Hong Kong, Jan 31 - China Flavors and Fragrances Co. Ltd. plans to more than double capacity by the end of 2008 and is considering buying two smaller rivals this year as it expands into the food business, its top financial executive said on Wednesday.
The firm, which with much-larger rival Huabao International Holdings Ltd., dominates a nascent domestic flavouring and fragrance sector, expects to take on new clients this year -- primarily food product makers -- adding to a list of 450.
China Flavors -- known officially as CFF -- is keen to wean itself off dependence on the tobacco industry, a market in which Huabao has a slightly larger footprint, financial controller Francis Lam told Reuters in an interview.
"Huabao is more tobacco-focused. We want to focus on food and fine fragrances. We will add around 20 clients (in that sector) this year.
"We are currently looking at two companies ... We want to buy companies with good formulas," Lam said without elaborating.
Expansion is on the cards. The 15-year-old firm is building an 83,000-square-metre factory in Shenzhen, scheduled to open by the end of 2008. The site will add 6,000 tonnes to the capacity, more than doubling the current 5,100.
The Hong Kong-listed firm -- which investment banks from CLSA to Citigroup are beginning to cover -- buys plant and meat extracts from farmers and concocts flavour and fragrance formulas.
It then sells those to tobacco, food, consumer and household product companies -- including foreign firms keen on tailoring the taste and scent of their products to Chinese preferences.
The firm's near-term focus will be on sweet flavours for ice cream and other dairy products, Lam said. It counts Inner Mongolia Mengniu Dairy -- part of top Chinese milk processor China Mengniu Dairy -- as one of its "high-growth" customers.
Lam declined to disclose the names of some international gum and snack-food giants among its clients.
Shares in China Flavors had gained 0.3 percent to HK$3.32 by midsession on Wednesday, outperforming the market's slight dip.
TOBACCO BASE
The lion's share of CFF's business is still dependent on tobacco, where it enjoys long-standing relationships with a state-owned and increasingly consolidated tobacco industry.
In 2005, tobacco still accounted for nearly two-thirds of CFF's sales, with just 26 percent going to food and 8 percent to fine fragrances, according to Macquarie.
CFF serves five out of 10 of China's largest tobacco companies -- including Hongta group -- and provides flavouring and aromas for six out of 10 of the country's top cigarette brands, including Hongmei and Xiademen, according to CLSA.
The country's tobacco flavours and fragrances industry alone was worth some 2.2 billion yuan ($283 million) in 2005, Citigroup estimated.
But the company competes head-on with Huabao -- roughly nine times bigger with a HK$13.4 billion market cap -- which holds greater sway among cigarette manufacturers. Huabao supplies all of China's 10 biggest tobacco companies, and eight of its top 10 brands.
"Tobacco is a very solid business model," Lam said. "But our growth will be in the food category."
In late January, CFF supplied CLSA 2007 sales guidance of 15-20 percent growth for tobacco flavours, 25-30 percent for food flavours, and 60-70 percent for fine fragrances.
"We stand by those figures," Lam said without further comment. The firm's goal is to have each revenue stream -- tobacco, food flavours, and fine fragrances -- make up equal parts of the sales mix in 10 years, he added.