Sino Agro Food Inc. Reports Q3 2016 Results

Revenue of USD 124.1M Remains Level with Q3 2015

Gross Profit Increases 3% with Gross Margin of 26.9%

EPS of USD .95 Falls Short of Q3 2015, but Increases 16% over Q2 2016

First Phase of Zhongshan Aquaculture Farm 50% Stocked

Sino Agro Food - Q3 2016 Interim ReportGUANGZHOU, China-- Sino Agro Food, Inc. (OTCQX: SIAF | OSE: SIAF-ME), an agriculture technology and natural food company that produces and sells protein food including seafood and cattle, is pleased to announce the following quarterly results ending September 30, 2016: 

Key Points

Summary Financials 

Overall financial results were stable as compared to Q3, 2015. Compared to Q2, 2016 gross profits increased by 11% to USD 33.4M (30.0), and earnings per share increased by 16% to USD .95 (.82). Most business segments showed growing results.

• Revenue for the quarter ending September 30, 2016 totaled USD 124.1M (124.7). Revenue from the sale of goods increased by 5% (y-o-y) to USD 100.7M (96.0), while revenue from project development and management fees decreased by 18% to USD 23.4M (28.6).
• Cash and equivalents increased from USD 3.3M at the end of Q2 2016 t0 USD 9.1M September 30, 2016.
• G&A expenses increased by 27% in Q3 2016 to USD 5.oM (4.0). The increase was mainly due to corporate exercises associated with the carve-outs.
• As of September 30 2016, the Company had net working capital of USD 342.8M (304.3).
• Stockholders’ equity increased by 15% to USD 535.3M (464.3) or USD 23.52 per share, based on the weighted average number of fully diluted outstanding shares in the quarter. The increase of USD 1.71 per share versus Q2, 2016 is due to the sequential increase of USD 19.7M and a small reduction in fully diluted shares.

Core Businesses and Outlook 

Improvements in gross profits stemmed mainly from an overall small increase in gross margins and solid sales performance in value added processing of imported beef, concentrated livestock feed, and trading of seafood and imported beef. Capital investments were made in SJAP and Aquaculture to allow for further capacity expansion and growth in Value Added Processing and to complete the first phase of the new Zhongshan aquaculture farm.

Integrated Cattle (SJAP)

Total revenue for the segment increased 22% to USD 43.4M (35.5), resulting in a 52% increase in gross profits to $10.2M (6.7). The gains were spearheaded by revenue increases 0f 196% in value added processing of imported beef to USD 24.6M (8.3) and 65% in concentrated livestock feed to USD 4.5M (2.7). Together these areas contributed gross profit of USD 6.6M (3.5). Value added processing production increased 146% in Q3 to a record 3,185 metric tons (1,297).

Live cattle sales decreased 56% to USD 7.1M (16.4), as the Company continues to transition to premium cattle breeds. However, gross margins showed a marked improvement to 17% (7%), resulting in a 7% increase in gross profit to USD 1.2M. Average sales prices for the quarter were CNY 30/kg, continuing the upward trend from a low price of CNY 20/kg in Q1. As prices steady or continue to increase, the Company expects to grow its inventory of fattening cattle, commensurate with expected margins and dependent on new contracts with cooperative farmers. The inventory was reduced when the pricing trough rendered live cattle sales unprofitable earlier in the year. Replenishing inventory will progress over several months.

Aquaculture (CA)

The Company is interchanging the species of seafood and prawns at its various farms such that referring to each as “aquaculture farms (“AF”)” is now more accurate. Fish Farm 1 becomes AF1 and Prawn Farms 1 through 4 become AF2 - 5. These labels will be forthcoming in the Company’s financial reports and collateral material as the carve-out materializes.

Revenue from the sale of goods decreased 56% to USD 12.5M (28.6), while gross profit decreased 42% to USD 3.2M (5.5). Facilities at AF1 began extensive renovation upgrades during Q3. These will continue through the end of November. Production is fully curtailed until completion. Also, retrofitting and modifications were performed at AF2 and AF3 during the quarter and are scheduled to continue throughout the remainder of the year. Whereas production will be reduced during this interim period, grow-out facilities for tiger prawns at AF2 and a tripling of harvests per year at AF3 are expected to dramatically improve 2017 production.

The first two buildings housing 72 APM units at AF4 (“MegaFarm”) are complete, and have been stocked to 50% of capacity, expected to increase to 75% by year-end. Stocking consists of the following varieties for full grow-out and post harvesting: Giant Freshwater Prawns, Grass Prawns, Sleepy Cod, Jade Perch, Murray Cod, and various higher priced fresh water mixed fish.

As part of the aquaculture carve-out, the Company has submitted all relevant documents for the transfer of all fishery assets to Jiangmen City A Power Fishery Development Co., Ltd. (“JFD”). JFD is in the process of becoming a Wholly Foreign Owned Enterprise (“WFOE”) under the ownership of Triway Industries Limited. (Hong Kong), (“Triway”). SIAF and Triway auditors are reviewing financial data treatments and procedures with the intended official carve-out date for reporting purposes recorded as October 1, 2016.

