KINETIC MINES AND ENERGY LIMITED KINETIC MINES AND ENERGY LIMITED KINETIC MINES AND ENERGY LIMITED 力量礦業能源有限公司 力量礦業能源有限公司 (於開曼群島註冊成立的有限公司) (Incorporated in the Cayman Islands with limited liability) 股份代號: 1277 Stock Code: 1277 2016 力量礦業能源有限 2016 年報 Annual Report 公司 ANNUAL REPORT 2016 年報 CONTENTS Corporate Information 2 Chairman’s Statement 3 Management Discussion and Analysis 5 Environmental, Social and Governance Report 21 Directors and Senior Management 40 Directors’ Report 46 Corporate Governance Report 57 Independent Auditor’s Report 71 Consolidated statement of profit or loss and other comprehensive income 77 Consolidated Statement of financial position 78 Consolidated Statement of Changes in Equity 80 Consolidated Statement of Cash Flow 81 Notes to the Consolidated Financial Statements 82 Financial Summary 128 CORPORATE INFORMATION Board of Directors Headquarters and Principal Place of Business in the PRC Executive Directors Dafanpu Coal Mine Mr. Zhang Li (Chairman) Majiata Village, Xuejiawan Town Mr. Gu Jianhua (Chief Executive Officer) Zhunge’er Banner, Erdos City Mr. Zhang Liang, Johnson Inner Mongolia, China Non-executive Director Principal Place of Business in Ms. Zhang Lin Hong Kong Unit B, 20th Floor Independent Non-executive Directors Two Chinachem Plaza Ms. Liu Peilian 68 Connaught Road Central Mr. Zheng Ercheng Hong Kong Ms. Xue Hui (appointed on 22 April 2016) Mr. Shi Xiaoyu (resigned on 22 April 2016) Legal Adviser Audit Committee Stephenson Harwood 18th Floor, United Centre, Ms. Liu Peilian (Chairman) Mr. Zheng Ercheng 95 Queensway, Hong Kong Ms. Zhang Lin Auditor Remuneration Committee Ernst & Young Ms. Xue Hui (Chairman) (appointed on 22 April 2016) 22/F CITIC Tower Ms. Liu Peilian 1 Tim Mei Avenue Ms. Zhang Lin Central, Hong Kong Mr. Shi Xiaoyu (resigned on 22 April 2016) Hong Kong Share Registrar Nomination Committee Computershare Hong Kong Investor Services Limited Mr. Zhang Li (Chairman) Shops 1712–16, 17th Floor Mr. Zheng Ercheng Hopewell Centre, 183 Queen’s Road East Ms. Xue Hui (appointed on 22 April 2016) Wanchai, Hong Kong Mr. Shi Xiaoyu (resigned on 22 April 2016) Principal Banker Authorised Representatives China Minsheng Banking Corp., Ltd Mr. Gu Jianhua Mr. Chan Kwok Wai, Danny Stock Code 1277 Company Secretary Mr. Chan Kwok Wai, Danny Website of the Company Registered Office www.kineticme.com Clifton House 75 Fort Street, P.O. Box 1350 Grand Cayman KY1-1108, Cayman Islands 2 KINETIC MINES AND ENERGY LIMITED CHAIRMAN’S STATEMENT On behalf of the board of directors (the “Board”) of Kinetic Mines and Energy Ltd., I am pleased to present the annual results of the Company, together with its subsidiaries (the “Group”), for the year ended 31 December 2016. In 2016, the global economy continued its gradual path in structural adjustment under a weak recovery and intensified uncertainties. However, supply-side structural reforms continued to offer China’s economic development a number of opportunities. Based on China’s ‘new normal’ for economic growth, supply-side structural reforms have been expedited. During the past year, China’s GDP increased 6.7% year-on-year, reaching RMB 74.4 trillion, which was within a reasonable range and expected targets were met. The national economy has been stable overall, with progress and enhancement attained. With the steel and coal sectors being the first to curb excess capacity, significant milestones were achieved in 2016. At the same time, under the expediting curbing measures over excess capacity, the operating conditions in steel and coal industries as a whole continued to improve, showing the effectiveness of government measures. Upon which, the severe imbalance between supply and demand in coal markets of China was alleviated. In August 2016, the coal market began to turn around its fortunes with prices for coal surging dramatically. According to statistics released on www.cqcoal.com, the monthly average price of Bohai-rim 5,000 kcal steam coal rebounded significantly from RMB354 per tonne (inclusive of value-added tax) in June of 2016 to RMB545 per tonne (inclusive of value-added tax) in December of 2016. With the continued elimination of inefficient capacity and a stronger crackdown on illegal mining, an inevitable continuous reduction in China’s total coal capacity will emerge in the coming years. The eliminated capacity will be replaced by new structural capacities and the supply-side will remain under constraints, shaping a positive landscape for the industry. Over the years, the Group has endeavored to develop its capabilities in coal mining, processing, transporting and trading. Following the commencement of the Xiaojia Station and its associated rail spur lines as well as the full operations at the