C&D Property Management Group Co., Ltd - Proxy Solicitation & Information Statement 2010

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Grand Forestry Green Resources Group Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(incorporated in Bermuda with limited liability)

(Stock code: 00910)

(I) VERY SUBSTANTIAL DISPOSAL IN RELATION TO DISPOSAL OF ASSETS; (II) CONNECTED TRANSACTION IN RELATION TO THE APPOINTMENT OF FINANCIAL ADVISER AND

(III) NOTICE OF SPECIAL GENERAL MEETING

Financial Adviser to the Company

A letter from the board of directors of China Grand Forestry Green Resources Group Limited is set out on pages 4 to 10 of this circular.

A notice convening the special general meeting of China Grand Forestry Green Resources Group Limited to be held at Units 3309-11, 33F., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on 30 March 2010 at 10:30 a.m. (or immediately after the conclusion or adjournment of the special general meeting of the Company to be held at 10:00 a.m. on the same day, if later), is set out on pages 122 to 123 of this circular. If you are unable to attend the special general meeting in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon. In order to be valid, the proxy form must be deposited by hand or post to the Company’s Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the special general meeting or adjourned meeting or not less than 24 hours before the time appointed for taking the poll subsequent to the date of the special general meeting or adjourned meeting thereof (as the case may be). If the proxy form is signed by a person under a power of attorney or other authority, a notarially certified copy of that power of attorney or authority shall be deposited at the same time as mentioned in the proxy form. Completion and return of the proxy form will not preclude you from subsequently attending and voting at the special general meeting or any adjournment thereof should you so wish.

12 March 2010

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Appendix I — Unaudited profit and loss statements on the identifiable
net income stream in relation to and valuations
of the Disposal Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Appendix II — Unaudited pro forma financial information of the Remaining Group . . . . .	13
Appendix III — Other financial information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Appendix IV — Valuation report on the Disposal Assets 1 & 2. . . . . . . . . . . . . . . . . . . . . . . .	27
Appendix V — Valuation report on the Disposal Assets 3 . . . . . . . . . . . . . . . . . . . . . . . . . . .	104
Appendix VI — Comfort letters in relation to valuation report
on the Disposal Assets 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	113
Appendix VII — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
Notice of SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	122

DEFINITIONS

In this circular, unless the context otherwise requires, the following words and expressions have the following meanings:

“Acquisition”

the acquisition of the entire issued share capital of Shenyu New Energy pursuant to the Acquisition Agreement by the Company from the Purchaser;

“Acquisition Agreement” the sale and purchase agreement dated 5 November 2007 as supplemented by the first, second and third supplemental agreements dated 23 November 2007, 17 December 2007 and 14 June 2008 respectively entered into between the Company and the Purchaser in relation to the Acquisition;
“Beijing Shenhao” 北京神浩新能源科技有限公司(Beijing Shenhao New Energy Technology Company Limited)*, a wholly owned subsidiary of Shenyu New Energy, is a company established in the PRC and is principally engaged in the research and development of technologies in biological energy and forestry resource;
“Board” the board of Directors;
“Business Day” a day on which banks are generally open for business in Hong Kong other than a Saturday and a Sunday;
“Company” or “Vendor” China Grand Forestry Green Resources Group Limited, a company incorporated in Bermuda with limited liability, the issued shares of which are listed on the main board of the Stock Exchange;
“Completion” the completion of the Disposal;
“Completion Date” the third Business Day after the Conditions Precedent having been fulfilled or at such other date as the parties may agree in writing;
“Conditions Precedent” the condition precedent to the completion of the Disposal Agreement;
“Director” a director of the Company and “Directors” include all directors of the Company;
“Disposal” the disposal of assets by the Company in accordance with the terms of the Disposal Agreement;
“Disposal Agreement” the agreement dated 12 February 2010 entered into between the Company and the Purchaser relating to the sale and purchase of the Disposed Assets;
For identification purposes only

DEFINITIONS

“Disposal Assets”	Collectively Disposal Assets 1, Disposal Assets 2 and Disposal
	Assets 3;
“Disposal Assets 1”	Current forest assets covers a total area of approximately
	1,350,000 Mu (excluding Jatropha Curcas L estate area) in the
	counties of Huize, Yanbi, Gengma, Yongren, Qiubei, Shuangbai,
	Yuanmou, Shuangjiang and Yunlong, all of which are located in
	the province of Yunnan;
“Disposal Assets 2”	Current Jatroph estate covers a total area of approximately
	300,000 Mu in the counties of Huize and Shuangjiang, all of
	which are located in the province of Yunnan;
“Disposal Assets 3”	A parcel land use right, construction contracts and respective
	liabilities of a hotel development project in Shuangbai county of
	Yunnan province;
“Financial Adviser”	Kingston Corporate Finance Limited, a licensed corporation
or “Kingston”	to carry on business in type 6 (advising on corporate finance)
	regulated activity under the SFO;
“Group”	the Company and its subsidiaries;
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC;
“Independent Third	third party(ies) independent of and not connected or
Party(ies)”	acting in concert with the Company and any of its connected
	persons (as defined in the Listing Rules) and are not connected
	persons of the Company;
“Jatropha”	Jatropha Curcas L,小桐子, is also called Gaotong, Heizaoshu,
	Muhuasheng, Youluzi and Laopangguo etc. It is a member of the
	Euphorbiaceae family. It is a deciduous shrub or tree that is two to
	five meters tall. As a source for bio-diesel after being processed,
	Jatropha Curcas L is a renewable energy source plant;
Latest Practicable Date	10 March 2010, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information
	contained in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange;
“Mu”	Chinese acres, one Chinese acre equals approximately 666.67
	square meters;

DEFINITIONS

“Purchaser” or “Forcemade”	Forcemade Investments Limited is a company incorporated in
	British Virgin Islands. To the best of the Directors’ knowledge,
	information and belief after having made reasonable enquiries, the
	Purchaser is an investment holding company and the Purchaser
	and its ultimate beneficial owner(s) are Independent Third Parties;
“PRC”	the People’s Republic of China and for the purpose of this
	circular, excludes Hong Kong, the Macau Special Administrative
	Region of the PRC and Taiwan;
“Remaining Group”	the Group immediately upon the Completion;
“RMB”	renminbi, the lawful currency of the PRC;
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the laws of
	Hong Kong)
“SGM”	a special general meeting of the Company to be convened to
	approve, amongst other things, the Disposal Agreement and the
	transactions contemplated thereunder;
“Share Option(s)”	the share option(s) granted under the Share Option Scheme;
“Share Option Scheme”	the share option scheme of the Company which was adopted on 23
	November 2001;
“Shareholders”	holders of Shares;
“Shares”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company;
“Shenyu New Energy”	Shenyu New Energy Group Limited, is a company incorporated in
	the British Virgin Islands and is an investment holding company;
“Shenyu New Energy Group”	Shenyu New Energy and its subsidiaries;
“Stock Exchange”	The Stock Exchange of Hong Kong Limited;
“Yunnan Shenyu”	Yunnan Shenyu New Energy Company Limited, a Company
	incorporated in the PRC and an indirect wholly-owned subsidiary
	of the Company;
“HK$”	Hong Kong dollar(s), the lawful currency of Hong Kong.

If there is any inconsistency between the Chinese name of PRC entities, departments, facilities or titles mentioned in this circular and their English translations, the Chinese version shall prevail.

LETTER FROM THE BOARD

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(incorporated in Bermuda with limited liability)

(Stock code: 00910)

Executive directors: Mr. Tse On Kin (Chairman) Mr. Pang Chun Kit

Independent non-executive directors:

Registered office:

Units 3309-11, 33rd Floor West Tower, Shun Tak Centre 168-200 Connaught Road Central Sheung Wan, Hong Kong

Dr. Wong Yun Kuen Mr. Chan Chi Yuen Ms. Xu Lei

12 March 2010

To the Shareholders

Dear Sir or Madam,

(I) VERY SUBSTANTIAL DISPOSAL IN RELATION TO DISPOSAL OF ASSETS; AND (II) CONNECTED TRANSACTION IN RELATION TO THE APPOINTMENT OF FINANCIAL ADVISER

INTRODUCTION

On 12 February 2010, after trading hours, the Company entered into the Disposal Agreement with the Purchaser relating to the Disposal. Pursuant to the Disposal Agreement, the Company has agreed to sell and the Purchaser has agreed to purchase the Disposal Assets, subject to fulfillment of the Conditions Precedent. Upon the completion of the Disposal, purchase consideration payables will be completely cancelled out and no outstanding amount under the Acquisition Agreement would be due to or owing to the Purchaser from the Group.

Kingston has been appointed as the financial adviser to advise the Company in respect of the Disposal. The beneficial owner of the Financial Adviser is a substantial shareholder (as defined in the Listing Rules) of the Company, and the Financial Adviser is therefore a connected person of the Company within the meaning of Rule 14A.11 of the Listing Rules. The Financial Adviser also holds 10,000,000 Share Options. The engagement of the Financial Adviser constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As the relevant percentages under Rule 14.07 of the

LETTER FROM THE BOARD

Listing Rules are less than 2.5%, the engagement of the Financial Adviser is subject only to the reporting and announcement requirements and is exempt from independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The purpose of this circular is to provide you with further details of the Disposal Agreement and the transactions contemplated thereunder and other information in compliance with the requirements of the Listing Rules.

THE DISPOSAL AGREEMENT

Date 12 February 2010 (after trading hours)

Parties

Vendor: the Company; and

Purchaser: Forcemade Investments Limited

To the best of the Directors’ knowledge, information and belief after having made reasonable enquiries, the Purchaser and its ultimate beneficial owner(s) are Independent Third Parties.

Assets to be disposed

Pursuant to the Disposal Agreement, the Vendor has agreed to sell and the Purchaser has agreed to purchase the Disposal Assets, subject to fulfillment of the Conditions Precedent.

In respect of the Disposal Assets 1 and Disposal Assets 2, the Purchaser or its nominee(s) is entitled to remove all forestry assets in their respective lands within two years from the Completion Date. In the event that the Purchaser is unable to remove the forestry assets within the two years from the Completion Date, then:

(a) the Company has the absolute discretion over the Disposal Assets 1 and Disposal Assets 2, including but not limited to the removal of Disposal Assets 1 and Disposal Assets 2 without being accountable for any legal responsibility;
(b) the Purchaser shall wholly indemnify the Company any related losses or fees incurred as a result of the Purchaser’s failure to remove the Disposal Assets 1 and Disposal Assets 2; and
(c) the Company shall after deducting expenses, reimburse the Purchaser any income accrued from the sales of Disposal Assets 1 and Disposal Assets 2 two years after the Completion Date. The Purchaser shall warrant not to seek any compensation against the Company any related losses or fees incurred from any negligence of the Company in relation to Disposal Assets 1 and Disposal Assets 2.

LETTER FROM THE BOARD

In respect of the Disposal Assets 3, the Purchaser shall take up all the commitments and liabilities regarding the construction contracts of the hotel development upon the Completion.

Consideration

Pursuant to the Acquisition Agreement, the consideration of the Acquisition was up to a maximum amount of HK$4,000 million. The purchase consideration payables owing to the Purchaser were created from the Acquisition. For further details of the Acquisition, please refer to the circular issued by the Company dated 24 July 2008.

Pursuant to the Disposal Agreement, the Consideration will be completely cancelled out by the sum of the outstanding purchase consideration payables otherwise due to or owing to the Purchaser from the Group under the Acquisition Agreement. As at 30 September 2009, the purchase consideration payables otherwise due to or owing to the Purchaser were approximately HK$2,370 million. The fair values of the Disposal Assets are subjected to subsequent changes in accordance with the independent valuation reports on the Disposal Assets as at 31 December 2009.

The basis of the Consideration was determined after arm’s length negotiations between the parties to the Disposal Agreement with normal commercial terms, amongst other things, the carrying value of the Disposal Assets as at 31 March 2009 which amounted to approximately HK$1,482 million.

Conditions Precedent

Completion of the Disposal is conditional upon fulfillment of the following conditions:

(a) the passing of the relevant board resolutions and shareholder resolutions of the Company for approving the Disposal Agreement and transactions (if any) contemplated;
(b) the obtaining by the Company of the written confirmation of the legal representative of Yunnan Shenyu New Energy for approving the Disposal Agreement; and
(c) the obtaining by the Company of all necessary consents and approvals in compliance with the Listing Rules.

In the event that the above conditions are not fulfilled on or before 30 June 2010 or such other later date as may be agreed between the parties, the Disposal Agreement shall be of no further effect and all parties shall be released from their respective obligations and the parties shall have no claims against each other in respect of the Disposal Agreement except for any claims arising from prior breach of obligations contained in the Disposal Agreement.

Completion

Completion of the Disposal Agreement shall take place on the third Business Day after the Conditions Precedent having been fulfilled or at such other date as the parties may agree in writing.

LETTER FROM THE BOARD

INFORMATION ON THE DISPOSAL ASSETS

The Disposal Assets are entirely owned by Yunnan Shenyu, a wholly owned subsidiary of Beijing Shenhao which in turn wholly owned by Shenyu New Energy, is principally engaged in the research and development of Jatropha based biological energy sources, such as bio-diesel. Jatropha is a source for biodiesel after being processed, and is a renewable energy source plant which is efficient for water and soil retention as well as ecology restoration.

The Group has acquired Shenyu New Energy since 12 September 2008. For the year ended 31 March 2009, the audited net loss arising from the Disposal Assets amounted to approximately HK$137 million.

POSSIBLE FINANCIAL EFFECT OF THE DISPOSAL

As at 30 September 2009, the carrying value of the Disposal Assets and purchase consideration payables amounted to approximately HK$1,457 million and approximately HK$2,370 million respectively. Based on the carrying values of the Disposal Assets and purchase consideration payables, the Group will recognize a gain of approximately HK$913 million arising from the Disposal upon the completion. However, this amount will be subjected to the subsequent changes in the fair values of the Disposal Assets and purchase consideration payables.

Since the whole consideration of the Disposal to be paid will be completely cancelled out the whole purchase consideration payables due to the Purchaser from the Group, no cash flow impact will be incurred.

VALUATION OF THE DISPOSAL ASSETS

Disposal Assets

PÖyry Forest Industry Consulting and LCH (Asia-Pacific) Surveyors Limited, independent valuers, have valued the Disposal Assets. Valuation reports are set out in Appendix IV and Appendix V to this circular.

A reconciliation of the carrying amount of the Disposal Assets, as of 30 September 2009 to their fair value as of 31 December 2009 as stated in Appendix II to this circular is as follows:

Carrying amount of the Disposal Assets as at 30 September 2009 (unaudited) _Less:_Release of prepaid lease payments for the three months ended 31 December 2009 Add: decrease in fair value of the Disposal Assets Fair value of the Disposal Assets as at 31 December 2009	HK$ million 1,457.1 (0.10) 1,457.0 (44.0) 1,413.0

LETTER FROM THE BOARD

According to the Valuation Reports, the fair value of the Disposal Asset 1, 2 and 3 as at 31 December 2009 are HK$1,013 million, HK$337 million and HK$63 million respectively.

REASONS FOR AND BENEFITS OF THE DISPOSAL

Forcemade was not satisfied with the progress in profitability of Shenyu Group and complained to the Company which led to discussion for a possible solution. Early settlement with Forcemade enables the Company to remove uncertainty of potential litigation. In addition, upon completion of the Disposal, the Group still retains all the land use rights of all existing forest land and the Purchaser or its nominee(s) has to remove all forestry assets in such forest lands within two years from the Completion Date. The Group can well implement the plantation plan of Jatropha accordingly. Seed of Jatropha is one of the raw materials of bio-diesel production. Development of bio-diesel is one of the key strategic business developments to enhance the revenue and provide profit for the Group. In addition, bio-diesel processing plant development project together with the forest land use rights are still retained by the Group so as to support the development of the Jatropha based bio-diesel business. Furthermore, the Company is aiming to bolster the financial position by reducing debt level and retaining cash in hand for future business developments.

Upon completion of the Disposal, the outstanding purchase consideration payable amounting to approximately HK$2,370 million (as at 30 September 2009), which was approximately 75.5% total liabilities approximately HK$3,139 million as at 30 September 2009, would be fully settled.

In light of the above reasons, the Directors consider that the terms of the Disposal are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

IMPLICATIONS OF THE LISTING RULES

As the applicable percentage ratios as calculated under Rule 14.07 of the Listing Rules exceed 75%, the Disposal constitutes a very substantial disposal for the Company under the Listing Rules and therefore is subject to approval by Shareholders at the SGM under Rule 14.49 of the Listing Rules. To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, no Shareholder has a material interest in the Disposal Agreement and the transactions contemplated thereunder and therefore no Shareholder is required to abstain from voting at the SGM.

CONNECTED TRANSACTION

Kingston has been appointed as the financial adviser to advise the Company in respect of the Disposal. The Financial Adviser is a licensed corporation to carry on type 6 (advising on corporate finance) regulated activity under the SFO. A fee of HK$400,000 will be payable in cash by the Company to the Financial Adviser.

The Directors (including the independent non-executive Directors) consider that the engagement of the Financial Adviser falls within the business scopes of the Financial Adviser. The beneficial owner of Kingston became the substantial shareholder (as defined in the Listing Rules) of the Company in late 2009 and given the fact that Kingston has been appointed as the financial adviser to the Company in respect of various transactions since 2006, Kingston has developed a long term good business relationship with

LETTER FROM THE BOARD

the Company and has thorough understanding in the business of Company. The Directors believe that Kingston can provide its services to the Company in a more effective and efficient manner. The Directors are of the view that engagement of Kingston is on the terms no less favourable to the Company than terms previously offered from Kingston when it was independent to the Company. The Directors consider that the engagement of the Financial Adviser is on normal commercial terms, fair and reasonable and in the interest of the Company and the Shareholders as a whole.

The beneficial owner of the Financial Adviser is a substantial shareholder (as defined in the Listing Rules) of the Company, and the Financial Adviser is therefore a connected person of the Company within the meaning of Rule 14A.11 of the Listing Rules. The Financial Adviser also holds 10,000,000 Share Options. The engagement of the Financial Adviser constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As the relevant percentages under Rule 14.07 of the Listing Rules are less than 2.5%, the engagement of the Financial Adviser is subject only to the reporting and announcement requirements and is exempt from independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

THE SGM

As the transactions under the Disposal Agreement constitute a very substantial disposal of the Company under the Listing Rules, the Disposal Agreement and the transactions contemplated thereunder are subject to the approval of the Shareholders in the SGM. A notice convening the SGM to be held at Units 3309-11, 33F., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on 30 March 2010 at 10:30 a.m. (or immediately after the conclusion or adjournment of the special general meeting of the Company to be held at 10:00 a.m. on the same day, if later) for the purpose of considering and, if thought fit, approving the Disposal Agreement and the transactions contemplated thereunder. The Notice of SGM is set out on pages 122 to 123 of this circular. Whether or not you are able to attend the SGM, please complete and return the accompanying form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar and transfer office in Hong Kong, Tricor Tengis Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time fixed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting at the SGM or any adjournment thereof should you so wish.

Pursuant to the amendments to the Listing Rules which became effective on 1 January 2009, any vote of shareholders at a general meeting must be taken by poll and accordingly, the ordinary resolution in relation to the Disposal Agreement will be put to vote by way of poll at the SGM. To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, no Shareholder has a material interest in the Disposal Agreement and the transactions contemplated thereunder and therefore no Shareholder is required to abstain from voting at the SGM.

If you are unable to attend the SGM in person, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon. In order to be valid, the proxy form must be deposited by hand or post to the Company’s Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time for holding the SGM or adjourned meeting or not less than 24 hours before the time appointed for taking the poll subsequent to the date of the SGM or adjourned meeting thereof (as the case

LETTER FROM THE BOARD

may be). If the proxy form is signed by a person under a power of attorney or other authority, a notarially certified copy of that power of attorney or authority shall be deposited at the same time as mentioned in the proxy form. Completion and return of the proxy form will not preclude you from subsequently attending and voting at the SGM.

GENERAL

The Company was incorporated in Bermuda with limited liability. The principal business activities of the Group are ecological forestry business. Upon completion of the Disposal, the Group still has estate area of approximately 7 million Mu to develop its ecological business continuously.

RECOMMENDATION

Having taken into account of the information set out above, the Board considers that the terms of the Disposal Agreement and the transactions contemplated thereunder are fair and reasonable, on normal commercial terms and in the interests of the Company and the Shareholders as a whole and so recommends the Shareholders to vote in favour of the resolutions relating to the aforesaid matters at the SGM.

By order of the Board China Grand Forestry Green Resources Group Limited Tse On Kin Chairman

APPENDIX I

UNAUDITED PROFIT AND LOSS STATEMENTS ON THE IDENTIFIABLE NET INCOME STREAM IN RELATION TO AND VALUATIONS OF THE DISPOSAL ASSETS

PROFIT AND LOSS STATEMENTS AND VALUATIONS OF THE DISPOSAL ASSETS

In accordance with paragraph 14.68(2)(b)(i) of the Listing Rules, the profit and loss statements of the Disposal Assets for the period from 12 September 2008 (the date of acquisition of Shenyu New Energy Group Limited by the Company) to 31 March 2009 and six months ended 30 September 2009 and the valuations of the Disposal Assets as at 31 March 2009 and 31 December 2009 are set out below. In the opinion of the directors of the Company, such information was in agreement with (A) the underlying books and records and (B) valuation reports of the Disposal Assets of the Group.

A. Profit and loss statements of the Disposal Assets

	Period from
	12 September 2008	Six months
	to 31 March	ended 30
	2009	September 2009
	HK$’000	HK$’000
Revenue	–	–
Cost of inventories and forestry products sold	–	–
Loss arising from changes in fair value of biological
assets less estimated point-of-sale costs	(136,481)	–
Other income	–	–
Administrative expenses	(351)	(325)
Finance costs	–	–
Loss before taxation	(136,832)	(325)
Taxation	–	–
Loss for the year/period	(136,832)	(325)

Procedures have been carried out by BDO Limited, the reporting accountants of the Company, on the profit and loss statements of the Disposal Assets as shown in the above table in accordance with Hong Kong Standard on Related Services 4400 “Engagements to Perform Agreed-Upon Procedures Regarding Financial Information” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) to ensure that such information has been properly compiled and derived from the underlying books and records of the Group. BDO Limited, the reporting accountants of the Company, reported that such information was in agreement with the underlying books and records of the Group.

APPENDIX I

UNAUDITED PROFIT AND LOSS STATEMENTS ON THE IDENTIFIABLE NET INCOME STREAM IN RELATION TO AND VALUATIONS OF THE DISPOSAL ASSETS

B. Valuations of the Disposal Assets

Valuations of the Disposal Assets 1 and 2 are as follows:

			As at	As at
		31	March 2009	31 December 2009
			HK$’000	HK$’000
Valuation of Disposal Assets	1		1,121,297	1,013,000
			(Note 1)	(Note 1)
Valuation of Disposal Assets	2		268,702	337,000
			(Note 2)	(Note 2)

The valuation of Disposal Assets 3 as at 31 December 2009 was HK$62,924,000 based on the valuation report prepared by LCH (Asia Pacific) Surveyors Limited, an independent valuer, on market value basis as stated in Appendix V to this Circular. No valuation has been performed for Disposal Assets 3 as at 31 March 2009.

Notes:

The valuation of the Disposal Assets 1 was based on the valuation report prepared by PÖyry Forest Industry Consulting, an independent valuer, on an income expectation approach based on projected wood flows of the forest assets, the projected future pre-tax cash flows, based on their assessment of current timber log price, and a discounted rate of 11.5%.
The valuation of the Disposal Assets 2 was based on the valuation report prepared by PÖyry Forest Industry Consulting, an independent valuer, based on the replacement cost approach by using the compound cost methodology.

Procedures have been carried out by BDO Limited, the reporting accountants of the Company, on the valuations of the Disposal Assets 1, 2 and 3 as shown in the above table in accordance with Hong Kong Standard on Related Services 4400 “Engagements to Perform Agreed-Upon Procedures Regarding Financial Information” issued by the HKICPA to ensure that such information was in agreement with the valuation reports prepared by PÖyry Forest Industry Consulting and LCH (Asia Pacific) Surveyors Limited, independent valuers. BDO Limited, the reporting accountants of the Company, reported that such information was in agreement with the valuation reports prepared by PÖyry Forest Industry Consulting and LCH (Asia Pacific) Surveyors Limited.

