Keyuan Petrochemicals Inc. Announces First Half 2011 Financial Results

Shareholder Letter from Chairman Tao Available on Corporate Website

-- First half 2011 revenues increased 19.4% YOY to approximately $297.7 million

-- $34.7 million Cash Flows from Operations in 1H 2011 and $158.5 million in cash and restricted bank deposits at June 30, 2011 provides adequate capital to fund growth

-- Reaffirms FY 2011 revenue and production guidance of $625.0 million and 570,000 MT, respectively

News provided by

Keyuan Petrochemicals, Inc.

Nov 02, 2011, 07:30 ET

NINGBO, China, Nov. 2, 2011 /PRNewswire-Asia-FirstCall/ -- Keyuan Petrochemicals Inc. (OTC: KEYP), ("Keyuan" or "the Company"), an independent manufacturer and supplier of various petrochemical products in China, today announced the Company's financial results for the six months ended June 30, 2011.

"Our first half 2011 revenues benefitted from solid customer demand and expanded production capacity," declared Mr. Chungfeng Tao, Chairman and Chief Executive Officer of Keyuan Petrochemicals Inc. "Although our margins were negatively impacted by higher raw materials costs and one-time legal and administrative expenses related to the investigation, we generated strong cash flows, which allow us to continue funding our growth initiatives. With our new SBS production facility ramping into commercial production later this month, I believe Keyuan's core earnings potential continues to improve."

	Q1 2011	Q1 2010	Chg.	Q2 2011	Q2 2010	Chg.
Net Revenues	$146.8M	$117.4M	25.0%	$150.9M	$132.0M	14.3%
Gross Profits	$12.7M	$8.8M	44.3%	$1.9M	$8.6M	(77.9%)
Net Income (loss)^(a)	$4.9M	$5.1M	(3.9%)	($2.1M)	$3.9M	(153.8%)
EPS (Diluted)	$0.08	$0.11	(27.3%)	($0.04)	$0.08	(150%)
Adjusted Net Income^(a)	$5.6M⁽¹⁾	$5.1M	9.8%	$0.2⁽²⁾	$3.9M	(94.9%)
Adjusted EPS (Diluted)	$0.09⁽¹⁾	$0.11	(18.2%)	$0.003⁽²⁾	$0.08	(96.3%)
Diluted Shares O/S	63.9	47.7	34%	57.6	54.9	4.9%
(1) Q1 2011 Adjusted net income and EPS (Non-GAAP) excludes approximately $0.7 million of non-cash stock compensation expenses. (2) Q2 2011 Adjusted net income and EPS (Non-GAAP) excludes approximately $0.6 million of non-cash stock compensation expenses and $1.7 million of legal expenses related to the independent investigation. (a) Net Income (loss) attributable to KEYP common stockholders

First Half 2011 Financial Results

6 months ended June 30, 2011	1H 2011	1H 2010	% Chg.
Net Revenues	$297.7 million	$249.4 million	19.4%
Gross Profits	$14.5 million	$17.5 million	(17.1%)
Net Income^(a)	$2.8 million	$9.0 million	(68.9%)
EPS (Diluted)	$0.05	$0.18	(72.2%)
Adjusted Net Income^(a)	$5.8 million⁽³⁾	$9.0 million	(35.6%)
Adjusted EPS (Diluted)	$0.09⁽³⁾	$0.18	(50.0%)
Diluted Shares O/S	63.8	51.3	24.4%
(3) Adjusted net income and EPS (Non-GAAP) excludes approximately $1.3 million of non-cash stock compensation expenses and $1.7 million of legal expenses related to the independent investigation. (a) Net Income (loss) attributable to KEYP common stockholders

For the six months ended June 30, 2011, sales were approximately $297.7 million compared to $249.4 million for the six months ended June 30, 2010. The Company sold 284,595 metric tons (MT) of petrochemical products, down 5.4% from 300,701 MT of products sold in the corresponding period in 2010. The average sales price per metric ton was $1,039 during the first half of 2011, a 25.3% increase from $829 per metric ton in the first half of 2010.

Cost of goods sold increased 21.3% in the six months ended June 30, 2011 to $283.1 million. Gross margin was 4.9% for the first six months of 2011 compared to 7.0% in the same period a year ago mainly due to higher raw materials costs.

