China Essence

Where there's a will to defraud, there's often a way - business, sport or otherwise...

Falling to new low? 5.9 cents....

Copy from somewhere else...

For example, China Essence is a potato processor. It buys potatoes from farmers and turns them into potato starch and starch-based products such as noodles.

Potato starch is a commodity. Super-normal profits should quickly attract competition and drive down margins. But China Essence reported gross margins of 40-45% and net margins of 28-30% for 5 consecutive years during FY2003-FY2008. Even after the crisis, for FY2009-FY2011 it had gross margins of 35-40% and net margins of 16-20%. These are impressive numbers by any measure. But to sustain them in a commodity-type business over 9 years is truly incredible.

So is China Essence sitting on a pile of cash? No. All the profits – and more – were reinvested back into PPE. In the 9 years ending 31 March 2011, sales grew more than 10 times. But the book value of assets used in production (leasehold buildings and plant, plus machinery) grew 33 times. Counting only the post-IPO period i.e. FY2006 onwards, production assets grew 9 times, while sales grew 2.6 times.

The comparison becomes even more lopsided when one realizes that sales hovered around RMB 900m during FY2008-FY2011, but production assets grew from RMB 607m to RMB 1.1bn during the same period. Clearly the additional equipment was having no effect, which begs the question of why it was being bought – or if it even existed in the first place.

What about the year ending 31 March 2012? Anyone who waited to get the FY12 results would have been badly punished for taking a wait-and-see attitude: the company reported a heavy loss for FY12. Gross margin was negative 10% and net loss was RMB 279m.

The real net loss was actually much worse, for the RMB 279m figure included a RMB 68m tax credit and a RMB 52m non-cash gain from restructuring its convertible bonds. It was a horrific turn of events, but entirely avoidable for anyone paying attention to the PPE numbers on the balance sheet.

(17-08-2012, 09:33 AM)Max12345678 Wrote: Copy from somewhere else...

For example, China Essence is a potato processor. It buys potatoes from farmers and turns them into potato starch and starch-based products such as noodles.

Potato starch is a commodity. Super-normal profits should quickly attract competition and drive down margins. But China Essence reported gross margins of 40-45% and net margins of 28-30% for 5 consecutive years during FY2003-FY2008. Even after the crisis, for FY2009-FY2011 it had gross margins of 35-40% and net margins of 16-20%. These are impressive numbers by any measure. But to sustain them in a commodity-type business over 9 years is truly incredible.

So is China Essence sitting on a pile of cash? No. All the profits – and more – were reinvested back into PPE. In the 9 years ending 31 March 2011, sales grew more than 10 times. But the book value of assets used in production (leasehold buildings and plant, plus machinery) grew 33 times. Counting only the post-IPO period i.e. FY2006 onwards, production assets grew 9 times, while sales grew 2.6 times.

The comparison becomes even more lopsided when one realizes that sales hovered around RMB 900m during FY2008-FY2011, but production assets grew from RMB 607m to RMB 1.1bn during the same period. Clearly the additional equipment was having no effect, which begs the question of why it was being bought – or if it even existed in the first place.

What about the year ending 31 March 2012? Anyone who waited to get the FY12 results would have been badly punished for taking a wait-and-see attitude: the company reported a heavy loss for FY12. Gross margin was negative 10% and net loss was RMB 279m.

The real net loss was actually much worse, for the RMB 279m figure included a RMB 68m tax credit and a RMB 52m non-cash gain from restructuring its convertible bonds. It was a horrific turn of events, but entirely avoidable for anyone paying attention to the PPE numbers on the balance sheet.

In future it would be good if you can state where you copy from and the author of it so that proper credit should be given. This applies to everybody doing the same.Lets respect the IP of others.

(17-08-2012, 09:33 AM)Max12345678 Wrote: Copy from somewhere else...

For example, China Essence is a potato processor. It buys potatoes from farmers and turns them into potato starch and starch-based products such as noodles.

Potato starch is a commodity. Super-normal profits should quickly attract competition and drive down margins. But China Essence reported gross margins of 40-45% and net margins of 28-30% for 5 consecutive years during FY2003-FY2008. Even after the crisis, for FY2009-FY2011 it had gross margins of 35-40% and net margins of 16-20%. These are impressive numbers by any measure. But to sustain them in a commodity-type business over 9 years is truly incredible.

So is China Essence sitting on a pile of cash? No. All the profits – and more – were reinvested back into PPE. In the 9 years ending 31 March 2011, sales grew more than 10 times. But the book value of assets used in production (leasehold buildings and plant, plus machinery) grew 33 times. Counting only the post-IPO period i.e. FY2006 onwards, production assets grew 9 times, while sales grew 2.6 times.

The comparison becomes even more lopsided when one realizes that sales hovered around RMB 900m during FY2008-FY2011, but production assets grew from RMB 607m to RMB 1.1bn during the same period. Clearly the additional equipment was having no effect, which begs the question of why it was being bought – or if it even existed in the first place.

