Recently we visited Chinese flavors and fragrances (3318.HK/ HK $2.75, unrated). The company is mainly engaged in the production and sales of flavors and spices, mainly used in tobacco, food and daily necessities. The company's Shenzhen factory was completed in 2015, and the Dongguan factory will also be expanded to further enhance its R & D strength. The company's strategy is to expand its market share of synergists (mainly used in tobacco) through mergers and acquisitions and to seize the opportunity of escalating consumer demand to launch more food spices and perfumes. The company also acquired an e-cigarette company at the end of 2015.
The highlight of the company
Sales analysis
1) Synergist (63 per cent of sales in 2015)-revenue reached 437 million yuan in 2015, up 5 per cent from a year earlier, mainly due to increased orders in the low-and middle-end cigarette market, while the high-end market was affected by the central government's anti-corruption campaign. In 2015, the division's net profit margin was 12.3%, down from 18.5% previously. Management said the company is already the second-largest synergist manufacturer after Huabao International (0336.HK/ HK $2.79, unrated) and a supplier to China's major cigarette manufacturers.
2) Food spices (18% of sales in 2015)-revenue was 127 million yuan, down 17.2% from a year earlier, mainly due to reduced orders from overseas customers and sluggish sales in local markets. Operating margins increased from 11.6% to 19.6%, mainly because of lower input costs. In order to expand sales, management will launch new products to increase the sales of existing customers such as Mengniu and Yili.
3) Perfume (19% of 2015 sales)-revenue reached 134 million yuan in 2015, an increase of 0.5% over the same period last year, as the company reformulated its sales strategy and gradually launched small and medium-sized customers. The company made an operating profit of 12 million yuan, better than the small loss in 2014.
4) net profit in 2015 was 89 million yuan, up from 69 million yuan in 2014, mainly due to the divestiture of marketable assets worth 34 million yuan (after tax).
Penetrate into the e-cigarette market: in November 2015, Chinese flavors and fragrances acquired Geary, a leading e-cigarette OEM manufacturer, for 750 million yuan. Jiri's production base is in Guangdong. Most of its products are sold to the United States and Europe. Management believes that China's e-cigarette market is still in its infancy and can be replaced by more consumers in the future. At the same time, e-cigarettes are usually equipped with a device that converts liquids into fog inhalation, which is also commonly used in medical products for children and adults. Management plans to use this to expand the sales of e-cigarettes in the domestic market.
Acquisition of synergist business: in December 2015 and January 2016, Chinese flavors and fragrances signed memorandums of understanding with four synergist manufacturers to acquire their synergist business. These four transactions will further increase the company's share of the synergist market and expand its product portfolio. Four deals are currently under due diligence and are expected to be completed in 2016.