Operating expenses for the six months of 2011 were approximately $8.5 million, consisting of $0.8 million in selling expenses and $7.7 million in general and administrative expenses compared to approximately $0.3 million and $2.0 million, respectively, in the first half of 2010. Operating expenses were higher due to public company expenses and increased headcount to support business expansion.

Operating income totaled $6.0 million, representing an operating margin of approximately 2.0%, compared to $15.1 million and 6.1% during the six months of 2010, respectively. Excluding approximately $1.3 million of non-cash stock compensation expenses and $1.7 million of legal expenses related to the independent investigation, operating income and operating margin in the first six months of 2011 were $9.0 million and 3.0%, respectively.

GAAP net income attributable to common stockholders for the six months of 2011 was $2.8 million with corresponding earnings per share of $0.05. Adjusted net income attributable to common shareholders was $5.8 million and $9.0 million in the first half of 2011 and 2010, respectively. Adjusted diluted net income per share was $0.09 in the first half of 2011 compared to $0.18 in the same period in 2010, based on 63.8 million and 51.3 million weighted average diluted shares outstanding, respectively.

The Company had $158.5 million of cash and restricted cash at June 30, 2011 compared to $127.4 million at December 31, 2010. For the six months of 2011, the Company generated $34.7 million in cash flow from operations compared to $10.3 million in the corresponding period a year ago. Inventories were $103.2 million at June 30, 2011 and advance payments for the suppliers amounted to $8.4 million.

Full Year 2011 Guidance

Management reiterates its prior guidance for $625.0 million of revenues and 570,000 MT of production for the twelve months ending December 31, 2011. This assumes approximately $30.0 million of revenue contribution from its SBS production facility.

Business Updates

The Company has issued a shareholder letter from the Chairman and Chief Executive Officer Chungfeng Tao on the investor relations section of its website. Interested parties can access the shareholder letter by clicking on the link below: http://ir.stockpr.com/keyuanpetrochemicals/presentation

By the end of September, 2011, the Company completed construction of its new 70,000 MT Styrene-Butadiene-Styrene ("SBS") production facility. Demands for SBS have been driven by strong growth in basic materials such as tires, rubbers and other industrial applications. The facility is currently under trial production for the next couple months to assure quality control with expected commercial production launching by year end 2011. Management expects to generate between $100 and $110 million in net revenues from SBS in 2012 with a net income between $10 and $11 million. Pictures of the new SBS facility can be viewed at the following link: http://www.keyuanpetrochemicals.com/our-company/sbs-facility.

Dividend Update

The Company's Board of Directors voted to suspend the payment of quarterly cash dividends on common stock while it pursues strategic alternatives including, but not limited to, taking the Company private, a merger or other transaction.

About Keyuan Petrochemicals, Inc.

Keyuan Petrochemicals, Inc., established in 2007 and operating through its wholly-owned subsidiary, Keyuan Plastics, Co. Ltd., is located in Ningbo, China and is a leading independent manufacturer and supplier of various petrochemical products. Having commenced production in October 2010, Keyuan's operations include an annual petrochemical manufacturing design capacity of 720,000 MT for a variety of petrochemical products, with facilities for the storage and loading of raw materials and finished goods, and a technology that supports the manufacturing process with low raw material costs and high utilization and yields. In order to meet increasing market demand, Keyuan plans to expand its manufacturing capacity to include a SBS production facility which was completed in September 2011 and is currently on trial production, additional storage capacity, a raw material pre-treatment facility, and an asphalt production facility.

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: adjusted net income and adjusted EPS (basic and diluted). The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our "recurring core business operating results". We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. We believe these non-GAAP financial measures are useful to investors because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income (Unaudited):

	1H2011	1H2010
Net Income attributable to KEYP common stockholders	$2,789,097	$8,965,324
Non-cash stock compensation expense	$1,285,185	--
Legal expense related to the independent investigation	$1,700,000	--
Adjusted Net Income	$5,774,282	$8,965,324

Basic and diluted weighted average shares outstanding
Basic	57,578,896	48,858,321
Diluted	63,836,982	51,314,420

Adjusted Earnings per share
Basic	0.10	0.18
Diluted	0.09	0.18

Cautionary Statement Regarding Forward-Looking Information

This press release may contain certain "forward-looking statements" relating to the business of Keyuan Petrochemicals, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements" including statements regarding the impact of the proceeds from the private placement on the Company's short term business and operations, the general ability of the Company to achieve its commercial objectives, including the ability of the Company to sustain growth; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov ). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

