Fufeng Group Limited - Interim / Quarterly Report 2016

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Interim Report 2016
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PROGRESSION THROUGH TECHNOLOGY

Corporate information	2
Management discussion and analysis	3
Interim condensed consolidated balance sheet	28
Interim condensed consolidated statement of	30
comprehensive income
Interim condensed consolidated statement of changes in equity	32
Interim condensed consolidated cash flow statement	33
Notes to the condensed financial statements	35
Other information	59
Glossary	64

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Fufeng Group Limited Interim Report 2016

CORPORATE INFORMATION

Executive Directors

Mr. Li Xuechun Mr. Wang Longxiang (resigned on 25 July 2016) Mr. Feng Zhenquan Mr. Xu Guohua Mr. Li Deheng Mr. Li Guangyu

Investor Relations Consultant

Vision Asia Consulting Group Ltd Room 1411, Austin Tower, 22-26 Austin Avenue, Tsim Sha Tsui Hong Kong

Independent Auditor

Independent Non-Executive Directors

Mr. Sun Yu Guo Mr. Qi Qing Zhong Ms. Zheng Yu

PricewaterhouseCoopers

Branch Share Registrar Tricor Investor Services Limited

Stock Code

Principal Place of Business in the PRC

Western section of Huahai Road Junan, Shandong 276600, PRC

Principal Place of Business in Hong Kong Suite 1102, 11th Floor Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong

546

ADRs Information

US Exchange: OTC CUSIP: 35953H105 ADR: Ordinary shares 1:20

Website

www.fufeng-group.com

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Business and Financial Review

Overview

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The PRC and global economies continued to face difficulties and challenges in the first half of 2016. As the leader in the industry, the Group achieved stable development for its core business and also further consolidated its leadership position in the market. In addition, the Group made considerable effort in developing high-value fermentation products in order to diversify its revenue stream, enhance profitability and provide impetus for the long-term sustainable growth of the Group.

The Group continued to strategically utilise the production facility and capacity of each plant in order to match ongoing market demand. The Group has also actively explored the development of new high-end polymer materials such as gellan gum, hyaluronic acid and amino acid products, in order to improve product diversity and increase sales and penetration in the health and wellness, pharmaceutical and skincare related industries. Only by continuously upgrading our product quality and expanding our product range can we transform gradually from the traditional, bulk-trade enterprise towards a modern, high-tech and high value-added supplier of biochemical products.

In addition, 2015 was a year for our production technology enhancement and product development. Our enhanced production technology of MSG further strengthened our competitive cost advantages which will reduce production costs and lead to an expected increase of production capacity. Implementation of production technology enhancement in Baoji Plant and Hulunbeir Plant was completed at the end of 2015 and at the beginning of 2016, respectively. The consumption of sugar and liquid ammonia required during the production of glutamic acid substantially decreased when adopting the production technology enhancement, which led to a noticeable decrease in the cost per tonne in the first half of 2016.

Despite ongoing challenges in the MSG market, the Group was able to record a moderate increase in its overall gross profit during the first half of 2016 compared to the corresponding period of 2015. Even though overall revenue of the Group remained fairly stable during the first half of 2016 compared to the corresponding period of 2015, the Group was able to rely on new products such as high-end amino acids and effective implementation of cost controls to increase overall profitability. The high-end amino acid products and threonine successfully expanded in terms of product development and market share, and we are more confident that we can become one of the world’s leading providers of threonine and high-end amino acid products.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

In terms of production capacity, the overall production capacity of the Group in the first half of 2016 remained almost fully operational.

Our Amino acid segment is primarily made up of our MSG and high-end amino acid products. In terms of MSG business, there was a decrease in the ASP of MSG in the first half of 2016 as costs of main raw materials significantly decreased during the period. The ASP of MSG remained at a relatively low level and the Group continued to face 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 and also increase gross profit margin by leveraging its cost advantages to adopt competitive pricing. The Group was able to record an increase in gross profit and gross profit margin in its Amino acid segment, mainly due to increasing contribution from the sales of MSG and higher margin products such as high-end amino acid product and threonine. 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 since 2014.

Our xanthan gum business, another key business segment of the Group, recorded a significant decrease in the ASP and gross profit margin, whilst the market demand of xanthan gum was generally weak. We have changed part of the production capacity in Xinjiang Plant to produce high-end amino acid products at the beginning of 2016 and have temporarily stopped part of the production capacity for maintenance in IM Plant since the second quarter of 2016. The production capacity will temporarily be reduced to 61,000 tonnes per annum. The Group, as the largest xanthan gum manufacturer in the world, continued to maintain the global market leading position in the first half of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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

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RMB (Million)
12,000 11,111.9 [11,366.7] [11,297.7] [11,225.7]
11,000
10,000
9,000 8,399.2
8,000
7,000 6,416.4
6,000 5,631.5 5,512.5
5,000 4,632.9
4,000
3,000
2,000
1,000
0
2009 2010 2011 2012 2013 2014 2015 1H 2015 1H 2016
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For the six months ended 30 June 2016, the Group’s revenue remained relatively stable at approximately RMB5,512.5 million as compared to approximately RMB5,631.5 million for the six months ended 30 June 2015. The slight decrease in revenue was primarily caused by the significant decrease in the ASP of xanthan gum, which was partially offset by the increase in the revenue contribution of MSG, high-end amino acid products and threonine. As the costs of major raw materials decreased in the first half of 2016, the ASP of MSG was adjusted accordingly. But, the performance represented by gross profit has improvement. Although the ASP of xanthan gum decreased significantly as the global oil industry market condition was weak, the Group was able to maintain the market leading position of xanthan gum during the six months ended 30 June 2016.

The Group’s overall gross profit slightly increased from approximately RMB1,036.8 million in the first half of 2015 to approximately RMB1,064.1 million in first half of 2016. This represents an increase of 2.6%, primarily due to the increase in gross profit contribution of the sales of MSG, high-end amino acids products and threonine, which were partially offset by the decrease in gross profit of sales of xanthan gum.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

In the first half of 2016, the ASP of the Group’s MSG decreased by 12.9% compared to the corresponding period of 2015, mainly because raw material costs decreased during the six months ended 30 June 2016. Moreover, the ASP of the Group’s xanthan gum decreased by 33.4% in the first half of 2016 compared to the corresponding period of 2015 due to intense competition and the weak market conditions in the global oil industry. Production costs of the Group, including the prices of corn kernel and coal, generally decreased in line with market conditions and overall weakness in global commodity prices. In addition, the production technology enhancement is being continuously implemented in our production plants, and as a result, the production cost of MSG noticebly decreased during the six months ended 30 June 2016. The Group’s overall gross profit margin increased to around 19.3% in the first half of 2016, primarily due to the effect from an increase in gross profit margin of MSG, and the higher gross profit margins enjoyed by our high-end amino acids products and threonine, which were partially offset by a decrease in gross profit margin of xanthan gum.

In view of the challenging market conditions, the Group also had to continue to actively implement cost control measures. The increasing trend of gross profit margin of the Group in the first half of 2016 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 increased by 18.8% and 15.5% in the first half of 2016 as compared to the same period in 2015, primarily as the implementation of production technology enhancement of MSG in Hulunbeir Plant was completed at the beginning of 2016, bringing the total production capacity of MSG of the Group to 1,130,000 tonnes per annum. The production and sales volume of xanthan gum in the first half of 2016 decreased by 16.2% and 20.5% over the same period in 2015. As xanthan gum market conditions were weak during the period, corresponding manipulate of production capacity of xanthan gum market implemented. A part of production capacity of xanthan gum about 12,000 tonnes in Xinjiang Plant has been adjusted to produce other new products such as high-end amino acid products. In addition, a production line of xanthan gum representing an annual production capacity of 12,000 tonnes in IM Plant has temporarily stopped operation for maintenance since the second quarter of 2016. The annual production capacity of xanthan gum has temporarily decreased to 61,000 tonnes per annum since the second quarter of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

The high-end amino acid business, as part of our Amino acid business segment, is the Group’s new growth driver. The Group’s high-end amino acid products were developed using different types of corn-based biochemical products by leveraging on the Group’s fermentation technology. The high-end amino acid products included 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 first half of 2016, the total sales amount of high-end amino acid products reached approximately RMB314.9 million, representing an increase of about 33.5% compared to the corresponding period in 2015. Our high-end amino acid products generally enjoy higher profitability and focus on health and wellness and pharmaceutical materials industries. 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 products type. The development and production of these products will add further diversity to 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 high-end products.

