard 700 “Engagements to review interim financial reports” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

Notes Turnover 3 Cost of sales Gross profit Other revenues Selling expenses Administrative expenses Other operating expenses Operating profit 4 Finance costs Share of profit less loss of associated companies Profit before taxation Taxation 5 Profit for the period Attributable to: Equity holders of the Company Minority interests Earnings per share for profit attributable to the equity holders of the Company-Basic 6	Unaudite Six months ended 3 2005 HK$’000 1,706,340 (1,556,676) 149,664 7,175 (57,833) (37,274) (7,475) 54,257 (24,938) 1,017 30,336 (6,364) 23,972 23,264 708 23,972 HK5.4 cents	d 0 September 2004 HK$’000 (As restated) 1,630,680 (1,463,250) 167,430 4,714 (60,558) (42,622) (10,041) 58,923 (15,425) 1,614 45,112 (12,423) 32,689 31,631 1,058 32,689 HK 7.4 cents

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Interim dividend per share HK1.5 cents Interim dividends 7 6,439 CONDENSED CONSOLIDATED BALANCE SHEET As at 30 September 2005 Unaudited 30 September 2005 HK$’000 Non-current assets Property, plant and equipment 83,110 Prepaid premium for land leases 72,589 Interests in associated companies 64,518 Deferred tax assets 2,743 222,960 Current assets Inventories 335,641 Accounts receivables, deposits and prepayments 1,305,683 Other financial assets at fair value through profit and loss 29,597 Other investments – Bank balances and cash 316,099 1,987,020 Current liabilities Accounts payable and accrued charges 569,424 Trust receipt loans 628,979 Taxation payable 7,795 Other financial liabilities at fair value through profit and loss 1,541 Bank loans 296,094 1,503,833 Net current assets 483,187 Total assets less current liabilities 706,147 Non-current liabilities Bank loans 72,188 Deferred tax liabilities 7,492 Total non-current liabilities 79,680 Net assets 626,467 Capital and reserves attributable to the Company’s equity holders Share capital 42,926 Other reserves 180,928 Retained earnings – Others 394,315 – Proposed dividend 6,439 581,682 Shareholders’ funds 624,608 Minority Interests 1,859 Total equity 626,467	Interim dividend per share HK1.5 cents Interim dividends 7 6,439 CONDENSED CONSOLIDATED BALANCE SHEET As at 30 September 2005 Unaudited 30 September 2005 HK$’000 Non-current assets Property, plant and equipment 83,110 Prepaid premium for land leases 72,589 Interests in associated companies 64,518 Deferred tax assets 2,743 222,960 Current assets Inventories 335,641 Accounts receivables, deposits and prepayments 1,305,683 Other financial assets at fair value through profit and loss 29,597 Other investments – Bank balances and cash 316,099 1,987,020 Current liabilities Accounts payable and accrued charges 569,424 Trust receipt loans 628,979 Taxation payable 7,795 Other financial liabilities at fair value through profit and loss 1,541 Bank loans 296,094 1,503,833 Net current assets 483,187 Total assets less current liabilities 706,147 Non-current liabilities Bank loans 72,188 Deferred tax liabilities 7,492 Total non-current liabilities 79,680 Net assets 626,467 Capital and reserves attributable to the Company’s equity holders Share capital 42,926 Other reserves 180,928 Retained earnings – Others 394,315 – Proposed dividend 6,439 581,682 Shareholders’ funds 624,608 Minority Interests 1,859 Total equity 626,467	Interim dividend per share HK1.5 cents Interim dividends 7 6,439 CONDENSED CONSOLIDATED BALANCE SHEET As at 30 September 2005 Unaudited 30 September 2005 HK$’000 Non-current assets Property, plant and equipment 83,110 Prepaid premium for land leases 72,589 Interests in associated companies 64,518 Deferred tax assets 2,743 222,960 Current assets Inventories 335,641 Accounts receivables, deposits and prepayments 1,305,683 Other financial assets at fair value through profit and loss 29,597 Other investments – Bank balances and cash 316,099 1,987,020 Current liabilities Accounts payable and accrued charges 569,424 Trust receipt loans 628,979 Taxation payable 7,795 Other financial liabilities at fair value through profit and loss 1,541 Bank loans 296,094 1,503,833 Net current assets 483,187 Total assets less current liabilities 706,147 Non-current liabilities Bank loans 72,188 Deferred tax liabilities 7,492 Total non-current liabilities 79,680 Net assets 626,467 Capital and reserves attributable to the Company’s equity holders Share capital 42,926 Other reserves 180,928 Retained earnings – Others 394,315 – Proposed dividend 6,439 581,682 Shareholders’ funds 624,608 Minority Interests 1,859 Total equity 626,467	HK 2.0 cents 8,585 Audited 31 March 2005 HK$’000 (As restated) 79,523 73,486 65,621 4,044 222,674 353,441 1,071,344 – 30,197 297,313 1,752,295 480,840 565,415 3,612 – 266,370 1,316,237 436,058 658,732 36,840 8,008 44,848 613,884 42,926
	180,928 394,315 6,439		176,597 378,046 12,878
	581,682 624,608 1,859 626,467		567,521 610,447 3,437 613,884

