China's economic growth may be slowing, but demand for white goods, automobiles, and the development of its rail system are continuing to drive demand for World Precision Machinery's high precision high tonnage stamping machines. NextInsight file photosCHINA’S ECONOMIC GROWTH of 7.4% year-on-year in 1Q2014 was its slowest pace since 3Q2012 but it spurred industry consolidation that spells good news for World Precision Machinery.
As a result, the company posted a 30.0% increase in its 1QFY2014 net profit to Rmb 28.2 million.
Its net margin also improved by 1.6 percentage points to 12.0%, thanks to an extension in the use of equipment life which lowered operating costs, as well as a decrease in finance expenses.
Cheng Hong, independent director."We gained market share when competing players exited,' said independent director Cheng Hong at an investor briefing on Friday.The slowdown in demand had weeded smaller manufacturers of precision stamping machines out of the market.
"Unlike World Precision Machinery, which is one of China’s top 3 players, smaller players cannot survive an industry consolidation because of the high cost of capital equipment," he said.
Mr Cheng pointed to the Group’s PAMA machines as illustration: It owns four units which were purchased at a total cost of Rmb100 million, a hefty amount that few players can afford.
He also pointed to the huge investment outlay required to construct its new factory at Shenyang, as well as the burden of pre-operating expenses during capacity expansion.
"The Group’s increase in market share will enable it to grow FY2014 bottom line in spite of the slowdown in industry demand."
However, the new plant in Shenyang will be under-utilized for some time.
The Group’s order book as at 25 April 2014 was Rmb 101.6 million, about a third lower than the Rmb 150 million it had one year ago.
Here is a summary of the questions raised by investors at the meeting and the answers provided by Mr Cheng and CFO Samuel Ng.
"We expanded our presence in inland and western China in the past year," said CFO Samuel Ng. NextInsight file photo.
Q: Will you be paying down loans this year?
We intend to pay down about Rmb 80 million this year. To finance the construction of our Shenyang plant, our borrowings increased to more than Rmb 500 million at its peak.
At interest rates of 6% to 7% a year, paying down the loan by Rmb 80 million translates into lower annual finance cost of some Rmb 5 million a year.
Q: When will your debt be due?
Our long term liabilities which are bank loans amounted to Rmb 187.5 million as at 31 March 2014. They will be due in 2015 and 2017.
The repayment of these loans will be financed from our operating cash flow. We currently have accounts receivables worth about Rmb 300 million.
Q: Where is your debt from?
All our debt is from banks in China.
Q: When will you commence operations at Shenyang?
We have started operations, but utilization will be low this year - about 20% to 30%.
Q: What utilization must be achieved for you to break even?
About 50%.
Q: Do you export your products?
We are focusing on China, as it is still the world's No.1 for the manufacturing of automobiles and automotive parts.
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