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China Essence Annual Report 2013 China Essence Annual (Incorporated in the Cayman Islands on 15 August 2005 as an exempted Company with limited liability) (Registered No. CT-152302) Bei Men Wai Road West Lindian County, Daqing Heilongjiang Province People’s Republic of China China Essence Annual Report 2013 China Essence Annual Well-Grounded & Cultivating Value Annual Report 2013 Contents Corporate Profile 01 At a Glance 02 Chairman’s Statement 04 Board of Directors 06 Senior Management 08 Corporate Information 09 Operational and Financial Review 10 Risk Management 14 Investor Relations 16 Corporate Governance Report 17 Financial Contents 25 Statistics of Shareholdings 81 Notice of Annual General Meeting 83 CORPORATE PROFILE Established in 2001 and listed on the main board of the Singapore Exchange Securities Limited (“SGX-ST”) in 2006, ISO-certified since 2004, China China Essence Group Ltd. (“China Essence” or together Essence places a strong emphasis with our subsidiaries, the “Group”) is one of the largest integrated producers of potato products in the People’s on R&D to augment its product Republic of China (“PRC”). The Group manufactures, offering and quality assurance to markets and sells potato starch, potato starch-based products such as vermicelli, starch strips and five-grain maintain the production of high noodles, and potato by-products such as potato protein quality products. and animal feed. The Group also produces modified starch, which can be applied in a diverse range of industries such Over the years, the Group has established a strong as textile, paper, adhesives, oil and mining, pharmaceutical reputation as a trusted manufacturer of high-grade potato and personal care and cosmetics. starch and potato starch-based products. It markets its products under the brand names “Songtian” (嵩天), China Essence is headquartered in Heilongjiang and “Dongbei” (东北) and “Buffalo” (水牛), through its operates five production facilities strategically located in extensive network of distributors spanning 48 cities in 21 Heilongjiang and Inner Mongolia Provinces, which are in provinces and municipalities within the PRC. The Group proximity to an abundant supply of high quality potatoes. also sells two types of animal feed under the brand names These facilities have 20 production lines, of which 8 are for “ Si Le Kang” (饲乐康) and “Si Le Zhuang” (饲乐壮). To the production of potato starch, one for modified starch further expand its sales channels and extend its market and the remainder for potato starch-based products and reach, China Essence has also started selling products potato by-products. directly to large food and noodle manufacturers in the PRC. China Essence Group Ltd Annual Report 2013 01 AT A GLANCE Potato Farming And Procurement of Harvesting Potato Extraction of Modified Extraction of Processing of Potato Starch Starch Potato Protein Animal Feed Widely used in food products Used as an adhesive, Animal feed with Protein-free animal as well as pharmaceutics, thickening agent or gel protein sold under feed sold under textile, paper and oil produc- coating with numerous Si Le Zhuang Si Le Kang tion industrial uses Environment• Friendly Disposal of Treated Potato Sludge Conversion of Natural Gas to Energy Source Production of Potato starch-based Products Vermicelli, Starch Strips, Five Grain Noodles Packaging or Warehousing Sale to Distributors Sale to Instant Noodle Manufacturers Sale to Animal Feed Distributors and Farmers 02 China Essence Group Ltd Annual Report 2013 POTATO STARCH MANUFACTURING Storage of Potato Remove Pebble Rinse and Sand Dehydration Centrifugal Sieve Grind Weigh Filtration Final Filtration Package OUR PRESENCE HEADQUARTERS PRODUCTION FACILITIES DISTRIBUTORS China Essence Group Ltd Annual Report 2013 03 CHAIRMAN’S STATEMENT As such, the Group managed to achieve a revenue of RMB397.6 million for FY2013, which was a decline of 59% from our revenue in the previous year. Production and operating costs as well as the need to sell our damaged potatoes at scrap severely impacted our margins, as the Group’s gross loss widened by 80% from the year before to RMB174.6 million for FY2013. Notwithstanding these short term challenges, the Group is continuously seeking ways to reduce the impact of unfavourable external conditions on our operations. Besides keeping a close watch on the market situation to minimise the impact of price fluctuations, we are also exploring the possibility of adding an antifreeze wall to our storage pits to insulate our raw material from extreme cold weather. Other longer term measures, such as the self-cultivation of potatoes to alleviate the cost pressures of raw material procurement, are also being carefully considered as the management works