Fufeng Group Limited — Annual Report 2011

Mar 20, 2012

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.

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Fufeng Group Limited 阜豐集團有限公司

(incorporated in the Cayman Islands with limited liability)

(Stock code: 546)

ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

HIGHLIGHTS OF GROUP RESULTS

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– In 2011, the Group continued to set new records in both production and operation
– The production and sales volumes of MSG and xanthan gum reached historical new records for the year
– Revenue increased by 30.9% to approximately RMB8,399.2 million (2010: RMB6,416.4 million). The significant
growth was driven by the increase in sales volumes and the increased production capacity which expanded its market
share
– Due to the significant increases in prices of raw materials and coal, gross profit margin for the Group decreased to about
18.1% (2010: 24.4%). The gross profit margin of MSG segment decreased to 16.1% (2010: 22.7%) and the gross profit
margin of Xanthan gum segment decreased to 36.2% (2010: 38.8%)
– Gross profit decreased from approximately RMB1,565.1 million in 2010 to approximately RMB1,519.7 million in 2011
– Profit attributable to the Shareholders decreased by about 37.5% to approximately RMB604.1 million (2010: RMB
966.1 million)
– Earnings per share (Basic) was RMB35.15 cents (2010: RMB57.75 cents)
– Return on Equity was 17.7% (2010: 30.7%)
– Final dividend of HK3 cents (2010: HK15 cents) per share has been recommended by the Board
– The sum of paid interim dividend and proposed final dividend is HK13 cents per share (2010: HK26 cents)
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– 1 –

ANNUAL RESULTS

The Board is pleased to announce the consolidated results of the Group prepared under HKFRS for the year ended 31 December 2011, together with the comparative figures for the year ended 31 December 2010, as follows:

Consolidated Income Statement

		2011	2010
	Note	RMB’000	RMB’000
Revenue	3	8,399,246	6,416,425
Cost of sales		(6,879,573)	(4,851,371)
Gross profit		1,519,673	1,565,054
Other income		117,619	110,550
Selling and marketing expenses		(421,328)	(272,008)
Administrative expenses		(373,703)	(277,697)
Other operating expenses		(64,296)	(22,187)
Operating profit		777,965	1,103,712
Finance costs – net		(61,529)	(32,383)
Profit before income tax		716,436	1,071,329
Income tax expense	4	(112,299)	(105,278)
Profit for the year and attributable to the Shareholders		604,137	966,051
Earnings per share for profit attributable to the Shareholders
during the year(expressed in RMB cents per share)
– basic	5	35.15	57.75
– diluted	5	33.55	53.68
Dividends	6	41,981	217,070

The Group has no other comprehensive income for the years ended 31 December 2011 and 2010.

– 2 –

Consolidated Balance Sheet

		2011	2010
	Note	RMB’000	RMB’000
ASSETS
Non-current assets
Leasehold land payments		265,217	169,187
Property, plant and equipment		6,032,345	4,087,675
Intangible assets		–	–
Deferred income tax assets		29,079	20,759
		6,326,641	4,277,621
Current assets
Inventories		1,179,863	710,695
Trade and other receivables	7	1,738,737	816,773
Short-term bank deposits		30,164	147,225
Cash and cash equivalents		583,917	767,951
		3,532,681	2,442,644
Total assets		9,859,322	6,720,265
EQUITY
Capital and reserves attributable to the Shareholders
Share capital		174,097	174,097
Share premium
– Proposed final dividend		–	217,070
– Others		188,576	329,594
Other reserves		18,877	(76,985)
Retained earnings
– Proposed final dividend		41,981	–
– Others		2,983,172	2,501,489
Total equity		3,406,703	3,145,265
LIABILITIES
Non-current liabilities
Deferred income		199,942	141,810
Borrowings	8	2,844,147	981,458
Deferred income tax liabilities		20,166	27,033
		3,064,255	1,150,301
Current liabilities
Trade, other payables and accruals	9	2,630,637	1,839,022
Current income tax liabilities		53,727	30,677
Borrowings	8	704,000	555,000
		3,388,364	2,424,699
Total liabilities		6,452,619	3,575,000
Total equity and liabilities		9,859,322	6,720,265
Net current assets		144,317	17,945
Total assets less current liabilities		6,470,958	4,295,566

– 3 –

Notes to the Consolidated Financial Statements

For the year ended 31 December 2011

1. Basis of preparation

The consolidated financial statements of the Company have been prepared in accordance with HKFRS. The consolidated financial statements have been prepared under the historical cost convention.

The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.

Changes in accounting policy and disclosures

• (a) New and amended standards adopted by the Group

The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2011 that would be expected to have a material impact on the Group.

• HKAS 24 (Revised), “Related Party Disclosures” is effective for annual period beginning on or after January 2011. It introduces an exemption from all of the disclosure requirements of HKAS 24 for transactions among government related entities and the government. Those disclosures are replaced with a requirement to disclose:

• The name of the government and the nature of their relationship;

• The nature and amount of any individually significant transactions; and

• The extent of any collectively-significant transactions qualitatively or quantitatively.

It also clarifies and simplifies the definition of a related party. The Group applied the revised standard on 1 January 2011 and it does not have any impact on the Group’s consolidated financial statements.

• (b) New and amended standards have been issued but are not effective for the financial year beginning 1 January 2011 and have not been early adopted

• HKFRS 9, ‘Financial instruments’ addresses the classification, measurement and recognition of financial assets and financial liabilities. HKFRS 9 was issued in November 2009 and October 2010.

• HKFRS 10 ‘Consolidated financial statements’ builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company.

• HKFRS 12 ‘Disclosures of interests in other entities’ includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

• HKFRS 13 ‘Fair value measurement’ aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across HKFRSs.

– 4 –

2. Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

2.1 Estimated impairment of property, plant and equipment

The Group reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amount of cash-generating unit has been determined based on the higher of value in use and fair value less costs to sell.

A full impairment charge of RMB4,433,000 arose in the specific assets mainly for MSG production during the year ended 31 December 2011, resulting in the carrying amount of these assets being written down to zero.

2.2 Useful lives of plant and equipment

The Group’s management determines the estimated useful lives and related depreciation charges for its plant and equipment. This estimate is based on the historical experience of the actual useful lives of plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated, or it will write off or write down technically obsolete or non-strategic assets that have been abandoned or sold. For the deferred government grants relating to the acquisition of property, plant and equipment, the periodic credits to income statement will also be increased under above mentioned circumstances as such grants are credited to the income statement over the periods and in the proportions in which depreciation on these assets is charged.

2.3 Estimated impairment of intangible assets

The Group tests annually whether intangible assets have suffered any impairment. The recoverable amounts of cashgenerating units have been determined based on value-in-use calculations. These calculations require the use of estimates.

A full impairment charge of RMB1,482,000 arose in the patents purchased during the year ended 31 December 2011, resulting in the carrying amount of the patents being written down to zero.

2.4 Borrowing costs eligible for capitalisation

The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an entity is co-ordinated centrally. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset requires and the exercise of judgement.

2.5 PRC taxes

The Group is mainly subject to different taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There are some transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that are initially recorded, such differences will impact the tax and deferred tax provisions in the period in which such determination is made.

– 5 –

3. Segment information

The chief operating decision-maker has been identified as the Board. The Board reviews the Group’s internal reporting in order to assess performance and allocate resources. The Board has determined the operating segments based on these reports.

The Board considers the business from a product perspective. Management assesses the performance of MSG and xanthan gum. The chief operating decision-maker assesses the performance of the operating segments based on a measure of segment profit or loss.

The Group’s operations are mainly organised under the following business segments:

Manufacturing and sales of:

• MSG, including MSG, glutamic acid, corn refined products, fertilisers, starch sweeteners, corn oil, chicken powder, threonine, branched-chain amino acid, pharmaceuticals and bricks;

• Xanthan gum

Approximately 82% (2010: 87%) of the Group’s revenue are generated from the PRC.

The Board assesses the performance of the business segments based on profit before income tax without allocation of finance costs, which is consistent with that in the financial statements.

