China High Speed aims to diversify
China High Speed Transmission Equipment Group, the nation's largest producer of gearboxes for wind power turbines, plans to spend about 400 million yuan (HK$493 million) this year to develop new businesses as growth of its core business slows and price competition intensifies.
The new businesses include light-emitting diode (LED) lighting and coal mining equipment production.
The Nanjing-based company, which also makes gearboxes for railway locomotives, vessels, construction and manufacturing equipment, is struggling with falling profits in the wind gearbox business that made up 67 per cent of last year's sales. The firm on Friday posted a 59.7 per cent decline in net profit to 556.97 million yuan for last year, 27 per cent lower than the 767.85 million yuan average estimate of 21 analysts polled by Thomson Reuters.
Excluding changes in fair values of convertible bonds and equity swaps, underlying net profit slid 49.3 per cent to 645.21 million yuan, of which profit fell 64.2 per cent in last year's second half to 270.2 million yuan.
Gross profit margin for wind gearboxes tumbled to 27.2 per cent from 31.2 per cent, with average selling price declining 12 per cent.
Chairman Hu Yueming said he could not see much improvement this year on both margin and prices, saying that the firm's target was to maintain last year's margin. He said it must look to new markets and products for growth.
'China's economy will go through a painful transformation, from a heavily export-reliant model to one driven by domestic consumption,' he said. 'A hefty price will be paid just like when China entered the World Trade Organisation [late 2001].'
Hu said China has great demand for LED lighting, which can be 80 per cent more energy-efficient than incandescent lamps, although he conceded the mainland was behind the curve on technology development compared with Japan, South Korea and Taiwan.
'Still, we have to try our best to close the gap,' he said. China High Speed has hired skilled personnel to help it venture into the new business, which will enter small-scale trial production this year.
The firm aims to have sales from gearboxes account for less than half its total sales by 2015, he said.
DBS Vickers analyst Dennis Lam said its venture into coal mining machinery was understandable, given that it had been making gearboxes for such equipment, but investors would have a harder time buying its diversification into the unrelated LED business.
The percentage of sales made up of exports for China High Speed Transmission Equipment Group, up from 11.7 per cent in 2010