China Essence - Potato protein & fibre production updates; in line with our expectations

Potato protein successfully passed production trial runs and independent third party test ? China Essence has sent sample products to an independent third party accreditation board, the China Commercial Union of Feed Quality Supervision and Testing Centre, which successfully passed all the test as of 20 November 2008, after successful test trials for the production line of potato protein took place for 10 days in November 2007 and 3 weeks in September 2008. As noted in our previous report dated 13 Feb 2009, 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. We understand from management that the Group has the ability to ramp up production quickly once firm orders are received from the customers for the next harvest season.

Potato fibre to commence production in May 2009 ? As with potato protein, China Essence has completed the trial run of the potato fibre production facility and have successfully passed 2 rounds of tests conducted by the same accreditation board as of 13 January 2009. The Group has sent sample products, to be fed to piglets and calves on a trial basis, to an animal-rearing organization under the local Heilongjiang government to conduct further testing and expect testing to be completed by May 2009. According to China Essence's announcement, there are approximately 40,000 tonnes of dried unprocessed potato skins under storage and rescheduling of commercial production of potato fibre from December 2008 to May 2009 will lead to cost savings in fuel.

Upgrade to BUY; Target price maintained at S$0.25 We maintain our FY09F earnings estimates, as we have adjusted our estimates in our report dated 13 February 2009. Based on last transacted price of S$0.205, China Essence is trading at 2.2x FY09F P/E and a 60% discount to FY09F book value. Given that stock price has fallen 7% since our last report from the broad market sell off, we believe value has emerged with 22% upside potential to our target price of S$0.25, pegged at an unchanged 0.5x FY09F P/B. As such, we upgrade China Essence to BUY.

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