CFO Joel Leong: Changjiang's M&A expansion plan of 1-2 plants a year is on track.
CHANGJIANG FERTILIZER posted 2Q10 revenue growth of 56.8% year-on-year to reach Rmb 114.5 million, thanks to a 25% boost from its newly acquired plant in Xiangyin, Hunan.
Other than the maiden sales contribution of Rmb 22.6 million from its second plant since May, top line growth was driven by increased sales of nitrogenous fertilizer, ammonia and methanol.
All of Changjiang’s products are derived from coal, and gross profit margin fell 5.2 percentage points to 27.2% due to higher coal prices.
”Margins will improve when we improve the efficiency of our second plant at Xiangyin county,” said its CFO, Joel Leong, during an analyst briefing today.
The company’s second plant in Xiangyin added 40,000 tons, or 36.7% of anhydrous ammonia capacity each year.
To improve the production efficiency and capture greater market share, the fertilizer manufacturer wants to upgrade the capacity of its Xiangyin plant to 60,000 tons per annum.
Revenue contribution of ammonia and methanol grew in 2Q10.
With the exception of nitrogenous fertilizer, which fell 5.3%, the average selling prices of all products increased by 5.3% to 8.8% during 2Q10.
Nitrogenous fertilizers are mostly used in paddy rice fields as they are easily soluble.
Their market prices fell as a severe drought in southwestern China affected demand in the first half of the year.
The company also lowered its prices to increase market share in the region.
For efficiency, its spare capacity for nitrogenous fertilizers was redirected to producing ammonia and methanol.
Below is a summary the questions raised at the analyst briefing and the management’s replies:
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I believe prices will remain stable this year, unlike in 2009. Methanol is dependant on oil price, which is relatively weak now. Ammonia prices have already risen by a fair amount this year.
Q: Is there still a price cap for urea?
No. That has been lifted as market prices for urea are below the cap.
Q: Why was your tax so high?
We made provisions for income tax incurred by the second plant. We have yet to obtain approvals for tax incentives for this plant.
Q: What is your total headcount?
We have a total of about 820 workers for the two plants. This number is unlikely to be reduced.
Q: How do you expect to fund your expansion?
We are likely to borrow from the bank or issue convertible bonds. We are unlikely to place shares given the current depressed valuation of Changjiang shares.
My personal target is a 50% gearing on net assets. In China, land use rights can be mortgaged at 50% while plant, property and equipment can be mortgaged at 30% to 40%.
