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CXDC > SEC Filings for CXDC > Form 10-Q on 12-Aug-2013All Recent SEC Filings

Show all filings for CHINA XD PLASTICS CO LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CHINA XD PLASTICS CO LTD


12-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China. Through our wholly-owned operating subsidiaries in China, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have 263 certifications from manufacturers in the automobile industry as of June 30, 2013. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team consists of 139 professionals including 16 consultants, of which two consultants are members of Chinese Academy of Engineering, and one consultant is the former chief scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 78 patents, one of which we have obtained the patent rights and the remaining 77 of which we have applications pending in China as of June 30, 2013.

Our products include seven categories: modified polypropylene (PP), modified engineering plastics, modified polyamides (PA), environmentally-friendly plastics, alloy plastics, polyether ether ketone (PEEK) and modified acrylonitrile butadiene styrene (ABS). The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 24 automobile brands and 80 automobile models manufactured in China, including Audi, Volkswagen, BMW, GM, Mazda, Toyota, Cherry, Geely and Hafei new energy vehicles. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three manufacturing bases in Harbin, Heilongjiang in the PRC. As of June 30, 2013, we had approximately 390,000 metric tons of production capacity across 83 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems, including the newly launched three additional factory buildings with 30 production lines completed the trial-run in December 2012 and further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013 and beyond.


Highlights for the three months ended June 30, 2013 include:

? Revenue was $202.2 million, an increase of 39.7% from $144.7 million in the second quarter of 2012

? Gross profit was $37.2 million, an increase of 5.4% from $35.3 million in the second quarter of 2012

? Gross profit margin was 18.4%, compared to 24.4% in the second quarter of 2012

? Net income was $20.8 million, compared to $22.8 million in the second quarter of 2012

? Total volume shipped was 69,915 metric tons, up 29.8% from 53,866 metric tons in the second quarter of 2012

Results of Operations

The following table sets forth, for the periods indicated, statements of income
data in thousands of USD:

(in millions, except percentage)    Three Months Ended                       Six Months Ended
                                        June 30,              Change             June 30,             Change
                                   2013         2012            %           2013          2012          %
Revenues                            202.2       144.7         39.7 %       373.1         267.8        39.3  %
Cost of revenues                   (165.0 )    (109.4 )       50.8 %      (306.8 )      (201.3 )      52.4 %
Gross profit                         37.2        35.3          5.4 %        66.3          66.5        (0.3 )%
Total operating expenses             (8.7 )      (6.9 )       26.1 %       (17.2 )       (11.9 )      44.5 %
Operating income                     28.5        28.4          0.4 %        49.1          54.6       (10.1 )%
Income before income taxes           27.9        29.6         (6.1 )%       47.3          56.8       (16.7 )%
Income tax expense                   (7.1 )      (6.8 )        2.9 %       (12.0 )       (13.5 )     (11.1 )%
Net income                           20.8        22.8         (8.8 )%       35.3          43.3       (18.5 )%

Three Months Ended June 30, 2013 compared to three months ended June 30, 2012

Revenues

Revenues were US$202.2 million in the second quarter ended June 30, 2013, an increase of US$57.5 million, or 39.7%, compared to US$144.7 million in the same period of last year, due to approximately 29.8% increase in sales volume and 3.3% increase in the average RMB selling price of our products. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our additional 30 production lines which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in Eastern and Southwestern China. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. The increase of average RMB selling price was due to the shift of product mix towards higher-end products.


