ACHL.L Regulatory News (ACHL)

ASIAN CITRUS HOLDINGS LIMITED

亞洲果業控股有限公司*

(Incorporated in Bermuda with limited liability)

(Stock Code: HKSE: 73; AIM: ACHL)

ANNOUNCEMENT OF THE INTERIM RESULTS

FoR THE SIX MONTHS ENDED 31 DECEMBER 2014

The board of directors (the "Board") of Asian Citrus Holdings Limited (the "Company" or "Asian Citrus") announces the unaudited consolidated results of the Company and its subsidiaries (collectively, the "Group") for the six months ended 31 December 2014 together with its comparative figures for the six months ended 31 December 2013.

Results Highlights

* For identification purpose only

** Conversion at £1 = RMB9.66 and RMB9.98 for the six months ended 31 December 2014 and 2013 respectively for reference only.

# Adjusted core financial information refers to activities for the period excluding change in fair value of biological assets and share-based payments.

RESULTS HIGHLIGHTS (Continued)

l Results for the first half year are as anticipated:

- Total orange production decreased by 25.0% to 110,993 tonnes due to (i) extensive damage at the Hepu Plantation from the impact of Typhoon Rammasun and Typhoon Seagull; and (ii) the effect of cryogenic freezing rain and frosts in Xinfeng in early 2014 on the fruit blossom, and the effect of high temperature and drought in Xinfeng during the period from September to December 2014 causing water scarcity for irrigation which affected the size as well as production volume of the winter orange crop (six months ended 31 December 2013: 147,927 tonnes).

- Revenue down by 21.9% to RMB584.4 million (six months ended 31 December 2013: RMB748.3 million).

- Adjusted core loss attributable to shareholders of RMB193.0 million (six months ended 31 December 2013: adjusted core profit attributable to shareholders RMB41.0 million) reflecting both the reduction in production volume and average selling price of winter oranges, as a result of the impact by the typhoons in Hepu and unfavourable weather in Xinfeng in 2014.

- Net operating activities cash outflow of RMB70.5 million (six months ended 31 December 2013: net operating activities cash inflow RMB165.1 million) and cash and cash equivalents of RMB1,528.2 million as at 31 December 2014 (31 December 2013: RMB2,108.0 million).

l The construction of Hunan Plantation was completed after 26,960 grapefruit trees were planted during the period.

l In view of the Group's net loss for the period, the Board does not recommend the payment of any interim dividend for the six months ended 31 December 2014 (six months ended 31 December 2013: Nil).

For further enquiries please contact:

CHIEF EXECUTIVE OFFICER'S STATEMENT

As foreshadowed in my first annual statement six months ago, the first half of the year has seen the Group face a number of challenges, with unfavourable weather conditions, which contributed to reducing harvest volumes and increasing our cost base, and a significant drop in the average selling price.

FINANCIAL HIGHLIGHTS

For the six months ended 31 December 2014, the Group's total revenue decreased by 21.9% to RMB584.4 million from RMB748.3 million in the same period last year. Adjusted core loss attributable to shareholders during the period, before the change in fair value of biological assets and share based payments, was RMB193.0 million, representing a decrease of 570.7% as compared to adjusted core profit attributable to shareholders of RMB41.0 million for the last corresponding period. This primarily reflected the reduction in production volume and average selling price of winter oranges, as well as higher direct costs, such as fertilisers and pesticides, as we sought to mitigate the impact of adverse weather conditions both on crops and on the leaching of nutrients from the soil.

The Group recorded a loss of RMB40.0 million from the change in fair value of biological assets for the six months ended 31 December 2014, compared with a loss of RMB583.0 million for the six months ended 31 December 2013; the Board would like to highlight that the change in the fair value of biological assets is non-operational and does not have any impact on the Group's cash flow.

After taking into account the non-cash flow items of the change in fair value of biological assets and share-based payments, the net loss for the period was RMB236.4 million (six months ended 31 December 2013: RMB548.0 million).

