On 30 Jan., 2016, Hubei Xingfa Chemicals
Group Co., Ltd. (Hubei Xingfa) released its 2015 performance forecast, showing
that its net profit is predicted to have fallen by about 85% year on year from
USD75.96 million in 2014 to USD11.38 million (RMB74 million).
According to Hubei Xingfa, the shrink in
net profit in 2015 can be attributed to the following two reasons.
1. According to the Corporate Accounting Standards, the shares
of the acquiree that are held before the acquisition date should be revalued on
the acquisition date based on the fair value and the differential between fair
value and carrying value should be added onto the return on investment for the
corresponding period.
In July 2014, Hubei Xingfa finished its acquisition of
part shares in both Hubei Taisheng Chemical Co., Ltd. (Hubei Taisheng) and
Yichang Jinxin Chemical Co., Ltd. (Yichang Jinxin). The differential between
fair value and carrying value of the two acquisition events, USD67.35 million
(RMB438 million), was added onto the return on investment in 2014. without this
non-recurring profit and loss, Hubei
Xingfa’s net profit dropped significantly compared with that of 2014.
2. According to the Corporate Accounting
Standards, a goodwill impairment test (a potential economic qualification that
can realize superprofit for the company), should be taken at the end of every
year. In 2015, influenced by global market conditions, the main product of
Hubei Taisheng, glyphosate technical, had a persistently low market price. As a
result, Hubei Taisheng failed to reach its performance target and this has led
to goodwill impairment.
Ignoring for the moment the influence of
non-recurring profit and loss in 2014, CCM found that Hubei Xingfa actually saw
an increase in its YoY net profit in 2015.
Despite the fact that China’s phosphorus chemical industry is currently depressed due to insufficient market
demand, Hubei Xingfa is expected to continue to show its powerful
competitiveness in 2016 in most part due to its abundant phosphorus ore
resources and complete industry chain which covers phosphate fertilizers,
phosphoric acid, phosphate, glyphosate, etc.
1. Phosphorus ore business to be growth
point for the future
Since the second half of 2015, Hubei Xingfa
has made three acquisitions of phosphorus ore businesses in Hubei Province. As
a result, 280 million tonnes of phosphorus ore reserves (all under exploration
and unmined) were newly added.
As Hubei Xingfa is a major local government
partner in the integration of phosphorus ore resources, these newly added
resources will very likely be successfully mined in the near future. This
should help Hubei Xingfa to better control its production costs and increase
its ability to deal with risk from market fluctuations.
2. Heavy operational pressure not to
trouble Hubei Xingfa
Although the condition of the domestic
market for the phosphate fertilizer industry is anticipated to remain depressed
in 2016, this shouldn't trouble Hubei Xingfa as its 600,000 t/a phosphate
fertilizer production line is in a leading position in the industry and its
profitability ranks highest among its contestants.
The gross profit margin of
their phosphate fertilizer business reportedly reached 12.74% in the first half
of 2015. Furthermore, Hubei Xingfa is currently working on some asset-light
projects, such as developing new types of fertilizers, to improve its profit
margin, and for this reason, Hubei Xingfa’s fertilizer business is expected to
break-even in 2016.
3. Glyphosate business to have sliding
profit margin but increasing sales volume
Though current profit margins in the glyphosate industry in China are declining, Hubei Xingfa is able to glean
enough of a profit margin by relying on its circular economy and its
comprehensive cost advantages it gets from having a complete industry chain.
According to an earlier released performance report, Hubei Taisheng gained a net
profit of USD13.56 million (RMB88.20 million) over the first three quarters of
2015.
It more or less maintained an average rate of 100% capacity utilization
in 2015. Currently, Hubei Taisheng has a glyphosate capacity of 70,000 t/a, and
when their newly built 60,000 t/a glyphosate production line is put into
production in 2016, the company's glyphosate sales volume is expected to
increase dramatically, offsetting the loss received from the overall slide in
profit margin.
This article comes from Phosphorus Industry China Monthly Report 1602, CCM
About CCM:
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intelligence provider for China’s agriculture, chemicals, food &
ingredients and life science markets. Founded in 2001, CCM offers a range of
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and customized market research reports. Our clients include Monsanto, DuPont,
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Tag: phosphorus glyphosate