Annual Report 2016

2 Chairman's Statement
8 Five-year Summary

Organisation Structure

9 Corporate Information
11 Financial Highlights
12 Major Products Processing Map
13 Biographies of Directors and Senior Management

Management Discussion and Analysis

17 Business and Financial Review
31 Other Financial Information
32 Outlook
33 Recent Development and Future Plan

Reports and Financials

37 ESG Report
47 Corporate Governance Report
56 Directors' Report
65 Independent Auditor's Report
69 Consolidated Financial Statements
151 Share Information
152 Glossary

Chairman's Statement

Dear Shareholders,

On behalf of the Board of Directors (the "Board"), I am pleased to present to you the results of Fufeng Group Limited for the year ended 31 December 2016.

Results for the Year

2016 was a year offering great opportunities for Fufeng in terms of favorable timing, location and strong team. Favorable timing came from the historic opportunities in the corn processing and bio-fermentation sector thanks to China corn market reform and the emerging effect of industry consolidation. Favorable location refers to the fact that the Group fully capitalised on the advantages of its strategic layout of production bases under the China corn market reform. Favorable strong team stands for our continuously optimised team of management yielding concrete, sustainable benefits through meticulous management and production technology enhancement.

2016 was a year of reform in the China corn market. The Northeast China and Inner Mongolia Autonomous Region altered the corn temporary storage policy to a new mechanism of "market acquisition" plus "subsidy". The liberalisation and marketisation of the corn policy allowed Fufeng to fully capitalise on its advantage in strategic production base layout. During the year, the Group greatly benefited from a substantial reduction in the purchase price of corn, achieving a greater competitiveness of our export products. More importantly, our purchase prices of corn in the two plants of Hulunbeir and Inner Mongolia saw a far greater reduction. With the change of situation brought forth by the implementation of this policy, we are optimistic of our expansion in different bio-fermentation products and maintaining a better position over our competitors in the long run.

Chairman's Statement

Years of industry consolidation has brought about further market concentration, a more consolidated position of the Group in the industry, an improving business environment, and the emerging results after consolidation.

In 2016, all of the Group's MSG production bases completed the first phase of production technology enhancement. The respective enhancement of production efficiency has also yielded additional economic benefits for the Group at a faster pace, which gave an impressive demonstration of our meticulous management projects launched in recent years. In particular, economic benefits can be derived upon the commencement of the second phase of technology enhancement for MSG production in 2017.

As at 31 December 2016, the audited turnover of the Group amounted to approximately RMB11.8 billion, representing an increase of about 5.1% compared to 2015. Net profit was approximately RMB1,092.5 million, representing an increase of about 111.6% compared to 2015.

The Board recommends the payment of a final dividend of HK7.8 cents per share, with the paid interim dividend and the final dividend to be paid totaling HK11.6 cents per share.

Achievements and Growth Dynamics

Enhancing competitiveness and profitability through production technology enhancement:

In the first half of 2016, we completed the first phase of technology enhancement for MSG production in our Hulunbeir Plant, and the relevant accomplishment gradually took effect in 2016, including greater competitiveness gained from cost savings and a higher profit derived from higher output. This momentum has already emerged in the first half of 2016 while the technology enhancement in the IM Plant was completed at the end of 2016. The related technology enhancement for production boosted the efficiency of our MSG business to a new level and further strengthened our market share.

Fully leveraging the Group's regional layout advantage under the China corn market reform:

As part of Fufeng's development strategy, we have been invested the largest production capacity of MSG and amino acid in Northeast China. Generally speaking, the region has a great advantage in purchasing price of raw materials. However, due to various factors in the past, this advantage has not been fully utilised. Since the corn temporary storage policy was cancelled in the second half of 2016, the market price of corn was more directed by corn supply and demand. The price of corn in Northeast China experienced a substantial slide, making the cost of corn there much lower than in other regions. This gave us a greater competitive advantage in the business of MSG and threonine, which in turn generated better profits. We are confident that the new situation of raw materials will sustain our distinct advantage.

Increasing efficiency by carrying out meticulous management:

In the past year, we have recruited a number of highquality management personnel, including our new Chief Executive Officer as well as senior executives for the sales team. They have extensive experience and management insight in related industrial chain and distribution fields and are conducive to intensifying the Group's meticulous management, particularly as the restructuring and upgrading of the sales system and the reform of fertiliser business will be initiated in 2017.

During the year, we, active in leveraging favorable interest rates from home and abroad, completed a few beneficial projects of debt refinancing and reduced the overall debt level through the application of the Group's cash flow, thus slashing finance costs during the period.

Sustainable Development

We attach great importance to sustainable development. The Group has continuously invested in energysaving equipment. Its production facilities, with low carbon emissions, aim to minimise the impact of our business on the environment. The Group has also placed great emphasis on green production. We continuously achieved energy-saving and emission reduction while the clean production technology was enhanced. Xinjiang Fufeng Biotechnologies Co., Ltd. was nominated by the Economic and Informatization Commission of Xinjiang Uygur Autonomous Region as one of the fourth batch of pilot enterprises for recycling economy in the industrial economic field in 2016. The Group reduced the environmental impact of waste water, exhaust, greenhouse gases, and hazardous and non-hazardous wastes generated during the course of production and operation. During the year, Baoji Fufeng Biotechnologies Co., Ltd. undertook technical upgrading of the existing flue gas treatment facilities to conform to the Group's long-term strategy. In addition, the company also extracts feed and fertiliser processing from wastewater through resources recycling. The biogas generated during the course of waste water treatment is collected and used for production.

2016 Overview

Currently our business involves four key segments:

Food additives: key products include MSG, chicken powder, crystallised sugar, corn oil etc.
Animal nutrition: key products include threonine, tryptophan, corn refined products etc.
Colloid: key products include xanthan gum, welan gums etc.
High-end amino acid: key products include valine, leucine, isoleucine, glutamine, hyaluronic acid, pectin etc.

MSG

In respect of the MSG business, we completed the first phase of the production technology enhancement during the year. At the same time, by fully leveraging our cost advantages, the extra output unleashed by production technology enhancement also successfully secured a greater market share as well as increased the Group's revenue. In addition, benefiting from a significant decrease in corn costs, the profit margin of our MSG business witnessed a remarkable increase, providing a golden development opportunity for our major line of business.

The annual ASP of MSG was approximately RMB5,910 per tonne, representing a decrease of about 12.4% as compared with the ASP in 2015. The sales volume of MSG achieved approximately 1,084,308 tonnes, representing an increase of about 14.4% as compared with 2015. The revenue of MSG accounted for 54.4% of the total revenue.

Amino Acid

Threonine: we have achieved great success in the production expansion in respect to threonine, which was attributable to the successful layout of production bases and a closer cooperation with Ajinomoto Group. Amidst considerable earnings of the threonine business, the Group managed to expand the production capacity of threonine. During the year, the output of threonine successfully increased from approximately 54,098 tonnes to approximately 126,821 tonnes, with sales volume amounting to approximately 119,145 tonnes. During the year, the revenue of threonine amounted to about RMB1,012.8 million.

