ITEM 1. BUSINESS
In this Annual Report, unless the context requires otherwise,
references to the “Company,” “Sino Agro” “we,” “our company,” “our”
and “us,” refer to Sino Agro Food, Inc., a Nevada corporation together with its subsidiaries.
Sino Agro
Food, Inc.
SIAF is an agriculture technology and natural food holding company
with principal operations in the People’s Republic of China. The Company acquires and maintains equity stakes in a cohesive
portfolio of companies that SIAF forms according to its core mission to produce, distribute, market and sell natural, sustainable
protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China. SIAF provides financial oversight
and strategic direction for each company, and for the interoperation between companies, stressing vertical integration between
the levels of the Company’s subsidiary food chain. The Company owns or licenses patents, proprietary methods, and other intellectual
properties in its areas of expertise. SIAF provides consulting and services to joint venture partners to construct and operate
food businesses, primarily producing wholesale fish and cattle. Further joint ventures market and distribute the wholesale products
as part of an overall “farm to plate” concept and business strategy.
Revenues by division were as follows (in millions of
U.S. dollars):
Division
|
|
2012
|
|
|
2013
|
|
Fisheries
|
|
$
|
86.3
|
|
|
$
|
107.6
|
|
Beef
|
|
|
14.2
|
|
|
|
32.4
|
|
Cattle
|
|
|
17.0
|
|
|
|
67.7
|
|
Plantation
|
|
|
11.9
|
|
|
|
22.8
|
|
Corporate, Marketing & Trading
|
|
|
|
|
|
|
30.9
|
|
Total
|
|
$
|
138.6
|
|
|
$
|
261.4
|
|
History
Our company, which was formerly known as Volcanic Gold, Inc.
and A Power Agro Agriculture Development, Inc., was incorporated on October 1, 1974 in the State of Nevada. We were engaged in
the mining and exploration business but ceased our mining and exploring business on October 14, 2005. On August 24, 2007, we entered
into a Merger and Acquisition Agreement with Capital Award Inc., a Belize corporation and its subsidiaries Capital Stage Inc. and
Capital Hero Inc. Effective the same date, Capital Award completed a reverse merger transaction with us. We acquired all the outstanding
common stock of Capital Award from Capital Adventure, a shareholder of Capital Award, for 32,000,000 shares of our common stock.
On August 24, 2007 we changed our name from Volcanic Gold, Inc.
to A Power Agro Agriculture Development, Inc. On December 8, 2007, we changed our name to Sino Agro Food, Inc. Our principal executive
office is located at Room 3801, 38 th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City,
Guangdong Province, PRC, 510610.
For two years, the Company operated in the dairy segment. We
sold our dairy business in December of 2009. We determined that the dairy industry had poor fundamentals in that it was manipulated
and controlled by a few value-added manufacturers who obtained a majority of their raw milk from various regional dairy farmers
of the country who received very little value yet were expected to deliver high quality milk. As a result, small dairy farmers
were essentially forced to use chemicals in their milk to bring up the milk’s protein level. In our opinion, this state of
affairs led to the downfall and collapse of the Chinese dairy industry in 2010. After the sale of our dairy business, we instituted
and began to implement our five year plan to develop the vertically integrated business operations consisting of (i) cattle fattening
and production of beef products and (ii) cultivation of fish and prawn and related products.
Corporate Acquisitions
On September 5, 2007, we acquired two businesses in the People’s
Republic of China (“PRC”):
(a) Tri-Way Industries Ltd., Hong Kong (“TRW”) (formerly
known as Tri-way Industries Limited), a company incorporated in Hong Kong; and
(b) Macau EIJI Co. Ltd., Macau (“MEIJI”) (formerly
known as Macau Eiji Company Limited), a company incorporated in Macau, and the owner of 75% equity interest in Enping City Juntang
Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a PRC corporate Sino Foreign joint venture.
On November 27, 2007, MEIJI and HST established a corporate
Sino Foreign joint venture, Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd, China (“JHST”) (formerly
known as Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.), a company incorporated in the PRC with MEIJI owning a
75% interest and HST owning a 25% interest. HST was dissolved in 2010.
In September 2009, we formed a 100% owned subsidiary in Macau,
A Power Agriculture Development (Macau) Ltd., China (“APWAM”) (formerly known as A Power Agro Agriculture Development
(Macau) Limited). APWAM presently owns 45% of a corporate Sino Foreign joint venture, Qinghai Sanjiang A Power Agriculture Co.
Ltd. (“SJAP”). SJAP is engaged in the business of manufacturing bio-organic fertilizer, livestock feed and development
of other agriculture projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, PRC.
On February 28, 2011, TRW applied to form a corporate joint
venture, Enping City A Power Prawn Culture Development Co. Ltd., China (“EBAPCD”) (formerly known as Enping City Bi
Tao A Power Fishery Development Co., Limited), which is incorporated in the PRC. TRW initially owned a 25% equity interest in EBAPFD.
On November 17, 2011, TRW formed Jiangmen City A Power Fishery Development Co. Ltd, China (“JFD”) (formerly known as
Jiang Men City A Power Fishery Development Co., Limited) in which it acquired a 25% equity interest, while withdrawing its 25%
equity interest in EBAPFD. As of December 31, 2011, we had invested $1,258,607 in JFD. JFD operates an indoor fish farm. On January
1, 2012, we acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. On April 1, 2012, we
acquired an additional 25% equity interest in JFD for the amount of $1,702,580. We presently own a 75% equity interest in JFD and
control its board of directors. As of September 30, 2012, we had consolidated the assets and operations of JFD.
On April 15, 2011, MEIJI applied to form Enping City A Power
Beef Cattle Farm 2 Co. Ltd., China (“EAPBCF”) (formerly known as Enping City A Power Cattle Farm Co., Limited), all
of which we would indirectly own a 25% equity interest in as of November 17, 2011. On September 13, 2012 MEIJI formed Jiangmen
City Hang Mei Cattle Farm Development Co. Ltd., a company incorporated in the PRC (“JHMC”) (formerly known as Jiang
Men City Hang Mei Cattle Farm Development Co., Limited) in which it owns 75% equity interest with an investment of $3,636,326,
while withdrawing its 25% equity interest in ECF. As of September 30, 2012, we had consolidated the assets and operations of JHMC.
Our Business Model
The Company works together with joint venture partners to form
operating companies, in which we acquire equity interest. After a certain period of time and successful operating results, the
Company and its joint venture partners will form a ‘“Sino Foreign Joint Venture Company (“SJVC”). Prior
to the formal naming, registration, and incorporation of an anticipated SJVC, SIAF would prepay a deposit toward the consideration
of its future SJVC as a percentage of the assets of the fully developed farm, based on cost. Upon formal incorporation, the pre-payments
become equity capital.
Incorporated companies are joint ventures managed at a local
operations level by joint venture partners, and overseen by SIAF.
The Company
embarked upon a five-year phased growth plan in January, 2010. This plan targeted accruing net assets of approximately $500 million
by the end of February, 2015. As of December 31, 2013, our net tangible book value stood at $
318,790,976.
Nearly all of these assets have come from, and are anticipated to come from, internally generated income and grants.
We believe that income from operations will fulfill our targeted
net assets. Expansion of existing joint venture operations, as well as increases in equity stakes in SJVC’s that will be
incorporated progressively through the end of 2014, are expected to add to net assets. As has been our history, the quarterly increase
in net assets is itself expected to grow each quarter in 2014; however there is no guarantee that this will be achieved.
Background
After successfully developing many aquaculture fishery farms,
cattle farms and related business operations (along with sales and marketing of produce and products) in Australia and Malaysia
since 1998, SIAF’s management team introduced our business activities in China in 2006. We are an engineering and consulting
company that specializes in building and operating agriculture and aquaculture farms.
To accomplish this, we use our expertise and know how in specific
agriculture and aquaculture technologies. Our “A Power Re-circulating Aquaculture System,” sometimes referred to herein
as “APRAS,” is a patented and proven technology for indoor fish farming. We have developed modern techniques and technologies
to grow, feed and house both fish and cattle. These are engineered into the designs of, and the management systems for, indoor
and outdoor fishery and cattle farms. Our experience managing crops, and employing technologies, including hydroponic, to work
within climate and growing conditions optimizes production of organic, green and natural agricultural produce.
In all of our developments we have acted as the master engineer,
pioneering the construction and building of farms, from raw land into fully operational facilities. We complete the construction
and building of infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities.
Our management teams are responsible for developing all business activities into effective and efficient operations.
In just a few years, SIAF has matured into a company dedicated
to the agriculture and aquaculture industry in China. We currently maintain operation of our HU Plantation as well as our services
in engineering consulting, specializing in the development of two major products, namely meat derived from the rearing of beef
cattle and seafood derived from the growth of fish, prawns, eel and other marine species.
Revenues are generated from activities that we divide into five
stand-alone business divisions or units: (1) Fishery, (2) Cattle, (3) Organic Fertilizer, (4) HU Plantation,
and (5) Marketing and Trading. This fifth and newest division, “Marketing and Trading” represents our strongest
push to vertically integrate the Company’s operations, furthering the Company’s overall “farm to plate”
concept.
Four major customers for the Marketing and Trading unit
accounted for 51.49% of consolidated revenues during the fiscal year ended December 31, 2013. Two of those customers
accounted for 33.11% of consolidated revenues, approximately evenly split.
Our largest customer represents a group of thirty separate live
seafood wholesalers at the Guangzhou wholesale markets. Our second largest customer is WSC1, which is owned and operated by Guangzhou
City A Power NaWei Trading Co. Ltd. (“APNW”). Capital Award was the consulting engineer responsible for the construction
of WSC1 and development of its business operation via a Consulting and Service Contract granted by APNW. APNW is now one of our
main wholesalers to whom we bill our sales of seafood. APNW then distributes the seafood to other wholesalers in various cities
in China.
The Company holds patents and licenses for fertilizer formulas
and for indoor fish farm techniques. We hold a “master license” in China for “A Power Technology” (“APT”),
a modular on-land fish growing system and technology based on a re-circulating aquaculture system (“RAS”).
The Company’s SIAF Division (also called “Corporate
and Other” or “Marketing and Trading”), plus our wholly owned subsidiaries Capital Award Inc. (“CA”),
Macau EIJI Company Ltd. (“MEIJI”), and Tri-way Industries Ltd. (“TRW”) generate revenues from two main
activities: “Engineering and Consulting Services” and “Marketing and Sales of Food Products.” Engineering
and Technology Services are awarded via Consulting and Service Contracts (“CSC’s”) for the development, construction,
supply of plants and equipment, and management of farms and related business operations (including fish, prawn, cattle, and plantation).
General standard principal terms and conditions for Farm
Development Consulting and Service Contracts are outlined below:
|
·
|
The Contracting parties: SIAF subsidiary is the consulting and service
provider (turnkey contractor). The China businessmen and investor group is the Developer of the Project.
|
|
·
|
Development schedules for the project.
|
|
·
|
Responsibilities and obligations of the parties: SIAF subsidiary is
to build the project (including development of its business operation) using our technology, systems, know-how, and management
expertise and systems for and on behalf of the Developer such that the Developer is responsible to pay SIAF subsidiary for its
work (including sub-contractors and suppliers appointed by SIAF) in a timely manner (normally a 60 days term).
|
|
·
|
Provisions allow SIAF subsidiary to select and appoint sub-contractors
and suppliers.
|
|
·
|
Extra work and additional work and extra cost provisions.
|
|
·
|
Warranty and limitation of liabilities.
|
|
·
|
Scope of work and lists of supplies (including all plant and equipment).
|
|
·
|
Installation, training and commissioning of the developments and business
operation.
|
|
·
|
Granting to SIAF subsidiary the right of management of operation,
and marketing and sales of the produce and products from the farm’s operation.
|
These SIAF subsidiaries generally have exclusive marketing,
sales and distribution rights to each subsidiary’s respective proprietary technologies, patents, licenses, and intellectual
property relating to their subject matter expertise (e.g., cattle, aquaculture, plantation farming). For example, CA purchases
all marketable fish and prawns from the farms and in turn sells them to wholesale markets. CA also supplies the farms with fingerling,
baby or adult fish or prawns and stock feed. MEIJI operates similarly with the cattle that are grown by JHMC.
Land Ownership in China
In China, nearly all land is owned by the Central Government
or local Village Collectives, which grant “usufructuary” rights (i.e., the right to use and enjoy the derived benefits
for a period of time) in the form of Land Use Rights (LUR). This is akin to “leasehold” land rights in the United States.
Corporate entities and individuals may own the property (buildings) erected on Government land.
Land Use Rights may be transferred, but they are based on agricultural
contracts, and cannot be changed arbitrarily to non-agricultural purposes.
OTC BB: SIAF
Sino Agro Food, Inc. became a fully reporting company in 2011,
with the effectiveness of its Form 10, which led directly to its current Over the Counter Bulletin Board (OTC BB) quotation.
Business Overview and Introduction
We introduced our business activities in China in 2006 as an
engineering consulting company that specializes in building agriculture and aquaculture farms and the development of related business
operations. We use our expertise and know-how in specific agriculture and aquaculture technologies, including:
|
·
|
Our A Power Re-circulating Aquaculture System and related technology
|
|
·
|
Our cattle growing, feeding and caring technology
|
|
·
|
Design engineering , construction, project management, business operations
and information systems for indoor and outdoor fishery and cattle farms and hydroponic vegetable farms, adaptable to various climate
and growing conditions
|
|
·
|
Producing organic, green and natural agriculture produce
|
|
·
|
Ongoing operational management, including sales and marketing, for
aquaculture fishery farms, cattle farms, produce farms, and products. We performed all these business functions successfully in
Australia and Malaysia since 1998.
|
In all of our developments, we were and continue to be the master
engineer pioneering the construction and building of farms from raw land into fully operational facilities. This covers the construction
and building of infrastructure including:
|
·
|
all production facilities
|
|
·
|
infrastructure, including roads
|
In each development, we provide the related management teams
responsible for leading all business activities into effective and efficient operations.
In the past few years, our company has matured into a company
dedicated to the agriculture and aquaculture industry. We have made early inroads to all levels of business in our supply chain.
Our revenues are mainly derived from seafood and beef, along with fertilizer, livestock, the HU Plantation, and our services in
engineering consulting. We divide our activities into five standalone business divisions or units: (1) Fishery, (2) Cattle, (3)
Organic Fertilizer, (4) HU Plantation and (5) Marketing and Trading.
Our LawZi Prawns
CHARTS AND
TABLES
The following exhibits provide overview
information about our Company:
(1) Exhibit 1 contains two organization charts. Chart 1(a) reflects
our Group Corporate Structure as at December 31, 2013. Chart 1(b) indicates the prospective structure of our “Unincorporated
Project Companies.” These are future SJVC’s that are not yet officially formed, but are operational. The Company paid
deposits (for a percentage of equity) as consideration toward their respective acquisitions pending formation of corresponding
SJVC’s. Official formations are scheduled in 2014 and 2015.
(2) Exhibit 2 is a table that indicates the abbreviations of
the names of our companies.
(3) Exhibit 3 is a map that shows the location of the Company’s
businesses in China.
(4) Exhibit 4 is a table that defines the activities of the
Company’s business units.
Exhibit 1, Chart 1(a) represents our
group organization structure:
Exhibit 1, Chart 1(b) shows how our unincorporated companies
fit into our corporate structure:
Exhibit 2: Abbreviated Names of the Entities
Incorporated Companies
#
|
Abbreviation
|
|
Names of Entity
|
|
Date
Formed
|
|
|
|
|
|
|
1
|
SIAF
|
|
Sino Agro Food, Inc.
|
|
1974
|
|
|
|
|
|
|
2
|
CA
|
|
Capital Award Inc.
|
|
2003
|
|
|
|
|
|
|
3
|
MEIJI
|
|
Macau EIJI Company Ltd.
|
|
2005
|
|
|
|
|
|
|
4
|
APWAM
|
|
A Power Agro Agriculture Development (Macau) Ltd.
|
|
2007
|
|
|
|
|
|
|
5
|
TRW
|
|
Tri-way Industries Ltd. (Hong Kong)
|
|
2009
|
|
|
|
|
|
|
6
|
CS
|
|
Capital Stage Inc.
|
|
2003
|
|
|
|
|
|
|
7
|
CH
|
|
Capital Hero Inc.
|
|
2003
|
|
|
|
|
|
|
8
|
JHST or HU
Plantation
|
|
Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd.
|
|
2009
|
|
|
|
|
|
|
9
|
JHMC or Cattle Farm 1
|
|
Jiangman City Hang Mei Cattle Farm Development Co. Ltd.
|
|
2012
|
|
|
|
|
|
|
10
|
SJAP
|
|
Qinghai Sanjiang A Power Agriculture Co. Ltd.
|
|
2009
|
|
|
|
|
|
|
11
|
JFD or Fish Farm 1
|
|
Jiangmen City A Power Fishery Development Co. Ltd.
|
|
2011
|
|
|
|
|
|
|
12
|
HSA
|
|
Hunan Shenghua A Power Agriculture Co. Ltd.
|
|
2011
|
|
|
|
|
|
|
13
|
SIAFS
|
|
Sino Agro Food Sweden Aktiebolag
|
|
2013
|
Unincorporated Project Companies
#
|
Abbreviation
|
|
Names of Entity
|
|
Date
Formed
|
|
|
|
|
|
|
14
|
APNW
or Wholesale Center 1
|
|
Guangzhou
City A Power Nawei Trading Co. Ltd. China
|
|
2012
|
|
|
|
|
|
|
15
|
ZSAPP
or Prawn Farm 2
|
|
Zhongshan A Power
Prawn Culture Farms Development Co. Ltd. China
|
|
2012
|
|
|
|
|
|
|
16
|
EBAPCD
or Prawn Farm 1
|
|
Enping City A
Power Prawn Culture Development Co. Ltd. China
|
|
2011
|
|
|
|
|
|
|
17
|
EAPBCF
or Cattle Farm 2
|
|
Enping City A
Power Beef Cattle Farm 2 Co. Ltd. China
|
|
2011
|
|
|
|
|
|
|
18
|
Fish & Eel
Farm 2
|
|
XinHui City Gao
A Power Aquaculture Fishery Development Co. Ltd.
|
|
2011
|
All “Unincorporated Project Companies” are private
companies formed in China with Chinese citizens acting as their legal representatives as required by Chinese law. These companies’
names will be changed in accordance with the names granted by the relevant authorities once their corresponding SJVC have officially
been formed. As of the date of this Annual Report, we do not own any equity stake in any of these Unincorporated Project Companies.
However, we have paid certain amount of pre-payments as deposits toward part of the respective consideration required for the purchase
of respective future SJVC, and the corresponding payments made are equal to the % of equity stakes being paid for in the respective
future SJVC.
Exhibit 3: Map of the Company’s Entities in China
Exhibit 4: Business Activities of the Company’s Entities
Abbreviation
|
Business Activities
|
SIAF
|
Engineering consulting (in general types of developments), business management, trading, sales and marketing
|
|
|
CA
|
Engineering consulting (mainly in development of fishery), management of fishery operations, marketing and sales of fishery produces and products.
|
|
|
MEIJI
|
Engineering consulting (mainly in cattle farming and vegetable farming), management service and marketing and sales of cattle and related products.
|
|
|
APWAM
|
Holding Company
|
|
|
TRW
|
Holding Company and holder of technology licenses.
|
|
|
CS
|
Dormant
|
|
|
CH
|
Dormant
|
|
|
JHST or HU Plantation
|
HU Plantation, Immortal Vegetable farming, processing and sales of produces and products.
|
|
|
JHMC or Cattle Farm 1
|
A demonstration farm for growing cattle in a semi-tropical climate.
|
|
|
SJAP
|
Existing activities:
Manufacturing of organic fertilizer, bulk and concentrated livestock
feed, and rearing of cattle and cooperative farming
Slaughter and de-boning of cattle and value added processing
of beef products
Expected added activities by 2014: Manufacturing of Enzyme
Electricity generation via Marsh Gas Station
|
|
|
JFD or Fish Farm 1
|
Growing of fish (sleepy cod species), eels (Flower Pattern species) and prawns.
|
|
|
HSA
|
Existing Activities
Manufacturing of organic fertilizer, 100% pure organic mixed
fertilizer and lake fish farming organic fertilizer.
Expected added activities by 2014: Cattle farming
|
|
|
SIAFS
|
Various support and service to parent company, asset management, finance, consulting and provision of services in agriculture and aquaculture, marketing and sale of agricultural products, consultancy for business development in China, and related business.
|
Business Activities of the Unincorporated Project Companies
Notes:
Abbreviation
|
Business Activities
|
|
|
Wholesale Center 1 or WC1
|
Marketing, sales and distribution of seafood and meats and related products.
|
|
|
ZSAPP or Prawn Farm 2
|
Hatchery and Nursery operation of prawns, production started
from Q2 2012
Growing of prawns using open-dams applying re-circulating filtration
systems, with production started from Q3 2013, although construction work is still in progress.
|
|
|
EBAPCD or Prawn Farm 1
|
Growth of prawns, production starting in Q3 2013
|
|
|
EAPBCF or Cattle Farm 2
|
By year 2014 - Cattle Growing.
|
|
|
Fish & Eel Farm 2
|
Growing fish, eels and prawns. Production to start in 2014, although construction is on-going.
|
“Unincorporated Project Companies” are private companies
formed in China with Chinese citizens acting as their legal representatives as required by Chinese law. These companies’
names will be changed in accordance with the names granted by relevant authorities once their corresponding SJVC are formed officially.
As of the date of this Annual Report, we do not own any equity stake in any of these Unincorporated Project Companies. However,
it means that we have paid certain pre-payments as deposits toward part of the consideration required for the purchase of respective
future SJVC, and the corresponding payments made are equal to the % of equity stakes being paid for in the future SJVC.
Our operations and assets in the PRC may be subject to significant
political and economic uncertainties. Government policies are subject to rapid change; the government of the PRC may adopt policies
that have the effect of hindering private economic activity and greater economic decentralization. All of the Company’s land
use rights are related to allocated land. The local government authorities have granted such land use rights to us for free, or
at a discounted levy rate given our contribution to the development of the local economy. Discounted rates could change. Because
Chinese law governs almost all of our material agreements, we cannot assure you that we will be able to enforce our legal rights
within China or elsewhere. Chinese law governs almost all of our material agreements. We cannot assure you that we will be able
to enforce any of our material agreements or that remedies will be available outside of China. The system of laws and the enforcement
of existing laws in China may not be as certain in implementation and interpretation as in the United States. It could be difficult
to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China. Substantially all of
our assets will be located in the PRC and all of our officers and all but one of our directors reside outside of the United States.
As a result, it may not be possible for United States investors to enforce their legal rights.
Note on Our Usage of “Prawns” and “Prawn
Fingerlings”
Prawns
: In this Annual Report, we use “prawns”
to represent any prawns or shrimp of all species and sizes.
Prawn Fingerlings
(
or prawn fries
): In this Annual
Report, we refer to “prawn fingerlings” of all species including our Mexican White Shrimp (baby shrimp that are 7 to
10 days old after hatching) and our LawZi River Prawns (baby prawns that are 21 to 28 days old after hatching).
Dates
Our fiscal quarters are aligned to the calendar year, so that
in this Annual Report we often refer to dates in a quarterly format (i.e., Q1, Q2, Q3 and Q4) along with the year. Q1 represents
January through March, Q2 means April through June, Q3 refers to July through September, and Q4 means October through December.
