(HAIK.L) Haike Chemical Group Ltd Buy/Sell

Mr. Yang Xiaohong, Executive Chairman, said:

"I am pleased to present our results for the first six months of 2009, during which time the Company returned to profitability, following a loss reported in the same period in 2008. This was largely due to increased profit margins in the oil refinery business. In early 2009, the PRC Government implemented a new pricing mechanism for refined products and made five successive adjustments to the prices of domestic refined products in order to align the price trends of domestic refined products to international crude oil prices. As a result, the Company's petrochemical division recorded an impressive $12.4m profit in the first six months of 2009. This compares with a loss of $6.2m in the first half of last year.

With the background of the global financial crisis, there has been a slowdown in the real economy and a decline in demand for chemical products. In response, the PRC government successfully launched a RMB4 trillion stimulus plan and implemented a series of policies aimed at recovery. These included substantially raising tax refunds on the export of chemical products and their related finished products. I believe this will have a positive impact on overall economic activity, which in turn will improve the prospects for the Company's speciality chemical division.

While we recognise the volatile nature of most of the markets we operate in, the Company will continue to focus on the market development of our speciality chemical products and on improving the flexibility of our petrochemical business model."

For further information please contact:

HaiKe Nick Su, Chief Finance Officer +86 (0) 546 8289175
Hanson Westhouse Tim Metcalfe / Martin Davison / +44 (0) 20 7601 6100
Christine Zhang
Cardew Group Rupert Pittman / Shan Shan Willenbrock +44 (0) 20 7930 0777
/ Catherine Maitland

First Half 2009 Results

Operating profit increased significantly by 185% from $5.5m in the first half of 2008 to $15.7m in 2009, and profit after tax was $10.8m (H1 2008: loss after tax of $1.0m). The gross margin improved significantly from 3.6% in 2008 to 8.8% in 2009.The improvement in the Company's profitability was largely due to the relatively stable oil prices experienced in the first half of 2009.

Total revenue decreased by 17.6% from $317.5m in 2008 to $261.5m in 2009. On a divisional basis, revenue from petrochemical products decreased from $266.8m in 2008 to $218.2m in 2009 as a result of an average 28% decrease in selling price, although sales volume increased by 8%. Revenue from speciality chemical products decreased by 14.4% from $50.7m in 2008 to $43.4m in 2009 as a result of an average 31% decrease in selling price. Trading volume increased by 68%.

Cost of sales decreased by 22.1% from $306.2m in 2008 to $238.4m in 2009, reflecting decreasing raw material prices and the Company's effective control on costs. The overall refinery utilisation rate was at 72%, giving a yield of approximately 98%. This helped to decrease the cost of final product production. In the speciality chemical division, the Company has undertaken a series of strict cost control measurements to minimise its electricity consumption and to improve raw material yield.

Sales and distribution expenses were marginally reduced from $2.2m in 2008 to $2.1m in 2009. Other administrative expenses increased slightly from $4.5m in 2008 to $5.3m in 2009, as a result of increased salary and employee benefit costs. Finance costs decreased from $5.6m in 2008 to $4.6m in 2009 due to a decrease in the prime interest rate in China from 6.57% to 5.58% during the period.

The income tax expenses decreased from $0.7m in 2008 to $0.1m in 2009 due to the carried forward taxable loss recorded in 2008. The carried forward loss will be available to offset against future taxable profit of HaiKe's subsidiaries companies.

The profit attributable to the shareholders of HaiKe in the first half of 2009 was $10.0m compared with a loss of $3.0m in 2008.

Basic and diluted earnings per share were both US 26 cents in 2009, compared with a loss per share of US 7.8 cents in 2008.

Capital expenditure

Investment in property, plant and equipment increased from $25.5m in the first half of 2008 to $51.5m in the same period in 2009, mainly due to the construction work for various expansion projects. These projects are: 1) the construction of Ruilin refinery facilities which will be completed in the first half of 2010; and 2) the construction of a new production and a research and development facility for Tiandong Biochemical which will be finished in the second half of 2009.