The following table summarizes the breakdown of revenues by product mix in millions of US$:

(in millions,                                        Revenues
except percentage)                      For the Three Months Ended June 30,
                                           2013                       2012
                                                                                       Change
                                                                                         in           Change in
                                 Amount              %        Amount          %        Amount             %
Modified Polypropylene (PP)         60.8           30.1 %        71.6       49.4 %       (10.8 )       (15.1 )%

Engineering Plastics                47.1           23.3 %        25.9       17.9 %        21.2          81.9 %

Modified Polyamide (PA)             38.6           19.1 %        12.2        8.5 %        26.4         216.4 %

Environment Friendly
Plastics                            31.5           15.6 %        15.2       10.5 %        16.3         107.2  %

Alloy Plastics                      14.2            7.0 %        12.9        8.9 %         1.3          10.1 %

Modified Acrylonitrile
Butadiene Styrene (ABS)              9.5            4.7 %         4.8        3.3 %         4.7          97.9 %

   Sub-total                       201.7           99.8 %       142.6       98.5 %        59.1          41.4 %

After-sales Service                  0.5            0.2 %         2.1        1.5 %        (1.6 )       (76.2 )%
Total Revenues                     202.2            100 %       144.7        100 %        57.5          39.7 %

The reduction of after-sales service fee was due to the discounts given to our distributors as part of our marketing strategy to further penetrate our less-developed markets, especially in East China and Southwest China.

The following table summarizes the breakdown of metric tons (MT) by product mix:

                                                    Sales Volume
(in MTs, except percentage)              For the Three Months Ended June 30,
                                           2013                        2012
                                                                                        Change in        Change in
                                    MT                %          MT            %            MT                %
Modified Polypropylene (PP)        30,337           43.4 %      34,354       63.7 %         (4,017 )        (11.7 )%

Engineering Plastics                9,506           13.6 %       5,121        9.5 %          4,385           85.6 %

Modified Polyamide (PA)             7,976           11.4 %       2,536        4.7 %          5,440          214.5 %

Environment Friendly
Plastics                           14,385           20.6 %       6,600       12.3 %          7,785          118.0 %

Alloy Plastics                      4,361            6.2 %       3,495        6.5 %            866           24.8 %

Modified Acrylonitrile
Butadiene Styrene (ABS)             3,350            4.8 %       1,760        3.3 %          1,590           90.3 %

Total sales volume                 69,915            100 %      53,866        100 %         16,049           29.8 %

The Company has shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide (PA), Environmental Friendly Plastics, modified ABS, and Engineering Plastics, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end cars made by automotive manufacturers from China and Germany, U.S. and Japanese joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross Profit and Gross Profit Margin

Three-Month Period Ended June 30, Change (in millions, except percentage) 2013 2012 Amount % Gross Profit $ 37.2 $ 35.3 $ 1.9 5.4% Gross Profit Margin 18.4% 24.4% (6.0)%

Gross profit was US$37.2 million in the second quarter ended June 30, 2013 compared to US$35.3 million in the same period of 2012, representing an increase of 5.4%. Our gross margin decreased to 18.4% in the second quarter ended June 30, 2013 from 24.4% during the same quarter of 2012.


The decrease of gross profit margin was primarily due to:

(i) The decrease of gross profit margin was primarily due to an average 6.4% discount on the listed prices for the three month period ended June 30, 2013 to distributors as part of our marketing initiatives to increase our market share in Eastern China and Southwestern China. The discount,is primarily aimed at further expanding into the Eastern China and Southwestern China market. As a result, revenues contribution from Eastern China and Southwest China grew to 29.8% and 4.8% during the three-month period ended June 30, 2013 compared to 21.5% and nil in the same period of 2012, respectively. We plan to maintain such discount rate for the rest of 2013.

(ii) The decrease of gross profit margin was also due to increase in shipping expenses to US$3.4 million in the three months ended June 30, 2013 from US$0.3 million in the three months ended June 30, 2012. We started managing logistics on our own to better serve our customers in a more timely manner and to better understand our customer demands and control our sales channel since the first quarter of 2013. Such arrangement is expected to continue in the future.

General and Administrative Expenses

                                          Three-Month Period Ended June 30,                   Change
(in millions, except percentage)           2013                      2012             Amount            %
General and Administrative Expenses   $           2.9           $           2.2     $       0.7           31.8 %
as a percentage of revenues                       1.4 %                     1.6 %                         (0.2 %)

General and administrative (G&A) expenses were US$2.9 million in the second quarter ended June 30, 2013 compared to US$2.2 million in the same period in 2012, representing an increase of 31.8%, or US$0.7 million, primarily due to the increase of professional fees and bank charges. On a percentage basis, G&A expenses in the second quarter of 2013 decreased to 1.4% of revenues from 1.6% in the second quarter of 2012.

