LI, Tao @ Hong Kong

Raw material prices eating into margins

Tingyi (Cayman Islands) Holding Corp, mainland’s largest instant noodle producer, said Monday that it posted a net profit of $200.5 million dollars or 3.59 US cents per share in the third quarter to September 30 – an increase of 36.01 percent over the same period last year.

However, the Taiwan-based company said that the recent rise in raw material costs has cut into their profitability.

“The cost surge has been so dramatic recently that we can hardly make a forecast on the prices for the next day,” said Frank Lin, the group’s chief financial officer, at the media briefing for the group’s results.

The company’s turnover also increased 34.5 percent to $2.07 billion compared with $1.54 billion a year ago. However, the company said that its gross margins had narrowed. Lin said the reason is because the key ingredients for producing two of its major products – instant noodles and beverages – have all seen extensive price hikes.

Prices of flour and palm oil, the main components in making noodles were priced at 3,200 yuan per ton and 7,400 yuan per ton, respectively, in October. By November 12 the latter had exceeded 8,200 yuan. PET resin and sugar – the key ingredients in producing beverage – were sold at 14,500 yuan per ton and 7,500 yuan per ton in November, soaring 40 percent and 22 percent respectively from 10,400 yuan and 6,160 yuan a month ago.

Compared with 2009, Lin said flour, palm oil and PET resin are all trading about 10 percent higher this year, while sugar prices have surged 35 percent.

“But supply these days is still short,” Lin said, adding that if the material price surge continues this quarter, he couldn’t even begin to estimate the effect it would have on its business.

Though sales of beverages increased 42.2 percent to $1.262 billion year-on-year in the third quarter while sales of instant noodles rose 25.2 percent to $743 million, the gross margin for the beverage segment contracted 6.5 percentage points to 31.1 percent in the past three months.

The gross margin of its instant noodle business, on the other hand, stood at 31.6 percent in the third quarter, down 1 percentage point year-on-year from 32.6 percent last year, but well above the average 29.1 percent for the first nine months.

According to an AC Nielsen’s survey, the sales volume and product value of its instant noodles have increased by 45 percent and 58 percent respectively.

Nevertheless, the company increased the price of its high-end instant noodle series by 10 percent, from 2 yuan a pack to 2.2 yuan, on November 1. This series accounts for about 30 percent of its noodle sales.

Some mainland reports said the company had also quietly reduced the size of some of its noodle packaging from approximately 95 grams to 90 grams, or even 85 grams, to counter the price hike of raw materials. The company has denied it.

“We didn’t do it furtively. The net weight is all printed on the package and consumers can see it clearly,” Lin said. “We reduced the size because surveys show that people in the southern part of the country tend to have a smaller appetite. We are trying to avoid any waste and protect the environment,” he added.

Kenny Tang, executive director with Redford Securities said the company is likely to maintain a good record this quarter, as the production of beverages is less affected by the material prices and its wider profit margin will continue to bring in notable revenue to the group.

Nevertheless Tang said he could not accept Lin’s explanation on the shrinking noodle size. “Ordinary customers will hardly be able to notice the size of the noodle. It is a typical move made by a company when it is faced with rising raw material prices.”

China Daily

(HK Edition 11/16/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-11/16/content_11553238.htm