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ER - Sino Agro Food Inc. Reports Q3 2016 Results

Company: Sino AG Date: 2016-11-15 Language: English Register to download
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 Sino Agro Food Inc. Reports Q3 2016 Results

# Sino Agro Food Inc. Reports Q3 2016 Results

Revenue of USD 124.1M Remains Level with Q3 2015  

  

Gross Profit Increases 3% with Gross Margin of 26.9%  

  

EPS of USD .95 Falls Short of Q3 2015, but Increases  

16% over Q2 2016  

  

First Phase of Zhongshan Aquaculture Farm 50% Stocked  

  

Sino Agro Food - Q3 2016 Interim Report  

(http://mbpublicbinaryproxy/Public/13869/2122663/9a3952  

c8eb9c71f9.pdf)GUANGZHOU, China-- Sino Agro Food, Inc.  

(OTCQX: SIAF | OSE: SIAF-ME), an agriculture  

technology and natural food company that produces and  

sells protein food including seafood and cattle, is  

pleased to announce the following quarterly results  

ending September 30, 2016:  

  

+---------------------------------------------+------+-  

\-----+---+  

|(USD M, except per share and margin data)  

|Q3 '16|Q3 '15|% |  

+---------------------------------------------+------+-  

\-----+---+  

|Revenue |124.1  

|124.7 |0 |  

+---------------------------------------------+------+-  

\-----+---+  

|Gross Profit |33.4  

|32.3 |3 |  

+---------------------------------------------+------+-  

\-----+---+  

|Gross Profit Margin |26.9%  

|25.9% |4 |  

+---------------------------------------------+------+-  

\-----+---+  

|Net Income attributable to SIAF |21.3  

|21.5 |-1 |  

+---------------------------------------------+------+-  

\-----+---+  

|Earnings Per Share (USD) - fully diluted |0.95  

|1.14 |-17|  

+---------------------------------------------+------+-  

\-----+---+  

|Diluted weighted average number of shares (M)|22.8  

|18.8 |21 |  

+---------------------------------------------+------+-  

\-----+---+  

  

Key Points  

  

Summary Financials  

  

Overall financial results were stable as compared to  

Q3, 2015. Compared to Q2, 2016 gross profits increased  

by 11% to USD 33.4M (30.0), and earnings per share  

increased by 16% to USD .95 (.82). Most business  

segments showed growing results.  

  

· Revenue for the quarter ending September 30, 2016  

totaled USD 124.1M (124.7). Revenue from the sale of  

goods increased by 5% (y-o-y) to USD 100.7M (96.0),  

while revenue from project development and management  

fees decreased by 18% to USD 23.4M (28.6).  

· Cash and equivalents increased from USD 3.3M at  

the end of Q2 2016 t0 USD 9.1M September 30, 2016.  

· G&A expenses increased by 27% in Q3 2016 to USD  

5.oM (4.0). The increase was mainly due to corporate  

exercises associated with the carve-outs.  

· As of September 30 2016, the Company had net  

working capital of USD 342.8M (304.3).  

· Stockholders' equity increased by 15% to USD  

535.3M (464.3) or USD 23.52 per share, based on the  

weighted average number of fully diluted outstanding  

shares in the quarter. The increase of USD 1.71 per  

share versus Q2, 2016 is due to the sequential  

increase of USD 19.7M and a small reduction in fully  

diluted shares.  

  

Core Businesses and Outlook  

  

Improvements in gross profits stemmed mainly from an  

overall small increase in gross margins and solid  

sales performance in value added processing of  

imported beef, concentrated livestock feed, and  

trading of seafood and imported beef. Capital  

investments were made in SJAP and Aquaculture to allow  

for further capacity expansion and growth in Value  

Added Processing and to complete the first phase of  

the new Zhongshan aquaculture farm.  

  

Integrated Cattle (SJAP)  

  

Total revenue for the segment increased 22% to USD  

43.4M (35.5), resulting in a 52% increase in gross  

profits to $10.2M (6.7). The gains were spearheaded by  

revenue increases 0f 196% in value added processing of  

imported beef to USD 24.6M (8.3) and 65% in  

concentrated livestock feed to USD 4.5M (2.7).  

Together these areas contributed gross profit of USD  

6.6M (3.5). Value added processing production  

increased 146% in Q3 to a record 3,185 metric tons  

(1,297).  