In addition, we have also continued with development of threonine. Threonine is a type of amino acid which is used as animal feed additives. The annual production capacity of threonine reached 136,000 tonnes at the end of 2015. In the first half of 2016, the Group sold about 47,021 tonnes of threonine as compared to about 27,955 tonnes in the same period of 2015.

Overall, the diversity of the Group’s product portfolio has allowed the Group to maintain its overall revenue growth momentum in the first half of 2016.

Operational review of the Group

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 Change 2016 2015 %	Six months ended 30 June Change 2016 2015 %

Turnover (RMB’000) Gross profit (RMB’000) Gross profit margin (%)	5,512,484 1,064,123 19.3	5,631,495 (2.1) 1,036,804 2.6 18.4 0.9 ppts.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

The performance of the Group in terms of gross profit and gross profit margin was stable mainly due to the effect from an increase in gross profit margin of our Amino acids segment, which was partially offset by a decrease in gross profit margin of xanthan gum. As weakness in China’s economy continued and main raw material costs decreased in the first half of 2016, the ASP of MSG trended downwards. As a result of our production technology enhancement being continuously implemented in our plants, gross profit margin of our MSG noticeably increased. Moreover, the increase in sales volume of our high-end amino acid products and threonine also brought additional growth momentum to our Amino acids segment. On the other hand, the market competition of xanthan gum intensified, resulting in the ASP of xanthan gum decreasing significantly in the first half of 2016. These are discussed in more details in the following sections.

Profit attributable to the Shareholders

		Six months ended 30 June 2016 2015 Change RMB’000 RMB’000 % 350,449 413,500 (15.2)


As reported		350,449

Our profit attributable to the Shareholders decreased by 15.2% in the six months ended 30 June 2016 as compared to the same period in 2015. If you ignore the effect of one-off compensation income after taxation from sales of a subsidiary amounting to RMB136.6 million in the past corresponding six months ended 30 June 2015, profit attributable to the Shareholders increased by 26.5% from RMB276.9 million in the six months ended 30 June 2015 to RMB350.4 million in the six months ended 30 June 2016.

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Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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Segment Highlights

The Group’s products are organised into two business segments, namely Amino acid segment and Xanthan gum segment. Amino acid segment includes MSG, glutamic acid, fertilisers, threonine, high-end amino acid products 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 June 2016 Six months ended 30 June 2015 Increase/(Decrease) Amino acid Xanthan gum Group Amino acid Xanthan gum Group Amino acid Xanthan gum Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 % % % Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited	Six months ended 30 June 2016 Six months ended 30 June 2015 Increase/(Decrease) Amino acid Xanthan gum Group Amino acid Xanthan gum Group Amino acid Xanthan gum Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 % % % Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited	Six months ended 30 June 2016 Six months ended 30 June 2015 Increase/(Decrease) Amino acid Xanthan gum Group Amino acid Xanthan gum Group Amino acid Xanthan gum Group RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 % % % Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
	Amino acid	Xanthan gum
	RMB’000	RMB’000
	Unaudited	Unaudited
Revenue Gross profit Gross profit margin Segment results Segment net assets Assets Liabilities			5,512,484 5,072,512 558,983 5,631,495 2.8 (46.5) (2.1) 1,064,123 796,534 240,270 1,036,804 27.7 (80.6) 2.6 19.3% 15.7% 43.0% 18.4% 3.8 ppts. (27.4) ppts. 0.9 ppts. 506,987 211,277 9.2 (98.4) 8,802,501 3,791,798 4.3 4.4 4,646,405 1,019,601 6.1 10.8
	5,213,176	299,308
	1,017,485	46,638
	19.5%	15.6%

	553,724	3,461


	9,182,392	3,960,516
	4,930,821	1,130,081

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

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Amino acid segment

Amino acid segment mainly includes the sales of MSG, fertiliser, threonine, high-end amino acid products and other related products.

Revenue and average selling price (“ASP”)

Revenue generated from the sale of the Amino acid segment products increased to RMB5,213.2 million in the first half of 2016, representing an increase of RMB140.7 million, or 2.8%, as compared with the corresponding period of 2015, mainly attributed to the increase in the revenue of high-end amino acid products and threonine. The revenue of MSG was stable primarily due to the effect of an increase in the sales volume of MSG offset by the effect from a decrease in ASP during the period. The sales volume of MSG was 508,477 tonnes in the first half of 2016, representing an increase of 15.5% as compared with the corresponding period of 2015, mainly due to the production technology enhancement which strengthened our competitive advantage.

The table below sets out the revenue of the products in this segment for the six months ended 30 June 2016 and 2015:

Product		Six months ended 30 June 2016 2015 Change RMB’000 RMB’000 % 3,066,942 3,057,420 0.3 70,564 23,879 195.5 277,972 236,218 17.7 668,460 715,845 (6.6) 300,445 397,081 (24.3) 416,351 326,104 27.7 314,943 235,898 33.5 15,391 11,815 30.3 6,391 7,663 (16.6) 75,717 60,589 25.0 5,213,176 5,072,512 2.8


MSG Glutamic acid Fertilisers Corn refined products Starch sweeteners Threonine High-end amino acid products Corn oil Compound seasoning Others		3,066,942 70,564 277,972 668,460 300,445 416,351 314,943 15,391 6,391 75,717 5,213,176

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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 2014 to the first quarter of 2016:

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RMB/Tonne
7,400
7,209
7,000 6,798
6,748 7,047
6,907
6,600
6,265
6,200
6,187
6,115 6,091
5,800 5,969
5,400
5,000
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
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MSG
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MSG

The Group maintained its market leadership in the MSG business through increased marketing efforts and competitive pricing. While the ASP decreased about 12.9%, from approximately RMB6,919 per tonne in the first half of 2015 to approximately RMB6,025 per tonne in the first half of 2016, turnover of MSG in the first half of 2016 increased by 0.3%, mainly due to sales volume increasing by 15.5% to approximately 508,477 tonnes compared to the first half of 2015.

In the first half of 2016, the Group continuously 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 RMB492.9 million in the first half of 2015 to about RMB506.4 million in the first half of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Fertilisers

During the period, the Group continuously developed high value-added fertiliser products, the ASP of fertilisers increased from approximately RMB419 per tonne in the first half of 2015 to approximately RMB450 per tonne in first half of 2016, representing an increase of about 7.4%, which was in line with prevailing market conditions. The sales volume also recovered in the first half of 2016. As a result, the revenue of fertilisers amounted to RMB278.0 million for the six months ended 30 June 2016 as compared to RMB236.2 million for the same period in 2015.

Corn refined products

In line with the cost of corn kernels, the ASP of corn refined products decreased in the first half of 2016. The revenue of corn refined products decreased by about 6.6% for the six months ended 30 June 2016 as compared with the corresponding period of 2015, which was due to a decrease in ASP of corn kernels in the first half of 2016.

Starch sweeteners

Turnover of starch sweeteners decreased by about 24.3% in the first half of 2016, primarily due to a fall in the ASP of starch sweeteners by about 23.8% from approximately RMB3,268 per tonne in the first half of 2015 to approximately RMB2,490 per tonne in the first half of 2016, whilst demand for our starch sweetener products was stable during this period.

Threonine

Threonine is a relatively new product of the Group, with annual production capacity of approximately 136,000 tonnes since the end of 2015. Threonine is an essential amino acid which maintains body protein balance and promotes the growth of living things. Our threonine is mainly used as animal feed additives.

The total revenue of threonine increased by about 27.7% in the first half of 2016 as compared to the same period in 2015, primarily as a result of increased sales volume of threonine from approximately 27,955 tonnes in the first half of 2015 to approximately 47,021 tonnes in first half of 2016, which was offset by the decrease in ASP of threonine by 23.8% from approximately RMB11,665 per tonne in the first half of 2015 to approximately RMB8,885 per tonne in the first half of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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High-end amino acid products

The high-end amino acid products business is the new growth driver of the Group. The total sales amount of high-end amino acid products including valine, leucine, isoleucine glutamine and hyaluronic acid, increased to approximately RMB314.9 million in the first half of 2016 as compared to approximately RMB235.9 million in the first half of 2015. The high-end amino acid market is one of the key markets that the Group remains focused on developing and strengthening. The Group aims to create a series of high-end amino acid products by capitalising on our research and development capabilities and resources advantage to realise the Group’s development strategy of “Low Investment – High Return”.

In the first half of 2016, the Group, through our wholly-owned subsidiary Shenhua Pharmaceutical, has actively developed and promoted new health and wellness products which use our new specialty ingredients such as hyaluronic acid and high-end amino acid products, with the aim of improving product diversity and increasing sales and penetration in health and wellness, pharmaceutical and skin care related industries.