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

(A) ACCOUNTANTS’ REPORT

Tel: +852 2541 5041 Fax: +852 2815 2239 www.bdo.com.hk

電話：+852 2541 5041 傳真：+852 2815 2239 www.bdo.com.hk

25[th] Floor Wing On Centre 111 Connaught Road Central Hong Kong

香港干諾道中111號永安中心25樓

12 March 2010

The Board of Directors

China Grand Forestry Green Resources Group Limited Room 3309-11, 33rd Floor West Tower, Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information of China Grand Forestry Green Resources Group Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 15 to 18 under the heading of “Unaudited Pro Forma Financial Information on the Remaining Group” (the “Unaudited Pro Forma Financial Information”) in Appendix II of the Company’s circular dated 12 March 2010 (the “Circular”) in connection with the proposed disposal of certain assets of Yunnan Shenyu New Energy Company Limited in accordance with the disposal agreement dated 12 February 2010 (the “Disposal”). The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Disposal might have affected the relevant financial information presented. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in Appendix II of the Circular.

Respective Responsibilities of the Directors of the Company and Reporting Accountants

It is the sole responsibility of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement does not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on the judgments and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

the financial position of the Remaining Group as at 30 September 2009 or any future date; and
the results of the Remaining Group for the six months ended 30 September 2009 or any future periods.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, BDO Limited Certified Public Accountants Hong Kong Sum Yuk Fan, Sharon Director Practising Certificate number P04967 Hong Kong

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

(B) UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

The following is the unaudited pro forma consolidated net assets statement and the unaudited pro forma consolidated income statement of the Remaining Group (collectively known as the “Unaudited Pro Forma Financial Information”) which have been prepared in accordance with Paragraph 29 of Chapter 4 of the Listing Rules for the purpose of illustrating the effect of the Disposal on the financial position of the Remaining Group as if the Disposal had been completed on 30 September 2009 and the results of the Remaining Group as if the Disposal had been completed at the commencement of the six months period ended 30 September 2009.

As the Unaudited Pro Forma Financial Information has been prepared for illustrative purpose only, and because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position and result of the Remaining Group following the completion of the Disposal.

The Unaudited Pro Forma Financial Information is based on the unaudited consolidated net assets of the Group as at 30 September 2009 and the unaudited consolidated income statement of the Group for the six months 30 September 2009 extracted from the published unaudited interim financial report of the Group for the six months ended 30 September 2009, after giving effect to the pro forma adjustments relating to the Disposal that are i) clearly shown and explained; ii) directly attributable to the Disposal and not relating to future events or decisions; and iii) factually supportable.

The Unaudited Pro Forma Financial Information is based on a number of assumptions, estimates and uncertainties. Accordingly, the Unaudited Pro Forma Financial Information does not purport to describe the actual financial position and result of the Remaining Group that would have been attained had the Disposal been completed on 30 September 2009 and at the commencement of the six months period ended 30 September 2009 respectively. The Unaudited Pro Forma Financial Information does not purport to predict the future financial positions or results of the Remaining Group.

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

1. Unaudited Pro Forma Consolidated Net Assets Statement

	The Group		The Remaining
	as at		Group as at
	30 September	Pro Forma	30 September
	2009	adjustments	2009
		Note 1
	HK$’000	HK$’000	HK$’000
ASSETS AND LIABILITIES
Non-current assets
Biological assets	6,821,680	(1,393,173)	5,428,507
Property, plant and equipment	83,369		83,369
Construction in progress	66,365	(32,274)	34,091
Prepaid lease payments	1,351,046	(30,971)	1,320,075
Long-term prepayments	109,190		109,190
Intangible assets	628,034		628,034
Available-for-sale investments	18,872		18,872
	9,078,556		7,622,138
Current assets
Inventories	656		656
Trade receivables	185,329		185,329
Prepaid lease payments	31,930	(648)	31,282
Other receivables, deposits and
prepayments	152,065		152,065
Financial assets at fair value through
profit or loss	14,122		14,122
Cash and cash equivalents	456,020		456,020
	840,122		839,474

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

	The Group		The Remaining
	as at		Group as at
	30 September	Pro Forma	30 September
	2009	adjustments	2009
		Note 1
	HK$’000	HK$’000	HK$’000
Current liabilities
Trade payables	18,882		18,882
Other payables and accruals	187,566		187,566
Purchase consideration payable	100,000	(100,000)	–
	306,448		206,448
Net current assets	533,674		633,026
Total assets less current liabilities	9,612,230		8,255,164
Non-current liabilities
Long term payables	465,822		465,822
Purchase consideration payable	2,269,831	(2,269,831)	–
Convertible notes	96,123		96,123
Deferred taxation	640		640
	2,832,416		562,585
Net assets	6,779,814		7,692,579

Note to the unaudited pro forma consolidated net assets statement

(1) The pro forma adjustments represent the elimination of the carrying value of approximately HK$1,457,066,000 of the Disposal Assets and the purchase consideration payable.

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

APPENDIX II

2. Unaudited Pro Forma Consolidated Income Statement

	The Group		The Remaining
	for the		Group for the
	six months		six months
	ended		ended
	30 September	Pro Forma	30 September
	2009	adjustment	2009
		Note 2
	HK$’000	HK$’000	HK$’000
Revenue	5,415		5,415
Other income	2,839		2,839
Other net loss	(2,338)		(2,338)
Cost of inventories and forestry
products sold	(2,812)		(2,812)
Staff costs	(41,668)		(41,668)
Depreciation of property, plant and
equipment	(9,238)		(9,238)
Amortisation of biological assets	(18,263)		(18,263)
Amortisation of patent	(13,380)		(13,380)
Release of prepaid lease payments	(15,970)	325	(15,645)
Other operating expenses	(23,038)		(23,038)
Finance costs	(15,147)		(15,147)
Loss before taxation	(133,600)		(133,275)
Taxation	332		332
Loss for the period	(133,268)		(132,943)
Other comprehensive income for the period:
Exchange difference on translation of
financial statements of overseas entities	23,334		23,334
Total comprehensive loss for the period	(109,934)		(109,609)

Note to the unaudited pro forma consolidated income statement

(2) The pro forma adjustment represent the amount for the release of prepaid lease payments in respect of the Disposal Assets 3.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

A. INDEBTEDNESS

As at the close of business on 31 January 2010, the Group had total outstanding borrowing of approximately HK$99 million representing the unsecured convertible notes due May 2010 with outstanding principal amount of approximately HK$100,000,000.

Save as aforesaid if any or as otherwise mentioned herein, and apart from intra-group liabilities and normal trade and other payables in the ordinary course of business, at the close of business on 31 January 2010, the Group did not have any outstanding indebtedness, loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debenture, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitment, guarantees or contingent liabilities.

The Directors confirm that, save as disclosed herein, there has not been any material change in the indebtedness or contingent liabilities of the Group since 31 January 2010.

B. WORKING CAPITAL

Taking into consideration the financial resources available to the Group, including its internally generated funds and other financial resources, and in the absence of unforeseen circumstances, the Directors are satisfied that the Group will have sufficient working capital for its present requirements, that is for at least twelve months from the date of this circular.

C. FINANCIAL AND TRADING PROSPECT

The Directors expect the existing ecological forestry business of the Group will be continued into foreseeable future immediately upon completion of the Disposal. There are presently no plans for the significant divestment of this existing business as the Directors have identified ecological business as a opportunity with highly favorable long term prospect.

In addition, with the increasing awareness of alternative energy and ecology protection, the Chinese government is implementing various measures to support the development of such industries as ecological forestry, carbon emission reduction and energy. Such measures include the reduction of emissions in the forest industry, land concession rights reform and subsidies to the plantation of environmentally-friendly species. Of these, land concession rights reform directly presents a golden opportunity to the Group. Such a policy can speed up the process of forest ownership transfers, thereby raising the value of the land and forests owned by the Group. Besides, the Group will also make efforts to develop downstream industries. Other than bio-diesel, wood pellets production is also one of the directions in which the Group is considering its development. With the Chinese government unveiling economic stimulus packages, the macro-economy in the PRC is expected to recover gradually. Thus, there should be an upward trend in timber price and energy price.

Moreover, the Group is exploring overseas development opportunities carefully in order to catch up the growing demand for timber in China, so as to maximise its shareholders’ returns.

Upon completion of the Disposal, the liabilities of the Group would be reduced by around 75.5% and the Group can retain more cash for future business developments.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

D. MANAGEMENT DISCUSSION AND ANALYSIS

The following information is the management discussion and analysis of the Remaining Group for the year ended 31 March 2009.

For the year ended 31 March 2009

Financial highlights

For the Year, the Remaining Group recorded a turnover of approximately HK$685 million, representing a decrease of 33% compared with the year ended 31 March 2008 (the “Previous Year”). The Remaining Group’s loss attributable to shareholders was approximately HK$316 million, representing a basic loss per share of HK5.75 cents (for the Previous Year: profit of HK$2,743,860,000, representing a basic earnings per share of HK51.03 cents).

The operating loss is mainly attributed to:

against the backdrop of global economic slump and the consequential drop in the demand for and prices of timber products, a significant drop in sales during the second half of the Year was recorded accordingly;
a net revaluation loss of biological assets of HK$203 million and write off of biological assets HK$66 million;
attributable non-cash imputed interest arising from the discounting of the consideration payable for to be amortised from the acquisition of Shenyu New Energy Group Limited and for acquisition of forest farms increased substantially by approximately HK$59 million;
HK$34 million incurred by the Remaining Group for debris removal and rebuilding of paths of forest farms within the affected area after snow-storm disaster in early 2008;
unrealised non-cash loss of HK$47 million on investments in listed equity securities at fair value; and
allowance for doubtful debts of approximately HK$59 million.

In calculating the Remaining Group’s net loss, sharing in losses of its joint-venture investment in the amount of HK$1.5 million (for the Previous Year: loss of HK$4.4 million) was included.

Dividend

The Board does not recommend any final dividend for the Year (for the Previous Year: HK$Nil).

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Review of the ecological forestry business

(i) Forest land and forest resources

As at 31 March 2009, the total area of forest land use rights owned by the Remaining Group amounted to approximately 7.5 million Chinese Mu and is mainly located in Hunan, Yunnan, Guizhou and Chongqing. The tree species mainly include massonpine, broadleaf hardwood, broadleaf tree, pine, foreign pine, Yunnan pine, Chinese pine and coniferous-broad leaved mixed natural forests. These species are mainly used for the production of pulp, building materials, furniture, wood board and particle board. With the growing timber resources, it is anticipated that the potential production capacity of timber products would increase and create a stable cash flow for the Remaining Group accordingly.

During the Year, the Remaining Group disposed of standing timber and land use rights of three forest farms in Shanxi Province, and recorded a net gain of HK$65 million. The majority of newly acquired forest land during the Year is located in Guizhou, Hunan and Chongqing and a higher proportion of timber in these areas has reached the phase for commercial purposes. This could optimise the quality of the Remaining Group’s forest resources.

Turnover from the sales of processed timber in various log grades, standing timber, paper mulberry products and others during the Year were approximately HK$550 million, HK$8 million, HK$69 million and HK$59 million respectively. Processed timber mainly comes from 21 forest farms in Hunan, Chongqing, Guangxi, Hubei and Sichuan. As mentioned above, a downturn in the real estate market and the financial crisis led to a sharp drop in sales for the Year.

(ii) Biomass energy

Biomass energy provides significant business opportunities for the forestry industry in China and would also optimise the Remaining Group’s business development. The Remaining Group’s biomass energy development can be classified into two aspects. First, Jatropha Curcas L. (“Jatropha”) is being used as a raw material for bio-diesel production. The development and cultivation bases are mainly located in Yunnan and Guizhou. Second, the Remaining Group uses residues from timber or bush as raw material, for biomass electrical generation. The development and cultivation bases are mainly located in Inner Mongolia and certain areas in Central China where suitable conditions exist.

Bio-diesel, a type of biomass energy, is a clean burning alternative fuel produced from renewable resources. In September 2008, the Remaining Group completed the acquisition of Shenyu New Energy Group. The principal business of Shenyu New Energy Group is the research and development of biological energy resources by using Jatropha. The plantation of Jatropha is very undemanding to soil quality and the Remaining Group considers Jatropha as one of the most promising non-edible crops for bio-fuel production. As at 31 March 2009, the accumulated plantation area of Jatropha of Remaining Group amounted to approximately 0.5 million Chinese Mu. Because of the severity of the financial tsunami, the bio-diesel project suffered a delay in the Year.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

The Chinese government actively encourages the use of alternative energy as a raw material for electricity generation. In view of this, the Remaining Group also actively developed operations in Hubei and Inner Mongolia as raw material providers for biomass electricity generation during the Year.

Financial review

Revenue

The table below sets out the breakdown of the Remaining Group’s revenue for the Year:

PRODUCT Processed timber products in various log grades Standing timber Paper mulberry products Others Total	Year ended 31 March 2009 2008 Amount Amount HK$’000 HK$’000 549,570 885,850 7,654 59,182 69,281 – 58,960 78,800 685,465 1,023,832	Year ended 31 March 2009 2008 Amount Amount HK$’000 HK$’000 549,570 885,850 7,654 59,182 69,281 – 58,960 78,800 685,465 1,023,832
		1,023,832

The decrease in sales for the Year is mainly attributed to the financial turmoil that dealt a serious blow to the global economy; worldwide markets are hampered by uncertainty from a credit crunch; China’s exports fell; and instability in its real estate market led to shrinking demand for timber products and the drop in product prices.

Loss arising from changes in fair value of biological assets less estimated point-of-sale costs

Gain arising from newly acquired biological assets during the Year Fair value loss for the Year Net loss	Amount HK$’000 437,381 (640,391)
	(203,010)

Gain arising from newly acquired biological assets during the Year represents the excess of the fair value of biological assets as at the date of acquisition over the cost of acquisition.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Other net loss

Other net loss mainly included net unrealised losses on investments in listed equity securities (classified as financial assets at fair value through profit or loss) amounted to approximately HK$47 million, allowance for doubtful debt of HK$59 million and expense incurred in snow-storm disaster of HK$34 million and impairment losses on interests in jointly-controlled entities and amounts due from jointly-controlled entities amounted to approximately HK$25 million. On the other hand, the Remaining Group recorded a net gain from disposal of three forest farms for the Year of approximately HK$65 million, the analysis of which is set out below:

Sales proceeds from disposal of standing timber in forest farms Sales proceeds from disposal of land use rights of forest farms Total gain Cost of standing timber in forest farms disposed, at fair value Cost of land use rights of forest farms disposed, net Net gain	Amount HK$’000 119,020 47,529 166,549 (67,857) (33,226) 65,466

Cost of inventories and forestry products sold

It mainly included timber cost, logging cost, transportation cost, processing cost and others. During the Year, unit cost of timber consumption was increased as a result of the increase in the purchase price of timber and fair value adjustments.

Other operating expenses

The Remaining Group’s other operating expenses being various administrative and selling expenses.

Finance costs

Approximately HK$54 million of which were non-cash financial costs to be amortised from the acquisition of Shenyu New Energy Group and approximately HK$5 million was imputed interest expenses on payables for acquisitions of certain forest farms.

Biological assets

The biological assets of the Remaining Group included other forest assets, Jatropha and paper mulberry trees which amounted to HK$4,749 million, HK$440 million and HK$237 million respectively.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

During the Year, PÖyry Forest Industry Consulting valued the Remaining Group’s other forest assets and Jatropha plantation. In addition, LCH (Asia-Pacific) Surveyors Limited, a firm of independent chartered surveyors, valued the Remaining Group’s growing barks and round logs of paper mulberry trees.

The net increase in value was mainly arising from the acquisition of Shenyu New Energy Group.

Prepaid lease payments

Prepaid lease payments are the prepayments of land use rights located in the PRC. The net significant increase in value for the Year was mainly attributable to the acquisition of Shenyu New Energy Group.

Intangible assets

Intangible assets included goodwill of HK$190 million and patent of HK$451 million. The significant increase for the Year, which was mainly arising from the goodwill arising from acquisition of Shenyu New Energy Group, amounted to HK$104 million.

Purchase consideration payable

The balances represent the present value of purchase consideration payable arising from the acquisition of Shenyu New Energy Group.

Other payables, accruals and long term payables

The balances mainly included payables of forest farms and plantation expenditure. The net decrease mainly represents the repayment for forest farms, additional plantation expenditure payable and amounts arising from the acquisition of Shenyu New Energy Group.

During the year, the Remaining Group negotiated and agreed with creditors to reschedule the payment timetable of payables for the consideration of forest assets acquired. Therefore, certain portions of payables were agreed to be repaid over one year and such portions were recorded as long term payables under non-current liabilities.

Liquidity, financial resources and Capital Structure

As at 31 March 2009, the Remaining Group’s cash and bank balances, which were principally Renminbi and Hong Kong dollar denominated, amounted to approximately HK$201 million. The Remaining Group was not exposed to any substantial risk in foreign exchange fluctuations. In general, the Remaining Group mainly used its Renminbi income receipt for operating expenses in the PRC and did not use any financial instruments for hedging purpose.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

As at 31 March 2009, the Remaining Group had no borrowing (after excluding convertible notes liabilities).

The Remaining Group generally finances its operation using internally generated resources. As at 31 March 2009, the Remaining Group’s net current assets amounted to approximately HK$406 million. The Remaining Group’s current ratio, being its current assets as a percentage of its current liabilities, amounted to approximately 202%.

As at 31 March 2009, the share capital of the Company consisted of 5,471,715,600 ordinary shares of HK$0.10 each. Apart from the ordinary shares in issue, the Company issued convertible notes as alternative financing instruments.

As at 31 March 2009, the Remaining Group’s gearing ratio, measured on the basis of total borrowings (including convertible notes) as a percentage of total shareholders’ funds, was approximately 1.4% (2008: 1.3%).

Material acquisition

On 12 September 2008, the Company completed the acquisition of the entire shareholdings of Shenyu New Energy Group Limited, a company incorporated in the British Virgin Islands and held as its principal assets a 100 per cent equity interests in Beijing Shenhao New Energy Technology Company Limited. Beijing Shenhao New Energy Technology Company Limited owns the entire equity interest in Yunnan Shenyu New Energy Company Limited, which in turn owns 99% equity interest in Shuangbai Shenyu New Energy Base Company Limited (collectively referred to as “Shenyu New Energy Group”).

Charge on the Group’s assets

The Remaining Group did not have any pledged assets as at 31 March 2009 and 2008 to secure general banking facilities.

Contingent liabilities

As at 31 March 2009, the Remaining Group did not have contingent liabilities of material amounts.

Capital commitments

As at 31 March 2009, capital commitments in respect of construction costs which had been contracted but not provided for by the Remaining Group amounted to approximately HK$33,300,000.

OTHER FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Exposure to Fluctuation in Exchange rate

The majority of the Remaining Group’s transactions and borrowings are denominated in Hong Kong dollars and Renminbi. Therefore, the Remaining Group’s exposure to exchange rate fluctuation is relatively insignificant. In general, the Remaining Group mainly uses its Renminbi income receipt for operating expenditure in the PRC and does not use any financial instruments for hedging purpose.

Employees

As at 31 March 2009, the Remaining Group employed a total of approximately 420 employees, of which 20 employees are employed in Hong Kong. In addition to competitive packages offered to the employees, other benefits provided to eligible candidates include contributions to mandatory provident fund as well as group medical and accident insurance. Ongoing training sessions were also conducted to enhance the competitiveness of the Remaining Group’s human assets. The Company also maintains a share option scheme, pursuant to which share options may be granted to directors, executives and employees of the Company as incentives for their contribution to the growth of the Remaining Group.

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

Final Report

2BA13349 12 March 2010

==> picture [271 x 322] intentionally omitted <==

Yunnan Shenyu New Energy Valuation of Forest Crop and Jatropha Assets As at 31 December 2009

==> picture [433 x 65] intentionally omitted <==

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

2BA13349

Cover Photo:[1]

All rights are reserved. This document or any part thereof may not be copied or reproduced without permission in writing from Pöyry Forest Industry.

1 This photo was taken in Huize County Yunnan Province of a Yunnan Shenyu Armand Pine stand exhibiting high stocking and canopy closure.

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

2BA13349

PREFACE

This report is issued by Pöyry Forest Industry Ltd ( Pöyry ) to China Grand Forestry Green Resources ( CGF ) for its own use. No responsibility is accepted for any other use.

The report contains the opinion of Pöyry as to the Value of Yunnan Shenyu New Energy’s Forestry covers an area of 89 941 ha (1 349 115 mu) and of its Huize and Shuangjiang Jatropha assets covers an area of 19 561 ha (293 415 mu) in China (Yunnan Shenyu or YS) as at 31 December 2009 . The combined valuations exclude the following:

Value of the Land Use Rights
The forest valuation excludes volume arising from areas harvested beyond 50 years including a second selective cut in the broadleaf forest and harvesting of replanted areas (i.e. values only current crops).
Other non forestry and non jatropha plantation related assets belonging to Yunnan Shenyu.

The findings and conclusions presented in this report are subject to the assumptions and limiting conditions set out in the following pages and to any further qualifications referred to in the body of the report.

See Young Ho VICE PRESIDENT

==> picture [90 x 32] intentionally omitted <==

Steve Croskery SENIOR CONSULTANT

Contact See Young Ho 2208-2210 Cloud Nine Plaza No. 1118 West Yan An Rd., SHANGHAI 200052 P.R.China Tel. +86 21 6115 9660 Fax +86 21 6115 9670 Email [email protected]

Pöyry Forest Industry Consulting Shanghai

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

2BA13349

CERTIFICATION

Pöyry certify to the following statements to the best of our knowledge and belief:

The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions.
Pöyry has no present or prospective interest in the subject property, and no personal interest or bias with respect to the parties involved.
Pöyry’s engagement in this assignment was not contingent upon developing or reporting predetermined results.
Pöyry’s compensation for completing this assignment is not contingent upon:
The development or reporting of a predetermined value or direction in value that favours the cause of the client
The amount of the value opinion
The attainment of a stipulated result, or
The occurrence of a subsequent event directly related to the intended use of this appraisal.
The report has been prepared by staff consultants, retained consultants and office support personnel of Pöyry.

==> picture [90 x 60] intentionally omitted <==

See Young Ho Vice President Asia Pacific Forest Industry Consulting Pöyry Forest Industry

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

2BA13349

ASSUMPTIONS AND LIMITING CONDITIONS

This report was prepared at the request of and for the exclusive use of the client, China Grand Forestry Green Resources Group Limited. This report may not be used for any purpose other than the purpose for which it was prepared. Its use is restricted to consideration of its entire contents. This valuation represents an update of Pöyry’s reports on the Valuation of Yunnan Shenyu New Energy’s Forestry and Jatropha Assets in China , as at 31 December 2007, as at 30 April 2008 and as at 31 March 2009.

Data describing the area of forest owned, by species, age and location were provided by China Grand Forestry Green Resources Group Limited.

Pöyry has not reviewed in any detail contracts relating to forest land use rights or cutting rights or forest asset purchases. Legal matters are beyond the scope of this report and the valuation is prepared on the assumption that titles to the forest assets are according to the data provided by China Grand Forestry Green Resources Group Limited. Maps, diagrams and pictures presented in this report are intended merely to assist the reader.

This valuation included limited inspections of the plantation forest and jatropha assets of Yunnan Shenyu New Energy Ltd. These were at locations selected by Pöyry. The inspections were carried out during the period 1 - 6 February 2010.

The forest inspection process comprised driving to and walking through and around selected forest areas and an inventory of nine plots in which trees were measured.

This valuation is of YS forest assets in nine counties in Yunnan, and its Jatropha assets in just two counties. The two counties containing jatropha that are included in this valuation are Huize and Shuangjiang. The field inspection of jatropha was carried out to the two counties. The field inspection of forest was carried out in Gengma and Huize counties.

Growth and yield expectations in the various types of forest tree crops are the same as those applied in Pöyry’s previous valuations. The yield tables have been derived from data provided by the client. Factors translating standing volume to recoverable (and merchantable) volume have been applied in the derivation of yield tables.

Any existing liens and encumbrances have been disregarded, and the forest resource has been appraised as though free and clear under responsible ownership and competent management.