To continue to meet the increasing environmental requirements, HaiKe's refinery division is building a sulphur collection system and a hydrogenisation system to achieve a cleaner gasoline output. Construction costs for the two facilities in 2009 were $9.7m; they are expected to be commissioned in the fourth quarter of 2009.

Cash flows

In the first half of 2009, cash used for operating activities amounted to $25.7m comparing to $2.5m in 2008 due to increased refinery feedstock inventory.

Cash outflow for investment in property, plant and equipment of $41.5m was mainly funded from an increase in bank facilities, from $156.4m as at 31 December 2008 to $208.1m as at 30 June 2009, in which long term project financing increased from $2.9m in 2008 to $17m. Within the Chinese banking system, it is common to provide bank borrowings on a short term renewal basis to most non-government controlled enterprises. It is expected that all HaiKe's short term facilities will be renewed when they fall due.

Cash and cash equivalents marginally increased from $34.7m as at 31 December 2008 to $37.1m as at 30 June 2009.

Liquidity and financial risk

We believe that the Company has sufficient funds to meet foreseeable business requirements due to a number of factors. These include raw material costs, which are currently stable and marginally decreasing, resulting in an anticipated improvement in overall market demand in both the petrochemical and speciality chemical sectors.

Operational Review

During the first half of 2009, the petrochemical division continued to experience slowing market conditions in the industrial sector, especially as the sales price of diesel dropped by 28% and sales volume dropped by 12% compared to the same period last year. Sales volume of gasoline increased by 59%, as a result of the growing number of family vehicles, although the sales price dropped by 18% compared to the first half of 2008. This has contributed to the overall decrease in the group revenue in the period. However, we believe with the PRC government's stimulus plan, the overall market demand for diesel will recover in the second half of 2009.

The Company believes that the pricing mechanism of refined products implemented in May this year will help the Company to respond to the movement of global crude and fuel oil markets more quickly. Under the current pricing mechanism and the relatively stable crude oil price, the Company has better visibility for the selling prices of refined products, which provides the Company with better flexibility and forward planning to source feedstock into the refinery facilities.

In the speciality chemical division, as a result of the ongoing challenging market conditions, a difficult period was experienced in the first six months of 2009. The price for DMC, our major speciality chemical product, dropped by 32%, with the sales volume dropping by 42% due to a slowdown in the overseas demand for this product. Raw material prices for DMC decreased during the first half of 2009, but the reduction in the production costs was unable to offset the fall in revenue. This resulted in the division contributing negatively to the group in terms of profit. However, we believe that the situation will be reversed in the second half of 2009 with general global economic recovery and with the benefit of the local economic stimulus plan for mid industrials. In the first half of 2009, demand for the chloral-alkali business increased from the domestic basic industries such as cement, glass and automobile manufacturing.

The biochemical business, being part of the speciality chemical division, remains the Company's smallest contributor to group revenue, although revenue increased by 307% to $6.9m with gross profit growing by 256% compared to 2008. Both the selling price and the price of heparin raw materials increased compared to the same period last year. Most of the demand was from new markets such as South America and Russia. In addition, the biochemical business successfully passed the quality assurance audit from Brazil in 2009. This will help the Company access the strong growth of the Brazilian market. By the end of June 2009, the biochemical business has already obtained quality assurance certificates in Brazil, the European Union, and India.

Outlook

Since the beginning of 2009 we have seen the petrochemical market both recover and stabilise. The crude oil price has seen less volatility and the PRC government has been more active in response to crude oil price fluctuations. However, the Chinese petrochemical market itself remains volatile and small changes in the market dynamics can have a material effect on the Company's profitability. This was particularly apparent in July and August when losses were made on the Company's refining activities, due to a relatively high priced fuel oil feedstock inventory, coupled with relatively low yields of gasoline and diesel. This situation has improved since the PRC government mandated price rise for refined products earlier this month and the outlook for the remainder of the year is more positive.

The Company continues to maintain good relationships with Sinopec, PetroChina and CNOOC, in particular, as this can benefit the Company in terms of further stabilising its oil supplies. In addition, the Company has already started to look at various options including hedging in order to protect the Company from oil price volatility.

