The Group reported a satisfactory growth in its sales and results for 2011 as compared with that of 2010.

MANAGEMENT DISCUSSION AND ANALYSIS

REVIEW OF YEAR 2011

OPERATING ENVIRONMENT

During the Year 2011, conditions in the steel industry remained volatile and led to an obvious difference in the performance in the first half and second half of the year under review. Strong economic growth in China helped steel prices move up and this trend continued through most of first half of Year 2011 with a brief softening happening in March 2011. Entering into the second half of the Year, steel demand was significantly affected by the slowdown in the PRC economy and the Euro zone crisis which in turn adversely affected sales prices.

During the year ended 31 December 2011, the iron ore and coking coal markets continued to be volatile. Iron ore prices remained at a high level all year having peaked in the third quarter. However iron ore prices trend turned down and dropped in November 2011 on account of weakening demand globally. The management of China Oriental Group Company Limited (the “Company”) and its subsidiaries (the “Group”) will closely monitor the market situation, strictly control the Group’s inventory level and adjust the purchasing strategy as and when needed.

The Group continues to make investments which can improve production efficiencies, eliminate inefficient production capacity and improve energy efficiency. The Group has also implemented different policies to control costs and improve employee motivation.

The Group continued to be a market leader in the PRC for H-section steels. During the year ended 31 December 2011, the Group sold 3.35 million tonnes of H-section steels.

The Group sold of 3,347,000 tonnes H-section steel products in the year ended 31 December 2011. The Group also focused on developing high-end products through improved research and development efforts, focused on H-section steel.

The property development project, namely Donghu Bay, located in Tangshan City, Hebei Province, the PRC fulfilled the pre-sale condition in April 2011. The construction on the main parts of phase one was completed during the year and pre-sales of some of the units built also commenced.

The Group continues to finetune the strategies related to receiving bank acceptance notes from customers for increasing gross profit and minimizing cash outflow. The settlement of the notes receivables were guaranteed by banks with maturity dates within six months and the credit risks in respect of the notes receivables are considered to be low. The Group also uses foreign trade payable finance as a means to reduce the finance costs and gain from the potential Renminbi appreciation against USD.

For the year ended 31 December 2011, the Group recorded revenues of RMB 38,597 million, representing an increase of 28.2% as compared with that of the corresponding period in prior year. Given the increase in revenues and its effective cost control measures, the Group sustained growth in its operating profit in Year 2011 when compared with prior year. During the year under review, the operating profit and profit for the year attributable to owners of the Company has increased by 15.5% and 16.8%, respectively, as compared with last year.

Since the Group introduced the world’s largest steel corporation ArcelorMittal as its strategic shareholder in Year 2008, collaboration between the Group and ArcelorMittal has grown considerably. ArcelorMittal appointed experienced executives to the Board of Directors of the Company (the “Board”) to participate in decision making for the Group’s business development. Technic and management staff from ArcelorMittal were sent to our production sites on a regular basis to inspect their operations and provide professional advice. Close collaboration is maintained for improving product quality.

BUSINESS REVIEW

During the year of 2011, the sales volume of H-section steel products, strips and strip products, billets, cold rolled sheets and galvanized sheets and rebar reached 3,347,000 tonnes, 3,627,000 tonnes, 1,633,000 tonnes, 477,000 tonnes and 471,000 tonnes respectively.

During the year of 2011, in response to the rising costs of raw material, the Group took proactive measures to control and reduce costs, and also enhanced operational efficiency. This enabled the Group to maintain a gross profit margin of 6.7%.

The audited profit before tax and profit attributable to owners of the Company for 2011 were RMB1,932 million and RMB1,242 million respectively, representing increase of 19.8% and 16.8% respectively when compared with those of the previous year.

Located in Qianxi, Tangshan City, Hebei Province, the PRC, Hebei Jinxi Iron and Steel Group Company Limited (“Jinxi Limited”) is the Group’s main production base. Jinxi Limited continued to make investments for improving the production efficiencies and products’ qualities. During the year of 2011, the sales volume of H-section steel products of Jinxi Limited was 1,440,000 tonnes.