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Notes

1. Basis of preparation and accounting policies

These unaudited consolidated condensed interim accounts have been prepared in accordance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial Reporting”, issued by the HKICPA and applicable discloseable provisions of Appendix 16 of Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

These condensed interim accounts should be read in conjunction with the 2005 annual accounts.

The accounting policies and methods of computation used in the preparation of these condensed interim accounts are consistent with those used in the annual accounts for the year ended 31 March 2005, except that the Group has changed certain of its accounting policies following its adoption of new/revised Hong Kong Financial Reporting Standards (“HKFRS”) and HKAS (collectively referred to as the “New HKFRSs”), which have become effective for accounting periods beginning on or after 1 January 2005.

These interim accounts have been prepared in accordance with those HKFRSs and interpretations issued and effective as at the time of preparing these accounts. The HKFRSs and interpretations that will be applicable at 31 March 2006 including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim accounts.

The changes to the Group’s accounting policies and the effect of adopting these new policies are set out in Note 2 below.

2. Effect of adopting new HKFRS

The applicable New HKFRSs adopted in these consolidated condensed accounts are set out below and the comparatives have been restated in accordance with the relevant requirements.

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 23	Borrowing Costs
HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 28	Investments in Associates
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings Per Share
HKAS 36	Impairment of Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKFRS 3	Business Combination

The adoption of HKAS 1,2,7,8,10,16,21,23,24,27,28 and 33 did not result in substantial changes to the Group’s accounting policies. In summary:

HKAS 1 has affected the presentation of minority interests, share of net after-tax results of associated companies and other disclosures. HKAS 21 had no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard.

HKAS 2,7,8,10,16,23,24,27,28 and 33 had no material effect on the Group’s policies.

The adoption of revised HKAS 17 has resulted in a change in the accounting policy relating to the reclassification of leasehold land and land use rights from property, plant and equipment to operating leases. The up-front prepayments made for the leasehold land with a carrying value of HK$72,589,000 as at 30 September 2005 (31 March 2005: HK$73,486,000) are reclassified as prepaid premium for land leases payments instead of property, plant and equipment, which are expensed in the consolidated profit and loss account on a straight-line basis over the period of the leases. In prior years, the leasehold land and land use rights were stated at valuation on an open market basis.

The adoption of HKAS 32 and HKAS 39 has resulted in the recognition of derivative financial instruments at fair value and the change in the recognition and measurement of hedging activities.

The adoption of HKFRS 3 and HKAS 36 results in a change in the accounting policy for goodwill. Until 31 March 2005, goodwill was:

• Amortised on a straight line basis over a period of 10 years; and

• Assessed for impairment at each balance sheet date.

• In accordance with the provisions of HKFRS 3:

• The Group ceased amortisation of goodwill from 1 April 2005;

• Accumulated amortisation as at 31 March 2005 has been eliminated with a corresponding decrease in the cost of goodwill;

• From the year ending 31 March 2006 onwards, goodwill is tested annually for impairment, as well as when there is indication of impairment.

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Effect of the above changes in accounting policies on profit after taxation for the six months ended 30 September 2005:

Unaudited Attributable to equity holders HK$’000 354

Increase in profit after taxation – HKFRS 3

Effect of the above changes in accounting policies on balance sheet as at 30 September 2005 and 31 March 2005:

Decrease in property, plant and equipment Increase in prepaid premium on land leases Increase in other financial assets at fair value through profit and loss Increase in other financial liabilities at fair value through profit and loss Decrease in other payable Increase in interests in associated companies	Unaudited 30 September 2005 HKAS 17 HKAS 32 & 39 HKFRS3 HK$’000 HK$’000 HK$’000 (72,589) – – 72,589 – – – 1,786 – – 1,541 – – (245) – – – 354	Audited 31 March 2005
		HKAS 17 HKAS 32 & 39 HKFRS 3 HK$’000 HK$’000 HK$’000 (73,486) – – 73,486 – – – – – – – – – – – – – –

3. Segment information

The Group is principally engaged in trading and marketing of paper products. In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format. No business segment analysis is provided as over 90% of the Group’s turnover and profit contribution came from the distribution business of paper products during the period.

