China Essence Group Ltd - Results slightly ahead of our forecasts; warns of challenging times ahead

Earnings ahead of our forecast ? China Essence reported a net profit of RMB81.2m in 3Q09, reflecting a yoy decline of 19.5%. 9M09 earnings of RMB161.3m accounted for 86% of our forecasts versus approximately 70% of consensus estimates. Selling and distribution cost and administrative expenses decreased 13.8% and 27.6% respectively, leading to a 2% increase in 3Q09 operating profits.

Challenging outlook ahead ? Given the dynamic and rapidly changing global business environment, management has guided for a challenging outlook for FY09~10F. To sustain demand, the Group has further reduced the selling price of potato starch in Jan 2009 by approximately 10% or RMB500/tonne.

Potato protein and potato fibre updates ? China Essence has commenced large-scale production in late September 2008 and has sent samples of potato protein to local and international distributors for further testing. The Group is cautiously optimistic that it will be able to secure orders from these customers and anticipates this to be a key performance driver in the 4Q09, though we remain skeptical. China Essence has completed the trial run of the potato fibre production facility and would likely to commence in May 2009, later than expected. As such, we have pushed back contribution from potato fibre to 2Q10F.

Maintain Hold; Target price of S$0.25 We raise our FY09F earnings estimates by 3.0%, due to a better than expected 3Q09, implying a 61.2% qoq decline in 4Q09F earnings amid the challenging economic climate. Given that the stock is already trading at 2.4x FY09F P/E and a 57% discount to book value, we maintain HOLD, valuing China Essence at S$0.25, pegged at an unchanged 0.5x FY09F P/B.

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