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 2020.
2020 has been a stable year for the cement industry in China, even under the impact of the coronavirus disease 2019 ("COVID-19") outbreak. In the first quarter of 2020, due to the impact of the COVID-19 outbreak and the respective traffic restrictions, some staff and customers could not report to work on time after Chinese New Year holidays and caused temporary disturbance to the Group's operations for a short period of time as well as certain impact on the periodic market demand. Such impact has ceased to exist since early March 2020 as all staff and customers reported to work subsequently. Meanwhile, infrastructure construction played a greater role in counter-cyclical growth stabilization. Greater efforts were made to commence construction of new investment projects, while progress of construction of projects under construction was expedited; the increase in the issuance of local governments' special purpose bonds, coupled with accelerating issuance of urban investment bonds promoted the continuous recovery of infrastructure investment growth in 2020. The growth rates of both Fixed Asset Investment ("FAI") and Real Estate Development Investment ("RDI") have continued to pick up since the first quarter of 2020 as a result of the government's economic stimulating policies in response to the impact of the COVID-19 outbreak, which have led to a stable demand for cement products from all producers in the Shaanxi Province. On the other hand, intense competition from the supply side is still a strong factor affecting the ASPs in Shaanxi Province, which continued to be balanced through the continuation of the occasional peak-shifting production halts during low season periods under the stringent environmental policy.
In 2020, 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 19.3 million tons in 2019 to 19.9 million tons in 2020 and the Group's profitability has been negatively affected by the decreasing pricing environment as a result of the impact of the COVID-19 outbreak during the year, which resulted in a 4.0% decrease in gross profit as compared to 2019. In addition, the Group has maintained strong cash flows, with EBITDA slightly decreased from approximately RMB3.1 billion in 2019 to RMB3.0 billion in 2020. The Group's net gearing ratio has in turn increased from 17.5% in 2019 to 21.2% in 2020, as a result of the slightly decreased gross profit and cash flows mentioned above as well as the increase in borrowings for capacity development during the year. The ratio is still maintaining at a low industry level to provide a healthy statement of financial positions in the Group.
Due to the Group recording a stable net profit for the year ended 31 December 2020 and to celebrate the 10th anniversary of the listing of the Company as well as to reward the shareholders, the Board has recommended payment of a final dividend of RMB8.6 cents per ordinary share and a special dividend of RMB3.4 cents per ordinary share for this financial year, respectively.
Due to the impact of the COVID-19 outbreak, a key feature of the Group's operational performance in 2020 has been the reversal of the difference between the Group's cement ASPs in Southern Shaanxi which historically has stronger ASPs premiums, as compared with those in Central Shaanxi which have been improved to a level even higher than the ASPs in Southern Shaanxi. Such improvement in ASPs in Central Shaanxi even under the continuing low demand scenario was contributed by the continuation of occasional peak- shifting production halts during low season periods under the stringent environmental policy and the continuous recovery and expedited infrastructure construction demand as a result of the government policy to stimulate the economy in response to the impact of the COVID-19 outbreak. However, due to the impact of the COVID-19 outbreak, the ASPs in Southern Shaanxi and Central Shaanxi still recorded overall decreases.
In 2020, with the occasional peak-shifting production halts during the low season periods under the stringent environmental policy, operation in Xinjiang Province is stable with increasing volumes but decreased ASPs as a result of the impact of COVID-19 outbreak. In Guizhou Province, the production volumes at the Huaxi Plant are still strong due to its superior location while ASPs have decreased mainly due to the imbalance between demand and supply as a result of the continuation of decreasing demand scenario, which was even worse under the impact of the COVID-19 outbreak.
Fortunately, I am pleased that the Group has continued to implement efficiency enhancements and cost-cutting measures and has been able to maintain a decreasing cost in 2020. Taken together, these have contributed to the Group's stable margins in 2020 even under the impact of COVID-19 outbreak.
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 2020. 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 mines 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 of 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.
The stable operating environment in 2020 reflected that the continuation of occasional peak-shifting production halts during low season periods under the stringent environmental policy is a 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.
In 2021, the PRC government will closely follow the goal of ensuring a good start of the 14th Five-Year Plan, and coordinate the normalization of epidemic prevention and control as well as economic and social development work. Under the premise of normalization of epidemic prevention and control, the PRC government will adhere to the keynote of seeking progress in a stable manner, adhere to the new development concept, and innovate to boost the quality and efficiency of various industries. The PRC government will adhere to the supply-side structural reform as the backbone, while focusing on the demand-side reform, in order to make efforts on both the supply and demand side, so as to grasp the strategy of expansion in domestic demand, to form a strong domestic market and to broaden the space for economic development. Moreover, the PRC government will accelerate the construction of the domestic economic cycle as its foundation to push forward the reform and opening up policy, so as to form a new development layout with domestic and international double-loop mutual advancement, and strive to carry out the "14th Five-Year Plan" with a good start. The performance of infrastructure investment is expected to continue to improve, while property investment is expected to remain stable, maintaining the continuous solid support in the demand of cement. Furthermore, in order to preserve the blue sky, the environmental management of atmospheric pollution will not be relaxed, and the local environmental control will be more stringent, and the continuous effect of policies such as peak-shifting production halts and mine comprehensive regulation are in favor of balancing the supply and demand of the cement industry. The cement industry will maintain a stable development trend during the "14th Five-Year Plan" period, the industry in general will further shift towards intelligent, information-based and green high-quality development. The competition within the industry will mainly be reflected in the energy consumption and costs advantages.
Whilst demand in Shaanxi Province remained stable in 2020, with a slight increase in cement sales volume as compared with that of 2019, the Company is cautiously optimistic about the outlook of the demand from the infrastructure construction and urbanization for the region into 2021 and beyond. Against the above background, it is expected that, in relation to cement industry, the overall market demand will slightly increase in 2021 and the market prices will remain stable.
In 2021, the Group will persist on the requirements of high-quality development. In terms of overseas development, the Group will actively and steadily promote the international development strategy, and continuously improve the quality of the operation of commissioned projects and strengthen their internal management. In terms of domestic development, the Group will focus on the cement business, seize appropriate development opportunities and continuously improve the market layout. At the same time, the Group will accelerate the extension of the upstream and downstream industrial chains, push forward the implementation of aggregate projects, steadily expand the concrete business and continuously expand into new business areas. In terms of operation and management, the Group will pay close attention to changes in the macro-economy at home and abroad, make regular efforts in epidemic prevention and control, and endeavor to further improve operation and management. The Group will conduct in-depth study of market supply and demand, coordinate and optimize resource allocation, rationally grasp the rhythm of production and sales, and strengthen its positions in end markets. The Group will also continue to promote traceability and source control, broaden the channels of supply of long-term resources, and lower procurement costs, as well as implement the national ecological civilization policies, and continuously carry out energy-saving and environmental protection technical reform, accelerate the transformation of innovative achievements, and push to launch the technological innovation projects. The Group will strive to carry out information construction, to promote the construction and application of intelligent plants, and continuously enhance the core competitiveness of the enterprise, as well as promote organizational structure optimization and talent echelon formation, to stimulate the innovation and creativity of talents, and encourage the high quality development of the Group.
On behalf of the Board, I would like to take this opportunity to thank our management, employees, bankers and advisors for their efforts in 2020. I would also like to thank our shareholders for their continuing support of our Group in the past and into the future.
29 March 2021