10-02-2012, 09:15 PM (This post was last modified: 12-02-2012, 11:39 PM by Underdogger.)
China Central Govt has committed to improving the productivity of the starch manufacturing sector. See Page 2 and Page 11 of this starch report.
China Essence which is already years ahead of its nearest rival in R&D on animal feed (converted from by-products from starch manufacturing) will stand to gain even more...
However, given their current holdings of high cost inventory and the persistently low ASP of starch, the company is most likely to register a big full-year net loss.
But as long as company can convert its high cost inventory to some cash, they can prepare for the next harvesting cycle. With the resolution of the CB in Dec 2011 (at a high strike price of 70 cents, not much discount to the original 77 cents), the company seems to be in the good book of the bondholders who are willing to give the company a chance to prove its mettle. [Why doesnt't the bondholders push for a strike price that is much lower and closer to the existing market share price?]
The local Chinese banks have also been very generous, extending new fresh loans of $220mil RMB to the company last year to help the company tide over this challenging period.
The central government has made it very clear in its 5-year plan that they will improve the productivity and income of the farmers. CE will stand in good stead in this regard.
Investors are eagerly awaiting news of the JV with the local company on modified starch as well as other possible development on R&D front such as potato seedlings, etc...
FY12 Q3 results are out. As forewarned, they were horrible.
But a prudent investor would have stayed away long ago anyway. Their capital expenditure is very strange - leading up to IPO they only needed about RMB 0.20-0.25 of plant, property and equipment (PPE) to generate RMB 1 of sales. Now they need RMB 0.6-0.7 of PPE to generate the same RMB 1 of sales. Note that this is "in-use" PPE, counting only "leasehold buildings and plant" and "machinery". Things like cars, office equipment, land use rights and (very important) new capacity under construction are not counted.
Comparing FY06 (just after IPO) and FY11 (last full year available):
FY06:
Leasehold Buildings & Plant 13m
Machinery 69m
Total Production Assets 82m
Sales 385m
Production Assets vs Sales 0.21
FY11:
Leasehold Buildings & Plant 310m
Machinery 459m
Total Production Assets 769m
Sales 999m
Production Assets vs Sales 0.77
Let's look at the additional sales obtained by the additional production assets:
Additional Production Assets
= 769m - 82m
= 687m
Additional Sales
= 999m - 385m
= 614m
Change in Production Assets / Change in Sales
= 687m / 614m
= 1.12
In other words the new facilities (buildings and equipment) were 5 times LESS productive than the original facilities they were using up to FY06.
Did potato starch prices change a lot, causing the distortion?
Let's look at the potato starch prices, given on page 7 of the company's slides for FY2011:
So potato starch prices were not very different between FY06 and FY11.
Here we have a mystery: the company invested heavily into production capacity but the increase was much less than the money spent would imply. Did the cost of starch processing equipment, on a per-ton basis, go up 5x in 5 years? I don't think so, which begs the question of exactly what they were spending all that money on.
17-02-2012, 11:40 AM (This post was last modified: 18-02-2012, 10:31 AM by Underdogger.)
Given the low cash level (at hand) in the company and the huge amount of trade receivables (from the 100k tons of starch sold in Q3 - some 667.4 mil RMB), we cannot rule out the possibility that the company has defaulted on their 1st CB repayment of $30mil HK or $24mil RMB.
After sleeping one night over it, this is what I think:-
Much as the company wanted to pay up on time, the A/Rs are not coming in on time. So company has gone ahead before the repayment date (15 Feb) to negotiate with MS to allow them until say end Feb for repayment of the 1st installment, with some interest imposed as penalty. When the company announced the planned trading halt on 15 Feb noon time, they might have already gotten the approval of the MS to repay at a later day.
Not a good news but it is not going to cripple the company. Some reputation and credibility will be lost but no choice. Company will live and fight for another year.
We have to look at the bigger picture that what the company is going is in line with Chinese govt's medium/long term plan for China rural poor.