  

Live cattle sales decreased 56% to USD 7.1M (16.4), as  

the Company continues to transition to premium cattle  

breeds. However, gross margins showed a marked  

improvement to 17% (7%), resulting in a 7% increase in  

gross profit to USD 1.2M. Average sales prices for the  

quarter were CNY 30/kg, continuing the upward trend  

from a low price of CNY 20/kg in Q1. As prices steady  

or continue to increase, the Company expects to grow  

its inventory of fattening cattle, commensurate with  

expected margins and dependent on new contracts with  

cooperative farmers. The inventory was reduced when  

the pricing trough rendered live cattle sales  

unprofitable earlier in the year. Replenishing  

inventory will progress over several months.  

  

Aquaculture (CA)  

  

The Company is interchanging the species of seafood  

and prawns at its various farms such that referring to  

each as "aquaculture farms ("AF")" is now more  

accurate. Fish Farm 1 becomes AF1 and Prawn Farms 1  

through 4 become AF2 - 5. These labels will be  

forthcoming in the Company's financial reports and  

collateral material as the carve-out materializes.  

  

Revenue from the sale of goods decreased 56% to USD  

12.5M (28.6), while gross profit decreased 42% to USD  

3.2M (5.5). Facilities at AF1 began extensive  

renovation upgrades during Q3. These will continue  

through the end of November. Production is fully  

curtailed until completion. Also, retrofitting and  

modifications were performed at AF2 and AF3 during the  

quarter and are scheduled to continue throughout the  

remainder of the year. Whereas production will be  

reduced during this interim period, grow-out  

facilities for tiger prawns at AF2 and a tripling of  

harvests per year at AF3 are expected to dramatically  

improve 2017 production.  

  

The first two buildings housing 72 APM units at AF4  

("MegaFarm") are complete, and have been stocked to  

50% of capacity, expected to increase to 75% by year-  

end. Stocking consists of the following varieties for  

full grow-out and post harvesting: Giant Freshwater  

Prawns, Grass Prawns, Sleepy Cod, Jade Perch, Murray  

Cod, and various higher priced fresh water mixed fish.  

  

As part of the aquaculture carve-out, the Company has  

submitted all relevant documents for the transfer of  

all fishery assets to Jiangmen City A Power Fishery  

Development Co., Ltd. ("JFD"). JFD is in the process  

of becoming a Wholly Foreign Owned Enterprise ("WFOE")  

under the ownership of Triway Industries Limited.  

(Hong Kong), ("Triway"). SIAF and Triway auditors are  

reviewing financial data treatments and procedures  

with the intended official carve-out date for  

reporting purposes recorded as October 1, 2016.  

  

Despite renovation, upgrading, modernization and  

supporting transformation work, the Company expects  

overall improvement in sales in the fourth quarter due  

to commencement of sales at AF4. With AF1 coming back  

on line; with AF2 and AF3 recommencing toward former  

capacity or expanded capacity; and with AF4 expanding  

facility use, the Company is excited by aquaculture  

prospects as soon as Q1 2017, and beyond.  

  

Management chose this time to perform supporting work  

and upgrades for several reasons, as follows:  

  

· Production ramp at AF4 is expected to overcome  

production reduction at AF1 - AF3 in Q4, due in part  

to support work to integrate other aqua farms.  

· All facilities are best served by continual  

improvement to optimize yields, margins, quality, and  

longevity, with particular attention paid to insuring  

AF4 performs optimally before full commercial scaling  

and before AF4 and AF5 install and develop similar,  

expanded support facilities within their own complexes.  

· The upcoming carve-out has been aligned with the  

Company modernizing its aquaculture facilities into  

integrated high-yielding stations, increasing value  

from both asset and projected income perspectives.  

  

The Company has secured a loan commitment from a group  

of third party lenders in the amount of USD 8.2M to  

fund intra-company lending from SIAF to Triway for  

short-term working capital. The first intra-company  

loan agreement between the Company and Triway for USD  

6M was entered July 5, 2016 with funds disbursed  

between July 15 and August 6, 2016. The remaining USD  

2.2M will be disbursed before the end of the year.  

  

The company continues to pursue other value accretive  

financing options for Triway.  

  

Seafood and Meat Trading  

  

Revenue increased by 131% to USD 23.2M (10.1) with  

import volume growing to 1,782 metric tons (1,087).  

