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Dear Shareholder,

It has been an extraordinary volatile year for our company. Equity markets have been under pressure due to central banks’ attempts to lower inflation through unprecedented interest rate hikes combined with a massive reduction in liquidity. There is an ongoing concern that the monetary tightening will result in a recession rather than a soft landing for the global economy and has had a large impact on cyclical sectors like commodities that are closely linked to global growth. Over the last 12 months we have seen Manufacturing and Service PMIs in most major economies largely trend downward. For now, that trend seems set to continue although we remain ready to invest opportunistically given the considerable fluctuation in equity markets as it speculates on whether it has been too bearish on the recession outlook, and whether the US Federal Reserve will have to pivot from the current expected pace of interest rate hikes.

Outside of concerns about the global economy, certain commodities have been more volatile than usual due to the uncertainty around Russian export disruptions, either through external sanctions or through its own production plans. The sentiment around geopolitical risk premium adds an additional layer of uncertainty in commodity markets.

A hotter than usual summer in the Northern Hemisphere has led to a jump in electricity usage while severe drought has reduced hydropower generation. This has put upward pressure on commodities used in baseload power generation, leading to large moves in both thermal coal and natural gas, and to a lesser extent oil and uranium. The high cost of electricity or a shortage in available power exacerbates the concerns about inflation and economic weakness as we have seen some closures in industrial and commercial businesses.

China’s Zero Covid Policy has resulted in ongoing sporadic lockdowns across the country, with the most severe occurring in Shanghai which was lockdown for approximately 60 days starting in March 2022, which lead to obvious disruptions to the economy. There is no indication as yet that the zero Covid measures will be relaxed in China, and as a result, we are cautious on the outlook of the Chinese economy in the short term and by extension, it’s demand for commodities.

Weakness in China’s employment levels and the housing market has put further pressure on economic confidence. In late August 2022, China rolled out a number of measures including an additional 1 trillion yuan of funding largely focused on infrastructure, and cut interest rates, although sentiment has yet to improve materially at the time of writing. In the medium term, we see a potential bull case premised on China reopening and government support through additional stimulus measures.

Despite significant weakness in global equity markets during the first half of 2022, our Commodity Business, Resource Investment and Principal Investment and Financial Services segments generated a very creditable combined profit of HK$257,687,000 for the year ended 30 June 2022. This was primarily driven by the strong performance of our Resource Investment division, which contributed a segment profit of HK$171,572,000.

However, the highly concentrated nature of our Strategic Investments segment can drive highly variable profits and this is what happened last financial year. Unfortunately, our strategic investments in Mount Gibson Iron Limited generated two material non-cash impairments, HK$364,734,000 for share of loss of associates and HK$405,751,000 for the fall in the share price of Mount Gibson Iron Limited shares. These two large losses flipped the Group to an overall net loss of HK$465,994,000 and outweighed the positive performances elsewhere.

We are cautious of the near term economic outlook given our expectation for further interest rate hikes and tightening of monetary policy. However we still see opportunities in select commodities that have growing end markets, such as battery metals and electric vehicles, and in the short term we expect commodities used in power generation to remain elevated from historical levels, although prices will also depend a large part on the upcoming winter weather.

It is our long held belief that shareholders should receive a return, as such we are pleased to recommend a final dividend of HK10 cents per share for the year. We will continue to reassess our dividend policy based on our expectations of the economic outlook. As ever, I would like to thank you all for your continued support for, and faith in APAC Resources.

Andrew Ferguson

Chief Executive Officer

27 September 2022

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