China Essence

[Underdogger]

Profit warning for q2 coming out soon ?

---

Utilisation is not indicative of market share. His competitors may be running low utilisation as well. IIRC CESS capacity jumped 4 folds over past 5 years. it is not a matter of supply, but a matter of whether demand can jump as much.

Based on their working capital, they will hardly be able to run at 50% NEW utilisation rate if no external funding. The incentive for the chairman to embark on such reckless, mathematically improbable project is intriguing. I can only guess that there is political points from the potato farmers and municipals.

Agreed that it is a matter of relativity versus its competitors . Essence seems to be buying its raw materials at a higher price than the prevailing market rates , ie paying higher for potato per tonne .

Not sure if essence is also offering a higher labour rate per hour . All these add up in its overall unit cost . When other companies are already breaking even and making decent profits , essence might still be struggling from breaking even .

And essence's greater capacity and hence greater spare capacity ( versus its competitors) might be undermining its bottom line ( much greater depreciation expenses even though plants are mothballed ) . Though on a marginal cost basis it might just make enough to cover VC, how long can it remain in its state without going under is a big unknown ??

[specuvestor]

CESS is likely to lose money on a PnL basis for years to come due to depreciation cost. That should not be a focus for investors now. The focus should be on whether their Operating Cashflow post AR write-offs, jump in labour costs etc will be positive on an ANNUAL basis because their cashflow is extremely lumpy.

FY2012 end March it was -RMB678m negative operating cashflow. Their peak season is now, 3Q end Dec, if they can't get positive operating cashflow this quarter, you can forget the other quarters.

[Underdogger]

CESS is likely to lose money on a PnL basis for years to come due to depreciation cost. That should not be a focus for investors now. The focus should be on whether their Operating Cashflow post AR write-offs, jump in labour costs etc will be positive on an ANNUAL basis because their cashflow is extremely lumpy.

FY2012 end March it was -RMB678m negative operating cashflow. Their peak season is now, 3Q end Dec, if they can't get positive operating cashflow this quarter, you can forget the other quarters.

Operating cash flow = net income + depreciation

Hard not to have a positive cash flow unless net income is so negative again ...

[dzwm87]

Operating CF is a function of several variables such as PAT, non-cash charges, working capital, etc.

Non-cash charges include depreciation & amortisation, as well as other add-backs such as associate earnings.

It is possible to be negative if PAT is low and requires high working capital maintenance.

[specuvestor]

^^ Correct, and sometimes even interest expense. To a business, cashflow is most important, not PnL income.

net income +depreciation is roughly EBITDA, and EDITDA is actually a quick and dirty way of trying to standardise operating cashflow comparision across companies and industries.

Intrinsic value investors should pay more attention reading cashflow statements, including financing and investing cashflows, as we assume we are looking at the company as a business, not just a stock. It gives you a much better idea of how the balance sheet and PnL statement interact, and clues on certain discrepancies. For eg high cash company issuing debt.

[Curiousparty]

Can we assume that the entire year will be losses again, similar to last year?


*****
PROFIT WARNING FOR SECOND QUARTER AS OF FINANCIAL YEAR ENDING 31 MARCH 2013
The Board of Directors of China Essence Group Ltd (the “Company”, or together with its subsidiaries,
the “Group”) wishes to announce that the Group expects to register a net loss for the second quarter
ended 30 September 2012 in the financial year ending 31 March 2013 (“2Q FY2013”). The Group
expects an adverse impact on profit margin for the second quarter as the operating environment
remained challenging for the potato starch industry in People’s Republic of China (“PRC”).
In its second quarter for the financial year ended 31 March 2012 (“2Q FY2012”) results
announcement dated 8 November 2011, the Group reported that the price of potatoes fell sharply in
the second half of September 2011 due to a supply glut, causing the market price of potato starch to
follow suit. Despite a moderate increase in potato prices in 2Q FY2013, the price of potato starch
remained disproportionately low, causing a squeeze on the Group’s profit margin.
The profit warning is based on a preliminary review of the unaudited financial results of the Group.
Further details of the Group’s performance will be made available when it announces its 2Q FY2013
financial results on 14 November 2012 after market close.

[potatolover]

Brave souls can continue buying at less than 3 cents....

Can we assume that the entire year will be losses again, similar to last year?


*****
PROFIT WARNING FOR SECOND QUARTER AS OF FINANCIAL YEAR ENDING 31 MARCH 2013
The Board of Directors of China Essence Group Ltd (the “Company”, or together with its subsidiaries,
the “Group”) wishes to announce that the Group expects to register a net loss for the second quarter
ended 30 September 2012 in the financial year ending 31 March 2013 (“2Q FY2013”). The Group
expects an adverse impact on profit margin for the second quarter as the operating environment
remained challenging for the potato starch industry in People’s Republic of China (“PRC”).
In its second quarter for the financial year ended 31 March 2012 (“2Q FY2012”) results
announcement dated 8 November 2011, the Group reported that the price of potatoes fell sharply in
the second half of September 2011 due to a supply glut, causing the market price of potato starch to
follow suit. Despite a moderate increase in potato prices in 2Q FY2013, the price of potato starch
remained disproportionately low, causing a squeeze on the Group’s profit margin.
The profit warning is based on a preliminary review of the unaudited financial results of the Group.
Further details of the Group’s performance will be made available when it announces its 2Q FY2013
financial results on 14 November 2012 after market close.

[Underdogger]

It seems that other starch makers are doing pretty well.....and why is it that Essence is still making a loss?

Does anyone know the reason why? Why is Essence paying above the prevailing market rate for potatoes? What benefit does it stand to gain? e.g. some coffee money from local govt?

[Curiousparty]

massive dumping at 3.5 cents....probably Samlem

going below 3 cents soon!!!

[jzk]

massive dumping at 3.5 cents....probably Samlem

Massive dumping indeed. HKD 33.460 changing hands


Results analysis:
-Topline just as horrible as expected.
-They will easily pull it through cb repayment at the end of the year (obviously assuming a lot of christmas spirit from the creditors, namely dbs).
-Receivables still slow, hopefully recovering.
-With this gross margin the imminent bankrupcy will be avoided, but this is not even close to what they need to get the utilisation higher.
-Cash is needed. I wouldn't issue new shares and nobody will loan them any more. So all there is to do is to sit down with your fingers crossed and hope that the margin recovery continues. If that is to happen, there are only a couple of years left to sit.