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Year 2015 First six months of 2015 Year 2014 First six months of 2014

BUSINESS REVIEW

Tinplating

Zhongshan Zhongyue Tinplate Industrial Co., Ltd. ("Zhongyue Tinplate") is a wholly-owned subsidiary of the Company. The Company holds a 66% interest in Zhongyue Posco (Qinhuangdao) Tinplate Industrial Co., Ltd. ("Zhongyue Posco") while the remaining 34% is held by POSCO Co., Ltd., an internationally renowned iron and steel enterprise. The new tinplating production line in Zhongshan, with an annual production capacity of 150,000 tonnes, commenced operation at the end of 2015. It not only enables the Group to improve the standard of production equipment and product quality and refine the product mix, but also facilitates the development of new products and strengthens our core competitiveness. Besides, the new coating and printing production lines, which commenced operation consecutively at the end of 2014, enrich varieties in product categories and enhance value-added. Moreover, with the change in customers' needs, and advancing production technology with each passing day, the application thickness of tinplate products nowadays is getting thinner. Hence the Group has reassessed the production capacity of all production lines. Together with the new tinplating production line that commenced operation recently, the annual production capacity of tinplate products and blackplates of the Group is 550,000 tonnes and 140,000 tonnes respectively, of which 350,000 tonnes of tinplate products and 140,000 tonnes of blackplates are from Zhongyue Tinplate's capacity, whereas 200,000 tonnes of tinplate products are from Zhongyue Posco's capacity.

The major key performance indicators of the Group's tinplating business are sales volume of tinplate products, revenue and segment profit. The performance for this year was unsatisfactory. In 2015, the Group produced 315,588 tonnes of tinplate products, representing a decrease of 19.6% as compared to that in 2014. Among which, Zhongyue Tinplate and Zhongyue Posco produced 190,800 tonnes and 124,788 tonnes respectively. In addition, the blackplate manufacturing plant of Zhongyue Tinplate produced 111,820 tonnes of blackplates, a decrease of 15.8% as compared to that in 2014, providing a steady supply of raw materials (i.e. blackplates) for its production of tinplate products. The Group's tinplating plants in northern and southern China sold 316,025 tonnes of tinplate products, a decrease of 20.4% as compared to that in 2014, of which, Zhongyue Tinplate and Zhongyue Posco sold 191,366 tonnes and 124,659 tonnes of tinplate products respectively. Revenue was HK$2,107,863,000, a decrease of 31.4% as compared to that in 2014 and segment loss was HK$8,371,000, a decrease of HK$82,844,000 as compared to segment profit of HK$74,473,000 in 2014. The tinplating business accounted for 85.0% of the Group's revenue.

With more new tinplating production lines operated by other companies in Mainland China commencing production in recent years and capturing market share by selling at prices lower than market rates, the excess of supply over demand in the iron and steel industry and intense competition placed significant pressure on the sales of tinplate products. As a result, the selling price and sales volume of tinplate products of the Group decreased during the year, and gross profit for 2015 decreased as compared to that in 2014.

Furthermore, due to the depreciation of the Renminbi against the United States Dollar in the second half of 2015, the exchange loss for 2015 increased as compared to that in 2014. Hence, segment profit of the Group's tinplating business in 2014 turned to a segment loss in 2015. During the year, the Group negotiated with its suppliers more beneficial purchase prices for raw materials in order to mitigate the pressure on the Group regarding the decrease in the selling price of tinplate products. Through the pursuit of more flexible payment methods with its suppliers, the Group successfully increased liquidity of its working capital. Interest income increased accordingly. The Group strived to stabilise the sales volume by capitalising on the favourable position in capital management, adopting selling prices more comparable to the market rate and adopting effective control in trade receivables' management.

The Group continued the implementation of various measures of its human resources refining project by streamlining human resources, elevating efficiency and optimising performance management. It also established interdepartmental sales and marketing teams and promoted service transformation so as to enhance customer service. In addition, Zhongyue Tinplate upgraded its safety production standardisation level, which effectively protects the work safety of staff and improves production efficiency.

Fresh and Live Foodstuffs

Guangnan Hong Company Limited ("Guangnan Hong") is a wholly-owned subsidiary of the Company. Guangnan Hong holds a 51% interest in Guangnan Live Pigs Trading Limited, a 15.45% (31 December 2014: 16.12%) interest in an associate, Hubei Jinxu Agriculture Development Co., Ltd. ("Hubei Jinxu"), and a 34% interest in an associate, Guangdong Zijin Baojin Livestock Co., Ltd. ("Guangdong Baojin"). In February 2015, Hubei Jinxu issued new shares to a new investor. After the issuance, the Group's equity interest in Hubei Jinxu was diluted from 16.12% to 15.45%.

The major key performance indicators of the Group's fresh and live foodstuffs business are market share in the live pigs supply into Hong Kong, revenue and segment profit. The performance for this year was satisfactory. In 2015, the revenue of the fresh and live foodstuffs business amounted to HK$349,341,000, representing an increase of 10.8% as compared to that in 2014. Together with the share of loss less profit of associates, Hubei Jinxu and Guangdong Baojin, of HK$282,000 (2014: HK$10,455,000), segment profit was HK$96,520,000, representing an increase of HK$21,346,000 or 28.4% as compared to HK$75,174,000 in 2014.

