(Yicai Global) Sept. 29 -- Chinese auto parts maker Chongqing Qin'an Mechanical & Electrical gained CNY297 million (USD43.5 million) in returns after closing all its futures positions and will cease its commodities investment trading to focus on its main business, the firm once famous for its high-profile dabbling in the commodities market announced yesterday.

Its shares [SHA:603758] closed the morning out up 7.11 percent at CNY8.44 (USD1.24) after logging 10 percent declines over the last three days. Its stock price had previously doubled since it announced its foray into futures trading on May 20.

The Chongqing-based company declared its intent to use up to CNY500 million of its own funds to invest in futures on April 15. Of the 25 transactions it has closed since, the first 21 all recorded positive returns totaling over CNY760 million, while the last four ones all went belly-up for an aggregate loss of CNY472 million, according to the company’s profit-and-loss sheets. The firm has thus posted a pretax profit of CNY297 million from its foray into futures. 

The public and high-profile participation in capital market speculation of Qin'an, a 1995-founded professional firm that produces automotive engine power system core parts and transmission key components, has generated some controversy. The market and investors became antsy over the prospect of the listed firm's assets becoming exposed to greater risks in the event of an extreme occurrence slashing the company's account balance to below zero. 

"Hedging is a great risk management method, but it becomes sheer speculation if the commodities do not equal the futures’ prices," a sector insider told Yicai Global, adding speculation is a taboo in this field.

Midas Touch

Its Chairman Tang Yuanming’s talent for recognizing a good deal has prompted some investors to quip the firm should change its name to Qin'an Financial Holdings. Others, however, worry the auto parts maker is running an "irrelevant business.”

Qin'an’s huge returns from futures trading are reasonable, another industry insider told Yicai Global. The sharp drop in commodity prices after the Covid-19 outbreak offered the firm an opportunity to buy cheap raw materials, thus greatly boosting its performance.

The prices of aluminum and gold, the firm’s top choices, have been up since May, rising a respective over 10 percent and 5 percent on the Shanghai Futures Exchange.

The company has only plied futures trading due to special circumstances, it said in its earnings report. It will gradually back out of the futures market, though it will continue to eye hedging with commodities, it stated.

The firm has been manufacturing and operating normally thus far, with no major adjustments because of market environmental or industrial policies, and no significant fluctuation of production costs and sales, while internal production and operations remain normal, Qin'an said in its announcement in response to its shares’ recent plunges. 

Excluding its futures investments, Qin'an realized CNY320 million in first-half operating revenue, up 41.82 percent on the year and became profitable after a CNY18.8 million first-quarter loss, posting CNY1.25 million in first-half net profit after deducting non-recurring gains and losses, with its main businesses bouncing back from the coronavirus trough. 

Profit from futures investments has stacked up to CNY297 million since April 15, and these investment earnings will be booked into the company's 2020 profit and loss statement, Qin'an said.

Editor: Ben Armour