Unless otherwise stated in this report, the existence of hazardous materials or other adverse environmental conditions, which may or may not be present on the property, were neither called to the attention of Pöyry, nor did the consultants become aware of such during the inspection.

iii

APPENDIX IV VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

2BA13349

Pöyry recognizes the possibility that any valuation can eventually become the subject of audit or court testimony. If such audit or testimony becomes necessary as a result of this valuation, it will be a new assignment subject to fees then in effect. Pöyry has no responsibility to update this report for events and circumstances occurring after the date of this report.

Any liability on the part of Pöyry is limited to the amount of fee actually collected for work conducted by Pöyry. Nothing in the report is, or should be relied upon, as a promise by Pöyry as to the future growth, yields, costs or returns of the forests. Actual results may be different from the opinion contained in this report, as anticipated events may not occur as expected and the variation may be significant.

VALUATION REPORT ON THE DISPOSAL ASSETS 1 & 2

APPENDIX IV

2BA13349

SUMMARY

Yunnan Shenyu New Energy Company Limited ( Yunnan Shenyu or YS ) is a wholly owned subsidiary of China Grand Forestry Green Resources Group Limited ( CGF ), a publicly listed company on the Hong Kong Stock Exchange.

Yunnan Shenyu is based in Yunnan, China, and engages in both bio-energy industry development, (more specifically in the research and development of Jatropha curcas ) and in the acquisition, management and harvest or stumpage sale[2] of existing tree crops.

At CGF’s request, Pöyry has prepared an independent market valuation of Yunnan Shenyu’s forest and Jatrohpa estate. The valuation date is as at 31 December 2009.

In preparing these valuations, Pöyry has relied on information provided by Yunnan Shenyu, other industry information available to the organisation, and the results of a high level field inspection and assessment. This report sets out Pöyry’s assessment and valuation of Yunnan Shenyu’s forest and jatropha estate and should be considered in conjunction with the assumptions and qualifications expressed.

The report contains the valuation results as to the value of Yunnan Shenyu’s forest asserts coversan area of 89 941 ha (1 349 115 mu) and of its Huize ahsn Shuangjiang Jatropha assets covers an area of 19 561 ha (293 415 mu). Among the total forest estate, 41 922 ha (628 830 mu) consists of bush and bare land areas. Since the bush and bareland areas are considered by Yunnan Shenyu to be suitable for the establishing with new jatropha plantations. Therefore, only the closed and open forest assts of 48 019 ha (720 285 mu), and 19 561 ha (293 415 mu) jatropha plantations in Huize (15 735 ha) and Shuangjiang (3 826 ha) are the subject of this valuation.

Figure S-1: Species Distribution - Yunnan Shenyu Forest and Jatropha Plantations December 2009 valuation area

==> picture [205 x 135] intentionally omitted <==

----- Start of picture text -----

ARMAND PINE
13%
Jatrohpa
29%
HARD BROAD
LEAF
32%
YUNNAN PINE
26%
Total Valuation Area 67 579 ha
----- End of picture text -----

2 A stumpage sale is the sale of trees while they are still standing in the forest. When forestry companies sell stumpage they are selling the trees in their standing state. The purchaser of the stumpage arranges the harvest of the trees within an agreed timeframe and owns the log produce. The owner of the land use rights (YS in this case), then has the right to replant the land in forest.

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Valuation Assumptions - Forest

The principal valuation assumptions are summarised in Table S-1

Table S-1:

Summary of Main Assumptions in Yunnan Shenyu Forest Valuation

Item	Assumptions	Assumptions	Assumptions	Report Reference
Delivered Log Prices - Pine - Broadleaf	Small (6-14cm SED) RMB590/m3 RMB460/m3	Medium (14-26cm SED) RMB850/m3 RMB950/m3	Large (>26cm SED) RMB1210/m3 RMB1500/m3	Section 7
Real Price Growth	Small Logs: 5.7% per annum for next 2 years, then flat	Medium and Large Logs: 8.3% per annum for next 2 years, then flat		Section 7
Volume mix at maturity - Pine - Broadleaf	Small (6-14cm SED) 20% 20%	Medium (14-26cm SED) 50% 40%	Large (>26cm SED) 30% 40%	Section 4
Yields	Pine Thinning cut at 25yrs: 25-30 m3/ha Pine Clearfall at 30yrs: 74-91 m3/ha Broadleaf Selective cut at 25yrs: 18-34m3/ha			Section 4
Silviculture Costs - Pine	Year 1 RMB4858.5/ha (RMB324/mu)	Year 2 onwards RMB37.5/ha/a (RMB2.5/mu/a)		Section 6
Harvest Cost - Pine (clearfall) - Broadleaf and Pine (selective cut)	RMB80/m3 RMB145/m3			Section 6
Harvest Roading Costs	RMB10/m3 – RMB15/m3			Section 6
Pre-Harvest Inventory	RMB6.50/m3
Transport Costs	Range: RMB75-110/m3(Distances of 100-250 km)			Section 6
Forest Taxes	A standard harvest tax of 10% of the forest roadside price (Price at mill gate – cartage cost)			Section 6
Overheads	RMB195/ha/a (RMB10/mu/a)			Section 6
Land Rental	RMB 31.5/ha/a (RMB 2/mu/a)			Section 6
Minimum Harvest Ages	Pine: 25 years (clearfall) Broadleaf: 25 years selective cut once in 25 year cycle removing 50% volume			Section 9

Pöyry has independently assessed market prices for the range of species and grades from data collected during the field inspection and Pöyry’s China log price database. The start log prices for the Yunnan Shenyu estate in December 2009 are similar to those in March 2009. On average, an increase in log prices of around 9.6% is expected over the next four years. The assumed log prices for the main species are shown in Table S-2.

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Table S-2: Current and Future Log Prices Applied in Valuation Model

Species YS-Yunnan Pine YS-Yunnan Pine YS-Yunnan Pine YS-Armand Pine YS-Armand Pine YS-Armand Pine YS-Hard Broadleaf YS-Hard Broadleaf YS-Hard Broadleaf	Grade SED (cms) 6-14 14-26 >26 6-14 14-26 >26 6-14 14-26 >26	Prices in December 2009	Period 1 1 Jan 2010 - 31 Dec 2010 566 839 1,257 566 839 1,257 551 953 1,519 927	Period 2 1Jan 2011 - 31 Dec 2011 577 865 1,294 577 865 1,294 562 981 1,565 953	Period 3 1 Jan 2012 – 31 Dec 2012 589 882 1,333 589 882 1,333 573 1,001 1,612 977	Period 4 1 Jan 2013 - onwards 595 891 1,373 595 891 1,373 579 1,011 1,660 996
		555
		815
		1 220
		555
		815
		1 220
		540
		925
		1 475
Simple average		902

Market Valuation - Forest

Pöyry’s estimate of the market value of the Yunnan Shenyu forest estate as at 31 December 2009 is RMB 893 million.

The market value of the forest has been derived in accordance with IAS 41 – Agriculture. This is a global standard for the reporting of agricultural activity prepared by the International Accounting Standards Board (IASB).

Pöyry has tested the sensitivity of the market value to changes in prices, costs and discount rate as shown in Tables S-3 – S-7.

Table S-3: Log Price Sensitivity

Table S-3: Log Price Sensitivity
Scenario 5% Real Price Increase No Real Price Increase (Base) 5% Real Price Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 1002 962 912 945 893 847 872 824 781

Table S-4: Overhead Cost Sensitivity

Scenario RMB295 fixed cost per ha/year RMB195 fixed cost per ha/year RMB95 fixed cost per ha/year	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 921 869 825 945 893 847 969 916 869

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Table S-5: Harvest Cost Sensitivity

Table S-5: Harvest Cost Sensitivity
Scenario 10% Harvest Cost Increase Base Harvest Cost 10% Harvest Cost Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 914 964 819 945 893 847 975 922 974

Table S-6: Land Rental Cost Sensitivity

Table S-6: Land Rental Cost Sensitivity
Scenario Cost RMB63/ha/year Cost RMB31.50/ha/year (Base) Cost RMB0/ha/year	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 937 884 839 945 893 847 953 900 855

Table S-7: Direct Forestry Cost Sensitivity

Table S-7: Direct Forestry Cost Sensitivity
Scenario 50% Forestry Cost Increase Base Forestry Cost 50% Forestry Cost Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 940 889 842 945 893 847 949 897 850

The valuation result is most sensitive to log price, with a 5% reduction in log price causing a 7% decrease in forest value, and vice versa. It is less sensitive to annual overhead costs, with increases of RMB100 per hectare per year causing a 2.5% reduction in forest value. A doubling of land rentals to RMB63/ha has a less than 1% impact on estate NPV. The valuation is also largely insensitive to harvest costs, with a 10% increase in the cost of logging causing a 3% reduction in value, and vice versa. Large changes in forestry direct costs have no material impact on the forest valuation.

The perpetual wood flows from the Yunnan Shenyu forest estate by county are shown in Figure S-3. The current rotation component of the overall wood flow on which the market valuation is based is also indicated. The periods are full years beginning 1 January. The first two years’ harvest is constrained to 175 000 m[3] per year. Beyond that, the level of harvest is constrained such that it does not vary within lustra (five-year periods), but may vary by up to 25% between lustra. In

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Pöyry’s opinion, this is a practicable harvesting strategy and one that should not exceed market capacity.

Figure S-2: Wood Flow by Origin (County)

==> picture [341 x 362] intentionally omitted <==

----- Start of picture text -----

250.0
200.0
150.0
100.0
50.0
-
Year Ending 31 December
GENGMA HUIZE QIUBEI SHUANGBAI SHUANGJIANG YANGBI YONGREN YUANMOU YUNLONG
Figure S-3:
Wood Flow by Rotation
250.0
200.0
150.0
100.0
50.0
-
Year ending 31 December
YUNNAN PINE ARMAND PINE HARD BROAD LEAF
Harvest Volume (m31,000)
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058
Harvest Volume (m31,000)
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058
----- End of picture text -----

Figure S-3: Wood Flow by Rotation

Table S-8 summarises the key factors that have produced the change in the value of the Yunnan Shenyu forest estate tree crops, between 31 March 2009 and 31 December 2009.

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Table S-8: Key Components Producing the Change in Forest Tree Crop Value March-December 2009

Crop Market Value as at 31-March 2009 Change in forest area and maturity due to area sales and purchases, and growth (maturing) of crops [i.e. 2009 Physical Forest Description] Change in Harvest Tax_(application of China generic_ harvest tax method) Change in Log price forcasting Crop Market Value as at 31-December 2009 TOTAL CHANGE	Cumulative Value Effect (RMB million) 989 1012 973 893 893 -96	Value Change by Step (RMB million) 23 -39 -80 -96	Value Change by Step (%) 2 -4 -8	Cumulative Value Change (RMB million) 23 -16 -96 -96	Cumulative Value Change (%) 2 -2 -10 -10

The main contributors to the change in forest crop value are:

The changes in forest crop maturity (nature growth) (+).
The generic harvest tax regulation changes in China on July 2009 (-) (see Chapter 6).
Poyry’s review of Chinese Market Log Price outlook (-) (see Chapter7).

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Valuation Assumptions – Jatropha Market Valuation

Table S-9: Main Assumptions Applied in Yunnan Shenyu Jatropha Plantation Market Valuation

Cost Items	Assumption	Report Reference
Land Preparation	RMB 1200 / ha ( RMB 80/mu)	Section 6
Planting	RMB 375 / ha ( RMB 25/mu)	Section 6
Seedlings	RMB 2 per seedling, RMB 3000 / ha ( RMB 200/mu)	Section 6
Fertilising	RMB 375 / ha ( RMB 25/mu)	Section 6
Maintenance	RMB 600 / ha ( RMB 40/mu) in first year and RMB 825 / ha ( RMB 55/mu) in subsequent years	Section 6
Land Rent	RMB 300 / ha ( RMB 20/mu)	Section 6
Administration	RMB 150 / ha ( RMB 10/mu)	Section 6

Market Valuation - Jatropha

The jatropha plantation market valuation has been undertaken using the replacement cost based approach.

Jatropha is a relatively new and developing crop. Because there is a lack of sufficient price and yield information with which to reliably forecast future cash flows, Pöyry has based its estimate of market value on the compounded replacement cost.

Pöyry has estimated the market value of the Yunnan Shenyu jatropha asset in Huize and Shuangjiang counties as at 31 December 2009 to be RMB 297 million.

Table S-10: Sensitivity Analysis of the Jatropha Plantation Market Valuation

Scenario	Value (million RMB)
Base Case (20% compounding rate)	297
25% increase in compund rate –25% compounding rate	335
25% decrease in compund rate -15% compounding rate	263
25% increase in land rental	309
25% decrease in land rental	285
10% increase in Silviculture cost	321
10% decrease in Silviculture cost	273

The jatropha plantation value is most sensitive to the estimated silviculture cost which includes all costs except for land rental and overheads. A 10% change in silviculture cost will cause an 8% difference in value. In comparison, land rental is a smaller component of the overall cost, with a 25% movement in either direction having only an impact of 4% on value.

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PREFACE

CERTIFICATION

ASSUMPTIONS AND LIMITING CONDITIONS

SUMMARY

GLOSSARY

1 INTRODUCTION

2 PURPOSE AND SCOPE
2.1 Purpose of the Valuation Update
2.2 Scope of the Valuation Update
2.3 Matters beyond the Scope of the Valuation
3

VALUATION METHODOLOGY

4 PHYSICAL ASSET DESCRIPTION
4.1 Forest Description
4.2 Field Inspections
4.3 Forest Area
4.4 Forest Asset Yield
4.5 Forest Yield by Log Grade 4.6 Yield Benchmarks
4.7 Jatropha Description
4.8 Yunnan Shenyu Jatropha Asset
5 RISKS TO YUNNAN SHENYU’S ASSETS
5.1 Risks to Forest Asset
5.1.1 Fire
5.1.2 Pests and Disease
5.2 Risks to Jatropha Asset
5.2.1 Landslides
5.2.2 Jatropha Related Business Risks
6 COSTS

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6.1 Forestry Asset
6.1.1 Direct Costs of Forestry Operations
6.1.2 Direct Costs of Harvesting and Cartage
6.1.3 Cartage Costs
6.1.4 Forestry Overheads and Indirect Costs
6.1.5 Forest Business Management and Administration Overhead Cost
6.1.6 Harvesting Overheads, Roading Cost and Indirect Costs
6.1.7 Harvesting Overheads and Roading Cost
6.1.8 Pre-Harvest Inventory & Survey Fee
6.1.9 Harvest Taxes and Fees
6.1.10 Forest Asset Land Rentals (Cost of land use)
6.2 Jatropha Asset
6.2.1 Direct Costs of Jatropha Operations

7 LOG MARKETS AND LOG PRICES

7.1 Log Price Outlook

8 BIOFUEL MARKETS

8.1 China Biofuel Policies
8.2 China Biofuel Demand
8.3 China Biofuel (Biodiesel) Supply
8.3.1 Biofuels Demand and Supply Balance
8.4 Market Prices for Biofuel Feedstock

9 WOOD FLOW AND ALLOCATION MODEL

9.1 Minimum and Maximum Rotation Ages
9.2 Regeneration Assumptions
9.3 Harvesting Constraints
9.4 Destinations and Allocation
9.5 Smoothing Constraints
9.6 Wood Flow

10 DISCOUNTED CASH FLOW VALUATION

10.1 Overview
10.2 Treatment of Taxation
10.3 Scope of the Analysis
10.4 Timing of Cash Flows
10.5 Date of Valuation
10.6 Discount Rate Applied in Valuing the Yunnan Shenyu Forest Resource

11 JATROPHA VALUATION MODEL

12 VALUATION RESULTS AND SENSITIVITY ANALYSIS

12.1 Forestry Asset Market Valuation as at 31 December 2009 12.2 Jatropha Asset Market Valuation as at 31 December 2009

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12.3 Sensitivity Analysis 12.3.1 Forestry Asset Sensitivity Analysis as at 31 December 2009 12.3.2 Jatropha Asset Sensitivity Analysis

13 CHANGE ANALYSIS – FOREST ASSET MARKET VALUATION

14 MERCHANTABLE VOLUME

Appendix 1: Valuation Methodology Appendix 2: Jatropha as a Biofuel Crop

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GLOSSARY

Abbreviation	Meaning
AAC	Annual allowable cut
AMG	At-mill-gate
CAPM	Capital asset pricing model
CPI	Consumer Price Index
DCF	Discounted cash flow
ha	Hectare
IDR	Implied discount rate
km	Kilometre
m3	Cubic metre
m3/a	Cubic metres per annum
MAI	Mean annual increment
RMB	Renminbi
TRV	Total recoverable volume
TSV	Total standing volume
USD	United States dollars
WACC	Weighted average cost of capital

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1 INTRODUCTION

Southwest China, including Guizhou, Sichuan and Yunnan Provinces, is the official target area for jatropha production in China. In this part of the country provincial governments have plans to expand the jatropha area to 15.4 million mu (1 million ha) on marginal land over the next decade and a half, or a roughly 15fold increase over current areas, much of which is wild.

The Yunnan provincial government wants to construct the largest production base for biofuels in China and act as an example province. The plan is to cultivate 10 million mu of jatropha and form a biofuel industry. The focus areas are Honghe, Chuxiong, Wenshan, Lijiang, Lincang and another six counties within Yunnan Province. While research on jatropha in China dates back to the late 1970s, the infrastructure that would support a rapid scaling up of jatropha plantations in Southwest China needs to be developed. At present no large scale commercial jatropha oil or jatropha biodiesel production exists in China. Therefore, compared to traditional forest or agricultural asset valuation, there is much greater variance and uncertainty involved in the valuation of jatropha plantations. However, production yields, agriculture practices and costs will become more certain over the next few years with further development in large scale jatropha plantations.

3 A stumpage sale is the sale of trees while they are still standing in the forest. When forestry companies sell stumpage they are selling the trees in their standing state. The purchaser of the stumpage arranges the harvest of the trees within an agreed timeframe and owns the log produce. The owner of the land use rights (YS in this case), then has the right to replant the land in forest.

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2 PURPOSE AND SCOPE

2.1 Purpose of the Valuation Update

The purpose of the valuation is to provide an independent estimate of the market value of the forest crop and jatropha assets for reporting purposes. A useful definition of “market value” is:

“the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming that the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

The buyer and seller are typically motivated.
Both parties are well informed or well advised, and acting in what they consider their own best interests.
A reasonable time is allowed for exposure in the open market.
The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale”[4] .

The market value of the forest crop and jatropha assets is estimated as at 31 December 2009 .

The term “Market Value” is usually interchangeable with “Fair Value” as defined in International Accounting Standard 41 (IAS 41). IAS 41 prescribes the accounting treatment, financial statement presentation, and disclosures related to agricultural activity.

In IAS 41, “Fair Value” is defined as “ the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction ”.

2.2 Scope of the Valuation Update

The forest asset valuation employs an income expectation approach based on projected wood flows to value Yunnan Shenyu’s forest asset. Forest asset value has been estimated by projecting pre-tax cash flows and applying a discount rate expressed in real terms.

A separate estimate of the market value of Yunnan Shenyu’s jatropha asset in Huize and Shuangjiang counties has been conducted and is based on the accumulated costs method. This approach estimates the market value of the jatropha estate by projecting forward industry standard costs required to establish

4 Uniform Standards of Professional Appraisal Practice, The Appraisal Institute (www.appraisalinstitute.org).

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and maintain the crop, until the asset reaches its current condition. In anticipation of the need to eventually migrate to an income based valuation (as applied to the forest crops), Pöyry has applied a harmonisation process that would see the costbased value transition to an income based value in a smooth, rather than discontinuous manner. This has involved adding 20% to the accumulated costs each year.

As a valuation update, the exercise has specifically addressed the following:

Changes to the area of tree crops, by location, species and age, between 31 March 2009 and 31 December 2009, and changes to the jatropha crop asset area, by location, over the same period.
Acknowledgement of recent inventory data and their support for the application of existing yield estimates (as applied in the March 2009 valuation) for the forestry asset.
Recognition of changes in harvest related costs for the forest assets.
Consideration of wider industry and more generic costs in relation to forest management overheads, land rentals and harvest related taxes for the combined assets.
Acknowledgement of the impact of the global economic recession on demand for logs and reduced log prices in the near term for the forestry asset.
Allowance for expectations of generally higher longer term log prices for the forestry asset.
The relative maturity and age-class profile of the YS forest estate, and the potential to harvest a large volume of wood in the near term.

2.3 Matters beyond the Scope of the Valuation

In arriving at the forest values, Pöyry has not confirmed the following:

The current legal ownership of the combined assets and the security of tenure.
The appropriateness of the species, genetic material and management techniques employed by YS in managing and re-establishing the combined assets.

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3 VALUATION METHODOLOGY

It is recommended practice when appraising real property to consider three main approaches:

The comparable sales method (i.e. referencing the results of market transactions of other properties similar to the subject property).
The income method (i.e. assessing the present value of the anticipated future net earnings stream).
The costs method (i.e. acknowledging what it would cost to recreate the asset in its current condition).

It then rests with the appraiser’s professional judgement to assess what weighting should be applied to the results from the respective methods.

The assessment of forest investments generally requires the examination of cash flows over a long time period. This leads to the application of discounted cash flow analysis techniques (DCF) as an indispensable part of the appraisal process. Each of the three main approaches may come to be applied within a DCF framework. Thus;

The cost method may be applied with wholly young stands and especially those where relying on a discounting approach alone produces values unlikely to be supported by the market. In valuing the young stands reference is made to their costs of establishment. In order to recognise the forest owner’s entitlement to a return on investment, a compounding approach may be applied, requiring the selection of a suitable compounding rate. Compounding is the inverse of discounting and there is a need to select an appropriate rate.
The income method employs a conventional discounting approach. In referencing wider evidence of investors’ expectations of a return on capital, one common basis for the discount rate is the Weighted Average Cost of Capital (WACC). The cost of equity may be examined within the Capital Asset Pricing Model (CAPM).
The comparable sales approach may also employ a DCF framework. This is particularly necessary because such sales evidence as does exist is rarely immediately comparable on a convenient unit basis (e.g. $/hectare or $/m[3] ). In order to effect adjustments it is necessary to consider relative forest maturity, and this leads back to DCF analysis. Ultimately the one parameter that can be distilled from sales and then extrapolated to a subject forest is the Implied Discount Rate (IDR). This is obtained from other contemporary transactions by relating constructed cash flows for the sold forests to their respective transaction values.

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For the forest asset, it is Pöyry’s opinion that the parties to any real or hypothetical transaction involving Yunnan Shenyu’s forest estate would not attribute weight to the cost method of valuation. This method has not therefore been further addressed in the forest valuation.

Both the comparable sales and income approaches have been considered for the forest asset valuation. Their application has shared the same forest estate model which provides the means of projecting future anticipated cash flows[5] . The distinction between the approaches has been maintained in the basis for selecting the discount rates.

The scope of the forest asset market valuation is confined to the projected cash flows arising from the existing tree crop. Previous expenditure on the forest is treated as “sunk” and is therefore excluded from the derivation of value. Perpetual wood flows are modelled, but their financial contributions are not included in the derived market value.

The cost method has been the primary means of valuing the jatropha resource. This crop has not yet reached large scale commercial production. As a result, there is little actual cost, price and yield information with which to reliably forecast future cash flows using the income method.

A full description of Valuation Methodology is provided in Appendix 1.

5 It is debatable whether the income and comparable sales approaches should share exactly the same basis for cash flow projection. It could be argued that the WACC employed in the income approach inherently assumes that the cash flows have been “de-risked” to a greater extent than commonly applies in the derivation of IDRs.

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4 PHYSICAL ASSET DESCRIPTION

Yunnan Shenyu provided Pöyry with data describing the forest and jatropha crop areas in Huize and Shuangjiang owned by species, maturity class and location. Table 4-1 below summarises this in terms of area by vegetation type and county.

