Li Heng revenue down 46% on pricing pressure

The group expands its customer base to 209 customers from 184 in 2008 despite lower earnings.

Mainboard-listed Li Heng Chemical Fibre Technologies Limited (Li Heng), manufacturer of high-end nylon fibres, announced 24 February that for its financial performance as at 31 December 2009, revenue was RMB2.0 billion (S$412.88), 46% lower than its corresponding period FY08.

Gross profit for FY09 was RMB250.9 million (S$51.8 million), 76.4% lower as compared to FY08, and for the same corresponding period, gross profit margin contracted to 12.6% from 28.7%. In the three months ended 31 December 2009 (4Q09), the Group's gross profit improved by 18.2% to RMB77.0 million (S$15.89 million) as compared to its previous corresponding quarter (4Q08).

As a result of the slowdown in the global economy in 2008, China's textile and garment industry was inevitably affected, which in turn led to price pressure on the Group's nylon yarn products. In review of FY09's financial performance, the Group's revenue decreased by 46.0% to RMB2.0 billion as compared to FY08. Although overall average selling prices (ASPs) of nylon yarn products have been stabilising since June 2009, ASPs in FY09 of RMB18,980 per mt is still about 37.3% lower than RMB30,250 per mt in FY08. Total sales volume shifted from 122,353 mt in FY08 to 105,259 mt in FY09 as the Group continued to offer new nylon products in finer measurements to their customers which resulted in lighter tonnage. Despite the drop in revenue, Li Heng continued to capture more market share and grew its customer base in FY09 to 209 customers from 184 at the end of FY08 and these new customers accounted for approximately 7.5% of total revenue in FY09.

In FY09, the group also recorded revenue of RMB0.6 million from sales of polyamide chips (PA chips) from trial production of the new PA chip plant completed in 3Q09. The high quality textile grade PA chips plant with 200mt daily designed production capacity had commenced trial and commercial production in September and October 2009 respectively. However, future sales of PA chips would be considered only after in-house consumption for production needs has been met.

Cost of sales dropped 33.8% in FY09 mainly due to the drop in PA chip prices. During September 2008, PA chip prices drastically dropped and since then, had undergone a period of volatility and uncertainty which badly disrupted the pricing mechanism and profit margins of the upstream manufacturers. Although nylon chip prices have gradually stabilised since June 2009, which brought about improvements in the Group's gross margins from 11.7% in the first half of 2009 to 13.2% in the second half of 2009, gross profit margin was still 16.2 percentage points lower than the 28.7% level achieved in FY08. Gross profit decreased by 76.4% in FY09 to RMB250.9 million compared to RMB1,063.8 million in FY08. For FY09, cost of sales also included testing and trial production costs of RMB9.7 million incurred from the new PA chip plant which comprised mainly feedstock raw materials used during the initial trial production stages in September 2009.

The Group's effective tax rates for FY09 and FY08 ended 31 December were 13.4% and 13.8% respectively. The changes in the effective tax rates were mainly due to changes in geographic earnings/losses mix and differences in treatment for certain expenses and income by different jurisdictions. Net profit after tax in FY09 is 84.0% lower at RMB130.3 million as compared to FY08 in line with the lower revenue and gross profit base. In reviewing quarterly performance, net profit in 4Q09 jumped 585.2% to RMB42.3 million as compared to 4Q08.

As of 31 December 2009, the Group maintained a healthy balance sheet and liquidity with net current assets at approximately RMB753.7 million and a net cash inflow of RMB125.1 million from its operating activities while cash and bank balances stood at RMB654.5 million.

Mr. Chen Jianlong, Executive Chairman, commented, "FY09 had been a very difficult and challenging year for us. We started the year on the motto that 2009 would be a year of the survival of the fittest and we are proud that our efforts have enabled us to end the year on a good note. During the year, we have successfully constructed and commenced production at our PA chip plant which is a great leap forward for Li Heng. In the first few months of 2010, we will be completing our additional yarn production facilities at Liheng Phase III and this is an exciting time for us as we will be able to offer a larger and finer product range to our existing and potential customers."

The Group is on track with its Liheng (PRC) Phase III development which entails the construction of additional nylon yarn production capacity, the construction of a self-contained R&D center as well as the establishing of customer services centres in major Chinese textile cities. Although prices of nylon chips, ASPs of nylon yarn products and general order volume has gradually stabilized, the Group is cautious with regards to the scale of the textile industry recovery as gross profits margins of the nylon products remain depressed.

On 19 October 2009, the Ministry of Commerce of the People's Republic of China announced that importers of PA chips from the United States, the European Union member states, Russia and Taiwan are required to place anti-dumping deposits with the Customs of the People’s Republic of China at rates ranging from 4% to 36.2%.

As of 31 December 2009, Li Heng has placed approximately RMB8.8 million of deposits with China Customs with respect to direct overseas purchases while the Group’s major suppliers have not increased the selling prices of the PA chips. However as PA chips remain the major constituent of the nylon yarns production, the Group may be exposed to higher raw material prices should the anti-dumping deposits remain or the enforcement of levy of anti-dumping tariffs regulation proceed. The Group will update all shareholders timely on these developments.

Notwithstanding the uncertainty of the global economy, the Group believes its expansion of Li Heng Phase III will lay the important foundation for long term, sustainable growth.