Gross profit and gross profit margin

The gross profit of this segment is set out below:

	Six months ended 30 June 2016 2015	Six months ended 30 June 2016 2015	Change

Gross profit (RMB’000) Gross profit margin (%)	1,017,485 19.5	796,534 15.7	27.7% 3.8 ppts.

During the six months ended 30 June 2016, gross profit and gross profit margin of MSG increased with the implementation of production technology enhancement. In addition, increasing gross profit contribution from high-end amino acids products and threonine, which have higher gross margins, resulted in an increase in the overall gross profit margin of the Amino acids segment. Gross profit increased to RMB1,017.5 million and gross profit margin increased by 3.8 percentage points to 19.5%.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

The Group has maintained its competitive pricing strategy in order to expand market share after industry consolidation in recent years. As market conditions gradually return to normality and with the gradual resumption of growth in the future, we believe that ASP for MSG could witness a return to stability going forward.

The Group expects that our pricing power and leading market position for MSG can be maintained or improved from current levels in the second half of 2016.

Production costs

		Six months ended 30 June 2015 % RMB’000	Six months ended 30 June 2015 % RMB’000	Change 2015 % %
	2016
	RMB’000
Major raw materials • Corn kernels • Liquid ammonia • Sulphuric acid Energy • Coal Depreciation Employee benefits Others Total cost of production		55.7 1.4 1.2 10.0 8.0 7.1 16.6 100.0	2,801,565 40,064 42,800 407,140 305,441 286,413 572,954 4,456,377	62.9 (14.4) 0.9 55.2 1.0 21.7 9.1 5.5 6.9 12.4 6.4 6.9 12.8 24.1 100.0 (3.5)

	2,397,326
	62,178
	52,093


	429,377

	343,447
	306,255
	710,761

	4,301,437

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Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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Corn kernels

During the first half of 2016, corn kernels accounted for approximately 55.7% (1H 2015: 62.9%) of the total production cost of this segment. The average price of corn kernels for six months ended 30 June 2016 was approximately RMB1,469 per tonne, representing a significant decrease of 23.8% compared to corresponding period of 2015. The decrease in average unit cost of corn kernels for the six months ended 30 June 2016 was due to weak demand and weakness in the overall economy.

The cost of corn kernels as a percentage of total production costs decreased by 7.2 percentage points. The total cost of corn kernels incurred decreased by 14.4% in the first half of 2016, which was mainly due to the decrease in ASP of corn kernels.

Price Trend of Corn Kernels

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RMB/Tonne
2,015
2,000
1,930
1,919
1,900
1,972
1,837
1,928
1,800
1,693
1,600
1,469
1,400
1H 12 2H 12 1H 13 2H 13 1H 14 2H 14 1H 15 2H 15 1H 16
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Liquid ammonia

Liquid ammonia accounted for approximately 1.4% (1H 2015: 0.9%) of total production cost in this segment in the first half of 2016. The average unit cost of liquid ammonia for the first half of 2016 increased to approximately RMB2,358 per tonne, which represents an increase of approximately RMB352 per tonne, or 17.5%, from the first half of 2015.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Sulphuric acid

Sulphuric acid accounted for approximately 1.2% (1H 2015: 1.0%) of total production cost in this segment in the first half of 2016. The average unit cost of sulphuric acid increased to approximately RMB231 per tonne, which represents an increase of approximately RMB20 per tonne, or 9.5%, from the first half of 2015.

Coal

Coal accounted for 10.0% (1H 2015: 9.1%) of total production cost in this segment in the first half of 2016. The average unit cost of coal for the first half of 2016 was RMB148 per tonne, which represents a decrease of RMB22 per tonne, or 12.9%, from the first half of 2015. The decrease in coal prices reflects a general decrease in commodity prices.

The Group’s major production bases in Inner Mongolia, Hulunbeir and Shaanxi, 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:

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RMB/Tonne
400
300
240
200 186 194 166 183 171
154
120 128 112 118 107
100
0
1H 2015 2H 2015 1H 2016
Shaanxi Inner Mongolia Hulunbeir Xinjiang
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Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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:

Product	Six months ended 30 June 2016 2015 Change Tonnes Tonnes %
MSG Annual designed production capacity (Note) Actual production output Utilisation rate Glutamic acid Annual designed production capacity (Note) Actual production output Utilisation rate Fertilisers Annual designed production capacity (Note) Actual production output Utilisation rate Starch sweeteners Annual designed production capacity (Note) Actual production output Utilisation rate	565,000 470,000 20.2 551,186 463,829 18.8 97.6% 98.7% 455,000 380,000 19.7 446,501 378,618 17.9 98.1% 99.6% 475,000 475,000 – 457,610 436,255 4.9 96.3% 91.8% 130,000 130,000 – 129,299 136,827 (5.5) 99.5% 105.3%

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

Utilisation rates kept stable and were close to 100% in the first half of 2016, except fertilisers. The increase in annual production capacity of glutamic acid and MSG was due to the implementation of production technology enhancement in Hulunbeir Plant being completed at the beginning of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Xanthan gum segment

The global market demand for xanthan gum has been weak in recent years with weakness in the global economy and oil industry in particular, which has significantly impacted the contribution of xanthan gum business in the Group. The Group has continued to maintain its market leading position since 2009 and the total supply of the top three xanthan gum manufacturers continue to dominate the global market.

Operation results

The table below sets out the sales amount, ASP, gross profit, gross profit margin and utilisation rate of xanthan gum for the six months ended 30 June 2016 and 2015:

		Six months ended 30 June Change 2016 2015 % 299,308 558,983 (46.5) 11,522 17,301 (33.4) 46,638 240,270 (80.6) 15.6 43.0 (27.4) ppts. 36,500 45,000 (18.9) 37,760 45,063 (16.2) 103.5% 100.1%

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		299,308 11,522 46,638 15.6 36,500 37,760 103.5%

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

Revenue generated from xanthan gum decreased by 46.5% from RMB558,983 million in the first half of 2015 to RMB299,308 million in the first half of 2016. The decrease in revenue was due to the decrease in ASP and sales volume during the period.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

The Group’s exports of xanthan gum decreased in terms of the percentage contribution to total sales. Export sales of xanthan gum contributed 89.9% and 83.7% of total sales of xanthan gum in the first half of 2015 and 2016, respectively, reflecting weak demand in the global oil industry.

Sales volume and ASP

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Sales Volume vs. ASP of Xanthan Gum
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Tonnes RMB/Tonne
21,677
36,000
33,629 22,000
32,063 31,454
29,000 31,235
19,624 25,485 19,000
17,301
22,000
16,000
15,000
13,000
8,000 11,552
12,932
1,000 10,000
1H 2014 2H 2014 1H 2015 2H 2015 1H 2016
----- End of picture text -----

Sales volume (tonne) ASP (RMB/tonne)

Sales in terms of volume decreased by 20.5% in the first half of 2016, since part of our production capacity temporarily stopped operation for maintenance in IM Plant while around 12,000 tonnes production capacity in Xinjiang Plant were changed to produce other high-end amino acid products. Sales amounts decreased by 46.5% over the same period. A decrease in the ASP of xanthan gum, due to overall weakness in the oil industry, was the main driver for the decrease in revenue of xanthan gum during the period. However, we were able to continue generating demand for our xanthan gum products due to our competitive pricing strategy. Global industry-wide demand for xanthan gum remained weak in the first half of 2016, and the Group expects this to continue in the foreseeable future as demand is still weak in the oil industry as well as other sectors.

The ASP of xanthan gum is expected to maintain at a relatively low level during the second half of 2016.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Gross profit and gross profit margin

Gross profit of the Xanthan gum segment decreased by about 80.6% from approximately RMB240.3 million in the first half of 2015 to approximately RMB46.6 million in the first half of 2016. Gross margin decreased as well, by 27.4 percentage points in the first half of 2016, reflecting the general pricing weakness of xanthan gum in the oil industry.