The price of live pigs in 2015 increased as compared to that in 2014, and hence the revenue and profit of the fresh and live foodstuffs business recorded an increase. However, avian flu still had impact on our distribution and sales of live poultry business, resulting in the suspension of the import of live poultry into Hong Kong for the whole year. On the other hand, the increase in the price of live pigs led to significant reduction in losses incurred by the associates, which are engaged in pig farming and sales of pigs, as compared to that in 2014. Through continuous optimisation of the business workflow, the Group proactively strengthened its communication with governmental authorities, suppliers, industry participants and customers. Service standards were enhanced as a result. The Group also actively maintained the market supply. The overall market share in the live pigs supply into Hong Kong was about 45%. This provided a relatively steady contribution to the earnings of the Group.

Property Leasing

The Group's leasing properties comprise the plant and staff dormitories of Zhongyue Tinplate and the office units in Hong Kong.

In 2015, revenue from the property leasing business of the Group was HK$21,457,000, a decrease of 3.7% as compared to that in 2014. The segment profit amounted to HK$14,934,000, an increase of 2.4% as compared to that in 2014. In addition, the increase in the valuation of office units in Hong Kong slowed down in 2015 and net valuation gains on investment properties of HK$4,200,000 (2014: HK$37,910,000) were recorded by the Group.

Yellow Dragon

The Group holds a 40% interest in an associate, Yellow Dragon Food Industry Co., Ltd. ("Yellow Dragon").

In 2015, Yellow Dragon recorded a sales volume of 333,765 tonnes of its major product, corn starch, a decrease of 13.9% as compared to that in 2014. Revenue was HK$1,647,491,000, a decrease of 20.2% as compared to that in 2014. Sales price and sales volume of its products decreased during the year. However, as the purchase cost of raw materials remained at a high level, it turned from a profit of HK$12,429,000 in 2014 to a loss of HK$43,387,000 in 2015. As the Company holds a 40% interest in Yellow Dragon, the Group's share of loss was HK$17,355,000 (2014: share of profit of HK$4,972,000).

FINANCIAL POSITION

As at 31 December 2015, the Group's total assets and total liabilities amounted to HK$3,140,529,000 and HK$639,013,000, representing a decrease of HK$538,275,000 and HK$432,351,000 respectively when compared with the positions at the end of 2014. Net current assets decreased from HK$1,460,331,000 at the end of 2014 to HK$1,034,574,000. The current ratio (current assets divided by current liabilities) decreased from 3.3 at the end of 2014 to 2.7.

Liquidity and Financial Resources

As at 31 December 2015, the Group's cash and cash equivalents balance was HK$959,853,000, representing a decrease of 10.4% when compared with the position at the end of 2014, of which 83.5% was denominated in Renminbi, 3.1% was denominated in United States Dollars while the remaining balance was denominated in Hong Kong Dollars. Interest income increased from HK$31,958,000 in 2014 by 28.4% to HK$41,050,000 in 2015.

As at 31 December 2015, the Group's borrowings comprised 1) unsecured bank borrowings of HK$271,300,000 (2014: HK$549,344,000), which were fully repaid in January 2016; and 2) loans from a related company of HK$71,760,000 (2014: HK$79,560,000), of which 51.6% was denominated in United States Dollars while the remaining balance was denominated in Hong Kong Dollars. 79.1% (2014: 63.6%) of the Group's borrowings was guaranteed by the Company. As at 31 December 2015, all of the Group's borrowings were repayable within 1 year, while as at 31 December 2014, 36.4% of the Group's borrowings were repayable within 1 year and the remaining balance was repayable within 2 years. All borrowings are subject to annual interest rates ranging from 1.68% to 1.91% (2014: 1.25% to 1.67%). All (2014: 76.3%) of the Group's borrowings bear interest at floating rates. The management pays attention to variations in interest rates.

As at 31 December 2015, the Group's gearing ratio, calculated by dividing the net borrowings (being borrowings less cash and cash equivalents) of the Group by total equity attributable to equity shareholders of the Company, was -26.5% (2014: -18.3%).

As at 31 December 2015, the Group's available banking facilities which are used for working capital and trade finance purposes, amounted to HK$494,237,000, of which HK$284,239,000 was utilised and HK$209,998,000 was unutilised. 54.9% of the Group's banking facilities was guaranteed by the Company. Currently, the cash reserves and available banking facilities, as well as the steady cash flow from operations, are sufficient to meet the Group's debt obligations and business operations.

Capital Commitments and Capital Expenditure

The Group's capital expenditure in 2015 amounted to HK$133,980,000 (2014: HK$103,893,000). Capital commitments outstanding at 31 December 2015 not provided for in the financial statements amounted to HK$8,899,000 (2014: HK$183,540,000). The amount decreased significantly mainly because the construction of the new tinplating production line in Zhongshan was completed before 31 December 2015 and operation was commenced. It is expected that the capital expenditure for 2016 will be approximately HK$12,000,000.

