Luxi Chemical Gains Progress from Strategic Shift    

A few projects of Luxi Chemical Group Co Ltd (Luxi Chemical, SZ: 000830) were recently completed and came on stream. Its 60 000 t/a methane chlorides unit, 100 000 t/a methylamine unit, 80 000 t/a melamine unit (CCR2010 No.15), 50 000 t/a chlorinated paraffin unit (CCR2010 No.15), 200 000 t/a ion-membrane caustic soda unit (CCR2010 No.11) and 50 000 t/a silicone unit all started operation one after another this year. Second phases of these projects are also in full swing and most of them will be completed in 2011. Luxi Chemical's capacity of these products will be doubled or more than doubled at that time. The successive completion of these new projects shows that Luxi Chemical has made major advances in its strategic shift. Owing to the sustained price rise of chemical products in the second half of 2010, new products in the company's portfolio have gained even higher profit-earning capability than expected.

Parallel development of two businesses:
chemical fertilizers and fine chemicals

Luxi Chemical has assets of around RMB10.0 billion today. Its sales revenues in the first three quarters exceeded RMB5.3 billion. It is capable of producing 2.75 million tons of chemical products, 3 million tons of chemical fertilizers and 100 000 tons of chemical equipment and vessels per year. According to its fiscal report for the first half of this year, its sales revenues were mainly contributed by its chemical fertilizer business - around 45% in the total. The proportion of its compound fertilizer business was around 33%. The combined proportion of these two chemical fertilizer businesses was around 78%. Nevertheless, China's capacity to make chemicals, especially urea, is in surplus. Fertilizers are also greatly influenced by changing state policies due to their close ties to agricultural production. The profit-earning performance of chemical fertilizer business is relatively low in recent years. Data from the company also show that the gross profit rate of nitrogenous fertilizers was only 6.49% in the first half of this year and the gross profit rate of compound fertilizers was only 14.21%. It is therefore inevitable for the company to make a shift.
   Luxi Chemical's shift can only depend on its existed main businesses. It can extend its industrial chain and the recycled use of resources based on its existing foundation, but cannot spin off the chemical fertilizer business. The goal settled upon by the company is to highlight both chemical fertilizers and fine chemicals, extending the industrial chain along the two lines of coal chemicals and salt chemicals and creating a cyclic economic mode in an industrial park. In terms of coal chemicals, the existing ammonia and urea business will be extended to methylamine, dimethyl formate (DMF) and melamine production, and the existing methanol production can lead to methane chlorides and silicone businesses. In terms of salt chemicals, the current caustic soda and chlorine business will be extended to chlorinated paraffin and benzyl chloride. Most of those extending products have already been made in the company and are giving satisfactory returns. According to its plan of shifting business, the company will however not halt its steps of extending the chains. It will further develop downstream products with high added value such as melamine, benzyl chloride, methane chlorides and silicone and also develop the comprehensive utilization of syngas, new catalysts and new fertilizers. Furthermore, the company will steadily improve its access to the fluorine and silicon sectors.
   The completion of several new projects this year can illustrate that Luxi Chemical's business shift strategy has brought about enormous success that helped the company manufacture new products with good returns, enhance its comprehensive benefit and reduce its production cost.

High profit-earning capacity of new products

Since May this year the price of chemical products has increased remarkably in China. The profit-earning rate of products made by Luxi Chemical Group Co Ltd is therefore greatly enhanced. The melamine and the methane chloride plants that recently started production, in particular, have very high gross profit rates.
   Luxi Chemical's first-phase 80 000 t/a unit of the melamine project started production in June this year. The second-phase 80 000 t/a unit is expected to start operation in 2011. Melamine prices have a significant rising trend today. According to the data at the end of October, the ex-factory price of melamine has increased by around 20% over September to around RMB12 000 per ton and surged around 34% over three months ago. Based on an ex-factory price of RMB10 000 per ton, Luxi Chemical can earn a gross profit rate as high as 40% from melamine. (If the ex-factory price is around RMB12 000 per ton, as it is today, the gross profit rate can reach 50%.)
   Methane chlorides, another product series the company started to produce this year, also have considerable profit-earning ability. Luxi Chemical's methane chloride project is planned to have a capacity of 120 000 t/a. The first-phase 60 000 t/a unit started production in March this year. Based on the cost of the company and the sales price, the gross profit rate of the product exceeds 40%. It should be noted that second-phase units of these two projects will be completed and put on stream in 2011 and Luxi Chemical's capacities of melamine and methane chlorides both will be doubled at that time. Driven by rising prices, performance upgrades in the company are to be expected.
   The gross profit rates of other products made by Luxi Chemical such as silicone and DMF are not as high as melamine or methane chlorides, but they also have a moderate profit-earning ability. The recent price increases of old products such as urea also greatly improved the financial performance of the company. The price of urea at the end of October had increased by more than 25% over the past three months.
   Needless to say, the sustainability of the rising prices trend for chemical products and its possible impact on the profit-earning capability of the company should be closely followed.