The speciality chemical division had a difficult period in the first half of 2009, impacted by the global economic crisis. The focus for the second half of 2009 is to continue to market the specialty chemical products domestically. This, along with the government's stimulus plan and the gradual recovery in the global economy, should see trading conditions for the speciality business improve.

In the biochemical business, the Company is looking to complete the construction of the new facilities later this year. The additional production facilities, coupled with the new research and development capability will assist with the development of the biochemical business and will ensure that it continues its significant growth.

Consolidated statement of comprehensive income

For the 6 months ended 30 June 2009
Notes 6 months ended 30 6 months ended 30 Year
June 2009 June 2008 ended 31 December

(Unaudited) (Unaudited) (Audited)
$000 $000 $000

Revenue 261,527 317,524 631,533
Cost of sales (238,444) (306,230) (633,494)
Gross profit/(loss) 23,083 11,294 (1,961)
Other income 303 924 868
Distribution costs (2,146) (2,195) (3,510)
Administrative expenses (5,305) (4,527) (11,770)
Other expenses (192) - -
Profit/(loss) from operations 15,743 5,496 (16,373)
Finance costs (5,371) (5,983) (15,349)
Finance income 753 406 2,104
Share of results of associates (154) (135) (77)
Profit/(loss) before tax 10,971 (216) (29,695)
Income tax expense 3 (142) (736) (992)
Profit/(loss) for the 10,829 (952) (30,687)

periods/year from continuing operations Other comprehensive income:
Exchange differences on 19 3,624 3,361

translating foreign operations
Total comprehensive income for 10,848 2,672 (27,326)

the periods/year Profit/(loss) attributable to:
Owners of the parent 9,903 (2,975) (29,234)
Minority interest 926 2,023 (1,453)
10,829 (952) (30,687)

Total comprehensive income attributable to:
Owners of the parent 9,922 230 (25,873)
Minority interest 926 2,442 (1,453)
10,848 2,672 (27,326)
Earnings per share for profit/(loss) attributable * *

to the equity holders of the parent during the periods/year

As at 30 June 2009
Notes 30 Jun 30 Jun 31 December

(Unaudited) (Unaudited) (Audited)
$000 $000 $000

Assets Non-current assets
Property, plant and equipment 187,410 131,090 145,545
Investments in equity-accounted - 187 204

associates
Available-for-sale investment 143 544 544
Intangible assets 8,645 4,455 5,082
Deferred tax assets 3 756 734 791
* 196,954 137,010 152,166

Current assets
Inventories 71,648 67,941 38,887
Trade and other receivables 16,254 33,183 25,240
Income tax receivable 3,732 - -
Amounts due from related parties - - 299
Restricted cash 67,737 - 56,313
Cash and cash equivalents 37,052 42,943 34,728
* 196,423 144,067 155,467
Total assets 393,377 281,077 307,633

Liabilities Non-current liabilities
Long-term loan 16,834 2,916 2,926
Deferred income 1,446 1,264 1,739
18,280 4,180 4,665

Current liabilities
Short-term loan 191,258 144,529 153,475
Trade and other payables 79,815 63,808 74,991
Amounts due to related parties 34,532 7,532 43,637
Deferred income 202 146 202
Income tax payable - 2,124 1,385
305,807 218,139 273,690
Total liabilities 324,087 222,319 278,355

* Equity
Share capital 77 77 77
Share premium 18,338 18,338 18,338
Other reserves 6,145 4,510 6,145
Statutory reserves 2,722 3,996 2,722
Retained earnings/(accumulated (3,931) 13,221 (13,834)

losses)
Foreign currency translation 6,291 6,116 6,272

reserve
Total equity attributable to 29,642 46,258 19,720

equity holders of the parent *
Minority interests 39,648 12,500 9,558
Total equity and liabilities 393,377 281,077 307,633

