NHU: Greatly Affected by the Global Economic Crisis         

Zhejiang NHU Co., Ltd. (NHU, SZ: 002001), located in Shaoxing, Zhejiang province, was established after the reorganization of the former Xinchang Chemical Company, which was founded in November 1988. NHU was listed on the Shenzhen Stock Exchange in May 2004. At present, NHU engages in the manufacture and sale of over 50 products, such as pharmaceutical, health protection products, pharmaceutical intermediates, flavors and perfumes, food additives and feed additives, etc. NHU has more than 10 000 t/a VE (100%) capacity and around 5 000 t/a VA (50%), making it the second largest in the world.
    It is composed of 11 affiliated enterprises, including Zhejiang Xindong Chemical Co., Ltd., Zhejiang NHU Imports & Exports Co., Ltd., and Xinchang NHU Vitamin Co., Ltd. The company's first shareholder is Xinchang NHU Holding Co., Ltd., holding 60.46%.
   In 2008, NHU achieved revenue of RMB3.34 billion and net profit of RMB1.375 billion, up 89.6% and 1683.43% from 2007 respectively. It is worth noting that NHU's net profit in the first three quarters of 2008 grew by 4801.68% over the same period of 2007 and reached RMB1.275 billion, NHU reaped less than RMB 1 billion in the fourth quarter. NHU announced on April 1st, 2009, its net profit in the first quarter of 2009 is estimated to suffer a sharp drop compared to 2008 - between 40% and 70%.
   This shows how severely NHU has been influenced by the global financial crisis. In the first half of 2008, the company made huge profits thanks to the price growth of VE (Vitamin E) and VA (Vitamin A). However, since the beginning of the fourth quarter in 2008, the sales of its key products, such as VE and VA, has fallen sharply, thus leading to decline in both sales and gross profit rate of all products in the company.
    NHU confesses that its main products are suffering from oversupply now and the price may slide down at any time. However, instead of doing nothing, NHU has been invested actively to manufacture new products to enhance its ability to resist risks. While stabilizing its share in the vitamin market, the company also began to explore the food additive market and the flavor and perfume market energetically. For example, it plans to invest RMB5 billion to RMB7 billion to build a flavor and perfume production base in Shandong province and also has set up pharmaceutical preparation manufacturing factories in Anhui province and Hangzhou, Zhejiang province.
    It is hard to say whether these measures will enable NHU to achieve good performance in 2009 because 78.8% of its sales in 2008 were from exports. However, influenced by the international financial crisis, the market scale for global feed industry is expected to go down this year, which will certainly affect the demand for vitamins, so it is difficult for the vitamin business to achieve excellent performance in the short term. The company plans to raise and invest RMB500 million to RMB700 million to build flavor and perfume projects and food additive projects respectively by issuing convertible bonds. These projects include 3 000 t/a of methyl dihydrojasmonate and 6 000 t/a of isovaleraldehyde; 900 t/a of leaf alcohol (geranyl) and 600 t/a of raspberry ketone; 6 000 t/a of glucosamine food grade additives. However, the food grade additives and flavor and perfume businesses, in fact, are not exempt from the impact of the financial crisis. Some analysis say that China Flavors & Fragrances Co., Ltd. (HK: 3318), a Hong Kong-listed flavor and perfume company which produces flavor and perfume and sells to tobacco, food industries, also see significant decrease in profit compared with previous year due to the increasingly fierce market competition. There is no way for similar companies in mainland China to maintain great profits. After all, whether the projects can go into operation and can make money is totally different.
    But some experts believe that since the production of VE and VA feature huge initial investments, high production difficulties, multiple synthetic reaction steps, production of several key intermediates, high entrance barriers, and relatively long testing time, the world's VE and VA production capacity will not change much within the next two years. Therefore, NHU enjoys unparalleled advantage in this aspect. As long as the economic situation improves, NHU is bound to stand up and make huge profits as the monopoly VE and VA manufacturer in China.
    However, NUH still faces a huge risk now: the export risk might cause by large RMB appreciation in the future. Since most of NUH's products are export-oriented, with the continuing depreciation of the US dollar, the company will suffer losses from exchange rate change with US dollar and HK dollar as its settlement currency; factors like the growing price of raw materials, the energy shortage and the rising cost of human resources will increase the company's pressure to enhance its performance; third, the cost of environmental protection may increase. Manufacturing vitamin products will, to a certain extent, pollute the environment. With the state raising the pollution discharge standards continually, NHU's cost of environmental protection will keep increasing, too.  
    Whether NHU can survive the financial crisis and achieve better performance is still uncertain. How much can the new projects contribute to the company? Let's wait expectantly.