An analysis of the Group’s turnover for the period by geographical segment is as follows:–

Hong Kong Mainland China Others	Unaudite Six months ended 3 2005 HK$’000 851,849 839,195 15,296 1,706,340	d 0 September 2004 HK$’000 842,197 779,367 9,116
		1,630,680

No contribution to operating profit from any of the above geographical segment is substantially out of line with the normal ratio of profit to turnover.

4. Operating profit

Operating profit is stated after crediting and charging the following:

Crediting Interest income Charging Depreciation of property, plant and equipment Amortisation of prepaid premium for land leases	Unaudite Six months ended 3 2005 HK$’000 4,238 3,502 897	d 0 September 2004 HK$’000 2,693
		3,782 846

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5. Taxation

Hong Kong profits tax has been provided at the rate of 17.5% (2004:17.5%) on the estimated assessable profit for the period. Taxation on oversea profits has been calculated on the estimated assessable profit at the applicable rates of taxation prevailing in the countries in which the Group operate, based on existing legislation, interpretation and practices in respect thereof.

Hong Kong profits tax Overseas taxation Deferred taxation	Unaudite Six months ended 3 2005 HK$’000 4,448 1,131 785 6,364	d 0 September 2004 HK$’000 (As restated) 11,169 832 422
		12,423

6. Earnings per share

The calculation of basic earnings per share is based on the Group’s unaudited consolidated profit attributable to equity holders of the Company of HK$23,264,000 (2004:HK$31,631,000) for the period and on the weighted average number of 429,258,039 (2004: 429,258,039) shares of the Company in issue during the period.

7. Interim dividends

Proposed, of HK$0.015 (2004: HK$0.02) per share	Unaudite Six months ended 3 2005 HK$’000 6,439	d 0 September 2004 HK$’000 8,585

Note: This proposed interim dividend is not reflected as a dividend payable in these condensed accounts, but will be reflected as an appropriation of retained earnings for the year ending 31 March 2006.

MANAGEMENT DISCUSSION AND ANALYSIS

The Economy

For the six months ended 30 September 2005, the Hong Kong economy continued to gain growth momentum with GDP leaped 8.2% in the third quarter following a 7.3% growth in the second quarter of 2005. The encouraging economic performance was partly the result of continued surge in export trade. With GDP growth averaging over 9% in the past few years, the burgeoning economy of the PRC, Hong Kong’s largest trading partner, has also buttressed local economic prosperity.

The Paper Industry

The printing and publishing industries generally benefited from the sustained expansion of the global economy and the persistent export boom in the PRC market. The total exports of printed matters and packaging material from Hong Kong rose 15% to HK$11,582 million and 1% to HK$17,970 million respectively in the first nine months of 2005.

The PRC continued to be the leading exporter to Hong Kong, accounting for HK$4,903 million (representing 74.8% of total imports) worth of printed matters and HK$8,801 million worth of packaging materials (representing 43.7% of total imports) in the first nine months of 2005.

In a bid to tap the growing market demand, paper manufacturers over-boosted their production capacities and the resultant excess supply dragged down paper prices in the market. By the end of the six months period ended 30 September 2005, prices of book printing papers had dropped 5% and that of packaging boards declined by 10% as compared with the levels in March 2005.

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Operations Review

The Group’s long history and solid foundation underscored its resilience in the fiercely competitive market. Despite the pressure from rising interest rates and intense competition, the Group’s continued efforts to expand its customer base were rewarded with growth in both turnover and sales volume. The Group reported a turnover of approximately HK$1,706 million for the six months ended 30 September 2005, 5% higher than that of the previous period. The Group delivered 322,000 metric tonnes in sales volume, a 10% growth over that of the last corresponding period. The Group’s better than expected performance during the period testified to its strong foothold in the market.

