Fufeng Group Limited — Interim / Quarterly Report 2014

Aug 19, 2014

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

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Fufeng Group Limited 阜豐集團有限公司

(incorporated in the Cayman Islands with limited liability)

(Stock code: 546)

ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2014

HIGHLIGHTS OF 2014 INTERIM RESULTS

• Turnover remained stable at approximately RMB5,707.6 million

• Gross profit of the Group increased by 11.0% to about RMB1,027.7 million

• Gross profit of MSG segment increased by 32.7% to about RMB650.9 million while gross profit of Xanthan gum segment decreased by 13.6% to about RMB376.8 million

• Gross profit margin increased to 18.0% due to the new tax relief policy, the ability of the Group to implement effective cost controls and the growing sales of high-end amino acid products which have higher gross profit margin

• Profit attributable to the Shareholders increased by 33.2% to about RMB274.7 million

• Earnings per share – basic and diluted for the first half of 2014 was HK16.58 cents and HK16.05 cents respectively (1H 2013: HK13.96 cents and HK13.91 cents)

• Return on equity for the first half of 2014 was 10.9% (1H 2013: 9.2%)

• Interim dividend of HK3 cents per share declared by the Board

• calculated on an annualised basis

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The Board is pleased to announce the unaudited condensed consolidated results of the Group prepared under HKFRS for the six months ended 30 June 2014 together with comparative figures are as follows:

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

Note

Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited 5,707,636 5,741,553 (4,679,951) (4,815,316) 1,027,685 926,237 76,652 64,631 (343,137) (339,820) (228,463) (246,932) (2,528) (21,704) – 936 530,209 383,348 – 48,061 (189,871) (175,362) (189,871) (127,301) 340,338 256,047 (65,609) (49,721) 274,729 206,326 13.16 11.12 12.74 11.08 49,720 33,259

Revenue 6 Cost of sales 8 Gross profit Other income 7 Selling and marketing expenses 8 Administrative expenses 8 Other operating expenses 8 Other gain Operating profit Finance income Finance costs Finance costs – net 9 Profit before income tax Income tax expense 10 Profit for the period and attributable to the Shareholders Earnings per share for profit attributable to the Shareholders during the period (expressed in RMB cents per share) – basic 11 – diluted 11 Dividends 12

5,707,636 (4,679,951) 1,027,685 76,652 (343,137) (228,463) (2,528) – 530,209 – (189,871) (189,871) 340,338 (65,609) 274,729 13.16 12.74 49,720

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INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

Note	30 June 2014 RMB’000 Unaudited	31 December 2013 RMB’000 Audited 506,289 7,575,975 51 88,232 8,170,547 1,516,878 2,069,339 56,405 805,999 4,448,621 12,619,168 203,644 – 702,873 194,143 3,718,126 4,818,786
ASSETS Non-current assets Leasehold land payments 13 Property, plant and equipment 13 Intangible assets 13 Deferred income tax assets Current assets Inventories Trade and other receivables 14 Short-term bank deposits Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Shareholders Share capital 15 Share premium 15 – Proposed interim dividend – Others Other reserves Retained earnings Total equity	919,486 7,618,894 50 104,812 8,643,242 1,528,911 2,535,265 44,470 823,788 4,932,434 13,575,676 203,644 49,720 587,228 195,535 3,992,855 5,028,982

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Note	30 June 2014 RMB’000 Unaudited	31 December 2013 RMB’000 Audited 360,121 3,309,187 20,286 3,689,594 2,890,997 51,884 1,167,907 4,110,788 7,800,382 12,619,168 337,833 8,508,380
LIABILITIES Non-current liabilities Deferred income Borrowings 16 Deferred income tax liabilities Current liabilities Trade, other payables and accruals 17 Current income tax liabilities Borrowings 16 Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	350,177 3,332,312 20,044 3,702,533 3,254,628 40,854 1,548,679 4,844,161 8,546,694 13,575,676 88,273 8,731,515

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Fufeng Group Limited (the “Company”) and its subsidiaries (together, the “Group”) manufacture and sell fermentation-based food additive and biochemical products and starch-based products. The Group has manufacturing plants in Shandong Province, Shaanxi Province, Jiangsu Province, Inner Mongolia Autonomous Region and Xinjiang Uygur Autonomous Region of the People’s Republic of China (the “PRC”) and sells mainly to customers located in the PRC.

The Company is a limited liability company incorporated in the Cayman Islands. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.

The Company has its shares listed on The Stock Exchange of Hong Kong Limited.

This condensed consolidated interim financial information is presented in RMB, unless otherwise stated. This condensed consolidated interim financial information was approved for issue on 19 August 2014.

This condensed consolidated interim financial information has not been audited.

Key Events

• (a) Pursuant to the overall town development planning of Junan County, Shandong Fufeng will relocate to the Junan Economic Development Zone of Shandong Province, PRC. As at 30 June 2014, the relocation was still at the primary stage.

• (b) On 16 January 2014, Baoji Fufeng entered into a framework investment agreement with Caijiapo Economic and Technological Development Zone Management Committee of Shaanxi Province. Pursuant to the framework investment agreement, Baoji Fufeng will relocate the existing production facilities to the Caijiapo Economic and Technological Development Zone of Shaanxi Province, PRC. As at 30 June 2014, the relocation of the Baoji Plant was still at the primary stage.

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2. BASIS OF PREPARATION

This condensed consolidated interim financial information for the six months ended 30 June 2014 has been prepared in accordance with HKAS 34, “Interim financial reporting”. The condensed consolidated interim financial statements shall be read in conjunction with the annual financial statements for the year ended 31 December 2013, which have been prepared in accordance with HKFRSs.

2.1 Going-concern basis

The Group meets its day-to-day working capital requirements through its bank facilities. The current economic conditions continue to create uncertainty particularly over (a) the level of demand for the Group’s products; and (b) the availability of bank finance for the foreseeable future. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its condensed consolidated interim financial information.

3. ACCOUNTING POLICIES

Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2013, as described in those annual financial statements.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

There are no amended standards or interpretations that are effective for the first time for this interim period that could be expected to have a material impact on the Group.

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The following new standards and amendments to standards have been issued but are not effective for the financial year beginning 1 January 2014 and have not been early adopted:

		Effective for
		annual periods
		beginning on
		or after
Annual improvements	HKFRS 2, ‘Share-based payment’	1 July 2014
2012	HKFRS 3, ‘Business combinations’
	HKFRS 9, ‘Financial instruments’
	HKAS 37, ‘Provisions, contingent
	liabilities and contingent assets’
	HKAS 39, ‘Financial instruments –
	Recognition and measurement’
	HKFRS 8, ‘Operating segments’
	HKAS 16, ‘Property,
	plant and equipment’
	HKAS 38, ‘Intangible assets’
	HKAS 24, ‘Related Party Disclosures’
Annual improvements	HKFRS 3, ‘Business combinations’	1 July 2014
2013	HKFRS 13, ‘Fair value measurement’
	HKAS 40, ‘Investment property’
HKFRS 15	Revenue from contracts	1 January 2017
	with customers
HKFRS 9	Financial instruments	Mandatory effective
		date not yet
		determined

There are no other HKFRSs or HK(IFRIC) interpretations that are not yet effective that would be expected to have a material impact on the Group.

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4. ESTIMATES

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

In preparing this condensed consolidated interim financial information, the significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2013.

5. FINANCIAL RISK MANAGEMENT

5.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow interest rate risk and fair value interest rate risk), credit risk and liquidity risk.

The interim condensed consolidated financial information does not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2013.

There have been no changes in the risk management department since year end or in any risk management policies.

5.2 Liquidity risk

Compared to year end, there were additional current borrowings of RMB367,677,000 in the contractual undiscounted cash out flows for financial liabilities.

5.3 Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

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• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

As at 30 June 2014 and 31 December 2013, the Group did not have any financial instruments carried at fair value.

The carrying value less impairment provision of trade and other receivables, cash and cash equivalents and short-term bank deposits are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

6. SEGMENT INFORMATION

The chief operating decision-maker has been identified as the executive directors. The executive directors review the Group’s internal reporting in order to assess performance and allocate resources. The executive directors have determined the operating segments based on these reports.

The executive directors consider the business from a product perspective and accordingly, the Group’s operations are mainly organised under the following business segments:

• manufacturing and sales of MSG, including MSG, glutamic acid, corn refined products, fertilisers, starch sweeteners, threonine, corn oil, compound seasoning, high-end amino acid products, pharmaceuticals and bricks; and

• manufacturing and sales of xanthan gum

Approximately 81% (30 June 2013: 82%) of the Group’s revenue are generated from the PRC.

