2009 China Oriental Group’s entering new era of its corporate development. The Group recorded substantial growth in net profit.

When the global economy was still under the shadow of the financial tsunami in the first half year of 2009, the PRC economy had already begun to show signs of recovery in the second quarter, as the government’s stimulus package to boost domestic demand took effect. With the gradual implementation of the State’s RMB 4 trillion investment plan, construction of many large-scale infrastructure projects in the country had successively commenced. The real estate industry also saw rapid rebound during the year under review, owing to expectations of inflation and the release of demands accumulated in the year before 2009. All these factors had positive impact on steel demand.

Although steel price remained low in the first half year of 2009, the rise in sales volume had significantly lifted the revenue of steel companies. In the second half of the year, steel price was pushed up by demand and rose steadily.

REVIEW OF OPERATION

The Group swiftly responded to changes in the market and operating environment by capturing the opportunities arising from insufficient supply of billets in the market, after a number of companies affected by the financial crisis had reined in production. By increasing the billet output of the Group’s subsidiary Tangshan Fengrun Qu Zhengda Iron and Steel Company Limited (“Zhengda Iron and Steel”) through acquisition and leasing arrangement, and by capitalizing on a favourable supply and demand balance to reap higher gross margins, the Group stood out as one of the few steel enterprises making profits in the first half of 2009. In the second half, the Group kept on strengthening cost control, setting stringent cost management index for various departments, while adjusting the product mix to meet market demand. All these enabled the Group to maintain relatively satisfactory results for the whole year.

In response to the State’s steel industry policy to control new production capacities in the steel sector, the Group seized the opportunities from market consolidation, acquiring existing production lines to lift the Group’s overall capacity to 7 million tonnes.

During the year under review, the Group continued to deepen cooperation with ArcelorMittal, which actively participated in the Group’s operation management and technological development. With advanced production technology and well-established management system, ArcelorMittal sent technicians to the Group’s production facilities, to assist the Group in further enhancing its product quality and production efficiency, and gave advice on the Group’s systematic management.

BUSINESS REVIEW

During the year under review, the revenue of the Group was RMB 20,589 million (2008: RMB 19,388 million), representing an increase of 6.2% as compared with that of 2008. The growth in revenue was mainly due to the increase in total sales volume from approximately 4.5 million tonnes in 2008 to approximately 6.9 million tonnes in 2009 and the slightly rebound in the selling price in the second half of 2009 after it hit rock bottom at the end of 2008. The average selling price decreased by 31% from RMB 4,273 per tonne in 2008 to RMB 2,962 per tonne in 2009.

During the year under review, the Group’s gross profit reached RMB 2,006 million. The main reason for the increase was that steel gross profit rose after it hit its lowest level at the end of 2008. Supported by our effective control on production cost and the increase in sales volume, which drove the overall gross profit margin to 9.7%, representing an increase of seven percentage points when compared with that of the previous year.

Zhengda Iron and Steel, which the Group set up in the end of 2008, focused on producing billet products to meet market demand during the year under review, and contributed a profit of RMB 213 million to the Group just a year after it was set up.

The audited profit before tax and profit attributable to equity holders of the Company for 2009 were RMB 1,314 million and RMB 884 million respectively, representing increases of 1,053% and 1,909% respectively when compared with those of the previous year.

During the year under review, the Group had a net cash inflow generated from operating activities of RMB 252 million (2008: RMB 148 million) for its consolidated cash flows.

Foshan Jin Xi Jinlan Cold Rolled Sheet Company Limited (“Jinxi Jinlan”) enhanced its production capacity to 500,000 tonnes, following the Group’s increase of its shareholding in Jinxi Jinlan to 81.5% and further capital injection to Jinxi Jinlan. During the year under review, Jinxi Jinlan continued to produce extremely thin steel sheets, which were supplied to high-end electronic consumer products manufacturers and thus had a higher competitive edge in the market. Jinxi Jinlan continued to improve its operation efficiency.

