NewOcean Energy Holdings Limited
(Incorporated in Bermuda with limited liability)

Corporate Profile       

NewOcean Energy Holdings Limited is listed on the Hong Kong Stock Exchange (stock code: 342) and has its headquarter in Hong Kong. The principal activities of the Group are sales and distribution of liquefied petroleum gas ("LPG"), oil products business, natural gas ("NG") and sales of electronic products.

Performance Overview

The Mainland China market was still plagued by overcapacity in 2018. Under a less satisfactory operating environment, our excellent procurement team and end-user sales networks had given full play to their competitive edges and continuously expanded the operating scale of our LPG and oil/ chemical products (collectively as "oil products") businesses during the year, thereby the sales in LPG and oil products had also improved. However, given the intense competitions, coupled with several hikes in costs following the rise in oil prices in the first half of the year and the unexpected sharp fall in oil prices at the end of the year, the Group had made a provision for its inventories of its net realizable value, resulting into a prominent fall in our operating gross profits of oil products; additionally, with the depreciation of Renminbi in 2018, the Group's profits were negatively hampered, leading to the decline in our net profits as compared to that of last year.

During the year, with the escalations in our sales volume and prices, our revenue had increased rapidly, which in turn led to a significant growth in the balances of inventories and trade receivables at the end of the year. In the field of coping operating risks, the Group has owned years of solid experience and has always been well-prepared from the start. Prior to any sales of credits, the Group would always conduct strict credit control on all of its clients, and amid the process, would always perform prudent credit management measures. Besides, in order to ensure the continuous expansion of its sales in a low-risk environment, the Group would also purchase credit insurance or obtain effective security or collateral for certain trade receivables, and maintain its inventory turnover within 30 days.

Apart from the ongoing developments of its energy business in the Southern China region, the Group had started to conceptualize the plan of expanding its business to the overseas markets since 2016 and started its LPG wholesaling business in Africa. In late 2017, the Group established its first procurement centre in Malaysia, which mainly assisted the marine bunkering businesses in Singapore, Hong Kong and the Mainland China for diversifying sourcing channels and lowering their procurement costs. In 2018, the Group quickened its pace and had its company in Singapore succeeded in tapping into the local marine bunkering market within a year, which had also obtained a wide recognition among the industry with its professions. Our subsidiary in Singapore had achieved an annual sales volume of approximately 1,213,000 tonnes, contributing approximately 27% of the Group's sales volume of oil products. In December 2018, the Group started leasing a floating warehouse with the size of around 300,000 tonnes for warehousing usages in Malaysia in order to get itself well-equipped for any further growth in the sales volume. Therefore, a continuous growth in such share is expected.

During the year, the Group had achieved a total revenue of approximately HK$30,007,805,000 (among which, the revenue of energy products was approximately HK$29,308,766,000, contributing around 97.67% of the total revenue), representing an increase of approximately 36.04% as compared with the total revenue of approximately HK$22,058,618,000 (among which, the revenue of energy products was approximately HK$21,469,496,000, contributing around 97.33% of the total revenue of the same period of the year) in last year. During the year, the sales volumes of energy products had surged more than 353,000 tonnes as compared with that of the same period of last year. Additionally, the average prices of LPG and oil products had also recorded considerable increment over the year. Together with the steady improvements in the sales volume of our electronics business during the year, our revenue had seen a relatively prominent growth.