Table 4-1:

Area Statement for Yunnan Shenyu Combined Assets of this valuation

County Huize Yangbi Gengma Yongren Qiubei Yunlong Shuangbai Yuanmou Shuangjiang Total	Close forest Area (ha) 11 226 9 419 12 441 603 747 3100 1 932 0 376 39 844	Open forest (ha) 2 948 0 942 776 556 206 0 1 091 1 656 8 175	Jatropha Area (ha) 15 735 3 826 19 561	Bush (ha) 4 276 0 56 16 609 605 56 585 2 052 8 255	Bareland (ha) 7 529 218 14 78 288 379 49 13 261 11 851 33 667	Total Area (ha) 41 714 9 637 13 453 1 473 2 200 4 290 2 037 14 937 19 761 109 502

4.1 Forest Description

When applied to forest resources, the term “Forest Description” is a technical term. It includes all aspects of the forest’s current physical condition. It also includes projections of the forests future growth performance. Further, it includes financial parameters; specifically the costs involved in growing and harvesting the forest and estimates of the prices for the products that will arise.

The physical and financial forest descriptions are combined in a forest estate model. This allows for the modelling of the forest in terms of the physical wood flows as well as the financial cash flows.

A summary of the physical description of Yunnan Shenyu’s forest estate, combining the data provided by Yunnan Shenyu, and Pöyry’s analysis of that data is presented in Map 4-1 and Figure 4-1 to Figure 4-2.

Subsequent sections outline the ‘financial forest description’ which detail all forestry and harvesting costs. Also included is Pöyry’s analysis of anticipated log prices, both current and projected.

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Map 4-1: Location of Yunnan Shenyu’s Forest Assets (Yunnan Province)

==> picture [349 x 212] intentionally omitted <==

Since Pöyry’s March 2009 valuation, the area of productive plantation forest operated by YS has not been changed. The largest county in terms of the area of forest owned by YS is Huize County with 14 174 ha, or 30% of the total forested area. Huize, Gengma and Yangbi are the three largest counties in terms of Yunnan Shenyu’s holdings, accounting for 77% of the total stocked forest area.

Yunnan Shenyu’s forest assets comprise two conifer species - Yunnan and Armand pine, and ‘hard broadleaf’ forest. The hard broadleaf forest consists mainly of southwest birch, oak and alder.

Yunnan Pine ( Pinus yunnanensis )

Yunnan pine is an endemic conifer species that can only be found in southwest China. The wood air-dry density is about 0.586-0.624g/cm³. It is used in various applications including furniture making, timber frames for construction, door and window frames, packaging, mine supports, wooden railroad crossties, and the pulp and paper industry. It is also an important species in resin production. Most of the near mature and mature trees visited in the region during the field inspection had been tapped for resin. Although it has been common in the Chinese state forestry industry to manage Yunnan pine on a 35 – 45 year rotation, Pöyry believes a largescale commercial operator such as YS would find a lower rotation age of 25 years a more viable economic option.

Southwest Birch/Alder-leaf Birch ( Betula alnoides )

This is a valuable indigenous broadleaf species with fast growth and high-quality wood. It is generally suited to an annual average temperature of 13.5 to 20.6°C and annual rainfall of more than 1 000 mm. Regarded as a pioneer species, this

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broadleaf rapidly colonises open ground, especially in secondary successions following a disturbance or fire. A large-scale commercial forest containing southwest birch could be managed with a 25 year rotation cycle. The species provides good material for wood flooring, furniture and panel board.

Oak Family ( Quercus L. )

The oak family in southwest China mainly consist of sawtooth oak and Oriental white oak. Oak wood has a density of around 0.75 g/cm³, great strength and hardness, and is very resistant to insect or fungal attack because of its high tannin content. It is commonly used for furniture making and flooring, door/window frames, and for veneer production.

Alder ( Alnus cremastogyne )

Alder is a fast-growing species, even on sites such as burned areas and mining excavations. The wood basic density of the species is about 0.419 g/cm³. It is mostly used for packaging or pallets, in wood flooring, and in some furniture. As is the case for the other mixed hard broadleaf species present in YS’s estate, alder could be managed in a large-scale commercial forestry operation on a minimum 25-year rotation cycle.

The species composition of the forest estate has not changed over the past year. Hard broadleaf, Yunnan pine and Armand pine still make up the entire estate area. The area-weighted average age of the YS forest estate, as at 31 December 2009, is 38.2 years. This compares with an area weighted average age of 37.4 years, as at 31 March 2009. Considering that the typical age of harvest of Yunnan pine, Armand pine and hard broadleaf and broadleaf forests in southern China is in the range 18 to 30 years, the YS estate could be described as over mature.

Figure 4-1: Area of Forest by Species and Age as at 31 December 2009

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Age as at 31 December 2009
1600
1400
1200
1000
800
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0
ARMAND PINE HARD BROAD LEAF YUNNAN PINE
Net stocked area (hectares)
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
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Figure 4-2: Area of Forest by County and Age as at 31 December 2009

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Age as at 31 December 2009
1600
1400
1200
1000
800
600
400
200
0
GENGMA HUIZE QIUBEI
SHUANGBAI SHUANGJIANG YANGBI
YONGREN YUANMOU YUNLONG
The data provided by YS grouped by maturity classes formed the basis of the area
by age distributions as shown in Figure 4-1 and Figure 4-2. Pöyry has associated
age ranges with the maturity classes. These are different to those applied in the
March 2009 valuation and are now consistent with the age ranges by maturity
classes as applied to the YS forest estate.
Table 4-2:
Broad Age Grouping Classes by Species in the YS Forest Estate
Crop Maturity Class
Middle Near Over
Species Region Origin Young Age Mature Mature mature
Age-Class (years) associated with Maturity Class
Armand Pine South Natural 5—15 16—25 26—35 36—55 >56
Yunnan Pine South Natural 5—15 16—25 26—35 36—55 >56
Hard Broadleaf All Natural 10-20 21-30 31-40 41-50 >51
Net Stocked area (hectares)
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
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For the purposes of wood flow modelling and valuation, the area in each maturity class was distributed evenly across each individual age within the associated ageclass. ‘Overmature’ areas were also distributed within the ‘mature’ age-class as per the March 2009 valuation. Recognising that, in most maturity classes, the areas provided by YS were the same to March 2009, Pöyry then advanced each area’s age by one year, to allow for growth.

4.2 Field Inspections

As part of the 2009 December valuation Pöyry undertook a high-level field inspection exercise for the combined forestry and jatropha assets. The main purpose of the inspection was to compare the forest and jatropha crop descriptions provided by the client with the actual conditions on the ground.

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Pöyry’s normal approach to field inspections is to visit different parts of the resource in question over successive valuations, and thereby confirm the full physical description over a period of time.

Pöyry selected the counties in which to assess the forests and jatropha crops, based on information provided by YS as to area of forest and jatropha crops by county, species and maturity class.

This year, Pöyry assessed forests in two counties - Gengma and Huize. These counties contain 27 557 ha or over 57% of the total YS stocked forest area. Pöyry staff also assessed jatropha crops in Huize and Shuangjiang Counties.

The work undertaken during the field inspections comprised:

Driving to and walking through compartments or stands of trees/ jatropha crops.
Establishing plots and measuring trees at selected locations within compartments in the forest estate.
Recording GPS locations and associated land form and vegetation type.
Interviews with staff at a large wood market in Kunming.

4.3 Forest Area

Two key components of the physical forest description for YS’s forest resource are the net stocked area of forest and the harvest yield or volume of logs per unit area. The product of these factors, area (in hectares) and yield (in cubic metres per hectare), are the main features of the forest that determine the wood flow. Accordingly it is important for the forest valuer to independently assess both the area of the forest and the likely yield.

At the conclusion of the field inspections, YS provided Pöyry with its estimates of the stocked area contained within the mapped boundaries of some compartments that Pöyry had inspected. Ground traces collected with the GPS during the field inspections were also used to verify plantation location.

The assessment covered three blocks of forest of varying size distributed across the resource in the Yunnan Province for three different forest crops.

Accordingly, Pöyry has chosen to make no adjustment to the base areas of forest as provided by Yunnan Shenyu. It is recommended however that a review be undertaken of the procedures used by Yunnan Shenyu for forest plantation and jatropha mapping. The use of high resolution satellite imagery together with GPS and GIS technologies can ensure accurate mapping of forest resources.

4.4 Forest Asset Yield

Yield tables indicate the expected recoverable volume per unit area of trees at a range of stand ages. Where more than one grade of log is produced at harvest, the yield table differentiates the recoverable volume, by log grade, or log type.

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Growth and yield expectations in the various tree crops are the same as those applied in Pöyry’s previous valuation except they have, in some cases been extrapolated to earlier ages of harvest. The basic yield curves (or tables) are derived from data of standing volume and stocked area of forest by maturity class provided by the client. Factors translating standing volume to recoverable (and merchantable) volume have been applied in the derivation of yield tables.

The following table and graph explain, by example, the derivation of the yield tables.

Table 4-3: Client Data and Interpretation for Yield Table Derivation – Gengma Yunnan Pine

Maturity Class	Age Range (years)	Age Range (years)	Mid-Age (years)	TSV (m3)	Area (hectares)	TSV (m3/ha)	TRV (m3/ha)
Middle	16	25	20.5	142123	1433	99	71
Near Mature	26	35	30.5	156334	1089	144	103
Mature	36	55	45.5	105279	563	187	135

The highlighted cells in Table 4-3 show data provided by the client. Pöyry then calculated the total standing volume (TSV) in cubic metres per hectare for each of the three maturity classes, and then the total recoverable volume (TRV) by applying a 72% recovery factor. A linear relationship was then derived from these three data points and applied between the ages 25 and 60 years. The minimum harvest age was set at 25 years and 60 years the maximum at which the extrapolation of the data was appropriate. From age 60 years, the TRV is assumed to follow a flat trajectory, i.e. no further growth is assumed.

Figure 4-1: Yield Curve for Yunnan Shenyu’s Yunnan Pine in Gengma County, Yunnan Province

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280
240
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40
0
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Tree Crop Age(years)
Yield Table TRV(m3/ha) Client Data
Total Recoverable Volume(m3/ha)
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The following graphs show the range of TRV in the yield tables of the three main species, hard broadleaf, Armand pine and Yunnan pine, by counties, in Yunnan Province.

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Figure 4-2: Estimated Harvest Yields for Hard Broadleaf

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100.0
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60.0
50.0
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0.0
25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89
Crop age(years)
Gengma Huize Qiubei Shuangbai Yangbi Yongren Yunlong
Total Recoverable Volume(m3/ha)
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Hard broadleaf yield tables are for selective cuts of 50% between the ages of 25 to 50 years. The TRVs are 75% of TSV and at an age of 35 years yields range between 30-45 m[3] /ha. The area weighted average TRV at age 35 years from selective cut hard broadleaf yield tables in the Yunnan Shenyu estate is about 39 m[3] /ha.

Figure 4-3: Estimated Harvest Yields for Armand pine

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160.0
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100.0
Huize
80.0
60.0
40.0
20.0
0.0
25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88
Crop age(years)
Total Recoverable Volume(m3/ha)
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Armand pine yield tables are for clearfall harvests between the ages of 25 to 90 years. The TRVs are 72% of TSV and at an age of 30 years the TRV in the Yunnan Shenyu estate is 85 m[3] /ha. Armand pine is wholly in Huize county, accounting for about 18.3% of the total forest area.

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Figure 4-4: Estimated Harvest Yields for Yunnan Pine

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180.0
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100.0
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25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88
Crop age(years)
Gengma Qiubei Shuangbai Yangbi Yunlong Shuangjiang
Total Recoverable Volume(m3/ha)
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Yunnan pine yield tables are for clearfall harvest of TSV between the ages of 25 to 90 years. The TRVs are 75% of TSV due to form and log length. At age 35 years, yields range from about 95 to 115 m[3] /ha. The area weighted average TRV at age 35 years of Yunnan pine yield tables in the YS estate is 105 m[3] /ha.

The following graphs show the results of Pöyry’s inventory plots against the yield tables that are used in the wood flow analysis and valuation.

Figure 4-5: Yunnan pine in Gengma County, Yunnan Province - TRV Yield Profile and Field Assessment Inventory

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200
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0
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Tree Crop Age(years)
Yield Table TRV(m3/ha) Inventory Plot TRV(m3/ha)
Total Recoverable Volume(m3/ha)
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Figure 4-6: Armand Pine in Huize County, Yunnan Province - TRV Yield Profile and Field Assessment Inventory Plots

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250.0
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150.0
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50.0
0.0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Tree Crop Age (years)
Total Recoverable Volume (m3/ha)
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Although there is insufficient inventory data upon which to make adjustments to the yield tables, the general indication from the comparisons of yield tables and the inventory data collected, is that some of the yield tables may be conservative. In other words, actual yield at harvest may be greater than is being modelled.

Yield has a significant influence on forest value. It is recommended that YS carry out some systematic inventory of its forests with a view to updating yield expectations in the forest description.

4.5 Forest Yield by Log Grade

The yield tables formed for the YS estate utilised three log grades based on small end diameters (SED). ‘Small logs’ are utilised in MDF/HDF, woodchip mills, pulpmills, blockboard manufacture and for mining poles. ‘Small-Medium” and ‘Medium Logs and greater’ are utilised by a large number of small sawmills and veneer mills. These grades are summarised in Table 4-4, below.

Table 4-4: Small End Diameter Ranges of Individual Log Grades used in the YS Yield Tables

Species	Small Log	Medium Log	Large Log
All Species	6 < 14cm	14 < 26cm	> = 26cm

Log grade allocations between small, medium and large logs have been estimated from a combination of figures provided by YS and Pöyry analyses. The average product mix allocation assumed in the yield tables is shown in Table 4-5, below.

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Table 4-5: Log Size Breakdown Percentages used in Yield Table Development

Species	Small Log	Medium Log	Large Log
Armand Pine	20%	50%	30%
Hard Broadleaf	20%	40%	40%
Yunnan Pine	20%	50%	30%

The following graphs show example yields by log type, (SED) for hard broadleaf, Yunnan pine, and Armand pine.

Figure 4-7:

Hard Broadleaf in Gengma County – Harvest Yields by Log Type

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90
80
70
60
50
40
30
20
10
0
Crop Age(years)
Small Log Medium Log Large Log
Figure 4-8:
Yunnan Pine in Yangbi County – Harvest Yields by Log Type
180
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100
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60
40
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25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88
Crop Age(years)
Small Log Medium Log Large Log
25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88
Total Recoverable Volume(m3/ha)
Total Recoverable Volume(m3/ha)
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Figure 4-8: Yunnan Pine in Yangbi County – Harvest Yields by Log Type

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Figure 4-9: Armand Pine in Huize County – Harvest Yields by Log Type

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25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88
Crop Age(years)
Small Log Medium Log Large Log
Total Recoverable Volume(m3/ha)
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4.6 Yield Benchmarks

Pöyry had benchmarked the Yunnan Shenyu forest yield tables against wider industry data the Company has collected in Southern China. At a harvest age of 60 years the total recoverable volume for pine in Yunnan typically ranges from 100180 m[3] /ha. Yunnan Shenyu’s records indicate that mature pine stands at 50 years range from 130-150 m[3] /ha. In broadleaf stands TRVs at maturity can range from 100-300 m[3] /ha. Yunnan Shenyu’s records indicate that for mature broadleaf stands at 60 years, assuming a recovery of 37.5% of TSV (50%*75%), the recoverable volumes are in the range 65 to 75 m[3] /ha. The Yunnan Shenyu inventory records are within the range of other volume estimates that Pöyry has collected in Yunnan.

4.7 Jatropha Description

Jatropha is non-edible oil-yielding perennial shrub. The genus grows in tropical and subtropical regions with approximately 175 species distributed throughout the world. Jatropha is attracting considerable global interest due to its potential use as a biofuel crop. These developments are discussed further in Appendix 4.

4.8 Yunnan Shenyu Jatropha Asset

Yunnan Shenyu’s jatropha resource is located in nine counties spread throughout the province of Yunnan in Southwest China. Huize represents the largest area of any county.

The Company plans to increase the jatropha crop area in the future by establishing the non-forest land in jatropha.

The average unit plantation size in the jatropha resource is small and scattered throughout Yunnan Province. Mature plantations, planted between 1960 and 1990, were typically established by local farmers under Government programmes. According to Yunnan Shenyu it has acquired the land lease agreements for the mature jatropha plantations. Areas classified as ‘young’ have been planted mainly in 2006.

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This valuation just carried out two counties Jatropha assets. The total area is 19 561 ha, which including 15 734 ha in Huize county and 3 826ha in Shuangjiang county.

Table 4-6: Yunnan Shenyu Current Jatropha Plantation Area in this valuation, by County

County Huize Shuangjiang Total area	Mature 2 227 0 2 227	Jatropha Areas (ha) Young (planted in 2005-07 Spring) Recent Planting (Autumn 2007- 2008) 3 513 9 995 0 3 826 3 513 13 821	Total Area 15 735 3 826 19 561

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5 RISKS TO YUNNAN SHENYU’S ASSETS

5.1 Risks to Forest Asset

In addition to risks relating to the cash flow assumptions there are other risks associated with establishing a biological resource. In the Yunnan Shenyu forest the key identifiable risks include:

Fire
Pest and Disease

5.1.1 Fire

Fire has not been a major threat in South China plantation forests in the past. This risk can be mitigated by the implementation of fire prevention techniques such as the construction of firebreaks inside plantations, the development of human resources trained in fire fighting and supported by physical infrastructure such as portable fire fighting equipment. Given that the resource is geographically fragmented and comprises discrete forest blocks that are generally less than 500 ha in size, the opportunity for a singular catastrophic event is remote.

It is evident from Pöyry’s previous field inspections of YS’s estate that in some regions farmers have used burning as a land preparation tool in the past. YS has previously used fire to prepare land for planting but is moving away from this practice. The Company’s aim is to reduce the loss of soil fertility that occurs when organic matter is volatilised and lost to the atmosphere.

Recently established and young stands are at greatest risk to fire damage as they are more likely to suffer crown damage that compromises their growth. In older stands close to harvest age, the impact of fire may be less significant as much of the timber may be salvaged and marketed with little discount.

5.1.2 Pests and Disease

As the area of single species plantations increases in Yunnan so does the potential risk of pest and disease problems. The wide number of species in YS’s resource and its geographical spread mitigate the potential risks for catastrophic loss. During Pöyry’s field inspections in three counties, no serious pest or disease problems were observed.

5.2 Risks to Jatropha Asset

5.2.1 Landslides

The jatropha plantations are planted on steep hills and there is a high risk of landslides. During the field trip many signs of landslides near the jatropha plantations were detected. The plantation areas are scattered and the effects of a single landslide should remain limited.

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5.2.2 Jatropha Related Business Risks

While research on Jatropha curcas in China dates back to the late 1970s, the infrastructure that would support a rapid scaling up of jatropha plantations in Southwest China needs to be developed. Expected seed yields and oil content are still uncertain. Compared to traditional forest or agricultural asset valuation there is higher variance and uncertainty involved in the valuation of jatropha plantations. At present no large scale commercial jatropha oil or jatropha biodiesel production exists in China. Worldwide interest in jatropha did not begin until 2005. Jatropha is at the trial stage and the actual yields, agriculture practices and costs will become more certain over the next few years.

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6 COSTS

6.1 Forestry Asset

6.1.1 Direct Costs of Forestry Operations

Forestry operations are those operations associated with the establishment and maintenance of the forest crop up until the time of harvest. Harvesting costs are covered for the current crops valuation.

Establishment costs were provided last year by YS for broad groupings of species. The following tables give the establishment and ongoing direct costs of maintaining crops for the three species present in the YS estate.

Hard broadleaf does not have any establishment or ongoing tending costs other than an annual ‘maintenance’ cost of RMB37.5. This species grouping is assumed to be selectively cut and to regenerate itself in each subsequent rotation.

Table 6-1: Establishment and Ongoing Direct Costs for Hard broadleaf (RMB/ha)

Cost Item Maintenance	Year 0 37.5	Year 1 37.5	Year 2 37.5	Year 3 + 37.5

Table 6-2: Establishment and Ongoing Direct Costs for Armand and Yunnan Pine (RMB/ha)

Cost Item Land Clearing Land Preparation Setting Fertilizer Planting Tending and Fertilizer Labour Additional Fertilizer Seedling Maintenance Total Cost	Year 0 375 1332 1332 666 450 0 666 37.5 4858.5	Year 1 37.5 37.5	Year 2 37.5 37.5	Year 3 + 37.5 37.5

With the exception of the areas of uncanopied forests less than 3 years of age, the only silvicultural costs incurred in the market valuation of the current rotation for Yunnan pine and Armand pine is the annual maintenance cost of RMB37.50/ha/annum.

6.1.2 Direct Costs of Harvesting and Cartage

Direct harvesting and cartage costs are all of the direct costs incurred between the standing tree and processing of the logs to the point of sale. In China, most harvesting operations are labour-intensive. Trees are felled by axe, cut to length in the forest and then carried to the roadside by hand. The main cost elements are:

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Tracking and road making for harvesting.
Tree felling.
Delimbing the fallen tree.
Cutting the stem to log lengths in the forest (a typical length is 2 m length to facilitate hand carriage to the road. Chinese fir stems are left longer, reflecting their lighter weight and preferred use as roof rafters).
Carriage to a truckable roadside (commonly by hand or a combination of carrying by hand and some in-forest cartage on trolleys or motor driven tractors.
Storage of logs.
Debarking.
Truck loading.
Cartage of logs to the mill or other point of sale.

Pöyry obtained information on current harvesting and cartage costs during the field inspection process.

Based on the information obtained from field inspections and data which YS provided and information from other recent projects Pöyry constructed the following generalised cost table for harvesting in the Yunnan Shenyu estate.

Table 6-3:

Logging Costs by Species (2009)

Species Armand Pine Hard Broadleaf Yunnan Pine	RMB/m3 80 145 80

The hard broadleaf with the highest harvesting costs are the natural forests, where only selective cutting can occur. Harvesting costs in pine plantations are lower due to the higher volumes per hectare and the ability to clearfell.

The harvest volume weighted average cartage cost of YS’s current crop is RMB97.27/m[3] .

6.1.3 Cartage Costs

Historical cartage cost data from Pöyry’s in-house database were adjusted to real costs as at 2009, based on China’s published CPI, and plotted against cartage distance. The resulting cost curve (Figure 6-1) was benchmarked against five data points collected during the last two year field inspection.

The associated cost equation

Cartage cost: RMB/m[3] /km = 9.2407*one-way cartage distance (km)[-0.548]

was then applied to assumed average cartage distances for the various counties.

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Figure 6-1: Unit Cartage Cost on Cartage Distance (2009)

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3
Inflation Adjusted Cartage Cost
(Rmb/m3/km)
2.5 Poyry Field Findings
Pow er (Inflation Adjusted Cartage
2 y = 9.2407x R2 = 0.7426 [-0.548] Cost (Rmb/m3/km)) Pow er (Poyry Field Findings)
1.5
1 y = 14.309x-0.6817
R2 = 0.9
0.5
0
0 100 200 300 400 500 600 700 800
One way Cartage Distance (kms)
Cartage Cost (Rmb/m3/km)
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Table 6-4 summarises the assumed average cartage cost from the forest to the point of sale applied in the forest estate model. The point of sale in every case is assumed to be at-mill-gate. The price point assumed in the derivation of log prices (see following section), is also at-mill-gate.

Table 6-4: Assumed Average Cartage Cost (RMB/m[3] ) for Logs from County to Nominal Destination or Point of Sale (2009)

Origin (County) Gengma Huize Qiubei Shuangbai Yangbi Yongren Yunlong Shuangjiang Yuanmou	Cartage Distance (km) 250 250 200 150 100 200 150 250 200	Nearest City Market/Sales Destination Baoshan (RMB/m3) Kunming (RMB/m3) Honghe (RMB/m3) 110.00 110.00 100.00 80.00 75.00 100.00 80.00 110.00 100.00	Dali (RMB/m3) 75.00

The harvest volume weighted average cartage cost of YS’s current crop is RMB97.27/m[3] .

6.1.4 Forestry Overheads and Indirect Costs

In addition to direct costs, all businesses incur indirect costs. These costs are sometimes called overheads. Indirects or overheads are all those costs that are not direct labour or materials or are not easily associated with particular units of production.

In the general management of the forest, units of production are usually areas (hectares) of forest that are treated in a specific way or undergo particular treatment operations. In the harvesting phase, they refer to the volume of logs that are harvested (cubic metres).