For more information, please contact:

Investor Relations:

Ted Haberfield, President
MZ North America, IR
Tel:   +1-760-755-2716
Email: [email protected]
Web: www.mz-ir.com

Mr. Andrew Haag, Managing Partner, USA
Hampton Growth, LLC
Tel:   +1-877-368-3566
Email: [email protected]
Web: www.hamptongrowth.com

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIAIRES CONDENSED CONSOLIDATED BALANCE SHEETS
	June 30,		December 31,
	2011		2010
	(Unaudited)
ASSETS
Current assets:
Cash	$	5,783,010	$	29,336,241
Pledged bank deposits		152,745,891		98,053,146
Bills receivable		3,652,467		9,194,513
Inventories		103,216,904		86,831,556
Prepayments to suppliers		8,399,486		14,071,219
Consumption tax refund receivable		34,406,640		39,144,688
Amounts due from related parties		38,675		5,332,193
Other current assets		48,477,204		28,608,833
Deferred income tax assets		479,207		469,914


Total current assets		357,199,484		311,042,303

Property, plant and equipment, net		163,015,224		129,781,304
Intangible assets, net		1,013,929		1,045,466
Land use rights		11,099,122		11,099,875
Prepayments for property, plant and equipment		4,516,760		-

Total assets	$	536,844,519	$	452,968,948

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings	$	168,068,315	$	135,768,634
Bills payable		51,747,150		60,224,900
Current portion of long-term bank borrowings		4,641,000		17,445,500
Accounts payable		149,772,489		92,225,936
Advances from customers		12,092,013		10,479,217
Accrued expenses and other payables		32,974,995		18,205,110
Income taxes payable		1,385,813		10,699,778
Dividends payable		2,969,935		234,393
Amounts due to related parties		3,104,306		115,535

Total current liabilities		426,756,016		345,399,003
Long-term bank borrowings		15,470,000		15,170,000

Total liabilities		442,226,016		360,569,003


Series B convertible preferred stock:
Par value: $0.001; Authorized: 5,400,010 shares
6% cumulative dividend with liquidation preference
over common stock
Issued and outstanding: 5,400,010 shares
liquidation preference of $20,250,000		16,701,565		16,701,565

Commitments and contingencies		-		-


Stockholders' equity:
Series M convertible preferred stock:
Par value: $0.001; Authorized: 47,658 shares;
Issued and outstanding: nil at June 30, 2011
and December 31,2010		-		-
Common stock:
Par value: $0.001; Authorized: 100,000,000 shares;
Issued and outstanding: 57,579,490 shares on June 30, 2011
and 57,577,840 shares on December 31, 2010		57,580		57,578
Additional paid-in capital		48,237,349		47,012,061
Statutory reserve		3,075,356		3,075,356
Accumulated other comprehensive income		5,042,587		3,310,416
Retained earnings		21,504,066		22,242,969

Total stockholders' equity		77,916,938		75,698,380

Total liabilities and stockholders' equity	$	536,844,519	$	452,968,948

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Sales
Third parties		115,281,945		105,627,764		239,436,744		202,182,241
Related Parties		35,607,658		26,369,453		58,217,477		47,186,862

Total Sales	$	150,889,603	$	131,997,217	$	297,654,221	$	249,369,103

Cost of sales
Third parties		111,055,933		98,516,344		224,870,131		187,429,672
Related parties		37,977,326		24,835,031		58,276,685		44,478,145

Total Cost of sales		149,033,259		123,351,375		283,146,816		231,907,817

Gross profit		1,856,344		8,645,842		14,507,405		17,461,286

Operating expenses
Selling expenses		215,548		258,901		754,680		343,413
General and administrative expenses		4,529,744		1,213,080		7,764,824		2,018,612

Total operating expenses		4,745,292		1,471,981		8,519,504		2,362,025

(Loss) income from operations		(2,888,948)		7,173,861		5,987,901		15,099,261

Other income (expenses):
Interest income		781,941		44,123		1,688,885		62,355
Interest expense		(2,638,734)		(1,634,060)		(5,835,364)		(2,725,817)
Foreign exchange gain (loss), net		3,200,356		-		2,052,713		293,028
Liquidated damages expense		(1,300,730)				(1,300,730)
Non-operating income (expenses)		1,689,404		118,802		3,716,178		(283,429)