Despite renovation, upgrading, modernization and supporting transformation work, the Company expects overall improvement in sales in the fourth quarter due to commencement of sales at AF4. With AF1 coming back on line; with AF2 and AF3 recommencing toward former capacity or expanded capacity; and with AF4 expanding facility use, the Company is excited by aquaculture prospects as soon as Q1 2017, and beyond.

Management chose this time to perform supporting work and upgrades for several reasons, as follows:

• Production ramp at AF4 is expected to overcome production reduction at AF1 - AF3 in Q4, due in part to support work to integrate other aqua farms.
• All facilities are best served by continual improvement to optimize yields, margins, quality, and longevity, with particular attention paid to insuring AF4 performs optimally before full commercial scaling and before AF4 and AF5 install and develop similar, expanded support facilities within their own complexes.
• The upcoming carve-out has been aligned with the Company modernizing its aquaculture facilities into integrated high-yielding stations, increasing value from both asset and projected income perspectives.

The Company has secured a loan commitment from a group of third party lenders in the amount of USD 8.2M to fund intra-company lending from SIAF to Triway for short-term working capital. The first intra-company loan agreement between the Company and Triway for USD 6M was entered July 5, 2016 with funds disbursed between July 15 and August 6, 2016. The remaining USD 2.2M will be disbursed before the end of the year.

The company continues to pursue other value accretive financing options for Triway.

Seafood and Meat Trading

Revenue increased by 131% to USD 23.2M (10.1) with import volume growing to 1,782 metric tons (1,087). Gross margins averaged 11.4% creating a 138% gain in gross profit to USD 2.7M (1.1). Import of seafood almost doubled from the previous quarter to USD 10.1M, accounting for 44% of revenue and 45% of gross profit. This business is meeting original production and margin targets. The Company is confident increases will continue as the revolving Trade Credit Facility for the Shanghai Distribution Center is fully and efficiently utilized and possibly increased as lucrative opportunities become available, and as the disposable income of China’s middle class continues to rise.

Project Development

Though revenue decreased 18% to USD 23.4M (28.6), the gross margin of 46.7% resulted in a smaller gross profit decline to USD 10.9 (11.5). Capital Award deferred billing of Q3 work performed at AF3 until Q4, due to the injection of assets into Triway. This deferred revenue approximates the shortfall between Q3 2016 and Q3 2015.

Carve-out Exercises 

The Company believes that the sum of its parts is worth considerably more than the market value of the whole. Accordingly, it has undertaken efforts to carve out its major businesses, establishing each as a standalone corporate entity. These carve-out enterprises will seek to establish value within the same financial measures afforded peer group companies, in part through private placement prior to applying to higher value market exchanges for IPO, utilizing market industry experts to assist those efforts in securing the best market(s) for listing.

Having had extensive discussions with consultants and underwriting banks and brokers, as a general proposition, the process involves three steps:

• Issue to SIAF shareholders a sustainable portion of equity interest of the carve-out based on a value equal to the entity’s net tangible assets (“NTA”).
• Seek and complete pre-IPO stages of private placements, aiming to establish a value approximating 2 times NTA, providing an exit opportunity to said existing shareholders.
• Seek listings on recognized exchanges with the intention of establishing IPO valuations of approximately 3-4 times NTA, or approximately 12 -16 times earnings.

Each exercise within each step requires countless hours of work with a cadre of consultants, attorneys, auditors, government authorities, and stock exchange officials. The Company continues to work diligently, making progress on its ambitions although at times required to veer from a straight-line approach to attain best results.            

CEO Commentary 

Sino Agro Food’s Chairman and CEO Solomon Lee summarized the quarter, as follows:

“During the third quarter of 2016 we made significant inroads executing on our strategic plan to restructure the business and maximize value for shareholders. Overall, it was a very positive quarter, exhibited through improved gross margins, a stronger cash balance and significant operational progress in both the aquaculture and the cattle/beef businesses.

“To recap our high-level strategy, we are undertaking a series of initiatives to transition Sino Agro Food into an investment vehicle with positions in multiple independent, public companies operating within China’s agricultural industry. To this end, Sino Agro Food’s two largest and fast growing subsidiaries – the aquaculture and beef businesses – will be carved out from the parent company and listed on stock exchanges where we believe their shares will be able to trade at a market value commensurate with peers and substantially higher than their embedded values. As part of this carve out and IPO process, we are raising growth capital for these subsidiaries to accelerate their development, with Sino Agro Food expected to retain significant stakes in each of the companies after the spin offs have occurred.

“One key focus right now is our aquaculture business, which we believe has the potential to develop into an extremely profitable and sustainable business model of much larger size. Through its proprietary indoor recirculating aquaculture systems (“RAS”) technology, the aquaculture business produces disease-free, superior quality and higher-margin seafood to the China markets all year-round. With aquaculture the fastest growing food production system in the world, and currently accounting for nearly 45% of world seafood supply, we are confident that our superior production methods position the aquaculture subsidiary as a competitive and significant player in a rapidly growing market.