Given that interest rate has been on the upward trend in the territory, the Group’s total interest expense increased sharply from approximately HK$15.4 million to approximately HK$24.9 million in the period. Gross profit dropped to HK$149.7 million as a result of fierce market competition, with gross profit margin at 8.77%, against 10.27% in the same period last year. The Group’s profit attributable to equity holders amounted to approximately HK$23.3 million with profit margin fell from 1.94% to 1.36% at the impact of interest rate hike. Earnings per share were HK 5.4 cents. The Board has resolved to declare and pay an interim dividend of HK 1.5 cents per share (2004: HK 2 cents).

As one of the largest paper trading companies in the region, the Group is committed to providing the timeliest services and extensive product choices. The Group has market presence in major cities in the PRC including Beijing, Chongqing, Foshan, Shanghai and Shenzhen, and during the period under review, its reach was extended to Wuxi and Malaysia. Sales of paper products in the PRC market grew 8% to reach HK$833 million, thanks to the Group’s devoted marketing efforts in the PRC to sustain growth and its adoption of a different sales strategy that focuses on quality customers. The Hong Kong and PRC markets accounted for 51% and 49% respectively of the Group’s total turnover arising from its paper product distribution business.

Sales contribution by product was maintained at a stable level, with 49% from book printing papers and 42% from packaging boards.

The Group’s paper manufacturing arm, Singapore-listed United Pulp & Paper Company Limited (“UPP”), contributed a profit of HK$1 million to the Group. With an over 37 years’ operating history, UPP certainly will continue to create synergy for the Group’s paper trading business.

The Group is dedicated to providing quality value added service to customers. During the period under review, the Group’s two other business arms-one was set up to enhance the Group’s transportation and custom clearance services and the other one specializes in aeronautical parts distribution in 13 countries, continued to make contribution to its profit. It has proven that the Group has been heading in the right direction and towards a bright future.

To combat the challenging economic conditions, the Group streamlined its operating flows and enhanced logistic management and cost control to strengthen its competitiveness. Thus, it was able to lower its selling and administrative expenses from 6.33% to 5.57% of its turnover in the period under review. In addition, the Group continued its prudent credit policy and was able to reduce the doubtful debts provision level from 0.54% to 0.41% of total sales. Other operating expenses was also lowered by 25.6% to HK$7.5 million.

The Group mitigated the adverse impacts of high interest rate by effective inventory control and maintained a healthy financial position. Average stock turnover for the period under review was kept at 37 days. The Group’s policy has always been to maintain an average inventory level of approximately one month with close regard to prevailing and expected market conditions.

Prospects

Looking to the future, the performance of the global economy is expected to progress at a fairly strong pace, and that of the PRC in particular will remain robust. The encouraging external environment will bolster local growth. The market expects interest rate to level off which will be favorable for the printing and publishing industries.

On the back of robust performance of the PRC economy, the Group believes that the printing and packaging sector will continue to grow. As for paper prices, they are expected to remain steady in the first quarter next year and start to climb in early second quarter, with the industry worldwide seeking to transfer the high energy and raw material costs to customers.

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Riding on its solid experience that spans four decades and connection in the paper trading industry, the Group will continue its proven strategy to capture opportunities in the vast and blooming PRC market. It will strengthen its network in the market to help it achieve the goal. With shareholders’ interest as a priority, the Group has been actively identifying the best opportunities to consolidate its market share in the PRC. It will also strictly follow its plan to open an additional overseas office to expand its regional reach. We expect to maintain market leadership, paving the way for our sustained growth in the future.

Looking ahead to 2006, the paper trading business will remain as the Group’s major growth driver. However, the Group will strive to diversify its services by adding more value added customer services. The Group aims to capitalize on any strategic opportunities that may help it realize its corporate vision and achieve long-term growth for the shareholders.

INTERIM DIVIDEND

The Board has resolved to declare the payment of an interim dividend of HK1.5 cents (2004: HK 2 cents) per share for the six months ended 30 September 2005. The interim dividend will be payable to all shareholders of the Company whose names appear on the register of members of the Company on Friday, 6 January 2006. The interim dividend will be paid on or about Monday, 16 January 2006.

CLOSURE OF REGISTER OF MEMBERS

The register of members of the Company will be closed from Wednesday, 4 January 2006 to Friday, 6 January 2006 (both days inclusive), during which period no transfers of shares of the Company will be registered. In order to qualify for the interim dividend, all transfers of shares accompanied by the relevant share certificates must be lodged with the Company’s branch registrar, Computershare Hong Kong Investor Services Limited at Suite 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration no later than 4:00 pm on Tuesday, 3 January 2006.