The govt cannot just let this company crumble because China Essence has been providing a good source of income for tens of thousands of farmers and bringing prosperity to the rural poors. This is exactly what the Chinese Central Government has been wanting to achieve all these years and is very clearly articulated in its long term plan for China
[Refer to my earlier posting on China Central Govt committment to improving the productivity of the starch manufacturing sector.]
The fact that the local chinese banks lent them additional $220mil during Q2 was no mean feat.
I guess company just has to talk and convince their CB lenders to extend the repayment schedule....Nothing much CB bondholders can do anyway, other than slapping the wrist of China Essence " Don't do it again next time".....
Investors need to look beyond the existing situation JV on modified starch and plantation integration moves are coming along within these few years
Actually, there are quite a few silver linings as follows:-
a. Animal feed sales/production has picked up strongly in Q3 of FY2012 [Oct to Dec 2011]. Provides a strong cushion and diversify the revenue base.
b. JV with local company on modified starch to be rolled out any time soon. Noted that Q3 2012, there was no modified starch production at all.
c. Company intends to set up the Research Institute on Potato Seedlings by this year and start their own potato plantation planting in the next year or so. This will remove their reliance on purchasing potatoes from the farmers.
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
Under the Conditions, the Issuer is obliged to redeem HK$30,000,000 in principal amount ("First Redemption") of Bonds (together with accrued interest) on 15 February 2012. However, due to the Chinese Year New holidays in China and the fact that the amount to be transferred was huge, the local government took an unexpectedly long period of time to process the fund transfer application. This resulted in the Issuer not being able to make the due payments under the Conditions on 15
February 2012. The Issuer believes that such delay in the fund transfer application is unlikely to arise again as the Issuer will be monitoring the timeline for the fund transfer application closely in the future.(Amount is only S$6m.......so hard to come out? )
The Issuer is committed to meeting its obligation under the Bonds and is currently in discussions with the Bondholders and Trustee concerning the postponement of the First Redemption. At the same time, the Issuer is working closely with the local government to expedite the fund transfer process. (Postponement????)
(20-02-2012, 07:34 PM)Nick Wrote: Seems there are some issue with the CB repayment. Request for suspension.
20-02-2012, 08:13 PM (This post was last modified: 20-02-2012, 09:02 PM by Underdogger.)
Bingo !!! I am sure that a lot of people will be very eager to dump the shares once the suspension is lifted..
The reason given by the company seemed very crapy - it is akin to going to the toilet to Sh** without bringing along tissue paper... Would u believe the company's silly reason?
This may be an opportune time to accumulate on this counter. This is perhaps one of the darkest period of company's history, after so many years of relentless expansion and growth...
Check out my call on SAH and New Toyo on the other thread...
SWP and SAH have just made an announcement today to set up an escrow account. Payout of special dividends will follow soon!!
Quote:However, due to the Chinese Year New holidays in China and the fact that the amount to be transferred was huge, the local government took an unexpectedly long period of time to process the fund transfer application.
1. Did someone in the company forget to look up CNY in the calendar? I thought they would have known well in advance the exact dates of CNY in 2012, and applied to remit the funds long before that. What a silly "administrative" mistake to make, no?
2. HK$30m is not "huge". I have shares in companies operating in China that regularly pay out HK$500m+ in dividends, and have been paying out dividends from China for more than a decade. Never been an issue.
This reminds me of China Milk which announced on 5 Jan 2010 that:
"The Board wishes to advise that the Company is still currently awaiting clearance from the State Administration of Foreign Exchange (“SAFE”) of the People’s Republic of China (the “PRC”) for the remittance out of the PRC of approximately US$170.56 million, being for the full settlement of the Early Redemption at the Option of the Bondholders (including interest). The Company believes the delay is administrative and procedural in nature and there is no legal obstacle to the remittance of the same."
We all know what happened shortly after - default with no recoveries to date (100% loss) for the China Milk CB holders.
BTW if anyone actually bothered to read up on Avebe they would have learnt that potatoes are not competitive as a source of starch. Starch content in potatoes is lower than other sources like wheat, as a result the cost of potato starch is higher. Avebe survives only because of EU subsidies that allow its European customers to overpay for Avebe's potato starch. China Essence receives no such subsidies, which makes one wonder how it can report such impressive margins.
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