Total other income (expenses)		1,732,237		(1,471,135)		321,682		(2,653,863)

(Loss) income before income taxes		(1,156,711)		5,702,726		6,309,583		12,445,398

Income tax expense		665,828		1,504,063		2,917,979		3,191,577

Net income (loss) attributable to Keyuan
Petrochemicals Inc. stockholders		(1,822,539)		4,198,663		3,391,604		9,253,821

Dividends to Series A convertible
Preferred stockholders		-		288,497		-		288,497

Dividends to Series B convertible
preferred stockholders		306,247		-		602,507		-

Net (loss) income attributable to Keyuan
Petrochemicals Inc. common stockholders	$	(2,128,786)	$	3,910,166	$	2,789,097	$	8,965,324

Net (loss) income attributable to Keyuan
Petrochemicals Inc. stockholders	$	(1,822,539)	$	4,198,663	$	3,391,604	$	9,253,821

Other comprehensive income
Foreign currency translation adjustment		617,550		192,224		1,174,874		193,948

Comprehensive (loss) income	$	(1,204,989)	$	4,390,887	$	4,566,478	$	9,447,769

(Loss)earnings per share:
Attributable to common stock:
- Basic	$	(0.04)	$	0.08	$	0.05	$	0.18
- Diluted	$	(0.04)	$	0.08	$	0.05	$	0.18

Weighted average number of shares of common stock used in calculation
- Basic		57,579,239		50,045,451		57,578,896		48,858,321
- Diluted		57,579,239		54,930,660		63,836,892		51,314,420

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	Six Months Ended June 30,
	2011		2010

Cash flows from operating activities:
Net income	$	3,391,604	$	9,253,821
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on disposal of property, plant and equipment		3,504		-
Depreciation		4,671,566		4,071,010
Amortization		51,675		49,508
Land use rights amortization		217,999		84,236
Deferred income tax expense		-		3,191,577
Share-based compensation expense		1,285,185		124,824
Changes in operating assets and liabilities:
Bills receivable		5,665,046		(9,895,257)
Inventories		( 14,517,420)		(34,628,566)
Prepayments to suppliers		11,118,823		(6,190,211)
Consumption tax refund receivable		5,455,515		(11,182,419)
Other current assets		(23 ,036,081)		1,175,434
Accounts payable		44,000,832		57,283,692
Advances (to) from customers		4,320,196		(3,078,476)
Income taxes payable		(9,427,659)		-
Accrued expenses and other payables		1,500,872		19,826

Net cash provided by operating activities		34,701,757		10,278,999

Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment		10,512		-
Purchase of property, plant and equipment,		(11,574,245)		(17,084,658)


Net cash used in investing activities		(11 ,563,733)		(17,084,658)

Cash flows from financing activities:
Pledged bank deposits used for bank borrowings		(52,211,458)		(27,655,715)
Proceeds from short-term bank borrowings		74,477,809		59,923,457
Repayment of short-term bank borrowings		(45,167,450)		(59,190,007)
Proceeds from bills payable		51,215,295		18,923,010
Repayment of bills payable		( 60,784,670)		(13,718,199)
Repayments of long-term bank borrowings		(13,014,350)		(1,466,900)
Short-term financing from related parties		13,144,234		4,400,700
Short-term financing to related parties		(13,144,234)		(4,400,700)
Repayment to Ningbo Litong		(95,094)		(953,485)
Repayments to unrelated parties		-		(733,450)
Proceeds from warrant exercises		7,332		23,132,089
Dividends paid		(1,396,964)		-

Net cash used in financing activities		(46,969,550)		(1,739,200)

Effect of foreign currency exchange rate changes on cash		278,295		36,879

Net decrease in cash		(23,553,231)		(8,507,980)

Cash at beginning of the period		29,336,241		14,030,655

Cash at end of the period	$	5,783,010	$	5,522,675

Supplemental disclosure of cash flow information:
Income taxes paid	$	12,345,638	$	-
Interest paid, net of interest capitalized		5,835,363		2,725,817
Dividends accrued		-		-
Non-cash financing activities:
Payable for purchase of property, plant and equipment		24,433,051		(14,864,749)