Thursday, March 28, 2024
 
Columnist
Martin Hennecke
 
FOOK WOO GROUP
HKEx Stock Code : 00923 
 
Corporate Profile
Principally engaged in the trading and manufacturing of tissue paper products and recycled greyboard, trading of recovered paper and provision of confidential materials destruction services.

Business Review - For the year ended December 31, 2012

Recovered Paper

During the year under view, revenue from the recovered paper segment was HK$1,244.7 million, representing an increase of 52.7% when compared to the same period last year. The segment accounted for 58.5% of the Group's total revenue.

In response to the burgeoning market demand for recovered paper products, the Group has expanded its waste paper supply network in both Hong Kong and Mainland China. During the year under review, the Group further strengthened its presence in the waste paper collection industry in Mainland China, especially in Beijing, Shanghai and Tianjin, and rapidly set up more waste paper collection points at printing houses, especially in Northern China. In Hong Kong, the Group was able to meet its target of adding four new waste paper packing stations, taking the total number of packing stations in the city to eight in total. The four new waste paper packing stations are located in Tsing Yi, Kwun Tong, Kowloon Bay and Stonecutters Island. The one in Kowloon Bay has its own pier to allow for transportation of waste paper from Hong Kong to the Group's production base in Huizhou in a cost-effective way. The Group's expanded waste paper collection network helps ensure a stable supply of waste paper for its recovered paper business customers and also for its growing production capacity of recycled paper products.

The demand for waste paper in Mainland China has been increasing as more paper recyclers (paper manufacturers using waste paper as raw materials) have preference for sourcing their raw materials (waste paper) in Hong Kong and Mainland China, due to the competitive advantages of local waste paper. This has caused the collection price and recovery rate of waste paper to trend upwards. This uptrend, together with rising operating costs, has made the waste paper market increasingly competitive. To maintain its leadership in the waste paper management services sector, the Group implemented a number of measures during the year under review. These included increasing the number of accounts for the CMDS segment, entering into more contracts with waste paper suppliers, which include printing companies, and increasing the volume of waste paper collected from households. Another measure taken was to minimize costs by adopting an automatic and advanced bailing system to increase the efficiency.

Tissue Paper Products

During the year under review, revenue generated from the Group's tissue paper products business increased by 44.5% to HK$831.6 million, accounting for approximately 39.1% of the Group's total revenue. The increase was mainly attributable to the rise in the average selling price as a result of sustained demand and inflationary pressures.

The Group seeks to grow this segment through capacity expansion and acquisitions. By upgrading the existing machinery, production capacity was increased. The production volume of napkins was also enhanced following the installation of additional machines. On 30 March 2011, the Group entered into an agreement with Zhongshan Baoli Paper Co., Ltd. (¡§Zhongshan Baoli¡¨) to acquire trademarks and distribution network of Zhongshan Baoli. The Group expected to strengthen its brand portfolio with the addition of reputable brands including ¡§Polly .ÄR¡¨, a top ten tissue products brand in Mainland China in 2010. The acquisition also would significantly expand the Group's sales and distribution network in China in terms of the number of distributors and chain stores. Upon the completion of the acquisition, the distribution network will consist of over 650 large chain stores and over 160 distributors. The two logistics centers that the Group established in Hunan and Jiangxi in October 2010 have strengthened its distribution networks in second and third-tier cities, enabling the Group to further expand the networks to include small retailers while growing its market share outside Southern China.

During the year under review, the Group executed its strategy of lowering the ratio of OEM customers and increasing the proportion of away-from-home customers, as well as the Mainland China retail market. To promote its branded products and maintain the high quality services that its customers have come to expect, the Group undertook a number of initiatives during the year under review. These included a further expansion of the product range, cooperation with direct customers, and working with machine manufacturers to custom-make equipment for product development plans or adjustments to better address customer needs. As for our OEM customers, our Forest Stewardship Council's (¡§FSC¡¨) and Programme for the Endorsement of Forest Certification (¡§PEFC¡¨) accreditations gave us competitive edge in meeting the market demand for certified green products.

Recycled greyboard

As the global economy continues to recover, the demand for recycled greyboard as a packaging material for export has increased. During the year under review, revenue from the Group's recycled greyboard segment increased by 65.4% to HK$45.9 million, accounting for approximately 2.2% of the Group's total revenue. As part of the Group's strategy to maximize the contribution from production and fully utilize existing resources, the recycled greyboard operation is a synergistic business that complements the core recovered paper and tissue paper businesses. ¡§Eagle King¡¨ and ¡§Hui Lan¡¨ are the Group's own recycled greyboard brands, which are produced from lowergrade recovered paper and targeted at paper merchants, manufacturers and printers in Mainland China.