The executive directors assess the performance of the business segments based on profit before income tax without allocation of finance costs, which is consistent with that in the financial statements.

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The revenue of the Group for the six months ended 30 June 2014 and 2013 are set out as follows:

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited
MSG Corn refined products Xanthan gum Starch sweeteners Fertilisers Threonine High-end amino acid products Glutamic acid Corn oil Others	3,086,665 861,177 677,241 333,334 256,393 236,303 146,159 26,909 8,206 75,249 5,707,636	3,151,313 873,148 743,032 193,452 468,869 131,598 94,007 29,830 20,081 36,223
		5,741,553

The segment results for the six months ended 30 June 2014 are as follows:

	MSG	Xanthan gum Unallocated	Xanthan gum Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Revenue Segment results Finance costs – net Profit before income tax Income tax expenses Profit for the period
	5,030,395	677,241	–	5,707,636
	196,112	340,964	(6,867)	530,209
				(189,871)
				340,338
				(65,609)
				274,729

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Other segment items included in the income statement are as follows:

	MSG	Xanthan gum Unallocated	Xanthan gum Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Depreciation of property, plant and equipment Amortisation of leasehold land payments and intangible assets
	345,240	30,650	799	376,689
	3,796	2,310	43	6,149

The segment assets and liabilities at 30 June 2014 are as follows:

	MSG	Xanthan gum Unallocated	Xanthan gum Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Total assets Total liabilities
	10,021,454	3,086,963	467,259	13,575,676
	4,860,729	713,289	2,972,676	8,546,694

The segment results for the six months ended 30 June 2013 are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited 5,741,553 383,348 (127,301) 256,047 (49,721) 206,326
Revenue Segment results Finance costs – net Profit before income tax Income tax expenses Profit for the period	4,998,521 2,108	743,032 392,227	– (10,987)

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Other segment items included in the income statement are as follows:

		Xanthan
	MSG	gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Depreciation of property,
plant and equipment	313,885	22,663	797	337,345
Amortisation of leasehold land
payments and intangible
assets	3,936	348	43	4,327

The segment assets and liabilities at 30 June 2013 are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Total assets Total liabilities	10,431,097 5,087,037	1,998,112 330,572	246,059 2,770,500	12,675,268
				8,188,109

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7. OTHER INCOME

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited
Sales of waste products Amortisation of deferred income Foreign exchange gains Government grants relating to expenses Others	27,645 27,308 6,892 3,100 11,707 76,652	24,336 25,024 – 3,896 11,375
		64,631

8. EXPENSES BY NATURE

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited
Amortisation of leasehold land payments and intangible assets Depreciation of property, plant and equipment Value on employee services for the share option schemes Foreign exchange losses Inventory write-down/(Reversal of inventory write-down)	6,149 376,689 1,393 – 37,142	4,327 337,345 771 15,255 (35)

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9. FINANCE COSTS – NET

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited 170,569 184,281 19,302 – 189,871 184,281 – (8,919) 189,871 175,362 – (48,061) – (48,061) 189,871 127,301
Interest expense: Net foreign exchange losses on financing activities Finance costs Less: amounts capitalised on qualifying assets Finance costs Finance income: Net foreign exchange gains on financing activities Finance income Net finance costs	170,569 19,302 189,871 – 189,871 – – 189,871

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10. INCOME TAX EXPENSE

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited
Current income tax – PRC enterprise income tax (“EIT”) Deferred income tax	82,431 (16,822) 65,609	59,775 (10,054)
		49,721

The Company was incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Law (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and is exempted from payment of the Cayman Islands income tax.

Hong Kong profits tax has not been provided for as the Group has no estimated assessable profit in Hong Kong for the six months ended 30 June 2014 and 2013.

PRC EIT is calculated based on the effective tax rate on assessable profit of subsidiaries established in the PRC in accordance with PRC tax laws and regulations.

11. EARNINGS PER SHARE

	Six months ended 30 June 2014 2013 Unaudited Unaudited	Six months ended 30 June 2014 2013 Unaudited Unaudited
Earnings per share for profit attributable to the Shareholders (RMB cents per share) – basic – diluted	13.16 12.74	11.12 11.08

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Basic earnings per share is calculated by dividing the profit attributable to the Shareholders of the Company by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by the Company and held as treasury shares. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding assuming the conversion of all dilutive potential ordinary shares.

Earnings per share – basic and diluted for the first half of 2014 was RMB13.16 cents and RMB12.74 cents respectively (equivalent to HK16.58 cents and HK16.05 cents) (1H 2013: RMB11.12 cents and RMB11.08 cents (equivalent to HK13.96 cents and HK13.91 cents)).

12. DIVIDENDS

On 18 March 2014, the Board proposed a final dividend in respect of the year ended 31 December 2013 of HKD83,502,000 (equivalent to RMB65,925,000), representing HK4 cents (equivalent to RMB3.16 cents) per share. The final dividend was paid in May 2014.

At a meeting held on 19 August 2014, the Board proposed an interim dividend of HKD62,627,000 (equivalent to RMB49,720,000) (2013: HKD41,751,000 (equivalent to RMB33,259,000)), representing HK3 cents (equivalent to RMB2.38 cents) (2013: HK2 cents (equivalent to RMB1.59 cents)) per share. This interim dividend has not been recognised as a dividend payable in this interim financial information, but will be recognised as an appropriation of share premium for the year ended 31 December 2014.

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13. LEASEHOLD LAND PAYMENTS, PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

	Leasehold land payments Property, plant and equipment RMB’000 RMB’000 Unaudited Unaudited	Leasehold land payments Property, plant and equipment RMB’000 RMB’000 Unaudited Unaudited	Intangible assets RMB’000 Unaudited	Total RMB’000 Unaudited 7,625,669 528,708 (6,564) (341,672) (805) 7,805,336
Six months ended 30 June 2013 Opening net book amount at 1 January 2013 Additions Disposals Depreciation and amortisation Impairment charge Closing net book amount at 30 June 2013 Six months ended 30 June 2014 Opening net book amount at 1 January 2014 Additions Disposals Depreciation and amortisation Closing net book amount at 30 June 2014	366,764 36,294 – (4,326) – 398,732	7,258,851 491,609 (6,564) (337,345) – 7,406,551	54 805 – (1) (805) 53
	506,289	7,575,975	51	8,082,315
	486,535	421,017	–	907,552
	(67,190)	(1,409)	–	(68,599)
	(6,148)	(376,689)	(1)	(382,838)
	919,486	7,618,894	50	8,538,430

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14. TRADE AND OTHER RECEIVABLES

	As at 30 June 2014 31 December 2013 RMB’000 RMB’000 Unaudited Audited 424,607 373,923 (4,510) (4,510) 420,097 369,413 1,584,456 1,444,119 55,739 58,190 81,835 126,134 2,142,127 1,997,856 393,138 71,483 2,535,265 2,069,339
Trade receivables (a) Less: provision for impairment of trade receivables Trade receivables, net Notes receivables (b) Deposits and others Value-added tax for future deduction Trade and other receivables excluding prepayments Prepayments for raw materials	424,607 (4,510) 420,097 1,584,456 55,739 81,835 2,142,127 393,138 2,535,265

a) The ageing analysis of the trade receivables was as follows:

	As at 30 June 2014 31 December 2013 RMB’000 RMB’000 Unaudited Audited 383,737 328,651 33,708 37,395 7,162 7,877 424,607 373,923
Within 3 months 3–12 months Over 12 months	383,737 33,708 7,162 424,607

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The Group sells its products to customers and received settlement either in cash or in form of bank acceptance notes upon delivery of goods. The bank acceptance notes are usually with maturity dates within six months. Major customers with good payment history are normally offered credit terms for no more than three months.

• b) As at 30 June 2014, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB1,025,872,000 (31 December 2013: RMB1,058,737,000) applied for settling the amounts payable to the Group’s suppliers.