High-end Amino Acid: after years of cultivation, we experienced a remarkable breakthrough in production process and market sentiment, achieving an increase in both sales volume and amount. In addition, with the successful launch of two new products, namely pectin and polyglutamic acid, our high-end amino acid product portfolio has been further diversified. We will continue to deepen our high-end amino acid business, for example, through quality improvement, technical sellings, cross sellings and the launch of new products, so as to continuously increase the profits from this line of business. During the year, the revenue of high-end amino acid amounted to RMB663.7 million.

By-products

Other by-products: based on sound management and full utilisation of advantages in raw materials, earnings from fertilisers and other by-products witnessed noticeable improvement.

Xanthan Gum

In respect to the xanthan gum business, though market conditions were still sluggish due to a price war triggered by competitors and the slow recovery of the oil industry, it is pleasing to note that we had proactively sorted out the customers with better profit margins and terminated the relationships with the loss-making customers. Our strategy helped us reverse the unfavorable situation and realise our objective of a moderate profit, which is better than the goal we set in mid-2016. In the second half of 2016, we witnessed a healthier trend in xanthan gum prices. Though a significant price recovery requires more time, we believe that the market conditions have been under control within the short term, with the tough situation of xanthan gum behind us. In the upcoming year, we will adopt various measures to grow our long-term competitiveness in the xanthan gum business and intensively explore the food market, which features a stable profitability in the long run and wait for the recovery of the oil end-market.

The annual ASP of xanthan gum was approximately RMB10,738 per tonne, representing a decrease of about 28.5% as compared with the ASP in 2015. The sales volume of xanthan gum achieved approximately 50,762 tonnes, representing a decrease of about 20.1% as compared with 2015. The revenue of xanthan gum accounted for 4.8% of the total revenue.

Strategic Investment

Co-developing the polylactide acid market with COFCO:

We joined hands with COFCO for equity investment in Jilin COFCO Biomaterial Company Limited (吉林中糧生物材料有限公司) to co-develop the polylactide acid business at the end of the year. We invested RMB30 million to hold 30% interest of the company, while COFCO holds 40%.

Jilin COFCO Biomaterial Company Limited is an associated company focusing on manufacturing polylactide acid (PLA), a bio-based material. With corn as its major raw material, PLA is a new type of environmentally degradable material which can be converted into biological fertiliser. It does not cause harm to the environment and conforms to the concept of environmental protection.

PLA boasts a huge potential market according to external studies. It is predicted that successful development of this product market will lead to more than 10 million tonnes of sales of PLA in the global market, or a market worth over RMB100 billion. PLA is supported by relevant policies as the use of non-degradable materials are explicitly prohibited in such fields as packaging in many developed countries and regions. Some provinces in the PRC have also adopted relevant policies and launched the ban on free plastic bags. The PLA products have a wide range of applications and enormous market potential. They are widely used in various fields including biomedical and daily-use macromolecular material.

Chairman's Statement

Adjustment to Capital Structure

By vigorously capitalising on the favorable interest rate environment inside and outside the PRC during the year, we completed a number of favorable refinancing activities for our debts and slashed the overall debt level by using the Group's cash flow, which substantially reduced finance costs during the period. By the end of 2016, we had improved our gearing ratio to a level which can be sustained in the long term as believed by the management.

During the year, the Group's total assets and total borrowings were approximately RMB14,456.1 million and approximately RMB3,100.0 million, respectively. The gearing ratio (the Group's total interest-bearing borrowings over total assets) was approximately 21.4%, representing a decline of 6.3 percentage points as compared with 2015. Cash and bank balances amounted to approximately RMB1,422.1 million, representing an increase of 39.6% as compared with 2015.

Outlook for 2017

2017 ushers in a great trend for Fufeng. We will proactively seize the business opportunities on low cost of corn, launch our second phase of production technology enhancement, and materialise the reorganisation and integration of our sales system. Hence, I believe that Fufeng will embrace lots of business opportunities in the next one or two years.

We will implement the following measures in 2017:

• To seize the historic opportunities brought by the reform of the China corn market, we have planned to construct a new production base in Qiqihar City, Heilongjiang Province for the development of crystallised sugar and animal nutrition products. Meanwhile, the Group is in the process of in-depth communication with leading biotech firms worldwide, to seek greater, more comprehensive development in animal nutrition.

Starting from 2017, we will make great efforts to integrate our distribution network from across the country and improve our sales team. This will involve the comprehensive integration of important segments of our national MSG and bio-fermentation market. We seek to form alliance with competitive distributors who will extend our market leadership from the production end to the sales end of the industrial chain, so that we can achieve better price and lock in greater profits in the industrial chain in the future. In the meantime, we will boost our sales capability by increasing the coverage of our direct sales network across China and improving the quality of our sales personnel. The measures aim to create cross sellings and more profitable product mixes through more technical proposals and services. We believe that considerable value still awaits us for exploration in the sales end of bio-fermentation.
In 2017, we plan to proceed with the second phase of production technology enhancement (regarding the transformation of extraction technology for MSG production). Relevant technology enhancement will improve the quality of products. On the same basis, productivity will be enhanced whilst the unit production costs will be reduced significantly.
For high-end amino acid, we will further develop new products and improve the quality of our existing products.
For food and beverage retail business, we will launch more products, improve the gross profit margin of our product series and portfolio, and tap into the experience of our new senior management to further market development and improve profit margin.

Chairman's Statement

Appreciation

In 2017 Fufeng will celebrate its tenth anniversary of being a listing company, and we have witnessed the growth of the Company from a top-10 Chinese MSG manufacturer to a global leader of multiple bio-fermentation products. In the next decade, I will lead the Group to evolve into a worldrenowned biological company and play a significant role in the industrial chains of seasoning, human nutrition, animal nutrition and plant nutrition. On behalf of the Board, I am grateful to our shareholders, customers, business partners and all the stakeholders for their long-term support. I would also like to thank our Board members and all the staff for their commitment and dedication. Let us join hands to make a greater success of the next decade.

Li Xuechun

Chairman

21 March 2017

Five-Year Summary

			Year
	2012	2013	2014	2015	2016
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000
Operating results – Summary
Turnover	11,111,920	11,366,722	11,297,696	11,225,722	11,803,131
Gross profit	1,637,455	2,099,443	2,166,865	1,802,491	2,406,373
Profit before income tax	490,213	634,697	774,176	679,774	1,301,898
Profit attributable to Shareholders	426,553	506,132	626,428	516,261	1,092,512
Balance sheets – Summary
Non-current assets	7,665,681	8,170,547	9,334,995	9,220,961	9,516,968
Current assets	4,305,271	4,448,621	4,359,282	4,629,217	4,939,134
Total assets	11,970,952	12,619,168	13,694,277	13,850,178	14,456,102
Non-current liabilities	2,417,222	3,689,594	4,258,072	2,761,158	2,647,336
Current liabilities	5,758,722	4,110,788	4,067,139	5,281,961	4,992,902
Net assets	3,795,008	4,818,786	5,369,066	5,807,059	6,815,864
Financial ratio
Earnings per share (Basic) (RMB Cents)	23.03*	25.13	29.98	24.36	51.37
Gross profit margin (%) (Note 1)	15	19	19	16	20
ROE (%) (Note 2)	11	11	12	9	16
Current ratio (Note 3)	0.75	1.08	1.07	0.88	0.99
Inventory turnover days (Day) (Note 4)	55	60	79	86	97
Debtors' turnover days (Day) (Note 5)	63	58	33	27	25
Trade receivable turnover days (Day) (Note 6)	9	12	12	13	13
Creditors' turnover days (Day) (Note 7)	55	49	60	49	58
Trade payable turnover days (Day) (Note 8)	55	48	40	47	48
Gearing ratio (%) (Note 9)	37 `	36	33	28	21