During the year, the Group recorded a net profit of approximately HK$670,456,000, representing a decrease of approximately 18.71% as compared with the net profit of approximately HK$824,803,000 in last year. Gross profits improved by around HK$342,634,000 during the year; however, our net profit had declined by approximately HK$154,347,000, which could be mainly due to the followings: (1) a net exchange loss of approximately HK$123,695,000 was recorded in 2018; comparing such with the net exchange gain of approximately HK$137,070,000 in last year, only the account for such exchange difference in these two years had accounted for an decrement of more than HK$261 million; (2) Upon the rapid drop in oil prices in the late December, the Group leased a new floating warehouse for oil storage with a size of 300,000 tonnes in Singapore. As moving from the old floating warehouse to the new one took a certain period of time, the efficiency of our oil delivery to end customers had been affected; thus at year end, inventories on hand of approximately 120,000 tonnes of oil products purchased in November had suffered from the drop in oil prices, which in turn had caused the Group to make a provision of around HK$120 million on the basis of the net realizable value; (3) subsequent to the HKFRS 9 coming into effect on 1 January of the year, the Group was required to make a general impairment losses of approximately HK$90,000,000 for its expected credit loss on trade receivables and other receivables, of which HK$50,000,000 had been reflected in the consolidated statement of profit or loss and other comprehensive income for the current year. Therefore, the three above-mentioned non-recurring expenses had already fully explained the decline instead of the growth in our net profit during the year.

Segment performance

In 2018, the LPG business, oil product business, electronics business and other businesses of the Group had achieved an operating income of approximately HK$30,007,805,000 in total, representing an increase of 36.04% as compared with the operating income of approximately HK$22,058,618,000 in last year. During the year, the three businesses had achieved total gross profits of approximately HK$1,966,997,000. In 2018, the Group had achieved the sales of energy products of approximately 6,601,000 tonnes, representing a growth of 5.65% as compared with the sales volume of approximately 6,248,000 tonnes in the same period of last year.

LPG Business

Over the past few years, the emergence of new energies indeed fettered the development of traditional clean energies such as LPG on automobile and civilian usage in a long run. Fortunately, the Group had already established and owned a fairly comprehensive sales network (either end-user or wholesaling), which enabled it to continue capturing a larger market share and grow along with the continuous increase in the domestic industrial usages of LPG in the recent years. In 2018, the LPG sales volume of the Group amounted to approximately 2,107,000 tonnes, representing an increase of approximately 214,000 tonnes as compared with the sales volume of approximately 1,893,000 tonnes in last year.

Throughout the year, the LPG business recorded a revenue of approximately HK$9,957,788,000, representing an increase of approximately 24.60% as compared to the revenue of approximately HK$7,991,909,000 in the same period of last year. The growth in business revenue was mainly due to the rise in average prices and sales volumes.

Oil Products Business

During the year, the Group achieved a total sales volume of around 4,494,000 tonnes of oil products, representing an increase of approximately 3.19% as compared with approximately 4,355,000 tonnes in last year.

The oil products business recorded a revenue of approximately HK$19,350,978,000, representing a hike of around 43.58% as compared with the revenue of approximately HK$13,477,587,000 in last year. Due to the rebound in the average oil products prices, the revenue grew more than 40% despite the growth of around 3.19% in the sales volume.

The revenue grew 43.58%, however, by case of the rise in costs, the provision made on the basis of the net realizable value amounting to HK$120 million and the fierce market competitions, the actual decrease in our gross profits was amounted to around 1.19% (2018: approximately HK$585,937,000; 2017: approximately HK$592,966,000). The gross margin of the oil products business slightly decreased from around 4.40% in last year to around 3.03% in 2018.

Business Outlook

In the past, the Group has been focusing on the sale of energy products in the Southern China region. Since the global market's LPG and oil production are kept increasing which leads to an oversupply situation. The Southern China is the biggest market for energy products, every market operator wants to increase their sales in order to grow their market shares which leads to fierce competitions. In addition to the economic slowdown in the Mainland China following the declaration of the trade war, such business have been facing lots of operational difficulties. Indeed, the issue of oversupply is not a key problem for operators who have owned a huge end-user market and fully integrated production chains such as NewOcean Group, who will have the advantages to stay in the market. Eventually, a balance between the demand and supply will be reached. For those operators who manage to maintain market share and being the cost leader with lower cost per ton compared with the industry peer, reasonable return expectations are wholly likely. However, their profitability may inevitably be affected to a certain extent while awaiting for the market to adjust itself. It is definitely possible to avoid such risk, which is by exploring more new markets and diversifying our risks.