Acquisitions and Disposals of Investments

In February 2015, Hubei Jinxu, an associate of the Group, issued new shares to a new investor. After the issuance, the Group's equity interest in Hubei Jinxu was diluted from 16.12% to 15.45%, which resulted in a gain on deemed disposal of interest in an associate of HK$1,314,000.Except for the abovementioned matter, the Group had no material acquisitions and disposals of investments during the year of 2015.

Pledge of Assets

As at 31 December 2015, the Group's interest in Guangdong Baojin was pledged to the major shareholder of Guangdong Baojin as a security for a loan and the related interest due to this shareholder by Guangdong Baojin which amounted to HK$11,711,000 (2014: HK$11,800,000). Other than the above, none of the assets of the Group was pledged.

Litigation

In 2013, a third party in Mainland China filed a claim against a subsidiary of the Group in the Court of Zhongshan City to recover an outstanding trade debt of approximately RMB2,060,000 (equivalent to HK$2,565,000) and a penalty of approximately RMB4,962,000 (equivalent to HK$6,178,000) for non-payment (collectively referred to as the "Claim"). According to the judgement made by the Court of Zhongshan City in May 2014, the subsidiary is required to repay the Claim. The subsidiary submitted an appeal in June 2014 to the High Court of Guangdong Province. According to the judgement of the High Court of Guangdong Province issued in April 2015, the appeal was repudiated and the subsidiary was ordered to repay the Claim and respective court charges of approximately RMB61,000 (equivalent to HK$76,000). Accordingly, a full provision was made during the current year, and the Claim and the respective court charges were fully paid in July 2015.

Contingent Liabilities

As at 31 December 2015, the Group had no material contingent liabilities.

Exchange Rate and Interest Rate Exposures

The majority of the Group's business operations are in Mainland China and Hong Kong. The Group is exposed to foreign currency risk primarily from import purchases from overseas suppliers and export sales to overseas customers that are denominated in a currency other than the functional currency of the operations to which they relate. The currency giving rise to this risk is mainly the United States Dollar against the Renminbi. In respect of trade receivables and payables denominated in currencies other than the functional currency of the operations to which they relate, the Group ensures that the net exposure is kept to an acceptable level, by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances.

In respect of unforeseen fluctuations in exchange rates, the Group will hedge the exposure as and when necessary. As at 31 December 2015, forward foreign exchange contracts of US$50,000,000 (equivalent to HK$390,000,000) against Renminbi were entered into by the Group to hedge against currency risks in respect of the repayment of United States Dollars liabilities by Renminbi funds. As at 31 December 2014, forward foreign exchange contracts of RMB155,089,000 (equivalent to HK$196,591,000) against the United States Dollars were entered into by the Group to hedge against currency risks in respect of export sales. When the forward exchange rate returns to an acceptable level, the Group will consider implementing appropriate measures and tools to further manage exchange rate risks, in order to reduce the impact of fluctuations of the exchange rate of the Renminbi.

In view of the market expectation of the depreciation of the Renminbi against the United States Dollar in the short to medium term, the Group has enhanced research and monitoring of the foreign exchange market since the second half of 2015 in order to reasonably reduce the financial impact from the fluctuations of the exchange rate of the Renminbi. While balancing interest income and exchange rate risks, the Group has been gradually increasing foreign currency assets and reducing foreign currency liabilities in order to reduce the exposure to exchange rate risks. After implementing these measures, the total liabilities of the Group as at 31 December 2015 decreased by HK$432,351,000 as compared to that at the end of 2014. In addition, in January 2016, using the abovementioned forward foreign exchange contracts of US$50,000,000 against Renminbi, the Group repaid all bank loans and some other foreign currency liabilities, gradually reducing the exposure to exchange rate risks as planned.

The Group's interest rate risk arises primarily from interest-bearing borrowings, cash and cash equivalents and loans to an associate. Borrowings, deposits and lendings carried at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. As the Group considers the interest rate risk faced is not material, no hedging arrangements have been entered into. Management closely monitors the changes in market interest rates.

EMPLOYEES AND REMUNERATION POLICIES

As at 31 December 2015, the Group had a total of 1,155 full-time employees, a decrease of 42 from the end of 2014. 192 employees were based in Hong Kong and 963 were based in Mainland China. Staff remuneration is determined in accordance with the duties, workload, skill requirements, hardship, working conditions and individual performance with reference to the prevailing industry practices. In 2015, the Group continued to implement controls over the headcount, organisation structure and total salaries of each subsidiary. The performance bonus incentive scheme for the management remained effective. Through performance assessment of each subsidiary, a performance bonus was accrued according to various profit rankings and with reference to net cash inflow from operations and profit after taxation. In addition, bonuses will be rewarded to the management, key personnel and outstanding staff through assessment of individual performance. These incentive schemes have effectively improved the morale of our staff members. The Company has also adopted share option schemes to encourage excellent participants to continue their contribution to the Group.