Global Sweeteners and peers face profit margin squeeze from surging corn prices

Despite rising demand for sugar on the mainland, domestic sweetener makers, including listing candidate Global Sweeteners Holdings, face pressure on profit margins because of surging corn prices.

Changchun-based Global Sweeteners, a unit of Hong Kong-listed Global Bio-Chem Technology, aims to raise as much as HK$612 million in an initial public offering this month. Its retail tranche was launched yesterday and will run until Thursday.

Global Sweeteners, which makes corn-based sugar products such as crystallised glucose and maltose syrup, posted a 94.4 per cent jump in net profit to HK$156.7 million for the year ending December on a 38.6 per cent increase in sales to HK$1.14 billion.

Earnings for the three months to March rose 46.6 per cent to HK$34.6 million as sales gained 58.6 per cent to HK$336.3 million, according to the company's prospectus.

The company offered to sell its shares at between seven times and 9.1 times its earnings last year.

By comparison, Xiwang Sugar Holdings, a mainland producer of starch-based sweeteners and refined corn products, traded at 10.81 times 2006 earnings based on yesterday's closing of HK$3.85.

Kenny Tang Sing-hing, an associate director at Tung Tai Securities, said Global Sweeteners' share pricing was reasonable and similar to its Hong Kong-listed peers.

China Starch Holdings, a mainland maker of corn-based sugar seeking to raise HK$347 million from an initial public offering this month, was selling shares at 10 to 14 times its earnings last year, a source said.

Mr Tang said that while demand for sugar on mainland was expected to surge, corn prices were unstable and Global Sweeteners would be vulnerable to margin squeeze.

Corn kernels are used in making a wide range of products including amino acids and ethanol, and this demand is driving up the price of corn, according to Global Sweeteners.

The company said the average price for corn starch rose more than 10 per cent in each of the past three years.

Last year, Global Sweeteners derived 55 per cent of its total sales from glucose syrup, which is used as sweetener for pharmaceutical products.

Maltose syrup, which is used in food and beverages, accounted for 25 per cent of sales while high fructose corn syrup, which is used in ice cream and beverages, contributed 10 per cent.

The company aims to boost production capacity for glucose and maltose syrup by 34.5 per cent next year to 780,000 tonnes and double the capacity for crystallised glucose to 400,000 tonnes.

The gross profit margin for glucose syrup dropped 0.4 percentage point last year to 21.3 per cent, while the margin for the first three months of this year dropped 1.2 percentage points to 15.9 per cent.

The surge in corn prices is already hurting the industry.

In July, Fufeng Group, the mainland's largest producer of food additive glutamic acid, which listed its shares in Hong Kong in February, warned that its interim profit would drop substantially as 'a result of an increase in the price of corn kernels, the major raw material of the group's products'.

Global Sweeteners said it expected another sugar price increase in the second half of this year.

Francis Lun Sheung-nim, a general manager at Fulbright Securities, said sugar had become a commodity in the sense that its price was cyclical.

'Buying shares of Global Sweeteners is like betting on the price of sugar - investors can reap a windfall when sugar prices surge,' he said.

Mr Lun, however, warned that competition in the mainland sugar-production sector was intensifying.

Simon Lam Ka-hang, a research director at Christfund Securities, said the spin-off would create an opportunity for speculation on Global Sweeteners' shares in the first few days of trading.

'But normally, the shares will retreat substantially after that,' Mr Lam said. 'The fundamentals of the spin-off company have not changed.'

Global Sweeteners said 23.8 per cent of the listing proceeds would be used for the construction of production lines in Jinzhou for products for export to Japan and South Korea, 42.8 per cent for construction of a factory in Changchun, 23.4 per cent for the acquisition of high fructose corn syrup production facilities and 10 per cent as general working capital.

What the analysts think

Kenny Tang,

associate director, Tung Tai Securities

Pros: Demand for sugar in China will surge

Cons: Cost of raw material, mainly corn, is unstable

Francis Lun,

general manager, Fulbright Securities

Pros: Investors could reap a windfall if they capture the rising trend of sugar in its price cycle

Cons: Competition in the sugar-making sector will intensify

Simon Lam,

research director, Christfund Securities

Pros: Spin-off often results in share speculation in the first few days after listing

Cons: Fundamentals of the company remain unchanged