What about the year ending 31 March 2012? Anyone who waited to get the FY12 results would have been badly punished for taking a wait-and-see attitude: the company reported a heavy loss for FY12. Gross margin was negative 10% and net loss was RMB 279m.

The real net loss was actually much worse, for the RMB 279m figure included a RMB 68m tax credit and a RMB 52m non-cash gain from restructuring its convertible bonds. It was a horrific turn of events, but entirely avoidable for anyone paying attention to the PPE numbers on the balance sheet.

For info, I think this was taken from Lighthouse Advisors' Public Newsletter June 30, 2012.

Link as follows:- http://www.lighthouse-advisors.com/LH_Pu...012_Q2.pdf

Regards.

A new low today 5.7 cents

(16-08-2012, 04:08 PM)Underdogger Wrote: Falling to new low? 5.9 cents....

(17-08-2012, 05:32 PM)Underdogger Wrote: A new low today 5.7 cents

(16-08-2012, 04:08 PM)Underdogger Wrote: Falling to new low? 5.9 cents....

Selling by substantial shareholder, from Lim and Tan report,

 Sanlam Universal Fund PLC (Sanlam) sold 102,000 shares in China Essence thereby reducing their stake from 35,292,000 shares (9%) to 35,190,000 shares (8.97%).

 This would be Sanlam’s first sale in China Essence since it first crossed the 5% disclosure level in Mar ’07 after having bought 4,542,000 shares at 92 cents each, increasing their stake to 6.18% of the company. Sanlam had increased their stake in Jan ’08 (1,057,000 shares at 58 cents), Apr ’10 (3,692,000 shares at 34 cents) and May ’10 (2,000,000 shares at 30 cents).

 Sanlam’s sale of 102,000 shares on 13 Aug ’12 accounted for 100% of the day’s traded volume and at 6.3 cents is far below their previous purchase prices stated above.

 Yesterday, the stock fell another 0.1 cent to 6.1 cents, a new all time low for the company since its listing in Feb ’06 at 45 cents. In the last year, China Essence’s trading volume has dwindled to an average of only 90,000 shares a day and the low trading liquidity will be a problem for Sanlam if they want to get out completely.

 We have been negative on China Essence for a while now, given their weak fundamentals & financial position and given the additional problem of share overhang from Sanlam, we would continue to avoid the stock.

(17-08-2012, 09:31 PM)KopiKat Wrote:  This would be Sanlam’s first sale in China Essence since it first crossed the 5% disclosure level in Mar ’07 after having bought 4,542,000 shares at 92 cents each, increasing their stake to 6.18% of the company. Sanlam had increased their stake in Jan ’08 (1,057,000 shares at 58 cents), Apr ’10 (3,692,000 shares at 34 cents) and May ’10 (2,000,000 shares at 30 cents).

 Sanlam’s sale of 102,000 shares on 13 Aug ’12 accounted for 100% of the day’s traded volume and at 6.3 cents is far below their previous purchase prices stated above.

I guess this is a classic case of "Catching A Falling Knife". I think this fund probably didn't realize what was happening and thought it was purchasing a bargain. However, it turned out to be a value trap.

This is one case where concentration (in one company) without proper knowledge can lead to huge losses.

Musicwhiz Wrote:I think this fund probably didn't realize what was happening and thought it was purchasing a bargain.

I looked up Sanlam. They are a financial services group with operations in banking, insurance and asset management.

In the annual report of their funds they list all the holdings in the funds they manage.

China Essence appears in the Sanlam Global Best Ideas Fund (0.96% of the fund)

I noticed that they also own:

Chaoda Modern, at 1.19% of the fund;
China Green, 1.88%; and
Xingda International, 0.45%

I have studied all 4 companies before. All were priced cheaply at some point (which is why I was looking). But China Essence, Chaoda Modern and China Green all have fishy accounting problems of some sort. I didn't find accounting issues at Xingda, but after I met them last year, I concluded that it was a pretty poor business - capital intensive and no pricing power.

So it appears that at least for these 4 stocks Sanlam was buying on quantitative metrics (PE, P/B etc) instead of really trying to understand the business.

(17-08-2012, 09:53 PM)Musicwhiz Wrote: it turned out to be a value trap.

A value trap is when there is indeed value but the value is trapped i.e. share price not reflecting the true value even over the long run or the management is benefiting at the expense of the shareholders. I classify the local property developers in general as value traps because their stocks are trading at discounts to NTA and yet they have the desire to retain cash (and more cash) to grow their business. That's understandable because their business can deploy "unlimited" amount of cash. Since their stocks always trade at a discount (except during euphoria), every dollar of cash retained creates less than a dollar in market value.

S-chips are not value traps. They are just ass-chips.