China Agri-Industries: Interim Results for H1/2010

Hong Kong / HK. (cai) The Board of China Agri-Industries Holdings Limited is pleased to present the un-audited interim results of the Company and its subsidiaries for the six months ended 30 June 2010 together with the comparative figures for the corresponding period in 2009. Financial highlights:

• During the period under review, there was a 15,6 percent increase in revenue to 22’686,5 million Hong Kong Dollar (HKD). The oilseeds processing unit remained as the largest revenue contributor.
• The Group´s operating profit for the six months period ended 30 June 2010 was 2’303,6 million HKD, representing an increase of 91,4 percent compared with the same period in 2009. Operating margin increased from 6,1 percent to 10,2 percent.
• Profit attributable to the owners of the Company increased by 28,3 percent over the corresponding period of 2009, amounting to 1’324,3 million HKD. Basic earnings per share were 0,343 HKD (six months ended 30 June 2009: 0,28 HKD).
• The Board of Directors declared the payment of an interim dividend of 0,066 HKD per share (six months ended 30 June 2009: 0,067 HKD per share).

China Agri-Industries Holdings Limited is China´s leading agribusiness and food processing company, engaging in the processing and sales of oilseeds, biofuel and biochemical products, rice, wheat and brewing materials. The Company is committed to providing customers with safe, nutritious and healthy food products that are reasonably priced.

Oilseeds Processing Business Review

The Company is one of the largest bulk edible oil and oilseeds meal producers in China. It processes and sells mainly soybean oil, palm oil and rapeseed oil. The products processed by the Company include bulk edible oils, specialty oils and fats, small pack oil, oilseeds meal and other products.

The oilseeds processing business is the largest revenue contributor of the Company, accounting for 56,4 percent of total revenue and 69,7 percent of total operating profit for the first half of 2010. During the period, the segment´s revenue and operating profit were 12’801,2 million HKD and 1’605,4 million HKD; representing increases of 8,2 percent and 143,3 percent, respectively.

The prices of raw materials and products were relatively stable in the first half of 2010 compared with the corresponding period last year. Sales of products were under pressure for a number of reasons, such as a relatively higher inventory level of imported soybean and palm oil due to massive output of major soybean producing countries, a change in government policy relating to imports of soybean oil and rapeseeds, and sluggish domestic feeds market. Nevertheless, sales of edible oil grew thanks to an effective pricing strategy that meets the demand of its core customers and that ensures the seamless supply of products. The Company sold 930’000 metric tons of edible oil in the first half of this year, generating revenue of 6’839,4 million HKD, an increase of 8,4 percent year on year. Of the edible oil sold, soybean oil accounted for 400’000 metric tons and reported a 50,0 percent growth in revenue over the corresponding period last year; palm oil accounted for 250’000 metric tons and reported 6,8 percent growth in revenue year on year. During the period, the Company sold 1’680’000 metric tons of oilseeds meal and feeds with revenue of 5’259,0 million HKD, down 1,2 percent year on year.

To ensure the stability of raw material supply, the Company closely monitored market trends and procured raw materials in bulk for reserves. It also judiciously entered into hedging arrangements for raw materials and the related products, which sought to manage the inherent risks associated with the price volatility of raw materials and the related products, and in turn enhanced the competitiveness of the Company.

The Company developed a new strong-flavoured soybean oil catering to market needs. The oil could be mixed with other types of oils to create different products. With good nutrition values and flavour, it has strong market potential for uses in Chinese cuisines. Pre-marketing of the new product is underway and it will be launched at an appropriate time. At the same time, the Company has stepped up its marketing efforts to raise awareness of its medium pack edible oil to meet demand from the food and restaurant industry. The efforts have so far yielded encouraging results. In addition, the Company continued to optimise its product mix based on actual needs so as to satisfy the different requirements of customers and create a win-win situation.

The Company continued to improve its strategic planning and boost its production capacity, with a view to solidify its industry leadership. Construction of four new rapeseed processing plants in Anhui, Hubei and Chongqing were approved in the first half of this year. Upon completion of these new plants, crushing and refining capacities will be increased by 900’000 metric tons and 600’000 metric tons, respectively. In addition to the other projects under construction in Shandong, Jiangxi, Guangxi and Tianjin, all eight new processing plants will increase the Company´s crushing and refining capacities by 4’800’000 metric tons and 1’680’000 metric tons respectively. The new plants will begin to commence operation one after the other between the end of 2010 and 2011.

As at the end of June 2010, the Company had a total of seven processing plants in Shandong, Jiangsu, Guangdong and Hubei, with aggregate crushing and refining capacities of 5’580’000 metric tons and 1’830’000 metric tons respectively.