Research and Development Expenses

                                          Three-Month Period Ended June 30,                   Change
(in millions, except percentage)           2013                      2012             Amount            %
Research and Development Expenses     $           5.8           $           4.6     $       1.2           26.1 %
as a percentage of revenues                       2.9 %                     3.2 %                         (0.3 )%

Research and development ("R&D") expenses were US$5.8 million during the quarter ended June 30, 2013 compared with US$4.6 million during the same period in 2012, an increase of US$1.2 million, or 26.1%, reflecting increased research and development activities on new products primarily in consumption of raw materials for various experiments for automotive applications from automobile manufacturers as well as other non-automotive applications. As of June 30, 2013, the number of ongoing research and development projects was 156. The consumption of raw materials for these projects accounted for 90% of total R&D expenses for the quarter ended June 30, 2013.

We expect to complete and realize economic benefits on approximately 25% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail and medical devices.

Operating Income

Total operating income was US$28.5 million in the quarter ended June 30, 2013 compared to US$28.4 million in the same period of 2012, representing an increase of 0.4% or US$0.1 million. This increase is primarily due to higher gross profit, partially offset by higher G&A and R&D expenses.


Interest Income (Expenses)

                                          Three-Month Period Ended June 30,                    Change
(in millions, except percentage)           2013                       2012              Amount           %
Interest Income                       $           1.5            $           1.4      $      0.1           7.1 %
Interest Expenses                                (3.4 )                     (0.9 )          (2.5 )       277.8 %
Net Interest Income (Expenses)        $          (1.9 )          $           0.5      $     (2.4 )      (480.0 )%
as a percentage of revenues                      (1.0 )%                     0.3 %                        (1.3 )%

Net interest expense was US$1.9 million in the quarter ended June 30, 2013, compared to net interest income of US$0.5 million in the same period of 2012, primarily due to increase of short-term loans to meet the need of our future capacity expansion in Southwest China. The average loan balance for the three months ended June 30, 2013 was US$218.4 million as compared to US$33.0 million as of that of the prior year, leading to US$2.5 million more interest expense.

Income Taxes

                                         Three-Month Period Ended June 30,                   Change
(in millions, except percentage)           2013                      2012             Amount            %
Income before Income Taxes           $           27.9           $         29.6      $     (1.7 )         (5.7 )%
Income Tax Expense                               (7.1 )                   (6.8 )          (0.3 )          4.4 %
Effective income tax rate                        25.4 %                   23.2 %                          2.2 %

The effective income tax rates for the three-month periods ended June 30, 2013 and 2012 were 25.4% and 23.2%, respectively. The effective income tax rate for the three-month period ended June 30, 2013 differs from the PRC statutory income tax rate of 25% primarily due to the increase of valuation allowance against deferred income tax assets and tax rate differential for non-PRC entities.

Our PRC subsidiaries have US$252.4 million of cash and cash equivalents, restricted cash and time deposits as of June 30, 2013, which is planned to be indefinitely reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of our PRC subsidiaries.

Net Income

As a result of the above factors, we had a net income of US$20.8 million in the second quarter of 2013 compared to net income of US$22.8 million in the same quarter of 2012.

Six Months Ended June 30, 2013 compared to six months ended June 30, 2012

Revenues

Revenues were US$373.1 million for the six months ended June 30, 2013, an increase of US$105.3 million, or 39.3%, compared to US$267.8 million in the same period of last year, due to approximately 31.5% increase in sales volume and 3.8% increase in the average RMB selling price of our products. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our additional 30 production lines which commenced production in December 2012, as well as the marketing efforts to develop new customers, in particular those in Eastern and Southwestern China. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. The increase of average RMB selling price was due to the shift of product mix towards higher-end products.


