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.
Company 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.
We used to operate a dairy segment but
sold it in December of 2009. We made the determination to do so because we believed 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 supplies from
various regional dairy farmers of the country who received very little value yet were expected to deliver high quality milk. As
a result, the small dairy farmers were essentially forced to use chemicals in their milk to bring up the milk’s protein level
that eventually caused the down-fall of the industry. In our opinion, this state of affairs led to the collapse of the Chinese
dairy industry in 2010. After the sale of our former dairy business, we decided to implement our growth plan to develop the vertically
integrated business operations in (i) cattle fattening and producing of beef products and (ii) fishery for the cultivation of fish
and prawn and related products, as is further described elsewhere in this Annual Report.
Corporate Acquisitions
On September 5, 2007, we acquired two existing
businesses in the People’s Republic of China, or the 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. HST was dissolved in 2010.
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.
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”), 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 (“EAPBCF2”) (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., China (“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.
Tables of information:
The
tables below show:
|
(1)
|
Table 1 shows the Company’s Corporate Structure, where the boxes marked “Unincorporated project companies”
mean that their respective Sino Foreign Joint Venture Company (“SJVC”) has not been formed officially, and that the
Company has paid a 25% deposit as consideration toward their acquisition pending the official formation of their corresponding
SJVC, all of which are anticipated to occur between December 31, 2013 to June 30, 2014.
|
|
(2)
|
Table 2 shows the abbreviation of the names of the companies.
|
|
(3)
|
Table 3 shows the location of the Company’s businesses
|
|
(4)
|
Table 4 shows the business activities of the Company’s businesses.
|
|
(5)
|
Table 5 summarizes the general information of our business and operation models.
|
TABLE 1: CORPORATE STRUCTURE
TABLE 2: ABBREVIATION OF THE NAMES OF THE COMPANIES
|
|
Abbreviation
|
|
Names of entities
|
|
Date of formation
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated Companies
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
Unincorporated Project Companies
|
|
|
|
|
|
|
|
|
|
13
|
|
Wholesale Center 1 or APNW
|
|
Guangzhou City A Power Nawei Trading Co. Ltd. China
|
|
2012
|
14
|
|
ZSAPP or Prawn Farm 2
|
|
Zhongshan A Power Prawn Culture Farms Development Co. Ltd. China
|
|
2012
|
15
|
|
EBAPCD or Prawn Farm 1
|
|
Enping City A Power Prawn Culture Development Co. Ltd. China
|
|
2011
|
16
|
|
Cattle Farm 2
|
|
Enping City A Power Beef Cattle Farm 2 Co. Ltd. China
|
|
2011
|
All “Unincorporated Project Companies”
are private companies formed in China with Chinese citizens acting as their legal representatives as required by company law of
China. These companies’ names will be changed in accordance with the names granted by the relevant authorities once their
corresponding Sino Foreign Joint Venture Company will officially have been formed.
TABLE 3: LOCATION MAP OF GROUP’S BUSINESS
TABLE 4: BUSINESS ACTIVITIES OF THE GROUP’S COMPANIES
ABBREVIATION Names
|
|
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 operation, 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 holders of Technology Licenses.
|
CS
|
|
Dormant
|
CH
|
|
Dormant
|
JHST or (HU Plantation)
|
|
H U Plantation, Immortal Vegetable farming, processing and sales of produces and products.
|
JHMC or (Cattle Farm 1)
|
|
Rearing of cattle at Cattle Farm 1 which is a demonstration farm
|
SJAP
|
|
Existing activities:
Manufacturing of organic fertilizer, bulk
and concentrated livestock feed, and rearing of cattle and corporative farming
Expected Added activities by 2014
Slaughter and de-boning of cattle and value
added processing of beef products
Manufacturing of Enzyme
Electricity generation via Mash Gas Station
|
|
|
|
JFD or (Fish Farm 1)
|
|
Growing of fish (sleepy cod species), eels (Flower Pattern species) and prawns (or shrimps) at Fish Farm 1
|
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
|
|
|
|
Wholesale Centre (1)
|
|
Marketing, sales and distribution of seafood
and meats and related products.
|
ZSAPP or (Prawn Farm2)
|
|
Hatchery and Nursery operation of prawns
(or shrimps)
Growing of prawns (or shrimp) using open-dams
applying re-circulating filtration systems.
|
EBAPCD or (Prawn Farm 1)
|
|
Growing of prawns (or shrimp)
|
Cattle Farm (2)
|
|
By year 2014-Cattle Growing
|
TABLE 5: SUMMARY OF BUSINESS AND OPERATION MODELS AND TECHNOLOGIES
Our Sino Foreign Joint Venture Companies (SJVC)
There are two methods that we use to obtain our SJVC’s
in China;
|
¨
|
One where we 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 HAS.
|
¨
|
The other way involves us acquiring the entity only after its business
operation has been developed and started to generate revenues; in this case, we would have evaluated 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 the Joint Venture Agreements bear standard
terms and conditions, in other words where the investors agree:
|
1.
|
to appoint us as their Consulting Engineer granting the right for us to appoint local qualified
sub-contracts to build/construct the farms and local suppliers to supply all plants and equipment and related parts and components
of the farms;
|
|
2.
|
to let us have full management right on the construction and development of the farm and the management
right to manage the operation of the related developed business operation of the farm afterward and as the sole marketing and distribution
agent of the farm for the sales and marketing of the farm’s produces and products;
|
|
3.
|
to 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.
|
in the event that we decide to acquire the developed farm and related business operations, the
investors shall agree to incorporate a Sino Foreign Joint Venture Company to acquire all assets and liabilities of the 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 and the investors keep 25%
of the SJVC; and
|
|
5.
|
in the event if we decide not to acquire the developed farm and related business operation, the
investors agree to appoint us as the management of operation of the farm for a minimum period of 15 years.
|
Our Employees
The following table describes our employees and for which divisions
they work as of the date of this Annual Report.
Abbreviation
|
|
Management
|
|
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Skilled
|
|
|
Non-skilled
|
|
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Casual
|
|
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Total
|
|
SIAF, including CA, MEIJI, APWAM, TRW, CS and CH
|
|
|
12
|
|
|
|
15
|
|
|
|
3
|
|
|
|
0
|
|
|
|
30
|
|
JHST
|
|
|
5
|
|
|
|
18
|
|
|
|
43
|
|
|
|
128
|
|
|
|
194
|
|
JHMC
|
|
|
2
|
|
|
|
2
|
|
|
|
13
|
|
|
|
16
|
|
|
|
33
|
|
SJAP
|
|
|
16
|
|
|
|
26
|
|
|
|
65
|
|
|
|
150
|
|
|
|
257
|
|
JFD
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
0
|
|
|
|
14
|
|
HSA
|
|
|
5
|
|
|
|
5
|
|
|
|
12
|
|
|
|
0
|
|
|
|
22
|
|
Total
|
|
|
42
|
|
|
|
72
|
|
|
|
142
|
|
|
|
294
|
|
|
|
550
|
|
Cooperative Farming Model
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 so that we have a win-win outcome for local small farmers who cooperate with
us as an intermediary to produce the goods to supply our farms. We believe that this model ensures that we have a supply pipeline
so we can ramp up production at lower margin cost to our operations albeit on favorable trade terms from us. We then work with
the local government and with their help we introduce and initiate Farmers Cooperatives, such as in Huangyuan County, Xining City.
This concept of strategic alliance with smallholder farmers under a Cooperative Farming Model was originated 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 is 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 is also prepared
based on our enzyme. The use of the enzyme is synergistic as the production of fertilizer and livestock feed is permissible during
12 months of the year, which is a competitive advantage.
|
|
•
|
The farmers use the bio-organic fertilizer on the soil 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’ averaged
annual incomes increased from RMB 480/Mu (about 660 square meters)/year to RMB 2,100/Mu/year by planting crops and pasture for
us applying our fertilizer with harvesting being done by our teams of harvesting workers using our machineries and equipment.
Farmers who grow cattle using our livestock
feed and sold their cattle to us has annual incomes increased by 4 times because it used to take them 4 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.
Our Technologies
A Power Re-circulating Aquaculture System
and Technology
We built our fishery (both for growing
of fish or shrimp) farms 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 A Power Technology and System is “an engineered,
self-contained water treatment and re-circulating aquaculture system (“RAS”) for the growth of aquatic animals on a
commercial scale”, whereas in the farm all fish grow-out tanks are in modules that can be built in various sizes to adapt
to the growing capacity of the farm. This technology is proven, having been used in Europe and Australia for over 30 years. The
Company attributes the following benefits to the system: improved productivity, lower labor requirements, mortality rates of less
than 8% and feed-to-fish conversion ratios of 1:1 for pallet feed and 2:1 for non-pallet feed. The indoor system is fully controlled,
tank water treated through micro-bio bacterial compartments to digest soluble wastes, solid waste separators remove the insoluble
wastes, UV and O3 chambers clean the water and oxygen of the water is maintained by in-built aerators with water temperature controlled
by heat exchangers, which is then recycled at the rate between 60 times to 120 times per hour adjustable according to the motion
requirement of the growing species of fish with water temperature being maintained at suitable ranges to suit the species of fish.
Importantly, this system does not require chemicals or antibiotics and is pollution free. 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 fishes and prawns 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 and our RAS has the ability to maximize the utilization of land because our technology can produce
greater quantity per surface area compared to the existing open-dam or caging aquaculture systems and technologies (which are rather
old systems) used in China; for instance, a standard AP Modular tank has a surface area of 100 m2 and the capacity to produce over
40 MT of prawns (or shrimp) per year whereas the old systems’ average of production is at 6 Mt/660 m2 per year; in other
word, we can produce annually 1,600 MT of prawns (or shrimp) per acre of land whereas the old systems are producing 36 MT of prawns
(or shrimp) per acre per year which gives us a considerable advantage. Now that we have established a few commercial APRAS farms
in China and proven their commercial viability, we believe the Company has the potential to venture into developing aquaculture
projects with annual productivity over hundreds of thousand metric tons will not be too far away.
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. The end results are that our
cattle have better growth rate and are healthy animals with tender meats that have an aromatic favor.
Our Enzyme Technologies (“Bacterial
and Bio-organic Manufacturing Technology”).
We have two Enzyme Technologies, one that
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 (T2) and another one that we brought from a third party that is being used in our Cattle Farm 1’s operation to
produce livestock feed (T1) and at HSA to produce 100% pure organic mixed fertilizer.