Looking ahead, the Company will continue to expand its business scale and optimise its strategic planning. It will closely monitor and manage the progress of the new plants construction to ensure they can all commence production as scheduled. As for sourcing, the Company will increase its control over raw materials procurement, ensure stable supply of raw materials, and manage risks associated with price volatility in raw materials through effective hedging. In addition, the Company will step up its marketing efforts, optimise sales channels, raise customer service standards, and enhance the marketing of new products. The Company will also seek to boost its share of the medium pack products market and further develop its brands. These measures will go toward enhancing the Company´s overall market share and leadership.

Biofuel and Biochemical Business Review

For the first half of 2010, the Company´s biofuel and biochemical businesses reported revenues and operating profit of 4’979,9 million HKD and 492,4 million HKD respectively, representing surges of 55,7 percent and 63,9 percent over the corresponding period last year.

Biofuel Business

The Company is one of China´s major fuel ethanol producers. It operates the business through two subsidiaries, namely COFCO Bio-Energy (Zhaodong) Co., Ltd. and Guangxi COFCO Bio-Energy Co., Ltd.

Currently, the price of fuel ethanol in China is pegged to the ex-factory price of No. 90 gasoline, which is determined by the National Development and Reform Commission (NDRC). The NDRC has raised the price of gasoline several times since the second half of 2009, resulting in a substantial increase in the ex-factory price of fuel ethanol compared to a year earlier. During the period, revenue from the biofuel business rose 19,8 percent to 2’076,3 million HKD from the corresponding period last year. In particular, fuel ethanol sales reached 190’000 metric tons, translating to a 33,8 percent growth in revenue year on year; sales of crude corn oil and corn DDGS amounted to 200’000 metric tons, representing a 24,1 percent increase in revenue.

During the period, the Company continued to enhance its operational efficiency and to lower cost with a more streamlined production process. Through better communications with PetroChina and Sinopec, the Company was able to play a proactive role in supporting the oil companies´ business development. And by assisting the State Administration for Industry and Commerce in market regulatory work, sales of fuel ethanol rose. In keeping with the growing economy, gasoline consumption rose sharply, which led to a steady growth in both the sales volume and revenue of fuel ethanol.

As at the end of June 2010, the Company operated two plants, one each in Guangxi and Heilongjiang. The plants have a combined capacity of 600’000 metric tons of fuel ethanol, consumable ethanol and anhydrous ethanol. Of which, fuel ethanol alone accounts for 380’000 metric tons.

Looking ahead, the Company will seek to strengthen cost control and provide customers with better quality consumable ethanol using more advanced technology. It will also strive to ensure food safety while managing to meet the customer´s ever-increasing standards for food quality.

Biochemical Business

The Company´s biochemical business is primarily engaged in corn processing. Products include corn starch, sweeteners and feed ingredients.

Prices of corn surged in the first half of 2010, but the growth was outstripped by an increase in the selling prices of corn products thanks to robust market demand. The Company took the opportunity to sell more products and to strengthen its relationship with core customers by ensuring product supply remained stable. As a result, the business reported growth in both sales and revenue. During the period, revenue from biochemical business rose 98,1 percent to 2’903,6 million HKD from the corresponding period last year. Corn starch sales reached 620’000 metric tons, contributing to a 76,4 percent growth in revenue. Sales of sweeteners amounted to 150’000 metric tons representing a 177,3 percent increase in revenue year on year. In 2010, the Company continued to be the official fructose syrup supplier for all seven Coca-Cola and Pepsi Cola bottlers in the north-eastern part of China. The Company has also entered into long-term procurement contracts and established strategic partnerships with high-end customers such as China Resources Snow Breweries and InBev to ensure a stable supply of products. In the area of research and development, the Company continued to develop and launch value-added products catering to customers´ needs, which in turn boosted profitability. Trial production of isomaltooligosaccharide has been successful. The new product is expected to be officially launched by the end of this year.

As of the end of June 2010, the Company operated a total of four plants in Jilin and Shanghai, with a processing capacity of 1’850’000 metric tons for corn, a production capacity of 450’000 metric tons for sweeteners. The Company´s projects under construction in Heilongjiang and Hebei are scheduled to be ready for use by 2011, offering a combined processing capacity of 1’200’000 metric tons of corn. Looking ahead, the Company will strengthen its control over raw materials by promoting quality seedling production and broadening raw material base. Moreover, it will optimise product mix, raise the management standards at existing plants and ensure the new projects can all commence production on schedule. The Company will place greater emphasis on brand–building and provide customers with excellent services while ensuring the quality of products.

