Yip’s Chemical Holdings Limited, based in Hong Kong, achieved revenues close to HKD4.5 billion (USD563.75 million) for the first half of 2017, up 18%, mainly driven by its solvents business. Gross profit margin from its coatings and inks businesses, which were under pressure from rising raw material costs, affected the group’s overall gross profit, which declined by 5% to approximately HKD53.6 million (USD6.7 million).
The company said its lubricants business’ strategy to produce and sell higher tier automotive engine oils in the past 12 months “has borne some fruits in that overall gross margin rate has managed to stay at par with that of the same period in 2016, despite upward raw material cost pressure.”
Determination to focus on the right business segment and to let go of its low margin business has led to lower sales revenue in the first half from HKD161 million (USD20.1 million) to HKD146 million (USD18.2 million) year-on-year, while gross profit dropped from HKD39.2 million (USD4.91 million) in the first half of 2016 to HKD36.8 million (USD4.61 million) in the first half of 2017.
On the other hand, segment focus coupled with robust business management has contributed to significant cost reduction, the company reported, “which in turn has supported the funding of the brand revitalization of our Hercules automotive lubricants series.”
As a result, operating profit for the period has recorded a slightly negative figure of HKD0.4 million (USD50,111), which was still better than the HKD1.3 million (USD162,863) loss reported in the first half of 2016.
“Management of the business would continue to strengthen our position in automotive engine oil by further building the Hercules brand and upgrading our channel capability to capture more customers and market share, hence further contributing to the sustainability of the business for years to come,” the company reported.
The overall operating environment in the first half of 2017 was characterised by the following features: the fluctuation of the renminbi narrowed considerably, inbound investment increased again, geopolitics was comparatively stable and external demands grew. Boosted by China’s “Belt and Road” initiative, the mainland’s GDP edged up to 6.9%, despite the fact that enterprises were seeking growth outside of the country, driven by export growth, while overcapacity persisted and growth in domestic demand was progressing at a slower pace than expected.
During the first half, particularly the first quarter, all types of chemical raw materials generally underwent a huge and continuing price hike. As it takes time to pass on the rise in costs to customers, Yip’s core business segments suffered a drop in profit margin of 4 to 5 percentage points on average during the period. This greatly suppressed the gross profit of its products.
For the second half, no substantial changes in the overall operating environment are expected. It is also expected that the slowdown in increases in all major raw material prices that began in the second quarter of the first half will continue. As prices become increasingly stable, the lagged effect of price increases for the group’s core products will gradually take hold. The company said it was confident that overall gross profit margin will rise in the second half, “though it will be challenging to reach the level attained last year.”
Over the years, the company has been upholding the principle of focusing on core businesses in striving for steady development and reasonable returns through three key strategies: economies of scale, branding and product research & development. But in reality, as the economies of scale, branding and product research & development evolves rapidly, and industry peers step up the pace of consolidation and competition becomes more ferocious than ever, the company said it “is in no doubt facing the predicament of achieving continuously growing sales but unsatisfactory returns.”