China Essence

[rstopel]

http://gain.fas.usda.gov/Recent%20GAIN%2...8-2012.pdf

fyi

[Stockerman]

Does anyone know the price of ex-factory potato starch price in China now, the northeast region?

Tks.

which part of northeast?
what yr price there? i check with my contact.

Tks so much . In Heilongjiang and Inner Mongolia region .
If starch price is still depressed, company will be in for another year of heavy loss ...

[pianist]

sorry i was unable to find

[Curiousparty]

Company is dying.. Low starch price and slow A/R collections, bad debt mounting...

Going to meet CB repayment .....will be suspended soon ...

[Stockerman]

Do you mean to say company has missed its CB repayment today?

Company just issued SGX announcement that it has difficulty paying a meagre HK$30mil....

Is this to be expected? somehow share price surged to about 5.5 cents on speculation that company will meet its debt obligation on time. Again, investors have been proved wrong!
think will see massive dumping back to 1 to 2 cents...surprised that company did not issue a trading halt and suspend trading as was previously done...

Company is dying.. Low starch price and slow A/R collections, bad debt mounting...

Going to meet CB repayment .....will be suspended soon ...

[Underdogger]

The bankruptcy cycle usually goes this way

1. Selling price drops
2. Delay in payment by customers
3. Huge overhanging A/R
4. First appearance of bad debt
5. More bad debt as customers facing credit crunch
6. Supply chain malfunctions – e.g. production drops but price doesn’t improve
7. Scale down in production level but to no avail; prices never recovers
8. Selling of assets at steep discount to NAV
In each of these steps, the one with the greater room for creative accounting is Step 3.

NAV does not apply in case of "distressed sales". When ferrochina kicked the bucket, im sure it had high NAV on paper.
So, technically equity holders should get back some money but instead they got back some toilet paper from SGX..

It is a slow death process - worse than being on "death row". For "death row", u still can count down and roughly know which day u will be hanged.

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The ex-CEO/now Chairman came out to save the company back during the start of the year during the CNY period.
This time around, company will not be so lucky again. Probably, he is preparing to "run road"...Retiring into Chairman behind the scene, and this way, it is very easy to run away when anything goes wrong...

Pai Pai Pi Gu Pao Diao !!!

[potatolover]

I think Essence is slowly grinding its way to death.

If it cannot collect A/R fast enough, it cannot repay local banks in time and local banks will not roll over loans. Company further reduces production and total unit cost further goes up, making it harder to even make ends meet.

How to break the vicious cycle? Starch price has to improve but we are not seeing an improvement despite the drop in production/supply.

One possible explanation is that in fact at the overall level, there is no drop in supply despite Essence's reduction in supply. Other companies have stepped up to cover Essence's drop in production. Can we trust the news article report?

The other possible explanation is that there was already a huge overcapacity in the potato starch industry just before the plummet in starch price back in 2011. we are talking about at least 100% spare capacity at the national level...The tell tale sign of this is that even when a lot of the companies cut back their production, starch price never recovers.

Given the economics, at the current level of starch price and cost of potatoes (remember how the Chinese Govt safeguards the farmers), we will see more and more big starch manufacturers close shop, unless they are already well-diversified right from the start (i.e. not relying on potato starch but has other forms of business).

The bankruptcy cycle usually goes this way

1. Selling price drops
2. Delay in payment by customers
3. Huge overhanging A/R
4. First appearance of bad debt
5. More bad debt as customers facing credit crunch
6. Supply chain malfunctions – e.g. production drops but price doesn’t improve
7. Scale down in production level but to no avail; prices never recovers
8. Selling of assets at steep discount to NAV
In each of these steps, the one with the greater room for creative accounting is Step 3.

NAV does not apply in case of "distressed sales". When ferrochina kicked the bucket, im sure it had high NAV on paper.
So, technically equity holders should get back some money but instead they got back some toilet paper from SGX..

It is a slow death process - worse than being on "death row". For "death row", u still can count down and roughly know which day u will be hanged.

---

---

The ex-CEO/now Chairman came out to save the company back during the start of the year during the CNY period.
This time around, company will not be so lucky again. Probably, he is preparing to "run road"...Retiring into Chairman behind the scene, and this way, it is very easy to run away when anything goes wrong...

Pai Pai Pi Gu Pao Diao !!!

[specuvestor]

^^As discussed earlier, they are killed by 2 things: their capex expansion which will hurt their ACCOUNTING PnL for years to come. But that is sunk cost and shareholders since then had paid the price.

2ndly is their high OPEX to support their enlarged capacity. That is the real killer in cashflow as operating leverage bites the other way. Company can give up on the new plant and lay it waste, or continue to be burdened by the OPEX. Whether they can do so politically is another question.

Assuming they are still the largest starch manufacturer, local banks will likely to support their working capital needs up to a point. But paying off foreign creditors or adding value to shareholders are unlikely to be a priority.

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.

[Stockerman]

**********
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.
If it is due to delay in fund transfer, why did CEO need to come out first with $12mil HK?

Under the Conditions, the Issuer is obliged to redeem HK$30,000,000 in principal amount (“Third
Redemption”) of Bonds (together with accrued interest) on 31 December 2012. However, due to the
challenging operating environment over the past few months, which was partially attributable to
decreasing potato starch prices worldwide, the Issuer experienced suppressed seasonal sales
volume and turnover. In addition, the difficult environment has affected the Issuer’s customers,
leading to a slow repayment of the Issuer’s receivables. As such, the Issuer faces difficulties in raising
sufficient funds to make timely payment of the Third Redemption.
In Q2 results, company said starch price has recovered marginally. Now, company is saying potato starch price worldwide is falling...

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Published December 29, 2012
China Essence faces problem redeeming HK$30m bonds
Insufficient funds with sales down and slower receivables payment
Byjasmine ng print |email this article CHINA Essence Group, which has to redeem HK$30 million (S$4.73 million) worth of convertible bonds on Dec 31, is experiencing difficulty making the payment on time.

The potato products maker cited an adverse operating environment - partly the result of lower potato starch prices worldwide, which have dampened sales volume and turnover. The difficult environment also affected customers, leading to slow repayment of the company's receivables, said China Essence.

The "third redemption" payment due is part of an instalment repayment plan for a HK$250 million issue of zero coupon guaranteed convertible bonds issued in 2006 and originally due in 2011.

Under an amendment last December, the principal amount was restated as HK$260 million with the maturity date postponed to Dec 31, 2014, and the bonds to be redeemed in instalments on various specified dates.

In a statement yesterday, China Essence's executive chairman Zhao Libin said the firm is obliged to redeem the HK$30 million in principal amount due (together with accrued interest) next week, on Dec 31.

But because of the difficult environment, "China Essence faces difficulties in raising sufficient funds to make timely payment of the third redemption".

China Essence said it is now in discussions with the bondholders and the trustee, Hongkong and Shanghai Banking Corporation, concerning the postponement of the third redemption.

"The issuer is expending all resources to hasten the recovery of its receivables and hopes to satisfy payment of the third redemption as soon as practicable," Mr Zhao said.

For its second quarter ended Sept 30, China Essence's net loss more than doubled to 35.83 million yuan (S$6.93 million) from 16.04 million yuan as revenue dived 71 per cent to 56.86 million yuan.

It expects the challenging business environment to continue for the remaining period of FY2013 despite the gradual recovery of potato starch prices.

[Stockerman]

dropping back below 5 cents....trading halt and suspension will follow soon since it is very unlikely deadline of 31 Dec 2012 can be met