China Essence

[jzk]

...If the potato purchase price is fixed based on existing opportunity cost of growing another crop other than potato, the company does not seem to be in a position of bargaining power.

That is the business risk, which devastated 2012 results. Should it happen again, the company would be out of business sooner rather than later. One has to live with it, and at least I was stunned by the magnitude of profitability drop last winter. When buying my shares earlier, I was mentally prepared for certain possibility of being screwed by either Chinese government or largest shareholders. Business risk of this magnitude was an extremely distant outlier possibility - but here we are... Still owning the shares, though.

...ie at the mercy of government to provide minimum income to the farmers ... Is the company merely a tool for the govt to achieve its social objectives at the expenses of investors ?

I think this asymmetry applies to all Chinese agriculture stocks. And natural resources. And banks. You just have to calculate decent price discount for that. It can't be zero and it can't be 100%. The truth lies somewhere in between.

[Stockerman]

Is essence stuck at both ends ?

One one hand, it has to pay decent income to farmers ..

On the other hand, it cannot pass on higher cost of raw materials to its distributors for the fear that they might go out of business ?

No bargaining power in short ..,,

[Curiousparty]

With the current climate towards S chips and reports surfacing that China's economic data might be fabricated, this counter might not see the light at the end of the tunnel any time soon...

No news of CB 2nd installment payment yet - is it a delay in payment again?

[potatolover]

There has been many reports about the future possibility of potato being traded as a commodity in China.

Will this be detrimental to starch makers?
Starch makers such as China Essence have to keep long positions on potato since a regular supply of potato is needed. (i.e. at the mercy of speculators in the market)

To what extent will starch markers be exposed to price volatility of potato when it becomes traded as a commodity?

(In the last FY, we have seen how the sharp decline in potato/starch price severely impacted the company.)

Any views pls?

---

http://www.chinaeconomicreview.com/china...to-futures



China's agri commodities bourse to launch potato futures
Submitted by alex.folkenflik on 14 May 2012 - 5:23pm
The Zhengzhou Commodity Exchange (ZCE), one of China's two agricultural commodities exchanges, is considering introducing potato futures trading among a raft of new agricultural contracts set to launch later this year, Qiao Jianhui, the exchange's media director, told the Global Times, without revealing a specific timetable.

China is quickly working to diversify its futures markets, especially for agriculture products, in a bid to stabilize spot commodities prices in the face of mounting domestic demand, Guo Shuqing, head of the China Securities Regulatory Commission, the nation's securities watchdog, said at a media conference on March 29.

As the world's largest consumer and producer of agricultural commodities, China has only launched trading of 13 futures contracts for these goods, although there is a huge push underway to introduce more contracts to the market, Liu Xingqiang, CEO of the Dalian Commodity Exchange, China's other agriculture futures exchange, said on March 6.

[Stockerman]

Do you know why speculators usually outwit starch makers?

Because speculators know that starch makers always need to LONG potato, and given the seasonality of the requirements for potatoes to make starch, think starch makers are going to get it big time from the speculators...

it is akin to the forex markets. If you are an exporter or importer, and the forex rates are against you, do you wait until the cow comes home before you do the forex exchanges? the answer is NO. U just take whatever the markets throw at you..

Anyway out for starch makers? yes..they have to do hedging...additional expenses and hedging by itself is a GAMBLE too. At what price to hedge and how much volume to hedge?

[jzk]

You guys are getting desperate... The last few posts suggest, that commoditizing starch would somehow hurt starch producers, which is insane. Speculators find their ways to any market available, but it certainly isn't the producer who gets hurt. Usually commodity producers use the derivatives market to match selling prices with investment/purchase costs, and that's exactly what China Essence needs to do in the future.

Through the last decade until 2011 the company was able to produce a constant positive ebit in the range of +23%...+42%. Fiscal year 2012 was horrible due to price mismatch (and the following cash flow/receivables problem) last winter, which could and would have been avoided, should there have been a market for confirming the selling price in advance.

In the long term commoditizing would only be a problem if it miraculously lowered starch price permanently in relation to production costs. Examples of prudent commodity trading by producers can be found easily by watching any of the large oil, mining, steel or electrical companies. The only agent getting constantly screwed by the commodity market are the clients of commodity hedge funds and/or investors in commmodity based structured products. The biggest relative gainers are hedge fund managers as long as they find new customers, but some monetary joy is also spread to the producers.

(Cash flow/receivables problem of course still exists. No news of delays in the partial CB payback so far should be good news, huh?)

[Curiousparty]

Just need to look at JP Morgan...

hedged wrongly and super massive LOSSES... Hedging is like gambling . Mark my word

You guys are getting desperate... The last few posts suggest, that commoditizing starch would somehow hurt starch producers, which is insane. Speculators find their ways to any market available, but it certainly isn't the producer who gets hurt. Usually commodity producers use the derivatives market to match selling prices with investment/purchase costs, and that's exactly what China Essence needs to do in the future.

Through the last decade until 2011 the company was able to produce a constant positive ebit in the range of +23%...+42%. Fiscal year 2012 was horrible due to price mismatch (and the following cash flow/receivables problem) last winter, which could and would have been avoided, should there have been a market for confirming the selling price in advance.

In the long term commoditizing would only be a problem if it miraculously lowered starch price permanently in relation to production costs. Examples of prudent commodity trading by producers can be found easily by watching any of the large oil, mining, steel or electrical companies. The only agent getting constantly screwed by the commodity market are the clients of commodity hedge funds and/or investors in commmodity based structured products. The biggest relative gainers are hedge fund managers as long as they find new customers, but some monetary joy is also spread to the producers.

(Cash flow/receivables problem of course still exists. No news of delays in the partial CB payback so far should be good news, huh?)

[Curiousparty]

For AR 2012 - Just noticed that CEO did not sign off the Directors’ Report and Statement by Directors? (page 34, 35)

Too hurried printing and left out in error?

Is this allowed?

---

A/R Ageing Analysis

$280mil past 60 days and beyond not collected!!! This looks bad

First time in history??

[jzk]

Expecting Q1 report in a week and a half. Nothing much to expect, naturally the most interesting points will be cash situation and receivables collection. One would also expect comment on loan refinancing, eventhough the company has a habit of announcing these separately.

My personal expectations:
-Back in black.
-Positive guidance for FY should come at some stage, however not necessarily yet.
-Cash flow improving, receivables collection still slow.
-Vague comments on refinancing progress.
-Vague comments on modified starch partnership.

[Stockerman]

Just pray that it has enough cash flow to pay CB and buy potato ...
Don't expect much from this counter unless someone decides to deliberately push up its price ...

Honestly it is a 50% 50% situation . Just got to be mentally prepared ....

Expecting Q1 report in a week and a half. Nothing much to expect, naturally the most interesting points will be cash situation and receivables collection. One would also expect comment on loan refinancing, eventhough the company has a habit of announcing these separately.

My personal expectations:
-Back in black.
-Positive guidance for FY should come at some stage, however not necessarily yet.
-Cash flow improving, receivables collection still slow.
-Vague comments on refinancing progress.
-Vague comments on modified starch partnership.