The revenue of the Group for the years ended 31 December 2011 and 2010 are set out as follows:

	2011	2010
	RMB’000	RMB’000
MSG	4,915,408	3,892,506
Corn refined products	1,113,473	773,563
Xanthan gum	835,762	681,725
Fertilisers	582,893	369,649
Starch sweeteners	430,341	356,704
Glutamic acid	167,457	153,633
Corn oil	133,349	103,680
Threonine	108,960	28,145
Others	111,603	56,820
	8,399,246	6,416,425

– 6 –

3. Segment information (Continued)

The segment information and capital expenditure for the year ended 31 December 2011 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	7,563,484	835,762	–	8,399,246
Segment results	497,790	249,886	30,289	777,965
Finance costs – net				(61,529)
Profit before income tax				716,436
Income tax expense_(Note 4)_				(112,299)
Profit for the year				604,137
Other segment items included in
the income statement
Depreciation	326,428	38,760	501	365,689
Amortisation of leasehold land payments	2,023	563	–	2,586
Gain on disposal of property, plant and
equipment	349	–	–	349
Gain on disposal of leasehold land payment	49	–	–	49
Capital expenditure	2,414,898	2,007	1,712	2,418,617

The segment assets and liabilities at 31 December 2011 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Segment assets and liabilities
Total assets	8,721,294	1,036,954	101,074	9,859,322
Total liabilities	3,359,969	195,881	2,896,769	6,452,619

– 7 –

3. Segment information (Continued)

The segment information and capital expenditure for the year ended 31 December 2010 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	5,734,700	681,725	–	6,416,425
Segment results	922,741	219,628	(38,657)	1,103,712
Finance costs – net				(32,383)
Profit before income tax				1,071,329
Income tax expense_(Note 4)_				(105,278)
Profit for the year				966,051
Other segment items included in the
income statement
Depreciation	214,394	36,383	518	251,295
Amortisation of leasehold land payments	2,421	229	–	2,650
Loss on disposal of property, plant and
equipment	(6,752)	–	–	(6,752)
Gain on disposal of property, plant and
equipment	1,836	–	–	1,836
Capital expenditure	1,824,396	86,014	1,928	1,912,338

The segment assets and liabilities at 31 December 2010 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Segment assets and liabilities
Total assets	5,467,764	747,285	505,216	6,720,265
Total liabilities	2,408,595	173,673	992,732	3,575,000

Unallocated assets mainly comprise cash and cash equivalents, property, plant and equipment and other receivables held by non-PRC established companies and Beijing Huijinhuaying for the Group as a whole.

Unallocated liabilities mainly comprise liability component of convertible bonds, senior notes, operating liabilities held by non-PRC established companies for the Group as a whole.

The result of its revenue from external customers in the PRC is RMB6,929,126,000 (2010: RMB5,562,690,000) and the total of revenue from external customers from Hong Kong and other countries is RMB1,470,120,000 (2010: RMB853,735,000).

– 8 –

3. Segment information (Continued)

The total of non-current assets other than financial instruments and deferred income tax assets (there are no employment benefit assets and rights arising under insurance contracts) located in the PRC is RMB6,297,535,000 (2010: RMB4,256,805,000), and the total of these non-current assets located in Hong Kong is RMB27,000 (2010: RMB57,000).

Revenues of approximately RMB219,981,000 (2010: RMB172,021,000) are derived from a single external customer. These revenues are attributable to the MSG segment.

4. Income tax expense

	2011	2010
	RMB’000	RMB’000
Current income tax
– PRC enterprise income tax (“EIT”)	114,986	118,063
Deferred income tax	(2,687)	(12,785)
	112,299	105,278

The Company was incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Law (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and is exempted from payment of the Cayman Islands income tax.

Hong Kong profits tax has not been provided for as the Group has no estimated assessable profit in Hong Kong for the years ended 31 December 2011 and 2010.

PRC EIT is calculated based on the applicable tax rates on assessable profits of subsidiaries established in the PRC in accordance with PRC tax laws and regulations.

5. Earnings per share

(a) Basic

Basic earnings per share for the years ended 31 December 2011 and 2010 are calculated by dividing the profit attributable to the Shareholders by the weighted average number of ordinary shares in issue during the year.

	2011	2010
	RMB’000	RMB’000
Profit attributable to the Shareholders	604,137	966,051
Weighted average number of ordinary shares in issue (thousands)	1,718,686	1,672,801
Basic earnings per share (RMB cents per share)	35.15	57.75

– 9 –

5. Earnings per share (Continued)

(b) Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding assuming the conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: convertible bonds and share options. The convertible bonds are assumed to have been converted into ordinary shares, and the net profit is adjusted to eliminate the interest expense less the tax effect. For the share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

	2011	2010
	RMB’000	RMB’000
Earnings
Profit attributable to the Shareholders	604,137	966,051
Interest expense on convertible debt (net of tax)	37,677	17,786
Profit used to determine diluted earnings per share	641,814	983,837
Weighted average number of ordinary shares in issue (thousands)	1,718,686	1,672,801
Adjustments for:
– Assumed conversion of convertible debt (thousands)	165,743	122,967
– Share options (thousands)	28,725	37,083
Weighted average number of ordinary shares for diluted earnings per share
(thousands)	1,913,154	1,832,851
Diluted earnings per share (RMB cents per share)	33.55	53.68

6. Dividends

	2011	2010
	RMB’000	RMB’000
Interim, paid	141,018	159,775
Final, proposed	41,981	217,070

At a meeting held on 20 March 2012, the Board proposed a final dividend of HKD51,561,000 (equivalent to RMB41,981,000) (2010: HKD257,803,000 (equivalent to RMB217,070,000)), representing HK3 cents (equivalent to RMB2.44 cents) (2010: HK15 cents (equivalent to RMB12.63 cents)) per share. This proposed dividend is not reflected as a dividend payable in these financial statements, but reflected as an appropriation of retained earnings for the year ending 31 December 2012.

– 10 –

7. Trade and other receivables

	2011	2010
	RMB’000	RMB’000
Trade receivables (a)	277,698	162,584
Less: provision for impairment of trade receivables (b)	(4,586)	(4,231)
Trade receivables – net	273,112	158,353
Notes receivables (c)	1,151,917	501,332
Deposits and others	28,373	43,365
Value – added tax recoverables	231,439	78,863
Trade and other receivables before prepayments	1,684,841	781,913
Prepayments for raw materials	53,896	34,860
	1,738,737	816,773

(a) As at 31 December 2011 and 2010 the ageing analyses of trade receivables were as follows:

	2011	2010
	RMB’000	RMB’000
Within 3 months	239,831	153,067
3–12 months	26,259	3,927
Over 12 months	11,608	5,590
	277,698	162,584

The Group sold its products to customers and received settlement either in cash or in form of bank acceptance notes (Note (c)) upon delivery of goods. The bank acceptance notes are usually with maturity dates within six months. Major customers with good repayment history are normally offered credit terms for not more than three months.

As at 31 December 2011, trade receivables of RMB9,356,000 (2010: RMB4,117,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The directors considered that trade receivables that are less than twelve months past due are not impaired. The ageing analyses of these trade receivables were as follows:

	2011	2010
	RMB’000	RMB’000
Past due within 3 months	2,258	817
Past due in 3–12 months	7,098	3,300
	9,356	4,117

– 11 –

7. Trade and other receivables (Continued)

• (b) As of 31 December 2011, trade receivables of RMB4,586,000 (2010: RMB4,231,000) were impaired and fully provided for. The individually impaired receivables mainly relate to Shenhua Pharmaceutical. It was assessed that none of these receivables is expected to be recovered as they existed before the Group acquired Shenhua Pharmaceutical in 2008, and are long overdue, and they relate to individual customers with doubtful repayment ability. The ageing of these receivables is as follows:

			2011	2010
			RMB’000	RMB’000
Past due over	12	months	4,586	4,231

Movements on the Group’s provision for impairment of trade receivables are as follows:

	2011	2010
	RMB’000	RMB’000
As at 1 January	4,231	4,527
Provision for receivables impairment	355	–
Reversal of amounts subsequently collected	–	(296)
As at 31 December	4,586	4,231

The creation and release of provision for impaired receivables have been included in “administrative expenses” in the consolidated income statement.