Summary of Business Information, Operation Models, Technologies,
Produce and Products:
Our Sino Foreign Joint Venture Companies (“SJVC’s”)
There are two methods that we use to obtain our SJVC’s
in China;
|
·
|
The first approach is to pay for our entire share of capital expenditures
and associated costs (including establishment and development cost) and applying for the formation of the SJVC starting from day
one. A Sino Joint Venture Agreement (or Memorandum of Understanding) is usually executed in advance bearing corresponding terms
and conditions agreed by the joint venture parties.
|
Examples: SJAP, JHST and HSA
|
·
|
The second method involves us acquiring the entity only after its
business operation has been developed and started to generate revenues; in this case, we would have determined that the particular
operation would be beneficial to the Company in all aspects, and thereafter we would apply for the formation of its SJVC:
|
Examples: JHMC and JFD.
This method is typically used in connection with projects that
we built and developed for our Chinese investors such that these Joint Venture Agreements bear standard terms and conditions in
which the investors agree to:
|
1.
|
Appoint us as their Consulting Engineer, granting the right for us to appoint local qualified sub-contractors to build/construct
the farms, and local suppliers to supply all plant and equipment and related parts and components of the farms;
|
|
2.
|
Give us full management rights on the construction and development of the farm, and the full rights to manage business operations
of the farm afterward, as well as appoint us to be sole marketing and distribution agent of the farm for the sales and marketing
of the farm’s produce and products;
|
|
3.
|
Pay for all construction and development costs in accordance with the terms and conditions of our consulting servicing contracts
for acting as their consulting engineer;
|
|
4.
|
Agree to incorporate a SJVC, in the event that we decide to acquire the developed farm and related business operations, in
which the SJVC will acquire all assets and liabilities of said farm and business, and allow us the option to take up to 75% of
the SJVC at 100% net asset value of the SJVC while the investors keep 25% of the SJVC; and
|
|
5.
|
Agree to appoint us as the management of operation of the farm for a minimum period of 15 years in the event we decide not
to acquire the developed farm and related business operation.
|
Our Employees
This table lists the number of our employees by job classification
and business division, as of the date of this Annual Report:
Abbreviation of Business Division
|
|
Managers
|
|
|
Skilled
|
|
|
Unskilled
|
|
|
Casual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIAF, including CA, MEIJI, APWAM, TRW, CS, CH
|
|
|
12
|
|
|
|
15
|
|
|
|
3
|
|
|
|
0
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JHST
|
|
|
5
|
|
|
|
18
|
|
|
|
83
|
|
|
|
100
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JHMC
|
|
|
2
|
|
|
|
2
|
|
|
|
12
|
|
|
|
16
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJAP
|
|
|
16
|
|
|
|
26
|
|
|
|
60
|
|
|
|
150
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JFD
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
0
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSA
|
|
|
5
|
|
|
|
5
|
|
|
|
12
|
|
|
|
6
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42
|
|
|
|
72
|
|
|
|
176
|
|
|
|
266
|
|
|
|
556
|
|
Cooperative
Farmers
Our Cooperative Farming Model provides us with an intermediary
supply pipeline so we can ramp up our production at lower marginal cost to our operations, albeit on favorable trade terms from
us.
Our strategy is to identify agriculture projects with strong
growth potential linked to sales demand where small farmers lack commercial scale and expertise, and where they benefit with our
strategic alliance approach. This provides a mutually beneficial outcome for local small farmers who cooperate with us as an intermediary
to produce the goods to supply our farms. We also work with local governments, and with their help we introduce and initiate Farmers
Cooperatives, such as in Huangyuan County, Xining City. This concept of strategic alliance with smallhold farmers under a Cooperative
Farming Model is based on the following key characteristics and value enhancers:
|
1.
|
Once we have completed our assessment of the ability of the regional farmers to grow crops and pastures for us as our nominated
contractors using our land that was leased to us free of rent by the local government or using the farmer’s own land, and
using our plants and equipment for their planting and harvesting, we provide the farmers with supervision and associated services,
seeds and organic fertilizer on credit terms offset by the crops and pastures that we purchase from them.
|
|
2.
|
We also use this regional farmers’ concept when we are growing cattle as these farmers are our contractors using our
bulk livestock feed on credit terms that will be offset by the amount of mature cattle that we buy from them.
|
|
3.
|
The ultimate aim of this arrangement is to obtain cattle that will be qualified as “organically reared cattle”
such that we shall be able to produce “organic beef products” on a commercial scale basis.
|
The Organic Chain: (Organic Beef Product and Supply Chain)
|
·
|
SIAF’s agricultural waste is prepared by SIAF into bio-organic
fertilizer. Also the livestock feed is prepared into bio-organic livestock feed.
|
|
·
|
The bio-organic fertilizer and the bio-organic livestock feed are
sold to farmers that work on SIAF’s land-use rights (which are owned by the government) at a discounted price. The fertilizer
and the livestock feed are also prepared based on our enzyme technologies. The use of the enzyme is synergistic as the production
of fertilizer and livestock feed is permissible during 12 months of the year, providing competitive advantage.
|
|
·
|
The farmers use the bio-organic fertilizer on the soil where they
plant grain, and feed the grain to the cows together with the livestock feed. Tests made by the government that owns the land shows
the following results from use of the bio-organic fertilizer:
|
|
·
|
Additional average weight gain per head of fattening cattle;
|
|
·
|
Additional fresh milk produced;
|
|
·
|
All feeds are much easier to digest resulting in a much cleaner environment
in the cattle yards and houses;
|
|
·
|
No sickness during the period was recorded through the cause of consumption
of our feeds; and
|
|
·
|
All cattle preferred to eat our feed and were reluctant to revert
back to the consumption of their old feed after they had consumed our feed during the period.
|
|
·
|
SIAF acquires the young cattle from the regional farmers when they
are about 6 months old. Due to the discounted price of the bio-organic fertilizer, SIAF acquires the young cattle to a discounted
price from the farmers for a win-win outcome. The young cattle are fed with SIAF’s organic livestock feed (our “Stock
Feed Manufacturing Technology”).
|
Recent Case Studies
Our records show that farmers’ average annual incomes
increased from RMB 480 per Mu per year to RMB 2,100 per Mu per year by planting crops and pasture for us applying our fertilizer
with harvesting being done by our teams of harvesting workers using our machinery and equipment (1 Mu is about 660 square meters).
Farmers who grow cattle using our livestock feed, and then sold
their cattle to us have quadrupled their annual incomes. Previously, it took them four years to grow and fatten a head of cattle
to about 600 kg of body weight, but now it takes them less than 12 months to fatten a head of cattle to a body weight of no less
than 700 Kg. There is no guarantee that local farmers using our products, methods and services will experience similar gains
in the future.
Our Technologies
A Power Re-circulating Aquaculture System and Technology
(APRAS)
We build fish farms (where we raise fish, prawns, and eels)
using our A Power Re-circulating Aquaculture System and Technology (“APRAS”), now in its 10
th
version, to
operate our sizeable commercial farming facilities. The APRAS is “an engineered, self-contained water treatment and re-circulating
aquaculture system (“RAS”) for growing aquatic animals on a commercial scale.” In a given farm all fish grow-out
tanks are modules that can be custom built in various sizes to support the farm’s growing capacity. RAS technology has been
proven in Europe and Australia for over thirty years. The Company attributes the following benefits to the system:
|
·
|
Lower labor requirements
|
|
·
|
Mortality rates of less than 8%, and
|
|
·
|
Feed-to-fish conversion ratios of 1:1 for pellet feed and 2:1 for
non-pellet feed
|
The indoor system is fully controlled:
|
·
|
Tank water is treated through micro-bio bacterial compartments to
digest soluble wastes
|
|
·
|
Solid waste separators remove the insoluble wastes
|
|
·
|
UV and O3 chambers clean the water
|
|
·
|
Optimal oxygen levels are maintained by in-built aerators
|
Water temperature is controlled by heat exchangers, which recycle
water at a rate between 60 times to 120 times per hour adjusted according to the motion requirement of the growing species of fish.
Water temperature is maintained within suitable ranges to suit each species of fish. Importantly, our system does not require chemicals
or antibiotics, and is pollution free. All tanks in the farm are built with concrete and all buildings are made of steel with concrete
walls that we anticipate will last for tens of years. Also all plant and equipment and components are replaceable, after their
life expectancy of 25 years. Given the high incidence of pollution in aquaculture and the existing outdated open dam aquaculture
methods used in China, we believe that our technology gives us distinct advantages both in the sales of prawns, fish, and eels,
and for our consulting and service business to develop more farms in China.
At the same time we believe that land prices are rising rapidly
in China. Our APRAS maximizes the utilization of land, because our technology produces a greater quantity of aquatic species per
surface area compared to China’s existing, aging open-dam or caging aquaculture systems and technologies. For instance, a
standard APRAS Modular tank has a surface area of 100 m2 and the capacity to produce over 40 MT of prawns per year, whereas the
old systems produce an average of 6 Mt per 660 m2 (or Mu) per year. In other words, we can produce annually 1,600 MT of prawns
per acre of land, whereas the old systems produce 36 MT of prawns per acre per year. This gives us a considerable advantage. Now
that we have established commercial APRAS farms in China and proven their commercial viability, we believe that in theory and conceptually
the Company has the potential to venture into developing aquaculture projects with annual productivity over hundreds of thousands
of metric tons in the foreseeable future. However, there can be no assurance that our annual productivity will in fact reach hundreds
of thousands of metric tons.
Our Aromatic Feed Formula and Feeding Systems
We feed our cattle with a portion of our aromatic feed (which
is a feed mix consisting of various Chinese herbs to improve the health of the cattle) at a ratio in accordance with their needs
during each growing stages of the cattle while they are being grown in the farm.
Our Enzyme Technologies
(Bacterial and Bio-organic Manufacturing Technology)
We own two Enzyme Technologies. The one known as T2 was invented
by SJAP and is being used for the manufacture of organic fertilizer and bulk livestock feed by SJAP at Qinghai, Xining’s
operation. We bought the other, known as T1, from a third party, and use it in our Cattle Farm 1’s operation to produce livestock
feed T1, and at HSA to produce 100% pure organic mixed fertilizer. We have the exclusive rights to both Enzyme Technologies. T2
has not been patented, but T1 is a patented intellectual property (see Exhibit 10.1 for further information).
There are fundamental differences between T1 and T2 as shown
in the table below:
Fundamentals
|
T1
|
T2
|
|
|
|
Required temperature for fermentation
|
15 degrees C
|
4 degrees C
|
|
|
|
Time required to complete fermentation processes
|
21 days
|
7 days
|
|
|
|
Temperature variation for storages
|
Up to -10 degrees C
|
Up to -30 degrees C
|
|
|
|
Shelf Life
|
One year
|
Two years or more
|
|
|
|
Protein % increases after fermentation
|
3%
|
6%
|
T2 is more practical and suitable to apply in colder regions,
such as at SJAP’s operation at Qinghai, Xining, with six month winters at average temperature of -20 degrees C and below.
T1 is better suited to regions with milder climates, such as at JHMC (Cattle Farm 1) and HSA where warm to hot weather is typical
for ten months each year, and winters are mild.
Composition of Bulk Livestock Feed
Raw materials consisting of crop wastes, as well as locally
grown and available wild wheat plus wild wheat stems, wild peas with stems and leaves, and selective grown pastures will be cut
and rolled into bales. The T1 or T2 enzyme is added during the cutting and rolling process, then the bales are packed and sealed
in airtight and weather proof packaging for storage in the open. The materials will go through a number of aging and fermentation
processes generated by the enzyme such that the feed will be ready for consumption, as the farmers require it to feed their cattle
or sheep.
Our Formulas for Concentrated Livestock Feed
We apply six different formulas in our concentrated livestock
feed manufacturing process. Our joint venture partners, former professors at the University of Xining before they joined SJAP,
invented these formulas. All cattle’s daily diets include consumption of both the bulk and concentrated livestock feed that
are tailor made to suit each stage of their growing cycles in order that optimal growth efficiency is achieved. For example, milk
cows require a higher protein diet, weaning calves need more calcium to grow body frames, and fattening cattle need higher calorie
input to gain body weight. Bulk livestock feed provides the carbohydrates while our concentrated livestock feed provides the protein,
vitamins, trace elements and other necessary supplements that will be required by cattle at various stages of their growing cycles.
Our formulas enhance feed with specific concentrated raw materials (i.e., soya bean, corns, seeds, etc.), such that no excessive
raw materials will be wasted, and all beneficial ingredients will be consumed. Thus, we produce healthy cattle with maximal efficiency.
At the same time, our formulas will reduce excessive body fat of growing cattle.
SJAP has conducted many tests to show that fattened cattle average
around 15 Kg of fat per body weight per 800 Kg if they were not fed with our Concentrated Livestock Feed. The fattened cattle fed
with our Concentrated Livestock Feed average only 6 Kg of fat per 800 kg, which means that salable net weight gain per cattle is
9 kg, because fats are not saleable.
Intellectual Property
As discussed in this section, the T1 Enzyme Technology (T1)
is our patented intellectual property. Our other proprietary technologies and techniques, such as “A Power Re-circulating
Aquaculture System and Technology,” our T2 Enzyme Technology, and six Concentrated Livestock Feed formulas are our trade
secrets, but not patented intellectual properties.
Cost and Effects
of Compliance with Environmental Laws
We believe that our environmental impact treatments are commercially
cost effective based on recycling of waste described as follows:
|
·
|
Using our APRAS systems, water is continually re-circulated in the
grow-out tanks while being treated internally in the filtration chambers. Insoluble wastes are centrally collected and reapplied
to our cropping fields as organic fertilizer, and all soluble wastes are consumed in our bacterial chambers to allow the recycling
of cleared water. In this respect the Company is planning on building commercial hydroponic farms (growing vegetables and fruit
in door using the fish farms’ organic fertilizer), adjacent to all of our APRAS farm with the first hydroponic farm expected
to be built during Q1 2014. We believe this will yield economic efficiency. In this respect, our first hydroponic farm is built
in conjunction with Prawn Farm 1’s expansion work, which is expected to add 6 more APM tanks to its existing operation and
the hydroponic farm next to the said expansion. As of the date of this Annual Report, this work has begun.
|
|
·
|
SJAP plans to build a marsh gas station during 2014 and 2015 to generate
electricity based on the source of energy generated from the fermentation processes of the cattle waste collected from its cattle
farms and after the fermentation processes, the residue will be recycled as raw materials for the manufacturing of its organic
fertilizer. For this project, the government has agreed to award SJAP a development grant of US$2 million to help initiate the
marsh gas station.
|
|
·
|
We believe the most cost effective way to take care of any environment
impact associated with our businesses is to create commercial viabilities through recycling the waste.
|
Vertical
Integration
Food quality and safety is a paramount concern in China, among
consumers and by the government. Our vertically integrated operations ensure that we control and deliver products with consistent
quality, value, and healthful attributes throughout our supply chain. Vertical integration also allows us to streamline our processes
while we optimize costs.
Our five year business plan, which started in January
2010 and runs through December 2014, aims to complete the development of all the integrated activities listed below with a view
to achieving our marketing plan concept of “From Farms to Plates.”
Vertical integration for our fishery developments:
We intend to develop the following mutually supportive business
activities:
|
·
|
Research and development in the fishery technologies, growing techniques,
management systems, species of aquatic animals that will be grown that will have commercial market niches, breeding stocks that
will have the ability to produce and sustain supplies of fingerling (or baby stocks) in commercial scales, feed analysis and formulation,
marketing and sales, logistics and transportation of live aquatic animals and other related general information of the industry
(e.g., we have established relationships with a number of local professional sub-contractors and entities to carry out the referred
duties for the Company).
|
|
·
|
Hatchery and nursery farm. For example, we established Prawn Farm
2 to serve such purpose.
|
|
·
|
Grow-out farms. For example, we established Fish Farm 1 and Prawn
Farm 1 for the growth of aquatic animals.
|
|
·
|
Marketing and distribution networks: We have established Wholesale
Center 1 and are developing a chain of restaurants as part of our ultimate distribution channels to sell our seafood. We envision
a distribution network that consist of sales channels via secondary wholesalers, restaurant and hotel distributors, supermarket
chain distributors, and commissioned sales agents. Some of these will compete directly with health shops and supermarket chains,
establishments similar to Wholesale Center 1 and the chains of restaurants that we intend to develop for and on behalf of our Chinese
joint venture investors.
|
Some of the companies listed above (i.e., Prawn Farms 1 and
2, Wholesale, Restaurants) are unincorporated project companies that we do not currently own, but intend to acquire according to
our typical SJVC formula:
|
·
|
Normally and prior to the official formation of the SJVC’s we
take an equity position in the company that is the developer of the project to secure our future acquisition of the SJVC’s.
|
|
·
|
The total consideration of the future purchase of any SJVC is based
on its book value at the time of official formation having injected all of the related project’s development assets and liabilities
into the SJVC.
|
|
·
|
As such the required acquisition cost is generally funded partly by
cash and partly by a receivable owing on the consulting and service fee.
|
Vertical Integration in our Organic Beef and Cattle Business
at SJAP
Currently, SJAP is developing the following mutually supportive
activities:
|
·
|
In-house Research and Development in enzyme and feed technologies,
growing techniques, management systems, breeding stocks, analysis and formulation, marketing and sales, logistics and transport,
and other aspect of SJAP’s industry. “Continuous Improvement” activities in all parts of the business.
|
|
·
|
Manufacturing of organic fertilizer since 2009.
|
|
·
|
Manufacturing of Bulk Livestock Feed since 2010.
|
|
·
|
Manufacturing of Concentrated Livestock Feed since March 2013.
|
|
·
|
Cattle growing and rearing since 2010.
|
|
·
|
Farming cooperative (initiated and formed in 2010; the cooperative
currently includes over 100 members from 22 cooperative farms).
|
|
·
|
Slaughtering, de-boning and value added processing of cattle, beef
meats and products are in start-up mode, with trial operations since January 2014.
|
|
·
|
Marketing, sales and distribution network discussions initiated during
Q4 2013 with some of the first and second tier wholesalers and distributors in Beijing City, Shanghai City and Guangzhou City to
prepare for sales starting in January 2014 of meat from our abattoir. However the construction work was delayed due to the lack
of delivery of some of the plants and equipment caused by the winter climate. (For further information please see the section entitled
“Under Progress Report and Subsequent Events” in the MD&A.
|
|
·
|
Construction of our enzyme factory is in on hold until the end of
winter in the Tibetan Plateau. By December 7, 2013, we had completed leveling land on the factory site. Our winter season prevents
further construction work until late April or May 2014.
|
|
·
|
Development of marsh gas station that completes our environmental
program to recycle all of our cattle waste is in the research and analysis phase. When completed, it will supply electricity to
our neighbors in Huangyuan District, and its by-products become raw material for the manufacture of organic fertilizer. This latest
SJAP contribution adds to the ways we service our corporate social responsibility in Qinghai Province.
|
MARKETING, SALES AND DISTRIBUTION, PRODUCE AND PRODUCTS
The Fishery Sector
Chinese markets prefer, and pay premium prices for, live aquatic
animals. There are many markets with hundreds of wholesalers selling live seafood in many Provinces of China, supported by well-developed
logistics services in road and air transport. As such, we currently sell our seafood mainly to wholesalers that operate in the
dominant wholesale markets at Shanghai City, the Southern Coastal Cities, and Guangzhou City.
Some of the fish farms that we report on in this section, notably
Prawn Farms 1 and 2 and Fish Farm 2, are unincorporated project companies that we do not currently own, but intend to acquire,
as outlined under the
Vertical Integration
section, and elsewhere in this Annual Report. Prawn Farms 1 and 2 and Fish Farm
2 are developed and managed by Capital Award.
Fish Farm 1:
Fish Farm 1 produces eel, prawns, and fish. Initially, we grew
a high value fish known as Sleepy Cod, a tropical species growing mainly in the Southern regions of Guangdong Province. Sleepy
Cod, similar to the much-prized marble or sand goby, is an attractive breed for aquaculture purposes as it is a relatively small
fish that grows well in our APRAS and provides white pieces of fillets with flaky flesh that we believe most Asians prefer. It
is easy to ship, as it lies motionless in shipping bags, and stacks well in the live fish tanks used in Asian restaurants. Our
APRAS system provides suitable environments to grow Sleepy Cod that allow the fish to grow in separated compartments inserted in
the tanks to avoid harm to their skin, resulting in a more valuable unblemished appearance.
Because our water management system is designed to recycle clean
water back to the grow-out tanks free from any pollutants and diseases, we don’t use antibiotics, pesticides, or other harmful
chemicals to grow our fish. The environments in our tanks are similar to the fish tanks that restaurants use to keep their fish
before selling them to customers. We market our fish as free from chemicals and pollutants. We believe that our Sleepy Cod are
well received and in demand, and in general our Sleepy Cod sell at premium prices of between 8% to 10% above the daily market averages.
In addition to four tanks of Sleepy Cod, Fish Farm 1 grows four tanks of Flower Pattern Eel and eight tanks of prawns.
Prawn Farm 1:
Stocking of prawn fingerling (baby prawns of 7 to 21 days old)
began during Q1 2013 for growing into marketable sized prawns from count sizes of 90-100 pieces per Kg and larger. Larger prawns
always demand higher premium prices. Prawn Farm 1 grows two varieties: the Mexican White Prawn, which is an imported breed grown
in water containing approximately 0.5% of salinity and that has a rather sweet flavor and crispy texture that is liked by Chinese
consumers; and a locally bred species that we call the “LawZi Prawn” (its direct English translation is “Big
Giant Prawn”) which originated in Thailand but is now well developed in China. The LawZi Prawns are grown in fresh water
and are in high demand in many gourmet kitchens, especially when they weigh over 50 grams per piece.
Prawn Farm 2:
Originally Prawn Farm 2 was developed as a hatchery and nursery
to produce prawn fingerlings for sale to regional prawn farmers. Through Q2 2013, the Company produced and sold mainly Mexican
White Prawn fingerlings. During Q1 2013, we successfully bred our second generation of LawZi brood stock prawns crossed between
the wild species and domestic species, and began to sell LawZi Prawn fingerlings in Q3 2013.
There
were eels at the hatchery, as we were conducting trials to examine how they would grow in an indoor environment.
The Cattle Sector
Organic Fertilizer, Livestock Feed and Cattle Farming
at SJAP
Currently SJAP manufactures organic fertilizer (since 2009),
bulk livestock feed (since 2010), concentrated livestock feed (since March 2013), and has been raising cattle since 2011.
Organic Fertilizers are sold mainly to our cooperative farmers,
who plant crops and pastures for us that we repurchase to process into Bulk Livestock Feed. Part of this Bulk Livestock feed will
be used to grow cattle in our own cattle farm and part will be sold to our cooperative growers for growing cattle, with the remaining
part being sold to other regional farmers.
The Concentrated Livestock Feed (“CLSF”) complements
SJAP’s bulk livestock feed to provide the local cattle and sheep farming industry with a complete feed formula that caters
to the nutritional requirements of cattle and sheep at various growth cycles (e.g., specially formulated mixes with efficient nutrients
for dairy cows and sheep, weaning, fattening and mature cattle and sheep). The advantage of our formulated feed combination is
that the cattle and sheep growers will realize cost savings in production knowing precisely the amount of concentrated feed that
will be needed by their livestock, thus avoiding excess concentrated feed being wasted on over feeding, which results in worthless
excess fat in mature animals. The Chinese central government has placed an order with SJAP to reserve annually up to 5000 MT of
CLSF as part of the country’s annual reserve emergency livestock feed inventory. Since March 2013, SJAP has generated additional
revenue from the sales of CLSF.