Notes:

Gross profit margin is equal to gross profit divided by turnover.
Return on equity is equal to profit attributable to shareholders divided by total equity.
Current ratio is equal to current assets divided by current liabilities.
The number of inventory turnover days is equal to inventories before provisions at the end of year divided by the cost of sales for the corresponding year and then multiplied by 366 days.
The number of debtors' turnover days is equal to trade and notes receivables at the end of year divided by the turnover for the corresponding year and then multiplied by 366 days.
The number of trade receivable turnover days is equal to trade receivable at the end of year divided by the turnover for the corresponding year and then multiplied by 366 days.
The number of creditors' turnover days is equal to trade and notes payables at the end of year divided by the cost of sales for the corresponding year and then multiplied by 366 days.
The number of trade payable turnover days is equal to trade payable at the end of year divided by the cost of sales for the corresponding year and then multiplied by 366 days.
Gearing ratio is equal to total borrowings at the end of the year divided by total assets at the end of the corresponding year.

* Restated

Corporate Information

Executive Directors

Mr. Li Xuechun Mr. Li Deheng Mr. Xu Guohua Mr. Li Guangyu Mr. Wang Longxiang (resigned on 25 July 2016) Mr. Feng Zhenquan (resigned on 19 September 2016)

Independent Non-executive Directors

Mr. Sun Yu Guo Ms. Zheng Yu Mr. Qi Qing Zhong

Registered Office

Cricket Square Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Principal Place of Business in the PRC

Western section of Huaihai Road Junan, Shandong, 276600 PRC

Principal Place of Business in Hong Kong

Suite 1102, 11th Floor, Chinachem Century Tower 178 Gloucester Road, Wanchai, Hong Kong

Company Secretary and Qualified Accountant

Mr. Lee Wai Yin CPA FCCA

Authorised Representatives

Mr. Li Xuechun Mr. Lee Wai Yin

Audit Committee

Mr. Sun Yu Guo (Chairman) Ms. Zheng Yu Mr. Qi Qing Zhong

Remuneration Committee

Mr. Sun Yu Guo (Chairman) Ms. Zheng Yu Mr. Qi Qing Zhong

Nomination Committee

Mr. Li Xuechun (Chairman) Mr. Sun Yu Guo Ms. Zheng Yu Mr. Qi Qing Zhong Mr. Wang Longxiang (resigned on 25 July 2016)

Principal Bankers in the PRC

China Construction Bank Bank of China Agriculture Bank of China China Merchants Bank Shanghai Pudong Development Bank

Principal Bankers in Hong Kong

Bank of China (Hong Kong) Limited Mizuho Bank Limited Hang Seng Bank Limited

Independent Auditor

PricewaterhouseCoopers

Principal Share Registrar Royal Bank of Canada Trust Company (Cayman) Limited

Branch Share Registrar Tricor Investor Services Limited

ADRs Information

US Exchange: OTC CUSIP: 35953H105 ADR: Ordinary Shares 1:20

Stock Code 546

Website www.fufeng-group.com

Financial Highlights

Revenue Analysis Production Cost Analysis

Major Products Processing Map

Biographies of Directors and Senior Management

Executive Directors

李學純 (Li Xuechun), aged 65, is the principal founder of the Group, the chairman of the Company and an executive Director. Mr. Li is also a director of Acquest Honour, Summit Challenge, Absolute Divine, Expand Base, Fufeng Singapore, Shandong Fufeng, Baoji Fufeng, IM Fufeng, Hulunbeir Fufeng, Xinjiang Fufeng and Shenhua Pharmaceutical. Mr. Li is responsible for the strategic planning and formulation of overall corporate development policy of the Group. Mr. Li obtained a bachelor's degree in industrial fermentation from 山東輕工業學院 (Shandong Institute of Light Industry) in 1982. Mr. Li is 山東省第十二屆人大代表 (a member of the Shandong Province 12th People's Congress), as well as being honored with "Outstanding Achievement" by the government of Shandong Province in April 2003. In the same year, he was also labeled as "Model Labour" of Shandong Province. Mr. Li first joined 山東福瑞酒廠 (Shandong Furui Brewery Group) in 1982 as a factory manager. Mr. Li established the Group by starting set up Shandong Fufeng in June 1999. He was appointed as a director of Shandong Fufeng upon its establishment. He has 35 years of experience in the fermentation industry. Mr. Li is the sole director of and is beneficially interested in the entire issued share capital of Motivator Enterprises Limited which in turn is interested in approximately 46.63% of the issued share capital of the Company and is a controlling shareholder of the Company. He is the father of 李廣玉 (Li Guangyu) (an executive Director) and the brother-in-law of 李德衡 (Li Deheng) (an executive Director).

李德衡 (Li Deheng), aged 48, is an executive Director and a deputy executive general manager of the Group who is responsible for the general operation of production and purchasing of the Group. He is also a director of Shandong Fufeng, Baoji Fufeng, IM Fufeng and Hulunbeir Fufeng. Mr. Li graduated from the 山東聊城師範學院 (Shandong Liaocheng Teacher's College) in 1992 and obtained a bachelor's degree in chemistry education. He joined the Group in January 2001 and was appointed as a director of Shandong Fufeng in November 2003 and has over 16 years of experience in business management. Mr. Li Deheng is the brother-in-law of Mr. Li Xuechun. Mr. Li is interested in 100% of the issued share capital of Empire Spring Investments Limited, which in turn is interested in 33,320,160 Shares, representing approximately 1.57% of the issued share capital of the Company.

徐國華 (Xu Guohua), aged 48, is an executive Director and vice general manager of the Group who is responsible for Shenhua Pharmaceutical and the research and development of the Group. Mr. Xu is also a director of Shandong Fufeng, Baoji Fufeng, IM Fufeng, Hulunbeir Fufeng and Shenhua Pharmaceutical. Mr. Xu graduated from 山東輕工業學院 (Shandong Institute of Light Industry) majoring in fermentation and economics management in July 1991 and 2003 respectively. He completed his study in fermentation engineering from 天津科技大學 (Tianjin University of Science and Technology) in September 2004. Mr. Xu has been elected to stand as the executive council member of the China Fermentation Industry Association in 2004 and prior to that was invited in 2002 to be a member of the Amino Acid Technology Committee under the China Fermentation Industry Association. Mr. Xu first joined Shandong Furui Brewery Group in 1991. Mr. Xu joined the Group in June 1999 and has over 26 years of experience in the fermentation industry. He was also one of the initial management Shareholders. Mr. Xu was appointed as a director of Shandong Fufeng in May 2002. Mr. Xu is interested in 100% of the issued share capital of Best Range Investments Limited, which in turn is interested in 28,320,160 Shares, representing approximately 1.33% of the issued share capital of the Company.

