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.

This announcement does not constitute an offer to sell or the solicitation of an offer to buy any securities in the United States or any other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. The securities referred to herein will not be registered under the United States Securities Act 1933, as amended. No securities may be offered or sold in the United States absent registration or an exemption from the registration requirements. Any public offering of securities to be made in the United States will be made by means of a prospectus that may be obtained from the issuer or the selling security holder. Such prospectus will contain detailed information about the company involved and its management and financial statements. The Company does not intend to make any public offering of securities in the United States.

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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)

OVERSEAS REGULATORY ANNOUNCEMENT

This overseas regulatory announcement is issued pursuant to Rule 13.09(2) of the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

Reference is made to the announcements of Fufeng Group Limited (the “Company”) dated 28 March 2011 and 6 April 2011 in relation to the Notes Issue (the “Announcements”). Terms used herein have the same meaning as defined in the Announcements, unless otherwise defined.

Please refer to the attached offering memorandum (the “Offering Memorandum”) in relation to the Notes, which has been published on the website of Singapore Exchange Securities Trading Limited on 15 April 2011.

The posting of the Offering Memorandum on the website of the Stock Exchange is only for the purpose of facilitating equal dissemination of information to investors in Hong Kong and compliance with Rule 13.09(2) of the Listing Rules, and not for any other purposes.

– 1 –

The Offering Memorandum does not constitute a prospectus, notice, circular, brochure or advertisement offering to sell any securities to the public in any jurisdiction, nor is it an invitation to the public to make offers to subscribe for or purchase any securities, nor is it calculated to invite offers by the public to subscribe for or purchase any securities.

The Offering Memorandum must not be regarded as an inducement to subscribe for or purchase any securities of the Company, and no such inducement is intended. No investment decision should be based on the information contained in the Offering Memorandum.

By order of the Board Fufeng Group Limited Li Xuechun Chairman

Shandong, the PRC, 15 April 2011

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

– 2 –

STRICTLY CONFIDENTIAL—DO NOT FORWARD

THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QIBs (AS DEFINED BELOW) UNDER RULE 144A OR (2) PERSONS OR ADDRESSEES OUTSIDE THE UNITED STATES.

IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the preliminary offering memorandum attached to this e-mail. You are therefore advised to read this disclaimer carefully before reading, accessing or making any other use of the attached preliminary offering memorandum. In accessing the attached preliminary offering memorandum, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.

Confirmation of Your Representation : By accepting the email and accessing the attached document you shall be deemed to have represented to Citigroup Global Markets Inc. and Deutsche Bank AG, Singapore Branch that (1) (i) you are not resident in the United States and, to the extent you purchase the securities described in the attached preliminary offering memorandum, you will be doing so pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”) OR (ii) you are acting on behalf of, or you are, a qualified institutional buyer, as defined in Rule 144A under the Securities Act (“QIB”), AND (2) that you consent to delivery of the attached preliminary offering memorandum and any amendments or supplements thereto by electronic transmission.

The attached document has been made available to you in electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of transmission and consequently none of the issuer of the securities or Citigroup Global Markets Inc. and Deutsche Bank AG, Singapore Branch or any of their respective directors, employees, representatives or affiliates accepts any liability or responsibility whatsoever in respect of any discrepancies between the document distributed to you in electronic format and the hard copy version. We will provide a hard copy version to you upon request.

Restrictions : The attached document is a preliminary offering memorandum and is being furnished in connection with an offering exempt from registration under the Securities Act solely for the purpose of enabling a prospective investor to consider the purchase of the securities described herein. You are reminded that the information in the attached document is not complete and may be changed.

THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTION AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN EXCEPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE OR LOCAL SECURITIES LAWS.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO.

Except with respect to eligible investors in jurisdictions where such offer is permitted by law, nothing in this electronic transmission constitutes an offer or an invitation by or on behalf of either the issuer of the securities or Citigroup Global Markets Inc. or Deutsche Bank AG, Singapore Branch to subscribe for or purchase any of the securities described therein, and access has been limited so that it shall not constitute a general advertisement or solicitation in the United States or elsewhere. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the underwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by Citigroup Global Markets Inc. or Deutsche Bank AG, Singapore Branch and their respective affiliates on behalf of the issuer in such jurisdiction.

You are reminded that you have accessed the attached preliminary offering memorandum on the basis that you are a person into whose possession this preliminary offering memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not nor are you authorized to deliver this document, electronically or otherwise, to any other person. If you have gained access to this transmission contrary to the foregoing restrictions, you will be unable to purchase any of the securities described therein.

Actions that You May Not Take : You should not reply by e-mail to this communication, and you may not purchase any securities by doing so. Any reply e-mail communications, including those you generate by using the “Reply” function on your e-mail software, will be ignored or rejected.

YOU ARE NOT AUTHORIZED AND YOU MAY NOT FORWARD OR DELIVER THE ATTACHED PRELIMINARY OFFERING MEMORANDUM, ELECTRONICALLY OR OTHERWISE, TO ANY OTHER PERSON OR REPRODUCE SUCH OFFERING MEMORANDUM IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT AND THE ATTACHED PRELIMINARY OFFERING MEMORANDUM IN WHOLE OR IN PART IS UNAUTHORIZED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.

You are responsible for protecting against viruses and other destructive items. Your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.

OFFERING MEMORANDUM

CONFIDENTIAL

US$300,000,000

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Fufeng Group Limited

(incorporated in the Cayman Islands with limited liability)

7.625% SENIOR NOTES DUE 2016

Issue Price per Note: 100%

plus, in each case, accrued interest, if any, from the issue date

The 7.625% Senior Notes due April 13, 2016 (the “Notes”) will bear interest from April 13, 2011 at 7.625% per annum payable semi-annually in arrears on April 13 and October 13 of each year, beginning October 13, 2011. The Notes will mature on April 13, 2016.

The Notes are senior obligations of Fufeng Group Limited (the “Company”) guaranteed by our existing subsidiaries (the “Subsidiary Guarantors”) (such guarantees provided by the Subsidiary Guarantors, the “Subsidiary Guarantees”) other than those organized under the laws of the PRC.

We may at our option redeem the Notes, in whole or in part, at any time on or after April 13, 2014, at redemption prices set forth in this offering memorandum plus accrued and unpaid interest, if any, to (but not including) the redemption date. At any time and from time to time prior to April 13, 2014, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more sales of common stock of the Company at a redemption price of 107.625% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to (but not including) the redemption date. In addition, we may redeem the Notes, in whole but not in part, at any time prior to April 13, 2014, at a price equal to 100% of the principal amount of the applicable Notes plus a premium as set forth in this offering memorandum. Upon the occurrence of a Change of Control Triggering Event (as defined herein), we must make an offer to repurchase all Notes outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.

The Notes will (1) rank senior in right of payment to any existing and future obligations of the Company expressly subordinated in right of payment to the Notes, (2) be at least pari passu in right of payment with all other unsecured, unsubordinated Indebtedness of the Company (subject to any priority rights of such unsubordinated Indebtedness pursuant to applicable law), (3) be effectively subordinated to all existing and future obligations of the Non-Guarantor Subsidiaries (as defined herein), and (4) be effectively subordinated to all existing and future secured obligations of the Company to the extent of the collateral securing such obligations (other than the collateral securing the Notes). However, applicable law may limit the enforceability of the Subsidiary Guarantees and the pledge of any collateral. See “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral.”

For a more detailed description of the Notes, see “Description of the Notes” beginning on page 123.

Investing in the Notes involves risks. See “Risk Factors” beginning on page 13.

Approval in-principle has been received for the listing and quotation of the Notes on the Official List of the Singapore Exchange Securities Trading Limited (the “SGX-ST”). The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained herein. Admission to the Official List of the SGX-ST and quotation of any Notes on the SGX-ST is not to be taken as an indication of the merits of the Company, the Subsidiary Guarantors, the Notes or any other subsidiary or associated company of the Company.

The Notes and the Subsidiary Guarantees have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold by the Initial Purchasers (as defined herein) only (1) to qualified institutional buyers in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A thereunder (“Rule 144A”) and (2) outside the United States in compliance with Regulation S under the Securities Act (“Regulation S”). For a description of certain restrictions on resale or transfer, see “Transfer Restrictions” beginning on page 198.

It is expected that the delivery of the Notes will be made through the facilities of The Depository Trust Company on or about April 13, 2011 in New York, New York against payment therefor in immediately available funds.

Joint Bookrunners and Joint Lead Managers

Citi

Deutsche Bank

The date of this offering memorandum is April 6, 2011.

Certain Definitions, Conventions and Currency Presentation . . . . . . . . . . . Forward-Looking Statements . . . . . . . Glossary of Technical Terms . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . The Offering . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . Use of Proceeds . . . . . . . . . . . . . . . . . Exchange Rate Information . . . . . . . . . Capitalization . . . . . . . . . . . . . . . . . . Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . Industry Overview . . . . . . . . . . . . . . . Corporate Structure . . . . . . . . . . . . . . Business . . . . . . . . . . . . . . . . . . . . . . Regulatory Overview . . . . . . . . . . . . .	Page v viii xi 1 3 13 37 38 40 41 44 72 83 84 107 Management . . . . . . . . . . . . . . . . . . . Principal Shareholders . . . . . . . . . . . . Related Party Transactions . . . . . . . . . Description of Other Material Indebtedness . . . . . . . . . . . . . . . . . Description of the Notes . . . . . . . . . . . Taxation . . . . . . . . . . . . . . . . . . . . . . Plan of Distribution . . . . . . . . . . . . . . Transfer Restrictions . . . . . . . . . . . . . Ratings . . . . . . . . . . . . . . . . . . . . . . . Legal Matters . . . . . . . . . . . . . . . . . . Auditor . . . . . . . . . . . . . . . . . . . . . . . General Information . . . . . . . . . . . . . . Summary of Certain Differences between HKFRS and U.S. GAAP . . . Index to Consolidated Financial Information . . . . . . . . . . .	Page
		112 118 119 120 123 189 194 198 201 201 201 202 203 F-1

This offering memorandum does not constitute an offer to sell or a solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. Neither the delivery of this offering memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this offering memorandum or that the information contained in this offering memorandum is correct as of any time after that date.

IN CONNECTION WITH THIS OFFERING, DEUTSCHE BANK AG, SINGAPORE BRANCH, AS STABILIZING MANAGER, OR ANY PERSON ACTING FOR IT, MAY PURCHASE AND SELL THE NOTES IN THE OPEN MARKET. THESE TRANSACTIONS MAY, TO THE EXTENT PERMITTED BY APPLICABLE LAWS AND REGULATIONS, INCLUDE SHORT SALES, STABILIZING TRANSACTIONS AND PURCHASES TO COVER POSITIONS CREATED BY SHORT SALES. THESE ACTIVITIES MAY STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES. AS A RESULT, THE PRICE OF THE NOTES MAY BE HIGHER THAN THE PRICE THAT OTHERWISE MIGHT EXIST IN THE OPEN MARKET. IF THESE ACTIVITIES ARE COMMENCED, THEY MAY BE DISCONTINUED AT ANY TIME AND MUST IN ANY EVENT BE BROUGHT TO AN END AFTER A LIMITED TIME.

This offering memorandum is highly confidential. We are providing it solely for the purpose of enabling you to consider a purchase of the Notes. You should read this offering memorandum before making a decision whether to purchase the Notes. You must not use this offering memorandum for any other purpose, or disclose any information in this offering memorandum to any other person.

Notwithstanding anything to the contrary contained herein, a prospective investor (and each employee, representative, or other agent of a prospective investor) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions described in this offering memorandum and all materials of any kind that are provided to the prospective investor relating to such tax treatment and tax structure (as such terms are defined in U.S. Treasury Regulation section 1.6011-4). This authorization of tax disclosure is retroactively effective to the commencement of discussions with prospective investors regarding the transactions contemplated herein.

We have prepared this offering memorandum, and we are solely responsible for its contents. You are responsible for making your own examination of us and your own assessment of the merits and risks of investing in the Notes. By purchasing the Notes, you will be deemed to have acknowledged that you have made certain acknowledgements, representations and agreements as set forth under the section headed “Transfer Restrictions” below.

No representation or warranty, express or implied, is made by the Initial Purchasers (as defined in “Plan of Distribution”), the Trustee or any of their respective affiliates or advisors as to the accuracy or completeness of the information set forth herein, and nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation, whether as to the past or the future.

Each person receiving this offering memorandum acknowledges that: (i) such person has been afforded an opportunity to request from us and to review, and has received, all additional information considered by it to be necessary to verify the accuracy of, or to supplement, the information contained herein; (ii) such person has not relied on the Initial Purchasers or the Trustee or any person affiliated with the Initial Purchasers or the Trustee in connection with any investigation of the accuracy of such information or its investment decision; and (iii) no person has been authorized to give any information or to make any representation concerning us, our subsidiaries and affiliates, the Notes or the Subsidiary Guarantees (other than as contained herein and information given by our duly authorized officers and employees in connection with investors’ examination of our company and the terms of the offering of the Notes) and, if given or made, any such other information or representation should not be relied upon as having been authorized by us or the Initial Purchasers or the Trustee.

The Notes and the Subsidiary Guarantees have not been approved or disapproved by the United States Securities and Exchange Commission, any state securities commission in the United States or any other United States regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering or the accuracy or adequacy of this offering memorandum. Any representation to the contrary is a criminal offense in the United States.

Prospective purchasers are hereby notified that sellers of the securities (the Notes and the Subsidiary Guarantees) may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. We are not, and the Initial Purchasers are not, making an offer to sell the Notes in any jurisdiction except where an offer or sale is permitted. The distribution of this offering memorandum and the offering of the Notes may in certain jurisdictions be restricted by law. Persons into whose possession this offering memorandum comes are required by us and the Initial Purchasers to inform themselves about and to observe any such restrictions. For a description of the restrictions on offers, sales and resales of the Notes and distribution of this offering memorandum, see the sections headed “Transfer Restrictions” and “Plan of Distribution” below.

This offering memorandum summarizes certain material documents and other information, and we refer you to them for a more complete understanding of what we discuss in this offering memorandum. In making an investment decision, you must rely on your own examination of us and the terms of the offering, including the merits and risks involved. None of the Company, the Initial Purchasers the Trustee or our or their respective directors, officers or advisors are making any representation to you regarding the legality of an investment in the Notes by you under any legal, investment or similar laws or regulations. You should not consider any information in this offering memorandum to be legal, business or tax advice. You should consult your own attorney, business adviser and tax advisor for legal, business and tax advice regarding an investment in the Notes.

This offering memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this offering memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Notes to be issued from time to time by the Company may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Notes are subscribed or purchased in reliance of an exemption under Sections 274 or 275 of the SFA, the Notes shall not be sold within the period of six months from the date of the initial acquisition of the Notes, except to any of the following persons:

(a) an institutional investor (as defined in Section 4A of the SFA);
(b) a relevant person (as defined in Section 275(2) of the SFA); or
(c) any person pursuant to an offer referred to in Section 275(1A) of the SFA,

unless expressly specified otherwise in Section 276(7) of the SFA.

Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

iii

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six (6) months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

(1) to an institutional investor (under Section 274 of the SFA), or to a relevant person (as defined in Section 275(2) of the SFA) and in accordance with the conditions specified in Section 275 of the SFA;
(2) (in the case of a corporation) where the transfer arises from an offer referred to in Section 276(3)(i)(B) of the SFA or (in the case of a trust) where the transfer arises from an offer referred to in Section 276(4)(i)(B) of the SFA;
(3) where no consideration is or will be given for the transfer;
(4) where the transfer is by operation of law; or
(5) as specified in Section 276(7) of the SFA.

We reserve the right to withdraw the offering of Notes at any time, and the Initial Purchasers reserve the right to reject any commitment to subscribe for or purchase the Notes in whole or in part and to allot to any prospective purchaser less than the full amount of the Notes sought by such purchaser. The Initial Purchasers and certain related entities may acquire for their own account a portion of the Notes.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED 1955, AS AMENDED (“RSA”), WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B OF THE RSA IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

CERTAIN DEFINITIONS, CONVENTIONS AND CURRENCY PRESENTATION

We have prepared this Offering Memorandum using a number of conventions, which you should consider when reading the information contained herein. When we use the terms “we,” “us,” “our” and words of similar import, we are referring to Fufeng Group Limited itself or to Fufeng Group Limited and its subsidiaries, as the context requires. When we use the term the “Company,” we are referring to Fufeng Group Limited itself and when we use the term the “Group” or “Fufeng,” we are referring to Fufeng Group Limited and its subsidiaries.

Market data and certain industry forecasts and statistics in this offering memorandum have been obtained from both public and private sources, including market research, publicly available information and industry publications. Although we believe this information to be reliable, it has not been independently verified by us or the Initial Purchasers or their respective directors and advisors, and neither us, the Initial Purchasers nor our or their respective directors and advisors make any representation as to the accuracy or completeness of that information. In addition, third-party information providers may have obtained information from market participants and such information may not have been independently verified. This offering memorandum summarizes certain documents and other information, and investors should refer to them for a more complete understanding of what is discussed in those documents. In making an investment decision, each investor must rely on its own examination of us and the terms of the offering and the Notes, including the merits and risks involved.

The information and statistics set forth in this offering memorandum relating to the PRC and the biochemical industry in the PRC were taken or derived from various government and private publications. The Initial Purchasers do not make any representation as to the accuracy of such information and statistics, which may not be consistent with other information or statistics compiled within or outside the PRC. Due to possibly inconsistent collection methods and other problems, the information and statistics herein may be inaccurate and should not be unduly relied upon.

We record and publish our financial information in Renminbi. Unless otherwise stated in this offering memorandum, all translations from Renminbi amounts to U.S. dollars were made at the rate of RMB6.6000 to US$1.00, the noon buying rate in New York City for cable transfers payable in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York on December 30, 2010, and all translations from H.K. dollars into U.S. dollars were made at the rate of HK$7.7810 to US$1.00, the noon buying rate in New York City for cable transfers payable in H.K. dollars as certified for customs purposes by the Federal Reserve Bank of New York on December 30, 2010. All such translations in this offering memorandum are provided solely for your convenience and no representation is made that the Renminbi amounts referred to herein have been, could have been or could be converted into U.S. dollars and Hong Kong dollars, or vice versa , at any particular rate or at all. For further information relating to the exchange rates, see “Exchange Rate Information.”

In this offering memorandum, references to “US$” and “U.S. dollars” are to United States dollars, the official currency of the United States of America (the “United States” or “U.S.”); references to “HK$” and “H.K. dollars” are to Hong Kong dollars, the official currency of the Hong Kong Special Administrative Region of the PRC (“Hong Kong” or “HK”), references to “RMB” or “Renminbi” are to Renminbi, the official currency of the People’s Republic of China; references to “Macau” are to the Macau Special Administrative Region of the PRC; references to the “PRC government” or “State” are to the central government of the PRC, including all political subdivisions (including provincial, municipal and other regional or local government entities) and instrumentalities thereof, or, where the context requires, any of them; and references to the “PRC” and “China” are to the People’s Republic of China and, for the purposes of this offering memorandum, do not include Hong Kong, Macau or Taiwan.

“2010 Convertible Bonds” means the Company’s U.S. dollar settled 4.5% convertible bonds due 2015 in the aggregate principal amount of RMB1,025 million.

“Articles of Association” means the articles of association of the Company as adopted on January 10, 2007, as amended from time to time.

“Baoji Fufeng” means Baoji Fufeng Biotechnologies Co., Ltd., a wholly foreign owned enterprise established in the PRC with limited liability on September 24, 2004 and a wholly owned subsidiary of the Company.

“Baoji Plant” means the production plant of the Group located at Baoji City in Shaanxi Province, the PRC.

“Baoji Plant Phase I” means phase I of the Baoji Plant, which commenced production in November 2004.

“Baoji Plant Phase II” means phase II of the Baoji Plant, which commenced production in November 2005.

“Board of Directors” or “Board” means the board of Directors of the Company.

“CAGR” means Compound Annual Growth Rate.

“Connected person” and “controlling shareholder” each has the meaning ascribed to it in the Listing Rules (as defined below).

“Director(s)” mean the director(s) of the Company.

“Ever Soar” means Ever Soar Enterprises Limited, a company with limited liability incorporated in the BVI on March 25, 2004.

“Hong Kong Stock Exchange” means The Stock Exchange of Hong Kong Limited.

“Inner Mongolia” means Inner Mongolia Autonomous Region.

“Inner Mongolia Fufeng” means Neimenggu Fufeng Biotechnologies Co., Ltd., a wholly foreign-owned enterprise with limited liability established in the PRC on March 31, 2006 and a wholly-owned subsidiary of the Company.

“Inner Mongolia Plant” means the production plant of the Group located in Hohhot, Inner Mongolia, the PRC.

“Inner Mongolia Plant Phase I” means phase I of the Inner Mongolia Plant, which commenced production in December 2006.

“Inner Mongolia Plant Phase II” means phase II of the Inner Mongolia Plant, which commenced production in the last quarter of 2008.

“Inner Mongolia Plant Phase III” means phase III of the Inner Mongolia Plant, which commenced production in the last quarter of 2009.

“IPO” means the initial public offering of the ordinary shares of HK$0.10 each in the share capital of the Company on February 8, 2007.

“Listing” means the listing of, and dealings in, our shares on the Hong Kong Stock Exchange.

“Listing Rules” means the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange, as amended, supplemented or otherwise modified from time to time.

“Motivator Enterprises” means Motivator Enterprises Limited, a company with limited liability incorporated in the BVI on March 23, 2004, which is wholly and beneficially owned by Mr. Li.

“Mr. Li Xuechun” or “Mr. Li” means Mr. Li Xuechun, the main founder, Chairman and the controlling shareholder of the Company.

“New EIT Law” means the new Enterprise Income Tax Law of the PRC, which came into effect on January 1, 2008.

“Northeast China Fufeng” means Hulunbeir Northeast Fufeng Biotechnologies Co., Ltd, our indirect wholly owned subsidiary.

“Northeastern Plant” means the production plant of the Group located in Hulunbeir, Inner Mongolia near the border with Heilongjiang Province.

“Northeastern Plant Phase I” means phase I of the Northeastern Plant, which we expect to commence production in the second half of 2011.

“Northeastern Plant Phase II” means phase II of the Northeastern Plant which we expect to commence construction by the end of 2011.

“Pre-IPO Share Option Scheme” means the share option scheme we adopted on January 10, 2007 for granting share options to certain of our Directors and employees before our IPO.

“Post-IPO Share Option Scheme” means the share option scheme we adopted on January 10, 2007 for granting share options to certain of our directors and employees after our IPO.

“SAFE” means the PRC State Administration of Foreign Exchange (中國國家外滙管理局), the PRC government agency responsible for matters relating to foreign exchange administration.

“SFO” means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time.

“Shandong Fufeng” means Shandong Fufeng Fermentation Co., Ltd., a company with limited liability established in the PRC on June 9, 1999 and a wholly owned subsidiary of the Company.

“Shandong Plant” means the production plant of the Group located at Junan County, Shandong Province, the PRC, which commenced commercial production in November 2003.

“Shenhua Pharmaceutical” means Jiangsu Shenhua Pharmaceutical Co., Ltd., a company with limited liability established in the PRC on December 28, 2000 and a wholly owned subsidiary of the Company.

“Tonnes” means metric tons.

In this offering memorandum, where information has been presented in thousands or millions of units, amounts may have been rounded up or down. Accordingly, totals of columns or rows of numbers in tables may not be equal to the apparent total of the individual items and actual numbers may differ from those contained herein due to rounding.

The English names of the PRC nationals, entities, departments, facilities, laws, regulations, certificates, titles and the like are translations of their Chinese names and are included for identification purposes only. In the event of any inconsistency, the Chinese name prevails.

vii

FORWARD-LOOKING STATEMENTS

This offering memorandum includes “forward-looking statements.” All statements other than statements of historical fact contained in this offering memorandum, including, without limitation, those regarding our future financial position and results of operations, strategies, plans, objectives, goals and targets, future developments in the markets where we participate or are seeking to participate, and any statements preceded by, followed by or that include the words “believe,” “expect,” “aim,” “intend,” “will,” “may,” “anticipate,” “seek,” “should,” “estimate” or similar expressions or the negative thereof, are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we will operate in the future. Important factors that could cause our actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, the following:

the intensely competitive industries in which we operate;
industry risks;
general economic, political and social conditions and developments in China and other jurisdictions in which we sell our products;
our financial condition;
fluctuations of the prices of raw materials and our products;
the achievement of our production capacity expansion plans;
our ability to maintain our leading position in terms of production and sale of our products;
market acceptance of our products; and
risks associated with the introduction of new products.

Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed under “Risk Factors” and elsewhere in this offering memorandum. We caution you not to place undue reliance on these forward-looking statements which reflect our management’s view only as of the date of this offering memorandum. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this offering memorandum might not occur.

viii

AVAILABLE INFORMATION

To permit compliance with Rule 144A in connection with resales of the Notes, we are required to furnish upon request of a holder of the Notes and a prospective purchaser designated by such holder the information required to be delivered under Rule 144A(d)(4) if at the time of such request we are neither a reporting company under Section 13 or Section 15(d) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder. So long as any of the Notes remain outstanding, we will provide to the Trustee for forwarding to the holders of the Notes our semi-annual and annual financial statements.

ENFORCEMENT OF CIVIL LIABILITIES

We are an exempted company incorporated in the Cayman Islands with limited liability, and each Subsidiary Guarantor is also incorporated outside the United States. The Cayman Islands has a different body of securities laws from the United States and protections for investors may differ.

All of our assets and the assets of the Subsidiary Guarantors are located outside the United States. In addition, all of our directors and officers and the Subsidiary Guarantors’ directors and officers are nationals or residents of countries other than the United States (principally in the PRC), and all or a substantial portion of such persons’ assets are located or may be located, as the case may be, outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us, any of the Subsidiary Guarantors or such persons or to enforce against us or any of the Subsidiary Guarantors or such persons judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.

We and each of the Subsidiary Guarantors expect to appoint National Corporate Research, Ltd. as our and their respective agent to receive service of process with respect to any action brought against us or the Subsidiary Guarantors in the United States federal courts located in the Borough of Manhattan, The City of New York under the federal securities laws of the United States or of any state of the United States or any action brought against us or the Subsidiary Guarantors in the courts of the State of New York in the Borough of Manhattan, The City of New York under the securities laws of the State of New York.

We have been advised by our Cayman Islands legal advisor, Conyers Dill & Pearman, that the courts of the Cayman Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that: (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.

We have been advised by our BVI legal adviser, Conyers Dill & Pearman, that the courts of the BVI would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the United States courts against us under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like

nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of the BVI, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of the BVI, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the BVI and (f) there is due compliance with the correct procedures under the laws of the BVI.

We have been advised by Li & Partners, our Hong Kong legal advisor, that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. However, under Hong Kong common law, a foreign judgment (including one from a court in the United States predicated upon U.S. federal or state securities laws) may be enforced in Hong Kong by bringing an action in a Hong Kong court, and then seeking summary or default judgment on the strength of the foreign judgment, provided that the foreign judgment is for a debt or definite sum of money and is final and conclusive on the merits. In addition, the Hong Kong courts may refuse to recognize or enforce a foreign judgment if such judgment:

(a) was obtained by fraud;
(b) was rendered by a foreign court that lacked the appropriate jurisdiction at the time;
(c) is contrary to public policy or natural justice;
(d) is for penal damages; or
(e) is based on foreign penal, revenue or other public law.

Further, we have been advised by our PRC legal advisor, King & Wood, that there is uncertainty as to whether the courts of China would (i) enforce judgments of U.S. courts obtained against us, our directors or officers, any Subsidiary Guarantor or its directors or officers predicated upon the civil liability provisions of the U.S. federal or state securities laws or (ii) entertain original actions brought in China against us, our directors or officers, any Subsidiary Guarantor or its directors or officers predicated upon the U.S. federal or state securities laws. See “Regulatory Overview — The PRC Judicial System.”

GLOSSARY OF TECHNICAL TERMS

This glossary of technical terms contains explanations of certain terms and definitions used in this offering memorandum in connection with our Company and its business. The terms and their meanings may not correspond to standard industry meaning or usage of those terms.

“amino acids” . . . . . . . . . . . . . . . .	a basis unit from which proteins are constructed in living
	cells. Amino acids represent a group of essential
	nutritional elements for human body build-up and can
	serve as an ingredient in animal feed, foods and
	beverages, dietary supplements, cosmetics and various
	specialized preparations
“chicken powder”. . . . . . . . . . . . . .	a compound artificial flavoring made from MSG
“citric acid”. . . . . . . . . . . . . . . . . .	a tricarboxylic acid C6H8O7 occurring in cellular
	metabolism, obtained especially from lemon and lime
	juices or by fermentation of sugars, and used to enhance
	the flavor of food and beverages
“corn germ”. . . . . . . . . . . . . . . . . .	nucleus or embryo of corn containing fat and protein;
	used for oil expelling and the feed industry
“corn gluten meal” . . . . . . . . . . . . .	by-products of corn processing typically characterized by
	its high protein and high energy content resulting from
	the corn wet milling process and principally used as an
	animal feed additive
“cornstarch” . . . . . . . . . . . . . . . . .	a principal product of corn processing which is a key raw
	material for the manufacture of corn-based biochemical
	products, which range from corn sweetener to amino
	acids and ethanol
“crystallization”. . . . . . . . . . . . . . .	a process of forming crystals from liquid or gas
“fermentation”. . . . . . . . . . . . . . . .	the biochemical process in which raw materials, such as
	cornstarch, are broken down and converted into other
	substances through the process of metabolism of
	microorganisms
“fertilizer”. . . . . . . . . . . . . . . . . . .	any of a large number of natural and synthetic materials
	including manure and nitrogen, phosphorus, and
	potassium compounds, spread on or worked into soil to
	increase its capacity to support plant growth
“glucose” . . . . . . . . . . . . . . . . . . .	a white crystalline sugar
“glucose syrup” . . . . . . . . . . . . . . .	a purified and concentrated aqueous solution of glucose
	with other saccharides

“glutamic acid” . . . . . . . . . . . . . . .	an amino acid occurring widely in plant and animal tissue
	and used by the body to build proteins. Glutamic acid can
	be converted into MSG through a simple chemical process
“isomerization” . . . . . . . . . . . . . . .	process of restructuring glucose to fructose
“monosodium glutamate” or
“MSG”. . . . . . . . . . . . . . . . . . . .	a salt of glutamic acid which is commonly used as a
	flavor enhancer and additive in the food industry, the
	restaurant sector and for domestic household use
“pH value” . . . . . . . . . . . . . . . . . .	a measure of the acidity or alkalinity of a solution
“threonine” . . . . . . . . . . . . . . . . . .	a colorless crystalline amino acid, C4H3NO3, that is
	produced using a biochemical process similar to that for
	MSG production and used for enhancing the nutritional
	value of animal feed
“xanthan gum”. . . . . . . . . . . . . . . .	off-white or light-yellow free flowing powder made
	mainly from starch, which is soluble in both hot and cold
	water and is insoluble in most inorganic solutions.
	Xanthan gum can also be soluble within a wide range of
	acidity levels. The unique properties of xanthan gum
	render it a very effective thickener, stabilizer or
	suspension agent, which can be used in food, personal
	care items, pharmaceutical items and petroleum drilling

xii

SUMMARY

This summary does not contain all the information that may be important to you in deciding to invest in the Notes. You should read the entire offering memorandum, including the section entitled “Risk Factors” and our consolidated financial information and related notes thereto, before making an investment decision.

Overview

We are a leading corn-based biochemical company. According to the China Fermentation Industry Association, we are the largest manufacturer of MSG in China and the largest manufacturer of xanthan gum in the world based on production capacity as of December 31, 2009. We have a highly vertically-integrated production process along the entire corn-based biochemical product value chain, from wet milling and processing of corn into cornstarch and other refined corn products, to the production of corn-based biochemical products. In addition to MSG and xanthan gum, our products include corn refined products (including corn germ, corn fiber and corn gluten meal), starch sweeteners (including maltose syrup, fructose syrup and crystallized glucose), fertilizers, corn oil, chicken powder and threonine, all of which are derived from different stages of corn processing. We believe our highly vertically-integrated production process allows us to diversify our product offering, lower our production costs and increase our competitiveness.

Our production facilities are strategically located in the major corn growing and/or coal mining reserve regions in Shandong Province, Shaanxi Province and Inner Mongolia providing us with easy access to our major raw materials at relatively low prices. As of December 31, 2010, our annual production capacity of MSG, xanthan gum, fertilizers, starch sweeteners, corn oil, chicken powder and threonine was 540,000 tonnes, 44,000 tonnes, 560,000 tonnes, 140,000 tonnes, 35,000 tonnes, 10,000 tonnes and 10,000 tonnes, respectively. We plan to take advantage of our leading market position to further expand our production capacity, through the construction of new production facilities and the addition of new production lines at our existing plants, to meet the anticipated growth in demand for our products and to further increase the market share of our products.

We recognize the importance of using advanced technology to continually improve our production efficiency and to develop new products. As of December 31, 2010, we had a well-qualified and strong research and development team, comprising 36 members. Our research and development capabilities have played a key role in providing technical support facilitating our successful diversification from a glutamic acid and MSG manufacturer to one of the leading corn-based biochemical product manufacturers by broadening our product range to include products such as xanthan gum, starch sweeteners, fertilizers and threonine.

The majority of the products in our MSG segment are sold domestically in China, primarily to industrial manufacturers, trading companies and food additive distributors, and we export the majority of our xanthan gum. As of December 31, 2010, our sales and marketing team comprised approximately 460 personnel, serving more than 4,000 domestic customers spanning all municipalities, provinces and autonomous regions in China as well as overseas customers in over 73 countries and regions.

We have been listed on the Hong Kong Stock Exchange since February 8, 2007. As of December 31, 2010, our market capitalization was approximately HK$11.4 billion (US$1.5 billion) based on the closing price of HK$6.81 per share as quoted on the Hong Kong Stock Exchange. We have been included as a constituent of the Morgan Stanley Capital International Global Small Cap Index since May 29, 2009 and the Hang Seng Composite Index since March 8, 2010. We have established a sponsored, unlisted ADR facility, which became effective on June 19, 2009. The ADRs are tradable in the United States in an over-the-counter market.

For the year ended December 31, 2008, 2009 and 2010, our consolidated revenue was RMB3,585.3 million, RMB4,632.9 million and RMB6,416.4 million (US$972.2 million), respectively. As of December 31, 2008, 2009 and 2010, our consolidated total assets were RMB3,262.5 million, RMB4,261.0 million and RMB6,720.3 million (US$1,018.2 million), respectively.

Competitive Strengths

We believe our rapid growth and strong market position are largely attributable to the following principal competitive strengths, which distinguish us from our competitors:

largest manufacturer of MSG in China and the largest manufacturer of xanthan gum in the world;
• high degree of vertical integration;
strategic location of our production plants;
strong research and development capabilities;
extensive distribution network and well-recognized brand name allowing us to achieve a diversified customer base; and
visionary and experienced management team.

Business Strategies

Our goal is to become the leading corn-based biochemical manufacturer in the world. To achieve our goal, we intend to pursue the following strategies:

continue to expand our production capacity and consolidate our leading market position;
• further enhance the degree of vertical integration of our production process; • diversify our product offering; • expand our marketing and distribution network; • continue to strengthen our brand recognition and consolidate our market position; and • continue to strengthen our research and development capabilities.

General Information

Our Company was incorporated in the Cayman Islands on June 15, 2005 as an exempted company with limited liability with registration number CT-150296. Our registered office is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our principal place of business and headquarters in the PRC is located at No. 10, Ke Chuang 2nd Street, East Zone of Beijing Economic-Technological Development Area, Beijing, People’s Republic of China. Our principal place of business in Hong Kong is Suite 1101, 11th Floor, Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong. Our website is www.fufeng-group.com. Information contained on our website does not constitute a part of this offering memorandum.

THE OFFERING

The following summary is provided solely for your convenience. This summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this offering memorandum. For a more detailed description of the Notes, see “Description of the Notes.” The information contained in the “Description of the Notes” shall prevail to the extent of any inconsistency with the information set forth in this section. Capitalized terms not defined herein are defined in “Description of the Notes.”

Issuer . . . . . .	. . . .	. . . . . . . . . . .	Fufeng Group Limited (the “Company”).	Fufeng Group Limited (the “Company”).	Fufeng Group Limited (the “Company”).
Notes Offered	. . . .	. . . . . . . . . . .	US$300,000,000 aggregate principal amount of 7.625%
			Senior Notes due 2016 (the “Notes”).
Offering Price	. . . .	. . . . . . . . . . .	100% of the principal amount of the		Notes.
Maturity Date	. . . .	. . . . . . . . . . .	April	13, 2016.
Interest . . . . .	. . . .	. . . . . . . . . . .	The Notes will bear interest from and including April 13,
			2011	at the rate of 7.625% per annum, payable
			semi-annually in arrears.
Interest Payment Dates . . . . . . . .			April	13 and October 13 of each year, commencing
			October 13, 2011.
Ranking of the	Notes . . . . . . . . . .		The Notes are:
			•	general obligations of the Company;
			•	senior in right of payment to any existing and
				future obligations of the Company expressly
				subordinated in right of payment to the Notes;
			•	at least pari passu in right of payment with all
				other unsecured, unsubordinated Indebtedness of
				the Company (subject to any priority rights of such
				unsubordinated Indebtedness pursuant to applicable
				law);
			•	guaranteed by the Subsidiary Guarantors on a
				senior basis, subject to the limitations described
				below under “Description of the Notes — The
				Subsidiary Guarantees” and in “Risk Factors —
				Risks Relating to the Subsidiary Guarantees and
				the Collateral”;
			•	effectively subordinated to all	existing and future
				obligations of the Non-Guarantor Subsidiaries; and
			•	effectively subordinated to all	existing and future
				secured obligations of the Company to the extent of
				the collateral securing such obligations (other than
				the Collateral).

		On the Original Issue Date, subject to the limitations	On the Original Issue Date, subject to the limitations
		described in “Risk Factors — Risks Relating to the
		Subsidiary Guarantees and the Collateral,” the Notes will
		be secured by a pledge of the Collateral as described
		below under “Description of the Notes — Security” and
		will:
		• be entitled to a first-priority lien on the Collateral
		(subject to any Permitted Liens); and
		• rank effectively senior in right of payment to
		unsecured obligations of the Company with respect
		to the value of the Collateral pledged by the
		Company securing the Notes (subject to any
		priority rights of such unsecured obligations
		pursuant to applicable law).
Subsidiary Guarantees. . . . . . . . .		Each of the Subsidiary Guarantors will jointly and
		severally guarantee the due and punctual payment of the
		principal of, premium, if any, and interest on, and all
		other amounts payable under, the Notes.
		A Subsidiary Guarantee may be released in certain
		circumstances. See “Description of the Notes — The
		Subsidiary Guarantees — Release of the Subsidiary
		Guarantees.”
		The initial Subsidiary Guarantors that will execute the
		Indenture on the Original Issue Date will consist of
		Acquest Honour Holdings Limited, Summit Challenge
		Limited, Absolute Divine Limited, Expand Base Limited,
		Profit Champion International Limited, Full Profit
		Investment (Group) Limited and Trans-Asia Capital
		Resources Limited.
		Any future Restricted Subsidiary (other than subsidiaries
		organized under the laws of the PRC) will guarantee the
		payment of the Notes as soon as practicable but in any
		event within 30 days after it becomes a Restricted
		Subsidiary.
Ranking of Subsidiary
Guarantees . . . . .	. . . . . . . . . . .	The Subsidiary Guarantee of each Subsidiary Guarantor:
		• is a general obligation of such Subsidiary
		Guarantor;
		• is effectively subordinated to secured obligations
		of such Subsidiary Guarantor,	to the extent of the
		value of the assets serving as security therefor;

												• is senior in right of payment to all future	• is senior in right of payment to all future
												obligations of such Subsidiary Guarantor expressly
												subordinated in right of payment to such
												Subsidiary Guarantee; and
												• ranks and will rank at least pari passu with all other
												unsecured, unsubordinated Indebtedness of such
												Subsidiary Guarantor (subject to any priority rights
												of such unsubordinated Indebtedness pursuant to
												applicable law).
												The Subsidiary Guarantee of each Subsidiary Guarantor
												Pledgor will:
												• be entitled to a first-ranking security interest in the
												Collateral (subject to any Permitted Liens) pledged
												by such Subsidiary Guarantor	Pledgor, as described
												below under “Description of the Notes —
												Security;” and
												• rank effectively senior in right of payment to the
												unsecured obligations of such	Subsidiary Guarantor
												Pledgor with respect to the value of the Collateral
												securing such Subsidiary Guarantee (subject to any
												priority rights of such unsecured obligations
												pursuant to applicable law).
												See “Risk Factors — Risks Relating	to the Subsidiary
												Guarantees and the Collateral.”
Security	to	be	Granted	.	.	.	.	.	.	.	.	The Company has agreed, for the benefit of the holders of
												the Notes, to pledge, or cause the initial Subsidiary
												Guarantor Pledgors to pledge, as the	case may be, the
												Capital Stock of the initial Subsidiary Guarantors (the
												“Collateral”) on a first-priority basis (subject to Permitted
												Liens) on the Original Issue Date in	order to secure the
												obligations of the Company under the Notes and the
												Indenture and of such initial Subsidiary Guarantor
												Pledgor under its Subsidiary Guarantee.
												The initial Subsidiary Guarantor Pledgors are Acquest
												Honour Holdings Limited, Summit Challenge Limited,
												Absolute Divine Limited and Expand Base Limited.
												The Collateral securing the Notes and the Subsidiary
												Guarantees may be released or reduced in the event of
												certain asset sales and certain other circumstances. In
												addition, the Company and each Subsidiary Guarantor
												Pledgor may incur Permitted Pari Passu Secured
												Indebtedness which would be secured by the Collateral on
												a pari passu basis with the Notes and the Subsidiary
												Guarantees. See “Description of the	Notes — Security.”

Use of Proceeds . . .	. . . . . . . . . . .	The Company intends to use the net	proceeds of the
		offering of the Notes as follows:
		• approximately US$62.0 million to construct
		Northeastern Plant Phase I;
		• approximately US$155.0 million to construct
		Northeastern Plant Phase II; and
		• the remainder of the estimated total net proceeds
		for general corporate purposes to enhance our
		liquidity position.
		The Company may adjust the foregoing plans in response
		to changing market conditions and, thus, reallocate the
		use of the proceeds. Pending application of the net
		proceeds of this offering, the Company intends to invest
		such net proceeds in “Temporary Cash Investments” as
		defined under “Description of the Notes.”
Optional Redemption	. . . . . . . . .	On or after April 13, 2014, the Company may redeem all
		or any of the Notes at the redemptions prices set forth in
		the first paragraph of “Description of the Notes –
		Optional Redemption” plus accrued	and unpaid interest,
		if any, on the Notes redeemed, to the applicable date of
		redemption.
		The Company may at its option redeem the Notes, in
		whole but not in part, at any time prior to April 13, 2014,
		at a redemption price equal to 100%	of the principal
		amount of the Notes plus the Applicable Premium as of,
		and accrued and unpaid interest, if any, to, the redemption
		date.
		At any time and from time to time prior to April 13, 2014,
		the Company may at its option redeem up to 35% of the
		aggregate principal amount of the Notes at a redemption
		price of 107.625% of the principal amount of the Notes,
		plus accrued and unpaid interest, if any, with the proceeds
		from sales of certain kinds of its capital stock, subject to
		certain conditions.

Withholding Taxes; Additional	Withholding Taxes; Additional
Amounts . . . . . . .	. . . . . . . . . . .	All payments of principal of, and premium (if any) and
		interest on the Notes or under the Subsidiary Guarantees
		will be made without withholding or deduction for, or on
		account of, any present or future taxes, duties,
		assessments or governmental charges of whatever nature
		imposed or levied by or within any Relevant Jurisdiction,
		unless such withholding or deduction is required by law
		or by regulation or governmental policy having the force
		of law. In the event that any such withholding or
		deduction is so required, holders of the Notes will receive
		additional amounts (subject to certain exceptions) as will
		result in receipt by the holder of each Note of such
		amounts as would have been received by such holder had
		no such withholding or deduction been required. See
		“Description of the Notes — Additional Amounts.”
Repurchase of Notes	Upon a
Change of Control	Triggering
Event . . . . . . . . .	. . . . . . . . . . .	Upon the occurrence of a Change of	Control Triggering
		Event, the Company will make an Offer to Purchase all
		outstanding Notes at a purchase price equal to 101% of
		their principal amount plus accrued and unpaid interest, if
		any, to the Offer to Purchase Payment Date.
Redemption for Taxation
Reason . . . . . . . .	. . . . . . . . . . .	Subject to certain exceptions and as	more fully described
		in the section entitled “Description of the Notes —
		Redemption for Taxation Reasons,” the Company may
		redeem the Notes, in whole but not in part, at a
		redemption price equal to 100% of the principal amount
		thereof, together with accrued and unpaid interest, if any,
		to the date fixed by the Company or	the Surviving Person,
		as the case may be, for redemption, if the Company, a
		Surviving Person or a Subsidiary Guarantor would be
		obligated to pay certain Additional Amounts as a result of
		certain changes in specified tax laws. See “Description of
		the Notes — Redemption for Taxation Reasons.”
Covenants . . . . . . .	. . . . . . . . . . .	The Notes and the Indenture governing the Notes and the
		Subsidiary Guarantees will limit the	Company’s ability,
		and the ability of its Restricted Subsidiaries to, among
		other things:
		• incur or guarantee certain additional Indebtedness;
		• declare dividends on its capital stock or purchase
		or redeem capital stock;
		• make investments or other specified Restricted
		Payments;

		• issue or sell capital stock of Restricted	• issue or sell capital stock of Restricted
		Subsidiaries;
		• guarantee indebtedness of the	Company or
		Restricted Subsidiaries;
		• enter into, renew or extend transactions with
		shareholders or affiliates;
		• create liens;
		• enter into sale and leaseback transactions; and
		• sell assets.
		These covenants are subject to a number of important
		qualifications and exceptions described in “Description of
		the Notes — Certain Covenants.”
Ratings . . . . . . . . .	. . . . . . . . . . .	The Notes have been provisionally rated “BB” by S&P
		and “BB” by Fitch. A credit rating is not a
		recommendation to buy, sell or hold	securities and may be
		subject to revision, suspension or withdrawal at any time
		by the relevant rating organization. Prospective investors
		should evaluate each rating independently of any other
		rating of the Notes or other securities of the Company.
		See “Ratings.”
Transfer Restrictions . . . . . . . . . .		The Notes will not be registered under the Securities Act
		or under any state securities laws of	the United States and
		will be subject to customary restrictions on transfer and
		resale. See “Transfer Restrictions.”
Form, Denomination	and
Registration . . . .	. . . . . . . . . . .	The Notes will be issued only in fully registered form,
		without coupons, in minimum denominations of
		US$200,000 of principal amount and integral multiples of
		US$1,000 in excess thereof and will	be initially
		represented by one or more global notes registered in the
		name of a nominee of DTC.
Book-Entry Only . .	. . . . . . . . . . .	The Notes will be issued in book-entry form through the
		facilities of DTC for the accounts of	its participants,
		including Euroclear and Clearstream, Luxembourg. For a
		description of certain factors relating to clearance and
		settlement, see “Description of the Notes — Book-Entry;
		Delivery and Form.”

Delivery of the Notes . . . . . . . . . .	Delivery of the Notes . . . . . . . . . .	Delivery of the Notes . . . . . . . . . .	The Company expects to make delivery of the Notes,
			against payment in same-day funds on or about April 13,
			2011, which will be the fifth business day following the
			date of this offering memorandum referred to as “T+5.”
			You should note that initial trading of the Notes may be
			affected by the T+5 settlement. See “Plan of
			Distribution.”
Trustee and Collateral Agent . . . .			Citicorp International Limited
Principal Paying Agent, Transfer
Agent and	Registrar . . . . . . . . .		Citibank, N.A., London branch
Listing and Trading		. . . . . . . . . . .	Approval in-principle has been received from SGX-ST for
			the listing and quotation of the Notes on the Official List
			of the SGX-ST. The Notes will be traded on the SGX-ST
			in a minimum board lot size of US$200,000 for so long as
			the Notes are listed on the SGX-ST.
Clearing System and
Settlement	. . . . .	. . . . . . . . . . .	The Notes have been accepted for clearance through the
			facilities of Euroclear, Clearstream and DTC. Certain
			trading information with respect to the Notes is set forth
			below:
			Common
			CUSIP ISIN Code
			Restricted Global
			Notes . . . . . . . . . . . 35953HAA3 US35953HAA32 060809992
			Regulation S Global
			Notes . . . . . . . . . . . G36844AB7 USG36844AB78 060810001
			Only Notes evidenced by a Global Note have been
			accepted for clearance through Euroclear, Clearstream
			and DTC.
Governing Law . . .		. . . . . . . . . . .	The Notes and the Indenture will be governed by and will
			be construed in accordance with the laws of the State of
			New York.
Risk Factors	. . . . .	. . . . . . . . . . .	For a discussion of certain factors that you should
			consider in evaluating an investment in the Notes, see
			“Risk Factors.”

Summary Consolidated Financial Information

The following summary consolidated financial information as of and for each of the years ended December 31, 2008, 2009 and 2010 has been derived from our consolidated financial statements, as audited by PricewaterhouseCoopers, our independent certified public accountants, for those years and as of the dates indicated included elsewhere in this offering memorandum. Our consolidated financial information has been prepared in accordance with the Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

Summary Consolidated Income Statements

For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 3,585,343 (2,941,011) 644,332 44,300 (166,407) (141,961) (12,222) 368,042 (42,662) 325,380 (30,674)	2009 (RMB’000) 4,632,884 (3,233,277) 1,399,607 63,908 (215,715) (194,910) (4,042) 1,048,848 (25,251) 1,023,597 (95,312)	2010 (RMB’000) 6,416,425 (4,851,371) 1,565,054 110,550 (272,008) (277,697) (22,187) 1,103,712 (32,383) 1,071,329 (105,278)	2010
			(US$’000) 972,186 (735,056) 237,130 16,750 (41,213) (42,075) (3,362) 167,230 (4,907) 162,323 (15,951)
294,706 17.75 17.75 146,293 522,815 14.6% 12.3 1.12	928,285 55.92 55.88 219,240 1,242,158 26.8% 49.2 0.48	966,051 57.75 53.68 217,070 1,357,657 21.2% 20.2 1.13	146,372 8.75 8.09 32,889 205,706 21.2% 20.2 1.13

Notes:

(1) Basic earnings per share are calculated by dividing the profit attributable to the Shareholders of our Company by the weighted average number of ordinary shares in issue during the year.

(2) Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding assuming the conversion of all dilutive potential ordinary shares. Our Company’s potentially dilutive ordinary shares comprised share options and the 2010 Convertible Bonds. The share options for 2008 are anti-dilutive and accordingly, the diluted earnings per share and basic earnings per share for 2008 are the same.