OPERATIONAL REVIEW

The Group controls three plantations in mainland China occupying a total area of approximately 103.3 square kilometres with two currently in full operation: Hepu Plantation in Guangxi Zhuang Autonomous Region ("Guangxi") and Xinfeng Plantation in Jiangxi Province. As I mentioned in my first annual statement, operations at our third plantation in Hunan Province, Hunan Plantation, are delayed but it remains on schedule to begin production in 2016.

For the six months ended 31 December 2014, the production yield at Hepu Plantation decreased by 71.1% to 7,146 tonnes in comparison to 24,699 tonnes for the same period last year. This was mainly due to the extensive damage from the impact of Typhoon Rammasun. The gross loss margin for Hepu Plantation was 431.4% this period, compared to a gross profit margin of 25.3% for the same period last year, as a result of the poor appearance of oranges inflected by citrus canker leading to a 40.2% decrease in the average selling price compared with the same period last year and the additional direct costs incurred resulting from the inclement weather.

The production yield for the six months ended 31 December 2014 at Xinfeng Plantation was 103,847 tonnes compared with 123,228 tonnes for the same period last year, a decrease of 15.7%. The gross loss margin for Xinfeng Plantation was 28.8% this period, compared to a gross profit margin of2.9% for the same period last year. The costs of maintaining the trees and plantation are fixed and when applied against a lower turnover this has severely impacted the gross profit margin. This has been further affected by the effect of cryogenic freezing rain and frosts in Xingfeng in early 2014 on the fruit blossomand the effect of high temperature and drought in Xinfeng area during the period from September to December 2014 causing water scarcity for irrigation, which impacted the size as well as production volume of the winter orange crop.

Through our 92.94% equity interest in Beihai BPG, the Group has three fruit processing plants. Two of them are located in Beihai City and Hepu County in Guangxi, covering a total site area of nearly 110,000 square metres, with an annual production capacity of around 60,000 tonnes and an average utilisation rate of 82.9% for the six months ended 31 December 2014. The third plant in Baise City, Guangxi remains in operation at a low level of capacity and will do so until more fruit processing business is attracted, at which stage further investment will be made into the business.  

OUTLOOK AND STRATEGY

Over the last two years, the inclement weather and persistent heavy rainfall has caused significant leaching of nutrients from the soil in Xinfeng Plantation, and the impact of Typhoon Rammasun prolonged the susceptibility of the orange trees to both citrus canker infection and soil leaching in Hepu plantation. High levels of direct costs are expected to be incurred in the short term. Due to the weak condition of the orange trees it will take a number of years for harvests at Hepu Plantation and Xinfeng Plantation to fully recover to previous levels.

While it is still early in the financial year to fully judge the materiality of the challenges highlighted above to the Group's likely full year performance, we anticipate that conditions in the second half will continue to be demanding.

Given the result of the first half year, the Board has decided not to pay an interim dividend. Our existing dividend policy, which stipulates a dividend of not less than 30% of our adjusted core net profit, remains unchanged.

Since accepting the position of the Chief Executive Officer of the Group, almost a year ago, I have sought to strengthen and develop the Group's underlying business. In this regard we have explored new-market opportunities regarding the diversification and innovation of the product mix in order to improve margins. We also continue to focus our attention on research and development in relation to the pricing and quality of our products.

Finally, on behalf of the Board, I would like to express my appreciation to our management team and employees for their continued valuable contributions and support. It has been a privilege to work with every single individual within Asian Citrus. Although our challenges remain, I am confident of the positive performance the Group can deliver in the medium and long term.

Ng Ong Nee

Chief Executive Officer

26 February 2015

MANAGEMENT DISCUSSION AND ANALYSIS

OPERATING PERFORMANCE

Revenue

The breakdown of revenue by type is as follows:

Sales of oranges

Revenue from sales of oranges decreased by approximately 27.3% to RMB341.0 million for the six months ended 31 December 2014. This was mainly due to a decrease ofapproximately 25.0% in the production yield to 110,993 tonnes (six months ended 31 December 2013: 147,927 tonnes) and an approximate decrease in average selling price of 2.9%.

