Fluctuating corn prices a sticky threat to China Starch earnings
Rising demand and expanded capacity fuelled earnings growth of listing candidate China Starch Holdings, boosting profit by 42 per cent last year. However, fluctuations in the price of corn, its main raw material, will squeeze profit margins and bring volatility to future earnings performance, analysts warned.
China Starch, the mainland's third-largest cornstarch supplier, is selling 150 million shares at HK$1.85 to HK$2.31 each to raise up to HK$346.5 million in a Hong Kong initial public offering. Its retail tranche was launched yesterday and will close on Monday.
The Shandong-based company, which saw its net profit jump to 114.39 million yuan last year, said the price and supply of corn, which accounted for 72 per cent of its cost of goods sold last year, will be one of its business risks.
The company's monthly average buying price of corn progressively rose to about 1,365 yuan per tonne in April from about 1,050 yuan in January last year.
Alex Tam Chi-wai, an analyst at CSC Securities, said the upward trend in the price of corn was likely to continue in the medium to long run as interest in the use of corn to produce ethanol as an alternative fuel would mount amid rising oil prices.
The firm would not necessarily be able to pass the higher raw material cost on to customers, Mr Tam said, citing the case of Fufeng Group.
In July, the corn-based food additive glutamic acid producer issued a warning that its interim profit would drop substantially as a result of an increase in the price of corn.
'Fufeng's production capacity is increasing, but the benefit from the economy of scale cannot entirely offset the negative effect arising from the cost increase and a flat sales price,' Mr Tam said.
Tian Qixiang, China Starch's chairman, played down the potential negative impact of the rising costs.
'Corn prices, in general, rose at a slow pace in the past 10 years,' Mr Tian said.
'All corn-based producers face the problem and we think we should tackle the problem based on our past experience.'
Cornstarch, produced from corn kernels, is an important raw material for the production of a wide range of products, including ethanol, glucose, lysine, animal feeds, agricultural fertilisers, paper, textiles, industrial chemicals, food and beverage, pharmaceutical and plastics.
China Starch also makes other ancillary corn-refined and corn-based products such as corn slurry, corn germ, corn fibre, corn gluten meal and agricultural fertilisers.
With a production capacity of 404,000 tonnes of cornstarch as at the end of last year, it aims to use the proceeds from the float to fund capacity expansion through mergers and acquisitions, building new capacity or outsourcing.
It plans to boost its annual production capacity of cornstarch to about 800,000 tonnes by the end of this year and 1.05 million tonnes by the end of next year.