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| 8-K - China Green Agriculture, Inc. | v195974_8k.htm |
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Transcript
of
China
Green Agriculture
Fourth
Quarter Fiscal Year 2010 Financial Results
September
1, 2010
Participants
Ted
Haberfield – HC International
Tao
Li – China Green Agriculture – Chairman, CEO, and President
Ken
Ren – China Green Agriculture – Chief Financial Officer
Analysts
Ingrid
Yen – Brean Murray
Tim
Tiberio – Charting Capital Markets
John
Hickey – Cohen Capital
Louis
Fan – Rodman and Renshaw
Emma
Zhao – Roth Capital Partners
Echo
He – Maxim Group
Presentation
Moderator
Greetings
and welcome to the China Green Agriculture, Inc. Fourth Quarter of Fiscal
Year 2010 Earnings Call. At this time all participants are in a
listen-only mode. A brief question and answer session will
follow the formal presentation. As a reminder, this conference
is being recorded.
It
is now my pleasure to introduce your host, Ted Haberfield from HC
International. Thank you, you may begin.
Ted Haberfield – HC International – Executive Vice
President
Thank
you and welcome everyone to China Green Agriculture's quarterly conference
call, which will cover fourth quarter fiscal 2010 financial and operating
results. The earnings release accompanying this conference call
went to the wire a moment ago before the close of the market or at the end
of the market. On our call today is Mr. Tao Li, Chairman, CEO,
and President, and Mr. Ken Ren, the company's Chief Financial
Officer.
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I
would like to remind our listeners that management's prepared remarks
contain forward-looking statements that are subject to risks and
uncertainties, and management may make additional forward-looking
statements in response to your questions. Therefore, the
company claims the protection of Safe Harbor for forward-looking
statements that is contained in the Private Securities Litigation Reform
Act of 1995. Actual results may differ from those discussed
today, due to such risks factors but not limited to fluctuations in
customer demand, management of rapid growth, intensity of competition from
other providers with China Green Agriculture products and services,
general economic conditions, geo political events and regulatory changes,
and other information detailed from time-to-time with China and the
company's filings and future filings with the United States Securities and
Exchange Commission. Accordingly, although the company believes
that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will provide
and prove to be correct. In addition, any projections as to the
company's future performance represent managements' estimates as of today,
September 1, 2010. China Green Agriculture assumes no
obligation to update these projections in the future as market conditions
change.
At
this time I'd like to turn the call over to Mr. Li, who will be providing
brief opening remarks, followed by Mr. Ken Ren, the company's Chief
Financial Officer, to review the financial performance of the company in
the fourth quarter in fiscal year 2010. Mr. Li, the floor is
now yours.
Tao
Li – China Green Agriculture – Chairman, CEO, and
President
Thank
you, everyone, for joining us today. I am very pleased with the
progress that we have made in the past 12 months and would like to share
our major achievements on this call ... We are also aware of rumors about
the company and will be addressing them on this call and will be available
for questions after our prepared remarks. Thank
you.
Ken
Ren – China Green Agriculture – Chief Financial
Officer
Good
morning and good evening, everyone. Thank you for joining us
today. We're pleased with our financial results for the fourth
quarter for the full fiscal year ended June 30, 2010.
Net
sales for the three months ended June 30, 2010 were $16.2 million, an
increase of 54.5% from $10.5 million for the three months ended June 30,
2009. Net sales of JiNong, our division that sells humic
acid-based compound fertilizers, accounted for 94.2% of the total net
sales. JiNong's net sales increased 61.4% to $15.3 million for
the three months ended June 30, 2010, from $9.5 million for the three
months ended June 30, 2009.
Sales
volume increased 119.5% from 9,315 metric tons for the three months ended
June 30, 2010 from 4,243 tons for the three months ended June 30,
2009. These increases were mainly attributable to the increased
production due to greater capacity from the company's new production line
and to strong growth in granular fertilizers. Net sales of
Jintai, which is the sales of agricultural products such as top-grade
fruits, vegetables, flowers and colored seedlings, declined 9.2% to $0.9
million for the three months ended June 30, 2010 from $1.0 million for the
same three months period in 2009.
Gross
profits for the fourth quarter of fiscal year 2010 totaled at $9.1
million, an increase of 42.8% from $6.4 million in the same quarter of
fiscal year 2009. Gross profit margin was 56.3% for the fourth
quarter of fiscal year 2010, down from 60.9% a year ago.
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Operating
income for the fourth quarter of fiscal year 2010 was $7.1 million, up
36.2% from $5.2 million in the fourth quarter of fiscal year
2009.
