On behalf of the board of directors (the "Board") of West China Cement Limited and its subsidiaries, I am pleased to present to our shareholders the annual report (including the audited consolidated financial statements) of the Group for the year ended 31 December 2017.
2017 has been a prosperity year for the cement industry in China. Fixed asset investment and construction has become more stable and have impacted on demand for cement in the PRC, and accordingly our Group's operating regions and markets. Whilst demand has been more stable than previous years, we continue to believe that it is the structure of the supply side that is of primary importance in the healthy development of the cement industry in China. Oversupply is self-evident, and it is the fragmented nature of that supply that hinders the profitability in the cement industry. In its current shape, the Shaanxi cement market illustrates the effect of this fragmentation.
Cement demand in 2017 has become more stable, with Fixed Asset Investment ("FAI") growth in Shaanxi Province rising from 12.3% in 2016 to 14.6% in 2017. During the year, the effect of this stable demand growth, accompanied by the continuation of occasional voluntary production halts during low season periods and improved market discipline with lower supply among all producers, significantly improved the average selling prices ("ASPs") and thus, the profitability in Central Shaanxi, which is an area of both oversupply and supply side fragmentation amongst a number of producers. Improving the market discipline of the industry supply side is therefore advantageous, and can promote a more stable industry that is able to withstand fluctuations in demand resulting from construction spending cyclicality. In Southern Shaanxi, the level of fragmentation and oversupply is less than in the centre of the province, resulting in a more rational and disciplined market with more stable and higher levels of profitability.
Therefore, I am very pleased that the collaboration with Conch Cement has led to a more stable supply side and market outlook in Shaanxi Province and surrounding areas, since its share subscription in our Company in June 2015. I believe that further collaboration with Conch Cement will continue to improve the trading prospects for the Group into 2018 and beyond.
In 2017, the Group saw an improving operating environment in Southern Shaanxi, Central Shaanxi, Xinjiang and Guizhou. The Group's cement and clinker sales volumes have increased from 17.8 million tons in 2016 to 19.1 million tons in 2017 and the Group's profitability has been positively affected by the improving pricing environment as a result of the improved market discipline with lower supply among all producers during the year, which resulted in a 75.2% rise in gross profit as compared to 2016. In addition, the Group has maintained stronger cash flows, with EBITDA increased from approximately RMB1.31 billion in 2016 to RMB1.88 billion in 2017. The Group's net gearing ratio has in turn improved from 45.1% in 2016 to 34.5% in 2017, as a result of the improved gross profit and cash flows mentioned above, which resulted in a healthier statement of financial positions in the Group.
Due to the Group recording a significant increase in net profit for the year ended 31 December 2017, the Board has recommend payment of a final dividend of RMB2.6 cents for this financial year.
As described above, the Group experienced some success in its operations in Central Shaanxi. ASPs have been improved in the Central Shaanxi and I am pleased that the Group has been able to maintain disciplined supply in the Central Shaanxi with significant narrowing of the difference between the Group's cement ASPs in Southern Shaanxi, which have remained reasonable and strong, as compared with those in Central Shaanxi, which have been significantly improved to a similar price level. Such significant improvement in ASPs in Central Shaanxi even under the continuing low demand scenario was achieved through the continuation of occasional voluntary production halts during low season periods and improved market discipline with lower supply among all producers.
Operations in Xinjiang and Guizhou have remained subdued in 2017. However, with the elimination of the use of low grade (32.5) cement since May 2017 in Xinjiang, which led to the closure of inefficient facilities with small production capacity and the voluntary production halts by all producers during the low season periods, the Group can see a more stable market of the cement industry with better market discipline and increased ASPs in 2017. In Guizhou Province, the production volumes at the Huaxi Plant are still strong due to its superior location.
The Group has moreover been able to maintain the trend of falling costs established since 2015. Input prices were stable in 2017 and the Group has continued to implement efficiency gains and cost cutting measures. Taken together, these have significantly improved the Group's margins in 2017. The Group has no current further expansion plans in 2017.
ENVIRONMENTAL PROTECTION SOLUTIONS & SAFETY
The Group's work in energy conservation, emission controls and environmental protection solutions have continued to be a major focus in 2017. The Group have already finished the installation of De-nitration ("De-Nox") equipment and plant upgrades to limit particulate matter ("PM") emissions at all of its plants in Shaanxi, Xinjiang and Guizhou Provinces. All upgrades to meet new emission standards as stipulated by the Cement Industrial Air Pollution Emissions Standards law were completed and the Group will continue to further reduce emissions through incremental upgrades.
The Group is looking forward to continuing its work in the building of waste treatment facilities at its plants together with China Conch Venture Holdings Limited and Mr. Ma Zhaoyang through the joint investment in Yaobai Environmental Technology Engineering Co. Ltd. As part of the joint investment, the Group will provide its cement kilns, logistics and management for a management fee to run the waste treatment facilities at its Lantian and Fuping Plants as well as its other plants in the future. Phase I and Phase II of the Lantian Waste Treatment Facility were in full operation since 2015 while Fuping Waste Treatment Facility commenced full operation since March 2016. Moreover, Mianxian Waste Treatment Facility has been in full operations since October 2017.
In 2017, the Group focused its EHS (Environmental, Health & Safety) efforts on completing the publication of several handbooks and guidelines regarding work safety measures as well as the initiation of a number of other safety related training courses. In addition, the Group will continue to implement a "Sustainable Safety Development Project", which involved continuous training for both management and on-site employees, on-site inspections and audits, stringent safety reports and on-going suggestions for safety improvements at all of the Group's plants.
The Group also joined the Cement Sustainability Initiative (CSI), a voluntary global organization of 25 major cement producers operating under the World Business Council for Sustainable Development (WBCSD). This initiative will help the Group further raise its standards in all aspects of environmental impact and safety procedures. Moreover, the designs of two green limestone mines to meet the new environmental protection policy of the government are completed during the year and will commence construction in 2018. The Group will continue to implement the green mine project to all our limestone mines to upgrade related environmental facilities in order to meet the policy requirement.
The improving operating environment in 2017 reflected that improved market discipline with lower supply among all producers is the solution to the problem of lacklustre demand in Shaanxi Province and in the PRC as a whole. However, the resolution of the fragmented nature of the supply side is still of primary importance in promoting a more stable market and improvement to production capacity for the region, which in turn will benefit the Group.
Whilst demand in Shaanxi Province remained stable in 2017, with certain growth in cement sales volume as compared with that of 2016, the Company is cautiously optimistic about the outlook of the demand from the infrastructure construction and urbanization for the region into 2018 and beyond.
Conch International Holdings (HK) Limited, a wholly-owned subsidiary of Anhui Conch Cement Co., Ltd ("Conch Cement"), had 1,147,565,970 shares in the Company, representing approximately 21.16% of the Company's issued share capital as at 31 December 2017. This will enable the Group and Conch Cement to achieve synergies in the manufacturing and sale of cement in Shaanxi Province, and can unify the operation and management of cement production capacity in the region thereby improving business efficiency and enhancing the effect of development strategies for both parties in the region. I believe that further collaboration between the two groups will lead to a significantly more stable supply side and market outlook for the region, significantly improving the trading prospects for the Group in 2018 and beyond.
On behalf of the Board, I would like to take this opportunity to thank our management, employees, bankers and advisors for their efforts in 2017. I would also like to thank our shareholders for their continuing support of our Group in the past and into the future.
19 March 2018