Huangshan Novel: Crisis May Not Bring Such a Cold "Winter"   

Huangshan Novel Co., Ltd. (Huangshan Novel, SZ: 002014) located in Huangshan, Anhui province was established in May 1992 and was listed on Shenzhen Stock Exchange in 2004. The company's main products include vacuum aluminum metalized film, color-printing plastic flexible packaging material, medical packing material and multi-functional high barrier film.
    Huangshan Novel recently announced its operating revenue in 2008 was RMB1.22 billion due to sustainable demand downstream, up 16.6% from 2007. The net profit was RMB68.05 million, increased 26.5%, the gross profit rate was 16.53%, up 1.58 percentage points over previous year.

*Excellent performance in 2008     

At present, the cost of oil-dependent feedstock such as BOPP (bi-oriented polypropylene), PE (polyethylene) films and granular material, CPP (chlorinated polypropylene) films and PP (polypropylene) aggregate, etc., accounts for about 80% of the whole production cost of Huangshan Novel. In the first half of 2008, soaring oil prices caused higher production cost; the melamine contamination scandal dramatically hit the packaging business in the dairy products area; and overall social demand fell steadily as the global financial crisis progressed.   
   Huangshan Novel has continually improved management, firmly controlling operating cost to address soaring oil prices, grabbing market share due to its advantages in huge scale and high efficiency. It also transformed a 5 000 t/a new typed high barrier materials debottlenecking project in one of its subsidiaries in Hebei province into a flexographic printing project - 3 000 t/a composite flexible printing packaging materials, the fastest developing printing process at present.
   In the second half of 2008, prices of the company's main petrochemical raw materials such as PE, PP and printing ink dropped dramatically as international oil prices plummeted. Selling prices of the company's products are also gradually declining but still more slowly than the falling cost of raw materials, so its gross profit rate rose greatly in the fourth quarter of 2008. The operating revenue growth is mainly a benefit from increased sales in a wholly-owned subsidiary in Hebei province, purchased in 2006. The startup of the company's 6 000 t/a aseptic packaging materials project in September 2008 also contributed a lot. The net profit growth rate was larger than the business income, because the company's tax rate of enterprise income tax was reduced to 15% as it enjoyed a preferential policy for three years since it was recognized among the top high-tech enterprises in Anhui province in 2008.
   
*Demand downstream is strong     

Color-printing composite packaging materials, the company's main product, contribute more than 90% to its operating income since 2004. More than 85% of that packaging is for food and washing products, essential in people's daily life.
    An insider of Huangshan Novel said the company's performance was influenced by the crisis in December 2008, but the order quantity slumped less than 10%. He said that besides selling products to customers, Huangshan Novel also provides packaging solution, participates in the packaging development and provides market consultation services for foreign customers; therefore the company has a certain pricing power.
   The company purchased Guangzhou Hequn Packaging Co., Ltd. in 2004 and Hebei Aika Packaging Material Group Co., Ltd. in 2006, holding 70% stake and 100% respectively. Through such activities, Huangshan Novel accelerated construction of its production base and sales network in the south and north of China. The company once announced in 2007 that it planned to invest RMB50 million in the next three to five years for appropriate purchases.
   Huangshan Novel aims to reap main business income of RMB 1.17 billion in 2009.

    Some analysts think transferring to flexographic printing is to meet the market demand, while this transition is easy to address for light industry. Financial crisis indeed affects the plastic industry, but the influence is not as big as to the heavy industry for this property. Its composite flexible printing packaging materials may not necessarily bring the company such a large profit as expected because the company has no independently developed new products.  
   Anyhow two successful experiences with merger and acquisition will be very helpful for the company's similar activities in the future. China's macro economic growth is slowing down, affected by the global economic crisis, and some enterprises in packaging section were dramatically hit. The market concentration of the flexible packaging sector is still very low at present and this financial crisis provides a good opportunity for industry integration through merger and acquisition.