15. SHARE CAPITAL AND PREMIUM

	Number of authorised shares ’000 Unaudited	Number of issued and fully paid shares ’000 Unaudited			Amount	Total RMB’000 Unaudited 416,439 493,182 909,621
				Ordinary shares RMB’000 Unaudited	Share premium RMB’000 Unaudited
Opening balance at 1 January 2013 Issue of ordinary shares At 30 June 2013 Opening balance at 1 January 2014 Dividends At 30 June 2014	10,000,000 – 10,000,000	1,741,048 348,210 2,089,258		175,921 27,858 203,779	240,518 465,324 705,842
	10,000,000	2,087,561		203,644	702,873	906,517
	–	–		–	(65,925)	(65,925)
	10,000,000	2,087,561		203,644	636,948	840,592

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16. BORROWINGS

	As at 30 June 2014 31 December 2013 RMB’000 RMB’000 Unaudited Audited 906,142 904,721 1,829,508 1,808,658 596,662 595,808 3,332,312 3,309,187 910,000 985,000 625,584 182,907 13,095 – 1,548,679 1,167,907 4,880,991 4,477,094
Non-current – Convertible bonds – Senior notes – Medium-term note Current – Bank borrowings, unsecured – Bank borrowings, secured – Convertible bonds	906,142 1,829,508 596,662 3,332,312 910,000 625,584 13,095 1,548,679 4,880,991

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Movements in borrowings were analysed as follows:

	RMB’000 Unaudited 4,452,640 2,137,037 (1,804,212) 4,008 467 11,328 335 (47,576) 4,754,027
Six months ended 30 June 2013 Opening amount as at 1 January 2013 New borrowings Repayments of borrowings Amortisation of transaction cost: – Senior notes – Convertible bonds – liability component – Syndicated bank loan – Medium-term note Exchange differences Closing amount as at 30 June 2013 Six months ended 30 June 2014 Opening amount as at 1 January 2014 New borrowings Repayments of borrowings Amortisation of transaction cost: – Senior notes – Convertible bonds – liability component – Medium-term note Exchange differences Closing amount as at 30 June 2014
	4 477,094
	1,401,000
	(1,035,000)
	4,253
	14,516
	854
	18,274
	4,880,991

Interest expenses on borrowings for the six months ended 30 June 2014 were RMB170,569,000 (30 June 2013: RMB175,362,000).

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17. TRADE, OTHER PAYABLES AND ACCRUALS

	As at 30 June 2014 31 December 2013 RMB’000 RMB’000 Unaudited Audited 1,568,345 1,208,736 381,250 370,121 625,228 825,851 256,943 46,870 220,562 200,478 45,519 58,192 407 407 – 47,920 156,374 132,422 3,254,628 2,890,997
Trade payables (a) Advances from customers Payables for property, plant and equipment Government grants received in advance Salaries, wages and staff welfares payables Interest payable Dividends payable Bank acceptance notes payable Other payables and accruals	1,568,345 381,250 625,228 256,943 220,562 45,519 407 – 156,374 3,254,628

a) The ageing analysis of the trade payables was as follows:

	As at 30 June 2014 31 December 2013 RMB’000 RMB’000 Unaudited Audited 962,018 853,823 486,134 243,161 83,779 88,416 20,651 16,959 15,763 6,377 1,568,345 1,208,736
Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	962,018 486,134 83,779 20,651 15,763 1,568,345

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18. CONTINGENT LIABILITIES – THE GROUP

As at 30 June 2014 and 2013, the Group had no material contingent liabilities.

19. RELATED PARTY TRANSACTIONS

Key management compensation is set out below:

	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2014 2013 RMB’000 RMB’000 Unaudited Unaudited
Salaries and allowances Pension costs-defined contribution plan Share options granted	10,837 333 1,392 12,562	8,040 281 1,262
		9,583

Key management are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and executive officers.

20. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Details of the interim dividend proposed are given in Note 12.

21. APPROVAL ON THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION

The condensed consolidated interim financial information was reviewed by the audit committee of the Company and approved by the Board on 14 August 2014 and 19 August 2014, respectively.

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BUSINESS AND FINANCIAL REVIEW

Overview

Despite ongoing challenges in the MSG market, the Group was able to register a moderate increase in its overall gross profit and net profit during the period ended 30 June 2014 compared to the same period last year. Even though overall revenue of the Group remained fairly stable during the period under comparison, the Group was able to rely on new products such as high-end amino acids and implement effective cost control to increase overall profitability. In terms of production capacity, except for the relocation of the Baoji Plant, the overall production capacity of the Group in the first half of 2014 remained almost fully operational.

For the period ended 30 June 2014, the Group recorded a slight decrease of approximately 0.6% in revenue to approximately RMB5,707.6 million from approximately RMB5,741.6 million for the six months ended 30 June 2013. Such a decrease was primarily caused by a decrease in the average selling price of MSG and xanthan gum products. However, the Group was able to increase the sales volume of xanthan gum due to an increase in production capacity, with the commencement of operations of xanthan gum at the Xinjiang Plant, in the second half of 2013.

In terms of MSG business, after continued market consolidation in 2013, the unbalanced demand and supply situation for MSG improved slightly in the first half of 2014. The market demand of MSG remained relatively stable during this period even though average selling price of MSG still remained at a relatively low level. The Group faced lackluster conditions in the domestic catering and consumer market as well as pricing pressure due to market competition. Despite the market conditions, the Group was able to maintain its leadership in terms of market share and sales volume by leveraging its cost advantages to adopt competitive pricing. Despite a slight decrease in revenue for its MSG, the Group registered an increase in gross profit and gross profit margin in MSG segment, mainly due to raw material cost tax relief increase, a new tax relief policy of agricultural products processing industries in Inner Mongolia was launched at the end of 2013, as well as the increasing contribution of the sales of high-end amino acid products and starch sweeteners. The high-end amino acid products, a relatively new product of the Group, continued to increase its revenue contribution to the Group especially after the commencement in operation of the new production facility in the Xinjiang Plant towards the end of 2013. The MSG market has witnessed a slight upward trend in the average selling price of MSG since June 2014.

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In terms of the Xanthan gum business, another key business segment of the Group, a new production facility of xanthan gum in Xinjiang commenced operation towards the end of 2013 which resulted in the Group being able to maintain an increase in the sales volume of xanthan gum during the period ended 30 June 2014. After a significant increase in recent years, the average selling price of xanthan gum retreated to a more reasonable level during the period ended 30 June 2014.

The table below illustrates the growth trend of the Group’s revenue:

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----- Start of picture text -----

RMB (Million)
12,000
11,111.9 [11,366.7]
11,000
10,000
9,000 8,399.2
8,000
7,000
6,416.4
6,000 5,741.6 5,707.6
5,000 4,632.9
4,000 3,585.3
3,000
2,445.7
2,000
1,000
0
2007 2008 2009 2010 2011 2012 2013 1H 2013 1H 2014
CAGR: 29.2%
----- End of picture text -----

The Group’s gross profit increased from approximately RMB926.2 million in the first half of 2013 to approximately RMB1,027.7 million in the first half of 2014. This represents an increase of 11.0% and is primarily due to raw material cost tax relief increase, the new tax relief policy of agricultural products processing industries in Inner Mongolia was launched at the end of 2013, and an increase in gross profit contribution of the sales of highend amino acid products, which have a higher profit margin than our traditional MSG products, as well as the revenue of starch sweeteners increase as our production capacity has increased since the end of 2013.

25

In the first half of 2014, the average selling price of the Group’s MSG decreased by 0.1% compared to the corresponding period of 2013. Moreover, the average selling price of the Group’s xanthan gum also decreased by 17.0% compared to the corresponding period of 2013 as the market demand gradually returned to a more stable situation after a significant increase which drove prices up substantially in the past. Production costs of the Group, including the prices of corn kernels and chemical products, generally increased in line with market rates, but the price of coal decreased as compared with the corresponding period in 2013 due to general weakness in commodity prices as market demand decreased. The Group’s overall gross profit margin increased from 16.1% in the first half of 2013 to 18.0% in the first half of 2014 primarily due to the new tax relief policy, the ability of the Group to implement effective cost controls and the growing sales of high-end amino acid products, which have higher profit margin than traditional MSG products.

In view of the challenging market conditions, the Group also has had to continue actively implement cost controls. The increase in gross profit margin of the Group in the first half of 2014 demonstrated the Group’s ability to leverage on its economy of scale and production capability to manage its costs effectively.

The production and sales volume of MSG decreased by 3.1% and 2.0% in the first half of 2014 as compared to the same period in 2013, respectively. The production volume of MSG decreased slightly primarily as the Group was in the process of relocating its Baoji Plant. The production and sales volume of xanthan gum, however, increased by 34.9% and 9.9% over the same period in 2013, respectively, in the first half of 2014. The production volume of xanthan gum increased mainly as the production capacity of xanthan gum in the Xinjiang Plant has increased to 30,000 tonnes per annum since the end of 2013. The diversity of the Group’s product portfolio has allowed the Group to maintain its overall revenue growth momentum in the first half of 2014.