The production yield from Hepu Plantation decreased by approximately 71.1% from 24,699 tonnes for the corresponding period of last year to 7,146 tonnes for the six months ended 31 December 2014. The decrease in production was mainly due to the extensive damage suffered from the impact of Typhoon Rammasun in July 2014, the strongest in the region for over 40 years, and Typhoon Seagull in September 2014 (the "Typhoons"). The Typhoons caused a significant drop in the volume of pre-mature fruit and leaves from the existing orange trees in Hepu Plantation. Furthermore, the impact of the Typhoons prolonged both the susceptibility of the orange trees to citrus canker infection and soil leaching in the plantation areas.

The production yield from Xinfeng Plantation decreased by approximately 15.7% from 123,228 tonnes for the corresponding period of last year to 103,847 tonnes for the six months ended 31 December 2014. This resulted from the effect of cryogenic freezing rain and frosts in Xinfeng in early 2014 on the fruit blossom and the effect of high temperature and drought in Xinfeng area during the period from September to December 2014 causing water scarcity for irrigation, which impacted the size as well as production volume of the winter orange crop.

The following table sets out the average selling prices of winter oranges in different plantations:

The average selling price of the winter orange crop in Xinfeng Plantation increased by approximately 2.7% for the six months ended 31 December 2014. However, the average selling price at Hepu Plantation was approximately 40.2% lower than the corresponding period of last year; this reduction reflects both extensive typhoon damage and the poor appearance of oranges inflected by citrus canker.

All of the Group's oranges were sold on the domestic market. The Group's customers can be divided into three categories, namely supermarket chains, corporate customers and wholesale customers. The breakdown of sales revenue by type of customer is as follows:

For the six months ended 31 December 2014, the volume and revenue from supermarket chains represented approximately 24.7% and 25.5% respectively of the total for the Group, compared to approximately 19.3% and 22.1% respectively for the corresponding period of last year; this percentage increase reflects more oranges sold to supermarket chains by Xinfeng Plantation.

For Hepu Plantation and Xinfeng Plantation, the volume sold to supermarkets was 2,169 tonnes and 25,218 tonnes respectively for the six months ended 31 December 2014 (six months ended 31 December 2013: 7,116 tonnes and 21,434 tonnes).

The Group sells two types of oranges to customers, namely ungraded oranges and graded oranges. Ungraded oranges are packaged and customers are required to arrange for the transportation at their own expense. Generally, ungraded oranges are sold to wholesale customers. Graded oranges are oranges that the Group grades, packages and delivers to the customers at the Group's cost, usually to supermarket chains and some corporate customers. The graded oranges are branded under our label "Royal Star", at a premium price compared to the ungraded oranges. The sales breakdown of the types of oranges is as follows:

Sales of processed fruit

The below table sets out the volume and revenue from the sales of processed fruit:

The Group has three fruit processing plants in the People's Republic of China (the "PRC"), which are located in Beihai City, Hepu County and Baise City, Guangxi ("BPG"). BPG processes over 22 different types of tropical fruit, including pineapples, passion fruit, lychees, mangoes and papayas (only products that account for over 10% of the revenue from the sales of processed fruit are shown in the table above).

Revenue from the sales of processed fruit decreased by approximately 12.9% to approximately RMB243.4 million for the six months ended 31 December 2014, mainly due to the decrease in sales of pineapple juice concentrates owing to limited raw material supplies as Typhoon Rammasun destroyed a significant volume of fruit crop, especially pineapples.

The average utilisation rate of the BPG was approximately 82.9% for the six months ended 31 December 2014.

BPG currently generates most of its sales from the PRC market, with key customers being beverage mixers supplying major beverage groups.

Cost of sales

The breakdown of the Group's cost of sales is as follows:

Cost of sales of oranges consists of raw materials such as fertilisers, packaging materials, pesticides and other direct costs such as direct labour, depreciation and production overheads. The cost of sales of oranges increased by approximately 16.2% from approximately RMB434.2 million to RMB504.3 million. The increase in cost of sales was mainly due to (i) the increase in consumption of both fertilisers and pesticides, which minimise further damage from the Typhoons so as to prevent citrus canker infection and soil leaching in Hepu Plantation areas; (ii) the increase in production overheads including weed covering, drip irrigation system maintenance and orange trees pruning owing to unfavourable weather in 2014. Consequently, the unit cost of production in Hepu Plantation and Xinfeng Plantation increased to approximately RMB12.02 and RMB4.03 per kg respectively for the six months ended 31 December 2014 (six months ended 31 December 2013: RMB2.83 per kg and RMB2.96 per kg respectively). It is expected that the high costs environment will continue in the short term.