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Forestry businesses overheads are usually divided into those associated with the general management of the forest estate and related forestry operations, and those more closely connected to harvesting activity.

6.1.5 Forest Business Management and Administration Overhead Cost

These are the total spend of the forest management business excluding all direct forestry operations costs, the cost of land rentals, and costs associated with harvesting and marketing activity. This provision is intended to cover the costs of:

All staff remuneration (corporate, management, administrative etc)
Offices rental, power, telecommunications, and other expenses
Vehicle running
Information technology and software licenses etc
Training
Research and development
External professional services e.g. legal, audit, other consultancies
Public relations and communications
Insurance
Repairs, maintenance and depreciation of assets
Memberships, levies and subscriptions.

Pöyry has international experience in assessing forestry overhead costs. Pöyry has applied an annual overhead cost of RMB195/ha, or RMB13/mu, an increase of RMB45/ha (RMB3/mu) from 2008. This figure was reached after discussions between Pöyry and CGF, and Pöyry’s assessment of an appropriate level of overhead to apply to the management of this forest estate.

6.1.6 Harvesting Overheads, Roading Cost and Indirect Costs

Harvesting overheads, roading costs and indirect costs comprise two parts. These are all of the harvest related costs that are not otherwise included in the direct costs and the significant indirect cost of harvesting taxes and fees.

6.1.7 Harvesting Overheads and Roading Cost

For a forestry business that is carrying out its own harvesting, there are associated overhead costs incurred. These cover the costs of:

Harvest planning and engineering (roads and landing)
Supervision of the harvesting operation to ensure value recovery
Marketing, administrative and accounting costs associated with sales
Other costs of sale such as log volume / weight measurement, scaling etc.

Table 6-3:

Harvest Overhead Costs Used in the Forest Valuation

Species Armand Pine Hard Broadleaf Yunnan Pine	RMB/m3 10 15 10

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Table 6-4: Harvest Roading Costs Used in the Forest Valuation

Species Armand Pine Hard Broadleaf Yunnan Pine	RMB/m3 10 12 10

6.1.8 Pre-Harvest Inventory & Survey Fee

A Harvest Inventory & Survey fee is charged by the third party/organization that holds the Forest Inventory & Survey Qualification issued by forest authority. This charge applies to the total standing volume (TRV) and ranges from RMB3/m[3] to RMB10/m[3] of the inventory total standing volume.

Pöyry has applied the mid-point of RMB6.5/m[3] .

6.1.9 Harvest Taxes and Fees

Forest Regenaration Fee

The Chinese Government’s removal of the forest specialty tax which published since July 2009, the only fee applicable is the forest regeneration fee. According to government policy document (Ministry of Finance PRC & State Forestry Administration PRC 2009(32)), this equates to 10% of the log sales revenue. The Forest Authorities in each province in China have the right to justice the fee’s rate by real situation.

Pöyry has applied a harvest tax of 10% to (Gross Sales Revenue at mill less Cartage Costs).

6.1.10 Forest Asset Land Rentals (Cost of land use)

Pöyry keep the annual land rental at RMB31.50/ha as March 2009 valuation.

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6.2 Jatropha Asset

6.2.1 Direct Costs of Jatropha Operations

The following table shows the current establishment and maintenance costs provided to Pöyry by Yunnan Shenyu for its jatropha Plantations (Table 6-5).

Table 6-5:

Establishment and Maintenance Costs for Jatropha provided by Yunnan Shenyu

Operation Land Clearing & Preparation Planting Seedling Fertilizer – base Fertilizer – supplementary applications Maintenance Total	0 80 25 50 25 40 220	1 25 55 80	Costs per year (RMB/mu) 2 3 4 25 25 25 55 55 55 80 80 80	5 25 55 80	6 � 25 55 80

Pöyry has benchmarked these establishment and operational costs for jatropha and has found them to be within the range of other companies.

The market asset value of the jatropha asset has been estimated by accumulating industry standard costs, incurred in establishing and maintaining the plantation. Interest, effectively a rate of return to the investor, has been included in the cost accumulation. This is to provide a means of harmonising the cost based valuation with the apparent results from DCF analyses. As more evidence becomes available on the growth, yield and revenue generation from jatropha investment, the basis of the valuation will transition to wholly DCF analysis.

Table 6-6: Establishment and Maintenance Costs for Jatropha used in the Market Valuation

Cost Items	Assumption
Land Preparation	RMB1200 / ha (RMB80/mu)
Seedlings	RMB2 per seedling, RMB3000 / ha (RMB200/mu)
Planting	RMB375 / ha (RMB25/mu)
Fertilising	RMB375 / ha (RMB25/mu)
Maintenance	RMB600 / ha (RMB40/mu) in first year and RMB825 / ha (RMB55/mu) in subsequent years
Land Rent	RMB300 / ha (RMB20/mu)
Administration	RMB150 / ha (RMB10/mu)

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7 LOG MARKETS AND LOG PRICES

Log market analysis, insofar as determining appropriate current and probable future log prices, constitutes an important part of the valuation process.

A wide range of factors influence prices and these include the wood demand and supply balance, exchange rates, pulp prices, financial positions of buyers and sellers, and production costs.

In forecasting China’s domestic log prices, Pöyry analyses all the factors that affect log demand and supply, production costs and competitive forces. In carrying out China’s domestic log price forecasting, an informed judgement on the Asia-Pacific region’s hardwood and softwood log price outlook is formed. This is based on supplying and consuming countries’ production and demand outlooks, and cost competitiveness. Any other factors that can potentially have an impact on the supply and demand outlook are also considered. Domestic log supply and demand outlooks, and cost developments and industry competitiveness are also analysed.

Table 7-1 illustrates the multitude of factors influencing key log prices in the Asia Pacific region which then ultimately affect domestic log price trends in China.

Table 7-1:

China Log Price Forecast Methodology

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New Zealand Softwood Log Price Outlook in
Asian Markets Russian Softwood Log Price Outlook in China Hardwood Log Price Outlook in Asia Pacific
Price Outlook for Imported Logs in China
China Log Production China Domestic Log
Outlook Price Outlook for Domestic Logs in China Demand
Cost of Production of Wood Paying Capability of
Chinese Domestic Logs End Use Industries
Supply Asia HW Logs
NZ SW Log Supply Asia Market Demand for NZ SW Log Cost competitiveness of NZ logs in Asia Wood Paying Capability of End Use Industries Russia SW Log Supply Demand for Russian SW Logs in Asia Cost of Production of Russian SW Logs Wood Paying Capability of End Use Industries Asia Pacific HW Log Demand for HW Logs in Cost of Production of Wood Paying Capability of End Use Industries
----- End of picture text -----

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7.1 Log Price Outlook

Presented in Table 7-2 is an overview of the factors which will influence log prices during the next five years. The log price forecast has been based on the expected outlook of the various factors discussed below.

China’s log demand growth is expected to stagnate during 2009, as a result of the global and local economic slow down. Growth is expected to resume by 2010, with a strong increase during 2010-2015, resulting in upward pressure on log prices.

Although China’s domestic roundwood removals will increase relative to previous years, this increase will not be sufficient to meet growing sawlog demand.

While importing of industrial roundwood logs will rise to meet domestic demand, this increase is expected to be modest during this decade. Regulations on harvest levels amongst the South East Asian suppliers will suppress the amount of tropical logs available in the next five years. In addition, various measures and regulations that will be implemented to support sustainable forestry in the tropical forest supplying countries will lead to higher production costs in Southeast Asian countries.

Proposed Russian log export tariffs are expected to affect the log supply dynamics in Asia. Furthermore, Russian imported logs production costs are expected to increase as logging locations shift to more distant forests. This will drive up the prices of imported sawlogs which will put upward pressure on domestic sawlog prices.

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Table 7-2: China Log Prices Outlook

Factors	Outlook and assumptions	Impact on log prices
Domestic supply	There will be increases of log supply from plantation forests but is partially offset by continuing declines in harvesting of natural forests. Overall, China’s domestic log supply is forecast to remain relatively consistent or increase moderately.	Neutral
Domestic demand	Domestic fibre demand will continue to increase as the economy keeps growing, albeit at a slower rate than before. The short-term outlook is especially positive as the market is set to bounce back from the stagnated conditions caused by global financial downturn.	Positive, especially in the short-medium term
Cost of supply	Transport costs may further increase as fuel prices in China are expected to rise. However, operational efficiency in logging and transportation can be improved through the introduction of more sophisticated systems.	Neutral to slightly positive
Imported log and woodchip prices	Imported log prices are currently on a rise again after a considerable drop experienced in late 2008/early 2009. Strong demand factors support the short-medium term upward trend. Imported woodchip prices are presently under some downward pressure as the demand remains weak. The future trend will depend on the establishment of planned pulpmills in China (and Australia) and their fibre procurement.	Positive (sawlogs) Marginally negative (pulpwood)
Wood paying capability	Increasing market competition among wood products manufacturers effectively cap the opportunity for domestic wood products prices to significantly go up.	Neutral to moderately negative

Based on the analysis described above, Pöyry has formed an opinion on the log price outlook. This is the basis of the prices applying in the future. This sees large sawlog grades increasing in price from 2009 to 2014 at 2-3%/a in real terms, medium-sized logs increasing at 1-2%/a and small (pulp) logs at around 1.0%/a.

Pulpwood demand is expected to increase in the next five years as a number of large mill development plans are implemented, and this will put upward pressure on pulplog prices. However, generally stagnant global pulplog and chip prices will offset the opportunity for domestic pulplog price increases in the future.

As part of this valuation, log price information was gathered for the range of species currently owned by Yunan Shenyu. The sources of this information were interviews with log buyers and wood using industries in Yunnan, on-line log price information, and Pöyry’s own China log price database. Log prices typically vary with the size of the log’s small end diameter, or SED. The log price and SED data were then plotted to show log price (RMB/m[3] at-mill-gate on log SED.

This analysis is shown in the graphs below:

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Figure 7-1: Yunnan Pine Log Price on Log Small End Diameter (Yunnan Province)

==> picture [348 x 133] intentionally omitted <==

----- Start of picture text -----

1800
1600 y = 23.538x + 309.41
1400 R [2] = 0.9574
1200
1000
800
600
400
200
0
0 10 20 30 40 50 60
Log Small End Diameter(cms)
Log Price at Mill Gate(rmb/m3)
----- End of picture text -----

Log prices for 2009 by log grade (SED size) were derived for Yunnan pine and Armand pine from the regression equation shown in Figure 7-1.

Hard broadleaf is a mixture of high value species such as south-west birch and oak, with some less valuable species such as alder in the mix as well. Less price data was obtained for these species than pines during the field inspections. The data that was obtained was used in conjunction with Pöyry’s China log price database to estimate appropriate 2009 market prices for logs of this mix.

The log prices applied in this valuation are shown in Table 7-3 below. On a simple overall average basis, the start prices applied in this valuation are similar to those for the same period in March 2009 valuation.

Poyry expects to see an increase in log prices in 2010 and 2011, with an average real price increase of 9.6% over the four years from 2009.

Table 7-3: Current and Future Log Prices Applied in Valuation Model

Species YS-Yunnan Pine YS-Yunnan Pine YS-Yunnan Pine YS-Armand Pine YS-Armand Pine YS-Armand Pine YS-Hard Broadleaf YS-Hard Broadleaf YS-Hard Broadleaf	Prices in December 2009	Period 1 1 Jan 2010 - 31 Dec 2010	Period 2 1Jan 2011 - 31 Dec 2011	Period 3 1 Jan 2012 – 31 Dec 2012	Period 4 1 Jan 2013 - onwards
	555	566	577	589	595
	815	839	865	882	891
	1 220	1,257	1,294	1,333	1,373
	555	566	577	589	595
	815	839	865	882	891
	1 220	1,257	1,294	1,333	1,373
	540	551	562	573	579
	925	953	981	1,001	1,011
	1 475	1,519	1,565	1,612	1,660
Simple average	902	927	953	977	996

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Key factors that will support the expected log price development in China are as follows:

Softening in prices in 2009, as demand weakens and the anticipated Russian export tax is not implemented.
By 2010, increasing domestic log demand driven by the expanding local wood end-use industries such as construction and furniture.
Post 2009, a decline in Russian log imports due to Russia’s log export tax increasing log supply constraints in China.
Declining hardwood log availability will boost demand for softwoods and hardwood plantation wood.
China’s wood processing industries are expected to continue expanding, supported by the rapidly growing economy and increasing investments.
Expanding global demand for wood products means that wood products exports will continue to expand, and this will support log demand in China.

Although China’s log supply is expected to increase during the next few years, demand growth will exceed supply, and higher volumes of imported wood will be required to meet domestic demand.

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8 BIOFUEL MARKETS

China’s biofuel production has historically focused on ethanol. Large scale production of fuel ethanol was actually aimed at disposing of high stocks of stale cereal stored in 2001 when the total volume reached about 100 million tonnes. In addition to disposing of cereal stock, development of fuel ethanol production in China was encouraged due to three other factors:

Fuel shortages
Air pollution
Development of more options for the rural economy.

Since 2004, with the dramatic increase in prices of crude oil and consequently that of coal and other energy sources, fuel ethanol producers started to expand capacities mostly based on food raw materials (corn and wheat). At the end of 2006, foreseeing a conflict between food safety and the bio-energy industry, the state government issued policies that banned any new biofuel capacity based on food raw material, but encouraged development of a biofuel industry backed by non-food crops and cellulose materials (e.g. jatropha, wood residue and straw) based biofuel production.

China is the third largest producer of ethanol worldwide with total production 1.46 million tonnes in 2008 after the US and Brazil. This accounts for about 3% of world ethanol production. The annual production increased from about 0.3 million tonnes in 2004 and 1.02 million tonnes in 2005 to 1.46 million tonnes in 2008. Annual growth has been slowing. Production growth has been slightly less than 10% during 2007-2008. The main reason for this is that the Chinese government has banned the use of corn or other food crops in new ethanol production facilities. Currently the Government encourages development of non-food feedstock like cassava, sorghum, jatropha and cellulosic ethanol.

The history of biodiesel production is somewhat shorter than that of ethanol production. China started experimental research on biodiesel derived from vegetable oil in 1981. Projects to develop biodiesel production have been encouraged more recently and since 2004 biodiesel investments have been a hot topic in China. The growth slowed down in 2007 due to the shortage of feedstock supplies. Chinese biodiesel production was about 300 000 metric tonnes in 2007. The industry is fragmented and most of existing companies producing biodiesel have only about 10-30 000 tonnes capacity.

There is growing interest in the development of biofuels intended to reduce oil imports, which currently account for more than 46% of China’s total oil supply. Aside from a reduction of imports, China’s reliance on imported oil is viewed as a security concern for the government. The government has set the target of 10% by 2010 and 15% by 2020 for the utilisation of biofuels in the transportation sector. As such, China has an ambitious plan to develop native woody energy crops like jatropha, Pistacia chinennsis , Xanthoceras sorbifolia and Vernicia fordii (Tungoil tree) for biodiesel feedstock. However, it seems unlikely that the 10% target will be

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fulfilled with the current biofuels supply. Efforts are needed in many fields including land utilization, feedstock development and research and development to reach the biofuel targets.

8.1 China Biofuel Policies

Liquid biofuel is cited in the 11th Five-Year Development Policy and Regulations as a major future direction for new Chinese industrial development.

The development of a biofuel industry is under strict government control. The support for biofuels is strong and there are several programs that deal with different parts of the value chain. It has been estimated that energy-oriented agriculture and the biodiesel industry can create about 6 million jobs.

The China Renewable Energy Law came into effect 1 January 2006. This law specifies that “the State government encourages clean and highly efficient development of biofuels and energy crops/plants. Liquid biofuels shall be included in the fuel sales network”. The law also offers financial incentives, such as a national fund to foster renewable energy development, and discounted lending and tax preferences for renewable energy projects. China's government imposed a national renewable energy requirement that is expected to boost the use of renewable energy capacity up to 15% by the year 2020.

The regulations under the Renewable Energy Law will establish incentives for investing in renewable energy in China. Although the exact forms that these schemes will take and the level of incentives which will be provided are not yet known, the Renewable Energy Law states that the incentives will be available to renewable energy development and utilization projects.

In March 2006�the 11th 5-year plan for China Economic & Social Development identified expansion of fuel ethanol and biodiesel capacity as a means of developing bio-energy.

In November 2006 � the Ministry of Finance, the National Development and Reform Commission, the Ministry of Agriculture, the State Taxation Administration, and the State Forestry Bureau published the implementation guideline for development of bio-energy and subsidizing bio-chemical industry which forms the basis for the government’s role and details its support for the bioenergy industry. The government has proposed in the same guideline, plans to provide subsidies of RMB200/mu for establishment of feedstock plantation for the bio-energy industry.

Since 2006, the state government has been working on the 11th 5 year plan for fuel ethanol and modified automobile ethanol which discourages fuel-ethanol capacity expansion based on food cereals and encourages using non-food material for growth.

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National biofuels standards[6] have been established. Oil companies (Sinopec and China Petroleum) must also incorporate biofuels in accordance with these standards into their distribution systems.

In September 2007, China’s National Development and Reform Commission issued the Renewable Energy Middle-Long Term Development Program . In this document, China plans to achieve fuel ethanol production of 10 million tonnes and biodiesel production of 2 million tonnes by 2020.

Biodiesel

The Ministry of Science and Technology of China, the China National Reform and Development Committee, and the China Engineering Academy rank biodiesel research and production as the leading priority of the Chinese energy industry.

The government encourages biodiesel manufacturing based on oil crops and oilbearing plants, and raw material plantations should be developed as the supply base for the production.

8.2 China Biofuel Demand

Fossil gasoline and diesel demand in China has increased as a result of a six-fold increase in private vehicle ownership in the past 10 years. Demand for motor vehicles is expected to continue to grow. By 2020, the number of motor vehicles in China is forecast to reach 100 – 150 million.

Although biodiesel production at a policy level was addressed only in 2006, the industry is expected to expand rapidly as China now consumes twice as much diesel as gasoline. Higher diesel use is a result of the widespread use of trucks, particularly for farms. Mechanized farm equipment has also contributed to the increase in diesel consumption. The nation is one of the biggest diesel users in the world, consuming approximately 60-70 million tonnes per year.

In 2020 the fossil fuel demand for motor vehicles alone is estimated to be about 228 million tonnes (76 MT of gasoline and 152 MT of fossil diesel).

China expects biofuels to meet 15% of its transportation energy needs by 2020. If biodiesel comprises 15% of diesel and the vehicle structure remains the same, the demand for biodiesel in 2020 will reach about 23 million tonnes. Should the direction of the current policy remain unchanged the targeted biofuel components may need to be revised as demand will outstrip supply with the stated targets.

8.3 China Biofuel (Biodiesel) Supply

Total biodiesel production nationwide in 2007 was estimated to be about 300 000 tonnes. It was mainly produced from grease trap waste oil and waste cooking oil. The Chinese biodiesel industry is fragmented. Most biodiesel producers have only about 5 000 tonnes to 30 000 tonnes capacity. Although China

6 National standard-GB/T 20828-2007 covering Diesel vehicle fuels and biodiesel standard

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is the world’s largest importer of soybeans, edible vegetable oils are used primarily for food, reducing the supply for biodiesel consumption. As such, some companies face insufficient supplies of feedstocks (i.e., animal fat or waste oil) and have to limit production to a few months a year. It also has been reported that biodiesel sometimes has not met quality standards for fuel-use biodiesel. Unlike ethanol, biodiesel is marketed directly to end users. Biodiesel is not officially available in the main gasoline stations for consumers. Currently there are no established official distribution channels for biodiesel or biodiesel feedstock. This has limited biodiesel development in China.

The main feedstock is still the waste grease and oil. However, canola oil, cotton seed oil and wild plant oil such as jatropha seed oil are potential feedstock for China’s biodiesel industry in the near future. Currently the availability of feedstock is limiting the growth of biodiesel production. Due to the feedstock constraints, illegal collection of used oil is rampant which results in limited supply and high prices for biodiesel feedstock. The success of large scale plantations of non fieldtested crops like jatropha, Pistacia chinennsis , Xanthoceras sorbifolia and Vernicia fordii (Tungoil tree) are going to determine the total production of biodiesel in coming years. In July 2008, The National Development and Reform Commission approved three biodiesel pilot projects using jatropha oil. Three state-owned entities - PetroChina Company Limited, Sinopec and the China National Offshore Oil Corporation (CNOOC) - will develop the projects, bringing on-stream about 170 000 tonnes capacity. Furthermore, PetroChina and COFCO are cooperating with The State Forestry Administration to establish “forestry oil integration” including about 1 million mu of native woody energy crops plantations.

Under current biofuel development policies, the country is expecting its biodiesel production to be 200 000 tonnes by 2010 and 2 million tonnes by 2020. To reach the target China needs to develop the feedstocks supply from non-food energy crops. The future biodiesel production volume will be highly dependent on the success of large scale woody energy crop plantations.

8.3.1 Biofuels Demand and Supply Balance

Demand for biofuels in China is expected to increase significantly over the next decade, driven by increasing domestic demand for fuel (from rising motor vehicle units) and the Government's target for biofuels to satisfy 15% of the nation's transportation energy needs by 2020. Estimated biofuel demand growth is expected to drive significant production capacity additions, although capacity growth could be constrained by limited feedstock availability. Strong demand for biofuels is expected to continue to outpace supply in the next decade, especially for biodiesel whose excess demand is expected to increase over the same time period. The supply can increase substantially should the second generation biofuel technology become commercially available on a large scale.

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Figure 8-1: Biodiesel Demand and Supply

==> picture [287 x 167] intentionally omitted <==

----- Start of picture text -----

1000 Mt
25000
20000
Demand
Supply
15000
10000
5000
0
2007 2010 2020 Year
----- End of picture text -----

8.4 Market Prices for Biofuel Feedstock

The main source of biodiesel raw material has been waste cooking oil which includes waste animal fat and vegetable oil. However, canola oil, cotton seed oil and wild plant oil such as jatropha, Pistacia and Tungoil seed oil are potential feedstock for China’s biodiesel in the future. Current government policy is putting more emphasis on non-edible and non-traditional biodiesel feedstock. In the long term, the main feedstock is expected be non-edible woody energy crops.

Growth in biodiesel production capacity has increased demand for feedstock and the prices of feedstock. Waste cooking oil rose sharply in price in the middle of 2008. The price of biodiesel has remained stable and gross margins have fallen. Some of the biodiesel producers have diversified into production of raw material for plastics and one company even declared bankruptcy in 2008. One of the big biodiesel producers announced its results for the year 2008, reporting pre-tax profit declined to RMB4 million from RMB16 million one year earlier.

Figure 8-2: Indicative Biodiesel Feedstock Price Development

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----- Start of picture text -----

RMB/ton (Oil)
8,000
Waste oil
Jatropha (limited
6,000
market)
Palm oil (CIF
Rotterdam)
4,000
2,000
Year
0
2005 2006 2007 2008 2009
----- End of picture text -----

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The prices of available raw material for biodiesel production clearly suggest that there is an acute demand for low-cost feedstock. It is not expected that the feedstock prices would fall in the near future.

Jatropha Seed Prices

From 2005 to mid-2006 jatropha seed price ranged from RMB0.8-1/kg[7] . This price does not reflect seed cost at a commercial scale. The commercial scale markets and the market pricing will form only after few years. At the end of 2006 and in 2007 prices in many areas reached RMB2/kg. However, current jatropha seed price has increased to RMB5-7/kg, with the main uses being new planting and research.

The future policy and possible Government subsidies to biodiesel will have an effect on seed prices in the future. Based on current prices and policy, Pöyry has used the seed price estimate of RMB2.0/kg in the investment and prospective valuation of the jatropha business. Assuming 31.5% extractable oil content this translates to RMB6350/tonne of oil. The seed price of RMB2.0/kg assumes a revenue of RMB0.6/kg from glycerine and seedcake (remaining after the oil is extracted from the seeds) sales. The seedcake is assumed to be converted to electricity and fertilizer. Currently, selling the electricity to the public grid is not common but the latest regulations suggest that this is going to change. According to the National Development and Reform Commission, the use of biomass in the electricity generation will attract a subsidy of RMB0.25/kWh for 15 years if the share of biomass fuel is more than 80%.