During the year of 2011, Hebei Jinxi Iron and Steel Group Zhengda Iron and Steel Company Limited (“Zhengda Iron and Steel”) worked on upgrading its production facilities with the target to reduce energy consumption and emissions. The project started in second half of 2011 and will increase the operating efficiencies of Zhengda Iron and Steel in 2012.

During the year of 2011, Foshan Jin Xi Jin Lan Cold Rolled Sheet Company Limited (“Jinxi Jinlan”) proactively controlled its costs, broadened its product variety, strengthened the communication with customers, and obtained more timely information of its competitors. The annual sales volume of Jinxi Jinlan was 477,000 tonnes.

The construction on the main parts of phase one of the property development project, named Donghu Bay, was completed in the year of 2011.

During the year of 2011, the Group actively explored new businesses to broaden its sources of revenue, including the development of a scrap recycling business and this new business has obtained preliminary government approval. Moreover, Hebei Jinxi Iron and Steel Group Dafang Heavy Industry Science and Technology Company Limited also developed several new projects during the year focusing on supplying equipment to the steel industry.

FINANCIAL REVIEW
Sales Volume

In 2011, the Group’s total sales volume was 9,555,000 tonnes (2010: 8,628,000 tonnes), representing an increase of approximately 10.8%.

The Group’s sales volume breakdown during the year was as follows:

During the year of 2011, the Group’s production capacity is 11 million tonnes per annum.

Revenue

Revenue of the Group in 2011 was RMB 38,597 million (2010: RMB 30,136 million), representing an increase of approximately 28.2%.

The Group’s sales breakdown and average selling price by product (excluding value-added tax) during the year were as follows:

The increase in revenue was primarily due to an increase in the sales volume of the Group’s products and an increase in its average selling price by 15.6% to RMB 4,039 per tonne in 2011 from RMB 3,493 per tonne in 2010. Increase in the sales volume and average selling price of the Group’s products was mainly attributable to rising demand driven by the continued improvement in economic conditions in the PRC in 2011 as compared to 2010.

Cost of Sales and Gross Profit

The audited consolidated gross profit of the Group in 2011 was RMB 2,602 million (2010: RMB 2,055 million), representing an increase of 26.6%. Gross profit margin was approximately 6.7% (2010: 6.8%).

Average cost per tonne, gross profit per tonne and gross profit margin of the Group during the year were as follows:

The gross profit per tonne of the Group’s products in 2011 was RMB 272, representing an increase of approximately 13.8% compared to the gross profit per tonne in 2010. Gross profit margin decreased to 6.7% in 2011 from 6.8% in 2010. Decrease in gross profit margin was primarily due to the increment in raw material price increases in proportionate more than the increment in selling prices on account of weaker market demand in the second half of 2011.

FINANCIAL REVIEW
Liquidity and Financial Resources

In order to sustain a stable financial status, the Group closely monitors its liquidity and financial resources.

As at 31 December 2011, the Group had unutilised banking facilities of approximately RMB 4.6 billion (2010: RMB 4.8 billion).

As at 31 December 2011, the current ratio of the Group, representing current assets divided by current liabilities, was 1.7 (2010: 2.0) and the gearing ratio, representing total liabilities divided by total assets, was 58.5% (2010: 58.9%).

As at 31 December 2011, the cash and cash equivalents of the Group amounted to RMB 965 million (2010: RMB 2,223 million).

After considering its cash and cash equivalents as well as the banking facilities currently available to the Group, it is believed that the Group has sufficient capital to fund its future operations and for general business expansion and development.

As at 31 December 2011, most of the borrowings of the Group bore fixed interest rates and the Group’s exposure to changes in market interest rates was limited. The Group did not use any derivatives to hedge its exposure to interest rate risk for the years ended 31 December 2011 and 2010.

Moreover, most of the borrowings of the Group as at 31 December 2011 were non-current with maturity over three years.

