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Profit & Loss

Profit & Loss 1Q2017

Balance Sheet

Balance Sheet 1Q2017

Cash Flow Statements

Cash Flow Statements 1Q2017

Review of Performance

Consolidated Statement of Comprehensive Income

Revenue

In 1Q2017, the Group's revenue was generated mainly from its ship-design service and shipbuilding project management and project financing services. The Group's revenue increased by RMB13 million or 18% to RMB86.1 million in 1Q2017 compared with 1Q2016. The increase was mainly due to: (1) Ship-design service revenue increasing by RMB17.1 million to RMB57.0 million due to variations in the percentage completion of ship-design work in progress; (2) Shipbuilding project management services income increasing by RMB5.5 million to RMB17.4 million, due to more projects being recognised during the period; (3) Shipbuilding project financing income increasing by RMB9.5 million arising from provision of financing to related party shipyards for the construction of vessels. No such income was earned in 1Q2016; and (4) Finance lease income increasing by RMB2.0 million arising from the sale of tug boats under finance lease agreement. No finance leasing income was earned in 1Q2016. The increase in revenue was partially offset by the decline in shipbuilding construction service revenue by RMB21.2 million due to completion of the Sri Lanka project in 2016.

Cost of sales and gross profit

Cost of sales decreased RMB5.7 million or 14% to RMB34.9 million in 1Q2017, attributed mainly to the completion of a shipbuilding contract. Gross profit increased 56% in 1Q2017, due mainly to increased contribution from the shipbuilding project management and project financing services, ship-design service and finance lease income.

Gross profit margin increased from 44% to 59%, mainly attributed to the increase in revenue from ship-design service, shipbuilding project management and financing services, and finance lease.

Other income

Other income consisted mainly of interest income. Other income decreased by RMB0.3 million to RMB0.8 million in 1Q2017, mainly due to decrease in interest income.

Other gains - net

Other gains in 1Q2017 amounted to RMB8.2 million which was attributed mainly to foreign exchange gains arising from receivables denominated in SGD which had strengthened against the USD.

Distribution and marketing expenses

Distribution and marketing expenses consisted mainly of sales and marketing department's office rental, employee benefits expenses and travelling expenses.

For 1Q2017, the decrease in marketing and distribution expense of RMB1.4 million was mainly due to the reclassification of certain staff expenses incurred for research and development to administrative expenses.

Operating lease expenses remained stable at RMB1.4 million in 1Q2017.

Administrative expenses

Administrative expenses comprised office rental and office expenses, depreciation expenses, amortisation expenses, professional fees incurred to maintain the Group's listing status, employee benefits and travelling expenses.

Administrative expenses decreased RMB0.9 million or 3% to RMB28.9 million in 1Q2017. The decrease was mainly due to decline in legal and professional fee and office expenses.

Operating lease expenses remained stable at RMB3.0 million in 1Q2017.

The depreciation charge for plant and equipment amounted to RMB0.8 million in 1Q2017. Amortisation of intangible assets amounted to RMB1.3 million in 1Q2017, mainly arising from the amortisation of software, technical knowhow and brand name from Deltamarin Group.

Finance expenses

Finance expenses increased RMB4.6 million or 93% to RMB9.6 million in 1Q2017, mainly due to increased borrowings obtained by the Group from banks in China.

Share of profit of associated companies

The share of profit from associated companies in 1Q2017 amounted to RMB0.1 million compared to a marginal loss in 1Q2016.

Income tax expense

The operating subsidiaries in China and Finland are subject to income tax rates of 25% and 20% respectively. Income tax expense increased RMB3.4 million to RMB3.2 million in 1Q2017. The increase was due to higher profits earned by the Group's subsidiaries in China and Finland during the period.

Profit for the period

After taking into account income tax expense and non-controlling interests, net profit attributable to shareholders for 1Q2017 was RMB11.8 million, an increase of 130% over the RMB5.1 million profit in 1Q2016.

Statement of Financial Position

Current assets

As at 1Q2017, the Group's cash at bank and on hand balances and fixed deposits amounted to RMB463.3 million, representing a decrease of RMB31.9 million from RMB495.2 million as at 31 December 2016. Cash pledged with bank decreased RMB25.2 million to RMB66.4 million and this is mainly due to release of payment for shipbuilding supplies.

Trade receivables decreased RMB31.2 million to RMB83.7 million as at 31 March 2017, comprising mainly: (1) RMB21.4 million due from customers on construction contracts, (2) RMB10.4 million arising from ship-design and project consultancy services and (3) RMB51.8 million arising from shipbuilding project management services.

Other receivables, amounting to RMB1,292 million as at 31 March 2017, comprised mainly prepayments, other tax recoverable and non-trade receivables due from related corporation. Other receivables increased RMB544.2 million, mainly due to an increased amount of RMB559.5 million receivables from related party shipyards arising from shipbuilding project financing services provided to the related party shipyards, and it is partially offset by (1) decrease in prepayment of RMB7.8 million for the purchase of shipbuilding material; and (2) decrease in tax recoverable amounted RMB5.2 million.

Inventories as at 31 March 2017 amounted to RMB276.8 million, compared to RMB279.0 million as at 31 December 2016.

Finance lease receivables as at 31 March 2017 amounted to RMB14 million, not materially different from that as at 31 December 2016.

Non-current assets

Property, plant and equipment comprised motor vehicles, computers and software, furniture and fixtures, and office equipment.

