Market Gems
China Essence update
China Essence have been agressively (in my opinon) expanding it's operation since mid of FY 2008. It's growth strategies are as follows for the coming year/s
1) Increase Potato Starch production from 170,000 to 250,000 tonnes. (To commence in FY2010 3Q)
2) New production line to increase Potato Protein from 8,000 to 16,000tonnes (To commence in late FY 2009)
3) Likewise Potato Fibre from 80,000 tonnes to 160,000 tonnes. (To commence in May 2009)
All three growth strategies, were funded by internal fundings and bank loans amounting to 570RMB million spent in 2008.
Without the aid of new revenue in place of the new productions by all three sectors, China Essence's Net profit for 9mth to 3Q of 2009, dropped by 8% despite a 21% increase in revenue. This was due to increased in Selling/Distrubution costs up 3.6% to 1.1million, Adminstratives up 35.6% to 8.2million due to expansion and loss of disposal of old factories and lastly finnace cost up by a whopping 103% to 18.4million due to increase in loans paying interest.
With that month full, now i shall touch on the risks that China Essence faces
1)Up coming loans need paying: DBS's $USD 60million (RMB about RMB 460.8million) to be paid by June 2009. Currently China Essence balance sheet states only RMB 262.5million in cash while the rest of the value is stuck in trade receivables 170.1million and inventories 245million. The risk here is, China essence must convert it's inventories and receivables back to holding cash on time and on target or risk borrowing more, especially at times like this when credit is scared.
2)Aggressive expansion plan for upcoming years in late 2009 and FY 2010, apparently these production lines will be activated only if demand meets its supply. According to statistics regarding potato related products as such, demand is at 800,000 tonnes, while supply is about 450-500,000 tonnes. These data is apparently taken from 2007, might not be applicable in 2009-2010, in fact no one knows what will be the actual demand for potatoes in China by 2009/10 all are estimates and cautiously outlooks. If however the demand were to drop drastically, China Essence is more or less doomed, with high interest rates to pay, aggressive expansion of new production lines but cannot activate cause no demand etc, China Essence will have to be forced to sell off it's new assets or old ones to pay back its loans, efforts and hard earned retained earning thru out 2006-2008 will be wasted, share price will plunged further (although its already at 0.19 cents).
Well then again, this are just risks that might not happen after all. Being a shareholder of China Essence, i wish the company all the best in the coming future especially its aggressive expansion, pray that demand will out strip supply still by then.
Note to self* once production begin, expect net profit to increase as well, if not might as well don;t expand if the company cannot earn more then its WACC (Weight Average Cost of Capital).
Good morning,
We understand that investors’ confidence in S-chips have been shaken recently, especially when some of the high profile SGX-listed Chinese companies have defaulted on their payments and suffered from negative media publicity. In addition, the prolonged global economic uncertainties have impacted the earnings outlook of some companies which are susceptible to fluctuations in consumer demand. Due to uncertain economic outlook and poor market sentiment, stock prices of many S-chips have suffered one of their worst declines in recent memory.
As you may be aware, China Essence’s share price has not been spared from the current turmoil. However, the company being one of the leading producers of potato starch products in China, is confident of the long-term outlook of the industry which is well-supported by strong growth fundamentals. While China Essence remains committed to its capacity expansion plans, it is adopting a prudent and cautious approach in order to minimise exposure to unnecessary risks.
If you have any queries or concerns pertaining to China Essence, feel free to call us or drop us a note. You may also wish to browse through the online Q&A which the company conducted with its investors post Q3 FY2009 results. Please click on “Online Q&A” at this link: http://www.chinaessence.com/ir.html Let us know how we can help to address your concerns.
Regards,
Charis
1) Increase Potato Starch production from 170,000 to 250,000 tonnes. (To commence in FY2010 3Q)
2) New production line to increase Potato Protein from 8,000 to 16,000tonnes (To commence in late FY 2009)
3) Likewise Potato Fibre from 80,000 tonnes to 160,000 tonnes. (To commence in May 2009)
All three growth strategies, were funded by internal fundings and bank loans amounting to 570RMB million spent in 2008.
Without the aid of new revenue in place of the new productions by all three sectors, China Essence's Net profit for 9mth to 3Q of 2009, dropped by 8% despite a 21% increase in revenue. This was due to increased in Selling/Distrubution costs up 3.6% to 1.1million, Adminstratives up 35.6% to 8.2million due to expansion and loss of disposal of old factories and lastly finnace cost up by a whopping 103% to 18.4million due to increase in loans paying interest.
With that month full, now i shall touch on the risks that China Essence faces
1)Up coming loans need paying: DBS's $USD 60million (RMB about RMB 460.8million) to be paid by June 2009. Currently China Essence balance sheet states only RMB 262.5million in cash while the rest of the value is stuck in trade receivables 170.1million and inventories 245million. The risk here is, China essence must convert it's inventories and receivables back to holding cash on time and on target or risk borrowing more, especially at times like this when credit is scared.
2)Aggressive expansion plan for upcoming years in late 2009 and FY 2010, apparently these production lines will be activated only if demand meets its supply. According to statistics regarding potato related products as such, demand is at 800,000 tonnes, while supply is about 450-500,000 tonnes. These data is apparently taken from 2007, might not be applicable in 2009-2010, in fact no one knows what will be the actual demand for potatoes in China by 2009/10 all are estimates and cautiously outlooks. If however the demand were to drop drastically, China Essence is more or less doomed, with high interest rates to pay, aggressive expansion of new production lines but cannot activate cause no demand etc, China Essence will have to be forced to sell off it's new assets or old ones to pay back its loans, efforts and hard earned retained earning thru out 2006-2008 will be wasted, share price will plunged further (although its already at 0.19 cents).
Well then again, this are just risks that might not happen after all. Being a shareholder of China Essence, i wish the company all the best in the coming future especially its aggressive expansion, pray that demand will out strip supply still by then.
Note to self* once production begin, expect net profit to increase as well, if not might as well don;t expand if the company cannot earn more then its WACC (Weight Average Cost of Capital).
Good morning,
We understand that investors’ confidence in S-chips have been shaken recently, especially when some of the high profile SGX-listed Chinese companies have defaulted on their payments and suffered from negative media publicity. In addition, the prolonged global economic uncertainties have impacted the earnings outlook of some companies which are susceptible to fluctuations in consumer demand. Due to uncertain economic outlook and poor market sentiment, stock prices of many S-chips have suffered one of their worst declines in recent memory.
As you may be aware, China Essence’s share price has not been spared from the current turmoil. However, the company being one of the leading producers of potato starch products in China, is confident of the long-term outlook of the industry which is well-supported by strong growth fundamentals. While China Essence remains committed to its capacity expansion plans, it is adopting a prudent and cautious approach in order to minimise exposure to unnecessary risks.
If you have any queries or concerns pertaining to China Essence, feel free to call us or drop us a note. You may also wish to browse through the online Q&A which the company conducted with its investors post Q3 FY2009 results. Please click on “Online Q&A” at this link: http://www.chinaessence.com/ir.html Let us know how we can help to address your concerns.
Regards,
Charis
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