The Group monitors its capital on the basis of the debt-to-capital ratio. This ratio is calculated as total debt divided by total capital. Total debt includes current and non-current borrowings, finance lease obligations and borrowings from related parties. The Group regards its non-current borrowings, non-current portion of its finance lease obligations and borrowings from related parties and its equity attributable to owners of the parent as its total capital. As at 31 December 2011, the debt-to-capital ratio of the Group was 55.8% (2010: 51.2%).

The consolidated interest expenses and capitalised interest in 2011 amounted to RMB 546 million (2010: RMB 308 million). The interest coverage (divide earnings before interest and taxes by total interest expenses) was 3.7 times (2010: 5.7 times).

Capital Commitments

As at 31 December 2011, the Group had capital commitments of RMB 505 million (2010: RMB 1.98 billion). It is estimated the capital commitments will be financed by the Group’s internal resources, senior notes and unutilised banking facilities.

Guarantees and Contingent Liabilities

As at 31 December 2011, the Group’s contingent liabilities amounted to RMB 30 million (2010: RMB 30 million), which was the provision of guarantee for bank borrowings in favour of a third party.

Pledge of Assets

As at 31 December 2011, the net book value of the Group’s property, plant and equipment amounted to approximately RMB 41 million (2010: approximately RMB 175 million), land use rights amounted to nil (2010: approximately RMB 23 million), inventories amounted to approximately RMB 61 million (2010: approximately RMB 89 million), notes receivable amounted to approximately RMB 161 million (2010: approximately RMB 55 million) and restricted bank balances amounted to approximately RMB 891 million (2010: approximately RMB 160 million) had been pledged as security for issuing notes payable of the Group and the Group’s banking facilities.

Exchange Risks

Foreign exchange risk is the risk to the Group’s financial conditions and results of operations arising from movements of foreign exchange rates. The Group mainly operates in the Mainland China with most of the transactions denominated and settled in RMB. The Group’s foreign exchange risk primarily arises from the procurement of iron ores and the relevant products from overseas suppliers and the Group’s Senior Notes, which is denominated and settled in USD. Foreign exchange rates fluctuates in reaction to the macro-economic performance of different countries and fund flows between countries arising from trade or capital commitments. The Group has not used any derivatives to hedge its exposure to foreign exchange risk for the years ended 31 December 2011 and 2010.

Final Dividend

The Board did not recommend the payment of any final dividend for the year ended 31 December 2011.

Post Balance Sheet Events

As announced by the Company on 7 March 2012, Jinxi Limited entered into an equity transfer agreement with Qianxi County Hui Yin Trading Company Limited (“Hui Yin”) pursuant to which, Jinxi Limited has conditionally agreed to acquire 20% equity interest in the Hebei Jinxi Section Steel Company Limited (“Jinxi Section Steel”) from Hui Yin. Upon completion of the acquisition, Jinxi Limited will increase its equity interests in Jinxi Section Steel from 80% to 100% and Jinxi Section Steel will become a wholly owned subsidiary of Jinxi Limited.

ACCREDITATION FOR THE COMPANY AND ITS MANAGEMENT

The Group was awarded the “Top 100 Outstanding Entrepreneur of Hebei Province” in 2011 and “AA Trustworthy Enterprise” by China Enterprise Confederation in April 2011. Mr. Han Jingyuan, the Chairman of the Company, had been named “Outstanding Entrepreneur of Hebei Province” and “2010 The Best Trustworthy Entrepreneur of China” by China Cooperative Trade Enterprises Association.

DIVIDEND POLICY

The Company plans to distribute not less than 20% of the Group’s distributable profit as dividend after its listing. However, the actual amount of dividend and as a percentage to profit will be at the discretion of the Board and will depend upon the Company’s future operation and earnings, capital requirement and surplus, general financial condition, contractual restrictions, and other factors that the Board considers relevant. In addition, pursuant to the relevant PRC laws, the distributable profit of the PRC respective subsidiaries of the Company should not be higher than its net profit, after appropriation to the statutory reserve as determined by the generally accepted accounting principles in the PRC.

