Li Heng third quarter profit down 43.6% to CNY40.2mn

Yet revenue grew 23.2% to CNY1.1bn as sequential revenue improvement reached 22% from CNY902.4mn in second quarter.

Mainboard-listed Li Heng Chemical Fibre Technologies Limited (“Li Heng”), one of the PRC’s leading manufacturers of high-end nylon fibres, Monday announced that revenue as at 30 September 2011 (“3Q11”), rose 23.2% to RMB1,097.2 million from 3Q010. Sequentially, the Group recorded approximately 22% growth in revenue from RMB 902.4 million in 2Q11.

Rising cost of raw materials as a result of anti-dumping tariffs on the Group’s Polyamide Chips (“PA Chips”) caused gross profit to slide 11.3% to RMB84.6million and impacted on gross profit margin which dropped to 7.7% from 10.7% in 3Q10.

In 3Q11, the Group’s revenue rose 23.2% to RMB1,097.2 million on the back of an increase in sales of self-produced PA chips of about RMB151.7 million as compared to RMB0.2 million in 3Q10. The Group sold a higher quantity of PA chips in the reporting quarter as less of the raw material were used, due to the maintenance overhaul of the 2 oldest manufacturing phases I and II at Liyuan production facilities from March 2011 and August 2011 respectively, during which Group’s revenue increase was also offset by an estimated 4500 metric tons (“mt”) of lost production capacity. In 3Q11, total revenue growth was also attributed to a 22.7% increase in average selling prices (“ASPs”) of nylon products to RMB32,650 per mt which partially reflected the increase in its underlying raw material prices as a result of anti-dumping tariffs levied by China on both imported PA chips and Caprolactam (“CPL”). Anti-dumping tariffs ranging 4% to 96.5% on imported PA chips from the United States (“the US”), the European Union member states (the “EU”), Russia and Taiwan are implemented for a period of 5 years from April 2010 while anti-dumping tariffs ranging from 2.2% to 25.5% on CPL imported from the US and the EU for a period of 5 years are levied from 22 October 2011 and dated retrospectively for imported CPL from both regions starting from 25 January 2011.

As early as January 2011, Li Heng had began to source CPL from countries not subjected to the new antidumping policy on imported CPL. With over 90% of CPL purchases not subjected to the anti-dumping tariffs, the new policy on CPL has no material impact on the Group’s overall cost and cash flows. The Group was able to successfully partially mitigate the impact of the anti-dumping tariffs on imported PA chips with the support of it’s in- house PA chips production plant. However, as the Group was not fully self-sufficient with in-house PA chips and as not all of the higher costs was completely passed on to the downstream customers, costs of sales in 3Q11 rose much faster than the growth in revenue and gross profit slid 11.3% to RMB84.6 million. Impacted gross profit margins fell from 10.7% in 3Q10 to 7.7% in 3Q11.

Net profit for 3Q11 decreased by 43.6% to RMB40.2 million, consistent with the smaller gross profit base, higher selling and distribution expenses, higher administrative expenses as well as higher effective tax rate.
Higher transportation costs in China increased selling and distribution expenses by 3.7% to RMB8.0 million.
Administrative expenses rose 14.0% to RMB26.4 million primarily on general increase in staff costs, bank service charges, traveling expenses and local levies in line with the Group’s expanded operating scale.

Effective tax rates for 3Q11 and 3Q10 were 8.4% and 33.1% respectively. The changes in the effective tax rates were mainly due to the expiration of the 50% relief from corporate income tax at the end of FY10 and also due to changes in geographic earnings/losses mix and differences in treatment for certain expenses and income by different jurisdictions. From FY11, Li Heng is subject to statutory income tax rate of 25% of itsassessable income.
As at 30 September 2011, the Group maintained a healthy financial position and liquidity with net current assets at approximately RMB576.0 million while cash and bank balances stood at RMB403.4 million.Mr. Chen Jianlong (陈建龙), Executive Chairman, said “Our strategy of switching sources of our CPL purchases to import from countries not implicated in the recent new anti-dumping tariffs policy proved timely. We are able to source good quality CPL without incurring high extra costs for the manufacturing of our PA chips. This is also vital to the planning of raw material purchase for our second PA chips plant which is equipped with a larger production capacity than our current PA chip plant.”

Overhaul and repair work on Liyuan Phase I, its oldest production facilities had been completed in July 2011.
Repair work on Liyuan Phase II is on track to complete in November 2011. The total cost of repair work of both phases is about RMB100 million and approximately 6000-7000 mt of production capacity will be compromised during the downtime, according to a Li Heng report.

The Group’s second phase of PA chip production plant on its existing Binhai Industrial Zone production premises with an annual capacity of approximately 100,000 mt is expected to complete in December 2011 and commence trial and official production in January 2012.

Notwithstanding the uncertainties, the Group believes its expansion plans will enlarge its revenue and profit base and partially mitigate the negative effect of the risks of increasing raw material cost and lay a strong foundation for long term, sustainable growth.