Following a Jan. 23 report forecasting a 30-70 percent yearly profit decline, Chinese compounder Kingfa Sci & Tech Co. Ltd. confirmed in its April 7 annual report that its 2008 net profit dipped 42.7 percent. Operating profit contracted further, marking a 67.4 percent decline from the previous fiscal year.

Kingfa listed a number of contributing factors to its thinning margins:

• During the first three quarters of 2008, plastics processors encountered difficulties in maintaining profitability and healthy cash flow, thanks to Beijing's macroeconomic and currency polices. Consequently, Kingfa's ability to raise prices and collect payments was impaired.

• Due to major resin price hikes in the first half of 2008 and sharp falls in the fourth quarter, the company suffered inventory depreciation loss as well as market reluctance to buy. Kingfa's overall product gross margin was 13.6 percent, just a half percentage point lower than the previous year.

• Kingfa's majority-owned real estate business unit took a 126.5 million yuan ($18.5 million) depreciation loss, as the Chinese housing market cools down.

• Wholly-owned subsidiary Mianyang Changxin New Material Development Co. Ltd. and its subsidiary were affected by the Sichuan earthquake. In addition to damage to factory buildings and machines, the companies' customers in the earthquake region either delayed payment or suspended materials purchasing.

• The snow storms in southern China during the beginning of the year led to transportation cost hikes. High oil prices and new customers located far away from shipping points also increased sales expenditures.

• Interest payments increased due to growing bank loans and rising interest rates in the first three quarters.

• Changes in accounting and tax policies.

Despite the profit decline, Kingfa's annual report stressed its goal of securing more than 10 percent of the domestic market by 2010.

Thanks to strong demand from the appliances and automotive end markets, Kingfa's capacity utilization rate exceeded 80 percent in March, according to analysts at Guotai Junan Securities Co. Ltd.

However, it is hard to tell if the growth in 2009's first quarter represented a real recovery or temporary uptick caused by inventory replenishment. "April and May will be critical times to show the real demand from downstream," a Guotai Junan's report said.