Selling
expenses were up by 44%, $2.9 million due to a higher shipping costs and a
higher marketing expense related to the Company's branding
initiatives.
Operating
margin was 43.7%, compared to 49.5% in the same quarter of fiscal year
2009. Excluding $0.4 million of non-cash, plus compensation
expenses, operating income increased by 43.3% for the fourth quarter of
fiscal year 2010 by $2.3 million.
Net
income for the fourth quarter of fiscal year 2010 was $6.0 million, up
35.5% compared with net income of $4.4 million during the same period in
fiscal year 2009. For the same three-month period ended June
30, 2010 basic and fully diluted net income per share reported $0.25 as
compared to $0.24 for the same period in 2009, based on weighted average
shares outstanding of $24.4 million and $18.6 million,
respectively. The increase in net income was largely due to the
increase in net sales of the fertilizer product, which provides higher
corporate margins than that of the Company's agriculture
product. Net income margins approximated 37.0% and 42.1% for
the three months ended June 30, 2010 and 2009, respectively.
I
would now like to review our financial performance for the twelve month of
fiscal year 2010. Total net sales for the twelve-month ended
June 30, 2010 were $52.1 million, an increase of 48.0%, from $35.2 million
for the twelve-month ended June 30, 2009. JiNong's net sales,
driven mainly by the sales of humic acid-based compound fertilizers,
accounted for 88.0% of the total net sales in the twelve-month ended June
30, 2010.
JiNong's
net sales increased by 58.6% to $45.8 million for the twelve-month ended
June 30, 2010, from $28.9 million for the twelve-month ended June 30,
2009. This increase was mainly attributable to the commencement
of the Company's new production line in August 2009 and the sale of more
high-ended products, including the Company's recently introduced liquid
fertilizer products. Jintai's net sales totaled $6.3 million
for the twelve-month ended June 30, 2010 and that's flat from the same
period last year because the greenhouses in Jintai have reached their full
capacity.
Having
completed the construction of a hundred sunlight greenhouses in June 2010,
we anticipated growing and selling more higher margin flowers and orchids
and discontinuing some lower margin vegetable products.
For
JiNong, gross profits increased 58.7% and $28.1 million in the
twelve-month of fiscal year 2010 compared to $17.7 million in the same
period a year ago. For Jintai, gross profit increased 2.2% and
$2.8 million in the twelve months of fiscal year 2010 versus $2.8 million
in the same period a year ago. In total, gross profits
increased 51% to $31.0 million in the twelve-month of fiscal year 2010
versus $20.5 million. Gross margins were expanded by 120 basis
points year-over-year, from 58.2% to 59.4% with increases in both JiNong
and Jintai by .1% and 1.2%, respectively.
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Operating
income for the first twelve months of fiscal year 2010 rose 45.9% to $24.9
million, compared with $17.1 million for the first twelve months of fiscal
year 2009. Excluding $1.7 million of non-cash stock acquisition
expenses, operating income was up 54.4% to $26.6 million resulting in an
operating margin of 51.1%.
Net
income for the twelve months ended June 30, 2010 was $21.3 million, an
increase of 47.2%, from $14.5 million for the twelve months ended June 30,
2009. For the twelve-month period ended June 30, 2009, net
income per share was $0.91 as compared with net income per share of $0.78
for the same period in 2009. Based on weighted average shares
outstanding of $23.5 million and $18.5 million, respectively, the increase
was mainly a result of increased net sales by JiNong. Net
margin approximated at 40.9% and 41.1% for the twelve months ended June
30, 2010 and 2009, respectively.
I
will now disclose our balance sheet and liquidity. The Company
has cash and cash equivalents of $62.3 million at June 30, 2010, an
increase of $44.5 million from June 30, 2009, primarily due to the net
proceeds from public offerings in 2009. Cash flows from
operation increased 70.1% to $12.2 million. The Company had no
short-term loans or long-term debt as of June 30, 2010.
Net
accounts receivable stood at $15.6 million as of June 30, 2010 with
trailing twelve-month days sales outstanding of 82 days compared with days
sales outstanding of 78 days last year mainly due to a
temporary increase in credit terms for distributors in South
China affected by the floods. For the twelve months ended June
30, 2010, the Company spent $16.5 million for capital expenditures
primarily due to the purchase of land use rights for the expansion of our
Company's new greenhouse facility.
