Revenue

Adversely affected by the current global economic crisis, the Group's revenue for the first 6 month ended 30 June 2009 ("1H09") was RMB 77.5 million, a decline of RMB 63.9 million, or 45.2%, from RMB 141.4 million in the same period of 2008 ("1H08"). This was mainly attributable to weaker demand from domestic wall hung boilers and LNG projects; sales revenue from domestic wall hung boilers decreased significantly by RMB 38.9 million as compared with RMB 74.1 million in 1H08, out of which a decrease of RMB 33.6 million, or 86.8%, was seen from export sales and the revenue from LNG projects was RMB 7.9 million in 1H09, a decrease of RMB 24.1 million, or 75.3%, as compared with 1H08.

Cost of Sales & Gross Margin

The Group's gross profit dropped RMB 19.5 million, or 58.3%, to RMB 14.0 million as compared with RMB 33.5 million in 1H08, as a result of lower sales. Gross profit margin for the Group decreased from 23.7% in 1H08 to 18.0% in 1H09 mainly due to the following reasons:

• Higher raw material cost, especially steel, for industrial boilers;
• Under-utilised production capacity and high fixed production cost for energy business resulted in a negative gross profit margin for this sector;
• Profit margin of LNG project, which was mainly in the business of equipment trading, dropped significantly from 27.2% to 9.0%, as profit margin was squeezed during the economic slowdown.

Distribution, Administrative and Finance expenses

Distribution costs increased by approximately RMB 1.8 million from RMB 9.7 million in 1H08 to RMB 11.5 million in 1H09. This is due mainly to the following reasons:

• A RMB 0.55 million decrease in freight cost and custom related expenses in line with reduction in revenue;
• After sales installation cost increased by RMB 1.8 million for domestic wall hung boilers in PRC market as the Group entered into more direct sale projects in addition to distributor sales;
• Advertising and overseas exhibition expenses increased by RMB 0.64 million to promote the Group's product brand name and market awareness.

Administrative expenses decreased by RMB 3.9 million from RMB 13.2 million in 1H08 to RMB 9.2 million in 1H09, which was due mainly to reduction in travelling and consultancy expenses, freezing salary increment as part of strict cost savings exercise.

Financial cost decreased by RMB 0.9 million from RMB 3.5 million in 1H08 to RMB 2.6 million in 1H09, which was mainly due to lower bank borrowing interest rate in 1H09.

Tax expense

Tax expense decreased from RMB 0.9 million in 1H08 to RMB 0.001 million in 1H09, due to the loss position of the Group in 1H09.

Statement of financial position

Under Non current assets, the cash and cash equivalents of the Group as at 30 June 2009 reduced by RMB 2.8 million as compared with RMB 5.5 million as at 31 December 2008, which was due to reduction in bank deposits for bill payable transactions in 1H09.

Trade and other receivables of the Group increased as compared with that as at 31 December 2008, which was mainly due to the Group having entered into more domestic wall hung boiler direct sale contracts in 1H09, which were on credit terms.

The increase in inventories was due to more raw materials purchased in 2nd quarter 2009 in anticipation of new orders and increasing production for the second half of 2009.

The increase in trade and other payables was due to the Group introducing stricter cash management policies.

Group's cash flow

The Group recorded net cash outflow of RMB 11.1 million in 1H09. There was a net cash outflow of RMB 8.1 million from operating activities, which was mainly due to the Group having incurred a loss before income tax of RMB 8.6 million in 1H09. The Group also paid a first and final tax-exempt dividend of RMB 4.6 million for financial year ended 2008.

Given the current global economic crisis, the operating environment in PRC is more challenging. The Group expects its business sectors to experience lower demand as compared with that in 2008.