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.