Let
me spend a few minutes updating you on a few of our strategic
initiatives. In the fiscal year 2010, we introduced 23 new
products, including nine new high margin liquid fertilizer products in the
fourth quarter alone. We added 43 new distributors during the
past twelve months bringing our total number of distributors to 573 number
of distributors. Having signed agreements with existing
distributors to becoming authorized reseller of our products in 608 of
their retail stores, we are aggressively expanding our distribution.
Finally, we have opened 15 directly-owned stores since launching our pilot
program in January 2010. The Company owned and operated stores
enhanced China Green Agriculture brands in new markets where we do not
compete our existing distributors. In June, we completed each
one of our research and development centers, completing the construction
of a hundred sunlight greenhouses on our 88 acre facility in
Beijing.
The
land purchase prior subsidy reported in our SEC filing is accurate and
truly reflects the total cost per U.S. debt. The transaction
was constructed through a land transfer acquisition from a state owned
entity. It was not conducted at a public auction from the Land
and the Natural Resource Bureau. The purchase cost was reported
at approximately $10.8 million, which included our land transfer fee, land
compensation fee, land use rights transfer fee, state tax, registration
fee, survey and mapping fee, and appraisal fee.
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In
July, we completed seedling conservation and expected seedling
transportation, transplantation, for this a hundred greenhouses by October
2010. We were also on schedule to complete Phase II of the
project, which includes the construction of 12 intelligent greenhouses by
the end of calendar year 2011. Once completed, this new
research and development opportunity will allow us to introduce more
customized, higher margin fertilizer products and the conservation of more
agriculture products.
We
also launched nine new liquid-based fertilizer products, accounting for
almost 4% of our fertilizer revenues in the fourth quarter. We
also added 21 new distributors during the quarter and selected over 300
stores as China Green Agriculture authorized retailers of our JiNong
branded humic acid-based compound fertilizer products. We need
to first lay the foundation for sustained growth in our fully line product
and revenues and profit margins.
In
July, we closed our acquisition of Gufeng and its wholly-owned subsidiary
Tianjuyuan for a total purchase price of approximately $31.8 million in
cash and stock as we disclosed in our 8-K filed on July 7,
2010. We also intend to provide up to $14.7 million to Gufeng
for their working capital needs in the future as needed.
In
the three months ended March 31, 2010 Gufeng’s revenue increased 22.4% to
$17.1 million, and net income increased 46.8% to $1.1
million. We continue to believe that Gufeng will contribute at
least 88.4% in revenue and at least $10.6 million in net income for the
fiscal 2011, which will end on June 30, 2011. I will provide a
detailed breakdown of our financial projections regarding Gufeng in a
minute when I discuss our fiscal year 2011 guidance.
Let
me review the strategic rationale for this acquisition. Gufeng
improves our competitive position in three ways. It provides us
with significantly greater capacity to 355k metric tons per year, it
advances our distribution by 26.0% to over 700 distributors, and it
broadens our portfolio of organic and non-organic fertilizer to serve a
larger base of customers. We have already discussed several
images with Gufeng’s management team that we will implement over the next
3 to 12 months.
Now,
our guidance, for the fiscal year ending June 30, 2011, we are forecasting
revenues of $150.5 million to $152.8 million, net income of $36.2 million
to $36.8 million, and earnings per share of $1.35 to $1.37 based on $26.8
million weighted average shares with presenting growth of 188%, 72.6%, and
49.5%, respectively.
For
the first quarter ended September 30, 2010, we expect revenues of $38.2
million to $38.6 million, net income of $7.7 million to $8.0 million, and
earnings per share of $0.29 to $0.30 based on $26.8 million weighted
average shares.
This
guidance reflects the anticipated strong sales resulting from the
Company's increased production capacity from 55k metric tons to 355k
metric tons, which reflect a full year contribution from Gufeng
incorporating our consolidated fiscal year 2011, financial guidance is
approximately $88.4 million of revenue and $10.6 million of net income
from Gufeng.
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Currently,
one-third of Gufeng's 300k metric tons production facility is capable of
producing organic compound fertilizers. We plan to invest $7.7
million in capital expenditures for Gufeng, which include $1.3 million to
convert existing 100k metric tons of production facility from chemical
fertilizers to higher market humic acid-based organic compound fertilizers
with full conversions to be completed by the end of the calendar year
2010. In addition, we will also spend $6.3 million to build a
new 200k metric ton production line, which will produce humic acid organic
compound fertilizers with construction beginning this September and the
production commencing by March 2011. Upon completion Gufeng's
production capacity will increase by 66.0% to 500k metric tons, out of
which 400k metric tons will be producing humic acid-based organic compound
fertilizers.