(3) We calculate EBITDA by adding depreciation and amortization expenses to operating profit. EBITDA is not a standard measure under HKFRS. EBITDA is a widely used financial indicator of a company’s ability to service and incur debt. EBITDA should not be considered in isolation or construed as an alternative to cash flows, profit attributable to shareholders or any other measure of performance or as an indicator of our operating performance, liquidity, profitability or cash flows generated by operating, investing or financing activities. EBITDA does not account for taxes, net finance costs and depreciation and amortization. In evaluating EBITDA, we believe that investors should consider, among other things, the components of EBITDA such as turnover and operating expenses and the amount by which EBITDA exceeds capital expenditures and other charges. We have included EBITDA herein because we believe it is a useful supplement to cash flow data as a measure of our performance and our ability to generate cash from operations to cover debt service and taxes. EBITDA presented herein may not be comparable to similarly titled measures presented by other companies. Investors should not compare our EBITDA to EBITDA presented by other companies because not all companies use the same definition. Investors should also note that the EBITDA as presented herein is calculated differently from Consolidated EBITDA as defined and used in the Indenture governing the Notes. See “Description of the Notes — Definitions” for a description of the manner in which Consolidated EBITDA is defined for purposes of the Indenture governing the Notes. (4) EBITDA margin is calculated by dividing EBITDA by revenue. (5) Gross interest expense represents interest expense before capitalization. Gross interest expense is not a standard measure under HKFRS. Gross interest expense presented herein may not be comparable to similarly titled measures presented by other companies. Investors should not compare our gross interest expense to the gross interest expense provided by other companies because not all companies use the same definition. Investors should also note that the gross interest expense presented herein is calculated differently from Consolidated Interest Expense as defined and used in the Indenture governing the Notes. See “Description of the Notes — Definitions” for a description of the manner in which Consolidated Interest Expense is defined for purposes of the Indenture governing the Notes. (6) Total debt represents the sum of borrowings included in non-current liabilities and borrowings included in current liabilities.

Summary Consolidated Balance Sheet

		As of December 31,	As of December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
ASSETS
Non-current assets
Leasehold land payments . . . . . . . . . .	132,334	140,160	169,187	25,634
Property, plant and equipment . . . . . . .	1,954,845	2,507,897	4,087,675	619,345
Deferred income tax assets . . . . . . . . .	423	5,162	20,759	3,145
	2,087,602	2,653,219	4,277,621	648,124
Current assets
Inventories . . . . . . . . . . . . . . . . . . . . .	356,288	551,028	710,695	107,681
Trade and other receivables . . . . . . . . .	548,355	687,782	816,773	123,754
Current income tax recoverable . . . . . .	2,654	–	–	–
Short-term bank deposits . . . . . . . . . . .	42,860	26,310	147,225	22,307
Cash and cash equivalents . . . . . . . . . .	224,706	342,682	767,951	116,356
	1,174,863	1,607,802	2,442,644	370,098
Total assets . . . . . . . . . . . . . . . . . . . .	3,262,465	4,261,021	6,720,265	1,018,222
EQUITY
Capital and reserves attributable to
the Shareholders
Share capital . . . . . . . . . . . . . . . . . . .	169,034	169,034	174,097	26,378
Share premium
– Proposed final dividend . . . . . . . . .	146,293	219,240	217,070	32,889
– Others . . . . . . . . . . . . . . . . . . . . .	931,851	566,200	329,594	49,939
Other reserves . . . . . . . . . . . . . . . . . .	(247,904)	(171,080)	(76,985)	(11,664)
Retained earnings . . . . . . . . . . . . . . . .	742,240	1,610,317	2,501,489	379,013
Total equity . . . . . . . . . . . . . . . . . . . .	1,741,514	2,393,711	3,145,265	476,555
LIABILITIES
Non-current liabilities
Deferred income . . . . . . . . . . . . . . . . .	27,798	90,880	141,810	21,486
Borrowings . . . . . . . . . . . . . . . . . . . .	312,000	180,000	981,458	148,706
Deferred income tax liabilities . . . . . . .	10,928	24,221	27,033	4,096
	350,726	295,101	1,150,301	174,288
Current liabilities
Trade, other payables and accruals . . . .	887,533	1,140,475	1,839,022	278,640
Current income tax liabilities . . . . . . .	–	13,734	30,677	4,648
Current portion of deferred income . . .	6,692	–	–	–
Borrowings . . . . . . . . . . . . . . . . . . . .	276,000	418,000	555,000	84,091
	1,170,225	1,572,209	2,424,699	367,379
Total liabilities . . . . . . . . . . . . . . . . .	1,520,951	1,867,310	3,575,000	541,667
Total equity and liabilities . . . . . . . . .	3,262,465	4,261,021	6,720,265	1,018,222
Net current assets . . . . . . . . . . . . . . .	4,638	35,593	17,945	2,719
Total assets less current liabilities . . .	2,092,240	2,688,812	4,295,566	650,843

RISK FACTORS

You should carefully consider the risks and uncertainties described below and other information contained in this offering memorandum before investing in the Notes. The risks and uncertainties described below may not be the only ones that we face. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also materially and adversely affect our business, financial condition or results of operations. If any of the possible events described below occurs, our business, financial condition or results of operations could be materially and adversely affected. In such case, we may not be able to satisfy our obligations under the Notes, and you could lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

We may not be able to maintain our leading position.

We are the largest manufacturer of MSG in China and the largest manufacturer of xanthan gum in the world based on production capacity as of December 31, 2009. In the year ended December 31, 2010, we produced 495,895 tonnes of MSG and 31,619 tonnes of xanthan gum. We have increased our share in China’s MSG market in recent years and have also increased our market share in the xanthan gum market globally. We cannot assure you that we can maintain or increase our competitiveness and market position and should we fail to maintain our leading position in terms of production of MSG and/or xanthan gum relative to other manufacturers in the industry, our financial condition and results of operations may be adversely affected.

Our leading market position has enabled us to benefit from comparatively stronger bargaining power in procuring raw materials, determining product pricing and responding effectively to changing market conditions and competition pressures, which in turn have contributed to our significant growth and stable profit margin. We plan to further expand the production capacity of our products through the construction of our Northeastern Plant as well as expanding existing production plants. We cannot assure you that such planned expansion of production capacity can be achieved or that such planned expansion will lead to an increase in output, and we cannot assure you that we can maintain our position as a leading manufacturer of our core products.

In addition, we face competition from companies offering similar products in China and elsewhere and such competitive pressures could have an adverse impact on the supply and pricing of our products, reduce our market share and have an adverse impact on our financial performance.

Decreases in the prices of our products may have an adverse effect on our financial condition and results of operations.

Our main products are MSG and xanthan gum. For the year ended December 31, 2008, 2009 and 2010, revenues from the sale of MSG accounted for 28.0%, 48.5% and 60.7% of our total revenues, respectively. For the year ended December 31, 2008, 2009 and 2010, the average selling price of our MSG was RMB6,865, RMB7,680 and RMB7,903 (US$1,197) per tonne, respectively. We believe that fluctuations in the price of our MSG reflected changes in the supply and demand dynamics in the market which is, in turn, subject to many factors relating to the industry for corn-based biochemical products and the wider economy. We cannot assure you that the price of MSG can remain at the selling prices achieved in the past and any reduction in the market price of MSG in the future may have an adverse effect on our financial condition and results of operations.

For the year ended December 31, 2008, 2009 and 2010, revenues from the sale of xanthan gum accounted for 12.6%, 8.8% and 10.6%, respectively, of our total revenues. The average selling price of our xanthan gum for the year ended December 31, 2008, 2009 and 2010 was RMB21,594, RMB20,989 and RMB19,579 (US$2,967) per tonne, respectively. We believe that the decrease in the average selling price of our xanthan gum reflected the decrease in the market price of xanthan gum, which was primarily due to improvements in production technologies, increased competition, our increased supply to the market and the negative effect of the global financial crisis on the dynamics of global supply and demand of xanthan gum. We cannot assure you that the market price of xanthan gum will remain at its current level, and any further decrease in the market price of xanthan gum may have an adverse effect on our financial condition and results of operations.

We are subject to the volatility of prices of corn and rely heavily on a sufficient supply of corn for our business.

Corn is one of the major raw materials for our products and accounted for 46.6%, 52.7% and 54.3% of our total cost of production for the year ended December 31, 2008, 2009 and 2010, respectively. For the same periods, our average unit cost of corn for the MSG segment was RMB1,424, RMB1,413 and RMB1,741 (US$263.8) per tonne, respectively. Our average unit cost of corn is closely related to the market price of corn in China, which is affected by factors including market demand and supply, domestic government policy and the occurrence of climatic and other natural disasters such as droughts, floods or earthquakes. We cannot assure you that we will be able to adjust the prices of our products to pass on any increase in the price of corn to our customers. Any failure to pass on any significant increase in the price of corn to our customers, or any significant increase in the price of corn may have an adverse effect on our financial condition and results of operations.

Our operations rely heavily on a sufficient supply of corn. Historically, we have purchased corn directly from local farmers, and have not entered into any long term procurement agreements with any of them. We cannot assure you that we will continue to be able to procure a sufficient supply of corn from local farmers at a price acceptable to us in the future or at all. Any interruption in the supply of corn may have an adverse effect on our financial condition and results of operations.

Disruption in coal supply as well as increase in coal price may adversely affect our financial condition and results of operations.

Coal is the primary energy source for our production process and represents the largest component in our cost of sales in the manufacture of xanthan gum. For the year ended December 31, 2008, 2009 and 2010, the cost of coal accounted for 14.1%, 11.5% and 13.1% of our total cost of production, respectively. For the same period, the cost of coal accounted for 42.3%, 30.7% and 35.4% of our total cost of production of xanthan gum, respectively. Our results of operations are therefore sensitive to the fluctuation of the price of coal. Historically, we have obtained coal through purchases in the open market, and have not experienced any interruption in operations caused by inadequate coal supply. However, we cannot assure you that, in the event of coal supply shortfalls, we will be able to procure a sufficient supply of coal and that our financial condition and results of operations would not be adversely affected. In the event of increases in the price of coal, we cannot assure you that we will be able to adjust the prices of our products to pass on any increase in the price of coal to our customers. Any failure to pass on any significant increase in the price of coal to our customers, or any significant increase in the price of coal, may have an adverse effect on our financial condition and results of operations.

We rely on our major customers.

For the year ended December 31, 2008, 2009 and 2010, revenues from our five largest customers accounted for an aggregate of 17.8%, 14.7% and 9.0% of our total revenues, respectively. We have not entered into any long-term sales agreements with our major customers. Should any of these major customers cease to purchase from us, or reduce their order size for our products, our financial condition and results of operations may be adversely affected.

We have experienced significant growth in the past few years, and we may not be able to maintain such growth in the future.

Since our incorporation in 1999, we have experienced significant growth in revenue and profitability. For the year ended December 31, 2008, 2009 and 2010, our consolidated revenues amounted to RMB3,585.3 million, RMB4,632.9 million and RMB6,416.4 million (US$972.2 million), respectively, representing a CAGR of 33.8%. We believe that our historical growth was primarily attributable to business-specific factors such as our ability to expand production capacity and effectively control raw material costs, as well as our highly vertically-integrated production process, and market-related factors such as the increasing market price of our products. We cannot assure you that we will be able to maintain a similar rate of growth in the future.

We may not be able to successfully implement our product diversification strategy.

As part of our strategy, we intend to leverage our position and reputation as a leading global manufacturer of MSG and xanthan gum and our vertically-integrated corn-based biochemical production business model to capitalize on new market opportunities presented by other biochemical and amino acid products. In 2008, we expanded our product offering to include chicken powder and corn oil. We commercialized a series of new threonine products in 2010 which were developed in 2009 in response to market demand for higher value-added corn-based biochemical products. In addition, we are developing a series of new amino acid products and biomass-based polymer products in order to enhance our product mix and improve our profitability. However, we cannot assure you that our product diversification strategy will be successfully implemented or that the new products would effectively improve our profitability. Failure to realize commercial benefits from the implementation of our product diversification strategy into commercial benefits may adversely affect our business and financial position.

We may not successfully manage our growth

As the scale of our operations grows, we will have to continually improve our management, operational and financial systems and strengthen our internal procedures and controls. The expansion of our business operations may also require us to establish and develop new relationships with our customers, suppliers, research partners and other third parties. Our expansion plans may be affected by a number of factors which may not be within our control. These factors include fluctuations in domestic and international demand for our products, changes in consumer taste and preference, increasing competition in the industry, and our ability to obtain sufficient financing for our expansion efforts. Any unfavorable change in any of these factors may disrupt our expansion plans and have a material adverse effect on our business, results of operations and financial position.

As we continue to expand, we will also need to improve our corporate governance standards and increase transparency of our communication with our security holders and the market. We cannot assure you that our existing or future management, operational and financial systems, procedures and controls (including those relating to corporate governance) will be adequate to support our expansion and future operations or that we will be able to establish or

develop business relationships beneficial to our future operations. Further, we may not be able to obtain adequate financing to complete construction and commence commercial operations of new production bases and processing facilities. Failure to scale our business appropriately and to manage our growth effectively could have a material adverse effect on our business, results of operations and financial position.

The discontinuation of or reduction in any preferential tax treatments currently available to us in the PRC may have an adverse effect on our financial condition and results of operations.

Under the New EIT Law, both foreign-invested enterprises and domestic enterprises are subject to a uniform 25.0% income tax rate. Furthermore, pursuant to the New EIT Law and relevant regulations issued by the State Council of the PRC, certain enterprises established prior to March 16, 2007 that were entitled to the lower tax rates in accordance with tax laws and regulations prevailing at that time would be eligible for a five-year transition period beginning from January 1, 2008. For the year ended December 31, 2008, the effective enterprise income tax rate for Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng was 12.5%, 7.5% and nil, respectively. For the year ended December 31, 2009, the effective enterprise income tax rate for Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng was 15.0%, 7.5% and 7.5%, respectively. For the year ended December 31, 2010, the effective enterprise income tax rate for Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng was 15.0%, 15.0% and 7.5%, respectively. For the year ended December 31, 2008, 2009 and 2010, our effective income tax rate was 9.4%, 9.3% and 9.8%, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Taxation” for further details.

Any discontinuation or reduction in preferential tax treatments may have an adverse effect on our financial condition and results of operations. In addition, we cannot assure you that any of our PRC subsidiaries will be able to obtain any further preferential tax treatments when existing preferential tax treatments expire.

The unavailability of government grants may affect our business adversely.

We have received government grants in the form of (i) a reduction in income tax applicable to Baoji Fufeng in the year ended December 31, 2008 and 2010 and Inner Mongolia Fufeng in the year ended December 31, 2009 and 2010, respectively, relating to the purchase of certain qualified domestic manufactured equipment; and (ii) cash grants from the government relating to the acquisition of certain raw materials, property, plant and equipment, environment protection and technology improvement for our production plants. During the year ended December 31, 2008, 2009 and 2010, we received government grants in the amounts of approximately RMB20.1 million, RMB37.2 million and RMB74.8 million (US$11.3 million), respectively. Government grants include grants which are to be applied towards operational costs and grants which are to be applied towards capital investments on an amortized basis over a period of time depending on the nature of the asset. The form and amount of such grants vary according to government policies prevailing at that time with respect to the agricultural industry in China. The amounts of and conditions attached to such grants are determined at the sole discretion of the relevant government authorities. We cannot assure you that we will be eligible to continue to receive such government grants or that the amount of any such grants will not be reduced in the future, and even if we continue to be eligible, we cannot guarantee any conditions attached to the grants will be as favorable to us as they have historically been. In the event we are not able to receive future government grants, and are not able to arrange for alternative funding on similar terms, our financial condition and results of operations may be adversely affected.

Changing tastes and preferences of MSG consumers may affect the sale of MSG

For the year ended December 31, 2008, 2009 and 2010, our revenues derived from the sale of MSG accounted for approximately 28.0%, 48.5% and 60.7% of our total revenues, respectively. We expect the sale of MSG to continue to be a significant contributor to our revenues and profits in the future. Whether we can successfully maintain or expand our sale of MSG, however, is subject to product price, the availability of substitute products, changes in consumers’ tastes and cooking and dining preferences and many other factors which are beyond our control. We note that some anecdotal reports expressed food safety concerns in connection with the application of MSG as a food additive. Although we believe we have satisfied the requirements of food safety and other relevant laws and regulation in both the PRC and the overseas market where we export the MSG, some consumers may change their tastes or cooking and dining preferences out of perceived food safety concerns and cease to use MSG as a food additive. We cannot assure you that MSG consumers will not change their consumption or cooking patterns under the influence of such reports regarding possible health effects of MSG or more authoritative or influential reports will not be published in the future. We also cannot assure you that the regulatory authorities in the PRC and the overseas market where we distribute MSG will not change their attitude towards the regulation of MSG’s applications. If any of the above uncertainties are substantiated, the sale of our MSG may be adversely affected which may in turn adversely affect our financial condition and results of operations.

There may be substitute products for MSG and xanthan gum.

Substitute products which can provide similar or better qualities than MSG and xanthan gum may be developed in the future. If any such substitute product gains wider application and popularity than our products, our sales of MSG and/or xanthan gum may be adversely affected and our financial condition and results of operations may be adversely affected.

A material disruption to our production lines could adversely affect our ability to generate revenue.

Our production lines and facilities are all located in China. Our production facilities typically operate 24 hours a day with three shifts, and we conduct annual inspections, repairs and maintenance during which our facilities are closed temporarily for one to three weeks every year. We cannot assure you that there will be no disruption to the operations of our production lines. If operations at any of our facilities were to be materially disrupted as a result of equipment failure, natural disasters, work stoppages, power outages, explosions, adverse weather conditions or other factors, our financial condition and results of operations could be adversely affected. The occurrence of any of these significant events could also require us to make significant unanticipated capital expenditure. Interruptions in production could increase our costs and delay our delivery of products. Production capacity limits caused by such disruptions could cause a reduction or delay in sales efforts. Lost sales or increased costs that we may incur due to such disruption of operations may not be recoverable under our existing insurance policies, and prolonged business disruptions could result in a loss of customers. If any one or more of the above risks were to materialize, our financial condition and results of operations may be adversely affected.

Our research and development efforts may be unsuccessful.

We believe our ability to develop new products in response to the changing market demands differentiates us from many of our competitors and is essential to the future development of our business, and we are committed to continually strengthen our research and development capability. We believe we have a strong research and development team, and we have made continuous efforts to upgrade our technological know-how, improve our production processes and expand our portfolio with new products. However, research and development activities require considerable amounts of human resources and capital investments. In the event that our research and development efforts fail to achieve the goals as planned, our financial condition and results of operations may be adversely affected.

Our production capacity expansion plan may not be successfully achieved.

We plan to further expand our production capacity, through construction of new production plants as well as expanding existing production plants, to increase the market share of our products.

We expect production at our Northeastern Plant Phase I to commence in the second half of 2011. Northeastern Plant Phase I has a planned production capacity of 200,000 tonnes of MSG and 250,000 tonnes of fertilizer. See “Business – Production Facilities – Future Expansion of Production Capacity.” In addition, we also plan to commence the construction of Northeastern Plant Phase II by the end of 2011, which we expect to have an annual production capacity of 250,000 tonnes of MSG and 30,000 tonnes of threonine, together with supporting facilities.

However, our expansion plan, including without limitation the planned construction of Northeastern Plant Phase II, is subject to risks and uncertainties in a number of areas, including, without limitation, capital requirements, the requirements of obtaining necessary governmental approvals and operational risks. In addition, there are many factors, some of which are beyond our control, that may adversely affect the construction of the additional facilities in a timely manner and within budget. We cannot assure you that any or all of the planned expansion of production capacity will be successfully achieved within the planned timeframe or at all. Should there be any delay or failure in the implementation of our expansion plan, our financial position and results of operations may be adversely affected.

Our products may be susceptible to product liability claims.

In line with industry practice, we do not currently maintain any third party liabilities or product liabilities insurance to cover any claims in respect of personal injury or defects in, or deterioration of, our products. We cannot assure you that we will not be subject to product liability claims in the future. Any product liability claim and any legal proceedings, arbitration or administrative sanctions or penalties arising therefrom could have an adverse effect on our financial condition, results of operations and reputation. Even if we are able to defend successfully any such claims, we cannot assure you that users will not lose confidence in our products as a result of the claims, which may adversely affect our future business and reputation. Furthermore, any product liability claim, even one without merit, could result in our management expending significant time and resources and us incurring significant expenses in defending such claim.

Our business requires significant and continuous capital investment.

Our business is capital intensive and we may be required to make significant capital investment to develop our business in the future. Historically, our capital expenditures have been primarily financed by bank borrowings, cash generated from our operations, as well as proceeds raised from our IPO in 2007 and proceeds from the issue of the 2010 Convertible Bonds in April 2010. We cannot assure you that in the future we will be able to secure sufficient capital to fund planned capital expenditures. In particular, the availability of external funding is subject to various factors, some of which are beyond our control, including the obtaining of governmental approvals, prevailing capital market conditions, credit availability, interest rates and the performance of the businesses we operate. Our inability to arrange sufficient funding in a timely manner on terms that are satisfactory to us could adversely affect our business, results of financial condition and expansion plans.

We may not be able to successfully expand our marketing and distribution network.

As part of our strategy, we intend to expand our domestic and international marketing and distribution network through expanding our geographical coverage, as well as deepening the coverage of our existing markets. We are in the process of opening 12 new sales offices, together with sales and logistics centers in China to cover those provinces where we do not currently have sales offices. To enhance our overseas sales capabilities of xanthan gum, MSG and starch sweeteners, we intend to establish overseas sales offices in the Middle East first and then gradually expand our direct marketing footprint to North America and Europe. The expansion of our marketing and distribution network and the exploration of new markets will require significant capital expenditure as well as human resources. We cannot assure you that we can successfully implement the market expansion strategy or that such market expansion can successfully improve our profitability.

The interests of our controlling shareholder may conflict with the interests of the holders of the Notes.

As of the date of this offering memorandum, our controlling shareholder, Mr. Li Xuechun, beneficially owned approximately 45.96% of our issued share capital. Subject to the Memorandum and Articles of Association and applicable laws and regulations, our controlling shareholder will continue to have the ability to exercise a controlling influence on our management, policies and business by controlling the composition of our board, determining the timing and amount of our dividend payments, approving significant corporate transactions, including mergers and acquisitions, and approving our annual budgets. We cannot assure you that our controlling shareholder will not cause us to enter into transactions or take, or fail to take, other actions or make decisions that may conflict with the best interests of the holders of the Notes.

Our growth depends on our ability to continue to attract and retain qualified personnel, including our senior management members.

We rely on our employees, which include skilled workers, equipment operators, engineers and other technical personnel for daily operations and business expansion. We cannot assure you that we will be able to continue to attract and retain sufficient skilled and experienced employees in the future. If we fail to recruit, retain or train skilled employees, our growth and business prospects could be adversely affected. Additionally, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force and/or increases in our rates of wages.

In addition, the industry expertise and extensive contributions of our executive directors and other members of our senior management are essential to our continuing success. As we continue to grow our business, we will increasingly require more employees and executives who have industry-related experience and expertise. We cannot assure you that we will not at any time lose the services of any of our senior management members or directors. If this occurs, we may not be able to recruit and retain replacement personnel with equivalent qualifications on a timely basis, the growth of our business may be adversely affected.

We may not be able to renew certain licenses, certificates and permits for our operations.

Under PRC law, we are required to obtain appropriate licenses, certificates and permits from relevant PRC governmental authorities. We believe we have obtained all necessary licenses, certificates and permits for the production and sale of our products. However, we cannot assure you that we will be able to renew such licenses, certificates and permits upon their expiration. In addition, eligibility criteria for these licenses, certificates and permits may change from time to time and additional licenses, certificates and permits may be required and higher compliance standards may have to be observed. In the event of the introduction of any new law or regulation, or change in the interpretation of any existing law or regulation that may increase compliance costs for us or make it more expensive for us to continue with the operation of any part of our business, our financial condition and results of operations may be adversely affected.

We may not be able to meet regulatory requirements imposed by the governments of our export destinations.

Certain countries to which we export our products may impose technical, hygiene or environmental requirements on our products, which may be higher than the standards imposed by the PRC government. These countries may also require us to obtain various permits, licenses and approvals for our exported products. We cannot assure you that we will be able to meet the relevant standards or obtain the requisite permits, licenses and approvals. If we fail to reach the relevant standards adopted by these countries or obtain the requisite permits, licenses and approvals now or in the future, our ability to export to these markets could be materially and adversely affected.

Our insurance coverage may be insufficient to cover all risks of loss associated with our business operations.

We maintain insurance policies that cover our fixed assets (including our buildings and machinery) and our current assets (including our inventory) against damage caused by, among other things, fire, explosions, thunderstorms, typhoons and landslides. We cannot, however, guarantee that our insurance polices will provide adequate compensation for all potential losses. Consistent with established practice in China, we do not carry any insurance for business interruption or loss of profit arising from accidents at any of our production facilities or other disruptions of our operations. Accidents or natural disasters may also result in significant property damage, disruption to our operations and personal injuries, and our insurance coverage may be inadequate to cover such losses. In the case of an uninsured loss or a loss in excess of insured limits, we could suffer from damage to our reputation or lose all or a portion of our production capacity as well as future revenue contribution from the relevant facilities.

RISKS RELATING TO THE BIOCHEMICAL INDUSTRY IN THE PRC

Compliance with environmental, health and production safety regulations can be costly, while non-compliance with such regulations may result in fines, other penalties or actions that could adversely affect our reputation.

As we operate mainly in China, we are required to comply with a variety of PRC national and local regulations on environmental protection, health and production safety, and in order to maintain or renew our licenses, certificates and permits, we are subject to various periodic inspections, examinations, inquiries and audits by PRC regulatory authorities in accordance with applicable PRC laws and regulations. Any non-compliance or failure to obtain, maintain or renew the necessary licenses, certificates, permits or approvals in a timely manner could have a negative impact on our financial condition and results of operations.

As the PRC environmental, health and safety laws and regulations are continuously evolving, we cannot assure you that we have always complied with such regulations on a historical basis or will continue to be in compliance with the applicable laws, or that we will not incur additional costs to comply with such laws and regulations. Failure to comply with any of these laws and regulations could result in the untimely delivery of goods, loss of revenue and income, the accrual of substantial costs and fines and the suspension or termination of our contracts. Any limitation or cost incurred as a result of our non-compliance with environmental, health and safety laws and regulations may have an adverse effect on our financial condition and results of operations.

Disruptions in the global financial markets or any further downturn in the global economy could have an adverse impact on our financial condition and results of operations.

The global financial crisis that began in 2008 has adversely affected the United States and other world economies, including China. Although the PRC government has adopted flexible macroeconomic policies, including an announced fiscal stimulus package, aimed at offsetting the slowdown brought about by the financial crisis, the growth of China’s overall economy has been negatively impacted. The financial crisis may adversely affect our business and operating results.

The global financial crisis also resulted in a tightening in credit markets and a lower level of liquidity in many financial markets, and increased volatility in credit and equity markets. Many financial institutions worldwide have tightened lines of credit and reduced the amount of funding available to borrowers. If these conditions continue, worsen or recur, they may adversely affect the availability, terms and cost of borrowing in the future, including any financing necessary to fund our capital expenditures. Any disruption in our ability to renew existing credit facilities or obtain new borrowings on acceptable terms may adversely affect our financial condition and results of operations and cash flows as we rely on bank borrowings for a portion of our working capital and capital expenditure requirements.

The timing and nature of any recovery in worldwide financial markets and the global economy remain uncertain, and there can be no assurance that market conditions will improve in the near future. Although there have been recent signs of a possible economic recovery, there can be no assurance that market conditions will not deteriorate again.

RISKS RELATING TO THE PRC

Adverse changes in the economic and political policies of the PRC government could have an adverse effect on overall economic growth in China, which may adversely affect our business.

We conduct the majority of our business operations in China. Accordingly, our financial condition, results of operations and prospects depend to a significant extent on economic developments in China. China’s economy differs from the economies of most other countries in many respects, including the degree of government intervention in the economy such as government control of foreign exchange and the allocation of resources, the general level of economic development and growth rates. While the PRC economy has experienced significant growth in the past 30 years, this growth has been uneven across different periods, regions and amongst various economic sectors. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government has, at times, implemented a number of measures, such as increasing the People’s Bank of China’s (“PBOC”) statutory deposit reserve ratio and imposing commercial bank lending guidelines, which had the effect of slowing the growth of credit availability. In 2008 and 2009, in response to the global financial crisis, the PRC government relaxed such requirements but, since early 2010, has begun to tighten such requirements again, partly in response to the recovery in the growth of the PRC economy. Any future actions and policies adopted by the PRC government could materially affect the Chinese economy, which may adversely affect our business.

PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.

We may make loans to our PRC subsidiaries. Loans to or investments in our PRC subsidiaries are subject to approval by or registration with relevant governmental authorities in China. We may also decide to finance our subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC operating subsidiaries may be subject to the approval of the PRC Ministry of Commerce or its local branches. We may not obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of the Notes and to capitalize our operations in China may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

Governmental control over currency conversion may limit our ability to utilize our cash effectively.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive the majority of our revenues in Renminbi. As a Cayman Islands holding company, we may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from the SAFE. But approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and

remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. This could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to satisfy our obligations under the Notes.

There are significant uncertainties under the New EIT Law relating to our PRC enterprise income tax liabilities.

Under the New EIT Law, the profits of a foreign invested enterprise arising in 2008 and which are later distributed to its immediate holding company outside the PRC will be subject to a withholding tax rate of 10.0% if the immediate holding company is determined by the PRC tax authority to be a non-resident enterprise for PRC tax purposes, unless there is an applicable tax treaty with the PRC that provides for a different withholding arrangement. Pursuant to a special arrangement between Hong Kong and the PRC, such rate is lowered to 5.0% if a Hong Kong resident enterprise owns over 25.0% of a PRC company. Further, according to the Circular on State Administration of Taxation on Printing and Issuing the Administrative Measures for Non-resident Individuals and Enterprises to Enjoy the Treatment Under Taxation Treaties, which became effective on October 1, 2009, the 5.0% tax rate does not automatically apply. Approvals from competent local tax authorities are required before an enterprise can enjoy the relevant tax treatments relating to dividends under relevant taxation treaties. However, according to a tax circular issued by the State Administration of Taxation in February 2009, if the main purpose of an offshore arrangement is to obtain a preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed by the relevant offshore entity. In addition, under the New EIT Law, enterprises established under the laws of jurisdictions outside of China with their “de facto management bodies” located within China may be considered to be PRC resident enterprises for tax purposes.

Although we are a company incorporated in the Cayman Islands and the equity interests of our PRC subsidiaries are directly held by our subsidiaries in Hong Kong, the PRC tax authorities may regard the main purpose of our subsidiaries in Hong Kong as seeking to reduce tax liability by obtaining a lower withholding tax rate of 5.0%. As a result, the PRC tax authorities could levy a higher withholding tax rate on dividends received by our subsidiaries in Hong Kong from our PRC subsidiaries. In addition, under current PRC laws and regulations, it is also uncertain whether we would be deemed to be a PRC tax-resident enterprise as a substantial portion of the members of our management team are located in China. If we are deemed to be a PRC tax-resident enterprise, our global income will be subject to PRC enterprise income tax at the rate of 25.0%, which could have an adverse effect on our financial condition and results of operations.

Uncertainties with respect to the PRC legal system could have an adverse effect on our operations.

The PRC legal system is based on written statutes. Unlike under common law systems, decided legal cases have little value as precedents in subsequent legal proceedings. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements are relatively new and are often changing, and their interpretation and enforcement involve significant uncertainties that could limit the reliability of the legal protections available to us. We cannot predict the effects of future developments in the PRC legal system. We may be required in the future to procure additional permits, authorizations and approvals for our existing

and future operations, which may not be obtainable in a timely fashion or at all. An inability to obtain such permits or authorizations may have an adverse effect on our financial condition and results of operations.

It may be difficult to serve process within the PRC or to enforce any judgment obtained from non-PRC courts against us or our directors.

Our operating subsidiaries are incorporated in the PRC, substantially all of our Directors currently reside within the PRC, and all or substantially all of our assets are located within the PRC. The PRC does not currently have treaties providing for the reciprocal recognition or enforcement of civil and commercial judgments of courts located in the United States, the United Kingdom, Singapore, Japan and most other western countries. An Arrangement between China and Hong Kong on Reciprocal Recognition and Enforcement of Judgments of Civil and Commercial Cases under the Jurisdictions as Agreed to by the Parties Concerned was signed on July 14, 2006 and came into effect on August 1, 2008. However, there are many restrictions on such arrangement. As a result, it may not be possible for investors to effect service of process upon our subsidiaries or our Directors resident in the PRC pursuant to the authority of non-PRC courts. Further, the recognition and enforcement in the PRC of judgments of courts outside the PRC might be difficult or impossible.

An occurrence of a widespread health epidemic or a natural disaster could have an adverse effect on our financial condition and results of operations.

Our business could be adversely affected by the effects of Influenza A virus subtype H1N1, or A (H1N1), Severe Acute Respiratory Syndrome, or SARS, avian influenza or other epidemics or outbreaks, or the fear of epidemics or outbreaks. A prolonged outbreak of A (H1N1), any recurrence of SARS, avian influenza or other adverse public health developments or an occurrence of any natural disasters, such as floods, earthquakes, sandstorms, snowstorms, fires and droughts in China or elsewhere in the world could have a material and adverse effect on our business operations. Such outbreaks or natural disasters could significantly impact the China market and could cause a temporary closure of our production or other facilities. Such closure could severely disrupt our operations and adversely affect our financial condition and results of operations. Our operations could be disrupted if any of our staff members were suspected of having A (H1N1), SARS or avian influenza, since this could require us to quarantine some or all of our sales professionals and staff or disinfect our facilities. In addition, our financial condition and results of operations could be adversely affected to the extent that A (H1N1), SARS, avian influenza or other outbreak or natural disasters harms the global or Chinese economy in general.

RISKS RELATING TO THE NOTES

We are a holding company and payments with respect to the Notes are structurally subordinated to liabilities, contingent liabilities and obligations of our subsidiaries.

We are a holding company with no material operations. We conduct our operations through our PRC subsidiaries. The Notes will not be guaranteed by any current or future PRC subsidiaries. In addition, shares of our PRC subsidiaries will not be pledged for the benefit of the holders of the Notes. Our primary assets are loans to and ownership interests in our PRC subsidiaries, which are held through the Subsidiary Guarantors. The Subsidiary Guarantors do not have material operations. Accordingly, our ability to pay principal and interest on the Notes and the ability of the Subsidiary Guarantors to satisfy their obligations under the Subsidiary Guarantees will depend upon our receipt of principal and interest payments on the intercompany loans and distributions of dividends from our subsidiaries. See “— Risks Relating to the PRC — Government control over currency conversion may limit our ability to utilize our cash effectively.”

Creditors, including trade creditors of our PRC subsidiaries and any holders of preferred shares in such entities, would have a claim on such subsidiaries, assets that would be prior to the claims of holders of the Notes. As a result, our payment obligations under the Notes will be effectively subordinated to all existing and future obligations of such subsidiaries, and all claims of creditors of our PRC subsidiaries will have priority as to the assets of such entities over our claims and those of our creditors, including holders of the Notes. As of December 31, 2010, our PRC subsidiaries had indebtedness in the amount of RMB555.0 million (US$84.1 million) and capital commitments of approximately RMB416.5 million (US$63.1 million), respectively. See “Description of Other Material Indebtedness.” The Notes and the Indenture limit the ability of our subsidiaries, including our PRC subsidiaries, to incur debt. However, these limitations are subject to significant exceptions. In addition, our secured creditors or those of any Subsidiary Guarantor would have priority as to our assets or the assets of such Subsidiary Guarantor securing the related obligations over claims of holders of the Notes to the extent such assets do not also secure such claims.

We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.

We now have, and will continue to have after the offering of the Notes, a substantial amount of indebtedness. As of December 31, 2008, 2009 and 2010, our total borrowings amounted to RMB588.0 million, RMB598.0 million and RMB1,536.5 million (US$232.8 million), respectively.

Our substantial indebtedness could have important consequences to you. For example, it could:

limit our ability to satisfy our obligations under the Notes and other debt;
increase our vulnerability to adverse general economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to servicing and repaying our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and for other general corporate purposes;
limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt;
limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds; and
increase the cost of additional financing.

In the future, we may from time to time incur substantial additional indebtedness and contingent liabilities. Although the Indenture governing the Notes restricts us and our Restricted Subsidiaries from incurring additional debt and contingent liabilities, these restrictions are subject to important exceptions and qualifications. If we or our subsidiaries incur additional debt, the risks that we face as a result of our already substantial indebtedness and leverage could intensify.

Our ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating performance, which will be affected by prevailing

economic conditions and financial, business and other factors, many of which are beyond our control. We anticipate that our operating cash flow will be sufficient to meet our anticipated operating expenses and to service our debt obligations as they become due. However, we may not generate sufficient cash flow for these purposes. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital. These strategies may not be instituted on satisfactory terms, if at all.

In addition, the terms of the Indenture prohibit us from incurring additional indebtedness unless (i) we are able to satisfy certain financial ratios or (ii) we are able to incur such additional indebtedness pursuant to any of the exceptions to the financial ratios requirements, and meet any other applicable restrictions. Our ability to meet our financial ratios may be affected by events beyond our control. We cannot assure you that we will be able to meet these ratios. Certain of our other financing arrangements also impose operating and financial restrictions on our business. See “Description of Other Material Indebtedness.” Such restrictions in the Notes and our other financing arrangements may negatively affect our ability to react to changes in market conditions, take advantage of business opportunities, obtain future financing, fund required capital expenditures, or withstand a continuing or future downturn in our business. Any of these factors could materially and adversely affect our ability to satisfy our obligations under the Notes and other debt.

Our subsidiaries are subject to restrictions on the payment of dividends and the repayment of intercompany loans or advances to us and our subsidiaries.

As a holding company, we depend on the receipt of dividends and the interest and principal payments on intercompany loans or advances from our subsidiaries, including our PRC subsidiaries, to satisfy our obligations, including our obligations under the Notes. The ability of our subsidiaries to pay dividends and make payments on intercompany loans or advances to their shareholders is subject to, among other things, distributable earnings, cash flow conditions, restrictions contained in the articles of association of our subsidiaries, applicable laws and restrictions contained in the debt instruments of such subsidiaries. See “Description of Other Material Indebtedness.” In addition, if any of our subsidiaries raises capital by issuing equity securities to third parties, dividends declared and paid with respect to such shares would not be available to us to make payments on the Notes. These restrictions could have a negative impact on the calculation of our EBITDA and could also reduce the amounts that we receive from our subsidiaries, which would restrict our ability to meet our payment obligations under the Notes and the ability of the Subsidiary Guarantors to satisfy their obligations under the Subsidiary Guarantees. See “Description of Other Material Indebtedness.”

PRC laws and regulations permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserves that are not distributable as cash dividends by the board of directors. In addition, starting from January 1, 2008, dividends paid by our PRC subsidiaries to their non-PRC parent companies will be subject to a 10% withholding tax, unless there is a tax treaty between the PRC and the jurisdiction in which the overseas parent company is incorporated, which specifically exempts or reduces such withholding tax. Pursuant to a double tax treaty between Hong Kong and the PRC, if the non-PRC parent company is a Hong Kong resident and directly holds a 25% or more interest in the PRC enterprise, such withholding tax rate may be lowered to 5%. However, according to a Circular of the PRC State Administration of Taxation dated October 27, 2009, tax treaty benefits will be denied to “conduit” or shell companies without substantive business activities. As a result of such limitations, there could be timing limitations on payments from our PRC subsidiaries to meet

payments required by the Notes or satisfy our obligations under the Subsidiary Guarantees, and there could be restrictions on payments required to redeem the Notes at maturity or as required for any early redemption.

Furthermore, in practice, the market interest rate that our PRC subsidiaries can pay with respect to offshore loans generally may not exceed comparable interest rates in the international finance markets. The interest rates on shareholders’ loans paid by our subsidiaries, therefore, are likely to be lower than the interest rate for the Notes. Our PRC subsidiaries are also required to pay a 10% (or 7% if the interest is paid to a Hong Kong resident, subject to approval by local tax authorities) withholding tax on our behalf on the interest paid under any shareholders’ loans. PRC regulations require our non-PRC subsidiaries making shareholder loans in foreign currencies to our PRC subsidiaries to be registered with the SAFE. Prior to payment of interest and principal on any such shareholder loan, the PRC subsidiaries must present evidence of payment of the withholding tax on the interest payable on any such shareholder loan and evidence of registration with the SAFE, as well as any other documents that the SAFE or its local branch may require.

As a result of the foregoing, we cannot assure you that we will have sufficient cash flow from dividends or payments on intercompany loans or advances from our subsidiaries to satisfy our obligations under the Notes or the obligations of the Subsidiary Guarantors under the Subsidiary Guarantees.

We may be subject to risks presented by fluctuations in exchange rates between the Renminbi and other currencies, particularly the U.S. dollar.

The Notes are denominated in U.S. dollars, while substantially all of our revenues are generated by our PRC operating subsidiaries and are denominated in Renminbi. Pursuant to reforms of the exchange rate system announced by the PBOC on July 21, 2005, Renminbi-to-foreign currency exchange rates are allowed to fluctuate within a narrow and managed band against a basket of foreign currencies, rather than being effectively linked to the U.S. dollar. Further, from May 18, 2007, the PBOC enlarged the floating band for the trading prices in the inter-bank foreign exchange market of the Renminbi against the U.S. dollar from 0.3% to 0.5% around the central parity rate, effective on May 21, 2007. This allows the Renminbi to fluctuate against the U.S. dollar by up to 0.5% above or below the central parity rate published by the PBOC. The PBOC announced its intention to proceed with the reform of the Renminbi exchange rate regime to increase the Chinese currency’s exchange rate flexibility on June 19, 2010. These changes in currency policy resulted in the Renminbi appreciating against the U.S. dollar by approximately 25.4% from July 21, 2005 to December 31, 2010. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible in the future. If such reforms were implemented and resulted in devaluation of the Renminbi against the U.S. dollar, our financial condition and results of operations could be adversely affected because of our substantial U.S. dollar denominated indebtedness and other obligations. Such a devaluation could also adversely affect the value, translated or converted into U.S. dollars or otherwise, of our earnings and our ability to satisfy our obligations under the Notes.

There are limited hedging instruments available in China to reduce our exposure to exchange rate fluctuations between the Renminbi and other currencies. In addition, following the offering of the Notes, we may enter into foreign exchange or interest rate hedging agreements in respect of our U.S. dollar-denominated liabilities under the Notes. These hedging agreements may require us to pledge or transfer cash and other collateral to secure our obligations under the agreements, and the amount of collateral required may increase as a result of mark-to-market adjustments. The Initial Purchasers and their affiliates may enter into such hedging agreements permitted under the Indenture governing the Notes, and these agreements may be secured by

pledges of our cash and other assets as permitted under the Indenture. If we were unable to provide such collateral, it could constitute a default under such agreements.

Any hedging obligation entered into or to be entered into by us or our subsidiaries, may contain terms and conditions that may result in the early termination, in whole or in part, of such hedging obligation upon the occurrence of certain termination or analogous events or conditions (howsoever described), including such events relating to us and/or any of our subsidiaries, and the terms and conditions of such hedging obligation(s) may provide that, in respect of any such early termination, limited or no payments may be due and payable to, or that certain payments may be due and payable by, us and/or any of our subsidiaries (as relevant) in respect of any such early termination. Any such early termination, in whole or in part, of any such hedging obligation(s), and the payment and any other consequences and effects of such early termination(s), may be material to our financial condition and/or any of our subsidiaries and may be material in relation to the performance of our or their respective obligations under or in relation to the Notes (if applicable), any indebtedness or any other present or future obligations and commitments.

We may not be able to repurchase the Notes upon a change of control triggering event.

Upon the occurrence of a change of control triggering event, the holder of each Note will have the option to require us to redeem all or some of the holder’s Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest. See “Description of the Notes.”

The source of funds for any such purchase would be our available cash or third-party financing. However, we may not have enough available funds at the time of the occurrence of any change of control triggering event to make purchases of the outstanding Notes. Our failure to make the offer to purchase or to purchase the outstanding Notes would constitute an event of default under the Notes. The event of default may, in turn, constitute an event of default under other indebtedness, any of which could cause the related debt to be accelerated after any applicable notice or grace periods. If our other debt were to be accelerated, we may not have sufficient funds to purchase the Notes and repay the debt.

In addition, the definition of change of control triggering event for purposes of the indenture governing the Notes does not necessarily afford protection for the holders of the Notes in the event of some highly leveraged transactions, including certain acquisitions, mergers, refinancings, restructurings or other recapitalizations, although these types of transactions could increase our indebtedness or otherwise affect our capital structure or credit ratings. The definition of change of control triggering event for purposes of the Indenture governing the Notes also includes a phrase relating to the sale of “all or substantially all” of our assets. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition under applicable law. Accordingly, our obligation to make an offer to purchase the Notes, and the ability of a holder of the Notes to require us to purchase its Notes pursuant to the offer as a result of a highly-leveraged transaction or a sale of less than all of our assets may be uncertain.

Noteholders may be unable to enforce their rights under U.S. bankruptcy law.

We are incorporated under the laws of the Cayman Islands, and our principal assets are located in the PRC. Under federal bankruptcy law in the United States, courts typically have jurisdiction over a debtor’s property, wherever located, including property situated in other countries. However, courts outside of the United States may not recognize the United States bankruptcy court’s jurisdiction. Accordingly, difficulties may arise in administering a United States bankruptcy case involving a Cayman Islands, British Virgin Islands or Hong Kong debtor

with property located outside of the United States, and any orders or judgments of a bankruptcy court in the United States may not be enforceable outside of the United States.

The insolvency laws of the Cayman Islands and other local insolvency laws may differ from U.S. bankruptcy law or those of another jurisdiction with which holders of the Notes are familiar.

Because we are incorporated under the laws of the Cayman Islands, an insolvency proceeding relating to us, even if brought in the United States, would likely involve Cayman Islands insolvency laws, the procedural and substantive provisions of which may differ from comparable provisions of United States federal bankruptcy law. In addition, the Subsidiary Guarantors are incorporated in the British Virgin Islands or Hong Kong and the insolvency laws of the British Virgin Islands and Hong Kong may also differ from the laws of the United States or other jurisdictions with which the holders of the Notes are familiar.

We may be unable to obtain and remit foreign exchange.

Our ability to satisfy our obligations under the Notes depends solely upon the ability of our subsidiaries in the PRC to obtain and remit sufficient foreign currency to pay dividends to us and to repay shareholder loans. Our PRC subsidiaries must present certain documents to the SAFE, its authorized branch, or the designated foreign exchange bank, for approval before they can obtain and remit foreign currencies out of the PRC (including, in the case of dividends, evidence that the relevant PRC taxes have been paid and, in the case of shareholder loans, evidence of the registration of the loan with the SAFE). Prior to payment of interest and principal on any shareholder loan we make to our PRC subsidiaries, the relevant PRC subsidiary must also present evidence of payment of the 10% (or 7% if the interest is paid to a Hong Kong resident, subject to approval by local tax authorities) withholding tax on the interest payable in respect of such shareholder loan. If any PRC subsidiary for any reason fails to satisfy any of the PRC legal requirements for remitting foreign currency payments, the PRC subsidiary will be unable to pay us dividends or interest and principal on our existing shareholder loans, which may affect our ability to satisfy our obligations under the Notes.

If we are unable to comply with the restrictions and covenants in our debt agreements or the Indenture, there could be a default under the terms of these agreements or the Indenture, which could cause repayment of our debt to be accelerated.

If we are unable to comply with the restrictions and covenants in the Indenture governing the Notes, or our current or future debt obligations and other agreements, there could be a default under the terms of these agreements. In the event of a default under these agreements, the holders of the debt could terminate their commitments to lend to us, accelerate repayment of the debt and declare all amounts borrowed due and payable or terminate the agreements, as the case may be. Furthermore, some of our debt agreements, including the Indenture, contain cross-acceleration or cross-default provisions. As a result, our default under one debt agreement may cause the acceleration of repayment of debt, including the Notes, or result in a default under our other debt agreements, including the Indenture. If any of these events occur, we cannot assure you that our assets and cash flow would be sufficient to repay in full all of our indebtedness, or that we would be able to find alternative financing. Even if we could obtain alternative financing, we cannot assure you that it would be on terms that are favorable or acceptable to us.

Our operations are restricted by the terms of the Notes and other debt agreements, which could limit our ability to plan for or to react to market conditions or meet our capital needs, which could increase your credit risk.

The Indenture and other debt agreements include a number of significant restrictive covenants. These covenants restrict, among other things, our ability, and the ability of our Restricted Subsidiaries, to:

incur or guarantee additional indebtedness and issue disqualified or preferred stock;
declare dividends on their capital stock or purchase or redeem capital stock;
make investments or other specified restricted payments;
issue or sell capital stock of Restricted Subsidiaries;
guarantee indebtedness of Restricted Subsidiaries;
sell assets;
create liens;
enter into sale and leaseback transactions;
enter into agreements that restrict the Restricted Subsidiaries’ ability to pay dividends, transfer assets or make intercompany loans;
enter into transactions with shareholders or affiliates; and
effect a consolidation or merger.

These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs. Our ability to comply with these covenants may be affected by events beyond our control, and we may have to curtail some of our operations and growth plans to maintain compliance.

A trading market for the Notes may not develop, and there are restrictions on resale of the Notes.

The Notes are a new issue of securities for which there is currently no trading market. Although approval in-principle has been received for the listing and quotation of the Notes on the Official List of the SGX-ST, we cannot assure you that we will obtain or be able to maintain a listing on the SGX-ST, or that, if listed, a liquid trading market will develop. We have been advised that the Initial Purchasers intend to make a market in the Notes, but the Initial Purchasers are not obligated to do so and may discontinue such market making activity at any time without notice. In addition, the Notes are being offered pursuant to exemptions from registration under the Securities Act and, as a result, you will only be able to resell your Notes in transactions that have been registered under the Securities Act or in transactions not subject to or exempt from registration under the Securities Act. See “Transfer Restrictions.” We cannot predict whether an active trading market for the Notes will develop or be sustained.

The ratings assigned to the Notes may be lowered or withdrawn in the future.

The Notes have been provisionally rated “BB” by S&P and “BB” by Fitch. The ratings address our ability to perform our obligations under the terms of the Notes and credit risks in determining the likelihood that payments will be made when due under the Notes. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time. We cannot assure you that the ratings will be confirmed or they will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by the relevant rating agency if in its judgment circumstances in the future so warrant. We have no obligation to inform holders of the Notes of any such revision, downgrade or withdrawal. A suspension, reduction or withdrawal at any time of the rating assigned to the Notes may adversely affect the market price of the Notes.

Certain transactions that constitute “connected transactions” under the Listing Rules will not be subject to the “Limitation on Transactions with Shareholders and Affiliates” covenant.

Our shares are listed on the Hong Kong Stock Exchange and we are required to comply with the Listing Rules, which provide, among other things, that any transaction between a listed company or any of its subsidiaries, on the one hand, and a “connected person” of such listed company, on the other hand, is a “connected transaction” that, if the value of such transaction exceeds the applicable de minimis thresholds, will require the prior approval of the independent shareholders of such listed company. The definition of “connected person” to a listed company includes, among others, any 10% or more shareholder of (i) such listed company or (ii) any subsidiary of such listed company. The concept of “connected person” also captures “associates,” which include, among others, (a) any subsidiary of such “connected person,” (b) any holding company of such “connected person” and any subsidiary of such holding company, and (c) any company in which such entity or entities mentioned in (a) and (b) above taken together has/have the power to exercise control, directly or indirectly, of 30% or more of the voting power of such company.

