Tingyi Holding, a producer of instant noodles and beverages under the "MasterKong" brand, expects production costs to stay high this year, putting pressure on its gross profits margin.

"The company will first control costs before considering raising prices," Chief Financial Officer Frank Lin said. "That includes improving production efficiency, upgrading technology and adjusting its products structure."

In 2007, prices of palm oil, flour and polyethylene terephthalate (PET) rose 55 percent, 10 to 15 percent and 2 percent respectively.

Lin said the price of palm oil, which accounts for 12 to 15 percent of noodle costs, has already increased over 30 percent in the first quarter of this year. Flour, accounting for 12 to 18 percent, has remained above 2,000 yuan per ton since early 2007.

The company's gross profits margin dropped slightly to 31.58 percent from 32.27 percent in 2007. The gross margin for the three types of products - instant noodles, beverages and bakery - are 25.35 percent, 36.77 percent and 38.33 percent, respectively.

However, Lin said the company already raised prices of noodles twice in 2007, at a range between 10 to 20 percent, and it has no plan to raise prices now.

He believes the price-adjustment policy set by the National Development and Reform Commission (NDRC) is only temporary. The company can still apply for price increases if it is able to prove its costs are increasing.

Tingyi's turnover increased 37.9 percent in 2007 to $3.22 billion, and net profits increased 30.8 percent to $195 million.

Turnover from instant noodles jumped 41.46 percent in 2007, accounting for 46 percent of the total turnover. Turnover from the beverage business increased 38.95 percent, accounting for 47 percent of the total.

The company's capital expenditure for 2008 is about $418 million. Of this, $300 million and $90 million are earmarked for beverages and instant-noodles production, respectively.

The company will invest more in beverages as it hopes to enlarge its market share in bottled water from 16.8 to 20 percent in three years, and eventually to 25 percent.

The intensive competition and rising production costs have forced many smaller food and beverage producers in China to close down. Lin said his company doesn't have a potential target, although it has met some of these producers.

"There are three requirements for our acquisition target - the brand, the facilities and the team," he said. "I haven't seen anyone who can fit into these criteria yet."

(HK Edition 04/23/2008 page2)