In
addition, we will spend approximately $14.7 million on working capital to
ramp up Gufeng's production utilization from the current 60.0% to 80.0% by
annual fiscal 2012. Once we are able to fully transition
Gufeng's production and distribution to our target levels, we expect a
$140 million in revenue contribution from Gufeng in fiscal
2012. We also expect Gufeng's gross margin to improve from
approximately 10.0% in the fiscal third quarter ended March 2010 to 20% by
the fiscal fourth quarter ended June 30, 2011.
Finally,
we expect Gufeng to introduce 15 new products and add over 30 new
distributors in the fiscal year 2010, two months after closing
acquisition. Management remains very confident about the
financial and strategic benefits that this acquisition will provide for
our Company and to our shareholders.
Before
I conclude my prepared remarks, I would like to discuss our strong
operating model. We ended fiscal year 2010 with over $62
million of cash and cash equivalents and no debt on our balance sheet,
$86.2 million of working capital generated $12.2 million of cash flows
from operation, and have minimal bad debt exposure.
We
were able to sustain a healthy growth in profits and cash flows for
several reasons. Our value-added products increased our
customers' yields; thereby, improving their sales and
profits. We have a significant opportunity to grow our market
share in a highly risk fragmented fertilizer market in China by
introducing new products and expanding in new territories.
The
ongoing research and development efforts and significantly expanded
manufacturing capacity and the product portfolio from Gufeng provides the
foundation of future growth. In September 2009, JiNong was
granted with a value-added tax exemption from September 1, 2009 to
December 31, 2015 by the Local Taxation Bureau. We have ongoing
productivity discussions with local and central government officials about
ways we can help reduce pollution and improve the welfare of newer
farmers.
On
the corporate governance front, we are committed by abiding the high
standards that comes with being a NYSE-listed Company. As such,
management is evaluating and looking to implement specific action items to
help us accomplish this goal. I, along with the rest of our
management team and board of directors, remain extremely confident in our
ability to execute and with the integrity of our financial controls to
ensure accurate and complete reporting. We look forward to
providing you with current updates on improvements we make in this
regard.
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This
concludes our prepared remarks for the fourth quarter of fiscal year
2010. I would now like to invite listeners to ask any questions
you may have with Chairman Mr. Li and myself.
Moderator
Thank
you. We will now be conducting a question and answer
session. (Operator Instructions) Our first question
is with Ingrid Yen with Brean Murray, please go ahead with your
questions.
Ingrid
Yen – Brean Murray
Hello,
everyone. Hello, can you hear me?
Moderator
Yes,
we can hear you.
Ingrid
Yen – Brean Murray
Great. My
first question is about the assumptions you made in your guidance for
2011. How much of this will be coming from your existing
operation and how much this will come from the Gufeng operation you
acquired?
Ken
Ren – China Green Agriculture – Chief Financial
Officer
For
Gufeng, we expected that we will contribute revenue $88.4 million, and
then for net income contribution, we will contribute $10.4
million.
Ingrid
Yen – Brean Murray
Okay,
$10.4 million or $10.6 million? I remember in the press
release, is it $10.6 million?
Ken
Ren – China Green Agriculture – Chief Financial
Officer
Specifically,
we expected that the sales from JiNong is about 40.5% in the next year's
guidance, and 4.1% from Jintai, and 50.5% from Gufeng. And then
for all our using the new research and development, the revenue
contributions is still immaterial, less than 0.5%.
Ingrid
Yen – Brean Murray
Okay,
great, thank you.
Moderator
Our
next question is from Tim Tiberio with Charting Capital Markets, please go
ahead with your questions.
Tim
Tiberio – Charting Capital
Markets
My
first question is, what is the current capacity utilization of your
organic facilities?
Ken
Ren – China Green Agriculture – Chief Financial
Officer
The
current utilization of our organic facilities is around
40%.
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Tim Tiberio – Charting Capital
Markets
Okay.
Ken Ren – China Green Agriculture – Chief
Financial Officer
That's
like 37% to 40%.
Tim Tiberio – Charting Capital
Markets
I
guess at Gufeng, you probably haven't released this yet, but what was the
capacity utilization rate at the end of June?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Around
60%.
Tim Tiberio – Charting Capital
Markets
Okay. And
then one other question, I know there's been a lot of questions around tax
returns for a lot of these Chinese companies. There's been some
issues raised between the VAT tax that appears to have been accrued and
was being paid to the Chinese tax authorities.
I
guess my first question is, can you walk us through that if there is a
difference? And then secondly, how can investors actually get
tax returns from the Chinese Central Government? We've heard
that due to privacy laws actually getting consolidated tax form is very
difficult. So just hoping that maybe you could address
that.