Rice Trading and Processing Business

The Company is the largest rice exporter in China and a leading domestic supplier of packaged rice, engaging primarily in the processing and trading of white and parboiled rice. The Company exports white rice to traditional markets such as Japan, Korea, Hong Kong and Macau and parboiled rice to countries in the Middle East, Eastern Europe, Africa, Middle Asia and Americas.

Revenue and operating profit of the rice trading and processing business were 2’122,1 million HKD and 80,5 million HKD for the first half of 2010 respectively, representing decreases of 2,4 percent and 65,4 percent over the corresponding period last year.

International demand for rice was relatively sluggish in the first half of 2010 due to massive output from rice producing countries like Vietnam, and Thailand, as well as surplus inventories in traditional rice importers such as Middle Asia, the Middle East and South Africa, resulting in a decline in the Company´s exports and average selling price. Nevertheless, the Company was able to solidify its leadership and enhance its share of the business in core markets including Japan, Korea, Hong Kong and Macau, thanks to its strong business acumen and an effective pricing strategy. The Company exported 210’000 metric tons of rice in the first half of the year, generating revenue of 985,3 million HKD; a decrease of 37,6 percent year on year.

China´s export quota of rice in the first half of the year was lower compared to the corresponding period last year due to changes in government policies. Nevertheless, the Company received a quota of 340’000 metric tons, representing 81,6 percent of the total. As a result, the Company´s premier position as a main Chinese rice exporter is maintained.

Domestically, the Company stepped up its rice business development efforts and accelerated penetration in key markets with the setting up of 16 sales offices as of the end of the interim period. The Company´s sales network now covers 30’000 points of sales such as hypermarket, supermarket and food store in 240 key cities. Moreover, the Company continued to maintain close partnerships with major supermarket chains such as Walmart, Carrefour and Metro, which helped boost sales volume and revenue significantly. During the period under review, the Company sold 230’000 metric tons of rice domestically, generating revenue of 925,3 million HKD, an increase of 89,3 percent year on year.

To raise the profile and market share of its products, the Company took initiatives to build a key distribution network for its mid-to-high-end brands and has actively expanded its customer base by strategically co-operating with large-scaled international catering chains such as Yum!.

During the period, the Company actively optimised its raw materials procurement plans and strengthened risk management to ensure the quality of grains. Using a mixture of measures such as contract farming, direct sourcing, trading, reserve rotation and government reserve auction, the Company has been able to broaden its sourcing channels, effectively alleviating the pressures of increasing grain prices. As at the end of June 2010, the Company operated three rice processing plants; one each in Liaoning, Jiangxi and Jiangsu, with a total production capacity of 530’000 metric tons.

The Company will further refine its strategic planning, expand capacity expansion and grow market share, with a view to become one of China´s largest rice processing enterprises. At present, the Company is constructing a total of five new rice processing plants in major paddy rice-growing regions such as Heilongjiang, Jilin, Liaoning and Ningxia. Upon completion, the new plants will add to the Company´s rice processing capacity 740’000 metric tons and are expected to commence operation one after the other between the end of 2010 and 2011.

Looking ahead, higher rice prices and the expansion into China´s market by domestic and foreign food companies are likely to drive further consolidation in the rice industry. On one end of the market, rice products are likely to be increasingly traded. On the other end of the market, a growing emphasis will be placed on brands. In view of this, the Company will step up its efforts to build a business model that covers the entire value chain. By refining its procurement system and tightening control over raw materials sourcing, the Company will actively develop its domestic business and branded retail business to propel further growth in upstream and downstream businesses and reinforce its market leadership in China.

Wheat Processing Business

The Company is one of the largest wheat processors in China engaging in the sales of general purpose flour, customised flour as well as other flour products such as noodles and breads.

Revenue and operating profit from the wheat processing business for the first half of 2010 amounted to 1’965,4 million HKD and 53,4 million HKD respectively, representing an increase of 17,9 percent and a decrease of 13,6 percent over the corresponding period last year.

During the first half of the year, price increases in flour and flour products lagged behind that of raw materials, which rose continuously to a greater extent. With product price hikes outstripped by those of raw materials and with keen competition in the industry, operating profit was down from the corresponding period last year despite the increase in revenue.

