Zhejiang Medicine: Benefiting from VE Price Rise     

Zhejiang Medicine Co., Ltd. (Zhejiang Medicine, SH: 600216) is located in Hangzhou, Zhejiang province. It is one of the major pharmaceutical producers in China. The company was listed on the Shanghai Stock Exchange in October 1999. A thoroughly professional and large-scale production of fat-soluble vitamins, vitamers, quinolone antibiotics and antibiotics for drug-fast microbes has been formed in the company. The output of the main product VE (Vitamin E) is China's largest.
    The impact of the cyclic feature of APIs (Active Pharmaceutical Ingredients) on the performance of companies was once again verified in Zhejiang Medicine. The 2007 annals and the 2008 Q1 seasonal report of the company showed that the net profit of the company in 2007 was 3.25% lower than 2006, but the net profit accomplished by the company in the first quarter of 2008 was more than the total net profit in the whole year of 2007, an increase of 2 501.11% over the same period of 2007.

Drastic net profit growth in the first quarter of 2008   

The performance of the company has been improving since the fourth quarter of 2007. The earnings per-share for the whole of 2007 was RMB0.13 and the earnings per-share in the fourth quarter alone reached RMB0.11. The net profit accomplished by the company in the first three quarters was only RMB5.7931 million, but the net profit in the whole year of 2007 reached RMB56.6050 million. In other words, the net profit accomplished in the fourth quarter accounted for 89.77% of the net profit in the whole year. The net profit in the fourth quarter was 2 334.57% higher than the net profit in the third quarter. While the net profit for the first three quarters was 86.8% lower than the same period of 2006, the net profit in the whole year of 2007 was still 3.25 percentage points lower than 2006.
   The performance of the company in 2008 continued the trend of high growth. The net profit accomplished from January to March this year was RMB77.0670 million, a drastic increase of 2 501.11% over the same period of 2007 and an increase of 51.67% over the fourth quarter of 2007.
   The performance of the company started improving from the fourth quarter of last year because of the drastic price rise of leading products VE and Vitamin H.
   According to Zhou Rui, a researcher from China Investment Securities, purchase orders in the company are mainly long-term orders. Compared with another VE listed company Zhejiang NHU Company Ltd., the reflection of the price rise in the performance of Zhejiang Medicine has a lag time of 2-3 months. The performance of Zhejiang Medicine will see a further drastic upgrade in the second quarter of 2008.
    In addition to vitamins, the output and the sales volume of various new products and formulations from the company also saw a drastic increase in 2007. For example, the sales volume of vancomycin hydrochloride injections was 55.84% higher than the previous year, the sales volume of vancomycin hydrochloride APIs was 70.40% higher and the sales volume of various beta-carotenes was 102.75% higher.
    Besides, Zhejiang Medicine announced on May 8th that the company had signed a contract for the supply of vancomycin hydrochloride APIs with Hospira of the United States. Under the contract, the company will supply vancomycin hydrochloride APIs to Hospira from April 30th, 2008 to December 31st, 2017. The total contract value is expected to be around US$120 million. (CCR2008, No. 15)

Lasting VE price rise

The impact of the cyclic feature of APIs on the performance of companies has been fully reflected in Vitamin C and Vitamin B2 producers in China. The price rise can bring fat profits to producers, but in case of a drastic price reduction, producers have no ability to reverse the situation and their performance will be greatly affected. Given this, what is the VE price trend in the future?
   Yan Xiaofei and Huang Ting, both researchers from Guojin Securities, point out that according to information from dealers the VE price has maintained a rising trend since April 2008, the quoted price of imported goods is RMB220-230 per kg and the domestic price is roughly identical. The price of Vitamin A has been stable, the average transaction price of imported goods is RMB205 per kg and the average domestic price is also around RMB200 per kg. Zhejiang Medicine announced on May 31st that the quoted price of VA in the company for both domestic and overseas markets increased 50%.
   Zhou Rui also thinks that based on the analysis of scale barriers, technology barriers and production concentration VE will be the variety of vitamins with the longest price rise time and the biggest price rise margin. The price trend of VE in future will be like VC and the possibility for a drastic price reduction like Vitamin B2 is relatively small. There are yet no reports on new entrants of VE. Before a fundamental change in the supply/demand relationship happens, the price of VE will likely be maintained at a high level and even have a further increase.
   Another leading product of the company, Vitamin H is a small variety. There is news about capacity expansion in China, but due to the supply shortage of upstream raw materials the price of Vitamin H will still have a rising trend.