China Food Company Plc A leading Chinese manufacturer of cooking and dipping sauces Interim Results Presentation September 2013
Overview • Established in 1994, CFC has two businesses – manufacture and distribution of cooking and dipping sauces (soya, vinegar and ancillary products) – manufacture and distribution of animal feed • Joined AIM in December 2007 • Headquartered in Singapore with principal operations in Shandong province, China
Chinese Economic Landscape • 2013 is another transitional year for China • Chinese economy eased to 7.5% in Q2 2013 from 7.7% in Q1 2013 and is targeted to grow by 7.5% in the full year • Strong retail sales growth in China of 12.7% in H1 2013 (source: National Bureau of Statistics) • Retail sales increased by 13.4% in August 2013, with food sales showing the largest increase (source: UKTI) • Consumer Price Index is running at 2.6% in August 2013, of which food prices remained the main contributor at 1.54% (source: UKTI) • Consumer demand still strong but with more emphasis in demand for mid-range products • China Food’s response to consumer focus on price and quality is to introduce new products and packaging at different price points • China Food well placed to capitalise on the significant rate of change in China
Interim Results 2013: Highlights • Adjusted EBITDA loss of £770,000 (H1 2012: (£1.7 million)) • Sales of mid–range soya sauce product grew from £2.8 million to £2.9 million despite overall fall in marketing spend of approximately £2 million • Total condiment sales of £6.3 million (H1 2012 £9.7 million) reflecting reduced marketing spend and streamlining of distribution network to focus on core geographic regions • New animal feed facility fully commissioned and operational from March 2013 with overall tonnage rates expected to nearly double in H2 and a return to profitability after a small loss for H1 2013 • Sale of animal feed business underway with an expected completion date of summer 2014 • Strong cash position of £5.6 million as at 30 June 2013 subsequently augmented by raising of £850,000 before expenses through a subscription of Convertible Loan Notes to cover HQ costs • Strengthened board and management team in place to drive streamlined business to sustainable profitability
Financial performance of continuing business H1 2013 H1 2012 Total 2012 £'000 Xaka 649 2,468 6,412 Hao Tai Tai 2,861 2,815 5,319 Soya sauce 3,510 5,283 11, 731 Vinegar/Bean 2,823 4,416 Paste 8370 Total revenue 6,332 9,699 20,101 Margin Soya sauce 630 1,029 3,140 Vinegar/Bean 933 1,628 3,033 Paste 2,657 6, 173 Add Back Depreciation 611 947 1,486 Gross Margin 1,544 3,604 7,659 Gross Margin % 34% 37% 38% Soya sauce 18.0% 19% 27% Vinegar/Bean 33.1% 36.0% 36% Paste Margin 25% 27% 31% EDITDA (before distributor clearance (770) (1,670) (1,407) costs)
China Food’s key products Hao Tai Tai Increasing demand in Shandong and the surrounding regions Hao Tai Tai sales returning to growth following refocus at £2.9 million for period (H1 2012: £2.8 million)
Condiments business • Refined distribution network • Marketing expenditure reduced by approximately £2.0 million; increased emphasis on balancing marketing spend with sales volume • Investment in development of new products and price increases to be launched from H2 2013 • Hao Tai Tai, Group’s mid-range soya sauce product, grew during the period to achieve revenues of £2.9 million (H1 2012: £2.8 million) • Sales of Xaka reduced due to lower marketing spend and refining of distributors • In the second half of 2013, revenue vinegar and bean paste during the period was £2.82 million (H1 2012: £4.42 million), with bean paste suffering from increased competition • Sales of condiments during the autumn festival have been strong • Identified efficiencies in the manufacturing process: reduced fermentation period from 180 to 120 days enables Group to increase production capacity, reduces energy costs and quicker response to changes in consumer taste • Adjusted EBITDA shows a £ 820,000 significant improvement in H1 2013 over H1 2012 • With the initiatives that are being instigated, EBITDA is expected to become positive in H2 2013
Marketing approach • In 2013, marketing spend is becoming more balanced to sales volumes – Emphasis is on supporting the distributors, rather than brand-building • Marketing expenditure reduced by approximately £2.0 million
Production: Quality and food safety • Manufacturing meets international requirements at a time when food safety is of paramount importance to Chinese consumers – China Food uses only GMO-free soybeans – Certifications such as ISO22000, HACCP and BRC • The Board believes that China Food’s facility is one of the top 20 in China • Total capacity of 50,000 tonnes per year of raw soya sauce
Animal Feed Business • Made a loss of £147,000 during 4 months of operations, and now trading profitably • Sale of the business managed by PwC, likely to be completed by summer 2014 • Fully commissioned compound feed line which commenced production in March 2013, tonnage rates at the year expected to be approximately 9,000 per month, which is practically double that of 2012 • Revenues impacted by the effect of H7N9 on the overall poultry industry, however the business is expected to become profitable in H2 2013 and overall for the year • Company well placed to operate in the changing market – has the equipment, skilled personnel, laboratory control and qualified nutritionists • Post-sale, China Food will increase focus on condiments business and inject new capital into the Group to repay its debts and provide additional working capital to the condiments business
Group strategy • Operating in a fragmented market, with many small manufacturers who cannot compete with China Food’s standards of production • Group is well positioned within the Chinese market to continue to increase its market share organically, as well as capitalising on opportunities for consolidation as appropriate • Focus on streamlining distribution network and removing underperforming distributors • Following the disposal of the animal feed business, the Company will be fully focused on the development of condiments
Board and Management Changes • Daniel Saw appointed as Non-Executive Director with effect from 31 July 2013 – Bringing considerable sector expertise from extensive experience of working with Chinese food manufacturers • Fung Shek Lee (“Jeffrey”) as Managing Director (Condiments) with effect from 16 October 2013 – He brings significant sales and distribution experience with branded consumer companies in Greater China, South East Asia and the Middle East • Ricky Mak King Pui as Chief Financial Officer (a senior management position) with effect from 1 August 2013 – Based in China, he has significant international experience working with listed companies
Board and Management Changes • Paul Fu will be stepping down as Chairman of China Operations with effect from mid-October 2013 • Feng Bo will be stepping down as Chief Executive Officer to focus on the running of the animal feed business and its sale • Raphael Tham will move from his current role as Executive Director to become a Non- Executive Director of the Group, with effect from 1 December 2013 • On conclusion of the sale of the Group’s animal feed business, which is expected to conclude during the summer of 2014, it is anticipated that John McLean will become Non- Executive Chairman.
Cash • Successfully put in place a structure to enable the Group to move funds out of China • On 6 September 2013, Group raised £850, 000 before expenses through subscription of Convertible Loan Notes • At the same time, a number of parties converted existing unsecured debt owed to them by the Company; this included three directors who converted debt totaling £390,000 • Group’s borrowings increased to £12.0 million (H1 2012: £8.5 million) • Strong cash position of £5.6 million as at 30 June 2013 (H1 2012: £7.2 million) and £5.9 million as at 31 August 2013
Outlook for China Food • Ongoing growth in Chinese economy reflected in strong retail sales growth in China of 12.7% H1 2013 • Following sale of the animal feed business – Increase focus on condiments business and inject new capital into the Group – Repay its debts and provide additional working capital to the condiments business • Northern China condiments market remains strong • Subdued sales for H1 2013 reflect the refocusing that has taken place, although the Board maintains confidence in the medium and longer term growth prospects • Operational changes are focused on driving profitability, although this is impacting revenues in the short term • The Board expects a stronger second half, and anticipates that both businesses will be EBITDA positive
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