Consolidated statement of changes in equity

For the six months ended 30 June 2009

Attributable to equity holders
For the six months ended 30 Share Share Other Statutory Accumulated Foreign currency Total Minority interests Total
June 2009 (Unaudited) capital premium Reserves reserves losses translation reserve *
* $000 $000 $000 $000 $000 $000 $000 $000 $000
Balance as at 1 January 2009 77 18,338 6,145 2,722 (13,834) 6,272 19,720 9,558 29,278
Capital injection by minority - - - - - - - 29,851 29,851

shareholders
Total comprehensive income for - - - - 9,903 19 9,922 926 10,848

the period
Dividend paid - - - - - - - (687) (687)
Balance as at 30 June 2009 77 18,338 6,145 2,722 (3,931) 6,291 29,642 39,648 69,290
Attributable to equity holders
For the six months ended 30 Share Share Other Statutory Retained Foreign Total Total
June 2008 (Unaudited) capital premium Reserves reserves earnings currency Minority interests
translation reserve
$000 $000 $000 $000 $000 $000 $000 $000 $000
Balance as at 1 January 2008 77 18,338 4,510 3,996 16,196 2,911 46,028 10,058 56,086
Total comprehensive loss for - - - - (2,975) 3,205 230 2,442 2,672

the period
Balance as at 30 June 2008 77 18,338 4,510 3,996 13,221 6,116 46,258 12,500 58,758
Attributable to equity holders
For the year ended 31 December Share Share Other Statutory Retained Foreign Total Total
2008 (Audited) capital premium reserves reserves earnings currency Minority interests
/(accumulated) translation reserve
losses

*
* $000 $000 $000 $000 $000 $000 $000 $000 $000
Balance as at 1 January 2008 77 18,338 4,510 3,996 16,196 2,911 46,028 10,058 56,086
Capital injection to 518 - 518 - 518

subsidiary from minority shareholders
Total comprehensive loss for - - - - (29,234) 3,361 (25,873) (1,453) (27,326)

the year
Transfer from/(to) statutory - - 1,635 (1,195) (440) - - - -

reserve
Transfer to minority - - - (79) (874) - (953) 953 -
interest
Balance as at 31 December 2008 77 18,338 6,145 2,722 (13,834) 6,272 19,720 9,558 29,278

Consolidated cash flow statement

For the six months ended 30 6 months ended 30 6 months ended 30 Year ended 31 December
June 2009 June 2009 June 2008 2008
(Unaudited) (Unaudited) (Audited)
* $000 $000 $000
Profit/(loss) before tax from 10,971 (216) (29,695)

continuing operations
Adjustments for: *
Amortization of intangible 34 84 153

assets
Depreciation of property, 6,531 5,594 15,422

plant and equipment
Loss on disposal of property, 117 6 227

plant and equipment
Amortisation of deferred (95) (71) (195)

capital grants
Impairment loss on loans and - 117 (231)

receivables
Gain on disposal of (570) - -

available-for-sale financial assets
Share of results of associates - 135 77
Dividend income from - (71) (62)

investment securities
Gain on disposal of investment - - (20)

securities
Foreign exchange gains - - (1,237)
Interest income (753) (406) (804)
Financial expense 5,371 5,983 15,349
Cash flow from operating 21,606 11,155 (1,016)

activities before changes of working capital and provisions Working capital changes: (Increase)/decrease in:
Inventories (40,012) (19,706) 8,909
Trade and other receivables 8,995 (1,390) 531
Amounts due from related 299 - (294)

parties
Restricted cash (11,392) - (35,701)

Increase/(decrease) in:
Trade and other payables (2,648) 7,693 13,960
Amounts due to related parties - (157) -
Cash used in operations (23,152) (2,405) (13,611)
Interest received 753 406 804
Income tax paid (3,275) (496) (1,629)
Net cash flows from operating (25,674) (2,495) (14,436)

activities * Cash flows from investing activities
Purchase of property, plant (41,541) (28,579) (39,775)

and equipment
Purchase of intangible assets (5,502) (1,153) (1,894)
Government grant received - - 425
Purchase of available-for-sale - - (13)

financial assets
Sale of financial assets held - 285 308

for trading
Dividend income from - 71 62

available-for-sale financial assets
Sales of available-for-sale 544 - -

financial assets
Gain on sales of 570 - -

available-for-sale financial assets
Proceeds from disposal of - 27 115

property, plant and equipment

Cash flows used in investing (45,929) (29,349) (40,772)

