Reviewing the second half of 2019, though the oil price has stabilised, it had nonetheless declined when compared with the high price level over the last year, leading to declining prices of plastic materials. As for the macroeconomic environment, the impact of the China-US trade negotiation on the businesses remained uncertain. The drop in Renminbi exchange rate and rising production costs in Mainland China also added to the pressure on businesses, resulting in a difficult operating environment. As customers placed orders prudently and maintained a low inventory, the order quantity secured by the Group was directly affected. Adjustments were also made to the price due to intense competition.
To respond to the tough operating environment, the Group was prudent in taking orders and strictly implemented cost control measures. However, affected by the factors such as declining prices and quantity, rising costs and price adjustments, its overall gross profit decreased. The Group actively optimised product portfolio by lowering the proportion of the trading business segment and, at the same time, strengthening production of high margin products and effectively reducing administrative costs.
In the second half of 2019, as the Chinese economy faced the challenge presented by external risks, national policy focuses on driving domestic demand in the market and stimulating the consumption power of the people. This direction benefits the Group’s colorants, pigments and compounded plastic resins segment products which are mainly sold to the domestic market. The segment also stood out in the performance among its three major businesses during the interim period. With the market competition intensifying, the daily necessities-related market has undergone consolidation and only the strong enterprises survived while the weak ones were phased out. The small enterprises with relatively lower ability to control costs and maintain technical standards as low-end manufacturing businesses have been acquired and phased out. In this aspect, the Group, which is known for high quality products, strategically increased the production of high-end sanitary products and continuously enlarged its market share in the food-packaging related product market in Mainland China. In order to secure more new orders, the Group expanded its capacity of Xiamen and Qingdao plants. Moreover, attentive to the upcoming introduction of 5G projects and strong demand in the Internet-of-Things smart home market in Mainland China, it has actively developed that market in order to explore future income sources.
Prices of plastic material have continued to fall since the slide of the prices in the second half of 2018. The low oil price, among other factors, has affected the profit of the engineering plastic business. The Group’s automobile manufacturer customers in Mainland China have received reduced orders due to the China-US trade negotiation and weak demand in the domestic market. The Group has strategically developed other export markets in response to shifting global trade conditions in the past. Towards this end, it has successfully secured orders with internationally-renowned brands and ventured into the European market. The Group has continued to reinforce its overall competitiveness, enhancing product quality while effectively controlling costs. Apart from continuously enriching its product portfolio, leveraging its business advantages and focusing on promoting higher margin products to maintain growth momentum, the Group will also actively approach and engage in discussions with end customers in order to open up new income streams and expand its client base.
The plastics trading business has been the segment most adversely affected by the China-US trade negotiation and domestic economic slowdown. The trade conflict has not only affected China’s automobile exports to the US, but the revenue of automobile parts manufacturers focusing on domestic market has also dropped due to shrinking market scale. This trend has hit export-oriented customers in Southern China hard, leading them to be more cautious in placing orders. The fall in raw material prices and the RMB exchange rate has also had a negative impact on the plastics trading business. Despite these challenges, the Group has implemented set strategies to reduce and control inventory, resulting in substantial improvement in inventory turnover during the period. Gross profit margin markedly narrowed when compared with the corresponding period last year. Apart from continuing to implement stringent cost control measures, the Group will continue to maintain close ties with existing customers in order to secure higher margin orders and maintain stable business.
HUI Sai Chung