Fufeng Group Limited — Interim / Quarterly Report 2018

Aug 10, 2018

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

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Fufeng Group Limited 阜豐集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 546)

ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2018

HIGHLIGHTS OF 2018 INTERIM RESULTS

• Turnover increased to approximately RMB6,610.2 million (1H 2017: RMB6,210.6 million), which represents an increase of 6.4%. The increase in revenue was primarily due to the increase in the sales volume of MSG, starch sweeteners, threonine and xanthan gum and slight increase in the ASP of our major products.

• Gross profit of the Group significantly decreased by 20.0% to approximately RMB1,121.5 million. Gross profit of the Amino acid segment decreased by 24.1% to approximately RMB997.0 million, mainly due to the ongoing lackluster conditions in the domestic catering and consumer markets, intensified sector competition, and the significant increase in raw material costs such as corn kernels and coal. On the other hand, gross profit of the Xanthan gum segment increased by 42.7% to approximately RMB124.4 million, mainly due to the market condition of oil industry returning to slight growth and reflected in the increase in market demand and price of xanthan gum.

• The Group recognised the importance of using advanced technologies to continually improve our production efficiency and develop new products. The Group continues to actively explore the development of amino acid products for animal nutrition, high-end amino acid products for pharmaceutical, health care and beauty and food additives mainly as starch sweeteners, in order to improve product diversity.

• Profit attributable to the Shareholders decreased by 51.0% to approximately RMB315.0 million for the six months ended 30 June 2018.

• Earnings per Share – basic and diluted for the first half of 2018 were HK14.73 cents and HK14.71 cents, respectively (1H 2017: HK32.24 cents and HK32.18 cents).

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• Return on equity for the first half of 2018 was 6.6% (1H 2017: 14.4%).

• Interim dividend of HK4.2 cents per Share declared by the Board.

• calculated on an annualised basis

INTERIM FINANCIAL RESULTS

The board of directors (the “ Board ”) of Fufeng Group Limited (the “ Company ”) announces the unaudited interim financial results of the Company and its subsidiaries (collectively the “ Group ”) for the six months ended 30 June 2018. The interim financial results are unaudited, but have been reviewed by PricewaterhouseCoopers, in accordance with Hong Kong Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”, issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”) whose report on review of interim financial information is included in the interim report to be sent to the shareholders of the Company. The interim financial results have also been reviewed by the Company’s Audit Committee.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

Note ASSETS Non-current assets Leasehold land payments 7 Property, plant and equipment 7 Intangible assets 7 Investments accounted for using the equity method Deferred income tax assets Current assets Inventories Trade and other receivables 8 Cash and bank balances 9 Assets of disposal group classified as held for sale 10 Total assets	30 June 2018 RMB’000 774,958 9,958,091 18,912 31,511 183,788 10,967,260 2,963,527 2,282,822 822,155 6,068,504 709,101 6,777,605 17,744,865	31 December 2017 RMB’000 1,393,941 9,234,061 17,791 31,396 182,447
		10,859,636
		3,229,895 1,361,559 515,444
		5,106,898
		–
		5,106,898
		15,966,534

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Note EQUITY Capital and reserves attributable to the Shareholders Share capital 11 Share premium 11 Other reserves Retained earnings Total equity LIABILITIES Non-current liabilities Borrowings 12 Deferred income Deferred income tax liabilities Current liabilities Trade, other payables and accruals 13 Contract liabilities Current income tax liabilities Borrowings 12 Liabilities of disposal group classified as held for sale 10 Total liabilities Total equity and liabilities	30 June 2018 RMB’000 244,436 1,510,568 387,775 7,410,669 9,553,448 570,517 808,579 16,650 1,395,746 3,261,935 666,464 39,551 2,826,522 6,794,472 1,199 6,795,671 8,191,417 17,744,865	31 December 2017 RMB’000 244,436 1,736,726 384,178 7,094,765
		9,460,105
		560,265 721,936 16,650
		1,298,851
		3,685,015 – 111,624 1,410,939
		5,207,578
		–
		5,207,578
		6,506,429
		15,966,534

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INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Note Revenue 6 Cost of sales Gross profit Other income 14 Selling and marketing expenses Administrative expenses Other operating expenses Other (losses)/gain – net Operating profit 15 Finance income Finance costs Finance costs – net 16 Share of profit of investments accounted for using the equity method Profit before income tax Income tax expense 17 Profit for the period and attributable to the Shareholders 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

Six months ended 30 June 2018 2017 RMB’000 RMB’000 6,610,222 6,210,619 (5,488,745) (4,809,012) 1,121,477 1,401,607 131,177 124,373 (534,920) (489,830) (254,304) (228,201) (17,801) (20,992) (10,332) 3,923 435,297 790,880 1,911 22,410 (70,524) (42,993) (68,613) (20,583) 115 53 366,799 770,350 (51,801) (127,790) 314,998 642,560 – – 314,998 642,560 314,998 642,560 12.37 27.98 12.35 27.93

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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, Heilongjiang 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 report is presented in RMB, unless otherwise stated. This condensed consolidated interim financial report was approved for issue on 10 August 2018 by the Board of Directors.

This condensed consolidated interim financial report has not been audited.

Significant events and transactions

The Group is constructing a new corn processing project in Qiqihar City, Heilongjiang Province to sustain the development of businesses of animal nutrition and food additive. The first phase of the new plant was completed in the first half year of 2018, and the second phase is expected to be completed by the end of 2018.

As at 30 June 2018, the Group’s significant capital expenditure contracted for but not yet incurred was approximately RMB206,110,000.

2. BASIS OF PREPARATION

This condensed consolidated interim financial report for the half-year reporting period ended 30 June 2018 has been prepared in accordance with HKAS 34, “Interim Financial Reporting”. The condensed consolidated interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 31 December 2017, which have been prepared in accordance with HKFRS.

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3. ACCOUNTING POLICIES

Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2017, as described in those annual financial statements except for the adoption of new and amended standards as set out below.

(a) New and amended standards adopted by the Group

The following new or amended standards became applicable for the current reporting period:

• HKFRS 9 Financial Instruments, and

• HKFRS 15 Revenue from Contracts with Customers

The impact of the adoption of these standards and the new accounting policies are disclosed in note (c) below.

(b) New standards and interpretations not yet adopted

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 2018 and have not been early adopted by the Group:

		Effective for
		annual periods
		beginning on or after
HKFRS 16	Leases	1 January 2019 i)
HK (IFRIC) 23	Uncertainty over income tax treatments	1 January 2019
Amendment to HKFRS 9	Prepayment Features with Negative	1 January 2019
	Compensation
Amendment to HKFRS 28	Long-term interests in Associates and	1 January 2019
	Joint Ventures
HKFRS 17	Insurance contracts	1 January 2021
Amendments to HKFRS 10	Sale or contribution of assets between	To be determined
and HKAS 28	an investor and its associate or joint
	venture

i) HKFRS 16, Leases

HKFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases.

The accounting for lessors will not significantly change.

The standard will affect primarily the accounting for the Group’s operating leases. As at the reporting date, the Group had non-cancellable operating lease commitments of RMB1,875,000. The Group estimates that all of these relate to payments for short-term and low-value leases which will be recognised on a straight-line basis as an expense in profit or loss.

However, the Group has not yet assessed what other adjustments, if any, are necessary for example because of the change in the definition of the lease term and the different treatment of variable lease payments and of extension and termination options. It is therefore not yet

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possible to estimate the amount of right-of-use assets and lease liabilities that will have to be recognised on adoption of the new standard and how this may affect the Group’s profit or loss and classification of cash flows going forward.

The standard is mandatory for first interim periods within annual reporting periods beginning on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption.

(c) Changes in accounting policies

i) HKFRS 9 Financial Instruments – Impact of adoption

HKFRS 9 replaces the provisions of HKAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.

There is no significant impact on the classification and measurement of its financial assets as the Group does not have:

• Debt instruments that are classified as available-for-sale financial assets;

• Debt instruments classified as held-to-maturity and measured at amortised cost;

• Equity investment measured at fair value through profit or loss

There is no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities which are subject to HKFRS 9.

The derecognition rules have been transferred from HKAS 39 Financial Instruments: Recognition and Measurement and have not been changed.

The new hedge accounting rules has aligned the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Group does not have any hedge instrument. Therefore, the Group does not expect any impact on the new hedge accounting rules.

The Group has trade receivables for sales of products that are subject to HKFRS 9’s new expected credit loss model, and the Group revised its impairment methodology under HKFRS 9 for these receivables.

Based on the assessments undertaken, the Group does not identify material change to the loss allowance for trade debtors.

While cash and cash equivalents, restricted cash and other receivables are also subject to the impairment requirements of HKFRS 9, no impairment loss was identified.

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ii) HKFRS 9 Financial Instruments – Accounting policies applied from 1 January 2018

Financial assets – impairment

From 1 January 2018, the Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables, the Group applies the simplified approach permitted by HKFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

iii) HKFRS 15 Revenue from Contracts with Customers – Impact of adoption

The Group adopted HKFRS 15 using the modified retrospective approach which means that the cumulative impact of the adoption (if any) will be recognised in retained earnings as of 1 January 2018 and that comparatives will not be restated.