tirelessly to improve its operational efficiency and profit margin. We would like to assure all shareholders that it is the Group’s priority and commitment to achieve a recovery and continue delivering returns to our loyal investors who have kept their faith in us throughout these difficult years. We have not lost sight of our goal of becoming Dear Valued Shareholders, China’s leading producer of potato-based products. Our During the financial year 2013 (“FY2013”), China Essence good business fundamentals, coupled with the long term continued to operate in a challenging environment prospects of China’s potato starch industry, will assist us exacerbated by the problems arising from the potato in this journey as we strive to overcome this challenging supply glut that occurred in the financial year 2012 period. (“FY2012”). Whilst the Group soldiered on in the hopes of a recovery, persistent external challenges and unexpected FY2013 has been a very tough year for us and we are climate changes continued to post hurdles in our loss- grateful to everyone who has been there to help us narrowing efforts. through. We thank all management and staff who have contributed to the growth of China Essence over the years Faced with limited working capital from the year before, and our shareholders for your unwavering support. the Group had to lower the utilisation rates of our production facilities for FY2013. However, despite a recovery of the potato starch market from the supply glut in FY2012, the average selling price of our products Yours sincerely remained relatively depressed during the year. In addition, increasing production costs continued to weigh in on our Mr Zhao Libin margins for the year. To compound matters, Northeast Executive Chairman China was unexpectedly struck by harsh winter conditions in November and December 2012. Besides damaging some of the Group’s raw materials which was amassed during the harvest season, the exceptionally cold weather caused a general yield reduction in our potato stockpile. 04 China Essence Group Ltd Annual Report 2013 主席致辞 2013财年,嵩天集团的营运环境依然存在挑战,而2012 响。我们除了通过密切关注市场动向来将价格波动带来 财年马铃薯供应量过剩所产生的问题令形势更为严峻。 的影响降至最低,此外也在探索通过为我们的仓储加装 虽然集团迎难而上,力图复苏,但不利的外在因素,加 防冻墙以使原材料不受极寒天气影响的可行性。目前, 上始料未及的气候变化,使我们减少损失的努力仍然遭 其它长期措施—例如通过自产马铃薯来降低采购原材料 遇到了重重阻力。 的成本压力也正在考虑之中。同时,管理层也在不遗余 力地改善着生产效率和利润率。 面对上一年以来营运资本有限的情况,集团在2013财年 不得不降低了生产设施的利用率。然而,尽管马铃薯淀 我们在此向所有股东承诺,集团仍然以实现复苏和继续 粉市场已从2011年供应量过剩的影响中复苏,但本年度 为多年来一直支持我们的忠诚投资者实现收益为首要任 我们产品的成交均价依然相对低迷。此外,生产成本的 务。嵩天集团始终秉持努力成为中国领先的马铃薯制品 不断上升继续影响着我们本年度的利润。而2012年11月 生产商的宏伟目标。我们坚实的企业基础和中国马铃薯 和12月极寒冬季天气突袭中国东北地区更是让局面雪上 淀粉业的远景将有助于我们在这段复苏之旅上面对并且 加霜,除对集团在收获季节储备的少数原材料造成了破 克服种种难关和挑战。 坏,此次罕见的极寒天气也导致了库存马铃薯之淀粉含 量普遍降低。 对我们而言,2013财年是跌宕起伏的一年。对于帮助 我们度过难关的每位人士,我们心怀感激。我们不仅要 综合以上因素,集团在2013财年实现的营业额为3.976 感谢所有多年来为嵩天集团的增长作出过重大贡献的管 亿元人民币,较上一年的营业额下降了59%。由于生产 理层成员和员工们,还要感谢股东们一如既往的大力支 和营运成本,加上不得不将受损的马铃薯作为废料出 持。 售,我们的利润率受到了严重影响,使集团2013财年的 毛亏损总额较上一年跌幅扩大到了80%,升至1.746亿元 人民币。 祝万事如意 尽管短期内遭遇到了这些挑战,但集团在一直在寻找着 赵立彬 解决方法,尽可能降低外部不利条件对我们营运的影 执行董事长 China Essence Group Ltd Annual Report 2013 05 BOARD OF DIRECTORS Mr Zhao Libin to 2012. Across those eight years, Mr Liu has led extensive Executive Chairman research into potato farming and product manufacturing Co-founder techniques, providing key recommendations to enhance best practices in the industry. His efforts gained much Mr Zhao founded China Essence in 2001 as Chairman recognition evidenced by the government’s adoption and Chief Executive Officer of the Group. He was pivotal of his recommendations into their plans to organise and in building the business from a small potato starch structuralise rural agriculture. In acknowledgment of production facility in Daqing, Heilongjiang, to one of the his outstanding stewardship and keen business acumen, leading producers of potato-based products in China. He Mr Liu won various accolades including the prestigious was also instrumental in establishing the brands, amassing “Dragon Head Enterprise Leader”, “Qiqihar City Top 10 a nationwide distribution network and augmenting the Outstanding Young Persons” and “Qiqihar City Model product offering to include potato starch-based products, Human Resources” amongst others. modified starch and animal feed. Today, as Executive Chairman of the Group, he continues to draw on his Mr Liu is also a representative at National People’s decades of expertise to maintain strategic oversight of the Assembly for Keshan County and Qiqihar City and the business. Vice-Chairman of the Qiqihar Federation of Industry and Commerce. Prior to China Essence, Mr Zhao was heavily involved in the food industry where he served in business development, From 1996 to 2004, Mr Liu worked his way up to managerial sales and marketing and operations departments within roles within two leading food and beverage companies in organisations