Simmental Cattle
The cattle we grow are primarily Simmental (a common breed introduced
to China in the early 20th century), Charolais, and some Angus cattle. In general, we buy six to eight months old cattle when they
have established their body frames, then they will be fattened either by us in our indoor cattle stations or by our cooperative
farmers at their own farms for a further 6 to 10 months until they will reach a body weight averaging 700-800 Kg per head and sell
them as live cattle to the wholesale cattle buyers. It is because our cattle are well fed and healthy with better meat recovery
rates such that we normally get premium prices that are about 10% above the daily market averages. We also earn between 10 to 12%
from buying the cattle back from the cooperative farmers and resold to the cattle wholesalers. Since January 2014, we slaughter
our own cattle, and process the meat in our de-boning and packaging facility.
Competitors
Sino Agro Food, Inc. is a primary producer. In China, millions
of primary producers generate many billion metric tons of primary agricultural products each year using various methods and technology
systems. Our production of a few thousand tons per year represents a tiny fraction of the supply chains competing internally among
primary producers in a rather stable market circumstance, because China needs food. All primary producers are subject to market
conditions, such as seasonal supply and demand, with higher quality products earning higher prices. We believe that our modern
agriculture technologies and systems provide us opportunities and advantages to compete favorably against established farming methods
and outdated technologies and systems used by the majority of primary producers in China.
BUSINESS ACTIVITIES OF EXISTING OR NEWLY FORMED SUBSIDIARIES
1. Fishery Division operated by Capital Award Inc.
Our wholly owned subsidiary Capital Award, Inc. (“CA”)
generates revenues from two main activities: “Engineering and Consulting Services” and “Marketing and Sales of
Seafood.” Engineering and Technology Services are awarded to CA via Consulting and Service Contracts (“CSC's”)
for the development, construction, supply of plants and equipment, and management of fishery (including prawn) farms and related
business operations.
CA’s standard principal terms and conditions for
Fishery Development Consulting and Service Contracts are outlined below:
|
·
|
The Contracting parties: CA is the consulting and service provider
(as the turnkey contractor), and the Chinese businessmen and investor group is the Developer of the Project.
|
|
·
|
Development schedules for the project.
|
|
·
|
Responsibilities and obligations of the parties: CA is to build the
fishery project (including development of its business operation) using our APRAS technology, systems, know-how, and management
expertise and systems for and on behalf of the Developer such that the Developer is responsible to pay CA for its work (inclusive
all sub-contractors and suppliers appointed by CA) in a timely manner (normally a 60 days term).
|
|
·
|
Provision clauses allow CA to appoint and to select sub-contractors
and suppliers.
|
|
·
|
Extra work and additional work and extra cost provisions.
|
|
·
|
Warranty and limitation of liabilities.
|
|
·
|
Scope of work and lists of supplies (including all plant and equipment).
|
|
·
|
Installation, training and commissioning of the developments and business
operation.
|
|
·
|
Granting to CA of right of management of operation, and marketing
and sales of the produce and products from the farm’s operation.
|
CA has entered into several CSC’s. Their information and
status are shown in the table below:
Name of the
Developments
|
|
Fish
Farm 1
|
|
Prawn
Farm 1
|
|
Fish Farm 2:
The Fish & Eel Farm
|
|
Prawn Farm 2:
Hatchery, Nursery & Grow-out
Farm
|
|
|
|
|
|
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|
|
Abbreviation of Company Name
|
|
JFD
|
|
EBAPCD
|
|
Fish & Eel Farm 2
|
|
ZSAPP
|
|
|
|
|
|
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|
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|
Location
|
|
Enping
|
|
Enping City
|
|
Xin Hui District,
Jiang Men
|
|
San Jiao Town, Zhong San City
|
|
|
|
|
|
|
|
|
|
Annual Capacity (as designed)
|
|
1,200 MT
|
|
2013=400MT 2014=800MT 2015=1200 MT
|
|
2014=800 MT
2015= 1600 MT 2016=2000MT
|
|
2013: 1.6 Billion Fingerlings and 400MT Prawns increasing yearly.
By 2015:3.2 billion Fingerlings and 1200 MT Prawns
|
|
|
|
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|
|
Land Area or Built Up Area
|
|
9,900 m2
|
|
23,100 m2
|
|
165,000 m2
|
|
120,000 m2
|
|
|
|
|
|
|
|
|
|
Current Phase and Stage
|
|
Fully Operational
|
|
2 phases and road work
|
|
4 Phases
|
|
3 phases
|
|
|
|
|
|
|
|
|
|
Date Development Commenced
|
|
July 2010
|
|
Phase 1: June 2011 Phase 2.1 + 2.2 Road Work: Aug 2012
|
|
Phase 1: January 2012
Bridge+Road Oct. 2012
Phase 3: 2013
Phase 4: 2014
|
|
Phases 1 and 2: May 2012 Phase 3 2014
|
|
|
|
|
|
|
|
|
|
Estimated Completion Date
|
|
June 2011
|
|
Phase 1: Dec. 2012
Phase 2: Q1 2013
|
|
Phase 1 June 2014
Bridge+Road Dec. 2013
Phase 3 & 4: 2015
|
|
Phase 1 Dec. 2012
Phase 2 December 2013
Phase 3 Dec. 2014
|
|
|
|
|
|
|
|
|
|
Contractual Amount (in Millions of U.S.
Dollars)
|
|
$5.3M
|
|
Phase 1: $11.6M
Phase 2: $6.39M
Road Work: $2.94M
|
|
Phase 1: $8.73M
Bridge & Road $2.48M Phase 3 $4.38M
Phase 4 $10.63M
|
|
Phase 1 $9.26M
Phase 2 $8.42 M
Phase 3 $11.5M
|
|
|
|
|
|
|
|
|
|
% complete as at December 31, 2013
|
|
Fully Operational
|
|
In operation
Phase 2 is the expansion work begun in Q4 of 2013
|
|
Phase 1 completed
Bridge+Road completed Phase 3 43% and Phase 4 not started
|
|
Phase 1 fully operational Phase 2 in operation
Phase 3 work started during Q4 of 2013
|
Notes:
(a) The proposed company name for Prawn Farm 2, our future SJVC,
is Zhongshan A Power Prawn Culture Development Co. Ltd. (“ZSAPP”). Prawn Farm 2 has generated income since May 2012.
Phase 2 production of prawns began in August 2013. Production begins after construction phases complete. The work that was completed
during Q2 2013 included the development of: (i) an additional indoor prawn nurturing apartment, (ii) three brood stock open dams
with all under-ground in built filtration systems that capable of holding up to 3,000 mother prawns at a time, (iii) all external
fences of the farm, and (iv) two open dams with all in built filtration systems that has the capacity to grow out up to 12 MT of
fish per year and all associated infrastructure. There are 30 Mu (equivalent to 5 acres) of land that has been reserved for the
construction of an indoor APRAS farm designed with the capacity to grow up to 1,200 MT of prawns per year at the complex. Its construction
work was planned to start during Q1 2014 when most of the existing open dams’ work was to have been completed. However as
of the date of this Annual Report, works in the open dams are still in progress, such that the said APRAS indoor farm work will
be delayed until the end of Q2 2014. The Company has pre-paid $5,558,057 toward the consideration of its future SJVC toward the
assets of the fully developed farm, equivalent to just under 45% equity interest in ZSAPP, the future SJVC that we target to formalize
during 2014.
(b) The development work on the fish and eel farm, Fish Farm
2, with an unrelated entity, Gao A Power Fishery Development Co. Ltd., is still in progress. The project is delayed because the
property is situated on an inlet and drainage is extremely difficult to resolve and costly to fix. We have engineered a solution
resolving this problem by constructing semi-enclosed growing dams that will be built with light building materials on land to be
filled by soil collected from the extra water holding dams constructed at the same complex, outfitted with re-circulated filtration
systems built externally adjacent to the water holding dams and the grow-out dams to suit the growing of prawns, fishes and/or
eels in this farm. We are dividing workflow into phases and stages to yield the optimal financial efficiency and benefits. As of
December 31, 2013, Phase 3 infrastructure construction work is in progress with Phase 1’s construction work’s open
dams being completed during Q1 2014.
(c) Not shown on the chart, and on hold, our development work
on Prawn Farm 3 at Huangyuan County, Xining City is for an unrelated third party Chinese investor, Wu Aquaculture A Power Development
Co. Ltd. (a proposed name for this future SJVC). Originally, Prawn Farm 3 was planned to be on SJAP property. All engineering design
and related pre-development work has been completed, with original plans to begin construction and infrastructure work in May 2013.
However, management decided in February 2013 to relocate Prawn Farm 3 to another block of land adjacent to SJAP’s existing
property consisting of a much bigger area to accommodate future expansion whenever necessary. As a result of the relocation, the
block of land where Prawn Farm 3 will be situated on a 45Mu area requiring rezoning from agriculture to industrial status. Any
rezoning on parcels greater than 40Mu requires central government approval versus from local authorities, unfortunately requiring
more time and causing delays in completing the process.
Fish Farm 1 (JFD)
A large complex situated on 9,900 m2 of land in the Enping City
District, Fish Farm 1 is fully self-contained, and provides our prototype model for fish farms in China.
Fish Farm 1, with 16 grow-out APRAS module tanks that grow fish
indoors on land, has capacity to grow over 1,200 MT of fish per year. In Q4 2012, market prices for Sleepy Cod fell sharply from
US$27 per kg to the current $15 per kg. We were able to respond to changing market conditions rapidly, and remodeled tanks to grow
eels (in four tanks since Q2 2013) and prawns (in eight tanks since Q3 2013). We continue to grow Sleepy Cod in four tanks.
Prawn Farm 1 (EBAPCD)
Situated in the Enping City district on 26,100 m2 of land, Prawn
Farm 1 is designed to grow up to 1,200 MT per year by 2015, with current capacity to grow-out 250 to 300 MT of prawns. Prawn Farm
1 is a fully self-serviced complex with office, staff quarters, laboratory, dry and cold storage, stand-by generator room, heating
rooms, water storage and tanks, landscaping gardens, etc.
Each grow-out tank in Prawn Farm 1 measures 12m x 10m x 2.5m
deep and holds up to 240,000 liters of water. Between 500,000 to 600,000 LawZi Prawn fingerlings (supplied by our own hatchery
and nursery at Prawn Farm 2 when they reach 21 to 28 days old) are stocked in each tank.
As shown in the photo at right, plastic netting rolls in the
tanks shelter the prawns as they grow, increasing each tank’s survival rates.
We grow prawns for up to twelve weeks to reach marketable sizes
from counts of 75 pieces per Kg and larger.
During their growing period at Prawn Farm 1, prawns are frequently
graded to optimize grow-out efficiency. In this way, faster growing prawns may reach marketable size after eight weeks, while slower
growing prawns may need twelve weeks.
Our first and second batch of grow-out records show that the
average of marketable prawn being harvested per tank is just under 8 MT per tank per growing cycle. As such, productivity per tank
per year can be conservatively estimated at 40 MT per tank per year.
When we compare productivity to existing open dam prawn farming,
which requires 26,000m2 (surface area of an open dam) to produce the 40 MT of marketable prawns per year, we obtain the same harvest
in one 120m2 grow-out tank, drastically reducing the surface area required to produce the same measurable results.
Prawn Farm 1 is operated by Capital Award for a private company
formed in China with Chinese citizens acting as its legal representative as required by Chinese law. Prawn Farm 1 will become a
SIAF subsidiary when its SJVC is officially formed. This is expected to occur in 2014; however, no guarantee can be made that the
SJVC will be formed. SIAF’s payments deposited toward future equity equates to an equity position of 45%.
Prawn Farm 2 (ZSAPP)
Prawn Farm 2 has a land bank of 120,000 m2. In addition to its
core function as our hatchery and nursery operation to supply quality prawn fingerlings, Prawn Farm 2 is developing open grow-out
dams that use built-in RAS filtration to reduce water consumption, and provide cleaner water to reduce the impact of pollution.
Some open-dams produced prawns during Q3 2013. An additional 30,000 m2 is reserved to construct an indoor APRAS grow-out farm that
aims to produce up to 1,200 MT of prawns per year. Construction began in Q1 of 2014
.
Pictured at right are nursery tanks. Each of these tanks can
nurture up to 10 million prawns every five days per 30 cubic liters (or 30 MT) of water. Like our other farms, Prawn Farm 2 is
a self-contained complex with all required facilities, including a classroom where local prawn farmers who buy our fries and fingerlings
are trained by us to optimize growing out the prawns successfully.
Prawn Farm 2 is operated by Capital Award for a private company
formed in China with Chinese citizens as its legal representatives as required by Chinese law. Prawn Farm 2 will become a SIAF
subsidiary when its SJVC is officially formed. This is expected to occur in 2014; however, no guarantee can be made that the SJVC
will be formed. Our deposits against our future ownership represent an equity position of 51%.
Marketing and Sales of Seafood
Capital Award is the sole marketing, sales and distribution
agent of our APRAS fishery and prawn farms, and purchases all marketable fish and prawns from the farms, and in turn sells them
to wholesale markets. CA also supplies the farms with fingerlings, baby or adult fish or prawns, and stock feed. Presently, our
RAS farms do not produce enough fish or prawns to warrant establishing and selling value added processing products or facilities,
given that the Chinese markets pay the best prices for live fish and prawns. Thus, CA sells only live fish and prawns. CA generates
revenue from the sale of seafood bought from farms that are Company subsidiaries, or are unincorporated project companies, and
also from contracted growers in the manner described below.
Fish Farm 1
The Company owns a 75% equity interest in JFD, the owner and
operator of Fish Farm 1. Fish Farm 1 represents our typical development model. Built on a block of land measuring 9,900m2, Fish
Farm 1 contains staff quarters that provide accommodation for up to 15 workers, a self-contained office, a laboratory, external
live bait holding tanks, all season red worms nurturing tanks, dry and cold storage, workshops, processing facilities, a heating
room, 500 MT of water holding tanks, landscape gardens, standby generator rooms, all related underground and above ground infrastructure,
and a 4,000m2 fish grow-out farm. This farm supports 16 RAS tanks, each measuring 10m x 10m x 3m in depth and holding up to 240,000
liters (or 240 Metric Tons (MT) of water. Each tank has production capacity to grow up to 80 MT of aquatic animals per year depending
on its stocking cycles (frequency of stocking of fish), and the initial size of the fish being stocked in each cycle. In other
words, if the initial stocked fingerling is around 30-40 mm per fish, then it will take over 12 months to grow the fish into a
marketable fish (averaging over 500 gram per fish) such that its annual production is only up to 30-35 MT per tank; however if
the initial fish being stocked are at an average of 200 to 300 grams each then its stocking and harvesting cycle is four times
per year, enhancing annual production capacity to up to 80 MT per tank.
Initially, Fish Farm 1 was designed to grow sleepy cod, which
had a particular market with very attractive prices in Chinese markets; however, sleepy cod does not have a large market share
in China compared to the carp species. Our market research of the sleepy cod market shows that total annual local domestic production
is about 25,000-28,000 MT distributed to more than 100 wholesale markets throughout many provinces, with the markets at Guangzhou
City, the Southern Coastal towns of Guangdong and in Shanghai City comprising the dominant markets. From the time we started stocking
sleepy cod in 2011 until the end of year 2012, live sleepy cod constituted a niche market in China and sold at wholesale for an
average price of US$27 per Kg. In January 2013, cheaper imports from other Asian countries were permitted to enter China at a low
import tax, such that wholesale prices fell sharply to an average of US$15 per Kg. We mainly had fed live bait fish to our baby
sleepy cod (250 to 300 gram each) that we bought from our contracted suppliers costing us approximately US$5 per sleepy cod grown
at an average feed to weight gain conversion rate of 2.5 Kg of live bait to 1 kg of weight gained. As such, when we purchased our
supplies of live bait at an average of US$1.65 per Kg, and low mortality rate at the average below 8% coupled with our recorded
3.5 stocking and harvesting cycles per year, Fish Farm 1 consistently achieved good sales revenues with gross profit margin of
50-55 % in 2011 and 2012. However, its gross profit margin fell in 2013 to between 35-40 % while the cost of supplies of baby sleepy
cod and live bait fell correspondingly by an average of only 10%.
In this respect and in an attempt to mitigate the adverse circumstances,
during Q1 2013 we stepped up the modification of our RAS tanks to adapt to the growing of eels using four tanks and prawns in eight
tanks. We expanded our program in the Research and Development Station to accommodate the nurturing of Flower Pattern Eels’
fingerlings to grow into adult eels (of 500 grams per eel and upward) that would be supplied to Fish Farm 1 to grow the adult eels
into marketable sized eels (around 1.5 kg per eel and larger) which at present are selling at high prices between US$27-28 per
Kg. Fish Farm 1 is now stocked with and growing Flower Pattern eels, prawns and sleepy cod.
Prawn Farm 1 (or EBAPCD):
EBAPCD (the proposed name of our future SJVC, subject to approval
by relevant Chinese authorities under our application for SJVC status) was established to own and operate Prawn Farm 1. EBAPCD
generated revenue starting during Q3 2013. Capital Award recognized income (booked in the Fishery Division’s sales of goods)
by purchasing prawns from Prawn Farm 1 and selling them to the wholesale markets.
On April 22, 2013, we placed our first 500,000 Mexican White
prawn fingerlings in Prawn Farm 1, and have noted that prawns are meeting growth benchmarks with low mortality, and reaching around
15 cm per prawn in size. Our Mexican White shrimp are known in the west as “Western White Shrimp,” or by their genus
species “
Penaeus Vannamei
.”
The Company believes that its Prawn Farm 1 represents the first
indoor RAS prawn farm in Asia. Going forward, Prawn Farm 1 will carry out its rotational stocking and harvesting program, targeting
to produce between 250 to 300 MT of live prawns in 2013. During fiscal year 2013, Prawn Farm 1 harvested just over 200 MT of marketable
sized prawns.
We saw a rapid increase in live prawn prices in Q1 2013 (averaging
100% increases in prices compared to Q1 2012) with current wholesale price averaging US$15 per Kg for size of 80s (equivalent to
80 to 90 pieces of prawn per Kg), and prices going up proportionately to sizes of Mexican White prawns, and at a premium rate for
popular, but rarer species (e.g., our LawZi prawns, Green Prawns, Banana Prawns and Tiger Prawns). From recent growing records
of the farm, the average time required to grow prawns from 7-days old Mexican White fingerlings and 21-days old LawZi Prawn fingerlings
to marketable sizes in commercial scale at the Prawn Farm 1 under our RAS system is between 60-70 days for marketable Mexican White
prawns for sizes weighing at 80 pieces per Kg, and 80-90 days for marketable LawZi Prawns for sizes weighing at 75 pieces per Kg.
We intend to add more grading tanks to grade out the bigger prawns from the smaller prawns thus to grow them in separated tanks
in the farm that will be able to reduce the grow-out period of the prawns because we will be able to grade them more frequently
such that some of the faster growing prawns will be able to reach marketable sizes much faster because the graded prawns can be
fed and cared for more appropriately and directly in their own graded tanks. The records also show a very low mortality rate, recording
less than 5%, which we believe is far superior to the existing open dam prawn farms’ average of 50%.
Prawn Farm 2 (or ZSAPP):
ZSAPP is also an intended name of the future SJVC (subject to
approval by relevant Chinese authorities under our application for SJVC status), established to own and operate Prawn Farm 2. ZSAPP
has generated revenues since May 2012. However, ZSAPP’s financial statements will not be consolidated with ours until approval
of this SJVC is obtained, and one of our subsidiaries acquires a majority equity interest therein. During the interim period, prior
to the said official formation of the SJVC, Capital Award acts as Prawn Farm 2’s sole marketing agent and recognizes income
from the following: (i) Management fees and commission fees charged to Prawn Farm 2 based on RMB20 per 10,000 pieces of Mexican
White prawn fingerlings and RMB40 per 10,000 pieces of LawZi Prawn fingerlings being sold by Prawn Farm 1 that were booked in the
Fishery Division’s Consulting and Service Revenues and (ii) the purchases of prawns from Prawn Farm 2 and sale to the wholesale
markets that were booked in the Fishery Division’s sales of goods.
During Q1 2013, Prawn Farm 2 successfully produced LawZi Prawn
fingerlings from the 5,000 pieces of breeding stock that we imported from Southeast Asian countries. Literally translated as “Big
Giant Prawns,” the full English name for our LawZi Prawns is “Giant Freshwater Prawns,” the genus species is
“
Macrobrachium Rosenbergii
,” and they are also called “Green Prawns.” By Q2 2013, reproduction of
the LawZi Prawn fingerlings had become consistent; consequently, during fiscal year 2013, ZSAPP sold 800 million Mexican White
fingerlings at an average of RMB165 per 10,000 fingerlings and over 200 million of LawZi Prawn fingerlings at an average of RMB460
per 10,000 fingerlings. During the past two years, our research confirmed that the demand and prices for LawZi Prawns in the local
domestic markets were high (at between RMB450 to 550 per 10,000 fries in 2012) because supplies of quality LawZi Prawn fingerlings
is competitively low compared to Mexican White fingerlings (price averaged between RMB150 to 170 per 10,000 fries in 2012), due
to problems of inbreeding. As such, we expect high demand for our LawZi Prawn fries by the regional prawn growers, as they are
offspring of our second generation breeding stock, and free from inbreeding problems. In the last week of September 2013, we imported
an additional 5,000 breeding-stock prawns from Southeast Asian countries in an effort to continue improving our offspring culture.
As of the date of this Annual Report, our third generation LawZi are being produced and we expect to be ready to introduce the
sales of fingerling from our third generation mother prawns by mid-May 2014.
Fish sales generated from purchases with other open-dam growers
contracted by Capital Award. Capital Award has been contracting with local aquaculture farms to grow sleepy cod since 2012 based
on a fixed production cost, with recently added eel growing contracts commencing in Q1 2013. There are existing contracts that
will provide up to 800,000 pieces of sleepy cod and 600,000 pieces of eels to be sold by Capital Award between 2013 through the
early part of 2014. During fiscal year 2013, more than 250,000 pieces of Sleepy cod and 66,000 pieces of eels were sold from these
contracts.
2. The Beef Cattle business of MEIJI
Similarly to CA, MEIJI has two sources of revenues, its Engineering
and Services revenues and its marketing and sales of cattle.
Engineering and services revenues
Revenues are generated from the construction and development
of Cattle Farm 1 and Cattle Farm 2. This table lists the status of MEIJI’s developments:
Name of the
Developments
|
|
Cattle Farm 1
(JHMC)
|
|
Cattle Farm 2
(EAPBCF)
|
|
Cattle Farm 1
external road work
|
|
Cattle Farm 2
external road work
|
|
|
|
|
|
|
|
|
|
Location
|
|
LiangXi Town, Enping City
|
|
LiangXi Town, Enping City
|
|
LiangXi Town, Enping City
|
|
LiangXi Town, Enping City
|
|
|
|
|
|
|
|
|
|
Estimated Annual Capacity
|
|
1,500 Head
|
|
2,500 head
|
|
No production
|
|
No production
|
|
|
|
|
|
|
|
|
|
Land Area or Built Up Area
|
|
165,013 m2
|
|
230,300 m2
|
|
4.5 Km road
|
|
5.5 Km Road
|
|
|
|
|
|
|
|
|
|
Current Phase and Stage
|
|
Two Phases
|
|
Two Phases
|
|
One Phase
|
|
One Phase
|
|
|
|
|
|
|
|
|
|
Date Development Commenced
|
|
April 2011
|
|
February 2012
|
|
September 2012
|
|
September 2012
|
|
|
|
|
|
|
|
|
|
Completion Date
|
|
December 2011
|
|
June 2014 (estimated)
|
|
March 2013
|
|
March 2013
|
|
|
|
|
|
|
|
|
|
Contract Amount (Millions of US Dollars)
|
|
$3M + $1.17M
|
|
$10.6M
|
|
$4.32M
|
|
$5.28M
|
|
|
|
|
|
|
|
|
|
% complete as at December 31, 2013
|
|
Fully Operational
|
|
90%
|
|
Completed
|
|
Completed
|
Enping is situated in the Southern part of China with a semi-tropical
climate, and the cattle farm is operated based on our semi-free-range growing and management system that allows the cattle to roam
around and feed in our pasture fields during the mornings and be kept and fed with our formulated aromatic feed in our semi-opened
cattle houses during the hot days and nights. This is an entirely different agricultural environment than that of SJAP (in Huangyuan,
Xining) where the long winters are bitterly cold, and all cattle are grown in fully insulated cattle houses.