Ken Ren – China Green Agriculture – Chief
Financial Officer
Okay,
with respect to that question, I will let Mr. Li address it, and I will
translate for him, hold on for a second.
(Chinese
Language)
Tao Li – China Green Agriculture – Chairman, CEO,
and President
(Chinese
Language)
Translator
I
understand there are some rumors. People are concerned about
the taxes that we filed with the local government. What I want
to emphasize here is the value added taxes and the income taxes that we
paid to the taxation bureaus are complete. The information out
there is showing partial data and we would be more than happy to share
with you our information which matched exactly to what we filed to the
SEC.
Tim Tiberio – Charting Capital
Markets
OK. Maybe
I can take that off line.
My
last question, obviously you have quite a bit of cash on your balance
sheet outside of some of your R&D investment. Is there any
thought about how else you might look to deploy that cash over the next
few quarters?
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Ken Ren – China Green Agriculture – Chief
Financial Officer
Yes,
I can address that question. For the fiscal year 2011, we have
certain capital expenditure budgets, specifically we will allocate to our
three subsidiaries. With regard to Gufeng, like I already
touched base in the prepared remarks, we will upgrade one existing
production line, which has metric ton capacity of 100,000 by spending RMB
9 million, which is roughly equivalent to $1.5 million. And we
will also install a new production line for Gufeng to produce humic acid
based organic compound fertilizer. Under the new production
line, we will have the production capacity of 200,000 metric
tons. So in total, after these capital expenditures plans,
Gufeng’s capacity will increase by 66%, and the new production line is
budgeted at RMB 43 million, which is roughly $7 million.
And
then for our research and development center …, we budgeted 85 million in
RMB. That can be translated into $13 million U.S. dollars and
specifically, we will continue to spend RMB 21 million for the sunlight
greenhouses, that’s roughly $3 million. And then we will spend
RMB 35 million for the intelligent greenhouse that we already planned, and
the budget for that piece is RMB 35 million. So, RMB 35 million
is roughly $6 million U.S. dollars. We will also spend less
than RMB 1 million in some dormitory building construction, and then we
will spend another RMB 12 million, which is less than $2 million in
related projects, such as weather pipelines and …well
drilling. Then we will also spend another RMB 12 million for
some other infrastructure connection projects to get our facilities
integrated with the network.
And
then similarly with our JiNong, the liquid and organic fertilizer
business, we will spend some additional less than $2 million U.S. dollars
for cap ex to improve the existing production capacity and some other
related small projects. So, that’s a total RMB 12 million, less
than $2 million U.S. dollars. So that’s our cap ex plan for the
next fiscal year.
Tim Tiberio – Charting Capital
Markets
OK,
thanks for taking the time to answer my questions.
Ken Ren – China Green Agriculture – Chief
Financial Officer
You’re
welcome.
Moderator
Our
next question is from John Hickey with Cohen Capital. Please go
ahead with your question.
John Hickey, Cohen Capital
Yes,
thanks for taking my questions. The first question I have
relates to your land purchase. You had mentioned it earlier,
but I may have missed something, it was $10.8 million as the reported
purchase price, but the official records are $2.5
million. Could you go over the reconciliation between those two
amounts one more time?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Sure,
we will be more than happy to give you certain details of our land
acquisition. Actually, we received inquiries on this land
acquisition from investors and media. There are some
understandings of the land property market in China. I would
like to emphasize that. This land acquisition was purchased
from a state owned enterprise through a private transaction, not from the
government. So, in terms of reconciliation, we paid a total of
$10.7 million U.S. dollars, which is the equivalent of $73.2
million. The fee items we paid to the government constitute
land granting fee of $5.2 million and land compensation fee of $12.1
million. In addition to that, we paid the seller $54.8 million
in terms of land use transfer fee and on top of all these fees, we also
paid other miscellaneous charges, such as fee tax, land use rights,
reservation fee, mapping fees, survey fee, appraisal fee. So in
total, that’s 73.2 million RMB, equivalent to $10.7 million U.S.
dollars.
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John Hickey, Cohen Capital
OK,
so for this kind of transaction, this private acquisition from the state
owned enterprise where the purchase price is $2.5 million, is it normal
for the fees and the rights and everything that you just described to be
four times the land purchase price?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Actually,
I would like to reemphasize that. The $2.8 million includes
just the land granting fee and the land compensation
fee. That’s just a part of the total land purchase
price. And the majority of the land purchase price is paid to
the seller in terms of land use transfer fee.
