Report Card: Richina Pacific looks to diversify further

Friday 11th May 2001

Leather, construction, venison and fish watching have little in common, apart from being major assets of Richina Pacific.

Such diversity has not helped the company achieve consistent profitability, although its latest annual report shows a strong recovery in 2000. Even so, the company is equivocal about its ability to stay in the black.

"With the US economy slowing and the Japanese economy stalled, it would be prudent to be cautious about the short-term prospects for the company," chairman Sir Allan Wright and chief executive Richard Yan warn.

On a more positive note, they say the company has been busy restructuring but that it now has a sound base from which it can fulfil the company's vision. This is a rather loosely defined goal of investing "New Zealand and overseas capital in international growth markets."

Such a vision sounds appealing but carries the danger, because of its imprecision, that the company will end up owning a ragbag of assets, none of which constitute a core business.

Perhaps aware of this, the company says it has appointed consultants to advise on which businesses it should keep and how best to raise new funds for expansion.

High on the list is "to further restructure our businesses" and sell some New Zealand assets. Since balance date, it has sold its Mair Venison operations.

The company seems hot on its China-based leather operations, which are growing rapidly. Despite moving from "a green field operation into the world's second largest manufacturer of waterproof shoe leather in the space of only four years," Shanghai Richina Leather is only marginally profitable.

It has not been helped by the cost of hides rising by 35% and skins by 25%, "placing pressure on our working capital and our ability to maintain margins." However, this would have been offset by higher prices from its leather processing plants in New Zealand.

In the year to December 31, Richina Pacific made a $4.7 million net profit, well up on 1999's loss of $3.8 million. On sales of $725 million, that equates to a minuscule profit margin of 0.6%.

Despite increasing sales by 28%, its net cash flow from operations has moved from $415.2 million to negative $6.3 million.

Nor does the $4.7 reported profit benefit shareholders. No dividend is planned and the normal enhancement in shareholders' funds is virtually wiped out by $3.5 million in currency losses - 10 times the level of 1999.

One of the features of a company that holds widely differing types of businesses is the wide variance of returns.

A particularly informative part of the Richina report is the note showing segmental performance. This shows its Mainzeal construction business contributes very little in profits (a margin of 0.7% last year, down on 1999's 1.1%) on sales that make up more than half the group's revenues. By comparison its leather operations not only increased sales strongly but delivered improved margins of 5.2% against 3.8% in 1999. Venison recovered strongly from a 0.9% to a 9.3% margin, which presumably meant Richina was able to get a good price when it sold. Its Blue Zoo aquarium in Beijing went from a 12.3% margin in 1999 to a small loss, which it blames on competitors undercutting it rather than using more "sophisticated" marketing efforts.

A similar picture emerges when comparing returns on assets. Mainzeal produced a 2.8% return on its $104 million while leather operations made 12.5% on their $112 million and venison an impressive 29.6%.

Rather than concentrate on size and diversity, Richina Pacific should focus on developing a core business and making sure it is a consistently profitable one.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web www.mcewen.co.nz, email davidm@mcewen.co.nz

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