Voluntary Announcement (6761P)
October 06 2011 - 4:30AM
UK Regulatory
TIDMACHL
RNS Number : 6761P
Asian Citrus Holdings Ltd
06 October 2011
For immediate release 6 October 2011
Asian Citrus Holdings Limited
("Asian Citrus" or "the Group")
Voluntary Announcement
The Board of Asian Citrus Holdings, the largest orange
plantation owner and operator in China, wishes to inform the
shareholders of the Company and potential investors in the Company
that the following voluntary announcement has been made on the Hong
Kong Stock Exchange, in which Mr Tong Wang Chow, Chairman, responds
to the recent comments made about the Company.
The announcement takes the form of responses to questions.
ASIAN CITRUS HOLDINGS LIMITED
(*)
(Incorporated in Bermuda with limited liability)
(Stock Code: HKSE:73; AIM:ACHL)
The following answers by Mr. Tong Wang Chow, Chairman, to
questions put by Corporate Focus Limited are intended to respond to
the recent comments made about Asian Citrus Holdings Limited and
outline the strategies of its operations.
Q There appears to be negative sentiment because of your perceived
association with Chaoda which is currently suspended by the
HK Stock Exchange and its Chairman and CFO investigated by
the Market Misconduct Tribunal. Chaoda was a major shareholder
in your company before being diluted down to 13%. On your
board is a representative of Chaoda and there are concerns
as to the independence of the management. Can you clarify
the exact nature of your relationship with Chaoda?
A By way of background, in 2001 when the Company was privately
owned, the Chairman sold part of his shares and also issued new
shares to Chaoda resulting in them owning a 49% interest. However
with the Company's listing and subsequent sales of shares in the
Company by Chaoda, its interest in Asian Citrus has now fallen to
13.4%. Chaoda is merely a passive financial investor in Asian
Citrus. The representative of Chaoda sitting on Asian Citrus'
board is a non-executive director. He does not participate in the
daily management of our Company. Neither does he participate in
any contract negotiations nor exert any undue influence in our
Company. We currently have 11 directors on our board, four of them
are independent directors; and with due regard to good corporate
governance, no one particular Director out of the eleven exercises
undue influence.
Q A recent report on Chaoda implied that there could be question
marks over the purchase of fertilizers by Asian Citrus from
Fujian Chaoda, a company with majority stake owned by the
Chairman of Chaoda. Why did you purchase fertilizer from this
company and how do you negotiate purchase contracts?
A The vendor you are talking about is Fujian Chaoda and its
subsidiaries, a company that is owned 95% by the Chairman of
Chaoda. Asian Citrus has for many years bought organic fertilizer
from Fujian Chaoda and its subsidiaries. We have disclosed this as
a connected party transaction in our annual reports since the
Company's listing and all purchases have been on an arms' length
basis. We are aware of the allegations against Fujian Chaoda but
Fujian Chaoda is nothing more than a vendor like any other third
party vendor of goods to our Company. However for the sake of
clarity, let me explain our procurement process. We have for many
years operated strict policies and procedures and are very proud
of these policies and procedures that govern our tendering
process. Every six months, the purchasing team tenders key
material supply contracts and in the case of fertilizers, we
receive at least three quotations from different suppliers. As in
all supply contracts, we consider many factors. Price and quality
of the fertilizers are obviously important factors. We also look
at reliability of service and delivery as well as spreading our
risk. In fact, the fertilizers supplied by Fujian Chaoda are not
only the best quality, but also very price competitive.
Accordingly, they consistently win the tender. In addition to the
tendering process, our auditors, Baker Tilly Hong Kong Limited,
was engaged to report on the Group's continuing connected
transactions in accordance with Hong Kong Standard on Assurance
Engagements 3000 "Assurance Engagements Other Than Audits or
Reviews of Historical Financial Information" and with reference to
Practice Note 740 "Auditor's Letter on Continuing Connected
Transactions under the Hong Kong Listing Rules" issued by the Hong
Kong Institute of Certified Public Accountants. The auditors has
issued his unqualified letter containing his findings and
conclusions in respect of the continuing connected transactions
disclosed by the Group in accordance with Hong Kong Listing Rule
14A.38. Having said that, our purchase of fertilizers from Chaoda
has decreased from RMB47 million in FY2010 (28% of total
fertilizer usage) to RMB34 million in FY2011 (17% of total
fertilizer usage). This is because other suppliers have become
more competitive in the current years and we continue to diversify
our suppliers. We are mindful of reputational risk of our
suppliers and should Fujian Chaoda or any other supplier come into
disrepute, we will terminate any commercial relationship with that
supplier.