The 2012 experience of the JHMC farm showed that cattle grow
faster in this environment than in SJAP (averaging 1.78 Kg per day per head in weight gain compared to SJAP’s 1.5 kg per
day per head). However, JHMC showed higher mortality rates than SJAP (recording 5% in JHMC compared to 0.25% in SJAP). The reason
for higher mortality is due mainly to the change of climate, as Cattle Farm 1 buys young cattle from farms situated in the colder
Northern part of China, where there is an ample supply of young cattle at lesser costs. However, these cattle require over three
days of transportation, during which some of the weaker young cattle cannot adapt to the hot climate of Enping, and thus could
not recover from the journey. To avoid repetition of this high mortality rate, JHMC built additional semi-open cattle houses that
are equipped with cooling systems as temporary depots to receive the young cattle and to nurture them back to health before they
are grown in our normal cattle houses.
Another difference between JHMC and SJAP is in the management
of environmental impact. SJAP will build a marsh gas station (during 2014 and 2015) to convert its cattle waste into electricity.
Residue becomes raw material for organic fertilizer manufacturing. At JHMC, cattle waste is kept in septic wells that are treated
with our enzyme under a fermentation process, and then channeled to fertilize our pasture fields at the farm. JHMC’s waste
treatment program is sufficient at present, as there is enough pasture fields to absorb the waste yielded from the limited number
of cattle (up to 500 head) on the farm. However, as the number of cattle increases beyond the fields’ fertilizer absorption
capacity, an alternative environment treatment plan must be implemented in order that this JHMC farm can grow more cattle.
Earlier in the year, JHMC bought young cattle of age six to
eight months and fattened them on the farm for six to ten months more. However from Q2 2013 onward, JHMC bought slightly older
cattle (15 to 16 months old) and fattened them at the farm for a further three to six months, then sold them to the wholesale markets
and/or to the Beijing cattle farm and wholesale shop that we have invested in. We expect faster and higher turnover of sales due
to faster turn-around cycles of growth of cattle at the farm. During fiscal year 2013, Cattle Farm 1 sold over 1,700 heads of cattle
averaging 22 months old.
EAPBCF complements JHMC with an additional 76 acres of land
suitable for growing our pasture (a cross between Elephant and Yellow grass) that has a very high yield of over 35 MT per 0.167
acres per year, and containing an average of over 9% protein that is very suitable for consumption by cattle. At capacity, both
farms will produce up to 30,000 MT of pasture per year under normal weather conditions. This amount will feed up to 5,000 head
of cattle per year at an average consumption rate of 6 MT per head per year if the environmental issue mentioned above is resolved.
By the end of February 2013, we completed the external roadwork
of about 10 Km leading from the outer-boundary access road to and surrounding the two farms. The development cost of this road
was shared at the ratio of 2/3 by JHMC and 1/3 by EAPBCF. This all-season road was constructed at the request of the district village
committee of Enping City, enhancing corporate social responsibility in our development of the two cattle farms. Development work
on Cattle Farm 2 was nearly complete at the end of September 2013, with pasture being planted and stocking of cattle expected to
commence early in 2014. Cattle Farm 2 is operated by a private company formed in China with Chinese citizens acting as its legal
representative as required by Chinese law. EAPBCF will become a SIAF subsidiary when its SJVC is officially formed. This is expected
to occur in 2014 or 2015; however, no guarantee can be made that the SJVC will be formed. SIAF’s payments deposited toward
future equity currently equates to an equity position of 35%.
Cattle Farm 1
Cattle Farm 1 was built as a demonstration farm to show that
cattle can be raised in a semi-tropical climate using our semi-grazing and housing method. Using our “semi-free growing”
management system, the cattle are allowed to graze in the field during the early morning and kept indoors and out of the sun during
the hot summer days. This method has proven reliable, with the growth rate of the cattle measuring slightly higher than the cattle
at SJAP (i.e., averaging some 0.28 kg per day per cattle more).
Marketing and Sale of Live Cattle by MEIJI
Similar to CA in its business model, MEIJI purchases fully-grown
cattle from Cattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young cattle from other farmers and sells the
young stock to Cattle Farm 1.
All cattle farms developed by MEIJI will utilize its “semi-free
growing” management system and aromatic-feed programs and systems to raise beef cattle.
Beef is traditionally a high-end market in China, as it is mainly
sold to expensive restaurants or upscale hotels rather than to Chinese consumers. This situation is rapidly changing, though, owing
to urbanization and rising incomes, the rising demand for a high protein diet, and the rise in restaurant dining due to work demands.
Our free-range cattle grown in the Enping farms are fed with
natural pastures, CLF and our Aromatic Feed that contains Chinese herbal plants believed to improve animal health. As a result,
these Enping farms produce healthy cattle and in turn quality meat. Although we cannot yet have them certified as pure organic
meat, because we cannot get certification from suppliers of the raw materials used to make our concentrated feed purely organic,
we believe that we are not far away from being qualified to obtain 100% pure organic meat certification.
Our Enping cattle farms operate in Guangdong Province, not traditional
cattle growing country due to its tropical climate. This provides advantages for our cattle sales within the region. Most cattle
and beef supplies are imported from Western and Northern Provinces at higher costs, entailing higher wholesale and retail prices
in Guangzhou City and its urban cities.
Moreover, our 2012 sampled meat trials, carried out with a number
of reputable restaurants and hotels in Beijing City, were well received with frequent requests for us to supply them on a long-term
basis. Our strategy is to ensure we can supply the quantity to maintain consistently sustainable supplies as required by our customers.
Enping cattle farms grew at least 1,000 heads of mature cattle in 2013, the minimum number required to sustain the supplies to
just a couple of restaurant chains.
Cattle Farm 1 is doing well and on target, having sold over
1,700 heads of mature cattle during fiscal year of 2013. These were grown collectively from the stocked six month old calves and
the twelve month yearling cattle bought in January and May of 2012 and from July 2013 onward Cattle Farm 1 started to fatten cattle
from 16 months and older. Out of the total sales of cattle during the first six months of 2013, on April 22, 2013, 180 heads of
matured beef cattle were transported to Beijing City and sold to one wholesaler that supplies quality beef meat to top hotels and
restaurants. Starting in Q3 2013, JHMC began to stock older cattle (of 16 months and older), and fatten the cattle on the farm
for shorter period of 3 to 3.5 months instead of the 5 to 6 months in earlier months of the year. This change resulted in JHMC
selling over 1,700 heads of cattle (at less than 2 year old), creating a much faster turn-around of sales of cattle at the farm.
The Consulting Services agreement between MEIJI and a group
of Chinese parties represented by a privately owned Chinese company named “Enping Bi Tao A Power Cattle Farm Co. Ltd”
(the “China Party”) for the development of Cattle Farm 1, dated April 15, 2011, is outlined below. Principal terms
and conditions include:
|
·
|
The China Party is the developer of Cattle Farm 1. MEIJI is an engineering
and management consultant providing development of cattle farms and related business operations with the expertise to provide those
related services.
|
|
·
|
Cattle Farm 1 is developed on a 250 Mu (about 42 acres) situated at
Yane Xiabban Village in the town of Liangxi, Enping City, Guangdong Province.
|
|
·
|
The scope of work for MEIJI includes project engineering management,
installation and commissioning, farm management, construction and buildings and supply of plants and equipment for consideration
of US$3 million, covering the development of a basic cattle farm to house 500 heads of cattle at a given time.
|
|
·
|
Further or additional work, if and when necessary to be carried out,
will be mutually agreed and determined by both parties.
|
|
·
|
The China Party must finance the development, paying MEIJI for its
respective work.
|
|
·
|
Subject to project completion and its performance, the parties agree
to form an SJVC. MEIJI retains the right to acquire up to 75% equity in the SJVC based on its book value at the time of acquisition
to be paid to the China Party.
|
Beijing Cattle Farm
In February 2013, we entered a joint venture with a group of
businessmen (the “Chinese Party”). We started setting up a Cattle Station and related facilities (the “Beijing
Cattle Farm”) on a block of leased land measuring about 130,000m
2
within the Central Cattle Market and Facility
of Beijing City to act as an intermediate housing to grow our Aromatic Beef cattle and to sell together with our Aromatic Cattle
from JHMC through regional distributors, and in turn to some of the top hotels and restaurants chains in Beijing City, and also
through wholesale shops that the Joint Venture intends to develop (“Operation of Sales”). The development of wholesale
shops fits well as part of our interstate wholesale and distribution development plan that we mapped for some of the big cities
in China. This one in Beijing City is the beginning of such a plan being put into motion.
By July 31, 2013, the Joint Venture established one small wholesale
shop within close proximity to the Beijing Cattle Farm and started sales of our beef meats regionally. This Beijing cattle station
housed 450 head of cattle every 6 months, and its wholesale shop sold an average of 3 head of cattle per day. We are satisfied
with its sales performance and realize that potentially there is good commercial viability to support expansion of similar shops
developed within Tier 1 and Tier 2 cities in China. As of the date of this Annual Report, the Beijing operation has three additional
small retailed shops selling an average of 120 Kg of meat per day per shop.
The Joint Venture Agreement has not been finalized; consequently,
the Joint Venture is currently based on a verbal understanding only with following principal terms and conditions:
|
·
|
The Chinese Party will be responsible for the development of and management
of daily operations of the Beijing Cattle Farm and the Operation of Sales.
|
|
·
|
Our company is responsible is to supply the aromatic beef cattle to
the Beijing Cattle Farm that will be billed to the Chinese Party at maximum trading term no longer than 120 days initially for
the first 12 months of operation and gradually reducing to within 60 days within year 2 of operation.
|
|
·
|
Capital expenditure including working capital is limited at US$2.5
million for year one of the development and operation, and will be contributed 65% and 35% by the Company and the Chinese Party
respectively. Subsequent capital requirement will be reviewed by both parties on or before February 28, 2014 pending its year one
progress.
|
|
·
|
After satisfactory progressive performance of its business operation
in years one and two, the parties will apply to form a Sino Foreign Joint Venture.
|
We are waiting on respective lawyers to finalize all terms and
condition of this joint venture for execution targeting to be on or before February 28, 2014. Meanwhile, we do not expect to generate
additional revenue from this operation, except from the sales of cattle from Cattle Farm 1.
3. SJAP and HSA Division in Fertilizer, Livestock Feed
and Cattle
We have two operations in this division spread over two provinces
in China, SJAP in Qinghai Province and HSA in Hunan Province.
Operation 1
. Operation 1 is operated from Huangyuan County
of Xining City in Qinghai Province by SJAP, a majority owned subsidiary of the Company incorporated in China in 2009. SJAP’S
principal revenue generating activities comprise: (i) manufacturing and sale of organic fertilizer, (ii) manufacturing and sale
of livestock feed and (iii) rearing and sale of beef cattle. On February 28, 2013, SJAP completed its development of the CLF manufacturing
factory, and started the production and sales of CLF. This CLF complements SJAP’s bulk livestock feed to provide the local
cattle and sheep farming industry with a completed feed formula that can cater to the rearing of cattle and sheep at various growing
cycles (e.g., specially formulated mixes with efficient nutrients for dairy cows and sheep, weaning, fattening and mature cattle
and sheep). The advantage of the formulated feed combination is that the cattle and sheep growers will realize cost savings in
production knowing precisely the amount of concentrated feed that will be needed by their livestock, thus avoiding wasted excess
concentrated feed due to over feeding, which results in worthless excess fat in mature animals. In this respect, the Chinese central
government has placed an order with SJAP to reserve up to 5,000 MT of CLF annually as part of the country’s annual reserve
emergency livestock feed inventory. Thus, from March 2013 onward, SJAP expects to have additional revenue generated from the sales
of CLF.
Our strategy is to increase the number of cooperative growers
and obtain more internal cattle houses in an attempt to double the volume of production of mature cattle during 2013, which in
turn would increase the demand for the production of fertilizer and bulk stock feed to grow in tandem. As of the date of this Annual
Report, SJAP has established 22 Farmers societies that have the capacity to fatten up to 18,000 heads of cattle per year based
on a 3-month turn around program. The cost of rearing cattle is expected to be lower as a result of concentrating efforts on manufacturing
and/or selling livestock feed. The regional farmers are contracted to grow crops and pasture for us using our land that has been
provided lease-free by the local Government or by using their own land, our equipment operated by our workers for planting and
harvesting, and our supervision and associated services, as well as seed and organic fertilizer. These items are provided to them
on credit, which are then charged against their account when the Company purchases the crops and pasture grass from them in return.
Regional farmers also raise cattle for us using our bulk livestock feed under the same credit terms and conditions described above.
That is, when the Company purchases the mature cattle from them, their accounts are charged for the feed against the amount paid.
As mentioned earlier, the cattle we grow are primarily Simmental,
Charolais, and Angus. In general, local farmers buy 12 to 15 month old cattle from our cattle agents, and we commit to repurchasing
the cattle between 21 months to 24 months old.
SJAP now has twelve cattle houses, with our smaller buildings
housing a minimum of 200 head and larger cattle houses accommodating up to 350 head. Additional cattle houses are under construction.
Sometime in 2014, we intend to rent part of our cattle housing to our cooperative farmers upon full development of all our cattle
houses. Early in 2014, we will provide slaughter and deboning services to farmers at our abattoir and deboning facilities. SJAP
received a business permit from the Chinese authorities on April 17, 2013, and construction commenced on April 21, 2013 on the
abattoir, de-boning factory, and related packaging facility. Since it is rare and difficult to obtain a permit for an abattoir
facility in China, having this facility is expected to become a very valuable asset. Trial runs of the slaughter facilities commenced
in December 2013. Phase 1 is newly operational.
Before our abattoir and related facilities were operational,
we sold mostly live cattle to or through various cattle wholesalers to existing wholesale and distribution markets that did not
require much marketing efforts and networking. In 2014, however, we will require organized marketing networks and efforts to sell
our beef (meats) and beef products efficiently in order to achieve better profit margins for our quality meat and establish our
own brands and labels.
In China, beef is customarily distributed through various tiers
of established wholesalers and distributors that source their beef from various slaughter and deboning houses located across many
districts in China. Most of these wholesalers sell multiple types of frozen or freshly chilled meats (including pork and poultry,
etc.), and some slaughterhouses specialize in and solely supply beef. These wholesalers and distributors supply beef to regional
supermarket chain stores, retailing wet and frozen food markets, the catering industry, etc. Therefore, after having established
its own slaughterhouse and deboning factory, SJAP is expected to automatically become the primary supplier of beef. As such, many
existing wholesalers and distributors will source their beef supplies directly from us. With the current ever increasing demands
of quality beef meats due to the increase of middle class consumers, the Government’s enforcement of food safety regulation,
and of anti-smuggling and illegal imports of beef, the right opportunity exists for SJAP to market its high-quality beef product.
Therefore, the Company is confident it will successfully sell its beef meats in domestic markets. Also, a portion will be exported
to South Asian countries (i.e., Malaysia, Singapore, Hong Kong, Middle East countries and Thailand etc.) in 2014, as the Local
Government encourages us to do.
The following table shows the current average mark-up margin
for most of the sellers and operators in the beef trade in China:
Type of wholesalers, distributors or retailers
|
|
Mark-up Margin in Localities
(Low / High)
|
|
|
Tier 1 Cities
|
|
Tier 2 and
Tier 3 Cities
|
|
Tier 4, Tier 5
& Lower Cities
|
Slaughter cum de-boning houses
|
|
30% / 35%
|
|
33% / 38%
|
|
39% / 42%
|
1st tier wholesalers and distributors
|
|
10% / 12%
|
|
12% / 15%
|
|
15% / 20%
|
2nd and 3rd tier wholesalers and distributors
|
|
15% / 20%
|
|
18% / 25%
|
|
20% / 30%
|
1st tier retailers (i.e. supermarket chains)
|
|
22% to 35%
|
|
22% / 35%
|
|
22% / 35%
|
Our marketing strategy to sell our beef meats and beef products
targets the middle class consumers through the following developments:
Development Items and
Marketing Channels
|
|
Estimated
Annual Beef Production
in Metric Tons (MT)
|
|
|
Shares of Sales
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
6,000
|
|
|
|
9,000
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop up to five sales and distribution outlets in Guangzhou, Beijing, Tianjin, Chongqing and Shanghai City
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Existing localized 1
st
, 2
nd
and 3
rd
tier wholesalers and distributors in these cities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
%
|
|
|
45
|
%
|
|
|
35
|
%
|
(B) Own sales and distribution outlets*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
Develop up to five sales and distribution outlets in Fuzhou, Changsha, Suzhou, Shenzhen and Xiamen City
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Existing localized 1st, 2nd and 3rd tier wholesalers and distributors in these cities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
%
|
|
|
20
|
%
|
(B) Own sales and distribution outlets *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
15
|
%
|
*Our own sales distribution outlets will include the development
and operation of the following:
|
·
|
1
st
and 2
nd
Tier Wholesale and Distribution
Network directly competing with existing local wholesalers.
|
|
·
|
Distribution and service networking into supermarket chains
|
|
·
|
Franchising of “Bull” Restaurants that will sell our own
beef and beef products
|
|
·
|
Franchising of retail butcher shops similar to the Beijing shop.
|
Currently our “Bull” restaurant serves as our demonstration
model. Converted from an old cattle house, and situated next to our renovated cattle houses at SJAP’s complex, Bull seats
over 130 and is a popular local dining facility. In fiscal year 2013, Bull sales reached over $590,000 with net profit of over
$70,000 (netting about 12%), and used one head of cattle every three days.
We can reasonably assume that in big cities, compared to the
small community of Huangyuan where the demonstration restaurant is located, a similar restaurant must have the capacity to use
up to at least two head of cattle per day, equal to 730 head per year. Therefore, if and when we develop fifty Bull restaurants,
we anticipate realizing sales of up to 36,500 head of cattle in a year, which is more than SJAP targets to slaughter in 2016 (i.e.,
30,000 head).
This table lists some of the biggest wholesale frozen food (including
beef) markets in Tier 1 cities (i.e., Beijing, Shanghai and Guangzhou City) from which there are many established logistic services
to channel frozen goods to other Tier 2 and Tier 3 cities, where many existing localized wholesalers and distributors are situated
and operating:
City
|
|
Name of Wholesale (cold storage) Markets
|
|
Address
|
Beijing
|
|
XinFa Di Wholesale Market of Agricultural Produce
|
|
XinFa Di Bridge, Jingkai Highway, Fengtai District, Beijing
|
|
|
Jing Hua Jin Niu Qing Zhen Wholesale Market of Meat and Aquatic Produce
|
|
No.6 Nanding Road, Fengtai District, Beijing
|
|
|
YueGeZhuang wholesale Market
|
|
No.34 Fengtai Road, Beijing
|
|
|
Jin Xiu Da Di Wholesale Market of Meat
|
|
No.69 Fushi Road, Haidian District, Beijing
|
Shanghai
|
|
Shanghai City Beef and Mutton Wholesale Trade Market
|
|
No.178 Nanda Road, Baoshan District, Shanghai
|
|
|
Cao An Hu Tai Agricultural Wholesale Market
|
|
Mei Ling North Road, Putuo District, Shanghai
|
|
|
Shanghai Agricultural Produce Wholesale Market Centre
|
|
Hunan Road, Pudong District, Shanghai
|
|
|
Shanghai Qi Bao Agricultural and Sideline Products
Integrated Trading Market
|
|
Laiting North Road, Minxing District, Shanghai
|
|
|
Shanghai Jiang Yang Agricultural Produce Wholesale Market
|
|
Jiang Yang North, Baoshan District, Shanghai
|
Guangzhou
|
|
HuiFeng Frozen Produce Market
|
|
No. 5 Shui Chang Road, Huang shi Xi Road, Guangzhou
|
|
|
Zi You Ma Frozen Produce Wholesale Market
|
|
No.1 Huang shi Xi Road, Guangzhou
|
|
|
Da Luo Tang International Frozen Produce Centre
|
|
Qiao Xing Avenue, Panyu District, Guangzhou
|
Note: We intend to acquire an existing wholesale establishment
in each of these Tier 1, Tier 2, and Tier 3 Cities to be our main sales and distribution outlets, and as our main regional sales
administration centers.
With the slaughterhouse, de-boning and value added processing
activities since Q1 2014, we expect rapid growth of year on year revenue and profits for SJAP thereafter. The table below lists
examples of SJAP’s revenue that we expect to be generated from one head of cattle.
Assumptions: Cattle is purchased at 15 to 16 months old and
fattened for a period of five to six months, then slaughtered and de-boned. 10% of the beef meat will be used for value added processed
beef products. Revenue generated from marketing division is excluded.
PER HEAD OF CATTLE
|
|
|
Revenue
Components
|
|
Quantity
|
|
Average
Unit Price
in RMB
|
|
Revenues
|
|
Average
Yielding Information & Statistics
|
(Ex-factory)
|
|
|
|
At cost
|
|
Sales value
|
|
|
|
|
|
|
|
|
Organic Fertilizer
|
|
1 MT
|
|
650 / MT
|
|
1200 / MT
|
|
1,200
|
|
Fertilizer /Mu / year
|
|
0.65 MT
|
|
1 Mu = 660 m2
|
Bulk Livestock Feed
|
|
3 MT
|
|
705 / MT
|
|
1250 / MT
|
|
3,750
|
|
Bulk livestock feed
|
|
6 MT / year
|
|
consumption
|
Concentrated Feed
|
|
600 Kg
|
|
1500 / MT
|
|
2600 / MT
|
|
1,560
|
|
Concentrated feed
|
|
4 Kg / Day
|
|
consumption
|
Live Cattle
|
|
Live-weight
|
|
27 / Kg
|
|
29 / Kg
|
|
22,330
|
|
Harvest of pasture
|
|
3.5 MT / Mu
|
|
yield / Mu/year
|
Slaughterhouse
|
|
Service fee
|
|
2200 / head
|
|
5000 / head
|
|
5,000
|
|
Average weight /cattle
|
|
500 kg / head
|
|
15 to 16 months old
|
Meats
|
|
423 Kg
|
|
65 / Kg
|
|
78 / Kg
|
|
32,995
|
|
Average weight /cattle
|
|
770 Kg / head
|
|
20 to 22 months old
|
Bones
|
|
116 Kg
|
|
Nil
|
|
60 / Kg
|
|
6,960
|
|
Average weight gain
|
|
1.5 Kg / day
|
|
Fattening period
|
Value added Beef products
|
|
42 Kg
|
|
78 / Kg
|
|
156 / Kg
|
|
6,552
|
|
Meat recovery rate
|
|
55%
|
|
423 Kg / head
|
Government Subsidy
|
|
1 head
|
|
|
|
|
|
1,000
|
|
Bone weight
|
|
25%
|
|
116 Kg / head
|
Total Revenue
|
|
|
|
|
|
|
|
81,347
|
|
Value added product
|
|
10%
|
|
42 Kg / head
|
As primary producer, SJAP’s revenue generated from one head of cattle
|
= RMB 29, 940.
|
As a value added processor, SJAP’s added revenue generated from one head of cattle
|
= RMB 51, 507.
|
Total Revenue Generated from one head of cattle
|
= RMB 81, 347.
|
Overall, SJAP expects that revenues from operations will multiply
and increase rapidly as a result of the addition of further herds, and of comprehensive value added processing and marketing facilities.