Biographies of directors and Senior management

李廣玉 (Li Guangyu), aged 38, is an executive Director and a vice general manager of the Group who is responsible for the product import and export business of the Group. Mr. Li has over 11 years of experience in the fermentation industry. Mr. Li graduated from 華東政法大學研究生院 (East China University of Political Science and Law Graduate School) in 2006 and obtained a master's degree in Laws. Mr. Li is the son of Mr. Li Xuechun. Mr. Li is not interested in any shares of the Company pursuant to Part XV of the Securities and Future Ordinance.

Independent Non-executive Directors

孫玉國 (Sun Yu Guo), aged 62, was appointed as an Independent non-executive Director on 23 November 2015. Mr. Sun has over 31 years experience in the field of accounting and financial management. Mr. Sun is the non – profession member of The Chinese Institute of Certified Public Accountant and The Chinese Institute of Certified Public Valuator. Prior to his retirement in February 2014, Mr. Sun was an executive director and vice president of Tsingtao Brewery Company Limited with rich experience in financial management and capital management. He ever served as Deputy Department Head in Finance Bureau of Qingdao, and Department Head in State-owned Assets Supervision and Administration Commission of the People's Government of Qingdao (the "SASACQ"). Mr. Sun was awarded China Annual Figure as Chief Financial Officer in 2004, and National Pioneer in Accounting in 2008.

Mr. Sun does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. Mr. Sun was an executive director of Tsingtao Brewery Company Limited (stock code: 0168. HK) up to June 2014, save as disclosed above, he did not have any directorships in other listed public companies in the last three years nor has held any other position with the Company and any of its subsidiaries. Mr. Sun was granted an option to subscribe the 300,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.01% of the issued share capital of the Company. Except for the above, Mr. Sun does not have any interests in the shares of the Company within the meaning of Part XV of the Securities and Futures Ordinance.

鄭豫 ( Z h e n g Y u ) , a g e d 4 9 , w a s a p p o i n t e d a s a n Independent non-executive Director in December 2012. Ms. Zheng was a Managing Director at PineBridge Investments (formerly known as the AIG Global Investments), in charge of private equity investment in Greater China from 2008 to 2011. She also has over 17 years experience in the management consulting industry through her service at the Boston Consulting Group and then at Roland Berger Strategy Consultants as its senior partner responsible for the industrial and automotive industries practice in Greater China. Ms. Zheng has extensive experience in various management practices including strategy development, brand management, organizational restructuring, global sourcing, joint venture strategy, and project management for both global and Chinese clients. Her industry experience includes automotive, industrial goods, consumer electronics, retail and fast moving consumer goods, education, media and publishing, etc. Prior to her investment and management consulting career, she has also worked in the computer industry in both China and the United States. Ms. Zheng received a bachelor's degree of science in Computer Science in Beijing Normal University and her Master of Business Administration from the University of Texas at Austin in the U.S. Ms. Zheng does not have any relationship with any Directors, senior management, substantial or controlling shareholders of the Company. Ms. Zheng is also a non-executive director of Minth Group Limited (Stock code: 425) in current, save as disclosed above, she did not have any directorships in other listed public companies in the last three years nor has held any other position with the Company and any of its subsidiaries. Ms. Zheng was granted an option to subscribe the 300,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.01% of the issued share capital of the Company. Except for the above, Ms. Zheng does not have any interests in the shares of the Company within the meaning of Part XV of the Securities and Future Ordinance.

Biographies of directors and Senior management

齊慶中 (Qi Qing Zhong), aged 62, was appointed as an Independent non-executive Director on 1 November 2014. Mr. Qi has over 32 years experience in the management of the corporation in fermentation and food industry. Mr. Qi has extensive experience in various management practices including strategy development, promotion and brand management and industrial operation management. Mr. Qi graduated in Institute of Light Industry, Dalian (Faculty of Food Engineering, Professional of Fermentation) in 1982. Mr. Qi currently works as a chief secretary and a chief executive officer of China Food Additives & Ingredients Association. Mr. Qi is also in position of Deputy Director of the Committee on Food Additions in National Standard Review Committee of Food Safety. Mr. Qi does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. He did not have any directorships in other listed public companies in the last three years nor has held any other position with the Company and any of its subsidiaries. Mr. Qi was granted an option to subscribe the 300,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.01% of the issued share capital of the Company. Except for the above, Mr. Qi does not have any interests in the shares of the Company within the meaning of Part XV of the Securities and Future Ordinance.

Senior Management

趙強 (Zhao Qiang), aged 49, is a chief executive officer of the Group. Mr. Zhao has over 21 years of experience in sales and operation in the food and beverage industry with a strong track record of leading and developing successful food businesses in Greater China and across Asia Pacific. Before joining the Company, Mr. Zhao was the Chief Operation Officer and the Chief Executive Officer of Lee Kum Kee Sauce Group since 2011 to 2015. During a career spanning more than 20 years, Mr. Zhao has held a range of senior leadership, strategy development and operation management positions with PepsiCo Group and Kraft Foods International in Greater China, and the Asia Pacific Region. Mr. Zhao would be responsible for the Group's operation management and business strategy, implementing decisions and plans approved by the Board, making day-to-day operational and management decision and coordinating overall business operations. Mr. Zhao was granted an option to subscribe the 5,000,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.24% of the issued share capital of the Company.

陳奕祺 (Chan Yick Kei), aged 37, is a chief financial officer of the Group who was appointed on 1 January 2015. Mr. Chan graduated from the London School of Economics and Political Science with a bachelor degree of accounting and finance. Mr. Chan has 15 years of corporate finance and M&A experience. Prior to joining us he was a director and head of consumer and retail sector, Asia at Deutsche Bank and before that he was a Vice President at the investment banking department of Credit Suisse. Mr. Chan is responsible for matters relating to corporate finance, capital markets, investor relations, corporate development and assists in strategic planning, as well as other financial management duties. Mr. Chan was granted an option to subscribe the 6,000,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.28% of the issued share capital of the Company.

來鳳堂 (Lai Fengtang), aged 48, is a general manager of Shandong Fufeng who is currently in charge of the operation of Shandong Fufeng. Mr. Lai graduated from 中國西北大學 (Northwest University of China) in 1998. He first joined Shandong Furui Brewery Group in 1991. Mr. Lai joined the Group in June 1999 and has over 25 years of experience in the fermentation industry. Mr. Lai is the sole director of and is interested in 14.3% of the issued share capital of Hero Elite, which in turn is interested in 69,120,000 Shares, representing 3.25% of the issued share capital of the Company.