There are fundamental differences between T1 and
T2 as shown in Table below:
Fundamentals
|
|
T1 (Page 65)
|
|
T2 (Page 40)
|
Required temperature for fermentation
|
|
15 degree C
|
|
4 degree C
|
Days required to complete fermentation processes
|
|
21 days
|
|
7 days
|
Temperature variation for storages
|
|
Up to -10 degree C
|
|
Up to -30 degree C
|
Shelve-life
|
|
One year
|
|
Two years or more
|
Protein % increases after fermentation
|
|
3%
|
|
6%
|
T2 is more practical and suitable to apply
at colder climate regions such as at SJAP’s operation at Qinghai, Xining which typically has 6 months of winter at average
temperature of -20 degree C and below whereas T1 is more suitable to regions where the climate is milder, such as at JHMC (Cattle
Farm 1) and HSA where there are typically 10 months of warm and hot climate with mild winters.
An example showing the manufacturing
process of Bulk Livestock Feed:
Raw materials consisting of crop wastes
as well as locally grown and available wild wheat plus wild wheat sterns, wild peas with sterns and leaves, and selective pastures
grown, will be cut and rolled into bales with the enzyme being added during the cutting and rolling process then 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 and when the farmers will require them to
feed their cattle or sheep.
Our Formulas used for the manufacture
of Concentrated livestock feed:
We have 6 formulas that we apply in our
concentrated livestock feed manufacturing process, and these are formulas invented by our joint venture partners who were professors
at the University of Xining before they joined our operation at SJAP. All cattle’s daily dietary needs include the consumption
both of the bulk and concentrated livestock feed that are tailor made to suit each stage of their growing cycles (e.g., milking
cows require higher protein diet while weaning calves need more calcium to grow body frames, and fattening cattle need higher energy
input to gain body weight) in order that optimal growth efficiency be achieved. The bulk livestock feed provides the carbohydrates
while the 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 will enhance feed with specific concentrated raw
materials (i.e. soya bean, corns and seeds, etc.), such that no excessive raw materials will be wasted and consumed thus producing
healthy cattle with maximal efficiency. At the same time this will reduce excessive body fat of growing cattle.
In this respect SJAP has done many tests
to show that on average the fattened cattle has around 15 Kg of fat/body weight of 800 Kg if they were not fed with our concentrated
Livestock feed, and the fattened cattle fed with our concentrated livestock feed on average has only 6 Kg of fat/body weight of
800 kg which means that saleable net weight gain per cattle is 9 kg because fats are not saleable.
Vertical Integration
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 have following activities developed to support one another:
¨
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 ZSAPP (or Prawn Farm 2) to service such purpose.
¨
Grown-out
farms. For example, we established Fish Farm 1 and Prawn Farm 1 for the growth of aquatic animals.
¨
Marketing
and distribution networks, e.g., we are developing Wholesale Center 1 and chains of restaurants with the intention that they will
eventually be used as part of our ultimate distribution channels to sell our aquatic seafood. Our vision of our distribution channels
consists of sales channels via secondary wholesalers, restaurant and hotel distributors, super market chain distributors and commissioned
sales agents. Some of these will be in direct competition to health shops and super market 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.
Vertical integration for our organic
beef and cattle business developments at SJAP
: We intend to have following activities developed to support one another:
¨
Research
and Development in the enzyme and feed technologies, growing techniques, management systems, breeding stocks, analysis and formulation,
marketing and sales, logistic and transporting, and many aspect information of the industry(we have established this activity in
house at SJAP).
|
¨
|
Manufacturing of organic fertilizer (in
operation since 2009).
|
|
¨
|
Cultivating and planting and harvesting
of organic crops and pasture (ongoing since 2010).
|
|
¨
|
Manufacturing of Bulk Livestock Feed (ongoing
since 2010).
|
|
¨
|
Manufacturing of Concentrated Livestock
Feed (commenced operation since March 2013).
|
|
¨
|
Cattle Growing and rearing (in operation
since 2010).
|
|
¨
|
Farming corporative (initiated and formed
in 2010 and currently we have over 86 members in the corporative).
|
|
¨
|
Slaughtering, deboning and value added
manufacturing of cattle, beef meats and products (that we are developing and constructing starting in January 2013 targeting completion
of and starting operation of Phase (1) developments during the first quarter of 2014.
|
|
¨
|
Marketing and sales and distribution networks
(that we plan on starting during the fourth quarter of 2013).
|
|
¨
|
Manufacturing of enzyme (which we intend
to start pre-mobilization work within sometimes at the end of final quarter 2013).
|
|
¨
|
Development of mash gas station to complete
our environmental program such that we shall able to recycle all of our cattle waste into raw material for the manufacture of our
organic fertilizer and to supply electricity to our regional neighbors within the District of Huangyuan to service our corporate
social responsibility.
|
Information on Marketing, sales and
distribution, produces and products:
The Fishery Sector
The Chinese markets prefer and pay premium
prices for Live Aquatic animals, and there are many live seafood wholesale markets with hundreds of wholesalers selling live seafood
in many Provinces of China supported by well-developed logistics services in road and air transports. As such we currently are
selling our aquatic seafood mainly to wholesalers in the wholesale markets at Shanghai City, Southern Coastal Cities and the Guangzhou
City which are the more dominant markets.
|
¨
|
Fish Farm 1: We produce Sleepy Cod which
is a tropical species growing mainly in the Southern regions of Guangdong Province, and an attractive breed for aquaculture purposes
as it is a relatively small fish that grows best in our APRAS and provides “white pieces of fillets with flaky flesh that
are suitable to the gourmet taste liked by Asians,” and is similar to that of the much-prized marble or sand goby. 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 ideal environments to grow Sleepy Cod that always have better appearance and shelf-life when they get to the wholesalers
with the important advantage of being free from chemicals and pollutants. Therefore our Sleepy Cod are well received and in demand
and creating a niche market such that in general our Sleepy Cod are selling at premium prices receiving between 8 to 10% above
the daily market averages.
|
The Sleepy Cod
Eels
|
¨
|
From Prawn Farm 1: Stocking of prawn fingerling
(baby prawns of 7 to 15 days old) began during the first quarter of 2013 for growing into marketable sized prawns from count sizes
of 90/100 piece/Kg and larger. Larger prawns always demand higher premium prices. There are two varieties being grown; one is the
Mexican White Prawns (or shrimp) 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; the other variety is a locally bred species that we
call the “LawZi Prawn” (its direct English translation is “Big Giant Prawns”) originated from Thailand
but now well developed in China. The LawZi Prawns are grown in fresh water and are in high demand in many gourmet kitchens especially
so when they are over 50 grams/piece.
|
The Mexican White Prawns (or Shrimp)
The LawZi Prawns (or The Big Giant Prawns)
|
¨
|
From Prawn Farm 2: Up to now it has been
developed as a Hatchery and Nursery producing Prawn Fingerling and selling them to the regional prawn farmers. Currently the Company
produces and sells mainly Mexican White Prawn Fingerling (or baby prawns) and expects to sell the LawZi Prawn fingerling during
the third quarter of 2013, having successfully bred the second generation of LawZi brood stock prawns crossed between the wild
species and domestic species during the first quarter of 2013.
|
|
|
The 5 days old baby prawns
|
The 20 or more days old baby prawns
|
The Organic Fertilizer, Livestock Feed and Cattle growing
at SJAP:
|
¨
|
Currently SJAP is manufacturing organic
fertilizer (since 2009), Bulk livestock feed (from 2010), Concentrated Livestock feed (starting March 2013), and has been growing
cattle since 2011.
|
Organic Fertilizer
Bulk Livestock Feed
The Organic Fertilizers are
sold mainly to our corporative 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 station and part will be sold to our corporative
growers for growing cattle with the remaining part being sold to other regional farmers.
Concentrated Livestock Feed
The Concentrated Livestock Feed (“CLSF”)
complements SJAP’s bulk livestock feed to provide the local cattle and sheep farming industry with a unique and completed
feed formula that can cater to the growing 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 excess concentrated feed being wasted on over feeding, resulting in
worthless excess fat in mature animals. In this respect, 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 reserved emergency livestock feed inventory. From March 2013
onward, SJAP generates additional revenue generated from the sales of CLSF.
The cattle we grow are primarily Simmental
(a common breed introduced to China in the early 20
th
century), Charolais, and some Angus cattle. In general, we buy
6 to 8 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 corporative farmers at their own farms for a further 6 to 10 months until they will reach body weight averaging
700/800 Kg/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 calculated to about 10% above the daily market
averages. We also earn between 10 to 12% from buying the cattle back from the corporative farmers and resold to the cattle wholesalers.
SJAP is constructing a slaughter house,
a de-boning factory and a value added processing factory that are targeted to be completed and in operation by early 2014. Until
such time, there will be no processed or frozen meats marketed and sold. However SJAP is planning on developing its marketing and
sales network beginning in the fourth quarter of 2013 based on following marketing plans:
|
¨
|
Developing sales offices in main cities of China (starting at Beijing,
Shanghai, Changshi and Guangzhou City).
|
|
¨
|
Initiating and establishing sales with established and reputable first
and second tier regional distributors.
|
|
¨
|
Initiating and establishing sales into first and second tier super
market chains either as direct suppliers or as tenants.
|
|
¨
|
Developing our own chains of butchery shops and outlets using franchising
methods.
|
|
¨
|
Developing our own restaurants based on the concept of our “Bull”
restaurant that sells mainly beef dishes that can use up to 85% of a whole cattle instead of the normal 30% used by the most of
the top restaurants and hotel caterers. In this respect, the expansion and development of the “Bull” restaurants will
be done through franchising methods.
|
|
¨
|
Developing our own sales teams and personnel to sell and market our
meats and products to the first and second tier restaurants and secondary distribution markets regionally.
|
Business Overview, Businesses and
Progress reports
We introduced our business activity in
China in 2006 as an engineering consulting company specializing in building agriculture and aquaculture farms and the developments
of related business operation using our expertise and knowhow knowledge in specific agriculture and aquaculture technologies (i.e.
our A Power Re-circulating aquaculture system and technology and our cattle growing feeding and caring technology), engineering
designs of, and management systems for, indoor and on-land fishery and cattle farms and vegetable farms (based on hydroponic technologies)
adaptable to various climate and growing conditions, production of organic, green and natural agriculture produces after having
developed many aquaculture fishery farms and cattle farms and related business developments including sales and marketing of produces
and products in Australia and Malaysia since 1998.