John Hickey, Cohen Capital
OK. Thanks.
Also,
you mentioned earlier regarding –
Ken Ren – China Green Agriculture – Chief
Financial Officer
I
would like to also reemphasize that in China, the land transaction can
either be conducted by the government through public auction or private
transaction, and in our case, it was executed through private
transaction. Then lately, there have been similar land
transactions in a neighboring area. For instance, in July 2010
in the same city, same suburb and area, three land transactions auctioned
by the government at roughly $120,000 per acre for project use purpose,
for industrial project purpose use. That’s through the auction
transaction. The total cost we paid is close to prices by the local
government through auction channel constituting land granting fee and land
compensation fee, totaled at $120,000 U.S. dollars per acre.
For
ours, the land price we paid is in the same ballpark, roughly $120,000
U.S. dollars per acre. And then nearby, the closest facility
area, the land price per acre is in the ballpark of $2-3 million U.S.
dollars per acre. And then if we rationale the purchase price
of $2.8 million U.S. dollars of the total 88 acres of our transaction, it
can be translated to an amount that our land per acre price is at
$20,000-$30,000 U.S. dollars. So that’s an unachievable price,
in today’s China property market, that’s impossible price. It’s
just an impossible price that one can acquire at such a low
level. It’s physically a joke on local property
market.
John Hickey, Cohen Capital
OK,
thank you for shedding light on that issue.
Shifting
gears for a second, you mentioned earlier Gufeng’s profitability at $1.1
million, what period was that for?
Ken Ren – China Green Agriculture – Chief
Financial Officer
That’s
for – you mentioned in Gufeng, right?
John Hickey, Cohen Capital
Yes.
Ken Ren – China Green Agriculture – Chief
Financial Officer
OK,
that period is for January through March in calendar year
2010.
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John Hickey, Cohen Capital
OK,
what was the revenue last period?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Just
a second. I think we disclosed that in a related 8-K and then
the revenue for that quarter period is $17 million.
John Hickey, Cohen Capital
OK. That
wraps up my questions. Thanks very much for helping me
understand.
Moderator
The
next question is from Emma Zhao with Roth Capital
Partners. Please go ahead with your question.
Emma Zhao, Roth Capital
Partners
Hi. Can
you hear me?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Yes,
we can hear you clearly.
Emma Zhao, Roth Capital
Partners
This
is Emma from Roth Capital. I’m filling in for Howard
Zhou. I know that you have talked about the land acquisition in
detail, so I won’t bother you with that. My question is that
your stock is trading at a pretty low valuation right now, and you have a
very strong cash balance and cash flow. Would you consider any
share buyback plan in the future?
Ken Ren – China Green Agriculture – Chief
Financial Officer
With
respect to that question, I will ask Mr. Li to answer.
Tao Li – China Green Agriculture – Chairman, CEO,
and President
[Chinese
spoken]
Emma Zhao, Roth Capital
Partners
[Chinese
spoken]
Ken Ren – China Green Agriculture – Chief
Financial Officer
We
are considering a share buyback action. However, I would like
to remind everybody that this action item is subject to the approval of
our board of directors. As the board of directors has not
discussed such action item yet, again, we will participate in such meeting
and then such action items will be feasible or possible for the nearby
future.
Emma Zhao, Roth Capital
Partners
Is
there a plan for the board meeting? Have you submitted a
proposal?
Tao Li – China Green Agriculture – Chairman, CEO,
and President
[Chinese
spoken]
Emma Zhao, Roth Capital
Partners
OK,
thank you.
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My
next question is, I know that the Gufeng facility will contribute to your
sales and earnings next quarter. Could you shed any light on
the gross margin expectations for the next quarter when Gufeng starts to
contribute?
Ken Ren – China Green Agriculture – Chief
Financial Officer
We
understand that Gufeng has limited earnings quality. However,
from the CGA standpoint, CGA has the capability to launch appropriate
growth plan and has the ability to execute that plan and exceed investor
expectations. We believe that Gufeng will provide an excellent
foundation for CGA’s specific growth expansion and this will help us to
conduct a successful new horizontal integration, and we believe that the
management from Gufeng is very capable for integration with our existing
management. In time, we believe that it will be proved to be a
very successful acquisition.
In
terms of margin, I can answer you that right now the Gufeng’s profit
margin, the gross profit margin, is roughly 10%. By our
strategic initiative at Gufeng, such as upgrading their production line
and installing a new production line with injecting our humic acid
proprietary technology, the margin will improve from the current low level
to about 20% by the fiscal year 2012. So, we will prove that we
have the ability to turn this acquisition into a very good
one.