Biographies of directors and Senior management

潘悅洪 (Pan Yuehong),aged 52, is the vice general manager of the Group. Mr. Pan graduated from 山東輕工業學院 (Shandong Institute of Light Industry) in 1988, majoring in fermentation. Mr. Pan joined 山東福瑞酒廠 (Shandong Furui Brewery Group) in 1988, and later joined the Group in June 1999. With nearly 29 years of experience in the fermentation industry, he is mainly responsible for the Group's sales and marketing activities. Mr. Pan is the sole director of and is interested in 14.3% of the issued share capital of Advanced Quality Limited, which in turn is interested in 69,120,000 Shares, representing 3.25% of the issued share capital of the Company.

王均成 (Wang Juncheng), aged 49, is the general manager of IM Fufeng. Mr. Wang graduated from 中國海洋大學 (Ocean University of China) in 1990, majoring in marine biology. Mr. Wang joined 山東福瑞酒廠 (Shandong Furui Brewery Group) in 1990, and later joined the Group in June 1999. With 27 years of experience in fermentation industry, he is mainly responsible for the operation of IM Fufeng.

嚴紀文 (Yan Jiwen), aged 50, is the general manager of Baoji Fufeng. Mr. Yan graduated from 山東輕工業學院 (Shandong Institute of Light Industry) in 2005, majoring in economic management. Mr. Yan joined 山東福瑞酒廠 (Shandong Furui Brewery Group) in 1988, and later joined the Group in June 1999. He has accumulated 29 years of experience in the industry and is mainly responsible for the operation of Baoji Fufeng. Mr. Yan is the sole director of and is interested in 16.0% of the issued share capital of Excel Energy Limited, which in turn is interested in 61,747,200 Shares, representing 2.90% of the issued share capital of the Company.

唐永強 (Tang Yongqiang), aged 42, is the vice general manager of the Group responsible of new project development. Mr. Tang graduated from 西北工業大學 (Northwestern Polytechnical University) in 1997, majoring in machinery manufacturing industry and equipment. Mr. Tang joined 山東福瑞酒廠 (Shandong Furui Brewery Group) in 1997, and later joined the Group in June 1999. With 19 years of experience in the industry management, he is mainly responsible for the project development of the Group.

趙蘭坤 (Zhao Lankun), aged 44, is a general manager of Hulunbeir Fufeng who is currently in charge of the operation of Hulunbeir Fufeng. Mr. Zhao graduated from 青島化工學院 (Institute of Chemical Technology of Qingdao) in 1994, majoring in chemical equipment and machinery. Mr. Zhao joined Shandong Furui Brewery Group in 1994, and later joined the Group in June 1999. With nearly 23 years of experience in industrial management. Mr. Zhao is interested in 14.3% of the issued share capital of Hero Elite, which in turn is interested in 69,120,000 Shares, representing 3.25% of the issued share capital of the Company.

Company Secretary and Qualified Accountant

李偉然 (Lee Wai Yin), aged 47, is the qualified accountant and company secretary of the Company since August 2008. Mr. Lee graduated from the Hong Kong Shue Yan College in 1993 with a diploma in accountancy and is a fellow member of the Association of Chartered Certified Accountants and an associate of the Hong Kong Institute of Certified Public Accountants. Mr. Lee has more than 23 years of working experience in finance and accounting including some with international accounting firms. Mr. Lee was granted an option to subscribe the 1,800,000 Shares pursuant to the Post-IPO Share Option Scheme, represented 0.08% of the issued share capital of the Company.

Business and Financial Review Overview

2016 was a year offered great opportunities for Fufeng in terms of timing, favourable location and a significant enhanced management team. The PRC and global economies continued to face difficulties and challenges in 2016. The Group, as the industry leader, managed to achieve strong results in its core business and also further consolidated its leadership position in the market. In addition, the Group made considerable strides in developing high-value fermentation products allowing us to further diversify our revenue stream, enhance profitability and provide impetus for the long-term sustainable growth of the Group.

In 2016, the Group benefited from the achieved results of industry consolidation in the past few years. We actively strengthened our competitiveness and constantly improved the production technology to achieve better costeffectiveness and more actively expand the Amino acid segment business. The strategy of our product development is mainly divided into four categories: 1. Food additives (key products include MSG, chicken powder, crystallised sugar, corn oil etc.), 2. Animal nutrition (key products include threonine, tryptophan, corn refined products etc.), 3. Colloid (key products include xanthan gum, welan gum etc.), and 4. High-end amino acid (key products include valine, leucine, isoleucine, glutamine, hyaluronic acid, pectin etc.).

The Group continued to strategically utilise the production facility and capacity of each plant in order to match ongoing market demand. The Group has also actively explored the development of new high-end products, in order to improve product diversity and increase sales and penetration in the health and wellness, pharmaceutical and skincare related industries. Only by continuously upgrading our product quality and expanding our product range can we transform gradually from the traditional, bulk-trade enterprise towards a modern, high-tech and high value-added supplier of biochemical products.

In addition, 2016 was a year for our production technology enhancement and product development. Our newly enhanced production technology of MSG further strengthened our competitive cost advantages by reducing production costs and increasing production yield. Implementation of the first phase of newly enhanced production technology in our plants was completed in 2016.

MSG industry consolidation gradually aided the improvement in the business environment, coupled with a decrease in the price of corn kernels during 2016, which led to a decrease in production costs and increase in the gross profit margin of our key products. The Group was able to record a significant increase in its overall gross profit and net profit during 2016 compared to the corresponding year of 2015. Even though overall revenue of the Group remained fairly stable during 2016 compared to 2015, the Group was able to rely on the growth products such as threonine and high-end amino acids and effective implementation of cost controls to increase overall profitability. The high-end amino acid products successfully expanded in terms of product development and market share, and we are more confident that we can become one of the world's leading suppliers of threonine and high-end amino acid products.

In terms of production capacity, the annual production capacity of MSG, threonine and high-end amino acid were increased during 2016. The overall production capacity of the Group in 2016 remained almost fully operational.

Our Amino acid segment is primarily made up of our MSG, threonine and high-end amino acid products. In terms of MSG business, there was a decrease in ASP of MSG in 2016 as costs of main raw materials, especially corn kernels, fell during the year. The ASP of MSG remained at a relatively low level and the Group continued to face lackluster conditions in the domestic catering and consumer markets as well as pricing pressure due to market competition. Despite the market conditions, the Group was able to maintain its leadership in terms of market share and sales volume by leveraging its cost advantages to adopt competitive pricing. The Group was, however, able to record an increase in gross profit and gross profit margin in its Amino acid segment, mainly due to increasing contribution from the sales of MSG, threonine and high-end amino acid products. The expansion of high-end amino acid products continued to increase its revenue contribution to the Group, especially after the commencement of operations at the new production facility in the Xinjiang Plant.

Our xanthan gum business, another key business segment of the Group, recorded a significant decrease in the ASP and gross profit margin due to weakness in the global economy and oil industry in particular. We have adjusted part of the production capacity in Xinjiang Plant to produce gellan gum and high-end amino acid products and have temporarily suspended part of the production capacity for maintenance in IM Plant. The production capacity of xanthan gum will temporarily be reduced to 73,000 tonnes per annum. The Group, as one of the top three xanthan gum manufacturers in the world, continued to dominate the global market share in 2016.