7 Biofuels in China: An Analysis of the Opportunities and Challenges of jatropha Curcas in Southwest China

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9 WOOD FLOW AND ALLOCATION MODEL

The physical and financial descriptions of the forest, as outlined above, are brought together in the form of input to the Forest Estate Model from which wood flows and cash flows are generated. The Forest Estate Model employs a linear programming formulation which allows constraints to be specified and applied to the management and harvest of the forest estate. These constraints include the specification of:

Minimum and maximum harvest ages by species
Replanting assumptions in terms of crop types and expected future crop yields
Levels of harvest volume (or area), in total or by defined parts of the forest estate, by species and location and period, and, where appropriate
The minimum and maximum volumes of particular log grades that can go to certain destinations

With every constraint added to or incorporated in the model, and the tighter or more demanding any particular constraint, the lower the value of the forest will be. This is simply because the ‘optimal solution’ is more constrained, and in turn lower.

Pöyry has modelled the resource within a 50 year timeframe, as per the March 2009 valuation. This timeframe extends from December 2009 to December 2059.

Constraints applied to the modelling of potential wood flow from the YS estate are as follows:

9.1 Minimum and Maximum Rotation Ages

The following table shows the minimum and maximum rotation ages allowed, by species in the Forest Estate Model. A common approach is to allow a wide range of ages in the early period of the model (periods 1 - 8), and then confine the range to one considered about the normal range for economic rotations of the various species. This allows reasonable flexibility to the model insofar as harvesting the various crops in the estate to meet the requirements of the other constraints.

Table 9-1: Clearfell Age Constraints by Species and Period in Model

Species Armand Pine (Closed) Armand Pine (Open) Hard Broadleaf (Closed) Hard Broadleaf (Open) Yunnan Pine (Closed) Yunnan Pine (Open) Armand Pine (Closed) Armand Pine (Open) Yunnan Pine (Closed) Yunnan Pine(Open)	Model Periods 1-8 1-8 1-50 1-50 1-8 1-8 9-50 9-50 9-50 9-50	Minimum Clearfell Age (years) 25 25 25 25 25 25 25 25 25 25	Maximum Clearfell Age (years) 90 90 50 50 90 90 45 45 45 45
Period 1 is from April 2009 to March	2010.

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The rotation age constraints listed above incorporate several changes to those used in the March 2008 valuation, which has had an impact upon the wood flow profile of the YS estate. Minimum rotation ages have decreased for all species. Armand pine and Yunnan pPine minimum rotation ages have decreased from 40 years to 25 for closed forest and from 30 to 25 for open forest. The minimum rotation age for hard broadleaf has decreased from 50 to 25 years. These changes are intended to reflect realistic management of the modelled resource that would be sought by an economically rationale owner of the forest estate.

9.2 Regeneration Assumptions

The December 2009 valuation model assumes all harvested stands are replanted the following year back into the same species. Open Forest areas are replanted back into the higher productivity Closed Forest of the same species.

9.3 Harvesting Constraints

The following table summarises the direct harvesting constraints applied in the model.

Table 9-2: Harvesting Constraints Applied in Forest Estate Model

Constraint 1	Start Period 1	End Period 2	Time Applies To Period	Group Applies To Whole estate	Sign =	Quantity 175 000	Unit m3

This constraint restricts the total harvest (clearfell plus thin volumes) in periods 1 and 2 (January 2010 to December 2011) to 175 000 m[3] /annum. This cut level imposes a front-ended harvest strategy on the YS resource that reflects the mature age-class characteristics of the estate. After period 2 volumes are smoothed to regulate year-on-year fluctuations in total harvest volume as described in Section 9.5.

9.4 Destinations and Allocation

The model assumptions for the allocation of log grades to markets for various species and grades of logs are the same as in the March 2009 valuation report. For the YS estate there are four generic ‘destination’ markets (all cities within Yunnan Province) which can accept all log grades of all species in the estate. They are Baoshan, Kunming, Honghe and Dali. Each destination can receive all log grades and all species.

The modelling software does permit precise specification of where wood, by species and grade, can and might flow. This can be achieved by specifying upper and lower volume limits by destination, and by varying the delivered log price and /or specifying the actual cartage cost by origin and destination. This level of sophistication has not been applied in the YS model. Typically in China there is a deficit in supply of logs. In addition, where there is an increase in the level of log supply, that is sustained, then commonly the wood processing investment that eventuates will see the average cartage distance and costs kept to a low level. The

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average cartage distances by province, as specified in Table 6-4, are considered realistic in terms of modelling likely average cartage cost and net stumpage for this valuation.

9.5 Smoothing Constraints

Both the harvesting and the smoothing constraints seek to ensure a sensible and practicable harvest of the forest in a manner that would allow reasonable management of harvesting resources and avoid any undesirable impact on the log market.

The YS estate wood flow profile has been ‘smoothed’ in order to maximise the NPV of the estate, subject to prudent management considerations, such as limiting the fluctuation in year-on-year total harvest volumes.

To this end, the annual harvest volume has been allowed to vary by up to 25% from the previous year, every fifth year, from period 3 to period 50. This creates a ‘block-smoothing’ effect over the modelled timeframe.

9.6 Wood Flow

The following graphs show the results of the wood flow modelling.

Figure 9-1: Wood Flow by Rotation

==> picture [351 x 162] intentionally omitted <==

----- Start of picture text -----

250.0
200.0
150.0
100.0
50.0
-
Year Ending 31 December
Current Rotation Future Rotation
31,0000Harvest Volume (m
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058
----- End of picture text -----*

Note, the estimate of the market value of the forest is based on the wood flow and cash flow of the current rotation only.

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Figure 9-2: Wood Flow by Species

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----- Start of picture text -----

250.0
200.0
150.0
100.0
50.0
-
Year ending 31 December
YUNNAN PINE ARMAND PINE HARD BROAD LEAF
Harvest Volume (m31,000)
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058
----- End of picture text -----*

The resource is composed of, in order of largest area, hard broadleaf, Yunnan pine and Armand pine. Individual species annual harvest volumes have not been smoothed in the YS model, and are harvested within their applicable harvest age ranges (Table 9-1). Any smoothing constraints introduced upon individual species would reduce the NPV of the estate.

Figure 9-3: Wood Flow by Origin (County)

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----- Start of picture text -----

250.0
200.0
150.0
100.0
50.0
-
Year Ending 31 December
GENGMA HUIZE QIUBEI SHUANGBAI SHUANGJIANG YANGBI YONGREN YUANMOU YUNLONG
Harvest Volume (m31,000)
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058
----- End of picture text -----*

The harvest profile adopted in the valuation model has no changed that adopted in Pöyry’s March 2009 valuation.

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10 DISCOUNTED CASH FLOW VALUATION

10.1 Overview

The diagram below illustrates the structure of the valuation model. Generation of the initial inputs (the wood flows) has been described in the previous section. These wood flows are then optimised in their delivery throughout the supply chain to the various end-use markets. Revenue is generated at each destination, the price point being delivered at mill gate (AMG). Harvesting and transport costs, annual forest management costs, indirect overhead costs and the net cost of land are deducted from this revenue to give an operating margin.

The linear programming model generates all of these costs streams, since their profile depends on the harvesting strategy and age-class structure of the forest.

Figure 10-1: Schematic Illustration of the Forest Valuation Process

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SUPPLY CHAIN OPTIMISATION
ALLOCATION TO MARKETS
LOG SALES REVENUE
HARVESTING & TRANSPORT
FOREST MANAGEMENT COSTS
INDIRECT OVERHEAD COSTS
“SALE” OF FREEHOLD LAND
PRE-TAX CASH FLOW NET PRESENT VALUE FROM
SCHEDULE MODEL PRE-TAX CASH FLOWS
----- End of picture text -----

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10.2 Treatment of Taxation

Astute forest investors are expected to prepare valuations on the basis of post-tax cash flows. However, in general the accessible information with which to interpret transaction evidence almost always excludes any evidence of the buyer’s taxation position. Accordingly, when forest valuers’ have sought to derive implied discount rates, these have been largely based on pre-tax cash flows. This valuation has been based on real pre-tax cash flows to which Pöyry has applied what we consider an appropriate discount rate. This is to translate the pre-tax cash flow forecast into a net present value representative of the market value of the tree crop asset.

10.3 Scope of the Analysis

In this context, scope refers to the time span of the analysis. The forest estate modelling process can provide projections of cash flows far into the future. Providing the existing forest is replanted into productive croptypes, it would be possible to run the analysis indefinitely. Two alternatives are demonstrated in forest valuation:

Perpetual cash flows - the forest is modelled as an ongoing business, where stands are replanted as they are felled. All revenue and costs associated with the sustained venture are modelled in perpetuity. In practice, the model is extended to the point where, after the discounting process, incremental cash flows are effectively immaterial. A figure in the order of fifty years is not uncommon when modelling a large plantation resource.
Current rotation analysis - only the revenue and costs associated with the existing tree crop are included in the analysis.

In general, Pöyry prefers to confine the valuation analysis to the current rotation. The justification for this approach is that future rotations, which include a degree of conjecture, are excluded from the analysis. The current rotation approach is especially compelling when future rotations appear either spectacularly profitable, or especially unprofitable. In either case it could be anticipated that some modifying influence would prevail.

If subsequent rotations are unprofitable, the forest owner will look to contain costs and increase log prices. If there is no prospect of either, a rational investor will quit forest ownership.

If subsequent rotations appear super-profitable, it can be anticipated that there will be competition for the underlying land and its price will increase. When charged with a higher land price, the profitability of the tree crop, and hence its value, will decline.

The approach is consistent with wider business appraisal that generally seeks to confine the analysis to the current investment cycle, and thereby avoid unnecessary conjecture.

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10.4 Timing of Cash Flows

Tree crop age has been estimated by dividing the area in each maturity class by the number of single year age-classes within it and assigning equal areas to the single year age-classes within the maturity class. This is described in Section 4.

Cash flows are assumed to arise on average at mid-period. Accordingly, with the first period being the 12 months from 1 January 2010 to 31 December 2010, the mid period is 30 June 2010. The first period’s net cash flow has therefore been discounted for 6 months or 0.5 years, from 30 June 2010 back to the valuation date of 31 December 2009. Period 2 is from 1 January 2011 to 31 December 2011. The mid period is 30 June 2011. Accordingly, the period 2 net cash flow has been discounted for 1.5 years, period 3 for 2.5 years and so on.

10.5 Date of Valuation

The date of the valuation is 31 December 2009 . Pöyry uses proprietary software that allows the isolation of both the cash flows arising from the current rotation and all future rotations at any point in the valuation horizon. The cash flows contributing to the YS market valuation (current crop) arise during the 50-year period beginning 1 January 2010 and ending 31 December 2059. In fact 95% of the market value derives from cash flows arising by 2026, and 99% by 2032.

10.6 Discount Rate Applied in Valuing the Yunnan Shenyu Forest Resource

Pöyry has chosen to apply a discount rate of 11.5% to pre-tax cash flow in this valuation. This is consistent with previous valuation reports as at December 2007, April 2008 and March 2009.

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11 JATROPHA VALUATION MODEL

It rests with the appraiser’s professional judgement to assess what weighting should be applied to the results from the respective valuation methods (as described earlier in this report).

Essential considerations in valuing the jatropha crops are:

The jatropha crop has not yet reached large scale commercial production, and the final market conditions are, at best, immature; and
There is a lack of sufficient price and yield information with which to reliably forecast future cash flows using the income method for the purposes of estimating the current market value of the jatropha asset.

It is Pöyry’s opinion that, given the lack of transaction evidence and yield information, a hypothetical transaction would more likely turn to a consideration of the costs that would be necessary to recreate the resource. Pöyry has in the first instance established a schedule of accumulated expenditure, by age-class. This has been expressed in terms of current standard costs. Costs have not been accumulated beyond five years of age. This recognises that by age five years jatropha crops are expected to have reached their maximum annual yield of fruit and can accordingly be regarded as economically mature.

Pöyry’s examination of DCF approaches for the jatropha suggests that these are producing higher results than the accumulated cost approach, albeit imprecise and potentially unreliable. In anticipation of the need to eventually migrate from the cost to an income approach, Pöyry has applied a harmonization process. This would see the cost-based values make the transition to income-based results in a smooth rather than discontinuous manner. The harmonization mechanism adds 20% to the accumulated costs each year.

It is Pöyry’s opinion that the cost accumulation approach must endure until such time as sufficient information becomes available to apply an income-based method with confidence.

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12 VALUATION RESULTS AND SENSITIVITY ANALYSIS

12.1 Forestry Asset Market Valuation as at 31 December 2009

Pöyry has estimated the market value of the Yunnan Shenyu forestry asset as at 31 December 2009 to be RMB 893 million. This is the net present value of the pre-tax cash flows arising from the future management and harvest of the existing forest crops during their current rotation. The valuation uses an 11.5% discount rate applied to real, pre-tax cash flows.

This is a decrease of RMB 96million, or -10% from the estimated market value of RMB988.798 million, as at 31 March 2009.

12.2 Jatropha Asset Market Valuation as at 31 December 2009

Pöyry has estimated the market value of the Yunnan Shenyu jatropha asset in Huize and Shuangjiang counties as at 31 December 2009 to be RMB 297.053 million. The jatropha estate market valuation has been calculated using the costbased methodology described in Section 11.

12.3 Sensitivity Analysis

12.3.1 Forestry Asset Sensitivity Analysis as at 31 December 2009

A sensitivity analysis has been conducted that addresses the main drivers of value within the current rotation valuation model. These are:

Discount rate and log price changes (in combination)
Changes in the level of fixed overhead costs
Changes in the costs of production (logging, loading and log cartage)
Changes in the level of Land Rentals
Changes in the level of Forestry Costs

Table 12-1: Log Price Sensitivity

Table 12-1: Log Price Sensitivity
Scenario 5% Real Price Increase No Real Price Increase (Base) 5%Real Price Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 1002 962 912 945 893 847 872 824 781

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Table 12-2: Overhead Cost Sensitivity

Table 12-2: Overhead Cost Sensitivity
Scenario RMB295 fixed cost per ha/year RMB195 fixed cost per ha/year RMB95 fixed costper ha/year	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 921 869 825 945 893 847 969 916 869

Table 12-3: Harvest Cost Sensitivity

Table 12-3: Harvest Cost Sensitivity
Scenario 10% Harvest Cost Increase Base Harvest Cost 10%Harvest Cost Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 914 964 819 945 893 847 975 922 974

Table 12-4: Land Rental Cost Sensitivity

Table 12-4: Land Rental Cost Sensitivity
Scenario Cost RMB63/ha/year Cost RMB31.50/ha/year (Base) Cost RMB0/ha/year	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
	Current Rotation Value (RMB million) 937 884 839 945 893 847 953 900 855

Table 12-5: Direct Forestry Cost Sensitivity

Table 12-5: Direct Forestry Cost Sensitivity
Scenario 50% Forestry Cost Increase Base Forestry Cost 50%ForestryCost Decrease	Real Discount Rate Applied to Pre-tax Cash Flows 10.50% 11.50% 12.50%
		12.50%
	Current Rotation Value (RMB million) 940 889 842 945 893 847 949 897 850

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reduction in forest value. A doubling of land rentals to RMB63/ha has a less than 1% impact on estate NPV. The valuation is also largely insensitive to harvest costs, with a 10% increase in the cost of logging causing a 3% reduction in value, and vice versa. As discussed above and shown in Table 12-5, large changes in forestry direct costs have no material impact on the valuation.

12.3.2 Jatropha Asset Sensitivity Analysis

Table 12-6, below shows the sensitivity of the estimated market value of the jatropha asset to changes in land rental and silvicultural costs.

Table 12-6: Sensitivity Analysis of the Jatropha Plantation Market Valuation

Scenario	Value (million RMB)
Base Case – 20% compounding rate	297
25% increase in compund rate – 25% compounding rate	335
25% decrease in compund rate – 15% compounding rate	263
25% increase in land rental	309
25% decrease in land rental	285
10% increase in Silviculture cost	321
10% decrease in Silviculture cost	273

The jatropha plantation value is most sensitive to the estimated silviculture cost which includes all costs except for land rental and overheads. A 10% change in silviculture cost will cause an 8% difference in value. In comparison, land rental is a smaller component of the overall cost, a 25% movement in either direction has an impact of 4% on value.

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13 CHANGE ANALYSIS – FOREST ASSET MARKET VALUATION

The following table summarises the key factors that have produced the change in the value of the Yunnan Shenyu forest estate (tree crops), between 31 March 2009 and 31 December 2009.

Table 13-1:

Key Components Producing the Change in Tree Crop Value March-December 2009

Crop Market Value as at 31-March 2009 Change in forest area and maturity due to area sales and purchases, and growth (maturing) of crops [i.e. 2009 Physical Forest Description] Change in Harvest Tax_(application of China generic_ harvest tax method) Change in Log price forcasting Crop Market Value as at 31-December 2009 TOTAL CHANGE	Cumulative Value Effect (RMB million) 989 1012 973 893 893 -96	Value Change by Step (RMB million) 23 -39 -80 -96	Value Change by Step (%) 2 -4 -8	Cumulative Value Change (RMB million) 23 -16 -96 -96	Cumulative Value Change (%) 2 -2 -10 -10

The main contributors to the change in forest crop value are the crop growth (maturing) (+). With the new Chinese generic harvest tax regulation changes in July 2009, there is negative effect to the value as seen in Table 13-1 above. With Pöyry’s update of Chinese log prices forecast, there is negative effect to the value as well. Compared with the March 2009 valuation there are 96 million Decreases in the forest value.

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14 MERCHANTABLE VOLUME

Table 14-1 summarises the merchantable standing volume of the existing YS plantations as at 31 December 2009, by species. These numbers are the product of the area in the forest estate (hectares), by species and age, and the expected TRV (m[3] /hectare) by species and age, from the respective croptype yield tables. Merchantable volumes for the YS estate are those volumes associated with stands aged between 25 and 62 years old.

Table 14-1: Standing Merchantable Volume by Species in the YS Estate as at 31-December 2009

Table 14-1: Standing Merchantable Volume by Species in the YS Estate as	at 31-December 2009
Species	TRV (m3)
Armand Pine Hard Broadleaf Yunnan Pine	170 158 457 362 766 790
Grand Total	1 394 311

Note: the total merchantable volume currently standing in the forest excludes areas less than 25 years old. This total merchantable volume of 1.39 million m³ in the forest is a notional figure. There is no expectation that it would be realised through immediate harvesting.

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APPENDIX 1

Valuation Methodology

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Appendix 1

1 METHODOLOGY

1.1 Outline of Valuation Methods

Accompanying the global expansion in planted forests has been ongoing refinement of the processes employed in forest appraisal.

Three main methods of appraisal are commonly distinguished. These are:

Comparable sales
Expectation value
Cost

If these methods are to be effectively utilised in forest valuation then all three of them generally require a discounted cash flow (DCF) approach[1] . A schematic representation of the relationship between the methods is shown in Figure 1-1.

Figure 1-1: Valuation Approaches

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Approaches Employing
Discounted Cash Flow
Analysis
Comparable Expectation Cost
Sales Approach Approach
Standing Stock Projected Wood
Approach [1] Flows
1
The standing stock approach is the special case where the
discounting period used in the DCF analysis is zero.
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1.2 Expectation Approach

The Expectation approach invariably involves DCF analysis. It provides the Net Present Value of the future net revenue stream and is commonly referred to as the “Income” or “NPV” approach[2] . As the terminology implies, this approach involves projecting the anticipated future net income stream, and then “discounting” this, at a suitable cost of capital, in order to acknowledge the lower economic value of delayed receipts.

1 In this context, DCF is considered within its wider interpretation. This recognises that the timing of the receipt or outlay of funds must be considered. When applied rigorously, the cost approach involves compounding. This process is the inverse of discounting, and thereby falls within the scope of DCF.

2 The list is not exhaustive. Other acronyms that may appear include PNW (Present Net Worth) and PW (Present Worth).

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1.3

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The Expectation approach may characteristically turn to a wide reference base when selecting the discount rate. A commonly applied practice is to derive a Weighted Average Cost of Capital (WACC). This distinguishes the distinct costs of debt and equity. The latter may be derived using the Capital Asset Pricing Model (CAPM).

Comparable Sales

In principle, the most satisfactory basis for valuing forests is to turn to the evidence provided by sales transactions.

In comparing transaction results it is necessary to consider which attributes influence the value of planted forests. Important factors may include:

Forest maturity
Species composition
Site productivity
Proximity to market
Forest terrain (and thereby harvesting system)
Silvicultural history
� Land value

Each of these factors may have a significant effect on forest value. Other features may also be influential. These include the standard of roading infrastructure in the forest, and the risks arising from climatic factors and pathogenic agents. Forest size may also have an influence, although there may not be a consistent trend with changing forest area.

When comparing forests and the prices paid for them, it is also necessary to consider the time at which an example sale took place. In the first instance, the timing is reflected in perceptions of current log prices and their anticipated future movement.

Given the range of factors affecting forest value, it is unlikely that forests can be found that are closely similar to the forest to be valued. This is especially the case given that forest estate transactions are not, by nature particularly frequent. Achieving a forest-to-forest match is extremely unlikely, as it would require finding forests alike in all respects, including size.

Forest appraisers commonly find that the one distillable parameter that can be most usefully extracted from transactions involving heterogeneous forest resources is the Implied Discount Rate (IDR). Derivation of the IDR involves developing a credible cash flow projection for each transacted forest, using the best information the analyst can obtain. This is then compared with the price actually paid for each resource. The discount rate at which the discounted cash flows match the purchase price is the IDR.

IDR evidence from the wider transaction base can be applied to the cashflow projections for the forest being valued.

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Appendix 1

The IDR offers a device by which differences in size, timing, markets, location, age-class, volume, operability and other relevant factors are recognised. Further, the approach also recognises that a useful method of arriving at a market comparable result is to employ the same procedure that market participants utilise in deriving and supporting their negotiating positions. For Asia Pacific forest resources, the most common method of negotiating transaction values involves DCF constructions.

The manner in which Pöyry applies the Comparable Sales and Expectation approaches may at first impression appear to be similar. Both employ a DCF formulation and refer to estimates of future cash flows. This does not imply that they can or should be unquestioningly coalesced into a single method. There is sufficient difference between them that they can potentially lead to different results.

1.3.1 Realisation Value of Current Standing Stock

This method warrants distinct discussion because it has had historical application. It recognises the potential net realisation value of the current timber content of the forest if it were cut down immediately. A value is based on the merchantable content (or “standing stock”) at the time of the valuation. It is therefore a special case within the Expectation approach. Because the forest is harvested immediately, the cash flow modelling is confined to a single period. No discounting is required to recognise the cost of capital. This value is both tangible and comparatively straightforward to calculate. It does however have obvious limitations:

For plantation forests, the timber realisation value of the stand may be very low for most of the rotation length. Despite this, the vendor will be mindful of the funds invested in each stand and are expected to seek some reimbursement.
By the final years of the characteristic rotation, the marginal rate of value growth of the standing stock becomes considerable. An informed and rational owner will recognise the economic opportunity associated with holding the growing trees rather than selling them. Only if the purchaser’s offer matches the vendor’s perception of economic opportunity cost can the vendor be indifferent as to whether to hold or sell. Inherently, therefore, the vendor’s perspective is based not on the current timber content but instead on the future anticipated revenue.
For forest resources of significant size it is unlikely that the market could absorb all of the forest wood content at once without log prices being depressed.

The first effect leads to an unduly conservative valuation, while the third can lead to an overly optimistic result. It is unlikely that the two effects would exactly offset one another. Pöyry’s preference in valuing forests is to avoid this method altogether, as it is unlikely to reflect either the buyer’s or vendor’s analysis.

1.4 Cost Method

There are different interpretations of the cost approach. A straightforward version takes the costs involved in acquiring or establishing and maintaining the forest and

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accumulates these with compound interest from the inception of the investment to the current point in time. The forest value is therefore the price that forest owners would have to receive if they were to obtain a satisfactory rate of return on their investment to date. The method is equivalent to the accountants’ concept of “capitalising” establishment/acquisition costs plus interest, although the forest valuer is more inclined to adopt assumed costs which are "standard" and current at the time of the valuation.

By using costs that are current, along with a “real” (inflation-corrected) compounding rate, the valuation is updated for inflation. The use of “industry standard” costs ensures that only costs consistent with efficient practice are recognised. Forest valuers are wary of the compounding approach, and likewise capitalisation. In the market place a “high cost” forest does not necessarily prove to be a “high value” forest and yet this is what the method implies.