Production costs

	Six months ended 30 June 2016 2015 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2016 2015 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2016 2015 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2016 2015 Change RMB’000 % RMB’000 % %

	RMB’000
Major raw materials • Corn kernels • Soybeans Energy • Coal Depreciation Employee benefit Others Total cost of production		40.2 8.0 14.9 9.2 12.8 14.9 100.0	173,791 38,655 70,261 31,224 45,210 57,740 416,881	41.7 (28.6) 9.3 (35.9) 16.9 (34.7) 7.5 (9.4) 10.8 (12.7) 13.8 (20.2) 100.0 (26.0)

	124,077
	24,784


	45,851

	28,284
	39,447
	46,063

	308,506

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

20
----- End of picture text -----

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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Corn kernels

During the first half of 2016, corn kernels represented approximately 40.2% (1H 2015: 41.7%) of the total production cost of this segment. The price of corn kernels decreased during the first six months of 2016. The average cost of corn kernels for the first half of 2016 was approximately RMB1,642 per tonne, which represents a decrease of approximately RMB275 per tonne, or 14.3%, from that of the corresponding period in 2015.

The cost of corn kernels as a percentage of total production costs decreased by 1.5 percentage points. The cost of corn kernels decreased about 28.6%, from approximately RMB173.8 million in the first half of 2015 to approximately RMB124.1 million in the first half of 2016, mainly due to the reduction in production volume as the Group changed part of its production facility to other new products and a production line in IM Plant temporarily stopped operation for maintenance.

Soybeans

During the first half of 2016, soybeans accounted for approximately 8.0% (1H 2015: 9.3%) of the total production cost of this segment. The decrease in proportion was mainly due to the decrease in soybeans prices from approximately RMB4,416 per tonne in the first half of 2015 to approximately RMB3,733 per tonne in the first half of 2016, representing a decrease of 15.5%.

Coal

During the first half of 2016, coal accounted for approximately 14.9% (1H 2015: 16.9%) of the total production cost of this segment. The Group was able to utilise the advantage of the relatively low coal cost in its IM Plant and Xinjiang Plant. The average unit cost of coal for the first half of 2016 was approximately RMB115 per tonne, which represents a decrease of approximately RMB31 per tonne, or 21.2%, from that of the first half of 2015.

Other production costs

The cost of employee benefit and other production costs in the first half of 2016 decreased slightly as compared to the corresponding period of 2015, mainly due to reduction in production volume as the Group changed part of its production facility to produce other new products and a production line in IM Plant temporarily stopped operation for maintenance.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Other financial information

Selling and marketing expenses

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

Administrative expenses

Administrative expenses increased by approximately RMB36.4 million, or 15.0%, for the six months ended 30 June 2016. The increase was mainly due to increase in depreciation of property, plant and equipment and amortisation of leasehold land payment. In addition, the research and development costs of high-end amino acid products and relevant products increased during the period.

Finance costs

The net finance costs of the Group for the six months ended 30 June 2016 decreased by approximately RMB56.4 million, or about 33.0%, when compared with the first six months of 2015 due to full repayment of senior note with coupon rate of 7.625% in the second quarter of 2015 and a decrease in bank borrowings incurred for the capital expenditure since 2015. The interest expenses of borrowings decreased by RMB71.5 million from RMB176.2 million for the six months ended 30 June 2015 to RMB104.7 million for the six months ended 30 June 2016.

Other income

In the first half of 2016, other income amounted to RMB123.3 million, which mainly comprised the income from the sales of waste products, amortisation of deferred income and government grants. There was no one-off income earned during the first half of 2016.

Income tax expense

The income tax expenses for the six months ended 30 June 2016 mainly comprised 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%.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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 2016.

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 and 2014, its new and high-technology enterprise qualification was further extended for another three years. Accordingly, the effective tax rate for Shandong Fufeng in the first half of 2016 was 15% (1H 2015: 15%).

Shenhua Pharmaceutical was approved to be a new and high-technology enterprise and entitled to a 15% tax rate from 2012 to 2016.

Outlook for second half of 2016

The Group will continuously explore the development of high-end amino acid products and specialty ingredients, including specialty gum products, in order to improve our product portfolio and to increase sales and penetration in health and wellness products, pharmaceutical entities and the skin care segments, becoming a critical player in such value chains.

Amino acid segment

The market demand for threonine continues to grow. The construction of our new 85,000 tonnes production capacity of threonine in Hulunbeir Plant was completed at the end of 2015, making us one of the top global players in this market. The Group is exploring a deepened cooperation with our strategic partner in threonine to further our global market penetration, particularly in Europe, and further enhance the threonine product quality and value. The Group will strengthen research and development efforts to develop and commercialise more new high-end amino acid products, and to look for further opportunities to improve productivity and production efficiency in our fermentation manufacturing, with an aim to further enhance our competitiveness in the MSG market. The Group will continuously launch new products and strengthen existing compound seasoning products to enhance our product portfolio.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Xanthan gum segment

The market condition of xanthan gum was very weak in the first half of 2016 as a result of weakness in the global oil industry. The Group has put in considerable effort during the period to optimise our customer mix and we believe that we are very well positioned to benefit from the future recovery of the xanthan gum market.

Future plan and recent development

For our Amino acid segment, we have completed the implementation of production technology enhancement in Hulunbeir Plant, which was adopted at the beginning of 2016. In the first half of 2016, we proceeded with the production technology enhancement of MSG in the IM Plant. It is anticipated that the positive result in this regard will occur in the second half of 2016 and we are excited about the prospects of the MSG sector. With benefits from the production technology enhancement, namely significant improvement in unit cost and yield, our advantage over our competitors will be further enhanced. We will further strengthen our market leadership due to such advantage and we believe that our emphasis on profit improvement of the MSG business will be realised in near future.

The Group has increased its efforts to develop the overseas MSG and xanthan gum markets by taking advantage of the establishment of the sales branches and offices. In the first half of 2016, the Group increased promotional activities in Middle East, Europe, Africa and South America, focusing on providing customers with better after-sale services, improving customer relationships, and further strengthening the Group’s reputation.

The Group is also actively monitoring the upcoming implementation of China corn price liberalization, and we believe in the medium to long run our Group will enjoy a substantial uplift in competitive advantages from this policy.

Proposed Spin-off

As set out in the voluntary announcement of the Company dated 11 May 2016, the Company has informed the Shareholders that the Stock Exchange of Hong Kong Limited returned the Listing Application on 29 March 2016. Although it is still the intention of the Company to continue proceeding with the Proposed Spin-off, the Company is at the moment still evaluating a number of strategic options with regards to related businesses. As at the date of this announcement, the Company has no finalised plan or timetable to resubmit a new application in the near future and if there is any material development relating to the Proposed Spin-off, the Company will issue further announcement(s) on the details of the Proposed Spinoff in accordance with the requirements of the Listing Rules.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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Liquidity and financial resources

As at 30 June 2016, the Group’s cash and cash equivalent and restricted bank deposits were RMB1,489.8 million (2015: RMB1,019.1 million) whereas current bank borrowings and current other borrowings (including the balances of convertible bonds) were approximately RMB844.6 million and RMB916.6 million (2015: RMB344.8 million and RMB1,501.1 million). Non-current bank borrowings and non-current other borrowings (including the balances of corporate bonds) were approximately RMB935.5 million and RMB989.0 million (2015: RMB1,005.5 million and RMB986.7 million).

Convertible Bonds

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 5-year terms (“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 were used to repay the syndicated bank loan at the end of 2013. During the six months ended 30 June 2015, convertible bonds in principal value of RMB56 million were converted to 17,065,033 ordinary Shares. During the six months ended 30 June 2016, no conversion had taken place. The current outstanding principal amount of 2013 CB is RMB919 million.

Medium-Term Note

In April 2013, IM Fufeng issued a medium-term note at par value of RMB600 million, which was dominated 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. It was fully repaid on April 2016.

Corporate Bonds

On 5 November 2015, IM Fufeng issued corporate bonds at par value of RMB1 billion, which was denominated in RMB with a fixed interest of 3.98% per annum. The corporate bonds mature in three years from the issue date. The net proceeds were used to repay certain shortterm 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 and other borrowings.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

Material acquisition or disposal of subsidiary and associated company

The Group had no material acquisition or disposal of the subsidiaries or associated companies for the six months ended 30 June 2016.

Employees

As at 30 June 2016, the Group had approximately 7,000 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. Please refer to the paragraph headed “Share Option Schemes” under the “Other Information” section below for the existing share options granted to certain employees of the Group after the IPO.

Charges on assets

As at 30 June 2016, certain leasehold land of the Group with carrying value of approximately RMB109.5 million were pledged to certain banks to secure bank borrowings of RMB412.5 million of the Group.

The 2013 CB 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 2016, the total assets of the Group amounted to approximately RMB14,076.7 million (2015: RMB13,850.2 million) whereas the total borrowings amounted to RMB3,685.7 million (2015: RMB3,838.1 million). The gearing ratio was approximately 26.2% (2015: 27.7%). The gearing ratio is calculated based on the Group’s total interest-bearing borrowings over total assets.

