gsg_stock discussion

Stockwatch- Century Sunshine (8276.HK)

A eco-agricultural play in organic fertilisers

Company website:

http://www.centurysunshine.com.hk/

2006 1Q financial report:

http://www.hkgem.com/listedco/listconews/gem/20060512/GLN20060512084.pdf

2005 annual report:

http://www.hkgem.com/listedco/listconews/gem/20060322/GLN20060322020.pdf

2004 annual report:

http://www.hkgem.com/listedco/listconews/gem/20050331/GLN20050331123.pdf

Announcements on HKSE:

http://www.hkex.com.hk/listedco/listconews/sehk/ByStockCode.asp

Yahoo articles:

http://hk.search.yahoo.com/search/news?p=tic%3A8276&s=-ut&ei=BIG5&n=15


Based in Fujian province in China, Century Sunshine Ecological Technology Holdings (CS) is engaged in the research and development (R&D), production and sale of organic fertilisers and organic compound fertiliser products that can be used in organic, green and pollution-free
agricultural products. The products are sold under CS’ “Lu Di” brand. CS targets farmers from various provinces, including Fujian and Jiangxi.

Established in 1998, patent of its organic fertiliser processor registered in 2002, listed in HKSE in 2004.

1. All of its products are registered with the Ministry of Agriculture

2. It is the only producer that has gained recognition from the EU

3. Beneficiary of favourable government policies

- rescinding the agricultural tax
- encourages the use of organic fertilisers to lend support to environmental protection and sustainable farming

4. While there are pricing regulations for chemical fertilisers, there are no pricing regulations for organic fertilisers

5. Launch of new business – bio-pesticides

Century Sunshine commenced its bio-pesticides business in the first half of this year. In the first quarter of 2005, it acquired a pesticide producer in Jiangxi province and subsequently expanded its production facility to 1,800 tons of bio-pesticides products per annum. The new facility commenced operation in December 2005. Its pesticides products are currently sold to 12 provinces in China and have become a new source of income of the Group.

6. Acquisition of land for future capacity expansion

In October 2005, Century Sunshine acquired a parcel of land with a site area of 126,700 square meters in Yunxiao, Fujian province. It plan to build on this site a new production plant (the “Yunxiao Plant”) with a total annual capacity of 400,000 tons of organic fertilizers. The Yunxiao Plant is to be completed in two phases: phase I is expected to be completed by the end of 2006 with a capacity of 200,000 tons and phase II is expected to be completed by the end of 2007 with a capacity of another 200,000 tons. The Yuanxiao Plant is strategically located in the South-western Fujian province in order to serve the customers in the southern Fujian and Guangdong province.

7. Share placement

In December 2005, the Company completed a share placement and raised net proceeds of
HK$121 million. All placing shares were subscribed by five independent institutional investors at a price of HK$2.20 per share. The net proceeds will be applied for building the Yunxiao Plant.

This was the company first share placement after the listing in February 2004. The capital expenditure for building the Yunxiao Plant will be fully satisfied by such net proceeds and our internal resources.

PROSPECT (2004 Annual Report)

During the year, the average prices of agricultural products increased sharply across the country. It was also announced that the agricultural tax will be exempted in Fujian province and Jiangxi province starting from 2005. These favorable government policies will provide farmers with further incentives to grow crops. As such, we believe that the future prospects for organic fertilizer industry are promising.

In order to take advantage of the growing market opportunities, we are going to carry out the following plans:–

Firstly, we plan to build a new plant in Jiangxi province with a planned annual capacity of 100,000 tones of organic fertilizers and organic compound fertilizers. Upon completion, our total annual production capacity will increase by 1.8 times to 155,000 tones. The new plant is expected to start operation in May 2005.

Secondly, we plan to commence the production and distribution of our new eucalypt trees fertilizers. The new product will broaden our product lines from agricultural fertilizers to forestry fertilizers. It is expected that the new product will make significant contribution to the Group’s profit next year.

Thirdly, we plan to extend our market coverage to Jiangxi, one of the major agricultural provinces in China. This will significantly enlarge our potential customer base thus contribute to future profit growth.

BUSINESS OUTLOOK (2005 Annual Report)

1. Chinese Government’s favorable agricultural policies

During the year, the Chinese central government announced a series of new policies in favor of the Chinese farmers and the agricultural industry as a whole. Such policies include a 14% increase of spending on the rural world in 2006 and the promotion of the use of organic fertilizers in China's “11th Five-Year Plan”. It is expected that such favorable policies will further stimulate Chinese farmers incentive to use organic fertilizers. As a result, we expect that the market demand for organic fertilizers will continue to grow in the coming years and that the future prospects for our business are promising.

2. Future capacity expansion

Production capacity will remain as a major bottleneck for our development in the foreseeable future. Therefore, we plan to progressively increase our capacity in the next two years. By the end of 2006 and 2007, we plan to increase additional capacity by 200,000 tons in each year. As a result, our total capacity (excluding subcontractors) in 2008 is expected to reach 555,000 tons. It is our objective to maintain our position as a leading producer of organic fertilizers in China.

3. Expansion of sales network

Following the capacity expansion, we also plan to expand our sales network in China. Our primary markets are Fujian and Jiangxi at the present with a secondary network extending to Guangdong, Zhejiang, Anhui, Hubei and Hunan. Our bio-pesticides are already sold to 12 provinces. It is our strategy to progressively increase our penetration into the neighbouring provinces, in particular, Guangdong and Zhejiang in the next two years.


BUSINESS OUTLOOK (2006 1Q financial report)

1. Production increase

We expect that the market demand for organic fertilizers to remain strong for the rest of the year. Our three factories are to contribute their full capacities this year. The Yunxiao plant is currently under construction as scheduled. The first phase of the plant with 200,000 tons capacity is expected to be completed by December 2006.

2. Selling price rise

Starting from 1 May 2006, we raised the selling prices of two types of our products, premium organic fertilizer and organic compound fertilizer, by 12% and 15% respectively. As a result, our sales and profit will be affected positively.

DIFFICULTIES AND CHALLENGES LYING AHEAD (2004 Annual Report)

Although we achieved satisfactory results for the year, we also realized that we are facing certain difficulties and challenges ahead.

1. Current capacity not enough to satisfy the rapidly increasing market demand

During the year, we had fully utilized our production capacity but were still unable to meet the growing demand in Fujian province. The total plantation area of crops in Fujian province is estimated to be about 38 million mu (about 2.5 million hectares). If we assume that all these plantations choose to use organic fertilizers at an annual consumption rate of 150 kilogram per mu, the total consumption will be about 5.7 million tones of organic fertilizers. Although it is unlikely that all the arable land in Fujian province would apply organic fertilizers, our current capacity of 55,000 tones is significantly small as compared to the potential demand. We need to expand our production capacity soon.

2. Shortage of talents in eco-technology and organic fertilizer industries

As eco-technology and organic fertilizers are relatively new in the PRC, there are not as many experienced professionals in these fields as in other industries. With the successful listing of the Group and the rapid development of our business, we urgently need to expand our professional team by both new recruitments and internal training.

Risk factors (UOB Initiation report):

1. Slow acceptance by farmers

2. High gross margin may be unsustainable as new entrants are attracted by the organic food products' high margin

3. Unexpected bad weather and flooding

Source- UOB Kayhian initiation report on 11 July 2006

posted by gsg @ 12:14 PM