Singapore, 12 February 2009 – China Essence Group Ltd. (“China Essence” or the “Group”), one of the largest, leading integrated producers of potato products in the People's Republic of China (“PRC”), today announced positive results for the third financial quarter ended 31 December 2008 (“3Q FY2009”). Despite the current global economic slowdown, the Group continued to progress well in 3Q FY2009, leading to strong year-on-year growth of 21% and 10% for revenue and gross profit respectively for the nine months ended 31 December 2008 (“9M FY2009”).
Mr Zhao Libin, Chairman and CEO of the Group said, “We are pleased with the commendable set of results this quarter. Potato starch is a necessary additive which is widely used in various manufacturing processes across food and non-food industries such as textile making and paper manufacturing industries. As such, the demand for our products remains strong and is proving to be resilient in tough times.”
Financial Review
Driven by strong demand for potato starch and modified starch, the Group recorded revenue of RMB352.6 million in 3Q FY2009, which is a 62.9% increase quarter-on-quarter and 6.8% increase year-on-year. The Group’s revenue for 9M FY2009 grew 21.0% to RMB712.3 million, up from RMB588.8 million in the previous corresponding period. The higher sales volume for both potato starch and modified starch is a result of stronger demand from new sales distributors. To-date, the Group’s sales and distribution network has further expanded to cover a total of 78 distributors and customers.
Due to a bumper harvest in 2008, potato prices have been under pressure, thus leading to lower average selling price of potato starch since October 2008. For 9M FY2009, the average selling price of potato starch slipped to RMB5,986 (inclusive of VAT), down 3.1% from the same period of last year. Nonetheless, demand and average selling price for potato starch-based products remained steady during 9M FY2009.
Despite a 10.1% increase in gross profit during 9M FY2009, the overall gross profit margin for the period fell to 41.5% from 45.6% in the previous corresponding period, as a result of higher sales contribution from potato starch, which commands a lower gross profit margin. Sales of potato starch accounted for 64.6% of the Group’s revenue for 9M FY2009, up from 60.3% during the same period last year. The lower margin can also be attributed to an increase in the cost of potatoes from the 2006 harvest season (RMB320 per tonne) to 2008 harvest season (RMB430 per tonne). The cost of potatoes contribute approximately 70% to COGS.
As a result of higher cost of potatoes and other materials, gross margin for potato starch base products declined to 43.1% in 9M FY2009, down from 48.6% in the previous corresponding period.
Operating expenses for 9M FY2009 rose in tandem with the Group’s larger business volumes, with selling and distribution expenses registering a 3.6% increase to RMB31.8 million for 9M FY2009, up from RMB30.7 million for 9M FY2008. Administrative expenses increased 35.6% to RMB31.1 million for 9M FY2009, as a result of higher costs incurred for the operation of the Group’s new production facility in Inner Mongolia, as well as losses on the disposal of plant and equipment at its two potato starch production lines in Daqing.
In 9M FY2009, the Group’s finance costs on bank borrowings increased by RMB19.4 million to RMB21.3 million, mainly due to an increase in bank borrowings by RMB350.6 million.
In line with strong revenue growth, the Group’s operating profit for 9M FY2009 grew 8% to RMB234.6 million, as compared to RMB217.1 million for the previous corresponding period. However, due to an increase in finance costs and income tax expense, profit attributable to equity holders fell 7.8% year-on-year to RMB161.3 million for 9M FY2009.
Cash and cash equivalents of the Group stood at RMB262.6 million as at 31 December 2008, down from RMB484.3 million as at 31 March 2008, primarily due to utilization of cash for the establishment of additional production plants and production lines. Despite the significant draw down of cash, cash flow of the Group remains healthy.
Outlook
As previously announced, the Group is progressing well in its plan to increase production capacity, despite the challenging global business environment. By FY2010, the Group expects to achieve enhanced production capabilities for potato starch and potato protein. Production capacity for potato starch will likely be increased from 170,000 t.p.a. to 250,000 t.p.a, while the production capacity of potato protein will double to 16,000 t.p.a. In addition, the Group intends to commence large-scale production of potato fibre in May 2009.
Operationally, the Group will focus on managing and containing operating cost in order to remain competitive. It will however, not compromise on its efforts to enhance its presence in existing markets and will continue to expand its distribution network to penetrate new regions in the PRC, such as Guangdong and Fujian in the Southern region; as well as Shanghai.
Mr Zhao continued, “The market for potato starch has not lost its lustre despite the challenging business climate. We remain optimistic of the potential of this market and are diligent in our efforts to optimise our production capacity to fulfil market demand for potato starch. We believe that we are well-positioned as one of the leading producers of potato products in the PRC.”