The Group is engaged in manufacture and sales of fermentation-based food additive, biochemical products and starch-based products.

The Group’s obligations to provide a refund for faulty products are under the standard warranty terms. Accumulated experience is used to estimate such returns at the time of sale. Because of the large size and low value of each individual product, the amount of products returned were immaterial. It is highly probable that a significant reversal in the cumulative revenue recognised will not occur. Therefore, no refund liability for goods return was recognized. The validity of this assumption and the estimated amount of returns are reassessed at each reporting date. As a result, no accounting impact for refunds while applying HKFRS 15.

The Group did not introduce any customer loyalty programme or volume discounts based on aggregate sales over a period time which are likely to be affected by HKFRS 15.

The Group did not incur costs to fulfil a contract which should be capitalized as they relate directly to the contract, generate resources used in satisfying the contract and are expected to be recovered.

The Group does not expect to have any contracts where the period between the transfer of the promised goods to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money.

As a result, other than certain reclassification of contract liabilities, the adoption of HKFRS 15 did not result in any impact to the financial statements as the timing of revenue recognition on sales of products is not changed.

The following adjustment was made to the amounts recognized in the balance sheet at the date of initial application (1 January 2018):

	HKAS 18		HKFRS 15
	carrying amount		carrying amount
	31 December 2017	Reclassification	1 January 2018
	RMB’000	RMB’000	RMB’000
Trade, other payables and accruals	3,685,015	(346,937)	3,338,078
Contract liabilities	–	346,937	346,937

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iv) HKFRS 15 Revenue from Contracts with Customers – Accounting policies applied from 1 January 2018

Revenue Recognition

The Group manufactures and sells a range of fermentation-based food additive, biochemical products and starch-based products in the market.

Sales are recognised when control of the products has transferred, being when the products are delivered to the customer, and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products have been shipped to the specified location for domestic sales or have been shipped on board for overseas sales. The risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied.

A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

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.

Other than those impacts by adopting HKFRS9 and HKFRS 15, in preparing this condensed consolidated interim financial statements, 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 2017.

5. FINANCIAL RISK MANAGEMENT

5.1 Financial risk factors

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

The interim condensed consolidated financial statements 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 2017.

There have been no changes in the risk management department since 2017 year end or in any risk management policies except that the risk management policies on credit risk was changed since 1 January 2018.

The Group has policies in place to ensure that receivables with credit terms are made to counterparties with an appropriate credit history and management performs ongoing credit evaluations of the counterparties. The credit period granted to the customers is usually no more than 90 days and the credit quality of these customers is assessed, which takes into account their financial position, past experience and other factors. In view of the sound collection history of receivables due from them, management believes that the credit risk inherent in the Group’s outstanding trade receivables arising from sales of products due from them is not significant.

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For other receivables, management makes periodic collective assessments as well as individual assessment on the recoverability of other receivables based on historical settlement records and past experience. In view of the history of cooperation and the sound collection history of receivables, management believes that the credit risk inherent in the Group’s outstanding other receivable balance is not significant.

5.2 Liquidity risk

Prudent liquidity risk management includes maintaining sufficient cash and available credit facilities to meet obligations when they arise. Management monitors the funding requirements of the Group and the availability of credit facilities in order to ensure the liquidity of the Group. The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

The Group At 30 June 2018 Borrowings Interests payments on borrowings Trade and other payables (excluding non-financial liabilities) Total At 31 December 2017 Borrowings Interests payments on borrowings Trade and other payables (excluding non-financial liabilities) Total	Less than 1 year RMB’000 2,826,522 78,956 2,803,111 5,708,589 1,410,939 59,872 2,875,253 4,346,064	Between 1 and 2 years RMB’000 252,930 12,613 – 265,543 250,773 15,352 – 266,125	Between 2 and 5 years RMB’000 333,083 4,762 – 337,845 326,710 10,090 – 336,800

5.3 Fair value estimation

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.

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The executive directors consider the business from a product perspective and accordingly, the Group’s operations are mainly organised under Amino acid segment and Xanthan gum segment. The products of the business segment are:

• manufacturing and sales of amino acid, including monosodium glutamate (“MSG”), glutamic acid, corn refined products, fertilisers, starch sweeteners, threonine, corn oil, compound seasoning, highend amino acid products, pharmaceuticals and bricks; and

• manufacturing and sales of xanthan gum.

Approximately 73% (30 June 2017: 70%) of the Group’s revenue are generated from the PRC.

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

The revenue of the Group for the six months ended 30 June 2018 and 2017 are set out as follows:

MSG Corn refined products Threonine High-end amino acid products Xanthan gum Starch sweeteners Glutamic acid Fertilisers Corn oil Others	Six months ended 30 June 2018 2017 RMB’000 RMB’000 3,322,145 2,998,000 844,380 988,587 668,880 631,338 419,846 455,494 388,015 332,023 433,612 310,909 171,128 226,215 143,574 161,805 4,401 4,749 214,241 101,499 6,610,222 6,210,619	Six months ended 30 June 2018 2017 RMB’000 RMB’000 3,322,145 2,998,000 844,380 988,587 668,880 631,338 419,846 455,494 388,015 332,023 433,612 310,909 171,128 226,215 143,574 161,805 4,401 4,749 214,241 101,499 6,610,222 6,210,619
		6,210,619

The segment information for the six months ended 30 June 2018 is as follows:

Revenue Segment results Finance costs – net Share of profit of investments accounted for using the equity method Profit before income tax Income tax expenses Profit for the period	Amino acid RMB’000 6,222,207 347,337	Xanthan gum RMB’000 388,015 101,856	Unallocated RMB’000 – (13,896)	Group RMB’000 6,610,222
				435,297 (68,613) 115
				366,799 (51,801)
				314,998

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

Amino acid Xanthan gum Unallocated RMB’000 RMB’000 RMB’000 Depreciation of property, plant and equipment 439,576 29,851 487 Amortisation of leasehold land payments 11,076 1,282 43 Amortisation of intangible assets 1,144 – – Reversal of impairment charges for property, plant and equipment (Note 7(a)) 56,513 – – Gain on disposal of leasehold land payments 5,900 – – Gain on disposal of property, plant and equipment 379 – – The segment assets and liabilities at 30 June 2018 are as follows: Amino acid Xanthan gum Unallocated RMB’000 RMB’000 RMB’000 Total assets 12,854,755 4,106,911 783,199 Total liabilities 6,234,387 1,058,955 898,075 The segment information for the six months ended 30 June 2017 is as follows: Amino acid Xanthan gum Unallocated RMB’000 RMB’000 RMB’000 Revenue 5,878,596 332,023 – Segment results 766,576 48,783 (24,479) Finance costs – net Share of profit of investments accounted for using the equity method Profit before income tax Income tax expenses Profit for the period

Group RMB’000 469,914 12,401 1,144 56,513 5,900 379 Group RMB’000 17,744,865 8,191,417 Group RMB’000 6,210,619 790,880 (20,583) 53 770,350 (127,790) 642,560

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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
	Depreciation of property, plant and
	equipment		411,233		33,055		637			444,925
	Amortisation of leasehold land payments		10,622		1,241		43			11,906
	Amortisation of intangible assets		786		–		–			786
	Gain on disposal of property, plant and
	equipment		1,291		–		–			1,291
	Loss on disposal of property, plant and
	equipment		228		–		–			228
	The segment assets and liabilities at 30 June		2017 are as follows:
			Amino acid		Xanthan gum		Unallocated			Group
			RMB’000		RMB’000		RMB’000			RMB’000
	Total assets		9,786,329		4,106,802		1,670,490			15,563,621
	Total liabilities		4,173,230		1,202,621		1,291,185			6,667,036
7.	LEASEHOLD LAND PAYMENTS, PROPERTY, PLANT AND EQUIPMENT AND								INTANGIBLE
	ASSETS
			Leasehold		Property,
			land		plant and		Intangible
			payments		equipment		assets			Total
			RMB’000		RMB’000		RMB’000			RMB’000
	Six months ended 30 June 2018
	Opening net book amount
	at 1 January 2018		1,393,941		9,234,061		17,791			10,645,793
	Additions		108,390		1,137,546		2,265			1,248,201
	Disposals		(5,890)		(115)		–			(6,005)
	Depreciation and amortisation		(12,401)		(469,914)		(1,144)			(483,459)
	Reversal of impairment charge (a)		–		56,513		–			56,513
	Transferred to assets classified as held
	for sale		(709,082)		–		–			(709,082)
	Closing net book amount
	at 30 June 2018		774,958		9,958,091		18,912			10,751,961
	Six months ended 30 June 2017
	Opening net book amount
	at 1 January 2017		1,413,942		7,858,775		9,108			9,281,825
	Additions		3,713		488,689		28			492,430
	Disposals		–		(913)		–			(913)
	Depreciation and amortisation		(11,906)		(444,925)		(786)			(457,617)
	Closing net book amount
	at 30 June 2017		1,405,749		7,901,626		8,350			9,315,725

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• (a) Due to the increase of sulphuric acid market purchase price, the Group has put an idle workshop back into the production of sulphuric acid for its own use since January 2018. Although the sulphuric acid is used internally as a raw material of MSG, the group of assets in the sulphuric acid workshop, reported under Amino acid segment, has been identified as one cash-generating unit because an active market exists for sulphuric acid. This group of assets in the sulphuric acid work had been fully impaired in prior years. The Group reassessed its recoverable amount using the value in use method to be RMB56,513,000 as at 30 June 2018. Therefore, of the total impairment provision of RMB83,686,000 set aside in prior years, RMB56,513,000 was reversed (six months ended 30 June 2017: nil) during the six months ended 30 June 2018, which was credited to “Cost of sales” in the consolidated income statement.