High-end Amino Acid Business

The high-end amino acid business, as part of our MSG business segment, is the Group’s new growth driver. The Group’s high-end amino acid products are developed by using different types of corn-based biochemical products by leveraging on the Group’s fermentation technology. The high-end amino acid products include valine 纈氨酸, leucine 亮氨酸, isoleucine 異亮氨酸, glutamine 谷氨醯胺 and hyaluronic acid 透明質 酸, etc. During the period, the total sales volume and sales amount of high-end amino acid products reached 1,824 tonnes and RMB146.2 million, respectively. Our high-end amino acid products generally enjoy higher profitability and focus on healthcare and pharmaceutical materials industries.

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In addition, the sales revenue of high-end amino acid products increased by 55.5% as the new production line of high-end amino acid products in Xinjiang Plant commenced operation at the end of 2013. The short-term goal of the Group is to become one of the world’s top three producers and suppliers by market share for several of our key amino acid product types. The development and production of these products will increase and further diversify the Group’s product and revenue mix. The Group also plans to extend its business scope from the production and sales of typical amino acid products to bulk trade of those of high-end products.

Threonine and Lysine

In addition, we have also continued the development of our threonine and lysine products. Threonine and lysine are different types of amino acid which are used as animal feed additives. In the first half of 2014, the revenue of threonine amounted to RMB236.3 million as compared to that of RMB131.6 million in the same period of 2013, representing growth of 79.6%.

The group completed the new production capacity of xanthan gum and high-end amino acid with 30,000 tonnes and 4,000 tonnes respectively in our Xinjiang Plant at the end of 2013. The annual production capacity of high-end amino acid reached an annual production capacity of 5,000 tonnes in the first half of 2014.

Market Overview

The Group continued to face challenges in both production and the operating environment in the first half of 2014. The overall demand for MSG in the industry in the first half of 2014 remained relatively stable whilst market demand of xanthan gum began to stabilise in early 2014 with the ASP of xanthan gum returning to a more reasonable level. Costs of major raw materials including corn kernels and soybeans witnessed slight increases during the period as compared to the first half of 2013. On the other hand, the average price of coal decreased during the period as compared to the first half of 2013. The Group will continue to review and adjust its pricing strategy and production capacity planning in order to further its market share going forward.

MSG segment

MSG segment mainly includes the sales of MSG, fertilisers, threonine, high-end amino acid products, starch sweeteners and other related products.

The MSG market in the PRC has become increasingly concentrated recently after waves of consolidation and the Group has adopted competitive pricing strategy and utilised our production capacity scale to win market share in recent years and continue as the world’s leading producer in the MSG industry.

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Xanthan gum segment

The global market demand for xanthan gum has increased continuously in recent years. The Group has increased its production capacity and has continued to increase its market share since 2009. The total supply of the top three xanthan gum producers continues to dominate the global market.

Operational Review of the Group

The new Xinjiang Plant has been fully operational since the end of 2013, allowing the Group to increase its production capacity and keep level of sales in the first half of 2014. Certain indicative operational figures of the Group are set out below:

Turnover/Gross profit/Gross profit margin of the Group

	Six months ended 30 June	Six months ended 30 June	Change
	2014	2013	%
Turnover (RMB’000)	5,707,636	5,741,553	(0.6)
Gross profit (RMB’000)	1,027,685	926,237	11.0
Gross profit margin (%)	18.0	16.1	1.9 ppts.

The improvement in the performance of the Group in terms of gross profit and gross profit margin was mainly due to raw material costs of production decreased as the new tax relief policy was launched in Inner Mongolia and the increase in sales volume and selling prices of high-end amino acid products. On the other hand, the ASP of MSG continued to decrease as a result of competitive pricing amidst market consolidation. These are discussed in more details in the following sections.

Profit attributable to the Shareholders

	Six months ended 30 June	Six months ended 30 June
	2014	2013	Change
	RMB’000	RMB’000	%
As reported	274,729	206,326	33.2

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As a result of implementation of cost controls and the increase in gross profit margin as discussed above during the period, profit attributable to shareholders increased by about 33.2% in the first half of 2014 as compared to the same period in 2013.

Segment Highlights

The Group’s products are organised into two business segments, namely MSG segment and Xanthan gum segment. MSG segment includes MSG, glutamic acid, fertilisers, threonine, high-end amino acid products, starch sweeteners and other related products while Xanthan gum segment represents the production and sale of xanthan gum.

The table below highlights the operating results of the above segments:

	Six months ended 30	Six months ended 30	June 2014	Six months ended 30	Six months ended 30	June 2013		Increase/(Decrease)	Increase/(Decrease)
		Xanthan			Xanthan			Xanthan
	MSG	gum	Group	MSG	gum	Group	MSG	gum	Group
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	%	%	%
	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	5,030,395	677,241	5,707,636	4,998,521	743,032	5,741,553	0.6	(8.9)	(0.6)
Gross profit	650,891	376,794	1,027,685	490,317	435,920	926,237	32.7	(13.6)	11.0
Gross profit ratio	12.9%	55.6%	18.0%	9.8%	58.7%	16.1%	3.1 ppts.	(3.1) ppts.	1.9 ppts.
Segment results	196,112	340,964		2,108	392,227		9,203.2	(13.1)
Segment net assets
Assets	10,021,454	3,086,963		10,431,097	1,998,112		(3.9)	54.5
Liabilities	4,860,729	713,289		5,087,037	330,572		(4.4)	115.8
Net assets	5,160,725	2,373,674		5,344,060	1,667,540		(3.4)	42.3

The sections below describe the performance of each segment in more details.

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MSG Segment

Revenue and average selling price (“ASP”)

Revenue generated from the sale of the MSG segment products increased to RMB5,030.4 million in the first half of 2014, representing an increase of RMB31.9 million, or 0.6%, as compared with that in the corresponding period of 2013, which was mainly attributed to the increase in the revenue of high-end amino acid products and starch sweeteners. However, the revenue of MSG decreased which was primarily due to the decrease in the ASP and sales volume of MSG. The sales volume of MSG was 497,989 tonnes in the first half of 2014, representing a decrease of 2.0% as compared with that in the corresponding period of 2013, mainly attributed to the relocation of the Baoji Plant during the period and a strategic decision to maintain our competitive pricing policies in order to maintain market share.

The table below sets out the revenue of the products in this segment for the six months ended 30 June 2014 and 2013:

Product	Six months ended 30 June 2014 2013 Change RMB’000 RMB’000 % 3,086,665 3,151,313 (2.1) 26,909 29,830 (9.8) 256,393 468,869 (45.3) 861,177 873,148 (1.4) 333,334 193,452 72.3 247,272 131,598 87.9 146,159 94,007 55.5 8,206 20,081 (59.1) 5,241 3,002 74.6 59,039 33,221 77.7 5,030,395 4,998,521 0.6
MSG Glutamic acid Fertilisers Corn refined products Starch sweeteners Threonine and Lysine High-end amino acid products Corn oil Compound seasoning Others	3,086,665 26,909 256,393 861,177 333,334 247,272 146,159 8,206 5,241 59,039 5,030,395

30

Set out below is a chart showing the ASP of the Group’s major products of MSG for each quarter from the first quarter of 2012 to the second quarter of 2014:

RMB/Tonne

==> picture [383 x 206] intentionally omitted <==

----- Start of picture text -----

9,400
9,000
8,600
8,200
7,800 7,621 7,466
7,400
7,000
7,206
6,248 6,377 6,265
6,600
6,200 6,515
6,429
5,800 6,131 6,115
5,400
5,000
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
----- End of picture text -----

MSG

MSG

The Group maintained its market leadership in the MSG industry through increases in production capacity, increased marketing efforts, and competitive pricing. While the ASP decreased 0.1%, from RMB6,189 per tonne in the first half of 2013 to RMB6,181 per tonne in the first half of 2014, turnover of MSG in the first half of 2014 decreased by 2.1% and sales volume decreased by 2.0% compared to the first half of 2013, to 497,989 tonnes.

In the first half of 2014, the Group also strengthened exports of MSG products and sales and marketing efforts in the promotion of its U Fresh Series products to retail customers. The Group increased exports of MSG products from about RMB344.4 million in the first half of 2013 to about RMB403.7 million in the first half of 2014.

