Robert Young, executive director, Yip's Chemical. Photo by Sim Kih
SENIOR MANAGEMENT of companies often say their interests are aligned with that of minority shareholders, but the chairman of Yip’s Chemical, Mr Ip Chi-Shing, has put it more compellingly – and perhaps more genuinely.
Yip’s Chemical executive director, Robert Young, told an audience of analysts and investors in Singapore: “My chairman proudly says that he has no business interest outside of the listed company, there is nothing to inject into the company, and he will not privatize any part of the company.
“He also says that it is wrong for the chairman who receives a salary from the company to spend time worrying about other businesses because that would like allowing the staff to hold another job."
Mr Young, who previously was director of Shell Hong Kong, added: "Now, just think how many chairmen or major shareholder can make that kind of statement?”
With clarity on matters close to investors’ heart, it is no wonder that in May this year, Yip’s Chemical (www.yipschemical.com) was ranked No. 5 in Hong Kong for investor relations, closely trailing big names like MTR Corporation, HSBC and Hang Seng Bank.
The poll gathered opinions and votes of 238 major investment professionals and financial analysts in the Asia-Pacific region this year.
Mr Young was speaking at yesterday's Financial PR conference featuring five companies (listed in Singapore or Hong Kong) with a strong China theme.
Financial snapshot of Yip's Chemical
Hong Kong-listed Yip’s Chemical is the largest acetate solvents producer in the world, and is poised to become even larger in the next few months when a factory comes on stream.
Acetate solvent is a quality environmentally friendly solvent widely used in the paints, artificial leather, inks, adhesives, resins and plastic industries. It is also used as raw material for producing dyes, medicines, artificial fiber and fragrances.
China’s market demand of acetate solvent is approximately 1.2 million tonnes, about one third of global production.
In FY 09 ended March this year, its revenue from solvents came up to HK$2.98 billion, up 8% year-on-year, but operating profit fell 15%.
Yip’s Chemicals also produces coatings (paints, inks and varnishes), which raked in HK$1.85 billion in sales in FY 09, up 11% while operating profit rose 3%.
Source: Yip's Chemical
The three charts below highlight the company's track record. Notably, though earnings fell in FY09, the dividend payout stayed unchanged from the previous year.
Mr Young addressed 4 concerns that investors generally have regarding industrial stocks:
#1. Impact of reminbi appreciation: Yip’s Chemical sells largely in reminbi but buys a significant amount of raw materials in USD, so a reminbi appreciation will only benefit Yip’s.
#2 Export market in the doldrums: Less than 10% of its products end up used for making products that are exported.
#3 Rising labour cost in China: Mr Young said it’s not an issue for Yip’s which employs 4,000 people and achieves HK$5 billion annual sales – “the output per employee is large.”
#4 Raw material price volatility: Prices of acetate solvents reflect international supply and demand, and any volatility in supply prices of raw materials is passed on immediately to customers.
On the other hand, coatings use solvents as a raw material, and selling prices typically lag behind raw material price trends.
There is thus a natural internal hedge for Yip’s.
What then accounted for the 19% earnings decline for the company in FY 09? Largely, it was caused by a drastic drop in solvents’ margin in Q3 (it was negative gross margin at one point, the first time in Yip’s 19-year history of being a listed company) as the economy suffered shock waves, leading to a drop in demand.
Since end-March, “we are seeing a very positive picture. With the decline in raw materials prices, what has happened to our cost of inventory, our receivables and so on? The working capital requirements have reduced – that has generated a lot of cashflow.”
Dividend payout by Yip's Chemical
As at end-March, Yip’s already was in a net cash position of HK$369 million, which was why it decided to pay a final dividend of HK$0.17 for a total of HK$0.25 for the year.
Some highlights of the Q&A session after Mr Young's presentation:
Q What is your competitive edge?
Mr Young: Solvents and coatings are our main businesses. Solvents are commodities, so size is usually the determining factor. We are five or six times as large as the next competitor. We have 60% market share in South China. We are the biggest in the world for acetate solvent production.
Q Do you intend to do another placement and what’s an acceptable gearing level?
Young: We don’t have any plans for placement at the moment. We have sufficient net cash (HK$369 million as at end-March 2009). We are starting to look at possible M&As again. But there’s nothing we are doing diligence on yet.
On the gearing ratio we are comfortable with, two years ago maybe I’d say 30%. As of June/July last year, the board made a resolution that it would be zero. We didn’t want any gearing because we could see what was coming. At the moment, we haven’t changed our position. With the economy on an upswing, we will look at the matter again.