Deyu Agriculture Corp. Releases Third Quarter 2011 Results

BEIJING, Nov. 16, 2011 /PRNewswire-Asia-FirstCall/ -- Deyu Agriculture Corp. (OTCBB: DEYU) ("Deyu" or the "Company"), a Beijing, China based vertically integrated producer and distributor of organic and non-organic corn and grain products, today announced its financial results for the third quarter ended September 30, 2011.

Third Quarter 2011 Financial Highlights:

• Revenue increased 313%, from $21.0 million in Q3 2010 to $86.6 million in Q3 2011
• Corn division sales rose 249%, from $17.8 million in Q3 2010 to $62.2 million in Q3 2011
• Simple processed grains division revenues grew 588%, from $3.2 million in Q3 2010 to $21.7 million in Q3 2011
• Gross profit improved 177%, from $4.9 million in Q3 2010 to $13.5 million in Q3 2011
• Net income increased 241%, from $2.2 million in Q3 2010 to $7.6 million in Q3 2011

Summarized Third Quarter 2011 Results:

"We are very pleased with our performance in the third quarter of 2011," said Jianming Hao, Deyu's Chief Executive Officer and Chairman. "By recently adding a new warehousing, processing, and logistics center in Shanxi Province, we were able to boost our supply of grains and achieve tremendous growth in our overall sales, gross profit and net income. This facility includes six warehouses and five cylinder storage units capable of housing more than 70,000 tons of food products with an annual turnover rate of over 350,000 tons, and as a result of our capacity expansion efforts, our storage capacity now stands at more than 120,000 tons with an annual turnover rate of greater than 600,000 tons. Our exclusive lease agreements with three railway lines in China for freight transportation also played an important part in our success this past quarter, as these agreements continued to ensure the speedy delivery of our products at lower costs than truck transportation."

Mr. Hao continued, "We are now supplying our products to well over 16,000 stores across China compared to around 10,000 stores last year. Additionally, we have display counters in more than 49 of these locations where our packaged and unpackaged grain products as well as other goods are prominently set apart from competing products. This "shop-in-shop" approach is continuing to be very beneficial in terms of building brand awareness and increasing customer purchases on a per store basis.  Also, we hosted several promotional and marketing activities in the third quarter of 2011, such as our national product release conference in Beijing, where we introduced our new packaged and unpackaged and deep processed grain products to wholesale distributors in July. We were delighted to have over 200 wholesale distributors and twelve media companies from all over China attend this conference and to have several of China's media outlets broadcast the event. Through these promotional and marketing activities, our brand name is gaining recognition and as a result, we saw considerable growth in our customer base in the third quarter of 2011."

2011 Third Quarter Financial Results

Revenue

In the third quarter of 2011, Deyu had sales of $86.6 million compared to sales of $21.0 million in the third quarter of 2010, an increase of $65.6 million or 313 percent.

Net sales from Deyu's corn division increased $44.4 million or 249 percent, from $17.8 million in the third quarter of 2010 to $62.2 million in the third quarter of 2011. This growth is attributable to the sustained, strong demand for corn in China coupled with Deyu's expanding capacities for production and storage, efficient management of inventory turnover, our ability to obtain a sufficient and prompt supply of corn, and sufficient working capital. Deyu's six new warehouses and processing center, which has five cylinder units for storage, were put into use late in the second quarter of 2011. Together, these new facilities at least doubled Deyu's production and storage capacities. Also, the Company's turnover was accelerated and turnover days were reduced, from 50 days for the three months ended September 30, 2010 to 34 days for the three months ended September 30, 2011, due in large part to our efforts to improve operations and logistics efficiency by effectively utilizing our warehouses and railway line agreements for freight transportation. To maintain a sufficient, steady and quality supply of crops, Deyu has developed numerous farmer-agent relationships that collectively provide the Company with access to over 109,000 acres of fertile farmland in China. Moreover, net proceeds received from bank loans and bank notes of $37.2 million during the nine months ended September 30, 2011 helped provide sufficient working capital for corn purchase to support revenue growth in the third quarter of 2011.

Revenue from Deyu's simple processed grain division improved $18.5 million or 588 percent, from $3.2 million in the third quarter of 2010 to $21.7 million in the third quarter of 2011. This increase in revenues was attributable to the Company's expansion of its packaged and unpackaged grain business segment, as well as Deyu's recently added business of bulk purchase and wholesales of rice, flour, wheat and other products.

Net sales from the Company's unpackaged grain business, which was added during the first quarter 2011 as part of its simple processed grain division, generated revenues of $10.0 million in the third quarter of 2011, an increase of $2.3 million when compared to the second quarter of 2011. This increase is attributable to Deyu's marketing initiatives such as the Company's promotion and new product press conferences, its expansion of its distribution network from 10,000 to 16,800 stores and its discounting of its selling prices as a sales expansion strategy. Additionally, the Company has established 49 "shop-in-shop" counters in supermarkets across China, where Deyu sells packaged and unpackaged grain products and this approach has helped Deyu increase customer brand awareness.