Cost of sales of processed fruit mainly includes the costs of raw material fruit and packaging materials and other direct costs such as direct labour and production overheads. For the six months ended 31 December 2014, the cost of sales of processed fruit was broadly flat at approximately RMB213.0 million compared to the same period last year at approximately RMB215.4 million.

Gross loss

The Group's overall gross loss for the six months ended 31 December 2014 increased to approximately RMB132.9 million, compared to the gross profit of approximately RMB98.8 million for the last corresponding period. The overall gross loss margin increased to 22.7% for the six months ended 31 December 2014, compared to the gross profit margin of 13.2% for the last corresponding period.

The following table sets out a breakdown of the Group's gross (loss)/profit margin by plantation:

The increase in gross loss margin was mainly due to (i) the total production yield of the winter orange crop decreased by approximately 25.0%; (ii) the average selling price of the winter orange crop in Hepu Plantation dropped by approximately 40.2%; and (iii) the cost of sales of oranges increased by approximately 16.2%, reflecting the increase in consumption of both fertilisers and pesticides to minimise further damage from the Typhoons by preventing citrus canker infection and soil leaching in the Hepu Plantation areas.

The following table sets out a breakdown of the Group's gross (loss)/profit margin by business:

For BPG, the normalised gross profit margin for the six months ended 31 December 2014 decreased to approximately 12.5% compared to 22.9% in the same period last year. The decrease was mainly due to the increase in cost of raw materials owing to limited supplies.

Change in fair value of biological assets

The Group recognised a loss of approximately RMB40.0 million from an adjustment in the fair value of biological assets for the six months ended 31 December 2014, compared to a loss of RMB583.0 million for the corresponding period of last year. The loss was mainly due to the decrease in production yield, higher cost of sales and the decrease in the market prices of winter oranges. The Board wishes to emphasise that the change in fair value of biological assets is non-operational and does not have any effect on the cash flow of the Group for the six months ended 31 December 2014.

Selling and distribution expenses

Selling and distribution expenses comprise mainly advertising, staff commission, salaries and welfare of sales personnel, traveling and transportation expenses. The selling and distribution expenses of the Group decreased by 9.5% from approximately RMB21.8 million for the corresponding period of last year to approximately RMB19.7 million for the six months ended 31 December 2014, mainly due to a decrease in transportation costs resulting from a decrease in revenue from sales of graded oranges.

General and administrative expenses

General and administrative expenses comprise mainly of salaries, office administration expenses, depreciation, amortisation, and research costs. The general and administrative expenses of the Group were broadly in line with the same period last year at approximately RMB59.8 million for the six months ended 31 December 2014 (six months ended 31 December 2013: RMB59.5 million).

Other operating expenses

Other operating expenses were approximately RMB488,000 for the six months ended 31 December 2014 (six months ended 31 December 2013: Nil), and mainly included raw material written off as a result of the damage caused by Typhoon Rammasun.

Loss attributable to shareholders for the period

The loss attributable to shareholders for the six monthsended 31 December 2014was approximately RMB236.4 million, compared to a loss of approximately RMB548.0 million for last corresponding period, representing a decrease of approximately 56.9%.

The adjusted core loss attributable to shareholders, which refers to the loss for the period excluding the change in fair value of biological assets and share-based payments for the six monthsended 31 December 2014was approximately RMB193.0 million, compared to the adjusted core profit of approximately RMB41.0 million for the corresponding period of last year, representing a decrease of approximately 570.7%.

DIVIDENDS

In view of the Group's net loss for the period, the Board does not recommend the payment of any dividend for the six months ended 31 December 2014 (six months ended 31 December 2013: Nil). Our existing dividend policy, which stipulates a dividend of not less than 30% of our adjusted core net profit, remains unchanged.

