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SCMP Reporter

ONE of the big business themes of the 1980s and early 1990s has been the return to favour of single-business companies.

   Diversification lost its cachet and back to basics became the name of the game.

 Yip's Hang Cheung never saw it any other way. If it isn't connected with paint or solvent production, the company is not interested, whatever the attractions of spreading risk.

  Commitment to the petrochemical industry is one of the attractions of this industrial stock, whose product range and quality make it unique in the local stock market.

   Its dynamism in cutting costs and developing other profit lines is the reason for its recent capacity expansion and subsequent strong profit growth.

  The recent rebound of its trading division, from a profit of $819,000 in 1992 to $7.2 million in its recently announced interim results, illustrates the success of its quick-response strategy.

  ''We realise the imperative to avoid high-priced, low-margin, high-risk petrochemical products and focus on solvent-related products,'' said managing director Tony Ip Chi-shing.

  Yip's Hang Cheung can sustain its profit growth only by continuously expanding production and winning new business.

   It is closely involved in the mainland market, with its products being sold direct or through dealers to southern China.

  Although its trading division's results have improved, Mr Ip said a steady rise in profit there was not expected.

  ''The trading performance is too much influenced by the political environment in China, its currency movements and its transportation network, things that are beyond our control,'' he said.

  Last year's yuan devaluation, which dragged down by 40 per cent the division's profit, also hit the company's share price.

  The trading business, which accounted for only 11.6 per cent of interim profits, buys products for the company's two other main businesses - solvent and paint manufacturing.

   By buying in bulk materials related to solvents for trading and self-use, the cost of solvent or paint production can be reduced.

  ''The economies arising from such vertical integration are substantial since raw materials make up 68 per cent to 70 per cent of the total production cost of solvents and paints,'' said Mr Ip.

    The company is also keen to produce its own raw materials to further reduce costs.

  Its 60 per cent interest in Jiangmen Handsome Chemical Development, which started producing ethyl acetate last September, will provide cheaper raw materials for mixed solvents manufacturing and the remainder will be sold through the trading division.

  In line with this cost-cutting philosophy, the company is considering the production of resin, another raw material for paints.

  Nevertheless, the main profit centre remains mixed solvent production, which contributed 63.4 per cent of the total interim profit of $61 million. With a gross profit margin of about 30 per cent and low barriers to newcomers to the market, production must grow for profits to increase.

  Catering mainly for enterprises in the Pearl River delta, the company has already established production and distribution facilities in major business sites. But Mr Ip said there remained ample room for further expansion.

  ''There are roughly 10,000 factories in that area - and we have about 5,000 to 6,000 clients. We can further enlarge our market share,'' he said.

  At present, its clients are largely involved in printing, furniture, electronics and toys. To secure new clients, the company plans to develop new petrochemical products for the shoe-making industry.

  There is a network of three solvent and three paint factories in the Pearl River delta, and Mr Ip expects to set up six to seven more strategic bases in the region in the next few years.

   Construction work in the Pak Ho district in Dongguan is continuing and production will start in March.

  Paint manufacturing, on which Yip's profit margin is 25 per cent, generated 24.8 per cent of interim profits. There has been steady growth in this area, together with expansion of the sales network.

  The network of Bauhinia paint distributors is scattered over 20 major cities in China, some with their own storage facilities.

  In an effort to make full use of this network as a weapon to break into the mainland market, the company sells car repair products as well as paints. It recently started making and selling car lubricants.

  ''The criteria for selection are that the products must be in high demand in China and that synergies can be achieved with the existing lines of business,'' said Mr Ip, who is keen to enlarge the network.

  The new lubricant joint venture, Zhanjiang Best Lubricant Blending Factory, will open in October and is expected to start contributing to profits in 1995-96.

  ''Our lubricant is almost 30 per cent cheaper than those from foreign companies due to tax advantages and lower transportation costs. We possess the competitive advantage,'' he said.

  China is an attractive market since it imports an estimated 120,000 tonnes of car lubricants every year, worth about $1 billion.

 More new products, mostly related to the car industry, are in the pipeline.

  Forming joint ventures is a safe bet in tapping the immense China market. Yip's existing co-operation with mainland agents often provides the basis for setting up further alliances.

  To investors, Yip's Hang Cheung is a China play, with its future hinging on the economic development of light industrial activity in southern China and the country's overall reform policy.

  ''Although we have small-scale strategic locations in Malaysia and Vietnam as safety valves, we believe it is not easy for China to go back to the pre-reform era,'' he said.

  As an industrial stock, Yip's stands out in the finance and property-dominated stock market.

   And investors seem comfortable with it. The stock, listed on a price-earnings multiple of seven in 1991, now commands a PE of 19.



Simple approach is lucrative for Yip's