Fertilisers

The general market demand for fertilisers decreased significantly due to adverse market conditions. The sales volume decreased by 59.6% compared to the first six months of 2013. However, the ASP of fertilisers increased from approximately RMB709 per tonne in the first half of 2013 to approximately RMB794 per tonne in the first half of 2014, representing an increase of about 12.0%. The ASP increase resulted from the Group changing its business strategy to target the high-end market of chemical fertilisers.

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Corn refined products

In line with the cost of corn kernels, the ASP of corn refined products remained fairly stable during the period. The revenue of corn refined products decreased by about 1.4% for the six months ended 30 June 2014 when compared with that in 2013, as a result of decreased sales volume.

Starch sweeteners

Turnover of starch sweeteners increased by about 72.3% in the first half of 2014, primarily due to the production capacity of starch sweeteners increased to 240,000 tonnes per annum at the second half of 2013 as the new production line of starch sweeteners commenced operation in the Hulunbeir Plant. In addition, ASP decreased by about 5.5% to approximately RMB2,859 per tonne in the first half of 2014 from approximately RMB3,026 per tonne in the corresponding period of 2013.

Threonine

Threonine is a relatively new product of the Group. The annual threonine production capacity is approximately 40,000 tonnes. Threonine is an essential amino acid which maintains body protein balance and promotes the growth of living things. Our threonine product is mainly used as an animal feed additive. The revenue of threonine amounted to approximately RMB236.3 million in the first half of 2014.

High-end amino acid products

The new high-end amino acid products commenced production in the new Xinjiang Plant in 2013. The high-end amino acid annual production capacity reached 5,000 tonnes at the end of 2013.

The total sales volume of high-end amino acid products including valine, leucine, isoleucine, glutamine and hyaluronic acid increased to 1,824 tonnes in the first half of 2014. The Group is striving to continuously develop these new products. Our objective is to strengthen the brand name of the Group and also continue developing new products for the industrial and retail markets, with a view to enhance market recognition of the Group’s products and generate higher demand for such products.

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Gross profit and gross profit margin

The gross profit of this segment is set out below:

	Six months ended 30 June	Six months ended 30 June
	2014	2013	Change
Gross profit (RMB’000)	650,891	490,317	32.7%
Gross profit margin (%)	12.9	9.8	3.1 ppts.

Lower ASP of MSG resulted in lower revenue of MSG during the period. Such decrease was compensated by the increase in revenue contribution from high-end amino acid products which have higher gross margin. In addition, the new tax relief policy of agricultural products processing industries in Inner Mongolia was launched at the end of 2013, resulting in an increase in relevant tax relief. As a result, the overall gross profit and gross profit margin of the MSG segment increased. Gross profit increased to RMB650.9 million and gross profit margin increased by 3.1 percentage points to 12.9%.

Lower ASP of MSG was a key factor affecting gross profit margin, as the Group maintained its competitive pricing strategy in order to expand its market share. As the oversupply condition gradually returns to normal, we believe that ASP of MSG is stabilised due to a rebound of ASP noted in June 2014.

The Group expects that our pricing power and leading market position for MSG will be maintained or improved from the current levels in the second half of 2014.

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Production costs

Six months ended 30 June

	2014 RMB’000 %	2014 RMB’000 %	2013 Change RMB’000 % %	2013 Change RMB’000 % %
Major raw materials Corn kernels Liquid ammonia Sulphuric acid Energy Coal Depreciation Employee benefits Others Total cost of production	2,753,783 88,753 67,312 486,567 311,424 260,142 617,702 4,585,683	60.1 1.9 1.5 10.6 6.8 5.7 13.4 100.0	2,739,526 199,369 109,729 540,579 279,367 222,994 590,400 4,681,964	58.5 0.5 4.3 (55.5) 2.3 (38.7) 11.5 (10.0) 6.0 11.5 4.8 16.7 12.6 4.6 100.0 (2.1)

Corn kernels

During the first half of 2014, corn kernels accounted for approximately 60.1% (1H 2013: 58.5%) of the total production cost of this segment. Market demand remained stable whilst the price of corn kernels increased during the first six months of 2014. The average cost of corn kernels for the first half of 2014 was approximately RMB2,054 per tonne, which represents an increase of approximately RMB154 per tonne or 8.1% from that of the corresponding period in 2013. Part of the effect from the price increase of corn kernels were offset by the tax benefit from the new tax relief policy of the agricultural products processing industry in Inner Mongolia.

34

Although the average price of corn kernels increased during this period, such increase was mitigated by the tax relief in inner Mongolia. The cost of corn kernels as a percentage of total production costs increased by 1.6%.

Price Trend of Corn Kernel

==> picture [384 x 224] intentionally omitted <==

----- Start of picture text -----

RMB/Tonne
2,200
2,015
1,987
1,930
2,000
2,054
1,972
1,900
1,800
1,820
1,600
1,400
1,200
1,000
1H 11 2H 11 1H 12 2H 12 1H 13 2H 13 1H 14
----- End of picture text -----

Liquid ammonia

Liquid ammonia accounted for approximately 1.9% (1H 2013: 4.3%) of total production cost in this segment in the first half of 2014. The average unit cost of liquid ammonia for the first half of 2014 decreased to approximately RMB2,180 per tonne, which represents a decrease of approximately RMB315 per tonne or 12.6% from that of 2013. In addition, the Group had additional production capacity of composite ammonia that was able to counteract the higher price of liquid ammonia. Therefore, the cost of liquid ammonia as a percentage of total production costs decreased by 2.4%.

Sulphuric acid

Sulphuric acid accounted for approximately 1.5% (1H 2013 2.3%) of total production cost in this segment in the first half of 2014. The average unit cost of sulphuric acid decreased in the first half of 2014. The average unit cost of sulphuric acid decreased to approximately RMB247 per tonne as compared to that in the first half of 2013, which represents a decrease of approximately RMB115 per tonne or 31.8% from that of the first half of 2013.

35

Coal

Coal accounted for 10.6% of total production cost in this segment in the first half of 2014 (1H 2013: 11.5%). The average unit cost of coal for the first half of 2014 was RMB193 per tonne, a decrease of RMB27 per tonne or 12.3% from the first half of 2013. The decrease in coal prices reflects a general decrease in commodity prices.

The Group’s major production in Inner Mongolia, Hulunbeir, Shaanxi and Xinjiang, with access to lower-cost coal in the regions, is instrumental in strengthening the Group’s pricing power. The chart below shows coal costs at each of our plants in Shandong, Shaanxi, Inner Mongolia, Hulunbeir and Xinjiang:

==> picture [409 x 207] intentionally omitted <==

----- Start of picture text -----

RMB/Tonne
800
714
700
603
600 547
500 457
400 349
327
300 262
212 195 204 189
170
200
127 129
100
0
1H 2012 1H 2013 1H 2014
Shandong Shaanxi Inner Mongolia Hulunbeir Xinjiang
----- End of picture text -----

36

Production

The annual designed production capacity, the actual production output and the utilisation rate of each of the major products for this segment were as follows:

	Six months ended 30 June	Six months ended 30 June
Product	2014	2013	Change
	Tonnes	Tonnes	%
MSG
Annual designed production capacity (Note)	525,000	525,000	–
Actual production output	523,424	540,408	(3.1)
Utilisation rate	99.7%	102.9%
Glutamic acid
Annual designed production capacity (Note)	410,000	410,000	–
Actual production output	408,620	445,658	(8.3)
Utilisation rate	99.7%	108.7%
Fertilisers
Annual designed production capacity (Note)	550,000	550,000	–
Actual production output	500,625	555,601	(9.9)
Utilisation rate	91.0%	101.0%
Starch sweeteners
Annual designed production capacity (Note)	120,000	70,000	71.4
Actual production output	122,440	59,353	106.3
Utilisation rate	102.0%	84.8%

Note: The annual designed production capacity is expressed on pro-rata basis.

Utilisation rates decreased slightly in the first half of 2014, as the Group was in the process of relocating its Baoji Plant. Except for fertilisers, utilisation rates for the other products of the Group are close to 100%, reflecting the Group’s ability to fully utilises its new production capacity in the Hulunbeir Plant.