• (c) As at 31 December 2011, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB1,047,599,000 (2010: RMB471,952,000) applied for settling the amounts payable to the Group’s suppliers.

• (d) Trade and other receivables are unsecured and interest-free. The carrying amounts of trade and other receivables approximate their fair values.

• (e) The carrying amounts of the Group’s trade and other receivables before prepayments are denominated in the following currencies:

	2011	2010
	RMB’000	RMB’000
– RMB	1,506,067	675,255
– USD	176,704	105,911
– SGD	2,070	–
– EUR	–	747
	1,684,841	781,913

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security.

– 12 –

8. Borrowings

	2011	2010
	RMB’000	RMB’000
Non-current
Convertible bonds (b)	990,802	981,458
Senior notes (c)	1,853,345	–
	2,844,147	981,458
Current
Bank borrowings, guaranteed and secured (a)	–	30,000
Bank borrowings, secured (a)	310,000	30,000
Bank borrowings, unsecured (a)	394,000	495,000
	704,000	555,000
Total Borrowings	3,548,147	1,536,458

(a) Bank borrowings

As at 31 December 2011, all the bank borrowings were denominated in RMB and included: (i) RMB110,000,000 secured by leasehold land and plant and machinery; (ii) RMB200,000,000 secured by the pledge of restricted bank deposits of RMB25,044,000.

As at 31 December 2010, all the bank borrowings were denominated in RMB and included: (i)RMB30,000,000 guaranteed by Mr. Li Xuechun and secured by leasehold land and plant and machinery; (ii) RMB30,000,000 secured by the pledge of restricted bank deposits of RMB2,500,000.

As at 31 December 2011 and 2010, the Group’s bank borrowings were repayable with one year.

The weighted average effective interest rates at the balance sheet dates were as follows:

	2011	2010
Bank borrowings	6.98%	5.30%

The carrying amounts of current borrowings approximate their fair values.

Interest rates of the bank borrowings are reset periodically according to the primary rate announced by the People’s Bank of China. The exposure of the Group’s bank borrowings to interest-rate changes and the contractual re-pricing dates are as follows:

		2011	2010
		RMB’000	RMB’000
6	months or less	300,000	–
6	to 12 months	404,000	555,000
		704,000	555,000

– 13 –

8. Borrowings (Continued)

(b) Convertible bonds

The Company issued 8,200 and 2,050 of 4.5% convertible bonds at a par value of the total amounted to RMB1,025,000,000 settled in USD on 1 April 2010 and 22 April 2010 respectively. The bonds mature in five years from the issue date at their nominal value of RMB1,025,000,000 or can be converted into shares at the holder’s option at the rate of HKD7.03 per share. The values of the liability component and the equity conversion component, net off transaction cost of RMB25,679,000, were determined at issuance of the bonds.

The fair value of the liability component, included in non-current borrowings, was calculated using a market interest rate of 5.08% for equivalent non-convertible bonds. The residual amount, representing the value of the equity conversion option, is included in shareholders’ equity in other reserves.

The convertible bonds recognised in the balance sheet are calculated as follows:

	Group and
	Company
	RMB’000
Net proceeds from convertible bond	1,011,621
Equity component	(36,853)
Liability component on initial recognition	974,768
Interest expense on convertible bonds	41,284
Interest paid	(23,063)
Liability component at 31 December 2010	992,989
Including:
– Interest payable – current portion	11,531
– Carrying amount at 31 December 2010	981,458
Liability component at 1 January 2011	992,989
Interest expense on convertible bonds	55,469
Interest paid	(46,125)
Liability component at 31 December 2011	1,002,333
Including:
– Interest payable – current portion	11,531
– Carrying amount at 31 December 2011	990,802

The fair value of the liability component of the convertible bonds at 31 December 2011 amounted to RMB965,754,000 (2010: RMB981,458,000).

(c) Senior notes

The Group issued 7.625% senior notes at a par value of total amounted to USD300,000,000 settled in USD on 13 April 2011. The notes mature in five years from the issue date and are secured by the pledge of the capital stock of certain subsidiaries of the Company, including Aquest Honour Holding Limited, Summit Challenge Limited, Absolute Divine Limited and Expand Base Limited. The guarantors are all intermediate holding companies that collectively control the operation and assets of its PRC subsidiaries of the Group. The values of the liability net off transaction cost of USD6,706,000 were determined at issuance of the bonds.

The fair value of the senior notes at 31 December 2011 amounted to RMB1,531,119,000.

– 14 –

9. Trade, other payables and accruals

	2011	2010
	RMB’000	RMB’000
Trade payables (a)	1,082,194	614,194
Advances from customers (b)	246,518	147,604
Bank acceptance notes payable	–	149,945
Payables for leasehold land, property, plant and equipment	1,013,444	743,499
Salaries, wages and staff welfares payables	96,392	58,313
Interest payables – current portion	47,565	11,531
Unused government grants	5,462	29,702
Dividends payable	407	407
Other payables and accruals	138,655	83,827
	2,630,637	1,839,022

• (a) As at 31 December 2011 and 2010, the ageing analyses of trade payables were as follows:

	2011	2010
	RMB’000	RMB’000
Within 3 months	849,373	575,781
3 to 6 months	210,218	23,959
6 to 12 months	12,661	5,594
Over 12 months	9,942	8,860
	1,082,194	614,194

(b) Advances from customers represented cash advances received from customers for purchase of the Group’s products and would be applied for settlement when sales were incurred.

• (c) Trade and other payables are unsecured and interest-free. The carrying amounts of trade and other payables approximate their fair values and are mainly denominated in RMB.

– 15 –

Management Discussion and Analysis

Business and Financial Review

Overview

In 2011, the Group continued its strategy of expanding its market shares by expanding production capacity, strengthening research and development capabilities, and diversifying its products. Presently, the Group is the largest producer of MSG and xanthan gum in the world, aiming to become a leading global corn-based biochemical products producer.

The Group’s MSG business recorded a significant growth in both revenue and sales volume and reached new highs for the year ended 31 December 2011. MSG sales increased by 26.3% to approximately RMB4,915.4 million on the back of sales volume growth and expanded production capacity, which drove up the market share. The Group’s another mainstay xanthan gum business also recorded historical highs in terms of production and sales volume during the year, strengthening its leading position in the global market and leaving competitors further behind.

The table below illustrates the continuous growth of the Group’s revenue in the past seven years:

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

RMB (Million)
10,000
9,000
8,399.2
8,000
7,000
6,416.4
6,000
5,000 4,632.9
4,000 3,585.3
3,000
2,445.7
1,787.2
2,000
1,296.4
1,000
0
2005 2006 2007 2008 2009 2010 2011
CAGR: 36.5%
----- End of picture text -----

The Group’s gross profit decreased by 2.9% from approximately RMB1,565.1 million in 2010 to approximately RMB1,519.7 million in 2011. The decrease was primarily due to a slight decline in the products’ selling price and hikes in major material costs resulting in the decrease of gross profit margin of its major products.

Although the PRC continued its strong economic growth and growth in market demand, the Group implemented its short-term strategy of cutting selling prices of its products to consolidate the MSG market. The ASP of the Group’s MSG increased by 1.0% compared to 2010. Production costs were rising, mainly due to a substantial increase in the prices of both raw materials (corn kernels and chemical products) and fuel coal. The Group’s gross profit margin was squeezed to 18.1% in 2011 from 24.4% in 2010.

Nevertheless, the Group stepped up efforts to control costs by leveraging its economies of scale, which was achieved with expanded production capacity and its leading market position. The Group was able to manage cost control effectively. For instance, it extended its business scope upstream by setting up a synthetic ammonia production line with an aim of reducing the cost of a major raw material. The construction of synthetic ammonia production line with an annual production capacity of 80,000 tonnes was completed and launched into operation by the end of 2011.