The “Limitation on Transactions with Shareholders and Affiliates” covenant in the Notes only applies to transactions between the Company or any Restricted Subsidiary, on the one hand, and (x) any holder (or any Affiliate of such holder) of 10% or more of the shares of the Company or (y) any Affiliate of the Company, on the other hand. As such, transactions between the Company or any Restricted Subsidiary, on the one hand, and an Affiliate of any Restricted Subsidiary, on the other hand, will not be captured by such covenant, even though they may be connected transactions under the Listing Rules and subject to any requirements under the Listing Rules to obtain approval from independent shareholders. As a result, we are not required by the terms of the Notes to ensure that any such transactions are on terms that are fair and reasonable, and we will not need to deliver officers’ certificates or procure the delivery of fairness opinions of accounting, appraisal or investment banking firms to the trustee of the Notes for any such transactions.

The liquidity and price of the Notes following the offering may be volatile.

The price and trading volume of the Notes may be highly volatile. Factors such as variations in our revenues, earnings and cash flows and proposals for new investments, strategic alliances and/or acquisitions, interest rates, fluctuations in price for comparable companies and government regulations and changes thereof applicable to our industry and general economic conditions nationally or internationally could cause the price of the Notes to change. Any such developments may result in large and sudden changes in the trading volume and price of the Notes. We cannot assure you that these developments will not occur in the future.

There may be less publicly available information about us than is available in certain other jurisdictions.

There may be less publicly available information about companies listed in Hong Kong than is regularly made available by public companies in certain other countries. In addition, our financial statements are prepared and presented in accordance with HKFRS, which differ in certain respects from generally accepted accounting principles in other jurisdictions, or other GAAPs, which might be material to the financial information contained in this offering memorandum. We have not prepared a reconciliation of our consolidated financial statements and related footnotes between HKFRS and other GAAPs. In making your investment decision, you must rely upon your own examination of us, the terms of the offering and our financial information. You should consult your own professional advisers for an understanding of the differences between HKFRS and any other GAAP and how those differences might affect the financial information contained in this offering memorandum. See “Summary of certain differences between HKFRS and U.S. GAAP.”

The Notes will initially be held in book-entry form, and therefore you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies.

The Notes will initially only be issued in global certificated form and held through Euroclear, Clearstream and DTC. Interests in the global notes representing the Notes will trade in book-entry form only, and notes in definitive registered form will be issued in exchange for book-entry interests only in very limited circumstances. Owners of book-entry interests will not be considered owners or holders of the Notes for purposes of the Indentures. The common depositary for Euroclear, Clearstream and DTC will be the sole registered holder of the global notes. Accordingly, you must rely on the procedures of Euroclear, Clearstream or DTC, and if you are not a participant in Euroclear, Clearstream or DTC, on the procedures of the participant through which you own your interest, to exercise any rights and obligations of a holder of the Notes under the Indentures. Upon the occurrence of an Event of Default under the Indentures, unless and until definitive registered notes are issued with respect to all book-entry interests, if you own a book-entry interest, you will be restricted to acting through Euroclear and Clearstream. The procedures to be implemented through Euroclear, Clearstream and DTC may not be adequate to ensure the timely exercise of rights under the Notes. See “Description of the Notes — Book-Entry; Delivery and Form.”

Certain facts and statistics are derived from publications not independently verified by us, the Initial Purchasers or our respective advisors.

Facts and statistics in this offering memorandum relating to China’s economy and the biochemical industry are derived from publicly available sources. While we have taken reasonable care to ensure that the facts and statistics presented are accurately reproduced from such sources, they have not been independently verified by us, the Initial Purchasers or our or their respective advisors and, therefore, we make no representation as to the accuracy of such facts and statistics, which may not be consistent with other information compiled within or outside China. Due to possibly flawed or ineffective calculation and collection methods and other problems, the facts and statistics herein may be inaccurate or may not be comparable to facts and statistics produced for other economies and should not be unduly relied upon. Further, we cannot assure you that they are stated or compiled on the same basis or with the same degree of accuracy as may be the case elsewhere.

We will follow the applicable corporate disclosure standards for debt securities listed on the SGX-ST, which standards may be different from those applicable to debt securities listed in certain other countries.

We will be subject to reporting obligations in respect of the Notes to be listed on the SGX-ST. The disclosure standards imposed by the SGX-ST may be different than those imposed by securities exchanges in other countries or regions such as the United States or Hong Kong. As a result, the level of information that is available may not correspond to what investors in the Notes are accustomed to.

RISKS RELATING TO THE SUBSIDIARY GUARANTEES AND THE COLLATERAL

Our initial Subsidiary Guarantors do not currently have significant operations.

None of our current PRC subsidiaries will provide a Subsidiary Guarantee either upon issuance of the Notes or at any time thereafter. No future subsidiaries that are organized under the laws of the PRC will provide a Subsidiary Guarantee at any time in the future. As a result, the Notes will be effectively subordinated to all the debt and other obligations, including contingent obligations and trade payables, of the PRC subsidiaries. Moreover, the Collateral will not include the capital stock of our existing or future PRC subsidiaries.

The initial Subsidiary Guarantors that will guarantee the Notes do not have significant operations. We cannot assure you that the initial Subsidiary Guarantors or any subsidiaries that may become Subsidiary Guarantors in the future will have the funds necessary to satisfy our financial obligations under the Notes if we are unable to do so.

Security over the Collateral will not be granted directly to the holders of the Notes, and the Collateral will generally be shared with creditors under certain other financings.

Security over the Collateral for the obligations of the Company under the Notes and the Indenture will not be granted directly to the holders of the Notes but will be granted only in favor of the Collateral Agent on behalf of the Trustee. As a consequence, holders of the Notes will not have direct security and will not be entitled to take enforcement action in respect of the security for the Notes, except through the Collateral Agent, which has agreed to apply any proceeds of enforcement on such security towards such obligations.

The Indenture also permits us to enter into certain future financings, and creditors under those future financings may share the Collateral pari passu with the holders of the Notes. See “Description of the Notes — Security — Permitted Pari Passu Secured Indebtedness” for a further discussion of the sharing of the Collateral with future financings. If creditors under future financings opt to share the Collateral under the Intercreditor Agreement, a smaller portion of the proceeds from the Collateral will be available to satisfy the claims of the holders of the Notes, which could have a material adverse effect on their ability to recover sufficient proceeds to satisfy their claims under the Notes.

The Intercreditor Agreement may limit the rights of the holders of the Notes to enforce the Collateral.

The ability of holders of the Notes to enforce the Collateral will be restricted under the Intercreditor Agreement, as only the Collateral Agent will be permitted to take enforcement actions. If an event of default occurs under the Notes, the holders of the Notes holding 25% of the outstanding amount of the Notes and holders (or their representative or agent) of any Permitted Pari Passu Secured Indebtedness must decide whether to take any enforcement action and, thereafter, may instruct the Collateral Agent to take such enforcement action. Enforcement

actions may be taken in respect of the Collateral that may be adverse to you. In the event that there is any disagreement or conflict among instructions from the secured parties, the instruction from holders of a majority of the outstanding principal amount of indebtedness secured by the Collateral will prevail or if no such instruction is given to the Collateral Agent, the Collateral Agent may in its discretion refuse to take any action, either of which may be inconsistent with the instruction from the Trustee or in your interest. In such event, the only remedy available to holders of the Notes would be to sue for payment on the Notes, the Subsidiary Guarantees and the Collateral. For a description on the Intercreditor Agreement, see “Description of the Notes — — Security Intercreditor Agreement.”

The Subsidiary Guarantees may be challenged under applicable insolvency or fraudulent transfer laws, which could impair the enforceability of the Subsidiary Guarantees.

Under bankruptcy laws, fraudulent transfer laws, insolvency laws in the British Virgin Islands or bankruptcy law, fraudulent transfer laws, insolvency or unfair preference or similar laws in Hong Kong and other jurisdictions where future Subsidiary Guarantors may be established or where insolvency proceeding may be commenced with respect to any such Subsidiary Guarantor, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by, or when it gives, its guarantee:

For Subsidiary Guarantors incorporated in the British Virgin Islands:

incurred the debt with the intent to defraud creditors (whenever the transaction took place and irrespective of insolvency);
either (i) put the beneficiary of the guarantee in a position which, in the event of the guarantor’s insolvency, would be better than the position the beneficiary would have been in had the guarantee not been given or (ii) received no consideration, or received consideration in money or money’s worth that is significantly less than the value, in money or money’s worth, of the consideration supplied by the guarantor (although in either case a guarantee will only be voidable if it (i) was entered into at a time when the guarantor was insolvent or if it became insolvent as a consequence of doing so, insolvent in this context meaning that the guarantor is unable to pay its debts as they fall due, and (ii) it was given within the six month, or, if the guarantee and beneficiary are connected entities, two year, period preceding the commencement of liquidation).

For Subsidiary Guarantors incorporated in other jurisdictions:

incurred the debt with the intent to hinder, delay or defraud creditors or was influenced by a desire to put the beneficiary of the guarantee in a position which, in the event of the guarantor’s insolvency, would be better than the position the beneficiary would have been in had the guarantee not been given;
received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee;
was insolvent or rendered insolvent by reason of such incurrence;
was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

The measure of insolvency for purposes of the foregoing will vary depending on the laws of the jurisdiction which are being applied. Generally, however, a guarantor would be considered insolvent at a particular time if it were unable to pay its debts as they fell due or if the sum of its debts was then greater than all of its property at a fair valuation or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities in respect of its existing debt as it became absolute and matured. We cannot assure you that such limitation will be effective in preserving the enforceability of any of the Subsidiary Guarantees. In addition, a guarantee may be subject to review under applicable insolvency or fraudulent transfer laws in certain jurisdictions or subject to a lawsuit by or on behalf of creditors of the guarantors. In such case, the analysis set forth above would generally apply, except that the guarantee could also be subject to the claim that, since the guarantee was not incurred for the benefit of the guarantor, the obligations of the guarantor thereunder were incurred for less than reasonably equivalent value or fair consideration, and, as a result, such guarantee would be rendered void.

In an attempt to limit the applicability of insolvency and fraudulent transfer laws in certain jurisdictions, the obligations of the Subsidiary Guarantors under the Subsidiary Guarantees will be limited to the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the guarantee, as it relates to such Subsidiary Guarantor, voidable under such applicable insolvency or fraudulent transfer laws.

If a court voided a Subsidiary Guarantee, subordinated such guarantee to other indebtedness of the Subsidiary Guarantor, or held the Subsidiary Guarantee unenforceable for any other reason, holders of the Notes would cease to have a claim against that Subsidiary Guarantor based upon such guarantee, would be subject to the prior payment of all liabilities (including trade payables) of such Subsidiary Guarantor, and would solely be creditors of us and any Subsidiary Guarantor whose guarantee was not voided or held unenforceable. We cannot assure you that, in such an event, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Notes.

The pledge of certain Collateral may in some circumstances be voidable.

The pledge of the Collateral may be voidable as a preference under insolvency or fraudulent transfer or similar laws of Hong Kong, the Cayman Islands and the British Virgin Islands at any time within six months of the creation of the pledge or, under some circumstances, within a longer period. Pledges of shares of future Subsidiary Guarantors may also be voidable as a preference under relevant insolvency or fraudulent transfer or similar laws. In addition, the pledge of certain Collateral may be voided based on the analysis set forth under “— The Subsidiary Guarantees may be challenged under applicable insolvency or fraudulent transfer laws, which could impair the enforceability of the Subsidiary Guarantees.”

If the pledges of the Collateral were to be voided for any reason, holders of the Notes would have only an unsecured claim against us.

The value of the Collateral will likely not be sufficient to satisfy our obligations under the Notes and other pari passu secured indebtedness.

The Collateral will consist only of the shares of the initial Subsidiary Guarantors. The security interest in respect of certain Collateral may be released upon the disposition of such Collateral and any proceeds from such disposition may be applied, prior to repaying any amounts due under the Notes, to repay other debt or to make investments in properties and assets that will not be pledged as additional Collateral.

The ability of the Collateral Agent, on behalf of the Trustee, to foreclose on the Collateral upon the occurrence of an Event of Default or otherwise, will be subject in certain instances to

perfection and priority issues. Although procedures will be undertaken to support the validity and enforceability of the security interests, we cannot assure you that the Collateral Agent, the Trustee or holders of the Notes will be able to enforce the security interest.

The value of the Collateral in the event of a liquidation will depend upon market and economic conditions, the availability of buyers and similar factors. No independent appraisals of any of the Collateral have been prepared by or on behalf of us in connection with this offering of the Notes. Accordingly, we cannot assure you that the proceeds of any sale of the Collateral following an acceleration of the Notes would be sufficient to satisfy, or would not be substantially less than, amounts due and payable on the Notes. By their nature, some or all of the Collateral, in particular, the shares of the existing or any future Subsidiary Guarantors may be illiquid and may have no readily ascertainable market value. Likewise, we cannot assure you that the Collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation.

The Collateral will be shared on a pari passu basis by the holders of the Notes, holders of our 2010 Convertible Bonds and any other creditors with respect to Permitted Pari Passu Secured Indebtedness. Accordingly, in the event of a default on the Notes or the other secured indebtedness and a foreclosure on the Collateral, any foreclosure proceeds would be shared by the holders of secured indebtedness in proportion to the outstanding amounts of each class of secured indebtedness. The value of the Collateral securing the Notes and the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors is unlikely to be sufficient to satisfy the Company’s and each of the Subsidiary Guarantor Pledgors’ obligations under the Notes and the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors, and the Collateral securing the Notes and such Subsidiary Guarantees may be reduced or diluted under certain circumstances, including the issuance of Additional Notes or additional Permitted Pari Passu Secured Indebtedness and the disposition of assets comprising the Collateral, subject to the terms of the Indenture.

USE OF PROCEEDS

We estimate that the net proceeds from this offering, after deducting the underwriting discounts and commissions and other estimated expenses payable by us in connection with this offering, will be approximately US$293.0 million, which we presently plan to use as follows:

approximately US$62.0 million to construct our Northeastern Plant Phase I;
approximately US$155.0 million to construct our Northeastern Plant Phase II; and
the remainder for general corporate purposes to enhance our liquidity position.

We may adjust the foregoing plans in response to changing market conditions and, thus, reallocate the use of the proceeds. Pending application of the net proceeds of this offering, we intend to invest such net proceeds in “Temporary Cash Investments” as defined under “Description of the Notes.”

EXCHANGE RATE INFORMATION

CHINA

The PBOC sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. The PBOC also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. From 1994 to July 20, 2005, the conversion of Renminbi into foreign currencies, including Hong Kong dollars and U.S. dollars, was based on rates set daily by the PBOC on the basis of the previous day’s inter-bank foreign exchange market rates and then current exchange rates in the world financial markets. During this period, the official exchange rate for the conversion of Renminbi to U.S. dollars remained generally stable. Although the PRC government introduced policies in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currencies for current account items, conversion of Renminbi into foreign currencies for capital items, such as foreign direct investment, loan principals and securities trading, still requires the approval of SAFE and other relevant authorities. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated by approximately 2% against the U.S. dollar. On May 18, 2007, the PBOC enlarged, the floating band for the trading prices in the inter-bank foreign exchange market of the Renminbi against the U.S. dollar from 0.3% to 0.5% around the central parity rate, effective on May 21, 2007. This allows the Renminbi to fluctuate against the U.S. dollar by up to 0.5% above or below the central parity rate published by the PBOC. From July 21, 2005 to December 31, 2010, the value of the Renminbi appreciated by approximately 25.4% against the U.S. dollar. The PRC government has since made and in the future may make further adjustments to the exchange rate system. On June 19, 2010, the PBOC instituted reform measures to increase the Renminbi exchange rate flexibility. The PBOC authorized the China Foreign Exchange Trading Center, effective since January 4, 2006, to announce the central parity exchange rate of certain foreign currencies against the Renminbi on each business day. This rate is set as the central parity for the trading against the Renminbi in the inter-bank foreign exchange spot market and the over-the-counter exchange rate for the business day.

The following table sets forth the noon buying rate for U.S. dollars in New York City for cable transfer in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York for the periods indicated:

Period	Period		Noon buying rate	Noon buying rate
		Period end	Average(1)	High	Low
2006 . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . 2010 September . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . 2011 January . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . March (through March 18) . . . . . . . .		7.8041 7.2946 6.8225 6.8259 6.6905 6.6705 6.6670 6.6000 6.6017 6.5749 6.5689	(RMB per US$1.00) 7.9579 8.0702 7.5806 7.8127 6.9193 7.2946 6.8295 6.8470 6.7425 6.8102 6.6677 6.6912 6.6536 6.6906 6.6473 6.6745 6.5960 6.6364 6.5762 6.5965 6.5690 6.5743		7.8041 7.2946 6.7800 6.8176 6.6869 6.6397 6.6233 6.6000 6.5809 6.5520 6.5540

Note:

(1) Determined by averaging the rates on the last business day of each month during the relevant year, except for average rates for the months in 2010 and 2011, which are determined by averaging the daily rates during the respective periods.

On March 18, 2011, the noon buying rate for U.S. dollars in New York City for cable transfers in Renminbi was US$1.00 = RMB6.5689 as certified for customs purposes by the Federal Reserve Bank of New York.

HONG KONG

The Hong Kong dollar is freely convertible into other currencies, including the U.S. dollar. Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 to US$1.00. The Basic Law of Hong Kong (the “Basic Law”), which came into effect on July 1, 1997, provides that no foreign exchange control policies shall be applied in Hong Kong.

The market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be determined by the forces of supply and demand in the foreign exchange market. However, against the background of the fixed rate system which applies to the issuance and withdrawal of Hong Kong currency in circulation, the market exchange rate has not deviated significantly from the level of HK$7.80 to US$1.00. In May 2005, the Hong Kong Monetary Authority broadened the 22-year-old trading band from the original rate of HK$7.80 per U.S. dollar to a rate range of HK$7.75 to HK$7.85 per U.S. dollar. The Hong Kong government has indicated its intention to maintain the link within that rate range. Under the Basic Law, the Hong Kong dollar will continue to circulate and remain freely convertible. However, no assurance can be given that the Hong Kong government will maintain the link at HK$7.80 to US$1.00 or at all.

The following table sets forth the noon buying rate for U.S. dollars in New York City for cable transfer in Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York for the periods indicated:

Period	Period		Noon buying rate	Noon buying rate
		Period end	Average(1)	High	Low
2006 . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . 2010 September . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . 2011 January . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . March (through March 18) . . . . . . . .		7.7771 7.7984 7.7499 7.7536 7.7599 7.7513 7.7649 7.7810 7.7926 7.7933 7.7999	(HK$ per US$1.00) 7.7685 7.7928 7.8008 7.8289 7.7814 7.8159 7.7513 7.7618 7.7646 7.7738 7.7579 7.7642 7.7550 7.7656 7.7741 7.7733 7.7800 7.7978 7.7895 7.7957 7.7912 7.8012		7.7506 7.7497 7.7497 7.7495 7.7561 7.7513 7.7506 7.7612 7.7683 7.7823 7.7858

Note:

On March 18, 2011, the noon buying rate for U.S. dollars in New York City for cable transfers in Hong Kong dollars was US$1.00 = HK$7.7999 as certified for customs purposes by the Federal Reserve Bank of New York.

CAPITALIZATION

The following table sets forth our indebtedness and capitalization as of December 31, 2010 on an actual basis and on an adjusted basis after giving effect to the issuance of the Notes in this offering after deducting the underwriting discounts and commissions and other estimated expenses payable by us in connection with this offering. The following table should be read in conjunction with our consolidated financial information and related notes included in this offering memorandum.

As of December 31, 2010	As of December 31, 2010	As of December 31, 2010	As of December 31, 2010
Actual (RMB’000) (US$’000) 30,000 4,545 30,000 4,545 495,000 75,001 555,000 84,091 981,458 148,706 – – 981,458 148,706 174,097 26,378 217,070 32,889 329,594 49,939 (76,985) (11,664) 2,501,489 379,013 3,145,265 476,555		As Adjusted
(RMB’000) 30,000 30,000 495,000 555,000 981,458 – 981,458 174,097 217,070 329,594 (76,985) 2,501,489 3,145,265		(RMB’000) 30,000 30,000 495,000 555,000 981,458 1,933,800 2,915,258 174,097 217,070 329,594 (76,985) 2,501,489 3,145,265	(US$’000) 4,545 4,545 75,001 84,091 148,706 293,000 441,706 26,378 32,889 49,939 (11,664) 379,013 476,555
4,126,723	625,261	6,060,523	918,261

Note:

(1) Total capitalization represents the sum of the non-current portion of long-term borrowings and total equity.

Except as otherwise disclosed in this offering memorandum, there has been no material adverse change in our indebtedness or capitalization since December 31, 2010.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following selected consolidated financial information as of and for each of the years ended December 31, 2008, 2009 and 2010 has been derived from our consolidated financial statements, as audited by PricewaterhouseCoopers, our independent certified public accountants, for those years and as of the dates indicated included elsewhere in this offering memorandum. Our consolidated financial information has been prepared in accordance with HKFRS issued by the HKICPA.

Selected Consolidated Income Statements

For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 3,585,343 (2,941,011) 644,332 44,300 (166,407) (141,961) (12,222) 368,042 (42,662) 325,380 (30,674)	2009 (RMB’000) 4,632,884 (3,233,277) 1,399,607 63,908 (215,715) (194,910) (4,042) 1,048,848 (25,251) 1,023,597 (95,312)	2010 (RMB’000) 6,416,425 (4,851,371) 1,565,054 110,550 (272,008) (277,697) (22,187) 1,103,712 (32,383) 1,071,329 (105,278)	2010
			(US$’000) 972,186 (735,056) 237,130 16,750 (41,213) (42,075) (3,362) 167,230 (4,907) 162,323 (15,951)
294,706 17.75 17.75 146,293 522,815 14.6% 12.3 1.12	928,285 55.92 55.88 219,240 1,242,158 26.8% 49.2 0.48	966,051 57.75 53.68 217,070 1,357,657 21.2% 20.2 1.13	146,372 8.75 8.09 32,889 205,706 21.2% 20.2 1.13

Notes:

(1) Basic earnings per share are calculated by dividing the profit attributable to the shareholders of our Company by the weighted average number of ordinary shares in issue during the year.

(3) We calculate EBITDA by adding depreciation and amortization expenses to operating profit. EBITDA is not a standard measure under HKFRS. EBITDA is a widely used financial indicator of a company’s ability to service and incur debt. EBITDA should not be considered in isolation or construed as an alternative to cash flows, profit attributable to shareholders or any other measure of performance or as an indicator of our operating performance, liquidity, profitability or cash flows generated by operating, investing or financing activities. EBITDA does not account for taxes, net finance costs and depreciation and amortization. In evaluating EBITDA, we believe that investors should consider, among other things, the components of EBITDA such as turnover and operating expenses and the amount by which EBITDA exceeds capital expenditures and other charges. We have included EBITDA herein because we believe it is a useful supplement to cash flow data as a measure of our performance and our ability to generate cash from operations to cover debt service and taxes. EBITDA presented herein may not be comparable to similarly titled measures presented by other companies. Investors should not compare our EBITDA to EBITDA presented by other companies because not all companies use the same definition. Investors should also note that the EBITDA as presented herein is calculated differently from Consolidated EBITDA as defined and used in the Indenture governing the Notes. See “Description of the Notes — Definitions” for a description of the manner in which Consolidated EBITDA is defined for purposes of the Indenture governing the Notes.
(4) EBITDA margin is calculated by dividing EBITDA by revenue.
(5) Gross interest expense represents interest expense before capitalization. Gross interest expense is not a standard measure under HKFRS. Gross interest expense presented herein may not be comparable to similarly titled measures presented by other companies. Investors should not compare our gross interest express to the gross interest expense provided by other companies because not all companies use the same definition. Investors should also note that the gross interest expense presented herein is calculated differently from Consolidated Interest Expense as defined and used in the Indenture governing the Notes. See “Description of the Notes — Definitions” for a description of the manner in which Consolidated Interest Expense is defined for purposes of the Indenture governing the Notes.
(6) Total debt represents the sum of borrowings included in non-current liabilities and borrowings included in current liabilities.

Selected Consolidated Balance Sheet

		As of December 31,	As of December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
ASSETS
Non-current assets
Leasehold land payments . . . . . . . . . .	132,334	140,160	169,187	25,634
Property, plant and equipment . . . . . . .	1,954,845	2,507,897	4,087,675	619,345
Deferred income tax assets . . . . . . . . .	423	5,162	20,759	3,145
	2,087,602	2,653,219	4,277,621	648,124
Current assets
Inventories . . . . . . . . . . . . . . . . . . . . .	356,288	551,028	710,695	107,681
Trade and other receivables . . . . . . . . .	548,355	687,782	816,773	123,754
Current income tax recoverable . . . . . .	2,654	–	–	–
Short-term bank deposits . . . . . . . . . . .	42,860	26,310	147,225	22,307
Cash and cash equivalents . . . . . . . . . .	224,706	342,682	767,951	116,356
	1,174,863	1,607,802	2,442,644	370,098
Total assets . . . . . . . . . . . . . . . . . . . .	3,262,465	4,261,021	6,720,265	1,018,222
EQUITY
Capital and reserves attributable to
the Shareholders
Share capital . . . . . . . . . . . . . . . . . . .	169,034	169,034	174,097	26,378
Share premium . . . . . . . . . . . . . . . . . .
– Proposed final dividend . . . . . . . . .	146,293	219,240	217,070	32,889
– Others . . . . . . . . . . . . . . . . . . . . .	931,851	566,200	329,594	49,939
Other reserves . . . . . . . . . . . . . . . . . .	(247,904)	(171,080)	(76,985)	(11,664)
Retained earnings . . . . . . . . . . . . . . . .	742,240	1,610,317	2,501,489	379,013
Total equity . . . . . . . . . . . . . . . . . . . .	1,741,514	2,393,711	3,145,265	476,555
LIABILITIES
Non-current liabilities
Deferred income . . . . . . . . . . . . . . . . .	27,798	90,880	141,810	21,486
Borrowings . . . . . . . . . . . . . . . . . . . .	312,000	180,000	981,458	148,706
Deferred income tax liabilities . . . . . . .	10,928	24,221	27,033	4,096
	350,726	295,101	1,150,301	174,288
Current liabilities
Trade, other payables and accruals . . . .	887,533	1,140,475	1,839,022	278,640
Current income tax liabilities . . . . . . .	–	13,734	30,677	4,648
Current portion of deferred income . . .	6,692	–	–	–
Borrowings . . . . . . . . . . . . . . . . . . . .	276,000	418,000	555,000	84,091
	1,170,225	1,572,209	2,424,699	367,379
Total liabilities . . . . . . . . . . . . . . . . .	1,520,951	1,867,310	3,575,000	541,667
Total equity and liabilities . . . . . . . . .	3,262,465	4,261,021	6,720,265	1,018,222
Net current assets . . . . . . . . . . . . . . .	4,638	35,593	17,945	2,719
Total assets less current liabilities . . .	2,092,240	2,688,812	4,295,566	650,843

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial information, including the notes thereto, included elsewhere in this offering memorandum. All significant intra-group transactions, balances and unrealized gains on intra-group transactions have been eliminated.

Our historical results do not necessarily indicate our performance for any future periods. The discussion and analysis of our financial condition and results of operations contain forward-looking statements that involve risks and uncertainties. In evaluating our business, you should carefully consider the information provided in the section headed “Risk Factors” in this offering memorandum.

OVERVIEW

We recognize the importance of using advanced technology to continually improve our production efficiency and to develop new products. Our research and development capabilities have played a key role in providing technical support facilitating our successful diversification from a glutamic acid and MSG manufacturer to one of the leading corn-based biochemical product manufacturers by broadening our product range to include products such as xanthan gum, starch sweeteners, fertilizers and threonine.

SIGNIFICANT FACTORS THAT AFFECT OUR RESULTS OF OPERATIONS

Production Capacity

Our results of operations have depended and will continue to depend to a large extent on our ability to fulfill customer orders, which in turn depends in part on our production capacity. In order to accommodate the growing demand for our products, we have increased the production capacity of our main products over the past three years. Our total production capacity for MSG increased from 171,667 tonnes in 2008 to 540,000 tonnes in 2010. We expect to further increase the production capacity of MSG to 750,000 tonnes by the end of 2011 with the completion of Northeastern Plant Phase I, coupled with reengineering work at our existing plants. To further expand our xanthan gum segment, we constructed a new production line capable of producing 12,000 tonnes of xanthan gum per annum at our Inner Mongolia Plant in 2010. Our total production capacity for xanthan gum increased from 32,000 tonnes in 2008 to 44,000 tonnes in 2010. In addition, we have constructed an 80,000 tonnes per annum synthetic ammonia production line and a 5,000 tonnes per annum fructose production line in 2010 at our Inner Mongolia Plant. We are also reengineering our thermal power plant and plan to build new railway facilities at our Inner Mongolia Plant beginning this year.

Furthermore, we are in the process of constructing our Northeastern Plant Phase I which is expected to have an annual production capacity of 200,000 tonnes of MSG, 250,000 tonnes of fertilizers and 100,000 tonnes of synthetic ammonia, together with supporting facilities including a thermal power plant and self-owned railway facilities. Commercial production is scheduled to commence in the second half of 2011. Given the significant growth of the PRC threonine industry in the past few years and the expected continued growth in the near future, we plan to construct additional production lines at our Inner Mongolia Plant and expect to increase our production capacity of threonine from 10,000 tonnes to 40,000 tonnes by the end of 2012.

As a result of our production capacity expansion, we had capital expenditure commitment amounting to RMB416.5 million as of December 31, 2010. We expect to continue to increase our production capacity to accommodate the expected increase in demand for our products. As a result, we anticipate that we will incur further capital expenditures, which we intend to finance using cash generated from our operations, bank borrowings and the net proceeds from the offering of the Notes. Whether we can successfully expand our production capacity will determine to a large extent our future results of operations.

Pricing of Our Products

Our revenue and results of operations are dependent on the average selling price of our products. Our main products are MSG and xanthan gum. For the year ended December 31, 2008, 2009 and 2010, the average selling price of our MSG was RMB6,865, RMB7,680 and RMB7,903 (US$1,197) per tonne, respectively, and the average selling price of our xanthan gum was RMB21,594, RMB20,989 and RMB19,579 (US$2,967) per tonne, respectively. We believe that the increase in the average selling prices of our MSG segment reflected increased demand in general and our ability to pass on a portion of our increased cost of sales to our customers through higher average selling prices. We believe the decrease in the average selling price of our xanthan gum in 2009 as compared to 2008 was primarily due to the decrease in the general market price of xanthan gum, which we believe was a result of our production capacity expansion which drove up the market supply of xanthan gum in 2009. We believe the decrease in the average selling price of xanthan gum in 2010 as compared to 2009 was primarily due to our increased production in order to expand market share, which increased the supply of xanthan gum on the market. We cannot assure you that the average selling price of MSG will remain at current levels or continue to rise, nor that the average selling price of xanthan gum will not further decrease or fluctuate in the future. Any significant decrease in the average selling prices of our main products may have a material and adverse effect on our revenue, profit margin and results of operations.

Cost of Production

Corn is one of the major raw materials for our products and accounted for 46.6%, 52.7% and 54.3% of our total cost of production for the year ended December 31, 2008, 2009 and 2010, respectively. For the same periods, our average unit cost of corn was RMB1,424, RMB1,413 and RMB1,741 (US$263.8) per tonne, respectively. Our average unit cost of corn is closely related to the market price of corn in China, which is affected by factors including market demand and supply, domestic government policy and the occurrence of climatic and other natural disasters such as droughts, floods or earthquakes. We cannot assure you that we will be able to adjust the prices of our products to pass on any increase in the price of corn to our customers. If we are unable to pass on any increase in the price of corn to our customers, there may be an impact on our cash flow position. Going forward, we believe our results of operations will continue to be impacted by the price of corn.

We use coal as our primary source of energy in the manufacture of our main products, particularly for the manufacture of xanthan gum. For the year ended December 31, 2008, 2009 and 2010, the cost of coal accounted for 14.1%, 11.5% and 13.1% of our total cost of production, respectively, 10,9%, 9.4% and 11.2% of our total cost of production of MSG, respectively and 42.3%, 30.7% and 35.4% of our total cost of production of xanthan gum, respectively. Our results of operations are therefore sensitive to the fluctuation of the price of coal. In 2009, the cost of coal as a proportion of our total cost of production decreased as compared to 2008, primarily due to a general decrease in the market price of coal and an increase in production efficiency at our Inner Mongolia Plant, as compared to our other production plants. The increased production efficiency at our Inner Mongolia Plant was attributable to its expanded production capacity. In 2010, the cost of coal as a proportion of our total cost of production increased as compared to 2009 primarily due to the increased purchase price of coal by approximately 22.8% in 2010 as compared to 2009, from an average unit cost of RMB254 per tonne in 2009 to an average unit cost of RMB312 per tonne in 2010. We cannot assure you that we can maintain the price of coal at an acceptably low level, or that there will not be any further hikes in the price of coal in the future. If we are unable to pass on any significant increase in the price of coal to our customers, our cash flow position, profit margin and results of operations may be materially adversely affected.

Taxation

Our operating results depend in part on the tax concessions and preferential tax treatment accorded by the PRC government to certain of our subsidiaries pursuant to favorable policies aimed at encouraging investment in western China, as well as to Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng, which have been designated as a new and high-tech enterprises (高新技術企業).

Effective from January 1, 2008, subsidiaries incorporated in PRC are required to pay the EIT in accordance with the Enterprise Income Tax Law of the People’s Republic of China (the “New EIT Law”) as approved by the National People’s Congress on March 16, 2007 and Detailed Implementation 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 rate for both domestic and foreign investment enterprises have been unified at 25% effective from January 1, 2008. For enterprises which were established before the publication of the New EIT Law and were entitled to the preferential treatment of reduced EIT rates granted by relevant tax authorities, the applicable income tax rate will be gradually increased from the preferential rates to 25% within five years after the effective date of the New EIT Law on January 1, 2008. For regions that enjoy a reduced EIT rate of 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 its related 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 such fixed term expires.

Effective from December 5, 2008, Shandong Fufeng was approved to be a new and hi-tech enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated December 5, 2004, Shandong Fufeng was entitled to a three-year 50% tax reduction from the standard PRC state EIT rate of 30% and a full exemption from local EIT of 3% during its approved operating period of 12 years. Accordingly, the effective tax rate for Shandong Fufeng for the years ended December 31, 2008 and 2009 was 12.5% and 15%, respectively, and its effective tax rate for the year ended December 31, 2010 was 15%. Going forward, the effective tax rate for 2011 is expected to be 15%.

Baoji Fufeng was established on September 24, 2004 as a foreign-invested limited liability company in Baoji, Shaanxi Province. Under applicable tax laws and regulations, Baoji Fufeng is entitled to preferential tax treatment for establishing its glutamic acid and corn processing facilities in Shaanxi Province, as part of the Western Development Plan (西部大開發). Its applicable reduced preferential state EIT rate was 15% up to December 31, 2010 and its local EIT rate was nil during its approved operating period of 12 years. Accordingly, the effective tax rate for Baoji Fufeng for the years ended December 31, 2008 and 2009 was 7.5% in both years and its effective tax rate for the year ended December 31, 2010 was 15%. We expect the effective tax rate to be 15% for 2011.

Inner Mongolia Fufeng was set up as a foreign-invested limited liability company on March 31, 2006 in Hohhot, Inner Mongolia. Inner Mongolia Fufeng is entitled to enjoy the preferential tax treatment under the Western Development Plan because it is situated in China’s western development region and its business is encouraged by the PRC government. In accordance with the relevant tax laws and regulations, the applicable income tax rate for Inner Mongolia Fufeng is 15% from 2001 to 2010. In addition, according to a local tax authority approval dated April 16, 2007, Inner Mongolia Fufeng is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from 2007. As a result, the effective tax rate for Inner Mongolia Fufeng for the year ended December 31, 2009 was 7.5% and it was fully exempted from income tax in 2008. Its effective tax rate for the year ended December 31, 2010 was 7.5%. Going forward, we expect the effective tax rate to be 7.5% for 2011.

The preferential tax treatment enjoyed by some of our PRC subsidiaries are due to expire in the next several years, at which time, they will be subject to the regular income tax rate of 25%. Termination or revision of various types of PRC preferential tax treatments that our subsidiaries currently enjoy will have a negative impact on our net profits and results of operations.

General Macroeconomic Conditions in China

We derive over 87% of our revenue from sales of products in China. We believe demand for our products in China is closely linked to China’s general economic condition and disposable household income. We have benefited from and expect to continue to benefit from the continuing growth of the PRC economy and the increasing purchasing power of Chinese consumers, which drives the demand for high quality biochemical products like ours. In addition, we believe we have benefited from a shift in the PRC government’s economic policy in recent years, which increasingly favors consumption driven economic growth rather than infrastructure investment driven economic growth. However, our business could be susceptible to any slowdown in the growth or recession of the PRC economy and we cannot assure you that we will continue to benefit from favorable PRC government policies. Please also see “Industry Overview” in this offering memorandum for an introduction to relevant PRC government policies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial information in conformity with HKFRS issued by the HKICPA, which requires us to make estimates and assumptions that affect the reported amounts of, among other things, assets, liabilities, revenue and expenses. We base our estimates on our own historical experience and on various other factors that we believe to be relevant under the circumstances. These estimates and assumptions are periodically re-evaluated by our management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Some of our accounting policies require a higher degree of judgment than others in their application. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our consolidated financial information and our consolidated financial statements.

Revenue Recognition

Our revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of our activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. We recognize revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of our activities. We make this estimate based on our historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Sales of goods are recognized when we have delivered the products to the customers, the customers have accepted the products and collectability of the related receivables is reasonably assured.

Property, Plant and Equipment

Property, plant and equipment, comprising plant, machinery, furniture and fixtures, and vehicles, are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Construction in progress includes plant under construction and machinery under installation and testing and which, upon completion, management intends to hold as property, plant and equipment. It is carried at cost, which includes cost of construction, plant and equipment and other direct cost plus borrowing costs used to finance these projects during the construction period less accumulated impairment losses, if any. No depreciation is provided for construction in progress. On completion, the relevant assets are transferred to property, plant and equipment at cost less accumulated impairment losses.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to us and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred.

Depreciation on property, plant and equipment, except for construction in progress, is calculated using the straight-line method to allocate their costs to their residual values over their estimated useful lives, as follows:

Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15 to 20 years
Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8 to 10 years
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3 to 8 years
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5 to 8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with carrying amount. These are included in the income statement under “other income” and “other operating expenses,” respectively.

Impairment of Assets

Assets that have an indefinite useful life, which are not subject to amortization, are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

Inventories

Our inventories primarily consist of: (i) raw materials; (ii) work-in-progress; and (iii) finished goods. We state our inventories at the lower of cost and net realizable value. Cost is determined using the weighted average method. The cost of finished goods and work-in-progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling and marketing expenses.

Trade and Other Receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business, if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is

reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated income statement within “administrative expenses.” When a receivable is uncollectible, it is written off against the allowance account for receivables. Subsequent recoveries of amounts previously written off are credited against administrative expense in the income statement.

Government Grants

Grants from the PRC local government are recognized at their fair value where there is a reasonable assurance that the grant will be received and we will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the consolidated income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the acquisition of property, plant and equipment are included in liabilities as deferred income and are credited to the consolidated income statement over the periods and in the proportions in which depreciation on these assets is charged.

Taxation

The tax expense for a reporting period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where we operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by us and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income taxes assets and liabilities relate to incomes taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

2010 Convertible Bonds

Compound financial instruments issued by the Group comprise convertible bonds that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry.

SELECTED ITEMS OF INCOME STATEMENTS

Revenue

We derive all of our revenue from sales of two main segments of products, namely:

MSG segment, which comprises MSG, glutamic acid, corn refined products, fertilizers, starch sweeteners, threonine and others; and
xanthan gum segment, which comprises xanthan gum.

Our revenue was approximately RMB3,585.3 million, RMB4,632.9 million, and RMB6,416.4 million (US$972.2 million) for the year ended December 31, 2008, 2009 and 2010, respectively, representing a growth of 29.2% from 2008 to 2009 and 38.5% from 2009 to 2010. Revenue from our MSG segment accounted for 87.4%, 91.2% and 89.4% of our revenue for the three years ended December 31, 2008, 2009 and 2010, respectively, whereas revenue from our xanthan gum segment accounted for 12.6%, 8.8% and 10.6% of our revenue for the same period, respectively. Approximately 87% of our revenue was generated from the PRC in 2010.

The following table sets forth our revenue generated from and the percentage of our overall revenue contribution by each of our products for the periods indicated:

				For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
		2008		2009			2010
			(% of		(% of			(% of
			Total		Total			Total
		(RMB’000)	Revenue)	(RMB’000)	Revenue)	(RMB’000)	(US$’000)	Revenue)
MSG segment
MSG . . . .	. .	1,004,381	28.0%	2,245,307	48.5%	3,892,506	589,774	60.7%
Glutamic acid		1,053,298	29.4%	720,631	15.6%	153,633	23,278	2.4%
Corn refined
products	. .	509,849	14.2%	557,523	12.0%	773,563	117,207	12.1%
Fertilizers .	. .	380,097	10.6%	361,468	7.8%	369,649	56,007	5.8%
Starch
sweeteners .		163,002	4.5%	245,168	5.3%	356,704	54,046	5.6%
Threonine .	. .	–	–	–	–	28,145	4,264	0.4%
Others (1) .	. .	22,977	0.7%	94,663	2.0%	160,500	24,318	2.4%
Xanthan gum
segment
Xanthan gum .		451,739	12.6%	408,124	8.8%	681,725	103,292	10.6%
Total . . . . . .	. .	3,585,343	100.0%	4,632,884	100.0%	6,416,425	972,186	100%

Note:

(1) Others include pharmaceutical products, chicken powder, corn oil and bricks.

Cost of Sales

Our cost of sales primarily consists of cost of production and change in inventory of finished goods and work in progress. Cost of production primarily includes raw materials, energy, depreciation, employee benefits and others. The table below sets forth the major components of our cost of production and reconciliation to cost of sales for the periods indicated.

		For the year ended	December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Major raw materials . . . . . . . . . . . . . .	1,917,251	2,185,523	3,234,765	490,116
Energy . . . . . . . . . . . . . . . . . . . . . . . .	411,626	386,304	646,581	97,967
Depreciation . . . . . . . . . . . . . . . . . . . .	133,691	177,364	231,013	35,002
Employee benefits . . . . . . . . . . . . . . . .	105,516	156,395	198,135	30,020
Others. . . . . . . . . . . . . . . . . . . . . . . . .	342,337	452,169	611,207	92,607
Total cost of production . . . . . . . . . . . .	2,910,421	3,357,755	4,921,701	745,712
Change in inventory of finished goods
and work in progress . . . . . . . . . . . .	30,590	(122,924)	(69,751)	(10,568)
Reversal of write-down of inventories . .	–	(1,554)	(579)	(88)
Cost of Sales. . . . . . . . . . . . . . . . . . . .	2,941,011	3,233,277	4,851,371	735,056

The cost of production of our MSG segment consists primarily of costs of raw materials such as corn and others, energy (coal), depreciation, employee benefits and others. The table below sets forth the breakdown of the cost of production for the MSG segment.

		For the year ended	December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Major raw materials:
Corn . . . . . . . . . . . . . . . . . . . . . . . .	1,304,277	1,692,010	2,559,799	387,848
Others . . . . . . . . . . . . . . . . . . . . . . .	515,349	371,862	521,779	79,057
Energy (coal) . . . . . . . . . . . . . . . . . . .	284,266	282,358	509,158	77,145
Depreciation . . . . . . . . . . . . . . . . . . . .	108,550	144,205	192,333	29,141
Employee benefit. . . . . . . . . . . . . . . . .	87,412	129,119	166,914	25,290
Others. . . . . . . . . . . . . . . . . . . . . . . . .	309,555	400,056	583,779	88,451
Total cost of production . . . . . . . . . . .	2,609,409	3,019,610	4,533,762	686,932

The cost of production of our xanthan gum segment consists primarily of cost of raw materials such as corn, starch and soybeans, energy, depreciation, employee benefits and others. The table below sets forth the breakdown of the cost of production for our xanthan gum segment.

		For the year ended	December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Major raw materials:
Corn . . . . . . . . . . . . . . . . . . . . . . . .	51,033	76,680	112,451	17,038
Starch . . . . . . . . . . . . . . . . . . . . . . .	23,290	22,314	17,745	2,689
Soy beans /soy bean starch . . . . . . . .	23,302	22,657	22,991	3,483
Energy (coal) . . . . . . . . . . . . . . . . . . .	127,360	103,946	137,423	20,822
Depreciation . . . . . . . . . . . . . . . . . . . .	25,141	33,159	38,680	5,861
Employee benefit. . . . . . . . . . . . . . . . .	18,104	27,276	31,221	4,730
Others. . . . . . . . . . . . . . . . . . . . . . . . .	32,782	52,113	27,428	4,156
Total cost of production . . . . . . . . . . .	301,012	338,145	387,939	58,779

Raw materials used in our MSG segment consist primarily of corn, liquid ammonia and sulphuric acid. Raw materials used in our xanthan gum segment consist primarily of corn, starch and soybeans. The cost of corn is one of our major raw material costs and accounted for 46.6%, 52.7% and 54.3% of our total cost of production for the year ended December 31, 2008, 2009 and 2010, respectively. Major raw material costs amounted to RMB1,917.3 million, RMB2,185.5 million and RMB3,234.8 million (US$490.1 million) for the three years ended December 31, 2008, 2009 and 2010, respectively. The increase in raw material costs was mainly due to the increased purchase prices of our major raw materials and increased volume of raw materials purchased.

Energy derived from coal accounts for the largest proportion of cost of production for our xanthan gum segment. Energy costs accounted for 14.1%, 11.5% and 13.1% of our total cost of production for the year ended December 31, 2008, 2009 and 2010, respectively and amounted to RMB411.6 million, RMB386.3 million and RMB646.6 million (US$98.0 million) for the same period, respectively. The cost of coal accounted for 42.3%, 30.7% and 35.4% of our cost of production of xanthan gum for the years ended December 31, 2008, 2009 and 2010. The increase in energy costs was mainly due to an increase in the purchase price of coal and increased volume of coal purchased.

Depreciation represents depreciation of our production plants and equipment. Depreciation amounted to RMB133.7 million, RMB177.4 million and RMB231.0 million (US$35.0 million) for the year ended December 31, 2008, 2009 and 2010, respectively. The increase was due to our expanded production capacity over the past three years.

Employee benefit includes payments to employees in our production plants in respect of their wages, salaries and allowance. Employee benefit costs amounted to RMB105.5 million, RMB156.4 million and RMB198.1 million (US$30.0 million) for the year ended December 31, 2008, 2009 and 2010, respectively. The increase in employee benefit was mainly due to the increased employee headcount as a result of operation expansions, as well as increased wages.

Others, which mainly consists of repair and maintenance expenses and non-key raw materials, amounted to RMB342.3 million, RMB452.2 million and RMB611.2 million (US$92.6 million) for the year ended December 31, 2008, 2009 and 2010, respectively. The increase in others was primarily due to our increased production capacity.

Gross Profit and Gross Profit Margin

For the year ended December 31, 2008, 2009 and 2010, our gross profit was approximately RMB644.3 million, RMB1,399.6 million and RMB1,565.1 million (US$237.1 million), respectively. The table below sets forth the gross profit and gross profit margin of our MSG and xanthan gum segments for the periods indicated.

MSG segment Gross profit . . . . . . . . . . . . . . . . . . . Gross profit margin (%) . . . . . . . . . . Xanthan gum segment Gross profit . . . . . . . . . . . . . . . . . . . Gross profit margin (%) . . . . . . . . . .	For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
	2008	2009	2010	2010
	(RMB’000) 488,936 15.6 155,396 34.4	(RMB’000) 1,250,764 29.6 148,843 36.5	(RMB’000) 1,300,291 22.7 264,763 38.8	(US$’000) 197,014 22.7 40,116 38.8

Other Income

Our other income primarily consists of interest income, amortization of deferred government grants related to the purchase of qualified domestic manufactured equipment and acquisition of certain property, plant and equipment, environment protection and technology improvement, as well as sales of waste products. For the year ended December 31, 2008, 2009 and 2010, our other income was approximately RMB44.3 million, RMB63.9 million and RMB110.6 million (US$16.8 million), respectively.

Government grants represent (i) a reduction in income tax granted to Shandong Fufeng in the year ended December 31, 2003, Baoji Fufeng in the year ended December 31, 2008 and Inner Mongolia Fufeng in the year ended December 31, 2009 and 2010, respectively, on purchase of certain qualified domestic manufactured equipment; and (ii) cash grants from the local government relating to the acquisition of certain property, plant and equipment, environment protection and technology improvement.

Sales of waste materials represent the sales of cinder which were produced as by-products during the burning of coal in electricity generation. Following the construction of additional production lines at our Baoji Plant in 2009 and at our Inner Mongolia Plant in 2009 and 2010, there was a significant increase in production output leading to an increase in consumption of coal, and thus, an increase in the sales of cinder.

Selling and Marketing Expenses

Our selling and marketing expenses primarily consist of freight costs, staff costs and advertisement fees. Freight costs consist of expenses related to our shipment of products to customers. For the three years ended December 31, 2008, 2009 and 2010, our selling and marketing expenses were approximately RMB166.4 million, RMB215.7 million and RMB272.0 million (US$41.2 million), respectively, representing 4.6%, 4.7% and 4.2% of our revenue, respectively.

Administrative Expenses

Administrative expenses mainly composed of staff costs, research and development expense, travelling expense, depreciation, entertainment fee, amortization of leasehold land and payments, professional fees, environment protection fee, repair and maintenance and pre-operating expenses. As the scale of our business increased during the three years ended December 31, 2008, 2009 and 2010, we incurred more administrative expenses to support our operation during the same periods. For the three years ended December 31, 2008, 2009 and 2010, administrative expenses were approximately RMB142.0 million, RMB194.9 million and RMB277.7 million (US$42.1 million), respectively, and represented 4.0%, 4.2% and 4.3% of our revenue, respectively.

Staff costs mainly include wages, salaries and allowances, retirement benefit costs, and share options granted to our directors and employees under a pre-IPO and post-IPO share option scheme which we adopted on January 10, 2007.

Environmental protection fee mainly includes payment to the local environmental protection administration bureau for environment protection in western China in connection with our Baoji Plant in 2009 and at our Inner Mongolia Plant in 2009 and 2010.

Professional fees mainly include auditing, legal and other advisory fees.

Other Operating Expenses

Our other operating expenses primarily include loss on disposal of property, plant and equipment and foreign exchange loss. For the year ended December 31, 2008, 2009 and 2010, our other operating expenses were approximately RMB12.2 million, RMB4.0 million and RMB22.2 million (US$3.4 million), respectively.

Finance Costs

Our finance costs were approximately RMB42.7 million, RMB25.3 million and RMB32.4 million (US$4.9 million) for the years ended December 31, 2008, 2009 and 2010, respectively.

Finance costs consist of interest expense on bank borrowings and other borrowings, including the 2010 convertible bonds, during the relevant periods.

Income Tax Expenses

Our income tax expense during the three years ended December 31, 2008, 2009 and 2010 represent PRC EIT. During the three years ended December 31, 2008, 2009 and 2010, our effective tax rate was 9.4%, 9.3% and 9.8%, respectively. Our effective tax rate increased from 9.3% in 2009 to 9.8% in 2010 mainly because of increased taxable income attributable to Baoji Fufeng, which was subject to an income tax rate of 15% in 2010, compared to an income tax rate of 7.5% in 2009.

