Source: Economic Observer News (by YAN Kai, LIU Dan)

Today, construction aluminium extrusion products are hardly seen at the manufacturing base of China Zhongwang Holdings Limited (“Zhongwang”, 1333.HK) located in Liaoyang City in Liaoning Province. These products are replaced by high-end industrial aluminium extrusion products extensively used in the transportation sectors such as aviation and aerospace, railway and vessels.  In 2010, industrial aluminium extrusion products accounted for 99.6% of China Zhongwang’s gross profit.

Mr. LU Changqing, Executive Director and Vice President of China Zhongwang, said China Zhongwang has basically completed the transformation from a manufacturer of  construction aluminium extrusion products to that of industrial aluminium extrusion products, having undergone a business transformation period of as long as eight years.

Capacity Expansion

One of the most eye-catching equipment at China Zhongwang’s production base located in Liaoyang Development Zone is the “125MN Dual-action Aluminum Extrusion Press” lying in the middle of a factory.  It has been the largest aluminium extrusion press in the industry so far.

Before the emergence of China Zhongwang, SAPA, Norsk Hydro and Alcoa were a few enterprises in the world which were able to produce industrial aluminium extrusion products in large quantities.

In 2009, China Zhongwang surpassed Norsk Hydro and Alcoa and has become the world’s second largest manufacturer of industrial aluminium extrusion products since then.  The production capacity of China Zhongwang reached 600 kilotons in 2009.  It accounted for a 6.2% share of the global market, ranking China Zhongwang second after SAPA.

Lu revealed that China Zhongwang plans to increase its production capacity to 1 megaton in 2014. It wil lfurther increase to 1.2 megaton in 2015, making it the world’s largest industrial aluminium extrusion product developer and manufacturer.

China Zhongwanghas made purchase for close to 20 sets of large-scale presses, with the minimum ones exceeding 75MN. Amongst the 20 sets of equipment are three new 125MN aluminium extrusion presses. Upon completion of installation, China Zhongwang will possess a total of four presses with the largest capacity in the industry globally.

“According to our investment plan, Zhongwang will have a total of 21 units of extrusion presses that are75MN or above in the next two to three years” said Lu.

According to a source close to China Zhongwang’s management, the company plans to introduce pioneering mega presses of 225MN and 300MN which are not yet available in the world.  The situation is similar to the time when th ecompany introduced the brand new 125MN Dual-action Aluminum Extrusion Press eight years ago.

Eight Years of Transformation

A ground-breaking transformation eight years ago sowed the seeds for China Zhongwang’s success today.

As early as in 2002, LIU Zhongtian, Chairman of China Zhongwang, was aware of the enormous demand forlarge cross-section industrial aluminium extrusion products in high-end sectors including transportation, machinery equipment and electric power engineering during a visit to the United States and Europe.

In contrast to the keen competition in the construction aluminium extrusion product market, the Chinese domestic market relied on high-end industrial aluminium extrusion products from overseas. Seeing the immense market potential, Liu introduced a series of large-scale presses and other equipment for the production of industrial aluminium extrusion products after returning to China. That included the advanced 125MN Dual-action Aluminum Extrusion Press situated in the Liaoyang plant.

Another reason for the transformation is the high profit margin of the industrial aluminium extrusion products which generally stays at over 40%, versus that of construction aluminium extrusion products which is usually around 10%.  In 2009, the gross profit margin of China Zhongwang’s construction aluminium extrusion product business decreased to 3.2%.

The transformation of China Zhongwang was regarded as crazy by industry peers at that time. “Not to mention the 125MN aluminium extrusion presses which didn’t even exist in the world at that time. All the presses in China were between 5MN and 10MN only then.” said an insider.

Capitalizing on the right direction set by Liu, China Zhongwang was proud to announce its successful transformation after eight years of hard work. At the beginning of 2009, the company started to produce high-end industrial aluminium extrusion products using large-scale presses such as the 125MN model. The company soon became the third largest manufacturer of industrial aluminium profiles in the industry.

Today, China Zhongwang is planning another major move. It plans to tap into the high value-added aluminium flat rolled products (usually named as “aluminium plate”), mainly consisting of medium-to-high thickness plates, high-end foils and sheets, etc., which are principally applied in sectors such as aviation and aerospace, vessel and railway transportation etc.

Currently, as the production of these high value-added aluminium flat rolled products requires advanced production technology, these products are mostly imported from overseas markets.  Entering this market sector, however, is difficult for local enterprises due to the high entry barriers.  Nevertheless, Lu expressed that China Zhongwang possesses extensive experience and leading edge technology in various areas including aluminium alloy smelting and product research.  These advantages put China Zhongwang in an advantageous position to enter this high-end sector.

Tapping the Domestic Market

Up to now, China Zhongwang has already received a number of orders from the domestic railway transportation sector.

As observed by our reporter during a factory visit in Liaoyang on 18 March 2011, finished aluminium profiles for high-speed rail carriage and subway conductor rails were stacked up in the workshop with labels such as “Project Tianjin Subway” and “Project Chongqing Subway” on them.

Last April, when the U.S. started anti-dumping and countervailing duties investigations on certain exports of aluminium extrusion products from China, Chinese manufacturers, including China Zhongwang, were pushed into a tight corner.  A countervailing duty of 137.65% and an anti-dumping duty of 59.31% basically expelled the Chinese aluminium enterprises from the U.S. market.

The U.S. anti-dumping and countervailing duties investigations led to drop in both the company’s revenue and net profit in 2010 to RMB10.5 billion and RMB2.6 billion respectively, representing year-on-year decreases of 24.0% and 26.4%. In fact, the investigations are not a bad thing to China Zhongwang’s long term development as it helps to accelerate the company’s pace to develop overseas markets other than the U.S.  “In the future, the Chinese domestic market will be the main battlefield. It will be complemented by overseas markets.” said Lu.

In 2009, China Zhongwang’s industrial aluminium extrusion products had a 14.1% share of the domestic market. In 2010, China Zhongwang’s sales from the domestic market reached 55% of the company’s total sales.  Lu said the company plans to increase the percentage to over 60% of total revenue in 2011, and further up to 70% and 80% in 2012.