In 2007 we acquired our first Sino Foreign
Joint Venture company in China operating a dairy farm that was sold to our joint venture partner in 2010 followed by the acquisition
of JHST (or the HU Plantation) in 2009, the establishment of SJAP (our major cattle growing operation) in 2009 and started the
building of our first fishery farm (JFD or Fish Farm 1) in 2010 and continuing until today when we conduct all the activities shown
in Table 2 above.
In all these developments we were the master
engineers and pioneered the construction and building of farms from bare land into fully operational facilities covering the construction
and building of infrastructures, staff quarters, offices, processing facilities, storages, and all related production facilities
and their related managements responsible in developing all business activities into effective and efficient operation including
all training of personnel.
Our Company is now maturing into a company
dedicated to the agriculture and aquaculture industry. We are currently operating the HU Plantation, maintaining our services in
engineering consulting, and specializing in the developments of two major products, namely meat derived from the growing of beef
cattle and seafood derived from the growing of fish, prawns (or shrimp) and other marine species having niche markets with revenues
generating from activities that we divide into five standalone business divisions or units: (1) fishery, (2) cattle, (3) beef organic
fertilizer, (4) HU Plantation and (5) Marketing and Trading.
We started our first 5 year business plan
in 2010 aiming to develop the concept of “From Farm to Plate” that would be supported with the vertical integration
and services defined above.
Below is a summary of our operational and/or
developing stage business activities carried out by our existing or newly formed subsidiaries.
1.
Fishery Division operated by Capital
Award Inc. (“CA”)
CA generates revenues from two main activities:
“Engineering and Consulting Services” and “Marketing and Sales of Aquatic seafood” described below:
Engineering and Technology Services via
Consulting and Service Contracts (“CSC’s”) for the development, construction, supplies of plants and equipment
and management of fishery (and prawn or shrimp) farms and related business operation.
CA has entered into numerous CSC’s;
their information and status are shown in the table below:
Notes to the developments in progress:
Name of the
developments
|
|
Location of
development
|
|
Land area or Built
up
area
|
|
Current Phase
&
Stage
|
|
Commencement
date
of development
|
|
(Estimated)
development's
completion date
on or
before
|
|
|
Contractual
amount
|
|
|
% of completion as at
April 15.2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
Fish Farm (1)
|
|
Enping City
|
|
9,900 m2
|
|
fully operational
|
|
July. 2010
|
|
Jun-11
|
|
|
$5.3 million
|
|
|
Fully operational
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prawn Farm (1)
|
|
Enping City
|
|
23,100 m2
|
|
2 phases
|
|
Phase 1 on June 2011
|
|
Phase (1) on December 2012
|
|
|
$11.6
million
|
|
|
Phase (1) in operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fish Farm (2) "The Fish & Eel Farm
|
|
Xin Hui District, Jiang Men.
|
|
33,000 m2
|
|
3 Phases
|
|
Phase 1 January 15, 2013
|
|
Phase 1 June 2014
|
|
|
14.9
million
|
|
|
35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prawn Farm (2) The Hatchery & Nursery & Grow-out prawn farm
|
|
San Jiao Town, Zhong San City,
|
|
120,000 m2
|
|
2 phases
|
|
Phase (1) and Phase (2) May 2012
|
|
Phase (1) Dec. 2012 and Phase (2) December 2013.
|
|
|
Phase
(1) $8.5 m and Phase (2) 8.67 Million
|
|
|
Phase (1) fully operational and Phase (2) 65%
|
|
(a)
|
Phase 1 development work on a prawn hatchery and nursery farm (Prawn Farm 2) with Zhongshan A Power
Prawn Culture Development Co. Ltd. (“ZSAPP”) (a proposed name of this future SJVC), where the Company owns a direct
25% equity interest, was completed in May 2012. Prawn Farm 2 has generated income since May 2012. Phase 2 development works involves
development of facilities for the production of prawns, brood stock, and associated expansion activities that were commenced in
May 2012 and are expected to be completed during 2013. The work that has occurred includes 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 is 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.
|
|
(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 are engineering a solution that should resolve this problem. As of the
date of this Annual Report, our engineering solution involves a semi-open dam and semi-enclosed farm concept built with groups
of independent filtration and water recirculation systems that are suitable for the growing of prawns, fishes and/or eels in this
farm. We are dividing work flow into phases and stages of work to yield the optimal financial efficiency and benefits.
|
|
(c)
|
The development work on a prawn farm at Huanyuan County, Xining City (Prawn Farm 3) is for an unrelated
third party Chinese investor, Wu Aquaculture A Power Development Co. Ltd. (a proposed name for this future SJVC) originally 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, after the winter season. 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. This relocation will require the approval of local authorities, resulting in a delay and a
new time schedule dependent on the approval by authorities and the said approval is still in progress.
|
Pictures showing Fish Farm 1
Views of the Fish Farm 1 complex situated
on 9,900 m2 of land in district of Enping City. It is a fully self-contained complex showing as one of typical development models
being developed in China.
The farm has 16 grow-out APM tanks growing
fish in-door and on land with the capacity to grow-out over 1,000 MT of fish/year
Pictures showing Prawn
Farm 1
Situated in the district of Enping City
on 26,100 m2 of land is our Prawn Farm 1 with a capacity to grow-out 250/300 MT of prawns/year and again is contained in a fully
self-serviced complex with office, staff quarters, laboratory, dried and cold storages, stand-by generators’ room, heating
rooms, water storage and tanks, landscaping gardens etc
.
The plastic netting rolls are designed
to provide shelter for the prawns and thus to increase the grow out capacity of the tanks.
Pictures showing Prawn Farm 2
Prawn Farm 2 has a much bigger land bank
of 120,000 m2 because apart from its core function of being the hatchery and nursery operation to supply quality prawn fingerling,
the farm is now developing open grow-out dams that have built-in RAS filtration systems to save on water consumption as well as
to provide cleaner water aimed at reducing the impact of pollution
.
The tanks in the picture are nursery tanks.
Each tank has the capacity to nurture up to 10 million prawns every 5 days per 30 cubic liters (or 30 MT) of water. Prawn Farm
2 is also built as a fully self-contained complex with all associated facilities.
Marketing and Sales of aquatic seafood:
CA is the sole marketing, sales and distribution
agent of the Re-circulating Aquaculture System (“RAS”) fishery and prawn (or shrimp) farms, such that it purchases
all marketable sized fish and prawns (or shrimp) from the farms and in turn sells them to the wholesale markets and at the same
time supplies the farms with fingerling, baby or adult fish or prawns and stock feed.
Our RAS farms do not produce enough fish
or prawns to warrant the establishment and sales of value added processing products or facilities given that the Chinese markets
pay the best prices for live fish and prawns. Therefore, currently CA sells only live fish and prawns.
In this respect, CA generates revenues
from the sales of seafood brought from farms that are either a subsidiary of the Company or an incorporated project company and
contracted growers in the manner described below:
Fish Farm 1:
JFD is the owner and
operator of Fish Farm 1; the Company presently owns a 75% equity interest in JFD.
The Fish Farm 1 complex represents our
typical model of developments and is built on a block of land measuring 9,900 m2 containing staff quarters providing accommodation
for up to 15 workers, a self-contained office, a laboratory, external live bait holding tanks, all season red worm nurturing tanks,
dry and cold storages, workshops, processing facilities, a heating room, 500 MT of water holding tanks, landscape gardens, standby
generator and rooms, all related underground and on land infrastructure and a fish grow-out farm of 4,000 m2 that has all associated
facilities to support 16 RAS tanks with each tank measuring 10 meter (m) x 10 m x 3 m in depth holding up to 240,000 liters (or
240 Metric Tons (MT) of water and has the production capacity to grow up to 80 MT of aquatic animals per year depending on its
stocking cycles (or frequency of stocking of fish) and the initial size of the fish being stocked at 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/fish) such that its annual production is only up to 30/35 MT/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 4 times per year, enhancing annual
production capacity at up to 80 MT/tank. Initially, Fish Farm 1 was designed to grow sleepy cod, which had a niche market with
most 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 size in 2012 shows that total
annual 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, Southern Coastal towns of Guangdong and markets 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/Kg until the cheaper imports from other Asian countries were permitted
to be imported to China at a low tariff starting in January 2013, such that the wholesale prices fell sharply to an average of
US$15/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
at around US$5/fish grown at 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/Kg, and low mortality rate at the average below 8% coupled
with our recorded 3.5 stocking and harvesting cycles per year, Fish Farm 1consistently achieved good sales revenues with gross
profit margin of 50/55 % in 2011 and 2012. However its gross profit margin has fallen so far this year.
In this respect and in mitigating such
situation, during the first quarter of 2013 we stepped up the modification of our RAS tanks to adapt to the growth of eels with
4 tanks and prawns (or shrimp) with 8 tanks and the expansion program in the Research and Development Station to accommodate the
nurturing of Flower Pattern Eels’ fingerlings to grow into adult eels (of 500 gram/eel and upward) that would be supplied
to Fish Farm 1 to grow the adult eels into marketable sized eels (around 1.5 kg/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
is the proposed 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 1. EBAPCD will generate revenue starting during the third quarter of 2013. Capital Award
will recognize income from purchases of prawns from Prawn Farm 1 and selling them to the wholesale markets.
Recently we placed our first 500,000 (Mexican
White) prawn fingerling in Prawn Farm 1, and as of the date of this Annual Report management reported that prawns are meeting growth
benchmarks with low mortality reaching around 15 cm/prawn in size. 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/ 300 MT of live prawns in 2013.
We have seen a rapid increase in live prawn
prices in the first quarter of this year (averaging 100% increases in prices compared to the corresponding period last year) with
current wholesale price averaging US$15/Kg for size of 80s (equivalent to 80 to 90 pieces of prawn/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 big giant prawns, Green Prawn,
Banana Prawns and Tiger Prawns). The average time required to grow prawns (of Mexican White Species or Big Giant Prawns) from 14-day
old fingerlings to marketable sizes in commercial scale at the Prawn Farm 1 under our RAS system is estimated conservatively between
60/70 days, 90/100 days and 120/130 days for sizes of 80s, 60s and 40s, respectively. We believe, but cannot assure you, that we
should be able to reduce this estimated grow-out period under our RAS system since the said grow-out period was calculated from
and based on information of open-dam prawn farms as we do not have any conclusive commercial grow-out statistic being recorded
at Prawn Farm 1 yet. However, we are confident that we shall be able to experience a much lower mortality rate, between 10/20 %,
compared to the 50/60% at the open-dam farms.