“By transferring all the assets from our wholly-owned subsidiary, Capital Awards, into a standalone entity, we expect to attract institutional investors who specialize in investing in high-growth business opportunities, spurring higher valuations for the “new” entities, as well as SIAF. We strongly believe this strategy is the most efficient way to enable the aquaculture business to grow rapidly, benefiting all shareholders.

“During the third quarter, we took necessary steps to commence work at the aqua-farms. This has curtailed production in the short term, but is expected to expand capacity, and therefore revenues, as early as Q4 2016. The Company was able to secure $8.2 million in working capital to facilitate these efforts while continuing to work closely with a major Asian bank toward securing a larger loan to accelerate the growth of the company. The larger loan is taking longer to complete since the prospective lender is agreeing to help underwrite the IPO as well. Thus, while the overall review and approval process for the “entire package” consumes more time, it also provides the Company’s shareholders a much greater return on investment than would other available alternatives, at this time. In the interim we will continue to develop the aquaculture farms organically via internally generated cash flow. With our plan to develop the world’s largest RAS farm, we are confident the aquaculture business can grow into a highly profitable company, driven by demand from the burgeoning middle classes in China.

“SJAP, our cattle and beef subsidiary, is also undergoing several strategic changes to maximize its value. Specifically, we are restructuring the business with the goal of listing it on a stock exchange in early 2017. As with the aquaculture business, the carve-out will make it easier to more accurately value the company and is expected to attract more investors at a higher valuation.

“SJAP is transitioning toward production of higher quality beef which, as well as generating improved margins for the company, allows us to tap into an underserved niche. Currently, there is limited supply of premium quality beef in China and products on the market are typically imported from abroad. However, as Chinese consumers become wealthier and more discerning about food quality, the consumption of premium beef is expected to grow significantly. Sino Agro Food is one of the foremost players in this market and our leadership position in the industry provides an advantage going forward. During the quarter, we continued to transition toward premium cattle breeds. Coupled with higher prices for domestic beef, the transition led to a marked improvement in gross margins.

In the short term our cash flow is constrained by ongoing investments in these business segments; yet, results from our strategy have already begun to materialize. As obscure as it may seem, the Company is reaching an inflection point in its growth trajectory and reiterates its appreciation to shareholders who remain confident in the Company’s mission going forward.”

2016 Third Quarter Report 

For detailed segment operational performance and developments, please take the time to read our latest 10-Q filing, or refer to the 2016 Q3 Interim Report posted to the Company website at http://sinoagrofood.investorroom.com/download/Sino-Agro-Food_Q3-2016-Interim-Report.pdf

Earnings Call Information 

The Company will host an earnings call on Tuesday, December 6, 2016 at 10:00 AM EDT/4:00 PM CET to discuss quarterly financial results.

Please submit questions by email to info@sinoagrofood.com. These will be organized and answered with questions submitted during the call, followed by live calls from institutional investors and/or analysts.

To listen to the conference call please use the following information:

Peter Grossman

Investor Relations

+1 (775) 901-0344

info@sinoagrofood.com

Nordic Countries

+46 (0) 760 495 885

se-info@sinoagrofood.com

Todd Fromer / Elizabeth Barker

+1 (212) 896-1215 / 212-896-1203

SIAF@kcsa.com

About Sino Agro Food, Inc.

Sino Agro Food develops and operates protein food production facilities in the People's Republic of China. The Company produces, distributes, markets, and sells sustainable seafood and beef to the rapidly growing middle class in China. Activities also include production of organic fertilizer and produce. The Company is a global leader in developing land based recirculating aquaculture systems (“RAS”), and with its partners is the world's largest producer of sustainable RAS prawns.

Founded in 2006 and headquartered in Guangzhou, the Company had over 550 employees and revenue of USD 429 million in 2015. Operations are located in the provinces of Guangdong, Qinghai, Hunan, and Shanghai.  Sino Agro Food is a public company listed on OTCQX U.S. Premier in the United States and on the Oslo Børs’ Merkur Market in Norway.

News and updates about Sino Agro Food, Inc., including key information, are published on the Company’s website (http://www.sinoagrofood.com), the Company’s Facebook page (https://www.facebook.com/SinoAgroFoodInc), and on twitter @SinoAgroFood.

Forward Looking Statements

This release may contain forward-looking statements relating to the business of SIAF and its subsidiary companies. All statements other than historical facts are forward-looking statements, which can be identified by the use of forward-looking terminology such as “believes,” “expects” or similar expressions. These statements involve risks and uncertainties that may cause actual results to differ materially from those anticipated, believed, estimated or expected. These risks and uncertainties are described in detail in our filings with the Securities and Exchange Commission. Forward-looking statements are based on SIAF’s current expectations and beliefs concerning future developments and their potential effects on SIAF. There is no assurance that future developments affecting SIAF will be those anticipated by SIAF. SIAF undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable securities laws.