1.5 Valuation Process

The process followed in deriving a value for WFC’s tree crop is illustrated in Figure 1-2. The first stage of the valuation process involves assembling a comprehensive “description” of the forest. Key components of this include a land area summary and information on the growth potential of the tree crop.

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Figure 1-2: Schematic Outline of the Valuation Process

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FOREST DESCRIPTION
Financial characteristics of the
Condition of the forest crop,
Physical characteristics of the forest site, including costs of
including its current status, and
forest site, including location , area, establishment, tending,
terrain, soil and climate administration, maintenance future growth potential by quantity
and log quality
and protection
Forest estate model, driven by a forest management and
harvesting strategy, providing: Log Market Prices:
Woodflow projection by log type and origin Domestic market
Revenue Flows Offshore market
Land Value
Cost flows
Cashflow model
This is primarily derived from the forest estate model, but
also recognises other management cost inputs, plus a
treatment of land value.
Practical woodflow No
strategy?
Yes
Reporting of Physical
Financial environment Outputs
the forest investment
environment
the general investment Reporting of Financial
environment Outputs
These provide determining
influences on the cost of
capital (i.e. the Discount Rate)
Selection and application of a
Discount Rate
Sensitivity
Analysis
Calculation of Net Present
Value
----- End of picture text -----

At the heart of modern forest management is a forest estate modelling system that employs a linear programming formulation to derive a credible harvesting strategy. This technology enables the collective resource to be modelled to meet various aims, including resource level constraints as well as the supply of various forest products into their end-use markets.

Following confirmation that the results of the forest estate modelling process are managerially workable, the generation of wood flows and the allocation of products to markets enables the derivation of cash flows upon which a DCF valuation can be

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based. Application of the discount rate to these cash flows produces a present value for the tree crop. The responsiveness of this valuation to changes in the input variables can then be tested with a variety of sensitivity analyses so as to derive a spread of potential tree crop values. This will indicate how sensitive the model is to changes in key inputs.

1.6 Other Aspects of the Valuation Process

In applying the DCF approaches, the following aspects also require consideration:

Analysis of pre-tax or post-tax cash flows
The period of analysis
Terminal value
Harvesting strategy

These aspects are discussed in more detail below.

1.6.1 Analysis of Pre-tax or Post-tax Cash Flows

Both approaches have been demonstrated in valuing planted forests. For cash flows derived on a pre-tax basis a pre-tax discount rate is applied. Post-tax cash flows should be discounted at a post-tax discount rate. If the discount rates have been consistently derived, either approach should lead to the same tree crop value.

1.6.2 The Period of Analysis

Wood flows and associated cash flows may be modelled on a perpetual basis or they may be confined to the current rotation.

Forest estate models have come to be an integral part of the forest valuation process, being applied to identify the forest’s long-term supply capability. Despite this extended wood flow-modelling horizon, there has been a general tendency to confine the scope of the financial analysis to those cash flows solely associated with the tree crop that currently exists. This includes all parts of the present forest from the oldest stands to those just established. It excludes, however, trees that are yet to be planted as these are considered to be part of a new investment cycle.

Wider business appraisal practice encourages the confinement of the scope of DCF analysis to the current investment cycle. There are arguments that forest valuation should be no different. The practice of considering the performance of the existing tree crop alone lies with the general preference for avoiding unnecessary conjecture associated with costs, yields, anticipated revenues and the future discount rate.

As generally applied, the current rotation model is not to be confused with a “liquidation” or “realisation” model. Instead, the harvesting strategy for the current tree crop is assumed to be consistent with a long-term sustainable management policy, and although there will be future rotations, they will not contribute to the net present value calculation, i.e. they are “NPV neutral”. In effect, all funds invested in them are assumed to earn such proceeds that the investment generates exactly the discount rate.

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Appendix 1

The current rotation model effectively assumes that through adaptive management the forest owners will seek to secure at least NPV neutrality on their reinvestment in succeeding rotations.

Pöyry finds that the current rotation model is widely applied. Furthermore the IAS41 standard encourages this approach stating:

“The objective of a calculation of net present value of expected cash flows is to determine the fair value of a biological asset in its present location and condition” (paragraph 21)

“An entity does not include any cash flows for financing the assets, taxation, or re-establishing biological assets after harvest (for example, the cost of replanting trees in a plantation forest after harvest).” (paragraph 22)

This does not suggest that this places the matter beyond scrutiny. In some locations the approach has found initial application in an environment where log prices have been high. Second and subsequent rotations, which included the expectation of continuing firm log prices, led in many situations to a net addition to the first rotation’s NPV. In those circumstances, confining the valuation to the current rotation represented some conservatism.

With log prices having softened, and a greater uncertainty surrounding the prospects of real price growth, current rotation models are now tending to provide higher valuations than their perpetual equivalents, if the discount rate is unchanged. It may be too simplistic to assume that future rotations can indeed be made “NPVneutral”. Certainly, it may be more straightforward with some forests than others to achieve the improvement in performance required. It would seem intuitively reasonable that those forests whose next rotation may be very hard to make profitable should be valued at a lower level than those which require little adaptive management. While Pöyry would prefer to incorporate some recognition of this effect in the valuation method, it is not considered that the market’s treatment of it is adequately handled by simply turning to a perpetual model.

Pöyry expects that forest valuers will continue to consider the relative suitability of current-rotation and perpetual models. Refinements to the methodology may necessarily await the availability of more empirical transaction data.

Within the valuation of WFC’s tree crop Pöyry has modelled the resource over multiple rotations in order to reflect the long-term management outlook of the estate. However, the market value estimate is clearly based solely on the cash flows arising from the management and harvest of the existing tree crop and the current rotation of those trees.

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APPENDIX 2

Jatropha as a Biofuel Crop

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Introduction to Jatropha as a Biofuel Crop

Jatropha is a non-edible oil-yielding perennial shrub. Jatropha grows in tropical and subtropical regions with approximately 175 species distributed throughout the world.

In India, the introduction of Jatropha has been most successful in the drier regions of the tropics with annual rainfall of 300-1 000 mm. According to literature, 1 200 - 1 900 mm of rainfall is considered the optimal rainfall range. In Indonesia, with evenly distributed annual rainfall of over 2000 mm, Jatropha does not drop leaves and can produce fruit all year round. Lower yields have been recorded in low rainfall areas while higher yields have been recorded for areas with higher rainfall or irrigated areas.

In Yunnan province among the 60 recorded existing Jatropha sites[2] , the lowest rainfall is in Bing-Chuan near “Golden-Sand (573.6 mm) and the highest being in Jin-Ping of South Yunnan (2251.4 mm). Most of the sites are in rainfall areas of 900-1100 mm.

Jatropha grows mainly at lower altitudes (0-500 m) but can grow at higher altitudes up to an elevation of 1 000 m according to Indian sources and typically up to 1400 m according to Chinese sources[3] . Yunnan Shenyu believes that Jatropha could grow at higher altitudes of up to 1600m. Jatropha grows in areas with average annual temperatures of 20-28°C[4] and tolerates light frosts. In Yunnan province, among the 158 existing Jatropha sites[5] �the lowest annual mean temperatures 15.1� and highest is 23.8 �. Most of the sites the mean annual temperature is between 18 and 22 �.

Jatropha grows on well-drained soils with good aeration and is well adapted to marginal soils with low nutrient content. It grows relatively quickly and has a productive life that can span from 35 to 50 years. However, there are records of 70-80 year old trees in China.

Jatropha is a deciduous tree with one to three fruiting cycle per year when grown without irrigation in a seasonal rainfall area. With ample water available (on a year-round basis irrigation or evenly distributed rainfall), possibly up to 7 cycles may occur within a year.

In Indian conditions, depending on planting, soil quality and rainfall, oil can be extracted from the Jatropha nuts after 18 months. In some other areas

1 Tree Oils India Ltd. http://www.treeoilsindia.com/

2 Kunming Institute of Botany, Weibang SUN

3 Biofuels in China. An Analysis of the Opportunities and Challenges of Jatropha Curcas in Southwest China

4 Centre of Excellence for Jatropha Biodiesel Promotion, India

5 Kunming Institute of Botany, Weibang SUN

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first seeds can be harvested after 4-6 months of planting the seedling. It is believed that Jatropha reaches its maximum productivity by year five.

Each Jatropha tree is believed to be able to produce an average of 3.5 kg of seeds each year depending on soil conditions, sunshine, temperature and rainfall or irrigation levels. According to D1's[6] estimates, if 2 200 Jatropha trees are planted on one hectare of land, each hectare could yield up to 7 tonnes of beans per annum. Jatropha beans can typically produce oil yields between 30% and 40% although much higher oil contents have also been recorded. One hectare is expected to deliver about 3 000 L of biodiesel. More conservative yield estimates suggest yields from 1.7 ton of seed per ha. According to Gaydou et al (1982), seed yields approach 6–8 ton/ha with around 37% oil yields. They calculated that such yields could produce the equivalent of 2 100–2 800 L fuel oil/ha. Based on a small-scale study made by Yunnan Academy of Agricultural Sciences, seed yield in Yunnan province varies between 1.7 and 2.2 ton of seed per ha in barren land and between 3.9 and 7.5 ton of seed per ha in normal soils.

It is difficult to estimate with certainty yield of a plant grown in very different conditions. Many pilot plantations have been recently established for example in China, Indonesia, Philippines, Malaysia, India, Cambodia, Madagascar, Hawaii and Belize but limited scientific data is so far available.

Harvesting in large scale plantations is recognised to be an issue due to the low productivity from hand picking but it is thought that seeds could be harvested using machinery somewhat similar to equipment used for thrashing coffee plants to knock coffee beans loose. Jatropha do not ripen at the same time and thus harvesting using mechanical means may be an issue. Another issue making harvesting more difficult is the fact that the fruit does not fall from the tree when it is ripe. However, Jatropha plantation are mostly established in regions where agriculture is core industry, therefore availability of labourers is not likely to be an issue.

Although in China, Africa, India, Southeast Asia and the Americas, Jatropha is considered one of the most promising feedstock for biodiesel, there are risks involved. There are no known mature large scale commercial plantations of Jatropha in the world. Therefore, the yield and other information are coming from old mature/natural areas, pilot plantations and other smaller plots. As the large scale commercial plantations have not been field tested, there is some uncertainty in investing in large scale plantations where large areas are planted at once.

6 D1 Oils plc: http://www.ecoworld.com/home/articles2.cfm?tid=356

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APPENDIX V

The following is the text of letter and valuation certificate on property interests of the Group as at 31 December 2009 prepared by LCH (Asia-Pacific) Surveyors Limited for the purpose of inclusion in this Circular.

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The readers are reminded that the report which follows has been prepared in accordance with the guidelines set by the HKIS Valuation Standards on Properties, First Edition, 2005 (“HKIS Standards”) published by the Hong Kong Institute of Surveyors (the “HKIS”) and entitles the valuer to make assumptions which may on further investigation, for instance by the readers’ legal representative, prove to be inaccurate. Any exception is clearly stated below. Headings are inserted for convenient reference only and have no effect in limiting or extending the language of the paragraphs to which they refer. If additional documents and facts are made available, the valuer reserves the right to amend this report and conclusion.

17th Floor Champion Building No. 287-291 Des Voeux Road Central Hong Kong

12 March 2010

The Directors China Grand Forestry Green Resources Group Limited Units 3309-11 33rd Floor, West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Dear Sirs,

In accordance with your instruction to us to value a property in which China Grand Forestry Green Resources Group Limited (hereinafter referred to as the “Company”) and its subsidiaries (collectively, hereinafter together with the Company referred to as the “Group”) have intention to dispose in the People’s Republic of China (hereinafter referred to as the “PRC” or “China”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary to support our opinion of value of the property as at 31 December 2009 (hereinafter referred to as the “Date of Valuation”) for the Company’s shareholders’ reference purpose.

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We understand that the management of the Company will incorporate our work product (i.e. this letter and the valuation certificate) as part of its business due diligence and we have not been engaged to make specific sale or purchase recommendations, or to give our opinion of value for the Company’s financing arrangement. We further understand that the use of our work product will not supplant other due diligence, which the management of the Company should conduct, in reaching its business decisions regarding the property valued. Our work is designed solely to provide information that will give the management of the Company a reference to form part of its internal due diligence process, and our work should not be the only factor to be referenced by the Company.

BASIS OF VALUATION AND ASSUMPTIONS

According to the HKIS Standards, there are two valuation bases supported by the HKIS Standards, namely the market value basis and valuation bases other than the market value. Our valuation of the property is on market value basis.

The term “Market Value” is defined as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Our valuation has been made on the assumptions, that

the legally interested party in the property sells the property in the market in its existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to increase the value of the property;
the legally interested party in the property has free and uninterrupted rights to assign the property interests for the whole of the unexpired terms as granted and has the rights to freely assign, let or mortgage the property. We have also assumed that any premiums payable have already been fully paid and the legally interested party has the right to occupy the subject property; and
that the property can be freely disposed and transferred free of all encumbrances at the Date of Valuation for its existing uses in the market to both local and overseas purchasers without payment of any premium to the government.

Should this not be the case, it will have adverse impact to the value as reported.

VALUATION METHODOLOGY

For valuing the property, we have adopted the Depreciated Replacement Cost (the DRC) Method which is an application of the Cost Approach. The DRC Method is a procedural value based on an estimate of the market value for the existing use of the land, plus the current gross replacement (reproduction) costs of the improvements erected thereon, less allowance for physical deterioration and all relevant forms of obsolescence and optimisation.

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For owner occupied specialised properties where it is impracticable to identify the market value by sales comparison approach, the DRC Method is considered as the most appropriate method. The underlying theory of this method is the market value of the valued property should, at least, be equivalent to the replacement cost of the remaining service potential of the valued property i.e. the DRC of the valued property. In our opinion, the DRC generally furnishes the most reliable indication of value for property where it is not practicable to ascertain its value on market basis.

Specialised properties are certain types of properties which are rarely, if ever, sold in the open market, except by way of a sale of the business of which they are a part (called the business in occupation), due to their uniqueness arising from their specialised nature and design of the buildings, their configuration, size, location or otherwise. Examples are: standard properties located in particular geographical areas and remote from main business centres for operational or business reasons, that are of such an abnormal size for that district, that there would be no market for such buildings there; buildings and site engineering works related directly to the business of the owner, as it is highly unlikely that they would have a value to anyone other than a company acquiring the undertaking; and properties of such construction, arrangement, size or specification that there would be no market (for a sale to a single owner occupier for the continuation of existing use) for those buildings.

As the property being valued are classified by us as specialised property for private sector, our valuation of the property is subject to the adequate potential profitability of the business having due regard to the value of the total assets employed and the nature of the operation.

By using the DRC Method, the land should be assumed to having obtained planning permission for the replacement of the existing buildings and it is always necessary when valuing the land, to have regard to the manner in which the land is developed by the existing buildings and site works, and the extent to which these realise the full potential value of the land. When considering a notional replacement site, it should normally be regarded as having the same physical and location characteristics as the actual site, other than characteristics of the actual site which are not relevant, or are of no value, to the existing use. In considering the buildings, it further stipulates that the gross replacement cost of the buildings should take into consideration everything which is necessary to complete the construction from a new green field site to provide buildings as they are at the date of valuation which are fit for and capable of being occupied and used for the current use. These estimated costs are not for erecting buildings in the future but for providing buildings to be available for occupation at the date of valuation, the work having commenced at the appropriate time.

The current status of the property regarding major approvals, consents or licences required in the PRC is set out as follows:

Enterprise

Legal Person Business Licence State-owned Land Use Rights Certificate

Yes Yes

Unless otherwise stated, we have not carried out a valuation on a redevelopment basis and the study of possible alternative development options and the related economics do not come within the scope of our work.

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APPENDIX V

MATTERS THAT MIGHT AFFECT THE VALUE REPORTED

No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions, and outgoings of an onerous nature which could affect its value.

As at the Latest Practicable Date of this circular, we are unable to identify any adverse news against the property which may affect the reported value in our work product. Thus, we are not in the position to report and comment on its impact (if any) to the property. However, should it be established subsequently that such news did exist at the Date of Valuation, we reserve the right to adjust the value reported herein.

ESTABLISHMENT OF TITLES

Due to the market value basis of valuation, the management of the Company was requested to provide us the necessary documents to support that the Group has free and uninterrupted rights to assign the property (in this instance, an absolute title) free of all encumbrances and any premiums payable have already been paid in full or outstanding procedures have been completed. However, our procedures to value as agreed with the management of the Company did not require us to conduct legal due diligence on the legality and formality on the way that the Group obtained the property from the relevant authorities. We agreed with the management of the Company that this should be the responsibility of the legal advisor to the management of the Company. Thus, no responsibility or liability is assumed from our part to the origin and continuity of the titles to the property.

In the course of valuation, we have been provided with copies of the title documents regarding the property. Due to inherent defects in the land registration system of China, we are unable to search the original documents from the relevant land registration departments to verify the existing titles of the property or any material encumbrances that might be attached to the property. As we are not legal professional and we are unable to ascertain the titles and to report any encumbrances (if any) that are registered against the property. However, we have relied solely on the copy of the PRC legal opinion dated 10 March 2010 as provided by the management of the Company with regard to the Group’s titles on the property as disclosed in the attached valuation certificate. We were given to understand that the PRC legal opinion was prepared by the Company’s PRC legal adviser, 建緯（昆明）律師事務所 (City Development Law Firm). No responsibility or liability is assumed in relation to the legal opinion or copies of document.

In our valuation, we have assumed that the legally interested party in the property has obtained all the approval and/or endorsement from the relevant authorities, and there would have no legal impediment (especially from the regulators) for the legally interested party to continue the ownership or occupation of the property. Should this not be the case, it will affect our conclusion in this report significantly. The readers are reminded to have their own legal due diligence work on such issues. No responsibility or liability is assumed.

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APPENDIX V

INSPECTIONS AND INVESTIGATIONS OF THE PROPERTY IN ACCORDANCE WITH VS4 OF THE HKIS STANDARDS

As there is no material physical change of the property since our previous inspection conducted in 2009, as part of our agreed-upon procedure, we have not conducted inspection to the property for the purpose of this assignment but have relied on our file records of previous inspections and recent updates provided by the management of the Company in respect of which we have been provided with such information as we have requested for the purpose of our valuation. In our previous inspections, we have not inspected those parts of the property which were covered, unexposed, not being arranged, excluded or inaccessible and such parts have been assumed to be in reasonable condition. We cannot express an opinion about or advice upon the condition of the property and the attached valuation certificate should not be taken as making any implied representation or statement about the condition of the property. No structural survey, investigation or examination has been made, but in the course of our inspections, we did not note any serious defects in the property inspected. We are not, however, able to report that the property is free from rot, infestation or any other structural defects. No tests were carried out to the services (if any) and we are unable to identify those services covered, unexposed or inaccessible.

We have not carried out on-site measurements to verify the correctness of the area of the property, but have assumed that the area shown on the documents and handed to us are correct. All dimensions, measurements and areas are approximations.

We have not arranged for any investigation to be carried out to determine whether or not any deleterious or hazardous material has been used in the construction of the property, or has since been incorporated, and we are therefore unable to report that the property is free from risk in this respect. For the purpose of this valuation, we have assumed that such investigation would not disclose the presence of any such material to any significant extent.

We are not aware of the content of any environmental audit or other environmental investigation or soil survey which may have been carried out on the property and which may draw attention to any contamination or the possibility of any such contamination. In undertaking our work, we have been instructed to assume that no contaminative or potentially contaminative uses have ever been carried out in the property. We have not carried out any investigation into past or present uses, either of the property or of any neighbouring land, to establish whether there is any contamination or potential for contamination to the property from these uses or sites, and have therefore assumed that none exists. However, should it be established subsequently that contamination, seepage or pollution exists at the property or on any neighbouring land, or that the premises have been or are being put to a contaminative use, this might reduce the value now reported.

SOURCES OF INFORMATION AND ITS VERIFICATION IN ACCORDANCE WITH VS5 OF THE HKIS STANDARDS

We have relied solely on the information provided by the management of the Company or its appointed personnel without further verification and have fully accepted advice given to us on such matters as planning approvals or statutory notices, locations, titles, easements, tenure, occupation, site and floor areas and all other relevant matters.

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APPENDIX V

The scope of valuation has been determined by reference to the property list provided by the management of the Company.

Information furnished by others, upon which all or portions of our work product are based, is believed to be reliable but has not been verified in all cases. Our procedures to value or work do not constitute an audit, review, or compilation of the information provided. Thus, no warranty is made nor liability assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by others which have been used in formulating our work product.

When we adopted the work products from other professions, external data providers and the management of the Company in our valuation, the assumptions and caveats that adopted by them in arriving at their figures also applied in our valuation. The procedures we have taken do not provide all the evidence that would be required in an audit and, as we have not performed an audit, accordingly, we do not express an audit opinion.We are unable to accept any responsibility for the information that has not been supplied to us by the management of the Company or its appointed personnel. Also, we have sought and received confirmation from the management of the Company or its appointed personnel that no materials factors have been omitted from the information supplied. Our analysis and valuation are based upon full disclosure between us and the Company of material and latent facts that may affect the valuation.

We have had no reason to doubt the truth and accuracy of the information provided to us by the management of the Company or its appointed personnel. We consider that we have been provided with sufficient information to reach an informed view, and have had no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary amounts are in Renminbi Yuan (“RMB”).

LIMITING CONDITIONS

Our opinion of value of the property in this report is valid only for the stated purpose and only for the Date of Valuation, and for the sole use of the named Company. We or our personnel shall not be required to give testimony or attendance in court or to any government agency by reason of this report, and the valuer accepts no responsibility whatsoever to any other person.

Our valuation has been made on the assumption that no unauthorised alteration, extension or addition has been made in the property, and that the use of the attached valuation certificate should not be used as a building survey of the property. If the management of the Company wants to satisfy them as to the condition of the property, then the management of the Company should obtain a surveyor’s detailed inspection and report of their own.

Our engagement did not include a land survey to verify the legal boundaries and the exact location of the property. We need to state that we are not in the land survey profession, therefore, we are not in the position to verify or ascertain the correctness of the representation of the Group’s or the Group’s personnel with regard to the legal boundaries and location of the property. No responsibility is assumed in this regard.

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VALUATION REPORT ON THE DISPOSAL ASSET 3

To the best of our knowledge, all data set forth in the attached valuation certificate are true and accurate. Although gathered from reliable sources, no warranty is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating the attached valuation certificate.

No responsibility is taken for changes in market conditions and local government policy and no obligation is assumed to revise the attached valuation certificate to reflect events or conditions, which occur or make known to us subsequent to the date hereof. Neither the whole nor any part of this report or any reference made hereto may be included in any published documents, circular or statement, or published in any way, without our written approval of the form and context in which it may appear. Nonetheless, we consent to the publication of this report in this circular to the Company’s shareholders’reference.

Our maximum liability relating to services rendered under this engagement (regardless of form of action, whether in contract, negligence or otherwise) shall be limited to the charges paid to us for the portion of its services or work products giving rise to liability. In no event shall we be liable for consequential, special, incidental or punitive loss, damage or expense (including without limitation, lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.

The Company is required to indemnify and hold us and our personnel harmless from any claims, liabilities, costs and expenses (including, without limitation, attorney’s fees and the time of our personnel involved) brought against, paid or incurred by us at a time and in any way based on the information made available in connection with our report except to the extent that any such loses, expenses, damages or liabilities are ultimately determined to be the result of gross negligence of our engagement team in conducting its work. This provision shall survive even after the termination of this engagement for any reason.

STATEMENTS

Our valuation has been prepared in line with the requirements contained in Chapter 5 and Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as well as the guidelines contained in the HKIS Standards. The valuation has been undertaken by valuers (see Note), acting as external valuers, qualified for the purpose of the valuation.

We retain a copy of this report together with the data from which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these records confidential, and we do not permit access to them by anyone, with the exception for law enforcement authorities or court order, without the Company’s authorisation and prior arrangement made with us. Moreover, we will add the Company’s information into our client list for our future reference.

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APPENDIX V

We hereby certify that the fee for this service is not contingent upon our conclusion of value and we have no significant interest in the property, the Group or the value reported.

