KUALA LUMPUR: China-based edible oils manufacturer XingHe Holdings Bhd expects its earnings growth to be flat for the financial year ending Dec 31, 2015 (FY15), amid stiff competition in China’s edible oils market.

XingHe (fundamental: 0.9; valuation:1.75) chief financial officer Bryant Chan said currently, the Chinese market is challenging and demand for premium oil has slowed down.

“We expect revenue will be similar to FY14. In China, the economy is slowing down. As our oil is premium oil, we can see the [demand] growth for premium oil is slowing down for FY15,” Chan told The Edge Financial Daily.

For FY14, XingHe, which undertook a reverse takeover of Key West Global Telecommunication Bhd for a back-door listing exercise last year, achieved annual revenue of RM981.62 million and a net profit of RM43.17 million. Revenue growth year-on-year (y-o-y) was 19.8%. Its earnings per share stood at 2.11 sen, compared to its share price of 7 sen.

The company’s overall profit margin widened to 15.8% for FY14, increased by 3.9% compared with FY13. This was attributed to 2.1% and 2.3% y-o-y increases in the gross profit margins of branded products and non-branded products respectively.

Chan explained that the company which launched its “XingHe” brand five years ago is a relatively young brand in China, hence it has allocated 25 million yuan (RM15.22 million) for brand promotion subject to market conditions.

Currently, XingHe is ranked the sixth largest edible oils manufacturer in China, with a market share of 7.16%. Its branded oil contributes to 40% of the company’s revenue, while the rest is contributed by non-branded oil and peanut cake.

Speaking on XingHe’s strategy for FY15, director Stephen Ng Min Lin said XingHe will focus on strengthening its brand recognition in China — in order to capture higher market share and to venture into the Middle Eastern and African markets — through a joint venture (JV) agreement with Arab Supplier Fabrication and Retail Sdn Bhd (ASF) signed on April 1.

“For China, we will continue to promote the brand, to have better awareness of the province over there, for us to have the room to increase our selling price for our products,” said Ng, noting that the competition in the China market has squeezed its profit margin.

On the JV with ASF, both parties will invest RM10 million each to build a manufacturing facility in Klang to blend, process, pack and distribute edible oils, Ng said, XingHe is in the midst of conducting independent research on the potential of the Jordan market and the profit margins.

Meanwhile, it is also waiting for the documentation from the Jordanian government in regards to the special tax exemption.

“We are waiting for the documentation from the Jordanian government to verify that they are giving us a special tax exemption to all the products we are going to export to the country, because that is one of the key initiatives for us to venture into the market,” Ng said.

Speaking on the timeline for the completion of the above matters, Ng said, “We have until end-September to finalise this deal. If everything went well, we should proceed with this JV.”

He said if the JV goes well, the facility can be set up and the first batch of the supply is expected to be produced in the middle of next year.

He added that they have identified a few locations for the new plant which would be located in Klang, as ASF has a plant in Klang as well, in a bid to minimise the logistic cost.

For near-term plan, Ng said, XingHe will continue to evaluate the implementation of the protein extract projects coupled with the cold press plant in China.

The project will see the company set up new cold press facility to produce food-grade protein extract, with the 10-year rights the company obtained from Henan University which came out with the technology in 2014.

“We began the discussion last year; we are still evaluating this and finding the right partner. This is constantly in our book,” he added.

Ng said the company will need a capital expenditure of 400 to 500 million yuan to build the facility.

“We haven’t made any decision yet; we need to find another partner to venture into this,” he added.

He said the project is the Chinese government’s initiative to ensure food safety, and the protein extract can be supplied for food industry.

“This will be a big market, as the technology is not really available in China now,” Ng added.

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This article first appeared in The Edge Financial Daily, on June 29, 2015.