CAPITAL STRUCTURE

As at 31 December2014 there were 1,249,637,884 shares in issue. Based on the closing price of HK$0.88as at 31 December2014, the market capitalisation of the Company was approximately HK$1,099.7 million (approximately GBP91.3 million).

HUMAN RESOURCES

There were a total of 1,865 employees (excluding Directors) of the Group as at 31 December 2014 (31 December 2013: 1,329 employees) and staff costs for the six months ended 31 December 2014 were approximately RMB83.0 million (six months ended 31 December 2013: RMB83.8 million). The Group aims to attract, retain and motivate high calibre individuals with competitive remuneration packages. Remuneration packages are performance-linked and business performance, market practices and competitive market conditions are all taken into consideration in calculating remuneration. Remuneration packages, which are reviewed annually, include salaries/wages and other employee benefits, such as discretionary bonuses, mandatory provident fund contributions and share options.

Liquidity

The current ratio and quick ratio were 16.61 and 14.70 respectively. The liquidity of the Group remained healthy with sufficient reserves for both current operational and future development.

Profitability

The asset turnover of the Group was approximately 0.10 (six months ended 31 December 2013: 0.10) for the six months ended 31 December 2014.

The basic loss per share for the six monthsended 31 December 2014 was approximately RMB0.19 (six months ended 31 December 2013: basic loss per share of RMB0.45).

The adjusted core net loss per share for the six months ended 31 December 2014 was approximately RMB0.15 (six months ended 31 December 2013: adjusted core net profit per share of RMB0.03), representing a decrease approximately 600.0%.

Debt ratio

The net cash position of the Group was approximately RMB1,528.2 million and RMB1,804.7 million at 31 December 2014 and 30 June 2014 respectively

Internal cash resource

The Group's funding resource is internal cash and cash equivalents. The Group did not have any outstanding borrowings as at 31 December 2014.

Charge on assets and contingent liabilities

Except for certain farmland infrastructure and machinery of approximately RMB775,000, none of the Group's assets were pledged as security and the Group did not have any material contingent liabilities as at 31 December 2014.

Capital Commitments

As at 31 December 2014, the Group had capital commitments of approximately RMB13.2 million, mainly in relation to the acquisition of plant and machinery in BPG.

Foreign exchange risk

The Group is exposed to currency risk, primarily through its cash and cash equivalents that are denominated in a currency other than the functional currency of the operation to which they related. The currencies giving rise to this risk are primarily Hong Kong dollars, United States dollars and British pounds.

The Group has limited transactions denominated in foreign currencies, hence exposures to exchange rate fluctuation is minimal. The Group currently does not use any derivative contracts to hedge against its exposure to currency risk. Management manages its currency risk by closely monitoring the movement of the foreign currency rate.

PLANTATIONS

The Group has three orange plantations in the PRC occupying approximately 155,000 mu (equivalent to approximately 103.3 sq.km.) of land in total, with approximately 46,000 mu (equivalent to approximately 30.7 sq.km.) located in the Hepu County of the Guangxi Zhuang Autonomous Region, Hepu Plantation, approximately 56,000 mu (equivalent to approximately 37.3 sq.km.) in the Xinfeng County of the Jiangxi province, Xinfeng Plantation, and approximately 53,000 mu (equivalent to approximately 35.3 sq.km.) in the Dao County of the Hunan province, Hunan Plantation.

Hepu Plantation

Hepu Plantation is fully planted and comprises of approximately 1.2 million orange trees. A total of 221,769 banana trees were naturally re-seeded from the original banana treesin August 2014, following clearance of the damage caused by Typhoon Rammasun. The first harvest of banana trees is expected in September 2015.

Xinfeng Plantation

Xinfeng Plantation is fully planted and comprises 1.6 million winter orange trees.

Hunan Plantation

Hunan Plantation is fully planted and comprises approximately 1.05 million summer orange trees and approximately 750,320 grapefruit trees as at 31 December 2014. The first harvest of oranges trees is expected in 2016.

The below tables set out the age profile as at 31 December 2014 and the production yield of the plantations for the six months ended 31 December 2014:

Summer orange trees

Grapefruit trees

Note: Grapefruit is a type of citrus fruit and is harvested during the winter period in the PRC.

Banana trees

Note: The first harvest of banana trees is expected in September 2015.