Our valuation certificate is attached.

Yours faithfully, For and on behalf of LCH (Asia-Pacific) Surveyors Limited

Joseph Ho Chin Choi B.Sc. PG Dip RPS (GP) Managing Director

Elsa Ng Hung Mui B.Sc. M.Sc. RPS (GP) Director

Contributing valuer:

Leslie Wong Tak Chiu BSc BBA

Notes:

Mr. Joseph Ho Chin Choi has been conducting asset valuations and advisory work in Hong Kong, Macau, Taiwan, mainland China, Japan, South East Asia, Australia, Scotland, Finland, Germany, Guyana, Argentina, Canada and the United States of America for various purposes since 1988. He has more than 19 years of experience in valuing real estate properties in mainland China.
Ms. Elsa Ng Hung Mui is a Registered Professional Surveyor who has been conducting valuation of real estate properties in Hong Kong since 1994 and has more than 10 years of experience in valuing properties in mainland China.
Both Mr. Joseph Ho Chin Choi and Ms. Elsa Ng Hung Mui are members of the HKIS and also valuers on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the HKIS.

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APPENDIX V

VALUATION CERTIFICATE

Property held by the Group for development purpose under long-term title certificate in the PRC and valued on the market value basis

Property

Description and tenure

Particulars of occupancy

Amount of valuation in existing state attributable to the Group as at 31 December 2009 RMB

The property comprises a parcel of land having a site area of approximately 87,025 sq.m.

A parcel of land and The property comprises a parcel a hotel development of land having a site area of to be named as 雙柏 approximately 87,025 sq.m. 煌城菀賓館 erecting thereon and located We were given to understand that at Xiaomiaohe the usage of the future development Shuangbai County, would be for hotel purpose and Chuxiong Yi the total gross floor area of the Autonomous development upon completion at Prefecture, June 2011 would be approximately Yunnan Province, 7,000 sq.m. The People’s Republic of China The property is subject to a right to use the land till 31 August 2056 for beverage and hotel purposes.

At the time of inspection, RMB55,470,000 the property is in the process of construction. (see Note 2 below) Due to the nature of construction in progress, we did not conduct any due diligence on the current occupation status of the property.

Notes:

The right to possess the land is held by the State and the right to use the land has been granted to 雲南神宇新能源有限公司 (Yunnan Shenyu New Energy Company Limited and hereinafter referred to “Yunnan Shenyu”), a wholly owned subsidiary of the Company, via the following ways:
(i) Pursuant to a Contract for the Grant of State-owned Land Use Rights No. (2006) 27 dated 31 August 2006, the land use rights of a parcel of land having a site area of approximately 88,000 sq.m. was transferred to Yunnan Shenyu for a term of 50 years for composite purpose at a consideration of RMB2,800,000; and
(ii) pursuant to a State-owned Land Use Rights Certificate known as Shuang Guo Yong (2006) Zi Di 216 Hao (雙國用 (2006)字第216號) dated 1 September 2006 and issued by the People’s Government of Shuangbai County, the property is a transferable land and has a land use term till 31 August 2056 for beverage and hotel purposes. The site area of the property is approximately 87,025 sq.m. as recorded under the State-owned Land Use Rights Certificate.
According to our on-site inspection and the information provided by the Company, we were given to understand that the buildings and structures being erected on the property are considered as construction in progress items. According to the information provided by the Company, the cost of the construction in progress of these items was approximately RMB28.4 million and the estimated cost to complete the development was approximately RMB12.5 million as at the Date of Valuation. In our valuation, the construction in progress items were reported at cost spent as at the Date of Valuation.
Pursuant to a copy of the Enterprise Legal Person Business Licence dated 2 January 2008, Yunnan Shenyu is a limited liability company for an operational period commencing from 1 March 2006 to 1 March 2016.
According to the legal opinion as prepared by the PRC legal adviser, City Development Law Firm, the following opinions are noted:
(i) Yunnan Shenyu is the legally interested party in the property and its rights in the property is protected under the PRC law;
(ii) Yunnan Shenyu has the rights to occupy, use, lease, mortgage, freely assign or sell the property; and
(iii) the property is not subject to any mortgage, encumbrances or restrictions.

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APPENDIX VI COMFORT LETTERS IN RELATION TO VALUATION REPORT ON THE DISPOSAL ASSETS 1

LETTERS FROM BDO LIMITED AND KINGSTON CORPORATE FINANCE LIMITED

(i) Comfort letter from BDO Limited

Set out below is the text of the comfort letter on the cash flow projection of Disposal Assets 1 of Yunnan Shenyu New Energy Company Limited which forms part of the basis of valuation performed by PÖyry Forest Industry Consulting received from BDO Limited for inclusion in this circular.

Tel: +852 2541 5041 25[th] Floor Wing On Centre Fax: +852 2815 2239 111 Connaught Road Central www.bdo.com.hk Hong Kong 電話：+852 2541 5041 香港干諾道中111號傳真：+852 2815 2239 永安中心25樓 www.bdo.com.hk

12 March 2010

The Board of Directors China Grand Forestry Green Resources Group Limited Unit 3309-11, 33/F, West Tower Shun Tak Centre 168-200 Connaught Road Central Sheung Wan Hong Kong

Dear Sirs,

We have performed work as detailed below on the cash flow projection of the forestry assets of Yunnan Shenyu New Energy Company Limited (“Yunnan Shenyu”) (the “Disposal Assets 1”) for fifty years up to 2059 (the “Projection”) used in the valuation of the Disposal Assets 1 as at 31 December 2009 (the “Valuation”) set out in the valuation report dated 12 March 2010 (“Valuation Report”) prepared by Pöyry Forest Industry Consulting (the “Valuer”) set out in Appendix IV of the circular of China Grand Forestry Green Resources Group Limited (the “Company”) dated 12 March 2010 (the “Circular”).

The Directors of the Company and the Valuer are solely responsible for the preparation of the Projection for the Valuation, including the assumptions on which it is based.

It is our responsibility to report, as required by paragraph 14.62(2) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, on the calculations of the Projection on which the Valuation is based, and to report our opinion solely to you, as a body, and for no other purpose. We accept no responsibility to any other person in respect of, arising out of or in connection with our work.

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APPENDIX VI

The Projection, being a projection of future cash flows, does not involve the adoption of accounting policies and accordingly, there are no accounting policies for us to report on. The Projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and other assumptions that may or may not necessarily be expected to occur and cannot be confirmed and verified in the same way as past results and not all of which may remain valid throughout the period. Consequently, we have not reviewed, considered or conducted any work on the appropriateness and validity of the assumptions and express no opinion on the appropriateness and validity of the assumptions on which the Projection, and thus the Valuation, are based.

Readers are cautioned that the Projection may not be appropriate for purposes other than that described above. Even if the events anticipated under the hypothetical assumptions occur, actual results are still likely to differ from the Projection since other anticipated events frequently may or may not occur as expected and the variation may be material.

We conducted our work in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance engagements other than audits or reviews of historical financial information” and with reference to the procedures under Auditing Guideline 3.341 “Accountants’ report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants. We checked the arithmetical calculations of the Projection. Our work has been undertaken solely to assist the Directors of the Company in evaluating whether the Projection, so far as the calculations are concerned, has been properly compiled and for no other purpose. Our work does not constitute any valuation of Yunnan Shenyu or the Disposal Assets 1.

Based on the work we have performed, in our opinion, the Projection, so far as the calculations are concerned, has been properly compiled in accordance with the assumptions made by the Directors of the Company and adopted by the Valuer as set out in the Valuation Report.

Yours faithfully, BDO Limited Certified Public Accountants Hong Kong

Sum Yuk Fan, Sharon

Director

Practising Certificate number P04967 Hong Kong

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APPENDIX VI

(ii) Comfort letter from Kingston Corporate Finance Limited

12 March 2010

The Directors

China Grand Forestry Green Resources Group Limited

Dear Sirs,

We refer to the valuation dated 12 March 2010 prepared by PÖyry Forest Industry Consulting (the “Valuer”) in respect of the forestry assets of Yunnan Shenyu New Energy Company Limited (the “Disposal Asset 1”) as at 31 December 2009 (the “Valuation”) set out in Appendix IV of the circular of China Grand Forestry Green Resources Group Limited (the “Company”) dated 12 March 2010 (the “Circular”).

The Valuation including the bases and assumptions, as set out in the valuation report on pages 27 to 103 of the Circular, for which the directors of the Company and the Valuer are solely responsible, has been prepared based on the cash flow projection of the forestry assets for fifty years up to 2059 made by the directors of the Company (the “Projection”). The Projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and other assumptions that may or may not necessarily be expected to occur. Consequently, readers are cautioned that the Projection may not be appropriate for purposes other than for deriving the Valuation. Even the events anticipated under the hypothetical assumptions occur, actual results are still likely to differ from the Projection since the other anticipated events frequently may or may not occur as expected and the variation may be material.

We have reviewed the bases and assumptions made by the directors of the Company and adopted by the Valuer as set out in the valuation report as set out in Appendix IV to this circular upon which the Valuation has been prepared. We have also considered the letter dated 12 March 2010 addressed to yourselves from BDO Limited (“BDO”) regarding the bases and assumptions upon which the Valuation has been made.

On the basis of the information comprising (i) the Valuation and (ii) the bases and assumptions made by the directors of the Company and adopted by the Valuer after properly reviewed by the directors of the Company and BDO, we are of the opinion that the Valuation, for which the directors of the Company and the Valuer are solely responsible, has been made after due and careful enquiry.

Yours faithfully, For and on behalf of

Kingston Corporate Finance Limited Eric Koo

Responsible Officer

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GENERAL INFORMATION

APPENDIX VII

1. RESPONSIBILITY OF THE DIRECTORS

This circular includes particulars given in compliance with the HK Listing Rules for the purpose of giving information with regard to the Company. The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS

Directors and chief executives interests or short position in the shares, underlying shares and debentures of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company or their respective associates in the Shares, underlying Shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and/or short positions in which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO or as otherwise, notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies adopted by the Company (“ Model Code ”) were as follows:

							Total
							interests
					Total		(including
					interests	Interests	underlying
				Total	as %	in	Shares)
				interests	of the	underlying	as %
				(excluding	issued	Shares	of issued
	Personal	Family	Corporate	underlying	share	(share	share
Director	interests	interests	interests	shares)	capital	options)	capital	Note
Mr. Tse On Kin	–	–	–	–	–	78,900,000	0.998%	1
Mr. Pang Chun Kit	500,000	3,450,000	–	3,950,000	0.05%	22,000,000	0.328%	2

Notes:

The interest in the underlying Shares attributed to Mr. Tse On Kin includes:
(i) share options to subscribe for 78,900,000 new Shares, exercisable at a price of HK$0.29 per Share and granted pursuant to the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001.
The interests in the underlying Shares attributed to Mr. Pang Chun Kit includes:
(i) share options to subscribe for 6,000,000 new Shares, exercisable at a price of HK$0.98 per Share and granted pursuant to the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001;

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(ii) share options to subscribe for 6,000,000 new Shares, exercisable at a price of HK$0.39 per Share and granted pursuant to the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001; and
(iii) share options to subscribe for 10,000,000 new Shares, exercisable at a price of HK$0.295 per Share and granted pursuant to the Company’s existing share option scheme, as adopted by the Shareholders in the Company’s annual general meeting held on 23 November 2001.

Saved as disclosed above, as at the Latest Practicable Date, none of the Director or chief executive of the Company had any interests or short positions in the Shares and the underlying shares of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which would have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO), or which were recorded in the register required to be kept by the Company under Section 352 of the SFO, or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code.

3. SUBSTANTIAL SHAREHOLDERS’ INTERESTS

As at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, the following interests of which fall to be disclosed under Divisions 2 and 3 of Part XV of the SFO, or who were deemed to be directly or indirectly interested in 5% or more of the issued share capital of the Company, or which were recorded in the register of interests required to be kept under Section 336 of the SFO or have notified to the Company were as follows:

			Number of	Percentage
Name	Class of Shares	Capacity	Shares	of holding
Mrs. Chu Yuet Wah	Ordinary	Beneficial Owner	890,000,000	11.25%
			(Note 1)
Best China Limited	Ordinary	Beneficial Owner	880,000,000	11.12%
			(Note 2)

Notes:

The beneficial interests of Mrs. Chu Yuet Wah in 890,000,000 Shares comprise corporate interest in 880,000,000 Shares, held through Best China Limited, and 10,000,000 Share Options held through Kingston Corporate Finance Limited.
The entire issue share capital of Best China Limited is beneficially owned by Mrs. Chu Yuet Wah.

Saved as disclosed above, as at the Latest Practicable Date, the Company had not notified by any persons (other than the Directors of the Company and the chief executive of the Group) who had interests or short positions in the Shares or underlying shares of the Company which would have to be notified to the Company and the Stock Exchange pursuant to Divisions 2and 3 Part XV of the SFO, or which were recorded in the register required to be kept by the Company under Section 336 of the SFO, or who were interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group, or any options in respect of such capital.

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4. SHARE OPTION SCHEME

As at the Latest Practicable Date, the Company has 1,233,900,000 outstanding share options which confer rights on holders to subscribe for 1,233,900,000 Shares. The share options were granted on various dates to the Directors, employees and consultants of the Company under the share option scheme of the Company adopted on 23 November 2001, details of the exercise price and exercise period of the share options are as follows:

						Number of
					share options
				Exercise		outstanding
	Date of		Exercisable	price		as at
Director	Grant		period	per share	10 March 2010
Mr. Tse On Kin	2 March 2010		3 March 2010 to	HK$0.29		78,900,000
			2 March 2013
Mr. Pang Chun Kit	27 March 2007		1 April 2007 to	HK$0.98		6,000,000
			31 March 2017
	30 September 2008	30	September 2008 to	HK$0.39		6,000,000
			29 September 2018
	9 February 2009		9 February 2009 to	HK$0.295		10,000,000
			8 February 2019
Sub-total						100,900,000

Employees and	27 March 2007		1 April 2007 to	HK$0.98		95,200,000
Consultants			31 March 2017
	2 October 2007		3 October 2007 to	HK$2.61		6,000,000
			2 October 2017
	30 September 2008	30	September 2008 to	HK$0.39		143,000,000
			29 September 2018
	30 October 2008	30 October 2008 to		HK$0.242		12,000,000
			29 October 2018
	23 January 2009		23 January 2009 to	HK$0.286		20,000,000
			22 January 2019
	9 February 2009		9 February 2009 to	HK$0.295		277,600,000
			8 February 2019
	2 March 2010		3 March 2010 to	HK$0.29		579,200,000
			2 March 2013
Sub-total					1,133,000,000
Total					1,233,900,000

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GENERAL INFORMATION

APPENDIX VII

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or their spouse and children under the age of 18 had any right to subscribe for the securities of the company, or had exercised any such right during the year.

There is no arrangement under which future dividends will be waived or agreed to be waived.

There is no restriction affecting the remittance of profits or repatriation of capital into Hong Kong from outside Hong Kong.

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position or outlook of the Group since 31 March 2009, being the date to which the latest published audited consolidated financial statements of the Group were made up.

6. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by any member of the Group within the two years immediately preceding the date of this circular that are or may be material.

i. the Disposal Agreement dated 12 February 2010 entered into by the Company and Forcemade relating to the sale and purchase of the Disposed Assets;
ii. the placing agreement dated 2 September 2009 entered into between the Company and Kingston Securities Limited in relation to placing of in aggregate of 1,110,000,000 placing shares at a price of HK$0.265 each, details of which have already been disclosed in the announcement of the Company dated 2 September 2009; and
iii. the placing agreement dated 30 November 2009 entered into between the Company and Kingston Securities Limited in relation to placing of in aggregate of 1,316,000,000 placing shares at a price of HK$0.26 each, details of which have already been disclosed in the announcement of the Company dated 30 November 2009.

7. DIRECTORS’ INTERESTS IN ASSETS/CONTRACTS AND OTHER INTERESTS

So far as known to the Directors, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date which was significant in relation to the businesses of the Group.

None of the Directors nor the expert(s) referred to in paragraph headed “Experts and Consents” of this Appendix has any direct or indirect interests in any assets which have been acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 March 2009, being the date to which the latest published audited consolidated accounts of the Group were made up.

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GENERAL INFORMATION

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8. DIRECTORS’ SERVICE CONTRACTS

As at the latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation).

9. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors or substantial Shareholders or their respective associates had any interests in any business which competes or may compete with the business of the Group.

10. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

11. EXPERTS AND CONSENTS

The following is the qualification of the experts who have given opinions or advice, which are contained or referred to in this circular:

Name Qualification Kingston Corporate Finance a licensed corporation to carry on business in type 6 Limited (“Kingston”) (advising on corporate finance) regulated activity under the SFO LCH (Asia-Pacific) Surveyors Professional Surveyors Limited (“LCH”) Pöyry Forest Industry Consulting Forestry Consultants (“Pöyry”) BDO Limited CPA (“BDO”)

Each of Kingston, LCH, Pöyry and BDO has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letters and references to its names, in the form and context in which it appears. As at the Latest Practicable Date, none of Kingston, LCH, Pöyry and BDO had any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

12. MISCELLANEOUS

(a) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11,Bermuda and the head of office and principal place of business of the Company is at Units 3309-11, 33/F., West Tower, Shun Tak Centre,168-200 Connaught Road Central, Sheung Wan, Hong Kong

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GENERAL INFORMATION

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(b) The Registrar and transfer office in Hong Kong is Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(c) The company secretary and the qualified account of the Company is Mr. Lau Che Yue, Stephen. Mr. Lau obtained his Master of Business (Information Technology) from RMIT University, Australia and Master of Business Administration from Heriot-Watt University, United Kingdom. He is a fellow of the Association of Chartered Certified Accountants and an associate of the Hong Kong Institute of Certified Public Accountants.
(d) In the event of consistency, the English texts of this circular shall prevail their respective Chinese texts.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours on any weekday (except Saturdays and public holidays) at the head office and principal place of business of the Company in Hong Kong at Units 3309-11, 33/F., West Tower, Shun Tak Centre,168-200 Connaught Road Central, Sheung Wan, Hong Kong, from the date of this circular, up to and including the date of the SGM:

(a) the memorandum of association and bye-laws of the Company;
(b) the material contracts referred to in the paragraph headed “Material contracts” to this appendix;
(c) the unaudited profit and loss statement on the identifiable net income stream in relation to and valuations of the Disposal Assets set out in Appendix I to this circular;
(d) the unaudited pro forma financial information of the Group set out in Appendix II to this circular;
(e) the valuation report on the Disposal Assets 1 & 2 set out in Appendix IV to this circular;
(f) the valuation report on the Disposal Assets 3 set out in Appendix V to this circular;
(g) the written consents referred to in paragraph headed “Experts and Consents” of this appendix; and
(h) the annual report of the Company for the two year ended 31 March 2008 and 31 March 2009 respectively;
(i) any contracts referred in this circular; and
(j) this circular.

121

NOTICE OF SGM

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(incorporated in Bermuda with limited liability) (Stock code: 00910)

NOTICE IS HEREBY GIVEN that a special general meeting (the “SGM”) of China Grand Forestry Green Resources Group Limited (the “Company”) will be held at Units 3309-11, 33F., West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on 30 March 2010 at 10:30 a.m. (or immediately after the conclusion or adjournment of the special general meeting of the Company to be held at 10:00 a.m. on the same day, if later) for the purpose of considering and, if thought fit, passing (with or without amendments) the following resolutions:—

ORDINARY RESOLUTIONS

“ THAT :

(a) the agreement (the “Disposal Agreement”) dated 12 February 2010 entered into between the Company and Forcemade Investments Limited relating to the sale and purchase of the Disposal Assets (as defined in the circular dated 12 March 2010 issued to shareholders of the Company) and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified;
(b) the directors of the Company (the “Directors”) be and are hereby authorised to do all acts and execute all documents they consider necessary or expedient to give effect to the transactions contemplated under the Disposal Agreement.”

By order of the Board

China Grand Forestry Green Resources Group Limited Tse On Kin Chairman

Hong Kong, 12 March 2010

122

NOTICE OF SGM

Notes:

(1) Any member entitled to attend and vote at the SGM of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a member. A proxy or proxies representing either a member who is an individual or a member which is a corporation shall be entitled to exercise the same powers on behalf of the member which he or they represent as such member could exercise.
(2) Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members in respect of the joint holding. Several executors or administrators of a deceased member in whose name any share stands shall be deemed joint holders thereof.
(3) A form of proxy for use at the SGM is enclosed herewith.
(4) The form of proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power of attorney must be lodged at the Company’s Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the SGM or adjourned meeting or not less than 24 hours before the time appointed for taking the poll subsequent to the date of the SGM or adjourned meeting thereof (as the case may be) and in default the form of proxy shall not be treated as valid. Completion and return of the form of proxy shall not preclude members from attending and voting in person at the SGM or at any adjourned meeting (as the case may be) should they so wish.

123

AI assistant

C&D Property Management Group Co., Ltd — Proxy Solicitation & Information Statement 2010

50406_rns_2010-03-12_ba878dec-33f3-4fdc-b4e3-31738a9aef3c.pdf

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(I) VERY SUBSTANTIAL DISPOSAL IN RELATION TO DISPOSAL OF ASSETS; (II) CONNECTED TRANSACTION IN RELATION TO THE APPOINTMENT OF FINANCIAL ADVISER AND

(III) NOTICE OF SPECIAL GENERAL MEETING

Financial Adviser to the Company

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

CHINA GRAND FORESTRY GREEN RESOURCES GROUP LIMITED 中國林大綠色資源集團有限公司

(I) VERY SUBSTANTIAL DISPOSAL IN RELATION TO DISPOSAL OF ASSETS; AND (II) CONNECTED TRANSACTION IN RELATION TO THE APPOINTMENT OF FINANCIAL ADVISER

INTRODUCTION

LETTER FROM THE BOARD

THE DISPOSAL AGREEMENT

Parties

Assets to be disposed

LETTER FROM THE BOARD

Consideration

Conditions Precedent

Completion

LETTER FROM THE BOARD

INFORMATION ON THE DISPOSAL ASSETS

POSSIBLE FINANCIAL EFFECT OF THE DISPOSAL

VALUATION OF THE DISPOSAL ASSETS

Disposal Assets

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE DISPOSAL

IMPLICATIONS OF THE LISTING RULES

CONNECTED TRANSACTION

LETTER FROM THE BOARD

THE SGM

LETTER FROM THE BOARD

GENERAL

RECOMMENDATION

APPENDIX I

UNAUDITED PROFIT AND LOSS STATEMENTS ON THE IDENTIFIABLE NET INCOME STREAM IN RELATION TO AND VALUATIONS OF THE DISPOSAL ASSETS

PROFIT AND LOSS STATEMENTS AND VALUATIONS OF THE DISPOSAL ASSETS

A. Profit and loss statements of the Disposal Assets

APPENDIX I

UNAUDITED PROFIT AND LOSS STATEMENTS ON THE IDENTIFIABLE NET INCOME STREAM IN RELATION TO AND VALUATIONS OF THE DISPOSAL ASSETS

B. Valuations of the Disposal Assets

(A) ACCOUNTANTS’ REPORT

The Board of Directors

Respective Responsibilities of the Directors of the Company and Reporting Accountants

Basis of Opinion

Opinion

(B) UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE REMAINING GROUP

1. Unaudited Pro Forma Consolidated Net Assets Statement

2. Unaudited Pro Forma Consolidated Income Statement

A. INDEBTEDNESS

B. WORKING CAPITAL

C. FINANCIAL AND TRADING PROSPECT

D. MANAGEMENT DISCUSSION AND ANALYSIS

For the year ended 31 March 2009

Financial highlights

Dividend

Review of the ecological forestry business

(ii) Biomass energy

APPENDIX III

Financial review

Revenue

APPENDIX III

Other net loss

Other operating expenses

Finance costs

Biological assets

APPENDIX III

Prepaid lease payments

Intangible assets

Purchase consideration payable

Other payables, accruals and long term payables

Liquidity, financial resources and Capital Structure

Material acquisition

Charge on the Group’s assets

Contingent liabilities

Capital commitments

Exposure to Fluctuation in Exchange rate

C&D Property Management Group Co., Ltd Proxy Solicitation & Information Statement 2010