In spite of the difficult operating environment, the Company pushed ahead with its «integrated operation and professional management» strategy regarding sourcing and sales. For sourcing, the Company implemented contract farming and strategic procurement to secure wheat supply in major growing regions and lock in prices. As for sales, the Company continued to improve its product and customer mix to minimise any adverse impact on its business led by unfavourable market conditions. Leveraging its competitive advantages in technology research and development, the Company provided large-scaled food enterprises with a wide range of comprehensive sourcing solutions. In the first half of the year, the Company sold 550’000 metric tons of flour, generating revenue of 1’527,4 million HKD; an increase of 12,1 percent year on year. Of the flour sold, general purpose flour and customised flour accounted for 170’000 metric tons and 380’000 metric tons, respectively, representing a drop of 4,9 percent and a growth of 20,8 percent in revenue, correspondingly.

As at the end of June 2010, the Company operated a total of eleven plants in Hebei, Henan, Jiangsu, Liaoning, Fujian, Shandong and Beijing with aggregate processing capacities of 2’010’000 metric tons for wheat, around 70’000 metric tons for dried noodles and around 2’000 metric tons for bakery products. Looking ahead, the Company will seek to grow its production capacity steadily to strengthen its industry leading position. It will offer the Company greater control over procurement and costs of raw materials, which is in line with its strategic planning. The Company will also maximise its product and customer mix to make products even more competitive.

Brewing Materials Business

The Company is a leading supplier of brewing materials in China engaging in the production and sales of malt. Its malt production plant, which is the largest in China, is equipped with technologically advanced facilities for the production of top quality products for sales to mainly domestic buyers and Southeast Asian countries.

During the period, revenue from the brewing materials business was 818,0 million HKD, representing an increase of 10,1 percent over the corresponding period last year. Segment operating profit was 126,2 million HKD, representing a major turnaround from an operating loss of 3,5 million HKD at the same period last year.

During the first half of 2010, prices of malting barley in the international market dropped significantly over the corresponding period last year, stimulating market demand for malt. The Company seized the opportunity to sell more malt, resulting in higher sales and revenue. During the period, the Company sold 250’000 metric tons of malt, generating revenue of 794,0 million HKD, an increase of 8,7 percent over the corresponding period last year. Of the malt sold, domestic sales accounted for 190’000 metric tons, representing a growth of 8,8 percent year on year; exports accounted for 60’000 metric tons, an increase of 8,6 percent year on year.

During the period, the Company enhanced its operation with better management. Proactive measures were taken to help clear pricey inventories from 2009. At the same time, the Company took advantage of lower prices to stock up on raw materials and sold products opportunistically. As a result, operating profit was up significantly from the corresponding period last year.

As for sales, the Company focused on network expansion and relationship building with core customers while developing new markets. The measures helped lift the Company´s market share from the corresponding period last year. In the area of research and development, the Company´s continued efforts in product and technology innovations have resulted in specialized malt products which not only meet market needs but also have broadened the Company´s revenue stream.

At of the end of June 2010, the Company has two malt plants, one each in the provinces of Liaoning and Jiangsu, with an aggregate production capacity of 660’000 metric tons. In addition, the Company is constructing a plant with a production capacity of 80’000 metric tons in Inner Mongolia, to be completed by the end of 2010.

Looking ahead, in view of China´s enormous market potential and of positive development in the brewing materials industry, the Company will seek to strengthen its control over raw materials, optimise its product mix, improve its competitiveness to continue to provide customers with products that are safe, nutritious, healthy and reasonably priced, as well as quality and timely services.

Financial Review – The Group´s Results for the Period

The economy of China continues to maintain its growth edge since the beginning of 2010 and the overall performance of national economy remained satisfactory, its development is getting more stable. Given the downstream businesses of the Group gradually picking up their demands, the sales of products was facilitated which in turn made the selling prices of our major products go up over the corresponding period of last year. For the six months ended 30 June 2010, the Group recorded a growth in revenue of 15,6 percent, up from 19’616,6 million HKD in the corresponding period of 2009 to 22’686,5 million HKD during the period. The oilseeds processing unit remained as the largest revenue contributor to the Group among the five segments, which accounting for 56,4 percent and 69,7 percent of the Group´s total revenue and segment results during the period, as compared to 60,3 percent and 54,8 percent over the corresponding period of last year, respectively. During the period, the Company adjusted its product sales strategy to facilitate extension of food chain and enhance the synergy. In addition, through the effective hedging policy and marketing strategy, the Group was able to mitigate the adverse impact of prices increment in raw materials. In particular, significant improvement was attained for the oilseeds processing business, biofuel and biochemical business and brewing materials business. Accordingly, the Group´s profit attributable to the owners of the Company reached 1’324,3 million HKD, an increase of 292,4 million HKD from 1’031,9 million HKD in the corresponding period of 2009, and the basic earnings per share rose to 0,343 HKD from 0,280 HKD over the same period in last year.

