MSG producer profits after healthy recovery

PUBLISHED : Monday, 18 August, 2008, 12:00am
UPDATED : Monday, 18 August, 2008, 12:00am

Firm's chairman says increase in sales volume leads to 108 per cent rise in gross profit despite an oversupply of the food additive on mainland

Fufeng Group, producer of glutamic acid, reported a substantial growth in gross profit for the first half of this year. The group has shaken off the oversupply of glutamic acid in the monosodium glutamate (MSG) market in China, according to chairman Li Xuechun. He said the company had benefited from market consolidation.

Did this year's results meet the set target? Yes. The group's performance in the first half of 2008 showed strong signs of recovery and the results have shown a notable improvement.

Are there any surprises in the results? The MSG and glutamic acid market was in a downturn last year. We expected the market to consolidate and then rebound. The significant improvement in our results is more or less as we expected. Established players, including Fufeng, have benefited from market consolidation. The increase in sales volume has led to a gross profit increase of 108 per cent to 237.7 million yuan (HK$270.53 million). Overall gross profit margin reached 14.6 per cent, a rise of 4.4 percentage points compared with the same period last year.

Have there been any notable changes in the industry this year? Any key challenges? Both of our major business segments - MSG and xanthan gum - are undergoing changes. The overall MSG market showed signs of recovery in the first half, especially in the second quarter. During the first half, the oversupply situation in the MSG market in China had largely subsided and, as a result, the selling price of glutamic acid rebounded. Our main MSG products include glutamic acid, MSG and fertilisers. In the first half of the year, the selling price of our products rose, especially that of fertiliser. For xanthan gum, the global supply remained stable in the first half. We lowered the price of xanthan gum to attract customers and increase market share.

What were the major challenges for management this year? The pace of market consolidation in the MSG/glutamic acid segment is beyond our control, so we closely monitor the market situation and respond promptly to adjust our strategy in the best interests of the company and our shareholders.

What did management do to ensure expectations by shareholders were met? The increase in the cost of coal and corn kernels led us to terminate production in Shandong and move to Inner Mongolia, where costs of coal and corn kernel are lower so we can better control production costs.

What are the plans for the rest of 2008? Any plans to expand and hire more staff? We are cautiously optimistic about the second half of the year. The MSG/glutamic acid market is expected to continue to consolidate. We will look for mergers and acquisition opportunities to expand and enhance our leading position. The group will further expand xanthan gum production by the end of the year.

Are there any changes in strategy this year? The development of the market has been in line with expectations. The group will continue to focus on the MSG and xanthan gum operations. New products [corn oil and chicken powder in the MSG segment] will be launched in November and will further strengthen our vertical integration of the MSG segment to enhance our competitiveness and gross profit margin. The group launched a brand-building strategy and marketing campaign this month to enhance brand recognition, market share and product value.

Are there any improvements in the business? Following last year's downturn, the group's performance in the first half showed strong signs of recovery. The improvement in turnover is mainly due to the increase in sales volume and the implementation of cost control measures.

Were there any investments made last year? Have they paid off this year in sales? The group acquired 100 per cent of the share capital of Shenhua Pharmaceutical on January25. That company works in the biochemical field using fermentation technology. It will be a research arm to develop new products.

What are the biggest issues that the industry will face in the rest of this year? The directors believe the consolidation of the MSG market will continue in the second half and in 2009. The supply of MSG and related products will further stabilise so selling prices will remain stable in the second half. We expect the selling price of xanthan gum will continue to come down.