Effective on January 1, 2008, in accordance with relevant PRC tax laws, the EIT rate applicable to our subsidiaries incorporated in the PRC was 25% for those with original applicable EIT rates higher than 25%, or gradually increased to 25% in a five-year transition period from 2008 to 2012 for those with original applicable EIT rates lower than 25%. However, our subsidiaries will continue to enjoy any existing tax preferential treatment up to the end of the tax concession period, after which the 25% standard rate will apply.

The following table summarizes the EIT rates applicable as of December 31, 2010 to our three subsidiaries enjoying preferential tax treatment.

Standard/preferential tax rate . . . . . . . . Tax holiday Full exemption (year) . . . . . . . . . . . . 50% exemption (year) . . . . . . . . . . . .	Shandong Fufeng 15% (1) Already expired Already expired	Baoji Fufeng 15% (2) Already expired Already expired	Inner Mongolia Fufeng
			15% (2) Already expired 2009 to 2011

Notes:

(1) Shandong Fufeng was approved as a high-tech enterprise, which was entitled to a preferential income tax rate of 15%, until December 31, 2010.

(2) Due to policies aimed at encouraging investment in western China, Baoji Fufeng and Inner Mongolia Fufeng were entitled to a preferential enterprise income tax rates of 15% and 15%, respectively, in 2010.

Profit for the Year

For the year ended December 31, 2008, 2009 and 2010, our profit for the year was RMB294.7 million, RMB928.3 million and RMB966.1 million (US$146.4 million), respectively.

RESULTS OF OPERATIONS

The following table sets forth our results of operations for the periods indicated:

		For the year ended December 31,	For the year ended December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Revenue . . . . . . . . . . . . . . . . . . . . . .	3,585,343	4,632,884	6,416,425	972,186
Cost of sales . . . . . . . . . . . . . . . . . . . .	(2,941,011)	(3,233,277)	(4,851,371)	(735,056)
Gross profit . . . . . . . . . . . . . . . . . . . .	644,332	1,399,607	1,565,054	237,130
Other income . . . . . . . . . . . . . . . . . . .	44,300	63,908	110,550	16,750
Selling and marketing expenses . . . . . .	(166,407)	(215,715)	(272,008)	(41,213)
Administrative expenses . . . . . . . . . . .	(141,961)	(194,910)	(277,697)	(42,075)
Other operating expenses . . . . . . . . . .	(12,222)	(4,042)	(22,187)	(3,362)
Operating profit . . . . . . . . . . . . . . . .	368,042	1,048,848	1,103,712	167,230
Finance costs . . . . . . . . . . . . . . . . . . .	(42,662)	(25,251)	(32,383)	(4,907)
Profit before income tax . . . . . . . . . .	325,380	1,023,597	1,071,329	162,323
Income tax expenses . . . . . . . . . . . . . .	(30,674)	(95,312)	(105,278)	(15,951)
Profit for the year and attributable to
the Shareholders . . . . . . . . . . . . . .	294,706	928,285	966,051	146,372

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Our revenue increased by approximately 38.5% from approximately RMB4,632.9 million for 2009 to approximately RMB6,416.4 million (US$972.2 million) for 2010. This increase was primarily due to increased sales volume as a result of the increase in our production capacity and market shares for MSG and xanthan gum.

MSG segment

Revenue from our MSG segment increased by approximately 35.7% from approximately RMB4,224.8 million in 2009 to approximately RMB5,734.7 million in 2010. This increase was primarily due to an increase of approximately 68.5% in the sales volume of MSG, from approximately 292,369 tonnes in 2009 to approximately 492,560 tonnes in 2010. This increase was partially offset by a decrease in glutamic acid sales volume by approximately 81.3%, from approximately 100,993 tonnes in 2009 to 18,936 tonnes in 2010, as part of our strategy to focus on MSG production and use our glutamic acid for MSG production internally rather than for external sales. Our average selling price for MSG increased by approximately 2.9% from RMB7,680 per tonne in 2009 to RMB7,903 per tonne in 2010. This was partially offset by a decrease in the average selling price of our fertilizer by approximately 4.7% from RMB727 per tonne in 2009 to RMB693 per tonne in 2010.

Our MSG sales volume increased primarily because of continuing domestic demand and the growth of the Chinese economy at large, particularly in its domestic consumption. Our sales volume was supported by our increased annual production capacity of approximately 77.0% from 305,000 tonnes in 2009 to 540,000 tonnes in 2010. The increase in the average selling price of our MSG reflected an increase in the market cost of corn of approximately 23.2%, translating into an increase in the average selling price of our MSG products.

Xanthan gum segment

Revenue from our xanthan gum segment increased by approximately 67.0% from approximately RMB408.1 million in 2009 to approximately RMB681.7 million in 2010. This increase was due to a significant growth in demand primarily driven by the recovery of the global economy in 2010, as approximately 86.4% of our xanthan gum was exported in 2010. While the average selling price of our xanthan gum decreased due to price competition, the sales volume of our xanthan gum increased significantly by approximately 80.0% from approximately 19,344 tonnes in 2009 to approximately 34,819 tonnes in 2010.

Cost of Sales

Our cost of sales increased by approximately 50.0% from approximately RMB3,233.3 million for 2009 to approximately RMB4,851.4 million (US$735.1 million) for 2010. This increase was primarily due to increases in major material costs and sales volume as we further expanded our production capacity.

MSG segment

Our cost of production in the MSG segment increased by approximately 50.1% from approximately RMB3,019.6 million in 2009 to approximately RMB4,533.8 million in 2010. The increase in cost of production of the MSG segment in 2010 was primarily due to our increased production volume and increased raw material costs. Corn accounted for 56.5% of our total production cost for the MSG segment in 2010, largely in line with its proportion of the total production cost for the MSG segment in 2009 of 56.0%, despite a significant increase in the average unit cost of corn from RMB1,413 per tonne in 2009 to RMB1,741 per tonne in 2010. The cost of coal also increased significantly in 2010, with our average unit cost increasing from RMB254 per tonne in 2009 to RMB312 per tonne in 2010, representing an increase of 22.8%. These increases were due to increased commodity prices in the PRC economy at large, resulting from the growth of the PRC economy and its continued recovery from the financial crisis.

Xanthan gum segment

Our cost of production in the xanthan gum segment increased by approximately 14.7% from approximately RMB338.1 million in 2009 to approximately RMB387.9 million in 2010. Our cost of production from the xanthan gum segment increased more slowly than the increase in revenue from sales of xanthan gum over the same period because we produced a higher proportion of xanthan gum at our Inner Mongolia Plant, which has a lower coal cost compared to our other plants. Our cost of corn as a percentage of cost of production of the xanthan gum segment increased from 22.7% in 2009 to 29.0% in 2010 as a result of an increase in the unit cost of corn from approximately RMB1,403 per tonne in 2009 to approximately RMB1,711 per tonne in 2010, representing an increase of 22.0%. Our cost of coal as a percentage of the cost of production of xanthan gum increased from 30.7% in 2009 to 35.4% in 2010, mainly due to an increase in the cost of coal by 16.2%, from approximately RMB228 per tonne in 2009 to RMB265 per tonne in 2010.

Gross Profit and Gross Profit Margin

As a result of the foregoing, our gross profit increased by approximately RMB165.5 million (US$25.1 million), or approximately 11.8%, from approximately RMB1,399.6 million for 2009 to approximately RMB1,565.1 million (US$237.1 million) for 2010.

Other Income

Our other income increased by approximately 73.0% from approximately RMB63.9 million for 2009 to approximately RMB110.6 million (US$16.8 million) for 2010. This increase was primarily due to increased sales of waste products resulting from our overall increased production, as well as amortization of deferred government grants related to the acquisition of environmental protection equipment and improvements in technology.

Selling and Marketing Expenses

Our selling and marketing expenses increased by approximately 26.1% from approximately RMB215.7 million for 2009 to approximately RMB272.0 million (US$41.2 million) for 2010. This increase was primarily due to increased freight expenses which were in line with our increased sales.

Administrative Expenses

Our administrative expenses increased by approximately 42.5% from approximately RMB194.9 million for 2009 to approximately RMB277.7 million (US$42.1 million) for 2010. This increase was primarily due to an increase in administrative personnel due to our increased operation scale, as well as increased wages for these personnel. In addition, we incurred increased research and development expenses related to more research projects. We also had an impairment provision for intangible assets of RMB14.0 million in relation to patents owned by Shenhua Pharmaceutical.

Other Operating Expenses

Our other operating expenses increased by approximately 448.9% from approximately RMB4.0 million for 2009 to approximately RMB22.2 million (US$3.4 million) for 2010. This increase was primarily due to an exchange loss of RMB18.0 million on our assets and liabilities denominated in Hong Kong dollars and U.S. dollars.

Finance Costs

Our finance costs increased by approximately 28.2% from approximately RMB25.3 million for 2009 to approximately RMB32.4 million (US$4.9 million) for 2010. This increase was primarily due to our issuance of the 2010 Convertible Bonds, as well as an increase in interest rates in 2010.

Profit Before Income Tax

As a result of the foregoing, our profit before income tax increased by approximately 4.7% from approximately RMB1,023.6 million for 2009 to approximately RMB1,071.3 million (US$162.3 million) for 2010.

Income Tax Expenses

Our income tax expenses increased by approximately 10.5% from approximately RMB95.3 million for 2009 to approximately RMB105.3 million (US$16.0 million) for 2010. This increase was primarily due to an increased effective tax rate of 9.8% in 2010 compared to 9.3% in 2009, as a result of increased taxable income attributable to Baoji Fufeng, which was subject to a tax rate of 15% in 2010, compared to 7.5% in 2009.

Profit for the Year

Our profit for the year increased by approximately RMB37.8 million (US$5.7 million), or approximately 4.1% from approximately RMB928.3 million for 2009 to approximately RMB966.1 million (US$146.4 million) for 2010.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenue

Our revenue increased by approximately 29.2% from approximately RMB3,585.3 million in 2008 to approximately RMB4,632.9 million in 2009. This increase was primarily due to an increase in both the sales volume and the average selling price of certain of our products resulting from the improved economic environment in 2009 as compared to 2008.

MSG segment

Revenue from our MSG segment increased by approximately 34.8% from approximately RMB3,133.6 million in 2008 to approximately RMB4,224.8 million in 2009. This increase was primarily due to an increase in the sales volume of MSG and the average selling price of MSG and glutamic acid. Our MSG sales volume increased by approximately 99.9% from 146,185 tonnes in 2008 to 292,369 tonnes in 2009. This was partially offset by a decrease in glutamic acid sales volume by approximately 37.9% from 162,708 tonnes in 2008 to 100,993 tonnes in 2009. Our average selling price for MSG increased by approximately 11.9% from RMB6,865 per tonne in 2008 to RMB7,680 per tonne in 2009. Our average selling price for glutamic acid also increased by approximately 10.2% from RMB6,474 per tonne in 2008 to RMB7,135 per tonne in 2009. This was partially offset by a decrease in the average selling price of our fertilizers by approximately 29.1% from RMB1,026 per tonne in 2008 to RMB727 per tonne in 2009.

Our MSG sales volume increased primarily because of strong domestic demand, boosted by a favorable macroeconomic environment and a shift in national policy from an infrastructure investment-driven economy to a more consumption-driven economy, as well as our increased marketing efforts to increase the sales of our MSG in 2009. MSG sales volume reflected the increase in our MSG annual production capacity by approximately 77.7% from 171,667 tonnes in 2008 to 305,000 tonnes in 2009. Although our annual glutamic acid production capacity increased by approximately 27.3% from 275,000 tonnes to 350,000 tonnes in 2009, our glutamic acid sales volume decreased in that year. This was because, in 2009, we increased our consumption of glutamic acid in line with our strategy to produce more MSG and correspondingly decreased our sales of glutamic acid to our customers. The average selling price of our MSG and glutamic acid increased reflecting an increase in the market cost of corn, which translated into an increase in the average selling price of our MSG and glutamic acid products.

Xanthan gum segment

Revenue from our xanthan gum segment decreased by approximately 9.7% from approximately RMB451.7 million in 2008 to approximately RMB408.1 million in 2009. This decrease was primarily due to a decrease in the average selling price of xanthan gum by approximately 2.8% from RMB21,594 per tonne in 2008 to approximately RMB20,989 per tonne in 2009, as well as a decrease in our sales volume of xanthan gum by approximately 6.1% from 20,590 tonnes in 2008 to 19,344 tonnes in 2009. The decrease in both average selling price and sales volume of xanthan gum was caused by the global economic downturn and falling oil prices, which adversely impacted the world demand for xanthan gum, as well an increased supply of xathan gum on the market from our increased production.

Cost of Sales

Our cost of sales increased by approximately 9.9% from approximately RMB2,941.0 million in 2008 to approximately RMB3,233.3 million in 2009. The increase in cost of sales in 2009 was proportionally smaller than the increase in revenue in 2009, primarily due to our improved production efficiency and a decrease in the costs of our main raw materials in that year.

MSG segment

Our cost of production in the MSG segment increased by approximately 15.7% from approximately RMB2,609.4 million in 2008 to approximately RMB3,019.6 million in 2009. The increase in cost of production of the MSG segment in 2009 was proportionally smaller than the increase in revenue in 2009, because the increase in the prices of raw materials used in production was lower than the increase in average selling prices of products in this segment. Our cost of corn as a percentage of cost of production of the MSG segment increased from approximately 50.0% in 2008 to 56.0% in 2009, mainly due to the increase in the price of corn relative to our other raw materials, such as liquid ammonia, sulphuric acid, as well as a decrease in the cost of coal. Our average unit cost of corn decreased by approximately 0.8% from RMB1,424 per tonne in 2008 to RMB1,413 per tonne in 2009. Our cost of coal as a percentage of cost of production of the MSG segment decreased in 2009 as compared to 2008, mainly due to a decrease in the average unit cost of coal resulting from the expansion of production capacity at our Inner Mongolia Plant, which procured coal at relatively lower prices due to the local coal market conditions. The average cost of coal used in our MSG segment decreased by approximately 31.2% from RMB369 per tonne in 2008 to RMB254 per tonne in 2009.

Xanthan gum segment

Our cost of production in the xanthan gum segment increased by approximately 12.3% from approximately RMB301.0 million in 2008 to approximately RMB338.1 million in 2009. Our cost of production from the xanthan gum segment increased in 2009 as compared to 2008 while revenue decreased over the same period, because demand for xanthan gum from our customers in the oil industry decreased as a result of the global economic downturn which caused a decrease in the average selling price of xanthan gum in 2009. Our cost of corn as a percentage of cost of production increased from approximately 17.0% in 2008 to 22.7% in 2009, mainly due to the decrease in the cost of coal. Our cost of coal as a percentage of cost of production of the xanthan gum segment decreased from 42.3% in 2008 to 30.7% in 2009, mainly due to a decrease in the average unit cost of coal resulting from the expansion of production capacity at our Inner Mongolia Plant. The average unit cost of coal in our xanthan gum segment also decreased by approximately 37.5% from RMB365 per tonne in 2008 to RMB228 per tonne in 2009.

Gross Profit and Gross Profit Margin

As a result of the foregoing, our gross profit increased by approximately RMB755.3 million, or approximately 117.2%, from approximately RMB644.3 million in 2008 to approximately RMB1,399.6 million in 2009, and our gross profit margin increased from approximately 18.0% in 2008 to 30.2% in 2009.

Other Income

Other income increased by approximately 44.3% from approximately RMB44.3 million in 2008 to approximately RMB63.9 million in 2009. This increase was primarily due to an increase in the amortization of deferred government grants and sales of waste products.

Selling and Marketing Expenses

Our selling and marketing expenses increased by approximately 29.6% from approximately RMB166.4 million in 2008 to approximately RMB215.7 million in 2009. This increase was primarily due to a much higher advertisement fee in line with our increased sales.

Administrative Expenses

Our administrative expenses increased by approximately 37.3% from approximately RMB142.0 million in 2008 to approximately RMB194.9 million in 2009. This increase was primarily due to an increase in the number of our administrative staff, an increase in management salaries, as well as amortization of share options as a result of an increase in our share price in 2009. In addition, research and development related expenses also increased in 2009 as compared with 2008 as more research and development projects were initiated during 2009.

Other Operating Expenses

Other operating expenses decreased by approximately 66.9% from approximately RMB12.2 million for 2008 to approximately RMB4.0 million for 2009.

Finance Costs

Our finance costs decreased by approximately 40.8% from approximately RMB42.7 million for 2008 to approximately RMB25.3 million for 2009. This decrease was primarily due to a decrease in our average bank loan balance, as well as a decrease in interest rates on our bank borrowings.

Profit Before Income Tax

As a result of the foregoing, our profit before income tax increased by approximately 214.6% from approximately RMB325.4 million in 2008 to approximately RMB1,023.6 million in 2009.

Income Tax Expenses

Our income tax expenses increased by approximately 210.7% from approximately RMB30.7 million in 2008 to approximately RMB95.3 million in 2009. This increase was in line with the increase in our profit before tax.

Profit for the Year

Our profit for the year increased by approximately RMB633.6 million, or approximately 215.0% from approximately RMB294.7 million in 2008 to approximately RMB928.3 million in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The following table sets forth a summary of our net cash flow for the periods indicated:

For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 448,943 (399,296) (53,790) (4,143) 228,849	2009 (RMB’000) 586,174 (222,741) (245,457) 117,976 224,706	2010 (RMB’000) 1,119,950 (1,394,679) 699,998 425,269 342,682	2010
			(US$’000) 169,689 (211,315) 106,060 64,434 51,922
224,706	342,682	767,951	116,356

Net cash generated from operating activities

The following table summarizes our cash flow from operating activities for the periods indicated:

		Year ended December 31,	Year ended December 31,
2008 (RMB’000) 512,042 (2,231) 509,811 (42,662) (18,206)		2009 (RMB’000) 1,227,177 (590,655) 636,522 (25,251) (25,097)	2010 (RMB’000) 1,330,934 (143,192) 1,187,742 (24,517) (43,275)	2010
				(US$’000) 201,657 (21,696) 179,961 (3,715) (6,557)
	448,943	586,174	1,119,950	169,689

Our net cash generated from operating activities was approximately RMB1,120.0 million (US$169.7 million) in the year December 31, 2010. This net cash inflow was primarily a result of (i) profit before income tax of approximately RMB1,071.3 million and (ii) the adjustment for depreciation in the amount of approximately RMB251.3 million, which was partially offset by (i) an increase in inventories in the amount of approximately RMB159.1 million, (ii) an increase in trade and other receivables in the amount of approximately RMB119.5 million and (iii) an increase in restricted bank deposits in the amount of approximately RMB118.4 million.

Our net cash generated from operating activities was approximately RMB586.2 million in 2009. This net cash inflow was primarily a result of (i) profit before income tax of approximately RMB1,023.6 million and (ii) the adjustment for depreciation in the amount of approximately RMB190.3 million, which was partially offset by (i) an increase in inventories in the amount of approximately RMB193.2 million and (ii) an increase in trade and other receivables in the amount of approximately RMB469.3 million.

Our net cash generated from operating activities was approximately RMB448.9 million in 2008. This net cash inflow was primarily a result of (i) profit before income tax of approximately RMB325.4 million and (ii) the adjustment for depreciation in the amount of approximately RMB152.5 million, which was partially offset by (i) an increase in inventories in the amount of approximately RMB27.4 million and (ii) an increase in trade and other receivables in the amount of approximately RMB18.2 million.

Net cash used in investing activities

Our net cash used in investing activities was approximately RMB1,394.7 million (US$211.3 million) for the year ended December 31, 2010, primarily reflecting payments for the acquisition of property, plant and equipment in the amount of approximately RMB1,416.3 million mainly with respect to the construction of our Northeastern Plant Phase I and the expansion of our xanthan gum production capacity at our Inner Mongolia Plant.

Our net cash used in investing activities was approximately RMB222.7 million for the year ended December 31, 2009, primarily reflecting payments for the acquisition of property, plant and equipment in the amount of approximately RMB217.8 million with respect to the construction of our Inner Mongolia Plant and Baoji Plant.

Our net cash used in investing activities was approximately RMB399.3 million in 2008, primarily reflecting (i) payments for the acquisition of property, plant and equipment in the amount of approximately RM355.6 million with respect to the construction of production facilities at our Inner Mongolia Plant; and (ii) purchase of leasehold land payments in the amount of approximately RMB46.8 million with respect to the construction of our Baoji Plant.

Net cash generated from/used in financing activities

Our net cash generated from financing activities was approximately RMB700.0 million (US$106.1 million) for the year ended December 31, 2010 primarily due to (i) net proceeds of approximately RMB1,011.6 million from the issuance of the 2010 Convertible Bonds, (ii) proceeds from bank borrowings in the amount of approximately RMB645.0 million, which were partially offset by repayments of bank borrowings in the amount of RMB688.0 million and dividends paid to our shareholders of RMB379.0 million.

Our net cash used in financing activities was approximately RMB245.5 million for the year ended December 31, 2009, primarily reflecting (i) repayments of bank borrowings in the amount of approximately RMB636.0 million and (ii) dividends paid to our shareholders in the amount of approximately RMB292.7 million, which was partially offset by proceeds from bank borrowings in the amount of approximately RMB646.0 million.

Our net cash used in financing activities was approximately RMB53.8 million in 2008, primarily reflecting repayments of bank borrowings in the amount of approximately RMB810.3 million, which was partially offset by proceeds from bank borrowings in the amount of approximately RMB750.0 million.

Capital Commitments and Contingent Liabilities

Capital commitments

We have entered into contracts to purchase property, plant and equipment. The following table sets forth the total amount of our commitments as of the indicated dates.

Purchase of property, plant and equipment Contracted but not yet incurred . . . . .		As of December 31,	As of December 31,
	2008	2009	2010	2010
	(RMB’000) 12,958	(RMB’000) 175,522	(RMB’000) 416,489	(US$’000) 63,104

Our capital commitments as of December 31, 2008 primarily related to purchases of equipment and machinery for our Baoji and Inner Mongolia Plants. Our capital commitments as of December 31, 2009 increased significantly compared to those as of December 31, 2008 because of further purchases of production equipment and machinery for our Baoji and Inner Mongolia Plants. Our capital commitments as of December 31, 2010 increased substantially compared to those as of December 31, 2009 because of the construction of, and the purchase of production equipment for, our Northeastern Plant Phase I.

Operating lease commitments

We lease buildings under non-cancellable lease agreements. Our future aggregate minimum lease payments under these non-cancellable operating leases are set forth as of the indicated dates in the table below.

	As of December 31,	As of December 31,	As of December 31,
2008 (RMB’000) 166 –	2009 (RMB’000) 679 713		2010 (RMB’000) 451 263	2010
				(US$’000) 68.3 39.8
166		1,392	714		108.2

Contingent liabilities

We do not have contingent liabilities that will have an adverse effect on our liquidity, results of operation, or financial positions.

Indebtedness

We have financed our operations primarily through cash flows from operations, short-term and long-term loans from banks as well as proceeds from the issue of the 2010 Convertible Bonds. The table below sets forth our short-term and long-term borrowings as of the dates indicated.

		As of December 31,	As of December 31,	As of December 31,
2008 (RMB’000) 232,000 80,000 – 312,000 – 312,000 – 30,000 246,000 – 276,000		2009 (RMB’000) 150,000 100,000 – 250,000 (70,000) 180,000 – – 348,000 70,000 418,000		2010 (RMB’000) – – 981,458 981,458 – 981,458 30,000 30,000 495,000 – 555,000	2010
					(US$’000) – – 148,706 148,706 – 148,706 4,545 4,545 75,001 – 84,091
	588,000		598,000	1,536,458	232,797

As of December 31, 2008, 2009 and 2010, our borrowings (including the 2010 Convertible Bonds) were repayable as follows:

		As of December 31,	As of December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Within 1 year . . . . . . . . . . . . . . . . . . .	276,000	418,000	555,000	84,091
Between 1 and 2 years . . . . . . . . . . . .	312,000	180,000	–	–
Between 2 and 5 years . . . . . . . . . . . . .	–	–	981,458	148,706
Total . . . . . . . . . . . . . . . . . . . . . . . . .	588,000	598,000	1,536,458	232,797

As of December 31, 2010, we had total borrowings of approximately RMB1,536.5 million (US$232.8 million), of which approximately RMB555.0 million (US$84.1 million), were bank borrowing. RMB30.0 million of our bank borrowings were guaranteed by Mr. Li and secured by leasehold land and plant as of December 31, 2010. A further RMB30.0 million of our bank borrowings were secured by restricted bank deposits of RMB2.5 million. Please also see “Related Party Transactions” in this offering memorandum. The average weighted interest rate of our bank borrowing was 5.30% as of December 31, 2010. We expect to continue to obtain bank loans from time to time to fund our working capital requirements. Our other borrowings as of December 31, 2010 of approximately RMB525.0 million (US$79.5 million) were unsecured. The remainder of our other borrowing represented the 2010 Convertible Bonds. For details of our bank borrowings and other borrowings, please refer to the section headed “Description of Other Material Indebtedness.”

As of December 31, 2010, all of our borrowings were denominated in Renminbi.

The weighted average effective interest rates of our bank borrowings are set forth in the following table for the periods indicated:

RMB bank borrowings . . . . . . . . . . . . . . . . . . . .	As of December 31,	As of December 31,
	2008	2009	2010
	6.59%	4.98%	5.30%

Since December 31, 2010, there has not been any material adverse change in our indebtedness and contingent liabilities. For more information, see “Description of Other Material Indebtedness.”

CAPITAL EXPENDITURES

Historical Capital Expenditures

Our capital expenditures include expenditures for property, plant and equipment and leasehold land payments. The table below sets forth capital expenditures for the year or period indicated.

		As of December 31,	As of December 31,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Acquisition of subsidiary . . . . . . . . . .	52,873	–	–	–
Purchase of leasehold land payments . .	63,447	10,800	42,631	6,459
Purchase of property, plant and
equipment . . . . . . . . . . . . . . . . . . . .	462,566	744,774	1,855,705	281,167
Purchases of intangible assets(1) . . . . . .	–	–	14,002	2,122
Total . . . . . . . . . . . . . . . . . . . . . . . . .	578,886	755,574	1,912,338	289,748

Note:

(1) Purchases of intangible assets are related to purchases of patents by Shenhua Pharmaceutical for which an impairment was subsequently recorded on our income statement.

Our capital expenditures during each year ended December 31, 2008, 2009 and 2010 primarily related to the expansion of our business operations.

Our capital expenditures in 2008 related primarily to (i) the migration of our MSG and glutamic acid production lines from our Shandong Plant to our Baoji Plant and Inner Mongolia Plant, which was completed in November 2008; (ii) the construction of 100,000 tonnes of MSG production capacity at our Inner Mongolia Plant, which was completed in November 2008; and (iii) the construction of corn oil and chicken powder production facilities at our Shandong Plant, which were completed at the end of 2008.

Our capital expenditures in 2009 related primarily to (i) the construction of 150,000 tonnes of MSG production capacity at our Inner Mongolia Plant, which was completed in November 2009; (ii) the construction of 70,000 tonnes of glutamic acid production capacity and 100,000 tonnes of fertilizer production capacity at our Baoji Plant, which was completed in December 2009; and (iii) the re-engineering of the production processes at our Baoji Plant and Inner Mongolia Plant to increase our production capacity of glutamic acid and MSG by 40,000 tonnes and 110,000 tonnes, respectively.

Our capital expenditures in 2010 related primarily to (i) the construction of 12,000 tonnes of xanthan gum production capacity at our Inner Mongolia Plant, which was completed during the first half of 2010 as well as the construction of our Northeastern Plant Phase I; (ii) the construction of 80,000 tonnes of synthetic ammonia production capacity at our Inner Mongolia Plant, which was completed in late 2010; (iii) the construction of 5,000 tonnes of fructose production capacity at our Inner Mongolia Plant, which was completed in mid-2010; (iv) the construction of additional capacity at our thermal power plant in Inner Mongolia, which was completed in late 2010; and (v) the construction of railway facilities at our Inner Mongolia Plant, which we expect to complete in 2011.

Leasehold land payments represent the prepaid operating lease payments for the medium term leasehold land (10 to 50 years) in the PRC where the Shandong Plant and Baoji Plant are located. We have historically funded our capital expenditures from internally generated cash, short-term and long-term bank borrowings, proceeds from share offerings and issuance of equity-linked security products.

Planned Capital Expenditures

Our capital expenditures are expected to primarily consist of expenditures related to the construction of our Northeastern Plant Phase I which is expected to have an annual production capacity of 200,000 tonnes of MSG, 250,000 tonnes of fertilizer and 100,000 tonnes of synthetic ammonia, together with supporting facilities including a thermal power plant and self-owned railway facilities. Commercial production is scheduled to commence in the second half of 2011.

In addition, we also plan to commence construction of Northeastern Plant Phase II by the end of 2011, which is expected to have an annual production capacity of 250,000 tonnes of MSG and 30,000 tonnes of threonine together with supporting facilities including a thermal power plant.

The majority of our capital expenditure plans are flexible and may be adjusted according to market conditions.

Based on our current plan, we estimate that an aggregate of approximately RMB1,200.0 million (US$181.8 million) will be required to fund construction of our Northeastern Plant Phase I. See “Use of Proceeds” for further information.

OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging or research and development services with us.

MARKET RISKS

Foreign Exchange Risk

We operate mainly in the PRC and most our transactions, assets and liabilities are denominated in RMB. Our exposure to foreign exchange risk is principally due to our receipt of foreign currencies, mainly U.S. dollars, from the sale of products to countries or areas outside the PRC. Foreign currencies received from export sales represented approximately 16%, 10% and 13% of our revenue for the three years ended December 31, 2008, 2009 and 2010, respectively. We manage foreign exchange risk arising from export sales of our products by asking overseas customers to pay in advance or by keeping the credit period available to overseas customers as short as possible in order to reduce the effects of any fluctuation between foreign currencies and the Renminbi.

Since the listing of our shares on the Main Board of the Hong Kong Stock Exchange in early 2007, we also received listing proceeds denominated in H.K. dollars. The listing proceeds were mainly used for our expansion in the PRC. We manage foreign exchange risk arising from listing proceeds by remitting the necessary funds into the PRC and converting them into Renminbi as soon as practicable in order to reduce the effects of any fluctuation between the H.K. dollar and the Renminbi.

We recognize foreign exchange gain or loss on our income statement due to changes in value of assets denominated in foreign currencies during the relevant accounting period. Appreciation of the Renminbi against the U.S. dollar generally results in loss arising from our bank deposits in Hong Kong dollars, U.S. dollars and the Euro. A depreciation of the Renminbi against the U.S. dollar would have the opposite effect. In addition, a depreciation of Renminbi would negatively affect the value of dividends paid by our PRC subsidiaries, which may in turn affect our ability to service foreign currency-denominated debts.

Fluctuations in the foreign exchange rate have had and will continue to have an impact on our business, financial condition and results of operations. See “Risk Factors — Risks Relating to the Notes — We may be subject to risks presented by fluctuations in exchange rates between the Renminbi and other currencies, particularly the U.S. dollar.” As of the date of this Offering Memorandum, we have not entered into any transaction to hedge against any fluctuation in foreign currency.

Interest Rate Risk

Our business is sensitive to fluctuations in interest rate. Our exposure to changes in interest rates is mainly attributable to our borrowings. Borrowings at variable rates expose us to cash flow interest rate risk. Borrowings at fixed rate expose us to fair value interest rate risk. A portion of current borrowings bear variable rates and expose us to cash flow interest rate risk. In addition, we are exposed to fair value interest rate risk, which arises from long-term borrowings that bear fixed interest rates. As of December 31, 2010, we had floating rate borrowings of RMB130.0 million (US$19.7 million) and fixed rate borrowings of RMB1,406.5 million (US$213.1 million). As of the date of this offering memorandum, we have not used any interest rate swap to hedge our exposure to interest rate risk.

Higher interest rates may lead to higher borrowing costs and thus adversely affect our revenue and profits. The PBOC benchmark one-year lending rates in China as of December 31, 2008, 2009 and 2010 were 5.31%, 5.31% and 5.81%, respectively. On February 8, 2011, the PBOC announced an increase in its benchmark one year lending rate to 6.06% from 5.81%, effective as of February 9, 2011. We cannot assure you that the PBOC will not further raise lending rates in the future or that our business, financial condition and results of operations will not be adversely affected as a result of these adjustments.

Inflation and Deflation Risk

For the three years ended December 31, 2008, 2009 and 2010, the inflation rate in China as measured by the consumer price index was 5.9%, -0.7% and 3.3%, respectively, according to the National Bureau of Statistics of China. We have not been materially and adversely affected by these inflationary pressures. However, if the consumer price index continues to rise and if we are not able to increase the prices of our services in China, our financial condition will be materially adversely affected. As of the date of this offering memorandum, we had not been materially affected by any inflation or deflation.

Credit Risk

Our credit risk is primarily attributable to our trade receivables. We have adopted a policy of only dealing with what we believe to be creditworthy counterparties and customers with long-term relationships. We believe the credit risk relating to trade receivables is low. Our customers’ default rate has been low in the past. Our credit risk exposure is spread among a large number of customers. As such, we believe we have no significant concentration of credit risk. Ongoing credit evaluation is performed on the financial condition of accounts receivable. We do not hold any collateral for trade and other receivables.

Liquidity Risk

Our management aims to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of available financial resources, including short-term and long-term bank loans and issuance of new ordinary shares. Due to the dynamic nature of our business, our finance department strives to maintain flexibility in funding by maintaining an adequate amount of cash and cash equivalents and having available sources of financing.

The table below sets forth an analysis of our financial liabilities based on remaining maturity period as of December 31, 2008, 2009 and 2010, respectively:

Less than 1 year	Between 1 and 2 years	Between 1 and 2 years	Between 2 and 5 years	Over 5 years	Total
(RMB’000) 276,000 8,711 776,688	(RMB’000) 312,000 34,873 –		(RMB’000) – – –	(RMB’000) – – –	(RMB’000) 588,000 43,584 776,688
1,061,399		346,873	–	–	1,408,272
418,000 22,873 1,000,387		180,000 6,040 –	– – –	– – –	598,000 28,913 1,000,387
1,441,260		186,040	–	–	1,627,300
555,000 69,318 1,625,678		– 46,125 –	1,025,000 115,313 –	– – –	1,580,000 230,756 1,625,678
2,249,996		46,125	1,140,313	–	3,436,434

Note:

(1) The interests on borrowings are calculated based on bank borrowings and the 2010 Convertible Bonds held as of December 31, 2008, 2009 and 2010 without taking into account of future issues. Floating-rate interests are estimated using current interest rate as at December 31, 2008, 2009 and 2010, respectively.

NON-GAAP FINANCIAL MEASURES

We use certain non-GAAP data, such as EBITDA, to provide additional information about our operating performance as we believe that it is a useful measure for certain investors to assess our operating performance, operating cash flow and historical ability to meet debt service and capital expenditure requirement. We calculate EBITDA by adding depreciation and amortization expenses to operating profit.

EBITDA is not a standard measure under HKFRS and should not be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of liquidity, profitability or cash flows derived in accordance with HKFRS. Investors should also note that EBITDA as presented herein may be calculated differently from Consolidated EBITDA as defined and used in the Indenture governing the Notes. Interest expense excludes amounts capitalized.

As a measure of our operating performance, we believe that the most directly comparable HKFRS measure to EBITDA is profit for the year. We operate in a capital intensive industry. We use EBITDA in addition to profit for the year because profit for the year includes many accounting items associated with capital expenditures, such as depreciation and amortization. These accounting items may vary between companies depending on the method of accounting adopted by a company. Funds depicted by this measure may not be available for debt service due to covenant restrictions, capital expenditure requirements and other commitments.

The following table reconciles our operating profit under HKFRS to our definition of EBITDA for the periods indicated.

For the year ended December 31,	For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 368,042 154,773		2009 (RMB’000) 1,048,848 193,310	2010 (RMB’000) 1,103,712 253,945	2010
				(US$’000) 167,229 38,477
	522,815	1,242,158	1,357,657	205,706

You should not consider our definition of EBITDA in isolation or construe it as an alternative to profit for the periods indicated or as an indicator of operating performance or any other standard measure under HKFRS. Our EBITDA measures may not be comparable to similarly titled measures used by other companies. Investors should also note that EBITDA as presented herein may be calculated differently from Consolidated EBITDA as defined and used in the Indentures governing the Notes. Interest expense excludes amounts capitalized. See the sections entitled ‘‘Description of the Notes — Definitions’’ for a description of the manner in which Consolidated EBITDA is defined for purposes of the Indentures governing the Notes.

INDUSTRY OVERVIEW

This industry overview section contains some information and statistics concerning the national PRC biochemical industry that we have derived partly from official government and industry sources. The information in these sources may not be consistent with information compiled by other institutions within or outside China. Due to the inherent time-lag involved in collecting any industry and economic data, some or all of the data contained in this section may only present facts and circumstances being described at the time such data was collected. As such, you should also take into account subsequent changes and developments in our industry and the PRC economy when you evaluate the information contained in this section.

We believe that the sources of such information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. The information has not been independently verified by us, the Joint Lead Managers or any of their respective affiliates or advisors, nor have any other parties involved in this offering independently verified such information or statistics. No representation is given as to the accuracy of such information.

CHINA MACROECONOMIC OVERVIEW

Rapid Economic Growth

The economy in China has continued to grow rapidly since reform commenced in 1978. Since then, the PRC government has continuously emphasized raising economic productivity and improving personal income through market oriented reforms as well as focusing on foreign trade as a major driver of economic growth. Since the introduction of these reforms, the economy in China has consistently maintained high growth, and real GDP has grown at a CAGR of 10.0% since 2003. Economic growth has continued to remain strong and real GDP growth stood at 10.3% in 2010. As result of this trend, China emerged as the second largest economy in the world last year, surpassing Japan. The table below sets out the nominal GDP and real GDP growth of China between 2003 and 2010:

Nominal GDP and Real GDP Growth in China (2003 – 2010)

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

45,000 25.0%
39,798
40,000
34,051
35,000 31,405 20.0%
30,000
25,731
25,000 21,192 15.0%
20,000 15,988 18,322 13.0%
15,000 13,582 11.6%
10,000 10.0% 10.1% 10.4% 9.6% 9.1% 10.3% 10.0%
5,000
0 5.0%
2003 2004 2005 2006 2007 2008 2009 2010
GDP (RMB bn)
Real GDP Growth (%)
----- End of picture text -----

Source: National Bureau of Statistics of China

Further, standard of living in China has continued to increase, as shown through increasing GDP per capita as set out in the table below from 2003 to 2009:

GDP Per Capita in China (2003 – 2009)

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

30,000
25,575
25,000 23,708
20,169
20,000
16,500
14,185
15,000 12,336
10,542
10,000
5,000
0
2003 2004 2005 2006 2007 2008 2009
(RMB)
----- End of picture text -----

Source: National Bureau of Statistics of China

Growth in Food Processing Amongst the Major Drivers of Rising Industrialization

As a result of economic growth in China, industrialization has continued to accelerate, partly driven by technological and processing advancements. From 2004 to 2010, the total value added of the industrial sector grew at a CAGR of 16.1% as illustrated in the chart below. In 2010, food processing was one of the industrial sectors demonstrating the highest year-on-year growth, showing growth of 15.0% from 2009 to 2010.

2004-2010 Industrial Value-Add in China

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

16.0
16
13.5 13.5
14 13.0
11.1
12
9.1
10
7.7
8 6.5
6
4
2
0
2004 2005 2006 2007 2008 2009 2010
Value-Add (RMB tn)
----- End of picture text -----

Source: National Bureau of Statistics of China

Rising Urbanization and Household Consumption

As a result of economic growth in China, urbanization has continued to accelerate. Populations in urban areas have increased substantially, largely due to the significant influx of people from rural areas. The urbanization rate of China has increased from approximately 40.5% in 2003 to 46.6% in 2009. The chart below sets forth the urbanization rate in China between 2003 and 2009:

Urbanization Rate in China (2003 – 2009)

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

48.0% 46.6%
45.7%
46.0% 44.9%
43.9%
44.0% 43.0%
41.8%
42.0% 40.5%
40.0%
38.0%
36.0%
34.0%
32.0%
30.0%
2003 2004 2005 2006 2007 2008 2009
Urbanisation Rate (%)
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Source: National Bureau of Statistics of China

As new cities emerge, and consumers increasingly move away from rural areas to urban areas, they earn substantially higher incomes which results in higher household consumption levels. Historically, from 2003 to 2009, per capita household consumption in urban households has been between 3.6 and 3.8 times higher than rural household consumption. For example, in 2009, urban household consumption per capita was RMB15,025 compared to RMB4,021 in rural households. The chart below sets forth urban versus rural household consumption from 2003 to 2009:

Urban vs. Rural Per Capita Household Consumption in China (2003 – 2009)

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

16,000 Urban Rural 15,025
13,845
14,000
12,211
12,000 10,682
9,644
10,000 8,912
8,060
8,000
6,000
3,795 4,021
4,000 2,103 2,319 2,579 2,868 3,293
2,000
0
2003 2004 2005 2006 2007 2008 2009
Per Capita Consumption (RMB)
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Source: National Bureau of Statistics of China

OVERVIEW OF THE CORN PROCESSING INDUSTRY IN CHINA

China is the second largest corn market globally by both consumption and production and continues to demonstrate steady demand.

Given the abundance of agricultural land and labor, China is currently the second largest producer of corn in the world, accounting for 19% of global output. In addition, given its large population base, China is also the second largest consumer of corn globally accounting for 20% of consumption in 2009/10.

2009/10 Share of Global Corn Production 2009/10 Share of Global Corn Consumption

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

Total Production = 812.3 million tonnes Total Consumption = 808.6 million tonnes
Others Others
India 18% 25%
2%
US
34%
Mexico
3% US
41%
Japan
Argentina 2%
3%
India
Brazil 2%
7%
Mexico
EU
7% 4% EU China
7% 20%
China Brazil
19% 6%
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Source: United States Department of Agriculture

A large factor that has led to China’s leading position in global corn production has been the strong support from the government over the past decade. Since the late 1990s when China had an oversupply of corn and prices of corn were at a low point, the Chinese government put forth strong policy support for both corn planting and the corn processing industry. The government’s strategic plan for the corn industry for 2008-15 called for increased and more efficient processing of corn by nurturing large-scale leading enterprises, “industrialized” supply chains, and the development of “production bases” of farmers. Some examples of government support include income tax waivers, reduced value-added tax rates, loans granted by state-owned banks, interest rate subsidies, access to real estate (often village-owned farmland that must receive government approval to be converted to industrial use) for industrial parks, and reduced tariffs on imported machinery. In addition, local governments would act as intermediaries and organize planting bases of farmers to supply corn. A national program would give subsidies to farmers for the purchase of quality seeds for corn and other grains. As a result of strong government support, China corn production volumes have grown from 106 million tonnes in 2001 to an expected 168 million tonnes in 2011, representing a 58% increase. At the same time, demand has continued to grow significantly given China’s strong consumption-driven economy and huge population base. China’s corn consumption volumes have grown from 120 million

tonnes in 2001 to an expected 162 million tonnes in 2011, representing a 35% increase. The charts below set forth corn production and consumption in China between 2001 and 2011:

2001–2011F China Corn Production Volumes (million tonnes)

2001–2011F China Corn Consumption Volumes (million tonnes)

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

165.9 168.0
158.0
151.6 152.3
139.4
130.3
121.3
114.1 115.8
106.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
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----- Start of picture text -----

159.0 [162.0]
[152.0]
145.0 [149.0]
137.0
120.2 [123.1] [125.9] [128.4] [131.0]
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
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Source: United States Department of Agriculture

In recent years, nearly all of the growth in corn demand in China has been driven by use in industrial processing. Corn-based industrial products include starches, beverage and industrial alcohol, fuel ethanol, lysine, citric acid, and glutamic acid and its salts such as monosodium glutamate among others. Industrial use of corn doubled from 2001 to 2005 to approximately 20 million tonnes and doubled again to 40 million tonnes by 2006. Currently, China demonstrates one of the highest percentages of corn used for food, livestock feed and industrial purposes.

Long Term Use of Corn by Segment in China (million tonnes)

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100
80
60
40
20
0
1985/1986 1987/1988 1989/1990 1991/1992 1993/1994 1995/1996 1997/1998 1999/2000 2001/2002 2003/2004 2005/2006 2007/2008
Feed Industrial Food, Seed, and Other
(Million tonnes)
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Source: United States Department of Agriculture

Breakdown of Corn Demand for Industrial Use in China by Segment (2008)

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Other
Starch Sugars
23%
25%
Citric Acid
4%
Lysine
5%
MSG Beverage and
10% Industrial Alcohol
22%
Fuel Ethanol
11%
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Source: United States Department of Agriculture

In addition, supply and demand of corn has been significantly influenced by policies as the government has emphasized developing the corn industry in China as part of an overall drive for food self-sufficiency. Encouraged by tax breaks and other government support, industrial processing capacity was above domestic demand from 2006 until 2010. In 2010, demand levels surpassed consumption causing the need for corn imports into China from overseas.

As government control over the corn sector has increased, corn prices in China have steadily risen as well. In 2008 and 2009, to bolster farm incomes and maintain incentives to plant grain, Chinese policymakers began setting minimum purchase prices for corn and other grains that are tied to rising production costs. This policy encouraged farmers to plant corn. However, corn processors in China began cutting back operations due to high prices for feedstock while their downstream product prices in areas such as starch and alcohol had declined. Thus in 2009, the government began offering companies subsidies to process surplus corn from the government.

As a result of government support, corn prices in China have increased at a fairly steady and stable pace, particularly in comparison to the United States where corn prices have been relatively more volatile. In October 2010, the USDA revised its projection for U.S. corn crop yields downward by about four percent, forecasting a much tighter supply of corn for the food production industry. This caused a surge in US corn prices which has continued into the beginning of 2011. The chart depicted below depicts the change in corn prices in China and the United States from January 2007 to December 2010.

Price Trend of Corn in China vs. the United States (Prices Indexed to 100)

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200
180
160
140
120
100
80
60
40
20
0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
China United States
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Source: China Corn Market Information ( 中國玉米市場網 ); United States Department of Agriculture

KEY TRENDS IN THE MSG INDUSTRY IN CHINA

China is the largest market globally in terms of consumption, production capacity and exports.

In 2010, MSG demand in China reached 2.0 million tonnes, and with a population of 1.3 billion at the end of 2010, this implied per capita consumption of MSG of approximately 1490 grams in 2010. From 2006 to 2010, MSG demand grew at a CAGR of 9.6%.

China MSG Consumption Volumes (million tonnes)

2009 Geographic Breakdown of MSG Capacity

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Indonesia
Thailand Others
2%
Brazil 3% 1%
4%
2006-2010 CAGR = 9.6% Japan
4%
2.5
2.0 1.8 2.0 Vietnam
1.6 9%
1.5
1.5 1.4
1.0
0.5
0.0 China
2006 2007 2008 2009 2010 77%
Million tonnes
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Source: China Fermentation Industry Association

China has also become the largest exporter of MSG in recent years. In 2008, China exported 227,192 tonnes, which accounted for 51% of total global MSG exports and just 12% of the country’s MSG production output. Approximately 77% of global MSG production was based in China as of 2009. China’s dominance of the global market is based on strengthening fundamentals in the industrial sector, cost advantages in both raw materials and labor, and strong domestic demand driven by its booming food processing and catering sectors.

Rising demand for MSG is expected to remain robust, driven by strong consumption-led growth of food processing and catering businesses in China.

MSG is a food additive commonly used for flavor enhancement. While it is frequently associated with Asian cuisine, particularly Chinese food, MSG is typically found in a broad range of daily consumed products globally. For example, MSG can be found in beverage products such as carbonated soft drinks, milk and fruit juices as well as food products such as ice cream, yogurt, sauces and frozen foods. While historically there have been concerns over the safety of MSG based on a few reported incidents involving adverse reactions after the consumption of food containing MSG, there has never been any definitive evidence to prove that MSG was related to the symptoms caused. In 1970, 1973 and 1987, the Joint FAO/WHO Expert Committee on Food Additives (“JECFA”) evaluated the safety of glutamate and after completing all three evaluations, JECFA placed MSG in the safest category of “Acceptable Daily Intake (ADI) not specified”. In 1995, further reaffirmation of MSG was given by the Federation of American Societies for Experimental Biology (“FASEB”). In its review, commissioned by the U.S. Food and Drug Administration (“FDA”), FASEB concluded that it found no evidence linking MSG to any serious or long-term health effects, which led the FDA to reaffirm that MSG is a safe food ingredient at normally consumed levels.

In China, 80% of demand derives from the food processing (50%) and catering industries (30%), while the remaining 20% is used directly by households. With China’s strong consumption growth, increasing disposable incomes and urbanization, the food processing and catering sectors in China are expected to maintain robust growth. According to the China National Bureau of Statistics, the food processing industry has demonstrated a CAGR of 28.7% from 2004 to 2009 and catering businesses have also demonstrated strong growth with a 20.8% CAGR since 2005. Additionally, according to the Annual Report on China’s Catering Industry Development 《全國餐飲業發展規劃綱要》國務院頒佈( ), it is expected that the catering industry will sustain 18% year on year growth up until 2013.

Sales of Food Processing Industry[(1)] in China (RMB trillion)

Sales of Catering Companies[(1)] in China (RMB billion)

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

2004-2009 CAGR = 28.7%
3.0 2.8
2.5 2.4
2.0 1.7
1.5 1.3
1.0
1.0 0.8
0.5
0.0
2004 2005 2006 2007 2008 2009
RMB trillion
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----- Start of picture text -----

2005-2009 CAGR = 20.8%
30 25.9 26.9
25
19.1
20 15.7
15 12.6
10
5
0
2005 2006 2007 2008 2009
RMB billion
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Source: China Statistical Yearbook 2010

Note (1): Enterprises over a designated size

Source: China Statistical Yearbook 2010 Note (1): Enterprises over a designated size

MSG COMPETITIVE LANDSCAPE IN CHINA

The supply of MSG is largely constrained by glutamic acid production, creating high entry barriers into the MSG sector.

Glutamic acid is the primary raw material for the production of MSG. As the estimated capacity of glutamic acid production in China is only about 1.7 to 1.8 million tonnes, MSG production is largely constrained by glutamic acid volumes. The production of glutamic acid is extremely capital intensive and creates very high entry barriers for potential new entrants into the sector. Among the top industry players, production of 100,000 tonnes of glutamic acid typically requires about RMB600 million to RMB700 million of capital investment. For smaller operators who lack internal glutamic acid production capacity, maintaining margins becomes difficult as they are highly dependent on sourcing glutamic acid from external suppliers.

From 2006 to 2009, the MSG landscape underwent considerable consolidation as many small-scale operators shut down under increasing pressure from costs and prices. Among the top 10 MSG producers in China, eight are equipped with their own glutamic acid production capacity for internal use. Thus, as the supply of glutamic acid is expected to remain tight, smaller players will find it more difficult to expand their MSG production, leaving market leaders that have their own glutamic acid production facilities to continue to extend their market shares. In 2009, Fufeng, Meihua and Lianhua dominated the sector given their high capacities of both glutamic acid and MSG.

