Full Apex - Brimming with optimism

Full Apex expects strong demand for PET bottles to drive organic growth, reports NANDE KHIN

CHINA-based PET bottle maker Full Apex (Holdings) Ltd is counting on strong growth in demand for soft drinks and other bottled drinks to drive its own organic growth, although it is also on the look-out for mergers and acquisition opportunities in related businesses.

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Bottling success: For FY2007, the utilisation rate of Full Apex's new plants is expected to hit 60 per cent, while the overall rate surged to 70 per cent
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It is looking to boost its production capacity by increasing the overall utilisation rate of its PET bottle-making factories from the current 61 per cent to 70 per cent by FY2007. In addition, its new business of PET chip manufacturing is to start contributing revenue by H2 FY2007.
PET stands for Polyethylene Terephthalate which is a strong but lightweight form of clear polyester. PET chips are used in the making of containers for soft drinks, juices, alcoholic drinks, water, edible oils, household cleaners, and other food and non-food items.

'Our growth will be driven by boosting our production capacity. We expect the utilisation rate for our new plants in Shenzhen, Jiedong and Zhanjiang to increase progressively with the market expansion of our major customers in these regions,' said Michael Tan, Full Apex financial controller.

The overall utilisation rate for all seven of Full Apex's bottle-making factories in China was 61 per cent for the first half of FY2006, while the rate for the three new plants was 45 per cent. For the second half of the year, the rate for the new plants should increase to 55 per cent, said Jordan Hou, Full Apex executive director. And he reckons that for FY2007, the utilisation rate for the new plants should have increased to 60 per cent, while the overall rate would be 70 per cent.

This is in line with the expected expansion of Pepsi and Coke bottlers in China, which are Full Apex's main customers. Full Apex is in fact one of only three approved PET bottle suppliers to both Coke and Pepsi bottlers in China. In addition, the company has recently inked five-year PET bottle supply agreements with Pepsi bottlers in Tianjin, Shenzhen and Jiedong.
'The industry prospects are very good. In 2005, compared with 2004, there was 24 per cent growth in the soft drinks market in China. And for Pepsi and Coke, they have been seeing growth rates of more than 20 per cent,' said Mr Hou.

Vertical integration

Growth in the soft drinks bottling market also translates vertically into growth in the PET chips market, which is why Full Apex decided to go upstream and invest US$90 million in a new PET chip production plant in Guangzhou province.

The plant, which will have a production capacity of 200,000 tonnes a year, will be the largest bottle-grade PET chip production plant in South China.
It is scheduled to be completed in the second quarter of next year and is expected to start contributing revenue in the second half of next year.

About 25 per cent of the PET chip plant's production will be used in Full Apex's own PET bottle production, while the remaining 75 per cent of the chips will be sold to other bottle makers in Guangdong, said Mr Hou.

The PET chip market in China has seen double-digit growth in the last five years and according to market studies, annual growth of 13 per cent is expected over the next 10 years. And much of the demand is concentrated in Guangdong province, where many PET bottle plants are located. In fact, four of the top 10 beverage manufacturere are located in that province, and the province accounts for some 22 per cent of China's total soft drink production.
'We are focusing on Guangdong province because the demand there is very strong. The demand is for 400,000 tonnes of bottle-grade chips a year while the current supply is just 110,000 tonnes,' said Mr Hou.

Like Full Apex, many of its bottle maker counterparts now have to source their PET chips from Jiangsu province. 'So with our new PET chip plant, at the very least, there will be savings in terms of transportation costs,' pointed out Mr Hou.
He added: 'We expect the chip business to be a significant contributor to our revenue. it will definitely boost the topline . . . In the long-term, we will have two core business: the bottle business and the chip business. It's good to have both businesses. And 5-10 years later, perhaps our chip business will be bigger.'

In fact, there is an option for Full Apex to develop a second phase for its PET chip plant. 'But we haven't decided whether we want to develop it,' said Mr Hou.

M&A opportunities

Aside from organic growth, Full Apex is also on the look-out for merger and acquisition opportunities in China.

'There are a lot of M&A opportunities in China, but we need to do detailed studies first. Acquisitions are another way to develop new products, but we must make sure it's synergistic. Various options are being considered and they are all on related businesses,' said Mr Hou.
Full Apex recently reported a marginal increase in Q2 net profit of 0.6 per cent to 47.1 million yuan (S$9.3 million), on the back of an 8.9 per cent increase in revenue to 258.9 million yuan.
For H1 2006, the company's net profit was up 1.3 per cent at 88.5 million yuan, while revenue increased by 9 per cent to 503.5 million yuan. Gross profit margin slipped by 1.6 percentage points to 28.5 per cent. Full Apex attributed it to higher crude oil prices and additional depreciation and amortisation charges.

Since hitting a 12-month high of 41 cents on Feb 8, Full Apex's share price took a sharp fall in May as a result of the general sell-down in China stocks as well as concerns over rising oil prices. In recent months, the stock has shown lacklustre performance, with low trading activity. It closed unchanged at 28.5 cents yesterday on a volume of 13,000 shares.