Winter orange trees

The below tables set out the age profile as at 31 December 2013 and the production volume of the plantations for the six months ended 31 December 2013:

Summer orange trees

Grapefruit trees

Note: Grapefruit is a type of citrus fruit and is harvested during the winter period in the PRC.

Banana trees

Winter orange trees

VALUATION OF BIOLOGICAL ASSETS

The Group engaged an independent valuer to perform a valuation of the fair value of the orange trees less costs to sell as at 31 December 2014.

The valuations of the Group's orange trees were conducted on the basis of discounted cash flow. The discount rate being applied to the discounted cash flow model is based on Capital Asset Pricing Model. The independent valuer began with the appraised value of the Group's orange trees by discounting the future income streams attributable to the Group's orange trees to arrive at a present value and then deducted the value of machinery and equipment and other assets (including plantation related machinery and equipment and land improvements) from the appraised value which are employed in the operation of the Group's plantations to arrive at a fair value of the biological assets.

Major assumptions

The discounted cash flow method adopted a number of key assumptions, which include the discount rate, market prices of oranges, production yield per tree, related production costs, etc. The values of such variables are determined by the independent valuer using information supplied by the Group, as well as proprietary and third-party data, as follows:

1) The discount rate applied for the six months ended 31 December 2014 was 18.0% (31 December 2013: 18.0%). The discount rate reflected the expected market return on the asset and can be affected by the interest rate, market sentiments and risk of the asset versus the general market risk.

2) The yield per tree variables represent the harvest level of the orange trees. The yield of orange trees is affected by the age, species and health of the orange trees, the climate, location, soil conditions, topography and infrastructure. In general, yield per tree increases from age 3 to 15, remains stable for about 10 years, and then starts to decline from age 25 to 35.

3) The market prices variables represent the assumed market price for the summer oranges and winter oranges produced by the Group. The independent valuer adopted the market sales prices prevailing as at the relevant reporting date for each type of orange produced by the Group as the sales price estimate. For the six months ended 31 December 2014, the wholesale prices per tonne of winter and summer oranges from Hepu Plantation and winter oranges from Xinfeng Plantation adopted were RMB2,310, RMB5,150 and RMB3,180, respectively; the supermarket selling prices per tonne of winter and summer oranges from Hepu Plantation and winter oranges from Xinfeng Plantation adopted were RMB5,320, RMB7,030 and RMB5,320, respectively. For the six months ended 31 December 2013, the selling prices per tonne of winter and summer oranges from Hepu Plantation and winter oranges from Xinfeng Plantation adopted were RMB3,270, RMB5,210 and RMB3,110, respectively.

4) The direct production cost variables represent the direct costs necessary to bring the oranges to their sales form, which mainly include raw material costs and direct labour costs. The direct production cost variables are determined by reference to actual costs incurred for areas that have been previously harvested, and have taken into account the projected long-term inflation rate of 3.0% per annum.

Sensitivity analysis

1) Changes in the discount rate applied result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to an increase or decrease of 1.0% in the discount rate of 18.0% applied by the independent valuer for the six months ended 31 December 2014:

2) Changes in the yield per orange tree can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the yield per tree applied for the six months ended 31 December 2014:

3) Changes in assumed market prices of the oranges can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the assumed market prices of oranges as at 31 December 2014 used to calculate the changes in fair value of orange trees less costs to sell for the six months ended 31 December 2014:

4) Changes in the assumed cost of sales can also result in significant fluctuations in the changes in fair value of orange trees less costs to sell. The following table illustrates the sensitivity of the Group's change in fair value of orange trees less costs to sell to a 5.0% increase or decrease in the Group's assumed cost of sales used to calculate the changes in fair value of orange trees less costs to sell for the year ended 31December2014:

The above sensitivity analyses are intended for illustrative purposes only, and any variation could exceed the amounts shown above.

Valuation

According to the valuation report of the independent valuer, the aggregate value of the orange trees in Hepu Plantation and Xinfeng Plantation as at 31 December 2014 was estimated to be approximately RMB1,040 million (30 June 2014: RMB1,080 million).

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the six months ended 31 December 2014