– 16 –

In 2011, the sales amounts and sales volume of MSG increased by 26.3% and 25.0% respectively in 2011. The sales amounts and sales volume of xanthan gum increased by 22.6% and 31.7% respectively. The Group was able to maintain the growth momentum in the year under review because of the strong sales of MSG products and xanthan gum.

The Group launched a threonine plant in the IM Plant with an annual production capacity of 10,000 tonnes into commercial production in 2010, and rapidly expanded the annual production capacity of threonine in the Hulunbeir Plant to 30,000 tonnes at the end of 2011 to capitalise on its cost advantage. Revenue from threonine sales increased by about 287.1% in 2011 when compared with that in 2010.

It is expected that continuously fast economic development and growth in China will benefit the retail sector. In order to capture the business opportunities, the Group continued to develop and promote its brand products for industrial and retail customers. It was selling its own brand MSG products, U Fresh Series, through an extensive retail and distribution network of supermarkets in the PRC. In addition, the Group has launched some compound seasoning products since the end of 2011 to widen the MSG product range.

According to the Group’s development plan, the main construction of the Hulunbeir Plant Phase 1, which is located in Inner Mongolia and close to the border with Heilongjiang, was completed on schedule and began production since the second half of 2011. Upon completion of this new plant, the Group’s MSG production capacity has been enhanced, maximizing the strength of the Group’s economies of scale and cost advantage.

On 13 April 2011, the Company successfully issued USD300.0 million senior notes for five years with fixed interest rate of 7.625% p.a. The fund raised from the senior notes was mainly used to finance the construction of new production facilities of Hulunbeir Plant Phase 1 and for general working capital purposes.

Market Overview

The Group faces challenges in both the production and operation aspects since the beginning of 2011. The overall industrial demand for MSG increased consistently. The demand for xanthan gum also grew steadily as the oil industry’s demand for the product increased, showing a continuing recovery of the xanthan gum market. Costs of major raw materials increased significantly due to the continuous economic growth in the PRC. Prices of corn kernels, coal and other major raw materials continued to increase during 2011. However, the Group adhered to its strategy of consolidating the MSG market with price-cutting despite the hikes of raw material and fuel costs. It is the Group’s main objective to expand its market share by increasing production capacity in the second half of 2011. The major raw material costs increased at a high degree than the average selling price of the Group’s products, resulting in a decrease in the gross profit margin to 18.1%.

Business Review

MSG

MSG segment mainly includes the sales of MSG, fertiliser, threonine and other related products.

The Group has become the world’s leading MSG producer as it presses ahead with the industry consolidation with its competitive pricing strategy to expand market share. The MSG market in the PRC became increasingly concentrated in 2011. In particular, in the second half of 2011, the MSG industry consolidation accelerated. The Group had set an objective of accelerating the industry consolidation in a short period of time and so adopted a competitive pricing strategy, which resulted in a slight decrease in the ASP of its MSG products. After the Hulunbeir Plant Phase 1 commenced production in the second half of 2011, the Group was able to use its economies of scale and cost advantage to eliminate its small to medium-sized competitors. As a result, it continuously expanded its market share in the PRC.

– 17 –

In late 2010, the Group entered into a co-operative agreement with “Ajinomoto” of Japan about the distribution of threonine products. According to the agreement, the Group’s threonine products will be sold through the sales and distribution network of Ajinomoto from 2011 onwards. The Group has rapidly expanded the threonine production capacity to 40,000 tonnes at the end of 2011. It will develop threonine into one of its core products to help drive its growth.

Xanthan gum

The global market demand for xanthan gum has continuously recovered since 2010. The Group has been increasing its production capacity and market share since 2009. The top three xanthan gum manufacturers continued to dominate the global market. Both the demand and sales volume of xanthan gum significantly increased in 2011.

Financial Review of the Group

The Hulunbeir Plant Phase 1 has commenced production since the second half of 2011. Following the rapid growth in 2010, the Group achieved a record high in sales in 2011 on the back of expanded production capacity. Certain indicative operational figures of the Group are set out below:

Turnover/Gross profit/Gross profit margin of the Group

	Year ended 31 December	Year ended 31 December	Change
	2011	2010	%
Turnover (RMB’000)	8,399,246	6,416,425	30.9
Gross profit (RMB’000)	1,519,673	1,565,054	(2.9)
Gross profit margin (%)	18.1	24.4	(6.3 ppts.)

The improvement in the performance of the Group was mainly due to the increase in production capacity and sales volume of certain products. The ASP of the Group’s products was maintained at a similar level as that in 2010. However, the costs of major raw materials rose significantly, resulting in a decrease in gross profit margin. These are discussed in more details in the following sections.

Profit attributable to the Shareholders

	Year ended 31 December	Year ended 31 December
	2011	2010	Change
	RMB’000	RMB’000	%
As reported	604,137	966,051	(37.5)

Profit attributable to the Shareholders decreased by about 37.5%, due to the factors mentioned above. The effect of the positive impact such as increased market share, sales volume growth, raised cost efficiencies and improved operating environment was more than offset by the significant increases in raw material costs. The Group made a strategic decision to adhere to its competitive pricing strategy in order to maintain its market share and accelerate the completion of industry consolidation. The Hulunbeir Plant filled the gap in the demand left behind by the supplanted competitors. In addition, administrative costs also increased as mainly due to the commencement of production at the Hulunbeir Plant in the second half of 2011. Costs of staff and research and development rose in 2011.

– 18 –

Segment Highlights

The Group’s products are organised into two business segments, namely MSG segment and Xanthan gum segment. MSG segment includes the businesses of MSG, glutamic acid, fertilisers, threonine and other related products, while the Xanthan gum segment is engaged in the production and sale of xanthan gum.

The table below highlights the operating results of the above segments:

Revenue Gross profit Gross profit ratio Segment results Segment net assets Assets Liabilities Net assets	Year ended 31 December 2011 MSG Xanthan gum Group RMB’000 RMB’000 RMB’000 7,563,484 835,762 8,399,246 1,217,515 302,158 1,519,673 16.1% 36.2% 18.1% 497,790 249,886 8,721,294 1,036,954 3,359,969 195,881 5,361,325 841,073	Year ended 31 December 2010 MSG Xanthan gum Group RMB’000 RMB’000 RMB’000 5,734,700 681,725 6,416,425 1,300,291 264,763 1,565,054 22.7% 38.8% 24.4% 922,741 219,628 5,467,764 747,285 2,408,595 173,673 3,059,169 573,612	Increase/(Decrease)
			MSG Xanthan gum Group % % % 31.9 22.6 30.9 (6.4) 14.1 (2.9) (6.6 ppts.) (2.6 ppts.) (6.3 ppts.) (46.1) 13.8 59.5 38.8 39.5 12.8 75.3 46.6

MSG Segment

Revenue and ASP

Revenue generated from the sales of the MSG segment products increased to RMB7,563.5 million in 2011, representing an increase of RMB1,828.8 million or 31.9%, as compared with that in 2010. The increase was mainly attributable to the increase in the sales volume after the Group launched the new MSG production capacity of the Hulunbeir Plant Phase 1 into production.

The table below sets out the revenue of the products in this segment for the years ended 31 December 2011 and 2010:

Product	2011	2010	Change
	RMB’000	RMB’000	%
MSG	4,915,408	3,892,506	26.3
Glutamic acid	167,457	153,633	9.0
Fertilisers	582,893	369,649	57.7
Corn refined products	1,113,473	773,563	43.9
Starch sweeteners	430,341	356,704	20.6
Threonine	108,960	28,145	287.1
Corn oil	133,349	103,680	28.6
Branched-chain amino acid	34,581	12,663	173.1
Others	77,022	44,157	74.4
	7,563,484	5,734,700	31.9

– 19 –

Set out below is a chart showing the ASP of the Group’s major products of MSG for each quarter from the first quarter of 2009 to the fourth quarter of 2011:

==> picture [339 x 219] intentionally omitted <==

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

RMB/Tonne
9,400 9,193
9,000
8,504
8,600
8,200 7,923 7,998
7,821
7,800 8,038 8,010 8,009
7,400
6,962 7,329
7,000 7,140
6,600 6,817
6,200
5,800
5,400
5,000
1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11
MSG
----- End of picture text -----

MSG

The increase in raw material cost was mainly contributed to the industry consolidation in 2011, as many obsolete production facilities closed. The Group maintained its industry leadership in the MSG segment through production capacity expansion, increased marketing efforts, and competitive pricing. While the ASP increased only about 1.0%, from approximately RMB7,903 per tonne in 2010 to approximately RMB7,984 per tonne in 2011, turnover of the MSG increased by about 26.3% and sales volume rose by about 25.0% to approximately 615,630 tonnes when compared to that in 2010. Market demand drove the growth in 2011.

