China Glass Holdings said high oil and raw material prices were to blame for a collapse in margins and a 56.9% fall in earnings in its first result since the company joined the stock market in June 20…
China Glass Holdings said high oil and raw material prices were to blame for a collapse in margins and a 56.9% fall in earnings in its first result since the company joined the stock market in June 2005. Although the sharp rise in oil prices occurred only after the company“s six-month reporting period closed and in the same month that it listed, the glass maker said net profit was down 56.87% to CNY 16.02 million because of high oil prices. “Oil rose beyond our expectations. The figures may cause some to despair but we are hopeful about the foundation of our growth,” said chairman John Zhao Huan on 26 September 2005. “High raw materials prices, such as those for heavy oil and soda ash, affected the company“s performance in the 1H,” added chief executive Zhou Cheng”. The company“s turnover was down 5.77% to CNY 193.36 million and its net profit margin fell to 8.3% in the 1H, down from 18.1% during the same period 2004. In the same period, another listed mainland glass maker, Zhejiang Glass, posted a decline in net profit of 36.53% to CNY 69.73 million. Zhejiang Glass registered a minimal increase in turnover, up a mere 0.63% to CNY 568.77 million. In addition to high prices for both oil and raw materials, Zhejiang Glass managers also blamed oversupply in China“s glass industry for the company“s poor performance. Spot oil prices reached USD 67 a barrel at their peak in August 2005 and remained at about USD 65, but for most of the 1H of the year oil was about USD 45 a barrel. The cost of soda ash, which accounted for 28% of the company“s sales cost, rose 42% in the 1H, Mr Zhou said. To cut costs, Mr Zhou said China Glass would replace all its oil raw material with coal fuel, which was 15% cheaper than oil, by the end of 2005. In addition, the company would try to maintain the rapid growth of its exports to maintain profit margins, as its export price was 22% higher than its domestic selling price in China, he said. The firm“s exports tripled to CNY 71.01 million in the 1H 2005, accounting for 36.7% of its sales, up from 22.2% of total sales in the 1H of 2004. The company“s third glass production line was scheduled to start operation on 1 October 2005 and would increase its production capacity by 66% as well as improving economies of scale, according to Mr Zhou. Most of the USD 180 million proceeds from the company“s initial public offering funded the new production line. “With the strong support of our shareholders, Legend Holdings and Pilkington, the company will make every effort to seek mergers and acquisition opportunities”, Mr Zhao said. Legend Holdings, the parent of Lenovo Group, has a 25% stake in China Glass, while British glass manufacturer Pilkington owns 9.9 %. Mr Zhou said a key driver in China“s glass industry was the government“s policy of consolidation through mergers and acquisitions. “This provides us with increasing mergers and acquisition opportunities”, he said. China“s float glass production grew 14.5% to 173 million weight cases in the 1H 2005, according to the National Bureau of Statistics. In the same period, China Glass produced 2.84 million weight cases of float glass.