Mando China eases price squeeze in suppliers deal

Korean company secures cheaper raw materials and hastens automation to counter tough market

PUBLISHED : Monday, 20 May, 2013, 12:00am
UPDATED : Monday, 20 May, 2013, 4:18am


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Car parts maker Mando China, which is launching its initial public offering in Hong Kong, plans to offset the downward pressure on the selling prices of its major products by shifting some of its costs to raw material suppliers and speeding up automated production.

"In the face of deteriorating average selling prices in the China market, the company has entered a two-year price reduction agreement with our major raw material suppliers, which should serve as an effective way to combat the downward pricing pressures," Sim Sang-deok, the chief executive of Mando China, said at a media briefing in Hong Kong yesterday.

The company, a spin-off of Mando Corp of South Korea, makes brakes, steering columns, and suspension systems. It sources raw materials, components and finished automotive part products from its parent firm to lessen pricing risks, according to its listing document.

The company has also pre-agreed three-year purchasing contracts valued at 3.8 billion yuan (HK$4.8 billion) to 2015.

Sim added that speeding up the pace of manufacturing through a combination of semi- and fully automated facilities would help ease the impact of rising labour costs and shorten overall production cycles.

Major expenses such as labour and sales and administrative costs were up for a third consecutive year last year, putting mounting pressure on the company's operating and profit margins. The company's gross profit margin fell to 21 per cent last year from 22.6 per cent in 2011, while its operating margin decreased to 10.8 per cent from 13.1 per cent.

"Investing in high-value products can help alleviate margin squeeze conditions in China, where growth is tremendous," Sim said.

Mando China plans to boost production of conventional brake products - anti-lock brakes and electronic stability control systems - to 22.4 million units next year from 19.4 million this year. Production of suspension products, including shocks absorbers and suspension struts and damper spring modules, will increase to 19.7 million units from 17.9 million units.

The car parts company, the first Korean company to go public in Hong Kong, plans to raise as much as US$270 million by selling 243.4 million shares, or 30 per cent of its enlarged share capital. The offer price is pitched at HK$6.80 to HK$8.60 per share, translating into a forecast price-earnings ratio of up to 9.5 times.

The company will take orders from retail investors today, with the listing scheduled for May 31.

Existing shares will make up 75 per cent of the issue, with the balance in new shares. About 70 per cent of the fresh capital will be used to finance production expansion in China.

The company, which has secured Beijing Hyundai, Dongdeng Kia and Shanghai General Motors as its top three customers - responsible for more than 60 per cent of total revenue last year - said it might consider expanding manufacturing capacities in Sichuan and Guangdong provinces to cater for orders from FAW-Volkswagen, Geely and Guangzhou Automobile.