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CPGI > SEC Filings for CPGI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CHINA SHENGDA PACKAGING GROUP INC.

Form 10-Q for CHINA SHENGDA PACKAGING GROUP INC.


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A "Risk Factors" described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

"the Company," "our company," "we," "us," or "our," are to the combined business of China Shengda Packaging Group Inc., a Nevada corporation, and its consolidated subsidiaries: Evercharm, Great Shengda, Shengda Color, Hangzhou Shengming, Suzhou A&A and Shuangsheng;
"Evercharm" are to Evercharm Holdings Limited, a BVI company;
"Great Shengda" are to Zhejiang Great Shengda Packaging Co., Ltd., a PRC company;
"Shengda Color" are to Zhejiang Shengda Color Pre-printing Co. Ltd., a PRC company;
"Hangzhou Shengming" are to Hangzhou Shengming Paper Co., Ltd., a PRC company;
"Suzhou AA" are to Suzhou Asian & American Paper Products Co., Ltd., a PRC company;
"Shuangsheng" are to Jiangsu Shuangsheng Paper Technology Development Co., Ltd., a PRC company;
"SD Group" are to Shengda Group Co., Ltd.;
"BVI" are to the British Virgin Islands;
"PRC" and "China" are to the People's Republic of China, excluding Hong Kong, Macau and Taiwan;
"YRD" are to Yangtze River Delta Economic Zone, which includes Shanghai, Zheijiang Province and Jiangsu Province;
"SEC" are to the Securities and Exchange Commission;
"Securities Act" are to the Securities Act of 1933, as amended;
"Exchange Act" are to the Securities Exchange Act of 1934, as amended;
"Renminbi" and "RMB" are to the legal currency of China; and
"U.S. dollars," "dollars" and "$" are to the legal currency of the United States.


Overview of Our Business

We are a leading paper packaging company in China. Through our wholly-owned subsidiaries, Great Shengda, Shengda Color, Hangzhou Shengming and Suzhou AA, we are principally engaged in the design, manufacturing and sale of flexo-printed and color-printed corrugated paper cartons in a variety of sizes and strengths. We also manufacture corrugated paperboards, which are used for the production of our flexo-printed and color-printed cartons.

We provide paper packaging solutions to a wide variety of industries, including food, beverage, cigarette, household appliance, consumer electronics, pharmaceutical, chemical, machinery and other consumer or industrial sectors. Our major products are single-layer paper cartons for food, drinks and medicine, double-layer paper cartons for garments, chemicals, furniture, refrigerators and air-conditioners, and triple-layer paper cartons for electrical machinery, motorcycles and other heavy-duty products. Our maximum annual production capacity of corrugated paperboards as of September 30, 2012 was approximately 545 million square meters.

Our production facilities are strategically located in the YRD, a manufacturing center in China, thus putting us in close proximity to a large number of paper carton customers. Due to the weight and bulk of paper products and the consequent high shipping costs, paper packaging companies are generally limited to servicing a geographic radius from their production site, usually between 300 and 500 kilometers, within which they can compete economically. The paper carton market, therefore, is highly influenced by regional supply and demand dynamics. Based from our three manufacturing facilities in Hangzhou, Zhejiang Province, we have established a sales network with five customer service centers that can service customers throughout the YRD. As the leading paper packaging manufacturer in the YRD, we are well positioned to capitalize on the fast-growing demand for paper cartons driven by the concentration and success of the manufacturing companies in the region.

We serve a broad base of reputable customers, including some Fortune 500 companies and Top 500 Chinese enterprises. Our major customers include Nongfu Spring Co., Ltd., Hangzhou Cigarette Company, Samsung's Chinese subsidiary Suzhou Samsung Electrical Co., Ltd. and Panasonic's Chinese subsidiary Hangzhou Panasonic Home Electrical Appliance Company. We have developed long-term relationships with and loyalty from our customers, many of which have been with us for over five years. We have also engaged in strategic alliance relationships with ten customers as their preferred supplier. At the same time, we continue to attract new customers to generate higher demand for our products and increase market penetration.