SJAP sells its organic fertilizer and bulk livestock feed mainly to its cooperative and regional farmers in addition to using it
to rear its own grown cattle, but because its geographic location is so far away from other major provinces there are high costs
associated with selling its fertilizer, bulk livestock feed and live cattle other than to local purchasers. Conversely, equivalent
imports from other provinces must be purchased at a higher cost, providing SJAP with a competitive edge. Furthermore, Qinghai Province
is a region rearing millions of cattle and sheep per year, providing an ample market for SJAP’s fertilizer and livestock
feed.
In the longer term, we believe that wholesale prices of SJAP’s
fertilizer and bulk livestock feed will maintain a steady growth rate of 5% to 10% per annum influenced mainly by rising labor
cost of the country. Furthermore, we expect a trend of continuous increases in beef and cattle prices given the increase in demand
for quality beef and beef products (including value-added products) in tandem with the rise of living standards in China, the short
supply of quality breeding stock that will be required to produce enough cattle to satisfy the increased demand, and the Government’s
stringent restrictions placed on imported cattle and beef meat from many developed nations due to disease and quarantine control
measures, all of which will influence the price rise in cattle and beef meats in China.
The table below shows SJAP’s targeted production:
Revenue Component
|
|
2013
|
|
2014
|
|
2015
|
Organic Fertilizer
|
|
40,000 MT
|
|
40,000 MT
|
|
40,000 MT
|
Bulk Livestock Feed
|
|
60,000 MT
|
|
60,000 MT
|
|
60,000 MT
|
Concentrated Feed
|
|
20,000 MT
|
|
30,000 MT
|
|
40,000 MT
|
Live cattle
|
|
|
|
|
|
|
• from our farms
|
|
4,000 heads
|
|
6,000 heads
|
|
9,000 heads
|
• cooperative growers
|
|
4,000 Heads
|
|
6,000 heads
|
|
9,000 heads
|
Slaughterhouse
|
|
|
|
|
|
|
• Cattle
|
|
0
|
|
20,000 heads
|
|
35,000 heads
|
• Sheep
|
|
0
|
|
75,000 heads
|
|
110,000 heads
|
De-boning meats
|
|
0
|
|
6,000 MT
|
|
9,000 MT
|
De-boning Bones
|
|
0
|
|
1,500 MT
|
|
2,250 MT
|
Meat Products
|
|
0
|
|
450 MT
|
|
1,350 MT
|
Note: Sheep are raised by our cooperative growers and regional
farmers.
The average of cattle prices in fiscal year 2013, live cattle
wholesale prices are RMB29 per Kg live weight for 2 to 3 years old beef cattle, representing a steady increase of 5 to 8% over
fiscal year 2012. However, prices increased sharply for beef cattle below one year old (priced between RMB32 to RMB34 per Kg live
weight) representing a strong increase of over 12% between year 2012 to 2013. This indicates that there is greater demand for young
cattle to be reared into mature cattle as the mature cattle market is becoming more stable and profitable. Current beef meat (in
general, grade equivalent to meats de-boned from 2 to 3 year old beef cattle) sells at wholesale between RMB80 to RMB92 per Kg,
depending on quality specifications, for locally produced meats that have been food safety certified and processed by food safety
regulated slaughterhouses and de-boning facilities.
Photos of SJAP’s Operation and Complex:
On October 28, 2013, SJAP’s nomination to apply merit
credentials as a certified Dragon Head Business in China was approved by Government Authorities. “Dragon Head Enterprise”
is a prestigious certification granted by the Government to businesses that demonstrate corporate social responsibility (“CSR”),
pioneering and leadership in business using high standards of quality and services. Dragon Head status frequently leads to additional
governmental grants and other assistance. Qinghai Province has larger numbers of ethnic minorities who receive proportionately
higher grants, incentives, assistance and subsidies from the Government. SJAP has been well supported by the Government due to
our CSR, and we expect to receive even greater Government support since approval of our Dragon Head Enterprise status.
SJAP’s abattoir, meat de-boning, meat packaging, and cold
storage facilities started trial operations in December 2013. Limited production began in January 2014.
Operation 2
. Operation 2, in Linli District, Hunan Province,
is run by Hunan Shenghua A Power Agriculture Co. Ltd. China (“HSA”), a 76% owned subsidiary. HSA conducts the following
business activities, both of which are in the development stage:
|
·
|
manufacturing and sales of organic and mixed fertilizer, and
|
|
·
|
cultivation of pastures and crops in preparation for the establishment
of beef cattle farms.
|
By January 2013, its first organic fertilizer production plant
was established and started its production of organic fertilizer. On March 5, 2013, HSA secured the rights to use an enzyme developed
by a Hong Kong company some twenty years ago that has been utilized by global manufacturers of organic fertilizer. Earlier in this
document we describe the enzyme, which we call T1. The advantage of this particular enzyme is that when it is applied to our organic
fertilizer it has the ability to convert part of the organic raw materials into potash and phosphate without having to add in chemically
formulated potash and phosphate, such that our end fertilizer can be qualified as pure organic fertilizer made with 100% natural
organic raw materials. With this pure organic fertilizer, HSA is in a position to fully explore the potential market for fish in
farm lakes and thereby to attempt to align itself with the government’s policy of encouraging Lake Fish Farmers to use pure
organic fertilizer instead of chemical fertilizers. In addition, cost savings from avoiding the use of chemical potash and phosphate
will, in management’s belief, result in a better profit margin for the Company. Sales of pure organic fertilizer commenced
at the end of Q1 2013.
Currently, chemical fertilizers in the region are sold at wholesale
between RMB 3,000 to 3,600 per MT depending upon their chemical composition, compared to organic fertilizer from SJAP selling at
an average of RMB1,200 to RMB1,300 per MT. Our new 100% pure organic fertilizer with up to 8% potash is currently being marketed
between RMB 2,000 to RMB 2,200 per MT targeting to reach an average up to RMB2,600 per MT such that its prices will be at the mid-range
between organic and chemical fertilizer.
HSA targeted to produce up to 30,000 MT of 100% pure organic
fertilizer in 2013 under its newly completed production plant and facilities, and aims to increase its capacity to about 90,000
MT per year in stages by 2015, subject to its sales performance within the period. The main hardship related to selling fertilizer
is the requirement to provide longer credit terms (sometimes up to 180 days) to our end buyers because these end users normally
can afford to pay for them only after they sell their products. Therefore, we assess creditworthiness of our prospective customers,
and only consider the farmers whom we deem creditworthy, and who follow our requirements for planting their fields and harvesting
crops each year.
Development of HSA in Linli District, Hunan Province, follows
SJAP’s business model. HSA is situated in a much better growing environment, a farming rich province next to the Guangdong
Province. Thus, HSA benefits from cheaper logistics costs, close proximity to large markets, and a more favorable climate (milder
winters and longer summers versus SJAP’s long bitterly cold winters and short summers). However, financial support from the
Government is more difficult to obtain because more entities share the Government’s support provisions.
HSA endures both higher development costs and longer time to
construct its facilities when compared to SJAP, whose property had 40 older (yet salvageable) buildings, which it has renovated
to meet its needs.
Hunan Province is one of the biggest primary producing provinces
of China with over four million primary producers that grow rice, tea, tobacco, grapes, citrus, cotton, seedlings, sunflowers,
herb plants and many varieties of cash crops. Hunan also has a long standing history in lake aquaculture producing millions of
tons of fish and other seafood annually (e.g., total primary production is over RMB 450 Billion, or about US$ 75 Billion, recorded
in 2011 as announced by Hunan Province Agriculture Department).
At our newly built fertilizer factory, the 100% pure organic
mixed fertilizer (“POMF”) is generating stable income and revenues aiming to reach its 2013 target of 30,000 MT. By
the end of September 2013, HSA produced and sold more than 12,000 MT of POMF at an average price above RMB 2,500 per MT (or US$403
per MT) collectively during the first nine months of 2013.
Construction work to develop HSA’s cattle station began
in March 2012 with preparation work on its general layout. We cultivated 75 acres of our land, situated below the fertilizer factory,
and we planted crops and pastures. The hill behind and above the fertilizer factory must be leveled before the cattle houses can
be built. Leveling is underway.
4. Hylocereus Undatus (HU) Plantation
JHST, an SJVC that is 75% owned by MEIJI, is consolidated as
a subsidiary, and is the owner and operator of our Hylocereus Undatus Plantation (the HU Plantation), at Enping City in Guangdong
Province. Hylocereus Undatus is a cacti commonly referred to as Dragon Fruit. In 2013, JHST contributed 9.2% of the Company’s
revenue and 17% of our gross profits. Developed in 2008, the HU Plantation has generated revenue since 2009. JHST conducts two
operations: (i) growth and sales of flowers, and (ii) drying and value added processing and sales of HU flower products. JHST cultivates
187 acres of Hylocereus Undatus in Guangdong Province. HU blooms for a very short period, sometimes only one night, and flowers
must be 20 to 25 cm long when picked before they turn from green to white. HU is a delicate crop. Harvest season runs from July
through October.
HU cacti take three years to reach maturity, though they will
flower a little even in their first year, and can produce for as long as twenty years. JHST began planting in late 2007, and by
2014 all of the plants are mature plants (averaging over four years). The product is sold in the form of dried flowers (used in
health-related soups and teas), and as fresh flowers that are consumed as vegetables in China.
Fresh flowers are sold to regional wholesale and retail markets
due to their short shelf life. Some are dried and packed; these flowers are sold to a few major wholesalers, who distribute them
to wholesale and retail markets and export traders through the winter and spring months (from October to June) in Guangdong Province.
HU is a seasonal revenue product: more than half of JHST’s revenues are recognized in the third quarter. No sales are made
in the first quarter.
We originally forecast that by 2014, dried and pickled flowers
would make up 96% of the division’s flower income as produce is diverted away from delicate fresh flowers. In 2013, we planted
a special selenium-rich Chinese herb (called XueYingZi, or “Immortal Vegetable” in China, and Snowsakurako in Japan)
among the HU Plants hoping to prolong the shelf life of the fresh flowers from 2-3 days up to 12-14 days and increasing the sales
of fresh flowers. This did not occur, so that we processed up to 80% of HU as dried flowers in 2013.
Our organic Immortal Vegetable plants have properties that some
believe induce good health. We have processed these into small gift packs - selling them as organic vegetables with leaves for
tea and stems for soup. Laboratory test results show that each Kg of fresh Immortal Vegetables from our Q3 2013 harvest contains
0.58 gram of selenium, which adds value to their sales. Immortal Vegetables grown as trials over the 30 Mu field produced over
200 MT of crops (including roots) during this quarter, averaging about 6.7 MT per Mu from a density of about 1,700 plants per Mu
—within our Q2 2013 estimates. In December 2013, we started trials to plant other cash crops in between the HU Plants with
the aim of improving revenues covering all seasons.
The Corporate (or
SIAF) Division
From Q4 2012, the Company decided to generate business income
to fund its shared services operations’ working capital annual budget, as described in this section.
We developed the Wholesale and Distribution Facilities project
including design, construction and project management of its business operation of a specialized modern beef wholesale and distribution
center (“Wholesale Center 2”) for Guangzhou City NaWei Trading Co. Ltd (“NWT”), an unrelated Chinese third
party owned company situated at the Guangzhou City, LiWan District, New Wholesale Market. We have completed a freezing room facility
that has the capacity to store up to 150 MT of frozen food at -25 degrees Celsius. We renovated other facilities (e.g., wholesale
shop, packaging and processing facility, office, dry good storage and function room), with alterations on-going. Wholesale Center
2 is in operation.
We developed the Central Kitchen and related facilities project
including design, construction, project management, and managing business operations for Guangzhou City Wangxiangcheng (“WXC”),
an unrelated Chinese company, of a Central Kitchen, a Central Bakery, a fast food restaurant and three mobile food stores (“Central
Facility 1”) situated adjacent to Wholesale Center 2. The construction work of the Central Kitchen is completed and the Central
Facility 1 is in operation.
Restaurant development projects encompass design, construction,
project management, and managing business operations for WXC. Six restaurants in and around Guangzhou are in varying stages of
development, as follows:
Restaurant 1
, at River South District, has operated since
Q1 2012. In Q1 2014, we began alterations and renovations at Restaurant 1, to improve service efficiency and to add a steak house
section. We anticipate completion of renovations and alterations in May 2014
Restaurant 2
, at the UU Park Complex in Tianhe District,
has operated since Q3 2012.
Restaurant 3
, at the Sporting Complex in Tianhe District,
opened at the end of Q1 2013. The Company stopped operating Restaurant 3 in November 2013, due to our landlord’s failure
to provide us a Fire Safety Permit. Lack of this permit prevents us from completing our business registration, and obtaining our
own Fire Safety Permit. Operating without both permits is subject to heavy penalties in China. We are currently suing the Shopping
Complex for contractual breach.
Restaurant 4
, at Harbor City Shopping Center, has operated
since October 31, 2013.
Construction and renovation work on
Restaurant 5
, at
the center of Zhungzhen City (approximately a 35 minute drive from Guangzhou), is virtually complete. Operations of Restaurant
5 started on March 28, 2014.
Restaurant 6
, at the Li Wan District and next to Wholesale
Center 1, started renovation work in September 2013. We await approval of various permits, particularly the one for change of purpose
(from wholesale market to food premise). We now hope to complete Restaurant 6 in June 2014.
When fully operational, these six restaurants will occupy a
total gross area of 5,800 m2 (about 63,800 ft2) with seating capacity for 1,370 persons. In Q4 of 2013, we initiated the planning
process to establish three additional smaller shops that will sell and cater specialized gourmet foods. We had hoped to begin operating
the gourmet food shops in December 2013, but the permitting issues described for Restaurant 6 have delayed construction until Q2
2014.
The following photos show the restaurants that we have developed:
In 2013, we also constructed a trading complex (the “Trading
Center”) for the Import and Export trades of the Company at another building adjacent to Wholesale Centers 1 and 2. The Trading
Center has imported frozen and fresh chilled and live seafood (i.e., cuttlefish, squid, prawns, salmon, crabs and eels) from Malaysia,
Thailand, Russia and Madagascar and other local coastal fishing towns. The seafood was sold to Wholesale Center 1, which distributed
and sold it into various reputable food chain outlets, wholesale market stores and supermarket chains in the Guangzhou City, Shanghai
City as well as in the southern coastal towns of the Guangdong Province.
We expect to be appointed the turnkey solution provider given
our current success on existing projects with our Chinese investor who owns the Guangzhou City WangXiangCheng Enterprise Management
Consulting Co. Ltd. (“WXC”). WXC intends to develop over 50 gourmet restaurants and fast food outlets collectively
within two years (2013 to 2014). We also expect to continue as the turnkey solution provider for NWT to develop a number of modern
health food department chains in Guangzhou City during 2014 and 2015. SIAF will act as engineering consultant, management service
provider, and marketer. As such, we expect SIAF’s business and engineering development division to be kept busy for the next
three years. At the same time we aim to further develop our import and export trades, and the seafood value added trades in harmony
with WXC’s and NWT’s developments to maintain our growth rates in the sales of fish, seafood and beef products. In
this way, we gain momentum in materializing our business vision of vertically integrated operations.
The Consulting Services Agreement between WXC and the Company
is outlined below.
Principal terms and conditions of the agreement:
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WXC is a restaurant owner and operator in China. SIAF is an engineering
and management consultant with the know-how to develop business operations of catering and food services and the expertise to provide
related services.
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The project development involves:
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the construction and business development of a Central Kitchen, a
Central Bakery, a fast food restaurant, a Central Storage, a Central Reception Centre and associated facilities at a location in
LiWan District, Guangzhou City; and
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15 signature restaurants, 20 medium sized catering food shops, 30
small Mobile Food Stores, with associated services and training, at suitable locations in Guangzhou city.
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The project development will be carried out under various phases and
sub-stages starting from October 1, 2012 and scheduled to be completed on or before September 30, 2015, at a total cost estimated
at US$ 11.66 million.
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WXC, as the developer, will be responsible to finance and pay for
the project development. WXC will pay SIAF or SIAF’s designated agents for work done and provided by SIAF in accordance with
the agreement.
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SIAF will be responsible to carry out and provide the services to
the Developer, in accordance with scope of work of the agreement.
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Upon completion of the project development and subject to the
performance of the developed businesses, the parties agree to form an SJVC to acquire and to operate the project businesses based
on its book value and upon the official formation of the SJVC SIAF will have the right to acquire up to 75% equity in the SJVC
thus to reimburse WXC for the amount paid by WXC on the project development up to the time of the SJVC is formed officially.
The Import and Export Trading of SIAF:
We have imported and sold over twelve 40-foot sea containers
of seafood from various countries (i.e., Russia, Malaysia, Thailand, Vietnam, Chile, etc.), Imports from Madagascar are impressive;
we have imported over 500 MT of live seafood (including Mud crabs, flower pattern eels, and other variety of fish).
Summary of the major work carried out during fiscal year
2013:
We believe that all development work carried out during fiscal
year 2013 demonstrated good progress including:
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Our own Trading Center is now operating (although finish
work is on-going)
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Leonie Chain’s Central Kitchen is 100% completed
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The Central Bakery has operated since May 2013
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Four restaurants are completed, with renovation and alternation work in progress on Restaurant (1) and Restaurant (5) started
business on March 28th 2014.
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SJAP has completed all essential construction work on its slaughterhouse and deboning facilities and had a trial run of slaughtered
and deboned 100 heads of cattle in November 2013 and the production of Marble beef in March 2014.
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JHST has completed the revitalization program of its HU Plantation (i.e., new irrigation systems with automatic sprinklers,
replacing with organic soil, planting with immortal vegetables in between each row of the HU plants, extension of staff quarters
with accommodation now for more than 40 workers at one time), planting 13 acres of Immortal Vegetables, and building associated
nursery
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Prawn Farm 1 commenced operation
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The Beijing Cattle Farm and wholesale shop began operating
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Prawn Farm 2 completed three prawn grow-out open dams with RAS systems and successfully bred fingerling of LawZi Prawns from
our second and third generation brood stocks
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We established facilities in Madagascar and in turn importing
from Madagascar
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HSA successfully produced the Lake Fish organic fertilizer.
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The Company views the foregoing accomplishments as giant milestones
toward building strong fundamentals for the Company’s future growth. Consequently, we see our 5-year plan play out as envisioned.
Particularly at the wholesale level in the fishery and beef divisions, economies of scale are being realized. The benefits of vertical
integration are being achieved gradually, most in evidence between the wholesale and distribution levels. These enhance the Company’s
competitive position. We are beginning to see a multiplier effect generating core sustainable value and adding a layer of corporate
maturity and operational reliability, reinforced by all financial metrics continuing to move positively.
INDUSTRY OVERVIEW
Economic Outlook for China
Over the course of the past four decades, China has displayed
vigorous growth. In 2011, the Chinese economy, as measured by its gross domestic product (GDP), was almost 20 times larger in volume
terms than it was in 1980. The agricultural sector, as measured by FAO’s net agricultural output index grew by 4.5 times
over the same period. The rapid growth in both national income and agricultural output has contributed to substantially higher
national food availability and much improved access to food. The details surrounding such success has many dimensions, including
a changing policy environment, increased national investments, and improved factor productivity, all amid a rapidly changing rural,
demographic and economic landscape, regional differences but also critically rising land and water constraints.
1
1
OECD-FAO Agricultural Outlook 2013 [Chapter 2
Feeding China: Prospects and Challenges in the Next Decade, page 52]
The OECD projects strong GDP growth to gradually slow over the
next ten years from the current 8% range toward 6%.5 This still means that per capita income in China will more than double over
the next decade, with an impact on domestic demand for food, particularly for those foods with higher income sensitivity. While
China’s Engel coefficient has declined as income has risen, and will decline much further in the next decade, it indicates
a considerable impact for food demand, especially if income growth is passed down to the lower income population.
On the demand side, population growth will continue, albeit
at a slower rate of 0.3% p.a. compared to 0.5% p.a. in the past decade. The rapid increase in urban population will continue to
impact on food demand patterns. While the UN projects a total population increase of some 38 million people (to 1.392 billion by
2022), urban population may increase by 138 million over this period. In 2011, the average net income of urban dwellers was almost
three times that of rural dwellers. Not only does food consumption appear higher in urban contexts, which are associated with higher
incomes, consumption of meat and dairy and fish products are also much higher. These demographic trends will support changes in
diet structure, implying growth in the demand for feed grain and protein meal. They also place higher demand for modern and efficient
food marketing chains that establish quality and safety regimes that must be met by supply chains reaching down to the primary
sector. Nevertheless, as measured by current data on apparent consumption, consumption of both meat and fish in China on a per
capita basis is similar to many OECD countries and an appropriate issue is how much the composition of protein intake will change
over the coming decade.
1
China’s real GDP growth is expected to moderate to around
7.7% in 2014-18 (compared to 10.5% during 2000 and 2007), as the country rebalances its growth model towards growth driven by domestic
consumption. Implementation of structural reforms will also be a critical factor in driving the Chinese economy towards sustainable
development and growing beyond the middle-income trap.
2
GDP growth for 2013 continued at more moderate growth levels
as the economy is shifting its growth model. Key indicators for 2013 show overall stable macroeconomic conditions and an anticipated
slight slowdown in growth for most of the indicators. In sum, economic growth in 2013 stabilized at similar levels to 2012. As
a sign of China’s economic transformation, 2013 marked the first year that the tertiary sector accounted for the largest
share of GDP. Following the government’s announcement of bold reform plans, 2014 will indicate how the government aims to
implement its new economic policies. Strengthening the role of markets will take time to implement with significant results unlikely
to be noticeable in the short-term. Reforming the Chinese economy and shifting the emphasis toward quality and efficiency will
be accompanied by a structural slowdown with policy experimentation taking place in areas including investment, international trade,
land rights, and pricing mechanisms.
Most GDP growth estimates for 2013 proved too bullish and were
revised downward over the year. Growth expectations for 2014 are significantly lower than in the previous year as most analysts
anticipate GDP growth to stabilize at between 7.4% and 7.8%. President Xi Jinping has used the first months to manifest his powerbase
after the leadership transition was completed in 2013 with a strong priority on economic reforms. As China begins to implement
the 60-point reform program issued by the Central Committee’s Third Plenum in November 2013 a key challenge to achieving
steady economic growth will be to set priorities and coordinate the reform efforts. Most certainly implementation of new long-term
policy goals will hit some roadblocks, but growth is highly unlikely to fall below 7% over the next few years.
