Breeding Unit Helps Keeps Anhui Results Buoyant

CHINA - Anhui Taiyang Poultry has announced a 54 per cent increase in gross profit for the first quarter of 2011.
calendar icon 18 May 2011
clock icon 6 minute read

Anhui Taiyang Poultry Co., Inc., a vertically integrated duck breeder, processor and distributor, has announced financial results for the first quarter ended 31 March 2011.

Financial highlights for the quarter include revenue totalling US$5.5 million, driven by 265 per cent increase in the higher margin Breeding Unit, while gross profit rose 54 per cent to $2.3 million. Gross margin improved to 42.3 per cent versus 19.7 per cent a year ago and operating profit increased 56 per cent to $1.3 million. Net income increased 214 per cent to $1.5 million, with basic and diluted earnings per share of $0.15.

Wu Qiyou, Chief Executive Officer and Chairman of the Board of Directors, stated: "Our business operates through three business units, Breeding, Feed and Food, all of which are vertically integrated. During the 2011 first quarter, we continued to enjoy a high price for ducklings of approximately an average of RMB7.05 or $1.07 per duckling, and RMB7.68 or $1.17 per kilogram for processing ducks. For this reason, we continued to sell a higher proportion of ducklings through our Breeding Unit, which carried higher margins at current prices than equivalent food product sold by our Food Unit, where prices remain relatively stable. As a result, during the 2011 first quarter, Breeding Unit revenue increased 265 per cent, overall gross profit increased by 54 per cent, and gross profit margins improved to 42 per cent from 20 per cent. Going forward we will continue to monitor industry trends and operate our business in the most profitable manner."

Revenue for the first quarter ending 31 March 2011 totalled $5.5 million, a decrease of 28 per cent as compared to $7.7 million for the first quarter ending 31 March 2010. During the 2011 first quarter, Breeding Unit revenue increased 265 per cent to $4.8 million as compared to $1.3 million for the same period the year prior. Feed Unit revenue was minimal during the 2011 first quarter generating negligible sales compared to sales of approximately $55,000 in 2010. Food Unit revenue decreased 88 per cent to $741,000 in 2011 as compared to $6.3 million in 2010.

Breeding Unit sales increased during the first quarter of 2011 primarily as a result of higher demand and market prices for ducklings in China. Because the Company generates its own ducklings from its biological assets, the cost of producing new ducklings does not fluctuate with the market selling price for the ducklings. At current industry pricing, the Company can maximise its profits by selling internally generated ducklings directly into the market, as opposed to using them as inputs for Food Unit products. The market price of packaged Food Unit products does not fluctuate as immediately with the market price of the input ducklings. Although overall revenue decreased by $2.2 million, gross profit increased by $817,000 as the margins on duck sales in 2011 exceeded Food Unit margins in 2010 as a result of substantially higher market prices for ducks in 2011. The Company expects sales to continue to fluctuate with the market price of ducks, and intends to continue to shift sales mix accordingly between ducks and food product to maximize profits as the market conditions change.

The Feed Unit realised minimal revenue during the 2011 and 2010 first quarters as products were primarily sold internally to the Breeding Unit. During the previous three quarters revenue within the Feed Unit was generated through one distributor. No sales were made to this distributor during the 2011 first quarter. The Company will attempt to market its feed products to external customers, primarily through feed distributors, in order to maintain revenue from such products.

Food Unit revenue was down for the 2011 first quarter as compared to the 2010 first quarter as a result of higher market prices for ducklings, which resulted in ducklings being sold to the market rather than being used internally for Food Unit products. When market prices of ducks is unusually high, on a consolidated basis the Company can make higher profits by selling ducks into the market rather than processing them into food products, which have a more stable market price, and thus will yield lower margins when the input costs increase. Because the total number of ducks produced by the Breeding Unit is fairly constant, the Company can maximize profits by selling more live ducks when their market price is high, and by selling more food products when the market price of ducks is low. Accordingly, sales of Food Unit products decreased substantially from 2010 to 2011 as a larger portion of the ducks produced at our facility were sold directly by the Breeding Unit due to the higher market price in 2011 relative to 2010, rather than being processed and sold as food product.

Cost of goods sold for the 2011 first quarter totaled $3.2 million, a decrease of 48 per cent as compared to $6.2 million for the same period in 2010. Cost of goods sold consists primarily of the cost of grains and fees paid to subcontracted farmers to raise commercial ducklings. Gross profit in 2011 increased 54 per cent to $2.3 million compared to $1.5 million in 2010. Gross profit margins increased to 42 per cent in 2011 as compared to 20 per cent in 2010. The increase in gross margin was primarily the result of increased sales prices of duck and the relatively smaller increase in the cost of grains and other materials used to raise ducks. As a result margins on duck sales increased from 36 per cent in the 2010 first quarter to 47 per cent in the 2011 first quarter.

Net income for the first quarter ending March 31, 2011 increased 214 per cent to $1.5 million as compared to $460,000 for the quarter ending March 31, 2010. During the quarter gross profit increased by $817,000 primarily from the higher market prices for ducks sold through the Breeding Unit. The Company also realized a gain of $910,000 in the first quarter of 2011 as a result of the decrease in the fair value of derivative financial instruments. Earnings per share for the 2011 first quarter was $0.15 based on 9.9 million basic and diluted shares as compared to $0.06 per share based on 8.1 million basic and diluted shares outstanding for the 2010 first quarter.

As of 13 May 2011, total shares outstanding were 10.4 million.

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