Potato starch manufacturer China Essence Group releases annual report

Chinese Starch manufacturer the China Essence Group has released its annual report.

On this occasion, China Essence Group Executive Chairman and CEO Zhao Libin made the following statement:

I am pleased to report that China Essence has delivered another year of strong growth despite uncertainties over the sustainability of general economic recovery.

For the full financial year ended 31 March 2011 ("FY2011"), China Essence recorded a 20% year-on-year (YOY) growth in revenue to RMB998.9 million, and a 22% YOY growth in net profit to RMB166.7 million.

In line with our efforts to strengthen the Group's earnings base, and our prudent and measured approach in pricing and cost management, we have been able to achieve improved margins on higher earnings. As one of the largest players in the potato starch industry, we are fortunate that we have been able to pass on the increase in raw material costs to our customers via the higher selling prices of our products. We have been successful, due to our strong brand name and market leading position. We have seen higher average selling prices across all our product segments. In particular, the average selling price of our potato starch products increased by nearly 40% during FY2011. Overall gross margin for our Group improved from 34.5% for FY2010 to 37.7% for FY2011.

We are pleased with the progress of the roll-out of our proprietary animal feed products since initial production commenced in 2009. Our animal feed has since expanded to include specific feed products for cattle during this financial year, which is an extension to the original product catered mainly for pigs. For FY2011, animal feed contributed approximately 11% to the Group's revenue and profit respectively. We believe animal feed will continue to play an integral part in diversifying and strengthening the Group's earnings base in many years to come.

In terms of capacity expansion, we also completed the construction of two new potato starch production plants and the installation of machineries in Nenjiang and Zhalantun. We have commenced test production during the past harvest season which has progressed well, and expect to commence commercial production at these two plants in September 2011. Once fully operational, the production capacity of our Group will reach a total of 250,000 tonnes per annum, making us the largest non state-owned producer of potato starch in China.

Our financial position has continued to strengthen. Cash and bank balances for the Group increased from RMB432.4 million at 31 March 2010 to RMB583.7 million at end of March 2011. The Group continued to generate positive cash flow from its operations, supported by continuing growth in consumer demand.

Long-term fundamentals of potato starch industry remain strong

Our strong performance in FY2011 has reinforced our confidence in the long-term prospects of our business and the fundamentals of this industry. We strongly believe that potato starch continues to be an important raw material in consumer staples and an additive in a wide variety of non-food sectors such as industrial and pharmaceutical products. In China, particularly, where the potato starch sector is highly-fragmented and traditionally dominated by small-scale producers, there has been in recent years an increasing awareness of the industrial applications of potato starch, paving the way for large-scale commercial potato starch production.

The current average consumption per capita for potato starch in China is less than 1kg per annum, representing only one-tenth of the utilisation level at developed economies such as Japan and other European countries. The room for growth is evident. We believe increasing consumption demand, underpinned by population growth will continue to support the demand for quality potato starch in both food and non-food industrial applications.

While we are confident of maintaining our market leading position, we recognise that margin pressure is likely to remain a challenge in the coming year as we face persistent inflationary risks and rising costs of raw materials. At the same time, there may be occasional fluctuations in potato supply due to global warming effect, which has an impact on the yield of agricultural crops worldwide.

China's Ministry of Commerce announced on 16 May 2011 that it would levy countervailing duties on potato starch imports from the European Union beginning 19 May 2011. This new levy is expected to last for five years and is likely to benefit local potato starch manufacturers, as the pricing of our products becomes more competitive, compared to the imported ones. We see this development as a good opportunity to further expand our market influence and distribution network across China.

Strengthening of earnings base

To continue to grow, we will continue to embark on various initiatives to boost our earnings and strengthen our leadership position. Firstly, we will continue our strategy of strengthening our earnings base via broadening of our product range. We have successfully launched new animal feed product made of byproducts, i.e. potato protein and potato fibre which have been well-received by our customers who are mainly pig and cattle farmers at the Heilongjiang province. We are greatly encouraged and will continue to develop this product segment into a key growth driver moving forward.

Working with industry experts, we are also exploring potential partnerships to develop new production lines for modified starch products. This will help us expand the current production capacity of modified starch, in line with our strategy to increase sales of modified starch to more industries. We are still in discussions with a few parties who have expertise in this area to jointly develop this product segment and expect to roll-out expansion plans in the later part of 2011 (FY2012).

Corporate governance and risk management

I am fortunate to have the strong support of a team of very passionate and committed people who share my passion for the potato starch business. As we constantly review and align our corporate governance and risk management processes with the best practices in the industry, we also remain prudent in our capital expenditure and financial management, and take measured approach to ensure the steady growth of the Group. I would also like to take the opportunity to assure all shareholders that China Essence observes strict financial discipline and manages its working capital needs and debt obligations in the best possible ways in the interest of the Group and its stakeholders.

I understand that many of you are concerned about our current financing situation. I would like to reiterate that the Group is currently in the process of finalising negotiations on the restructuring of bank borrowings and convertible bonds. Upon the conclusion of the restructuring by the end of September 2011, we will emerge stronger and be better-positioned to capitalise on the various growth opportunities in the market.

Enhancing shareholder value

As a gesture of appreciation to our loyal shareholders, the Board has recommended a final dividend of HK$0.02 per share for FY2011.

Looking ahead, enhancing shareholder value remains our priority in our pursuit of stronger growth and better earnings. While there are always hiccups and bumpiness along the journey, we remain confident in the long-term fundamentals of this industry and believe that with our integrated product range, established brand name, dedicated work force, extensive sales network and production capacities, we are well-poised to capitalise on this longterm growth trend.

Last but not least, I would like to thank all our shareholders and partners, for your belief in our goals and the long-term vision of China Essence. I look forward to your continuing support towards our growth strategy and together we will work towards delivering sustainable returns and greater value to all shareholders in many years to come.

Yours Sincerely

Mr Zhao Libin
Executive Chairman and CEO