During the year under review, the Group made use of its FSC and PEFC accreditations to successfully launch FSC/ PEFC-certified recycled greyboard products to the market. The products were well received by the market and were able to command premium prices.

Confidential Material Destruction Service (¡§CMDS¡¨)

CMDS is a strategic operation of the Group which provides it with a stable supply of quality waste paper. The customers of the business are mainly Hong Kong government bodies, financial and professional institutions, and banks. During the year under review, revenue from this segment reached HK$4.3 million, representing an increase of 7.6% when compared to the corresponding period of the previous year. By fully utilizing its existing network and resources, the Group was able to offer more diversified and value-added services to its customers, such as hard disc degaussing and destruction services. This has helped the Group to position itself as a one-stop service provider and to increase customer loyalty.

Business Outlook - For the year ended December 31, 2012

To pursue economic growth in an environmentally sustainable manner is a common consensus today among responsible businesses worldwide. Mainland China, the second-largest economy in the world and the Group's growth driver, has drawn up a host of effective measures to create a greener and better living environment. A key policy direction of the 12th Five-Year Plan is the creation of a low carbon and low emission economy, with ¡§energy saving and emission reduction¡¨ a top priority for the country's ¡§seven major industries¡¨. The paper manufacturing industry is one of these industries that the Central Government is keen to consolidate and upgrade. More rigorous enforcement of environmental regulations would exert greater pressure on non-compliant mediumand small-sized paper manufacturers, and is likely to trigger a significant consolidation in this highly fragmented market. Moreover, the rising affluence of consumers and a gradual global economic recovery are expected to further boost the domestic consumption of recovered paper and tissue paper. Fook Woo, as the largest integrated recycled paper producer in Mainland China, is well positioned to benefit from this favorable economic environment.

Having established new waste paper packing stations and having widened the channels for waste paper collection in Hong Kong and Mainland China, the Group has now secured a stable supply of raw materials to support the growth of its tissue paper products business. Still, the Group will continue to explore partnership opportunities in other locations, such as in hi-tech industrial zones and other densely populated areas, where it can collect large volume of waste paper. The Group expects its total collection volume to continue to increase with the settingup of new collection points, which will help the Group sustain its growth momentum.

The tissue paper division is another growth engine and the Group has already made plans for its aggressive expansion. In particular, the Group's extensive sales network and its well-known brands can help spearhead the development of this division in second- and third-tier cities. When the acquisition is completed, the brands, including ¡§Polly .ÄR¡¨ and ¡§AUS&NEW ¿D¯Ã¡¨, will complement and strengthen the Group's existing product portfolio, which includes the ¡¥Moonily', ¡¥Smoovie' and ¡¥See-mia' brands, and thus enable it to reach a wider group of customers. In order to make the most of the Polly trademarks, the Group plans to create a new range of recycled products. More efforts will be made to boost brand awareness through joint marketing promotional activities with large chain store groups. Leveraging its expanded and extensive distribution network, the Group aims to increase the sales and market share of its own-branded products and thus increase the segment's contribution to overall revenue.

Bearing in mind inflationary pressures and rising paper pulp costs, which are expected to continue in the near term albeit at a more moderate pace, the Group will maintain its practice of passing cost pressure onto its customers. With the reputation of its branded tissue paper products, the Group is confident that it will still be able to compete strongly in the market while enhancing its profitability.

In anticipation of more supportive measures and guidelines for environmentally friendly paper products under the 12th Five-Year Plan of the Central Government, Fook Woo will make every effort to fully exploit its competitive advantages to capture this tremendous growth potential. Apart from fine-tuning its sales strategy, the management is also actively seeking opportunities for new business development or strategic cooperation. The perception of recycled tissue paper products has gradually improved in recent years in both the public and private sectors in Hong Kong and Mainland China. The Group has been invited by government bodies to tender for recycled paper supplies. This is a testament to the technical expertise of the Group and will provide the Group with a strong impetus to deliver more robust and sustainable growth in its core business. With effective execution of its strategies, the Group is confident that it will be able to maintain and enhance its leading position in the market.

Source: Fook Woo Group (00923) Annual Report 2012
Chairman Cheng Chi Ming, Brian Issued Capital (shares) 2,411M
Par Value HKD 0.1 Market Capitalisation (HKD) 3,303M
 
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