Top MSG Producers in China by Production Capacity (2009)

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Fufeng
25.0%
Others
43.5%
Meihua
18.5%
Yipin Lianhua
3.7% 9.3%
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Top Glutamic Acid Producers in China by Production Capacity (2009)

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Others
27.2% Fufeng
31.0%
Yipin
4.0%
Linghua
6.7%
Lianhua Meihua
8.8% 22.2%
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Source: China Fermentation Industry Association

Further consolidation of the industry is expected as government regulations and policies continue to drive out smaller operators

In addition, glutamic acid production is strictly controlled by the government for environmental protection, and due to significant costs related to environmental issues, China has recently taken initiatives in closing down smaller operators in the industry, causing intense waves of industry consolidation. The fermentation process for glutamic acid results in two kinds of pollutions: waste water and flue gas. The cost of environmental governance for a 100,000 tonne glutamic acid project can amount to between RMB50 million and RMB100 million. Due to the significant costs relating to environmental issues, China’s government has restricted glutamic acid capacity expansion undertaken by under-scale MSG producers. In October 2007, the National Development and Reform Commission (“NDRC”) and the State Environmental Protection Administration, the predecessor of the Ministry of Environmental Protection issued a notice regarding the elimination of under-scale MSG production capacity, aimed mainly at producers with capacity of less than 30,000 tonnes per year. The objective was to eliminate 200,000 tonnes of MSG production capacity among under-scale manufacturers by the end of 2009.

Further consolidation is expected, particularly since the State Council recently issued another notice in February 2010 reinforcing the intent to eliminate under-scale MSG production capacity. The elimination process is already underway as the local government in Shandong is planning to shut down one plant with capacity of 25,000 tonnes in 2010 and three plants with a combined capacity of 85,000 tonnes in 2011.

KEY TRENDS IN THE GLOBAL XANTHAN GUM INDUSTRY

The market for xanthan gum will continue to be driven by growth in the food, industrial oil drilling and health and personal care sectors globally.

Xanthan gum is one of the most versatile of hydrocolloids commonly used for its thickening and suspension properties. It is estimated to be a US$451 million market globally, with growth driven by its applications in food and beverage products as well as in industrial oilfield drilling. In addition, further applications have been developing in the personal care and pharmaceuticals (“HPC”) sector, which has become another area for growth in the industry.

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2004 Breakdown of 2009 Breakdown of 2012F Breakdown of
Global Xanthan Global Xanthan Global Xanthan
Gum Demand Gum Demand Gum Demand
2004 Demand = 70,513 tonnes 2009 Demand = 95,990 tonnes 2012F Demand = 113,634 tonnes
HPC HPC HPC
7.1% 10.3% 10.2%
Technical
12.2% Technical Technical
9.1% Food 9.1% Food
38.6% 37.6%
Food
44.9%
Oil Oil
35.8% 42.0% Oil
43.0%
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Source: CyberColloids

According to CyberColloids, demand volumes for xanthan gum have grown from 70,513 tonnes in 2004 to 95,990 tonnes in 2009 at a CAGR of 6.4%, and volumes are expected to increase to 113,634 tonnes up to 2012 at a 2009-2012 CAGR of 5.8%. Of its applications, from 2004 to 2009, oil drilling accounted for 59.4% of volume growth, food accounted for 21.3% of volume growth and HPC accounted for 19.3% of volume growth. Going forward to 2012, the segment breakdown of xanthan gum demand is expected to remain fairly stable with food and oil related sectors continuing to account for the majority of xanthan gum consumption.

The overall market for xanthan gum has been growing strongly in volume terms in recent years. However at the same time, sales value has declined due to decreased selling prices from intensified competition from Chinese suppliers. In terms of total sales value, the xanthan market in 2009 is estimated to be US$451 million compared to US$430 million in 2004, implying a relatively flat CAGR of 1.0%. In addition, in 2009, the market experienced a drop in value due to lower priced products being available from Chinese producers as they continue to take significant market share in the sector through competitive pricing.

China has recently become the dominant supplier of xanthan gum globally.

Over the last five years, Chinese manufacturers of xanthan gum have become the dominant suppliers in the global market, with western producers withdrawing from the sector or trying to maintain production capacity by specializing on differentiated grades or other biopolymers. The main volumes being exported from China are believed to be predominately for non- food markets. According to CyberColloids, it is estimated that in 2009, 68% of xanthan gum used for oil drilling was supplied by Chinese producers.

Competition from Chinese producers has been increasing intensely as they provide extremely competitive prices compared to international producers due to significantly lower raw material and production costs. According to CyberColloids, export prices from China have declined from an average of US$4.17 per kilogram in the second quarter of 2005 to US$3.79 per kilogram at the end of 2009 a decrease of approximately US$0.38 on average. The chart below illustrates export prices of xanthan gum from top producers globally, with Fufeng, China’s top xanthan gum producer, offering the lowest export prices to all regions in 2009.

2009 Xanthan Gum Export Prices (US$ per kg)

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

6.00
5.06
5.00
3.88
4.00 3.59 3.52
3.11
3.00
2.00
1.00
0.00
CP Kelco Deosen Other Cargill Fufeng
U.S. dollars
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Source: CyberColloids

XANTHAN GUM COMPETITIVE LANDSCAPE

The xanthan gum landscape is highly concentrated, dominated by the top three global players: Fufeng, Deosen and CP Kelco.

In 2009, the top three players, Fufeng, Deosen and CP Kelco, accounted for 70% of global market share of xanthan gum production capacity. Fufeng held the leading position with capacity of 32,000 tonnes per annum in 2009, accounting for 31% market share.

2009 Xanthan Gum Global Market Share by Production Capacity

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

Fufeng
Others 31%
30%
CP Kelco
10%
Deosen
29%
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Source: China Fermentation Industry Association

CORPORATE STRUCTURE

The following chart sets forth our corporate structure as of the date of this offering memorandum:

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

Xuechun Mr. Li 100% EnterprisesMotivator (BVI) Ever Soar (BVI) [ (1)] Excel Energy Limited (BVI) [ (2)] Hero Elite Limited (BVI) [ (3)] Advanced Quality Limited (BVI) [ (4) ] Shareholders Other public
45.96% 10.77% 2.99% 3.35% 3.35% 33.58%
The Company
(Cayman Islands)
Investment holding
100%
Acquest Honour Holdings Limited
(BVI)
Investment holding
100% 100% 100%
Summit Challenge Absolute Divine Expand Base
Shenhua Limited Limited Limited
Pharmaceutical (BVI) (BVI) (BVI)
(PRC) Investment holding Investment holding Investment holding
Production and sales of
eubacteria material 100% 100% 100%
medicine, preparations
and food additives and other related products in the PRC 34.1% International LimitedProfit Champion (HK) Full Profit Investment (Group) Limited (HK) Trans-Asia Capital Resources Limited (HK)
Investment holding Investment holding Investment holding
Shandong Fufeng 100% 100% 100%
Bio-technologies
Development Co., Ltd. industrialization of new Biological techniques promotion and development, research and (PRC) 100% 65.9% biochemical products and Production and sales of other corn processing Shandong Fufeng products (PRC) biochemical products and Production and sales of other corn processing Baoji Fufeng products (PRC) biochemical products and Inner Mongolia Fufeng Production and sales of other corn processing products (PRC)
and achievement in the biological techniques 30%
PRC
Inner Mongolia Inner Mongolia Inner Mongolia
100% Shandong Plant Baoji Plant Phase Baoji Plant Phase Plant Phase I Plant Phase II Plant Phase III
Production and sales I II Production and sales Production and sales Production and sales
Beijing Huijinhuaying of xanthan gum and Production and Production and of glutamic acid, of glutamic acid, of glutamic acid,
Commercial Co., Ltd. MSG sales of glutamic sales of glutamic MSG, fertilizer, MSG, fertilizer, MSG, fertilizer,
(PRC) acid, MSG, acid, MSG, starch sweeteners, starch sweeteners, starch sweeteners,
Holds an office fertilizer and other fertilizer and other xanthan gum and xanthan gum and xanthan gum and
building in Beijing corn processing corn processing other corn other corn other corn
products products processing products processing products processing products
Northeast China Fufeng
Production and sales of
20% fertilizers and other corn glutamic acid, MSG, 50%
refined products
Subsidiary guarantors
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Notes:

(1) The issued share capital of Ever Soar is beneficially owned as to 15% by Mr. Feng Zhenquan, 15% by Mr. Xu Guohua and 15% by Mr. Li Deheng (each of whom are executive Directors), and the balance is owned by employees and former employees of the Company.
(2) The issued share capital of Excel Energy Limited is owned by employees and former employees of the Company.
(3) The issued share capital of Hero Elite is beneficially owned as to 14.3% by Mr. Wang Longxiang, who is an executive Director, and the balance is owned by employees and former employees of the Company.
(4) The issued share capital of Advanced Quality Limited is owned by employees and former employees of the Company.

BUSINESS

OVERVIEW

The majority of the products in our MSG segment are sold domestically in China, primarily to industrial manufacturers, trading companies and food additive distributors, and we export the majority of our xanthan gum. As of December 31,2010, our sales and marketing team comprised approximately 460 personnel, serving more than 4,000 domestic customers spanning all municipalities, provinces and autonomous regions in China as well as overseas customers in over 73 countries and regions.

OUR STRENGTHS

We believe our rapid growth and strong market position are largely attributable to the following principal competitive strengths, which distinguish us from our competitors:

Largest manufacturer of MSG in China and the largest manufacturer of xanthan gum in the world

We are a leading corn-based biochemical company. According to the China Fermentation Association, we are the largest manufacturer of MSG in China and the largest manufacturer of xanthan gum in the world based on production capacity as of December 31, 2009. In 2009, we had a 25% share in the MSG market according to the China Fermentation Industry Association. In the year ended December 31, 2010, we produced 495,895 tonnes of MSG and 31,619 tonnes of xanthan gum.

We believe that our leading market position has enhanced our ability to:

withstand industry cycles and increase our market share. For example, we enhanced our market share during the consolidation of China’s glutamic acid and MSG industry from 2007 to early 2008 which took place as a result of a combination of industry-wide pricing pressure from an oversupply of products and rising raw material costs, leading to the closure of a number of small and medium-sized manufacturers;
benefit from increasing economies of scale with stronger purchasing power and a lower overall cost base, thereby maintaining a competitive cost structure to achieve sustainable growth and profitability;
further enhance our brand reputation and customer loyalty, as well as our ability to quickly diversify into new products and new geographic markets; and
offset fluctuations in raw material costs by making corresponding adjustments to our selling prices.

High degree of vertical integration

We have a highly vertically-integrated production process along the entire corn-based biochemical product value chain. We produce a variety of products along different stages of the corn-processing process, ranging from corn-refined products, such as corn germ, corn fibers and corn gluten meal, to corn-based biochemical products. In addition, we produce our own corn starch for use in the production of our products and we own and operate power plants at each of our production facilities to generate steam and power needed for our production process. We believe our vertically-integrated business model brings us significant advantages over our competitors who are less vertically-integrated, including:

Stable supply. Due to our internal production of glutamic acid, we reduce our reliance on external suppliers of this key ingredient, thereby helping to maintain a steady production stream of MSG.
Competitive cost structure . As we produce the cornstarch that is used internally at our Baoji Plant and Inner Mongolia Plant, we are able to lower our raw material costs and achieve savings on corresponding transportation costs. We are also using more internally produced glutamic acid to manufacture MSG which helps to further lower raw material costs. In addition, with power supplied by our own power plants, we are able to minimize our utility costs. As a result, we believe that our vertically-integrated model has improved our profit margins;

Sustainable development . We endeavor to fully utilize the by-products and waste products from our manufacturing process. For example, we have developed, through our research and development efforts, a process to produce fertilizer using waste residue and excess heat generated from our production processes. This technology, for which we have applied for patent protection in the PRC, enables us to recycle waste products in compliance with environmental laws and regulations and maintain sustainable development throughout our production process. In addition, we successfully installed flue gas desulphurization facilities at our Baoji Plant in April 2009 which we believe have alleviated the impact of flue gas released during our production process, a key problem that is encountered by MSG manufacturers in their production process;
Incremental revenues . We are able to sell other corn-refined products such as corn germ, corn fibers and corn gluten meal, which are by-products in our production of cornstarch, to maximize efficiency of our corn usage and enhance our revenues and profits. We also produce chicken powder from MSG, and corn oil from corn germ, to increase our profit margins. In addition, we sell the fertilizer produced from waste residue and excess heat to generate additional revenues; and
Flexible production planning . Our integrated production facilities allow us to produce a broad range of corn-refined products and corn-based biochemical products across the production chain. Through effective controls, we are able to closely monitor and efficiently manage production volumes and product mix as well as optimize the efficiency of the overall production process.

Strategic locations of our production plants

Our production plants are located at Junan in Shandong Province, Baoji in Shaanxi Province and Hohhot in Inner Mongolia. We started our production in Junan in 1999, a region with an abundant supply of corn and coal. In an effort to further lower our cost and improve our profit margins, we strategically expanded our production to Baoji in 2004 and to Hohhot in 2006, regions that have relatively larger supply and lower prices of corn and coal than Junan. The strategic locations of our plants in eastern China, northern China and western China also allow us to more effectively market our products in different regions throughout China. We believe that the strategic locations of our production plants provide us with a stable supply of raw materials at relatively low cost.

Strong research and development capabilities

We believe that our ability to develop new products in response to changing market demands differentiates us from many of our competitors and is essential to the future development of our business, and we are committed to continually strengthening our research and development capabilities. We have a well qualified and strong research and development team which as of December 31, 2010 comprised 36 members. Our 9,000 square meter research and development center in Junan, which has been accredited with a national-grade laboratory qualification, houses an amino acid fermentation technology research center and a testing plant with modern equipment. Our research and development team is responsible for developing new products as well as improving our production processes, and collaborates regularly with universities and research institutes to advance our research and development projects. Since 2008, our research and development center has been approved as a national post-doctoral research center.

Our strong research and development capabilities allow us to expand and improve our product offering in response to market demand. For example, we successfully developed and commenced commercial production of xanthan gum in 2003 with our proprietary production technology and have now become the largest manufacturers of xanthan gum in the world. In addition, we commercialized a series of threonine products in 2010, which was developed in 2009 in response to market demand for higher value-added biochemical products. We currently have a number of new products under research and development which we expect to be able to commercialize within the next few years, such as citric acid. In addition to generating additional revenues, our research and development capabilities also allows us to improve the environmental standards of our production processes which typically results in cost savings. We have received a total of 22 patents in the PRC, with 44 patent applications pending approval.

Extensive distribution network and well-recognized brand name allowing us to achieve a diversified customer base

We have established a nationwide marketing and distribution network comprised of approximately 460 full-time sales and marketing personnel as of December 31, 2010 that serves our domestic customers spanning across China, as well as our overseas customers in over 73 countries. To ensure timely and efficient delivery of customers’ orders, we have also set up 25 sales and logistics centers across China to coordinate our nationwide distribution operations. Through regular meetings and calls with existing and potential customers, our sales teams have not only built strong relationships with our customers, but have also collected valuable market information for our management to formulate our product development, marketing and pricing strategies.

We have a proven track record and strong brand recognition in China. We believe our brands are associated with high-quality food products and trusted by consumers. We use the brands “Furui” (“阜瑞”), “Uo Fresh” (“Uo 鮮”) and “Xuemei” (“雪梅”) to market our MSG products. Our Furui MSG was recognized as a “Well-known Brand of Shandong Province” in 2007 by the Top Trademark Evaluation Committee of Shandong Province. It has also maintained, since 2007, “Product Quality Exempted from State-level Inspection” status, which was awarded by the PRC General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”).

Most of our MSG customers are regional and local distributors, food additive manufacturers and food processors. Our industrial-grade xanthan gum is mostly sold to international petroleum exploration companies and our food-grade xanthan gum is mostly sold to multinational food processors. We believe that by tailoring our marketing and branding approaches according to customer segment, we have been able to more effectively reach different customer groups and establish a diversified customer base.

We serve over 4,000 domestic customers, and during the three years ended December 31, 2010, sales to our five largest customers in the MSG segments represented 20.2%, 16.1% and 10.1% of our total revenue, respectively, and sales to our five largest customers in the xanthan gum segment represented 38.4%, 24.7% and 32.9% of our total revenue, respectively.

Visionary and experienced management team

We have a visionary and experienced management team with extensive industry and operational expertise in China and an in-depth understanding of the production process of corn-based biochemical products and the corn-based biochemical industry. We believe our management team possesses vision surpassing that of our competitors, which has enabled us to rapidly develop from a local producer in 1999 to the largest MSG manufacturer in China and the largest manufacturer of xanthan gum in the world based on production capacity as of December

31, 2009. Mr. Li Xuechun, our principal founder and Chairman, has approximately 30 years of experience in the fermentation industry. The majority of our executive Directors and senior management have been with us since our establishment in 1999 and have over 15 years of experience in the fermentation industry. We believe our experienced and stable management team has been a significant factor that has contributed to our past success.

OUR BUSINESS STRATEGIES

Our goal is to become the leading corn-based biochemical manufacturer in the world. To achieve our goal, we intend to pursue the following strategies:

Continue to expand our production capacity and consolidate our leading market position

We plan to further expand our production capacity and consolidate our leading market position through the construction of new production plants and new production lines at our existing plants, to meet anticipated growth in demand for our products.

China’s economy was relatively less affected by the global economic downturn than other major economies, and achieved a GDP growth rate of 10.3% in 2010. We expect demand for our MSG to continue to rise as a result of the continued growth of China’s economy in general and the food industry in particular. We also believe that the PRC government’s current focus on restructuring the PRC economy towards domestic consumption will further increase demand for our MSG. In addition, we also expect demand for our xanthan gum, which are mostly exported to the international market, to increase with the gradual recovery of the global economy and as more applications for xanthan gum are developed.

We believe that we are well-positioned to meet the increased demand for our products through our increased production capacity. Our annual production capacity for MSG increased from 171,667 tonnes as of the end of 2008 to 540,000 tonnes as of the end of 2010. We expect to further increase the production capacity of MSG to 750,000 tonnes by the end of 2011 with the completion of Northeastern Plant Phase I, coupled with reengineering work at our existing plants. To further expand our xanthan gum segment, we constructed a new production line capable of producing 12,000 tonnes of xanthan gum per annum at our Inner Mongolia Plant in 2010. Our total production capacity for xanthan gum increased from 21,000 tonnes as of the end of 2008 to 44,000 tonnes as of the end of 2010. In addition, we have constructed an 80,000 tonnes per annum synthetic ammonia production line and a 5,000 tonnes per annum fructose production line in 2010 at our Inner Mongolia Plant. We are also reengineering our thermal power plant and plan to build new railway facilities at our Inner Mongolia Plant beginning this year. We expect our thermal power plant and the new railway facilities to be completed by the end of 2011. Furthermore, we are in the process of constructing our Northeastern Plant Phase I which is expected to have an annual production capacity of 200,000 tonnes of MSG, 250,000 tonnes of fertilizers and 100,000 tonnes of synthetic ammonia, together with supporting facilities including a thermal power plant and self-owned railway facilities. Commercial production is scheduled to commence in the second half of 2011. Given the significant growth of the PRC threonine industry in the past few years and the expected continued growth in the near future, we are constructing additional production lines at our Inner Mongolia Plant to increase our production capacity of threonine from 10,000 tonnes as of the end of 2010 to 40,000 tonnes by the end of 2012. We expect that we will be able to further increase our market share and strengthen our leading position in the MSG and xanthan gum markets. See “– Production Facilities – Future Expansion of Production Capacity.”

Further enhance the degree of vertical integration of our production process

We believe that a highly vertically-integrated production process will enable us to increase our profitability and strengthen our leading position in the industry. In recent years, we have taken a number of measures to enhance vertical integration of our production process, including increasing consumption of internally produced glutamic acid to produce MSG in order to capture the higher profit margin of MSG, utilizing waste residue and excess heat generated from our production processes to produce fertilizers and bricks, and building production capacities of chicken powder and corn oil. We also built production capacity of 80,000 tonnes of synthetic ammonia, which is an important raw material for the fermentation of glutamic acid, at our Inner Mongolia Plant and are constructing further production capacity of 100,000 tonnes of synthetic ammonia at our Northeastern Plant Phase I. Going forward, with the increased vertical integration of our production process, we intend to develop a series of food flavor enhancers using our internally produced MSG as the primary raw material, in order to further improve our operational efficiency and reduce our production costs. Given suitable opportunities, we may also consider further vertically integrating our production process upstream, including, among others, obtaining access to coal and other raw materials used in our production process.

Diversify our product offering

We intend to leverage our position as a leading manufacturer of MSG and xanthan gum, our vertically-integrated corn-based biochemical production chain and our strong research and development capabilities to capitalize on new market opportunities presented by other biochemical and amino acid products. In 2008, we expanded our product offering to include chicken powder and corn oil. We commercialized a series of threonine products in 2010, which was developed in 2009 in response to market demand for higher value-added biochemical products. We are also developing a series of additional amino acid and biomass-based polymer products in order to enhance our product mix and improve our profitability. Going forward, we expect to develop and commercialize a series of retail-market food flavor enhancers using our internally produced MSG.

Expand our marketing and distribution network

We intend to broaden our domestic and international marketing and distribution network through expanding our geographical coverage, as well as enhancing the coverage of our existing markets. We expect to continue to open new sales offices together with sales and logistics centers across China to cover those provinces where we do not currently have sales offices. Our sales and marketing headcount is expected to continue to grow along with the opening of our new sales offices. To enhance our overseas sales capabilities in relation to xanthan gum, which is mostly exported, and to a lesser extent, MSG and starch sweeteners, we intend to establish a total of six overseas sales offices in the Middle East, North America, Europe and Africa in 2011.

Continue to strengthen our brand recognition and consolidate our market position

We believe successful branding is key to our business development and that our core brands have gained wide recognition and popularity in the biochemical products industry in recent years as a result of our successful marketing and promotional strategies. To further strengthen and capitalize on the established reputation and recognition of our brands, we have established a branding team to help devise strategies to further market and promote our brand in order to consolidate our market share. We intend to strategically target our advertising and marketing efforts on selected cities or regions where there is higher average consumer spending and potential for growth. In addition, we expect to increase our advertising and promotional expenses to approximately RMB20.0 million in 2011 from approximately RMB15.0 million in 2010 to accommodate the increased advertising and marketing activities.

Continue to strengthen our research and development capabilities

We believe technological advancement is one of the key factors to our continued success in the market place. In addition to improving production efficiency, we plan to actively pursue and enhance our research and development capabilities to develop new production techniques and products, such as the development of new amino acid products and new applications for xanthan gum. We intend to invest additional resources to further strengthen our existing research and development capabilities as well as to increase research collaboration with established research institutes in China.

OUR PRODUCTS

Our products are broadly categorized into two business segments: (i) the MSG segment and (ii) the xanthan gum segment. The MSG segment represents the production and sale of MSG, glutamic acid, corn refined products, fertilizers, starch sweeteners, threonine and others, including chicken powder, corn oil, pharmaceutical products and bricks. Our xanthan gum segment represents the production and sale of xanthan gum.

The following table sets forth our revenues generated from and the percentage of our overall revenue contributed by each of our products for the periods indicated.

	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) (% of Total Revenue) 1,004,381 28.0% 1,053,298 29.4% 509,849 14.2% 380,097 10.6% 163,002 4.5% – – 22,977 0.7% 451,739 12.6%	2009 (RMB’000) (% of Total Revenue) 2,245,307 48.5% 720,631 15.6% 557,523 12.0% 361,468 7.8% 245,168 5.3% – – 94,663 2.0% 408,124 8.8%	2010
(RMB’000) 1,004,381 1,053,298 509,849 380,097 163,002 – 22,977 451,739	(RMB’000) 2,245,307 720,631 557,523 361,468 245,168 – 94,663 408,124	(RMB’000) (US$’000) (% of Total Revenue) 3,892,506 589,774 60.7% 153,633 23,278 2.4% 773,563 117,207 12.1% 369,649 56,007 5.8% 356,704 54,046 5.6% 28,145 4,264 0.4% 160,500 24,318 2.4% 681,725 103,292 10.6%

Note:

(1) Others include pharmaceutical products, chicken powder, corn oil and bricks.

As one of the leading corn-based biochemical products manufacturers in China, we have a highly vertically-integrated production process along the entire corn-based biochemical product value chain, from wet milling and processing of corn into cornstarch and other refined corn products, to the production of corn-based biochemical products, such as MSG, glutamic acid and xanthan gum through fermentation. The following chart sets forth our products in the context of our production process.

==> picture [388 x 525] intentionally omitted <==

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

Corn oil
Maltose crystallised Crystallised
glucose Corn protein Corn bran Corn germ
syrup syrup glucose
Starch Starch Corn refinery
Sweeteners by-products
Cornstarch
syrup
Waste Synthetic
Cornstarch Corn
residue Ammonia
Glutamic Xanthan
Threonine Pharmaceuticals
acid Gum
Fermentation
MSG Technologyy
Segment
Xanthan Gum
MSG
Segment
Electricity
Chicken
Fertilisers Bricks
Powder Power
Plant
Steam
Raw material Products Coal
----- End of picture text -----

In 2010, we commercialized a series of threonine products, and we are also in the process of developing a series of additional amino acid products and biomass-based polymer products in order to enhance our product mix and improve our profitability.

MSG Segment

MSG and glutamic acid

MSG is created by converting glutamic acid through a simple chemical reaction. MSG is commonly used as a flavor enhancer in the food industry, the restaurant sector and for domestic household use and can be found in many food and beverage products to enhance flavor and can also be found in dietary supplements, healthcare products and pharmaceutical products. Most of our MSG is sold to MSG distributors and traders, food manufacturers and food seasoning manufacturers.

For each of the years ended December 31, 2008, 2009 and 2010, our annual production volume of MSG was 150,353 tonnes, 302,572 tonnes and 495,895 tonnes, respectively, and our annual sales volume of MSG was 146,185 tonnes, 292,369 tonnes and 492,560 tonnes, respectively.

Glutamic acid is a type of amino acid produced from corn through a bio-fermentation process, and is the main precursor for the production of MSG. The glutamic acid produced by us is mainly used internally as a raw material for our MSG production. In recent years, as a result of our strategy of shifting our focus away from the sale of glutamic acid to third parties, we have increased the internal utilization of our glutamic acid to produce MSG in order to capture the higher profit margin of MSG.

For each of the years ended December 31, 2008, 2009 and 2010, our annual production volume of glutamic acid was 275,212 tonnes, 354,638 tonnes and 434,333 tonnes, respectively, and our annual sales volume of glutamic acid was 162,708 tonnes, 100,993 tonnes and 18,936 tonnes, respectively.

Fertilizer

Fertilizer is used to improve soil fertility. We produce our fertilizer from waste residue and excess heat generated from our production processes. The technology was developed by us with an aim to improve the environmental standards of our production process, and a PRC patent application was made in 2005 relating to such technology. In addition, our fertilizer contains a rich amount of amino acids which help the microorganisms in the soil to produce a significant amount of bio-enzymes that can raise the utilization rate of the fertilizer and as a result, can improve the soil structure and enhance the soil’s ability to preserve fertility and nutrients. We produce both organic fertilizer and organic-inorganic compound fertilizer, with the production of organic fertilizer accounting for the majority of our total production of fertilizer as of December 31, 2010. Our fertilizer is mainly sold to fertilizer distributors and manufacturers for the production of other types of fertilizers.

For each of the years ended December 31, 2008, 2009 and 2010, our annual production volume of fertilizer was 380,531 tonnes, 457,978 tonnes and 517,303 tonnes, respectively, and our annual sales volume was 339,060 tonnes, 460,421 tonnes and 487,537 tonnes, respectively.

Starch sweeteners

Starch sweeteners are the hydrolyzed form of starch, which can be obtained from corn. Starch sweeteners are widely used as raw materials in the pharmaceutical, food and beverage industries. Our starch sweeteners are mainly sold to starch sweetener distributors and traders, as well as food and beverage manufacturers in China.

For each of the years ended December 31, 2008, 2009 and 2010, our annual production volume of starch sweeteners was 67,819 tonnes, 106,194 tonnes and 130,268 tonnes, respectively, and our annual sales volume was 74,016 tonnes, 107,431 tonnes and 121,186 tonnes, respectively.

Corn refined products

Our corn refined products include corn germ, corn fiber and corn gluten meal, which are by-products in our production of cornstarch. Corn germ refers to the nucleus or embryo of corn, which is commonly used for extraction of corn oil. Corn fiber is the remaining mixture of the endosperm and the hull of a corn which has passed through a series of grinding and screen processing and can be used in producing animal feed products. Corn gluten meal is typically characterized by its high protein and high energy content which results from the corn wet milling process. All of our corn refined products are sold to animal feed and corn oil manufacturers in China.

Threonine

Threonine is a colorless crystalline essential amino acid and is primarily used as a dietary supplement. We commercialized a series of threonine products in 2010, which was developed in 2009 in response to market demand for higher value-added biochemical products.

Other Products

Chicken powder

Chicken powder is a compound flavor enhancer principally made of MSG. We launched our chicken powder product in 2008.

Corn oil

Corn oil is extracted from corn germ, a by-product in our production of cornstarch. Its main use is in cooking, where its high smoke point makes refined corn oil a valuable frying oil and is perceived to be a relatively healthy edible oil. We launched our corn oil product in 2008.

Pharmaceutical products

Our wholly-owned subsidiary, Shenhua Pharmaceutical, is principally engaged in the manufacture and sales of eubacteria material medicine, preparations and food additives and other related products.

Bricks

We produce bricks using the waste residue and excess heat generated from our production processes. Bricks are used as building and paving material.

Xanthan Gum Segment

Xanthan gum

Xanthan gum is a polysaccharide which is made from the fermentation and processing of cornstarch and can be used either as a food additive or theology modifier. The unique properties of xanthan gum render it a very effective thickener, stabilizer or suspension agent, which can be tailored to the needs of petroleum drilling and exploration, fine chemicals, and the production of food, personal care and pharmaceutical products. Xanthan gum is soluble in both hot and cold water and in solutions with a wide range of acidity levels but is insoluble in most inorganic solutions.

The principal customers for our xanthan gum are petroleum exploration companies, as well as food additive traders, manufacturers and distributors. The majority of our xanthan gum is exported and sold in over 70 countries around the world. The following table sets forth the approximate percentage of sales volume of xanthan gum in overseas and domestic markets for the periods indicated.

Year ended December 31,	Year ended December 31,
2008 85.2% 14.8%	2009 84.5% 15.5%	2010
		86.4% 13.6%
100.0%	100.0%	100%

For each of the years ended December 31, 2008, 2009 and 2010, our annual production volume of xanthan gum was 21,277 tonnes, 28,232 tonnes and 31,619 tonnes, respectively, and our annual sales volume of xanthan gum was 20,590 tonnes, 19,344 tonnes and 34,819 tonnes, respectively.

RAW MATERIALS

We prefer to maintain flexibility in sourcing our raw materials. Our annual procurement of raw materials is based on an annual production plan. The annual production plan is prepared at the beginning of every year based on our annual budget and sales forecast. The production plan is further adjusted on a monthly and weekly basis at the end of the previous month or week based on our production capacity and monthly or weekly sales plans taking into account the actual production requirements and current inventory levels. We do not have long-term contracts with any of our suppliers. We believe that the relationship between our suppliers and us has been and will continue to be stable. All of our raw materials are sourced in China.

During the years ended December 31, 2008, 2009 and 2010, we did not encounter any difficulty in sourcing any of our raw materials. We believe that, in terms of quantity and quality, there are sufficient raw materials suppliers within the areas surrounding our production facilities to meet the ongoing needs of our production.

Corn

Corn is one of the principal raw materials used in our production processes. For each of the years ended December 31, 2008, 2009 and 2010, the cost of corn represented 46.6%, 52.7% and 54.3% of our total cost of production, respectively. For the same periods, our average unit cost of corn was RMB1,424, RMB1,413 and RMB1,741 (US$263.8) per tonne, respectively. Our average unit cost of corn is closely related to the market price of corn, which may be affected by

market demand and supply, domestic government policy, climate and other natural disasters such as droughts, floods or earthquakes. All of our corn is purchased domestically directly from local farmers, and we have not entered into any long term procurement agreements with any of them.

All our plants are located in areas with an abundant supply of corn at comparatively low prices. Our production plants are strategically located in Shaanxi Province and Inner Mongolia, which rank among provinces with the highest corn production volumes in China. We believe that the close proximity of an ample supply of corn to our production facilities allows us to source our corn requirements at relatively low prices and effectively minimize transportation costs. Cornstarch Cornstarch is the principal product from the processing of corn and is one of the key raw materials for the manufacture of corn-based biochemical products. During the production of cornstarch, other corn refined products, including corn gluten meal, corn germ, corn fibers and corn oil, are produced. All cornstarch currently used in the production of glutamic acid at our Baoji Plant and Inner Mongolia Plant are supplied internally while cornstarch used at our Shandong Plant is sourced from third parties domestically.

Our production plants in Baoji City, Shaanxi Province and Hohhot, Inner Mongolia are strategically located in provinces with abundant coal reserves at prices lower than China’s national average. This has allowed us to source our coal requirements at relatively low prices and effectively minimize transportation costs.

Other Chemical Ingredients

Liquid ammonia and sulphuric acid are the major chemical raw materials used in the production of our products. For each of the years ended December 31, 2008, 2009 and 2010, the cost of liquid ammonia accounted for 11.4%, 9.9% and 9.4% of our total cost of production, respectively, and the cost of sulphuric acid accounted for 6.3%, 1.1% and 1.2% of our total cost of production, respectively. For the same periods, our average unit cost of liquid ammonia was RMB2,700, RMB2,209 and RMB2,481 (US$375.9) per tonne, respectively, and our average unit cost of sulphuric acid was RMB923, RMB212 and RMB279 (US$42.3) per tonne, respectively.

We built production capacity of 80,000 tonnes of synthetic ammonia at our Inner Mongolia production plant in 2010 and are constructing further production capacity of 100,000 tonnes of synthetic ammonia at our Northeastern Plant Phase I. We plan to use the ammonia produced for our internal consumption, which we expect will reduce our cost of sales. See “– Production Facilities – Future Expansion of Production Capacity.”

INVENTORY CONTROL

We maintain overall inventory records to ensure proper procurement, usage and storage. To ensure the proper recording of our inventory, random physical stocktakes are performed from time to time and a full stocktake is performed every year. Our centralized inventory control system provides us with real-time inventory information to better manage our product delivery requirements among our sales and logistics centres.

Controls Over Raw Materials

Our annual procurement of raw materials is based on an annual production plan. The annual production plan is prepared at the beginning of every year based on our annual budget and sales forecast. The production plan is further adjusted on a monthly and weekly basis at the end of the previous month or week based on our production capacity and monthly or weekly sales plans, taking into account actual production requirements and current inventory levels.

An optimal storage level is set for the inventory of each type of raw material. If the storage level falls below the set minimum level, the our procurement department sources additional raw materials from suppliers, as necessary.

Controls Over Finished Goods

The majority of our inventories are stored in separate warehouses located at our production sites. Records of finished goods inventories are kept at these warehouses and conformed with the records of our finance department at the end of each month. We maintain a centralized inventory control system that provides us with real-time inventory information to better manage our product delivery among our sales and logistics centers.

PRODUCTION FACILITIES

Production facilities

Since the commencement of our business, we have increased our production capacity by building new production plants and upgrading production facilities in order to satisfy the increasing demand for our products. We currently have three production plants, namely the Shandong Plant, the Baoji Plant and the Inner Mongolia Plant.

Our production sites are easily accessed through waterways, railways or roads. The Shandong Plant is located 50 kilometers away from Port Rizhao, 200 kilometers away from Port Qingdao and 90 kilometers away from Port Lianyungang, which are the principal water transfer ports for shipment. The Baoji Plant is located approximately 10 kilometers away from the railway transport system. The Inner Mongolia Plant is located five kilometers away from the railway transport system.

The following table sets forth the annual designed production capacity of our key products in 2010.

Annual production capacity of: MSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corn oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xanthan gum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fertilizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chicken powder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Threonine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Starch sweeteners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2010
	(tonnes) 540,000 35,000 44,000 560,000 10,000 10,000 140,000

Annual production capacity of:
MSG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corn oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Xanthan gum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fertilizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicken powder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Threonine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Starch sweeteners
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2010

(tonnes)
540,000
35,000
44,000
560,000
10,000
10,000
140,000

Shandong Plant

We established the Shandong Plant in June 1999. The total site area of Shandong Plant is 268,862 square meters, on which various buildings and structures are erected which are mainly used for factory, office, warehouse and supplementary uses with a total gross floor area of 21,922 square meters. In 2008, we moved part of all of our glutamic acid and part of our MSG production facilities in our Shandong Plant to our Baoji Plant and Inner Mongolia Plant. The Shandong Plant produces MSG and xanthan gum.

Baoji Plant

We established the Baoji Plant Phase I and Baoji Plant Phase II in November 2004 and November 2005, respectively, with a total site area of 271,280 square meters. in Baoji, Shaanxi Province, which is used for our factory, office, warehouse and supplementary uses with a total gross floor area of 35,916 square meters Baoji Plant Phase I and Baoji Plant Phase II comprise five factories, producing glutamic acid, MSG and fertilizer.

Inner Mongolia Plant

We completed Inner Mongolia Plant Phase I in December 2006 with a total site area of 658,235 square meters in Hohhot, Inner Mongolia, which is used for our factory, office and warehouse uses with a total gross area of 94,506 square meters We completed Inner Mongolia Plant Phase II and Inner Mongolia Plant Phase III in the last quarter of 2008 and 2009, respectively. The Inner Mongolia Plant produces glutamic acid, MSG, xanthan gum, starch sweetener, fertilizer and bricks.

We built an additional production capacity of 12,000 tonnes of xanthan gum at our Inner Mongolia Plant, which was completed during the first half of 2010. We also built additional production capacity of 80,000 tonnes of synthetic ammonia and 5,000 tonnes of fructose together with an expanded thermal power plant at our Inner Mongolia Plant in 2010. We are currently building a self-owned railway facility at our Inner Mongolia, which are expected to be completed in 2011.

Future Expansion of Production Capacity

We expect to begin production at our Northeastern Plant Phase I in the second half of 2011, which will include supporting facilities including a thermal power plant and self-owned railway facilities. Northeastern Plant Phase I has a planned annual production capacity of 200,000 tonnes of MSG and 250,000 tonnes of fertilizer. Northeastern Plant Phase II is expected to commence construction by the end of 2011. The production plant is strategically located to take advantage of the abundant supply of corn and coal in the surrounding areas.

PRODUCTION PROCESS

The production processes of our principal products are illustrated in the diagram below.

==> picture [370 x 474] intentionally omitted <==

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

Threonine
----- End of picture text -----

The major production processes are described as follows.

Steeping . Steeping is a process of turning dry corn comprising 14% of water into wet corn comprising 42% of water.

Separation . After steeping, the soaked corn are separated from the steepwater. The corn are ground coarsely to separate the corn germ from other components. Separators are then used to spin the corn germ out of the slurry. The corn germ is then screened and washed to remove any remaining starch. The corn germ is further dried and sold in the market. The residue steepwater is used in the production of fertilizer.

Grinding . The remaining liquid enters the corn germ separator for a second time, but it is ground by a finer grinder to separate the fiber of the kernel from the starch and gluten suspension. The fiber of the kernel is then removed from the starch and gluten suspension by pouring the suspension through screens. The corn germs are finally washed and re-screened.

Starch separation . Starch separation is a process of separating the main product and the by-product through special washing and screening equipment after the process of grinding is completed.

Saccharification . Saccharification is a process of breaking a complex carbohydrate (as starch slurry) into its monosaccharide components, and preparing for syrup refining.

Syrup refining . Syrup refining is a process of refining starch syrup to enhance its purity.

Filtration . Filtration is a process of straining out contained substances. Such a process, when used in the production of MSG, is used to help to purify the glutamic acid and prepare for crystallization.

Fermentation . Fermentation is a process where complex sugars are fermented as a result of the inclusion of additives such as microbial enzymes, oxygen and other chemicals.

Extraction . Extraction is a process where fermented mixture is processed with sulphuric acid or alcohol so as to extract glutamic acid or xanthan gum, respectively.

Separation . Separation is a process where the extracted products are further separated.

Neutralization . A certain amount of alkaline is added to the glutamic acid to adjust the pH value of the liquid to around 3.0 in preparation for the filtration of glutamic acid.

Crystallization and glucose separation . Crystallization is a process of crystallizing MSG from glutamic acid mixture.

Evaporation and concentration . Evaporation is a process of transforming water to water vapor, through which glucose syrup will be condensed.

Concentration . Concentration is a process used to enhance purity.

Isomerization . Isomerization is a process where glucose syrup is transformed into fructose syrup.

Alcoholic extraction . Alcoholic extraction is a process where a product is extracted from the fermented mixture after adding alcohol, making use of its alcohol-insoluble property.

Pressing . Pressing is a process where water is squeezed out through special equipment.

Drying . Drying is a process where water is removed by way of direct or indirect heating.

Pelletizing . Pelletizing is a process where concentrated waste water and excess stream is compressed into a pellet.

SALES AND MARKETING

Sales and Marketing

We have established a nationwide marketing and distribution network, which as of December 31, 2010 comprised approximately 460 full-time sales and marketing personnel. These personnel are responsible for the sales and marketing of our principal products, serving both the domestic and international markets. Furthermore, our plants are strategically located in eastern China, northern China and western China which enables us to access our customers more easily and market our products more effectively in different regions in China. In addition, to ensure timely delivery of customers’ orders, we have also set up 25 sales and logistics centers to manage our sales and logistics operations. Our centralized inventory control system provides us with real-time inventory information to better manage our product delivery requirements and inventory allocation among our sales and logistics centers. We intend to broaden our domestic and international marketing and distribution network through expanding our geographical coverage, as well as enhancing the coverage of our existing markets.

We expect to continue to open new sales offices together with sales and logistics centers across China to cover those provinces where we do not currently have sales offices. Our sales and marketing headcount is expected to continue to grow along with the opening of our new sales offices. To enhance our overseas sales capabilities in relation to xanthan gum, which is mostly exported, and to a lesser extent, MSG and starch sweeteners, we intend to establish a total of six overseas sales offices in the Middle East, North America, Europe and Africa in 2011.

We have a diversified customer base and the majority of our MSG is sold domestically in China, primarily to industrial manufacturers, trading companies, food additive distributors and local distributors. We also sell our MSG directly to food additive manufacturers and food processors. With respect to xanthan gum, our industrial-grade xanthan gum are mostly sold to international petroleum exploration companies and our food-grade xanthan gum are mostly sold to multinational food processors. Sales of xanthan gum are sometimes conducted through the tenders of auction bids in an open auction by customers in the food and oil industries. Such customers usually make a bulk order to fulfill the whole year’s production requirement, and thus, enable us to secure orders for the coming 12 months. We are able to access information on auction bids through our agents in target markets.

Our sales and marketing strategies are developed by our senior sales management team. The senior sales management team is responsible for formulating strategies and coordinating sales personnel. The senior sales management team is based at our headquarters so as to enhance operational efficiency, especially with regard to internal communication with the production team. The sales personnel are assigned to designated regions, liaising with regional and local customers on a regular basis, who are also responsible for collecting local market information to facilitate our marketing and pricing strategies.

In line with our tailored approach to branding by customer segment, we market our products under several different brands. The table below sets forth our various consumer product brands.

Brand Fufeng (阜豐) . . . . . . . . . . . Uo Fresh (Uo 鮮) . . . . . . . . .	Products Threonine MSG, chicken powder	Logos

100

Brand Furui (福瑞) . . . . . . . . . . . . Xuemei (雪梅) . . . . . . . . . . . Uo Fragrant (Uo 香) . . . . . . Fufeng (阜豐). . . . . . . . . . . . Golden Fufeng (金阜豐) . . . . Friend Year (福瑞年). . . . . . . Ka Fei Dou (卡非豆) . . . . . . Fufeng (阜豐). . . . . . . . . . . .	Products MSG MSG Corn oil Xanthan gum Fertilizer Fertilizer Fertilizer Starch sweeteners	Logos

Pricing Policy

The prices of our products are determined based on their respective prevailing market prices. There are currently no legal or regulatory controls which regulate the prices of our products. In general, we set prices for our products on the basis of market demand for such products in both domestic and overseas markets.

As corn and coal are the key raw materials for our production processes and account for a substantial portion of our cost of production, fluctuations in the supply or price of either would have an impact on our pricing determinations. We generally aim to mitigate any adverse effect of fluctuations in the prices of our raw materials by adjusting our sales prices, and we aim to maintain our gross margins at a consistent level.

Our management convenes for monthly meetings at which pricing is discussed. The Chairman and senior personnel from the sales department, the raw material procurement department and the financial department participate in the meeting and the price of any of our products will be adjusted if considered necessary.

QUALITY CONTROL

We recognize the importance of stringent quality control in the production of our products and have established departments responsible for implementing and monitoring quality-control measures and procedures. As of December 31, 2010, the quality control department had approximately 138 staff, stationed at the microbiological laboratory at each of our production facilities.

All of our production facilities have been accredited with IS09001:2000 (quality management systems), ISO22000 (food safety management systems), ISO14001 (environment management systems) and ISO18001 (occupational health and safety management systems) certifications. These recognitions confirm that our quality control management systems are consistent with national standards.

101

Quality Control of Raw Materials

Each of our quality-control departments conduct on-site inspections when raw materials are delivered to the production plants to ensure that the raw materials meet the required standards. Any raw materials which are identified as defective are returned immediately to the suppliers.

Production Quality Control

Quality-control measures are in place throughout the production process to ensure that the finished products meet the standards of quality expected from our customers. Quality-control staff monitor and inspect the products during the production process. We adopt a cross-check quality assurance system. This includes the testing of raw materials and half-finished products at the factory sites as well as by the quality control department at the laboratories. We also send product samples to independent testing institutions such as the Shandong Provincial Institute of Product Quality Supervision and Inspection if so requested by our customers. The local environmental protection bureau has real-time access to our environmental records to monitor emissions.

REPAIR AND MAINTENANCE

We have a regular repair and maintenance program and will periodically review whether our production plants need to be shut down temporarily (for approximately 20 days) for annual maintenance work. The repair and maintenance department is responsible for overseeing the progress of the maintenance projects in order to ensure that day-to-day maintenance and repairs of the machinery are carried out properly.

COMPETITION

MSG

We are the largest manufacturer of MSG in China. We compete primarily with a few manufacturers with similar or lower capacities. China’s MSG industry experienced industry-wide consolidation from 2007 to early 2008 due to a combination of industry-wide pricing pressure from an oversupply of products and rising raw material costs. Such market conditions led to a number of small- and medium-sized manufacturers becoming unprofitable and being forced to shut down operations. As a leading manufacturer of MSG with low production cost, quality products and a stable customer base, we were able to take advantage of the industry consolidation and enlarge our market share through increase in production capacity and sales. We believe that our large scale of production has enabled us to take advantage of economies of scale.

We consider our major competitors in the production of MSG to be Hebei Meihua Monosodium Glutamate Group Co., Ltd. and Henan Lianhua Monosodium Glutamate Co., Ltd.

Xanthan Gum

We are one of the largest manufacturers of xanthan gum in the world. The overall market for xanthan gum has been growing strongly in volume over the years and is expected to continue to grow in the near future. We believe there are only a limited number of global players in the xanthan gum industry in China and in the international market, and we are one of the largest manufacturer of xanthan gum in the world. As supply of xanthan gum exceeds demand in the PRC market, we believe that xanthan gum manufacturers in China have to establish overseas markets for their products and accordingly, we also face competition from overseas manufacturers. However, with the improving quality of our xanthan gum, coupled with our price advantage, we expect to be able to maintain and increase our competitiveness in the future.

102

We consider our major competitors in the production of xanthan gum to be CP Kelco and Deosen Corporation Ltd.

RESEARCH AND DEVELOPMENT

We recognize the importance of using advanced technology to continuously improve our production efficiency and to develop new products. As of December 31, 2010, our well-qualified and strong research and development team comprised 36 members. Our 9,000 sq.m. research and development center in Junan, which has been accredited with national-grade laboratory qualification, houses an amino acid fermentation technology research center consisting of over 10 laboratories and a testing plant with modern equipment. Since 2008, our research and development center has been approved as a national post-doctorate research center. In addition, we were named a Model Sustainable and Environmental Enterprise (全國發酵行業循環經濟示範企業) by the China Fermentation Industry Association in 2008.

Our research and development team also collaborates regularly with universities and research institutes in China to advance our research and development projects. We have established long-term and stable cooperation programs with a number of universities and institutions in China to jointly conduct research and develop technologies. We have also undertaken three projects among the 863 China National Programs, one relating to technology improvement, one relating to development of new technology and new techniques and one relating to advanced fermentation techniques. In addition, a number of our research and development results reports have been accredited by the provincial government.

Our research and development capability allows us to expand and improve our product offering in response to market demand. For example, we successfully developed and commenced commercial production of xanthan gum in 2003 with our proprietary production technology and have now become one of the largest manufacturers of xanthan gum in the world. In 2010, we commercialized a series threonine products, which was developed in 2009 in response to market demand for higher value-added biochemical products. Our research and development capability also enables us to improve the environmental standards of our production processes. For example, we successfully developed a technology that utilizes waste residue and excess heat generated from our production processes to produce fertilizer and a PRC patent application was made in 2005 with regard to such technology. In addition, we successfully installed flue gas desulphurization facilities at our Baoji Plant in April 2009 which has alleviated the impact of flue gas released during our production process, a key problem that is encountered by MSG manufacturers in their production process. In recent years, we have also improved our production technology for MSG to further reduce consumption of electricity and steam in the production process which has led to increased unit productivity and decreased production costs. Waste residue and excess heat generated from our production processes are also recycled for the production of bricks. Our current research and development initiatives include the development of citric acid, which is colorless crystalline and is an important organic acid used in food and beverage additives, and a series of additional amino acid products and biomass based polymer products in order to enhance our product mix and improve our profitability.

SAFETY MATTERS

Our business and operations are subject to the Production Safety Law of the PRC, which sets out the legal standard for safety measures in relation to the establishment, modification and expansion of production facilities. In case of any non-compliance, the relevant governmental body has the right to order any company to remedy such non-compliance within a given period of time, failing which it may be subject to an order for cessation of production and penalty charges, and if it amounts to a criminal offense, such company will be prosecuted under criminal laws.

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We have implemented comprehensive occupational health and safety procedures and measures for our operations. Our management examined and scrutinized the internal industrial safety control measures and safety awareness of the workforce and supervisors in all plants and within all workstations.

Safety-related training and education were provided periodically to promote safety awareness among our management and employees. Examinations on safety related matters were conducted to reinforce the safety awareness of the management and the staff in the workplace. Workers were sent in different groups to the Local Quality and Technology Supervision Bureau for training and for certification of Specialized Equipment Operator Qualification, and to the Local Safety Production Supervision and Management Bureau for training and for certification of Specialized Operation Qualification.

We were accredited with OHSAS 18001:1999 and GB/T28001-2001 certification by the CQC Center on May 31, 2005. OHSAS 18001 is an internationally recognized certification which demonstrates that a safety-oriented approach has been integrated into a company’s processes, and further demonstrates a company’s commitment to a safe working environment and to protecting employees against injury at work. GB/T28001-2001 is a nationally recognized certification which demonstrates a company’s commitment to industrial health and safety management pursuant to nationally recognized occupational health and safety management standards. To maintain such accreditation, we are required to conduct safety reviews semi-annually to ensure that safety measures are in place and are observed by our employees. In addition, we are required to engage an independent qualified safety assessment company to conduct annual reviews of our safety measures.

