Standing on Shoulders of Chemical Giants
Hong Kong light industry boomed in the 70’s when Yip’s two siblings established a pint-size company named ‘Hang Cheung Hong’ in the Western District, mainly selling chemical products like lubricating oil and rubber solvent and later, thinners to different clients including plastic flower factories, printing factories, toy factories and electronics factories. The company’s business was thereby growing promptly. However, two years later, in 1973, a frustrating scenario arose when a number of peers closed one by one amid the global oil crisis. Ho Sai Hou, executive director and chief financial officer of Yip’s Chemical, expressed in AASTOCKS.COM interview that crisis and opportunity are just the two sides of a coin. Regarding the crisis as an opportunity, Yip’s two siblings captured a considerable number of orders and loyal customers by purchasing a large amount of chemical products at reasonable prices with all their funds, achieving a complete triumph in the 70s.
After 40 years of business growth, the group has already owned a total of 17 factories, 40 marketing offices and over 2,000 staff devoting to the production and sales of the three core products- solvents, coatings and lubricants. Ho noted that the solvents used on chemical raw materials can be classified into two major types, one is monomer solvent and the other is mixed solvent; the latter accounts for 10% business of the group, while the former, containing butyl acetate, accounts for 90 % business of the group. As for coatings, including household paints, industrial paints as well as special ink used in food packaging process, are developing well. For automotive and industrial lubricants, the products only account for 5% sales of the group. Li admitted sales of household paints are more or less affected by the recent slowdown in the mainland property market under the macro control. Nonetheless, Nippon, Dulux and China Resources, capturing relatively large market shares in the mainland, are impacted most by the slowdown and it is even estimated that a large-scale integration will emerge in the market. In contrast with the above brands, the group, having relatively small market shares in household paints, is still able to maintain a secure position in the market as the sales of its featured product ‘Bauhinia Paints’ is not much affected.
Regarding the interim results announced by the group recently, the management admitted that the net profit of HKD103mln recorded in the ‘transcript’ is disappointing; with profits even posting a record low in recent years, the management believed there is still much room for improvement. Fortunately, the turnover, which advanced 19% to HKD3.77 bln. The management is also optimistic that the group will attain an output value of RMB8 bln in the annual results, performing much better than the interim results. Ho explained that it is primarily attributable to two main reasons: first, the interim results stalled as the first half year was an offseason for the mainland and even the global markets and during the period, the group only operated for five months but paid costs for six months; second, soaring raw material prices in the year directly influenced the overall income of the coating business; yet, as the group cannot always transfer the increased costs to its clients, the profits lagged. Ho used titanium dioxide as an example illustrating that the price of the titanium dioxide was only around $13 to 14 per kg last year, but it surged to $23 to 24 per kg early this year, up nearly 80%, weighing on the profit.
Ho considers that Yip’s Chemical, as a chemical stock with high yield, has never deviated from the chemical industry in the mainland over the past 40 years; moreover, in an effort to optimize the formulation of its chemical products, the group set up its own research center in Shanghai. The management of the group projects a double digit growth in sales hereafter and believed the growth will certainly render support to the stock price in long run. Ho stressed ‘Bauhinia Paints’, which has long been the featured product of Yip’s Chemical, is also an essential product generating funds to the group. He added the stock price of Yip’s Chemical has once hit a record by breaking above $10 and if the current stock price $6.2 has already priced in the undesirable results, it is expected that the stock price will pick up and show significant improvement in 2012. Nonetheless, technical wise, since the stock price has dropped below 20MA and 50 MA respectively, it is contemplated that the stock price will be hard to reclaim the old record at $10.