EMPLOYEES AND REMUNERATION POLICIES

As at 30 September 2005, the total number of the Group’s employees was 458. The Group’s remuneration policies are primarily based on prevailing market levels and salaries are reviewed with reference to the performance of the Group and the individual employee concerned. In addition to salary payment, other staff benefits including performance bonus, education subsidies, provident fund, medical insurance and share option are offered to reward our high-calibre staff. Training on strategic planning and implementation, sales and marketing disciplines are offered to various management levels on a regular basis.

LIQUIDITY AND FINANCIAL RESOURCES

The Group’s short term deposits and bank balances as at 30 September 2005 amounted to approximately HK$316 million. To meet the financing demand of the Group, additional bank borrowings were drawn and the aggregate balance increased by HK$129 million to HK$997 million for the six months ended 30 September 2005. As at 30 September 2005, its gearing ratio, measured on the basis of the Group’s long term debt over the Group’s shareholders’ funds was 11% (31 March 2005: 6%). With bank balances and other current assets of approximately HK$1,987 million as well as available banking and trade facilities, the directors of the Company (the “Directors”) believe the Group has sufficient working capital to meet its present requirement.

The Group’s foreign currency purchases were mainly denominated in United States dollars. Foreign exchange contracts and options were used, if necessary, to hedge the Group’s foreign currency exposure. As the Group relied on the RMB banking finances to fund the operation in the PRC, which provides a natural hedge against currency risks, the appreciation of RMB does not have much impact on the Group.

CONTINGENT LIABILITIES

The Company provided corporate guarantees on the banking facilities granted to its subsidiaries. The amount of such facilities utilized by the subsidiaries as at 30 September 2005 amounted to HK$997,261,000 (31 March 2005: HK$868,625,000).

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CHARGE OF ASSETS

As at 30 September 2005, trust receipt loans of HK$211,793,000 (31 March 2005: HK$174,104,000) and bank loans of HK$55,521,000 (31 March 2005: HK$40,554,000) were secured by legal charge on certain properties of the Group in Hong Kong.

AUDIT COMMITTEE

The Audit Committee of the Company (the “Committee”) was set up to review and provide supervision of the Group’s financial reporting process and internal controls. The Committee has reviewed the Group’s unaudited interim report for the six months ended 30 September 2005 before it was tabled for the Board’s approval. The review of the unaudited interim financial statements was conducted in conjunction with the Group’s external auditors.

PURCHASE, SALE OR REDEMPTION OF SHARES

During the six months ended 30 September 2005, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

MODEL CODE FOR SECURITIES TRANSACTIONS

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) as the Company’s code of conduct for dealings in securities of the Company by the Directors. Having made specific enquiry of all the Directors, the Directors confirmed that they have complied with the required standard set out in the Model Code throughout the accounting period covered by the interim report.

COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES OF THE LISTING RULES

In the opinion of the Directors, the Company was in compliance with the Code of Corporate Governance Practices as set out in Appendix 14 of the Listing Rules during the six-month period ended 30 September 2005 except that the nonexecutive Directors were not appointed for a specific term but are subject to retirement by rotation and re-election at the Company’s annual general meetings in accordance with the bye-laws of the Company.

PUBLICATION OF RESULTS ANNOUNCEMENT AND INTERIM REPORT ON THE STOCK EXCHANGE’S WEBSITE

This announcement will be published on the website of the Stock Exchange. The interim report for the six months ended 30 September 2005 containing all the information required by Appendix 16 of the Listing Rules will be despatched to shareholders and published on the website of the Stock Exchange in due course.

BOARD OF DIRECTORS

As at the date of this announcement, the Board comprises five executive Directors, namely Mr. SHAM Kit Ying, Mr. LEE Seng Jin, Mr. CHOW Wing Yuen, Ms. SHAM Yee Lan, Peggy and Mr. LEE Yue Kong, Albert, one non-executive Director, Mr. LAU Wang Yip, Eric and three independent non-executive Directors, namely Mr. PANG Wing Kin, Patrick, Mr. TONG Yat Chong, and Mr. NG Hung Sui, Kenneth.

By order of the Board SHAM Kit Ying Chairman

Hong Kong, 16 December 2005

Please also refer to the published version of this announcement in The Standard.

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