American Lorain: Solid Results Despite Inflationary Climate in China

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 |  Includes: ALN
by: Dutch Trader

As some investors know I am long American Lorain (NYSEMKT:ALN) and I already wrote an article about the company on February 1 called The Long Case for American Lorain.

On Monday American Lorain announced their Q2 results.

Below, is the wrap up from their press release.

Q2 2011 Operational Highlights

  • Each product segment increased by over 19% in sales year-over-year
  • Convenience food segment continued to grow as a percent of total revenue
  • Continued channel building efforts and progress such as sales to railway system

Q2 2011 Financial Highlights

  • Total revenues of $35.7 million, an increase of 22.3% year over year
  • Gross margins decreased slightly to 21.4%, compared to 23.0% year-over-year and 22.7% at 12/31/2010
  • Net income attributable to common stockholders of $3.3 million, up 21.8% year-over-year
  • Diluted earnings per share of $0.09

2011 Operations and Market Overview

Sales by categories of product consisted of the following for the three months ended June 30, 2011 and 2010:

Three months ended

Category

6/30/2011

6/30/2010

% Increase

Chestnut

$

17,719,636

$

14,868,240

19.2%

Convenience food


$

12,807,758


$

10,269,991

24.7%

Frozen food


$

5,199,255


$

4,080,083

27.4%

Total

$

35,726,650

$

29,218,314

22.3%

Click to enlarge

Categories of product as a percentage of sales for the three months ended June 30, 2011 and 2010:

Three months ended

Category

6/30/2011 % of Total Revenues

6/30/2010 % of Total Revenues

% Difference

Chestnut

49.6%

50.9%

(1.3%)

Convenience food

35.8%

35.1%

0.7%

Frozen food

14.6%

14.0%

0.6%

Total

100%

100%

Click to enlarge

American Lorain's Chairman and CEO, Mr. Si Chen, stated, "We are satisfied with the Company's performance in the second quarter, during which we have achieved solid growth in each of our three business lines despite various difficulties such as the general inflation. We believe the largest contributor to our growth in the coming months will be the continued expansion of our convenience foods segment, as well as the chestnut food segment as we enter the seasonally strong quarters. We believe the continuous focus on product quality and building our distribution channels and brand equity is key to the Company's success in a competitive landscape and will continue to execute on these strategies in the coming months."

2011 Second Quarter Financial Review

American Lorain Corporation

Selected Financial Statements in USD ($ in 000s)

3 months ended

3 months ended

% Increase

6/30/2011

6/30/2010

Sales

$35,726,650

$29,218,314

22.3%

Cost of Revenues

($28,070,066)

($22,499,645)

24.8%

Gross Profit

$7,656,584

$6,718,669

14.0%

Gross Profit Ratio

21.4%

23.0%

Income from operations

$4,974,450

$4,591,463

8.3%

Earnings before tax

$4,747,488

$3,729,113

27.3%

Net income attributable to common stockholders

$3,262,451

$2,679,613

21.8%

Diluted earnings per share

$0.09

$0.10

(10.0%)

Weighted average diluted shares outstanding

35,030,343

26,750,592

31.0%

Click to enlarge
  • The Company reported sales for the 2011 second quarter of $35.7 million, an increase of 22.3% compared to $29.2 million in the second quarter of 2010.
  • Gross profit increased 14.0% to $7.7 million from $6.7 million in the prior-year period. Gross margin declined slightly to 21.4% for the three months ended June 30, 2011, from 23.0% for the prior-year period, due to inflation pressure. However, American Lorain expects that its margins will remain relatively stable and in the 20-25% range in the coming months.
  • Income from operations during the period was $5.0 million, an increase of 8.3% from $4.6 million reported in the prior year period. Operating margin for the 2011 second quarter was 13.9% compared with 15.7% in the prior year.
  • The Company had net income attributable to common shareholders for the second quarter of 2011 of $3.3 million, or $0.09 per diluted share based on 35.0 million diluted shares outstanding, compared to $2.7 million, or $0.10 per diluted share based on 26.8 million diluted shares outstanding in the prior-year period. The Company's net margin for the period was 9.1% compared with 9.2% in the prior year period.

Balance Sheet Highlights and Financial Position

(in millions)

6/30/2011

12/31/2010

% Increase

Cash and Cash Equivalents

$

9.6

$

12.7

(24.5%)

Restricted Cash

7.1

2.3

206.0%

Working Capital

74.8

57.4

30.3%

Total Liabilities

43.2

45.6

(5.4%)

Stockholders' Equity

138.7

129.3

7.3%

Click to enlarge

American Lorain had a book value per share at June 30, 2011 of $4.03.

Outlook for 2011

Mr. Chen concluded, "We are optimistic about the second half of 2011 based on what we are seeing thus far. The efforts of our management group in all three business segments are producing greater efficiencies in both the operating infrastructure and costs control which will help us as we continue to grow. Despite the current uncertainties weighing on the global economy, we remain optimistic about the outlook of our market growth in China and as well as abroad because of growing demand, improving brand recognition, and balanced supply. We will continue to execute on the Company's core strategies of driving growth through each of our business segments."

Conclusion and my view

I participated in the Conference Call today because I wanted to know a little bit more.

Despite the inflationary climate the company thinks that gross margin will stay between 20 and 25%. Most growth of the revenues comes from volume, so this is a positive sign.

The Share Repurchase Program is initiated but not yet implemented, so in Q3 and Q4 this is going to take place.

One of the most important contracts according my view is the one-year contract the company signed with the Beijing Railway Commerce Company. American Lorain has the chance to sell its various rice and chestnut products aboard the Beijing - Shanghai high speed train as well as all other trains managed under Beijing Railway Bureau.

Beijing Railway Commerce Company is wholly owned by the State Beijing Railway Bureau and is in charge of food related services in the railway system. During the one-month test sale period, the company's rice box and nitrogen-aerated fruit box products were well received by customers and that's why they got the contract. The plan is that they are also going to introduce big lunch and breakfast boxes.

Rough estimates for 2012 and 2013 about the food boxes and other food products sold in the train could come in between 100 million and 200 million boxes depending of course on the success and distribution.

The recent stock price doesn't reflect the enormous potential this company has. The stock is trading below 4x 2011 earnings and way under the company's book value of $ 4.03.

Disclosure: I am long ALN.