Biochemical firm sees sharp rise in net profit

PUBLISHED : Monday, 23 August, 2010, 12:00am
UPDATED : Monday, 23 August, 2010, 12:00am

Hong Kong-listed corn-based biochemical manufacturer Fufeng Group has seen a sharp increase in its interim net profit on the back of a thriving mainland economy.

The mainland-based company says that its net profit attributable to shareholders rose about 30 per cent year-on-year to 460.1 million yuan (HK$525.7 million) for the period ending June 30.

'In the first half of 2010, the MSG [monosodium glutamate] industry thrived thanks to the robust performance of China's economy,' says Li Xuechun, chairman of Fufeng.

Despite intense competition and higher raw material costs, the group leveraged on its leading position in the industry and transferred the rising price of raw materials to clients, maintaining the gross profit margin of its MSG segment at a high level.

With the strong sales performance of MSG products and xanthan gum, and the expansion of production capacity, the group further enlarged its market share.

During the period under review, the group's growth continued and it achieved good sales performance in MSG and xanthan gum segments. Turnover for the period rose 45.4 per cent year-on-year to 2.99 billion yuan.

During the interim period under review, the average selling price of MSG rose about 8.8 per cent year-on-year to about 7,489 yuan per tonne. Benefiting from the domestic consumption rebound on the mainland and capitalising on its position in the market, Fufeng focused on MSG production and stepped up marketing efforts to boost its sales.

As such, the sales volume of MSG increased to 235,405 tonnes, a 79.1 per cent increase over the same period last year.

Revenue generated from MSG sales gained 94.7 per cent, which was mainly attributable to the large market share and greater production capacity.

In pursuit of its strategy of moving from glutamic acid to MSG, the group substantially reduced the sales volume of glutamic acid from 62,440 tonnes to 12,309 tonnes.

Rising demand from the oil industry has led to a surge in demand for xanthan gum globally. During the period under review, the food additive's profit increased to 381.5 million yuan, representing a year-on-year increase of 105.2 per cent.

The average selling price of xanthan gum fell by 8.5 per cent from 21,853 yuan per tonne to 19,987 yuan per tonne.

Despite the drop in the average selling price of the food additive, as a result of intense competition, the sales volume and revenue of xanthan gum grew by 127.5 per cent and 105.2 per cent, respectively.

Using economies of scale, brought by the expansion of the plant in Inner Mongolia, the group recorded a year-on-year increase of 129.2 per cent in the gross profit of the food additive, which amounted to 149.7 million yuan. The gross profit margin of xanthan gum increased to 39.2 per cent.

Driven by strong demand on the mainland and a steady growth in demand for MSG, the group successfully extended its glutamic acid production downstream to MSG products during the period under review.

It also made significant progress in venturing into retail markets by expanding its market share and increasing branding efforts in order to capture the condiment market.

Targeting retail consumers, the group launched a series of products which were sold in more than 2,000 supermarkets through its nation-wide distribution channels.

In view of meeting growing market demands and further reducing production costs, the group has started construction of a new production plant at the intersection of the Inner Mongolia Autonomous Region and Heilongjiang Province.

According to the company, the new plant is to have a production capacity of 200,000 tonnes of MSG, 160,000 tonnes of glutamic acid, 200,000 tonnes of fertilisers and 100,000 tonnes of synthetic ammonia. Production is expected to begin in the second half of next year.

Looking ahead to the second half of the year, Li says: 'The group will continue to focus on the expansion of business coverage. It will strive to increase its market share through expanding the sales network, which is supported by an advanced logistics system.

'Leveraging on its strong research and development capability, the group will endeavour to diversify the product range so as to increase its sources of income and enhance its profit margins.

'Along with employing innovative and effective publicity strategies, the group also plans to step up its marketing promotions and launch more advertisements to strengthen its brand image.'

Li says the Inner Mongolia plant will also be equipped with a new production capacity of 5,000 tonnes of fructose.

The plant will also benefit from a newly-built railway and a thermal power plant.

'Benefiting from the low coal price, it is believed that this revamp, and the establishment of ancillary facilities, will further lower the production and transportation costs at the Inner Mongolia plant, contributing to the long-term and solid growth of the group,' he says.