In 2011, the Group also enhanced the marketing of U Fresh Series products in consumable retail section. During the second half of 2011, the Group launched some new compound seasoning products. The compound seasoning products targeted the household market, which was booming as the PRC’s living standards improved. The operating results of this product series were generally in line with the management’s expectations.

Moreover, the increase in the domestic consumption demand drove the growth of the PRC’s MSG market. The demand for MSG continued to grow in 2011.

Fertilisers

The bad weather affected part of the market demand for fertilisers during the first half of 2011. The Group actively implemented a competitive pricing strategy to counteract the changes of market environment. However, the market demand has recovered since the second half of 2011. The ASP of fertilisers slightly increased from approximately RMB693 per tonne in 2010 to approximately RMB698 per tonne in 2011, representing an increase of about 0.7%. This is in line with the price trend of the products of the same nature. The production and sales volume of fertilisers significantly increased, mainly due to the increase in production capacity in the Hulunbeir Plant Phase 1 in the second half of 2011 and increased efforts in sales and marketing of fertilisers.

– 20 –

Corn refined products

The ASP of corn refined products increased in tandem with the corn kernels price in 2011. The revenue of corn refined products increased by about 43.9% for the year ended 31 December 2011 compared with that in 2010. The increase was mainly due to the increased consumption of corn kernels and the increase in the ASP of corn refined products.

Starch sweeteners

Turnover of starch sweeteners rose by about 20.6% in 2011, reflecting a strong demand. ASP of the product increased by about 22.3% to approximately RMB3,444 per tonne in 2011 from approximately RMB2,816 per tonne in 2010 due to sugar shortages.

Threonine

Threonine is a new product of the Group. By the end of 2010, the annual threonine production capacity was 10,000 tonnes. Threonine is an essential amino acid which maintains body protein balance and promotes the growth of living things. Our threonine product is mainly used as animal feed additives. The revenue and sales volume of threonine amounted to approximately RMB109.0 million and approximately 8,979 tonnes respectively in 2011. The ASP of threonine was approximately RMB12,135 per tonne.

Others

During the year under review, the Group developed its product range along its value chain to include branched-chain amino acid, corn oil and chicken powder. The sales volume of branched-chain amino acid, corn oil and chicken powder increased to about 413 tonnes, 13,989 tonnes and 354 tonnes respectively in 2011. The Group continued to develop new products. The objective is to strengthen the brand name of the Group and also develop new products for both industrial and consumable retail market. The move is expected to help increase market recognition of the Group’s products and boost demand for such products.

Gross profit and gross profit margin

The gross profit of this segment is set out below:

	Year ended 31 December	Year ended 31 December
	2011	2010	Change
Gross profit (RMB’000)	1,217,515	1,300,291	(6.4%)
Gross profit margin (%)	16.1	22.7	(6.6 ppts.)

Rising raw material costs squeezed margins during the year. The gross profit decreased by 6.4% as compared to 2010. The Group made a strategic decision to adhere to its competitive pricing strategy in order to maintain market share and accelerate the completion of industry consolidation. The Hulunbeir Plant Phase 1 filled the gap in the demand left behind by the supplanted competitors. The ASP of MSG decreased to approximately RMB7,964 per tonne in the second half of 2011. The gross profit margin decreased from 19.9% in the first half of 2011 to 13.0% in the second half of 2011.

Gross profit decreased by 6.4% to RMB1,217.5 million, while gross profit margin fell by 6.6 percentage points to 16.1%. The decreases had already been anticipated and weighed by the Group.

– 21 –

Production costs

		Year ended 31 December	Year ended 31 December
		2011		2010		Change
	RMB’000	%	RMB’000		%	%
Major raw materials
• Corn kernels	3,577,070	53.7	2,559,799		56.5	39.7
• Liquid ammonia	647,175	9.7	461,143		10.2	40.3
• Sulphuric acid	136,230	2.0	60,636		1.3	124.7
Energy
• Coal	753,147	11.3	509,158		11.2	47.9
Depreciation	292,568	4.4	189,713		4.2	54.2
Employee benefits	242,805	3.6	166,914		3.7	45.5
Others	1,007,951	15.3	586,399		12.9	71.9
Total cost of production	6,656,946	100.0	4,533,762		100.0	46.8

Corn kernels

In 2011, corn kernels accounted for approximately 53.7% (2010: 56.5%) of the total production cost of this segment. As the demand continued to increase in 2011, the price of corn kernels kept rising since 2009. The average unit cost of corn kernels became stable since the fourth quarter of 2011. The average unit cost of corn kernels for 2011 was approximately RMB1,912 per tonne, which represents an increase of approximately RMB171 per tonne or 9.8% over 2010.

Liquid ammonia

Liquid ammonia accounted for approximately 9.7% (2010: 10.2%) of total production cost in this segment in 2011. Being affected by the increase in market demand as industrial demand recovered, the average unit cost of liquid ammonia for 2011 increased to approximately RMB2,956 per tonne, which represents an increase of approximately RMB475 per tonne or 19.1% from that of 2010. The Group has begun construction of additional production capacity of composite ammonia in order to counteract higher prices of liquid ammonia. We anticipate reductions of 2–3% in the share of liquid ammonia to total production costs over the next year, through the first half of 2012.

Sulphuric acid

Sulphuric acid accounted for approximately 2.0% (2010: 1.3%) of total production cost in this segment in 2011. The average unit cost of sulphuric acid has been rising since the end of 2009. It was affected by the increase in market demand as the industrial demand recovered. In 2011, the average unit cost of sulphuric acid increased to approximately RMB486 per tonne, which represents an increase of approximately RMB207 per tonne or 74.2% from that of 2010. The increase, which was higher than those of other inputs such as corn kernels and coal, translated into a 0.7% increase in its share of total production costs.

– 22 –

Coal

Coal accounted for 11.3% of total production cost in this segment in 2011 (2010: 11.2%). The average unit cost of coal for 2011 was approximately RMB340 per tonne, an increase of approximately RMB28 per tonne or 9.0% from 2010. The increase in coal prices reflects a general increase in commodity prices. While the increase in the average unit cost of coal was significant, the contribution of coal to total production costs increased by a modest 0.1%. This was in part due to our pricing power, as we located our production facilities in the coal-producing regions such as Inner Mongolia, Hulunbeir and Shaanxi, to enjoy access to lower-cost coal. This helped strengthen the Group’s pricing power. The chart below shows coal costs at each of our plants in Shandong, Shaanxi, Inner Mongolia and Hulunbeir:

==> picture [283 x 241] intentionally omitted <==

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

800
700
600
500
400
300
200
100
0
1H 2010 2H 2010 1H 2011 2H 2011
Shandong Shaanxi Inner Mongolia Hulunbeir
720
695 685 687
456
437
406
383
Coal Cost (RMB/Tonne)
302
275
244 233
191
----- End of picture text -----

Other production costs

The increase in cost of depreciation, employee benefits and other costs was mainly due to the increased production capacity of MSG in the new Hulunbeir Plant as new production capacity has completed and started production since the second half of 2011. It is in line with our production volume output.