The value in use calculation used pre-tax cash flow projections based on the financial budgets approved by management. The pre-tax discount rate used in the calculations is 13%.

8. TRADE AND OTHER RECEIVABLES

Trade receivables (a) Less: provision for impairment of trade receivables Trade receivables, net Notes receivables (b) Deposits and others Loans to employees	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 529,490 509,204 (20,510) (20,258) 508,980 488,946 716,706 562,423 130,966 46,553 2,301 2,299	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 529,490 509,204 (20,510) (20,258) 508,980 488,946 716,706 562,423 130,966 46,553 2,301 2,299
– Loans to key management – Loans to other employees	– 2,301	– 2,299
Value-added tax for future deduction Trade and other receivables excluding prepayments Prepayments for raw materials	249,824 1,608,777 674,045 2,282,822	193,258 1,293,479 68,080 1,361,559

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• (a) At 30 June 2018 and 31 December 2017, the ageing analysis of the trade receivables based on invoice date were as follows:

Within 3 months 3–12 months Over 12 months	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 369,998 402,822 108,486 60,765 51,006 45,617 529,490 509,204	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 369,998 402,822 108,486 60,765 51,006 45,617 529,490 509,204
		509,204

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 2018, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB615,218,000 (31 December 2017: RMB509,926,000) applied for settling the amounts payable to the Group’s suppliers.

9. CASH AND BANK BALANCES

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	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 892 472 754,350 419,016 755,242 419,488 22,000 22,100 777,242 441,588 44,913 73,856 822,155 515,444	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 892 472 754,350 419,016 755,242 419,488 22,000 22,100 777,242 441,588 44,913 73,856 822,155 515,444
		419,488 22,100
		441,588 73,856
		515,444

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10. ASSETS/LIABILITIES OF DISPOSAL GROUP HELD FOR SALE

In January 2018, the Group decided to sell the leasehold land owned by two of its subsidiaries, namely Baoji Dingfeng Properties Co., Ltd. (“Baoji Dingfeng”) and Baoji Baofeng Properties Co., Ltd.(“Baoji Baofeng”), and initiated the plan to locate a buyer. In June 2018, a third-party buyer has been located and the Group was in the process of negotiating with the buyer the principal terms of transfer of all the shares of the two subsidiaries. The sale was expected to be completed within one year from 30 June 2018. Therefore, the assets and liabilities of the two aforementioned subsidiaries were classified as held for sale at 30 June 2018 under the unallocated segment.

In August 2018, the Group signed the sales and purchase agreements with the buyer. The Group estimated the consideration of the sale to be approximately RMB1,792.3 million, resulting in a gain of approximately RMB1 billion to be recognized in the second half year of 2018.

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

ASSETS Non-current assets Leasehold land payments Current assets Cash and bank balances Total assets Liabilities of disposal group classified as held for sale: LIABILITIES Current liabilities Trade, other payables and accruals Total liabilities	2018 RMB’000 709,082 19 709,101 2018 RMB’000 1,199 1,199	2017 RMB’000 –
		–
		–
		2017 RMB’000 –
		–

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

– 16 –

11. SHARE CAPITAL AND SHARE PREMIUM

Number of authorised shares ’000 Opening balance at 1 January 2017 10,000,000 Conversion of convertible bonds – Issuance of ordinary shares – Dividends – At 30 June 2017 10,000,000 Opening balance at 1 January 2018 10,000,000 Dividends – At 30 June 2018 10,000,000 12. BORROWINGS Non-current – Bank borrowings, unsecured Current – Bank borrowings, unsecured – Corporate bonds	Number of issued and fully paid shares ’000 2,126,685 280,049 140,000 – 2,546,734 2,546,734 – 2,546,734	Ordinary shares RMB’000 207,222 24,807 12,407 – 244,436 244,436 – 244,436	Ordinary shares RMB’000 207,222 24,807 12,407 – 244,436 244,436 – 244,436	Amount Share premium RMB’000 462,639 904,513 666,737 (176,815) 1,857,074 1,736,726 (226,158) 1,510,568 As at 30 June 2018 RMB’000 570,517 570,517 1,828,146 998,376 2,826,522 3,397,039	Amount Share premium RMB’000 462,639 904,513 666,737 (176,815) 1,857,074 1,736,726 (226,158) 1,510,568 As at 30 June 2018 RMB’000 570,517 570,517 1,828,146 998,376 2,826,522 3,397,039	Total RMB’000 669,861 929,320 679,144 (176,815) 2,101,510 1,981,162 (226,158) 1,755,004 31 December 2017 RMB’000 560,265 560,265 415,000 995,939 1,410,939 1,971,204

– 17 –

Movements in borrowings were analysed as follows:

Six months ended 30 June 2017 Opening amount as at 1 January 2017 New borrowings Repayments of bank borrowings Conversion of convertible bonds Amortisation of transaction cost: – Corporate bonds Exchange differences Closing amount as at 30 June 2017 Six months ended 30 June 2018 Opening amount as at 1 January 2018 New borrowings Repayments of bank borrowings Amortisation of transaction cost: – Corporate bonds Exchange differences Closing amount as at 30 June 2018	RMB’000 3,099,977 697,235 (311,035) (931,944) 2,332 (17,823)
	2,538,742
	1,971,204 2,050,824 (644,900) 6,412 13,499
	3,397,039

Interest expenses on borrowings for the six months ended 30 June 2018 were RMB57,025,000 (30 June 2017: RMB42,993,000).

13. TRADE, OTHER PAYABLES AND ACCRUALS

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 welfares payables Interest payables Government grants received in advance Dividends payable Other payables and accruals	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 1,219,079 1,451,471 – 346,937 1,219,052 1,013,726 11,320 83,795 61,980 62,281 382,315 398,098 23,663 9,227 2,041 2,039 407 407 342,078 317,034 3,261,935 3,685,015	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 1,219,079 1,451,471 – 346,937 1,219,052 1,013,726 11,320 83,795 61,980 62,281 382,315 398,098 23,663 9,227 2,041 2,039 407 407 342,078 317,034 3,261,935 3,685,015
		3,685,015

– 18 –

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

Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	As at 30 June 31 December 2018 2017 RMB’000 RMB’000 735,124 1,014,534 243,281 218,759 161,825 151,949 49,358 44,024 29,491 22,205 1,219,079 1,451,471	As at 30 June 31 December 2018 2017 RMB’000 RMB’000 735,124 1,014,534 243,281 218,759 161,825 151,949 49,358 44,024 29,491 22,205 1,219,079 1,451,471
		1,451,471

14. OTHER INCOME

Sales of waste products Amortisation of deferred income Government grants relating to expenses Others	Six months ended 30 June 2018 2017 RMB’000 RMB’000 58,638 48,985 36,829 38,731 21,414 16,879 14,296 19,778 131,177 124,373	Six months ended 30 June 2018 2017 RMB’000 RMB’000 58,638 48,985 36,829 38,731 21,414 16,879 14,296 19,778 131,177 124,373
		124,373

15. OPERATING PROFIT

An analysis of the amounts presented as operating items in the financial information is given below.

	Six months ended 30 June	Six months ended 30 June
	2018	2017
	RMB’000	RMB’000
Amortisation of leasehold land payments	12,401	11,906
Amortisation of intangible assets	1,144	786
Depreciation of property, plant and equipment	469,914	444,925
Reversal of provision for impairment charges for property,
plant and equipment_(Note 7(a))_	(56,513)	–
Value on employee services for the share option schemes	4,503	6,512
Reversal of inventory write-down – net	(1,610)	–
Plant relocation expenses	5	153

– 19 –

16. FINANCE COSTS – NET

Interest expense Foreign exchange losses on financing activities Finance costs Interest income Foreign exchange gains on financing activities Finance income Net finance costs 17. INCOME TAX EXPENSE Current income tax – PRC enterprise income tax – Hong Kong enterprise income tax – U.S. enterprise income tax – Singapore enterprise income tax Deferred income tax	Six months ended 30 June 2018 2017 RMB’000 RMB’000 57,025 42,993 13,499 – 70,524 42,993 (1,911) (4,526) – (17,884) (1,911) (22,410) 68,613 20,583 Six months ended 30 June 2018 2017 RMB’000 RMB’000 48,050 110,737 89 1,135 5,002 528 1 – (1,341) 15,390 51,801 127,790

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 enterprise income tax is calculated based on the effective tax rate on assessable profit of subsidiaries established in Hong Kong in accordance with Hong Kong tax laws and regulations.

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.

