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Xiamen Kingdomway Company

 
 

With the vitamin market rallying, Kingdomway's sales take flight 

 

by David LIN and YANG Yang
 
 

Xiamen Kingdomway Group Company (Kingdomway), one of the three largest vitamin D3 producers and one of the only six large-scale vitamin A producers in the world, is a key high-tech enterprise of the National Torch Project in China.

 

The company offers five main categories of products, including vitamin A, vitamin D3, microalgae DHA, ARA and coenzyme Q10. Used extensively in the feed, animal health, pharmaceutical, nutraceutical, food and cosmetics industries, Kingdomway also exports these supplements to over a dozen countries.

 

The company has established four production bases with 1,000 employees working in Xiamen, Fujian, and Hohhot, Inner Mongolia. In October 2011, the company was listed on Shenzhen Stock Exchange. By early 2012, the company had accumulated RMB120 million (US$19.33 million) worth of net assets.

 
 
Grim vitamin market in 2013
 

With feed output falling for two consecutive years for the first time since China's economy was liberalised, the last two years have not been kind to China's vitamin makers. Kingdomway's annual report states that the downturn in China's livestock sector dented feed production, which in turn depressed its domestic vitamin sales.

 

Moreover, despite a notable increase in vitamin exports to western markets, international vitamin prices fell as producers slashed prices in order to defend their market share.

 

With domestic demand faltering and gross margins from exports narrowing, vitamin producers reduced their fourth quarter 2013 output. This significantly curtailed supplies, such that many vitamins rose in price during the latter part of 2013 and the first half of this year.

 
 
Financial status
 

While conditions have improved of late, 2013 was a very difficult year. Due to the lacklustre demand in the first three quarters, Kingdomway sold only 3,382 tonnes of vitamins in 2013, 20% less than the 4,214 tonnes sold in 2012.

 

The company's operating income was flat, falling an immaterial 0.86% to RMB670.16 million (US$107.96 million) in 2013. Net profit totalled RMB102 million (US$16.43 million), representing a paltry growth of 0.43% compared to 2012.

 

The company's gross profit margin on vitamin A dipped to 35% last year, a fall of 3% on-year, while that of vitamin D3 retreated to the negative territory of -6%, a 48% plummet. Overall, Kingdomway endured a steep 43% decline in gross profit for its vitamin products.

 

Operating income from sales of vitamin A fell by 10% on-year to RMB234.22 million (US$36.13 million), accounting for 35% of the total revenue and a 3.5% drop from the previous year. More devastating news for the company is that sales of vitamin D3 plunged 30% and its average selling price fell 44% on-year, resulting in a significant 61% fall in vitamin D3 operating income.

 

But there was also good news: sales of the company's coenzyme Q10 hit a new record. In 2013, the company sold 37% more of the product than the previous year and its 2013 revenue of RMB366.71 million (US$59.08 million) is a surge of 43% over the previous year. Coenzyme Q10 accounted for nearly 55% of the total revenue last year, versus 38% in 2012.

 
 
Recent development
 

Supplement making is a highly capitalised, technology-intensive industry. In particular, production of vitamin A requires huge investment. This forms a high entry barrier and result in an oligopolistic industry structure with few large-scale producers. Despite the challenges, Kingdomway has improved its production process over the years and secured a market niche for itself.

 

Since kingdomway started production of vitamin A in 1998, the company has taken a string of measures to improve its production technology and equipment. These have effectively enhanced its product quality while bringing down production costs. The company's current annual production capacity of vitamin A reached 2,000 tonnes, making it the sixth largest producer in the world.

 

In 2001, Kingdomway commenced vitamin D3 production and became a pioneering Chinese company in this line. In recent years however, China's vitamin D3 market has been highly volatile with large, erratic price swings. 

 

In July 2009, Taizhou Hisound Pharmaceutical Company (Hisound), China's second largest vitamin D3 maker, halted production and sold its feed-grade vitamin D3 business to Zhejiang Garden Biochemical High-tech Company, the world's largest producer. A few months later, the Chinese market's price of feed-grade vitamin D3 shot up from RMB60/kg (US$9.63/kg) to RMB500/kg (US$80.28/kg), a 733% spike. Though the craze receded later, the market was nowhere near normal with prices staying as high as RMB350/kg (US$56.17/kg) in December 2009.

 

Lured by the colossal profits, more companies entered the marketplace, Hisound also resumed production of vitamin D3 in September 2010 after a one-year hiatus. Boxed in by new competitors and bloated supplies, vitamin D3 prices fell continually after 2011. It was not until 2013 that producers curtailed production and prices stabilised.  

 

Riding out the waves in the Chinese market, Kingdomway maintained its status as a leading producer of vitamin D3. The company's current production capacity of 1,500 tonnes makes it the third largest in the country.
 

Transacted prices of calcium phosphate in China

Vitamins for feed use

2013 (tonne)

2012 (tonne)

2011 (tonne)

Sales

3,382

4,214

3,278

Production

3,381

4,167

3,394

Inventory

184

185

232

Table 1: Kingdomway’s sales and production of vitamins from 2011 to 2013
RMB1= US$0.1575 (Nov 17)

 

In a move to shield its earnings from the feed sector's volatility, Kingdomway diversified into the human supplement sector. In recent years, it has become one of China's top suppliers of coenzyme Q10.

 
 
Optimistic outlook
 

As production of vitamins A and D3 are highly concentrated, there is less competition in the market, leaving prices to be mainly determined by changes in costs of raw material and market demand.

 

Along with Zhejiang NHU Company and Zhejiang Medicine Company, Kingdomway is one of the only three companies in China that are able to run large-scale production of vitamin A. Collectively, these three Chinese companies supply 40% of the world market, with large multinationals such as DSM, BASF and Adisseo accounting for the remaining 60%.  

 

Global supply of vitamin D3 is also concentrated in China, with Zhejiang Garden Biochemical High-tech Company accounting for 50% of the world's production, followed by Hisound, Kingdomway and Zhejiang NHU Company.

 

With the pall cast by H7N9 outbreaks lifting and a long-lasting downturn in the hog market ending, China's livestock sector is in a secular upturn. This has spurred a new growth cycle in vitamin demand.   

Internationally, with the US and European economies recovering, there is a steady rise in demand for vitamins. This world market upturn is improving Kingdomway's bottom line.

 

After a poor 2013, Kingdomway staged a strong rebound in the first quarter of 2014. According to the company's financial statement, the company realised operating income of RMB193.10 million (US$31.11 million) in the first quarter of 2014, soaring by 21% on-year. Net profit in the same period totalled RMB44.34 million (US$7.14 million), a staggering jump of 158% from the first quarter of 2013.

 

The company forecasts net profit will hit RMB90.99 million (US$14.66 million) to RMB109.18 million (US$17.59 million) in the first half of 2014, a whopping 1.5-fold to twofold increase compared to the same period of last year.

 
 
Stock information
 

Though Kingdomway's share price experienced a slump from July 2012 to July 2013, it had picked up fast since then and surged to a record high in May. The world vitamin market's upswing has another one to two years to run, as does China's livestock market recovery. This implies another four to eight quarters of strong growth in Kingdomway's fortunes.

 
 


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