Gross margins averaged 11.4% creating a 138% gain in  

gross profit to USD 2.7M (1.1). Import of seafood  

almost doubled from the previous quarter to USD 10.1M,  

accounting for 44% of revenue and 45% of gross profit.  

This business is meeting original production and  

margin targets. The Company is confident increases  

will continue as the revolving Trade Credit Facility  

for the Shanghai Distribution Center is fully and  

efficiently utilized and possibly increased as  

lucrative opportunities become available, and as the  

disposable income of China's middle class continues to  

rise.  

  

Project Development  

  

Though revenue decreased 18% to USD 23.4M (28.6), the  

gross margin of 46.7% resulted in a smaller gross  

profit decline to USD 10.9 (11.5). Capital Award  

deferred billing of Q3 work performed at AF3 until Q4,  

due to the injection of assets into Triway. This  

deferred revenue approximates the shortfall between Q3  

2016 and Q3 2015.  

  

Carve-out Exercises  

  

The Company believes that the sum of its parts is  

worth considerably more than the market value of the  

whole. Accordingly, it has undertaken efforts to carve  

out its major businesses, establishing each as a  

standalone corporate entity. These carve-out  

enterprises will seek to establish value within the  

same financial measures afforded peer group companies,  

in part through private placement prior to applying to  

higher value market exchanges for IPO, utilizing  

market industry experts to assist those efforts in  

securing the best market(s) for listing.  

  

Having had extensive discussions with consultants and  

underwriting banks and brokers, as a general  

proposition, the process involves three steps:  

  

· Issue to SIAF shareholders a sustainable portion  

of equity interest of the carve-out based on a value  

equal to the entity's net tangible assets ("NTA").  

· Seek and complete pre-IPO stages of private  

placements, aiming to establish a value approximating  

2 times NTA, providing an exit opportunity to said  

existing shareholders.  

· Seek listings on recognized exchanges with the  

intention of establishing IPO valuations of  

approximately 3-4 times NTA, or approximately 12 -16  

times earnings.  

  

Each exercise within each step requires countless  

hours of work with a cadre of consultants, attorneys,  

auditors, government authorities, and stock exchange  

officials. The Company continues to work diligently,  

making progress on its ambitions although at times  

required to veer from a straight-line approach to  

attain best results.  

  

CEO Commentary  

  

Sino Agro Food's Chairman and CEO Solomon Lee  

summarized the quarter, as follows:  

  

"During the third quarter of 2016 we made significant  

inroads executing on our strategic plan to restructure  

the business and maximize value for shareholders.  

Overall, it was a very positive quarter, exhibited  

through improved gross margins, a stronger cash  

balance and significant operational progress in both  

the aquaculture and the cattle/beef businesses.  

  

"To recap our high-level strategy, we are undertaking  

a series of initiatives to transition Sino Agro Food  

into an investment vehicle with positions in multiple  

independent, public companies operating within China's  

agricultural industry. To this end, Sino Agro Food's  

two largest and fast growing subsidiaries - the  

aquaculture and beef businesses - will be carved out  

from the parent company and listed on stock exchanges  

where we believe their shares will be able to trade at  

a market value commensurate with peers and  

substantially higher than their embedded values. As  

part of this carve out and IPO process, we are raising  

growth capital for these subsidiaries to accelerate  

their development, with Sino Agro Food expected to  

retain significant stakes in each of the companies  

after the spin offs have occurred.  

  

"One key focus right now is our aquaculture business,  

which we believe has the potential to develop into an  

extremely profitable and sustainable business model of  

much larger size. Through its proprietary indoor  

recirculating aquaculture systems ("RAS") technology,  

the aquaculture business produces disease-free,  

superior quality and higher-margin seafood to the  

China markets all year-round. With aquaculture the  

fastest growing food production system in the world,  

and currently accounting for nearly 45% of world  

seafood supply, we are confident that our superior  

production methods position the aquaculture subsidiary  

as a competitive and significant player in a rapidly  

growing market.  

  

"By transferring all the assets from our wholly-owned  

subsidiary, Capital Awards, into a standalone entity,  

we expect to attract institutional investors who  

specialize in investing in high-growth business  

opportunities, spurring higher valuations for  

the "new" entities, as well as SIAF. We strongly  

believe this strategy is the most efficient way to  

enable the aquaculture business to grow rapidly,  

benefiting all shareholders.  