Emma Zhao, Roth Capital
Partners
So
it will increase to 20% in 2012? What about next
year? Will it increase gradually or will it remain in the low
10 to teens margin?
Ken Ren – China Green Agriculture – Chief
Financial Officer
In
our projection and our expansion plans with Gufeng, we will need three to
nine months to fully turn the project plan into fully operable, so that by
the fiscal year 2011, the margin will be ramped up.
Emma Zhao, Roth Capital
Partners
So,
roughly 20%?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Yes.
Emma Zhao, Roth Capital
Partners
Is
there a premium gross margin that you are targeting for that granular
business, for Gufeng? Is 20% a premium gross margin that you’re
targeting or is there room to improve?
Ken Ren – China Green Agriculture – Chief
Financial Officer
This
is our initial goal and we believe there is space to improve.
Emma Zhao, Roth Capital
Partners
OK,
so it will actually improve – just that we are targeting, like, 20% in
fiscal year 2011 and 2012. Am I right?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Can
you repeat your question?
Emma Zhao, Roth Capital
Partners
Is
there room for improvement for margin going forward, but we are just
targeting 20% for fiscal year 2011 and 2012?
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Ken Ren – China Green Agriculture – Chief
Financial Officer
That’s
roughly a fair expectation of 20% in fiscal 2011 and fiscal
2012.
Emma Zhao, Roth Capital
Partners
OK,
that’s all the questions I have. Thank you.
Moderator
The
next question is from Louis Fan with Rodman and Renshaw. Please
go ahead.
Louis Fan, Rodman and Renshaw
Hi,
thanks for taking my question. Congratulations on a strong
quarter, Chairman Li and Mr. Ren.
First
of all, I just want to clarify something that I think I have heard from
Ken during his earlier announcement. Did you say that the
company is building a new facility starting in September that when
completed will increase the company’s annual production capacity from
355,000 metric tons to 500,000 metric tons. Is that
correct?
Ken Ren – China Green Agriculture – Chief
Financial Officer
Yes,
that is correct. That’s for Gufeng. We add, for
Gufeng, only for Gufeng, we add additional 200,000 metric
tons.
Louis Fan, Rodman and Renshaw
OK,
because initially based on the company’s previous press announcement that
–
Ken Ren – China Green Agriculture – Chief
Financial Officer
Starting
this September, and it will take at least 6 months to complete
installation.
Louis Fan, Rodman and Renshaw
OK,
because initially based on the company’s previous press release, and also
actually in your current press release, you say the Gufeng facility can
increase the company’s production capacity to 355,000 metric tons, so
there’s an additional 145,000 metric tons.
Ken Ren – China Green Agriculture – Chief
Financial Officer
There’s
additional 200,000, so in total that will be 555,000 metric
tons.
Louis Fan, Rodman and Renshaw
OK,
555,000, thank you. So you expect the expansion will start in
September and when can it get completed?
Ken Ren – China Green Agriculture – Chief
Financial Officer
It
will take at least 6 months for the new production installation to
continue.
Louis Fan, Rodman and Renshaw
OK,
thank you.
Ken Ren – China Green Agriculture – Chief
Financial Officer
After
March 2011.
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Louis Fan, Rodman and Renshaw
OK. The
next question is, you indicated that the company has this new distribution
plus retail branding strategy, and in fact you have opened 15 direct-owned
retail stores. So, does that mean the company is switching its
distribution strategy away from distributors, or is this going to be
somewhat of a healthy balance between distributors and retailers, with
emphasis on distributors?
Ken Ren – China Green Agriculture – Chief
Financial Officer
I
think the real case is that we’re still focusing on our core marketing
channel through distributors, not retailers. The retail store
program is somewhat complementary. It is more like a balancing
rather than a strategic shift in sales and distribution.
Louis Fan, Rodman and Renshaw
OK. Next
question, this will be a quick one. What is the average selling
price of JiNong products in the quarter?
Ken Ren – China Green Agriculture – Chief
Financial Officer
It’s
roughly $2,100 U.S. dollars per metric ton.
Louis Fan, Rodman and Renshaw
OK. One
more question. There appears to be some difference between the
VAT tax accrued and what was paid to the Chinese tax
authority. Can you please help us understand what occurred
there, and reconcile the difference?
Ken Ren – China Green Agriculture – Chief
Financial Officer
I’ll
let Mr. Li answer and I will translate.
