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Chairman's Statement

High quality development with environmental protection solutions will be a major focus in 2022 and beyond

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 2021.

OVERVIEW

The Group focuses on strengthening its position in its core markets of Eastern and Southern Shaanxi Province, where it has constructed or acquired well-positioned plants. This has resulted in the Group enjoying a leading market position in Shaanxi Province and benefiting from barriers to entry caused by high transportation costs. The Group has maintained a strong market position in its Southern Shaanxi core markets, where high levels of market share coupled with good infrastructure demand have resulted in continued average selling price (“ASPs”) premiums and more stable margins. ASPs in Central Shaanxi have been increasing in recent years even under the continuing low demand scenario through the continuation of occasional peak-shifting production halts during low season periods under the stringent environmental policy. In 2021, the impact of the coronavirus disease 2019 (“COVID-19”) outbreak was mitigating. The PRC government continued to closely coordinate the pandemic prevention and control as well as the economic work. The performance of infrastructure investment continued to improve, while that of property investment remained stable, maintaining the continuous solid support in the demand of cement. Furthermore, in order to control air pollution and preserve the blue sky, the environmental management of atmospheric pollution did not relax and the local environmental control became more stringent. As a result, the effect of various policies such as peak-shifting production halts and mine comprehensive regulation are more and more favorable to balancing the supply and demand of the cement industry.

Energy conservation and emission controls are increasingly important factors in the cement industry and the Group continues to work towards the highest industry standards in these areas. All of the Group’s production facilities are NSP lines, mostly situated in close proximity to limestone quarries and the Group uses conveyor belts at many of its plants in order to minimise transportation related emissions. The Group has constructed heat-recycling plants at over 80% of its production capacity, reducing approximately 30% of electricity consumption and decreasing CO2 emissions by approximately 22,000 tons per year per million tons of production. All of the Group’s plants in Shaanxi, Xinjiang and Guizhou Provinces have been installed with denitration (De-NOx) equipment, reducing nitrous oxide emissions by approximately 60% per ton of clinker produced, as well as Particulate Matter (PM) reduction equipment. The Group is also involved in hazardous and municipal waste incineration.

FINANCIAL RESULTS

In 2021, the Group saw a stable operating environment in Southern Shaanxi, Central Shaanxi, Guizhou and Xinjiang. The Group’s cement and clinker sales volumes have increased slightly from 19.9 million tons in 2020 to 20.3 million tons in 2021 and the Group’s profitability has been improved as a result of the mitigated impact of the COVID-19 outbreak during the year, which resulted in 1.5% increase in gross profit as compared to 2020. In addition, the Group has maintained strong cash flows, with EBITDA increased from approximately RMB3.0 billion in 2020 to RMB3.2 billion in 2021. The Group’s net gearing ratio has in turn increased from 21.2% in 2020 to 42.3% in 2021, as a result of the increase in borrowings for capacity development during the year. The ratio is still maintained at a low industry level to provide a healthy statement of financial positions in the Group.

DIVIDEND

Having considered the Group’s stable net profit for the year ended 31 December 2021, the Board has recommended payment of a final dividend of RMB8.7 cents per ordinary share for this financial year.

OPERATIONS

n 2021, Shaanxi Province as a whole has seen a stable Fixed Asset Investment (“FAI”) and Real Estate Development Investment (“RDI”). Both FAI and RDI have returned to normal level as a result of the government’s economic stimulating policies and the mitigated impact of the COVID-19 outbreak. The stable FAI and RDI have led to a stable demand for cement products from all producers in the Shaanxi Province. Accordingly, intense competition from the supply side is still a strong factor affecting the ASPs in Shaanxi Province, which continued to be balanced through the occasional peak-shifting production halts during low season periods under the stringent environmental policy. During the year, ASPs was improved with a slight decrease in sales volume in Shaanxi Province.

Operations at the Group’s plant in Xinjiang Province have been improving in 2021. During the year, both sales volume and ASPs in Xinjiang have increased as a result of the government’s economic stimulating policies and the mitigating impact of the COVID-19 outbreak. In Guizhou Province, the ASPs was improved as a result of the decrease in cement supply under the occasional peak-shifting production halts during low season periods and the limitation of electricity supply during the year. However, the ASPs were still lower than that of prior years and the sales volume remained low due to the imbalance between demand and supply as a result of the continuation of decreasing demand scenario. The sales volumes at the Huaxi Plant have already been better than other locations in Guizhou due to its location being in close proximity to Guiyang City and the Guiyang — Anshun New Area.

Even though the economy was still under the impact of the COVID-19 outbreak, the ASPs in Southern Shaanxi, Central Shaanxi, Guizhou and Xinjiang were improving and the overall sales volume remained stable. Moreover, the Group has continued to implement efficiency enhancements and cost control measures and has been able to limit the increase in cost under the increasing prices of bulk raw materials and coal during the year. Overall, these have contributed to the Group’s stable margins.

