Potato starch manufacturer China Essence reports double digit growth for 3Q FY2011

China Essence Group Ltd. ("China Essence"or the "Group"), one of the largest, leading integrated producers of potato starch products in the People’s Republic of China ("PRC"), today announced its financial results for the third quarter ("3Q FY2011") and nine months ("9M FY2011") ended 31 December 2010.

The Group’s latest quarter’s results show a continuous recovery in earnings performance. In line with better economic performance and recovery in overall market demand, the Group’s revenue increased 11% Q-o-Q to RMB347.7 million in 3Q FY2011 while net profit grew by a healthy 13% Q-o-Q to RMB77.7 million in 3Q FY2011. Gross profit for the quarter increased by 6% to RMB134.1 million, as compared to RMB126.9 million in the previous corresponding quarter.

Commenting on the latest results, Mr Zhao Libin, Chairman and CEO of the Group said, "We are very pleased to deliver healthy top and bottom line results for this quarter, in line with the global economic recovery. Leveraging on our leading market position, we have so far been able to maintain our gross margin. Nonetheless, margin pressure is a real risk and we are monitoring the situation closely and will react accordingly by making adjustments to our pricing strategy and production schedule to weather potential fluctuations in supply of raw materials."

Higher average selling prices alleviating margin pressures

Revenue from potato starch increased 7.4% from RMB388.6 million in 9M FY2010 to RMB417.2 million 9M FY2011. The sales revenue from potato starch accounted for 58.2% of the Group’s overall revenue in 9M FY2011. While ASP increased 24.4% from RMB5,364 per tonne in 9M FY2010 to RMB6,676 per tonne in 9M FY2011, sales volume for potato starch saw a 13.7% decrease.

Revenue from potato starch-based products, namely vermicelli, starch strips and five-grain noodles, rose 1.0% to RMB132.1 million, contributing approximately 18.4% to the Group’s overall revenue for 9M FY2011.

The remaining revenue came from modified starch, which registered a 33.3% growth in 9M FY2011 mainly due to a recovery in sales volume, as well as from animal feed, which tripled its revenue for 9M FY2011 to RMB80.5 million.

Animal feed accounted for 11.2% of the Group’s revenue for 9M FY2011, up from 3% in the previous corresponding period. The Group sells two types of animal feed: Si Le Kang (???), which is animal feed without protein;and Si Le Zhuang (???), which is animal feed with protein. Both were launched in August 2010.

Overall gross profit for the Group increased 18% from RMB221.7 million for 9M FY2010 to RMB261.0 million for 9M FY2011. Accordingly, the Group’s overall gross margin increased from 35.2% for 9M FY2010 to 36.4% for 9M FY2011, mainly due to higher ASPs of the Group’s products and contribution from higher-margin animal feed.

As a result of aggressive advertising and promotional efforts for the animal feed, and an increase in logistics and transportation costs in line with increase in business transactions, the Group’s selling and distribution expenses increased by 13.2% from RMB44.5 million for 9M FY2010 to RMB50.4 million for 9M FY2011.

Administrative expenses, which mainly comprised depreciation, insurance and staff-related expenses, rose 18.3% from RMB29.2 million in 9M FY2010 to RMB34.5 million in 9M FY2011. The increase was mainly due to the research and development costs which amounted to RMB3.0 million incurred in 9M FY2011, and higher costs associated with the running of the two new production plants in Nenjiang and Zhalantun.

The Group incurred capital expenditure of RMB72.8 million during 9M FY2011, which was mainly related to the construction of new plants and the acquisition of machinery and equipment. This investment was for the construction of new potato starch production plants with production capacities of 80,000 tonnes per annum ("t.p.a") in Nenjiang, Heilongjiang Province and in Zhalantun, Inner Mongolia province, as well as production plants for potato protein (8,000 t.p.a) and potato fibre (80,000 t.p.a) in Daqing, Heilongjiang Province, and in Ahlihe, Inner Mongolia province.