– 23 –

Production

The annual designed production capacity, the actual production output and the utilisation rate of each of the major products for this segment were as follows:

	Year ended 31 December	Year ended 31 December
Product	2011	2010	Change
	Tonnes	Tonnes	%
MSG
Annual designed production capacity_(Note)_	606,667	540,000	12.3
Actual production output	648,025	495,895	30.7
Utilisation rate	106.8%	91.8%
Glutamic acid
Annual designed production capacity_(Note)_	513,333	460,000	11.6
Actual production output	552,197	434,333	27.1
Utilisation rate	107.6%	94.4%
Fertilisers
Annual designed production capacity_(Note)_	643,333	560,000	14.9
Actual production output	757,562	517,303	46.4
Utilisation rate	117.8%	92.4%
Starch sweeteners
Annual designed production capacity_(Note)_	140,000	130,000	7.7
Actual production output	130,326	130,268	0.0
Utilisation rate	93.1%	100.2%

Note: The annual designed production capacity is expressed on pro-rata basis.

The new production capacity from the new Hulunbeir Plant has commenced production in the second half of 2011. Utilisation rates kept at fully usage level in 2011. It represented that our new production are successively absorbed by the market and reflected the Group’s increasing the market share of MSG.

Xanthan Gum Segment

Operation results

The table below sets out the sales amount, gross profit, gross profit margin and utilisation rate of xanthan gum for the years ended 31 December 2011 and 2010:

	Year ended 31 December	Year ended 31 December	Change
	2011	2010	%
Revenue (RMB’000)	835,762	681,725	22.6
Gross profit (RMB’000)	302,158	264,763	14.1
Gross profit margin (%)	36.2	38.8	(2.6 ppts.)
Annual designed production capacity (tonnes)(Note)	44,000	38,000	15.8
Actual production output (tonnes)	43,242	31,619	36.8
Utilisation rate	98.3%	83.2%

Note: The annual designed production capacity is expressed on pro-rata basis.

– 24 –

Revenue generated from xanthan gum increased by about 22.6% to approximately RMB835.8 million in 2011, from approximately RMB681.7 million in 2010. The significant increase in revenue was due in part to the Group’s strategy of expanding market share through competitive pricing.

The Group’s exports of xanthan gum remained stable in terms of the percentage contribution to total sales. Export sales of xanthan gum contributed 88.5% of total sales of xanthan gum in 2011 (2010: 86.4%).

Sales and ASP

==> picture [361 x 243] intentionally omitted <==

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

Sales Volume vs. ASP of Xanthan Gum
Tonne RMB/Tonne
25,000 24,329
28,000
23,000
21,538
21,000
26,000
19,086
19,000
17,000 15,733 24,000
15,000
21,853
13,000
22,000
11,226
11,000
20,328 19,987
9,000 8,390
19,085 20,000
7,000 18,545
17,935
5,000
18,000
3,000
1,000
16,000
1H 2009 2H 2009 1H 2010 2H 2010 1H 2011 2H 2011
Sales volume (Tonne) ASP (RMB/Tonne)
----- End of picture text -----

Sales volume increased by about 31.7% in 2011, reflecting expanded production capacity, while revenue increased by just 22.6% over the same period. The mismatch was due to a 6.9% decrease in ASP from approximately RMB19,579 per tonne in 2010 to approximately RMB18,222 per tonne in 2011.

Global economic recovery and the Group’s increased sales and marketing efforts boosted sales volume of xanthan gum in 2011. We expect this trend to continue as the demands in the oil industry and other sectors grow. We expect to achieve record growth in sales volume as well as a reversal of the recent decline in ASP.

Gross profit and gross profit margin

Gross profit of the Xanthan gum segment increased by about 14.1% from approximately RMB264.8 million in 2010 to approximately RMB302.2 million in 2011. Gross profit margin fell slightly as well, with a decrease of 2.6 percentage points in 2011, reflecting lower ASP. Counterbalancing the lower average selling price, we experienced significant cost advantages at the IM Plant where we have access to lower-cost coal. The increase in production at the IM Plant has given us pricing power over coal and helped to reduce overall production costs.

– 25 –

Production costs

		Year ended 31 December	Year ended 31 December
		2011		2010		Change
	RMB’000	%	RMB’000		%	%
Major raw materials
• Corn kernels	186,157	39.7	112,451		29.0	65.5
• Starch	2,317	0.5	17,745		4.6	(86.9)
• Soy bean	32,401	6.9	20,923		5.4	54.9
Energy
• Coal	161,649	34.5	137,423		35.4	17.6
Depreciation	38,042	8.1	38,680		10.0	(1.6)
Employee benefit	32,855	7.0	31,221		8.0	5.2
Others	15,283	3.3	29,496		7.6	(48.2)
Total cost of production	468,704	100.0	387,939		100.0	20.8

Corn kernels/Starch

During 2011, corn kernels and starch represented approximately 40.2% (2010: 33.6%) of the total production cost of this segment. The increase in proportion was mainly due to the higher increasing percentage of the cost price of corn kernels and starch. The corn kernels price and starch price increased from approximately RMB1,711 per tonne and approximately RMB2,362 per tonne in 2010 to approximately RMB1,915 per tonne and approximately RMB2,620 per tonne in 2011, representing an increase of 11.9% and 10.9% respectively. Since the production of xanthan gum has concentrated in the IM Plant from the beginning of 2011, the production cost of starch significantly reduced in 2011.

Soy bean

During 2011, soy bean accounted for approximately 6.9% (2010: 5.4%) of the total production cost of this segment. The increase in proportion was mainly due to the increase in soy bean price from approximately RMB3,747 per tonne in 2010 to approximately RMB3,907 per tonne in 2011, representing an increase of 4.3%.

Coal

During 2011, coal accounted for approximately 34.5% (2010: 35.4%) of the total production cost of this segment. The Group took full advantage of the relatively low coal cost in the IM Plant. The average unit cost of coal for 2011 was approximately RMB305 per tonne, which represents an increase of approximately RMB40 per tonne or 15.1% from that of 2010.

Other production costs

The cost of depreciation in 2011 was similar to the corresponding period of 2010 mainly as there is no change on the production capacity of xanthan gum from the beginning of 2011.

– 26 –

Other Financial Information

Selling and marketing expenses

A substantial increase in selling and marketing expenses was mainly due to an increase in the transportation costs in line with the increase in sales. Marketing and promotion expenses also increased as part of a campaign to strengthen the Group’s brand.

Administrative expenses

Administrative expenses increased by approximately RMB96.0 million or 34.6% for the year ended 31 December 2011. The increase was mainly due to increased research and development related expenses after more research and development projects have been initiated since 2009. The staff costs also increased during the year. In addition, the administrative expenses from the new Hulunbeir Plant was incurred from the mid of the first half of 2011.

Finance costs

The finance costs of the Group for the year ended 31 December 2011 increased by approximately RMB29.1 million or about 90.0% when compared with that of 2010. The Company has successfully issued the senior notes with a principal amount to USD300 million on 13 April 2011. The fixed interest rate of the senior notes is 7.625% p.a.. The increase of finance cost was mainly due to the senior notes issued during the year and increase in interest rate in 2011.

Staff cost

Staff cost of the Group increased by approximately RMB103.7 million or 30.8% from approximately RMB336.3 million in 2010 to approximately RMB440.0 million in 2011. The increase was mainly due to the increase in the staff costs resulting from the expansion of the Group and the increase in the average salary of the senior management and staffs.

Depreciation

Depreciation expense of the Group increased by approximately RMB114.4 million or 45.5% from approximately RMB251.3 million in 2010 to approximately RMB365.7 million in 2011. The increase was mainly due to commencement of production in the Hulunbeir Plant Phase 1 in the second half of 2011.

Foreign exchange loss

During the year 2011, RMB appreciated by approximately 5.0% as compared with Hong Kong dollar. The appreciation of RMB led to a net exchange loss of approximately RMB50.0 million (2010: RMB18.0 million) on the group’s assets and liabilities denominated in Hong Kong dollars and US dollars mainly including part of the proceeds of senior notes which are kept in saving and fixed bank deposits in US dollar in Hong Kong during 2011 waiting for remittance to the PRC subsidiaries for capital expenditure and operating use.

Taxation

The income tax expenses for the year 2011 represented the PRC Enterprise Income Tax (“EIT”).