INVESTOR RELATIONS

The Company maintained close contact with its investors during the year of 2011. The Company not only made timely disclosures of the Company’s information through the website of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) for increasing the transparency of the Company, but also held regular meetings with investors, updating them on the Group’s business development and industrial trend. In addition, members of the senior management of ArcelorMittal who were appointed as Directors of the Company actively participated in investor relations activities and, together with other members of the Group’s management, attended investors’ seminars, as well as one-to-one analyst meeting.

In 2011, the Group actively participated in large-scale investment promotion seminars organized by major investment banks, enhancing investors’ understanding and confidence in the Company.

All such activities helped to promote investors’ understanding of the Group while allowing us to understand more about the opinions and expectations of investors. In future, the Group will further its effort to maintain close contact and effective interactive communication with investors.

HUMAN RESOURCES AND REMUNERATION POLICIES

As at 31 December 2011, the Group had a workforce of approximately 13,000 and temporary staff of approximately 2,000. The staff cost included basic salaries and benefits. Staff benefits included discretionary bonus, medical insurance plans, pension scheme, unemployment insurance plan, maternity insurance plan and the fair value of the share options, etc.. Effective from July 2008, the Group implemented a workers’ injury insurance scheme and contributed 1.5% of the workers’ wages to the Social Insurance Bureau. According to the Group’s remuneration policy, employees’ package is based on productivity and/or sales performance, and is consistent with the Group’s quality control and cost control targets.

FUTURE PROSPECTS

Steel demand is expected to be fueled by the commencement of the Twelfth Five-year Plan of the PRC government, the development of Northwest China and the revitalization of Northeast China’s traditional industrial base. In addition, the escalated development of alternative sources of energy, cutting-edge industrial machinery/ equipment, low cost housing projects, Euro3 standard compliant automobiles as well as a renewed focus on environmental protection and energy saving measures by the State will increase steel consumption.

The economic environment in 2012 will remain complicated and volatile. Driven by a comparative shortage of resources supply, the prices of various raw materials including iron ore, coke and coal are expected to remain high. The management of the Group will closely control the inventory level and adjust purchasing strategy for raw materials when needed.

In addition, various projects on harnessing power generated and emission reductions internally from the equipments (Blast Furnace, Sinter Plant etc) in the production bases of the Group will be gradually started or completed on or after 2012. The completion of these facilities will significantly reduce energy consumption and mitigate the upward pressure on raw materials and energy costs. Apart from effective energy cost control, these facilities can substantially reduce pollutant emission during the production process, leading to an improved community environment in proximity of the plants.

The State has imposed strict regulations on the expansion of steel production capacities and implemented measures to speed up the elimination of backward production capacities, with a goal of accelerating consolidation in the steel industry.

The Group will continue to explore opportunities to expand its business portfolio and broaden its source of revenue generation through enlarging its scope of business.

Since its listing in 2004, the Group has continued to expand its business, diversify its product categories and business portfolio. During the last seven years (since being listed), the Group’s overall crude steel production capacity has reached 11.0 million tones per annum from 3.1 million tonnes per annum at the time of the listing. Its product portfolio has grown from billets to a variety of steel product series – each in a comprehensive range of products and is available in different specifications. These product series include H-section steel products, strips and strip products, billets and cold rolled sheets and galvanized sheets. Moreover, the H-section steel of the Group commands a leading position in China. The Group has been gradually diversifying its business. In addition to expanding its supply chain through upstream and downstream integration, the Group has also expanded horizontally by tapping into other business sectors. The Group will strive to take full advantage of the current solid financial condition and efficient management to intensify the continuous development of the Group and to maximize the shareholders’ value.

APPRECIATION

The Group’s encouraging results in 2011 were attributable to support from its staff and shareholders. The Board would like to take this opportunity to extend its deepest gratitude to its staff and shareholders. The Group will continue to pursue steady and sustainable growth in year 2012, with the support of its staff, and share fruitful return with its shareholders.

On behalf of the Board
China Oriental Group Company Limited
Han Jingyuan
Chairman and Chief Executive Officer
Hong Kong, 23 March 2012