The Group’s main production base – Hebei Jinxi Iron and Steel Group Company Limited (“Jinxi Limited”) (original Hebei Jinxi Iron and Steel Company Limited) – located in Qianxi, Tangshan, Hebei province, continued to provide stable profit contribution to the Group. While securing efficient production volume, Jinxi Limited further developed new products with high added value, including track steel and special section steel.

During the year under review, the Group’s overall annual production capacity of crude steel reached 7 million tonnes, including approximate 3 million tonnes annual production capacity of H section steel, which can be used in high quality construction. This had further consolidated the Group’s position as one of the largest H section steel production centres in China.

In addition, the Group developed hot rolled H section steel used for steel pole supporting overhead contact wires for electric railway in 2009. The introduction of this hot rolled H section steel for steel pole supporting overhead contact wires for electric railway has not only addressed the problem of opening up new markets for H section steel, but also generated greater economic benefits since its price is higher than other H section steel products.

The Group entered into a co-operative framework agreement with Asia Energy Logistics Group Limited (stock code: 351) in November 2009, pursuant to which Asia Energy Logistics Group Limited will assist the Company in constructing a cargo site at Santunying Station of Zunxiao Railway and providing railway logistics and transportation services to Jinxi Limited for the two years ending 23 November 2011. This will lower the Company’s transportation cost and increase efficiency, as well as squeeze the transportation distance from the original 521 kilometres to 96 kilometres in the future, thereby shortening the transportation distance effectively and enhancing transportation capacity.

STRENGTHEN STRATEGIC COOPERATION WITH ARCELORMITTAL

Since senior management staff of ArcelorMittal joined the board of China Oriental in 2008, ArcelorMittal has been to providing support to the Group in the aspect of scientific research and technology.

The representatives of ArcelorMittal at the board of the Company actively participated in the management of the Company in 2009, helped strengthen investor relations through arranging meetings with multinational institutional investors, and attended investor forums held at home and abroad, thereby further promoting the Company in the capital market. In addition, ArcelorMittal also sent technicians to the Group’s production facilities for regular meetings with production staff and offering professional advice, which further improved the production workflow and productivity of each of the plants.

With ArcelorMittal being a global leader in section steel production, the cooperation between the two companies will be advantageous for the Group to consolidate its leadership in the PRC’s H-section steel market, while providing a solid foundation for the Group’s expansion in overseas markets in the future.

In view of the climbing price of iron ore, securing a stable supply of iron ore in the long run becomes a key issue to the Group’s cost control. ArcelorMittal’s market influence and huge purchasing platform will be enable the Group to secure a stable supply of iron ore from the international market, and to effectively control the risk of price fluctuations of raw material.

SALES VOLUME

In 2009, the Group’s total sales volume was 6,948,000 tonnes (2008: 4,534,000 tonnes), representing an increase of approximately 53%.

The Group’s sales volume breakdown was as follows:

During the year, the Group experienced substantial increase in the gross profit. This was mainly attributable to the increase in sales volume of strips and strip products and H-section steel products, which offered a higher gross profit margin of 11.6% and 9.5% respectively.

REVENUE

Revenue of the Group in 2009 was RMB 20,589 million (2008: RMB19,388 million), representing an increase of approximately 6%.

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

COST OF SALES AND GROSS PROFIT

The audited consolidated gross profit of the Group in 2009 was RMB 2,006 million (2008: RMB 517 million), representing an increase 288%. Gross profit margin was 9.7% (2008: 2.7%).

Average cost per tonne and gross profit/(loss) during the year were as follows:

FINANCIAL REVIEW
Capital Structure

The cash and cash equivalents of the Group as at 31 December 2009 was RMB 644 million (2008: RMB 729 million). After deducting the cash and cash equivalents and the relevant restricted bank balances, net borrowings was RMB 1,722 million (2008: RMB 1,257 million), accounting for 24% (2008: 20%) of the Group’s consolidated net assets after deducting minority interests of RMB 7,169 million (2008: RMB 6,265 million).

The current ratio (current assets divided by current liabilities) was 1.01 as at 31 December 2009 (2008: 0.88). As at 31 December 2009, the ratio between total liabilities and total assets of the Group was 51% (2008: 54%).