We have also rewritten the internal safety operating manual and risk approval procedures to ensure strict compliance with internal rules and regulations by our employees and have taken various proactive measures to strengthen our production safety in the workplace. Our management and employees are trained under continued reassessment so as to comply with all the required procedures and the relevant operating guidelines.

ENVIRONMENTAL MATTERS

Our business and operations are governed by relevant environmental laws and regulations, including the Environmental Protection Law of the PRC, the Law on Prevention of Air Pollution of the PRC, the Law on Prevention of Water Pollution of the PRC and the Law on Prevention Solid Waste Pollution of the PRC.

We have adopted a number of environment protection and safety measures and pollution controls throughout our production process, brief details of which are set out below:

as part of our production process, we discharge pollutants such as waste residue, excess heat and dust. The waste discharge is subject to applicable state or local discharge limits. We have installed a range of waste management systems to cater for the proper management of pollutants throughout the production process;
we have developed a technology that utilizes waste residue and excess heat generated from our production processes to produce fertilizers and a PRC patent application was made in 2005 with regard to such technology. Furthermore, solid waste from coal burning is in the form of cinders, and such cinders are sold by us as by-products and therefore minimizes pollution;
environmental control is carried out by our production department. We have pollution control systems in relation to our waste water discharge installed in all of our

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production plants. These systems are connected directly to the local environmental bureaus so that the local environmental bureaus can monitor whether our waste water discharges are in compliance with the relevant environmental standards; and

we also provide training to our staff regarding environmental protection rules and regulations. We also invite qualified advisers to visit our plants from time to time to assess whether environmental protection measures are up to standard and to make recommendations for further improvements.

We believe we comply with applicable laws and regulations on environmental protection in all material respects.

INTELLECTUAL PROPERTY

We have registered, or have applied for registration of, our material patents and trademarks in the PRC. We have been granted 22 patents and have an additional 44 patent applications pending approval in the PRC. We have registered a number of trademarks and brand names which are widely used to market our products in China and overseas. In addition, technology is protected through strict internal controls such as requiring employees involved in the production technology development and production processes to sign confidentiality agreements with us and restricting personnel that can enter our research and development and restricted production areas. We are entitled to initiate civil proceedings to seek compensation for loss and damages arising from any third parties’ unauthorized disclosure or misappropriation of our proprietary technology and processes under applicable PRC laws and regulations.

During the three years ended December 31, 2010, we were not exposed to any infringement claims and have not experienced any third party infringement of our intellectual property rights.

INSURANCE

We do not have any product liability insurance to cover any liability arising from any defect in our products. PRC laws do not require us to maintain insurance covering any such liability. We also believe that all our products meet the quality standards set by the PRC supervision authorities and are therefore of the view that insurance coverage for product liability is not necessary. During the three years ended December 31, 2010, no legal claim or complaint has been made against us by any of our customers in relation to any products provided by us.

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EMPLOYEES

As of December 31, 2010, we employed a total of approximately 2,600 staff in China and Hong Kong. A breakdown of our employees by function is shown below:

Employee Function	Number of Employees	Number of Employees
Quality inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		138 460 36 1,804 162
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		2,600

Our employees’ remuneration is paid in accordance with the relevant PRC policies, and the benefits of our employees include salary, bonus, pension, unemployment insurance and housing allowance. We believe our relationship with our employees has been cordial. There has not been any material dispute between us or any of our subsidiaries and any of our respective employees during the three years ended December 31, 2010.

COMPLIANCE

During the three years ended December 31, 2010, we were in possession of all of the necessary approvals and qualification certificates required under PRC laws and regulations in order to conduct our businesses.

We have implemented comprehensive internal control and corporate governance systems. The internal control and corporate governance systems aim to achieve operational, financial reporting and compliance targets as defined in the framework of the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Each of our subsidiaries has adopted such systems for internal control purposes. We have a designated management team assigned to oversee the systems. In accordance with the COSO framework, we have performed an annual self-assessment of our internal controls, identified corrective actions after such assessment and implemented new controls.

LEGAL PROCEEDINGS

We are not aware of any material legal proceedings, claims or disputes currently existing or pending against us. We believe that there were no material legal proceedings or disputes which were of material importance or which have adversely affected us during the three years ended December 31, 2010.

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REGULATORY OVERVIEW

This section summarizes the principal PRC laws and regulations which are relevant to our business and operations. These include the laws and regulations relating to our glutamic acid, MSG, xanthan gum and fertilizer production and sales in the PRC and other relevant laws and regulations. As this is a summary, it does not contain the detailed analysis of the PRC laws which are relevant to our business and operations.

THE PRC

The PRC Legal System

The PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, directives and local laws, laws of Special Administrative Regions and laws resulting from international treaties entered into by the PRC government. Court verdicts do not constitute binding precedents. However, they are used for the purposes of judicial reference and guidance.

The National People’s Congress of the PRC (“NPC”) and the Standing Committee of the NPC are empowered by the PRC Constitution to exercise the legislative power of the State. The NPC has the power to amend the PRC Constitution and enact and amend basic laws governing State agencies and civil and criminal matters. The Standing Committee of the NPC is empowered to enact and amend all laws except for the laws that are required to be enacted and amended by the NPC.

The State Council is the highest organ of the State administration and has the power to enact administrative rules and regulations. The ministries and commissions under the State Council are also vested with the power to issue orders, directives and regulations within the jurisdiction of their respective departments. All administrative rules, regulations, directives and orders promulgated by the State Council and its ministries and commissions must be consistent with the PRC Constitution and the national laws enacted by the NPC. In the event that a conflict arises, the Standing Committee of the NPC has the power to annul administrative rules, regulations, directives and orders.

At the regional level, the provincial and municipal congresses and their respective standing committees may enact local rules and regulations and the people’s governments may promulgate administrative rules and directives applicable to their own administrative areas. These local rules and regulations must be consistent with the PRC Constitution, the national laws and the administrative rules and regulations promulgated by the State Council.

The State Council, provincial and municipal governments may also enact or issue rules, regulations or directives in new areas of the law for experimental purposes or in order to enforce the law. After gaining sufficient experience with experimental measures, the State Council may submit legislative proposals to be considered by the NPC or the Standing Committee of the NPC for enactment at the national level.

The PRC Constitution vests the power to interpret laws in the Standing Committee of the NPC. The Supreme People’s Court, in addition to its power to give general interpretation on the application of laws in judicial proceedings, also has the power to interpret specific cases. The State Council and its ministries and commissions are also vested with the power to interpret rules and regulations that they have promulgated. At the regional level, the power to interpret regional rules and regulations is vested in the regional legislative and administrative bodies which promulgate such laws.

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The PRC Judicial System

Under the PRC Constitution and the Law of Organization of the People’s Courts, the judicial system is made up of the Supreme People’s Court, the local courts, military courts and other special courts.

The local courts are comprised of the basic courts, the intermediate courts and the higher courts. The basic courts are organized into civil, criminal, economic, administrative and other divisions. The intermediate courts are organized into divisions similar to those of the basic courts, and are further organized into other special divisions, such as the intellectual property division. The higher level court supervise the basic and intermediate courts. The people’s procuratorates also have the right to exercise legal supervision over the civil proceedings of courts of the same level and lower levels. The Supreme People’s Court is the highest judicial body in the PRC. It supervises the administration of justice by all other courts.

The courts employ a two-tier appellate system. A party may appeal against a judgment or order of a local court to the court at the next higher level. Second judgments or orders given at the next higher level and the first judgments or orders given by the Supreme People’s Court are final. First judgments or orders of the Supreme People’s Court are also final. If, however, the Supreme People’s Court or a court at a higher level finds an error in a judgment which has been given in any court at a lower level, or the presiding judge of a court finds an error in a judgment which has been given in the court over which he presides, the case my then be retried according to the judicial supervision procedures.

The Civil Procedure Law of the PRC, which was adopted on April 9, 1991 and amended on October 28, 2007, sets forth the criteria for instituting a civil action, the jurisdiction of the courts, the procedures to be followed for conducting a civil action and the procedures for enforcement of a civil judgment or order. All parties to a civil action conducted within the PRC must comply with the Civil Procedure Law. Generally, a civil case is initially heard by a local court of the municipality or province in which the defendant resides. The parties to a contract may, by express agreement, select a jurisdiction where civil actions may be brought, provided that the jurisdiction is either the plaintiff’s or the defendant’s place of residence, the place of execution or implementation of the contract or the object of the action. However, such selection can not violate the stipulations of grade jurisdiction and exclusive jurisdiction in any case.

A foreign individual or enterprise generally has the same litigation rights and obligations as a citizen or legal person of the PRC. If a foreign country’s judicial system limits the litigation rights of PRC citizens and enterprises, the PRC courts may apply the same limitations to the citizens and enterprises of that foreign country within the PRC. If any party to a civil action refuses to comply with a judgment or order made by a court or an award granted by an arbitration panel in the PRC, the aggrieved party may apply to the court to request for enforcement of the judgment, order or award. The time limit imposed on the right to apply for such enforcement is two years. If a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.

A party seeking to enforce a judgment or order of a court against a party who is not located within the PRC and does not own any property in the PRC may apply to a foreign court with proper jurisdiction for recognition and enforcement of the judgment or order. A foreign judgment or ruling may also be recognized and enforced by the court according to the PRC enforcement procedures if the PRC has entered into, or acceded to, an international treaty with the relevant foreign country, which provides for such recognition and enforcement, or if the judgment or ruling satisfies the court’s examination according to the principal of reciprocity, unless the court finds that the recognition or enforcement of such judgment or ruling will result in a violation of the basic legal principles of the PRC, its sovereignty or security, or for reasons of social and public interests.

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RELEVANT LAWS AND REGULATIONS

The businesses of the Group, in particular, the production and sale of its principal products are primarily regulated by the following regulations and measures:

Production Safety Law of the PRC

The Production Safety Law of the PRC (中華人民共和國安全生產法) promulgated by the Standing Committee of the National People’s Congress on June 29, 2002 which lays down the framework for the requirement, supervision and enforcement of safety standards in production. It imposes prime responsibility on the representative of production entities for ensuring a comprehensive safety accountability within the entity, the drawing up of safety manual and operating procedures, the supervising and checks on safe work practices and the elimination of hazards in its manufacturing processes. The law safeguards certain interests of workers injured from industrial accidents and at the same time penalize not only the production entities for non-observance of its provisions, but the relevant safety supervisory administration departments for its lack of proper supervision or for approving the production without adequate inspection of the entity’s safety measures.

In addition, other relevant PRC laws and regulations on safety requirements applicable to the Group include: Measures to Punish the Illegal Action on Safety Production (安全生產違法行為行政處罰辦法), Fire Protection Law of the People’s Republic of China (中華人民共和國消防法), Safety Production Supervisory Regulations of Shandong Province (山東省安全生產監督管理規定), Work Safety and Hygiene Regulations of Shandong Province (amended) (山東省勞動安全衛生管理規定（修正)), Special Equipment Safety Supervisory Rules (特種設備安全監察條例) and Work-related Injury Insurance Regulations (工傷保險條例).

Regulations on the Administration of Permit for Production of Industrial Products and its implementing rules

The Regulations on the Administration of Permits for the Production of Industrial Products of the PRC (中華人民共和國工業產品生產許可證管理條例), which took effect on September 1, 2005, and the Implementing Rules for the Administration of Permits for Production of Industrial Products (中華人民共和國工業產品生產許可證管理條例實施辦法), which were promulgated on November 1, 2005 and revised on April 21, 2010 (issued by the General Administration of Quality Supervision, Inspection and Quarantine (國家質量監督檢驗檢疫總局) These laws are applicable to industrial product manufacturing enterprises and set out various standards on, including but not limited to, production processes, the management of inspectors, inspection and approving bodies. Manufacturing operations conducted without the proper permit being issued may subject the producer to an order of suspension of operations, confiscation of unauthorized products and fines.

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The Food Safety Law

The Food Safety Law of the PRC (中華人民共和國食品安全法) promulgated by the Standing Committee of the National People’s Congress and effective on June 1, 2009, and the Implementing Rules for the Food Safety Law (中華人民共和國食品安全法實施條例) issued by the State Council on July 20, 2009, regulated the production and trading of food (including food additives) through various mechanisms such as risk assessment, licensing, standardization and inspection. Under the Food Safety Law, an entity producing food additives must obtain a permit in accordance with the Regulations on the Administration of Permits for the Production of Industrial Products. Production of food additives without such permit may subject the producer to confiscation of unauthorized products, illegal income, tools, equipment and raw materials used for illegal production and fines.

Fertilizer Registration Administration Methods

Fertilizer Registration Administration Methods Law (肥料登記管理辦法) issued by the PRC Ministry of Agriculture (農業部) and taking effect on June 23, 2000 requires that any import, manufacture, sales and use of fertilizers, including organic, inorganic, microorganic and compound fertilizers, are subject to the product test requirements and registration procedures specified by the law. It provides detailed requirements regarding the packaging label and product specification of fertilizers and the penalties for breaching its provisions. In addition, it exempts certain products from the registration requirements.

The Environmental Protection Laws

The State Environmental Protection Administration (國家環境保護總局) is responsible for the overall supervision and management of environmental protection in the PRC. All manufacturers in the PRC must comply with environmental laws and regulations including the Environmental Protection Law of the PRC (中華人民共和國環境保護法), Prevention and Control of Water Pollution Law of the PRC (中華人民共和國水污染防治法), Prevention and Control of Air Pollution Law of the PRC (中華人民共和國大氣污染防治法) and Prevention and Control of Environmental Pollution by Solid Waste Law of the PRC (中華人民共和國固體廢物污染環境防治法), and relevant environmental regulations such as provisions regarding the treatment and disposal of pollutants and sewage, discharge of polluted fumes and the prevention of industrial pollution. Depending on the circumstances and the seriousness of the violation of the environmental regulations, the local authorities are authorized to impose various types of penalties on the persons or entities in violation of the environmental regulations. The penalties which could be imposed include the issue of warning, suspension of operation or installation and use of preventive facilities which are incomplete and fail to meet the prescribed standard, reinstallation of preventive facilities which have been dismantled or left idle, administrative sanction against office-in-charge, suspension of business operations or shut-down of the enterprise or institution. Fines could also be levied together with these penalties. The relevant local authorities may apply to the court for compulsory enforcement of environmental compliance. The persons or entities in violation of the applicable laws and regulations may also be liable to pay damages to the victims and/or result in criminal liability.

Other environmental protection laws applicable to the Group include: Regulations of Environmental Management on Project (建設項目環境保護管理條例), Regulations of Environmental Protection Acceptance Inspection on Projects Completion (建設項目竣工環境保護驗收管理辦法) and Environmental Impact Evaluation Law of the PRC (中華人民共和國環境影響評價法).

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PERMITS, APPROVALS, CERTIFICATES AND BUSINESS LICENSES

For food additive production

The following is a summary of the required certificates, permits and/or licenses required to be obtained from the relevant supervisory bodies before an enterprise can manufacture or distribute food additive products:

(i) Hygiene Permit (衛生許可證) issued prior to June 1, 2009 in respect of each food additive product produced by the enterprise being inspected by the relevant health bureau. After June 1, 2009, the Hygiene Permit was no longer required for food additive product as the Food Hygiene Law of the PRC was abolished on the effective date of the Food Safety Law of the PRC.
(ii) Industrial Products Manufacturing License (工業產品生產許可證) issued by the relevant administrative bureau of quality supervision, inspection and quarantine (質量監督檢驗檢疫部門); and
(iii) Business License (營業執照) issued by the relevant administrative bureau of industry and commerce.

For fertilizer production and sales

Enterprises engaged in the production and sales of fertilizers in the PRC have to additionally obtain the following certificate, approvals and licenses from the relevant government authorities:

(i) for the manufacture and sales of fertilizers, the Industrial Products Manufacturing License (全國工業產品生產許可證) issued by the relevant administrative bureau of quality supervision, inspection and quarantine (質量監督檢驗檢疫部門);
(ii) for the manufacture and sale of fertilizers, a Fertilizer Registration Certificate (肥料登記證) issued by the relevant administrative bureau of agriculture; and
(iii) filing with each of the relevant administrative bureau of agriculture for the sale of fertilizers outside of the province where the manufacturing operation is based.

For special manufacturing processes and equipment

In accordance with the Production Safety Law of the PRC (中華人民共和國安全生產法) and the Special Equipment Safety Supervision Regulations (特種設備安全監察條例), manufacturing entities which employ hazardous equipment or apparatus or present significant danger source must obtain the following permits or registration for its use or operation:

(i) Special Equipment Safety Certificate (特種設備安全使用証) issued by the relevant State Bureau of Quality and Technical Supervision (國家質量技術監督局); and
(ii) registration with the State Administration of Work Safety (國家安全生產監督管理局) and submit to periodic review and maintenance program.

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MANAGEMENT

DIRECTORS

Our Board of Directors is responsible and has general powers for the management and conduct of our business. The members of our Board are appointed through a shareholders’ general meeting.

The rights and obligations of each member of the Board of Directors are regulated by the Articles of Association and by our shareholders during our general meetings.

Our Directors are elected for a three-year term, without prejudice to the rights of the general meeting of shareholders to dismiss a Director during his or her term of office or to reappoint a Director whose term of appointment has expired. Other officers of the Company serve at the discretion of the Board of Directors.

Our Board of Directors acts as the primary day-to-day approval and decision-making body.

Our governance framework provides for checks and balances while allowing our management flexibility for prompt decision making in the ordinary course of business. Post-implementation audits of significant expenditures are conducted and reviewed by designated committees and by our Board of Directors.

The members of the Board of Directors, who are responsible for day-to-day management, are as follows:

Name Li Xuechun . . . . . . . . . . . . . . . . . Wang Longxiang . . . . . . . . . . . . . Feng Zhenquan . . . . . . . . . . . . . . Xu Guohua . . . . . . . . . . . . . . . . . Li Deheng . . . . . . . . . . . . . . . . . Chen Yuan . . . . . . . . . . . . . . . . . Gong Qingli . . . . . . . . . . . . . . . . Li Guangyu . . . . . . . . . . . . . . . . Choi Tze Kit, Sammy . . . . . . . . . Chen Ning . . . . . . . . . . . . . . . . . Liang Wenjun . . . . . . . . . . . . . . .	Age 59 49 41 42 42 41 43 32 48 48 47	Position
		Chairman and Executive Director Executive Director Executive Director Executive Director Executive Director Executive Director Executive Director Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director

Executive Directors

Li Xuechun (李學純) , aged 59, 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, Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng. 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 Shandong Institute of Light Industry (山東輕工業學院) in 1982. Mr. Li is a member of the Shandong Province 11th People’s Congress (山東省第十一屆人大代表), 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 Worker” of Shandong Province. Mr. Li first joined Shandong Furui Brewery Group (山東福瑞酒廠) in 1982 as the factory manager. Mr. Li established the Group by setting up Shandong Fufeng in June 1999 and was appointed a director of Shandong Fufeng the same year. He has 29 years of experience in the fermentation industry. Mr. Li is the sole director of and is beneficially interested in the entire issued share

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capital of Motivator Enterprises Limited which in turn is interested in approximately 45.96% of the issued share capital of the Company and is a controlling shareholder of the Company. He is the father of Li Guangyu (李廣玉) (an executive Director) and the brother-in-law of Li Deheng (李德衡) (an executive Director).

Wang Longxiang (王龍祥) , aged 49, is an executive Director and the general manager of the Group and is responsible for the overall management of the Group’s daily operations. Mr. Wang obtained a bachelor’s degree in industrial fermentation from Shandong Institute of Light Industry (山東輕工業學院) in 1982. He is qualified as a senior engineer. Mr. Wang also obtained a master’s degree in business administration from University of Science and Technology of China (中國科技大學) in 1992. Mr. Wang joined the Group in 2005 and has over 19 years of experience in the fermentation industry. Mr. Wang is interested in 14.3% of the issued share capital of Hero Elite, which in turn is interested in 57,600,000 shares, representing 3.35% of the issued share capital of the Company. Mr. Wang was granted an option to subscribe for 16,000,000 Shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share option, which were held by Mr. Wang, was 5,910,000 shares, representing 0.3% of the issued share capital of the Company.

Feng Zhenquan (馮珍泉) , aged 41, is an executive Director and vice general manager of the Group. Mr. Feng is also a director of Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng. He is in charge of the operations of Hulunbeir Fufeng. Mr. Feng graduated from Shandong Institute of Light Industry (山東輕工業學院專科) in 1990 majoring in electrical and mechanical technology. Mr. Feng was appointed as a director of Shandong Fufeng in May 2002 and has over 17 years of experience in the fermentation industry. He was one of the initial management shareholders. Mr. Feng is interested in 15% of the issued share capital of Ever Soar, which in turn is interested in 185,112,000 shares, representing approximately 10.77% of the issued share capital of the Company.

Xu Guohua (徐國華) , aged 42, is an executive Director and vice general manager of the Group who is responsible for the production and research and development department of the Group. Mr. Xu is also a director of Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng. Mr. Xu graduated from Shandong Institute of Light Industry (山東輕工業學院) majoring in fermentation and economics management in July 1991 and 2003 respectively. He completed his study in fermentation engineering from Tianjin University of Science and Technology (天津科技大學) in September 2004. Mr. Xu has been elected to the executive council 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 jointed us in June 1999 and has over 20 years of experience in the fermentation industry. Mr. Xu was appointed a director of Shandong Fufeng in May 2002. Mr. Xu is interested in 15% of the issued share capital of Ever Soar, which in turn is interested in 185,112,000 shares, representing approximately 10.77% of the issued share capital of the Company.

Li Deheng (李德衡) , aged 42, is an executive Director and a vice general manager of the Group who is responsible for the business operations of Inner Mongolia Fufeng. He is also a director of Shandong Fufeng, Baoji Fufeng and IM Fufeng. Mr. Li graduated from the Shandong Liaocheng Teacher’s College (山東聊城師範學院) in 1992 and obtained a bachelor’s degree in chemistry education. He joined us in January 2001 and was appointed a director of Shandong Fufeng in November 2003 and has over 10 years of experience in business management. Mr. Li Deheng is the brother-in-law of Mr. Li Xuechun. Mr. Li is interested in 15% of the issued share capital of Ever Soar, which in turn is interested in 185,112,000 shares, representing approximately 10.77% of the issued share capital of the Company.

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Chen Yuan (陳遠) , aged 41, is an executive Director and a vice general manager of the Group. Mr. Chen is responsible for the Group in the sectors of capital markets, corporate development and investor relations matters, and for strategic planning and long-term development plan formulation. Mr. Chen obtained a bachelor degree of accountancy from Xiamen University in 1991 and then received his master in business administration degree from Birmingham Business school of University of Birmingham in 2001. Mr. Chen joined the Group in September 2010 and has over 18 years of experience in the corporate finance, corporate development and investor relation sectors. Previously, he worked as a managing director and head of institutional sales for China Everbright Securities (HK) Limited. Mr. Chen was granted an option to subscribe for 5,000,000 shares pursuant to the Post-IPO Share Option Scheme, representing 0.29% of the issued share capital of the Company. Mr. Chen did not hold any directorship in other listed public companies in the last three years.

Gong Qingli (龔卿禮) , aged 43, is an executive Director and the chief financial officer of the Group who is responsible for financial management and assists in strategic planning of the Group. He is also designated to manage and oversee the internal control and corporate governance systems of the Group. Mr. Gong obtained his accounting degree from Shanghai Lixin Accounting College (立信會計專科學校) in 1988. Mr. Gong is a member of the Chinese Institute of Certified Public Accountants. Prior to joining the Group in January 2007, Mr. Gong had over 21 years of experience in accounting, business advisory and risk management services, including some with an international accounting firm. Centerpoint Assets Management Limited, a company wholly and beneficially owned by Mr. Gong and at which Mr. Gong served as its sole director, was granted an option to subscribe for 16,000,000 shares pursuant to the Pre-IPO Share Option Scheme. Mr. Gong exercised all share options during the year. Mr. Gong is interested in 10,000,000 shares, representing approximately 0.58% of the issued share capital of the Company.

Li Guangyu (李廣玉) , aged 32, is an executive Director and a vice general manager of the Group who is responsible for project management for our Northeastern Plant. Mr. Li has over five years of experience in the fermentation industry. Mr. Li graduated from East China University of Political Science and Law Graduate School (華東政法大學研究生院) in 2006 and obtained a master’s degree in law. Mr. Li is the son of Mr. Li Xuechun. Mr. Li did not hold any directorship in other listed public companies in the last three years. 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

Choi Tze Kit, Sammy (蔡子傑) , aged 48, was appointed as an independent non-executive Director in January 2007. Mr. Choi graduated from the Hong Kong Shue Yan College (presently known as Hong Kong Shue Yan University). He is an associate member of the Institute of Chartered Accountants in England and Wales, a fellow member of the Association of Chartered Certified Accountants and a fellow Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Taxation Institute of Hong Kong. Mr. Choi is also a council member of the Society of Chinese Accountants and Auditors. He has over 22 years of experience in finance and auditing.

Chen Ning (陳寧) , aged 48, was appointed as an independent non-executive Director in January 2007. Mr. Chen is a professor at the School of Bioengineering, Tianjin University of Science and Technology (天津科技大學生物工程學院), and a committee member of the 天津微生物學會 (Tianjin Society for Microbiology). Mr. Chen had spent 10 years in the study and research in microbial metabolism in the control of fermentation processes and in the amino acids technology. Mr. Chen was co-author of six academic textbooks and has written over 90 academic papers.

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Liang Wenjun (梁文俊) , aged 47, was appointed as an independent non-executive Director in January 2007. Mr. Liang is a professor of financial management at the 石油化工管理幹部學院 (Sinopec Management Institute) since 2010. Mr. Liang has over 21 years of experience in financial accounting, auditing and consulting. Mr. Liang received his bachelor’s degree in 1989 from 北京化工大學 (Beijing University of Chemical Technology) majoring in industrial engineering management.

SENIOR MANAGEMENT

Lai Fengtang (來鳳堂) , aged 42, is a vice general manager of the Group. Mr. Lai graduated from Northwest University of China (西北大學) in 1998. He first joined Shandong Furui Brewery Group in 1991. Mr. Lai joined the Group in June 1999 and has over 19 years of experience in the sales and marketing. 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 57,600,000 shares, representing 3.35% of the issued share capital of the Company. Mr. Lai was granted an option to subscribe for 3,200,000 shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share Options, which were held by Mr. Lai, was 1,088,000 shares, representing 0.06% of the issued share capital of the Company.

Shen Dequan (沈德權) , aged 45, is a vice general manager of Baoji Plant. Mr. Shen graduated from The Agriculture School of Linyi (山東省臨沂農業學校) in 1986, majoring in forestry. Before joining Shandong Fufeng in 1999, he spent six years with the Shandong Furui Brewery Group. Mr. Shen has accumulated 12 years of experience in production management. His current responsibilities within the Group include managing the production department. Mr. Shen is interested in 10.7% of the issued share capital of Hero Elite, which in turn is interested in 57,600,000 Shares, representing 3.35% of the issued share capital of the Company.

Xu Lingguo (徐令國) , aged 36, is a vice general manager of Hulunbeir Fufeng. Mr. Xu graduated in 1997 from Taiyuan University of Technology (太原理工大學) majoring in economic law. Mr. Xu joined the Group in 1999. Mr. Xu has 11 years of experience in the fermentation industry and is presently responsible for the Group’s sales and marketing. Mr. Xu was granted an option to subscribe for 1,280,000 shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share option, which were held by Mr. Xu, is 436,000 shares, representing 0.03% of the issued share capital of the Company.

Li Hui (李慧) , aged 44, is a vice general manager of the international trade department of the Group. He obtained his bachelor’s degree from University of Science and Technology Beijing (北京科技大學) in 1989. In 1999, Mr. Li completed a course in international trade at University of International Business and Economics (對外貿易大學國際貿易專業). He joined the Group in 2003 and is responsible for the Group’s international market development and sales. He was granted an option to subscribe for 6,400,000 shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share options, which were held by Mr. Li, were 2,176,000 shares, representing 0.13% of the issued share capital of the Company.

Xiao Yong (肖勇) , aged 42, is a manager in the quality control department of the Group. Mr. Xiao obtained his bachelor’s degree from Hunan University (湖南大學) in 1992, majoring in chemical industry. Before joining the Group in 2003, Mr. Xiao has accumulated nine years of experience in quality control management and is primarily responsible for our quality and production control. Mr. Xiao was granted an option to subscribe for 1,280,000 shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share options, which were held by Mr. Xiao, was 436,000 shares, representing 0.03% of the issued share capital of the Company.

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Ge Wencun (葛文村) , aged 50, is a manager of operation department of the Group and has joined the Group since 1999. Mr. Ge obtained his bachelor’s degree in 1986 from Shandong Institute of Light Industry (山東輕工業學院). Mr. Ge is currently responsible for the Group’s domestic and international market development. Mr. Ge first joined Shandong Furui Brewery Group in 1992 and has over 18 years of experience in the fermentation industry. Mr. Ge was granted an option to subscribe for 1,120,000 shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share option, which were held by Mr. Ge, is 382,000 shares, representing 0.02% of the issued share capital of the Company.

Zhang Yuannian (張元年) , aged 37, is a manager of the finance department of the Group. Mr. Zhang first joined Shandong Furui Brewery Group in 1994 and graduated from (The Commerce School of Linyi (臨沂市商業學校). He joined the Group in 1999 and has accumulated over 16 years of experience in finance. Mr. Zhang was granted an option to subscribe for 1,280,000 Shares pursuant to the Pre-IPO Share Option Scheme. At the end of 2010, the remaining balance of share option, which were held by Mr. Zhang, was 436,000 shares, representing 0.03% of the issued share capital of the Company.

COMPANY SECRETARY

Lee Wai Yin (李偉然) , aged 41, 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 17 years of working experience in finance and accounting including some with international accounting firms. Mr. Lee was granted an option to subscribe for 1,000,000 Shares pursuant to the Post-IPO Share Option Scheme, representing 0.06% of the issued share capital of the Company.

BOARD PRACTICES

In the absence of extraordinary events, it is the practice of the Board of Directors to meet at least once every quarter. At such meetings, the Directors conduct, among other things, an operational review of our business.

AUDIT COMMITTEE

The Company established an audit committee on January 10, 2007 with written terms of reference in compliance with the Code on Corporate Governance Practices as set out in Appendix 14 to the Listing Rules. The primary duties of the audit committee are to review and supervise the financial reporting process and internal control systems of the Group and to provide comments and advice to the Board.

The audit committee has three members, namely Choi Tze Kit, Sammy (蔡子杰), Chen Ning (陳寧) and Liang Wenjun (梁文俊), all of whom are independent non-executive Directors. Mr. Choi is the chairman of the audit committee.

REMUNERATION COMMITTEE

The Company established a remuneration committee on January 10, 2007 with written terms of reference in compliance with the Code on Corporate Governance Practices as set out in Appendix 14 to the Listing Rules. The primary duties of the Remuneration Committee include: (i) making recommendations to the Directors on the Company’s policy and structure for the remuneration of all Directors and senior management; (ii) determining the terms of the specific remuneration package of each executive Director and each member of senior management; and

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(iii) reviewing and approving performance-based remuneration by reference to corporate goals and objectives resolved by the Directors from time to time. The remuneration committee consists of the Chairman of the Company, Mr. Li Xuechun and three independent non-executive Directors, namely, Choi Tze Kit, Sammy (蔡子杰), Li Xuechun (李學純), 陳寧 (Chen Ning) and Liang Wenjun (梁文俊). Mr. Choi is the chairman of the remuneration committee.

We paid no remuneration to our directors or the five highest paid individuals as an inducement to join or upon joining us or as compensation for loss of office, apart from severance of Mr. Wu Xindong, Mr. Yan Ruliang and Ms. Li Hongyu, in respect of the three years ended December 31, 2008, 2009 and 2010. Further, none of our directors had waived any remuneration during the same period.

Save as disclosed above, no other payments including contributions to pension schemes have been paid or are payable, in respect of the three years ended December 31, 2008, 2009 and 2010, by us or any of our subsidiaries to our directors, and no payments were made during the three years ended December 31, 2008, 2009 and 2010 by us to any of our directors as an inducement to join or upon joining us.

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PRINCIPAL SHAREHOLDERS

As of December 31, 2010, according to the register we maintain in accordance with Section 336 of the Securities and Futures Ordinance, the following parties were directly or indirectly interested in 5% or more of our issued share capital.

Name Motivator Enterprises (1) . Shi Guiling (2) . . . . . . . . Ever Soar (3) . . . . . . . . .	Nature of interest Beneficial interests Interests of spouse Beneficial interests	Number of shares held 789,946,000 789,946,000 185,112,000	Percentage of shareholding in our Company
			45.96% 45.96% 10.77%

Notes:

(1) The interest in these Shares is held by Motivator Enterprises, the entire issued share capital of which is wholly and beneficially owned by Mr. Li Xuechun, an executive Director and the Chairman of the Company. Accordingly, Mr. Li Xuechun is deemed to be interested in all Shares held by Motivator Enterprises under the SFO.
(2) Ms. Shi Guiling is the spouse of Mr. Li Xuechun. Accordingly, she is also deemed to be interested in the 786,000,000 Shares held by Motivator Enterprises, which in turn is also deemed to be interested by Mr. Li Xuechun under the SFO.
(3) Ever Soar is owned as to 15% by Mr. Feng Zhenquan, 15% by Mr. Xu Guohua, 15% by Mr. Li Deheng (all of whom are executive Directors), 25% by Mr. Wu Xindong (a former executive director who resigned with effect from March 9, 2010), 15% by Mr. Yan Ruliang (a former executive director who resigned with effect from May 15, 2009) and 15% by Ms. Guo Yingxi.

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RELATED PARTY TRANSACTIONS

On December 16, 2010, Mr. Li, the Chairman and one of our executive directors, granted a personal guarantee in favor of China Construction Bank for a credit facility that our PRC subsidiary Shandong Fufeng entered into with China Construction Bank. The credit facility has a limit of RMB110.0 million and as of December 31, 2010, Shandong Fufeng had drawn down a total of RMB30.0 million. The guarantee was entered into in the ordinary course of business, on fair and reasonable commercial terms.

Other than the personal guarantee as described, there was no other related party transaction between us, our consolidated subsidiaries and our directors, executive officers and principal shareholders nor, in each case, the companies with whom they are affiliated, as of December 31, 2010.

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DESCRIPTION OF OTHER MATERIAL INDEBTEDNESS

To fund our existing business operations and to finance our working capital requirements, we have borrowed money or incurred indebtedness from various banks. As of December 31, 2010, our total borrowings amounted to RMB1,536.5 million (US$232.8 million). Since December 31, 2010, the Company has from time to time incurred additional indebtedness in the ordinary course of business. We set forth below a summary of the material terms and conditions of these loans and other indebtedness.

PRC LOAN AGREEMENTS

Bilateral Bank Loan Agreements

Our PRC operating subsidiaries Shandong Fufeng, Baoji Fufeng and Inner Mongolia Fufeng have entered into loan arguments with a number of PRC banks including China Construction Bank, Agricultural Bank of China, Bank of China, China Merchants Bank, Agricultural Development Bank of China, SPD Bank, Huaxia Bank, Chang’an Bank, China Minsheng Bank and Bank of Communications. These loans are typically used to satisfy our working capital requirements and are repayable within one to two years.

Interest

The principal amounts outstanding under the majority of the PRC bank loans bear interest at fixed rates ranging between 4.9383% and 5.81% per annum. A few bank loans, such as certain loans from China Merchants Bank and Bank of Communications, are subject to floating interest rates calculated by reference to the PBOC’s benchmark interest rate per annum. Floating interest rates generally are subject to review monthly.

Any overdue amount under the bank loans will be subject to a penalty interest accruing from the due date up to the date of actual payment at a rate of between 30% and 50% above the benchmark interest rate per annum. Any portion of the Loan which is not used for the present bid purpose will be subject to a penalty interest at a rate of between 50% and 100% above the benchmark interest rate per annum.

Covenants

Under this PRC bank loans, our subsidiary borrowers have agreed, among other things, not to take the following actions without first notifying the lender and/or obtaining the lenders’ prior consent:

create encumbrances on any part of properties or assets or deal with assets in a way that may adversely affect its ability to repay its loans;
grant guarantees to any third parties that may adversely affect its ability to repay its loans;
application for bankruptcy, liquidation and dissolution proceedings;
transfer part or all of the liabilities under the loans to a third party; and
prepay the loan.

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Pursuant to a number of PRC bank loans, our subsidiary borrowers also agreed to keep their debt ratio at no higher than 70%. In addition, under its loan agreement with Bank of China, Baoji Fufeng agreed not to provide security to third parties such that the total value of the security exceeds 50% of Baoji Fufeng’s total net assets.

Guarantee and security

Certain of our PRC subsidiaries have entered into guarantee and security agreements with the lenders in connection with the bank loan agreements, pursuant to which such PRC subsidiaries have provided guarantees and security including land use rights and property of such PRC subsidiaries. Mr. Li, our Chairman and an executive director, granted a personal guarantee to our subsidiary Shandong Fufeng in relation to its credit facility of up to RMB110.0 million from China Construction Bank.

OFFSHORE FINANCING AGREEMENT

2010 Convertible Bonds

On April 1, 2010 and April 22, 2010, we issued U.S. dollar settled 4.5% convertible bonds due 2015 in the aggregate principal amount of RMB1,025,000,000 on the 2010 Convertible Bonds. The 2010 Convertible Bonds are unsecured and will mature on April 1, 2015. As of the date of this offering memorandum, RMB1,025.0 million of the 2010 Convertible Bonds are outstanding.

Conversion

The 2010 Convertible Bonds are, at the option of the holders, convertible at any time until into our fully paid ordinary shares with a par value of HK$0.10 each at an initial conversion price of HK$7.03 per share with a fixed exchange rate of RMB0.8797 to HK$1.00. The conversion price is subject to customary adjustment for, among other things, consolidation, subdivision or reclassification of shares, capitalization of profits or reserves, capital distributions, rights issues of shares or options over shares, rights issues of other securities, issues or other issues at less than current market price, modification of rights of conversion or other offers to shareholders. As of the date of this offering memorandum, the conversion price is HK$7.03 per share.

Redemption at the option of holders

On April 1, 2013, the holder of each 2010 Convertible Bond has the right, at such holder’s option, to require us to redeem all or some only of the 2010 Convertible Bonds at an amount equal to the U.S. dollar equivalent of their Renminbi principal amount, together with accrued but unpaid interest to the date fixed for redemption. A holder shall also have the right, at such holder’s option, to require us to redeem all but not some only of that holder’s 2010 Convertible Bonds at a redemption price equal to the U.S. dollar equivalent of their Renminbi principal amount, together with interest accrued, upon the shares ceasing to be listed or admitted to trading or are suspended for trading for a period equal to or exceeding 90 consecutive days on the Hong Kong Stock Exchange.

Redemption at our option

At any time after April 1, 2013 and prior to April 1, 2015, we may redeem all but not some only of the 2010 Convertible Bonds outstanding at a redemption price equal to the U.S. dollar equivalent of their Renminbi principal amount, together with interest accrued, if the closing price of our shares translated into Renminbi (at the prevailing exchange rate for Hong Kong

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dollars and Renminbi applicable to the relevant trading day for any 20 out of 30 consecutive trading days prior to the date upon which notice of the redemption is given) was at least 130% of the prevailing conversion price translated into Renminbi at the fixed exchange rate of RMB0.8797 to HK$1.00. We may also at any time redeem in whole but not in part, the 2010 Convertible Bonds outstanding at a redemption price equal to the U.S. dollar equivalent of their Renminbi principal amount, together with accrued but unpaid interest to the date fixed for redemption, if prior to the date of notice at least 90% in Renminbi principal amount of the 2010 Convertible Bonds originally issued has already been converted, redeemed or purchased and cancelled.

Redemption upon change of control

Upon the occurrence of certain events of change of control of our Company, the holder of each 2010 Convertible Bond will have the right to require us to redeem all but not some only of that holder’s 2010 Convertible Bonds at a redemption price equal to the U.S. dollar equivalent of their Renminbi principal amount, together with interest accrued. A change of control of our Company that would grant a 2010 Convertible Bond holder the right to require us to redeem includes (i) any entity (other than Li Xuechun, Shi Guilin, Wu Xindong, Yan Ruliang, Feng Zhenquan, Xu Guohua, Li Deheng and Cheah Cheng Hye or any of their affiliates) acquiring control of our Company or (ii) our Company consolidating or merging with another entity or selling all or substantially all of our assets to another entity, unless the consolidation, merger, sale or transfer will not result in the other entity acquiring control of our Company or our Company’s successor. “Control” under this provision the acquisition or control of more than 50% of the voting rights of our issued share capital or the right to appoint and/or removal all or the majority of the members of our board of directors or other governing body, whether obtained directly or indirectly and whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise.

Negative pledge

So long as any 2010 Convertible Bond remains outstanding, we will not, and we will ensure that none of our subsidiaries will, create or have outstanding any encumbrance, upon the whole or any part of our present or future undertaking, assets, or revenues (including any uncalled capital) to secure certain forms of indebtedness unless, at the same time or prior thereto, our obligations under the 2010 Convertible Bonds are secured equally and rateably (a) by the same encumbrance or (b) at our option, by such other security, guarantee, indemnity or other arrangement as either (i) the 2010 Convertible Bonds trustee may in its absolute discretion deem not materially less beneficial to the interests of the holders of the 2010 Convertible Bonds or (ii) shall be approved by an extraordinary resolution (as defined in the 2010 Convertible Bonds trust deed) of the holders.

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DESCRIPTION OF THE NOTES

For purposes of this “Description of the Notes,” the term “Company” refers only to Fufeng Group Limited, and any successor obligor on the Notes, and not to any of its subsidiaries. Each subsidiary of the Company which guarantees the Notes is referred to as a “Subsidiary Guarantor,” and each such guarantee is referred to as a “Subsidiary Guarantee.”

The Notes are to be issued under an indenture (the “Indenture”), to be dated as of the Original Issue Date, among the Company, the Subsidiary Guarantors, as guarantors, and Citicorp International Limited, as trustee (the “Trustee”).

The following is a summary of certain provisions of the Indenture, the Notes, the Subsidiary Guarantees and the Intercreditor Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Indenture, the Notes, the Subsidiary Guarantees and the Intercreditor Agreement. It does not restate those agreements in their entirety. Whenever particular sections or defined terms of the Indenture not otherwise defined herein are referred to, such sections or defined terms are incorporated herein by reference. Copies of the Indenture will be available on or after the Original Issue Date at the corporate trust office of the Trustee at 39th Floor, ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong.

Brief Description of the Notes

The Notes are:

general obligations of the Company;
senior in right of payment to any existing and future obligations of the Company expressly subordinated in right of payment to the Notes;
at least pari passu in right of payment with all other unsecured, unsubordinated Indebtedness of the Company (subject to any priority rights of such unsubordinated Indebtedness pursuant to applicable law);
guaranteed by the Subsidiary Guarantors on a senior basis, subject to the limitations described below under “— The Subsidiary Guarantees” and in “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral”;
effectively subordinated to all existing and future obligations of the Non-Guarantor Subsidiaries (defined below); and
effectively subordinated to all existing and future secured obligations of the Company to the extent of the collateral securing such obligations (other than the Collateral).

In addition, on the Original Issue Date, subject to the limitations described in “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral,” the Notes will be secured by a pledge of the Collateral as described below under “— Security” and will:

be entitled to a first-priority lien on the Collateral (subject to any Permitted Liens); and
rank effectively senior in right of payment to unsecured obligations of the Company with respect to the value of the Collateral pledged by the Company securing the Notes (subject to any priority rights of such unsecured obligations pursuant to applicable law).

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The Notes will mature on April 13, 2016, unless earlier redeemed pursuant to the terms thereof and the Indenture. The Indenture allows additional Notes to be issued from time to time (the “Additional Notes”), subject to certain limitations described under “— Further Issues.” Unless the context requires otherwise, references to the “Notes” for all purposes of the Indenture and this “Description of the Notes” include any Additional Notes that are actually issued. The Notes will bear interest at 7.625% per annum from the Original Issue Date or from the most recent interest payment date to which interest has been paid or duly provided for, payable semiannually in arrears on April 13 and October 13 of each year (each an “Interest Payment Date”), commencing October 13, 2011.

Interest on the Notes will be paid to Holders of record at the close of business on March 29 or September 28 immediately preceding an Interest Payment Date (each, a “Record Date”), notwithstanding any transfer, exchange or cancellation thereof after a Record Date and prior to the immediately following Interest Payment Date. In any case in which the date of the payment of principal of, premium on or interest on the Notes is not a Business Day in the relevant place of payment or in the place of business of the Trustee, then payment of principal, premium or interest need not be made in such place on such date but may be made on the next succeeding Business Day in such place. Any payment made on such Business Day shall have the same force and effect as if made on the date on which such payment is due, and no interest on the Notes shall accrue for the period after such date. Interest on the Notes will be calculated on the basis of a 360-day year comprised of twelve 30-day months.

The Notes will be issued only in fully registered form, without coupons, in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof. No service charge will be made for any registration of transfer or exchange of the Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. All payments on the Notes will be made in U.S. dollars by the Company at the office or agency of the Company maintained for that purpose (which initially will be an office of the Paying Agent, currently located at Ground Floor, DUB-01-11, 1 North Wall Quay, Dublin, Ireland), and the Notes may be presented for registration of transfer or exchange at such office or agency; provided that, at the option of the Company, payment of interest may be made by check mailed (at the expense of the Company) to the address of the Holders as such address appears in the Note register maintained by the Note Registrar or by wire transfer. Interest payable on the Notes held through DTC will be available to DTC participants (as defined herein) on the Business Day following payment thereof.

The Subsidiary Guarantees

The initial Subsidiary Guarantors that will execute the Indenture on the Original Issue Date will consist of all of the Company’s Restricted Subsidiaries other than the Non-Guarantor Subsidiaries (as defined below). All of the initial Subsidiary Guarantors are holding companies that do not have significant operations. The initial Subsidiary Guarantors will be Acquest Honour Holdings Limited, Summit Challenge Limited, Absolute Divine Limited, Expand Base Limited, Profit Champion International Limited, Full Profit Investment (Group) Limited and Trans-Asia Capital Resources Limited.

Restricted Subsidiaries organized under the laws of the PRC (collectively, the “Non-Guarantor Subsidiaries”) will not be Subsidiary Guarantors on the Original Issue Date.

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The Company will cause each of its future Restricted Subsidiaries (other than Persons organized under the laws of the PRC), as soon as practicable and in any event within 30 days after it becomes a Restricted Subsidiary, to execute and deliver to the Trustee a supplemental indenture to the Indenture pursuant to which it will Guarantee the payment of the Notes as a Subsidiary Guarantor.

Each Restricted Subsidiary that Guarantees the Notes after the Original Issue Date is referred to as a “Future Subsidiary Guarantor” and, upon execution of the applicable supplemental indenture to the Indenture, will be a “Subsidiary Guarantor.”

None of the existing Non-Guarantor Subsidiaries will provide a Subsidiary Guarantee at any time in the future. Moreover, no future Restricted Subsidiaries organized under the laws of the PRC will provide a Subsidiary Guarantee at any time in the future. Although the Indenture contains limitations on the amount of additional Indebtedness that Non-Guarantor Subsidiaries may incur, the amount of such additional Indebtedness could be substantial. In the event of a bankruptcy, liquidation or reorganization of any Non-Guarantor Subsidiary, such Non-Guarantor Subsidiary will pay the holders of its debt and its trade creditors before it will be able to distribute any of its assets to the Company.

As of December 31, 2010,

the Company and its consolidated subsidiaries (including the Non-Guarantor Subsidiaries) had total consolidated indebtedness of approximately RMB1,536.5 million (US$232.8 million), of which RMB60.0 million (US$9.1 million) was secured; and
the Non-Guarantor Subsidiaries had total indebtedness of approximately RMB555.0 million (US$84.1 million).

In addition, as of December 31, 2010, the Non-Guarantor Subsidiaries had capital commitments and contingent liabilities of approximately RMB416.5 million (US$63.1 million) and nil, respectively.

The Subsidiary Guarantee of each Subsidiary Guarantor:

is a general obligation of such Subsidiary Guarantor;
is effectively subordinated to secured obligations of such Subsidiary Guarantor, to the extent of the value of the assets serving as security therefor;
is senior in right of payment to all future obligations of such Subsidiary Guarantor expressly subordinated in right of payment to such Subsidiary Guarantee; and
ranks and will rank at least pari passu with all other unsecured, unsubordinated Indebtedness of such Subsidiary Guarantor (subject to any priority rights of such unsubordinated Indebtedness pursuant to applicable law).

In addition, subject to the limitations described in “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral,” the Subsidiary Guarantee of each Subsidiary Guarantor Pledgor will:

be entitled to a first-ranking security interest in the Collateral (subject to any Permitted Liens) pledged by such Subsidiary Guarantor Pledgor, as described below under “— Security”; and

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rank effectively senior in right of payment to the unsecured obligations of such Subsidiary Guarantor Pledgor with respect to the value of the Collateral securing such Subsidiary Guarantee (subject to any priority rights of such unsecured obligations pursuant to applicable law).

Under the Indenture, and any supplemental indenture to the Indenture, as applicable, each of the Subsidiary Guarantors will jointly and severally Guarantee the due and punctual payment of the principal of, premium, if any, and interest on, and all other amounts payable under, the Notes. The Subsidiary Guarantors will (1) agree that their obligations under the Subsidiary Guarantees will be enforceable irrespective of any invalidity, irregularity or unenforceability of the Notes or the Indenture and (2) waive their right to require the Trustee to pursue or exhaust its legal or equitable remedies against the Company prior to exercising its rights under the Subsidiary Guarantees. Moreover, if at any time any amount paid under a Note or the Indenture is rescinded or must otherwise be restored, the rights of the Holders under the Subsidiary Guarantees will be reinstated with respect to such payments as though such payment had not been made. All payments under the Subsidiary Guarantees are required to be made in U.S. dollars.

Under the Indenture, and any supplemental indenture to the Indenture, as applicable, each Subsidiary Guarantee will be limited in an amount not to exceed the maximum amount that can be Guaranteed by the applicable Subsidiary Guarantor without rendering the Subsidiary Guarantee, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. If a Subsidiary Guarantee were to be rendered voidable, it could be subordinated by a court to all other indebtedness (including Guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such indebtedness, a Subsidiary Guarantor’s liability on its Subsidiary Guarantee could be reduced to zero.

The obligations of each Subsidiary Guarantor under its respective Subsidiary Guarantee and the enforceability of the Collateral granted in respect of the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors may be limited, or possibly invalid, under applicable laws. See “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral — The Subsidiary Guarantees may be challenged under applicable, insolvency or fraudulent transfer laws, which could impair the enforceability of the Subsidiary Guarantees.”