The table below illustrates the trend of the Group's revenue in the past six years:

For the year of 2016, revenue for the Group remained relatively stable at approximately RMB11,803.1 million as compared to approximately RMB11,225.7 million for the year of 2015. The slight increase in revenue was primarily caused by the increase in the sales volume of MSG and the increase of the revenue from threonine and high-end amino acid products, which was offset by the decrease in the ASP and sales volume of xanthan gum. MSG industry consolidation gradually aided the improvement in the business environment, coupled with a decrease in the price of corn kernels, which led to a decrease in production costs.

Although ASP and sales volume of xanthan gum decreased significantly as the global oil industry remained weak, the Group was able to maintain market share of xanthan gum as a market leader during 2016. In addition, the market condition of the global oil industry stabilised at the end of 2016 and therefore the market condition of xanthan gum has returned to stability as well.

The Group's overall gross profit significantly increased from approximately RMB1,802.5 million in 2015 to approximately RMB2,406.4 million in 2016. This represents an increase of 33.5%, primarily due to MSG industry consolidation gradually aiding the improving business environment,

coupled with a decrease in the price of corn kernels and the improvement of efficiency of production by means of our production technology enhancement and expansion of production capacity, which led to a decrease in production costs and increase in the gross profit contribution of the sales of threonine, MSG, starch sweeteners and highend amino acid products. This was partially offset by the decrease in gross profit margin of sales of xanthan gum.

In 2016, the ASP of the Group's MSG decreased by 12.4% compared to 2015 mainly as the average price of corn kernels decreased. In addition, the ASP of the Group's xanthan gum decreased by 28.5% compared to 2015 due to intense competition and weak market conditions in the global oil industry.

In view of the challenging market conditions, the Group also has had to continue actively implementing cost controls and also managed to undertake a technology enhancement to its production processes, which contributed to improvements in production efficiency and cost structure. The significantly increased gross profit margin of Amino acid segment in 2016 demonstrates the Group's ability to leverage its economies of scale and production capabilities to manage its costs effectively.

The production and sales volume of MSG increased by approximately 17.4% and 14.4% in 2016 as compared to 2015, respectively. The production volume of MSG increased as a result of the technology enhancement of its production processes which led to the production yield increase of MSG during the year.

The production and sales volume of xanthan gum decreased by approximately 37.0% and 20.1% in 2016 compared to 2015, respectively. The production volume of xanthan gum decreased primarily as a result of low market demand. Therefore, the Group temporarily suspended part of the production lines of xanthan gum, which were for maintenance or were changed to produce other profitable products such as gellan gum and other high-end amino acid products.

Animal nutrition and high-end amino acid business

In addition, we continued the development of our threonine product. Threonine is a type of amino acid which is used as animal feed additives. During the year, the Group achieved great success in the production expansion in respect to threonine, which was attributable to the successful layout of production bases and a closer cooperation with Ajinomoto Group. Amidst considerable earnings of the threonine business, the Group managed to expand the production capacity of threonine. The total sales amount of threonine reached approximately RMB1,012.8 million in 2016. Compared to 2015, it represented an increase of 70.3%. In the 2016, the Group sold about 119,145 tonnes of threonine as compared to the sales volume of about 53,605 tonnes in 2015.

The high-end amino acid business, as part of our Amino acid segment, is the Group's new growth driver. The Group's high-end amino acid products are developed using different types of corn-based biochemical products by leveraging the Group's fermentation technology. The high-end amino acid products include valine 纈氨酸, leucine 亮氨酸, isoleucine 異亮氨酸, glutamine 谷氨醯胺 and hyaluronic acid 透明質酸, etc. During the year, the total sales amount of high-end amino acid products reached approximately RMB663.7 million. Compared to 2015, it represented an increase of 35.3%. Our high-end amino acid products generally enjoy higher profitability and focus on the health and wellness and pharmaceutical materials industries. The short-term goal of the Group is to become one of the world's top three producers and suppliers by market share for several of our key amino acid product types. The development and production of these products will add further diversity to the Group's product and revenue mix. The Group also plans to extend its business scope from the production and sales of typical amino acid products for bulk trade to those of highend products.

Overall, the diversity of the Group's product portfolio has allowed the Group to maintain its revenue growth momentum in 2016.

It is expected that such development and production of these products will further diversify the Group's product and revenue mix and it is the goal of the Group to become one of the key producers and suppliers in terms of global market share.

Market Overview Amino acid segment

Our Amino acid segment is primarily made up of our MSG, threonine and high-end amino acid products. In terms of MSG business, there was a decrease in the ASP of MSG in 2016 as costs of main raw materials, especially corn kernels, significantly decreased during the year. The ASP of MSG remained at a relatively low level and the Group continued to face lackluster conditions in the domestic catering and consumer markets. As market conditions improved after industry consolidation was completed, the Group was able to maintain its leadership in terms of market share and sales volume and also increase gross profit margin by leveraging its cost advantages to adopt competitive pricing. The Group was able to record an increase in gross profit and gross profit margin in its Amino acid segment, mainly due to increasing contribution from the sales of MSG, threonine and high-end amino acid products. The high-end amino acid products, a relatively new product of the Group, continued to increase its revenue contribution to the Group.

Xanthan gum segment

Our xanthan gum business, another key business segment of the Group, recorded a significant decrease in the ASP and gross profit margin, whilst the market demand of xanthan gum was generally weak. We have adjusted part of the production capacity in Xinjiang Plant to produce gellan gum and high-end amino acid products at the beginning of 2016 and have temporarily suspended part of the production capacity for maintenance in IM Plant since the second quarter of 2016. The production capacity will temporarily be reduced to 73,000 tonnes per annum. The Group, as one of the top three xanthan gum manufacturers in the world, continued to maintain the global market leading position in 2016. As global market condition of oil industry returned to stability at the end of year, the ASP of xanthan gum also stabilised and showed a slight upward trend at the end of 2016.

Operational Review of the Group

Certain indicative operational figures of the Group are set out below:

Turnover/Gross profit/Gross profit margin of the Group

	Years ended 31 December	Change
	2016	2015	%
Turnover (RMB'000)	11,803,131	11,225,722	5.1
Gross profit (RMB'000)	2,406,373	1,802,491	33.5
Gross profit margin (%)	20.4	16.1	4.3 ppts.

The performance of the Group in terms of gross profit and gross profit margin was significantly improved, mainly due to the effect from an increase in gross profit margin of our Amino acids segment, which was partially offset by a decrease in gross profit margin of xanthan gum. As MSG industry consolidation gradually aided the improvement in the business environment and main raw material costs, especially corn kernels, decreased in 2016, the ASP of MSG trended downwards. As a result of our production technology enhancement being continuously implemented in our plants, gross profit margin of our MSG noticeably increased. Moreover, the increase in sales volume of our high-end amino acid products and threonine also brought additional growth momentum to our Amino acids segment. On the other hand, the market competition of xanthan gum intensified, resulting in the ASP of xanthan gum decreasing significantly in 2016. These are discussed in more details in the following sections.