activities

Cash flows from financing activities
Capital injection from 29,850 - 518

minority shareholders in subsidiaries
Increase in borrowings 108,110 116,858 270,524
Decrease in borrowings (48,867) (62,376) (207,184)
Loans from related parties (9,123) - 35,333
Interest paid (5,371) (5,983) (15,349)
Dividends paid to minorities (687) - -
Cash flows from financing 73,912 48,499 83,842

activities

Net increase in cash and cash 2,309 16,655 28,634

equivalents

Cash and cash equivalents at 34,728 24,319 5,585

beginning of periods/year
Foreign exchange translation 15 1,969 509

differences
Cash and cash equivalents at 37,052 42,943 34,728

end of periods/year

Notes to the interim consolidated financial information

For the six months ended 30 June 2009

1. General information

Haike Chemical Group Ltd. (the "Company") was incorporated on 20 June 2006. The address of the registered office is at Scotia Center 4th Floor, P.O. Box 2804 George Town, Grand Cayman, Cayman Islands. The principal activity of the Company is that of investment holding. The Company's ultimate parent company is Hi-Tech Chemical Investment Limited, a company incorporated in the British Virgin Islands.

The principal activities of the Group are manufacturing of petrochemical and chemical products. The principal place of business of the Company is West of Boxin Road, Shikou Country, Dongying City, Shandong Province, China.

The financial statements present information about the Company and its subsidiaries as a consolidated group of companies.

2. Accounting policies
Basis of presentation

The financial information has been prepared using the recognition and measurement principles of International Accounting Standards, International Financial Reporting Standards and interpretations adopted for the use in the European Union. The principle Accounting Policies used in preparing the interim statements are those the group expects to apply in its financial statements for the year ended 31 December 2009 and are unchanged from those disclosed in the group's report and financial statements for the year ended 31 December 2008, except that the requirements of IAS 1(revised), Presentation of Financial Statements, have been adopted, resulting in the presentation of a consolidated statement of changes in owners' equity. This presentation has been applied to comparative information in this report. Financial information for the six months ended 30 June 2009 and for the six months ended 30 June 2008 is unaudited and does not constitute the group's financial statements for those periods. Comparative financial information for the full year ended 31 December 2008 has, however, been derived from the audited financial statements for that period. The Board of Directors approved this interim statement on 24 September 2009.

3. Business divisions

The following tables present certain sales, profit regarding the Group's business divisions for the periods ended 30 June 2008 and 2009.
Six months to 6 months ended 30 6 months ended 30 June Year ended 31 December 2008
30 June 2009 (Unaudited) June 2009 2008
(Unaudited) (Unaudited) (Audited)
$000 $000 $000

Sales to external customers
Petrochemical 218,177 266,840 526,939
Chemical products 43,350 50,684 104,594
261,527 317,524 631,533

Profit/(loss) for the periods/year
Petrochemical 12,602 (6,235) (36,761)
Share of associate (154) - (77)
12,448 (6,235) (36,838)

Chemical products (706) 6,618 8,254
Unallocated expenses (771) (599) (1,111)

Profit/(loss) from operation 10,971 (216) (29,695)

before tax
Income tax expense (142) (736) (992)
Profit/(loss) for the 10,829 (952) (30,687)

periods/year
Business divisions*Cont'd*
Six months to 30 June 30 June 31 December 2008
30 June 2009 (Unaudited) 2009 2008
(Unaudited) (Unaudited) (Audited)
$000 $000 $000

Divisional assets
Petrochemical 248,386 222,772 247,981
Investment in associates - 187 61
248,386 222,959 248,042
Chemical products 243,625 107,798 113,781
Unallocated assets 436 706 239
Less: Intersegment balance (99,070) (50,386) (54,429)
393,377 281,077 307,633

Divisional liabilities
Petrochemical 267,807 182,271 242,040
Chemical products 157,991 86,606 86,904
Unallocated liabilities 3,842 3,828 3,840
Less: Intersegment balance (105,553) (50,386) (54,429)
324,087 222,319 278,355

Other division information Capital expenditures
Petrochemical 41,069 3,687 17,821
Chemical products 10,428 21,807 32,449
51,497 25,494 50,270

Depreciation and amortisation
Petrochemical 3,187 3,223 9,568
Chemical products 3,378 2,455 6,007
6,565 5,678 15,575