37

Xanthan Gum Segment

Operation results

The table below shows the sales amount, ASP, gross profit, gross profit margin and utilisation rate of xanthan gum for the six months ended 30 June 2014 and 2013:

Six months ended 30 June Change 2014 2013 % Sales amount (RMB’000) 677,241 743,032 (8.9) ASP (RMB/tonne) 21,677 26,120 (17.0) Gross profit (RMB’000) 376,794 435,920 (13.6) Gross profit margin (%) 55.6 58.7 (3.1) ppts. Annual designed production capacity (tonnes) (Note) 37,000 29,500 25.4 Actual production output (tonnes) 40,431 29,978 34.9 Utilisation rate 109.3% 101.6% 7.7 ppts.	Six months ended 30 June Change 2014 2013 % Sales amount (RMB’000) 677,241 743,032 (8.9) ASP (RMB/tonne) 21,677 26,120 (17.0) Gross profit (RMB’000) 376,794 435,920 (13.6) Gross profit margin (%) 55.6 58.7 (3.1) ppts. Annual designed production capacity (tonnes) (Note) 37,000 29,500 25.4 Actual production output (tonnes) 40,431 29,978 34.9 Utilisation rate 109.3% 101.6% 7.7 ppts.
Sales amount (RMB’000) ASP (RMB/tonne) Gross profit (RMB’000) Gross profit margin (%) Annual designed production capacity (tonnes) (Note) Actual production output (tonnes) Utilisation rate	677,241 21,677 376,794 55.6 37,000 40,431 109.3%

Note: The annual designed production capacity is expressed on pro-rata basis.

Revenue generated from xanthan gum decreased by 8.9% to RMB677.2 million in the first half of 2014, from RMB743.0 million in the first half of 2013. The decrease in revenue was due to the decrease in ASP, but the sales volume continued to increase during the period, representing the Group’s ability to increase production capacity to meet market demand.

The Group’s exports of xanthan gum increased slightly in terms of the percentage contribution to total sales. Export sales of xanthan gum contributed 90.5% and 90.7% of total sales of xanthan gum in the first half of 2013 and 2014, respectively.

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Sales volume and ASP

Sales Volume vs. ASP of Xanthan Gum

==> picture [442 x 245] intentionally omitted <==

----- Start of picture text -----

Tonnes RMB/Tonne
31,235
31,000 28,432 29,122 28,000
29,000 26,971
25,287
27,000
26,000
25,000
23,000 26,120
21,000 24,000
19,000 24,408
17,000
22,000
15,000
22,410
13,000 21,677
11,000 20,000
9,000
7,000
18,000
5,000
18,501
3,000
1,000 16,000
1H 2012 2H 2012 1H 2013 2H 2013 1H 2014
Sales volume (tonne) ASP (RMB/ tonne)
----- End of picture text -----

Sales volume increased by 9.9% in the first half of 2014, reflecting expanded production capacity, while sales amount decreased by 8.9% over the same period. Such decrease in the ASP of xanthan gum was due to the gradual return to a more reasonable market demand and supply situation after significant increase in recent years. The market demand of xanthan gum continued to increase nonetheless during the period.

Global industry-wide demand growth has been a strong driver in the higher sales volumes of xanthan gum in the first half of 2014, and we expect this to continue in the foreseeable future as demand continues to grow in the oils and gas industry as well as other sectors.

Gross profit and gross profit margin

Gross profit of the xanthan gum segment decreased by about 13.6% from approximately RMB435.9 million in the first half of 2013 to approximately RMB376.8 million in the first half of 2014. Gross margin decreased as well, by only 3.1 percentage points in the first half of 2014, reflecting our pricing strategy and our competitive costs advantage at the IM Plant and new Xinjiang Plant, and also benefit from the new tax relief policy of agricultural products processing industries in Inner Mongolia which was launched at the end of 2013.

39

Production costs

Six months ended 30 June

	2014 RMB’000 %	2014 RMB’000 %	2013 Change RMB’000 % %	2013 Change RMB’000 % %
Major raw materials Corn kernels Soybeans Energy Coal Depreciation Employee benefit Others Total cost of production	169,760 39,717 64,686 30,077 44,724 44,754 393,718	43.1 10.1 16.4 7.6 11.4 11.4 100.0	142,271 27,445 64,465 21,657 25,621 41,002 322,461	44.1 19.3 8.5 44.7 20.0 0.3 6.7 38.9 7.9 74.6 12.8 9.2 100.0 22.1

Corn kernels

During the first half of 2014, corn kernels represented approximately 43.1% (1H 2013: 44.1%) of the total production cost of this segment. The price of corn kernels increased during the first six months of 2014. The average price of corn kernels for the first half of 2014 was approximately RMB2,148 per tonne, which represents an increase of approximately RMB248 per tonne or 13.1% from that of the corresponding period in 2013. Part of the effect from the increasing price of corn kernels were offset by the tax benefit from the new tax relief policy of the agricultural products processing industry in Inner Mongolia. The cost of corn kernels as a percentage of total production costs decreased by 1.0%.

Soybeans

During the first half of 2014, soybeans accounted for approximately 10.1% (1H 2013: 8.5%) of the total production cost of this segment. The increase in proportion was mainly due to the increase in soybeans price from approximately RMB4,583 per tonne in the first half of 2013 to approximately RMB4,890 per tonne in the first half of 2014, representing an increase of 6.7%.

40

Coal

During the first half of 2014, coal accounted for approximately 16.4% (1H 2013: 20.0%) of the total production cost of this segment. The Group took full advantage of the relatively low coal costs in its IM Plant and Xinjiang Plant. The average unit cost of coal for the first half of 2014 was approximately RMB162 per tonne, which represents a decrease of approximately RMB29 per tonne or 15.2% from that of the first half of 2013.

Other production costs

The cost of depreciation in the first half of 2014 increased relative to the corresponding period of 2013 mainly due to the new Xinjiang Plant, which became fully operational at the end of 2013.

Other Financial Information

Selling and marketing expenses

Selling and marketing expenses were relatively stable and generally in line with the amount of sales revenue.

Administrative expenses

Administrative expenses decreased by approximately RMB18.5 million or 7.5% for the six months ended 30 June 2014. The decrease was mainly due to the reduction of expenses of research and development and relocation of the Baoji Plant.

Finance costs (net)

The Company successfully raised RMB975 million at the end of 2013 through a 3.0% convertible bonds due 2018, which was mainly used for repayment of the syndicated bank loan at the end of 2013.

The net finance costs of the Group for the six months ended 30 June 2014 increased by approximately RMB62.6 million, or about 49.2%, when compared with the first six months of 2013. The interest expenses of borrowings decreased by RMB13.7 million from RMB184.3 million for the six months ended of 2013 to RMB170.6 million for the six months ended of 2014. The net finance costs increased for the period was mainly due to the foreign exchange losses on the USD borrowings, such as senior notes, amounted to RMB19.3 million, while there were foreign exchange gains amount to RMB48.1 million for the six months ended of 2013. The Group expects that the level of capital expenditure for expansion of production facilities will decrease. The interest expenses are expected to be reduced as the expected borrowing level will be decreased in coming periods.

41

Income tax expense

The income tax expenses for the six months end of 2014 mainly represented the PRC Enterprise Income Tax (“EIT”).

According to the Caishui (2011) No. 58 “The notice on the tax policies of further implementation of the western region development strategy issued by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs” (財稅2011 58號“關於深入實施西部大開發戰略有關稅收政策問題的通知”), companies set up in the western region and falling into certain encouraged industry catalogue promulgated by the PRC government will be entitled to a preferential tax rate of 15%.

Some of the Group’s subsidiaries in the PRC, namely Baoji Fufeng, IM Fufeng, Hulunbeir Fufeng and Xinjiang Fufeng, were set up in the western development region and fall into the encouraged industry catalogue, and therefore they are entitled to the above said preferential tax rate in 2014.

Shandong Fufeng was approved to be a new and high-technology enterprise and entitled to a 15% tax rate from 2008 to 2010. In 2011, its new and high-technology enterprise qualification was further extended for another three years. Accordingly, the effective tax rate for Shandong Fufeng for 2014 is 15% (2013: 15%).

Shenhua Pharmaceutical was approved to be a new and high-technology enterprise and entitled to a 15% tax rate from 2012 to 2014.

Outlook for Second Half of 2014

Plant relocation

Relocation of Shandong Plant

The Group relocated its Shandong production of MSG to Inner Mongolia in May 2011 and the Group had ceased production activities on the Shandong Land and had since utilised that Land for office use, before being notified by the Land Bureau that, as a part of the overall town planning and development of Junan County, the Land would be returned to Junan County Government and be put up for auction. As a result, the Group will receive a total compensation of approximately RMB439.2 million (the “Compensation”). The book value of the Shandong Land (including land and building) was estimated to be approximately RMB126 million as at 31 December 2013, and depending on certain factors which can only be ascertained in the future, such as the timing and the cost of the relocation and demolition of the existing buildings and equipments on the Land (which will be borne by the Group), the Group may record a gain in the Group’s accounts as a result of the Compensation. The Company will inform the Shareholders and the investor public regarding such issue as and when necessary and in compliance with the Listing Rules.