Effective from 1 January 2008, the subsidiaries incorporated in the PRC are required to determine and pay the EIT in accordance with the Corporate Income Tax Law of the People’s Republic of China (the “New EIT Law”) as approved by the National People’s Congress on 16 March 2007 and Detailed Implementations Regulations of the New EIT Law (the “DIR”) as approved by the State Council on 6 December 2007. According to the new EIT Law and DIR, the income tax rates for both domestic and foreign investment enterprises have been unified at 25% effective from 1 January 2008. For enterprises which were established before the publication of the New EIT Law and were entitled to preferential treatments of reduced EIT rates granted by relevant tax authorities, the New EIT rate will be gradually increased from the preferential rates to 25% within 5 years after the effective date of the new EIT Law on 1 January 2008. For the regions that enjoy a reduced EIT rate at 15%, the tax rate would gradually increase to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012 according to the grandfathering rules stipulated in the DIR and related

– 27 –

circular. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. The following table summaries the EIT rates applicable to the Group’s major subsidiaries:

				Hulunbeir
	Shandong Fufeng	Baoji Fufeng	IM Fufeng	Fufeng
Standard/preferential tax rate	15%(Note 1)	15%(Note 2)	12.5%(Note 3)	–
PRC State tax rate	–	–	–	25%
Tax holiday
Full exemption	Already expired	Already expired	Already expired	N/A
50% exemption (year)	Already expired	Already expired	2009 to 2011	N/A

Note 1: Shandong Fufeng was approved to be a high-technique enterprise, which is entitled to a preferential enterprise income tax rate of 15% until 31 December 2011.

Note 2: Baoji Fufeng chose to utilise the tax preferential policy of new and high technique enterprise, which is entitled to a preferential enterprise income tax rate of 15% from 2011 to 2013.

Note 3: IM Fufeng was approved to be a new and high-technique enterprise, which was entitled to 15% tax rate from 2010 to 2012, but this policy cannot be enjoyed at the same time with the “2+3” tax holiday. Finally, IM Fufeng chose to utilise the PRC state 25% tax rate with the “2+3” tax holiday.

Outlook

In 2011, the prices of the Group’s products decreased slightly. With the Hulunbeir Plant going on stream, the Group took advantage of its expanded production capacity and continued its competitive pricing strategy in 2011 to exert pressure on the small to mediumsized players in the MSG industry. The moves enhanced the Group’s market share and its leading position in the industry as well as completed the last round of consolidation for the PRC MSG industry. The Group accelerated the industry consolidation which eliminated production capacity of outdated technology.

We are pleased to see that the current industry consolidation is drawing to a close and the MSG industry has bottomed and begun recovering. Over the last year, small-sized MSG producers which lagged behind in technology and did not have cost advantages and resources advantages in the industry, ceased their production due to business and financial difficulties. Upon the commencement of production at the Hulunbeir Plant Phase 2, this round of the industry consolidation will be basically completed.

Future Plan and Recent Development

Looking ahead to the prospects of 2012, the Group has confidence in its business performance despite a slowdown in the PRC’s economic growth. The main products of the Group such as MSG, xanthan gum and starch sweeteners are raw material and additives for food processing and production. As the overall living standard has risen and the food and catering industries have been experiencing a rapid development, both the industrial and retail demands for the Group’s products will continue to grow and will not be affected by fluctuations in the macroeconomic cycle. This is a fundamental assurance for maintaining the Group’s fast growth momentum. Also, the economic slowdown caused the prices of some major raw materials to decline, which will lower our costs and improve the gross profit margin.

Strategically increasing production capacity

With the management’s foresight, the Group led and accelerated the industry consolidation and enlarged its market share. The Hulunbeir Plant gave the Group cost advantage and the strength of the economies of scale to supplant the competitors with outdated and inefficient production capacities. By the second quarter of 2012, the Group’s annual MSG production capacity will increase to 1,000,000 tonnes, achieving the mid-term strategic target set in 2009. By then, the Group will enjoy absolute competitive advantages and maintain its leadership in the domestic MSG market.

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Development of amino acid products used in animal feed additives and construction of a new Xinjiang plant

In 2012, in addition to the mainstay food additive products of MSG and xanthan gum, the Group will step up its effort on developing the market for amino acid products used in animal feed. It will launch other related products based on the existing threonine products.

The Group will set up a new production base in Xinjiang in 2012 for developing high-end amino acid products with cost advantage and advantage of the abundant coal supply in Xinjiang. The Group’s product portfolio will be further enhanced by developing and producing this type of products. This will enable us to provide more diversified biochemical products, shifting the Group’s focus from production and sales of traditional commodity-type amino acid products for bulk transaction to high-end products.

Mid-term strategic objectives for the coming three to five years

• To fortify and maintain its present leading position in the food additive market in which MSG and xanthan gum are the major products. The Group will use its economies of scale and cost advantage to drive the industry development and help make the competition more reasonable so that products efficiency can be brought into full play;

• Based on the existing threonine products, the Group will put more effort in exploring other amino acid products used in animal feed so as to become a key producer and supplier of this type of products in the PRC.

• With the Xinjiang plant, the Group will step up its efforts to develop the market for high-end amino acid products and build a stronghold in that market. It targets to become one of the top three producers and suppliers of three to five small types of these products in the world.

Enhancement corporate management structure to achieve coming targets

To achieve the coming targets, the Group needs to keep improving its management structure, nourishing and attracting talents and further enhancing its corporate culture. The Group has appointed professional management and strategy consultation institution and review, integrate and strengthen the Group’s existing management system, human resource system and corporate culture with the Board, which will bring a positive effect on the sound development of the Group in the long run.

Other Information

Liquidity and financial resources

The Group maintained a healthy liquidity position throughout the period under review. As at 31 December 2011, the Group’s cash and cash equivalent and restricted bank deposits were RMB614.1 million (2010: RMB915.2 million) whereas current bank borrowings were approximately RMB704.0 million (2010: RMB555.0 million) and non-current bank borrowings and non-current other borrowings were approximately Nil and RMB2,844.1 million (2010: Nil and RMB981.5 million).

Related party transaction

Mr. Li Xuechun, Chairman and an executive Director of the Group, has granted a personal guarantee in favour of Shandong Fufeng on 16 December 2010 with a maximum credit amounting to RMB110 million for bank borrowings, issuing bank acceptance notes, letters of credit and letters of guarantee from 23 December 2010 to 23 December 2013. The aforesaid personnel guarantee has not been utilised as of 31 December 2011 while utilised by Shandong Fufeng as of 31 December 2010 for bank borrowings amounting to RMB30 million.

Convertible bonds

The Group issued RMB820.0 million in convertible bonds with a coupon rate of 4.5% per year on 1 April 2010 together with bond options of RMB205.0 million on 22 April 2010. The bonds can be converted into Group shares any time on or after 12 May 2010 up to the close of business on 22 March 2015 at an initial conversion price of HKD7.03 per share, which represents a premium of approximately 20.0% over the closing price of the shares on 25 March 2010. Based on the initial conversion price of HKD7.03 and assuming full conversion of the bonds at the initial conversion price, the bonds will convert into 165,742,524 Shares, representing approximately 9.64% of the existing issued share capital of the Group and approximately 8.80% of the issued share capital of the Group, as enlarged.

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Senior notes

The Company has issued USD300.0 million senior notes for five years on 13 April 2011. The fixed interest rate is 7.625% p.a. The fund raising from the senior notes has mainly used to finance the construction of new production facilities of Hulunbeir Plant Phase 1 and Phase 2 and for general working capital purposes.

Material acquisition or disposal of subsidiary and associated company

The Group had no other material acquisition or disposal of the subsidiaries or associated companies for the year ended 31 December 2011.

Employees

As at 31 December 2011, the Group had approximately 2,800 employees. Employees’ remuneration is paid in accordance with relevant policies in the PRC. Appropriate salaries and bonuses are paid which are commensurate with the actual practices of the Group. Other corresponding benefits include pension, unemployment insurance, housing allowance, etc.

Contingent Liabilities

As at 31 December 2011, the Group had no material contingent liabilities.