Geographical divisions

Six months to 30 June 2009 (Unaudited)

Six months to Domestic sales Export sales Total

30 June 2009
Segment sales 2009 2008 2009 2008 2009 2008
$000 $000 $000 $000 $000 $000
251,450 310,653 10,077 6,871 261,527 317,524

Twelve months to 31 Dec 2008 (Audited)

Twelve months to31 December Domestic sales2008$000 Export sales2008$000 Total2008$000

Segment sales 614,427 17,106 631,533
3. Taxation
* 6 months ended 30 Year ended
June 2009 6 months ended 30 June 2008 31 December 2008
*Six months to 30 June 2009 (Unaudited) (Unaudited) (Audited)

(Unaudited)
* $000 $000 $000

Income tax expense is as follows:

Current income tax 108 765 1,075
Origination and reversal of 34 (29) (83)

temporary differences
* 142 736 992

Relationship between tax expense and accounting profit

Reconciliation between tax expense and the accounting profit multiplied by the applicable corporate tax rate is as follows:
Six months to 6 months ended 30 6 months ended 30 Year ended
30 June 2009 (Unaudited) June 2009 June 2008 31 December 2008
(Unaudited) (Unaudited) (Audited)
$000 $000 $000

Accounting profit/(loss) 10,971 (216) (29,695)

before income tax
Tax at respective companies' 3,137 (54) (7,071)

domestic income tax rate
Effect of partial tax 333 (1,006) (922)

exemption
Tax effect of expenses not - 583 -

deductible for taxation purposes
Non-deductible expenses - - (274)
Unrecognised tax loss (2,922) 1,266 8,397
Utilisation of previously (214) (53) 828

unrecognised tax loss
Share of results of associate (192) - 34
Income tax expense recognized 142 736 992

in income statement

Deferred tax assets

Deferred income tax assets relates to the following:
* 30 June 30 June 31 December 2008

* (Unaudited) (Unaudited) (Audited)
* $000 $000 $000
Provision for doubtful debts 617 704 635
Allowance for long-term 26 30 26

investment
Depreciation 113 - 130

Unrecognised tax losses

As at 30 June 2009, the Group has tax losses of approximately $5.1m (30 June 2008: $5,8m; 31 December 2008: $8.6m) that are available to offset against future taxable profits of the companies in which the losses arose and for which no deferred tax asset is recognised due to uncertainty of its recoverability. The use of these tax losses is subject to the agreement of the tax authorities and compliance with certain provisions of the tax legislation of China.

4. Earnings per share from continuing operations

Earnings for the purpose of basic and diluted earnings per share are the net profit/(loss) for six months ended 30 June 2009 attributable to equity holders of the parent of $9,903,494 (for six months ended 30 June 2008: $2,975,000 of loss, for the year ended 31 December 2008: $29,234,000 of loss)

The profit/(loss) from continuing operations for the financial period attributable to equity holders of the parent is as follows:
* 6 months ended 6 months ended Year ended
30 June 2009 30 June 2008 31 December

* (Unaudited) (Unaudited) (Audited)
* $000 $000 $000
Profit/(loss) from continuing 9,903 (2,975) (29,234)

operations attributable to equity holders of the parent

The weighted average number of ordinary shares used in the calculation of earnings per share from continuing operations has been derived as follows:

* 6 months ended 6 months ended Year ended
30 June 30 June 31 December

* (Unaudited) (Unaudited) (Audited)
* $000 $000 $000
Number of ordinary shares * * *
Weighted average number of 38,353,571 38,353,571 38,353,571

ordinary shares - basic
Dilutive effect of share - 160,622 -

options

Weighted average number of 38,353,571 38,514,193 38,353,571

ordinary shares - diluted

5. Contingencies

As at 30 June 2009, as a warrantor, the Group has guaranteed the bank loans of third parties to an aggregate amount of $125.8m (30 June 2008: $50.0m; 31 December 2008:$57.5m). It is unlikely that any significant liability will arise because the financial statements of the warrantees indicate that the debtors are able to pay their debts as they mature.

This information is provided by RNS The company news service from the London Stock Exchange

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