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 been generating revenues since May 2012. However, ZSAPP’s financial
statements will not be consolidated with ours until approval of this SJVC is formalized, and one of our subsidiaries acquires a
majority equity interest therein. However, Capital Award recognizes income from commissions earned from ZSAPP’s sales of
prawn fingerling to regional growers who constitute its sole marketing and sales agent.
ZSAPP has been successful, producing LawZi
Prawn (or the Big Giant Prawns) fingerling from the 5,000 pieces breeding stock that were imported from South-East Asian countries
and the reproduction of the Big Giant Prawns fingerling has been consistent; consequently, we intend to market the Big Giant Prawn
flies beginning during the third quarter of 2013 together with the Mexican White fingerling which constituted our main sales in
2012. During the past two years, our research confirmed that the demand and prices of the Big Giant Prawns in the local domestic
markets were high (at between RMB450 to 550/10,000 flies in 2012) because supplies of quality Big Giant Prawn fingerling is fairly
low compared to Mexican White (at averaged price between RMB150 to 170/10,000 flies in 2012), due to problems of inbreeding. As
such, we expect high demand for our Big Giant Prawn flies by the regional prawn growers as they will be the offspring from our
2
nd
generation breeding stock free from inbreeding problems.
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 to present based on a fixed production cost, with recently added eel growing contracts commencing in
the first quarter of 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. However, Capital Award is exploring similar new
contracts consistent with local reliable growers who meet our quality standards targeting to increase its fish sales revenue whenever
the opportunity presents itself.
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;
2.1. Engineering and services revenues
.
These revenues are generated from the Construction and development of Cattle Farm 1 and Cattle Farm 2.
The MEIJI table below shows the latest
status of their developments:
Name of the developments
|
|
Location of
development
|
|
Land area or
Built up area
|
|
Current Phase &
Stage
|
|
Commencement
date
|
|
Estimated
completion date
on or before
|
|
Contractual amount
|
|
% of completion as
at
15.04.2013
|
|
Cattle Farm (1)
|
|
LiangXi
Town,
Enping
City
|
|
165,013 m2
|
|
2 phases
|
|
Apr-11
|
|
Dec. 2011
|
|
$4.17 million
|
|
|
100
|
%
|
Cattle Farm (2)
|
|
LiangXi Town, Enping City
|
|
230,300 m2
|
|
2 Phases
|
|
Feb. 2012
|
|
March. 2014
|
|
$10.6 million
|
|
|
65
|
%
|
Cattle Farm (1) external road
work
|
|
LiangXi Town, Enping City
|
|
4.5 Km road
|
|
One Phase
|
|
Sept. 2012
|
|
March. 2013
|
|
$4.32 million
|
|
|
100
|
%
|
Cattle Farm (2) External Road
work.
|
|
LiangXi Town, Enping City
|
|
5.5 Km Road
|
|
One Phase
|
|
Sept. 2012
|
|
March. 2013
|
|
$5.28 Million
|
|
|
100
|
%
|
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 ranged 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, which has bitterly cold and long winter seasons and where all cattle are being grown in
fully insulated cattle houses. The 2012 experience of the JHMC farm showed that the growth rate of the cattle in this environment
is faster than at SJAP (averaging 1.78 Kg/day/head in weight gain compares to SJAP’s 1.5 kg/day/head). However Cattle Farm
1 showed higher mortality rates than SJAP (recording 5% in Cattle Farm 1 compared to 0.25% in SJAP). The reason for the higher
mortality is due mainly to the change of climate, as Cattle Farm 1 has to buy young cattle from farms situated in the cold Northern
part of China where they have ample supply of young cattle at lesser costs, but which require over 3 days of transportation, such
that some of the weaker young cattle could not adapt to the hot climate of Enping and thus could not recover from the journey.
To avoid the repetition of this high mortality rate, Cattle Farm 1 is building 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. The other differential aspect between Cattle Farm 1 and SJAP is in the management of environmental impact;
SJAP is going to build a mash gas station (estimated by the year end of 2013) to manage all of its cattle waste into electricity
with its residue recycled as raw material used in its manufacturing of organic fertilizer, whereas in Cattle Farm 1, the cattle
waste is being kept in septic wells that is treated with our enzyme under fermentation process, and then is channeled to fertilize
our pasture fields at the farm. JHMC’s waste treatment program is sufficient for the time being as it has enough pasture
fields to absorb the waste yielded from limited number of cattle (up to 500 head) being grown on the farm, however as the cattle
number increases to a point where it could exceed the fields’ fertilizer absorption capacity, an alternative environment
treatment plan must be implemented in order that this JHMC farm can grow more cattle.
Cattle Farm 2 will be complementary to
Cattle Farm 1 having an additional 76 acres of land suitable for growing our type of pasture (a cross between Elephant and Yellow
grass) that has a very high yield rate of over 35 MT/1/6 acre/year, and contains an average of over 9% protein that is very suitable
for consumption by cattle. Between the two farms, under normal seasons, they have a capacity to produce up to 30,000 MT of pasture/year
collectively that is capable to feed up to 5,000 head of cattle/year based on the consumption rate of average of 6 MT/head/year
if the environmental issue mentioned above is resolved properly.
By the end of February 2013, the Company
had completed the external road works 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 Cattle Farm 1 and 1/3 by Cattle Farm 2. 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.
Pictures showing Cattle Farm 1
This is our Cattle Farm 1 which 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
that we call “Semi-free growing” management system” where the cattle are allowed to graze in the field during
the early morning and kept indoors and hence away from the hot sun during the hot summer afternoon. So far this method has been
proven applicable with the growth rate of the cattle measured slightly better than the cattle at SJAP (i.e., averaging some 0.28
kg/day/cattle better).
2.2. Marketing and sales of live Cattle
by MEIJI:
Similar to CA in its model of operation, MEIJI purchases fully grown cattle from Cattle Farm 1 and sells them to
the cattle wholesalers and brings young cattle from other farmers and sells them to Cattle Farm 1.
All cattle farms developed by MEIJI will
be using its “Semi-free growing” management systems and aromatic-feed programs and systems to raise beef cattle.
Beef is traditionally a niche market in
China, as it is sold mainly by expensive restaurants of upmarket hotels rather than in the homes of China’s consumers. This
situation is rapidly changing 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, concentrated livestock feed and our Aromatic Feed that contains Chinese herbal plants specially
designed to improve animal health such that these Enping farms produce healthy cattle and in turn quality meat. Although we cannot
have them certified as pure organic meat yet 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.
The Enping cattle farms are situated in
Guangdong Province, which is not a traditional cattle growing country due to its tropical climate. Most cattle and beef supplies
are imported from the Western and Northern Provinces at higher costs entailing higher wholesale and retail prices in Guangzhou
City and in its urban cities, which provides marketing advantages for our cattle sales within the region.
Moreover, our 2012 sampled meat trials
carried out with a number of reputable restaurants and hotels in Beijing City were well received with constant 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. At Enping cattle farms we will grow at least 1,000 head of mature cattle in 2013, which
is the minimum number required to sustain the supplies to just a couple of restaurant chains.
According to the China Federal Agriculture
Quarterly Report of 2011 the consumption of beef was over 6.48 million MT, 10% of which were premium cuts. Our planned 1,000 head
of mature cattle in 2013 will yield approximately 375 MT of meat, which is a tiny fraction of the total market share indicating
significant potential for growth in the future.
Under a joint venture with a group of businessmen
(the “Joint Venture”), we started the setting up of a Cattle Station and related facilities on a block of leased land
measuring about 130,000 m2 within the Central Cattle Market and Facility of Beijing City (that we call “The Beijing Cattle
Farm”) to act as an intermediate house aiming to house and to grow our Aromatic beef cattle and to sell together with our
Aromatic Cattle from Cattle Farm 1 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. In this respect, the development of wholesale
shops fits in well as part of our interstate wholesale and distribution development plan that we mapped for some of the big cities
in China, and this one in Beijing City will see the beginning of such plan being put into motion. The Joint Venture Agreement has
not been finalized; consequently, the Joint Venture is currently based on a verbal understanding only.
Pictures showing the Beijing Cattle
Farm and the Small Wholesale Shop
3.
SJAP and HSA Division in fertilizer,
livestock feed and cattle:
We have two operations in this division
spread over two provinces in China, consisting of the following:
3.1 Operation 1.
Operation 1 is
operated from Huangyuan County of Xining City, Qinghai Province, by SJAP, a majority owned subsidiary of the Company incorporated
in China in 2009. As of the date of this Annual Report, SJAP’S principal activities that are generating revenues comprise:
(i) manufacturing and sales of organic fertilizer, (ii) manufacturing and sales of livestock feed, and (iii) rearing and sales
of beef cattle. On February 28, 2013, SJAP completed its development of the Concentrated Livestock Feed Manufacturing Factory and
started the production and sales of Concentrated Livestock Feed (“CLF”).This CLF complements SJAP’s bulk livestock
feed to provide the local cattle and sheep farming industry with a unique and 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 excess concentrated feed being wasted on over feeding, resulting in worthless excess fat in mature animals.
In this respect, the Chinese central government has placed an order with SJAP to reserve annually up to 5000 MT of CLF 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.
The fertilizer, bulk livestock feed and
cattle divisions under SJAP contributed 3%, 2% and 10% of the Company’s total revenue and 3%, 2% and 5% of the Company’s
total consolidated gross profit, respectively, in 2012 derived from the production of about 4,500 head of mature cattle (between
15 months to 18 months old) from its own cattle houses and the co-operative growers, collectively, 25,000 MT of organic fertilizer,
and 22,000 MT of bulk stock feed.
Our strategy is to increase the number
of co-operative growers and obtain more internal cattle houses and thus to attempt to double the volume of production of mature
cattle during 2013, which would in turn increase the demand for the production of fertilizer and bulk stock feed to grow in tandem.
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, use our equipment for their planting and harvesting, are provided supervision
and associated services from us, as well as seeds 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.
The cattle we grow are primarily Simmental
(a common breed introduced to China in the early 20
th
century), Charolais, and some Angus cattle. In general, six month
old cattle are sold to local farmers, and we commit to repurchasing the cattle when they are between 15 months to 18 months old.
We also rent cattle housing to farmers,
and will provide slaughter and deboning services to them once our abattoir and deboning facilities are completed in 2014.
