China Food Company Plc A leading Chinese manufacturer of cooking and - - PowerPoint PPT Presentation

Interim Results Presentation September 2013 A leading Chinese manufacturer of cooking and dipping sauces

China Food Company Plc

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
• f

£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 Paste 2,823 4,416 8370 Total revenue 6,332 9,699 20,101 Margin Soya sauce 630 1,029 3,140 Vinegar/Bean Paste 933 1,628 3,033 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 Paste 33.1% 36.0% 36% Margin 25% 27% 31% EDITDA (before distributor clearance costs) (770) (1,670) (1,407)

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

• f £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
• rganically, 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

• f 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

Summary

• Production has been improved and efficiencies identified in the manufacturing process
• Strong condiments business, which is driving the future growth of the Company
• It produces both premium and mid-range soya sauce which have a good taste and are at the

right price points

• The Group’s marketing strategy is now being refined
• Consumer / retail growth in China for groceries is forecast to increase by 11% per annum

until 2015

• China Food is becoming a more focused, streamlined business which is well positioned for

future growth

• Strong distribution network in key provinces in Northern China

The Company is capitalising on the opportunity to be a significant player in the soya sauce market in Northern China

Appendix

Management team

John McLean (Executive Chairman) John McLean is executive Chairman of China Food Company plc, the 9th largest manufacturer and seller of soya sauce in China and is also Non-executive Chairman of Sorbic International Plc, the leading Chinese sorbate producer and distributor. More recently he has been appointed to the boards of the China Britain Business Council (CBBC) as a non-executive director and as Chair of VSO

• China. In 2007 he joined the board of Humberts

plc, the estate agent, and became its Executive Chairman to lead its rescue and ultimate disposal. Prior to this, he carried out a strategic review for Gamma Holdings NV of their UK interests, including Sanderson, the textile and wallpaper company, and as its UK group managing director successfully implemented the turnaround and disposal

• plan. Sanderson was a global company which was brand and design led and had operations in America, Asia and China. In the

nineties, he was Finance Director and then General Manager of ICS, the UK logistics and overnight courier business and co-led a management buy-out of the company with 3i, prior to its successful disposal to Hays plc. John is a Chartered Accountant and was previously with Coopers & Lybrand in both London and New York. Feng Bo (Chief Executive Officer) Feng Bo graduated from the Beijing Agriculture Engineering University in 1991 with a Bachelor of Science. She then completed her graduate course in International Trade at China Ocean University in 2003. She is also a committee member of the China Animal Husbandry and Veterinary Institute of Animal Nutrition. She joined Fuss Feed in 1994 and subsequently became its General Manager. Feng Bo is currently a director of Fuss Feed, its legal representative and General Manager.

Management team

Raphael Tham Wai Mun (Executive Director) Raphael is experienced in various businesses within the technology, construction, retail and finance industries and has been involved in general management, strategic development, financing and corporate restructuring. Prior to joining the Company, Mr Tham was the senior vice president of a Hong Kong based, GEM listed company involved in securities, corporate finance advisory and other related services and was the country manager of their Singapore subsidiary. He is also the Non-executive Chairman of Auhua Clean Energy plc, another London AIM listed company and a non-executive director of Byte Power Group Limited, an Australian listed

• company. Mr Tham started his career with the Economic Development Board of Singapore and holds a Bachelor of Arts (Economics)

from the National University of Singapore. Clifford Halvorsen (Non-Executive Director) Clifford is a corporate financier with over 25 years experience of originating and executing a wide range of transactions in the UK, continental Europe, the USA and South Africa. For over 20 years, he has focused on the consumer and, in particular, food sectors. Until 2012, he was a Corporate Finance Director at Investec Investment Banking responsible for UK consumer corporate finance. He previously held a similar role at SG Hambros, part of Société Générale. Before this, Clifford was Business Development Manager at Grand Metropolitan plc, then a diversified consumer group in the FTSE 100. Prior to this, he worked in the corporate finance department at Robert Fleming. Clifford is a qualified barrister and is a graduate of Bristol University in Philosophy.

Management team

Daniel Saw (Non-Executive Director) Daniel Saw brings considerable sector expertise from his extensive experience of working with Chinese food manufacturers. Previously, he served as the president of Asia at Campbell Soup Company, a New York Stock Exchange listed company, and before that he was Chief Executive Officer and board member of Lee Kum Kee, a global Chinese soya sauce brand with annual revenues exceeding HK$1 billion. His experience in global FMCG businesses includes roles at Cadbury Confectionery, Kraft Foods and Philip Morris, at both a regional and an international level. Fung Shek Lee (“Jeffrey”) (Managing Director (Condiments)) Jeffrey brings to the Board significant sales and distribution experience with branded consumer companies in Greater China, South East Asia and the Middle East, and was previously the Managing Director, North Asia and Pacific Region, of Lee Kum Kee (International) Trading Limited. Before his role at Lee Kum Kee, Jeffrey was the Head of Sales & Distribution for China and Hong Kong for Phillip Morris Asia Limited. Ricky Mak King Pui (Chief Financial Officer (Senior Management Position)) At senior management level, Ricky Mak King Pui was appointed as Chief Financial Officer with effect from 1 August 2013. Ricky has significant international experience in working with listed companies and is a Hong Kong CPA, a FCCA, bilingual and based in China.