Q What would be the cost impact if you chose another supplier?
Your gross margin declined in 2010/2011. What contributed
to this decline? Was this in any way related to the fertilizer
contracts?
A The decline in the gross margin is not related to our fertilizer
contracts. Rather the decline in the gross margin in 2010/2011
was because of the consolidation of the juicing business we
bought in November 2010. Our agricultural gross margin was
approximately 60% (58% in 2009/2010) while the fruit processing
gross margin was approximately 34% in FY2010/2011. As a final
point, had we not used Fujian Chaoda at all in 2010/2011 the
overall fertilizer costs would have increased by 2-3%
Q Beyond the fertilizer contract, are there any other commercial
arrangements between Chaoda and Asian Citrus that shareholders
should be aware?
A Other than the fertilizer contact, there are currently no
other commercial arrangements between Chaoda and Asian Citrus.
Q If Chaoda is forced to sell its stake in Asian Citrus, would
you consider purchasing the shares back or would you prefer
to see the shares in the hands of institutional investors
and do you expect to see any setback in price?
A Let me state, it is up to Chaoda to decide on how to manage
its holdings in Asian Citrus. Should they decide to sell,
it is also up to them to whom and when they sell. In fact
we have been overwhelmed by investors who have approached
us recently to explore the possibility to acquire that parcel
of shares. To be fair to every shareholder, Asian Citrus should
only buyback the shares from the market which we are actively
considering, not from any specific shareholder. In the event
Chaoda decided to sell its stake in Asian Citrus, we would
try our best to make sure the disposal is in an orderly manner
to either institutional or strategic investors.
Q There have been many allegations against PRC and Hong Kong
listed companies about the valuation of their assets, rights
to harvest and ownership title and lease tenure. You have
specifically relied on PRC legal advisors in absence of procuring
title. Can you comment on all the above?
A This was comprehensively and satisfactorily covered as part of the
legal due diligence for our HK listing in 2009. We understand
there has been concern in the market towards certain companies who
have allegedly overstated their assets or harvesting rights. We
stand by the comprehensive valuation undertaken by Vigers
Appraisal & Consulting Limited on an annual basis that values our
plantations and which is audited by our external auditors.
Moreover, our PRC legal advisors, Zhong Lun Law Firm, confirmed in
2009 that all our land leases are legal and valid and Asian Citrus
has been duly registered with the relevant government authorities
as the owners of the orange trees at our respective plantations.
Q For the year ended June 30, 2011 you had a 90% increase in
profit from a 74% increase in revenue. Is this sustainable?
Can you comment on the profile of ageing of your assets and
its yield from your Hepu, Xinfeng and Hunan plantations?
A The substantial increase in profit and revenue in FY2011 was
mainly due to the 16% increase in production volume of oranges,
10% increase in average selling price of oranges and the inclusion
of the trading results for seven months of the fruit processing
business since December 2010. In FY 2012, we expect there will be
continued growth in the production volume of oranges benefiting
from the increasing maturity of our Xinfeng Plantation and the
full year's trading results of the fruit processing business will
be consolidated into our Group for the first time. To that would
be added, any price increments, if available. In FY 2011, we have
enhanced our disclosures including certain analysis of the age
profile and corresponding production volume for our plantations
which was included in our latest announcement for FY 2011.
Q Why did you acquire the Hepu plantation? Did Pepsico reject
this plantation and what did you see in it they didn't?
A The Hepu Plantation was a business invitation opportunity from the
Hepu County government in 1999. Pepsico acquired Tropicana in 1998
and decided to give up the Hepu Plantation for its own strategic
reasons and handed the Hepu Plantation back to the Hepu County
government in 1999. The Hepu Plantation was very young and not
productive at that time so required a substantial amount of
working capital. As a result, the Hepu County government decided
to introduce new investors to the Hepu Plantation by way of a
business invitation opportunity. After due diligence and
inspections, our Chairman decided to take over the Hepu Plantation
from the Hepu County government in view of its strong growth
potential.