– 20 –

18. EARNINGS PER SHARE

	Six months ended 30 June	Six months ended 30 June
	2018	2017
Earnings per share for profit attributable to the Shareholders
(RMB cents per share)
– basic	12.37	27.98
– diluted	12.35	27.93

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. 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 2018 was RMB12.37 cents and RMB12.35 cents respectively (equivalent to HK14.73 cents and HK14.71 cents) (1H 2017: RMB27.98 cents and RMB27.93 cents respectively (equivalent to HK32.24 cents and HK32.18 cents)).

19. DIVIDENDS

On 27 March 2018, the Board proposed a final dividend in respect of the year ended 31 December 2017 of HKD280,141,000 (equivalent to RMB226,158,000), representing HK11.0 cents (equivalent to RMB8.88 cents) per share. The final dividend was paid in June 2018.

At a meeting held on 10 August 2018, the Board proposed an interim dividend of HKD106,963,000 (equivalent to RMB93,379,000) (1H2017: HKD224,113,000 (equivalent to RMB191,298,000)), representing HK4.2 cents (equivalent to RMB3.67 cents) (1H2017: HK8.8 cents (equivalent to RMB7.51 cents)) per share. This interim dividend has not been recognized as a dividend payable in this interim financial information, but will be recognized as an appropriation of share premium for the year ending 31 December 2018.

20. CONTINGENT LIABILITIES

As at 30 June 2018 and 31 December 2017, the Group had no material contingent liabilities.

– 21 –

21. RELATED PARTY TRANSACTIONS AND BALANCES

Mr. Li Xuechun is the controlling shareholder of the Group. The entities controlled by close family members of the controlling shareholder are regarded as related parties.

(a) Transactions with related parties

The following transactions occurred with related parties:

(1) Non-recurring connected transation

	Six months ended 30 June	Six months ended 30 June
	2018	2017
	RMB’000	RMB’000
Services purchased from a related party*	40,942	–

• The Group acquired the construction services from an entity that is controlled by a close family member of controlling shareholder.

(2) Continuing connected transaction

	Six months ended 30 June	Six months ended 30 June
	2018	2017
	RMB’000	RMB’000
Sales of products to a related party*	36,217	–

• The Group sold products to an entity that is controlled by a close family member of controlling shareholder.

(b) Key management compensation

Salaries and allowances Pension costs-defined contribution plan Share options granted	Six months ended 30 June 2018 2017 RMB’000 RMB’000 7,048 9,371 475 337 3,597 5,354 11,120 15,062	Six months ended 30 June 2018 2017 RMB’000 RMB’000 7,048 9,371 475 337 3,597 5,354 11,120 15,062
		15,062

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 –

(c) Period-end/year-end balances with related parties

The following balances are outstanding at the end of the reporting period in relation to transactions with related parties:

(1) Trade receivables from a related party

– A company controlled by a close family member of the controlling shareholder (2) Advance from a related party – A company controlled by a close family member of the controlling shareholder (3) Other payables to a related party – A company controlled by a close family member of the controlling shareholder	As at 30 June 2018 31 December 2017 RMB’000 RMB’000 – 7,604 As at 30 June 2018 31 December 2017 RMB’000 RMB’000 1,375 – As at 30 June 2018 31 December 2017 RMB’000 RMB’000 36,700 27,726

(d) Terms and conditions

Sales and purchase transactions to related parties during the year were based on the price lists in force and terms that would be available to third parties.

22. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Details of the asset disposal and the interim dividend proposed are described in Note 10 and Note 19 respectively.

– 23 –

BUSINESS AND FINANCIAL REVIEW

Overview

In the first half of 2018, the Group continued to be confronted with challenging factors, including but not limited to: the ongoing lackluster conditions in the domestic catering and consumer markets, intensified sector competition, and the significant increase in raw material costs such as corn kernels and coal during the six months ended 30 June 2018, as compared to the same period in 2017. Although committed to making necessary ongoing investments for implementing its long-term development strategy, the Group also had to actively implement cost controls in order to address these challenges. In terms of the MSG business, the Group faced lackluster conditions in the domestic catering and consumer markets as well as pricing pressure due to market competition. Despite these market conditions, the Group focused on increasing its market share and sales volume by leveraging its cost advantages to adopt competitive pricing. However, the significant increase in raw material costs, particularly corn kernels and coal, resulted in a significant decrease in the Group’s gross profit and gross profit margin of MSG business during the period.

As the leader in the industry, the Group achieved stable development for its core business and also further consolidated its leading 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 recognized the importance of using advanced technologies to continually improve our production efficiency and develop new products. The Group also actively explored the development of amino acid products for animal nutrition, high-end amino acid products for pharmaceutical, health care and beauty and food additives mainly as starch sweeteners, 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 the first half of 2018, the Group actively strengthened our competitiveness and constantly improved the production technology to achieve better cost effectiveness and help stablize our profitability.

The strategy of our product development is mainly divided into four categories: 1. Food additives (key products include MSG, glutamic acid, compound seasoning, starch sweeteners, corn oil etc.), 2. Animal nutrition (key products include threonine, corn refined products etc.), 3. Colloid (key products include xanthan gum, welan gum, pectin etc.), and 4. High-end amino acid (key products include valine, leucine, isoleucine, glutamine, hyaluronic acid etc.).

– 24 –

MSG industry consolidation continued during the period under review. As the central government further strengthened the environmental policies, some production capacities in the sector were eliminated. However, the costs of core materials, including corn kernels and coal, recorded an upward trend during the first half of 2018, which led to a significant increase in production costs and a decrease in the gross profit margin of our key products. The Group recorded a significant decrease in its overall gross profit and net profit during the first half of 2018 compared to the corresponding period of 2017.

Overall revenue of the Group slightly increased for the six months ended 30 June 2018, and the Group was able to rely on the growth products such as starch sweeteners, threonine and high-end amino acids and effective implementation of cost controls to maintain its overall profitability. The high-end amino acid products 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 suppliers of threonine and high-end amino acid products. The Group has further enhanced its business strategy to adjust its production capacities according to market demand. The strategy not only fully utilizes the cost advantages of the Group but also leverages on the Group’s pricing power to maximize its profitability.

Our Amino acid segment is primarily made up of three main category products including Food additives (key products include MSG and starch sweeteners), Animal nutrition (key products include threonine and corn refined products) and High-end amino acid (key products include valine, leucine, isoleucine, glutamine, hyaluronic acid).

In terms of Food additives business, the ASP and sales volume of MSG slightly increased in the first half of 2018. However, costs of major raw materials, particularly corn kernels and coal, increased significantly during the period. The Group continued to face lackluster conditions in the domestic catering and consumer markets as well as pricing pressure due to market competition. Despite the market conditions, the Group was able to maintain its leadership in terms of market share and sales volume by leveraging its cost advantages to adopt competitive pricing. The Group recorded a significant decrease in gross profit and gross profit margin of the MSG business, which negatively affected the result contribution from the MSG business during the period.

On the other hand, the new Longjiang Plant phase one has commenced production since the first half of 2018 and the annual production capacity of starch sweeteners increased to 420,000 tonnes. The sales revenue from starch sweeteners significantly increased to RMB433.6 million, a 39.5% increase, as compared to the corresponding period of 2017.

In terms of Animal nutrition business, the Group recorded a slightly increased contribution from the sales of threonine and the expansion of threonine continued to increase its revenue contribution to the Group.

On the other hand, the sales of high-end amino acid products decreased during the six months ended of 30 June 2018, mainly due to the restructuring of our internal products portfolio, lackluster conditions in the domestic consumer markets and stiff market competition.

– 25 –

As another key business segment of the Group, our Xanthan gum business has returned to stability since the second half of 2017 as market conditions in the oil industry recover. The ASP of xanthan gum increased to RMB15,004 per tonne, representing an increase of 18.9% during the six months ended of 30 June 2018, as compared to the corresponding period of 2017. The Xanthan gum business demonstrated a recovering trend in the first half of 2018. During the period, we slightly increased the annual production capacity of xanthan gum to 65,000 tonnes by means of a new production line commencing operation in our Xinjiang Plant. The Group, as the largest xanthan gum manufacturer in the world, continued to dominate the global market share during the six months ended of 30 June 2018.

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

RMB (Million)

==> picture [263 x 177] intentionally omitted <==

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

14,000
13,033.5
13,000
11,803.1
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 6,210.6 [6,610.2]
6,000
5,000
4,000
3,000
2,000
1,000
0
2011 2012 2013 2014 2015 2016 2017 1H 2017 1H 2018
----- End of picture text -----

For the six months ended 30 June 2018, the Group’s revenue increased to approximately RMB6,610.2 million, as compared to approximately RMB6,210.6 million for the six months ended 30 June 2017. The increase in revenue was primarily due to (1) the increase in annual production capacity of starch sweeteners and threonine in the new Longjiang Plant, and (2) the increase in the sales volume of MSG, starch sweeteners, threonine and xanthan gum.

The Group’s overall gross profit decreased from approximately RMB1,401.6 million in the first half of 2017 to approximately RMB1,121.5 million in the first half of 2018. This represents a decrease of 20.0%, primarily due to the increase in the major raw material costs, particularly corn kernels and coal.

In the first half of 2018, the ASP of the MSG increased slightly by 6.6% compared to the corresponding period of 2017, which was not sufficient to cover the significant increases of the average price of corn kernels and coal. On the other hand, the ASP of xanthan gum increased by 18.9% compared to the corresponding period of 2017, as market conditions of xanthan gum demonstrated an upward trend in the global oil industry.

