Business Overview

HUAAN Business

6.5 Future Prospects of the Hua-An Group 6.5 Future Prospects of the Hua-An Group The Hua-An Group is one of the major independent coke producers in the Shandong/ Linyi region of the PRC. Its demographic advantages and its new manufacturing facilities with intensive quality and environmental control have provided the Hua-An Group with the competitive edge over its competitors. Further details of the competitive edge of the Hua-An Group are as follows:­(i) High and efficient manufacturing capacity The metallurgical coke market exhibits commodity-type characteristics.  Product differentials among competitors are at best minimal and there is high product price sensitivity. The profit margin would be mainly driven by sales turnover and economies of scale enjoyed by the larger metallurgical coke producers. As the size of manufacturing capacity increases, the operating cost of production reduces accordingly. As a plus point, the increase in capacity size would enable metallurgical coke producers to increase their supply to bigger steel plants. In line with the PRC government’s drive to encourage consolidation in the metallurgical coke market, which is currently populated by small metallurgical coke producers, larger coke producers, like the Hua-An Group which produces more than 1.2 MT metallurgical coke per annum, would be in a better position to negotiate any potential merger and acquisition. In addition, the Hua-An Group is also able to produce above the design production capacity of 1.2 MT due to its efficient manufacturing process. This is possibly due to the effort of the Hua-An Group’s continuous improvement of its production flow to increase productivity.
(ii) Close proximity to steel production customers The main users of metallurgical coke are steel manufacturers of which the major steel players are mainly located in the Shandong and its neighbouring Provinces such as Hebei, Jiangsu, Shanxi and Liaoning Provinces.  Whilst steel manufacturers have the option to purchase coke from other suppliers not within the neighbouring Provinces, the Hua-An Group’s close proximity and availability of coke will inevitably enable the Hua-An Group to supply its coke in a timely manner to its customers which is one of the main criteria imposed by the steel manufacturers as any disruption in supply will result in huge losses to steel manufacturers. Transportation cost is also minimised thus enabling the Hua-An Group to price its coke competitively as compared to other coke manufacturers.
(iii) Close proximity to coal suppliers Approximately 50% of the PRC’s coal reserves are located in Shandong and the surrounding Provinces such as Shanxi, Anhui, Shaanxi and Henan Provinces. Such geographical reserve distribution has enabled the Hua-An Group to source approximately 100% of the Hua-An Group’s required coal from the aforementioned provinces.  The Hua-An Group’s top ten suppliers are the major players in the coal industry and with its close proximity to its suppliers, the Hua-An Group is able to ensure that it will have undisrupted supply of coal and lower transportation costs.
(iv) Close proximity to railway system and cordial relationships with rail company Transportation of coke to customers is mainly done by rail. The rail transportation cost, which is borne by the customers constitute an important part of the cost on the Hua-An Group’s customers. As such, as an incentive for its customers to purchase from the Hua-An Group, Yehua has entered into a 10-year railroad transportation agreement and a supplemental railroad transportation agreement on 30 June 2005 and 27 April 2006 respectively with Huasheng Jiangquan Group Company Limited – Railroad Operating Branch Company for the use of their rail system network at a fee 10% lower than the normal rate charged The railway system is set up right inside the Hua-An Group’s plant and is strategically linked to the national railway grid system thus allowing the Hua-An Group’s delivery network to be strategically linked to customers across the PRC.
(v) Close proximity to power plant and cordial relationship with power supply company The Hua-An Group believes that cheaper power supply is a vital success factor for the Hua-An Group as power supply is one of the main cost elements of coke manufacturers. As such, on 30 June 2005, Yehua entered into an Electricity Supply Agreement with Shandong Huasheng Jiangquan Thermoelectricity Co., Ltd. (“Jiangquan Thermo”) which is located within the same industrial zone as Yehua, whereby:­(1) Jiangquan Thermo will provide electricity to Yehua for production purposes;
(2) Jiangquan Thermo guarantees to charge the electricity supply at a reduced rate of 10% lower than the market rate. Jiangquan Thermo is willing to give a 10% discount as Jiangquan Thermo and Yehua are both located within the same industrial zone which is Shenquanzhuang Industrial Zone and Yehua is the major customer of Jiangquan Thermo; and
(3) The electricity supply agreement is valid for 30 years.