Q How will the new replanting yield better results for you?
A The strategy of the replanting program is to maximize our revenue
by replacing certain existing winter orange trees in the Hepu
Plantation with summer orange trees. The reason being that the
average selling price of our summer oranges was approximately
RMB6,000 per tonne while the average selling price of our winter
oranges was less than RMB4,000 per tonne in FY 2011. This was
discussed at our latest results announcement. So, the replanting
is targeted at yielding better profitability for Asian Citrus.
Q You have diversified into concentrates and other fruits with
the acquisition of Beihai BPG for HKD780m and issuance of
164m new shares of Asian Citrus. How does this acquisition
help the company?
A The acquisition of the fruit processing business was accretive to
our operational earnings per share for FY 2011. The fruit
processing business is an important addition for Asian Citrus
allowing us to move downstream in the value chain and create more
flexibility for our agricultural business. Consumer needs are
changing and they are consuming more juices. This acquisition
equips us with the necessary processing capacity, technical
know-how and distribution network to enter into the juice market.
Q Your sales to supermarkets increased last year and you have
previously mentioned that this had led to higher margins for
the Group. What is your preferred mix of sales into the different
channels and how do you expect this to affect your performance?
A We expect to increase our direct sales to supermarkets in
order to achieve a better margin as a result of the higher
selling price. The larger the direct sales to supermarkets,
the better the profitability and margin for Asian Citrus.
Sales to supermarkets are normally at a significant premium
and branded under our own brand of "Royal Star". Even after
additional costs associated with the sales to supermarkets,
such as packaging and transportation the margins are considerably
better than selling to wholesalers.
Q Let's talk about the China market. You are the largest supplier.
What is the threat of the other suppliers taking market share
from you? What is outlook for growth of the PRC market for
domestic consumption of oranges and other fruits that you
are selling?
A Agriculture in China is very fragmented. The threat of other
suppliers taking significant market share from us would be remote
as sizeable orange plantations are very capital intensive and take
many years to yield a meaningful amount of harvest. According to
USDA, the total production of oranges in China in 2010 was
approximately 6.5 million tonnes. With total population exceeding
1.3 billion in China, the consumption of oranges per capita is
estimated at below 5kg which is far less than the other developed
countries. The total orange consumption in China increased with a
CAGR of 10% from 2008 to 2010 according to USDA. In such a
fragmented market with sustainable growth in consumption, we are
very optimistic about the growth potential of the orange market in
China.
Q How does the sale of self-bred saplings help your business?
A Designed to release capital from our balance sheet, the sale
of self-bred saplings offer us the first right to buy back
the oranges from the farmers in the future. By doing so, we
are contracting with farmers to grow the oranges on our behalf
and it represents a less capital intensive means for Asian
Citrus to grow our production volume in the long run.
Q You have HKD2.2bn in cash. Given the fall in your share price
would you consider a buy back? If not, what is your plan for
the cash? Do you have a heavy capex rollout that will exhaust
the cash? Will you consider acquisitions?
A All our cash are kept in China and Hong Kong with major banks such
as China Construction Bank, Industrial and Commercial Bank of
China and Nanyang Commercial Bank where we have full access and
absolute control over such bank balances. A shareholders' mandate
for share buyback was granted at the last AGM in 2010 and we are
actively considering buyback of shares when the expected returns
from share buyback exceed the returns we can reasonably anticipate
from new investments, although we have to consider strengthening
our strategic position as the dominant producer of oranges and
juice concentrates. In FY 2012, the major capex would be the
continuing investment in the Hunan Plantation and the investment
in the new juicing facility in Baise city of Guangxi Region. We
are also on the lookout for potential acquisitions.
For further enquiries please contact
Asian Citrus
Eric Sung, Finance Director +852 2559 0323
Seymour Pierce Limited
Nandita Sahgal, Jonathan Wright (NOMAD) 020 7101 8000
Leti McManus, Richard Redmayne, (Broking)
Weber Shandwick Financial 020 7067 0700
Nick Oborne, Stephanie Badjonat,
John Moriarty
This information is provided by RNS
The company news service from the London Stock Exchange
END
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