– 26 –

In view of the challenging market conditions, the Group had to continue actively implementing cost controls and managed to undertake a technological enhancement to its production processes, which contributed to improvements in production efficiency and cost structure. The significantly decreased gross profit margin of the Amino acid segment in the first half of 2018 was mainly due to the increase in major raw material costs. Meanwhile, the effect could not be fully transferred to customers by increasing the price of MSG and other major products.

The production of MSG decreased by approximately 20.2% while sales volume slightly increased by 3.8% in the first half of 2018 as compared to the first half of 2017, respectively. The production volume of MSG decreased, which was mainly due to the change of business strategy to adjust the production capacity of MSG according to market demand. The strategy not only fully utilised the cost advantages of the Group but also leveraged on the Group’s pricing power to maximise its profitability.

The production and sales volume of starch sweeteners increased by approximately 48.1% and 38.8% in the first half of 2018 as compared to the first half of 2017, respectively. The production volume increased as a result of the new production capacity of starch sweeteners commencing operation in our new Longjiang Plant.

Animal nutrition and High-end amino acid business

We continued the development of our threonine business. Threonine is a type of amino acid which is used as animal feed additives. During the six months ended of 30 June 2018, the sales of threonine reached approximately RMB668.9 million, representing an increase of 5.9% as compared to the first half of 2017. The Group sold approximately 79,407 tonnes of threonine in the first half of 2018, as compared to 76,036 tonnes in the first half of 2017.

In January 2018, the Group and Evonik entered into a cooperation agreement for the production of ThreAMINO[®] (L-Threonine). The Group will manufacture ThreAMINO[®] on behalf of Evonik and the collaboration enables Evonik to ensure a reliable supply of L-Threonine worldwide. The strategic partnership further strengthened the Group’s market leadership in threonine, which is the new growth driver of the Group.

The Group’s high-end amino acid products are developed using different types of corn-based biochemical products by leveraging the Group’s fermentation technology. The high-end amino acid products include valine 纈氨酸, leucine 亮氨酸, isoleucine 異亮氨酸, glutamine 谷氨醯 胺 and hyaluronic acid 透明質酸, etc. During the six months ended 30 June 2018, the sales of high-end amino acid products reached approximately RMB419.8 million, representing a decrease of 7.8% as compared to the first half of 2017. Our high-end amino acid products focus on the health and wellness and pharmaceutical materials industries and generally enjoy higher profitability. 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. 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 for bulk trade to those of high-end products.

– 27 –

The production and sales volume of xanthan gum increased by 64.1% and 0.2%, respectively, in the first half of 2018 as compared to the first half of 2017. The production volume of xanthan gum increasing significantly during the period was mainly due to the reducing closing stock level in 2017.

Overall, the diversity of the Group’s product portfolio allowed the Group to maintain its overall revenue growth momentum in the first half of 2018.

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
	2018	2017	%
Turnover_(RMB’000)_	6,610,222	6,210,619	6.4
Gross profit_(RMB’000)_	1,121,477	1,401,607	(20.0)
Gross profit margin_(%)_	17.0	22.6	(5.6) ppts.

As weakness in China’s economy continued and major raw material costs increased in the first half of 2018, the performance of the Group in terms of gross profit and gross profit margin was significantly affected, especially reflected in the MSG business. Although the ASP of MSG slightly increased during the period, it could not offset the effect from an increase in raw material costs, particularly corn kernels and coal. Although the ASP of other main products such as threonine, high-end amino acid and starch sweeteners recorded slight increases compared to the corresponding period of 2017, overall gross profit decreased by 20.0% in the first half of 2018.

On the other hand, the market condition of xanthan gum stabilised, resulting in the ASP of xanthan gum increasing in the first half of 2018. The result contribution from Xanthan gum segment increased for the six months ended of 30 June 2018.

– 28 –

Profit attributable to the Shareholders

	Six months ended	30 June
	2018	2017	Change
	RMB’000	RMB’000	%
As reported	314,998	642,560	(51.0)

Our profit attributable to the Shareholders decreased by 51.0% for the six months ended 30 June 2018 as compared to the corresponding period in 2017.

Segment Highlights

The Group’s products are organised into two business segments, namely Amino acid segment and Xanthan gum segment. Amino acid segment includes three main categories of products: 1. Food additives (key products include MSG, glutamic acid, compound seasoning, starch sweeteners, corn oil etc.), 2. Animal nutrition (key products include threonine, corn refined products etc.), and 3. High-end amino acid (key products include valine, leucine, isoleucine, glutamine, hyaluronic acid etc.), while Xanthan gum segment represents the production and sale of xanthan gum and colloids such as welan gum.

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

	Six months ended 30	Six months ended 30	June 2018	Six months ended 30	Six months ended 30	June 2017	Increase/(Decrease)	Increase/(Decrease)	Increase/(Decrease)
	Amino	Xanthan		Amino	Xanthan		Amino	Xanthan
	acid	gum	Group	acid	gum	Group	acid	gum	Group
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	%	%	%
	**Unaudited **	**Unaudited **	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	6,222,207	388,015	6,610,222	5,878,596	332,023	6,210,619	5.8	16.9	6.4
Gross profit	997,028	124,449	1,121,477	1,314,398	87,209	1,401,607	(24.1)	42.7	(20.0)
Gross profit ratio	16.0%	32.1%	17.0%	22.4%	26.3%	22.6%	(6.4) ppts.	5.8 ppts.	(5.6) ppts.
Segment results	347,337	101,856		766,576	48,783		(54.7)	108.8
Segment net assets
Assets	12,854,755	4,106,911		9,786,329	4,106,802		31.4	0.0
Liabilities	6,234,387	1,058,955		4,173,230	1,202,621		49.4	(11.9)

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

– 29 –

Amino acid segment

Amino acid segment mainly includes the sales of three main categories products including Food additives (key products include MSG and starch sweeteners), Animal nutrition (key products include threonine and corn refined products) and High-end amino acid (key products include valine, leucine, isoleucine, glutamine, hyaluronic acid) and other related products.

Revenue and average selling price (“ASP”)

Revenue generated from the sales of the Amino acid segment products increased to RMB6,222.2 million in the first half of 2018, representing an increase of RMB343.6 million, or 5.8%, as compared to the corresponding period of 2017, mainly attributed to the increase in the revenue of MSG and starch sweeteners. The increased revenue of MSG was primarily due to the effect of an increase in the sales volume and slight increase in ASP of MSG during the period. The sales volume of MSG was approximately 568,439 tonnes in the first half of 2018, representing a slight increase of 3.8% as compared with the corresponding period of 2017, which was mainly due to increased marketing efforts and competitive pricing. In addition, the revenue of starch sweeteners increased, primarily due to the effect of an increase in the sales volume of starch sweeteners during the period. The sales volume of starch sweeteners was approximately 159,478 tonnes in the first half of 2018, representing an increase of 38.8% as compared with the corresponding period of 2017, largely a result of the added production capacity of starch sweeteners in the new Longjiang Plant which has commenced operations since the first half of 2018.

The table below sets out the revenue of the products in this segment for the six months ended 30 June 2018 and 2017:

Product MSG Glutamic acid Fertilisers Corn refined products Starch sweeteners Threonine High-end amino acid products Corn oil Compound seasoning Synthetic ammonia Others	Six months ended 30 June 2018 2017 Change RMB’000 RMB’000 % 3,322,145 2,998,000 10.8 171,128 226,215 (24.4) 143,574 161,805 (11.3) 844,380 988,587 (14.6) 433,612 310,909 39.5 668,880 631,338 5.9 419,846 455,494 (7.8) 4,401 4,749 (7.3) 10,882 9,615 13.2 94,208 8,850 964.5 109,151 83,034 31.5 6,222,207 5,878,596 5.8

– 30 –

Detail sales and gross profit analysis by three major categories in amino acid segment:

	Food	Animal	High-end
	additives	nutrition	amino acid	Others	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	3,942,168	1,513,260	498,324	268,455	6,222,207
Gross profit	447,637	313,318	206,768	29,305	997,028
Gross profit margin	11.4%	20.7%	41.5%	10.9%	16.0%

Food additives

MSG

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 2016 to the second quarter of 2018:

==> picture [275 x 186] intentionally omitted <==

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

RMB/Tonne
6,200 6,091
5,996 5,986
6,000 5,941
5,969
5,800
5,603
5,600 5,691 5,711
5,400
5,200 5,334
5,275
5,000
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18
MSG
----- End of picture text -----

The Group maintained its market leadership in the MSG business through increased marketing efforts and competitive pricing. While the ASP increased by 6.6%, from RMB5,475 per tonne in the first half of 2017 to RMB5,838 per tonne in the first half of 2018, sales volume increased by 3.8%, from 547,672 tonnes in the first half of 2017 to 568,439 tonnes in the first half of 2018. As a result, turnover of MSG increased by 10.8% in the first half of 2018.

In the first half of 2018, 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. Exports of MSG products decreased from approximately RMB602.2 million in the first half of 2017 to approximately RMB514.9 million in the first half of 2018.

