Overall Performance Returns to a More Reasonable Level

HONG KONG — Yip’s Chemical Holdings Limited (SEHK: 00408) (“Yip’s Chemical” or the “Group”), the world’s largest manufacturer of acetate solvents and one of China’s major manufacturers of petrochemical products, today announced its annual results for the year ended 31 December 2016 (the “review period”).

Highlights:
– New high total product sales tonnage at approximately 1.2 million metric tons, up 17% year-on-year.
– With product average selling price down year-on-year and Renminbi (“RMB”) depreciation continuing, turnover was around HK$8.6 billion, similar to that of 2015.
– The Group’s overall performance returned to a more reasonable level, resulting in HK$169 million in profit attributable to owners, an increase of 254% from a year before.
– Operating profit of solvents business more than doubled and that of inks business surged by close to 46%, whereas lubricants business turned around to record a profit. Coatings business recorded a 56% drop in operating profit due to re-organization of product lines and a one-off substantial cost commanded by business consolidation.
– Net cash inflow from operating activities was approximately HK$380 million, gearing ratio was maintained at a healthy level of 50.4%, which was a decrease of 3.6 percentage points compared to that of 2015.
– The Board has recommended payment of a final dividend of HK10 cents per share. Total dividend payment for the year amounted to HK15 cents per share.

During the review period, the Group broke the record of overall product sales tonnage again, pushing it up 17% year-on-year. With product average selling price down relative to 2015 and RMB depreciation continuing, the Group made turnover of around HK$8.6 billion, similar to that of 2015. Benefitting from the more than double and close to 46% growth in operating profit of solvents business and inks business respectively, and lubricants business turning around to record a profit, plus the active and effective measures adopted by the management to combat the persistent drop in RMB exchange rate, the Group narrowed exchange loss and profit attributable to owners increased by 254% to HK$169 million. Moreover, the Group continued prudent financial management, strictly implemented credit control and kept improving asset quality, and as such it was able to lower its gearing ratio significantly to 50.4%, a healthy and controllable level, which was a decrease of 3.6 percentage points compared to that of 2015. The Board recommended payment of a final dividend of HK10 cents per share (same period in 2015: nil; special dividend HK4.5 cents per share), total dividend payment for the year amounted to HK15 cents per share. Despite the challenging operating environment, the Group has upheld its dividend payout policy to reward shareholders.

Mr. Tony Ip, Chairman of Yip’s Chemical, said, “Although the overall operating environment had continued to be unfavourable during the year, thanks to the leadership of its new management team, the Group was able to capture market opportunities and its different business segments reported satisfactory results. The Group achieved an overall improvement in operating profit compared with the lacklustre numbers in 2015. Looking at 2017, we expect uncertainties to continue to affect our operating environment. However, the Group is confident that the Chinese economy will keep advancing on the growth path in steady strides and is cautiously optimistic about the prospects of its businesses. The Group will continue to focus on developing its core businesses and strengthening R&D, in particular of innovative environmentally-friendly products, so as to consolidate its competitiveness in the industry and capture more opportunities.”

Business Review and Prospects

Solvents

The Group’s market share expanded during the review period, benefitted from the smooth running of the new Taixing factory in Jiangsu after it began operation, giving the Group ample production capacity to meet the demands of Eastern and Southern China markets. There was also a two-fold increase in export sales volume to close to 100,000 metric tons, which pushed up the total product sales tonnage by 20% to nearly 950,000 metric tons. Turnover increased by 4% to HK$5.2 billion during the period, as hampered by the drop in average selling prices and RMB exchange rate. Operating profit, on the other hand, benefitted from greater economies of scale and the rebound of material prices in the fourth quarter last year boosting gross profit. Operating profit of the solvents division rose by 151% to HK$340 million.

To sustain growth of the solvents business, the management has taken different measures to improve the Group’s integrated competitiveness, including optimizing production capacity and expanding sales volume with the aim to cross the 1 million metric tons threshold, upgrading technology, reviewing supply chain operations to lower costs and its corporate structure to enhance operational efficiency.

Inks
The Group’s strategies of segment focus and its efforts to optimize operations and enhance profit brought good results during the review period. Product sales tonnage of inks business increased to close to 70,000 metric tons and operating profit amounted to HK$100 million, up almost 46% year-on-year, while turnover recorded a mild drop of 4% to HK$1.43 billion.

New product R&D remained as the Group’s main growth driver of the business. Commercialization of eco-friendly inks progressed smoothly in the second half of last year and some customers have started to place orders. In the coming year, building on its market leadership, the inks segment will continue to strengthen the profitability of its food packaging business, trim costs further through structural reform and develop new eco-friendly products to enhance its product mix.

Coatings
The management implemented various strategies during the period targeting to step up the sales of environmentally-friendly water-based emulsion paints, rebuild the distributor network to strengthen business development, sacrifice a small portion of business with high credit risks to enhance overall sales quality, consolidate product portfolio including exiting from the electronic products paint segment which is with low profit margin and unpromising prospect and streamline corporate structure. As a result of these efforts, overall sales volume of the coatings business grew by 12% year-on-year.

However, the reorganized product lines which increased the sales proportion of environmentally-friendly yet lower margin emulsion paints, led to a drop in operating profit. Moreover, the business had to make a relatively notable one-off cost in relation to business consolidation. Turnover of the coatings business was down by 10% to HK$1.7 billion and operating profit decreased by 56% year-on-year to HK$27 million.

To cope with the increasingly challenging operating environment, the coatings group adopted a Co-President structure in early 2017, with one President to focus on business development for architectural coatings and furniture coatings, building of sales network, and R&D on higher tier eco-friendly products like second-generation of water-based wood paints and multi-functional architectural emulsion paints; while the other President to oversee supply chain operation and optimization, bring in consultants and experts to assure continuous improvement of the Group’s organizational capability in order to lower structural costs.

Lubricants
The lubricants business turned around during the year from a loss of HK$26 million in 2015 to an operating profit of HK$1.68 million. Its turnover decreased by 6% to HK$328 million, but its gross profit margin improved markedly year-on-year, as the Group strived to drive segment focus and lower structural costs pinpointing each link in the value chain including sales procedures, raw material procurement, production and logistics.

The management team’s hard work at venturing into the higher tier automobile engine oil segment started to bring result. It will take advantage of this trend to reposition product mix, strengthen distributor network and facelift the brand of Hercules lubricants, with an objective to continue to enhance the profitability in targeted market segments.

In late 2016, the Group purchased a property in Wanchai, Hong Kong Island to use as new office at the price of HK$130 million. Its headquarters is scheduled to move to the new address in the second quarter of 2017. As for the existing office building of the Group in Fanling, four and a half floors of office and godown have been leased to a third party since December 2016. The entire property will be occupied by the tenant after the Group moves out in 2017, in order to achieve a more efficient use of assets.

Mr. Stephen Yip and Mr. Nat Wong, Co-Chief Executive Officers of the Group, concluded, “We expect the challenging operating environment to continue in 2017. However, we believe, with the Group maintaining its solid operating strategies: focusing on targeted market segments, lowering operation costs and hastening development of new products, it will be able to keep delivering better results and create greater value for shareholders.”

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