CFO interview: Nerves of aluminium

China Zhongwang’s CFO, Vincent Cheung, keeps calm when making major business decisions.

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.”

For those not familiar with the engineering industry, China Zhongwang builds the internal parts used in aerospace and motor vehicles, trains, vessels and large machinery. The company is headquartered in Liaoning and has offices in Beijing and Hong Kong. It employs more than 3,000 staff of which 500 are involved in research and development alone.

What differentiates China Zhongwang from other companies in the industrial aluminium extrusion manufacturing business is that it acts as a one-shop stop for its customers. The complete process from mould design through to the final product is completed within the 1 million square-metre factory space the company owns in Northern China. “Having our own die design centre is a competitive advantage,” Cheung explained. “Another advantage we have over other similar companies is we have our own smelting and casting production lines to produce aluminium alloy billets customised to the specific needs of our customers.”

After joining the company at the end of 2008, Cheung led China Zhongwang to complete a successful listing on the Hong Kong Stock Exchange in May 2009, raising HK$9.6 billion ($1.26 billion), which was the largest initial public offering globally that year.

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.

While initially taken on board to prepare the company for its IPO, Cheung’s responsibilities have broadened since arriving at the firm. As an active member of the company’s senior management he is also charged with defining and implementing business strategies going forward. With more than 40 accounting and treasury staff located in Liaoning to handle daily accounting functions and around 10 more finance staff reporting to him in the Beijing head office, Cheung’s time is utilised elsewhere. “My role as the CFO is not only to manage the company accounts but also to also be a business decision maker,” he said.

The company has now kick started its third phase of transformation beginning this year, venturing into aluminium flat rolled products, aluminium plates, sheets and foiled products used in building the externals for modes of transport, canned drink containers and electric capacitors. According to a research report by The Boston Consulting Group, the current world consumption of aluminium flat rolled products amounts to 16 million tonnes with six million tonnes from mainland China alone. By 2020 world consumption of aluminium flat rolled products is expected to reach 28 million tonnes and China is expected to consume around half, with a compound annual growth rate of 8% per year.

China Zhongwang has invested $3.8 billion to purchase additional land and factories to tap into this high-potential new market. It expects to begin manufacturing products by 2014 with a production capacity of 1.8 million tonnes initially, increasing to three million tonnes by 2018. At the same time it is beginning to extend its aluminium extrusion product business arm to produce semi-finished products for use directly in the installation process downstream.

Cheung’s goal is for the new business line to drive his company’s business, accounting for at least two thirds of total revenue. “By 2014, aluminium flat rolled products will be the driver of China Zhongwang’s business,” he concluded.


This story was first published in the Cash Management Yearbook supplement for the November issue of FinanceAsia magazine.

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