The sweet tooth - China Lifestyle FY07 result

Sales +23.5%
Cost of sales +24.9%
Gross profit +21.2%
Profit before tax +10.5% (Significant increase of administrative and finance expense)
Profit after tax +3.5% (Income tax +32%)
Borrowing at 20,000K
ROE at 18.9% (86,741/458,589)

From cashflow statement (figure in '000),
Profit increased from 83,839 to 86,741, but operating cashflow increased from 125,314 to 145,217. This is due to a few adjustments. But the core profit cashflow didn't increase significantly. Where does the cash from adjustment came from?
Net cash go from 200,578 to 48,088 due to purchase of property, plant and equipment. Still able to cover the borrowing.

EPS decreased to 0.17 RMB from 0.19 RMB. Profit increased slightly but there is dilutive impact from the share option.

Although the sales increased significant, but the cost increase is even greater. Big increase at advertising and promotion expense and there are significant items like exchange loss and disposal on property, plant and equipment(quoted as one off item). Constraint on jelly dessert sales, and significant jump on candy sales. Gross profit margin 39.2% and the raw material price increase remain challenging.

FY07 probably is a consolidation year where they build the brand name, expand production capability and lay the foundation for future growth. Management expect new production facility to ease constraint and more product choice to drive more earning growth. I thought this is a disappointing result where cost increased faster than sales and I don't understand why the core profit cashflow only increased marginally. Given the continue rising of raw material price and uncertain advertising effect, best is to avoid for now.