Beef is distributed through wholesalers
and through our own or developed restaurants as described elsewhere in this Annual Report. SJAP intends to add sheep farming during
2013 and value added product processing (including abattoir and deboning facilities in 2013 and a value added processing facility
in 2014), and aims to, but cannot assure you that it will, expand its steakhouse restaurant “BULL” into a franchisee
style chain of 50 outlets over time, whereas currently the one and only “Bull restaurant is to act as SJAP’s first
demonstration model converted from one of our old cattle houses situated next to our newly renovated cattle houses at SJAP’s
complex. This one Bull has over 130 seating capacity and since its commencement of business operations it is now becoming a popular
dining of the locals, having achieved sales of just over $420,000 in year 2012 with net profit of just over $50,000 (or netting
about 12%) which is a very small contribution to the Company’s consolidated revenues and profits. However as SJAP’s
first demonstration model it has served the purpose.
Overall, SJAP expects that revenues from
operations will increase 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 corporative 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 made at a higher cost, which provides SJAP with a competitive edge. Further, Qinghai
Province is a region rearing a million head of cattle and sheep per year, providing an ample market for SJAP’s fertilizer
and livestock feed.
Our strategy includes building and owning
our own abattoir and boning room in 2013 and the value added processing facilities in 2014, meaning that the distribution of our
value added beef products to other provinces and main cities will become feasible as we improve our economies of scale to mitigate
cost of transportation being charged on net meat weight instead of live cattle weight, and also exploit the lower production cost
and leverage of our fully integrated operation and benefit from high sale prices due to its higher meat quality.
SJAP is making progress with the required
merit credentials in China to become a certified China Dragon Head Business, which is a prestigious certification granted by the
Government to businesses demonstrating corporate social responsibility (“CSR”) by 2014, frequently leading to additional
governmental grants and other forms of assistance. Qinghai Province has bigger numbers of ethnic minorities receiving proportionately
higher grants, incentives, assistances and subsidies from the Government, and SJAP has been well supported by the Government due
to our CSR. In line with the focus on food security and managing the imbalance between rural (i.e., agrarian) and urban communities,
this development will only enhance SIAF’s niche market position.
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. Further, 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.
In 2012, we have seen the wholesale prices
ramp up from an average of RMB 16/Kg for live cattle and RMB 36/Kg for beef meat in January 2012 to an average of RMB 32/Kg of
live cattle and RMB 55/Kg of beef meat at the end of February 2013, representing a rise of 100% in live cattle and 53% in beef
meat prices. We do not expect prices to rise continuously at such a rate, but it is reasonable to assume rate increases to be between
10% to 15% per year for the next three years.
Progress reports:
Additional revenues are being generated
from our newly built Concentrated Livestock Feed (“CLF”) factory. This factory is designed with an annual production
capacity up to 60,000 MT, and it had produced and sold over 6,000 MT of CLF at an average price of RMB 2,600/MT (or US$419/MT)
for the period of 3.5 months ended April 15, 2013.
Work on the construction of all 29 cattle
houses and related facilities is progressing and targeted for completion during 2013 (from our present 12 cattle houses) that will
have the capacity to house up to 2,500/3,000 heads of cattle at any one time. Collectively, these cattle houses will be able to
rear up to 6,000 heads of marketable sized cattle annually (estimated at average weight of about 750/800 Kg per head) based on
a six months rotational stocking and sales program growing from cattle averaged at 350/400 Kg per head. SJAP’s intention
is to lease part of the cattle houses to the corporative growers to grow their own cattle, with SJAP supplying them with feed and
associated services in veterinary, management and marketing of their grown cattle. Apart from this cattle house operation, SJAP
will continue to promote its concept of the corporative growers in tandem with the increase of productivity of its livestock feed.
We cultivate an additional 1,500 acres
of land, for a total over 6,500 acres of land that will be harvested in 2013. All of this land was granted rent-free to SJAP by
the local government.
We saw an increase in demand for our organic
fertilizer this year resulting in doubling shift work at SJAP’s fertilizer factory since mid-February to meet the sales of
30,000 MT for 2013.
SJAP received a business permit from the
Chinese authorities in April of 2013, and construction commenced in the same month 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.
The construction of our enzyme factory
is targeted to start during the third quarter of 2013 and the construction of a Mash Gas station is targeted to start during the
fourth quarter of 2013.These are essential supporting activities to recycle our cattle wastes to be applied as raw materials for
the manufacturing of our organic fertilizer and to further extend our Corporate Social Responsibility to provide free electricity
to the regional district within close proximity to our existing complex. In this respect, the Government agreed to provide a grant
of up to US$2 million to cover part of the development cost of the Mash Gas Station.
Pictures showing SJAP’s operation
and complex
The Corporate office building, the Cattle
Station and the concentrated livestock feed manufacturing factory
The organic fertilizer factory
The cattle houses -we now have over 12
cattle houses with each to house over 150 heads with more cattle houses being built
Construction site and construction in
progress of the slaughter house and deboning factory
The “Bull” restaurant next
to our Cattle Station
3.2 Operation 2
. Operation 2 is
operated in Linli District, Hunan Province, by Hunan Shenghua A Power Agriculture Co. Ltd. China (“HSA”), a 76%owned
subsidiary. As of the date of this Annual Report, HSA conducts the following business activities, both of which are in the development
stage: (i) manufacturing and sales of organic and mixed fertilizer, and (ii) cultivation of pastures and crops in preparation for
the establishment of beef cattle farm. 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. 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 during the fourth week of March of 2013.
Currently, chemical fertilizers in the
region are wholesale between RMB 3,000 to 3,600/MT depending upon their chemical composition and our old organic fertilizer from
SJAP was sold at an average of RMB1,200 to RMB1,300/MT. Our new 100% pure organic fertilizer with up to 8% potash is currently
being marketed between RMB 2,000 to RMB 2,200/MT targeting to reach an average up to RMB2,600/MT such that its prices will be at
the mid-range of organic and chemical fertilizer.
HSA is targeting to produce up to 30,000
MT of 100% pure organic fertilizer in 2013 under its newly completed production plant and facilities aiming to increase its capacity
to about 90,000 MT/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; however only farmers who are assessed as creditworthy
by us and who plant their fields and follow our requirement to harvest crops each year are considered.
Development of HSA in Linli District, Hunan
Province is modeled like SJAP but it has a much better environment, being situated in a farming rich province that is next to the
Guangdong Province and benefits from cheaper logistical costs, being closer to large markets and having a more favorable climate
(milder winters and longer summers compared to SJAP’s long and bitterly cold winters and short summers). However financial
support from the Government is more difficult to obtain due to there being more entities sharing the Government’s support
provisions.
HSA had to endure 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 4 million primary producers producing rice, tea, tobacco, grapes, citrus, cotton, seedlings,
sunflowers, herb plants and many varieties of cash crops and it 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 RMB450 Billion, or about US$75 Billion) recorded
in 2011 (as announced by Hunan Province Agriculture Department).
Progress
report
:
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. HSA produced and sold more than 6,000 MT of POMF at an average price above RMB 2,500/MT (or US$403/MT) collectively
during the first 3.5 months of 2013.
Work on the construction and development
of a cattle station commenced in March 2012 with preparation work in progress being carried out on its general layout, cultivation
and planting of crops and pasture on 75 acres situated below the hill of the fertilizer factory, and hill leveling and cutting
within the hill next to the fertilizer factory where the cattle houses will be built, which work is presently in progress.
Pictures showing HSA’s complex
and operation
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 the Hylocereus Undatus Plantation (the “HU Plantation”),
which is situated at Enping City, Guangdong Province. In 2012, JHST contributed 9% and 10% of the Company’s revenue and gross
profit, respectively. The plantation was developed in 2008 with revenues being generated since year 2009. As of the date of this
Annual Report, JHST has two types of operations; (i) growth and sales of flowers, and (ii) drying and value added processing and
sales of HU flower products. Hylocereus Undatus is commonly referred to as Dragon Fruit plants.
The HU Plantation has been suffering from
plant disease over the past two years, which resulted in a reduced yield of HU flowers. The Company tried to overcome this problem
with various preventive trials in 2012 (such as green housing, replanting, change of fertilization program and anti-disease spraying
from Malaysia, etc.) with few positive results. Although the overall harvest of 2012 was better than in 2011, it was still far
below the harvest of 2010. In fact, the HU Plantation’s 2012 revenue and earnings were mainly supported by the sales of additional
dried HU flowers processed from fresh HU flowers that were bought from regional growers. Since October 2012 after the harvesting
a season of HU flowers, the Company has dedicated its effort to finding a viable solution to this disease problem, and by the end
of February 2013, the Company believed that a solution was found. We started to implement the developments from March of 2013 on
the HU Plantation with the aim of rectifying the situation before the start of the new harvest season beginning in June 2013.
JHST cultivates 187 acres of Hylocereus
Undatus, or Dragon Fruit (cacti) flowers in Guangdong Province. Dragon Fruit flower for a very short period, sometimes only one
night, and must be picked before they turn from green to white 20 to 25 cm long flowers, so they are by definition a fairly delicate
crop. The harvesting season is from July through October.
Dragon Fruit 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 2013 all of the plants are matured plants (averaging over 4 years old). To date, the product has
been sold in the form of dried flowers, which are used in health-related soups and teas, and fresh flowers, consumed as vegetables
in China.
Currently, fresh flowers are sold to regional
wholesale and retail markets due to their short shelf life, whereas dried flowers are sold after they are dried and packed to a
few major wholesalers who in turn distribute them to other wholesale and retail markets and export traders right through the winter
and spring months (from October to June each year) in Guangdong Province. In this respect, it is a distinctly seasonal revenue
product, as more than half of the division’s revenues are recognized in the third quarter, and no sales are made in the first
quarter.
It was originally forecasted 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. However, the planting of a special Chinese herb (called XueYingZi and commonly referred to as “Immortal Vegetable”
in China), which is rich in selenium, among the HU Plants is expected to help to prolong the shelf life of the fresh flowers from
2-3 days up to 12-14 days, which will increase the sales of fresh flowers that are delicious to eat as fresh vegetables and commonly
accepted as quality gourmet vegetables.
We expect this improvement of shelf life
of the HU flowers to gradually even out our sales of dried flowers and fresh flowers through the harvest season starting in late
June to October of each year and leave our drying and processing facilities extra time to process more flowers that we intend to
buy from other regional growers so as to increase our overall revenue from 2013 onwards. Beginning in June 2013, JHST will also
add the sales of the Immortal Vegetables planted now, which we expect to harvest within two and half months followed by the replanting
of two more crops in 2013 and thereafter 4 crops/year in subsequent years.
