Chinese Potato Starch manufacturer China Essence Group reports 21% increase in 9M FY2009 Revenue

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”).

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.

Mr Zhao Libin, Chairman and CEO of the China Essence Group: “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.”