Fufeng Group Limited Interim Report 2016

MANAGEMENT DISCUSSION AND ANALYSIS

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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 operates mainly in the PRC and most of the Group’s transactions, assets and liabilities are denominated in RMB. Foreign currencies were, however, received for the export sales of products and the issuance of convertible bonds. 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 bank borrowings 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 six months ended 30 June 2016.

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. 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.

Dividend

The Board has resolved to pay an interim dividend of HK3.8 cents per Share for the six months ended 30 June 2016, payable on or before 30 September 2016 to the Shareholders whose names appear on the register of members of the Company on 15 September 2016.

Closure of register of members

The register of members of the Company will be closed from Monday, 12 September 2016 to Thursday, 15 September 2016 (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 Friday, 9 September 2016.

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

Note	30 June 2016 RMB’000 Unaudited	31 December 2015 RMB’000 Audited


ASSETS Non-current assets Property, plant and equipment 7 Leasehold land payments 7 Intangible assets 7 Deferred income tax assets Other long-term assets Total non-current assets Current assets Inventories Trade and other receivables 8 Cash and bank balances 9 Assets of disposal group classified as held for sale 13 Total current assets Total assets EQUITY Capital and reserves attributable to the Shareholders Share capital 10 Share premium 10 Other reserves Retained earnings Total equity	7,606,137 1,583,897 3,298 168,636 20,158 9,382,126 2,095,021 1,109,755 1,489,760 4,694,536 – 4,694,536 14,076,662 207,222 531,934 231,645 5,167,474 6,138,275	7,566,778 1,510,060 1,051 143,072 –







		9,220,961

		2,191,849 1,213,787 1,019,069




		4,424,705

		204,512

		4,629,217

		13,850,178

		207,222 555,157 227,655 4,817,025






		5,807,059

Fufeng Group Limited Interim Report 2016 INTERIM CONDENSED CONSOLIDATED BALANCE SHEET Note		30 June 2016 RMB’000 Unaudited



LIABILITIES Non-current liabilities Borrowings 11 Deferred income Deferred income tax liabilities Total non-current liabilities Current liabilities Trade, other payables and accruals 12 Current income tax liabilities Borrowings 11 Liabilities of disposal group classified as held for sale 13 Total current liabilities Total liabilities Total equity and liabilities		1,924,516 781,666 16,650 2,722,832 3,378,737 75,623 1,761,195 5,215,555 – 5,215,555 7,938,387 14,076,662

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Note		Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited 5,512,484 5,631,495 (4,448,361) (4,594,691) 1,064,123 1,036,804 123,329 268,524 (351,001) (340,044) (279,115) (242,755) (23,434) (27,856) 13,878 6,582 547,780 701,255 1,652 5,958 (116,285) (177,008) (114,633) (171,050) 433,147 530,205 (82,698) (116,705) 350,449 413,500



Revenue 6 Cost of sales 15 Gross profit Other income 14 Selling and marketing expenses 15 Administrative expenses 15 Other operating expenses 15 Other gain Operating profit Finance income Finance costs Finance costs – net 16 Profit before income tax Income tax expense 17 Profit for the period and attributable to the Shareholders		5,512,484 (4,448,361) 1,064,123 123,329 (351,001) (279,115) (23,434) 13,878 547,780 1,652 (116,285) (114,633) 433,147 (82,698) 350,449

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Note	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Other comprehensive income for the period Total comprehensive income for the period Total comprehensive income attributable to the Shareholders Earnings per share for profit attributable to the Shareholders during the period (expressed in RMB cents per share) – basic 18 – diluted 18	– 350,449 350,449 16.48 15.75	–

		413,500

		413,500

		19.59


		18.55

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Unaudited Attributable to the shareholders	Unaudited Attributable to the shareholders	Unaudited Attributable to the shareholders	Unaudited Attributable to the shareholders	Total RMB’000 5,369,066 413,500 11,315 3,095 53,760 – (73,536) (5,366)
	Share capital Share premium RMB’000 RMB’000		Other reserves RMB’000	Retained earnings RMB’000
Balance at 1 January 2015 Total comprehensive income for the period ended 30 June 2015 Transactions with Shareholders, recognised directly in equity Employees share option scheme: – Shares issued – Value of employee services Conversion of convertible bonds Repurchase of shares of the Company Dividends Total transactions with Shareholders, recognised directly in equity Balance at 30 June 2015 Balance at 1 January 2016 Total comprehensive income for the period ended 30 June 2016 Transactions with Shareholders, recognised directly in equity Employees share option scheme: – Value of employee services Dividends Total transactions with Shareholders, recognised directly in equity Balance at 30 June 2016	205,243 – 688 – 1,347 (56) – 1,979	638,986 – 14,656 – 55,980 (1,805) (73,536) (4,705)	206,770 – (4,029) 3,095 (3,567) – – (4,501)	4,318,067 413,500 – – – 1,861 – 1,861
	207,222	634,281	202,269 4,733,428 5,777,200

	207,222	555,157	227,655 4,817,025 5,807,059
	–	–	–	350,449	350,449



	–	–	3,990	–	3,990
	–	(23,223)	–	–	(23,223)

	–	(23,223)	3,990	–	(19,233)

	207,222	531,934	231,645 5,167,474 6,138,275

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Cash flows from operating activities Cash generated from operations Interest paid Income taxes paid Net cash flows generated from operating activities Cash flows from investing activities Purchases of property, plant and equipment Payments of leasehold land Purchase of intangible assets Urban planning related government grants received Payments of plant relocation expenses Proceeds from disposal of property, plant and equipment Proceeds from disposal of a subsidiary Assets-related government grants received Interest received Proceeds from term deposits Payment for term deposits Net cash (used in)/generated from investing activities	1,328,827 (83,291) (97,526) 1,148,010 (689,151) (80,636) (163) – (4,855) 1,571 – 69,078 1,652 145,000 – (557,504)	306,027 (177,739) (66,293)




		61,995

		(370,040) (81,097) (964) 227,862 (18,966) – 298,750 65,181 5,958 8,000 (24,100)












		110,584

Fufeng Group Limited Interim Report 2016

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

		Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited – 11,315 675,489 1,391,100 (277,600) (997,500) (600,000) – – (611,690) – (13,200) (23,223) (73,180) (225,334) (293,155) 365,172 (120,576) 776,880 796,564 1,142,052 675,988



Cash flows from financing activities Net proceeds from shares issued Proceeds from bank borrowings Repayments of bank borrowings Redemption of medium-term note Redemption of senior notes Repayments of convertible bonds Dividends paid to the Company’s shareholders Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period		– 675,489 (277,600) (600,000) – – (23,223) (225,334) 365,172 776,880 1,142,052

Fufeng Group Limited Interim Report 2016

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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 16 August 2016.

This condensed consolidated interim financial information has not been audited.

2. Basis of Preparation

This condensed consolidated interim financial information for the six months ended 30 June 2016 has been prepared in accordance with HKAS 34, “Interim financial reporting”. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2015, which have been prepared in accordance with HKFRS.

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.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

3. Accounting Policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2015, as described in those annual financial statements except for the adoption of amendments to HKFRSs effective for the financial year ending 31 December 2016.

3.1 Changes in accounting policy and disclosures

(a) New and amended standards adopted by the Group

HKFRS 7 (Amendments) “Financial instruments: Disclosures condensed interim financial statements” is effective for annual periods beginning on or after 1 January 2016. This amendment clarifies that the additional disclosure required by the amendments to HKFRS 7 “Disclosure – Offsetting financial assets and financial liabilities” is not specifically required for all interim periods, unless required by HKAS 34.

HKAS 19 (Amendments) “Employee benefits” is effective for annual periods beginning on or after 1 January 2016. This amendment clarifies that, when determining the discount rate for post-employment benefit obligations, it is the currency that the liabilities are denominated in that is important, and not the country where they arise. The assessment of whether there is a deep market in high-quality corporate bonds is based on corporate bonds in that currency, not corporate bonds in a particular country. Similarly, where there is no deep market in high-quality corporate bonds in that currency, government bonds in the relevant currency should be used.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

3. Accounting Policies (Continued)

3.1 Changes in accounting policy and disclosures (Continued)

(a) New and amended standards adopted by the Group (Continued) HKAS 34 (Amendments) “Interim financial reporting” is effective for annual periods beginning on or after 1 January 2016. This amendment clarifies what is meant by the reference in the standard to ‘information disclosed elsewhere in the interim financial report’. It also amends HKAS 34 to require a cross-reference from the interim financial statements to the location of that information. The amendment is retrospective.