Recent Developments

On October 15, 2012, we announced that our Board of Directors received a preliminary, non-binding letter from our Chairman Mr. Fang, which stated that Mr. Fang intends to acquire all of the outstanding shares of the Company's common stock not currently owned by him or his family in a going private transaction at a proposed price of $1.40 per share in cash. Following receipt of the proposal, our Board of Directors formed a special committee of independent directors to consider the proposal and any amendments thereto as well as any alternative proposals. No decisions have been made by the special committee with respect to our response to Mr. Fang's proposal and there can be no assurance that any definitive offer will be made, that any agreement will be executed or that Mr. Fang's proposal or any other transaction will be approved or consummated.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter of 2012:

Revenues: Revenues decreased by $0.6 million, or 1.8%, to $33.0 million for the three months ended September 30, 2012, from $33.6 million for the same period of last year.
Gross Profit: Gross profit for the three months ended September 30, 2012 was $6.0 million, which was approximately the same as for the same period of 2011.
Net income attributable to common stockholders: Net income attributed to stockholders decreased by $0.9 million, or 41.1%, to $1.4 million for the three months ended September 30, 2012, from $2.3 million for the same period of last year.
Basic and diluted net income per share: Basic and diluted net income per share was $0.04 for the three months ended September 30, 2012, compared with $0.06 for the same period last year.


Results of Operations

Comparison of Three Months Ended September 30, 2012 and September 30, 2011
(unaudited)

The following table sets forth key components of our results of operations
during the three months ended September 30, 2012 and 2011, both in dollars and
as a percentage of our revenues.

                                      Three Months Ended            Three Months Ended
                                      September 30, 2012            September 30, 2011
                                                     % of                          % of
                                     Dollars       Revenues        Dollars       Revenues
Revenues                         $  33,033,566      100.00%    $  33,643,951      100.00%
Cost of goods sold                  27,019,968       81.80%       27,693,050       82.31%
Gross profit                         6,013,598       18.20%        5,950,901       17.69%
Operating expenses
         Selling expenses            1,379,774        4.18%        1,100,302        3.27%
         General and                 2,940,979        8.90%        2,354,326        7.00%
administrative expenses
Total operating expenses             4,320,753       13.08%        3,454,628       10.27%
Other income (expenses)
         Interest income               118,520        0.36%           89,150        0.26%
         Interest expense             (115,577 )      (0.35 )%      (145,378 )      (0.43 )%
         Subsidy income                 46,309        0.14%          259,002        0.77%
         Other                         (16,878 )      (0.05 )%             -            -
Total other income (expenses)           32,374        0.10%          202,774        0.60%
Income before income tax expense     1,725,219        5.22%        2,699,047        8.02%
and noncontrolling interest
         Income tax expense            365,352        1.11%          386,023        1.15%
Net income                           1,359,867        4.12%        2,313,024        6.88%
         Less: net income                1,663        0.01%                -            -
attributable to noncontrolling
interest
Net income attributable to       $   1,361,530        4.12%    $   2,313,024        6.88%
common stockholders

Revenues. We generate revenues from the sale of our paper cartons and other paper products. Our revenues decreased by $0.6 million, or 1.8%, to $33.0 million for the three months ended September 30, 2012, from $33.6 million for the same period of 2011. The decrease was mainly attributable to the decrease in sales volume, partially offset by the increase in average prices per square meter. The average price per square meter increased by approximately 1.9%, to approximately $0.39 for the three months ended September 30, 2012, from approximately $0.38 in the same period of 2011. Sales volume decreased by 3.2 million square meters, or 3.6%, to 84.4 million square meters for the three months ended September 30, 2012, from 87.6 million square meters for the same period of 2011. The decreased sales volume was mainly the result of the challenges resulting from the domestic and foreign economic environment.

For the three months ended September 30, 2012, color cartons accounted for 31.3% of our revenues and flexo cartons accounted for 68.7% of our revenues, compared to 28.3% and 71.7%, respectively, for the same period of 2011. Average per square meter prices for our color cartons and flexo cartons for the three months ended September 30, 2012 were approximately $0.41 and $0.38, respectively, as compared to approximately $0.44 and $0.36, respectively, for the same period of 2011.

Consumer and industrial goods manufacturing sectors are the principal markets we serve. Our major customers were home appliances and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 23.6% and 36.4%, respectively, of our revenues for the three months ended September 30, 2012, compared to 24.1% and 26.6%, respectively, of our revenues in the three months ended September 30, 2011.

Cost of goods sold. Our cost of goods sold is comprised of raw materials, labor cost for production-related workers, depreciation and amortization of production-related equipment, utilities consumption costs and overhead allocation. Our cost of goods sold decreased by $0.7 million, or 2.4%, to $27.0 million for the three months ended September 30, 2012, from $27.7 million for the same period of 2011, which was mainly attributable to the decrease in sales volume described above. Average cost of goods sold per square meter for the three months ended September 30, 2012 was approximately $0.32, which was approximately the same as for the same period of 2011. Management will keep monitoring raw material prices for cost control.


