China Automation : (013) 2018 Interim Report (Eng)

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CONTENTS

Management Discussion and Analysis

1. Financial Review

1. Future Outlook
2. Corporate Governance

1. Other Information

1. Report on Review of Condensed Consolidated
2. • Financial Statements
3. Condensed Consolidated Statement of Profit or
4. • Loss and Other Comprehensive Income

15 Condensed Consolidated Statement of   Financial Position

1. Condensed Consolidated Statement of
2. • Changes in Equity
3. Condensed Consolidated Statement of
4. • Cash Flows
5. Notes to the Condensed Consolidated
6. • Financial Statements

48 Corporate Information

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

CONTINUING OPERATIONS

Revenue

For the six months ended 30 June 2018, revenue from continuing operations of the Group increased by 96.1% to RMB809.5 million (1H 2017: RMB412.7 million). The significant increase in revenue was mainly attributable to the consolidation of the newly acquired hospital services business (acquisition was completed on 26 July 2017) of which contribution amounted to RMB230.2 million.

Revenue generated from the petrochemical segment increased by 40.4% to RMB579.3 million (1H 2017: RMB412.7 million), whereas revenue generated from the newly acquired hospital services segment recorded at RMB230.2 million for the six months ended 30 June 2018.

Turnover analysis by operating segment

		Six months ended 30 June
	2018		2017		Change
	(RMB'		(RMB'
	million)	%	million)	%	(%)
Petrochemical	579.3	71.6	412.7	100.0	+40.4
Hospital Services	230.2	28.4	-	-	N/A
	809.5	100.0	412.7	100.0	+96.1
Turnover analysis by the type of goods and services rendered
		Six months ended 30 June
	2018		2017		Change
	(RMB	Proportion	(RMB	Proportion
	million)	(%)	million)	(%)	(%)
Petrochemical Segment
- Safety systems	245.5	30.3	160.5	38.9	+53.0
- Control valves (Note)	283.5	35.0	202.0	48.9	40.3
- Provision of engineering and maintenance services	50.3	6.3	49.4	12.0	+1.8
- Distribution of equipment	-	-	0.8	0.2	-100.0
Sub-total	579.3	71.6	412.7	100.0	+40.4
Healthcare Segment
- Hospital services	230.2	28.4	-	-	N/A
Total	809.5	100.0	412.7	100.0	+96.1

Note: Control valve system sales included related services income.

2 China Automation Group Limited

MANAGEMENT DISCUSSION AND ANALYSIS

System sales and related services to petrochemical industries

Safety systems and engineering design services

For the six months ended 30 June 2018, revenue generated from sales of safety and critical control systems and engineering design services in relation to the petrochemical industries increased by 53.0% to RMB245.5 million (1H 2017: RMB160.5 million). It was mainly attributable to the bottoming-out of the market and therefore more tendering and delivery activities in the petrochemical industry.

Control valves

The Group's control valve business saw revenue increased by 40.3% to RMB283.5 million (1H 2017: RMB202.0 million) for the six months ended 30 June 2018. The increase was mainly attributable to (i) more contract won following the market recovery in the petrochemical industry; and (ii) more large orders won from the alkaline battery as well as the pharmaceutical industry.

Provision of engineering and maintenance services

Revenue generated from the provision of engineering and maintenance services increased by 1.8% to RMB50.3 million (1H 2017: RMB49.4 million).

Distribution of equipment

The Group did not record any revenue from the distribution of equipment (1H 2017: RMB0.8 million).

Hospital Services

Revenue generated from the hospital services for the six months ended 30 June 2018 amounted to RMB230.2 million, of which pharmaceuticals and healthcare services accounted for RMB115.3 million and RMB114.9 million respectively.

In terms of operating segment, 71.6% (1H 2017: 100%) of the Group's revenue was generated from the petrochemical segment and 28.4% (1H2017: Nil) from the healthcare services segment.

Gross profit

Gross profit for the six months ended 30 June 2018 was RMB200.2 million (1H 2017: RMB34.5 million), representing a 480.3% increase when compared to that of the corresponding period last year. Out of the gross profit of RMB200.2 million, RMB76.0 million was contributed by the hospital services business.