Amendments and interpretations as mentioned above are not expected to have a material effect on the Group’s operating results, financial position or comprehensive income.

(b) Standards, amendments and interpretations to existing standards effective in 2016 but not relevant to the Group

		Effective for
		accounting periods
		beginning on or after
HKAS 1 (Amendment)	Disclosure initiative	1 January 2016
HKAS 16 (Amendment)	Property, plant and equipment	1 January 2016
HKAS 27 (Amendment)	Separate financial statements	1 January 2016
HKAS 38 (Amendment)	Intangible assets	1 January 2016
HKAS 41 (Amendment)	Agriculture	1 January 2016
HKFRS 5 (Amendment)	Non-current assets held for sale and	1 January 2016
	discontinued operations
HKFRS 7 (Amendment)	Financial instruments: Disclosures	1 January 2016
	– Application of the disclosure
	requirements to a servicing contract
HKFRS 11 (Amendment)	Joint arrangements	1 January 2016
HKFRS 12 (Amendment)	Disclosure of interests in other entities	1 January 2016
HKFRS 14	Regulatory deferral accounts	1 January 2016

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

3. Accounting Policies (Continued)

3.1 Changes in accounting policy and disclosures (Continued)

(c) The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year beginning on 1 January 2016 and have not been early adopted by the Group:

		Effective for
		accounting periods
		beginning on or after
HKFRS 15	Revenue from Contracts with Customers	1 January 2018
HKFRS 9	Financial Instruments	1 January 2018
HKFRS 16	Leases	1 January 2019
HKFRS 10 (Amendment)	Consolidated financial statements	To be determined
HKAS 28 (Amendment)	Investment in associates	To be determined

The adoption of these new and amended standards would not result in any material impact on the results and financial position of the Group. The Group has not applied any new or amended standard that is not effective for the current accounting period.

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 2015.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

5. Financial Risk Management

5.1 Financial risk factors

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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 2015.

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 2015 year end, there were additional current bank borrowings of RMB499,784,000 in the contractual undiscounted cash out flows for financial liabilities.

The Group expects timely settlements by positive cash flows from operating and refinancing activities.

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).
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).

There were no changes on valuation techniques during the period.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

5. Financial Risk Management (Continued)

5.3 Fair value estimation (Continued)

The carrying amount of the Group’s financial assets (including trade and other receivables, cash and cash equivalents and short-term bank deposits) and short term liabilities (including trade and other payables and short-term borrowings) 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 MSG segment and Xanthan gum segment. On 1 January 2015, MSG segment was renamed to Amino acid segment. The products of the business segment are:

manufacturing and sales of amino acid, 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 76% (30 June 2015: 77%) of the Group’s revenue are generated from the PRC.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

6. Segment Information (Continued)

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.

The revenue of the Group for the six months ended 30 June 2016 and 2015 are set out as follows:

	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



MSG Corn refined products Threonine High-end amino acid products Starch sweeteners Xanthan gum Fertilisers Glutamic acid Corn oil Others	3,066,942 668,460 416,351 314,943 300,445 299,308 277,972 70,564 15,391 82,108 5,512,484	3,057,420 715,845 326,104 235,898 397,081 558,983 236,218 23,879 11,815 68,252










		5,631,495

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

6. Segment Information (Continued)

The segment information for the six months ended 30 June 2016 is as follows:

	Amino acid	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
	5,213,176	299,308	–	5,512,484

	553,724	3,461	(9,405)	547,780
				(114,633)

				433,147
				(82,698)

				350,449

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

	Amino acid	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 Amortisation of intangible assets Gain on disposal of property, plant and equipment Loss on disposal of property, plant and equipment
	377,782	33,596	748	412,126
	11,462	3,066	43	14,571
	134	–	–	134
	98	–	–	98
	463	–	–	463

The segment assets and liabilities at 30 June 2016 are as follows:

	Amino acid	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Total assets Total liabilities
	9,182,392	3,960,516	933,754	14,076,662

	4,930,821	1,130,081	1,877,485	7,938,387

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

6. Segment Information (Continued)

The segment information for the six months ended 30 June 2015 is as follows:

	Amino acid Xanthan gum RMB’000 RMB’000 Unaudited Unaudited	Amino acid Xanthan gum RMB’000 RMB’000 Unaudited Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Revenue Segment results Finance costs – net Profit before income tax Income tax expenses Profit for the period	5,072,512 501,029	558,983 211,277	– (11,051)	5,631,495
				701,255 (171,050)
				530,205 (116,705)
				413,500

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

	Amino acid	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited
Depreciation of property, plant
and equipment	338,109	32,563	799	371,471
Amortisation of leasehold land
payments	4,775	836	43	5,654
Amortisation of intangible assets	530	–	–	530
Loss on disposal of property,
plant and equipment	1,080	–	–	1,080

The segment assets and liabilities at 30 June 2015 are as follows:

	Amino acid Xanthan gum RMB’000 RMB’000 Unaudited Unaudited	Amino acid Xanthan gum RMB’000 RMB’000 Unaudited Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Total assets Total liabilities	8,802,501 4,646,405	3,791,798 1,019,601	980,402 2,131,495	13,574,701
				7,797,501

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

7. Leasehold Land Payments, Property, Plant and Equipment and Intangible Assets

	Leasehold land payments RMB’000 Unaudited	Property, plant and equipment RMB’000 Unaudited	Intangible assets RMB’000 Unaudited	Total RMB’000 Unaudited 9,221,340 477,538 (344,990) (377,655) 8,976,233
Six months ended 30 June 2015 Opening net book amount at 1 January 2015 Additions Disposals Depreciation and amortisation Closing net book amount at 30 June 2015 Six months ended 30 June 2016 Opening net book amount at 1 January 2016 Additions Disposals Transferred from disposal group classified as held for sale (Note 13) Depreciation and amortisation Closing net book amount at 30 June 2016	1,748,704 81,097 (297,625) (5,654) 1,526,522	7,470,082 393,972 (47,365) (371,471) 7,445,218	2,554 2,469 – (530) 4,493

	1,510,060	7,566,778	1,051	9,077,889
	80,636	386,016	163	466,815
	–	(1,936)	–	(1,936)
	7,772	67,405	2,218	77,395
	(14,571)	(412,126)	(134)	(426,831)

	1,583,897	7,606,137	3,298	9,193,332

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

8. Trade and Other Receivables

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	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited 294,000 399,614 (4,800) – 289,200 399,614 128,228 418,293 76,714 74,423 1,260 1,402	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited 294,000 399,614 (4,800) – 289,200 399,614 128,228 418,293 76,714 74,423 1,260 1,402



Trade receivables (a) Less: provision for impairment of trade receivables Trade receivables, net Notes receivables (b) Deposits and others Loans to employees	294,000 (4,800) 289,200 128,228 76,714 1,260








– Loans to key management – Loans to other employees	–	–
	1,260	1,402
Value-added tax for future deduction Trade and other receivables excluding prepayments Prepayments for raw materials	70,991 566,393 543,362 1,109,755	71,114 964,846 248,941 1,213,787

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

8. Trade and Other Receivables (Continued)

(a) At 30 June 2016 and 31 December 2015, the ageing analysis of the trade receivables based on invoice date were as follows:

	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Within 3 months 3–12 months Over 12 months	234,379 51,309 8,312 294,000	348,549 48,562 2,503



		399,614

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 2016, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB10,494,000 (31 December 2015: RMB353,519,000) applied for settling the amounts payable to the Group’s suppliers.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

9. Cash and Bank Balances

==> picture [156 x 110] intentionally omitted <==

	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Cash and cash equivalents – Cash on hand – Cash in bank Term deposits over 3 months and within one year Cash and bank balances Restricted bank deposits Total cash and bank balances	721 1,141,331 1,142,052 4,000 1,146,052 343,708 1,489,760	534 740,753



		741,287 145,000


		886,287 132,782


		1,019,069

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

10. Share Capital and Premium

	Number of authorised shares ’000 Unaudited	Number of issued and fully paid shares ’000 Unaudited		Amount
			Ordinary shares RMB’000 Unaudited	Share premium RMB’000 Unaudited	Total RMB’000 Unaudited
Opening balance at 1 January 2015 Employee share option scheme: – Shares issued Conversion of convertible bonds Repurchase of shares of the Company Dividends At 30 June 2015 Opening balance at 1 January 2016 Dividends At 30 June 2016	10,000,000 – – – – 10,000,000 10,000,000 – 10,000,000	2,105,208 5,117 17,065 (705) – 2,126,685 2,126,685 – 2,126,685	205,243 688 1,347 (56) – 207,222 207,222 – 207,222	638,986 14,656 55,980 (1,805) (73,536) 634,281 555,157 (23,223) 531,934	844,229 15,344 57,327 (1,861) (73,536)
					841,503
					762,379 (23,223)
					739,156