Investment in associated companies represented the total amount of investment in non-controlling entities held by the Deltamarin Group.

Available-for-sale financial assets represented investment shares held by the Deltamarin Group.

Intangible assets comprised software licenses, brand name and technical knowhow. Intangible assets amounted to RMB74.4 million as at 31 March 2017, a decrease of RMB0.6 million. The decrease was due to amortisation of RMB1.2 million, partially offset by the addition of intangible assets amounting to RMB0.1 million and a translation gain RMB0.5 million arising from the appreciation of the Euro against RMB.

The Group's goodwill had arisen from the acquisition of the Deltamarin Group in 2013 and the amount was recognised based on the purchase price allocation exercise performed previously in 2013. The goodwill amounted to RMB107.6 million as at 31 March 2017, RMB0.8 million higher than the RMB106.8 million as at 31 December 2016. The increase was due to a translation gain arising from the appreciation of Euro against the RMB.

Deferred tax assets represented the timing differences between accounting and tax bases, and are mainly derived from the operating subsidiaries in China.

Non-current portion of finance lease receivables decreased RMB3.8 million to RMB46.8 million as at 31 March 2017 as a result of payment from the buyer of tug boats which were sold under a finance lease agreement.

Current liabilities

Short-term loan and current portion of long-term loan represented that portion of the loans raised which were repayable within 12 months as at 31 March 2017. Short term loans totalled RMB1,144.8 million due to classification of more long term loans as short term loans, and as more bank loans were obtained to finance working capital requirements.

Trade payables amounted to RMB70.6 million as at 31 March 2017 compared to RMB67.5 million as at 31 December 2016. The increase was mainly attributed to (1) RMB2.6 million from ship-design business, and (2) RMB0.5 million from procurement of shipbuilding equipment.

Advances received represented amounts received on behalf of shipyards for the purpose of acquiring tools and equipment, which amounted to RMB306.9 million as compared to RMB253.3 million as at 31 December 2016.

Other payables and accruals consisted of VAT taxes payable, sales tax and surcharges payable, accrued operating and office expenses, and amount due to related parties. Other payables and accruals decreased by RMB12.4 million, attributed mainly to payment made for accrued staff cost of RMB15.5 million and it is partially offset by a RMB2.5 million increase in the amount due to related parties.

Income tax payable decreased by RMB1.3 million from RMB19.2 million to RMB18 million as at 31 March 2017 mainly due to payment of business tax during the financial period.

Non-current liabilities

Long-term portion of loan represented that portion of the loans raised that were repayable after 12 months as at 31 March 2017. Long-term borrowings decreased by RMB37.7 million to RMB454.6 million as at 31 March 2017.

Deferred tax liabilities represented the tax liabilities for the timing differences arising from the recognition of the intangible assets, deferred ship-design fee income and fair valuation of the Deltamarin Group's assets.

Capital reserve

The amount of capital reserve as at 31 March 2017 comprised a deemed contribution from the former immediate holding company as a result of initial recognition of shareholder's loan at fair value during the financial year ended 31 December 2012. There is no movement in capital reserve in 1Q2017.

Consolidated cash flow statements

Net cash outflow from operating activities in 1Q2017 was RMB451.0 million compared to net cash outflow of RMB18.5 million in the corresponding quarter last year. The increased cash outflow was due to increase in trade and other receivables arising from the substantial increase in project financing for vessel construction provided to related party shipyards.

Net cash used in investing activities was RMB1.9 million in this quarter. In 1Q2017, net cash inflow from financing activities amounted to RMB421.6 million, compared to net cash outflow of RMB31.3 million in 1Q2016 and this was mainly due to increase in new loans raised, partially offset by repayment of borrowings.

Commentary

Despite some recent signs of recovery in the shipbuilding market, it will still take time for the oversupply of vessels to be absorbed. The market environment remains challenging.

The Group's strong capability in building dry bulk carriers positions it well to tap on the opportunities that may be brought about by the increase in demand for dry bulk. In addition, working closely in association with AVIC Dingheng, a shipyard within AVIC Group, AVIC Maritime is able to command a competitive position globally in the category of small-size (30,000 DWT and below) highly-specialized chemical tankers which are LNG ready and designed for operation in very cold waters. The Group, in association with its related shipyards, will continue to leverage on its expertise and further its track record in the building and delivery of specialized vessels, such as Ro-Pax vessels and chemical tankers, where demand is more resilient and promising.

Deltamarin will focus its resources on the design contracts it received in 2016, which included the design contract for the largest mega passenger vessel to be built. The contract was the largest Deltamarin had ever received. It is expected that the current design contracts in Deltamarin's order book will take up a high utilization rate for its design capacity for 2017 and following into 2018.

With its expertise and track record in designing complex and clean energy vessels, and its ability to integrate technology in ship design and shipbuilding, develop expertise in the R&D and the building of high-technology, high-value added vessels, Deltamarin is expected to continue to contribute positively to the Group, capitalizing on the synergies between Deltamarin and other members of the Group.

Shipbuilding project management service and ship-design service will continue to be our key drivers. We will continue to implement the strategy in cost rationalisation and direct more resources in developing higher margin businesses. With enhanced capital management and improve capital efficiency, as well as value creation through enhanced supply-chain related services and support from the AVIC Group, we shall strive to deliver better performance as market conditions become more favorable.