Hai Hong poised for flagship role

RED-CHIP China Merchants Hai Hong is likely to become the major listed vehicle of the China Merchants Group.

To strengthen the company's role in the market, parent company China Merchants injected Ming Wah (Universal) Shipping and Lucky Dragon Investments into Hai Hong last year.

The two operations, shipping and glass manufacturing, boosted profit and turnover last year for Hai Hong, which was mainly involved in paint manufacture.

Net profit soared 144 per cent to $65 million and turnover increased 67 per cent to $560.2 million.

Ming Wah contributed 56 per cent of the group's earnings last year - its acquisition became effective in July.

Director Zhao Qingsheng said: 'China Merchants has injected its most profitable assets into our company. It wants to turn Hai Hong into the flagship of the China Merchant Group.' He declined to reveal whether China Merchants would inject more assets into Hai Hong.

Mr Zhao said: 'We negotiate with our parent company about our expansion plans every day.' He said the company would focus on transportation and industrial manufacturing if it expanded.

Dhamala Securities analyst Ben Kwong said it was very likely that China Merchants would put more assets into Hai Hong.

'I believe there will be more injections. China Merchants has so many operations and it needs one more vehicle in the [equity] market for capital.' He said it was also important for the China Merchants Group to strengthen its role as a major China player through Hai Hong due to increasing competition from other red chips.

'China Merchants is a conservative company and I think the injection plan will be very cautious.' Mr Kwong was optimistic that the company would be able to maintain robust profit growth this year because the injected assets, especially Ming Wah, would bring the type of profit contributed in the later half of last year to the group for the whole year.

The company's three operations - shipping and glass and paint manufacture - should provide stable growth, he said.

Another director, To Wing-sing, also vice-chairman of Ming Wah Shipping Co, said profit of the shipping operation should be able to increase in line with the international market, which was expected to grow by 10 per cent.

The company owns one large ore ship and five Aframax for the shipment of oil products.

'We don't need to worry about the ore ship as it was leased to a tenant for 30 years,' said Mr To. 'And the Aframax has a stable market.' He said shipping operations were overshadowed by the rise in United States interest rates last year, but the fear had been removed due to a slowdown in the US economy this year.

Mr To said the company might consider expanding its shipping operation.

He said an injection by China Merchants or buying more Aframax were possible.

Mr Kwong expected Ming Wah profits to grow at more than 10 per cent this year because of the growth in the shipping industry.

As for the paint operations, director Zhao Huxiang said the company was not feeling too much pressure although prices for raw material had soared.

He said price increases for different raw materials varied from one to 20 per cent.

But impact on the company was minimal because it had fixed prices with major suppliers, he said.

The company was not affected by the volatility of the foreign exchange market because most of its income was in US currency and Hong Kong dollars, Mr Zhao said.

Imported raw materials took up 70 per cent of the total raw material cost.

Forty per cent of raw materials was imported because the company wanted to maintain the quality of its products.

'We have to admit the cost for raw materials has increased. But we do not feel much pressure and our profit margin will not be affected significantly.' The company would increase the production of raw materials in China to cut costs, he said.

But he admitted such a move might face difficulties with quality control.

Mr To said the company had a stable market as it focused on paint products for container manufacture and shipbuilding and was therefore not hit by the austerity measures and the slump in the mainland property market.

Consolidating operating profit in paint-making added a meagre five per cent to the $40.8 million last year.

China Merchants also injected a 13.39 per cent stake of China Southern Glass through Lucky Dragon into the company last year. China Southern Glass contributed $8.7 million profit to the group last year.

Although the company expected robust growth in profit for China Southern Glass, Mr Zhao said the company was not under negotiation to increase its stake in the company.

But he said it was possible the company might increase its interests in the factory in the long term.