Release of the Subsidiary Guarantees

A Subsidiary Guarantee given by a Subsidiary Guarantor may be released in certain circumstances, including:

upon repayment in full of the Notes;
upon a defeasance as described under “— Defeasance — Defeasance and Discharge”;
upon the designation by the Company of a Subsidiary Guarantor as an Unrestricted Subsidiary in compliance with the terms of the Indenture; or

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upon the sale or merger of a Subsidiary Guarantor in compliance with the terms of the Indenture (including the covenants under “— Certain Covenants — Limitation on Sales and Issuances of Capital Stock in Restricted Subsidiaries,” “— Certain Covenants — Limitation on Asset Sales” and “— Consolidation, Merger and Sale of Assets”) resulting in such Subsidiary Guarantor no longer being a Restricted Subsidiary, so long as (1) such Subsidiary Guarantor is simultaneously released from its obligations in respect of any of the Company’s other Indebtedness or any Indebtedness of any other Restricted Subsidiary and (2) the proceeds from such sale or disposition are used for the purposes permitted or required by the Indenture.

As of the date of the Indenture, all of the Company’s Subsidiaries will be “Restricted Subsidiaries.” However, under the circumstances described below under “— Certain Covenants — Designation of Restricted and Unrestricted Subsidiaries,” the Company will be permitted to designate certain of its Subsidiaries as “Unrestricted Subsidiaries.” The Company’s Unrestricted Subsidiaries will generally not be subject to the restrictive covenants in the Indenture. The Company’s Unrestricted Subsidiaries will not Guarantee the Notes.

Security

The Company has agreed, for the benefit of the Holders, to pledge, or cause the initial Subsidiary Guarantor Pledgors to pledge, as the case may be, the Capital Stock of the initial Subsidiary Guarantors (the “Collateral”) on a first-priority basis (subject to Permitted Liens) on the Original Issue Date in order to secure the obligations of the Company under the Notes and the Indenture and of such initial Subsidiary Guarantor Pledgor under its Subsidiary Guarantee.

The initial Subsidiary Guarantor Pledgors are Acquest Honour Holdings Limited, Summit Challenge Limited, Absolute Divine Limited and Expand Base Limited.

None of the Capital Stock of the Non-Guarantor Subsidiaries will be pledged on the Original Issue Date or at any time in the future. In addition, none of the Capital Stock of any future Restricted Subsidiary that may be organized under the laws of the PRC, or any Restricted Subsidiary owned directly by a Subsidiary organized under the laws of the PRC, will be pledged at any time in the future.

The Company has agreed, for the benefit of the Holders, to pledge, or cause each Subsidiary Guarantor to pledge, the Capital Stock owned directly by the Company or such Subsidiary Guarantor of any Person that becomes a Restricted Subsidiary (other than Persons organized under the laws of the PRC or a Restricted Subsidiary owned directly by such Person) after the Original Issue Date, as soon as practicable and in any event within 30 days after such Person becomes a Restricted Subsidiary, to secure the obligations of the Company under the Notes and the Indenture, and of such Subsidiary Guarantor under its Subsidiary Guarantee, in the manner described above.

Each Subsidiary Guarantor that pledges capital stock of a Restricted Subsidiary after the Original Issue Date is referred to as a “Future Subsidiary Guarantor Pledgor” and, upon giving such pledge, will be a “Subsidiary Guarantor Pledgor.”

The value of the Collateral securing the Notes and the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors (as reduced by the obligations owed to other secured creditors under the Intercreditor Agreement) is unlikely to be sufficient to satisfy the Company’s and each of the Subsidiary Guarantor Pledgors’ obligations under the Notes and the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors, and the Collateral securing the Notes and such Subsidiary Guarantee may be reduced or diluted under certain circumstances, including the

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issuance of Additional Notes and other Permitted Pari Passu Secured Indebtedness and the disposition of assets comprising the Collateral, subject to the terms of the Indenture. See “— Release of Security” and “Risk Factors — Risks Relating to the Subsidiary Guarantees and the Collateral — The value of the Collateral will likely not be sufficient to satisfy our obligations under the Notes and other Pari Passu Secured Indebtedness.”

No appraisals of the Collateral have been prepared in connection with this offering of the Notes. There can be no assurance that the proceeds of any sale of the Collateral, in whole or in part, pursuant to the Indenture and the Security Documents following an Event of Default, would be sufficient to satisfy amounts due on the Notes or the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors. Some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral would be sold in a timely manner or at all.

So long as no Payment Default has occurred and is continuing, and subject to the terms of the Security Documents and the Indenture, the Company and any Subsidiary Guarantor Pledgor, as the case may be, will be entitled to exercise any and all voting rights and to receive, retain and use any and all cash dividends, stock dividends, liquidating dividends, non-cash dividends, shares or stock resulting from stock splits or reclassifications, rights issues, warrants, options and other distributions (whether similar or dissimilar to the foregoing) in respect of Capital Stock constituting Collateral.

Permitted Pari Passu Secured Indebtedness

On or after the Original Issue Date, the Company and any Subsidiary Guarantor Pledgor may create Liens on the Collateral pari passu with the Lien for the benefit of the Holders to secure Indebtedness of the Company (including Additional Notes) and any Pari Passu Subsidiary Guarantee of a Subsidiary Guarantor Pledgor with respect to such Indebtedness (such Indebtedness of the Company and any such Pari Passu Subsidiary Guarantee, “Permitted Pari Passu Secured Indebtedness”); provided that (1) the Company or such Subsidiary Guarantor Pledgor was permitted to Incur such Indebtedness under the covenant described under “— Limitation on Indebtedness”; (2) the holders of such Indebtedness (or their representative or agent), other than with respect to Additional Notes, become party to the Intercreditor Agreement referred to below; and (3) the Company and such Subsidiary Guarantor Pledgor deliver to the Trustee and the Collateral Agent (as defined below) an Opinion of Counsel and Officers’ Certificate with respect to corporate and collateral matters in connection with the Security Documents, in form and substance as set forth in the Security Documents. The Trustee and/or the Collateral Agent, as the case may be, will be permitted and authorized, without the consent of any Holder, to enter into any amendments to the Security Documents, the Intercreditor Agreement or the Indenture and take any other action necessary to permit the creation and registration of Liens on the Collateral to secure Permitted Pari Passu Secured Indebtedness in accordance with this paragraph and the terms of the Indenture (including, without limitation, the appointment of any collateral agent under the Intercreditor Agreement referred to below to hold the Collateral on behalf of the Holders and the holders of Permitted Pari Passu Secured Indebtedness).

Except for certain Permitted Liens and Permitted Pari Passu Secured Indebtedness, the Company and its Restricted Subsidiaries will not be permitted to Incur any other Indebtedness secured by all or any portion of the Collateral without the consent of each Holder of the Notes then outstanding.

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Intercreditor Agreement

On the Original Issue Date, (i) the Company, (ii) the initial Subsidiary Guarantor Pledgors, (iii) Citicorp International Limited (the “Collateral Agent”), (iv) Citicorp International Limited, as the trustee under the 2010 Convertible Bonds (the “2010 CB Trustee”) and (v) the Trustee, will enter into an intercreditor agreement (as amended, waived, restated, replaced and/or supplemented from time to time, the “Intercreditor Agreement”), which will provide, among other things, that (1) the secured parties thereto and the holders of any future Permitted Pari Passu Secured Indebtedness (or their representative or agent) will share equal priority and pro rata entitlement in and to the Collateral; (2) the Collateral shall only be substituted or released and Liens only be granted on the Collateral to the extent permitted under the Debt Documents (as defined herein); and (3) the parties thereto shall enforce their rights with respect to the Collateral and the Indebtedness secured thereby as described in “— Enforcement of Security” below. Items (1), (2) and (3) in the previous sentence may only be amended or waived with the consent of the holders of a majority of the outstanding principal amount of the Indebtedness secured by the Collateral (the “Majority Creditors”).

The Indenture, the Intercreditor Agreement and/or the Security Documents principally provide that, at any time while the Notes are outstanding, the Collateral Agent has the exclusive right to manage, perform and enforce the terms of the Security Documents relating to the Collateral and to exercise and enforce all privileges, rights and remedies thereunder according to its direction, including to take or retake control or possession of such Collateral and to hold, prepare for sale, process, lease, dispose of or liquidate such Collateral.

Prior to the first Incurrence of any Permitted Pari Passu Secured Indebtedness (other than Additional Notes), the holders of such Permitted Pari Passu Secured Indebtedness (or their representative) will accede to the Intercreditor Agreement to include the holders of such Permitted Pari Passu Secured Indebtedness as parties to the Intercreditor Agreement.

By accepting the Notes, each Holder shall be deemed to have consented to the execution of the Intercreditor Agreement and any amendments or modifications thereto required under the Indenture.

Enforcement of Security

The first-priority Lien (subject to any Permitted Lien) securing the Notes and the Subsidiary Guarantees of the Subsidiary Guarantor Pledgors will be granted to the Collateral Agent. Citicorp International Limited will act as the initial Collateral Agent under the Intercreditor Agreement and the Security Documents entered into on the Original Issue Date. The Collateral Agent, subject to the Intercreditor Agreement, will hold such Liens over the Collateral granted pursuant to the Security Documents with sole authority as directed by the written instruction of the Creditor Representatives (as defined herein) to exercise remedies under the Security Documents. The Collateral Agent has agreed to act as secured party under the applicable Security Documents on behalf of the creditors under the Debt Documents, to follow the instructions provided to it by one or more of the Creditor Representatives under the Indenture, the Security Documents and/or the Intercreditor Agreement and to carry out certain other duties. The Trustee will give instructions to the Collateral Agent by itself or in accordance with instructions it will receive from the Holders under the Indenture.

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The Intercreditor Agreement will provide that the Collateral Agent will enforce the Collateral in accordance with a written instruction by any Creditor Representative to do so if it does not receive any conflicting instruction, and in the case of conflicting instructions delivered by two or more Creditor Representatives, the Collateral Agent will only enforce the Collateral upon receiving written instructions from the Majority Creditors. See “Risk Factors – Risks Relating to the Subsidiary Guarantees and the Collateral – The Intercreditor Agreement may limit the rights of holders of the Notes to enforce the Collateral.”

All payments received and all amounts held by the Collateral Agent in respect of the Collateral under the Security Documents will be applied as follows:

first , to the Collateral Agent to the extent necessary to reimburse the Collateral Agent for any expenses (including reasonable expenses of its counsel) incurred in connection with the collection or distribution of such amounts held or realized or in connection with expenses incurred in enforcing all available remedies under the Intercreditor Agreement and the Security Documents and preserving the Collateral and all amounts for which the Collateral Agent is entitled to indemnification under the Intercreditor Agreement and the Security Documents;

second, to the extent not reimbursed under the above paragraph, to the Trustee, the 2010 CB Trustee and other Creditor Representatives, to the extent necessary to reimburse the foregoing persons ratably for any unpaid fees, costs and expenses (including expenses of any paying agents, transfer agents, registrars or other agents in connection therewith appointed in connection with the foregoing and reasonable expenses of counsel) incurred under the Security Documents and the agreements governing any Permitted Pari Passu Secured Indebtedness (or any other document in connection with the foregoing that such paying agents, transfer agents, registrars or other agents are party to) in connection with the collection or distribution of such amounts held or realized or in connection with expenses incurred in enforcing all available remedies under the Debt Documents, the Intercreditor Agreement, the Security Documents and preserving the Collateral and all indemnification payments for which the foregoing persons are entitled to under the Debt Documents, the Intercreditor Agreement and the Security Documents;

third , ratably to each of the Trustee for the benefit of the Holders, the 2010 CB Trustee for the benefit of the holders of the 2010 Convertible Bonds and, to the extent applicable, to other Creditor Representatives for the benefit of the holders of any Permitted Pari Passu Secured Indebtedness (to the extent not paid pursuant to the paragraphs above), inclusive of any reasonable fees and expenses of the foregoing persons and the principal, interest and premium thereon and for the benefit of the holders each thereof in accordance with the terms of the relevant Debt Documents; and

fourth , any surplus remaining after such payments will be paid to the Company, the Subsidiary Guarantor Pledgors or to whomever may be lawfully entitled thereto.

The Collateral Agent may decline to expend its own funds, foreclose on the Collateral or exercise remedies available if it does not receive indemnification and/or security to its reasonable satisfaction. In addition, the Collateral Agent’s ability to foreclose on the Collateral may be subject to lack of perfection, the consent of third parties, prior Liens and practical problems associated with the realization of the Collateral Agent’s Liens on the Collateral. Neither the Trustee, the Collateral Agent nor any of their respective officers, directors, employees, attorneys or agents will be responsible or liable for the existence, genuineness, value or protection of any Collateral securing the Notes, for the legality, enforceability, effectiveness or sufficiency of the Security Documents or the Intercreditor Agreement, for the creation, perfection, continuation, priority, sufficiency or protection of any of the Liens, or for any defect or deficiency as to any such matters, or for any failure to demand, collect, foreclose or realize upon or otherwise enforce any of the Liens or Security Documents or any delay in doing so.

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The Security Documents provide that the Company and the Subsidiary Guarantor Pledgors will indemnify the Collateral Agent for all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind imposed against the Collateral Agent arising out of the Intercreditor Agreement or the Security Documents except to the extent that any of the foregoing are finally judicially determined to have resulted from the negligence, fraud or willful misconduct of the Collateral Agent.

This section, “— Enforcement of Security,” shall be subject to any amendments to the Security Documents or the Indenture to permit the creation of Liens on the Collateral to secure Permitted Pari Passu Secured Indebtedness in accordance with “— Permitted Pari Passu Secured Indebtedness” above.

Release of Security

The security created in respect of the Collateral granted under the Security Documents may be released in certain circumstances, including:

upon repayment in full of the Notes;
upon defeasance and discharge of the Notes as provided below under “— Defeasance — Defeasance and Discharge”;
upon certain dispositions of the Collateral in compliance with the covenants described under “— Certain Covenants — Limitation on Sales and Issuances of Capital Stock in Restricted Subsidiaries” or “— Certain Covenants — Limitation on Asset Sales” or in accordance with the provision described under “— Certain Covenants — Consolidation, Merger and Sale of Assets”; and
with respect to security granted by a Subsidiary Guarantor Pledgor, upon the release of the Subsidiary Guarantee of such Subsidiary Guarantor Pledgor in accordance with the terms of the Indenture.

Further Issues

Subject to the covenants described below and in accordance with the terms of the Indenture, the Company may, from time to time, without notice to or the consent of the Holders, create and issue Additional Notes having the same terms and conditions as the Notes (including the benefit of the Subsidiary Guarantees) in all respects (or in all respects except for the issue date, issue price and the first interest period and, to the extent necessary, certain temporary securities law transfer restrictions) (a “Further Issue”) so that such Additional Notes may be consolidated and form a single class with the previously outstanding Notes and vote together as one class on all matters with respect to the Notes; provided that the issuance of any such Additional Notes will then be permitted under the “Limitation on Indebtedness” covenant described below and the other provisions of the Indenture; and, provided further that any Additional Notes which are consolidated and form a single series with previously outstanding Notes must be fungible with the previously outstanding Notes for U.S. federal income tax purposes.

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Optional Redemption

On or after April 13, 2014, the Company may on any one or more occasions redeem all or any part of the Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, on the Notes redeemed, to the applicable date of redemption, if redeemed during the twelve-month period beginning on April 13 of the years indicated below, subject to the rights of holders of Notes on the relevant Record Date to receive interest on the relevant Interest Payment Date:

Year 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Redemption Price
	103.8125% 101.90625%

The Company may at its option redeem the Notes, in whole but not in part, at any time prior to April 13, 2014, at a redemption price equal to 100% of the principal amount of the Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest, if any, to the redemption date.

At any time and from time to time prior to April 13, 2014, the Company may at its option redeem up to 35% of the aggregate principal amount of the Notes with the Net Cash Proceeds of one or more sales of Common Stock of the Company in an Equity Offering at a redemption price of 107.625% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date; provided that at least 65% of the aggregate principal amount of the Notes originally issued on the Original Issue Date remains outstanding after each such redemption and any such redemption takes place within 60 days after the closing of the related Equity Offering.

The Company will give not less than 30 days’ nor more than 60 days’ notice of any redemption. If less than all of the Notes are to be redeemed at any time, the Trustee will select Notes for redemption as follows:

(1) if the Notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes are listed; or
(2) if the Notes are not listed on any national securities exchange, on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate unless otherwise required by law or by applicable stock exchange or clearing system requirements.

A Note of US$200,000 in principal amount or less shall not be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note will state the portion of the principal amount to be redeemed. A new Note in principal amount equal to the unredeemed portion will be issued upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions of them called for redemption.

Repurchase of Notes Upon a Change of Control Triggering Event

Not later than 30 days following a Change of Control Triggering Event, the Company will make an Offer to Purchase all outstanding Notes (a “Change of Control Offer”) at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the Offer to Purchase Payment Date (as defined in clause (2) of the definition of “Offer to Purchase”).

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The Company has agreed in the Indenture that it will timely repay all Indebtedness or obtain consents as necessary under or terminate, agreements or instruments that would otherwise prohibit a Change of Control Offer required to be made pursuant to the Indenture. Notwithstanding this agreement of the Company, it is important to note that if the Company is unable to repay (or cause to be repaid) all of the Indebtedness, if any, that would prohibit repurchase of the Notes or is unable to obtain the requisite consents of the holders of such Indebtedness, or terminate any agreements or instruments that would otherwise prohibit a Change of Control Offer, it would continue to be prohibited from purchasing the Notes. In that case, the Company’s failure to purchase tendered Notes would constitute an Event of Default under the Indenture.

Future debt of the Company may also (1) prohibit the Company from purchasing Notes in the event of a Change of Control Triggering Event; (2) provide that a Change of Control Triggering Event is a default; or (3) require repurchase of such debt upon a Change of Control Triggering Event. Moreover, the exercise by the Holders of their right to require the Company to purchase the Notes could cause a default under other Indebtedness, even if the Change of Control Triggering Event itself does not, due to the financial effect of the purchase on the Company. The Company’s ability to pay cash to the Holders following the occurrence of a Change of Control Triggering Event may be limited by the Company’s then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make the required purchase of the Notes. See “Risk Factors — Risks Relating to the Notes — The Company may not be able to repurchase the Notes upon a Change of Control Triggering Event.”

The phrase “all or substantially all,” as used with respect to the assets of the Company in the definition of “Change of Control,” will likely be interpreted under applicable laws of the relevant jurisdictions and its interpretations will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer of “all or substantially all” the assets of the Company has occurred.

The Trustee shall not be required to take any steps to ascertain whether a Change of Control Triggering Event or any event which could lead to the occurrence of a Change of Control Triggering Event has occurred and shall not be liable to any person for any failure to do so.

Except as described above with respect to a Change of Control Triggering Event, the Indenture does not contain provisions that permit the Holders to require that the Company purchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.

No Mandatory Redemption or Sinking Fund

There will be no mandatory redemption or sinking fund payments for the Notes.

Additional Amounts

All payments of principal of, and premium (if any) and interest on the Notes or under the Subsidiary Guarantees will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or within any jurisdiction in which the Company, a Surviving Person (as defined under “— Consolidation, Merger and Sale of Assets”) or an applicable Subsidiary Guarantor is organized or resident for tax purposes or any political subdivision or taxing authority thereof or therein (each, as applicable, a “Relevant Taxing Jurisdiction”) or any jurisdiction through which payment is made or any political subdivision or taxing authority thereof or therein (together with the Relevant Taxing Jurisdictions, the “Relevant Jurisdictions”), unless such withholding or

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deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction is so required, the Company, a Surviving Person or the applicable Subsidiary Guarantor, as the case may be, will pay such additional amounts (“Additional Amounts”) as will result in receipt by the Holder of each Note, of such amounts as would have been received by such Holder had no such withholding or deduction been required, except that no Additional Amounts shall be payable:

(1) for or on account of:
(a) any tax, duty, assessment or other governmental charge that would not have been imposed but for:
- (i) the existence of any present or former connection between the Holder or beneficial owner of such Note and the Relevant Jurisdiction other than merely holding such Note or the receipt of payments thereunder or under a Subsidiary Guarantee, including, without limitation, such Holder or beneficial owner being or having been a national, domiciliary or resident of such Relevant Jurisdiction or treated as a resident thereof or being or having been physically present or engaged in a trade or business therein or having or having had a permanent establishment therein;
- (ii) the presentation of such Note (in cases in which presentation is required) more than 30 days after the later of the date on which the payment of the principal of, premium, if any, and interest on, such Note became due and payable pursuant to the terms thereof or was made or duly provided for, except to the extent that the Holder thereof would have been entitled to such Additional Amounts if it had presented such Note for payment on any date within such 30-day period; or
- (iii) the failure of the Holder or beneficial owner to comply with a timely request of the Company, a Surviving Person or any Subsidiary Guarantor addressed to the Holder, to provide information concerning such Holder’s or beneficial owner’s nationality, residence, identity or connection with any Relevant Jurisdiction, if and to the extent that due and timely compliance with such request would have reduced or eliminated any withholding or deduction as to which Additional Amounts would have otherwise been payable to such Holder;
(b) any estate, inheritance, gift, sale, transfer, personal property or similar tax, assessment or other governmental charge;
(c) any withholding or deduction that is imposed or levied on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directives;
(d) any tax, duty, assessment or other governmental charge to the extent such tax, duty, assessment or other governmental charge results from the presentation of the Note (where presentation is required) for payment and the payment can be made without such withholding or deduction by the presentation of the Note for payment elsewhere; or
(e) any combination of taxes, duties, assessments or other governmental charges referred to in the preceding clauses (a), (b), (c) and (d); or

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(2) to a Holder that is a fiduciary, partnership or person other than the sole beneficial owner of any payment to the extent that such payment would be required to be included in the income under the laws of a Relevant Jurisdiction, for tax purposes, of a beneficiary or settlor with respect to the fiduciary, or a member of that partnership or a beneficial owner who would not have been entitled to such Additional Amounts had that beneficiary, settlor, partner or beneficial owner been the Holder thereof.

The Company will (i) make such withholding or deduction and (ii) remit the full amount deducted or withheld to the relevant authority in accordance with applicable law. The Company will make reasonable efforts to obtain certified copies of tax receipts evidencing the payment of any taxes so deducted or withheld from the Relevant Jurisdiction imposing such taxes. The Company will furnish to the Holders and the Trustee, within 60 days after the date the payment of any taxes so deducted or withheld is due pursuant to applicable law, either certified copies of tax receipts evidencing such payment or, if such receipts are not obtainable, other evidence of such payments.

At least 30 days prior to each date on which any payment under or with respect to the Notes is due and payable, if the Company will be obligated to pay Additional Amounts with respect to such payment, the Company will deliver to the Trustee an Officers’ Certificate stating the fact that such Additional Amounts will be payable and the amounts so payable and will set forth such other information necessary to enable the Paying Agent to pay such Additional Amounts to the Holders on such payment date.

In addition, the Company will pay any stamp, issue, registration, documentary, value added or other similar taxes and other duties (including interest and penalties) payable in any Relevant Jurisdiction in respect of the creation, issue, offering, execution or enforcement of the Notes, or any documentation with respect thereto.

Whenever there is mentioned in any context the payment of principal of, and any premium or interest on, any Note or under any Subsidiary Guarantee, such mention shall be deemed to include payment of Additional Amounts provided for in the Indenture to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

Redemption for Taxation Reasons

The Notes may be redeemed, at the option of the Company or a Surviving Person with respect to the Company, as a whole but not in part, upon giving not less than 30 days’ nor more than 60 days’ notice to the Holders and the Trustee (which notice shall be irrevocable), at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest (including any Additional Amounts), if any, to the date fixed by the Company or the Surviving Person, as the case may be, for redemption (the “Tax Redemption Date”) if, as a result of:

(1) any change in, or amendment to, the laws (or any regulations or rulings promulgated thereunder) of a Relevant Taxing Jurisdiction, excluding any applicable treaty with the Relevant Taxing Jurisdiction, affecting taxation; or
(2) any change in the existing official position or the stating of an official position regarding the application or interpretation of such laws, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction),

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which change or amendment becomes effective or, in the case of an official position, is announced (i) with respect to the Company or any initial Subsidiary Guarantor, on or after the Original Issue Date, or (ii) with respect to any Future Subsidiary Guarantor or Surviving Person, on or after the date such Future Subsidiary Guarantor or Surviving Person becomes a Subsidiary Guarantor or Surviving Person, with respect to any payment due or to become due under the Notes or the Indenture, the Company, a Surviving Person or a Subsidiary Guarantor, as the case may be, is, or on the next Interest Payment Date would be, required to pay Additional Amounts, and such requirement cannot be avoided by the taking of reasonable measures by the Company, a Surviving Person or a Subsidiary Guarantor, as the case may be; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company, a Surviving Person or a Subsidiary Guarantor, as the case may be, would be obligated to pay such Additional Amounts if a payment in respect of the Notes were then due.

Notwithstanding anything to the contrary herein, the Company or a Surviving Person may not redeem the Notes in the case that Additional Amounts are payable in respect of PRC withholding tax at a rate of 10% or less solely as a result of the Company or a Surviving Person being considered a PRC tax resident under the Enterprise Income Tax Law.

Prior to the mailing of any notice of redemption of the Notes pursuant to the foregoing, the Company, a Surviving Person or a Subsidiary Guarantor, as the case may be, will deliver to the Trustee at least 30 days but not more than 60 days before a redemption date:

(1) an Officers’ Certificate stating that such change or amendment referred to in the prior paragraph has occurred, describing the facts related thereto and stating that such requirement cannot be avoided by the Company, a Surviving Person or a Subsidiary Guarantor, as the case may be, taking reasonable measures; and
(2) an Opinion of Counsel or an opinion of a tax consultant, in either case of recognized standing with respect to tax matters of the Relevant Taxing Jurisdiction, stating that the requirement to pay such Additional Amounts results from such change or amendment referred to in the prior paragraph.

The Trustee is entitled to accept such certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent described above, in which event it shall be conclusive and binding on the Holders.

Any Notes that are redeemed will be cancelled.

Certain Covenants

Set forth below are summaries of certain covenants contained in the Indenture.

Limitation on Indebtedness

(1) The Company will not, and will not permit any Restricted Subsidiary to, Incur any Indebtedness (including Acquired Indebtedness), provided that the Company may Incur Indebtedness (including Acquired Indebtedness) and any Restricted Subsidiary may Incur Permitted Subsidiary Indebtedness if, after giving effect to the Incurrence of such Indebtedness or Permitted Subsidiary Indebtedness and the receipt and application of the proceeds therefrom, (x) no Default has occurred and is continuing and (y) the Fixed Charge Coverage Ratio would not be less than 3.5 to 1.0 with respect to any Incurrence of Indebtedness.

Notwithstanding the foregoing, the Company will not permit any Restricted Subsidiary to Incur any Disqualified Stock (other than Disqualified Stock held by the Company or a Subsidiary Guarantor, so long as it is so held).

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(2) Notwithstanding the foregoing, the Company and any Restricted Subsidiary may Incur, to the extent provided below, each and all of the following (“Permitted Indebtedness”):
(a) Indebtedness under the Notes (excluding any Additional Notes and any Permitted Pari Passu Secured Indebtedness of the Company) and each Subsidiary Guarantee;
(b) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Original Issue Date excluding Indebtedness permitted under clause (c) below; provided that such Indebtedness of Restricted Subsidiaries shall be included in the calculation of Permitted Subsidiary Indebtedness;
(c) Indebtedness of the Company or any Restricted Subsidiary owed to the Company or any Restricted Subsidiary; provided that (i) any event which results in (x) any Restricted Subsidiary to which such Indebtedness is owed ceasing to be a Restricted Subsidiary or (y) any subsequent transfer of such Indebtedness (other than to the Company or any Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (c) and (ii) if the Company is the obligor on such Indebtedness, such Indebtedness must expressly be subordinated in right of payment to the Notes, and if any Subsidiary Guarantor is the obligor on such Indebtedness (and the Company is not the obligor), such Indebtedness must be expressly subordinated in right of payment to the Subsidiary Guarantee of such Subsidiary Guarantor;
(d) Indebtedness (“Permitted Refinancing Indebtedness”) of the Company or any Restricted Subsidiary issued in exchange for, or the net proceeds of which are used to refinance or refund, replace, exchange, renew, repay, redeem, defease, discharge or extend (collectively, “refinance” and “refinances” and “refinanced” shall have a correlative meaning), then outstanding Indebtedness (or Indebtedness that is no longer outstanding but that is refinanced substantially concurrently with the Incurrence of such Permitted Refinancing Indebtedness) Incurred under the proviso in paragraph (1) above or clauses (a), (b), (f), (k) or (o) of paragraph (2) and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that (i) Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is pari passu with, or subordinated in right of payment to, the Notes or any Subsidiary Guarantee shall only be permitted under this clause (d) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes or any Subsidiary Guarantee, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes or such Subsidiary Guarantee, as the case may be, or (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes or any Subsidiary Guarantee, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes or such Subsidiary Guarantee, as the case may be, at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes or such Subsidiary Guarantee, as the case may be, (ii) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to

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be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded, and (iii) in no event may Indebtedness of the Company or any Subsidiary Guarantor be refinanced pursuant to this clause by means of any Indebtedness of any Restricted Subsidiary that is not a Subsidiary Guarantor;

(e) Indebtedness Incurred by the Company or any Restricted Subsidiaries pursuant to Hedging Obligations (i) entered into in the ordinary course of business and designed solely to protect the Company or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities and not for speculation or (ii) designed to reduce or manage interest expenses;
(f) any Pari Passu Subsidiary Guarantee by any Subsidiary Guarantor;
(g) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently, except in the case of daylight overdrafts, drawn against insufficient funds in the ordinary course of business; provided, however , that this Indebtedness is extinguished within five Business Days;
(h) Indebtedness of the Company or any Restricted Subsidiary in respect of workers’ compensation claims and claims arising under similar legislation, or in connection with self-insurance or similar requirements, in each case in the ordinary course of business;
(i) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for indemnification, adjustment of purchase price, earn-out or other similar obligations, in each case Incurred or assumed in connection with the disposition of any business, assets of the Company or of a Restricted Subsidiary of Company, other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of any of the Company’s or a Restricted Subsidiary’s business or assets for the purpose of financing an acquisition; provided , however , that the maximum assumable liability in respect of all this Indebtedness shall at no time exceed the gross proceeds actually received by the Company and/or the relevant Restricted Subsidiary in connection with the disposition;
(j) obligations with respect to trade letters of credit, performance and surety bonds and completion guarantees provided by the Company or any of its Restricted Subsidiaries securing obligations, entered into in the ordinary course of business, to the extent the letters of credit, bonds or guarantees are not drawn upon or, if and to the extent drawn upon is honored in accordance with its terms and, if to be reimbursed, is reimbursed no later than 30 days following receipt of a demand for reimbursement following payment on the letter of credit, bond or guarantee;
(k) Indebtedness of the Company or any Restricted Subsidiary incurred in the ordinary course of business:
(i) representing Capitalized Lease Obligations; or
(ii) constituting purchase money Indebtedness incurred to finance all or any part of the purchase price of equipment, property or assets of the Company to be used in the ordinary course of business by the Company or a Restricted Subsidiary;

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provided, however , that (A) such purchase money Indebtedness shall not exceed the purchase price of such property or assets so acquired, (B) such purchase money Indebtedness shall be Incurred no later than 180 days after the acquisition of such property or assets and (C) on the date of the Incurrence of any Indebtedness permitted by this clause, and after giving effect thereto, the sum of (1) the aggregate principal amount outstanding of all such Indebtedness permitted by this clause (k) (together with any refinancings thereof) plus (2) the aggregate principal amount outstanding of all Indebtedness Incurred under clause (n) below does not exceed an amount equal to 10.0% of Total Assets;

(l) Guarantees by any Non-Guarantor Subsidiary of Indebtedness of any other Non-Guarantor Subsidiary, provided that the Indebtedness guaranteed is permitted to be Incurred under the Indenture;
(m) Guarantees by the Company and any Subsidiary Guarantor of any Indebtedness of the Company or any Subsidiary Guarantor, provided that Indebtedness guaranteed is permitted to be Incurred under the Indenture;
(n) Indebtedness of the Company or any Restricted Subsidiary with a maturity of one year or less for working capital; provided that on the date of the Incurrence of any Indebtedness and after giving effect thereto, the sum of (1) the aggregate principal amount outstanding of all such Indebtedness Incurred pursuant to this clause (n) plus (2) the aggregate principal amount outstanding of all Indebtedness Incurred under clause (k) above (together with any refinancings thereof) does not exceed an amount equal to 10.0% of Total Assets; and
(o) Indebtedness of the Company or any Restricted Subsidiary in an aggregate principal amount outstanding at any time (together with any refinancings thereof) not to exceed US$10 million (or the Dollar Equivalent thereof).
(3) For purposes of determining compliance with this “Limitation on Indebtedness” covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Permitted Indebtedness, or of Indebtedness described in the proviso in paragraph (1) of this covenant and one or more types of Permitted Indebtedness, the Company, in its sole discretion, shall classify, and from time to time may reclassify, such item of Indebtedness in one or more types of Indebtedness described above.

Limitation on Restricted Payments

The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly (the payments or any other actions described in clauses (1) through (4) below being collectively referred to as “Restricted Payments”):

(1) declare or pay any dividend or make any distribution on or with respect to the Company’s or any of the Restricted Subsidiaries’ Capital Stock (other than dividends or distributions payable solely in shares of the Company’s or any Restricted Subsidiary’s Capital Stock (other than Disqualified Stock or Preferred Stock) or in options, warrants or other rights to acquire shares of such Capital Stock) held by Persons other than the Company or any Wholly Owned Restricted Subsidiary;

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(2) purchase, call for redemption or redeem, retire or otherwise acquire for value any shares of Capital Stock of the Company or any Restricted Subsidiary or any direct or indirect parent of the Company (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Persons other than the Company or any Wholly Owned Restricted Subsidiary;
(3) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Subordinated Indebtedness (excluding any intercompany Indebtedness between or among the Company and any Wholly Owned Restricted Subsidiary); or
(4) make any Investment, other than a Permitted Investment; if, at the time of, and after giving effect to, the proposed Restricted Payment:
(a) a Default has occurred and is continuing or would occur as a result of such Restricted Payment;
(b) the Company could not Incur at least US$1.00 of Indebtedness under the proviso in paragraph (1) of the covenant described under “— Limitation on Indebtedness”; or
(c) such Restricted Payment, together with the aggregate amount of all Restricted Payments made by the Company and the Restricted Subsidiaries after the Original Issue Date, shall exceed the sum of:
- (i) 50% of the aggregate amount of the Consolidated Net Income of the Company (or, if the Consolidated Net Income is a loss, minus 100% of the amount of such loss) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter during which the Original Issue Date occurs and ending on the last day of the Company’s most recently ended fiscal quarter for which consolidated financial statements of the Company (which the Company shall use its reasonable best efforts to compile in a timely manner and which may be internal financial statements) are available; plus
- (ii) 100% of the aggregate Net Cash Proceeds received by the Company after the Original Issue Date as a capital contribution to its common equity by, or from the issuance and sale of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, including any such Net Cash Proceeds received upon (A) the conversion by a Person who is not a Subsidiary of the Company of any Indebtedness (other than Subordinated Indebtedness) of the Company into Capital Stock (other than Disqualified Stock) of the Company, or (B) the exercise by a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (other than Disqualified Stock), in each case after deducting the amount of any such Net Cash Proceeds used to redeem, repurchase, defease or otherwise acquire or retire for value any Subordinated Indebtedness or Capital Stock of the Company or any Restricted Subsidiary; plus

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(iii) the amount by which Indebtedness of the Company or any of its Restricted Subsidiaries is reduced on the Company’s consolidated balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Original Issue Date of any Indebtedness of the Company or any of its Restricted Subsidiaries convertible or exchangeable into Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the Fair Market Value of any other property, distributed by the Company upon such conversion or exchange); provided, however , that the foregoing amount shall not exceed the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from the Incurrence of such Indebtedness; plus
(iv) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) that were made after the Original Issue Date in any Person resulting from (A) payments of interest on Indebtedness, dividends or repayments of loans or advances by such Person, in each case to the Company or any Restricted Subsidiary (except, in each case, to the extent any such payment or proceeds are included in the calculation of Consolidated Net Income), or (B) the unconditional release of a Guarantee provided by the Company or a Restricted Subsidiary after the Original Issue Date of an obligation of another Person, (C) to the extent that an Investment made after the Original Issue Date is sold or otherwise liquidated or repaid for cash, the lesser of (x) cash return of capital with respect to such Investment (less the cost of disposition, if any) and (y) the initial amount of such Investment, or (D) from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries, not to exceed, in each case, the amount of Investments (other than Permitted Investments) made by the Company or a Restricted Subsidiary after the Original Issue Date in any such Person, plus
(v) US$20 million (or the Dollar Equivalent thereof).

The foregoing provision shall not be violated by reason of:

(1) the payment of any dividend or redemption of any Capital Stock within 60 days after the related date of declaration or call for redemption if, at said date of declaration or call for redemption, such payment or redemption would comply with the preceding paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or retirement for value of Subordinated Indebtedness of the Company or any Subsidiary Guarantor with the Net Cash Proceeds of, or in exchange for, a substantially concurrent Incurrence of Permitted Refinancing Indebtedness;
(3) the redemption, repurchase or other acquisition of Capital Stock of the Company or any Subsidiary Guarantor (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the Net Cash Proceeds of, a substantially concurrent capital contribution or sale (other than to a Subsidiary of the Company) of, shares of Capital Stock (other than Disqualified Stock) of the Company or any Subsidiary Guarantor (or options, warrants or other rights to acquire such Capital Stock); provided that the amount of any such Net Cash Proceeds that are utilized for any such Restricted Payment will be excluded from clause (c)(ii) of the preceding paragraph;

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(4) the redemption, repurchase, defeasance or other acquisition or retirement for value of Subordinated Indebtedness of the Company or any Subsidiary Guarantor in exchange for, or out of the Net Cash Proceeds of, a substantially concurrent capital contribution or sale (other than to a Subsidiary of the Company) of, shares of the Capital Stock (other than Disqualified Stock) of the Company or any Subsidiary Guarantor (or options, warrants or other rights to acquire such Capital Stock); provided that the amount of any such Net Cash Proceeds that are utilized for any such Restricted Payment will be excluded from clause (c)(ii) of the preceding paragraph;
(5) the payment of any dividends or distributions declared, paid or made by a Restricted Subsidiary payable, on a pro rata basis or on a basis more favorable to the Company, to all holders of any class of Capital Stock of such Restricted Subsidiary, at least a majority of which is held, directly or indirectly through Restricted Subsidiaries, by the Company; or
(6) the declaration and payment of dividends by the Company with respect to the fiscal year ended December 31, 2010 in an aggregate amount not to exceed HK$257,803,000 (or the Dollar Equivalent thereof);

provided that, in the case of clauses (2), (3) and (4) of this paragraph, no Default shall have occurred and be continuing or would occur as a consequence of the actions or payments set forth therein. Each Restricted Payment made pursuant to clause (1) of this paragraph shall be included in calculating whether the conditions of clause (c) of the first paragraph of this “— Limitation on Restricted Payments” covenant have been met with respect to any subsequent Restricted Payments.

The amount of any Restricted Payments (other than cash) will be the Fair Market Value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or the Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The value of any assets or securities that are required to be valued by this covenant will be the Fair Market Value. The Board of Directors’ determination of the Fair Market Value of a Restricted Payment or any such assets or securities must be based upon an opinion or an appraisal issued by an appraisal or investment banking firm of recognized international standing if the Fair Market Value exceeds US$10 million (or the Dollar Equivalent thereof).

Not later than the date of making any Restricted Payment (other than those made pursuant to clause (6) of the second paragraph of this “— Limitation on Restricted Payments” covenant) in excess of US$10 million (or the Dollar Equivalent thereof), the Company will deliver to the Trustee an Officers’ Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this “— Limitation on Restricted Payments” covenant were computed, together with a copy of any fairness opinion or appraisal required by the Indenture.

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Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries

(1) Except as provided below, the Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distribution on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary;
(b) pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary;
(c) make loans or advances to the Company or any other Restricted Subsidiary; or
(d) sell, lease or transfer any of its property or assets to the Company or any other Restricted Subsidiary.
(2) The provisions of paragraph (1) do not apply to any encumbrances or restrictions:
(a) existing in agreements as in effect on the Original Issue Date, or in the Notes, the Subsidiary Guarantees, the Indenture, the Security Documents or under any Permitted Pari Passu Secured Indebtedness of the Company or any Subsidiary Guarantor Pledgor or Pari Passu Subsidiary Guarantee of any Subsidiary Guarantor, or any extensions, refinancings, renewals or replacements of any of the foregoing agreements; provided that the encumbrances and restrictions in any such extension, refinancing, renewal or replacement, taken as a whole, are no more restrictive in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced;
(b) existing under or by reason of applicable law, rule, regulation or order;
(c) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired, and any extensions, refinancings, renewals or replacements thereof; provided that the encumbrances and restrictions in any such extension, refinancing, renewal or replacement, taken as a whole, are no more restrictive in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced;
(d) that otherwise would be prohibited by the provision described in clause (1)(d) of this covenant if they arise, or are agreed to, in the ordinary course of business and (i) restrict in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease or license, (ii) exist by virtue of any Lien on, or agreement to transfer, option or similar right with respect to any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture or (iii) do not relate to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary;

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(e) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary that is permitted by the “— Limitation on Sales and Issuances of Capital Stock in Restricted Subsidiaries,” “— Limitation on Indebtedness” and “— Limitation on Asset Sales” covenants; or
(f) with respect to any Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the Incurrence of Indebtedness permitted under clauses (2)(d) or (k) of the “— Limitation on Indebtedness” covenant if, as determined by the Board of Directors, the encumbrances or restrictions are (i) customary for such type of agreement and (ii) would not, at the time agreed to, be expected to materially and adversely affect the ability of the Company to make required payment on the Notes.

Limitation on Sales and Issuances of Capital Stock in Restricted Subsidiaries

The Company will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including in each case options, warrants or other rights to purchase shares of such Capital Stock) except:

(1) to the Company or a Wholly Owned Restricted Subsidiary;
(2) to the extent such Capital Stock represents director’s qualifying shares or is required by applicable law to be held by a Person other than the Company or a Wholly Owned Restricted Subsidiary;
(3) the issuance or sale of Capital Stock of a Restricted Subsidiary (which remains a Restricted Subsidiary after any such issuance or sale); provided that the Company or such Restricted Subsidiary applies the Net Cash Proceeds of such issuance or sale in accordance with the “— Limitation on Asset Sales” covenant; and
(4) the issuance or sale of Capital Stock of a Restricted Subsidiary if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer be a Restricted Subsidiary and any remaining Investment in such Person would have been permitted to be made under the “Limitation on Restricted Payments” covenant if made on the date of such issuance or sale and provided that the Company complies with the “— Limitation on Asset Sales” covenant.

Limitation on Issuances of Guarantees by Restricted Subsidiaries

The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee any Indebtedness (“Guaranteed Indebtedness”) of the Company or any Subsidiary Guarantor, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for an unsubordinated Subsidiary Guarantee of payment of the Notes by such Restricted Subsidiary and (b) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee until the Notes have been paid in full.

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If the Guaranteed Indebtedness (1) ranks pari passu in right of payment with the Notes or any Subsidiary Guarantee, then the Guarantee of such Guaranteed Indebtedness will rank pari passu in right of payment with, or subordinated to, the Subsidiary Guarantee or (2) is subordinated in right of payment to the Notes or any Subsidiary Guarantee, then the Guarantee of such Guaranteed Indebtedness will be subordinated in right of payment to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Notes or the Subsidiary Guarantee.

Limitation on Transactions with Shareholders and Affiliates

The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction or arrangement (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with (x) any holder (or any Affiliate of such holder) of 10.0% or more of any class of Capital Stock of the Company or (y) any Affiliate of the Company (each an “Affiliate Transaction”), unless:

(1) the Affiliate Transaction is on fair and reasonable terms that are no less favorable to the Company or the relevant Restricted Subsidiary, as the case may be, than those that would have been obtained in a comparable transaction by the Company or the relevant Restricted Subsidiary with a Person that is not an Affiliate of the Company; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of US$2 million (or the Dollar Equivalent thereof), a Board Resolution set forth in an Officers’ Certificate certifying that such Affiliate Transaction complies with this covenant and such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of US$10 million (or the Dollar Equivalent thereof), in addition to the Board Resolution required in clause 2(a) above, an opinion as to the fairness to the Company or such Restricted Subsidiary, as the case may be, of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of recognized international standing.

The foregoing limitation does not limit, and shall not apply to:

(1) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company;
(2) transactions between or among the Company and any Wholly Owned Restricted Subsidiary or between or among Wholly Owned Restricted Subsidiaries;
(3) any Restricted Payment of the type described in clause (1) or (2) of the first paragraph of the covenant described above under “— Limitation on Restricted Payments” if permitted by that covenant;

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(4) any sale of Capital Stock (other than Disqualified Stock) of the Company; and
(5) the payment of compensation to officers and directors of the Company or any Restricted Subsidiary pursuant to an employee stock or share option scheme, so long as such scheme is in compliance with the listing rules of The Stock Exchange of Hong Kong Limited, which as of the Original Issue Date require a majority shareholder approval of any such scheme.

In addition, the requirements of clause (2) of the first paragraph of this covenant shall not apply to (i) Investments (other than Permitted Investments) not prohibited by the “Limitation on Restricted Payments” covenant, (ii) transactions pursuant to agreements in effect on the Original Issue Date and described in this Offering Memorandum, or any amendment or modification or replacement thereof, so long as such amendment, modification or replacement is not more disadvantageous to the Company and its Restricted Subsidiaries than the original agreement in effect on the Original Issue Date and (iii) any transaction between or among the Company, any Wholly Owned Restricted Subsidiary and any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary; provided that in the case of clause (iii), (a) such transaction is entered into in the ordinary course of business and (b) none of the minority shareholders or minority partners of or in such Restricted Subsidiary is a Person described in clauses (x) or (y) of the first paragraph of this covenant (other than by reason of such minority shareholder or minority partner being an officer or director of such Restricted Subsidiary).

Limitation on Liens

The Company will not, and will not permit any Subsidiary Guarantor to, directly or indirectly, incur, assume or permit to exist any Lien of any nature whatsoever on the Collateral (other than Permitted Liens).

The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, incur, assume or permit to exist any Lien of any nature whatsoever on any of its assets or properties of any kind, whether owned at the Original Issue Date or thereafter acquired, except Permitted Liens, unless the Notes are (or, in respect of any Lien on any Subsidiary Guarantor’s property or assets, any Subsidiary Guarantee of such Restricted Subsidiary is) secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to the Notes, prior to) the obligation or liability secured by such Lien, for so long as such obligation or liability is secured by such Lien.

Limitation on Sale and Leaseback Transactions

The Company will not, and will not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction; provided that the Company or any Restricted Subsidiary may enter into a Sale and Leaseback Transaction if:

(1) the Company or such Restricted Subsidiary, as the case may be, could have (a) Incurred Indebtedness in an amount equal to the Attributable Indebtedness relating to such Sale and Leaseback Transaction under the covenant described under “— Limitation on Indebtedness” and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under “— Limitation on Liens,” in which case, the corresponding Indebtedness will be deemed Incurred and the corresponding Lien will be deemed incurred pursuant to those provisions;

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(2) the gross cash proceeds of that Sale and Leaseback Transaction are at least equal to the Fair Market Value of the property that is the subject of such Sale and Leaseback Transaction; and
(3) the transfer of assets in that Sale and Leaseback Transaction is permitted by, and the Company or such Restricted Subsidiary, as the case may be, applies the proceeds of such transaction in compliance with, the covenant described below under “— Limitation on Asset Sales.”

Limitation on Asset Sales

The Company will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless:

(1) no Default shall have occurred and be continuing or would occur as a result of such Asset Sale;
(2) the consideration received by the Company or such Restricted Subsidiary, as the case may be, is at least equal to the Fair Market Value of the assets sold or disposed of;
(3) in the case of an Asset Sale that constitutes an Asset Disposition, the Company could Incur at least US$1.00 of Indebtedness under the proviso in paragraph (1) of the covenant described under “— Limitation on Indebtedness” after giving pro forma effect to such Asset Disposition; and
(4) at least 75% of the consideration received consists of cash, Temporary Cash Investments or Replacement Assets (as defined below); provided that in the case of an Asset Sale in which the Company or such Restricted Subsidiary receives Replacement Assets involving aggregate consideration in excess of US$10 million (or the Dollar Equivalent thereof), the Company shall deliver to the Trustee an opinion as to the fairness to the Company or such Restricted Subsidiary of such Asset Sale from a financial point of view issued by an accounting, appraisal or investment banking firm of recognized international standing. For purposes of this provision, each of the following will be deemed to be cash:
(a) any liabilities, as shown on the Company’s most recent consolidated balance sheet, of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee) that are assumed by the transferee of any such assets pursuant to a customary assumption, assignment, novation or similar agreement that releases the Company or such Restricted Subsidiary, as the case may be, from further liability; and
(b) any securities, notes or other obligations received by the Company or any Restricted Subsidiary from such transferee that are promptly, but in any event within 30 days of closing, converted by the Company or such Restricted Subsidiary, as the case may be, into cash, to the extent of the cash received in that conversion.

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(5) Within 360 days after the receipt of any Net Cash Proceeds from an Asset Sale, the Company or any Restricted Subsidiary may apply such Net Cash Proceeds to:
(a) permanently repay unsubordinated Indebtedness of the Company or any Restricted Subsidiary (and, if such unsubordinated Indebtedness repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto) in each case owing to a Person other than the Company or a Restricted Subsidiary; or
(b) acquire properties and assets (other than current assets) that will be used in the Permitted Businesses (“Replacement Assets”);

provided that, pending the application of Net Cash Proceeds in accordance with clauses (a) or (b) of this paragraph, such Net Cash Proceeds may be temporarily invested only in cash or Temporary Cash Investments.

(6) Any Net Cash Proceeds from Asset Sales that are not applied or invested as provided in clause (5) will constitute “Excess Proceeds.” Excess Proceeds of less than US$10 million (or the Dollar Equivalent thereof) will be carried forward and accumulated. When accumulated Excess Proceeds exceed US$10 million (or the Dollar Equivalent thereof), within ten days thereof, the Company must make an Offer to Purchase Notes having a principal amount equal to:
(a) accumulated Excess Proceeds, multiplied by
(b) a fraction (x) the numerator of which is equal to the outstanding principal amount of the Notes and (y) the denominator of which is equal to the outstanding principal amount of the Notes and all pari passu Indebtedness similarly required to be repaid, redeemed or tendered for in connection with the Asset Sale,

rounded down to the nearest US$1,000.

The offer price in any Offer to Purchase will be equal to 100% of the principal amount plus accrued and unpaid interest to the date of purchase, and will be payable in cash.

If any Excess Proceeds remain after consummation of an Offer to Purchase, the Company or any Restricted Subsidiary may use those Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes (and any other pari passu Indebtedness) tendered in such Offer to Purchase exceeds the amount of Excess Proceeds, the Trustee will select the Notes to be purchased on a pro rata basis based on the principal amount of the Notes and such other pari passu Indebtedness tendered. Upon completion of each Offer to Purchase, the amount of Excess Proceeds will be reset at zero.

Limitation on Business Activities

The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, engage in any business other than Permitted Businesses; provided , however , that the Company or any Restricted Subsidiary may own Capital Stock of Unrestricted Subsidiary or joint venture or other entity that is engaged in a business other than Permitted Businesses as long as any Investment therein was not prohibited under the “— Limitation on Restricted Payments” covenant.