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On 20 June 2014, Junan Company, a wholly-owned subsidiary of the Company, won a bid for the land use right in respect of the Land at the consideration of RMB286.04 million, representing an average selling price of approximately RMB1,126.5 per square meter in terms of total site area through an auction (listing-for-sale) organized by Junan County Public Resources Service Center (莒南縣公共資源交易服務中心). The Land has a total site area of 253,926.1 square metres and is located at Longshan Road (Northern section), Junan County, Shandong Province, the PRC (莒南縣隆山路北段).

The Directors believe that the Acquisition represents a good opportunity to repurchase an old property of the Company at a reasonable price. Upon completion of the auction and the Land Transfer Contracts, the usage of the Land will be changed from industrial to commercial, of which the Directors expect the value of the Land will increase.

The Group is also expecting that the remaining plots of the Shandong Land will be put up for auction (listing-for-sale) some time in the future, however the Group has not been informed by the Land Bureau or the Junan County Government regarding its concrete timetable or the exact size of land to be put up for sale. Nonetheless, subject to the assessment of the then market situation and the terms of such auction, the Group will consider entering such bidding for the remaining part of the Shandong Land should the opportunity arise.

Relocation of Baoji Plant

Pursuant to the Framework Investment Agreement, Baoji Fufeng and Caijiapo Committee will, subject to the entering of further definitive agreement(s), establish new production facilities in the Caijiapo Economic and Technological Development Zone of Shaanxi Province (陝西省蔡家坡經濟技術開發區) (the “Framework Cooperative Investment”). Such new production facilities are planned to replace the existing production facilities of the Baoji Plant.

According to the Framework Investment Agreement, Caijiapo Committee will provide land, for the relocation of Baoji Plant, to Baoji Fufeng with a total site area of 500 mu (equivalent to approximately 333,335 square metres), with a land use right of 50 years for a consideration of RMB30 million, subject to the entering into of the definitive agreement. In addition, Baoji Fufeng would also enjoy certain preferential tax treatment and refund in the coming years.

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The Directors expect that the entire construction and relocation of the Baoji Plant will be fully completed in 2016 and MSG production will be gradually rolled out at the new Baoji Plant. As a result, even though that it is expected that in 2014 and 2015, MSG production capacity at the Baoji Plant of the Group will be reduced by around 60,000 tonnes in each year, respectively, due to the relocation, the Group as a whole can still maintain an annual MSG production capacity of around 1,000,000 tonnes by utilising the existing facilities at the Baoji Plant (until full relocation) and other MSG plants of the Group.

It is currently expected that capital expenditure for the construction and relocation of the Baoji Plant will be approximately RMB300 million in 2014 and that such amount will be funded by the internal resources of the Group. Besides, the management of the Baoji Plant continue to negotiate the formal relocation agreement with the government. The Directors believe that the agreement will be reached shortly. The Directors consider that there will not be any material adverse effect on the operations and financials of the Group as a result of the relocation of the Baoji Plant.

Overseas market expansion

The Group has made vigorous efforts on market expansion by establishing sales branches and offices in overseas markets. In the first half of 2014, the Group continuously strengthened promotion activities in Middle East, Europe, Africa and South America, focusing on providing customers with better after-sales services, improving customer relationships, and enhancing our reputation.

Future Plan and Recent Development

Despite the challenging macro-economic environment and operating environment in the first half of the year, the Group was still able to record impressive profit growth whilst maintaining the overall revenue level. We expect the operating environment will continue to improve in the second half of the year.

MSG segment

MSG business

The MSG market in China is on a track of sustainable long term development after recent three years of industry consolidation and elimination of excess production capacities. This can be demonstrated by: 1) the majority of the market share being occupied by only several leading corporations in the industry, led by the Group; 2) the withdrawal of a number of weak corporations and inferior production capacities from the market; 3) gradual stabilisation of price as a result of a more balanced market demand and supply situation, reducing pricing pressure in the industry, and thereby increasing the prospects of profit margin returning gradually to normality going forward.

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The Group is in a good position to benefit from such potential upturn in market situation and will seize the opportunities and increase the MSG price in due course in order to enhance the efficiency of the MSG business as well as consolidate and expand the Group’s leading position and competitive strength in the industry. We expect the steady recovery trend of the MSG market will continue in the second half of the year. If the average selling price of the MSG products continue to stabilise or even increase in the second half of the year, it could mitigate the costs of production and the gross margin of the MSG business could improve as a result.

High-end amino acid business

The high-end amino acid business is the Group’s new growth driver. In the second half of the year, we will focus on strengthening the sales teams and enhancing the marketing and development efforts while optimising the product mix and increasing the type of products, including hyaluronic acid. We will also strive to more effectively leverage on our cooperation with Shenhua Pharmaceutical to further increase sales of such products.

Xanthan gum segment

Xanthan gum business

The price of xanthan gum slipped in the first half of the year due to market demand returning to a more stable level after significant increase in recent years. It is expected that the price of the xanthan gum will slightly decrease in the second half of the year compared with that of the first half. The competitive strength of the Group in the xanthan gum market is significant, as demonstrated by: 1) the lower production cost compared with our counterparts; 2) the significantly higher sales price in the North America market compared with that of our counterparts due to the favorable anti-dumping ruling in the U.S.. The Group will fully capitalise on its strength, increase its market share in North America, continue to develop new products such as gellan gum, and fully capitalise on the efficiency level of the xanthan gum business in order to support the profit growth of the Group.

Liquidity and Financial Resources

As at 30 June 2014, the Groups cash and cash equivalent and restricted bank deposits were RMB868.3 million (2013: RMB862.4 million), whereas current bank borrowings and other current borrowings were approximately RMB1,535.6 million and RMB13.1 million respectively (2013: RMB1,167.9 million and Nil) and non-current other borrowings (including the balances of senior notes, convertible bonds and medium-term notes) were approximately RMB3,332.3 million (2013: RMB3,309.2 million).

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Convertible Bonds

The Group issued RMB820.0 million in convertible bonds with a fixed rate of 4.5% per year on 1 April 2010, together with bond options of RMB205.0 million on 22 April 2010 (“2010 CB”). In November 2012, the Company repurchased a principal amount of RMB843.8 million of the 2010 CB resulting in an outstanding principal amount of 2010 CB of RMB182.2 million as at 31 December 2012. On 1 March 2013, certain holders of 2010 CB irrevocably exercised their right to request the Company to redeem RMB167 million principal amount of 2010 CB on 2 April 2013. The current outstanding principal amount of 2010 CB is RMB13.2 million.

The Group issued RMB975.0 million in new convertible bonds with a fixed coupon rate of 3.0% per year on 27 November 2013 with a 5-year term (“2013 CB”). The yield to maturity rate of 2013 CB is 4.5% per annum. The net proceeds in the amount of approximately USD155 million from the Issue of the 2013 CB was used to repay the syndicated bank loan at the end of 2013.

Senior Notes

The Company issued USD300.0 million senior notes for five years on 13 April 2011. The fixed interest rate is 7.625% p.a.. The funds raised from the senior notes were mainly used to finance the construction of new production facilities of Hulunbeir Plant Phase 1 and Phase 2 and for general working capital purposes.

Medium-Term Note

In April 2013, IM Fufeng issued a medium-term note at a par value of total amounted to RMB600 million, which was denominated in RMB with a fixed interest of 5.11% per annum. The note matures in three years from the issue date. The net proceeds were used to repay certain short term bank loans and for general working capital purposes.

The Directors believe that the Group’s liquidity position is relatively stable and that the Group has sufficient banking facilities to repay or renew existing short term bank loans.

Material Acquisition or Disposal of Subsidiary and Associated Company

During the period, the Group had no other material acquisition or disposal of subsidiaries or associated companies for the six months ended 30 June 2014.

Employees

As at 30 June 2014, the Group had approximately 5,500 employees. Employees’ remunerations are paid in accordance with relevant PRC policies. Appropriate salaries and bonuses are commensurate with the actual practices of the Group. Other corresponding benefits include pension, unemployment insurance, housing allowance, etc.

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Charges on Assets

As at 30 June 2014, certain leasehold land, property, plant and equipment and trade receivables of the Group with carrying value of approximately RMB163.6 million were pledged to certain banks to secure bank borrowings of RMB441 million of the Group.