Profit attributable to the Shareholders

	Years ended 31 December
	2016	2015	Change
	RMB'000	RMB'000	%
As reported	1,092,512	516,261	111.6

The improving business environment, coupled with corn kernel costs significantly decreasing and increasing of production efficiency in 2016, led to the gross profit margin of Amino acid segment increasing in 2016. However, part of contribution was offset by the effect of the weak performance of our Xanthan gum segment. In addition, finance costs also decreased during the year as the Group has fully repaid the senior notes and increased working capital from operations, with the objective of maintaining total borrowings at a lower level and reduce the finance costs of the Group. With selling and administrative expenses remaining relatively stable in 2016, the net profit attributable to the Shareholders for 2016 significantly increased by approximately 111.6% as compared to 2015.

Segment Highlights

The Group's products are primarily organised into two business segments, namely Amino acid segment and Xanthan gum segment. The Amino acid segment includes MSG, fertilisers, threonine, high-end amino acid products and other related products while the Xanthan gum segment represents the production and sale of xanthan gum.

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

	Year ended 31 December 2016			Year ended 31 December 2015			Increase/(Decrease)
	Amino	Xanthan		Amino	Xanthan		Amino	Xanthan
	acid	gum	Group	acid	gum	Group	acid	gum	Group
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	%	%	%
	audited	audited	audited	audited	audited	audited	audited	audited	audited
Revenue	11,240,665	562,466	11,803,131	10,256,444	969,278	11,225,722	9.6	(42.0)	5.1
Gross profit	2,316,680	89,693	2,406,373	1,447,537	354,954	1,802,491	60.0	(74.7)	33.5
Gross profit margin	20.6%	15.9%	20.4%	14.1%	36.6%	16.1%	6.5 ppts.	(20.7) ppts.	4.3 ppts.
Segment results	1,482,307	39,923		757,638	289,006		95.6	(86.2)
Segment net assets
Assets	9,919,823	3,769,193		8,668,125	3,861,218		14.4	(2.4)
Liabilities	4,833,050	908,334		5,051,084	1,030,067		(4.3)	(11.8)

The sections below describe the performance of each segment in more detail.

Amino acid segment

Revenue and average selling price

Revenue generated from the sale of the Amino acid segment products increased to RMB11,240.7 million in 2016, representing an increase of RMB984.2 million, or 9.6%, as compared with 2015, mainly attributed to the increase in the revenue of threonine and high-end amino acid products. The revenue of MSG was stable primarily due to the effect of an increase in the sales volume of MSG offset by the effect from a decrease in ASP during the year. The sales volume of MSG was about 1,084,308 tonnes in 2016, representing an increase of 14.4% as compared with 2015, mainly due to the production technology enhancement which increased production yield and strengthened our competitive advantage.

The table below sets out the revenue of the products in this segment for the years ended 31 December 2016 and 2015:

	Years ended 31 December
	2016	2015	Change
Product	RMB'000	RMB'000	%
MSG	6,415,119	6,418,049	(0.0)
Corn refined products	1,473,794	1,314,548	12.1
Threonine	1,012,837	594,830	70.3
High-end amino acid products	663,744	490,732	35.3
Starch sweeteners	642,086	724,002	(11.3)
Fertilisers	614,964	483,257	27.3
Glutamic acid	200,834	42,068	377.4
Corn oil	27,995	35,937	(22.1)
Compound seasoning	15,169	16,117	(5.9)
Others	174,123	136,904	27.2
	11,240,665	10,256,444	9.6

Set out below is a chart showing the ASP of the Group's MSG products for each quarter from the first quarter of 2014 to the fourth quarter of 2016:

MSG

The Group maintained its market leadership in the MSG business through increased marketing efforts and competitive pricing. While the ASP decreased by 12.4%, from approximately RMB6,744 per tonne in 2015 to approximately RMB5,910 per tonne in 2016, turnover of MSG in 2016 slightly decreased, mainly due to the effect of sales volume increasing by 14.4% to approximately 1,084,308 tonnes compared to 2015, offset by the decrease in ASP of MSG during the year.

In 2016, the Group also strengthened the export of MSG and sales and marketing efforts in the promotion of its U Fresh Series products to retail customers. The export of MSG in term of sales volume increased by 7.2% in 2016, which export sales amounted to about RMB1,079.0 million.

Fertilisers

During the year, the Group continuously developed high value-added fertiliser products, and the ASP of fertilisers increased from approximately RMB380 per tonne in 2015 to approximately RMB549 per tonne in 2016, representing an increase of about 44.5%, while the sales volume decreased in line with prevailing market conditions. The revenue of fertilisers amounted to approximately RMB615.0 million for the year ended 31 December 2016 as compared to approximately RMB483.3 million for 2015.

Corn refined products

As the average price of corn kernels decreased in 2016, the ASP of corn refined products also decreased in 2016. However, with the volume of consumption for production increasing, revenue of corn refined products increased by approximately 12.1% for the year ended 31 December 2016 as compared with the corresponding year of 2015.

Starch sweeteners

Turnover of starch sweeteners decreased by about 11.3% in 2016, primarily due to a fall in the ASP of starch sweeteners by 15.8% from approximately RMB2,954 per tonne in 2015 to approximately RMB2,486 per tonne in 2016, whilst demand for our starch sweetener was stable during this year.

Threonine

Threonine is a relatively new product of the Group, with annual production capacity increased to approximately 136,000 tonnes since the end of 2015. Threonine is classified as a major type of our product of animal nutrition in Amino acid segment. It is an essential amino acid which maintains body protein balance and promotes the growth of living things and our threonine is mainly used as animal feed additives.

The total revenue of threonine increased by about 70.3% in 2016 as compared to the year of 2015, primarily as a result of increased sales volume of threonine from approximately 53,605 tonnes in 2015 to approximately 119,145 tonnes in 2016, which was offset by the decrease in ASP of threonine by 23.7% from approximately RMB11,097 per tonne in 2015 to approximately RMB8,473 per tonne in 2016.

High-end amino acid products

The high-end amino acid products business is the new growth driver of the Group. The total sales amount of highend amino acid products including valine, leucine, isoleucine, glutamine and hyaluronic acid, increased to approximately RMB663.7 million in 2016 as compared to approximately RMB490.7 million in 2015. The high-end amino acid market is one of the key markets that the Group remains focused on developing and strengthening. The Group aims to create a series of high-end amino acid products by capitalising on our research and development capabilities and resources

advantage to realise the Group's development strategy of "Low Investment – High Return".

In 2016, the Group, through our wholly-owned subsidiary Shenhua Pharmaceutical, actively developed and promoted new health and wellness products and high-end amino acid products which use our new specialty ingredients such as hyaluronic acid, with the aim of improving product diversity and increasing sales and penetration in health and wellness, pharmaceutical and skin care related industries.

Gross Profit and Gross Profit Margin

The gross profit of this segment is set out below:

	Years ended 31 December
	2016	2015	Change
Gross profit (RMB'000)	2,316,680	1,447,537	60.0%
Gross profit margin (%)	20.6	14.1	6.5 ppts.

During the year ended 31 December 2016, gross profit and gross profit margin of MSG increased due to the cost of corn kernels decreasing and the implementation of production technology enhancement. In addition, increasing gross profit contribution from high-end amino acid products and threonine, which have higher gross profit margins, resulted in an increase in the overall gross profit margin of the Amino acid segment. Gross profit increased to RMB2,316.7 million and gross profit margin increased by 6.5 percentage points to 20.6%.