The audited net asset value per share of the Group as at 31 December 2009 was RMB 2.45 (2008: RMB 2.14), representing an increase of 14% as compared with that of the previous year.

The consolidated interest expenses and capitalised interest in 2009 amounted to RMB 176 million (2008: RMB 155 million). The interest coverage (divide earnings before interests and taxes by total interest expenses) was 8.2 times (2008: 1.3 times).

Capital Commitments

As at 31 December 2009, the Group had capital commitments of RMB 2,950 million (2008: RMB 3,300 million), which mainly consisted of the capital commitments to the construction of coking coal project and rolled sheets project and other ancillary projects. It is estimated the capital commitments will be financed by the Group’s internal resources and bank borrowings.

Guarantees and Contingent Liabilities

As at 31 December 2009, the Group’s contingent liabilities amounted to RMB 30 million (2008: RMB 61 million) which was the provision of guarantee for bank borrowings in favour of third parties.

Pledge of Assets

As at 31 December 2009, the net book value of the Group’s property, plant and equipment amounting to approximately RMB 1,463 million (2008: approximately RMB 1,406 million), land use rights amounting to approximately RMB 61 million (2008: approximately RMB 62 million), inventories amounting to approximately RMB 67 million (2008: approximately RMB 390 million), notes receivable amounting to approximately RMB 102 million (2008: approximately RMB 251 million) and restricted bank balances amounting to approximately RMB 342 million (2008: approximately RMB 362 million) had been pledged as security for the Group’s bank facilities.

Exchange Risks

As at 31 December 2009, Renminbi, US dollar, HK dollar and Euro accounted for 81.8%, 17.9%, 0.3% and 0.0001% of the Group’s total bank balances (including restricted bank balances) respectively (31 December 2008: 93.8%, 5.7%, 0.2% and 0.3% respectively). As the majority of the sales, purchases of raw materials and bank borrowings committed by the Group were in Renminbi in 2009 and 2008, the Group’s exposure to foreign exchange risk remained relatively low.

Interest Rates Risk

The interest rates of the Group’s certain borrowings are subject to variation. The risk of increasing interest rate will increase the interest costs of both new borrowings and existing borrowings. At present, the Group does not use any derivatives to hedge its interest rate risk exposure.

Post Balance Sheet Events

Saved as disclosed in this report of the Group, there are no events to cause material impact on the Group from the balance sheet date to the date of this report.

Human Resources and Remuneration Policies

As at 31 December 2009, the Group had a workforce of approximately 13,167 and temporary staff of 2,187. 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 approximately RMB 5.14 million to the Social Insurance Bureau. The amount of contribution was calculated at 1.5% based on the workers’ wages. 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.

ACCREDITATION FOR THE COMPANY AND ITS MANAGEMENT

The Group was named “The Advanced Collective of the National Steel Industry” by the Ministry of Human Resources and Social Security and China Iron and Steel Association in February 2009.

The Group’s hot rolled H-section steel product brandname, Jinxi Pai, was accredited “Consumers Satisfactory Products in Hebei Province” by China Quality and Assurance Committee.

Mr. Han Jingyuan, the Chairman of the Company, had been named on the list of “The Third Annual Top 10 People for Enterprise Management Innovation” by the State-owned Asset Regulatory Commission and “Enterprise Management” magazine in January 2009. He was also named as one of the “60 Outstanding Entrepreneurs” at the 60th anniversary of New China by China Enterprise Newspaper and the research centre of State-owned Asset Regulatory Commission under the State Council in December 2009.

Moreover, Mr. Zhu Jun, Executive Deputy General Manager and Chief Operating Officer of the Group, was named as the “Model Worker of the National Steel Industry” by China Iron and Steel Association in February 2009.

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, Jinxi Limited’s distributable profit 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.