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

11. Borrowings

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	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Non-current – Bank borrowings, unsecured – Bank borrowings, secured – Corporate bonds Current – Bank borrowings, unsecured – Bank borrowings, secured – Convertible bonds – Medium-term note	645,540 290,000 988,976 1,924,516 722,092 122,500 916,603 – 1,761,195 3,685,711	635,477 370,000 986,744




		1,992,221

		294,808 50,000 901,734 599,378





		1,845,920

		3,838,141

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

11. Borrowings (Continued)

Movements in borrowings were analysed as follows:

	RMB’000 4,515,647 1,391,100 (1,622,390) (53,760) 4,606 15,441 900 1,115 4,252,659
Six months ended 30 June 2015 Opening amount as at 1 January 2015 New borrowings Repayments of borrowings Conversion of convertible bonds Amortisation of transaction cost: – Senior notes – Convertible bonds – liability component – Medium-term note Exchange differences Closing amount as at 30 June 2015 Six months ended 30 June 2016 Opening amount as at 1 January 2016 Transfer from disposal group classified as held for sale New borrowings Repayments of bank borrowings Repayments of medium-term note Amortisation of transaction cost: – Corporation bonds – Convertible bonds – liability component – Medium-term note Exchange differences Closing amount as at 30 June 2016
	3,838,141
	20,100
	675,489
	(277,600)
	(600,000)

	2,232
	14,869
	622
	11,858

	3,685,711

Interest expenses on borrowings for the six months ended 30 June 2016 were RMB104,700,000 (30 June 2015: RMB176,235,000).

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

12. Trade, Other Payables and Accruals

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	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Trade payables (a) Advances from customers Payables for property, plant and equipment Bank acceptance notes payable Government compensation related to property, plant and equipment disposal received in advance Salaries, wages and staff welfare payables Interest payables – current portion Government grants received in advance Dividends payable Other payables and accruals	1,373,981 493,291 570,649 165,200 151,144 398,232 36,902 15,020 407 173,911 3,378,737	1,195,564 510,875 866,878 47,606 151,144 347,628 33,682 15,005 407 142,404










		3,311,193

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

12. Trade, Other Payables and Accruals (Continued)

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

	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	1,089,063 205,028 35,144 33,289 11,457 1,373,981	798,319 263,308 87,786 36,410 9,741





		1,195,564

13. Current and Non-Current Assets Held for Sale

On 26 November 2015, the Group approved in an extraordinary general meeting the spin-off and listing plan on The Stock Exchange of Hong Kong Limited of Shenhua Health Holdings Limited (“Shenhua Health”), a holding company directly held by the Company, which is engaged in the manufacturing and sales of pharmaceutical products. On 27 October 2015, Shenhua Health submitted the listing application form (Form 5A) to the Stock Exchange to apply for the listing of, and permission to deal in, the shares of Shenhua Health Holdings Limited on The Stock Exchange of Hong Kong Limited.

As at 31 December 2015, the assets and liabilities of Shenhua Health were classified as held for sale when their carrying amount was to be recovered principally through a sale transaction and a sale was considered highly probable. However, on 29 March 2016, the Stock Exchange of Hong Kong Limited discontinued reviewing the application and returned the application form to Shenhua Health Holdings Limited. Such spin-off transaction was not assessed highly probable. Accordingly, as of 30 June 2016, the assets and liabilities of Shenhua Health were not classified as held for sale.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

13. Current and Non-Current Assets Held for Sale (Continued)

(a) Assets of disposal group classified as held for sale:

	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



ASSETS Non-current assets Leasehold land payments Property, plant and equipment Intangible assets Deferred income tax assets Long-term bank deposits Current assets Inventories Trade and other receivables Cash and bank balances Total Assets	– – – – – – – – – – –	7,772 67,405 2,218 4,638 20,100







		102,133

		32,189 30,597 39,593




		102,379

		204,512

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

13. Current and Non-Current Assets Held for Sale (Continued)

(b) Liabilities of disposal group classified as held for sale:

	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2016 31 December 2015 RMB’000 RMB’000 Unaudited Audited



Liabilities Non-current liabilities Deferred income Current liabilities Trade and other payables Current income tax liabilities Borrowings Current portion of deferred income Total liabilities	– – – – – – –	584



		28,966 1,148 20,100 5,673





		55,887

		56,471

14. Other Income

	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Gain on disposal of a subsidiary Sales of waste products Amortisation of deferred income Government grants relating to expenses Others	– 57,793 39,592 14,581 11,363 123,329	160,666 48,216 32,601 20,829 6,212





		268,524

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

15. Expenses by Nature

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	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Amortisation of leasehold land payments Amortisation of intangible assets Depreciation of property, plant and equipment Value on employee services for the share option schemes Inventory write-down – net Plant relocation expenses Loss on disposal of property, plant and equipment	14,571 134 412,126 3,990 22,007 4,855 463	5,654 530 371,471 3,095 12,282 18,966 1,080

16. Finance Costs – Net

	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Interest expense Foreign exchange losses on financing activities Finance costs Finance income Net finance costs	104,701 11,584 116,285 (1,652) 114,633	176,235 773


		177,008

		(5,958)

		171,050

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

17. Income Tax Expense

		Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited 103,479 123,816 102 – 43 218 (20,926) (7,329) 82,698 116,705



Current income tax – PRC enterprise income tax – U.S. enterprise income tax – Singapore enterprise income tax Deferred income tax		103,479 102 43 (20,926) 82,698

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 2016 and 2015.

PRC enterprise income tax 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.

Singapore enterprise income tax is calculated based on the assessable profit of the subsidiary established in Singapore in accordance with Singapore tax laws and regulations.

The U.S. enterprise income tax is calculated based on the assessable profit of the subsidiary established in the U.S. in accordance with the U.S. tax laws and regulations.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

18. Earnings Per Share

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	Six months ended 30 June 2016 2015 Unaudited Unaudited	Six months ended 30 June 2016 2015 Unaudited Unaudited


Earnings per share for profit attributable to the Shareholders (RMB cents per share) – basic – diluted	16.48 15.75	19.59 18.55

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 2016 was RMB16.48 cents and RMB15.75 cents respectively (equivalent to HK19.28 cents and HK18.43 cents) (1H 2015: RMB19.59 cents and RMB18.55 cents respectively (equivalent to HK24.84 cents and HK23.52 cents)).

19. Dividends

On 15 March 2016, the Board proposed a final dividend in respect of the year ended 31 December 2015 of HKD27,647,000 (equivalent to RMB23,223,000), representing HK1.3 cents (equivalent to RMB1.09 cents) per share. The final dividend was paid in June 2016.

At a meeting held on 16 August 2016, the Board proposed an interim dividend of HKD80,814,000 (equivalent to RMB69,295,000) (2015: HKD95,701,000 (equivalent to RMB79,124,000)), representing HK3.8 cents (equivalent to RMB3.26 cents) (2015: HK4.5 cents (equivalent to RMB3.72 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 ending 31 December 2016.

Fufeng Group Limited Interim Report 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

20. Contingent Liabilities – the Group

As at 30 June 2016 and 2015, the Group had no material contingent liabilities.

21. Related Party Transactions

Key management compensation is set out below:

	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2016 2015 RMB’000 RMB’000 Unaudited Unaudited



Salaries and allowances Pension costs-defined contribution plan Share options granted	9,385 443 3,990 13,818	9,363 362 3,095



		12,820

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.

22. Events Occurring After the Balance Sheet Date

Details of the interim dividend proposed are given in Note 19.

23. 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 11 August 2016 and 16 August 2016, respectively.

Fufeng Group Limited Interim Report 2016

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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 2016.

The audit committee of the Company has reviewed the Group’s unaudited interim financial statements for the six months ended 30 June 2016.

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 2016.