Gross profit. Our gross profit for the three months ended September 30, 2012 was $6.0 million, which remained constant as for the same period of 2011. Gross profit from flexo cartons decreased by $0.1 million, or 1.5%, to $3.8 million for the three months ended September 30, 2012, from $3.9 million for the same period of 2011. Gross profit from color cartons increased by $0.1 million, or 7.4%, to $2.1 million for the three months ended September 30, 2012, from $2.0 million for the same period of 2011. Gross profit as a percentage of revenues was 18.2% for the three months ended September 30, 2012, as compared to 17.7% for the same period of 2011.

Selling expenses. Our selling expenses include freight, salary and benefits for sales and marketing personnel, travelling and advertising expenses. Our selling expenses increased by $0.3 million, or 25.4%, to $1.4 million for the three months ended September 30, 2012, from $1.1 million for the same period of 2011. Such increase resulted mainly from $0.1 million increase in staff costs, which include salary, benefits, social insurance and other relevant staff expenses; and $0.2 million increase in freight. As a percentage of revenues, selling expenses for the three months ended September 30, 2012 increased to 4.2%, from 3.3% for the same period of 2011.

General and administrative expenses. Our general and administrative expenses are comprised of research and development, or R&D, expense, salary and benefits for administrative personnel, rental fees, depreciation and amortization for equipment used other than for production and miscellaneous expenses unrelated to production. Our general and administrative expenses increased by $0.5 million, or 24.9%, to $2.9 million for the three months ended September 30, 2012, from $2.4 million for the same period of 2011. Such increase resulted mainly from $0.2 million increase in staff costs, which include salary, benefits, social insurance and other relevant staff expenses; and $0.2 million increase in office expenses, travelling expenses and other general and administrative expenses. As a percentage of revenues, general and administrative expenses for the three months ended September 30, 2012 increased to 8.9%, as compared to 7.0% for the same period of 2011.

Subsidy income. We received local government funds in support of our R&D activities and hi-tech development in the amounts of $0.05 million and $0.3 million for the three months ended September 30, 2012 and 2011, respectively.

Income tax expense. Our income tax expense was $0.4 million for the three months ended September 30, 2012, which was approximately the same as for the same period of 2011.

In December 2010, Great Shengda was qualified as a National High-Tech Enterprise in the PRC, a status recognized by China's Ministry of Science and Technology, Ministry of Finance, and State Administration of Taxation. In December, 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. Such status is subject to review by government authorities every three years. We cannot assure that we will continue to have such status after 2013 or that the PRC government will continue the preferential tax treatment of designated high-tech enterprises.

Hangzhou Shengming was entitled to two years' exemption followed by three years' half deduction on its income tax rate from 2007. Thus, it was exempt from income tax for 2007 and 2008 and was granted a 12.5% income tax rate for 2009, 2010 and 2011. Hangzhou Shengming is subject to the uniform income tax rate of 25% for calendar year 2012.

Shengda Color, Suzhou AA and Shuangsheng are not entitled to any tax holidays or preferential tax treatment. Therefore, they are each subject to the uniform income tax rate of 25% for calendar years 2011 and 2012.

Net income attributable to common stockholders. As a result of the cumulative effect of the above factors, our net income attributable to common stockholders decreased by $0.9 million, or 41.1%, to $1.4 million for the three months ended September 30, 2012, from $2.3 million for the same period of 2011.


Comparison of Nine Months Ended September 30, 2012 and September 30, 2011
(unaudited)

The following table sets forth key components of our results of operations during the nine months ended September 30, 2012 and 2011, both in dollars and as a percentage of our revenues.

                                      Nine Months Ended             Nine Months Ended
                                      September 30, 2012            September 30, 2011
                                                     % of                          % of
                                     Dollars       Revenues        Dollars       Revenues
Revenues                         $  98,151,414      100.00%    $  93,155,316      100.00%
Cost of goods sold                  80,827,790       82.35%       73,920,644       79.35%
Gross profit                        17,323,624       17.65%       19,234,672       20.65%
Operating expenses
         Selling expenses            3,961,498        4.04%        3,382,469        3.63%
         General and
administrative expenses              7,847,277        8.00%        7,173,391        7.70%
Total operating expenses            11,808,775       12.03%       10,555,860       11.33%
Other income (expenses)
         Interest income               298,716        0.30%          300,560        0.32%
         Interest expense             (487,640 )      (0.50 )%      (474,966 )      (0.51 )%
         Subsidy income                263,714        0.27%          965,652        1.04%
         Other                           7,142        0.01%                -            -
Total other income (expenses)           81,932        0.08%          791,246        0.85%
Income before income tax expense
and noncontrolling interest          5,596,781        5.70%        9,470,058       10.17%
         Income tax expense          1,044,868        1.06%        1,444,026        1.55%
Net income                           4,551,913        4.64%        8,026,032        8.62%
         Less: net income
attributable to noncontrolling
interest                                 4,855        0.00%                -            -
Net income attributable to
common stockholders              $   4,556,768        4.64%    $   8,026,032        8.62%

