CFO interview: Nerves of aluminium

Aluminium or steel? Which is the superior material for use in the transportation industry and for building machinery? The debate among engineers continues. Historically, steel has been perceived to be the stronger and more easily maintained metal, but with modern day technology and an environmentally conscious society, aluminium may yet prove to be the better alternative.

“In the past, steel has always been the material of choice, but light weight, non-corrosive and recyclable aluminium is becoming increasingly popular,” said Vincent Cheung, chief financial officer of China Zhongwang Holdings.

China Zhongwang was established as an aluminium construction product manufacturer in 1993 focusing on producing soft aluminium parts for the construction industry. According to Cheung there has always been intense competition in the aluminium windows and doorframes markets in mainland China due to the low barriers of entry.

The 18-year old company has grown into the world’s second-largest industrial aluminium extrusion product developer and manufacturer in terms of annual production capacity, which is 700,000 tonnes. However, the company only expects to produce roughly 400,000 tonnes by the end of this year. “It is common for manufacturers in the industrial aluminium extrusion industry to maintain around 60% production capacity utilisation due to the differing needs of each individual product,” Cheung noted. “In reality, our factories are running 24 hours a day and our workers operate on three shifts.”

The firm subsequently decided to shift from its roots in the soft aluminium construction products to manufacture hard aluminium products used in the industrial sector — products that Cheung refers to as the “skeleton” — around nine years ago. By the end of last year, 99.6% of gross profit was derived from its industrial aluminium extrusion product line.

Following a successful transformation in product strategy, China Zhongwang began to focus on mainland China as its core market. This was partly due to the new anti-dumping and countervailing regulations imposed by the US on Chinese aluminium extrusion product exporters during 2010. This meant that companies such as China Zhongwang faced significant increases in tax duties when exporting products to the US, its largest overseas market.

Exploring new horizons

According to its interim results this year, revenue from China was Rmb4.27 billion ($672 million) for the six months ended June 30, up from Rmb2.65 billion in the same period last year. Revenue from overseas was Rmb88 million for the six months ended June 30, down significantly from Rmb3.8 billion a year before. Revenue from the sales to the US accounted for more than 40% and 29% total sales revenue for the year ended December 31, 2009 and 2010 respectively. This is set to fall even further as 98% of total revenue was derived solely from China during the first half of 2011.