3
Agriculture in China
China is the world’s largest agricultural economy. It
is the leading producer of many agricultural commodities such as pork, horticultural products, rice, and cotton. It is also the
largest consumer of many agricultural products, such as pork, rice and soybeans. While China generally has been successful in meeting
its rapidly rising demand for food and fiber by increasing domestic production, it has emerged as a leading global importer of
several agricultural commodities, including cotton, soybeans, vegetable oils, and animal hides. As its domestic agricultural production
has grown, China has also become the largest exporter in global markets for several horticultural products, including mandarin
oranges, apples, apple juice, garlic, and other vegetables.
About 40% of China’s population of 1.3 billion is employed
in the agricultural sector, and agriculture contributes about 11% to China’s GDP.
4
According to OECD, China’s contribution of scientific
and technological progress in 2012 to growth in agriculture has reached 54.5%, doubling from 27% in the beginning of rural reform.
Accordingly, OECD projects China should maintain its leading role in global fisheries as its aquaculture as production continues
to increase, albeit at half the rate of the previous decade. China is expected to account for 63% of global aquaculture production
in 2022 and remain one of the world’s leading fish exporters.
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2
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OECD-FAO Agricultural Outlook 2013 [Chapter 2 Feeding
China: Prospects and Challenges in the Next Decade, pages 62-64]
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3
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OECD Economic Outlook for Southeast Asia, China and India
2014 Pocket Edition [page 3]
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4
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China
Economic Outlook 2014
, German Chamber of
Commerce in China [pages 1-2]
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5
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USITC: China’s Agricultural Trade: Competitive
Conditions and Effects on U.S. Exports, March 2011 [pages 1-1 and1-8]
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China’s Support for Agriculture
Traditionally, China’s government support for agriculture
was low compared to that of developed countries, such as the United States and the member states of the European Union, but in
line with that of other rapidly growing economies, according to the United States International Trade Administration, or the USITC.
As measured by the OECD’s PSE,
5
the amount of support provided to Chinese farmers was low (and sometimes negative)
during the 1990’s, but gradually rose to 9% in 2007. Compared with other countries at a similar level of development, including
Brazil, Mexico, Russia, and South Africa, China’s support for farmers falls in the middle of the range. China’s PSE
reflects changes in the central government’s policy priorities from grain self-sufficiency and low consumer prices toward
a stronger focus on raising farm household incomes, according to the USITC.
However, more recently, government support to China’s
agricultural sector indicates that Chinese policymakers are placing a renewed emphasis on the rural economy. Indirect support,
in the form of general services, is very high relative to similar support programs in other countries, due largely to investments
in agricultural infrastructure. General services include modern research and extension services, food safety agencies, and agricultural
price information services, most of which provide benefits to producers and consumers throughout the economy. Compared with direct
payments to farmers, general services support is less production-distorting to the sector.
China’s medium term policy priorities are enunciated in
its
12th Five-Year Plan for National Economic and Social Development of the People’s Republic of China (2011-2015)
and supplemented by its
National Modern Agriculture Development Plan
.
The Plan (2011-2015) strives to solve the “Sannong”
issues: agriculture, rural community, and farmers. These priorities focus on the following areas:
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Safeguard national grain security, transform agricultural development,
and improve agricultural production capacity.
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Increase farmers’ income and living standards, narrowing the
gap of living standards between urban and rural areas.
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Ensure food quality and safety.
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Protect agricultural resources and promote environmental sustainability.
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The Plan strives for general self-sufficiency in food production:
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Per capita annual net income of rural residents will grow more than
7% and the impoverished population will be significantly reduced.
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Improve resource utilization and land productivity, strengthen risk
prevention and emergency management capacity development.
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The main measures taken by the government will focus on the following:
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Strengthen agricultural development and institutional reform.
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Enhance policy support and protection for agriculture.
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Promote the opening-up of agricultural markets.
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Improve and develop the legal system supporting the agriculture and
food
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Agricultural Consumption
China is a major global consumer of agricultural products. It
consumes one-third of the world’s rice, one-fourth of all corn, and one-half of all pork and cotton, and it is the largest
consumer of oilseeds and most edible oils. The traditional Chinese diet centers around staple foods (mainly grains and starches),
which account for nearly one-half of the daily caloric intake. Average Chinese per capita consumption recently stabilized at approximately
3,000 calories per day, one of the highest levels among Asian countries.
Chinese food consumption is influenced by factors such as population
size and demographics, income, food prices, and general preferences. Per capita income growth and urbanization are the two factors
most responsible for altering recent consumption patterns in China. Rising income translates into higher per capita food consumption,
while increasing urbanization is driving diversification of food choices because of greater availability and choice offered through
increasingly diverse sales outlets.
The UN projects China’s urban population to increase by
138 million by 2022.
Chinese consumers generally fall into one of three categories:
rural consumers; urban low-income consumers; or urban high-income consumers. Although high-income consumers can afford to buy more
and better-quality food, the ubiquity of food outlets in cities means that nearly every urban resident, regardless of income, sees
an increasingly diverse food selection. Compared to rural diets, urban diets contain less grain and more non-staple items, including
processed and convenience foods. Rural migrants to cities tend to adopt the urban diet.
6
OECD: PSE is defined as the estimated monetary
value of transfers from consumers and taxpayers to farmers, expressed as a percentage of gross farm receipts (defined as the value
of total farm production at farm gate prices), plus budgetary support
According to OECD, livestock, both the meat and dairy sectors,
will continue to expand, with increasing feed requirements which will result in higher imports of coarse grains, likely beyond
the current tariff quota levels. China is expected to become the world’s leading consumer of pig meat (pork) on a per capita
basis, surpassing the European Union by 2022.
Food Expenditures
Food is the largest class of household expenditure for all Chinese
income groups; even housing takes a smaller share of average household income, according to the USITC. As income rises, the absolute
amount of food expenditure increases, although the share of income spent on food falls. Urban residents spend substantially more
on food than their rural counterparts, according to the USITC. Higher incomes lead to an increase in both the quantity and quality
of food demanded.
However, while demand for higher quantities of food appears
to level off in the top income households, demand for higher-quality foods continues to rise with income spending on food consumed
outside the home being on the rise. In 2008, the average per capita annual expenditure on dining out was $127 among urban residents,
up 26% from a year earlier. Per capita expenditures on food consumed away from home vary among regions, with Shanghai spending
the most ($300) and Tibet the least ($84). Most such expenditures are made in restaurants, both independent establishments and
fast-food chains. Although consumption away from the household is increasing, most foods are still eaten at home. The exception
is meat, with about half of all meat consumed outside the home.
Food Preferences
Along with more varied consumption, higher incomes lead to changing
food preferences, including demand for better quality and safer foods. Food preferences determine where urban Chinese purchase
their food, whether it be at local “wet markets,” urban supermarkets, or restaurants. Chinese value the diversity in
food products that different shopping outlets offer. In the future, analysts predict that further income growth and urbanization
will continue to increase demand for a variety of higher quality foods, according to the USITC.
As in other developing countries, the traditional diet in China
comprises mostly grains and other starches. Consumption of non-staple, higher-value foods such as pork meat, dairy, fruits, vegetables,
and processed food has grown significantly in the past three decades; 30% of food currently consumed in China has been processed
in some way, according to the USITC.
China’s per capita expenditures for animal proteins in
2008 averaged $184, up from $137 in 2007. The Chinese consume about four times as much pork as poultry, the second most popular
animal protein. Pork consumption has been encouraged by improved cold storage distribution that transports the meat greater distances
to reach more customers. Pork consumption also is high due to government support programs, including purchasing pork for reserves
and occasionally subsidizing pork purchases for low-income consumers.
Food quality and food safety are important factors affecting
Chinese food preferences. High income urban groups that focus their spending on high-quality products also seek assurance that
their food is safe. Safety concerns can determine where certain foods are bought: fresh produce is usually purchased at a wet market
as fresher produce is perceived to be safer, while meats are increasingly bought at a supermarket because of the availability of
cold storage.
6
Aquaculture
A new World Bank report estimates that in 2030, 62% of the seafood
we eat will be farmed, to meet growing demand from regions such as Asia, where roughly 70% of fish will be consumed. China will
produce 37% of the world’s fish, while consuming 38% of world’s food fish.
As the global population approaches nine billion by 2050, there
will be a need for more food and jobs. A growing aquaculture industry can meet these needs, as it operates responsibly. Risks and
environmental impacts of some aquaculture practices have made headlines of late. Disease outbreaks in shrimp aquaculture in China,
Thailand and Vietnam, and in salmon farming in Chile illustrate some of the industry’s challenges. Aquaculture presents countries
with an opportunity to improve sustainable and environmentally responsible fish farming.
“We continue to see excessive and irresponsible harvesting
in capture fisheries, and in aquaculture, disease outbreaks, among other things, have heavily impacted production,” says
Juergen Voegele, Director of Agriculture and Environmental Services at the World Bank. “There is a major opportunity for
developing countries that are prepared to invest in better fisheries management and environmentally sustainable aquaculture.”
7
USITC: China’s Agricultural Trade: Competitive
Conditions and Effects on U.S. Exports, March 2011
“Aquaculture will be an essential part of the solution
to global food security. We expect the aquaculture industry to improve its practices in line with expectations from the market
for sustainable and responsibly produced seafood,” says Jim Anderson,
7
Bank Advisor on Fisheries, Aquaculture
and Oceans and co-author of the report.
The Market for Seafood in China
The information in this section, including graphs, is taken
from the USDA’s GAIN Report Number CH12073 of December 28, 2012 unless otherwise stated.
8
Total Aquatic Products Production
China has the world’s largest aquatic production. By 2010,
its market share has risen to 35% from 7% in 1961.
9
Total 2012 aquatic production in China is estimated to increase
four percent over last year to reach 58 million tons, compared to the 56 million tons in 2011 and 53.7 million tons in 2010, according
to the USDA. Fish production accounts for 59% of the total aquatic production, followed by shellfish and crustaceans at 22.6% and
10%, respectively. Fish production is, according to the USDA, expected to continue its upward growth trend to reach 34.5 million
tons in 2012, up from 33 million tons in 2011 and 31.3 million tons in 2010.
In 2011, Shandong, Guangdong, Fujian and Zhejiang provinces
profited from favorable coastal locations and abundant freshwater resources/facilities to rank as the top four aquatic production
areas. In terms of freshwater cultured production, Hubei, Guangdong, and Jiangsu provinces are the largest producers. These rankings
are expected to remain unchanged in 2012, according to the USDA.
China remains the world largest aquaculture producer with total
cultured aquatic production accounting for about 70% of the world total, based on industry sources. Total aquaculture water area
reached 7.83 million hectares (MHa) in 2011 from 7.65 MHa in 2010, with the majority (164,000 Ha) expansion in freshwater facilities.
While the majority of cultured facilities are fresh water due to available natural resources, growth in seawater facilities has
outpaced that of freshwater facilities over the past four years, rising 33% between 2008 and 2011, compared to 15% for freshwater.
Aquaculture area growth has slowed overall, investment in facility expansion is slowing, with 2011’s 2.5% expansion cooling
significantly from 2009’s 14% expansion. Government officials relate that environmental concerns and the rapid industrialization/urbanization
of China’s coastal region are hampering further aquaculture expansion.
According to the USDA, aquaculture fish production dominates
the sector with total production of 22.8 million tons, accounting for 69% of total fish production in 2011. Carp remains the most
popular cultured freshwater fish with total production of 15.6 million tons in 2011 (up from 15.1 million tons in 2010), accounting
for 72% of total freshwater cultured fish.
Cultured freshwater and seawater shrimp and prawn are produced
primarily in Guangdong, Jiangsu, Hubei, Zhejiang and Guangxi provinces. In 2011, Guangdong led shrimp production with total cultured
production of 609,207 tons, compared to 554,000 tons in 2010. Eel production is concentrated in Fujian, Guangdong, and Jiangxi
provinces, and much of the production is destined for the Japanese market.
Aquatic Consumption
As China’s processing and distribution systems become
more developed and consumers rising affluence increases their interest in a more diversified and nutritious diet, seafood consumption
is on the increase. According to the National Statistics Bureau, the per capita consumption of aquatic products was 14.62 Kg per
urban dweller and 5.36 Kg per rural inhabitant in 2011. Per capita consumption is expected to increase steadily, with strong growth
potential in the rural sector. The per capita consumption of aquatic products is highest in coastal regions, for example in Shanghai
and Guangdong, (where aquatic products have been a traditional source of protein) and locations with relatively high disposable
income.
According to Ministry of Agriculture (MOA) survey results
(among 80 major aquatic product wholesale markets), the average wholesale price for aquatic products increased by 8.5% in the
first eight months of 2012 from the previous year. The price increased by 9.7% for sea water products, and 6.9% for fresh water
products.
Trade
Total aquatic trade value in 2012 is estimated at $27 billion,
up four percent over $25.8 billion in 2011, according to the USDA. Total trade volume is expected to fall by two percent. According
to MOA statistics, in the first three quarters of 2012, total aquatic trade volume stood at 5.86 million tons, down 2.4%, while
trade value was $19.4 billion, up 6% over the previous year. Total aquatic import volume was 3.1 million tons, down 0.9% over the
previous year; total aquatic trade surplus reached $7.5 billion, up $912 million over the same period from the previous year. Industry
sources expect the 2012 total trade value will hit $27 billion. China’s aquatic export trade destinations (with export values
over $100 million) rose from 17 countries/regions in 2009 to 25 in 2011 and will likely increase in 2012. Japan continues to be
the largest export destination, followed by the United States and South Korea.
8
Fish to 2030: Prospects for Fisheries and Aquaculture
.
World Bank Report No. 83177-GLB, December 1, 2013
9
Definition of terms: China’s definition of
aquatic products includes both cultured (farm-raised) and wild caught products; aquatic products include fish, shrimp/prawn/crab,
shellfish, algae, and other. Aquatic catch production is total volume of both fresh and seawater wild caught aquatic products;
Aquaculture production is the total volume of both fresh and seawater cultured (farmed) aquatic products. This report uses Chinese
terminology to maintain consistency between Chinese statistics and product categories. Total aquatic trade statistics below do
not include fishmeal.
10
The State of World Fisheries and Aquaculture
2012, FAO
Exports and Imports
Export value is expected to rise to $18.5 billion, up four percent
over 2011. This growth is mainly due to increased prices as volume is expected to fall from the previous year. Most Chinese industry
insiders believe that a stable recovery of global economies support higher aquatic exports in the near future.
Import value is estimated at $5.7 billion in 2012, almost unchanged
from the previous year; however, total import volume is likely to be 2.6 million tons, down four percent over the previous year.
Russia is expected to remain China’s largest supplier of aquatic products in 2012, followed distantly by the United States
and Japan. Qingdao and Dalian continue to be the two largest arrival ports for aquatic products, accounting for 80% of the total
import volume in first ten months of 2012. Well-established facilities, including processing factories in Qingdao and Dalian, solidify
their status as the largest seafood import hubs in China.
China’s Fishery Production Policy
China’s fishery production policy remains generally unchanged.
In the
12th Five Year Fishery Development Plan
, the MOA plans to continue to promote a more sustainable development model
with resource utilization, environmental protection, production of safe products, and increases in farmer income as major priorities.
In November 2012, MOA published a notice promoting a sustainable and healthy development of marine fishing in other territorial
seas. The notice stressed the need to upgrade fishing facilities to maintain a stable catch volume which reached 1.15 million tons
in 2011.
Implementation of aquaculture licensing system continues
The MOA will continue to implement a nationwide aquaculture
licensing system during the
12th Five Year Fishery Development Plan
period. Licensing thousands of small-scale aquaculture
facilities, however, has proven to be a challenge for the government. As of the end of 2011, 79% of aquaculture facilities had
obtained production licenses.
The policy on aquatic processing trade remains unchanged
China’s reportedly positive view of the aquatic processing
trade may be due to its role in generating new employment and producing rendered feed ingredients that are in demand by the growing
feed industry. If imports are exported as processed products, they will not be subject to a tariff or value-added tax (VAT). Imports
sold in China are subject to tariff and VAT.
According to MOA, the share of processing trade has declined,
accounting for 28.6% of aquatic export value in 2012 (compared to 33% in 2010). Nevertheless, both Chinese industry and official
sources claim that China is becoming the world’s processing center for mackerel, salmon, cod, and herring. Industry sources
note that the number of enterprises involved in the “Processing Trade” is on the rise, especially in Shandong and Liaoning.
Aquatic exports for domestic consumption
High import costs, which include a duty plus value-added tax
approaching 25%, make imports for domestic consumption expensive. Some industry experts are calling for reduced import duties and
VAT for seafood species that are not produced in China to encourage more imports for domestic consumption.
Import certificate for live edible aquatic products
Through bilateral consultation, a NOAA amended version of the
Health Certificate for live edible aquatic products was approved by the Administration for Quality Supervision, Inspection and
Quarantine of China, or AQSIQ. Obtaining the certificate for live edible aquatic product may remain an issue for exporters.
New hygiene certificate for US imported fishmeal
In late July 2011, the Department of Commerce, NOAA, the Seafood
Inspection Program and AQSIQ reached agreement on a new health certificate for fish meal and fish oil exports to China, which took
effect on July 1, 2012. In addition, AQSIQ approved registration of 26 US fish meal and fish oil exporters.
New health certificate for fish and fishery products
On April 10, 2012, AQSIQ requested an amendment to the US Health
Certificate for Fish and Fishery Products destined to China, effective Jan 1, 2013. In late December, the Department of Commerce,
NOAA, the Seafood Inspection Program and AQSIQ agreed on a new certificate that will be implemented January 1, 2013. The current
certificate will be accepted for entry into China for fish and fishery products exported prior to January 1, 2013. After January
1, 2013, any fish and fishery products exported from the US to China must be accompanied by the new health certificate.
Marketing
Due to market development efforts, domestic demand has increased
for imported frozen aquatic products. Salmon, snow crab legs, and cod are all products commonly available in supermarkets. Product
identification, such as brand names, logo and country of origin are important tools to attract consumer interest.
Scallops, salmon, Alaskan snow crab legs, king crabs, black
cod, and oysters are popular items in many upscale hotels that commonly feature these products in buffets. With the proper display,
high-value imported items can be promoted to customers.
Importers claim high value U.S. seafood products are easy to
sell in both first and second tier cities, even in coastal cities such as Qingdao. Major obstacles include inconsistent availability
due to insufficient supply and counterfeit products.
The Market for Meat in China
China is the world’s largest producer and consumer of
meat, which includes pork, poultry and beef, by far. Historically, this situation did not have a large impact on the rest of the
world, as China, for the most part, maintained self-sufficiency in meat. However, since 2007 the situation has changed dramatically.
China has gradually turned into a net importer of meats.
World meat production was around 297.1 million tons in 2011
and forecast to grow by less than 2% to 302 million tons in 2012.
11
China’s meat production reached 79.57 million
tons in 2011, including 50.53 million tons of pork, yet the overall production was slightly less than the consumption; meanwhile,
the net imports of meat climbed 33.59% year on year to 1.57 million tons. According to the
12th Five-Year Plan
of the meat
industry, it is expected that by the end of 2015, China’s total meat output will have reached 85 million tons, consisting
of about 63% pork.
With strong economic growth, China’s urbanization has
been occurring at a faster pace than commonly expected. By the end of 2011, the urban population for the first time exceeded the
rural population, reaching 51.3% of the total population. If rural migrants working in urban areas are included, the population
working and living in urban areas accounted for about 70% of the total population.
Urbanization and rising purchasing power has led to a dietary
pattern change switching from the consumption of traditional food grain products to an increase in consumption of meat.
12
The change in consumer preferences, meaning higher priced red meat representing a major part of Chinese consumers main protein
source, partly derives from the perception that consumption of red meat is equal to higher status than consumption of poultry or
pork.
13
There are several other specific market drivers which underpin
the increase in demand for red meat. One driver is the improved living standard in China which stimulates the growth of beef markets,
since beef often sells at a much higher price and traditionally goes beyond a majority of people’s affordable level. Another
is the fact that Chinese people’s dietary structure is becoming more diversified and reasonable, bringing larger amount of
beef consumption since beef has nutritional benefits. Lastly, further regulation of China’s beef industry is likely to ensure
sufficient supply of cattle and promote the development of the beef industry, which would result in safer and healthier beef products.
14
The strong rise in feed grain prices in the past five years
is now moving substantially through the market chain and is being reflected in higher meat prices with the exception of poultry
where adjustments have been made. On the contrary, world meat consumption continues to grow at one of the highest rates among major
agricultural commodities. Thus, developing countries can expect an increase in meat imports despite strong meat prices, driven
by population, income growth and elasticity of demand. Equally so, strong prices will result in sustained export earnings, which
will encourage large meat exporting countries to invest in international meat markets. When breaking the expected increase of demand
down by region it is evident that the Asia and Pacific region is projected to stand for the largest increase in demand by far.
15
The supporting policies from Chinese government is expected
to ensure adequate supply of cattle sources from the upstream area and improve the quality and taste of beef products. Therefore,
consumers are likely to get safer and healthier beef products and beef consumption is expected to move to a higher development
level in the near future.
16
The Market for Fertilizer in China
Demand for fertilizer in China is forecast to increase 3.3%
per annum through 2015 to 262 million metric tons. We expect sales of fertilizers to be supported by healthy expansion of agricultural
activities as the amount of sown areas continues to grow and rural income levels rise. Farmers will continue to register steadily
increasing incomes, the result of growing crop prices and government subsidies designed to supplement their revenues and reduce
their material costs. Subsidies aimed directly at cutting the cost of fertilizers is expected to encourage additional use. In addition,
rising crop prices have encouraged farmers to invest in fertilizers to further boost crop yields. Advances will also be driven
by increases in the hectares of sown land dedicated to growing cash crops. However, increasing demand for organic food and improved
understanding of the correct application of fertilizers is expected to prevent demand from rising at a faster pace.
11
Food Outlook Global Market Analysis
, published by the Trade and Market Division of FAO under Global Information
and Early Warning System (GIEWS), November 2012
12
China’s growing appetite for meats: Implications for World meat trade. A Multi-Client Study, April 2012
13
China and Hong Kong: Food Opportunities for Maine, Maine International Trade Center, March 2012
14
Frost & Sullivan: China’s beef market has great growth potential
15
Meat - OECD-FAO Agricultural Outlook 2012-2021
16
Frost & Sullivan: China’s beef market has great growth potential
In value terms, fertilizer demand is expected to grow 6.0% per
year to 548 billion Yuan, outpacing gains in volume terms. Faster value growth will be driven by strong demand for higher value
multi-nutrient fertilizers. In addition, advances will be supported by continued growth in fertilizer prices as the cost of natural
gas, oil, coal, and other raw materials continues to rise.
Demand for fertilizer nutrients in China is projected to grow
4.4% annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing use of higher nutrient
level products as income levels grow in rural areas in China. In addition, government efforts to promote multi-nutrient fertilizers
will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total fertilizer demand in 2010,
single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low growth rate of 2.1% per
year. Sales of single nutrient fertilizers will continue to be supported by their relatively low prices. Multi-nutrient fertilizer
demand will post a strong annual growth rate of 7.3% through 2015, fortified by government efforts to promote their utilization.
The size, growth and composition of fertilizer demand in the
six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest regional fertilizer
markets. Due to the comparatively high income levels in the Central-South and Central-East - which enable residents to afford
more expensive food items - demand for cash crops such as fruits and vegetables will rise in these regions, which in turn will
fuel demand for fertilizer. Sales in the Northeast and Northwest regions will outpace the average through 2015, benefiting from
the Great Western Development Strategy, the Northeast Revitalization Policy, and increasing income levels for farmers.
17
17
Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012
ITEM 1A.
RISK FACTORS.
