West China Cement Limited - Interim Results

West China Cement Limited - Interim Results
18 September 2007

Financial Highlights

•    Group turnover for the first half of the year up by 46% to Rmb
     201 million (June 2006: Rmb 138 million); Pucheng plant Rmb 152 million
     (June 2006: Rmb 138 million) and Lantian plant, which came into operation
     in Apr 2007, Rmb 49 million
•    Profit before tax up by 72% to Rmb 56 million (June 2006: Rmb32 million)
•    Other operating income of Rmb 12 million (June 2006: Rmb 2 million)
     includes Rmb 11 million VAT rebates (June 2006: Rmb 2 million). The
     significant change is due to the timing of approval and recognition
•    Net debt to equity at 30 June 2007 was 42% (30 June 2006: 155%)
•    Operating cashflow was Rmb 83 million (June 2006: Rmb 57 million)
•    Working capital increased as a result of significant increase in capacity
     and turnover

Operational Highlights
• Lantian 1 completed on 26 March and was producing at normal production level in May and June 2007
• Lantian 2 was completed after the period-end, at the end of July 2007
• Lantian waste heat project is according to plan and is expected to complete in April next year
•    The Group improved its Lantian facilities enabling the use of
     de-sulphurised gypsum in the production process, increasing the capacity to
     use wet fly-ash rather than dry and bringing the crushing of limestone
•    The Board has approved the Ankang project (building a 1.9 million tonnes
     per annum plant in southern Shaanxi province) 

Chairman’s Statement
I am delighted to report profit before tax of Rmb55.9m (£3.7m) in the six months to 30 June 2007, an increase of 72% on the first half of last year. Sales amounted to 913,000 tonnes, an increase of 31%, reflecting a maiden contribution from the Lantian 1 plant which started up at the end of March and was running around design capacity by June. Prices were strong on the back of robust demand, and, while there was inflation of input costs, costs were well controlled. The slight decrease in gross margin, from 36% to 34% was due to higher coal prices in the first three months of the year. The coal price has now fallen back to the previous level. VAT credits increased to Rmb11.4m from Rmb2m as a result of success in obtaining an annual approval from the local tax office in April whereby the VAT rebates are now recognised when
sales occur.

The successful commissioning of Lantian 1 was another key milestone. This was followed by the commissioning of Lantian 2 at the end of July. Both these 1m tonne a year plants should be running at capacity by the year end, increasing our production to 3.5m tonnes a year. The Board agreed to changes of scope to the Lantian project, which will improve its operating efficiency, increasing the final estimated cost of the project by Rmb50m to Rmb470m.

A number of factors have caused the Board to review the company’s strategy, with the result of increasing our ambition and determination to take advantage of the remarkable growth opportunities we face. Firstly we gain confidence from the success of the two Lantian projects, confidence that we can handle a more rapid rate of expansion. Secondly we see an opportunity for West China Cement to meet the ambitions of the Shaanxi government to have a handful of producers operating to the highest standards and meeting the development needs of the province. We are seeking opportunities to grow the business to 8 to 10m tonnes a year. The first of these is the Ankang project, but we are actively examining other opportunities both by organic growth and by acquisition.

We are confident that we could finance the Ankang project from a combination of internally generated cash and bank debt. However, if we are to realise the potential available to us over the next two to three years, it may be appropriate to strengthen our financial position further, and we will be looking at financing options.
We are not in a position at this stage to go into detail on the likely expansions beyond the agreed Ankang project. Ankang is an area to the south of Lantian, far from other cement producers of substance, and whose mountainous terrain favours a local producer. We have gained the necessary consents and made the arrangements to build a plant based on a single kiln, producing 1.9m tonnes a year. Construction is due to start in the last quarter of 2007 and completion is scheduled for early in 2009. The capital cost is Rmb630m. This will make WCC a 5.4m tonne company, well on the way to achieving our medium term ambition.
The outlook remains robust although recent trading has been affected by unusually severe rain, especially in August. This disrupted the supply of limestone to the Lantian plants causing temporary production delays and necessitated buying in clinker to meet market demand, which will have some effect on margins in the second half. Accordingly we expect full year results to be slightly below current market expectations although every effort will be made to make up the shortfall in the fourth quarter.

The opportunity to grow in west China is exciting. The company is committed to fully exploiting this opportunity. We aim by 2010 to be a market leader in Shaanxi province and one of the top 50 Chinese cement producers.

Robert Robertson
Non-Executive Chairman
14 September 2007
Unaudited Consolidated Income Statement
for the six months ended 30 June 2007
Published under Cement News