Product Mix

The following table summarizes the breakdown of revenues by product mix in
millions of US$:

(in millions,                                Revenues
except percentage)               For the Six Months Ended June 30,
                                 2013                        2012
                                                                                 Change in       Change in
                         Amount           %          Amount           %           Amount             %
Modified
Polypropylene (PP)         118.2         31.6%         136.0         50.8%          (17.8)         (13.1)%

Engineering Plastics        86.7         23.2%          50.7        18.9 %            36.0           71.0%

Modified Polyamide
(PA)                        68.5         18.4%          23.2         8.7 %            45.3          195.3%

Environment Friendly
Plastics                    57.2         15.3%          24.8         9.3 %            32.4          130.6%

Alloy Plastics              27.1          7.3%          19.4         7.2 %             7.7           39.7%

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                       14.4          3.9%           9.6         3.6 %             4.8           50.0%

   Sub-total               372.1         99.7%         263.7        98.5 %           108.4           41.1%

After-sales Service          1.0          0.3%           4.1         1.5 %            (3.1 )       (75.6)%
Total Revenues             373.1          100%         267.8         100 %           105.3           39.3%

The reduction of after-sales service fee was due to the discounts given to our distributors as part of our marketing strategy to further penetrate our less-developed markets, especially in East China and Southwest China.


The following table summarizes the breakdown of metric tons (MT) by product mix:

(in MTs, except                              Sales Volume
percentage)                        For the Six Months Ended June 30,
                                   2013                          2012
                                                                                     Change in        Change in
                            MT               %             MT             %              MT               %
Modified
Polypropylene (PP)         59,210             45.2 %      65,348          65.5 %        (6,138  )          (9.4 )%

Engineering Plastics       17,651             13.5 %       9,926          10.0 %         7,725             77.8 %

Modified Polyamide
(PA)                       14,344             10.9 %       4,749           4.8 %         9,595            202.0 %

Environment Friendly
Plastics                   26,254             20.0 %      10,750          10.7 %        15,504            144.2 %

Alloy Plastics              8,482              6.5 %       5,388           5.4 %         3,094             57.4 %

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                       5,120              3.9 %       3,540           3.6 %         1,580             44.6 %

Total sales volume        131,061              100 %      99,701           100 %        31,360             31.5 %

The Company shifted product mix from traditional Modified Polypropylene (PP) to higher-end products such as Modified Polyamide (PA) , Environmental Friendly Plastics, Engineering Plastics and alloy plastics, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end cars made by automotive manufacturers from China and Germany, US and Japanese joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross Profit and Gross Profit Margin

                                      Six Months Ended June 30,               Change
(in millions, except percentage)      2013                2012          Amount         %
Gross Profit                       $      66.3         $      66.5      $  (0.2 )      (0.3 )%
Gross Profit Margin                       17.8 %              24.8 %                   (7.0 )%

Gross profit was US$66.3 million for the six months ended June 30, 2013 compared to US$66.5 million in the same period of 2012, representing a decrease of 0.3%. Our gross margin decreased to 17.8% during the six months ended June 30, 2013 from 24.8% during the same period of 2012.

The decrease of gross profit margin was primarily due to:

(i) The decrease of gross profit margin was primarily due to an average 6.7% discount on the listed prices for the six month period ended June 30, 2013 to distributors as part of our marketing initiatives to increase our market share in Eastern China and Southwestern China. The discount is primarily aimed at further expanding into the Eastern China and Southwestern China market. As a result, revenues contribution from Eastern China and Southwestern China grew to 29.8% and 2.7% during the six-month period ended June 30, 2013 compared to 20.6% and nil in the same period of 2012, respectively. We plan to maintain such discount rate for the rest of 2013.

(ii) The decrease of gross profit margin was also due to increase in shipping expenses to US$6.0 million in the six months ended June 30, 2013 from US$0.5 million in the six months ended June 30, 2012. We started managing logistics on our own to better serve our customers in a more timely manner and to better understand our customer demands and control our sales channel since the first quarter of 2013. Such arrangement is expected to continue in the future.


General and Administrative Expenses

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