With the abovesaid Electricity Supply Agreement, the Hua-An Group is assured that there will be continuous and reliable power supply from Jiangquan Thermo at a cost lower than the market rate.
(vi) Experienced Management Team The Hua-An Group’s management team for coke operations, have extensive experience in the coke-related industry, from the sales and marketing of coke down to the production of coke. With the vast experience and knowledge possessed, the management of the Hua-An Group is able to identify the changing market environment and needs and react promptly to remain competitive. In addition, their experience and extensive knowledge also enable the Hua-An Group to better position itself in its resource allocation and control pollution management, thus enhancing the operation efficiency and profitability of the Hua-An Group.
(vii) Established customer base The Hua-An Group is able to maintain a good customer base and strong working relationships with various large steel manufacturers which are located in the surrounding regions of its manufacturing facilities due to the Hua-An Group’s prompt delivery and high quality products which are in accordance with the quality control requirements as per ISO9001:2000. The manufacturing facilities of the Hua-An Group are also relatively new as compared to its competitors thus further enhancing its product quality. The Hua-An Group believes that its stable customer base will provide a strong foundation to further expand its business.
(viii) Accredited with ISO9001 certification  The Hua-An Group has fulfilled all necessary requirements for its accreditation of ISO9001:2000 certification for its product quality on 26 February 2006 of which it obtained its certification on 3 April 2006. It also employs stringent environmental control procedures to ensure that its production process are environmentally friendly. These are two of the crucial success factors for a coke manufacturers to be competitive in both the local and overseas market, especially for overseas customers from the US and European countries whereby product quality and environmental concern is always a priority.
(ix) Future expansion in production capacity and capabilities Currently, the Hua-An Group has two (2) production lines for its production of coke with a designed coking capacity is 1.2 MT along with the by-products of tar (60,000 tonnes); crude benzene (18,000 tonnes); ammonium sulphate (17,000 tonnes) and coal gas (360 million m3). As the major customers of the Hua-An Group are steel manufacturers, the future production expansion plans of the Hua-An Group will be skewed towards the development and growth potential of the steel industry. The Hua-An Group plans to increase its production capacity by another 300,000 tonnes per annum in 2007 with the addition of one additional oven. The Hua-An Group also intends to increase its production capacity with the purchase of one additional oven in 2009 to further support the Hua-An Group’s future sales projection. In addition to the expected increase in its production capacity, the Hua-An Group also intends set-up its own pre-washing facilities for its production lines by 2007 which is in line with the current technology trend whereby clean coal technology ensures coking coal is cleaned prior to production thus facilitating coal usage in an environmentally satisfying and economically viable way.
(x) Intensive Quality Control and Environmental Management System The Hua-An Group focuses significantly on the quality of the raw material and finished products to ensure the desired quality of outputs. The Hua-An Group’s quality control team is committed to attaining high quality in its products and as such, the Hua-An Group has implemented stringent and comprehensive quality control and environmental management procedures. In view of the anticipated steady and sustainable growth potential as well as opportunities in the coke and steel manufacturing industries as highlighted in Section 6.3 above, the Board of Hua-An believes that the Hua-An Group is well equipped to capitalise on the growth of the industry and to ride on the opportunities presented. To achieve its future objectives, the Hua-An Group plans to employ the following strategies:­

(i) Setting up coal washing facilities The Hua-An Group intends to set up coal washing facilities for raw materials by 2007, which costs approximately RM75 million and a production capacity of 2.4 MT per annum. With the coal washing facilities, the Hua-An Group is able to control the quality of the coke and reduce cost. In addition, such new facilities could also produce another two by-products, namely middlings and coal slime which could also generate additional revenue to the Hua-An Group.
(ii) Increase in production capacity Moving forward, the Hua-An Group intends to increase its production capacity for its coking process in view of the expected increase in market demand for metallurgical coke.  In line with this intention, the Hua-An Group has plans to increase its production capacity with the addition of one (1) oven for metallurgical coke processing by 2007 which is expected to increase to 1.5 MT per annum as compared to its existing capacity of 1.2 MT per annum.  In 2009, the Hua-An Group intends to increase its production capacity by a further 300,000 metric tonnes to a total of 1.8 MT per annum.
(iii) Setting up marketing office in Malaysia for the ASEAN countries Subsequent to the listing in Malaysia, the Hua-An Group will consider the possibility and viability of setting up a marketing office in Malaysia which will house the sales and marketing team of the Hua-An Group, which will concentrate primarily on possible sales of its products to the ASEAN countries. The Hua-An Group believes that its products will have good response from local steel companies due to its high quality and competitive pricing. The Hua-An Group will eventually venture into other ASEAN countries such as Indonesia, Thailand and Singapore, where the market conditions and cultures of these countries are very similar to Malaysia.
(iv) Continuously strengthen its workforce In recognition of the importance of its workforce for its future success, the Hua-An Group intends to progressively increase its workforce size in particular in its production department in anticipation for its increase in future sales.

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