The Ministry of Finance recently released a list of commodities subject to changes in export tax rebate rates (see Table 1). The update includes numerous pharmaceutical and chemical raw materials, primarily falling under tariff code 29, with approximately 70 products affected. Most of these items will now have their export tax rebate rate reduced to 5%, down from previous levels.
Since the official list only provides a general description of product structures without specifying exact names, many raw material drug companies are unsure whether their products are impacted. As a result, they are currently verifying with customs authorities, which makes it difficult for us to provide precise profit adjustments for individual products or companies. However, based on current inquiries, ChinaPharm (1093HK) is likely to see its tax rebate for penicillin and vitamin C raw materials drop from 13% to 5%. The company is actively seeking confirmation from relevant departments. Similarly, companies like Sea Zhengye Pharmaceutical (600267) and Huahai Pharmaceutical (600521) have already received specific results through other inquiries due to product segmentation.
From a static perspective, the reduction in export tax rebates directly increases production costs, as reflected in financial statements. This significant cut could hurt the profitability of bulk drug manufacturers that rely heavily on exports. The negative impact is clear. However, from a dynamic angle, higher sales costs may raise industry entry barriers, making it harder for smaller players to compete after price hikes. This could prolong the price increase cycle in the API sector this year.
For leading companies, the adjustment might not be entirely negative. It could reduce earnings volatility and potentially extend the price rise trend into 2008. In the long run, the push for cleaner production and environmental standards in the pharmaceutical and chemical sectors aligns with the structural reforms aimed at sustainable development.
Regarding ChinaPharm (1093HK), the company has not yet confirmed whether the tax rebate changes will affect its products. Assuming all other factors remain constant, a drop from 13% to 5% would reduce 2007 net profit by HK$37 million, bringing it down to HK$257 million (HK$0.17 per share). In 2008, the net profit could fall further by HK$73 million to HK$249 million (HK$0.16 per share).
However, the market is evolving. Increased industry barriers may slow down price increases, but the average selling prices of penicillin and vitamin C are expected to rise over time. Given the company’s sensitivity to pricing, even a small increase could significantly boost profitability. Therefore, the tax rebate adjustment is unlikely to greatly alter the company's earnings outlook, and we maintain our positive view on its 2007–2008 growth.
Key assumptions: 40% of penicillin is exported; 60% of vitamin C is exported; the 5% tax rebate rate becomes effective from July 1, 2007, impacting the second half of 2007 and the full year of 2008; the effective tax rate is 18%.
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Uses for chromatographic analysis of standard substances and solvents, and also for the synthesis of lithium chloride and spices from alkali chlorides.
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with most organic solvents
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