Accordingly, the Group has established its development blueprint in 2017, which was to expand its overseas business in a proactive manner. Having successfully expanded into the Singaporean marine bunkering market in 2018, we will continue to adopt the same operating strategies, that are designed to push our developments forward with our end-user markets so as to facilitate the rapid growth in our business volume. Meanwhile, we are reviewing the Group's industry structure and operating model so as to continuously improve the efficient coordination between our industry and logistics chains. It is expected that such measures will enhance our operating efficiency and further lower our operating costs.

Oil products business - The developments of our oil products business will be expedited.

1. As for our marine bunkering business, since Hong Kong or ports along the coastal lines of the Mainland China are not considered as embodying with any geographical advantage, our foothold established in Singapore plays a very crucial role for improving our marine bunkering business. At the end of 2018, we had successfully leased a floating warehouse with a size of approximately 300,000 tonnes in Malaysia as a procurement centre, which had already sufficiently helped lowering the procurement costs of fuel oil for marine uses, and successfully helped the Group to tap into the marine bunkering market in Singapore. Our long-term objective is to further increase the market share and explore stable and long-term suppliers and clients.
2. We are currently planning to expand our marine bunkering business to all of the ports in Malaysia; meanwhile, our company in Singapore will provide supply services of oil and technical support for these new markets.
3. Other than laying the groundwork for operations in the Mainland China, we also acquired shareholdings of three companies which engaged in auto-fuel trading and oil products transportation in Hong Kong in the late 2017, which in turn allowed the Group to become the primary agent of the four major oil companies in Hong Kong and officially tap into the auto-fuel market in Hong Kong. The oil sales volume on land was approximately 102,500 tonnes throughout the year in 2018.
4. We are not only facilitating our cooperation with our partners in the Mainland China to construct refueling stations at prime locations in the Guangdong Province, but also considering establishing sales networks of automotive refueling stations by means of acquisition and mergers.

LPG business - The retail markets located in the Southern China region (including Macau and Hong Kong) will still be the core of our business.

1. We are currently exploring more opportunities to develop more end-user markets for our bottled LPG. Meanwhile, we will enhance our management towards distributors and provide them with more support in order to improve our sales volume, and thus our profitability.
2. We are actively exploring more LPG industrial users. When the emergence of new energies has already affected the volume of auto-gas refueling for civilian uses, the volume of LPG for industrial uses is still skyrocketing on a year-on-year basis, thus our sales team in the Mainland China will continue its efforts to look for new industrial clients.
3. As to the expansion of our business to the overseas markets, we began wholesaling LPG to Africa two years ago. At present, we are seeking suitable land parcels in Africa for the construction of LPG terminal gas plants and bottling plants. We aim to tap into the local end-user markets as soon as possible, which are expected to yield healthy return on capital.

Improvement on our industry chain - Vertical integration will be conducted.

1. The Group is now pressing ahead with the establishment of its refinery project in Malaysia. We believe that a significant part of the Group's annual sales volume of oil and gas will be from the products manufactured by the refinery upon the completion of the refinery. Thus, the oil and gas business of the Group will be able to be largely self-sufficient, instead of relying on the supply from other sources.
2. After the works of such vertical integration, the Group will be able to achieve better costs management under a low-risk ecosystem. This will also enhance the Group's bargaining power on the international markets, thus broadening its procurement channels and realizing its promise on creating more sales opportunities.

We are confident that a long-term growth in the sales of the Group and improvements in our profitability can only be achieved by the continuous expansion of our end-user sales network in the Southern China region, the active expansion of sales markets in the overseas markets, as well as the vertical integration of our supply chain.

updated 7th May, 2019

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