Deyu introduced the bulk purchase and wholesale of rice, flour, wheat and other products as part of its business operations in fourth quarter of 2010, and this segment generated revenues of $11.7 million in the third quarter of 2011. The Company is continuing to utilize its strengths and resources to develop this business segment, which comes with low maintenance costs.  The bulk purchase and wholesale of rice and flour is gradually becoming a stable part of Deyu's revenue and net income. The Company believes that this business may eventually develop into and combine with the "China Grain Trading Center" project of Hebei YuGu Grain Co., Ltd., a Deyu subsidiary, in which the Company seeks to establish one of the largest grain trading and processing centers in China in the next few years.

Revenue from Deyu's deep processed grain division in the third quarter of 2011 was $2.7 million compared to $0.8 million in the second quarter of 2011. This division is still in a development stage in terms of business and product development, market research, branding and improving consumer understanding and acceptance of healthy products.

Cost of Goods Sold

Cost of goods sold mainly consists of cost of raw materials, labor, utilities, manufacturing costs and related depreciation, and packaging costs and as a result of Deyu's increase in sales volume and purchase prices, the Company's cost of goods sold was $73.1 million in the third quarter of 2011 compared to $16.1 million in the third quarter of 2010, an increase of $57.0 million, or 354 percent. As a percentage of net revenue, Deyu's cost of goods increased by 760 basis points from 76.8 percent in the three months ended in September 30, 2010 to 84.4 percent in the three months ended September 30, 2011. Additionally, the Company experienced purchase cost increases with respect to corn and grains due to the inflation of the costs of raw materials in China. The increases of the selling price of corn and packaged and unpackaged grains could not catch up with the purchase price as a result of price limitations imposed by the Chinese government in addition to Deyu's sales expansion strategy of lowering its average selling price compared with market price. The Company's bulk purchase and wholesale trading of rice, flour, wheat and other products also contributed to a low gross margin of approximately 5 percent, which negatively affected Deyu's overall profit margin in the third quarter of 2011.

Gross Profit & Gross Margin

Due to the increase in sales volume, Deyu's gross profit increased by $8.6 million, or 177 percent, from $4.9 million in the third quarter of 2010 to $13.5 million in the third quarter of 2011. This increase is attributed to increases of $5.7 million in the Company's corn division, $1.8 million in its simple processed grains division and $1.1 million in its deep processed grains division. However, Deyu's gross margin decreased from 23.2 percent in the three months ended September 30, 2010 to 15.6 percent in the three months ended September 30, 2011. This decrease is a reflection of the drop in gross margin of Deyu's corn division in addition to the Company's packaged and unpackaged grain sales and the low margin contributed by its recently added bulk purchase and wholesale of rice, flour, wheat and other products business segment.

In the third quarter of 2011, gross profit for Deyu's corn division was $9.2 million, contributing to 68.3 percent of the Company's total gross profit for the three months ended September 30, 2011. This division's gross margin however was 14.8 percent for the three months ended September 30, 2011, down by 520 basis points from 20.0 percent for the three months ended September 30, 2010. This decrease in gross margin was mainly due to Chinese government's tying up and controlling the market price of corns. The gross margin of corn was higher in 2010 because Deyu procured large amounts of corn before prices sharply increased due to a supply shortage caused by drought and floods in China during that period. Although the price of corn continued to rise through 2011, Deyu was unable to maintain the same gross margin as that in 2010 as a result of not being able to procure corn at a lower price. The Chinese government took some measures to control the increase of the selling price of corn in the third quarter of 2011, which reduced Deyu's gross margin as the purchasing price of corn continued to rise. Additionally, as a percentage of total purchases, the amount Deyu purchased from wholesale suppliers more than doubled in the three months ended September 30, 2011 as compared to the same period in 2010, whose pricing was usually 10 percent higher than that of corns purchased directly from farmers. Deyu anticipates that the decrease in the gross margin of corn will be temporary, as it projects that there will still be a significant shortage of corn supply in the market for the next few years.  Accordingly, the Company believes that margins will improve as result of the Company's strengths in regards to inventory quantity, warehousing capacity, improved procurement and security of supply.

In the third quarter of 2011, gross profit for Deyu's simple processed grain division was $3.1 million, contributing to 23.0 percent of total gross profit for the three months ended September 30, 2011. Moreover, the gross margin for its simple processed grain division was 14.4 percent for the three months ended September 30, 2011, compared to 41.6 percent for the three months ended September 30, 2010. This decrease was mainly attributed to the lower gross margin of approximately 5 percent in Deyu's newly added business of bulk trading of rice, flour, wheat and other products, and the gross margin decrease of 1670 basis points in the Company's business of selling packaged and unpackaged grain products in stores, which is included in its simple processed grains division.

