China Shengda Packaging Group Inc. Announces First Quarter 2011 Results

HANGZHOU, China, May 13, 2011 /PRNewswire-Asia-FirstCall/ -- China Shengda Packaging Group Inc. (NASDAQ: CPGI), a leading Chinese paper packaging manufacturer, today announced its financial results for the three months ended March 31, 2011.

First Quarter 2011 Results

Revenues declined 2.4% to $26.9 million from $27.6 million in the prior year period.  The decline in revenues was primarily the result of a decrease in sales volume.  Sales volume decreased 5.3% to 73.6 million square meters from 77.7 million square meters in the prior year period.  The decreased sales volume was mainly the result of (i) a reduction in demand from the Company's customers due to challenges resulting from more restrictive financial policies by the People's Bank of China (the "PBOC"), which adversely affected many of the Company's customers, and (ii) a loss of certain orders due to labor shortages resulting from longer delays in the Company's workforce returning following the Chinese New Year holiday as compared to the same period in 2010. As reported by Chinese media sources, the problem of workers not returning to work in greater numbers was more pronounced in the Yangtze River Delta Economic Zone ("YRD") region this year compared to prior years.

Mr. Daliang Teng, Chief Executive Officer of China Shengda Packaging, commented, "We did not lose any customers in the first quarter, but our orders from existing customers declined.  Manufacturing enterprises in the YRD, many of whom are our largest customers, felt the impact of more restrictive financial policies implemented by the PBOC during the first quarter of 2011.  In addition, after the Chinese New Year holiday, we experienced an unexpected shortage of workers.  While there are always some percentage of workers that delay or do not return following the Chinese New Year, this phenomenon was more pronounced this year in the YRD region.  As a result of these shortages, we were unable to fulfill certain orders.  Our furniture packaging business saw the greatest impact given that the December to April timeframe is the peak season for the furniture manufacturing industry."

Color cartons accounted for 26.0% of total revenues for in the first quarter of 2011 and flexo cartons accounted for 74.0%, compared to 25.7% and 74.3%, respectively, in the same period of 2010. Average per square meter prices for color cartons and flexo cartons during the first quarter of 2011 were approximately $0.42 and $0.35, respectively, as compared to approximately $0.41 and $0.34, respectively, for the same period of 2010.

Consumer and industrial goods manufacturing sectors are the Company's principal markets. Its major customers remained home appliances and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 26.2% and 26.7%, respectively, of the total revenues in the first quarter of 2011.

Gross profit declined 10.7% to $7.1 million from $7.9 million in the same period of 2010. Gross profit from flexo cartons declined 11.7% to approximately $5.1 million from $5.8 million in the same period of 2010. Gross profit from color cartons declined 9.5% to approximately $1.9 million from $2.1 million in the same period of 2010. Gross margin declined 240 basis points to 26.3% from 28.7% in the same period of 2010. The decrease in gross margin was mainly due to the decline in sales and increase in cost of goods sold.

Selling expenses increased 9.0% to $1.1 million from $1.0 million in the same period of 2010. As a percentage of revenues, selling expenses increased to 4.2% from 3.8% for the same period of 2010. Freight as a percentage of revenues was approximately 2.9% compared with 2.4% in the same period last year.

General and administrative ("G&A") expenses increased 143.0% to $2.2 million from $0.9 million in the same period of 2010. The increase was mainly attributable to additional R&D expenses in the first quarter of 2011. R&D expenses increased to $0.9 million during the first quarter of 2011 from $0.02 million in the same period of 2010. As a percentage of revenues, G&A expenses increased to 8.2% as compared to 3.3% for the same period of 2010.

Income tax expense decreased 50.4% to $0.7 million from $1.4 million during the same period of 2010. The decrease in income tax expense was mainly attributable to the fact that Great Shengda was subject to the uniform income tax rate of 25% for the three months ended March 31, 2010 as compared to 15% for the same period of 2011. In October 2010, Great Shengda qualified as a National High-Tech Enterprise, a status recognized by China's Ministry of Science and Technology, Ministry of Finance, and State Administration of Taxation. In December 2010, the status was approved by the local tax bureau. As a result, Great Shengda is entitled to a preferential tax rate of 15%, retroactively effective as of January 1, 2010. The retroactive effect for the tax rate was accounted in the fourth quarter of 2010.

Net income attributable to common stockholders decreased 20.1% to $3.4 million, or $0.09 per diluted share, from $4.3 million, or $0.16 per diluted share, in the same period of 2010.