Charges on assets

As at 31 December 2011, certain leasehold land, property, plant and equipment and restricted bank deposit of the Group with carrying value of approximately RMB65.1 million, RMB13.8 million and RMB25.0 million, respectively, were pledged to certain banks to secure bank borrowings of RMB310 million of the Group.

Gearing ratio

As at 31 December 2011, the total assets of the Group amounted to approximately RMB9,859.3 million (2010: RMB6,720.3 million) whereas the total borrowings amounted to RMB3,548.1 million (2010: RMB1,536.5 million). The gearing ratio was approximately 36.0% (2010: 22.9%). The gearing ratio is calculated based on the Group’s total interest-bearing borrowings over total assets.

Foreign exchange exposure

The Directors do not consider the exposure to foreign exchange risk is significant to the Group’s operation as the Group operated mainly in the PRC and most of the Group’s transactions, assets and liabilities were denominated in RMB. Foreign currencies were however received for the export sales of products and issuance of convertible bonds and senior notes. Such proceeds were subject to foreign exchange risk before receiving and converting into RMB. The foreign currencies received for export sales were converted into RMB upon receipt from the overseas customers. The Group manages foreign exchange risk arising from proceeds from issuance of convertible bonds and senior notes by remitting the necessary funds to the PRC and utilisation of the proceeds as soon as possible. The Group has not used any derivatives to hedge its exposure to foreign exchange risk for the year ended 31 December 2011.

American Depositary Receipt Facility

The Company has established a sponsored, unlisted American Depositary Receipt (“ADR”) facility, which has become effective on 19 June 2009. The Depositary is the Bank of New York Mellon. Each of the ADRs represents 20 ordinary shares of the Company. In the forming of the facility adopted by the Company, the ADRs will be issued against ordinary shares trading on the Main Board of the Stock Exchange of Hong Kong Limited that have been deposited with a custodian bank under the facility. The ADRs will be traded in the U.S. in an over-the-counter market.

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Dividend and dividend policy

The Board recommended the declaration of a final dividend of HK3 cents per share, subject to shareholders’ approval at the Annual General Meeting.

The final dividend will be payable on or about 31 May 2012 to Shareholders whose names appear on the register of members of the Company on 14 May 2012.

Subject to the availability of the Company’s cash and distributable reserves, the Group’s investment requirements, and the cashflow and working capital requirements of the Group, the Directors intend to recommend annually distribution to Shareholders of not less than 30% of the Group’s annual net profits as dividend in the foreseeable future. In addition, the Board will consider paying dividend in the form of an interim and a final dividend for each financial year.

Purchase, redemption or sales of listed securities of the Company

Neither the Company, nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year ended 31 December 2011

Corporate governance report

The listing of the Shares on the Main Board of the Stock Exchange took place on 8 February 2007 and the Directors are of the opinion that the Company has complied with the code provision as set out in the Code since the listing of Shares.

Audit Committee

The Company has established an audit committee in compliance with the Listing Rules. The audit committee comprises three independent non-executive directors, and is responsible for reviewing the Group’s audit, interim and annual accounts of the Group and the system of internal control. The audit committee has reviewed the Group’s consolidated financial statements for the year ended 31 December 2011, including the accounting principles and practices adopted by the Group.

Annual general meeting

The annual general meeting is expected to be held on 8 May 2012. A notice convening the annual general meeting will be dispatched to the Shareholders in due course.

Closure of register of members

The register of members of the Company will be closed from 4 May 2012 to 8 May 2012 (both dates inclusive), during which period no transfer of shares will be registered. In order to determine the identity of members who are entitled to attend and vote at the annual general meeting to be held on 8 May 2012, all transfers of shares accompanied by the relevant share certificates must be lodged with the Company’s branch registrar in Hong Kong. Tricor Investor Services Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong not later than 4:30 p.m. on 3 May 2012.

The register of members of the Company will be closed from 14 May 2012 to 16 May 2012 (both dates inclusive), during which no transfer of shares will be registered. In order to qualify for the proposed final dividend, all transfers of shares accompanied by the relevant share certificates must be lodged with the Company’s branch registrar in Hong Kong. Tricor Investor Services Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong not later than 4:30 p.m. on 11 May 2012.

By Order of the Board Fufeng Group Limited Li Xuechun Chairman

Hong Kong, the PRC, 20 March 2012

As at the date of this announcement, the executive Directors are Mr. Li Xuechun, Mr. Wang Longxiang, Mr. Feng Zhenquan, Mr. Xu Guohua, Mr. Li Deheng, Mr. Chen Yuan and Mr. Li Guangyu and the independent non-executive Directors are Mr. Choi Tze Kit, Sammy, Mr. Chen Ning and Mr. Liang Wenjun.

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Glossary

ASP	average selling price(s) of the products of the Group
Baoji Fufeng	寶雞阜豐生物科技有限公司(Baoji Fufeng Biotechnologies Co., Ltd.), an indirect wholly-
	owned subsidiary of the Company
Baoji Plant	the production plant of the Group located at Baoji City (寶雞市) in the Shaanxi Province, the
	PRC
Beijing Huijinhuaying	Beijing Huijinhuaying Commercial Co., Ltd, an indirect wholly-owned subsidiary of the
	Company
Board	the board of Directors
CAGR	cumulative average growth rate
Code	Code on Corporate Governance Practice under Appendix 14 of the Listing Rules
Company	Fufeng Group Limited
Directors	the director(s) of the Company
EIT Law	Enterprise Income Tax Law of the PRC which came into effect on 1 January 2008
Group	the Company and its subsidiaries
HKFRS	Hong Kong Financial Reporting Standards
HKICPA	Hong Kong Institute of Certified Public Accountants
Hong Kong	the Hong Kong Special Administrative Region of the PRC
Hulunbeir Fufeng	呼倫貝爾東北阜豐生物科技有限公司(Hulunbeir Northeast Fufeng Biotechnologies Co.,
	Ltd), an indirect wholly-owned subsidiary of the Company
Hulunbeir Plant	the production plant of the Group located at Hulunbeir, Inner Monogolia Autonomous
	Region, the PRC
IM Fufeng	內蒙古阜豐生物科技有限公司(Neimenggu Fufeng Biotechnologies Co., Ltd.), an indirect
	wholly-owned subsidiary of the Company
IM Plant	the production plant of the Group located at Inner Mongolia Autonomous Region, the PRC
IPO	Initial public offering of the Shares on 8 February 2007
Listing Date	8 February 2007, the date on which the Company was listed on the Stock Exchange
Listing Rules	the Rules Governing the Listing of Securities on the Stock Exchange

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Model Code	Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix
	10 of the Listing Rules
MSG	monosodium glutamate, a salt of glutamic acid which is commonly used as a flavour enhancer
	and additive in the food industry, restaurant and household application
PRC	the People’s Republic of China, which for the purpose of this annual report exclude Hong
	Kong, the Macau Special Administrative Region of the PRC and Taiwan
Prospectus	the prospectus issued by Fufeng Group Limited dated 25 January 2007 in relation to the
	listing of the Company’s shares on the Main Board of the Stock Exchange of Hong Kong
	Limited
Shandong Fufeng	山東阜豐發酵有限公司(Shandong Fufeng Fermentation Co., Ltd.), an indirect wholly-
	owned company of the Company
Shandong Plant	the production plant of the Group located at莒南縣(Junan County), Shandong Province, the
	PRC
Shenhua Pharmaceutical	江蘇神華藥業有限公司(Jiangsu Shenhua Pharmaceutical Co., Ltd.), a company with
	limited liability established in the Jiangsu Province of the PRC, an indirect wholly-owned
	subsidiary of the Company
SFO	the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
Share(s)	share(s) in the share capital of the Company
Shareholder(s)	holder(s) of the Share(s)
Stock Exchange	the Stock Exchange of Hong Kong Limited
RMB	Renminbi, the lawful currency of the PRC
HKD	Hong Kong dollars, the lawful currency of Hong Kong
USD	United States dollars, the lawful currency of the United States of America
EUR	Euro, the lawful currency of the participating states within the European Union
SGD	Singapore dollars, the lawful currency of Singapore
%	per cent

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