THIS MONTH (NOV), Asia Fashion is expected to post its first healthy quarterly profit after more than two years of losses.
The dramatic change in financial performance stems from the 27 June 2014 completion by the Group of the acquisition of an effective stake of 49% in a construction materials player that promises to revolutionize the market.
The newly acquired business (Xuzhou Zhongsen Tonghao New Materials, “Xuzhou Zhongsen”) produces a high-tech and cost effective innovation to fill the gap in wall and flooring finishing.
Its main product range comprises of multi-function boards designed to address the shortcomings of common construction materials such as fiberboards, composite wood panels, wood-based panels and solid wood panels.
These construction materials had a combined market size of Rmb 1 trillion in 2013, according to China Industrial Information Network.
At only Rmb 500 to Rmb 600 a ton, raw materials for multi-function boards cost a fraction of the wood used to make traditional wooden panels (over Rmb 1,000 per ton).
The same goes for Xuzhou Zhongsen’s flooring substitute.
Not only are the multi-function boards most cost effective, they are also resistant to fire, moisture, termites, mold, mildew, and are also sound-proof, lightweight as well as environmentally friendly.
“The main competitive advantage of our multi-function boards is ready acceptance by customers who see it for the first time,” said Xuzhou Zhongsen founder and CEO Huo Weisheng in a telephone interview with NextInsight on Monday.
Mr Huo, formerly from a state-owned property developer, collaborated with the Chinese Academy of Sciences and Liaoning University in over 4 years of research to develop the boards.
The boards were commercialized in 2009 with such great success that sales doubled annually between 2009 and 2011.
On 13 October, the Group provided guidance that its financial performance for 3QFY2014 will significantly improve with the consolidation of the financial results of China Construction Material (Hong Kong) (“CCM”), which holds 49% in Xuzhou Zhongsen.
During 1H2014, Xuzhou Zhongsen posted revenue Rmb 238.7 million and net profit of Rmb 34.8 million.
This works out to a healthy net margin of 15%, compared with 5% or less for competitors dealing with natural materials.
The Group is expected to announce its 3QFY2014 results in about 2 weeks.
According to the management, the Group seasonally performs better in the second half of each year because first quarter results are affected when construction activities halt for one and a half months during Chinese New Year celebrations.
Xuzhou Zhongsen currently has 3 main sales channels.
♦ Firstly, it supplies to large scale engineering projects through strategic partners.
A strategic partner is Baota Petrochemical, China’s largest non-state owned petrochemical group.
Baota Petrochemical has a strong pipeline of infrastructure projects and requires that its oil refineries and petrol stations be built with fire-safety materials.
Not only has Xuzhou Zhongsen's building materials been able to meet this criteria, its products are also designed to contain flames and do not emit toxic fumes when heated.
A second strategic partner is Hong Kong-listed Hanergy, a multinational clean energy company, as well as the world's largest thin-film solar power company.
As the environmentally friendly characteristics of Xuzhou Zhongsen building materials are consistent with Hanergy's corporate philosophy, the MNC has chosen to use its products for the development of industrial parks and redevelopment of rural townships.
♦ The second sales channel is through industry associations, such as the Association of Aluminium Products in China where Mr Huo is a board member.
Its members are suppliers of the aluminium plastic composite panel, a common construction material with an annual market size of Rmb 30 billion to Rmb 40 billion in China.
Xuzhou Zhongsen has given incentives to the 300-odd manufacturers of aluminium plastic boards to be its sales agent.
♦ The third sales channel is through retailers of flooring such as Home Depot and Lowe’s Home Improvement.
“We hope to acquire the remaining 51% in Xuzhou Zhongsen as soon as possible, because our takeover price increases with each improvement in its financial results,” said CFO Jimmy Ng, who participated in the telephone interview.