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 2021. The Group has already completed the installation of de-nitration (“De-NOx”) equipment at all of the Group’s plants in China. This equipment reduces nitrogen oxide (“NOx”) emissions by approximately 60% per ton of clinker produced, bringing NOx emissions to within the new standards stipulated by the Cement Industrial Air Pollution Emissions Standards. Modifications of production lines to meet particulate matter (“PM”) emission standards have been completed, resulting in all of the Group’s plants in China having been upgraded to meet new PM emission standards as well. Moreover, the Group has effectively reduced the emission of dust through the technical renovation of the kiln- head and kiln-end dust collectors and also further reduced the emission of nitrogen oxide and the consumption of ammonia water through the implementation of de-nitration spray guns and automated technological innovation.

During the year, the Group has increased the investment in environmental protection, carried out ultra-low emission remodeling at its environmental treatment facilities, established an early warning platform for pollutants exceeding standards, and strictly controlled the concentration of pollutant emissions, so as to achieve the management goal of limiting its pollutant emissions concentration well below the national emission standard. In addition, the Group also regularly invites external online monitoring experts to conduct system checks on the Company’s online monitoring equipment, and conduct comprehensive analyses of the equipment operation principle, monitoring principle and production system operation, so as to switch from equipment troubleshooting to fault prevention, thus reduce the equipment failure rate, improve the accuracy of online monitoring equipment measurements, and ensure that the real-time monitoring and control of pollutants meets the national emission standards. Moreover, all plants in China were already refurbished as garden like plants in the preliminary stage and the Group will further develop the garden like plants to meet the environmental policy requirements. Green limestone mine projects, including soil reclamation and mine re-greening, have been already commenced construction to comply with the environmental policy. The Group will continue to implement the green mine projects to reduce the pollution to the soil and mines during mining in order to comply with the government policy of “managing while mining” in the future.

The Group’s safety and environmental protection department continuously monitors and reviews safety procedures in accordance with evolving environmental and safety regulations in the PRC. In 2020, the Group has focused its EHS (Environmental, Health & Safety) efforts on revising and improving the safety emergency response plan by employing independent safety experts to strengthen the handling capacity of all employees in emergency accidents. Moreover, several handbooks and guidelines were revised significantly to improve the work safety measures as well as numerous safety related training courses were initiated to strengthen the staff’s safety awareness. 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.

OUTLOOK

In 2022, the central government will adhere to the keynote of seeking progress in a stable manner, complete, refine and thoroughly execute the new development concept, deepen the supply-side structural reform, speed up the establishment of the new development layout, and promote quality development. It will continue to work on the “six stabilities” (六穩) and “six guarantees” (六保), make proper cross-cycle adjustments in response to macro policies, uphold the continuity, stability and sustainability of macro policies, maintain economic operation at a reasonable level, and endeavor to achieve the goals of economic and social development for the year. It will accelerate the progress of significant construction projects of the “14th Five-year” Plan, providing certain support for infrastructure investments. The PRC will adhere to the stance of “houses are for inhabitation and not for speculation” to stabilize the land price, house price and expectation and promote the stable and healthy development of the real estate market. Given the impact of regulatory policies, it is expected that the pace of development of and investments in real estate will gradually slow down. At the same time, the PRC will continue to make greater efforts on ecological and environmental treatment, strive for peaking carbon emissions and carbon neutrality in an orderly manner, extend comprehensive and normalized peak-shifting production halts for the cement industry, implement increasingly stringent policies of capacity replacement, which will be a great boost to the supply and demand relationship in the industry. Against the above background, it is expected that, in relation to the cement industry, the overall market demand and the market prices will remain stable.

In 2022, the Group will persist on the requirements of high-quality development. In terms of investment development, the Group plans to increase investment and development efforts around the Company’s annual investment plan. First, the Group will accelerate the implementation of a complete supply chain development approach through active development of its aggregate, commercial concrete, and commercial prefabricated concrete housing business, with an aim to create new industrial growth poles. Second, the Group will steadily promote its international development strategy, make progress in the development of existing projects, and step up efforts in carrying out expansion projects. Third, the Group will further develop intelligence and information technology, accelerate the pace of innovation, increase investment in research and development, and consolidate and enhance the Company’s core competitiveness. In terms of operation and management, the Group will pay close attention to changes in the macro-economy at home and abroad, coordinate and implement epidemic prevention and control and production, operation, and management. First, the Group will conduct further analysis and studies on the market conditions; make better adjustments to the sales organization and reasonably control the pace of production and sales; deepen strategic cooperation with major customers and increase control of the end-user market. Second, the Group will continue to trace and control the source of bulk raw materials and fuel; deepen strategic cooperation with large coal enterprises; actively explore sourcing channels, with an emphasis on securing the supply of key resources at competitive prices; explore the development and utilization of alternative resources, and strive to reduce overall procurement costs. Third, the Group will implement the “green building materials” strategy; continue to increase investment in environmental protection; actively implement technical reform and employ technological measures, and accelerate industrial transformation and upgrading. Fourth, the Group will focus on achieving peak carbon emission and carbon neutrality; deepen cooperation among industry, academia and research institutions in order to carry out joint scientific and technological efforts to explore medium- and long-term solutions to reduce pollution and lower carbon emission, and promote green and low-carbon circular development, consolidate the competitiveness and comparative advantage. Fifth, the Group will strengthen the development of talent pool, accelerate the implementation of medium to long-term employee incentive mechanisms, stimulate talent innovation and creativity, so as to maintain highquality development.


Zhang Jimin
Chairman
27 March 2022