Given this progress of improvements, JHST
is attempting to eliminate the factor of seasonality in revenue. The overall market situation for HU flowers is that demand is
greater than supply due to the following reasons; (i) in Guangdong Province, HU Plants can only be grown commercially along certain
districts where there were over 40,000 acres of HU Plantation back in 2005, but due to the growth of industrialization and modernization
acreage is now less than 4,000 acres, and (ii) farm laborers are getting harder to find, coupled with the increase of cost of wages
and salaries, the rapid rise of the land cost and the increase cost of farm developments, making it extremely difficult to start
a large HU plantation. For these reasons we are anticipating prices of dried HU flowers to enjoy a steady rise at an average rate
of 8 to 12% per year, which has been the trend since 2009.
Progress report
We expect a much improved performance in
2013.
Our field revitalization program has been
carried out on the HU plantation since early March 2013 with certain work still being in progress; management reported seeing marked
improvement in the field with healthy green everywhere as compared to last year’s concentration of yellow colors.
Coupling this improvement to the HU plants
and the extra revenues that will be generated from the “Immortal vegetables” being planted now, we are optimistic and
targeting an increase of at least 25% in revenue on the plantation itself in 2013 (excluding flowers that will be brought from
regional growers for drying and sales of dried flowers).
Construction of the expansion of the drying
and packaging factory of the HU Plant division commence over the summer months after we had completed the field revitalization
work. As of the date of this Annual Report, we had built and started to use three new driers and basic infrastructural works around
the site of the packaging factory are in progress expecting completion by the end of 2013.
5.
The Corporate (or SIAF) Division
From the last quarter of 2012 the Company
decided to generate the following business income to fund its shared services operations’ working capital annual budget:
The Wholesale and Distribution Facilities
development project including design, construction and project management of its business operation of a specialist 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. Work started in November
2012, and as of the date of this Annual Report, we have completed a freezing room facility that has the capacity to store up to
150 MT of frozen food at -25 degrees Celsius with renovation and alteration work progressing on other facilities (e.g., wholesale
shop, packaging and processing facility, office, dry good storage and function room).
|
(1)
|
The Central Kitchen and related facilities development project including design, construct, project
management of development and management of business operation for Guangzhou City
Wangxiangcheng (“
WXC
”),
an unrelated Chinese company, of a Central Kitchen, a Central Bakery, a fast food restaurant and 3 mobile food stores (Central
Facility 1) situated adjacent to Wholesale Center 2. Work started in November 2012, and as of the date of this Annual Report, about
80% of the construction work was completed.
|
|
(2)
|
The Restaurant development project including design, construct, project management of development
and management of its business operation for WXC. To date, Restaurant 1 at River South District has been operating for over 15
months, Restaurant 2 (at the UU Park Complex, Tianhe District) has been in operation for 7 months, Restaurant 3 (at the Sporting
Complex, Tianhe District) has commenced operation since March 2013, the work at Restaurant 4, which is located at Harbor City Shopping
Center, Guangzhou City, is almost completed and is targeted to open for business by October 2013, design and construction plans
for Restaurant 5 (located at the center of Zhungzhen City, about a 35 minute drive from the Guangzhou City) have been submitted
to the authorities for approval targeting construction work to start in August 2013, and Restaurant 6 (at the Li Wan District,
next to Wholesale Center 1) will start renovation work during November 2013. Collectively, these 6 restaurants cover a total gross
area of 5,800 m2 (about 63,800 ft2) with seating capacity for 1,370 persons.
|
Pictures below show the restaurants that
we developed
Restaurant (1)
|
Restaurant (2)
|
Restaurant (3)
|
Restaurant (4)
|
|
(3)
|
We are constructing a trading complex for the Import and Export trades of the Company itself at
another building adjacent to the Wholesale Center 1 and 2 (the “Trading Center”). As of the date of this Annual Report,
the Trading Center is importing 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, that were sold to Wholesale Center 1 for
Wholesale Center 1’s distribution and sales into various reputable food chain outlets, wholesale market stores and super
market 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 WXC’s development plan to
develop over 50 gourmet restaurants and fast food outlets collectively within 2 years (2013 to 2014) and (via NWT) is planning
on the development of a number of modern health food department chains in the Guangzhou City during 2014 and 2015with SIAF as its
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 3 years. At the same time we are aiming to 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 to gain momentum in materializing our business vision of vertically integrated operations.
Progress reports:
The import and export trading of SIAF:
During the early months of 2013, we made
good progress in the marketing and distribution channels having sold approximately 7,000 MT of imported frozen seafood including
prawns (or shrimp), squids, octopus, and varieties of fish from Malaysia, Thailand, Norway and Vietnam and from local brokers and
agents that were sold to Wholesale Center 1 for it to sell and distribute to various reputable clients in super market chains,
central kitchen of restaurant chains and multiple number of seafood wholesale markets at some of the populated centers.
We also discovered, during the first quarter
of 2013, the potential of sourcing and importing good quality frozen seafood (mainly in fish) as well as in live seafood (including
live Flower Pattern eels, mud-crabs and lobsters) from Madagascar that would provide good profit margins. We had tried a number
of sample shipments (by air cargoes) with good success rates; as such we have sent personnel over to Madagascar to liaise with
local suppliers and to investigate the situation a number of times already with the intention to send a permanent team of workers
over there to set up packaging and related facilities to explore its potential fully.
The Engineering and Consulting services
|
¨
|
Work is in progress with the developments
of Wholesale Centers 1 and 2. Operations at Wholesale Center 1 (“
WSC 1
”) commenced
during the first quarter of 2013 and is moving along nicely, developing varieties of regional clients in the Guangzhou City
.
We have sold sleepy cod to WSC 1 for it to sell to wholesalers at the Shanghai Wholesale Market and in this respect the corresponding
sales were well received by the Shanghai Market such that our sleepy cod was consistently sold at a premium of about RMB6 to RMB10/Kg
above its daily market prices. We have also rectified WSC 1’s water treatment; as such all of its live fish holding tanks
are now functioning and stocked with fish from Fish Farm 1.
|
|
¨
|
Although development work is still in
progress on Wholesale Center 2 (“
WSC 2
”), having completed of its refrigeration
facilities, but in the meantime, and during the first quarter 2013, WSC 2 has started to import Simmental variety of beef cuts
from Hubei Province to start selling into local food catering chains with the intention to introduce our beef cuts from SJAP at
a later date. However, selling frozen meats requires special quality certificates and retailing permits that WSC 2 is in the process
of applying for, but we discovered that the related certification and permits are extremely difficult to obtain and are not confident
that they will be obtained before the end of 2013 or beyond.
|
As at the date of this Annual Report, we
believe that all development work demonstrated good progress including our own Trading Center (which is now operating although
part of its finishing work is still in progress), Leonie Chain’s Central Kitchen (as reported above, 80% has been completed)
and the central bakery will start operations from May 2013, and we have 4 restaurants being completed with work in progress on
2 others. SJAP has completed more than 50% of its construction work on its slaughter house and deboning facilities, HST has completed
its revitalization program of its HU Plantation (i.e., new irrigation systems with automatic sprinkle, replacing with organic soil,
planting with Immortal Vegetables in between each roll of the HU plants, extension of staff quarters such that it has accommodation
now for more than 40 workers at one time), planned 13 acres of Immortal Vegetable and built associated nursery, commencement of
production from Prawn Farm 1, started operation of the Beijing Cattle Farm and wholesale shop, Prawn Farm 2 completed 3 prawn grow-out
open dams with RAS systems and the successful breeding of fingerling of Big Giant Prawns from our 2
nd
generation breed
stocks, the establishment of facilities in Madagascar and the successful production of the lake fish organic fertilizer. We view
the foregoing developments as a giant step forward building strong fundamentals for the Company’s future growth.
Consequently, we are seeing the 5-year
plan play out as envisioned. Particularly at the wholesale level in the fishery and beef divisions, economies of scale are being
realized. And the benefits of vertical integration are being achieved gradually, most in evidence between the wholesale and distribution
levels. These are enhancing 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.
Summary of Our Land Assets
Item
|
|
Owner
|
|
Location
|
|
Project
|
|
Area
(acre)
|
|
Nature of
Ownership
|
|
Tenure
|
|
Date Acquired
|
|
Expiry
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hunan Lot 1
|
|
Hunan Shenghua A Power
Agriculture Co. Ltd.
|
|
Ouchi Village, Fenghuo Town, Linli County
|
|
Fertilizer production
|
|
31.92
|
|
Lease
|
|
43
|
|
4-5-11
|
|
4-4-54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hunan Lot 2
|
|
Hunan Shenghua A Power
Agriculture Co. Ltd.
|
|
Ouchi Village, Fenghuo Town, Linli County
|
|
Pasture growing
|
|
247.05
|
|
Management Rights
|
|
60
|
|
7-18-11
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hunan Lot 3
|
|
Hunan Shenghua A Power
Agriculture Co. Ltd.
|
|
Ouchi Village, Fenghuo Town, Linli County
|
|
Fertilizer production
|
|
8.24
|
|
Land Usage Rights
|
|
40
|
|
5-24-11
|
|
5-23-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 1
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Yane Village, Liangxi Town, Enping City
|
|
HU Plantation
|
|
8.23
|
|
Management Rights
|
|
60
|
|
8-10-07
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 2
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Nandu Village of Yane Village, Liangxi Town, Enping
City
|
|
HU Plantation
|
|
27.78
|
|
Management Rights
|
|
60
|
|
3-14-07
|
|
3-13-67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 3
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Nandu Village of Yane Village, Liangxi Town, Enping
City
|
|
HU Plantation
|
|
60.72
|
|
Management Rights
|
|
60
|
|
4-18-07
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 4
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Nandu Village of Yane Village, Liangxi Town, Enping
City
|
|
HU Plantation
|
|
54.68
|
|
Management Rights
|
|
60
|
|
9-1207
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 5
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Jishilu Village of Dawan Village, Juntang Town, Enping
City
|
|
HU Plantation
|
|
28.82
|
|
Management Rights
|
|
60
|
|
9-12-07
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 6
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Liankai Village of Niujiang Town, Enping City
|
|
Fish Farm, HU Plantation
|
|
31.84
|
|
Management Rights
|
|
60
|
|
1-1-08
|
|
12-31-68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 7
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Nandu Village of Yane Village, Liangxi Town, Enping
City
|
|
HU Plantation
|
|
41.18
|
|
Management Rights
|
|
26
|
|
1-1-11
|
|
12-31-37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 8
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Shangchong Village of Yane Village, Liangxi Town,
Enping City
|
|
HU Plantation
|
|
11.28
|
|
Management Rights
|
|
26
|
|
1-1-11
|
|
12-31-37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot 9
|
|
Jiangmen City Hang Mei
Cattle Farm Development Co. Ltd.
