China Essence Group growth dampened by tough economic climate

China Essence Group Ltd., one of the largest, leading integrated producers of potato products in the People’s Republic of China (“PRC”), announced results for the year ended 31 March 2009 (“FY2009”), reporting a 4% increase in revenue over the previous year to RMB889.4 million.

Mr Zhao Libin, Chairman and CEO of the Group said, “Despite the challenging operating conditions, I am pleased to report that we have achieved commendable overall growth for the financial year. Although the tough economic climate has somewhat dampened the rate of growth for the demand of potato starch, it has not altered the fundamental demand for the product. I am confident that our sound business model and strategies will enable us to weather the current uncertainties and strengthen our position, thereby allowing us to emerge as a stronger player in the industry.”

The Group recorded revenue of RMB177.1 million in 4Q FY2009, which was a 50% decrease over 4Q FY2008. On a full year basis, the Group saw sales volumes of potato starch and modified starch increase but that of potato starch-based products such as vermicelli, starch strips and five-grain noodles decrease.

Revenue from potato starch, which accounted for 66.3% of the Group’s revenue, increased by 7.7%, from RMB547.4 million for FY2008 to RMB589.4 million for FY2009. Sales volume for potato starch increased 13.4% as the Group began selling more potato starch directly to large food manufacturers from June 2008. Sales of potato starch to existing distributors also increased slightly. Meanwhile, sales volume of potato starch-based products vermicelli, starch strips and five-grain noodles decreased 8% while that of modified starch increased 4.7%.

China Essence also saw potato protein contributing RMB6.4 million in revenue, or 0.7% to full year revenue, in FY2009. Going forward, potato protein is expected to be an increasingly important contributor to the Group’s growth.

Average selling prices (“ASP”) of all products fell between 1.9% and 5.1% as demand softened slightly. ASP of potato starch fell from RMB6,188 per ton for FY2008 to RMB5,873 per ton for FY2009. Distributors who traditionally placed advanced orders for products at the beginning of each year preferred to delay their orders this year, in anticipation of their end customers, namely restaurants and hotels, cutting back on orders on fears due to the uncertain economy.

Gross profit decreased 7.4% from RMB383.0 million for FY2008 to RMB354.7 million for FY2009. Gross profit margin slid from 44.6% for F2008 to 39.9% for FY2009 due to lower ASP for its range of products, as well as higher sales contribution from potato starch, which traditionally commands a lower gross profit margin.

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