INVESTORS’ RELATIONS

The Group has placed strong emphasis on the interactive communications with shareholders and investors. The Company operates mainly in the PRC with an office in Hong Kong headed by an Executive Director who will be responsible for and oversees the communication with investors and handles enquiries from investors. During the period under review, the Company took initiation in having regular meeting with investors and updating them with the business development and industrial trend. The Company will also make timely disclosures of the Company’s information through the website of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and press release for increasing the transparency of the Company. In addition, members of the senior management of ArcelorMittal appointed as Directors of the Company will actively participate in the investors activities and will, together with the members of the Group’s senior management, attend road shows, investors’ seminars organized for large domestic and overseas institutional investors as well as one-to-one analyst meeting.

During the year, the Group invited investors to visit its factory located at Hebei and Foshan and actively participated in various largescale investment promotion seminars organized for institutional investors. Meanwhile, the Group also had regular meetings with analysts and representatives from the investment professional for allowing investors to grasp the information on the latest business development of the Company.

All such activities helped promote investors’ understanding of the Company while allowing us to understand more about the opinions and expectations of investors. In future, we will further our effort in maintaining the close and interactive communication with investors.

In 2009, the Group held a total of 15 one-to-one investor meetings and received a total of 3 for factory visits.

FUTURE PROSPECTS

Given the uncertainty hanging over the global economy, the economic environment for 2010 will be complicated. China will focus on maintaining economic growth, while keeping inflation on a tight rein. It is expected that the State policies will continue to aim at stabilising prices, and to impose strict control on new production capacity in the building materials industry.

With the gradual economic recovery and the continued development of government infrastructure projects and private real estate projects, we expect a further increase in the demand for steel in 2010. However, the gradual rebound in the steel production volume in the PRC, together with an almost unchanged supply and demand balance in the short run, will to some extent exert pressure on the domestic steel price. The significant increase in the price of iron ore and coke in 2010 will create further strain on the cost of steel enterprises, pushing up the price of steel. Yet, we anticipate that the increase in steel prices will not fully offset the increase in raw material prices. In the face of a changing and complicated market environment, the Group will enhance its core competitiveness in effective cost control amid a low profit margin steel industry.

Regarding raw material purchase, the Group will strengthen its monitoring of the price trend, in order to timely adjust its raw material inventory. The Group will also accelerate the pace of cooperation with ArcelorMittal on iron ore purchase, in order to secure a stable supply of iron ore with relatively steady prices.

On the front of raw material and energy consumption, the Group will enhance its production techniques to further reduce the energy consumption per product and consumption of raw material during the production process, in order to meet the objectives of energy saving and unit cost reduction.

The Group will continue to exercise stringent budget control, in order to lower the percentage of selling and distribution costs, administrative expenses and finance costs to the total revenue.

With respect to broadening revenue source, it is expected that the sales of newly developed extremely thin steel sheets and H section steel for specific use will rise gradually, which will help increase the average gross profit margin of products.

The Group will proactively participate in the steel industry takeover and restructuring according to the PRC steel industry policies, in an attempt to enhance its overall production capacity to over 10 million tonnes by the end of 2010. After achieving the targeted production capacity, the Group will focus on adjusting its product mix, and develop new products with high profit margins. The Group will also actively identify appropriate business opportunities from the upstream and downstream sectors, thereby creating new growth drivers for the Group in the future and achieving further vertical integration. In addition to the development of its core business, the Group is also exploring ways to make safe investments to broaden its revenue source by capitalising on the Group’s connections and surplus fund. During the year under review, the Group started to acquire a piece of land in Tangshan for real estate development. It is anticipated that the capital to be used for property development will not have any material impact on the Group.

The Group will continue to deepen its cooperation with ArcelorMittal on corporate governance, production technology, supply of raw material and overseas sales, in an attempt to improve the efficiency and management of every aspect of the Group’s operations.

APPRECIATION

The Group’s outstanding results are achieved with the dedication of staff and the support and trust of our shareholders. The Board would like to extend its deepest gratitude to our staff and our shareholders. The Group will spare no effort in achieving greater success and bringing higher return for shareholders with the support of our staff.

On behalf of the Board

China Oriental Group Company Limited
Han Jingyuan

Chairman and Chief Executive Officer
Hong Kong, 23 March 2010