|
|
Xiaoban Village of Yane Village, Liangxi Town, Enping
City
|
|
Cattle Farm
|
|
41.18
|
|
Management Rights
|
|
20
|
|
4-1-11
|
|
12-31-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qinghai Lot 1
|
|
Qinghai Sanjiang A Power
Agriculture Co. Ltd.
|
|
No. 498, Bei Da Road, Chengguan Town of Huangyuan
County, Xining City, Qinghai Province
|
|
Cattle farm, fertilizer & livestock feed production
|
|
21.09
|
|
Land Usage Rights &
Building ownership
|
|
40
|
|
11-1-11
|
|
10-30-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong Lot
10
|
|
Jiangmen City Heng Sheng
Tai Agriculture Development Co. Ltd.
|
|
Niu Jiang Town
Enping City,
|
|
HU Plantation
Processing
factory
|
|
6.27
|
|
Management Right Lease
|
|
10
|
|
4-1-13
|
|
4-1-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
620.28
|
|
|
|
|
|
|
|
|
As far as “ownership” of land
is concerned, in general all land is owned by the Government. Whereas in urban areas, the land is owned directly by the central
Government in rural and suburban areas, the land (agricultural land) is owned by the local village collectives, usually through
the villagers’ collective economic organization or the village committees. Uncultivated land in mountain and other remote
areas is also Government-owned. Corporate entities and individuals may own the property (building) erected on Government land.
As such, any transferrable rights to the
land are in the form of usufructuary rights (i.e., the right to use and enjoy the benefits derived therefrom for a period of time).
There are several types of usufructuary
rights. These include the right to land contractual management (granted by local village collectives for agriculture land), the
right to use of construction land (state land in urban areas), etc. The right to land contractual management allows a party the
right to possess, utilize, and obtain profits from agricultural land. This right is transferrable, but this land use right is based
on agricultural household contracts and cannot be changed arbitrarily to non-agricultural purposes.
A usufructuary right properly granted in
accordance with the laws may be transferred, leased, or mortgaged in accordance with the laws and the terms of the land-grant contract.
1. A lease confers on
the recipient the same right to use and enjoy the benefits except for the right to own the building erected by the recipient and
the right to transfer. In case of government acquisition of the land, the compensation paid by the government for the building
will go to the lessor, unless the lease agreement states otherwise.
The Agreement for the 109.79MU land of
HSA is stated to be a lease agreement but the terms therein seem to suggest that HSA is being granted a Management Right.
2 & 3. Land Use Rights and Management
Rights confer the same right to use and enjoy the benefits. “Land Use Right” is one granted by the State and usually
used in the context of urban land, whereas “Management Right” is granted by local village collectives and the term
is usually used in respect of rural land.
4. The term Land Use Right relates to the
right to use the land and enjoy the benefits derived there from, whereas Building Ownership Right relates to the right to ownership
of the building erected on the land concerned.
SJAP was granted a Land Use Right by the
State for the land (state-owned land), and a Building Ownership Right for the buildings erected thereon.
SIAF's Group of Companies - Rented
Premises Profiles
|
|
Company
|
|
Location
|
|
Usage
|
|
Landlord
|
|
Tenure
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Sino Agro Food, Inc. Guangzhou Representative Office
|
|
Room 3801, Block A, China Shine Plaza,
No. 9, Linhexi Rd.,
Tianhe district,
Guangzhou City
|
|
Head office
|
|
Guangzhou Shine Real Property Development Limited Company
|
|
9 July 2012 to
8 July 2014
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd.
|
|
Unit 1-3, Jiangzhou Shuizha Building, No. 19 Jiangjun Rd., Juntang Town, Enping City
|
|
Office
|
|
Enping City Jiangzhou Water Engineering Management Dept.
|
|
1 April 2013 to
31 March 2018
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Jiangmen City A Power Fishery Development Co. Ltd.
|
|
Room 202, Finance Building Chang’an Street, Niujiang Town, Enping City
|
|
Office
|
|
The Economic Development Office of Enping Government
|
|
15 July 2011 to
14 July 2016
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Jiangmen City Hang Mei Cattle Farm Development Co. Ltd.
|
|
Unit 4-5, Jiangzhou Shuizha Building No. 19 Jiangjun Rd., Juntang Town, Enping City
|
|
Office
|
|
Enping City Jiangzhou Water Engineering Management Dept.
|
|
1 June 2012 to 30 June 2017
|
INDUSTRY OVERVIEW
Economic outlook China
China’s
economy is at present second only to that of the United States (third, if the European Union is counted as one economy), having
overtaken Japan’s role as number two in 2010.
1
The OECD expects that China’s real GDP will grow by 8.5% in 2013 and by 8.9% in 2014.
2
The IMF expects that China will be the worlds’ largest economy in 2017 with 18.3% of the world economy. The USA’s
share is expected to fall to 17.9% by 2017.
3
The strong growth in China has delivered
major improvements in living standards and poverty has been reduced dramatically.
4
Based on the World Bank’s
classification, China recently graduated from lower to upper middle-income status. A growing emphasis on improving access to health
and education as well as high investment in infrastructure have helped spread the benefits of growth nationally including in rural
areas, where incomes have enjoyed consistently strong gains. Recent OECD simulations suggest that China could maintain high, though
gradually easing, growth during the current decade, averaging 8% in per capita terms.
Source: OECD Economic Outlook No. 92 (database)/OECD economic
surveys: China 2013
Time Period
|
|
Low and middle
income countries
|
|
|
China
|
|
|
High-income
countries
|
|
|
United
States
|
|
1990-2000
|
|
|
3.3
|
|
|
|
10.4
|
|
|
|
2.7
|
|
|
|
3.4
|
|
2000-2010
|
|
|
5.9
|
|
|
|
10.5
|
|
|
|
1.6
|
|
|
|
1.7
|
|
2010-2020 a
|
|
|
5.6-7.4
|
|
|
|
7.4-10.1
|
|
|
|
2.0-3.1
|
|
|
|
2.3-3.5
|
|
2020-2030 a
|
|
|
4.2-6.6
|
|
|
|
4.2-7.8
|
|
|
|
1.3-2.7
|
|
|
|
1.5-3.0
|
|
Average annual per capita GDP growth
Source:
OECD Economic Outlook No. 92 (database)/OECD economic surveys: China 2013
|
1
The World Bank; China 2030, Building a Modern,
Harmonious, and Creative Society [pages 3, 376-377], 2013
2
OECD Economic Outlook No. 92 (database)/OECD
economic surveys: China 2013
3
IMF, October 2012
4
The World Bank; China 2030, Building a Modern,
Harmonious, and Creative Society, 2013 [pages 3, 376-377]
1990-2000
|
|
|
1.6
|
|
|
|
9.3
|
|
|
|
2.0
|
|
|
|
2.3
|
|
2000-2010
|
|
|
4.6
|
|
|
|
9.8
|
|
|
|
1.0
|
|
|
|
0.7
|
|
2010-2020 a
|
|
|
4.4-6.1
|
|
|
|
6.8-9.5
|
|
|
|
1.6-2.6
|
|
|
|
1.5-2.7
|
|
2020-2030 a
|
|
|
3.4
|
|
|
|
3.9-7.6
|
|
|
|
1.1-2.4
|
|
|
|
0.9-2.4
|
|
Source: World Bank calculations using Envisage Model.
a. The lower and upper bounds reflect average growth rates in
the low-growth and high-growth scenarios.
Source: IMF, October 2012
The share of the population aged 20 to
64 in the total population is expected to peak soon, according to the OECD, and the elderly dependency ratio will continue to
rise, exerting downward pressure on saving rates. Agricultural employment has been falling for a decade at an average rate of
3.5% annually, with massive migration from the countryside to cities. Continuing migration of workers out of agriculture is expected
to help boost farming profitability, leading to further gains from more mechanization. In addition, some consolidation of farms
into bigger units may occur provided that the laws governing the ownership of rural land-use rights are changed to allow the sale
of use-rights and favor the rental market for agricultural land, according to the OECD.
5
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 and
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, and garlic and other vegetables.
China’s increasingly important position
in global agricultural markets followed decades of gradual growth in domestic food production and consumption. After the introduction
of market-based reforms in 1978 that included the elimination of the collective production system and relaxation of government
direction over certain farming production and marketing decisions, Chinese agricultural output grew significantly. Between 1978
and 2008, China almost doubled its production of grains (rice, wheat, and corn) and quadrupled its production of meats; production
of fruit and milk was about 30 times greater in 2008 than in 1978. During these three decades, population growth of about 1% annually,
coupled with annual per capita income growth of 8%, fueled a large increase in demand for more and higher-value agricultural products,
especially by China’s large and growing middle class. China’s rapid growth in food consumption was largely met by
domestic production growth, enabling it to remain self-sufficient in most major commodities. 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.
6
China’s support for agriculture
China’s government support for agriculture
is 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,
7
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.
5
OECD Economic Surveys China, March 2013 [Pages 20-21]
6
USITC: China’s Agricultural Trade: Competitive Conditions and Effects on U.S. Exports, March 2011 [pages 1-1 and1-8]
7
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
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.
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.
Chinese consumers generally fall into one
of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although urban 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, has available 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.
Expenditure on food
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 2003, about 18% of urban household food expenditures and over 11% of rural household food expenditures were made
outside the home. 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 are leading 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.
Like that of other countries at similar
stages of development, the traditional Chinese diet comprises mostly grains and other starches. Consumption of non-staple, higher-value
foods such as meat (especially pork), dairy, fruits, vegetables, and processed food has grown significantly in the past three decades;
30% of the food currently consumed in China has been processed in some way, according to the USITC.
China’s per capita expenditures for
animal proteins for 2008 averaged $184, up from $137 in the previous year. 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, as
the product can be transported greater distances to reach more customers. Pork consumption levels are also high due to government
support programs, including purchasing pork for reserves and occasionally subsidizing pork purchases for low-income consumers.
Food quality and safety are important
factors affecting Chinese food preferences. High-income urban groups that focus their expenditure 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 because fresher produce is perceived to be safer, while meats are increasingly bought at a supermarket
because of the availability of cold storage.