Dafanpu Coal Mine, the Group’s businesses are on track towards sustainable development. Due to the loss of production time as a result of this changing of coal mining surfaces as well as controls imposed by PRC Government on coal production during the first half of 2016, the Group sold 2.72 million tonnes of commercial coal for the year ended 31 December 2016, down 28.8% as compared to the same period of 2015. However, the Group not only strived to achieve the sales target set at the beginning of the year, but always maintained highly mechanized operations with production costs per tonne at the lowest industry level. This enabled the consolidated gross profit margin of the Group to reach 28.6% in 2016. Thanks to these efforts and the obvious coal market recovery during the second half of the year, the Group made a record high profit and turnaround with a remarkable result for the whole year. Accordingly, the Group recorded a turnover of RMB1,051.5 million and a consolidated net profit of RMB138.1 million for the year ended 31 December 2016, compared with a consolidated loss of RMB2.1 million for the previous year. ANNUAL Report 2016 3 CHAIRMAN’S STATEMENT With the initial success in coal output curbs and the strenuous efforts of the PRC Government to promote supply-side structural reforms, which strengthened the efforts in resolving excess capacity in the coal industry, the industry is back on track while coal prices increase gradually. In this context, the Group can achieve healthy and balanced growth of the business, while the Group will take the initiative to identify new acquisition targets, in order to tap the enormous development potential under ‘new normal’ in China. Finally, on behalf of the Board, I would like to take this opportunity to express my sincere gratitude to our shareholders and business partners for their continuous support to the Group, and our committed senior management team and employees for their hard work. Zhang Li Chairman and Executive Director 28 March 2017 4 KINETIC MINES AND ENERGY LIMITED MANAGEMENT DISCUSSION AND ANALYSIS DIVERSE OFFERING OF QUALITY PRODUCTS MANAGEMENT DISCUSSION AND ANALYSIS Key Financial and Operational Performance Indicators Revenue Gross Profit Margin (RMB Million) 1,176.0 1,200 100 1,051.50 1,000 80 840.3 800 60 600 40 400 30.3% 28.6% 126.7 20 200 10.9% 8.7% 0 0 2013 2014 2015 2016 2013 2014 2015 2016 Sales Volume Gearing Ratio (Million tonnes) 5 100 3.8 4 80 2.7 61.0% 56.7% 55.7% 3 60 2.6 48.4% 2 40 1 20 0.4 0 0 2013 2014 2015 2016 2013 2014 2015 2016 CAPEX EBITDA (RMB Million) (RMB Million) 300 256.1 250 383.7 400 200 350 300 131.9 254.6 150 201.3 250 100 200 59.2 58.6 150 50 100 0 0 2013 2014 2015 2016 -50 -100 (65.7) 2013 2014 2015 2016 6 KINETIC MINES AND ENERGY LIMITED MANAGEMENT DISCUSSION AND ANALYSIS 2016 monthly average price of 5,000 Kcal thermal coal at the Bohai Rim: 544 545 600 522 482.5 500 416 344 345 345 354 378 400 327 335 300 200 100 0 April May June July March January August February October September November December Illustration of the Structure of Customers: 25% 26% Large-scale state-owned enterprises Trading rms Terminal power plant 49% ANNUAL Report 2016 7 MANAGEMENT DISCUSSION AND ANALYSIS MARKET REVIEW According to the National Bureau of Statistics of China, China achieved a gross domestic product (“GDP”) aggregating RMB74.4 trillion in 2016, up 6.7% from 2015 in comparable terms. By quarters, the first quarter recorded a year-on-year increase of 6.7%, with a rise of 6.7% in the second quarter, followed by an increase of 6.7% in the third quarter and 6.8% in the fourth quarter. In 2016, the country’s fixed asset investment amounted to RMB59.7 trillion, representing a nominal rise of 8.1% over the previous year (or an actual growth of 8.8% excluding price factors). In 2016, the supply-side structural reforms advanced in a gradual and orderly manner, with initial success in the main task of “overcapacity elimination, destocking, deleveraging, lowering costs and improving weak links”. The employment situation and price levels for the whole year generally remained stable. In 2016, the raw coal production volume of Chinese coal enterprises amounted to 3.41 billion tonnes, down 9.0% from the corresponding period last year. On the pricing front, the China Coal Price Index (CCPI) was up 44.2 points from the beginning of the year to reach 160 points at the end of 2016, representing an increase of 38.1%. China imported a total of 256 million tonnes of coal in 2016, up 25.2% from the corresponding period last year while China exported 8.78 million tonnes of coal, up 64.5% from the corresponding period last year. In 2016, 1.9 billion tonnes of coal was transported by rail in China, down 4.7% year-on-year.