Tao Li – China Green Agriculture – Chairman, CEO,
and President
[Chinese
spoken]
Ken Ren – China Green Agriculture – Chief
Financial Officer
I
would like to emphasize that the actual value added tax we submitted or we
paid to the Chinese government is exactly consistent with the amount we
have filed with the SEC. So according to the government record,
the tax payment exactly matches with each other. So, in terms
of the rumors and the anonymous report, we’re not sure where the report
comes from and that information appeared to be incomplete and
inaccurate. Again, we were waived the value added tax from the
majority of our humic acid based organic fertilizer product from September
2009. It was since then that our product is not subject to
accrual of value added tax, the majority of our organic fertilizer
products. However, there are still some other products, but the
majority is waived from the value added tax.
Louis Fan, Rodman and Renshaw
OK,
thank you very much.
Moderator
We
have time for one last question. The last question is from Echo
He from Maxim Group. Please go ahead.
Echo He, Maxim Group
Hi,
Ken, thank you for taking my question. Could you explain in
more detail how you’re going to grow your sales, given that you are adding
this big amount of capacity? And also you’re converting
Gufeng’s capacity mostly to organic fertilizer, so that probably will be
different from Gufeng’s original distribution for customers. So
how are you going to deal with this situation and grow your sales through
your own distribution network?
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Ken Ren – China Green Agriculture – Chief
Financial Officer
We
will emphasize our growth through our core distribution network expansion
by adding new distributors. And concurrently, as we have
illustrated and we have already achieved, by adding new product timely and
effectively and proactively. So, in the past two summer
quarters you can see that both added new products contribute potentially
for our net income… That’s where we’re going to continue
to focus by launching new products, setting up new
distributors. The original program will serve as
supplementary.
And
then with respect to Gufeng, we feel that our current need or focus is to
replicate or articulate Gufeng’s production capacity into compatible or
integral production facilities to our product offering plan. So
that’s why we budget … cap ex to upgrade their existing production
facility and the new production facility.
And
then by that time, the majority of Gufeng’s production capacity will be
capable of delivering humic acid organic compound fertilizers and then
organic humic acid based fertilizer will be our mainstream. By
delivering the humic acid asset compound fertilizer through our unique
marketing and distribution channel work, we can actually improve on
product margins.
Echo He, Maxim Group
Are
you going to change your Gufeng current customers to a new customer base
because they’re using chemical fertilizers - you’re converting to organic
and chemical fertilizers, right? Compound
fertilizers? [Chinese spoken]
Tao Li – China Green Agriculture – Chairman, CEO,
and President
[Chinese
spoken]
Echo He, Maxim Group
OK,
I understand.
Ken Ren – China Green Agriculture – Chief
Financial Officer
Yes,
with respect to Gufeng’s existing customer base, although currently these
customers are more like inorganic chemical fertilizer users, by upgrading
Gufeng’s production facility to become more organic fertilizer oriented,
then those customers will be welcoming equivalent new products after our
production line expansion and upgrading. And then each customer
base will gradually shift from inorganic fertilizer oriented base customer
population to a compound organic fertilizer base customer
population. For those who are sticking to the chemical
fertilizer, Gufeng will keep a small portion of their production capacity
to focus on the chemical fertilizer production so that each chemical
fertilizer customer’s need will still be met. By integrating
Gufeng’s sales force with JiNong’s sales and marketing force, we believe
that the total marketing strength will be enhanced by effective
integration.
… Hee, Maxim Group
OK,
great. The receivables – since Gufeng has just so many
customers and such high sales, would you expect the receivables will grow
at the same December scale as the sales in the next fiscal
year?
Ken Ren – China Green Agriculture – Chief
Financial Officer
I
would also like to emphasize that Gufeng’s accounts receivable collection
is different and that they have certain customer concentration,
higher level of customer concentration. We believe that by
continuing to expand their customer base, account receivables level will
gradually improve.
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Echo He, Maxim Group
What’s
the current receivable base for Gufeng?
Ken Ren – China Green Agriculture – Chief
Financial Officer
With
regard to Gufeng, the account receivables, I think we reported it in the
related 8-K and you’re more than welcome to check it out. As of
now, we are subject to the following obligation at the Roth Conference,
but we would be more than happy to discuss that with you
later.
Echo He, Maxim Group
OK,
thank you so much.
Moderator
I
would now like to turn the call back over to management for closing
remarks.
Ken Ren – China Green Agriculture – Chief
Financial Officer
Thank
you, everyone, for joining us at the annual earnings conference
call. This concludes today’s annual conference
call. Thank you.
Moderator
This concludes today’s
teleconference. Thank you for your
participation.
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