8
The market for aquatic and aquaculture
in China
The information in this section regarding
aquatic and aquaculture, including graphs, is taken from the USDA’s GAIN Report Number: CH12073 per 12/28/2012 unless otherwise
stated.
9
8
USITC: China’s Agricultural
Trade: Competitive Conditions and Effects on U.S. Exports, March 2011
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 will use Chinese terminology to maintain consistency between Chinese statistics and product categories. Total aquatic
trade statistics below do not include fishmeal.
Total Aquatic Products Production
China has the world’s largest aquatic
production and its market share has risen from 7% in 1961 to 35% by 2010.
10
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 has a long history of aquaculture
but large-scale production only began after the founding of the People's Republic of China in 1949. More recently, after China
opened up to the outside world in the 1980's, the sector has been growing dramatically, becoming one of the fastest growing sectors
among the agriculture industries in China.
11
China remains the world largest aquaculture
producer with total cultured aquatic production accounting for about 70% of the world total in recent years, based on industry
sources. Total aquaculture water area reached 7.83 million hectares (MHa) in 2011 from 7.65 MHa in the previous year, 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 slowing 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.
Aquaculture fish production dominates the
sector with a 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 production, according to the USDA.
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. Prices for aquatic products are expected to grow in 2013, reflecting increases in the price of feed and other
inputs.
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.
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.
10
The State of World Fisheries and Aquaculture 2012, FAO
11
FAO – National Aquaculture Sector Overview China
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 12
th
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 12
th
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 government 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 which 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.
Any fish and fishery products exported from the US after January 1, 2013 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 which 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 by far the world’s largest
producer and consumer of meat which includes pork, poultry and beef. 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.
12
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 “12
th
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.
13
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.
14
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.
15
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 and income growth and high income 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.
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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.
17
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. Sales of fertilizers are expected 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.
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 increase.
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.
18
12
Food Outlook Global Market Analysis, published by the Trade and Market Division of FAO under Global Information and Early Warning System (GIEWS), November 2012
13
China’s growing appetite for meats: Implications for World meat trade. A Multi-Client Study, April 2012
14
China and Hong Kong: Food Opportunities for Maine, Maine International Trade Center, March 2012
15
Frost & Sullivan: China’s beef market has great growth potential
16
Meat - OECD-FAO Agricultural Outlook 2012-2021
17
Frost & Sullivan: China’s beef market has great growth potential
18
Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012
In 2006, the central government started a program intended
to partially compensate farmers for price increases in fuel, fertilizer and other agricultural inputs. In the case of fertilizers,
government support is part of several separate programs targeting fertilizer producers, with cost reductions being passed along
to farmers purchasing the input. By 2009, fuel and fertilizer subsidies totaled $10.5 billion.
19
An investment in our common stock involves
significant risks. You should carefully consider the following risks and all other information set forth in this Annual Report
before deciding to invest in our common stock. If any of the events or developments described below occurs, our business, financial
condition and results of operations may suffer. In that case, the value of our common stock may decline and you could lose all
or part of your investment.
R
isks 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.
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 our reporting of
financial information, or non-compliance with the 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 operation in accordance with our business plan and growing strategy, our failure
to obtain necessary financing will impair our growth strategy; in addition, the risk of “vertical integration” is significant.
As of December 31, 2012, we had working
capital of $111,401,112, including cash and cash equivalents of $8,424,265. Our capital requirements in connection with
our planned vertically integrated development and growth plan of our business are significant.
In most of the developed countries, risks
of agriculture operations are shared to a certain degree by different sectors in the industry, for example the following:
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Research and development are at times initiated and supported by government departments;
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The primary producers are mainly concerned with the growing risks of the produce;
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There are marketing companies that assume the risks of marketing the produce;
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There are trading houses conduct the sales of the produce and assume the credit risks of the sales; and
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There are logistic companies that assume the risks of transporting the produce.
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However, as a vertically integrated operator,
we shall have to cover all the mentioned risks. China is a developing country and currently its agriculture industry has not been
fully developed similarly to other developed nations. As a result, management believes that it is essentially important for us
to be able to develop our business operation in a vertically integrated manner in order to be able to achieve reasonable profit
margins for our products. Although we also believe that the multiple layers of profits generated through the multiple operations
may compensate to some degree for the variety of risks that we face through the multiple operations, nevertheless, the overall
risks are much greater. At the same time, the full module of our vertically integrated developments has not been completed and
these vertically integrated 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 cost us an estimated $500 million in the aggregate and will be
undertaken in phases of our 5 year-plan that was initiated in March of 2010, depending on the funds available to us including internal
capital and external capital. We intend to use a significant part of the net proceeds from an offering of our securities to fund
part of the estimated costs of its final phase. However, we will need approximately $118 million in 2013 to accomplish our longer
term objectives, including but not limited to the approximately $26 million in gross proceeds intended to be raised from any such
offering.
19
USITC: China’s Agricultural Trade: Competitive Conditions and Effects on U.S. Exports, March 2011
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 product launch, including the hiring of additional personnel, has resulted in significantly higher operating expenses.
As a result, we anticipate that our operating expenses will continue to increase. Expansion of our operations may also cause a
significant demand 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. There can be no assurance that significant problems
in these areas will not occur. Any 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. There can be no assurance that our attempts to expand our marketing, sales, manufacturing and customer
support efforts will be successful or will result in additional sales or profitability in any future period. As a result of the
expansion of our operations and the anticipated increase in our operating expenses, as well as 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 existing goods. Assuming we obtain sufficient funding to increase
our production capacity, any projects that we undertake 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 these production upgrades. Any
material delay in completing these projects, or any substantial increase in costs 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 result in harming our financial condition.
Our business and operations are experiencing
rapid growth. 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, which has placed, and may continue to place, significant demands on our management,
operational and financial infrastructure. If we do not effectively manage our growth, the quality of our products and
services could suffer, which could negatively affect our operating results. To effectively manage this growth, we will
need to continue to improve our operational, financial and management controls and our reporting systems and procedures. These
systems enhancements and 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 China
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, the efforts we have taken 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 adversely affect our results of operation. Also, protecting our intellectual property
rights is costly and time consuming. Policing the 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 of enforcing a court’s judgment in China, there is
no guarantee that litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may
divert our management’s attention away from our core business. An adverse determination in any lawsuit involving
our intellectual property is likely to jeopardize our business prospects and reputation. Although currently 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 in the future. All of the foregoing factors could harm our business,
financial condition and results of operations. Any increase in the unauthorized use of our intellectual property in
the future 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 adversely 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. The 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 and 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 the development and implementation of the 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 of our 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 adversely affected by epidemics, adverse 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. During May and June of 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,
severe acute respiratory syndrome 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 the outbreak of avian influenza and severe acute respiratory syndrome. 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. Furthermore, the 2008 Sichuan earthquake also had a negative impact on many businesses
in the 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.
Insofar as we do not encounter any epidemic
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 will be obtained before any of our products will be sold. Alternatively, 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 the 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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the difficulty of integrating acquired products, services or operations;
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the potential disruption of the ongoing businesses and distraction of our management and the management
of acquired companies;
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the 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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the potential impairment of relationships with employees and customers as a result of any integration
of new management personnel;
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the 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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the 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 of our competitors have significant financial, operations, sales and marketing resources and experience
in research and development and compete with us by offering lower prices. Competitors could develop new technologies that compete
with our products on achieving a lower unit price. If a competitor develops superior technology or cost-effective alternatives
to our products and services, our business could be seriously harmed as they may achieve a lower price for the same quality.
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, distributional, personnel and other resources than we possess.
Using these resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response
to specific marketing efforts by competitors, and enter into new markets more rapidly to introduce new products. In certain instances,
competitors with greater financial resources also 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 of 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. 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 of our distributors could
engage in activities that are harmful to our brand and to our business.
Our products are sold primarily through
distributors, and those distributors are responsible for ensuring that our products have the appropriate licenses to be sold to
farmers in their provinces and be kept at the right temperature to be fresh and meet shelf life terms. If those 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 affect
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, or 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, or the People's Bank, 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 also announced that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would
be allowed to float within a band of 0.3% around the central parity published by the People's Bank, while the trading prices of
the 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 at all. 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 the 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 some
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 us and 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
have the power 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 have 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. A 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 of these 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,
namely, 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 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 which 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 which 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;
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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 officer, 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 of our current operations are conducted
in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons are located outside the United States. As
a result, it may be difficult for you to effect service of process within the United States upon these persons. It may
also be difficult for you 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. In addition, there is uncertainty as to whether the courts of
the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law 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. So it is uncertain whether a PRC court would enforce
a judgment rendered by a court in the United States.
We will be a “controlled company”
within the meaning of the NASDAQ Marketplace rules and, as a result, will qualify for and will rely on certain exemptions from
certain corporate governance requirements.
Our chief executive officer controls a
majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” pursuant
to Rule 5615 (c) of the corporate governance standards of the NASDAQ Stock Market LLC should we successfully apply for a listing
on this exchange. Under such rules, a company of which more than 50% of the voting power for the election of directors
is held by an individual, a group or another 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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the nominating and corporate governance committee be composed entirely of independent directors
with a written charter addressing 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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there be an annual performance evaluation of the nominating and corporate governance and compensation
committees.
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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 intend to elect to be treated as a “Controlled
Company” in the event that we should seek to list our shares on the Nasdaq Stock Market LLC. As a result, you
may not have 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 which 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) 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 market 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.
We believe that the market 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 market prices are suffering (e.g.,
our shares are presently trading at approximately 25% of our net tangible asset value per share). Many Chinese companies are suffering
from this stigma, which tends to affect both market prices and liquidities, and our company is no exception. There are reasons
of varying degrees of legitimacy explaining 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, (iii) the difficult in enforcing US judgments in foreign courts generally, all of which have contributed
to a negative perception in the minds of some US investors regarding all Chinese companies publicly traded on US markets. Regardless
of the reasons for this perception, should it continue over a sustained period of time our market prices may keep on trading below
our net tangible asset value per share, which would not only increase the risk that our shareholders lose the funds they have invested
in our company, but may also adversely affect our ability to maintain our growth plan on a timely manner and thus our business
and financial condition as well.
Our shares of our common stock are
subject to the U.S. “Penny Stock” Rules, meaning that investors who purchase our common stock 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 at some point,
shares of our common stock will 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 investors our company 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-NASDAQ and 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 the federal securities laws relating to a forward-looking statement does not apply to us and 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.
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.
The 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.