China Essence sees signs of recovery in potato starch market

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”), announced results for the second quarter year ended 30 September 2009 (“2Q FY2010”).

This quarter’s results indicate hope of a recovery in potato starch demand as China Essence’s revenue rose 147.6% to RMB225.0 million in 2Q FY2010 on a sequential quarter-on-quarter basis. Net profit rose 318.0% to RMB30.2 million in 2Q FY2010. Comparing 1H FY2009 and 1H FY2010, the Group’s revenue fell 12% to RMB315.9 million while net profit decreased 53% to RMB37.4 million. Cash levels remained healthy, at RMB301.7 million for 1H FY2010.

Commenting on the results, Mr Zhao Libin, Chairman and CEO of the Group said, “We are very happy with our latest set of results, following some very bleak quarters. The environment in which we currently operate is still very challenging, but we are hopeful that the industry as a whole is beginning to ride an upturn.”

Signs of recovery, but environment still challenging During the first half of 2009 (calendar year), consumer spending in the PRC still appears to be slow, thus impacting demand for China Essence’s products. The food and catering industry as a whole has seen a dip in overall business, with China Essence’s customers cutting back on their orders of the Group’s products. Food manufacturers which export their products to international markets have also reported a slowdown in sales orders, and in turn reducing their orders from China Essence. Lastly, there also remains a downward pressure on the average selling price of potato starch, as potato starch manufacturers had offloaded their stock in the market especially between December 2008 to June 2009, in order to clear their inventories by the harvest season this year (i.e. August to November 2009).

The Group saw a decrease in sales volumes and average selling prices of modified starch (volume down 14%, ASP down 12.9%) and potato starch-based products (volume down 3%,ASP down 8.7%) in 2Q FY2010, compared to 2Q FY2009. Bucking the trend was potato starch,which saw sales volume increase 20.2% for 2Q FY2010, compared to 2Q FY2009. ASP fell 13.7% for the same period.

However, signs of recovery are beginning to show, as sales of potato starch increased by approximately RMB104.8 million or 330.6% from RMB31.7 million in 1Q FY2010 to RMB136.5 million in 2Q FY2010. The ASP of potato starch also increased from RMB4,668 per ton in 1Q FY2010 to RMB5,250 per ton in 2Q FY2010. The gross margin of potato starch increased from 25.6% in 1Q FY2010 to 31.1% in 2Q FY2010.

Recent developments China Essence started selling potato protein and potato fibre in June 2009, which contributed
revenue of RMB28.6 million, or 9.1% of total revenue for 1H FY2010.

On 27 October 2009, China Essence entered into Facility Agreements with the Bank of Communications and Agricultural Bank of China for a total of RMB 200 million in short-term loans. The loans will be used to meet the working capital requirements of China Essence. They are not secured against any assets of the Group and will mature in October 2010.

Potato starch features as an important raw material in consumer staples and an additive to industrial products, both of which are a function of a growing population. The Group remains a firm believer in the robustness of the long-term fundamentals of the business and the potato starch market.

Mr Zhao added, “Given its wide applications, potato starch is an absolute necessity in everyday life, which is why we are confident of its long-term prospects. Coupled with our strategy of offering potato starch-based products and by-products, we are in a good position to weather the challenging times and emerge an even stronger player.”