  

"During the third quarter, we took necessary steps to  

commence work at the aqua-farms. This has curtailed  

production in the short term, but is expected to  

expand capacity, and therefore revenues, as early as  

Q4 2016. The Company was able to secure $8.2 million  

in working capital to facilitate these efforts while  

continuing to work closely with a major Asian bank  

toward securing a larger loan to accelerate the growth  

of the company. The larger loan is taking longer to  

complete since the prospective lender is agreeing to  

help underwrite the IPO as well. Thus, while the  

overall review and approval process for the "entire  

package" consumes more time, it also provides the  

Company's shareholders a much greater return on  

investment than would other available alternatives, at  

this time. In the interim we will continue to develop  

the aquaculture farms organically via internally  

generated cash flow. With our plan to develop the  

world's largest RAS farm, we are confident the  

aquaculture business can grow into a highly profitable  

company, driven by demand from the burgeoning middle  

classes in China.  

  

"SJAP, our cattle and beef subsidiary, is also  

undergoing several strategic changes to maximize its  

value. Specifically, we are restructuring the business  

with the goal of listing it on a stock exchange in  

early 2017. As with the aquaculture business, the  

carve-out will make it easier to more accurately value  

the company and is expected to attract more investors  

at a higher valuation.  

  

"SJAP is transitioning toward production of higher  

quality beef which, as well as generating improved  

margins for the company, allows us to tap into an  

underserved niche. Currently, there is limited supply  

of premium quality beef in China and products on the  

market are typically imported from abroad. However, as  

Chinese consumers become wealthier and more discerning  

about food quality, the consumption of premium beef is  

expected to grow significantly. Sino Agro Food is one  

of the foremost players in this market and our  

leadership position in the industry provides an  

advantage going forward. During the quarter, we  

continued to transition toward premium cattle breeds.  

Coupled with higher prices for domestic beef, the  

transition led to a marked improvement in gross  

margins.  

  

In the short term our cash flow is constrained by  

ongoing investments in these business segments; yet,  

results from our strategy have already begun to  

materialize. As obscure as it may seem, the Company is  

reaching an inflection point in its growth trajectory  

and reiterates its appreciation to shareholders who  

remain confident in the Company's mission going  

forward."  

  

2016 Third Quarter Report  

  

For detailed segment operational performance and  

developments, please take the time to read our latest  

10-Q filing, or refer to the 2016 Q3 Interim Report  

(http://sinoagrofood.investorroom.com/download/Sino-  

Agro-Food\_Q2-2016-Interim-Report.pdf) posted to the  

Company website at  

http://sinoagrofood.investorroom.com/download/Sino-  

Agro-Food\_Q3-2016-Interim-Report.pdf  

  

Earnings Call Information  

  

The Company will host an earnings call on Tuesday,  

December 6, 2016 at 10:00 AM EDT/4:00 PM CET to  

discuss quarterly financial results.  

  

Please submit questions by email to  

info@sinoagrofood.com. These will be organized and  

answered with questions submitted during the call,  

followed by live calls from institutional investors  

and/or analysts.  

  

To listen to the conference call please use the  

following information:  

  

+-----------------------------------+------------------  

\------------------------+  

|SIAF 2016 Q3 Results  

Call  

|  

|Information  

|  

+-----------------------------------+------------------  

\------------------------+  

|Date: December 6, 2016 |Time: 10:00 AM,  

EDT/4:00 PM CET |  

+-----------------------------------+------------------  

\------------------------+  

|Participant Dialing  

Instructions:  

|  

+-----------------------------------+------------------  

\------------------------+  

|SE: +46 8 5059 63 06 NO: +47 23|UK:+44 203 139 48  

30 CN:+86 400 681 54|  

|50 05 59 US: +1 (866) 928-7517  

|21 |  

+-----------------------------------+------------------  

\------------------------+  

|Conference  

Pincode25125518#  

|  

| The earnings call will also  

be |  

|available over the web.To  

access, |  

|click the following link: Sino  

Agro |  

|Q3 2016 Earnings  

Call  

|  

|  

(https://wonderland.videosync.fi/si  

|  

|no-agro-food-q3-  

report)  

|  

+-----------------------------------+------------------  

\------------------------+