Fufeng Group Limited Interim Report 2016

OTHER INFORMATION

Share option scheme

The Company granted options to subscribe for an aggregate of 16,600,000 Shares on 9 April 2015 to eligible employees. Details of the share options granted and outstanding for the period ended 30 June 2016, are as follows:

Director and eligible employees	At 1 January 2016	Number of share options Granted during the period Exercised during the period	Number of share options Granted during the period Exercised during the period	Lapsed during the period	At 30 June 2016 Date of grant Revised/ Adjusted exercise price (HKD) Exercise period
Eligible employeesB	16,600,000 16,600,000	– –	– –	– –	16,600,000 9/4/2015 5.69 9/4/2016 – 8/4/2020 16,600,000

The total fair value, which was determined by an independent qualified appraiser using Binominal Option Pricing Model, of the options granted as at the grant dates is approximately RMB30,216,000. The following assumptions were adopted to calculate the fair value of the options on the grant date:

	Granted on
	9 April 2015
Average share price	HKD4.89
Exercise price	HKD5.69
Expected life of options	5.0 years
Expected volatility	43.11%
Expected dividend yield	2.26%
Risk free rate	0.99%

Fufeng Group Limited Interim Report 2016

OTHER INFORMATION

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Interest of Directors and chief executive

Directors’ Interests in Shares

The interest and short positions of the Directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of the SFO) as at 30 June 2016, as recorded in the register required to be kept under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code were as follows:

Long position

				Percentage of
				interests to
				total issued
			Number and	share capital
Name of Director	Name of company	Capacity	class of securities	(approximate)
Li Xuechun	The Company	Interests of controlled	985,138,461 Shares	46.32%
		corporation (Note 1)
Wang Longxiang	The Company	Beneficial interests	8,292,000 Shares	0.39%
		(Note 2)
Feng Zhenquan	The Company	Interests of controlled	33,320,160 Shares	1.57%
		corporation (Note 3)
Xu Guohua	The Company	Interests of controlled	33,320,160 Shares	1.57%
		corporation (Note 4)
Li Deheng	The Company	Interests of controlled	33,320,160 Shares	1.57%
		corporation (Note 5)

Notes:

The interest in these Shares is held by Motivator Enterprises Limited, the entire issued share capital of which is wholly and beneficially owned by Mr. Li Xuechun, an executive Director and the chairman of the Company. Accordingly, Mr. Li Xuechun is deemed to be interested in all Shares held by Motivator Enterprises Limited under the SFO.
The interest in these Shares is held by Mr. Wang Longxiang, an executive Director of the Company.
The interest in these Shares is held by Elite Chance Holdings Limited, the entire issued shares capital of which is wholly and beneficially owned by Mr. Feng Zhenquan, an executive director of the Company. Accordingly, Mr Feng Zhenquan is deemed to be interested in all Shares held by Elite Chance Holdings Limited under the SFO.

Fufeng Group Limited Interim Report 2016

OTHER INFORMATION

The interest in these Shares is held by Best Range Investments Limited, the entire issued shares capital of which is wholly and beneficially owned by Mr. Xu Guohua, an executive director of the Company. Accordingly, Mr Xu Guohua is deemed to be interested in all Shares held by Best Range Investments Limited under the SFO.
The interest in these Shares is held by Empire Spring Investments Limited, the entire issued shares capital of which is wholly and beneficially owned by Mr. Li Deheng, an executive director of the Company. Accordingly, Mr Li Deheng is deemed to be interested in all Shares held by Empire Spring Investments Limited under the SFO.

Save as disclosed above, for the six months ended 30 June 2016, none of the Directors or the chief executive of the Company had an interest or short position in any shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register of interests required to be kept by the Company pursuant to section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

Interest of persons holding 5% or more interests

As at 30 June 2016, the interests and short positions of the persons, other than a Director or chief executive of the Company, in the Shares and underlying Shares as recorded in the register required to be kept under section 336 of the SFO were as follows:

Long position

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

||||||
|---|---|---|---|---|
|Percentage of|
|interests to|
|Class and|total issued|
|Name of|number of|share capital|
|Name|Group member|Capacity|securities|(approximate)|
|Motivator Enterprises Limited|The Company|Beneficial interests|985,138,461 Shares|46.32%|
|(Note 1)|
|Shi Guiling (Note 2)|The Company|Interests of spouse|985,138,461 Shares|46.32%|
|Treetop Asset Management SA|The Company|Beneficial interests|214,678,304 Shares|10.09%|
|JPMorgan Chase & Co.|The Company|Beneficial interests|126,282,601 Shares|5.93%|

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Fufeng Group Limited Interim Report 2016

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OTHER INFORMATION

Notes:

The interest in these Shares is held by Motivator Enterprises Limited, the entire issued share capital of which is wholly and beneficially owned by Mr. Li Xuechun, an executive Director and the chairman of the Company. Accordingly, Mr. Li Xuechun is deemed to be interested in all Shares held by Motivator Enterprises Limited under the SFO.
Ms. Shi Guiling is the spouse of Mr. Li Xuechun. Accordingly, she is also deemed to be interested in the 985,138,461 Shares held by Motivator Enterprises Limited, which in turn is also deemed to be interested by Mr. Li Xuechun under the SFO.

Short position

				Percentage of
				interests to
			Class and	total issued
	Name of		number of	share capital
Name	Group member	Capacity	securities	(approximate)
JPMorgan Chase & Co.	The Company	Beneficial interests	37,484,045 Shares	1.76%

Save as disclosed above, for the period ended 30 June 2016, according to the register of interests required to be kept by the Company under section 336 of the SFO, there was no person who had any interest or short position in the shares or underlying shares of the Company.

Fufeng Group Limited Interim Report 2016

GLOSSARY

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 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 (Neimenggu Fufeng 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 Listing Date 8 February 2007, the date on which the Company was listed on the Stock Exchange

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Fufeng Group Limited Interim Report 2016

GLOSSARY

Listing Rules

Model Code

MSG

PRC

Proposed Spin-off

Shandong Fufeng

Shandong Plant

Share(s)

Shareholder(s)

Shenhua Health

Shenhua Pharmaceutical

the Rules Governing the Listing of Securities on the Stock Exchange

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

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

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

the proposed spin-off of Shenhua Health by the Company

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

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

share(s) in the share capital of the Company

holder(s) of the Share(s)

Shenhua Health Holdings Limited (神華維康控股有限公司), a company incorporated under the laws of the Cayman Islands with limited liability on 19 August 2015, and a direct wholly-owned subsidiary of the Company as at the date of this announcement

江蘇神華藥業有限公司 (Jiangsu Shenhua Pharmaceutical Co., Ltd.), a company with limited liability established in the Jiangsu Province of the PRC, an indirect wholly-owned subsidiary of the Company

Fufeng Group Limited Interim Report 2016

GLOSSARY

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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AI assistant

Fufeng Group Limited — Interim / Quarterly Report 2016

49286_rns_2016-08-29_5477e53b-237c-4ffc-af5f-b19799440539.pdf

CONTENTS

CORPORATE INFORMATION

Executive Directors

Investor Relations Consultant

Independent Auditor

Stock Code

Principal Place of Business in the PRC

ADRs Information

Website

MANAGEMENT DISCUSSION AND ANALYSIS

Business and Financial Review

Overview

Operational review of the Group

Turnover/Gross profit/Gross profit margin of the Group

MANAGEMENT DISCUSSION AND ANALYSIS

Profit attributable to the Shareholders

Segment Highlights

Amino acid segment

Revenue and average selling price (“ASP”)

MSG

Fertilisers

Corn refined products

Starch sweeteners

Threonine

High-end amino acid products

Gross profit and gross profit margin

MANAGEMENT DISCUSSION AND ANALYSIS

Production costs

Corn kernels

Price Trend of Corn Kernels

Liquid ammonia

Sulphuric acid

Coal

Production

Xanthan gum segment

Operation results

Sales volume and ASP

Sales volume (tonne) ASP (RMB/tonne)

Gross profit and gross profit margin

Production costs

Corn kernels

Soybeans

Coal

Other production costs

Other financial information

Selling and marketing expenses

Administrative expenses

Finance costs

Other income

Income tax expense

Outlook for second half of 2016

Amino acid segment

Xanthan gum segment

Future plan and recent development

Proposed Spin-off

Liquidity and financial resources

Convertible Bonds

Medium-Term Note

Corporate Bonds

Material acquisition or disposal of subsidiary and associated company

Employees

Charges on assets

Gearing ratio

Foreign exchange exposure

American Depositary Receipt Facility

Dividend

Closure of register of members

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. General Information

2. Basis of Preparation

2.1 Going-concern basis

3. Accounting Policies

3.1 Changes in accounting policy and disclosures

Fufeng Group Limited Interim / Quarterly Report 2016