Finance costs increased by 23,2 percent to 145,2 million HKD during the period, which was mainly attributable to the new loans raised to meet the requirement of working capital. Nonetheless, the rise of finance costs lagged behind the loans increment due to the benefit of a low interest rate environment during the period. Income tax expense was up 48,7 percent over the corresponding period of last year to 375,8 million HKD (six months ended 30 June 2009: 252,8 million HKD) which was mainly due to improvement in profit as a result of enhancement of profitability.

Financial Review – Segment Results

For the six months ended 30 June 2010, revenue from the oilseeds processing business amounted to 12’801,2 million HKD, representing an increase of 8,2 percent over the same period of last year under the rebound of oilseeds product prices and considerable increase in sales volume of soybean oil. As the impact of the financial crisis faded, the prices of oilseeds products were picked up, in which 15,4 percent and 14,3 percent of growth in selling prices of soybean oil and palm oil were recorded. In the wake of the positive sentiment in the market, the sales volume of soybean oil jumped 30,0 percent, while the sales of soybean meal dropped because of the unfavourable conditions of livestock industry. Profit margin was improved through enhanced operational management and effective hedging policy. For the six months ended 30 June 2010, the gross margin of the oilseeds processing business was 14,9 percent (six months ended 30 June 2009: 5,9 percent). As our oilseeds processing business strives to fortify and enhance its leading position in the industry, coupled with active capacity expansion, the sales volume of oilseeds products is expected to uplift steadily.

For the six months ended 30 June 2010, revenue from the biofuel and biochemical business amounted to 4’979,9 million HKD, representing a significant increase of 55,7 percent over 3’198,9 million HKD in the corresponding period last year. The financial crisis had demonstrated its effects to a larger extent last year. While the economic recovery has driven up significant improvement in prices and sales volumes of our major products which fueled the revenue growth this year. As for biofuel business, under the effect of upsurge of international oil price, the selling price of fuel ethanol rose 27,5 percent over the corresponding period of last year. Regarding biochemical business, the prices of starch and sweeteners surged 36,2 percent and 29,1 percent respectively and the sales volumes of which jumped over the same period of last year, in turn provoking the growth of revenue. In spite of a rise in raw materials price, the profit margin during the period increased to 14,8 percent from 9,7 percent in the corresponding period last year, which was mainly attributable to the increasing demand of starch and sweeteners and the successful transfer of cost increments to customers.

Regarding the rice trading and processing business, a slight drop was recorded for its sales revenue to 2’122,1 million HKD during the period from 2’173,4 million HKD, which was mainly attributable to the growth of domestic sales business offset by the dip in revenue from export sales business. The Group remained as the largest rice exporter in China. However, the export sales volume dropped by 37,3 percent during the period due to weak demand of rice from the international markets and relatively large increase in domestic raw materials costs. Nevertheless, domestic sales sustained a rapid growth and increased by 56,9 percent to 230’000 metric tons during the period as compared with 150’000 metric tons over the corresponding period of last year as a result of the efforts in marketing activities and promotions, expansion of domestic market share and strong development of sales channels. In the meantime, revenue from domestic sales business climbed up 89,3 percent to 925,3 million HKD.

During the period, profit margin decreased to 14,2 percent with the drop in export sales proportion but increase in domestic sales proportion. Sales revenue of 818,0 million HKD was materialised for the brewing materials business for the six months ended 30 June 2010, representing an increase of 10,1 percent over the same period last year. The surge in revenue was arising from the dramatic increase in sales volume of malt by 21,6 percent during the period as compared with the corresponding period in last year. Timely procurement was made by the Group during the period with an accurate judgement of the market trend. As a result, the drop in costs of raw material outweighed the drop in product selling prices, leading a surge in profit margin of the brewing materials business to 23,7 percent, which represents an increase of 18,4 percentage points over the corresponding period of last year. The Group will continue to consolidate customers´ network and strengthen marketing efforts in anticipation of enhancement of market share.

During the period, revenue from the wheat processing business rose 17,9 percent to 1’965,4 million HKD, which was mainly benefited from the increases of 5,1 percent and 6,6 percent in sales volume and selling price of flour, respectively. Given the relatively large upsurge of raw materials costs and the rise of product prices lagging behind the increasing raw materials cost, the profit margin dropped over the corresponding period of last year. During the period, the profit margin of the wheat processing business was 8,7 percent, as compared to 10,1 percent in the corresponding period last year. It is believed that the wheat processing business will continue to grow through capacity expansion, product mix optimisation and development of high-end products.

Info: China Agri-Industries Holdings Limited – Announcement of interim results for the six months ended 30. June 2010 – press release (PDF; 29 pages; 312 KB).