– 31 –

Starch sweeteners

Turnover of starch sweeteners increased by approximately 39.5% in the first half of 2018, which was primarily due to an increase in sales volume of starch sweeteners to approximately 159,478 tonnes in the first half of 2018. The annual production capacity of starch sweeteners increased to 420,000 tonnes as the new Longjiang Plant commenced operation in the first half of 2018. The ASP of starch sweeteners was relatively stable, increasing approximately RMB2,702 per tonne in the first half of 2017 to approximately RMB2,778 per tonne in the first half of 2018, whilst demand for our starch sweeteners was also stable during this period. It became apparent that our new production capacity of starch sweeteners can be properly absorbed by the market demand during the period.

Animal nutrition

Threonine

Threonine is a growth product of the Group, with annual production capacity increasing to 243,000 tonnes as the new Longjiang Plant commenced operation in the first half of 2018. Threonine is classified as a major type of our animal nutrition product in the Amino acid segment. It is an essential amino acid which maintains body protein balance and promotes the growth of living things and our threonine is mainly used as animal feed additives. The total revenue of threonine increased by about 5.9% in the first half of 2018 as compared to the corresponding period of 2017, which was primarily due to the increased sales volume of threonine from approximately 76,036 tonnes in the first half of 2017 to approximately 79,407 tonnes in the first half of 2018. The ASP of threonine was stable, slightly decreasing from approximately RMB8,319 per tonne in the first half of 2017 to approximately RMB8,311 per tonne in the first half of 2018.

Corn refined products

Bacterial protein are classified into the corn refined products category and the revenue of corn refined products decreased by about 14.6% for the six months ended 30 June 2018 as compared to the same period in 2017. This was mainly due to a decrease in the ASP of bacterial protein from RMB2,482 per tonne in the first half of 2017 to RMB2,226 per tonne in the corresponding period of 2018, representing a decrease of 10.3%.

High-end amino acid products

The total sales amount of high-end amino acid products including valine, leucine, isoleucine, glutamine and hyaluronic acid etc, decreased to approximately RMB419.8 million in the first half of 2018 as compared to approximately RMB455.5 million in the corresponding period of 2017. 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.

– 32 –

Others

Fertilisers

The ASP of compound fertilises for the six months ended 30 June 2018 was approximately RMB369 per tonne, representing a decrease of RMB70, or about 15.9%, as compared to the corresponding period of 2017. Due to weak market demand, the ASP of fertilisers was in line with prevailing market conditions. As a result, the revenue of fertilisers decreased from RMB161.8 million for the six months ended 30 June 2017 to RMB143.6 million for the six months ended 30 June 2018. As the Group has continuously enhanced development of high value added fertilisers products, the ASP of fertilisers was in line with prevailing market conditions.

Gross Profit and Gross Profit Margin

The gross profit of this segment is set out below:

	Six months ended	30 June
	2018	2017	Change
Gross profit_(RMB’000)_	997,028	1,314,398	(24.1)%
Gross profit margin_(%)_	16.0	22.4	(6.4) ppts.

The decreasing gross profit contribution from amino acid segment was mainly due to increases in major raw material costs as well as pricing pressure due to market competition. Gross profit decreased to RMB997.0 million and gross profit margin decreased by 6.4 percentage points to 16.0% for the six months ended 30 June 2018. The Group strengthened the portfolio of our products, such as starch sweeteners, animal nutrition and high-end amino acids products and also maintained its competitive pricing strategy in order to expand its market share. As market conditions gradually return to normal and with the gradual resumption of growth in the future, we believe that the ASP of our major products will witness a return to stability going forward.

– 33 –

Production costs

Six months ended 30 June

Major raw materials • Corn kernels • Liquid ammonia • Sulphuric acid Energy • Coal Depreciation Employee benefits Others Total cost of production	2018 RMB’000 % 2,191,704 43.7 72,068 1.4 48,347 1.0 734,533 14.7 388,444 7.8 293,922 5.9 1,283,148 25.5 5,012,166 100.0	2017 Change RMB’000 % % 2,410,522 47.7 (9.1) 96,854 1.9 (25.6) 43,842 0.9 10.3 669,318 13.3 9.7 383,593 7.6 1.3 299,828 5.9 (2.0) 1,147,355 22.7 11.8 5,051,312 100.0 (0.8)

Corn kernels

During the first half of 2018, corn kernels accounted for approximately 43.7% (1H 2017: 47.7%) of the total production cost of this segment, representing a decrease of 4.0 percentage points. The average price of corn kernels for six months ended 30 June 2018 was approximately RMB1,417 per tonne, representing a significant increase of 11.4% as compared to the corresponding period of 2017. The increase in average unit cost of corn kernels for the six months ended 30 June 2018 was due to strength in demand and the overall economy.

The total cost of corn kernels decreased by 9.1% in the first half of 2018, which was mainly due to the decrease in consumption volume as the actual production volume of MSG decreased during the period.

==> picture [262 x 157] intentionally omitted <==

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

Price Trend of Corn Kernels
RMB/Tonne
2,000 1,928
1,800
1,693
1,600
1,469
1,417
1,351
1,400 1,340
1,272
1,200
1H15 2H15 1H16 2H16 1H17 2H17 1H18
----- End of picture text -----

– 34 –

Liquid ammonia

Liquid ammonia accounted for approximately 1.4% (1H 2017: 1.9%) of total production cost in this segment in the first half of 2018. The average unit cost of liquid ammonia for the first half of 2018 increased to approximately RMB2,774 per tonne, which represents an increase of approximately RMB529 per tonne, or 23.6%, from the first half of 2017. As the ASP of liquid ammonia continuously increased, we used less volume of liquid ammonia which was substituted by composite ammonia produced by our company. The total cost of liquid ammonia decreased by 25.6% in the first half of 2018, which was mainly due to the decrease in consumption volume as actual production volume of MSG decreased during the period. In addition, the ASP of liquid ammonia significantly increased, we use more volume of synthetic ammonic, which was produced by our company, to replace liquid ammonia.

Sulphuric acid

Sulphuric acid accounted for approximately 1.0% (1H 2017: 0.9%) of total production cost in this segment in the first half of 2018. The average unit cost of sulphuric acid increased to approximately RMB393 per tonne, which represents an increase of approximately RMB195 per tonne, or 98.5%, from the first half of 2017.

Coal

Coal accounted for 14.7% (1H 2017: 13.3%) of total production cost in this segment in the first half of 2018. The average unit cost of coal for the first half of 2018 was RMB231 per tonne, which represents an increase of RMB31 per tonne, or 15.5%, from the first half of 2017. The increase in coal prices reflects a general increase in commodity prices as market demand increases.

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

==> picture [303 x 111] intentionally omitted <==

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

RMB/Tonne
400 323 331
300
300 247 253 256
221 213 225
192
200 154
124
107
100
0
1H 2017 2H 2017 1H 2018
Shaanxi Inner Mongolia Hulunbeir Xinjiang Heilongjiang
----- End of picture text -----

– 35 –

Production

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

	Six months ended	30 June
Product	2018	2017	Change
	Tonnes	Tonnes	%
MSG
Annual designed production capacity_(Note)_	665,000	615,000	8.1
Actual production output	488,405	612,193	(20.2)
Utilisation rate	73.4%	99.5%
Threonine
Annual designed production capacity_(Note)_	107,000	78,000	37.2
Actual production output	92,848	80,027	16.0
Utilisation rate	86.8%	102.6%
Fertilisers
Annual designed production capacity_(Note)_	540,000	540,000	–
Actual production output	409,778	546,542	(25.0)
Utilisation rate	75.9%	101.2%
Starch sweeteners
Annual designed production capacity_(Note)_	175,000	130,000	34.6
Actual production output	177,154	119,603	48.1
Utilisation rate	101.2%	92.0%

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

Utilisation rates kept stable in the first half of 2018 with the exception of the utilisation rate of production capacity of MSG, which decreased to 73.4%. This represents the changing business strategy of MSG, in which the Group decides the production volume according to market demand in order to minimise the risk from pricing competition. The increase in annual production capacity of starch sweeteners to 420,000 tonnes was due to the production capacity in the new Longjiang Plant commencing operations in the first half of 2018.

Xanthan Gum Segment

The global market demand for xanthan gum trended upward in the first half of 2018, which was mainly due to a recovery in the global oil industry. The Group continued to maintain and increase its market share and the total supply of the top three xanthan gum manufacturers continued to dominate the global market.

– 36 –

Operational results

The table below set out the sales amount, ASP, gross profit, gross profit margin and utilisation rate of xanthan gum for the six months ended 30 June 2018 and 2017:

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	Six months ended 30 June Change 2018 2017 % 388,015 332,023 16.9 15,004 12,624 18.9 124,449 87,209 42.7 32.1 26.3 5.8 ppts. 31,667 30,000 5.6% 25,252 15,384 64.1 79.7% 51.3% 28.4 ppts.

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

Revenue generated from xanthan gum increased by 16.9% from RMB332.0 million in the first half of 2017 to RMB388.0 million in the first half of 2018. The increase in revenue was due to the increases in the ASP and sales volume during the period.

The Group’s exports of xanthan gum decreased in terms of the percentage contribution to total sales. Export sales of xanthan gum contributed 79.4% and 77.1% of total sales of xanthan gum in the first half of 2017 and 2018, respectively, reflecting the volatile condition of the global oil industry.