Investing in our common stock involves a high degree of risk.
You should carefully consider each of the following risks and all other information in this Annual Report before deciding to invest
in our common stock. If any of these risks actually occur, our business, financial condition, results of operations, and our future
growth prospects would suffer. Under these circumstances, the share price and value of our common stock could decline and you could
lose all or part of your investment. The risks and uncertainties described in this Annual Report are the only material risks and
uncertainties that we presently know to be facing our company.
This Annual Report contains forward-looking statements. Forward-looking
statements anticipate future events or future financial performance. Full disclosure regarding forward-looking statements, Cautionary
Statement Regarding Forward-Looking Statements, follows this section.
This Annual Report also contains market data related to our
business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions
turn out to be incorrect, actual results may differ from projections based on them. As a result, our markets may not grow
at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a
material adverse effect on our business, results of operations, financial condition and the market price of our common stock.
Currently, we conduct our business operations in the People’s
Republic of China. As China’s economy and its laws, regulations and policies may and do differ from those found in the West,
and change continually, we face certain risks that are summarized in this section.
Risks Related to Our Company
The current global economic and credit environment
could have an adverse effect on demand for certain of our products and services, which would in turn have a negative impact on
our results of operations, our cash flows, our financial condition, our ability to borrow and our stock price.
Since 2008, global market and economic conditions have been
disrupted and volatile. Concerns over increased energy costs, geopolitical issues, the availability and cost of credit, the U.S.
mortgage market sub-prime collapse and a declining residential real estate market in the U.S. have contributed to this increased
volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil
prices, declining business and consumer confidence and increased unemployment, have precipitated a global recession. It is difficult
to predict how long the current economic conditions will persist, whether they will deteriorate further, and which of our products,
if not all of them, will be adversely affected. These conditions, if they continue, could cause a material decrease in our sales,
net income and an increase in the prices we pay for raw materials used in producing our primary produce and products and our development
cost and, thus, materially affect our operating results and financial condition.
The concentration of our current major customers
could adversely affect our business if we were to lose one or more of them.
Four major customers for the Marketing and Trading unit accounted
for 51.49% of consolidated revenues during the fiscal year ended December 31, 2013. Two of those customers accounted for 33.97%
of consolidated revenues, approximately evenly split. If one of our major customers were to go bankrupt, our associated accounts
receivable would become difficult to collect or a loss.
Our largest customer represents a group of thirty separate live
seafood wholesalers at the Guangzhou wholesale markets. Our second largest customer is WSC1, which is owned and operated by APNW.
Capital Award was the consulting engineer responsible for the construction of WSC1 and development of its business operation via
a Consulting and Service Contract granted by APNW. APNW is now one of our main wholesalers to whom we bill our sales of seafood.
APNW then distributes the seafood to other wholesalers in various cities in China.
We may be unable to maintain an effective system
of internal control over financial reporting, and as a result we may be unable to accurately report our financial results.
Our reporting obligations as a public company place a significant
strain on our management, operational and financial resources and systems. If we fail to maintain an effective system of internal
control over financial reporting, we could experience delays or inaccuracies in reporting our financial information, or non-compliance
with SEC reporting and other regulatory requirements. This could subject us to regulatory scrutiny and result in a loss of public
confidence in our management, which could, among other things, cause our stock price to drop.
Because we will require additional financing to
expand our vertically integrated operations according to our business plan and growth strategy, our failure to obtain necessary
financing will impair our growth strategy; in addition, the risks of vertical integration are significant.
As of December 31, 2013, we had net working capital of $154,368,525,
including cash and cash equivalents of $1,327,274. Our capital requirements to accomplish our planned vertically integrated development
and growth plan of our business are significant.
In most developed countries, risks of agriculture operations
are shared to a certain degree by different sectors in the industry. For example:
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Research and development are often initiated and supported by government
departments;
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Primary producers are mainly concerned with the growing risks of the
produce;
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Marketing companies assume the risks of marketing the produce;
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Trading houses sell the produce and assume the credit risks of the
sales; and
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Logistics companies assume the risks of transporting the produce.
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However, as a vertically integrated operator, we must assume
all the above-mentioned risks. China is a developing country; compared to other developed nations, its agriculture industry is
not modern. Thus, management believes that it is essential for us to develop our business operation in a vertically integrated
manner so that we can achieve reasonable profit margins for our products. We believe that the multiple layers of profits generated
through vertical integration may compensate to some degree for the variety of risks that we face through the multiple operations;
however, the overall risks are much greater. At the same time, our five year plan for vertically integrated developments is not
fully completed, and the remaining developments may require significant capital expenditures and management resources. Failure
to implement these vertically integrated developments could hurt our ability to manage our growth and our financial position.
The estimated costs for this and other projects that are part
of our growth strategy in the future will total an investment of an estimated $500 million in the aggregate. Growth will be undertaken
in phases of our 5-year plan that was initiated in January, 2010, and will depend on the funds available to us including internal
capital and external capital.
To accomplish the objectives discussed above and to execute
our business strategy, we need access to capital on appropriate terms. We currently have no commitments with any third party to
obtain such additional financing and we cannot assure you that we will be able to obtain the requisite additional financing on
any terms and, if we are able to raise additional funds, it may be necessary for us to sell our securities at a price which is
at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with any such
financing, we may be required to provide registration rights to the investors and pay damages to the investors in the event that
the registration statement is not filed or declared effective by specified dates. The price and terms of any financing which would
be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our
stock price. We cannot assure you that our business objectives, particularly over the longer term, will be met on a timely basis,
if at all. Consequently, we may be unable to meet fixed obligations and expenses that will be generated in the operation of our
business, whether as presently in existence or as proposed. Any failure to obtain requisite financing on acceptable terms could
have material and adverse effect on our business, financial condition and future prospects.
No assurance of successful expansion of operations.
Our significant increase in the scope and the scale of our operations,
including the hiring of additional personnel, has resulted in significantly higher operating expenses. We anticipate that our operating
expenses will continue to increase. Expansion of our operations may also make significant demands on our management, finances and
other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion
of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems,
procedures and controls. We cannot assure that significant problems in these areas will not occur. Failure to expand these areas
and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could
have a material adverse effect on our business, financial condition and results of operations. We cannot assure that attempts to
expand our marketing, sales, manufacturing and customer support efforts will succeed or generate additional sales or profits in
any future period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, along
with the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations in its results
of operations.
We may be unable to successfully expand our production
capacity, which could result in material delays, quality issues, increased costs and loss of business opportunities, which may
negatively impact our product margins and profitability.
Part of our future growth strategy is to increase our production
capacity to meet increasing demand for our goods. Assuming we obtain sufficient funding to increase our production capacity, any
projects to increase such capacity may not be constructed on the anticipated timetable or within budget. We may also experience
quality control issues as we implement any production upgrades. Any material delay in completing these projects, or any substantial
cost increases or quality issues in connection with these projects could materially delay our ability to bring our products to
market and adversely affect our business, reduce our revenue, income and available cash, all of which could harm our financial
condition.
Our business and operations are growing rapidly.
If we fail to effectively manage our growth, our business and operating results could be harmed.
We have experienced, and may continue to experience, rapid growth
in our operations. This has placed, and may continue to place, significant demands on our management, operational and financial
infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could
negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial
and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures
and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial
position.
If the Chinese government were to change its presently
favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially
and adversely impact our sales performance, margins, and net profit and our costs structure.
As producers active in the agriculture industry, our subsidiaries
are presently exempt from income tax and enjoy various incentive grants and subsidies given by the Chinese government. If the Chinese
government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present
tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs
structure. We have experienced, and may continue to experience, quick changes of policies by the Chinese government. If we do not
effectively and efficiently manage our growth on time due to lack of capital, we could suffer adversely from the consequences of
any such policy changes.
Our intellectual property rights are valuable, and
any inability to adequately protect, or uncertainty regarding validity, enforceability or scope of them could undermine our competitive
position and reduce the value of our products, services and brand, and litigation to protect our intellectual property rights may
be costly.
We attempt to strengthen and differentiate our product portfolio
by developing new and innovative products and product improvements. As a result, our patents, trademarks, trade secrets, copyrights
and other intellectual property rights are important assets to us. Various events outside of our control pose a threat to our intellectual
property rights as well as to our products and services. For example, effective intellectual property protection may not be available
in China and other countries in which our products are sold. Also, although we have registered our trademark in China, our efforts
to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights
could harm our business or our ability to compete and hurt our results of operation. Also, protecting our intellectual property
rights is costly and time consuming. Policing unauthorized use of our proprietary technology can be difficult and expensive. Litigation
might be necessary to protect our intellectual property rights. But due to the relative unpredictability of the Chinese legal system
and potential difficulties to enforce a court’s judgment in China, there is no guarantee that litigation would result in
a favorable outcome. Furthermore, any such litigation may be costly and may divert our management’s attention from our core
business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects
and reputation. Although we are not aware of any of such litigation, we have no insurance coverage against the litigation costs
so we would be forced to bear all litigation costs if we cannot recover them from other parties. All foregoing factors could harm
our business, financial condition, and results of operations. Any unauthorized use of our intellectual property could make it more
expensive for us to do business and harm our operating results.
We may be exposed to infringement or misappropriation
claims by third parties, which, if determined against us, could adversely affect our business and subject us to significant liability
to third parties.
Our success mainly depends on our ability to use and develop
our technology and product designs without infringing upon the intellectual property rights of third parties. We may be subject
to litigation involving claims of patent infringement or violations of other intellectual property rights of third parties. Holders
of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us, which may
make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies licensed to us and
that we rely upon that are subject to infringement or other corresponding allegations or claims by third parties which may damage
our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess
appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement
created by suppliers of components used in our products or by companies we work with in cooperative research and development
activities. Our current or potential competitors may have obtained or may obtain patents that will prevent, limit or interfere
with our ability to make, use or sell our products. The defense of intellectual property claims, including patent infringement
suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the
efforts and resources of our technical personnel and management. These factors could effectively prevent us from pursuing
some or all of our business operations and result in our customers or potential customers deferring, canceling or limiting their
purchase or use of our products, which may have a material adverse effect on our business, financial condition and results of operations.
We rely on highly skilled personnel and the continuing
efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely
disrupted.
Our performance largely depends on the talents, knowledge, skills,
know-how and efforts of highly skilled individuals and in particular, the expertise held by our chief executive officer, Solomon
Lee. His absence, were it to occur, could impact development and implementation of our projects and businesses. Our future success
depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our
organization. Our continued ability to compete effectively depends on our ability to attract new technology developers and to retain
and motivate our existing contractors. If one or more of our executive officers are unable or unwilling to continue in their present
positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may
incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms
a competing company, we may lose some customers.
Our financial and operating performance may be adversely
affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.
Our financial and operating performance may be affected adversely
by epidemics, bad weather conditions, natural disasters and other catastrophes. For example, in early 2003, several economies in
Asia, including China, were affected by the outbreak of severe acute respiratory syndrome, or SARS. In May-June 2003, many businesses
in China were closed by the PRC government, to prevent transmission of SARS. Our business could be materially and adversely
affected by the effects of H1N1 flu (swine flu), avian flu, SARS, or other epidemics or outbreaks. In April 2009, an outbreak of
H1N1 flu first occurred in Mexico and quickly spread to other countries, including the U.S. and China. In the last decade, China
has suffered health epidemics related to such outbreaks. Any prolonged occurrence or recurrence of H1N1 flu (swine flu), avian
flu, SARS or other adverse public health developments in China may have a material adverse effect on our business and operations.
These health epidemics could result in severe travel restrictions and closures that would restrict our ability to ship our
products. Potential outbreaks could also lead to temporary closure of our manufacturing facilities, our suppliers’ facilities
and/or our end-user customers’ facilities, leading to reduced production, delayed or cancelled orders, and decrease in demand
for our products. Any future health epidemic or outbreaks that could disrupt our operations and/or restrict our shipping abilities
may have a material adverse effect on our business and results of operations.
We do not expect to encounter any epidemics in our aquaculture
fishery farms in districts of the Guangdong Province or cattle farms in Huangyuan District of the Qinghai Province. However in
the event of epidemics, we expect that our marine animals and our cattle will be quarantined until such time as a sanitary certificate
for clean bill of health is obtained, before any of our products will be sold. In an extreme situation where our products would
fail to obtain the sanitary certificate, they will be destroyed subject to the direction of the Inspection Authorities of the Agriculture
Department of China. There is compensation granted by the Chinese government for the destruction of our products but only for a
fraction of our cost of production; as such the Company will bear virtually all losses under such circumstances.
Furthermore, the 2008 Sichuan earthquake also had a negative
impact on many businesses in that region. Losses caused by epidemics, adverse weather conditions, natural disasters and other catastrophes,
including SARS, avian flu, swine flu, earthquakes or typhoons, will adversely affect our operations.
If we make any acquisitions, they may disrupt or
have a negative impact on our business.
Although we have no present plans for any specific acquisitions,
in the event that we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations
with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the
effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations
could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described
above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
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difficulty of integrating acquired products, services or operations;
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potential disruption of the ongoing businesses and distraction of
our management and the management of acquired companies;
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difficulty of incorporating acquired rights or products into our existing
business;
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difficulties in disposing of the excess or idle facilities of an acquired
company or business and expenses in maintaining such facilities;
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difficulties in maintaining uniform standards, controls, procedures
and policies;
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potential impairment of relationships with employees and customers
as a result of any integration of new management personnel;
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potential inability or failure to achieve additional sales and enhance
our customer base through cross-marketing of the products to new and existing customers;
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effect of any government regulations which relate to the business
acquired;
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potential unknown liabilities associated with acquired businesses
or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired
products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our
acquisition.
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Our business could be severely impaired if and to the extent
that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions,
many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of operations.
We face significant competition, including changes
in pricing.
The markets for our products are both competitive and price
sensitive. Many competitors have significant financial, operations, sales and marketing resources, plus experience in research
and development, and compete with us by offering lower prices. Competitors could develop new technologies that compete with our
products to achieve a lower unit price. If a competitor develops lower cost superior technology or cost-effective alternatives
to our products and services, our business could be seriously harmed.
The markets for some of our products are also subject to specific
competitive risks because these markets are highly price competitive. Our competitors have competed in the past by lowering prices
on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce sales revenues
and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate losses.
Many of our competitors are larger and have greater
financial and other resources than we do.
Our products compete and will compete with similar if not identical
products produced by our competitors. These competitive products could be marketed by well-established, successful companies that
possess greater financial, marketing, distribution personnel, and other resources than we do. Using said resources, these companies
can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by
competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial
resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale
of products that compete with our products or present cost features that consumers may find attractive.
Risks Related to our Industry
Our agricultural assets are situated in three provinces
in China and crop disease, severe weather, natural disasters and other conditions affecting the environment, including the effects
of climate change, could result in substantial losses and weaken our financial condition.
Our agricultural operations are situated in Qinghai Province,
Hunan and Guangdong Province. Qinghai Province in particular is subject to occasional periods of drought. Crops require water in
different quantities at different times during the growth cycle. The limited water resource at any given point can adversely impact
production. In Qinghai our cropping and pasture land presently comprises over 5,000 acres, an area too big and too costly to afford
drip irrigation systems for our crops. In Hunan, the district of Linli where we have over 300 acres of crop and pasture land may
from time to time be subject to flooding that could affect our agriculture production. In Enping, Guangdong, our HU Plants are
very susceptible to dry and wet seasonal variation that could also affect our agriculture production.
Crop disease, severe weather conditions, such as floods, droughts,
windstorms and hurricanes, and natural disasters, may adversely affect our supply of one or more products, reduce our sales volumes,
increase our unit production costs or prevent or impair our ability to ship products as planned. Since a significant portion of
our costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other
factors could result in increases in unit production costs, which could result in substantial losses and weaken our financial condition.
We may experience crop disease, insect infestation, severe weather and other adverse environmental conditions from time to time.
Severe weather conditions may occur with higher frequency or
may be less predictable in the future due to the effects of climate change.
An occurrence of such an event might result in material disruptions
to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture industry. There can
be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may
lead to adverse conditions to our operations and financial results.
Prices of agricultural products are subject to supply
and demand, a market condition which is not predictable.
Because our agricultural products are commodities, we are not
able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products in
many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause
severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher.
Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected.
Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either
favorable or unfavorable, it will receive from the market.
In addition, general public perceptions regarding the quality,
safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the
extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify
our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However,
even if market prices are unfavorable, some of our agricultural products which are ready to be, or have been, harvested must be
brought to market promptly. A decrease in the selling price received for our products due to the factors described above could
have a material adverse effect on our business, results of operations and financial condition.
We could realize losses and suffer liquidity problems
due to declines in sales prices for our agriculture products.
Sales prices for agricultural products are difficult to predict.
It is possible that sales prices for our products will decline in the future, and sales prices for other agricultural products
may also decline. In recent years, there has been increasing consolidation among food retailers, wholesalers and distributors.
A significant portion of our costs is fixed, so that fluctuations in the sales prices have an immediate impact on our profitability.
Our profitability is also affected by our production costs, which may increase due to factors beyond our control.
We are subject to the risk of product contamination
and product liability claims.
The sales of our products may involve the risk of injury to
consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the
presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation
phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects
with all applicable laws and regulations, including internal product safety policies, we cannot be sure that consumption of our
products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to
such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products
caused illness or injury could adversely affect our reputation with existing and potential customers and our brand image. We do
not maintain product liability insurance.
We may not be successful in the implementation of
our new technologies and new products, and our new products may be not widely accepted.
Our new technologies such as our drip irrigation system for
precision agriculture or the introduction, testing and promotion of new agricultural varieties, must be able to adapt to local
conditions. The term “drip irrigation” refers to a system whereby the exact amount of water is supplied to the plants’
roots at the correct moment. On the one hand, there exists the failure risk due to not being suitable for the local environment
and market conditions; on the other hand, there are risks of loss of competitive advantages due to the rising of producing similar
products enterprises and other enterprises that follow to produce the similar products.
We are a holding company whose subsidiaries are given
certain degree of independency and our failure to integrate our subsidiaries may adversely affect our financial condition
.
According to the specific characteristics of agricultural production
in China, we have given our subsidiary companies and their farms a certain degree of independency in decision-making. On one hand,
this independency increases the sense of ownership at all levels, on the other hand it has also increased the difficulty of the
integration of operation and management, which has resulted in increased difficulty of management integration. In the event we
are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative impact on our
business.
One or more distributors could engage in activities
that harm our brand and our business.
Our products are sold primarily through distributors, who are
responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces, and are stored
at the correct temperature to ensure freshness and meet shelf life terms. If distributors do not obtain the appropriate licenses,
their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation
of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province
may also cause a delay for our other distributors in receiving a license from the authorities for their provinces, which could
further adversely impact our sales. In addition, distributors may sell our products under another brand licensed in a particular
province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of
our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers.
Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable
to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors
sell inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make
marketing of our branded seeds more difficult. As of the date of this Annual Report, we are not aware of the occurrence of any
of the potential violations by our distributors described above.
The PRC agricultural market is highly competitive
and our growth and results of operations may be adversely affected if we are unable to compete effectively.
The agricultural market in China is highly fragmented, largely
regional and highly competitive, and we expect competition to increase and intensify within the sector. We face significant competition
in our lines of business. Many of our competitors have greater financial, research and development and other resources than we
have. Competition may also develop from consolidation within our industry in China or the privatization of producers that are currently
operated by local governments in China. Our competitors may be better positioned to take advantage of industry consolidation and
acquisition opportunities than we are. The reform and restructuring of state-owned equity in enterprises involved primarily in
producing sectors will likely lead to the reallocation of market share in the agriculture industry, and our competitors may increase
their market share by participating in the restructuring of state-owned agriculture companies. Such privatization would likely
result in increased numbers of market participants with more efficient and commercially viable business models. As competition
intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience a reduction
in our revenues and profit.
We may not possess all of the licenses required to operate
our business, or we may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which
could materially adversely affect our results of operations
.
We are required to hold a variety of permits and licenses to
conduct business in China. We may not possess all of the permits and licenses required for each of our business segments. In addition,
the approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could
fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or to maintain such permits
or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited
in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial
condition could be materially and adversely affected.
Risks Related to Doing Business in China
Under PRC law, we are required to obtain and retain
permits and business licenses, and our failure to do so would adversely impact our ability to conduct business in China.
We hold various permits, business licenses, and approvals authorizing
our operations and activities, which are subject to periodic review and reassessment by the Chinese authorities. Standards of compliance
necessary to pass such reviews change from time to time and differ from jurisdiction to jurisdiction, leading to a degree of uncertainty.
If renewals, or new permits, business licenses or approvals required in connection with existing or new facilities or activities,
are not granted or are delayed, or if existing permits, business licenses or approvals are revoked or substantially modified, we
may not be able to continue to operate our facilities which would have a material adverse effect on our operations. If new standards
are applied to renewals or new applications, it could prove costly for us to meet these new standards.
The PRC economic cycle may negatively impact our
operating results.
We believe that the rapid growth of the PRC economy before 2008
generally led to higher levels of inflation. We believe that the PRC economy has more recently experienced a decrease in its growth
rate. We believe that a number of factors have contributed to this deceleration, including appreciation of the RMB, the currency
of China, which has adversely affected China’s exports. In addition, we believe the deceleration has been exacerbated by
the recent global crisis in the financial services and credit markets, which has resulted in significant volatility and dislocation in
the global capital markets. It is uncertain how long the global crisis in the financial services and credit markets will continue
and the significance of the adverse impact it may have on the global economy in general or the Chinese economy in particular. Slowing
economic growth in China could result in weakening growth and demand for our products, which could reduce our revenues and income.
In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation. The government’s attempts
to control inflation may adversely affect the business climate and growth of private enterprise. In addition, our profitability
may be adversely affected if prices for our products rise at a rate that is insufficient to compensate for the rise in inflation.
Currency fluctuations and restrictions on currency
exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi (RMB) into foreign currencies
and, if the RMB were to decline in value, reducing our revenue in U.S. dollar terms.
The exchange rate of the RMB is currently managed by the Chinese
government. On July 21, 2005, the People’s Bank of China, with the authorization of the State Council of the PRC, announced
that the RMB exchange rate would no longer be pegged to the U.S. Dollar and would float based on market supply and demand with
reference to a basket of currencies. According to public reports, the governor of the People’s Bank has stated that the basket
is composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen and the South Korean Won. Also considered, but
playing smaller roles, are the currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada and Thailand. The
weight of each currency within the basket has not been announced.
The initial adjustment of the RMB exchange rate was an approximate
2% revaluation from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar. The People’s Bank announced
that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would float within a
band of 0.3% around the central parity published by the People’s Bank, while trading prices of non-U.S. Dollar currencies
against the RMB would be allowed to move within a certain band announced by the People’s Bank. The People’s Bank has
stated that it will make adjustments of the RMB exchange rate band when necessary according to market developments as well as the
economic and financial situation. In a later announcement published on May 18, 2007, the band was extended to 0.5%. Since July
2008, the RMB has traded at 6.83 RMB per U.S. Dollar. Recent reports indicate an upward revaluation in the value of the RMB against
the U.S. Dollar may be allowed. The People’s Bank announced on June 19, 2010 its intention to allow the RMB to move more
freely against the basket of currencies, which increases the possibility of sharp fluctuations in the value of the RMB in the near
future and thus the unpredictability associated with the RMB exchange rate.