The overall gross profit margin for the six months ended 30 June 2018 increased significantly by 16.3 percentage points to 24.7% (1H 2017: 8.4%).

Gross profit margin analysis by the type of goods and services

	Six months ended 30 June
	2018	2017	Change
	(%)	(%)
Petrochemical Segment
- Safety systems	19.1	2.1	+17.0
- Control valves (Note)	22.9	6.6	+16.3
- Provision of engineering and maintenance services	24.7	35.6	-10.9
- Distribution of equipment	-	37.4	N/A
Sub-total	21.4	8.4	+13.0
Healthcare Segment
Hospital services	33.1	-	N/A
Total	24.7	8.4	+16.3

Note: Control value system sales included related services income.

INTERIM REPORT 2018

3

MANAGEMENT DISCUSSION AND ANALYSIS

Gross profit margin of system sales and engineering design services in relation to petrochemical industries

Gross profit margin of safety systems and engineering design services

The gross profit margin of safety systems and engineering design services in relation to the petrochemical industries increased by 17.0 percentage points to 19.1% (1H 2017: 2.1%). The significant improvement in gross profit margin was primarily due to the Group's revised tendering strategy of emphasizing the quality of the contracts namely higher margin and better payment terms.

Gross profit margin of control valves

The gross profit margin increased by 16.3 percentage points to 22.9% (1H 2017: 6.6%). The significant improvement in gross profit margin was primarily due to the fact that the Group has changed its strategy for bidding new projects to ensure reasonable margin as well as better payment terms.

Gross profit margin for the provision of engineering and maintenance services

The gross profit margin for the provision of engineering and maintenance services decreased by 10.9 percentage points to 24.7% (1H 2017: 35.6%).

Gross profit margin of hospital services

For the six months ended 30 June 2018, the gross profit margin of the hospital services business was 33.1%.

Other income

For the six months ended 30 June 2018, other income amounted to RMB14.3 million (1H 2017: RMB7.8 million). The increase was primarily attributable to the government subsidies received by the Company's subsidiaries from relevant government bodies in connection with expenses on technology development.

Other losses

For the six months ended 30 June 2018, other losses increased significantly to RMB67.9 million (1H 2017: losses of RMB2.1 million). The significant losses were primarily due to the change in fair value of convertible bonds amounted to RMB67.9 million.

Selling and distribution expenses

Selling and distribution expenses for the six months ended 30 June 2018 were RMB44.4 million (1H 2017: RMB43.2 million), representing an increase of 2.8% when compared to the corresponding period last year.

Selling and distribution expenses for the six months ended 30 June 2018 as a percentage of the Group's revenue was 5.5% (1H 2017: 10.5%).

Administrative expenses

Administrative expenses for the six months ended 30 June 2018 increased by 12.2% to RMB93.9 million (1H 2017: RMB83.7 million). Out of the RMB93.9 million, the consolidation of the hospital services business accounted for RMB17 million. The administrative expenses in relation to the petrochemical business decreased by 8.1% or RMB6.8 million when compared to the corresponding period last year.

Administrative expenses for the six months ended 30 June 2018 as a percentage of the Group's revenue was 11.6% (1H 2017: 20.3%).

Research and development expenses

Research and development expenses for the six months ended 30 June 2018 were RMB28.6 million (1H 2017: RMB31.8 million). The research and development projects undertaken during the period were mainly related to (i) development of high-end control valves in response to the preferential policies regarding localisation enacted by the Chinese Government; (ii) core hardware for turbine machinery control systems.

Finance costs

Finance costs for the six months ended 30 June 2018 decreased by 3.5% to RMB27.9 million (1H 2017: RMB28.9 million). The decrease was mainly attributable to the capitalization of interest expenses amounted to RMB4.1 million in connection with the project under construction.

Income tax expenses/(credit)

Income tax expenses amounted to RMB16.1 million (1H 2017: income tax credit of RMB1.2 million) for the six months ended 30 June 2018. The income tax expenses were mainly related to the hospital services business.

The effective tax rate for the six months ended 30 June 2018 was 24.3% (1H 2017: -0.8%).

4 China Automation Group Limited