Deyu's business of selling packaged and unpackaged grain products in stores generated a gross profit of $2.5 million for the three months ended September 30, 2011, contributing to 18.0 percent of its total consolidated gross profit, with a gross margin of approximately 24.8 percent. This decrease in gross margin of 1670 basis points from the same period of 2010 was primarily caused by: (a) Deyu's implementation of a sales expansion strategy in which the Company offered promotional price reductions upon entering new supermarkets in 2011, (b) increased sales percentages of certain types of grains with lower gross margins such as millet and flour, and (c) the increase in selling price of our grain products was not as steep as the increase in purchase price of grains.

As a newly-added business in first quarter of 2011, Deyu's bulk trading of rice, flour, wheat and other products generated gross profit of $0.6 million for the three months ended September 30, 2011, contributing to 4.8 percent of the Company's total consolidated gross profit, with a gross margin of approximately 5.5 percent. The lower gross margin associated with bulk trading is in line with the low risk and high turnover rate nature of this business, circumstances which diluted and decreased the gross margin of Deyu's simple processed grain division this quarter. The margin in this segment for the three months ended September 30, 2011 decreased by 400 basis points from 9.5 percent for the six months ended June 30, 2011. The decrease was primarily due to the continuous increase in the purchase cost of rice and flour in the third quarter of 2011, while our selling price of these consumer agricultural products cannot reflect price increases of purchase costs in time.

Net Income

Deyu's net income increased $5.5 million or 259 percent, from $2.1 million in the third quarter of 2010 to $7.6 million in the third quarter of 2011.

Recent Updates

In the third quarter of 2011, Deyu launched a new project entitled "China Grain Trading Center" in Gaocheng City, Hebei Province, China, as the Company seeks to establish one of the largest grain processing and trading centers in China in the next few years. Deyu plans for this trading center to provide for procurement, storage, processing, logistics, trading, research and development, quarantine inspection, digital data exchange and financing services to agriculture companies in China. Since China is one of the largest grain producers and consumers in the world, and since a large portion of grain trading in China is conducted in Hebei Province, Deyu believes that creating and developing this center will facilitate progress in China's agriculture sector.

Business Outlook

"As we head into 2012, our primary objectives are to continue to develop our corn and simple processed grain divisions, and we are confident that our latest capacity expansion efforts have put us in a better position to achieve these goals. In regards to our emerging deep processed grain division, we are considering trading organic food products through our extensive distribution network. Also, we are looking to enhance our relationships with corn farmers by providing them with updated technology services, as well as improving our inventory turnover efficiency by optimizing our logistics chain management and working capital management. Additionally, we are really excited about the potential of our 'China Grain Trading Center' project, and we believe completing this project will strengthen our competitive advantages and contribute to increases in corn sales and the bulk trading of grains in China", says Mr. Hao.

About Deyu Agriculture

Deyu Agriculture Corp. is a vertically integrated producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains operating in the Shanxi Province of the People's Republic of China. The Company has access to over 109,000 acres of farmland in the Shanxi Province for breeding, cultivating, processing, warehousing, and distributing grain and corn products. Deyu's deep-processed grain division was created in 2010 and its business is conducted through Detian Yu, Deyufarm and its subsidiaries, by producing and distributing instant grain vermicelli, instant millet beverage, and buckwheat tea to wholesalers and supermarkets under the Company's brand name, "Deyufang". Deyu has an extensive retail distribution network of more than 16,000 retail stores across China. The Company's website is located at www.deyuagri.com.

Safe Harbor Statements

This press release contains forward-looking statements made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon the current plans, estimates and projections of Deyu Agriculture's management and are subject to risks and uncertainties, which could cause actual results to differ from the 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; uncertainties related to conducting business in China, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. Therefore, you should not place undue reliance on these forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: business conditions in China, general economic conditions; geopolitical events and regulatory changes, availability of capital, changes in the agricultural industry, the Company's ability to maintain its competitive position. Additional Information regarding risks can be found in the Company's Quarterly Report on Form 10-Q and in the Company's Prospectus filed pursuant to Rule 424(b)(3) with the SEC.

Investor Contact:
Mr. Kevin Fickle, President
NUWA Group LLC
Tel: +1-925-330-8315
Email: [email protected]

Company Contact:
Mr. Charlie Lin, Chief Financial Officer
Deyu Agriculture Corp.
Tel: +1-626-242-5292
Email: [email protected]

SOURCE Deyu Agriculture Corp.

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