Chinese compounders seek market shares, often at the expense of margins

By Nina Ying Sun
Assistant Managing Editor

Published: August 29, 2014 10:02 am ET
Updated: August 29, 2014 10:07 am ET

Related to this story

Topics Materials, Materials Suppliers

China’s largest compounder, Kingfa Sci. & Tech. Co. Ltd., as well as its more automotive-focused counterparts Shanghai Pret Composites Co. Ltd. and China XD Plastics Co. Ltd. all posted continued sales growth for the first half of 2014. Profit margin, however, is another story.

Kingfa’s revenues grew 12 percent year-on-year during the first six months to 7.5 billion yuan ($1.2 billion), while net profit tumbled 24.5 percent to 315 million yuan ($52.3 million).  The company said lowering gross margins and increasing expenses negatively impacted the net profit.

On the bright side, Kingfa’s sales volume grew 26.2 percent in the first half, led by automotive compounds. China’s vehicle production increased 9.6 percent during the same time period. Total vehicle sales grew 8.4 percent, and passenger car sales were up 14.5 percent.

Guangzhou-based Kingfa said it also expanded its market share in appliances and power tools. Analysts from China’s Industrial Securities noted that the market share gain is at the expense of price drops, while some raw material prices went up.

Kingfa, listed on the Shanghai Stock Exchange, said its overall gross margin for the plastics business fell by less than one percentage point — 0.8 — to 14.52 percent. Plastic alloys had the highest gross margin of 23.4 percent, albeit being 4.5 percentage points lower than last year. Flame-resistant resin was the only product category with improved margin, standing at 18.3 percent.

Sales growth rate was similar for the domestic market (12.3 percent) and export (11.5 percent), Kingfa added. Domestic sales continue to dominate Kingfa’s business, representing 91.4 percent of the total sales.

Shanghai Pret

The smallest of the trio, Pret’s operating revenue in the first half increase 22.4 percent to 933 million yuan ($151.9 million). But it managed to grow its net profit by 11.2 percent to 98.7 million yuan ($16.1 million).

The company, listed on the Shanghai Stock Exchange, also forecast that its net profit in the first three quarters will grow in the range of 10-20 percent, along with fast market share growth in the auto industry.

However, gross margin dropped 2.4 percentage points to 18.6 percent for automotive materials. Margins for plastic alloys and ABS compounds were on the rise, reaching 33.2 percent and 20 percent respectively. Polyolefins compounds saw the margin fall to 14.4 percent.

China XD

Unlike Kingfa and Pret, XD said its gross profit margin actually grew to 20.3 percent during the first half, up from 17.8 percent in the same period of the previous year.

The Nasdaq-listed company explained the reasons behind the margin increase, saying its higher-end products sales accounted for a larger share of its total revenues for the six months ending June 30 compared to the prior year. It also raised prices, as it gave an average 6.7 percent discount off the original prices in the first half of 2013, but reduced the discount rate to a mere 0.8 percent this year.

XD didn’t specify its margins to specific product categories, but noted that it has shifted its product mix from PP compounds to higher products such as nylon (6 and 66) compounds. It said the change was in response to the increasing demand of plastic materials in luxury cars in China and Korea and China’s push for clean energy vehicles.

XD’s first half revenues jumped 30.7 percent to $487.8 million. Sales growth rate reach as high as 47.7 percent in Eastern China, 24.9 percent in Southwest, and 15.7 percent in its more established northern Chinese market. Net income soared 18.6 percent to $41.8 million.

XD didn’t discuss market share in its 10Q filing. But during an earnings call with investors, Chairman and CEO Han Jie said domestic suppliers including XD are aggressively taking market share from importers by offering equal or superior quality at better prices. CFO Taylor Zhang added XD boasts a leading market share in Northeast China with accelerating penetration in East China.

Last month, XD was accused by a research report for manipulating financial results. The article by Bleecker Street Research noted that XD’s gross margin was 184 percent higher than Kingfa in 2013. XD rebutted by pointing out its margins were “in line” with Shanghai Pret, which also focuses on automotive compounds.


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Chinese compounders seek market shares, often at the expense of margins

By Nina Ying Sun
Assistant Managing Editor

Published: August 29, 2014 10:02 am ET
Updated: August 29, 2014 10:07 am ET

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