Financial Condition

As of March 31, 2011, China Shengda Packaging had cash and cash equivalents of $23.0 million and restricted cash of $6.5 million. Accounts receivable were $33.5 million as of March 31, 2011 compared with $31.4 million as of year-end 2010.  Working capital was $42.3 million compared to $40.7 million in the prior year period.  Shareholders' equity was $89.9 million, compared with $86.1 million as of December 31, 2010.  Net cash used in operating activities was $10.7 million for the first quarter of 2011, as compared to $0.7 million in net cash provided by operating activities for the same period in 2010. The decrease in the balance of our accounts and notes payable due to our suppliers reduced our net cash flow, totaling $15.7 million. However, the decrease was partially offset by a decrease in the balances of our restricted cash, amounting to $5.9 million.

Recent Developments

• The Company will present at the Oppenheimer 5th Annual China Dragon Conference.  The date, time and location of China Shengda Packaging's presentation at the Oppenheimer 5th Annual China Dragon Conference are as follows:

Investors who wish to meet with China Shengda Packaging's management may contact Oppenheimer & Co. Inc. or the Company's investor relations representative in the U.S., Raymond Campos at +1 (310) 954-1356 or [email protected].

• In May 2011, the Company launched a new English corporate website under the domain name of www.cnpti.com.
• On April 28, 2011, the Company engaged Marcum Bernstein & Pinchuk LLP as its independent registered public accounting firm.  

Business Outlook

The Company expects fiscal 2011 revenues of between $115 million and $125 million, net income of between $11.5 million and $12.5 million, and diluted earnings per share of between $0.29 and $0.32.

The Company anticipates that the second quarter will be weaker than the first quarter, an improvement in the back half of the year, and an overall flat full year sales performance compared to 2010.  The restrictive financial policies of the PCOB are expected to persist over the balance of the year and continue to impact the manufacturing enterprises in the YRD.  The Company also expects electricity shortages in the YRD during the summer season that are more severe than those experienced historically.  The Company expects net income to be lower than in 2010 given the inflation in raw material prices and labor costs in China.  Based on the experience of management, during a period of inflation, it is very difficult for the Company to pass on all of the input cost increases.  The Company also recently raised employee salaries to attract additional workers. Finally, the packaging orders the Company lost in the first quarter due to the labor shortage will be difficult to win back as customers are hesitant to change suppliers after they have made a switch.

Mr. Teng commented, "Despite the challenges in the market, we remain the industry leader with a strong reputation and capability to further capture organic growth and consolidation opportunities.  We are the largest domestic paper packaging company in the YRD and one of the largest in China. We are proud to serve a high-quality diversified customer base.  Many of our customers are Fortune 500 companies and PRC top 500 enterprises.  They include international brand names such as Samsung and Panasonic and also Chinese top enterprises such as Wahaha and Nongfu Spring.  

Mr. Teng concluded, "We expect to return to growth in 2012 as a result of an improved macro environment as well due to several important business developments and initiatives.  Shengda Color has moved to their new facility and is expected to contribute more to our total sales with a higher gross margin.  We are currently targeting three large clients and have passed the supplier qualification checks for one of them earlier this month and expect to receive orders soon.  We are optimistic about the other two.  We are increasing our advertising investments and attending more exhibitions to help drive additional sales.  Finally, we are increasing our investments in research and development to continue to shift our revenue profile to higher margin products."

About China Shengda Packaging Group Inc.

China Shengda Packaging Group Inc. is a leading paper packaging company in China. It is principally engaged in the design, manufacturing and sale of flexo-printed and color-printed corrugated paper cartons in a variety of sizes and strengths. It also manufactures corrugated paperboards, which are used for the production of its flexo-printed and color-printed cartons. The company provides paper packaging solutions to a wide variety of industries, including food, beverage, cigarette, household appliance, consumer electronics, pharmaceuticals, chemicals, machinery and other consumer and industrial sectors in China. For more information, visit http://www.cnpti.com.

Safe Harbor Statements

This press release may contain forward-looking statements. Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company's ability to develop and market new products, the ability to access capital for expansion and continued investment in R&D, the ability to acquire other companies, changes from anticipated levels of sales, changes in national or regional economic and competitive conditions, changes in relationships with customers, changes in profit margins of principal product and other factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

SOURCE China Shengda Packaging Group Inc.