Singapore, 14 November 2008 – China Essence Group Ltd., one of the largest, leading integrated potato-processing producers in the People's Republic of China, today announced its results for the first half ended 30 September 2008 achieving 8.5% net profit growth on the back of a 39.1% increase in revenue.
Highlights
Revenue increases 39.1% to RMB359.7 million for 1H FY2009 thanks to
- Stronger potato starch sales
- Higher average selling price of potato starch
Gross profit surges 26.1% to RMB151.4 million
Profit attributable to equity holders increases 8.5% to RMB80.2 million
Plans to increase production capacities of potato starch, potato protein and
potato fibre well on track
Mr Zhao Libin, Chairman and CEO of the Group, said, “We are pleased to achieve a set of good half year results, driven mainly by improved performance across all our product segments. Riding on continued strong support from customers and our established market standing, China Essence will focus on capitalising demand opportunities in the PRC potato starch and related products industry through organic expansion for our future growth.”
Group revenue surged 39.1% to RMB359.7 million in 1H FY2009 as compared to the previous corresponding period (“1H FY2008”), driven mainly by higher sales volume and a 11.9% increase in average selling prices of potato starch. Sales of potato starch leaped 88.2% to RMB196.1 million, accounting for 54.5% of the Group’s 1H FY2009 revenue. This is due to increased demand from existing and new sales distributors, following the implementation of anti-dumping regulations on potato starch producers from the European Union in February 2007.
Demand and average selling prices for potato starch-based products and modified potato starch products remained steady throughout 1H FY2009. Overall gross profit increased 26.1% to RMB151.4 million for 1H FY2009. Overall gross profit margin, however, declined from 46.5% in the previous year to 42.1% for 1H FY2009, as a result of higher sales contribution from potato starch which commands a lower gross profit margin. This was also due to an increase in the cost of potatoes, from RMB320 per tonne for the 2006 harvest season to RMB450 per tonne for this year’s harvest season, causing profit margins for potato starch to fall from 42.3% in 1H FY2008 to 40.2%.
Operating expenses for 1H FY2009 rose in tandem with the Group’s larger business volumes, with selling and distribution expenses registering a 34.5% increase to RMB14.9 million from RMB11.1 million for 1H FY2008.
Administrative expenses increased 166.6% to RMB20.0 million for the period under review, as a result of higher costs incurred for the operation of the Group’s new production facility in Inner Mongolia, directors’ fees and performance bonuses which were not provided for in the previous financial year, as well as losses incurred from the Group’s disposal of plant and equipment at its two potato starch production lines in Daqing.
Finance costs increased from RMB11.9 million in 1H FY2008 to RMB18.6 million in 1HFY2009 mainly due to the increase in bank borrowings which was raised for financing the capital expenditure this financial year. Profit attributable to equity holders grew 8.5% to RMB80.2 million in 1H FY2009.
Correspondingly, earnings per share2 rose 6.3% to RMB0.204 from RMB0.192 in 1H FY2008. Cash and cash equivalents decreased from RMB484.3 million as at 31 March 2008 to RMB397.0 million as at September 2008, mainly due to capital expenditure incurred for the establishment of additional production plants and production lines during the period under review.
Expansion of Production Capacities
Plans to expand the Group’s production capacity are well on track. Subject to market demand and availability of working capital, these new and enhanced production capabilities would be operational in FY2010.
Potato Starch
The Group has commenced construction of facilities for its new plants at Nenjiang 3 , Heilongjiang Province and Zhalantun, Inner Mongolia, each with capacities of 40,000 tonnes per annum. In addition to existing facilities in Daqing and Sui Ling, the Group will have a total of five potato starch production facilities with annual production capacity of 250,000 tonnes by 2Q FY2010.
In 1Q FY2009, the Group disposed two potato starch production lines at the Daqing plant, each with a capacity of 5,000 tonnes per annum, to make way for the installation of production lines for potato protein (with capacity of 4,000 tonnes) and potato fibre (with capacity of 40,000 tonnes), bringing its current production capacity for potato starch from 180,000 tonnes per annum to 170,000 tonnes per annum.
Potato Protein & Potato Fibre
China Essence currently has potato protein production lines with an annual production capacity of 8,000 tonnes at the existing potato starch plant in Sui Ling. The Group conducted further testing of its potato protein production lines during this year’s harvest season and commenced large-scale production in late September 2008. The Group intends to sell protein suitable for the animal feed market to local and international distributors, and expects this additional contribution to be one of its key performance drivers in the second half of FY2009.
The Group also intends to conduct further testing of its potato fibre production facility in Sui Ling (with a current annual production capacity of 80,000 tonnes) after this year’s harvest season and commence large-scale production in December 2008. The Group intends to sell potato fibre, which is used as a high-grade animal feed, to local animal feed manufactures.
The Group had earlier announced that it was considering Fu Yu, Heilongjiang province as a suitable site for its new
potato starch production plant. However, upon further consideration, the Group has decided to expand into Nenjiang, Heilongjiang, instead of Fu Yu.
Plans are underway to double the annual production capacities of potato protein and fibre to reach total capacities of 16,000 tonnes and 160,000 tonnes respectively. Construction works for the new plants are ongoing and are slated to be completed in time for the harvest season of August to November 2009 (2Q FY2010). These additional capacities will be added to the existing potato starch facilities in Daqing and Ahlihe. Subject to market demand and availability of working capital, large-scale production would commence in FY2010.
Outlook
Following the recent drop in potato prices as a result of a bumper crop this year and discussions with certain larger food manufacturers in China to reduce the selling price of their products to sustain demand, the Group reduced its selling price of potato starch in October by RMB200 per ton to RMB5,800 per ton. The Group will continue to monitor price trends for potatoes and maintain close discussions with its customers, and may further reduce its potato starch selling price to reflect the lower raw material cost, thereby sustaining product sales. In view of the dynamic and rapidly changing business environment, China Essence believes that the rest of 2008 and 2009 will continue to be challenging.
Nevertheless, the Group will monitor market conditions closely and take prompt, appropriate action to maintain its position as one of the leading potato processing producers in China.
Mr Zhao added, “Looking ahead, the Group will focus on expanding our distribution network to penetrate new regions in the PRC, as well as reinforcing our presence in existing markets. With increased contribution from capacity enhancements plans coming onstream in the upcoming quarters, as well as anti-dumping measures in place, we believe that prospects for the PRC potato starch and related products industry on the whole will continue to look good.”
Beyond the near-term challenges posed by the global economic environment, and barring further exacerbation of its effects, the management is cautiously optimistic of the Group’s performance in the second half of FY2009 as it expects order momentum for core products, such as potato starch, to remain stable.