The Group has maintained its competitive pricing strategy in order to expand market share after industry consolidation in recent years. As market conditions gradually return to normality and with the gradual resumption of growth in the future, we believe that the ASP for MSG should witness a return to stability going forward.

The Group expects that our pricing power and leading market position for MSG can be maintained or improved from current levels in 2017.

Trend of Gross Profit Margin of Amino Acid Segment

The above chart shows the changes in gross profit margin from 2013 to 2016. As the government policy was changed, the average price of corn kernels has decreased significantly since the fourth quarter of 2015. As such, the Group adopted a competitive pricing strategy to significantly lower the ASP of MSG, with an aim to further strengthen its market share and leading position. Although the short term market fluctuation has affected our results, the Group believes that the industry demand and supply has stabilised and expects that the ASP of MSG will stabilise or gradually improve. In addition, the Group will continue to launch highend amino acid products which have higher profit margins and the Group believes that such increasing diversity in the product mix will help to improve its gross profit margin in this segment.

Production costs

		Years ended 31 December
	2016		2015		Change
	RMB'000	%	RMB'000	%	%
Major raw materials
• Corn kernels	4,821,570	53.4	5,239,431	60.1	(8.0)
• Liquid ammonia	110,124	1.2	90,709	1.0	21.4
• Sulphuric acid	97,885	1.1	96,858	1.1	1.1
Energy
• Coal	923,716	10.2	784,449	9.0	17.8
Depreciation	688,643	7.6	629,582	7.2	9.4
Employee benefits	590,911	6.5	579,173	6.6	2.0
Others	1,793,563	20.0	1,299,532	15.0	38.0
Total cost of production	9,026,412	100.0	8,719,734	100.0	3.5

Corn kernels

During 2016, corn kernels accounted for approximately 53.4% (2015: 60.1%) of the total production cost of this segment. The average price of corn kernels was approximately RMB1,408 per tonne in 2016, representing a decrease of 22.3% from 2015, which was mainly due to the change of PRC government policy.

The cost of corn kernels as a percentage of total production costs decreased by 6.7 percentage points, which was due to the decrease in average price of corn kernels during 2016.

The following chart shows the price trend of corn kernels from the first half of 2013 to the second half of 2016:

Price Trend of Corn Kernels

Liquid ammonia

Liquid ammonia accounted for approximately 1.2% (2015: 1.0%) of total production cost in this segment in 2016. The Group witnessed fluctuation in the average unit cost of liquid ammonia in 2016. The average price of liquid ammonia amounted to RMB1,853 per tonne in 2016, representing a decrease of approximately RMB168 per tonne or 8.3% from 2015. However, as the cost of corn kernels as a percentage of total production cost decreased due to lower average price, the cost of liquid ammonia as a percentage of total production costs still increased by 0.2 percentage points.

Sulphuric acid

Sulphuric acid accounted for approximately 1.1% (2015: 1.1%) of total production cost in this segment in 2016. The average unit cost of sulphuric acid decreased to approximately RMB213 per tonne in 2016, which represents a decrease of approximately RMB27 per tonne, or 11.3% from 2015.

Coal

Coal accounted for about 10.2% (2015: 9.0%) of total production cost in this segment in 2016. The average unit cost of coal was RMB155 per tonne in 2016, representing a slight decrease of RMB4 per tonne or 2.5% from 2015. Based on the market situation, the average unit cost of coal in Shaanxi and Inner Mongolia increased during the year. On the contrary, the average unit cost of coal in Hulunbeir and Xinjiang decreased in 2016. Our average coal costs were still at a low level which reflected that the competitive cost advantages from Hulunbeir Plant and Xinjiang Plant were fully realised during the year.

The Group's major production bases in Inner Mongolia, Hulunbeir and Xinjiang, with access to lower-cost coal, are instrumental in strengthening the Group's pricing power. The chart below shows coal costs at each of our plants in Shaanxi, Inner Mongolia, Hulunbeir and Xinjiang:

Other production costs

Certain machineries mainly used for Amino acid segment were impaired amounting to RMB119.8 million in 2016 (2015: RMB60,000) because of high production cost and those machineries are now idle. Moreover, the increase in cost of depreciation and employee benefits was mainly due to gradually increased production capacity of the new Baoji Plant since the second half of 2015.

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:

	Years ended 31 December
	2016	2015	Change
Product	Tonnes	Tonnes	%
MSG
Annual designed production capacity (Note)	1,130,000	940,000	20.2
Actual production output	1,120,396	954,700	17.4
Utilisation rate	99.2%	101.6%

Glutamic acid
Annual designed production capacity (Note)	926,667	760,000	21.9
Actual production output	927,436	766,917	20.9
Utilisation rate	100.1%	100.9%
Fertilisers
Annual designed production capacity (Note)	950,000	950,000	–
Actual production output	891,823	897,542	(0.6)
Utilisation rate	93.9%	94.5%

Starch sweeteners
Annual designed production capacity (Note)	260,000	260,000	–
Actual production output	257,145	238,393	7.9
Utilisation rate	98.9%	91.7%

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

Utilisation rates remained high in 2016, which was the same case in 2015.

Xanthan gum Segment

Operation results

The table below set out the sales amount, ASP, gross profit, gross profit margin and utilisation rate of xanthan gum for the years ended 31 December 2016 and 2015:

	Years ended 31 December	Change
	2016	2015	%
Revenue (RMB'000)	562,466	969,278	(42.0)
ASP (RMB/tonne)	10,738	15,013	(28.5)
Gross profit (RMB'000)	89,693	354,954	(74.7)
Gross profit margin (%)	15.9	36.6	(20.7) ppts.
Annual designed production capacity (tonnes) (Note) Actual production output (tonnes) Utilisation rate	73,000 53,000 72.6%	87,500 84,162 96.2%	(16.6) (37.0)

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

Revenue generated from xanthan gum decreased by 42.0% to RMB562.5 million in 2016, from RMB969.3 million in 2015. The decrease in revenue was due to the decrease in ASP and sales volume resulting from weak market demand. The significant decrease in the ASP of xanthan gum was due to intense competition and weak market conditions in the global oil industry in 2016.

The Group's exports of xanthan gum also decreased in terms of the percentage contribution to total sales. Export sales of xanthan gum contributed approximately 91.1% and 84.1% of total sales of xanthan gum in 2015 and 2016, respectively.

Sales volume and ASP

Sales Volume vs. ASP of Xanthan Gum

Global demand for xanthan gum fluctuated during the year. The market demand was still weak in the second half of 2016 and the Group expects this to continue in the foreseeable future as demand remains stable at a low level in the oil industry as well as other sectors.

Gross profit and gross profit margin

Gross profit of the Xanthan gum segment decreased by about 74.7% from approximately RMB355.0 million in 2015 to approximately RMB89.7 million in 2016. Gross profit margin decreased as well, by 20.7 percentage points to 15.9% in 2016, reflecting weakness in global market demand and a depressed oil industry.