– 37 –

Sales and ASP

==> picture [265 x 176] intentionally omitted <==

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

Sales Volume vs. ASP of Xanthan Gum
Tonnes RMB/Tonne
36,000 22,000
20,000
29,000
25,485 25,277 25,996 26,826 26,041
18,000
22,000
15,004 16,000
15,000 13,962
14,000
12,624
8,000 11,522 12,000
10,643
1,000 10,000
1H 2016 2H 2016 1H 2017 2H 2017 1H 2018
Sale Volume (tonne) ASP (RMB/tonne)
----- End of picture text -----

Global demand for xanthan gum was stable and slightly increased during the six months ended 30 June 2018. Market demand demonstrated an upward trend in the first half of 2018, therefore, the market condition of the oil industry returned to slight growth. Sales volume increased by 0.2% and sales increased by 16.9% in the first half of 2018, respectively. The ASP of xanthan gum increased to RMB15,004 per tonne, representing an increase of 18.9%. The Group expects this to continue in the foreseeable future as demand remains stable at a low level in the oil industry as well as other sectors. The ASP of xanthan gum is expected to remain stable and have slight growth during the second half of 2018.

Gross profit and gross profit margin

Gross profit of the xanthan gum segment increased by about 42.7%, from approximately RMB87.2 million in the first half of 2017 to approximately RMB124.4 million in the first half of 2018. Gross profit margin increased as well, by 5.8 percentage points, in the first half of 2018, reflecting the general pricing of xanthan gum and the oil industry returning to stability.

– 38 –

Production costs

Major raw materials • Corn kernels • Soybeans Energy • Coal Depreciation Employee benefit Others Total cost of production	Six months ended 30 June 2018 2017 Change RMB’000 % RMB’000 % % 79,098 27.6 40,476 25.1 95.4 17,404 6.1 10,771 6.7 61.6 64,518 22.6 35,507 22.1 81.7 21,349 7.5 14,704 9.1 45.2 23,408 8.2 16,834 10.5 39.1 80,301 28.0 42,649 26.5 88.3 286,078 100.0 160,941 100.0 77.8

As the market demand for xanthan gum has returned to stability since the second half of 2017, the annual production capacity of xanthan gum has increased to 65,000 tonnes since March 2018. The actual production output of xanthan gum increased to 25,252 tonnes in first half of 2018, representing an increase of 64.1% as compared to the corresponding period in 2017. Therefore, the total costs of production for xanthan gum increased to RMB286.1 million, an increase of 77.8%, as compared to the corresponding period of 2017.

Corn kernels

During the first half of 2018, corn kernels represented approximately 27.6% (1H 2017: 25.1%) of the total production cost of this segment, representing an increase of 2.5 percentage points. The average cost of corn kernels for the first half of 2018 was approximately RMB1,717 per tonne, which represents an increase of approximately RMB154 per tonne, or 9.9%, from that of the corresponding period in 2017.

The cost of corn kernels increased 95.4%, from approximately RMB40.5 million in the first half of 2017 to approximately RMB79.1 million in the first half of 2018, mainly due to the increase in price of corn kernels and production volume of xanthan gum.

Soybeans

During the first half of 2018, soybeans accounted for approximately 6.1% (1H 2017: 6.7%) of the total production cost of this segment. Soybeans prices decreased from approximately RMB4,269 per tonne in the first half of 2017 to approximately RMB3,878 per tonne in the first half of 2018, representing a decrease of 9.2%.

– 39 –

Coal

During the first half of 2018, coal accounted for approximately 22.6% (1H 2017: 22.1%) of the total production cost of this segment. The Group took full advantage of the relatively low coal cost utilizing its strategic locations of IM Plant and Xinjiang Plant. The average unit cost of coal for the first half of 2018 was approximately RMB231 per tonne, which represents an increase of approximately RMB33 per tonne, or 16.7%, from that of the first half of 2017.

Other production costs

The cost of employee benefits and other production costs in the first half of 2018 increased as compared to the corresponding period of 2017, mainly due to the other production costs increasing in line with the increases in production volume.

Other financial information

Selling and marketing expenses

An increase in selling and marketing expenses was mainly due to an increase in transportation costs, which was in line with the increase in sales volume of our major products. Marketing and promotional expenses also increased as part of a campaign to strengthen the Group’s brand.

Administrative expenses

Administrative expenses increased by approximately RMB26.1 million, or 11.4%, in the first half of 2018. The increase was mainly due to the new Longjiang Plant construction being completed and commencing operations in the beginning of 2018.

Finance costs (net)

The finance costs (net) of the Group in the first half of 2018 included two main parts: interest expense and exchange gain or loss on financial activities.

Interest expense increased by approximately RMB14.0 million, due to (1) an increase in bank borrowings as our working capital from operations increased, and (2) the interest rate of bank borrowings increased during the six months ended 30 June 2018.

During the first half of 2018, the Group recorded an exchange loss on financing activities amounting to approximately RMB13.5 million, mainly due to the exchange loss of current bank borrowings denominated in USD.

– 40 –

Depreciation

Depreciation expense of the Group increased by approximately RMB25.0 million, or approximately 5.6%, from approximately RMB444.9 million in the first half of 2017 to approximately RMB469.9 million in the first half of 2018. The increase was mainly due to the commencing of operations at the new Longjiang Plant since the beginning of 2018.

Other income

In the first half of 2018, other income amounted to RMB131.2 million, which mainly comprised the income from the sales of waste products, amortization of deferred income and government grants.

Continuing connected transaction

On 5 July 2017, the Company and Inner Mongolia Wo Feng Agricultural Development Company Limited (內蒙古沃豐農業發展有限公司, the “ Purchaser ”) entered into the Procurement Framework Agreement, pursuant to which the Company has agreed to supply the Purchaser fertiliser products during the term of the Procurement Framework Agreement. Pursuant to the Procurement Framework Agreement, the Company shall supply fertiliser products to the Purchaser on normal commercial terms, of which the sale price shall not be lower than the price of similar products sold by the Company to independent third parties in its ordinary course of business. As at the date of the Procurement Framework Agreement, 68.06% equity interest of the Purchaser is held by Ms. Li Hongyu, the daughter of Mr. Li Xuechun, an executive Director and the chairman of the Board, and sister of Mr. Li Guangyu, an executive Director. Therefore the Purchaser is a connected person of the Company. The Company considers that working with the Purchaser, which has assembled an experienced and professional team to operate its fertiliser business and has in place an extensive sales and distribution network, will be beneficial to the future development of the fertiliser business of the Group.

The Procurement Framework Agreement can (i) promote sales growth of the Group’s fertilisers; (ii) expand the sales channel and market penetration of the Group’s fertilisers; and (iii) enhance the recognition and competitiveness of the Group’s fertilisers in the PRC market by leveraging on the Purchaser’s sales network and experienced sales team in the fertiliser industry.

The Company estimated that its sales volume of fertiliser products to the Purchaser under the Procurement Framework Agreement would be 120,000 tonnes, 250,000 tonnes and 350,000 tonnes for the years ending 31 December 2017, 2018 and 2019, respectively. The annual cap of the revenue would be RMB54 million, RMB112.5 million and RMB157.5 million for the years ending 31 December 2017, 2018 and 2019, respectively. During the first half of 2018, the sales volume of fertilisers to the Purchaser under the Procurement Framework Agreement was approximately 74,035 tonnes, resulting in sales revenue of RMB36.2 million.

– 41 –

The independent non-executive Directors have reviewed the continuing connected transactions under the Procurement Framework Agreement and confirm that the transactions have been entered into: (1) in the ordinary and usual course of business of the Group; (2) on normal commercial terms or better; and (3) on terms that are fair and reasonable and in the interests of the Shareholders as a whole.

The audit committee of the Company have also reviewed the continuing connected transactions under the Procurement Framework Agreement and confirm that nothing has come to their attention that causes them to believe that the continuing connected transactions: (1) have not been approved by the Board; (2) were not, in all material respects, in accordance with the pricing policies of the Group; (3) were not entered into, in all material respects, in accordance with the Procurement Framework Agreement; or (4) have exceeded the cap.

Income tax expense

The income tax expenses for the six months ended 30 June 2018 mainly represented the PRC Enterprise Income Tax (“ EIT ”). Two subsidiaries of the Group including Shandong Fufeng and Shenhua Pharmaceutical, have obtained the approvals to become a new and hightechnology enterprise and had been entitled to a preferential income tax rate of 15% (1H 2017: 15%). The qualification of new and high-technology enterprise is subject to renewal for each three years interval.

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%.

Four subsidiaries of the Group, including 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 of 15% (1H 2017: 15%).

The other subsidiaries of the Group in the PRC are subject to an income tax rate of 25% (1H 2017: 25%).

– 42 –

Outlook for second half of 2018

Amino acid segment

The Group will continuously explore the development of amino acid products for animal nutrition, high-end amino acid products for pharmaceutical, health care and beauty and food additives mainly as starch sweeteners, in order to improve product class and increase sales and penetration in health and wellness products, pharmaceutical entities and the skin care products field. Only by continuously upgrading our product quality and expanding our product range can we transform gradually from a traditional, bulk-trade enterprise towards a modern, hightech and high value-added supplier of biochemical products.