Despite this change in its exchange rate regime, the Chinese
government continues to manage the valuation of the RMB. The value of our common stock will be indirectly affected by the foreign
exchange rate between the U.S. dollar and the RMB. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business
or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will
be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in
the future.
The income statements of our operations are translated into
U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign
currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses
and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the
translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income
for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded
as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies
other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities
create fluctuations that will lead to a transaction gain or loss.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter
into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currencies.
Uncertainties with respect to the PRC legal system could
adversely affect us and we may have limited legal recourse under PRC law if disputes arise under our contracts with third parties
.
Since 1979, we believe PRC legislation and regulations have
significantly enhanced protections afforded to various forms of foreign investments in China. However, China has not developed
a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities
in China. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws
and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, sometimes we may
not be aware of our violation of these policies and rules until sometime after violation.
The Chinese government has enacted laws and regulations dealing
with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience
in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims
or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either
of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable
to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business,
financial condition and results of operations.
Under the PRC EIT Law, we may be classified as a
“resident enterprise” of the PRC. Such classification could result in tax consequences to the Company or our non-PRC
resident shareholders.
On March 16, 2007, the National People’s Congress approved
and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1,
2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established
outside of China with “de facto management bodies” within China is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing
rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial
and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise;
however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to
the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident
treatment of a foreign company on a case-by-case basis.
If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we could be subject
to the enterprise income tax at a rate of 25 percent on our worldwide taxable income, as well as PRC enterprise income tax reporting
obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises”
are exempt from enterprise income tax. As a result, if we are treated as a PRC “qualified resident enterprise,”
all dividends paid from our Chinese subsidiaries to us would be exempt from PRC tax.
Finally, the new “resident enterprise” classification
could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our non-PRC stockholders that are not PRC
tax “resident enterprises” and gains derived by hem from transferring our common stock, if such income is considered
PRC-sourced income by the relevant PRC authorities. In such event, we may be required to withhold a 10% PRC tax on any dividends
paid to non-PRC resident stockholders. Our non-PRC resident stockholders also may be responsible for paying PRC tax at a rate of
10% on any gain realized from the sale or transfer of our common stock in certain circumstances. We would not, however, have an
obligation to withhold PRC tax with respect to such gain.
Moreover, the State Administration of Taxation (SAT) released
Circular Guoshuihan No. 698 (“Circular 698”) on December 15, 2009 that reinforces the taxation of non-listed equity
transfers by non-resident enterprises through overseas holding vehicles. Circular 698 addresses indirect share transfers as well
as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a foreigner (non-PRC
resident) who indirectly holds shares in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers
equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5 percent or where the offshore income of his, her,
or its residents is not taxable, the foreign investor is required to provide the PRC tax authority in charge of that PRC resident
enterprise with certain relevant information within 30 days of the transfer. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization
and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will be able to re-assess the nature of the equity transfer under the doctrine of substance over form.
A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up
to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s
challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning
purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a relatively short history,
there is uncertainty as to its application. We (or a foreign investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such foreign investor) should
not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations
(or such foreign investor’s investment in us).
If any such PRC taxes apply, a non-PRC resident stockholder
may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit against such stockholder’s
domestic income tax liability (subject to applicable conditions and limitations). Prospective investors are encouraged to consult
with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and
any available foreign tax credits.
Failure to comply with PRC regulations relating
to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.
In October 2005, the PRC State Administration of Foreign Exchange,
or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents inside China, generally referred to as Circular 75. The policy announced in this notice required
PRC residents to register with the relevant SAFE branch before establishing or acquiring control over an offshore special purpose
company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally
held by those residents. Failure to comply with the requirements of Circular 75 and any of its internal implementing guidelines as
applied by SAFE in accordance with Notice 106 may result in fines and other penalties under PRC laws for evasion of applicable
foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
We requested our shareholders who are PRC residents to make
the necessary applications, filings and amendments as required under Circular 75 and other related rules. We attempt to comply,
and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we
cannot provide any assurances that our shareholders who are PRC residents will comply with our request to make any applicable registrations,
and nor can we provide any assurances that our shareholders who are PRC residents will be able to obtain such applicable registration or
comply with other requirements required by Circular 75 or other related rules or that, if challenged by government agencies, the
structure of our organization fully complies with all applicable registrations or approvals required by Circular 75. Moreover,
because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future strategies. Failure by such PRC resident shareholders or future
PRC resident shareholders to comply with Circular 75 or other related rules, if SAFE requires it, could subject these PRC resident
shareholders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’
ability to make distributions or pay dividends, or affect our ownership structure, which could adversely affect our business and
prospects.
Adverse changes in political and economic policies
of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the
demand for our products and materially and adversely affect our competitive position.
Our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the
economies of most developed countries in many respects, including:
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the amount of government involvement;
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the level of development;
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the control of foreign exchange; and
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the allocation of resources.
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While the Chinese economy has grown significantly in the past
20 years, we believe the growth has been uneven, both geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources. We believe some measures benefit
the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations
may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy
to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization
of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government.
The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies.
Contract drafting, interpretation and enforcement
in China involve significant uncertainty.
We have entered into numerous contracts governed by PRC law,
many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend
to contain less detail and to not be as comprehensive in defining contracting parties’ rights and obligations. As a result,
contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in
China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties.
Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise,
we cannot assure you that we will prevail.
The application of PRC regulations relating to the
overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request approval of
the PRC authorities prior to listing our shares in the U.S.
On August 8, 2006, six PRC government agencies (the Ministry
of Commerce (“MOFCOM”), the State Administration for Industry and Commerce (“SAIC”), the China Securities
Regulatory Commission (“CSRC”), SAFE, the State-Owned Assets Supervision and Administration Commission, (“SASAC”),
and the State Administration for Taxation (“SAT”), jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “New M&A Rules”), which became effective on September 8, 2006. The New M&A
Rules purport, among other things, to require offshore “special purpose vehicles” that are (1) formed for the purpose
of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly or indirectly by PRC
companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas
stock exchanges. On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the CSRC published on its official
website relevant guidance with respect to the listing and trading of PRC domestic enterprises’ securities on overseas stock
exchanges (the “Related Clarifications”), including a list of application materials regarding the listing on overseas
stock exchanges by special purpose vehicles. We were and are not required to obtain the approval of CSRC under the new M&A
Rules in connection with this transaction because we were and are not a special purpose vehicle formed or controlled by PRC individuals.
However, there are substantial uncertainties regarding the interpretation,
application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state
whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. Any violation
of these rules could result in fines and other penalties on our operations in China, restrictions or limitations on remitting dividends
outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial
conditions.
The New M&A Rules also established additional procedures
and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex,
including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional
brands. We may grow our business in part by acquiring other businesses. Complying with the requirements of the New M&A Rules
in completing this type of transaction could be time-consuming, and any required approval processes, including CSRC approval, may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our
market share.
We may face regulatory uncertainties that could
restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens or residents
under PRC law. The grant of stock options under any incentive plan that we adopt in the future would require registration with
SAFE.
On April 6, 2007, SAFE issued the “Operating Procedures
for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company,” also known as “Circular 78”. It is not clear whether Circular 78 covers all forms of equity
compensation plans or only those that provide for the grant of stock options. For any equity compensation plan which is so covered
and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register
with, and obtain the approval of, SAFE prior to their participation in any such plan. In addition, Circular 78 also requires PRC
citizens to register with SAFE and make the necessary applications and filings if they participate in an overseas listed company’s
covered equity compensation plan prior to April 6, 2007. As of the date of this filing, we have not adopted any incentive plans,
but may do so in the future. Any such plan may grant equity compensation, including, but not limited to, stock options, to our
PRC employees and/or directors. The grant of any equity compensation under such a plan to a PRC citizen, however, may under Circular
78 require the PRC citizen to register with and obtain approval of SAFE. We believe that the registration and approval requirements
contemplated in Circular 78 will be burdensome and time consuming. If it is determined that our such a plan, or any equity compensation
grant under such a plan, is subject to Circular 78, failure to comply with such provisions of Circular 78 may subject us and any
recipients thereof to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees
and/or directors. In that case, our ability to compensate our employees and directors through equity compensation would be hindered
and/or prevented.
Capital outflow policies in the PRC may hamper our
ability to remit income to the United States.
The PRC has adopted currency and capital transfer regulations.
These regulations may require that we comply with complex regulations for the movement of capital and as a result we may not be
able to remit all income earned and proceeds received in connection with our operations or from the sale of our operating subsidiary
to the U.S. or to our stockholders.
Our operations and assets in the PRC are subject
to significant political and economic uncertainties.
Government policies are subject to rapid change and the government
of the PRC may adopt policies that have the effect of hindering private economic activity and greater economic decentralization.
There is no assurance that the government of China will not significantly alter its policies from time to time without notice
in a manner with reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion
of productive assets in China remains government-owned. For instance, all lands are state or rural collective economic organizations
owned and leased to business entities or individuals through governmental grants of the land use rights. The grant process is typically
based on government policies at the time of the grant, which could be lengthy and complex. This process may adversely affect our
business. The government of China also exercises significant control over China’s economic growth through the allocation
of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies.
Uncertainties may arise as a result of changing governmental policies and measures. In addition, changes in laws and regulations,
or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of
supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes
in the political, economic or social conditions in China, could have a material adverse effect on our business, results of
operations and financial condition.
Our use of the allocated land may be subject to
challenges in the future.
All land use rights that we own are land use rights relating
to allocated land. The local governmental authorities have granted such land use rights to us for free use or at a discounted levy
rate given our contribution to the development of the local economy. However, pursuant to the Catalogue on Allocated Land issued
by the Ministry of Land Resources of the PRC (the “Catalogue”), the land use rights for allocated land may only be
granted to those specific projects which are in compliance with the Catalogue, subject to the approval of the competent governmental
authorities. We, as a privately owned agricultural producer, may not be qualified to be granted such land use rights for allocated
land according to the Catalogue. Consequently, our use of such land may be subject to challenge in the future, and the legal consequences
could include the confiscation of such land by the governmental authorities or a demand that we pay a market price for purchasing
the land use rights for such land and converting the allocated land use right to a granted land use right.
Because Chinese law governs almost all of our material
agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in a significant loss
of business, business opportunities, or capital.
Chinese law governs almost all of our material agreements. We
cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of
China. The system of laws and the enforcement of existing laws in China may not be as certain in implementation and interpretation
as in the United States. Our inability to enforce or obtain a remedy under any of our current or future agreements could result
in a significant loss of business, business opportunities or capital. It will be extremely difficult to acquire jurisdiction and
enforce liabilities against our officers, directors and assets based in China.
Substantially all of our assets will be located in the PRC and
all of our officers and our present directors reside outside of the United States. As a result, it may not be possible for United
States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments
of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities
laws. Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition and enforcement
of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the federal securities laws.
We do not have insurance coverage.
We currently do not purchase property insurance for our properties,
including raw materials, semi-manufactured goods, manufactured goods, buildings and machinery equipment, livestock, and we currently
do not carry any product liability or other similar insurance, nor do we have business liability or business disruption insurance
coverage for our operations in the PR. There is no insurance covering risks incurred through seasonal variation consequences. In
this respect, we as an engineering based company have qualified personnel and staffs to manage and to limited the happenings of
these relevant risk factors; however there is no guarantee that accidents will not happen, and if they happen, the consequences
may have a material adverse effect on our business, financial condition and results of operations.
Because our cash and cash equivalent are held in
banks that do not provide capital guarantee insurance, the failure of any bank in which we deposit our funds could affect our ability
to continue in business.
Banks and other financial institutions in the PRC do not provide
insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited with banks in the PRC,
and in the event of bank failure, we may not have access to, or may lose entirely, our funds on deposit. Depending upon the amount
of cash we maintain in a bank that fails, our inability to have access to such cash deposits could impair our operations, and,
if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United States Foreign
Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices
Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject
to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in
the PRC. We cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible.
If our employees or agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
Labor laws in the PRC may adversely affect our results
of operations.
On June 29, 2007, the PRC government promulgated a new labor
law, namely, the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The New
Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision
to reduce its workforce. Further, it requires that certain terminations be based upon seniority and not merit. In the event we
decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to effect
such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and results of operations.
Risks Related to Ownership of our Common Stock
Volatility in our common stock price may subject
us to securities litigation.
Stock markets, in general, have experienced in recent months,
and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be
subject to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility, coupled
with depressed economic conditions, could continue to have a depressing effect on the market price of our common stock. The following
factors, many of which are beyond our control, may influence our stock price:
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the status of our growth strategy including the building of our new
production line with any proceeds we may be able to raise in the future;
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announcements of technological or competitive developments;
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regulatory developments in the PRC affecting us, our customers or
our competitors;
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announcements regarding patent or other intellectual property litigation
or the issuance of patents to us or our competitors or updates with respect to the enforceability of patents or other intellectual
property rights generally in the PRC or internationally;
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of our competitors;
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additions or departures of our executive officers;
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release or expiration of lock-up or other transfer restrictions on
our outstanding common stock; and
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sales or perceived sales of additional shares of our common stock.
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In addition, the securities markets have, from time to time,
experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and could cause
our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted securities class action litigation against that company. If we were involved in
a class action suit or other securities litigation, it would divert the attention of our senior management, require us to incur
significant expense and, whether or not adversely determined, have a material adverse effect on our business, financial condition,
results of operations and prospects.
Your ability to bring an action against us or against
our directors and officers, or to enforce a judgment against us or them, will be limited because we conduct substantially all of
our operations in the PRC and because the majority of our directors and officers reside outside of the United States.
We are a Nevada holding company and substantially all of our
assets are located outside of the United States. Substantially all current operations are conducted in the PRC. In addition, all
but one of our directors and officers are nationals and residents of countries other than the United States. Substantial portions
of the assets of these persons are located outside the United States. Thus, it may be difficult to effect service of process
within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments on the civil liability
provisions of the U.S. federal securities laws against us and our officers and directors, none of whom are residents in the United
States and the substantial majority of whose assets are located outside of the United States. It is also uncertain whether the
courts of the PRC would recognize or enforce judgments of U.S. courts. Our PRC Legal Counsel has advised us that the recognition
and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the
country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements
that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according
to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers
if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest.
It is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
We may be a “controlled company” within
the meaning of the NASDAQ Marketplace rules and, as a result, would qualify for and would rely on certain exemptions from certain
corporate governance requirements.
We have submitted a listing application for our shares of common
stock to be listed on the NASDAQ Stock Market LLC. Our chief executive officer controls a majority of the voting power of our outstanding
common stock. As a result, we will unless certain changes are made be a “controlled company” pursuant to the NASDAQ’s
Rule 5615(c) regarding corporate governance standards. Under such rules, when more than 50% of the voting power for the election
of directors is held by an individual, a group or another company, a company is a “controlled company” and may elect
not to comply with certain corporate governance requirements of the NASDAQ Stock Market LLC, including the requirements that:
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A majority of our Board of Directors consist of independent directors;
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Nominating and Corporate Governance Committees solely composed of
independent directors with a written charter defining the committee’s purpose and responsibilities;
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The Compensation Committee be composed entirely of independent directors
with a written charter addressing the committee’s purpose and responsibilities; and
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Performance of the Nominating, Corporate Governance, and Compensation
Committees must be evaluated annually.
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This controlled company exemption does not extend to the audit
committee requirements under Rule 5605(c) or the requirement for executive sessions of Independent Directors under Rule 5605(b)(2).
We may elect to be treated as a “controlled company”
in the event that our shares should become listed on the NASDAQ Stock Market LLC. As a result, there may not be the same protections
afforded to stockholders of companies that are mandatorily subject to all of the corporate governance requirements of the NASDAQ
Stock Market LLC.
One of our directors and officers controls a majority
of our common stock and his interests may not align with the interests of our other stockholders.
Solomon Lee, our chairman, chief executive officer and president,
controls our company and beneficially owns in excess of 50.1% of our issued and outstanding common stock. This significant concentration
of share ownership may adversely affect the trading price of our common stock because investors often perceive a disadvantage in
owning shares in a company with one or several controlling stockholders. Furthermore, our directors and officers, as a group, have
the ability to significantly influence or control the outcome of all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all
of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company
that could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and
might reduce the price of our common stock. In addition, without the consent of Mr. Lee, we could be prevented from entering into
transactions that could be beneficial to us. Mr. Lee may cause us to take actions that are opposed by other stockholders as his
interests may differ from those of other stockholders.
Future issuances of capital stock may depress the
trading price of our common stock.
Any issuance of shares of our common stock (or common stock
equivalents) after the date hereof could dilute the interests of our existing stockholders and could substantially decrease the
trading price of our common stock. We may issue additional shares of our common stock in the future for a number of reasons, including
financing our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions).
Sales of a substantial number of shares of our common
stock in the public market could depress the market price of our common stock, and impair our ability to raise capital through
the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related
securities would have on the market price of our common stock.
We believe that the price of our shares in the OTC BB markets
is adversely affected by the current stigma associated with Chinese companies quoted or listed publicly in the United States.
Although we managed to maintain our liquidity to a certain degree,
our share price has suffered (e.g., our shares presently trade at roughly 25% of our net tangible asset value per share). Many
Chinese companies suffer from this stigma, which tends to affect both market prices and liquidity, and our company is no exception.
Reasons with varying degrees of legitimacy explain this stigma, including but not limited to: (i) investors’ experience of
losses suffered in the course of investing in other Chinese companies, (ii) the difficulty some Chinese companies have had in preparing
auditable financial statements, and (iii) the difficulty in enforcing US judgments in foreign courts generally. All of these have
contributed to a negative perception by some US investors regarding all Chinese companies publicly traded on US markets. Regardless
of the reasons for this perception, if it continues over a sustained period of time our market prices may continue to trade below
net tangible asset value per share. This would increase risk that our shareholders could lose the funds they invested in our company.
It could also impact our ability to maintain our growth plan on schedule, which would adversely affect our business and financial
condition.
If our shares of common stock remain subject to
the U.S. “Penny Stock” Rules, investors in our company may have difficulty re-selling their shares of our common stock
as the liquidity of the market for our shares may be adversely affected by the impact of the “Penny Stock” Rules.
Although we anticipate that our shares of our common stock will
within the foreseeable future trade on the NASDAQ Capital Market, in the event that shares of our common stock do not become listed
on the NASDAQ Capital Market or if our shares are in the future delisted from the NASDAQ Capital Market, it may be more difficult
for our stockholders to sell the shares of our common stock. A “penny stock” is generally defined by regulations of
the U.S. Securities and Exchange Commission (“SEC”) as an equity security with a market price of less than US$5.00
per share. However, an equity security with a market price under US$5.00 will not be considered a penny stock if it fits within
any of the following exceptions:
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the equity security is listed on a national securities exchange;
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the issuer of the equity security has been in continuous operation
for less than three years, and either has (a) net tangible assets of at least US$5,000,000, or (b) average annual revenue of at
least US$6,000,000; or
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the issuer of the equity security has been in continuous operation
for more than three years, and has net tangible assets of at least US$2,000,000.
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Although we believe our common stock is not a penny
stock based upon the exception (iii) above, we cannot provide any assurance that in the future our common stock will not be classified
as Penny Stock.
If an investor buys or sells a penny stock, SEC regulations
require that the investor receive, prior to the transaction, a disclosure explaining the penny stock market and associated risks.
Furthermore, trading in our common stock is currently subject to Rule 15g-9 of the Exchange Act, which relates to non-exchange
listed securities. Under this rule, broker/dealers who recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s
written agreement to a transaction prior to sale.
The low price of our common stock has a negative effect on the
amount and percentage of transaction costs paid by individual shareholders. The low price of our common stock also limits our ability
to raise additional capital by issuing additional shares. There are several reasons for these effects. First, the internal policies
of certain institutional investors prohibit the purchase of low-priced stocks. Second, many brokerage houses do not permit low-priced
stocks to be used as collateral for margin accounts or to be purchased on margin. Third, some brokerage house policies and practices
tend to discourage individual brokers from dealing in low-priced stocks. Finally, broker’s commissions on low-priced stocks
usually represent a higher percentage of the stock price than commissions on higher priced stocks. As a result, our stockholders
may pay transaction costs that are a higher percentage of their total share value than they would if our share price were substantially
higher.
As an issuer of “penny stock” the protection
provided by federal securities laws relating to a forward-looking statement does not apply to us. As a result we could be subject
to legal action.
Although federal securities laws provide a safe harbor for forward-looking
statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to
issuers of penny stocks. As a result, if we are a penny stock, we will not have the benefit of this safe harbor protection in the
event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was
misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
Such an action could hurt our financial condition.
The issuance of any of our equity securities pursuant
any equity compensation plan we may adopt may dilute the value of existing stockholders and may affect the market price of our
stock.
In the future, we may issue to our officers, directors, employees
and/or other persons equity based compensation under any equity compensation plan we may adopt to provide motivation and compensation
to our officers, employees and key independent consultants. The award of any such incentives could result in an immediate and potentially
substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of
these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have
an adverse effect upon the price of our stock. In addition, if the holders of outstanding convertible securities convert such securities
into common stock, you will suffer further dilution; at present, the only convertible securities issued and outstanding are the
7,000,000 shares of Series B Preferred Stock, which are convertible into common stock on a one-for-one basis.
The requirements of being a public company may strain
our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
We are a public company and subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other
things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial
reporting. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of
our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources
and will take a significant amount of time and effort to complete. If we fail to maintain compliance under Section 404, or
if in the future management determines that our internal control over financial reporting are not effective as defined under
Section 404, we could be subject to sanctions or investigations by the NASDAQ Stock Market should we in the future be listed
on this market, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this
could cause a decline in the market price of our common stock. Any failure of our internal controls could have a material adverse
effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or
efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal
controls from our independent auditors. We may need to hire a number of additional employees with public accounting and disclosure
experience in order to meet our ongoing obligations as a public company, particularly if we become fully subject to Section 404
and its auditor attestation requirements, which will increase costs. Our management team and other personnel will need to devote
a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public
company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial
condition and results of operations.
Our shares of common stock may be thinly traded,
so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an active public market
for our common stock will develop or be sustained. Our common stock is currently traded on the OTC Bulletin Board where the shares
have historically been thinly traded, meaning that the number of persons interested in purchasing our common stock at or near bid
prices at any given time may be relatively small or non-existent.
This situation may be attributable to a number of factors, including
the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others
in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons,
they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase
of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days,
weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We
cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained or not diminish.
We may become involved in securities class action
litigation that could divert management’s attention and harm our business.
The stock market in general, and the shares of early stage companies
in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate
to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past, following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has often been brought against that company. If the market price
or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive
and divert management’s attention and resources from managing our business.
As a public company, we may also from time to time make forward-looking
statements about future operating results and provide some financial guidance to the public markets. Our management has limited
experience as a management team in a public company and as a result projections may not be made timely or set at expected performance
levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely
affect the stock price could result in losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions
issued by the SEC.
Securities analysts may elect not to report on our
common stock or may issue negative reports that adversely affect the stock price.
At this time, no securities analysts provide research coverage
of our common stock, and securities analysts may not elect not to provide such coverage in the future. It may remain difficult
for our company, with its small market capitalization, to attract independent financial analysts that will cover our common stock.
If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the stock’s actual
and potential market price. The trading market for our common stock may be affected in part by the research and reports that industry
or financial analysts publish about our business. If one or more analysts elect to cover our company and then downgrade the stock,
the stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility
in the market, which, in turn, could cause our stock price to decline. This could have a negative effect on the market price of
our common stock.