The senior notes issued in April 2011 are secured by the pledge of the capital stock of certain subsidiaries of the Company, which are Acquest Honour Holdings Limited, Summit Challenge Limited, Absolute Divine Limited and Expand Base Limited. The guarantors are all holding companies that collectively control the operation and assets of its PRC subsidiaries of the Group.

Gearing Ratio

As at 30 June 2014, the total assets of the Group amounted to approximately RMB13,575.7 million (2013: RMB12,619.2 million) whereas the total borrowings amounted to RMB4,881.0 million (2013: RMB4,477.1million). The gearing ratio was approximately 36.0% (2013: 35.5%). The gearing ratio is calculated based on the Group’s total interest-bearing borrowings over total assets.

Foreign Exchange Exposure

The Directors do not consider that the exposure to foreign exchange risk is significant to the Group’s operation as the Group operated mainly in the PRC and most of the Group’s transactions, assets and liabilities were denominated in RMB. Foreign currencies were, however, received for the export sales of products and the issuance of convertible bonds and senior notes. Such proceeds were subject to foreign exchange risk before receiving and converting them into RMB. The foreign currencies received for export sales were converted into RMB upon receipt from the overseas customers. The Group manages foreign exchange risk arising from proceeds from issuance of convertible bonds and senior notes by remitting the necessary funds to the PRC and using the proceeds as soon as possible. The Group did not use any derivatives to hedge its exposure to foreign exchange risk for the period ended 30 June 2014.

American Depositary Receipt Facility

The Company has established a sponsored, unlisted American Depositary Receipt (“ADR”) facility, which has become effective on 19 June 2009. The Depositary is the Bank of New York Mellon. Each of the ADRs represents 20 ordinary shares of the Company. In the forming of the facility adopted by the Company, the ADRs will be issued against ordinary shares trading on the Main Board of the Stock Exchange of Hong Kong Limited that have been deposited with a custodian bank under the facility. The ADRs will be traded in the U.S. in an over-the-counter market.

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Dividend

The Board has resolved to pay an interim dividend of HK3 cents per share for the six months ended 30 June 2014, payable on or before Wednesday, 15 October 2014 to the shareholders whose names appear on the register of members of the Company on Friday, 19 September 2014.

Closure of Register of Members

The register of members of the Company will be closed from Tuesday, 16 September 2014 to Friday, 19 September 2014 (both dates inclusive), during which no transfer of shares will be registered. In order to qualify for the interim dividend, all transfer of shares accompanied by the relevant share certificates must be lodged with the Company’s branch registrar in Hong Kong. Tricor Investor Services Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Monday, 15 September 2014.

OTHER INFORMATION

Corporate Governance

The Company is committed to establishing and ensuring a high standard of corporate governance practices which place emphasis on quality of the board, sound and efficient internal control and accountability as well as transparency to equity holders. The Directors are in the opinion that the Company has complied with the code provisions as set out in the Code on Corporate Governance Practices in Appendix 14 to the Listing Rules since the Listing Date to 30 June 2014 except for the following:

Code provision A.6.7 of the Revised Code: The independent non-executive Directors and the non-executive Directors should attend the general meetings of the Company. However, due to other commitments, the independent non-executive Directors, Mr. Chen Ning and Mr. Liang Wenjun did not attend the annual general meeting of the Company held on 8 May 2014. All the Directors have given the Board and the committees of which they are members the benefit of their skills, expertise and varied backgrounds and qualifications through regular attendance and active participation. The Directors will also endeavor to attend future general meetings and develop a balanced understanding of the views of Shareholders.

The audit committee of the Company has reviewed the Group’s unaudited interim financial statements for the six months ended 30 June 2014.

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Model Code for Securities Transactions by Directors

The Company has adopted the Model Code as set out in Appendix 10 to the Listing Rules. Specific enquiries have been made with all Directors who have confirmed that they have complied with the required standard set out in the Model Code and the Company’s code of conduct regarding Directors’ securities transactions during the period under review.

Purchase, Redemption or Sale of Securities of the Company

Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the six months ended 30 June 2014.

By order of the board Fufeng Group Limited Li Xuechun Chairman

Hong Kong, 19 August 2014

As at the date of this announcement, the executive directors of the Company are Mr. Li Xuechun, Mr. Wang Longxiang, Mr. Feng Zhenquan, Mr. Xu Guohua, Mr. Li Deheng, Mr. Chen Yuan and Mr. Li Guangyu and the independent non-executive directors of the Company are Mr. Choi Tze Kit, Sammy, Mr. Chen Ning, Mr. Liang Wenjun and Ms. Zheng Yu.

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GLOSSARY

Acquisition the acquisition of the land use right in respect of the Land by Junan Company under the auction (listing-for-sale) process ASP average selling price(s) of the products of the Group Baoji Fufeng 寶雞阜豐生物科技有限公司 (Baoji Fufeng Biotechnologies Co., Ltd.), an indirect wholly-owned subsidiary of the Company Baoji Plant the production plant of the Group located in Baoji City in the Shaanxi Province, the PRC Board the board of Directors CAGR cumulative average growth rate Company Fufeng Group Limited Director(s) the director(s) of the Company Group the Company and its subsidiaries HKFRS Hong Kong Financial Reporting Standards Hong Kong Hong Kong Special Administrative Region of the PRC Hulunbeir Fufeng 呼倫貝爾東北阜豐生物科技有限公司 (Hulunbeir Northeast Fufeng Biotechnologies Co., Ltd.), an indirect wholly-owned subsidiary of the Company Hulunbeir Plant the production plant of the Group located at Hulunbeir, Inner Mongolia Autonomous Region, the PRC IM Fufeng 內蒙古阜豐生物科技有限公司 ( N e i m e n g g u F u f e n g Biotechnologies Co., Ltd.), an indirect wholly-owned subsidiary of the Company IM Plant the production plant of the Group located at Inner Mongolia Autonomous Region, the PRC

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IPO

Initial public offering of the Shares on 8 February 2007

Junan Company

Junan North City Property Company Limited* (莒南北城置業 有限公司), a PRC incorporated company and a wholly-owned subsidiary of the Company

• Land Seven plots of land located at Longshan Road (Northern section) Junan County, Shandong Province, PRC (land lot no.: Junan 2014-G05/06/07/08/09/10/14) (莒南縣縣城隆山路北 段), occupying a total site area of approximately 253,926.1 square metres

Land Bureau 莒南縣國土資源局 (Junan County Bureau of Land and Resources*)

• Land Transfer Contracts seven contracts for the transfer of land use right of seven plots of state-owned construction land (國有建設用地使 用權出讓合同) in respect of the land use right of the Land to be entered into between the Land Bureau as transferor and Junan Company as transferee for a consideration of RMB286.04 million (equivalent to approximately HKD354.69 million**)

• Listing Date 8 February 2007, the date on which the Company was listed on the Stock Exchange

• Listing Rules the Rules Governing the Listing of Securities on the Stock Exchange

• Model Code Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules

• MSG

• monosodium glutamate, a salt of glutamic acid which is commonly used as a flavour enhancer and additive in the food industry, restaurant and household application

PRC

the People’s Republic of China, which for the purpose of this report exclude Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

• For identification purpose only

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• 山東阜豐發酵有限公司 (Shandong Fufeng Fermentation Co., (Shandong Fufeng Fermentation Co., Ltd.), an indirect wholly-owned company of the Company

Shandong Fufeng 山東阜豐發酵有限公司 (Shandong Fufeng Fermentation Co., (Shandong Fufeng Fermentation Co., Ltd.), an indirect wholly-owned company of the Company Shandong Land a parcel of land located at Longshan Road (Northern section) Junan County, Shandong Province, PRC (莒南縣縣城隆山路 北段), occupying site area of approximately 509,857.4 square metres

Shandong Plant the production plant of the Group located at 莒南縣 (Junan County), Shandong Province, the PRC

Share(s) share(s) in the share capital of the Company Shareholder(s) holder(s) of the Share(s) Stock Exchange The Stock Exchange of Hong Kong Limited Xinjiang Fufeng 新疆阜豐生物科技有限公司 (Xinjiang Fufeng Biotechnologies Co., Ltd.), and indirect wholly-owned subsidiary of the Company)

Xinjiang Plant the production plant of the Group located in Urumqi, Xinjiang Uygur Autonomous Region

HKD Hong Kong dollars, the lawful currency of Hong Kong RMB Renminbi, the lawful currency of the PRC USD United States dollars, the lawful currency of the United States of America % per cent

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