Revenues. Our revenues increased by $5.0 million, or 5.4%, to $98.2 million for the nine months ended September 30, 2012, from $93.2 million for the same period of 2011. The increase was primarily attributable to the increase in sales volume. The average price per square meter increased by $0.01, or 2.1%, to $0.39 for the nine months ended September 30, 2012, from $0.38 in the same period of 2011. Sales volume increased by 7.6 million square meters, or 3.2%, to 249.0 million square meters for the nine months ended September 30, 2012, from 241.4 million square meters for the same period of 2011. The increased sales volume was mainly the result of greater efforts by our sales team to get purchase orders, even though there were challenges resulting from the domestic and foreign economic environment.

For the nine months ended September 30, 2012, color cartons accounted for 29.7% of our revenues and flexo cartons accounted for 70.3% of our revenues, compared to 27.8% and 72.2%, respectively, for the same period of 2011. Average per square meter prices for our color cartons and flexo cartons for the nine months ended September 30, 2012 were approximately $0.42 and $0.38, respectively, as compared to approximately $0.44 and $0.37, respectively, for the same period of 2011.

Consumer and industrial goods manufacturing sectors are the principal markets we serve. Our major customers were home appliances and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 26.1% and 32.8%, respectively, of our revenues for the nine months ended September 30, 2012, compared to 23.9% and 25.5%, respectively, of our revenues in the nine months ended September 30, 2011.

Cost of goods sold. Our cost of goods sold increased by $6.9 million, or 9.3%, to $80.8 million for the nine months ended September 30, 2012, from $73.9 million for the same period of 2011. Average cost of goods sold per square meter for the nine months ended September 30, 2012 was approximately $0.32, an increase of approximately $0.01, as compared to approximately $0.31 for the same period of 2011. This increase was primarily due to the increased cost of raw materials. Management will keep monitoring raw material prices for cost control.

Gross profit. Our gross profit decreased by $1.9 million, or 9.9%, to $17.3 million for the nine months ended September 30, 2012, from $19.2 million for the same period of 2011. Gross profit from flexo cartons decreased by $1.5 million, or 11.5%, to $11.7 million for the nine months ended September 30, 2012, from $13.2 million for the same period of 2011. Gross profit from color cartons decreased by $0.4 million, or 19.3%, to $5.6 million for the nine months ended September 30, 2012, from $6.0 million for the same period of 2011. Gross profit as a percentage of revenues was 17.7% for the nine months ended September 30, 2012, as compared to 20.6% for the same period of 2011. The decrease in our gross profit was mainly due to increased cost of goods sold as noted above.


Selling expenses. Our selling expenses increased by $0.6 million, or 17.1%, to $4.0 million for the nine months ended September 30, 2012, from $3.4 million for the same period of 2011. Such increase resulted mainly from $0.3 million increase in staff costs, which include salary, benefits, social insurance and other relevant staff expenses; and $0.3 million increase in freight. As a percentage of revenues, selling expenses for the nine months ended September 30, 2012 increased to 4.0%, from 3.6% for the same period of 2011.

General and administrative expenses. Our general and administrative expenses increased by $0.6 million, or 9.4%, to $7.8 million for the nine months ended September 30, 2012, from $7.2 million for the same period of 2011. This was mainly attributable to a $0.4 million increase in staff costs, which includes salary, benefits, social insurance and other relevant staff expenses. As a percentage of revenues, general and administrative expenses for the nine months ended September 30, 2012 increased to 8.0%, as compared to 7.7% for the same period of 2011.

Subsidy income. We received local government funds in support of our R&D activities and hi-tech development in the amounts of $0.3 million and $1.0 million for the nine months ended September 30, 2012 and 2011, respectively.

Income tax expense. Our income tax expense decreased to $1.0 million for the nine months ended September 30, 2012, as compared to $1.4 million for the same period of 2011. The decrease in income tax expense was mainly attributable to the decrease in income before income tax expense and noncontrolling interest.

Net income attributable to common stockholders. As a result of the cumulative effect of the above factors, our net income attributable to common stockholders decreased by $3.5 million, or 43.2%, to $4.5 million for the nine months ended September 30, 2012, from $8.0 million for the same period of 2011.

Liquidity and Capital Resources

Cash generated from our operations and borrowing capacity under our lines of credit are used as our primary source of liquidity. As of September 30, 2012, we had cash and cash equivalents of $16.7 million and restricted cash of $19.3 million. We anticipate that cash on hand, and cash generated from our operations will be sufficient to satisfy our obligations for at least the next 12 months.

The following table sets forth a summary of our cash flows for the periods indicated:

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