The market demand for threonine continues to grow. Therefore, the Group will continuously work with our strategic customers in threonine to deepen our global market penetration and further enhance the product quality and value.

Xanthan gum segment

Although the market condition of xanthan gum remained slow recovery, the demand for xanthan gum stabilised in the first half of 2018 and the Group will strengthen our effort to promote xanthan gum in the food industry. By leveraging on our leading position in the xanthan gum market, the Group will continue to optimise its customer mix and gain market share and we believe that we can act as a leader to bring the industry out of the low tide in 2018.

FUTURE PLAN AND RECENT DEVELOPMENT

I. Completion and commencement of the second phase of the Longjiang base

The second phase of the Longjiang base in Qiqihar Heilongjiang will commence pilot production as planned in the fourth quarter of this year, adding 300,000 tonnes of starch sweeteners and 200,000 tonnes of lysine to our production capacity. Meanwhile, by fully capitalizing on its regional resource advantages and cost advantages, the Group occupies a dominant position in the market competition in terms of crystalline glucose products. Our long-term goal is to replace the other high-cost production capacities in North China and other regions in China. The production and sales of lysine products will enrich the Group’s existing animal nutrition products package to be more complete and comprehensive. In combination with the current threonine and tryptophan products, the distribution and integrated sales of the “lysine – threonine – tryptophan” structure will provide a “package” solution for feed enterprises and breeding customers, enabling stronger overall competitiveness of the Group’s animal nutrition products.

– 43 –

II. Favourable position in the MSG industry fully utilised to improve efficiency

Starting from the middle of this year, the MSG industry, under the combined effects of market factors and environmental inspections, began to face the scenario of “discontinued/ limited production”, a condition which has not been seen for years and has led to a significant reduction in the production and supply of MSG in the domestic market. It is estimated that the overall supply of the industry will be lower than last year. Such “supply side” reduction and exclusion have created favorable conditions for leading enterprises in the industry to divert cost pressure and increase the price of MSG products. At present, the competition landscape of the MSG industry has become increasingly clear, in which case, the general supply of the industry is stable despite a decline, while the demand is expected to remain stable for a long time. In this regard, the MSG market will ride out the long-term situation where “supply exceeds demand”, and is expected to make a good contribution to the Group in terms of product efficiency and return on investment.

III. Completion of the sale of the land parcel in Baoji for returns on investments

On 1 August 2018, the Group announced the sale of the parcel of land in Baoji City, Shaanxi Province, PRC for an aggregate consideration of RMB1,792.3 million. The transaction is estimated to result in a one-off gain of approximately RMB1 billion to the Group and will contribute to the cash flow in the coming months.

Liquidity and financial resources

As at 30 June 2018, the Group’s cash and cash equivalent and restricted bank deposits were RMB822.2 million (31 December 2017: RMB515.4 million) whereas current bank borrowings and current other borrowing (including the balances of corporate bonds) were approximately RMB1,828.1 million and RMB998.4 million (31 December 2017: RMB415.0 million and RMB995.9 million). Non-current bank borrowings were approximately RMB570.5 million (31 December 2017: RMB560.3 million).

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.

– 44 –

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 2018.

Employees

As at 30 June 2018, the Group had approximately 12,000 employees (31 December 2017: 9,500 employees). Employees’ remunerations are paid in accordance with relevant PRC policies. Appropriate salaries and bonuses are commensurate with the actual practices of the Group. Other corresponding benefits include pension, unemployment insurance, housing allowance, etc.

Charges on assets

As at 30 June 2018, there were no charges on assets for bank borrowings (31 December 2017: Nil).

The non-current bank borrowings are guaranteed 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, under an inter-creditor agreement. 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 2018, the total assets of the Group amounted to approximately RMB17,744.9 million (31 December 2017: RMB15,966.5 million) whereas the total borrowings amounted to RMB3,397.0 million (31 December 2017: RMB1,971.2 million). As at 30 June 2018, the gearing ratio was approximately 19.1% (31 December 2017: 12.3%). The gearing ratio is calculated based on the Group’s total interest-bearing borrowings over total assets.

Foreign exchange exposure

The Directors do not consider that the exposure to foreign exchange risk is significant to the Group’s operation as the Group operated mainly in the PRC and most of the Group’s transactions, assets and liabilities were denominated in RMB. Foreign currencies were, however, received for the export sales of products and foreign currency bank borrowings. Such proceeds were subject to foreign exchange risk before receiving and converting them into RMB. The Group slowed down the exchange settlement as a result of the devaluation of the RMB. The Group manages foreign exchange risk arising from proceeds from bank borrowings by remitting the necessary funds to the PRC and using the proceeds based on operational needs and foreign exchange market situation. The Group did not use any derivatives to hedge its exposure to foreign exchange risk for the six months ended 30 June 2018.

– 45 –

Dividend

The Board has resolved to pay an interim dividend of HK4.2 cents per Share for the year ended 31 December 2018, payable on or before 28 September 2018 to the Shareholders whose names appear on the register of members of the Company on 20 September 2018.

Closure of register of members

The register of members of the Company will be closed from Monday, 17 September 2018 to Thursday, 20 September 2018 (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, 14 September 2018.

OTHER INFORMATION

Corporate governance

The listing of the Shares on the Main Board of the Stock Exchange took place on 8 February 2007 and the Directors are of the opinion that the Company’s corporate governance practices are based on the principles and code provisions (“ Code Provisions ”) set out in the Code of Corporate Governance Practices (the “ Former CG Code ”) which was subsequently revised as the Corporate Governance Code (the “ Revised CG Code ”) contained in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange (“ Listing Rules ”) and came into full effect on 1 April 2012. For the six months ended 30 June 2018, the Company has complied with the Code Provisions of the Revised CG Code except for the following: Code provision A.6.7 of the Revised Code: The Independent non-executive Directors and the nonexecutive Directors should attend the general meetings of the Company.

Due to other commitments, Mr. Xiao Jian Lin and Mr. Qi Qing Zhong, an independent nonexecutive Director, did not attend the annual general meeting of the Company held on 21 May 2018. All the Directors have given the Board and the committees of which they are members the benefit of their skills, expertise and varied backgrounds and qualifications through regular attendance and active participation. The Directors will also endeavor to attend future general meetings and develop a balanced understanding of the views of Shareholders.

The audit committee of the Company has reviewed the Group’s unaudited interim financial statements for the six months ended 30 June 2018.

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.

– 46 –

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 2018.

By order of the Board Fufeng Group Limited Li Xuechun Chairman

Hong Kong, 10 August 2018

As at the date of this announcement, the executive directors of the Company are Mr. Li Xuechun, Mr. Zhao Qiang, Mr. Li Deheng, Mr. Pan Yuehong and Mr. Li Guangyu and the independent non-executive directors of the Company are Mr. Xiao Jian Lin, Mr. Qi Qingzhong and Ms. Zheng Yu.

– 47 –

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 at Baoji City (寶雞市)
	in the Shaanxi Province, the PRC
Board	the board of Directors
Company	Fufeng Group Limited
Director(s)	the director(s) of the Company
Evonik	Evonik Nutrition & Care GmbH (贏創營養與消費化學品有限
	責任公司), having its registered office in Germany
Group	the Company and its subsidiaries
HKFRS	Hong Kong Financial Reporting Standards
Hong Kong	the 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
	Monogolia Autonomous Region, the PRC
IM Fufeng	內蒙古阜豐生物科技有限公司( N e i m e n g g u F u f e n g
	Biotechnologies Co., Ltd.), an indirect wholly-owned subsidiary
	of the Company
IM Plant	the production plant of the Group located at Inner Mongolia
	Autonomous Region, the PRC
Listing Rules	the Rules Governing the Listing of Securities on the Stock
	Exchange
Longjiang Fufeng	齊齊哈爾龍江阜豐生物科技有限公司(Qiqihar Longjiang
	Fufeng Biotechnologies Co., Ltd.), an indirect wholly-owned
	subsidiary of the Company

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Longjiang Plant	the production plant of the Group located at Qiqihar city,
	Heilongjiang Province, the PRC
Model Code	Model Code for Securities Transactions by Directors of Listed
	Issuers as set out in Appendix 10 of the Listing Rules
MSG	monosodium glutamate, a salt of glutamic acid which is
	commonly used as a flavour enhancer and additive in the food
	industry, restaurant and household application
PRC	the People’s Republic of China, which for the purpose of
	this announcement exclude Hong Kong, the Macau Special
	Administrative Region of the PRC and Taiwan
Procurement Framework	the procurement framework agreement entered into between the
Agreement	Company and the Purchaser dated 5 July 2017
Proposed Spin-off	the proposed spin-off of Shenhua Health Holdings Limited by
	the Company to be effected by way of the Distribution
Shandong Fufeng	山東阜豐發酵有限公司(Shandong Fufeng Fermentation Co.,
	Ltd.), an indirect wholly-owned company of the Company
Shandong Plant	the production plant of the Group located at莒南縣(Junan
	County), Shandong Province, the PRC
Share(s)	share(s) in the share capital of the Company
Shareholder(s)	holder(s) of the Share(s)
Shenhua Pharmaceutical	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
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

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

– 50 –