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Use of Proceeds

The Company will not, and will not permit any Restricted Subsidiary to, use the net proceeds from the sale of the Notes issued and sold on the Original Issue Date, in any amount, for any purpose other than (1) as specified under “Use of Proceeds” in this Offering Memorandum and (2) pending the application of all of such net proceeds in such manner, to invest the portion of such net proceeds not yet so applied in cash or Temporary Cash Investments.

Designation of Restricted and Unrestricted Subsidiaries

The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary; provided that (1) no Default shall have occurred and be continuing at the time of or after giving effect to such designation; (2) such Restricted Subsidiary does not own any Disqualified Stock of the Company or any Subsidiary Guarantor or Disqualified or Preferred Stock of a Restricted Subsidiary that is not a Subsidiary Guarantor or hold any Indebtedness of, or any Lien on any property of, the Company or any Restricted Subsidiary, if such Disqualified or Preferred Stock or Indebtedness could not be Incurred under the covenant described under “— Limitation on Indebtedness” or such Lien would violate the covenant described under “— Limitation on Liens”; (3) such Restricted Subsidiary does not own any Voting Stock of another Restricted Subsidiary, and all of its Subsidiaries are Unrestricted Subsidiaries or are being concurrently designated to be Unrestricted Subsidiaries in accordance with this paragraph; (4) such Restricted Subsidiary has no outstanding Indebtedness that could trigger a cross-default to the Indebtedness of the Company or any other Restricted Subsidiary and none of the Company or any Restricted Subsidiary Guarantees or provides credit support for the Indebtedness of such Restricted Subsidiary; and (5) the Investment deemed to have been made thereby in such newly designated Unrestricted Subsidiary and each other newly designated Unrestricted Subsidiary being concurrently redesignated would be permitted to be made by the covenant described under “— Limitation on Restricted Payments.”

The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (1) no Default shall have occurred and be continuing at the time of or after giving effect to such designation; (2) any Indebtedness of such Unrestricted Subsidiary outstanding at the time of such designation which will be deemed to have been Incurred by such newly designated Restricted Subsidiary as a result of such designation would be permitted to be Incurred by the covenant described under “— Limitation on Indebtedness”; (3) any Lien on the property of such Unrestricted Subsidiary at the time of such designation which will be deemed to have been incurred by such newly designated Restricted Subsidiary as a result of such designation would be permitted to be incurred by the covenant described under “— Limitation on Liens”; (4) such Unrestricted Subsidiary is not a Subsidiary of another Unrestricted Subsidiary (that is not concurrently being designated as a Restricted Subsidiary); (5) if such Restricted Subsidiary is not organized under the laws of the PRC, such Restricted Subsidiary will upon such designation execute and deliver to the Trustee a supplemental indenture to the Indenture by which such Restricted Subsidiary will become a Subsidiary Guarantor; and (6) if such Restricted Subsidiary is not organized under the laws of the PRC or directly owned by a Restricted Subsidiary organized under the laws of the PRC, all Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary will be pledged as required under “— Security.”

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Government Approvals and Licenses; Compliance with Law

The Company will, and will cause each Restricted Subsidiary to, (1) obtain and maintain in full force and effect all governmental approvals, authorizations, consents, permits, concessions and licenses as are necessary to engage in the Permitted Businesses; (2) preserve and maintain good and valid title to its properties and assets (including land-use rights) free and clear of any Liens other than Permitted Liens; and (3) comply with all laws, regulations, orders, judgments and decrees of any governmental body, except to the extent that failure so to obtain, maintain, preserve and comply would not reasonably be expected to have a material adverse effect on (a) the business, results of operations or prospects of the Company and its Restricted Subsidiaries, taken as a whole, or (b) the ability of the Company or any Subsidiary Guarantor to perform its obligations under the Notes, the Indenture, the relevant Subsidiary Guarantee or the Security Document.

Anti-Layering

The Company will not Incur, and will not permit any Subsidiary Guarantor to Incur, any Indebtedness if such Indebtedness is contractually subordinated in right of payment to any other Indebtedness of the Company or any Subsidiary Guarantor, as the case may be, unless such Indebtedness is also contractually subordinated in right of payment to the Notes and the Subsidiary Guarantees on substantially identical terms; provided that this requirement does not apply to distinctions between categories of Indebtedness that exist by reason of any Liens or Guarantees securing or in favor of some but not all of such Indebtedness.

Maintenance of Insurance

The Company will, and will cause its Restricted Subsidiaries to, maintain insurance with reputable and financially sound carriers against such risks and in such amounts as is customarily carried by similarly situated businesses, including, without limitation, property and casualty insurance.

Suspension of Certain Covenants

If on any date following the date of the Indenture, the Notes have a rating of Investment Grade from both of the Rating Agencies and no Default has occurred and is continuing (a “Suspension Event”), then, beginning on that day and continuing until such time, if any, at which the Notes cease to have a rating of Investment Grade from either of the Rating Agencies, the provisions of the Indenture summarized under the following captions will be suspended:

(1) “— Certain Covenants — Limitation on Indebtedness”;
(2) “— Certain Covenants — Limitation on Restricted Payments”;
(3) “— Certain Covenants — Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries”;
(4) “— Certain Covenants — Limitation on Sales and Issuances of Capital Stock in Restricted Subsidiaries”;
(5) “— Certain Covenants — Limitation on Issuances of Guarantees by Restricted Subsidiaries”;

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(6) “— Certain Covenants — Limitation on Business Activities”;
(7) “— Certain Covenants — Limitation on Sale and Leaseback Transactions”; and
(8) “— Certain Covenants — Limitation on Asset Sales.”

During any period that the foregoing covenants have been suspended, the Board of Directors may not designate any of the Restricted Subsidiaries as Unrestricted Subsidiaries pursuant to the covenant summarized under “— Certain Covenants — Designation of Restricted and Unrestricted Subsidiaries” or the definition of “Unrestricted Subsidiary.”

Such covenants will be reinstituted and apply according to their terms as of and from the first day on which a Suspension Event ceases to be in effect. Such covenants will not, however, be of any effect with regard to actions of the Company or any Restricted Subsidiary properly taken in compliance with the provisions of the Indenture during the continuance of the Suspension Event, and following reinstatement the calculations under the covenant summarized under “— Certain Covenants — Limitation on Restricted Payments” will be made as if such covenant had been in effect since the date of the Indenture except that no Default will be deemed to have occurred solely by reason of a Restricted Payment made while that covenant was suspended.

There can be no assurance that the Notes will ever achieve a rating of Investment Grade or that any such rating will be maintained.

Provision of Financial Statements and Reports

(1) So long as any of the Notes remain outstanding, the Company will file with the Trustee and furnish to the Holders upon request, as soon as they are available but in any event not more than 10 calendar days after they are filed with The Stock Exchange of Hong Kong Limited or any other recognized exchange on which the Company’s common shares are at any time listed for trading, true and correct copies of any financial or other report in the English language filed with such exchange; provided that if at any time the Common Stock of the Company ceases to be listed for trading on a recognized stock exchange, the Company will file with the Trustee and furnish to the Holders:
(a) as soon as they are available, but in any event within 90 calendar days after the end of the fiscal year of the Company, copies of the financial statements (on a consolidated basis and in the English language) of the Company in respect of such financial year (including a statement of income, balance sheet and cash flow statement) prepared in accordance with GAAP and audited by a member firm of an internationally recognized firm of independent accountants;
(b) as soon as they are available, but in any event within 45 calendar days after the end of the second financial quarter of the Company, copies of the financial statements (on a consolidated basis and in the English language) of the Company in respect of such half-year period (including a statement of income, balance sheet and cash flow statement) prepared in accordance with GAAP and reviewed by a member firm of an internationally recognized firm of independent accountants; and

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(c) as soon as they are available, but in any event within 45 calendar days after the end of each of the first and third financial quarters of the Company, copies of the unaudited financial statements (on a consolidated basis and in the English language) of the Company, including a statement of income, balance sheet and cash flow statement, prepared on a basis consistent with the audited financial statements of the Company, together with a certificate signed by the person then authorized to sign financial statements on behalf of the Company to the effect that such financial statements are true in all material respects and present fairly the financial position of the Company as at the end of, and the results of its operations for, the relevant quarterly period.
(2) In addition, so long as any Note remains outstanding, the Company will provide to the Trustee (a) within 120 days after the close of each fiscal year, an Officers’ Certificate stating the Fixed Charge Coverage Ratio with respect to the four most recent fiscal quarters and showing in reasonable detail the calculation of the Fixed Charge Coverage Ratio, including the arithmetic computations of each component of the Fixed Charge Coverage Ratio, with a certificate from the Company’s external auditors verifying the accuracy and correctness of the calculation and arithmetic computation; and (b) as soon as possible and in any event within 30 days after the Company becomes aware or should reasonably become aware of the occurrence of a Default, an Officers’ Certificate setting forth the details of the Default, and the action which the Company proposes to take with respect thereto.

Further, the Company and each Subsidiary Guarantor have agreed that, for as long as any Notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, during any period in which the Company or such Subsidiary Guarantor is neither subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the Company or such Subsidiary Guarantor, as the case may be, shall supply to (i) any Holder or beneficial owner of a Note or (ii) a prospective purchaser of a Note or a beneficial interest therein designated by such Holder or beneficial owner, the information specified in, and meeting the requirements of Rule 144A(d)(4) under the Securities Act upon the request of any Holder or beneficial owner of a Note.

Events of Default

The following events will be defined as “Events of Default” in the Indenture:

(1) default in the payment of principal of (or premium, if any, on) the Notes when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise;
(2) default in the payment of interest or Additional Amounts on any Note when the same becomes due and payable, and such default continues for a period of 30 days;
(3) default in the performance or breach of the provisions of the covenant described under “— Consolidation, Merger and Sale of Assets,” the failure by the Company to make or consummate an Offer to Purchase in the manner described under “— Repurchase of Notes upon a Change of Control Triggering Event” or “— Certain Covenants — Limitation on Asset Sales” or any failure by the Company to create, or cause its Restricted Subsidiaries to create, a first-priority Lien on the Collateral in accordance with the provisions described under “— Security”;

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(4) the Company or any Restricted Subsidiary defaults in the performance of or breaches any other covenant or agreement in the Indenture or under the Notes (other than a default specified in clause (1), (2) or (3) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes;
(5) there occurs with respect to any Indebtedness of the Company or any Restricted Subsidiary having an outstanding principal amount of US$10 million (or the Dollar Equivalent thereof) or more in the aggregate for all such Indebtedness of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (a) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and/or (b) a failure to make a principal payment when due;
(6) one or more final judgments or orders for the payment of money are rendered against the Company or any Restricted Subsidiary and are not paid or discharged, and there is a period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed US$10 million (or the Dollar Equivalent thereof) (in excess of amounts which the Company’s insurance carriers have agreed to pay under applicable policies) during which a stay of enforcement, by reason of a pending appeal or otherwise, is not in effect;
(7) an involuntary case or other proceeding is commenced against the Company or any Restricted Subsidiary with respect to it or its debts under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect seeking the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Restricted Subsidiary or for any substantial part of the property and assets of the Company or any Restricted Subsidiary and such involuntary case or other proceeding remains undismissed and unstayed for a period of 60 consecutive days; or an order for relief is entered against the Company or any Restricted Subsidiary under any applicable bankruptcy, insolvency or other similar law as now or hereafter in effect;
(8) the Company or any Restricted Subsidiary, (a) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (b) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Restricted Subsidiary or for all or substantially all of the property and assets of the Company or any Restricted Subsidiary or (c) effects any general assignment for the benefit of creditors;
(9) any Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guarantee or, except as permitted by the Indenture, any Subsidiary Guarantee is determined to be unenforceable or invalid or will for any reason cease to be in full force and effect;
(10) any default by the Company or any Subsidiary Guarantor Pledgor in the performance of any of its obligations under the Security Documents that adversely affects the enforceability, validity, perfection or priority of the applicable Lien on the Collateral or that adversely affects the condition or value of the Collateral; or

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(11) the Company or any Subsidiary Guarantor Pledgor denies or disaffirms its obligations under any Security Document or, other than in accordance with the Indenture and the Security Documents, any Security Document ceases to be or is not in full force and effect or the Collateral Agent ceases to have a first-priority Lien over the Collateral.

If an Event of Default (other than an Event of Default specified in clause (7) or (8) above) occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the written direction of such Holders shall, declare the principal of, premium, if any, and accrued and unpaid interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued and unpaid interest shall be immediately due and payable. If an Event of Default specified in clause (7) or (8) above occurs with respect to the Company or any Restricted Subsidiary, the principal of, premium, if any, and accrued and unpaid interest on the Notes then outstanding shall automatically become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder.

The Holders of at least a majority in principal amount of the outstanding Notes by written notice to the Company and to the Trustee may on behalf of all the Holders waive all past defaults and rescind and annul a declaration of acceleration and its consequences if:

(1) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived; and
(2) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction.

Upon such waiver, the Default will cease to exist, and any Event of Default arising therefrom will be deemed to have been cured, but no such waiver will extend to any subsequent or other Default or impair any right consequent thereon.

If an Event of Default occurs and is continuing, the Trustee may pursue, in its own name or as trustee of an express trust, any available remedy by proceeding at law or in equity to collect the payment of principal of and interest on the Notes or to enforce the performance of any provision of the Notes, the Indenture or the Security Documents. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. In addition, if an Event of Default occurs and is continuing, the Trustee may, and shall upon written direction of the Holders of at least 25% in aggregate principal amount of outstanding Notes subject to being indemnified and/or secured to its satisfaction (i) give the Collateral Agent a written notice of the occurrence of such continuing Event of Default and (ii) instruct the Collateral Agent in accordance with the terms of the Intercreditor Agreement to foreclose on the Collateral in accordance with the terms of the Security Documents and the Indenture and take such further action on behalf of the Holders with respect to the Collateral as the Trustee deems appropriate. See “— Security.”

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The Holders of at least a majority in aggregate principal amount of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders. In addition, the Trustee will not be required to expend its own funds in following such direction if it does not reasonably believe that reimbursement or reasonable satisfactory indemnification is assured to it.

A Holder may not institute any proceeding, judicial or otherwise, with respect to the Indenture or the Notes, or for the appointment of a receiver or trustee, or for any other remedy under the Indenture or the Notes, unless:

(1) the Holder has previously given the Trustee written notice of a continuing Event of Default;
(2) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer the Trustee indemnity and/or security reasonably satisfactory to the Trustee against any costs, liability or expense to be incurred in compliance with such request;
(4) the Trustee does not comply with the request within (x) 60 days after receipt of the written request pursuant to clause (2) above or (y) 60 days after the receipt of the offer of indemnity pursuant to clause (3) above, whichever occurs later; and
(5) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request.

However, such limitations do not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or any payment under any Subsidiary Guarantee, or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder.

Officers of the Company must certify to the Trustee in writing, on or before a date not more than 120 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and the Restricted Subsidiaries and the Company’s and the Restricted Subsidiaries’ performance under the Indenture and that the Company and each Restricted Subsidiary have fulfilled all of their respective obligations thereunder, or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. The Company will also be obligated to notify the Trustee in writing of any default or defaults in the performance of any covenants or agreements under the Indenture. See “— Provision of Financial Statements and Reports.”

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Consolidation, Merger and Sale of Assets

The Company will not consolidate with, merge with or into another Person, permit any Person to merge with or into it, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of the properties and assets of the Company and the Restricted Subsidiaries (computed on a consolidated basis) (as an entirety or substantially an entirety in one transaction or a series of related transactions) unless each of the following conditions is satisfied:

(1) the Company shall be the continuing Person, or the Person (if other than it) formed by such consolidation or merger, or with or into which the Company consolidated or merged, or that acquired or leased such property and assets (the “Surviving Person”) shall be a corporation organized and validly existing under the laws of the British Virgin Islands, the Cayman Islands or Hong Kong and shall expressly assume, by a supplemental indenture to the Indenture, executed and delivered to the Trustee, all the obligations of the Company under the Indenture, the Notes and the Security Documents, as the case may be, including the obligation to pay Additional Amounts with respect to any jurisdiction in which it is organized or resident for tax purposes or through which it makes payments, and the Indenture, the Notes and the Security Documents shall remain in full force and effect;
(2) immediately after giving effect to such transaction, no Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma basis, the Company or the Surviving Person, as the case may be, shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction;
(4) immediately after giving effect to such transaction on a pro forma basis, the Company or the Surviving Person, as the case may be, could Incur at least US$1.00 of Indebtedness under the proviso of paragraph (1) of the covenant described under “— Certain Covenants — Limitation on Indebtedness”;
(5) the Company shall deliver to the Trustee (x) an Officers’ Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (3) and (4)) and (y) an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and the relevant supplemental indenture complies with this provision and that all conditions precedent provided for in the Indenture relating to such transaction have been complied with;
(6) each Subsidiary Guarantor, unless such Subsidiary Guarantor is the Person with which the Company has entered into a transaction described under “— Consolidation, Merger and Sale of Assets,” shall execute and deliver a supplemental indenture to the Indenture confirming that its Subsidiary Guarantee shall apply to the obligations of the Company or the Surviving Person, as the case may be, in accordance with the Notes and the Indenture; and
(7) no Rating Decline shall have occurred.

No Subsidiary Guarantor will consolidate with, merge with or into another Person, permit any Person to merge with or into it, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of the properties and assets of the Subsidiary Guarantor and its Restricted Subsidiaries (computed on a consolidated basis) (as an entirety or substantially an entirety in one transaction or a series of related transactions) to another Person (other than the Company or another Subsidiary Guarantor), unless each of the following conditions is met:

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(1) such Subsidiary Guarantor shall be the continuing Person, or the Person (if other than it) formed by such consolidation or merger, or with or into which the Subsidiary Guarantor consolidated or merged, or that acquired or leased such property and assets shall be the Company, another Subsidiary Guarantor or shall become a Subsidiary Guarantor concurrently with the transaction in accordance with the Indenture;
(2) immediately after giving effect to such transaction, no Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma basis, the Company shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction;
(4) immediately after giving effect to such transaction on a pro forma basis, the Company could Incur at least US$1.00 of Indebtedness under the proviso of paragraph (1) of the covenant described under “— Certain Covenants — Limitation on Indebtedness”;
(5) the Company shall deliver to the Trustee (x) an Officers’ Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (3) and (4)) and (y) an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and the relevant supplemental indenture complies with this provision and that all conditions precedent provided for in the Indenture relating to such transaction have been complied with; and
(6) no Rating Decline shall have occurred;

provided that this paragraph shall not apply to any sale or other disposition that complies with the “Limitation on Asset Sales” covenant or any Subsidiary Guarantor whose Subsidiary Guarantee is unconditionally released in accordance with the provisions described under “— The Subsidiary Guarantees — Release of the Subsidiary Guarantees.”

The foregoing requirements shall not apply to a consolidation or merger of any Subsidiary Guarantor with and into the Company or any other Subsidiary Guarantor, as long as the Company or such Subsidiary Guarantor survives such consolidation or merger. The foregoing provisions would not necessarily afford Holders protection in the event of highly leveraged or other transactions involving the Company or the Subsidiary Guarantors that may adversely affect Holders.

No Payments for Consents

The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture, the Notes or any Subsidiary Guarantee unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend such term or provision within the time period set forth in the solicitation documents relating to such consent, waiver or amendment.

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Defeasance

Defeasance and Discharge

The Indenture will provide that the Company will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 183rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to the Notes (except for, among other matters, certain obligations to register the transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things:

(1) the Company (a) has deposited with the Trustee, in trust, cash in U.S. dollars, U.S. Government Obligations or a combination thereof that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes and (b) delivers to the Trustee an Opinion of Counsel or a certificate of an internationally recognized firm of independent accountants to the effect that the amount deposited by the Company is sufficient to provide payment for the principal of, premium, if any, and accrued interest on, the Notes on the Stated Maturity of such payment in accordance with the terms of the Indenture and an Opinion of Counsel to the effect that the Holders have a valid, perfected, exclusive Lien over such trust;
(2) the Company has delivered to the Trustee (a) either (i) an Opinion of Counsel of recognized international standing with respect to U.S. federal income tax matters that is based on a change in applicable U.S. federal income tax law occurring after the Original Issue Date to the effect that beneficial owners will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the Company’s exercise of its option under this “Defeasance and Discharge” provision and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same time as would have been the case if such deposit, defeasance and discharge had not occurred or (ii) a ruling directed to the Company or Trustee received from the U.S. Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (b) an Opinion of Counsel of recognized international standing to the effect that the creation of the defeasance trust does not violate the U.S. Investment Company Act of 1940, as amended, and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law;
(3) the Company shall have delivered to the Trustee an Officers’ Certificate stating that the deposit was not made by it with the intent of preferring the Holders over any other of its creditors or with the intent of defeating, hindering, delaying or defrauding any other of its creditors or others; and
(4) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 183rd day after the date of such deposit, and such defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of the Restricted Subsidiaries is a party or by which the Company or any of the Restricted Subsidiaries is bound.

In the case of either discharge or defeasance of the Notes, each of the Subsidiary Guarantees will terminate.

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Defeasance of Certain Covenants

The Indenture will further provide that the provisions of the Indenture will no longer be in effect with respect to clauses (3) and (4) under the first and second paragraphs under “— Consolidation, Merger and Sale of Assets” and all the covenants described herein under “— Certain Covenants,” other than as described under “— Certain Covenants — Government Approvals and Licenses; Compliance with Law” and “— Certain Covenants — Anti-Layering,” clause (3) under “Events of Default” with respect to such clauses (3) and (4) under the first and second paragraphs under “— Consolidation, Merger and Sale of Assets” and with respect to the other events set forth in such clause, clause (4) under “— Events of Default” with respect to such other covenants and clauses (5), (6), (7) and (8) under “— Events of Default” shall be deemed not to be Events of Default upon, among other things, the deposit with the Trustee, in trust, of cash in U.S. dollars, U.S. Government Obligations or a combination thereof that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes, the satisfaction of the provisions described in clause (2)(b) of the preceding paragraph and the delivery by the Company to the Trustee of an Opinion of Counsel of recognized international standing with respect to U.S. federal income tax matters to the effect that beneficial owners will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same time as would have been the case if such deposit and defeasance had not occurred.

Defeasance and Certain Other Events of Default

In the event the Company exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to the Notes as described in the immediately preceding paragraph and the Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of cash in U.S. dollars and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Notes at the time of their Stated Maturity but may not be sufficient to pay amounts due on the Notes at the time of the acceleration resulting from such Event of Default. However, the Company and the Subsidiary Guarantors will remain liable for such payments.

Amendments and Waiver

Amendments Without Consent of Holders

The Indenture, the Intercreditor Agreement or any Security Document may be amended, without the consent of any Holder:

(1) to cure any ambiguity, defect, omission or inconsistency in the Indenture, the Notes, the Intercreditor Agreement or any Security Document;
(2) to comply with the provisions described under “— Consolidation, Merger and Sale of Assets”;
(3) to evidence and provide for the acceptance of appointment by a successor Trustee;
(4) to provide for the issuance of Additional Notes in accordance with the limitations set forth in the Indenture;
(5) in any other case where a supplemental indenture to the Indenture is required or permitted to be entered into pursuant to the provisions of the Indenture without the consent of any Holder;

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(6) to effect any changes to the Indenture in a manner necessary to comply with the procedures of the relevant clearing system;
(7) to add any Subsidiary Guarantor or any Subsidiary Guarantee or release any Subsidiary Guarantor from any Subsidiary Guarantee as provided or permitted by the terms of the Indenture;
(8) to add any Subsidiary Guarantor Pledgor or release any Subsidiary Guarantor Pledger as provided or permitted by the terms of the Indenture;
(9) to conform the text of the Indenture, the Notes or the Subsidiary Guarantees to any provision of this “Description of the Notes” to the extent that such provision in this “Description of the Notes” was intended to be a verbatim recitation of a provision of the Indenture, the Notes or the Subsidiary Guarantees;
(10) to permit Permitted Pari Passu Secured Indebtedness (including, without limitation, permitting the Trustee and the Collateral Agent to enter into any amendments to the Security Documents, the Intercreditor Agreement or the Indenture and take any other action necessary to permit the creation and registration of Liens on the Collateral to secure Permitted Pari Passu Secured Indebtedness, in accordance with the Indenture);
(11) to add additional Collateral to secure the Notes or any Subsidiary Guarantee; or
(12) to make any other change that does not adversely affect the rights of any Holder.

Amendments With Consent of Holders

Amendments of the Indenture, the Intercreditor Agreement or any Security Document may be made by the Company, the Subsidiary Guarantors, the Trustee and the Collateral Agent with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding Notes, and the Holders of a majority in principal amount of the outstanding Notes may waive future compliance by the Company with any provision of the Indenture, the Notes, the Intercreditor Agreement or any Security Document; provided , however , that no such modification, amendment or waiver may, without the consent of each Holder affected thereby:

(1) change the Stated Maturity of the principal of, or any installment of interest on, any Note;
(2) reduce the principal amount of, or premium, if any, or interest on, any Note;
(3) change the place, currency or time of payment of principal of, or premium, if any, or interest on, any Note;
(4) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the redemption date) of any Note;
(5) reduce the above-stated percentage of outstanding Notes the consent of whose Holders is necessary to modify or amend the Indenture;
(6) waive a default in the payment of principal of, premium, if any, or interest on the Notes;

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(7) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults;
(8) release any Subsidiary Guarantor from its Subsidiary Guarantee, except as provided in the Indenture;
(9) release any Collateral, except as provided in the Intercreditor Agreement, the Indenture and the Security Documents;
(10) amend, change or modify any Subsidiary Guarantee in a manner that adversely affects the Holders;
(11) amend, change or modify any provision of the Intercreditor Agreement, any Security Document or the Indenture relating to the Collateral, in a manner that adversely affects the Holders, except in accordance with the other provisions of the Intercreditor Agreement or the Indenture;
(12) reduce the amount payable upon a Change of Control Offer or an Offer to Purchase with the Excess Proceeds from an Asset Sale or change the time or manner by which a Change of Control Offer or an Offer to Purchase with the Excess Proceeds from an Asset Sale may be made or by which the Notes must be repurchased pursuant to a Change of Control Offer or an Offer to Purchase with the Excess Proceeds from an Asset Sale;
(13) change the redemption date or the redemption price of the Notes from that stated under “— Optional Redemption” or “— Redemption for Taxation Reasons”;
(14) amend, change or modify the obligation of the Company or any Subsidiary Guarantor to pay Additional Amounts; or
(15) amend, change or modify any provision of the Indenture or the related definition affecting the ranking of the Notes or any Subsidiary Guarantee in a manner which adversely affects the Holders.

Unclaimed Money

Claims against the Company for the payment of principal of, premium, if any, or interest, on the Notes will become void unless presentation for payment is made as required in the Indenture within a period of six years.

No Personal Liability of Incorporators, Stockholders, Officers, Directors or Employees

No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company or any Subsidiary Guarantor in the Indenture, or in any of the Notes or the Subsidiary Guarantees or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company or any Subsidiary Guarantor or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes and the Subsidiary Guarantees. Such waiver may not be effective to waive liabilities under the federal securities laws.

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Concerning the Collateral Agent, Trustee and the Paying Agent

Citicorp International Limited is to be appointed as Trustee under the Indenture, and Citibank, N.A., London branch is to be appointed as paying agent (the “Paying Agent”) and transfer agent (the “Transfer Agent”) with regard to the Notes. Citibank, N.A., London branch is to be appointed as registrar under the Indenture. Except during the continuance of a Default, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Indenture, the Notes, the Security Documents or the Intercreditor Agreement (as the case may be), and no implied covenant or obligation shall be read into the Indenture, the Notes (as the case may be) against the Trustee. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it under the Indenture or the Notes or the Intercreditor Agreement (as the case may be) as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs. The Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder, unless such Holder shall have offered to the Trustee security and/or indemnity satisfactory to it against any loss, liability or expense.

Pursuant to the terms of the Indenture, the Notes, the Security Documents or the Intercreditor Agreement (as the case may be), the Company and the Subsidiary Guarantors will reimburse the Trustee and the Collateral Agent for all reasonable expenses.

The Indenture contains limitations on the rights of the Trustee, should it become a creditor of the Company or any of the Subsidiary Guarantors, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however , that if it becomes aware it has acquired any conflicting interest, it must eliminate such conflict or resign.

Citicorp International Limited will initially act as Trustee and Collateral Agent under the Intercreditor Agreement and the Security Documents in respect of the Security over the Collateral. The Collateral Agent, acting in its capacity as such, shall have such duties with respect to the Collateral pledged pursuant to the Security Documents as are set forth in the Indenture, the Intercreditor Agreement and the Security Documents. Under certain circumstances, the Trustee and the Collateral Agent may have obligations under the Intercreditor Agreement and the Security Documents that are in conflict with the interests of the Holders. Neither the Trustee nor the Collateral Agent will be under any obligation to exercise any rights or powers conferred under the Indenture, the Intercreditor Agreement or any of the Security Documents for the benefit of the Holders unless such Holders have offered to the Trustee indemnity and/or security satisfactory to the Trustee against any loss, liability or expense. Furthermore, each Holder, by accepting the Notes will agree, for the benefit of the Trustee, that it is solely responsible for its own independent appraisal of and investigation into all risks arising under or in connection with the Intercreditor Agreement and the Security Documents and has not relied on and will not at any time rely on the Trustee or the Collateral Agent in respect of such risks.

If the Company maintains a paying agent in a European Union member state, then it will ensure that it maintains a paying agent in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 (each, a “Directive”) or any law implementing or complying with, or introduced in order to conform to, such Directive.

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Book-Entry; Delivery and Form

The certificates representing the Notes will be issued in fully registered form without interest coupons. Notes sold in offshore transactions in reliance on Regulation S under the Securities Act will initially be represented by one or more permanent global notes in definitive, fully registered form without interest coupons (each a “Regulation S Global Note”) and will be deposited with Citibank, N.A., London branch as custodian for, and registered in the name of a nominee of, DTC for the accounts of Euroclear and Clearstream.

Notes sold in reliance on Rule 144A will be represented by one or more permanent global notes in definitive, fully registered form without interest coupons (each a “Restricted Global Note”; and together with the Regulation S Global Notes, the “Global Notes”) and will be deposited with Citibank, N.A., London branch as custodian for, and registered in the name of a nominee of, DTC.

Each Global Note (and any Notes issued for exchange therefor) will be subject to certain restrictions on transfer set forth therein as described under “Notice to Investors.”

Ownership of beneficial interests in a Global Note will be limited to persons who have accounts with DTC (“participants”) or persons who hold interests through participants. Ownership of beneficial interests in a Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Restricted Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system.

Investors may hold their interests in a Regulation S Global Note directly through Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations that are participants in such system. Euroclear and Clearstream will hold interests in the Regulation S Global Notes on behalf of their participants through DTC.

So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. No beneficial owner of an interest in a Global Note will be able to transfer that interest except in accordance with DTC’s applicable procedures, in addition to those provided for under the Indenture and, if applicable, those of Euroclear and Clearstream.

Payments of the principal of, and interest on, a Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Company, nor any of the Guarantors, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

The Company expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants.

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Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures.

The Company expects that DTC will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Note is credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC will exchange the applicable Global Note for Certificated Notes, which it will distribute to its participants and which may be legended as set forth under the heading “Notice to Investors.”

The Company understands that: DTC is a limited purpose trust company organized under the laws of the State of New York, a “banking organization” within the meaning of New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform Commercial Code and a “Clearing Agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of securities certificates. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies and certain other organizations that clear through or maintain a custodial relationship with a participant, either directly or indirectly (“indirect participants”).

Although DTC, Euroclear and Clearstream are expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Note among participants of DTC, Euroclear and Clearstream, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, any of the Subsidiary Guarantors, the Trustee or any Paying Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the Company within 90 days, the Company will issue Certificated Notes in registered form, which may bear the legend referred to under “Notice to Investors,” in exchange for the Global Notes. Holders of an interest in a Global Note may receive Certificated Notes, which may bear the legend referred to under “Notice to Investors,” in accordance with the DTC’s rules and procedures in addition to those provided for under the Indenture.

The Clearing Systems

General

DTC, Euroclear and Clearstream have advised the Company as follows:

DTC. DTC is a limited-purpose trust company organized under the laws of the State of New York, a “banking organization” within the meaning of New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants and to facilitate the

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clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of securities certificates. DTC’s participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations, some of whom own DTC, and may include the Initial Purchasers. Indirect access to the DTC system is also available to others that clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly. Transfers of ownership or other interests in Notes in DTC may be made only through DTC participants. In addition, beneficial owners of Notes in DTC will receive all distributions of principal of and interest on the Notes from the Trustee through such DTC participant.

Euroclear and Clearstream. Euroclear and Clearstream hold securities for participating organizations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide to their participants, among other things, services for safekeeping, administration, clearance and settlement of internationally-traded securities and securities lending and borrowing. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear or Clearstream is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear or Clearstream participant, either directly or indirectly.

Initial Settlement

Initial settlement for the Notes will be made in immediately available funds. All Notes issued in the form of global notes will be deposited with Citibank, N.A., London branch, as custodian for DTC. Investors’ interests in Notes held in book-entry form by DTC will be represented through financial institutions acting on their behalf as direct and indirect participants in DTC. As a result, Euroclear and Clearstream will initially hold positions on behalf of their participants through DTC.

Investors electing to hold their Notes through DTC (other than through accounts at Euroclear or Clearstream) must follow the settlement practices applicable to United States corporate debt obligations. The securities custody accounts of investors will be credited with their holdings against payment in same day funds on the settlement date.

Investors electing to hold their Notes through Euroclear or Clearstream accounts will follow the settlement procedures applicable to conventional Eurobonds in registered form. Notes will be credited to the securities custody accounts of Euroclear Holders and of Clearstream Holders on the Business Day following the settlement date against payment for value on the settlement date.

Secondary Market Trading

Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any Notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired value date.

Trading between DTC Participants. Secondary market trading between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled using the procedures applicable to United States corporate debt obligations in same-day funds using DTC’s Same Day Funds Settlement System.

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Trading between Euroclear and Clearstream Participants. Secondary market trading between Euroclear participants and Clearstream participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional Eurobonds in same-day funds.

Trading between DTC Seller and Euroclear or Clearstream Purchaser. When Notes are to be transferred from the account of a DTC participant to the account of a Euroclear participant or a Clearstream participant, the purchaser must send instructions to Euroclear or Clearstream through a participant at least one Business Day prior to settlement. Euroclear or Clearstream, as the case may be, will receive the Notes against payment. Payment will then be made to the DTC participant’s account against delivery of the Notes. Payment will include interest accrued on the Notes from and including the last interest payment date to and excluding the settlement date, on the basis of a calendar year consisting of twelve 30-day calendar months. For transactions settling on the 31st day of the month, payment will include interest accrued to and excluding the first day of the following month. Payment will then be made to the DTC participant’s account against delivery of the Notes. After settlement has been completed, the Notes will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Euroclear participant’s or Clearstream participant’s account. Credit for the Notes will appear on the next day (European time) and cash debit will be back-valued to, and the interest on the Notes will accrue from, the value date (which would be the preceding day when settlement occurs in New York). If settlement is not completed on the intended value date (i.e., the trade date fails), the Euroclear or Clearstream cash debit will be valued instead as of the actual settlement date.

Euroclear participants or Clearstream participants will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to pre-position funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within Euroclear or Clearstream. Under this approach, they may take on credit exposure to Euroclear or Clearstream until the Notes are credited to their accounts one day later.

As an alternative, if Euroclear or Clearstream has extended a line of credit to them, participants can elect not to pre-position funds and allow that credit line to be drawn upon to finance settlement. Under this procedure, Euroclear participants or Clearstream participants purchasing Notes would incur overdraft charges for one day, assuming they cleared the overdraft when the Notes were credited to their accounts. However, interest on the Notes would accrue from the value date. Therefore, in many cases, the investment income on Notes earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each participant’s particular cost of funds.

The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC participant, a cross-market transaction will settle no differently than a trade between two DTC participants.

Finally, day traders that use Euroclear or Clearstream and that purchase Notes from DTC participants for credit to Euroclear participants or Clearstream participants should note that these trades will automatically fail on the sale side unless affirmative action is taken. At least three techniques should be readily available to eliminate this potential problem:

(1) borrowing through Euroclear or Clearstream for one day (until the purchase side of the day trade is reflected in their Euroclear account or Clearstream account) in accordance with the clearing system’s customary procedures;
(2) borrowing the Notes in the United States from a DTC participant no later than one day prior to settlement, which would give the Notes sufficient time to be reflected in the borrower’s Euroclear account or Clearstream account in order to settle the sale side of the trade; or

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(3) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC participant is at least one day prior to the value date for the sale to the Euroclear participants or Clearstream participants.

Trading between Euroclear or Clearstream Seller and DTC Purchaser. Due to the time zone differences in their favor, Euroclear participants or Clearstream participants may employ their customary procedures for transactions in which Notes are to be transferred by the respective clearing system to another DTC participant. The seller must send instructions to Euroclear or Clearstream through a participant at least one Business Day prior to settlement. In these cases, Euroclear or Clearstream will credit the Notes to the DTC participant’s account against payment. Payment will include interest accrued on the Notes from and including the last interest payment date to and excluding the settlement date, on the basis of a calendar year consisting of twelve 30-day calendar months. For transactions settling on the 31 st day of the month, payment will include interest accrued to the Notes excluding the first day of the following month. Payment will then be made to the DTC participant’s account against delivery of the Notes. The payment will then be reflected in the account of the Euroclear participant or Clearstream participant the following day, and receipt of the cash proceeds in the Euroclear or Clearstream participant’s account will be back-valued to the value date (which would be the preceding day when settlement occurs in New York). If the Euroclear participant or Clearstream participant has a line of credit with its respective clearing system and elects to draw on such line of credit in anticipation of receipt of the sale proceeds in its account, the back-valuation may substantially reduce or offset any overdraft charges incurred over the one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Euroclear or Clearstream participant’s account would instead be valued as of the actual settlement date.

As in the case with respect to sales by a DTC participant to a Euroclear or Clearstream participant, participants in Euroclear and Clearstream will have their accounts credited the day after their settlement date. See “— Trading between DTC Seller and Euroclear or Clearstream Purchaser” above.

None of the Company, the Trustee or any Paying and Transfer Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Notices

All notices or demands required or permitted by the terms of the Notes or the Indenture to be given to or by the Holders are required to be in writing and may be given or served by being sent by prepaid courier or by being deposited, first-class postage prepaid, in the United States mails (if intended for the Company, any Subsidiary Guarantor or the Trustee) addressed to the Company, such Subsidiary Guarantor or the Trustee, as the case may be, at the corporate trust office of the Trustee and, if intended for any Holder, addressed to such Holder at such Holder’s last address as it appears in the Note register (or otherwise delivered to such Holders in accordance with applicable DTC, Euroclear or Clearstream procedures).

Any such notice or demand will be deemed to have been sufficiently given or served when so sent or deposited and, if to the Holders, when delivered in accordance with the applicable rules and procedures of the relevant clearing system. Any such notice shall be deemed to have been delivered on the day such notice is delivered to the relevant clearing system or if by mail, when so sent or deposited.

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Consent to Jurisdiction; Service of Process

The Company and each Subsidiary Guarantor will irrevocably (1) submit to the non-exclusive jurisdiction of any U.S. federal or New York state court located in the Borough of Manhattan, The City of New York in connection with any suit, action or proceeding arising out of, or relating to, the Notes, any Subsidiary Guarantee, the Indenture or any transaction contemplated thereby; and (2) designate and appoint National Corporate Research, Ltd. for receipt of service of process in any such suit, action or proceeding.

Governing Law

Each of the Notes, the Subsidiary Guarantees and the Indenture provides that such instrument will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby.

Definitions

Set forth below are defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for other capitalized terms used in this “Description of the Notes” for which no definition is provided.

“2010 Convertible Bonds” means the Company’s U.S. dollar settled 4.5% convertible bonds due 2015 in the aggregate principal amount of RMB1,025 million.

“Acquired Indebtedness” means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or Indebtedness of a Restricted Subsidiary assumed in connection with an Asset Acquisition by such Restricted Subsidiary whether or not Incurred in connection with, or in contemplation of, the Person merging with or into or becoming a Restricted Subsidiary.

“Adjusted Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

“Affiliate” means, with respect to any Person, any other Person (1) directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person; (2) who is a director or officer of such Person or any Subsidiary of such Person or of any Person referred to in clause (1) of this definition; or (3) who is a spouse or any person cohabiting as a spouse, child, parent, brother, sister, parent-in-law, grandchild, grandparent, uncle, aunt, nephew or niece of a Person described in clause (1) or (2). For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Applicable Premium” means, with respect to a Note at any redemption date, the greater of (1) 1.00% of the principal amount of such Note and (2) the excess of (A) the present value at such redemption date of the redemption price of such Note at April 13, 2014, plus all required remaining scheduled interest payments due on such Note (but excluding accrued and unpaid interest to the redemption date) through April 13, 2014, computed using a discount rate equal to the Adjusted Treasury Rate plus 100 basis points, over (B) the principal amount of such Note on such redemption date.

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“Asset Acquisition” means (1) an investment by the Company or any Restricted Subsidiary in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any Restricted Subsidiary; or (2) an acquisition by the Company or any Restricted Subsidiary of the property and assets of any Person other than the Company or any Restricted Subsidiary that constitute substantially all of a division or line of business of such Person.

“Asset Disposition” means the sale or other disposition by the Company or any Restricted Subsidiary (other than to the Company or another Restricted Subsidiary) of (1) all or substantially all of the Capital Stock of any Restricted Subsidiary; or (2) all or substantially all of the assets that constitute a division or line of business of the Company or any Restricted Subsidiary.

“Asset Sale” means any sale, transfer or other disposition (including by way of merger, consolidation or Sale and Leaseback Transaction) of any of its property or assets (including any sale of Capital Stock of a Subsidiary or issuance of Capital Stock of a Restricted Subsidiary) in one transaction or a series of related transactions by the Company or any Restricted Subsidiary to any Person; provided that “Asset Sale” shall not include:

(1) sales or other dispositions of inventory, receivables and other current assets in the ordinary course of business;
(2) sales, transfers or other dispositions of assets constituting a Permitted Investment or Restricted Payment permitted to be made by the covenant described under “— Certain Covenants — Limitation on Restricted Payments”;
(3) sales, transfers or other dispositions of assets with a Fair Market Value not in excess of US$1 million (or the Dollar Equivalent thereof) in any transaction or series of related transactions;
(4) any sale, transfer, assignment or other disposition of any property or equipment that has become damaged, worn out, obsolete or otherwise unsuitable for use in connection with the business of the Company or the Restricted Subsidiaries;
(5) any transfer, assignment or other disposition deemed to occur in connection with creating or granting any Permitted Lien;
(6) a transaction covered by the first paragraph of the covenant described under “— Consolidation, Merger and Sale of Assets”; and
(7) a sale, transfer or other disposition to the Company or a Restricted Subsidiary, including, without limitation, an issuance of Capital Stock by a Restricted Subsidiary to the Company or to another Restricted Subsidiary.

“Attributable Indebtedness” means, in respect of a Sale and Leaseback Transaction, the present value, discounted at the interest rate implicit in the Sale and Leaseback Transaction, of the total obligations of the lessee for rental payments during the remaining term of the lease in the Sale and Leaseback Transaction.

“Average Life” means, at any date of determination with respect to any Indebtedness, the quotient obtained by dividing (1) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (b) the amount of such principal payment by (2) the sum of all such principal payments.

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“Board of Directors” means the board of directors elected or appointed by the stockholders of the Company to manage the business of the Company or any committee of such board duly authorized to take the action purported to be taken by such committee.

“Board Resolution” means any resolution of the Board of Directors taking an action which it is authorized to take and adopted at a meeting duly called and held at which a quorum of disinterested members (if so required) was present and acting throughout or adopted by written resolution executed by every member of the Board of Directors.

“Business Day” means any day which is not a Saturday, Sunday, legal holiday or other day on which banking institutions in The City of New York, London or in Hong Kong (or in any other place in which payments on the Notes are to be made) are authorized or required by law or governmental regulation to close.

“Capitalized Lease” means, with respect to any Person, any lease of any property (whether real, personal or mixed) which, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person.

“Capitalized Lease Obligations” means the discounted present value of the rental obligations under a Capitalized Lease.

“Capital Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether outstanding on the Original Issue Date or issued thereafter, including, without limitation, all Common Stock and Preferred Stock.

“Change of Control” means the occurrence of one or more of the following events:

(1) the merger, amalgamation or consolidation of the Company with or into another Person (other than one or more Permitted Holders) or the merger or amalgamation of another Person (other than one or more Permitted Holders) with or into the Company, or the direct or indirect sale of all or substantially all the consolidated assets of the Company to another Person (other than one or more Permitted Holders);
(2) the Permitted Holders are the beneficial owners (as such term is used in Rule 13d-3 of the Exchange Act) of less than 35% of the total voting power of the Voting Stock of the Company;
(3) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined above), directly or indirectly, of total voting power of the Voting Stock of the Company greater than such total voting power held beneficially by the Permitted Holders;
(4) individuals who on the Original Issue Date constituted the Board of Directors, together with any new directors whose election to the Board of Directors was approved by a vote of at least two-thirds of the directors then still in office who were either directors on the Original Issue Date or whose election was previously so approved, cease for any reason to constitute a majority of the Board of Directors then in office; or
(5) the adoption of a plan relating to the liquidation or dissolution of the Company.

“Change of Control Triggering Event” means the occurrence of both a Change of Control and a Rating Decline.

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“Clearstream” means Clearstream Banking, société anonyme , Luxembourg.

“Collateral” means all collateral securing, or purported to be securing, directly or indirectly, the Notes or any Subsidiary Guarantee pursuant to the Security Documents, and shall initially consist of the Capital Stock of the initial Subsidiary Guarantors.

“Commodity Hedging Agreement” means any commodities swap agreement, commodities cap agreement, commodities floor agreement, commodities futures agreement, commodities option agreement or any other similar agreement or arrangement which may consist of one or more of the foregoing agreements, designed to manage commodities prices and commodities price risk.

“Common Stock” means, with respect to any Person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person’s common stock or ordinary shares, whether or not outstanding at the date of the Indenture, and includes, without limitation, all series and classes of such common stock or ordinary shares.

“Comparable Treasury Issue” means the U.S. Treasury security having a maturity comparable to April 13, 2014 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities with a maturity comparable to April 13, 2014.

“Comparable Treasury Price” means, with respect to any redemption date (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated “Composite 3:30 p.m. Quotations for U.S. Government Securities”; or (2) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if fewer than three such Reference Treasury Dealer Quotations are available, the average of all such quotations.

“Consolidated EBITDA” means, with respect to any Person for any period, Consolidated Net Income of such Person for such period plus, to the extent such amount was deducted in calculating such Consolidated Net Income:

(1) Consolidated Interest Expense;
(2) income taxes (other than income taxes attributable to extraordinary and non-recurring gains (or losses) or sales of assets); and
(3) depreciation expense, amortization expense and all other non-cash items reducing Consolidated Net Income (other than non-cash items in a period which reflect cash expenses paid or to be paid in another period), less all non-cash items increasing Consolidated Net Income;

all as determined on a consolidated basis for such Person and its Subsidiaries (excluding Unrestricted Subsidiaries) in conformity with GAAP; provided that (i) if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on

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the last day of such period by the Company or any of the Restricted Subsidiaries; and (ii) in the case of any PRC CJV (consolidated in accordance with GAAP), Consolidated EBITDA shall be reduced (to the extent not already reduced in accordance with GAAP) by any payments, distributions or amounts (including the Fair Market Value of any non-cash payments, distributions or amounts) required to be made or paid by such PRC CJV to the PRC CJV Partner, or to which the PRC CJV Partner otherwise has a right or is entitled, pursuant to the joint venture agreement governing such PRC CJV.

“Consolidated Fixed Charges” means, with respect to any Person for any period, the sum (without duplication) of (1) Consolidated Interest Expense for such period and (2) all cash and non-cash dividends paid, declared, accrued or accumulated during such period on any Disqualified Stock or Preferred Stock of such Person or any of its Subsidiaries (other than Unrestricted Subsidiaries) held by Persons other than the Company or any Wholly Owned Restricted Subsidiary, except for dividends payable in the Company’s Capital Stock (other than Disqualified Stock) or paid to the Company or to a Wholly-Owned Restricted Subsidiary.

“Consolidated Interest Expense” means, with respect to any Person for any period, the amount that would be included in gross interest expense on a consolidated income statement prepared in accordance with GAAP for such period of such Person and its Restricted Subsidiaries, plus, to the extent not included in such gross interest expense, and to the extent incurred, accrued or payable during such period by such Person and its Restricted Subsidiaries, without duplication, (1) interest expense attributable to Capitalized Lease Obligations, (2) amortization of debt issuance costs and original issue discount expense and non-cash interest payments in respect of any Indebtedness, (3) the interest portion of any deferred payment obligation, (4) all commissions, discounts and other fees and charges with respect to letters of credit or similar instruments issued for financing purposes or in respect of any Indebtedness, (5) the net costs associated with Hedging Obligations (including the amortization of fees), (6) interest accruing on Indebtedness of any other Person that is Guaranteed by, or secured by a Lien on any asset of, such Person or any of its Restricted Subsidiaries and (7) any capitalized interest; provided that interest expense attributable to interest on any Indebtedness bearing a floating interest rate will be computed on a pro forma basis as if the rate in effect on the date of determination had been the applicable rate for the entire relevant period.

“Consolidated Net Income” means, with respect to any Person (the “Subject Person”) for any period, the aggregate of the net income (or loss) of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in conformity with GAAP; provided that the following items shall be excluded in computing Consolidated Net Income (without duplication):

(1) the net income (or loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting except that:
(a) subject to the exclusion contained in clause (5) below, the Company’s equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (3) below); and
(b) the Company’s equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income to the extent funded with cash or other assets of the Company or Restricted Subsidiaries;

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(2) the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of the Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of the Restricted Subsidiaries;
(3) the net income (but not loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter, articles of association or other constitutive document or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary;
(4) the cumulative effect of a change in accounting principles;
(5) any net after tax gains realized on the sale or other disposition of (a) any property or asset of the Company or any Restricted Subsidiary that is not sold in the ordinary course of its business or (b) any Capital Stock of any Person (including any gains by the Company or a Restricted Subsidiary realized on sales of Capital Stock of the Company or of any Restricted Subsidiary);
(6) any translation gains and losses due solely to fluctuations in currency values and related tax effects; and
(7) any net after-tax extraordinary or non-recurring gains.

“Consolidated Net Worth” means, at any date of determination, stockholders’ equity as set forth on the most recently available semiannual or annual consolidated balance sheet of the Company and the Restricted Subsidiaries, plus, to the extent not included, any Preferred Stock of the Company, less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of the Restricted Subsidiaries, each item to be determined in conformity with GAAP.

“Creditor Representatives” mean, collectively, the Trustee and the holders (or their representatives or agents) of the holders of any Permitted Pari Passu Secured Indebtedness.

“Currency Hedging Agreement” means any currency swap agreement, currency cap agreement, currency floor agreement, currency futures agreement, commodity option agreement or any other similar agreement or arrangement which may consist of one or more of the foregoing agreements, designed to manage currencies and currency risk.

“Debt Documents” mean, collectively, the Indenture, the trust deed dated April 1, 2010 governing the 2010 Convertible Bonds and the documents evidencing any Permitted Pari Passu Secured Indebtedness.

“Default” means any event that is, or after notice or passage of time or both would be, an Event of Default.

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“Disqualified Stock” means any class or series of Capital Stock of any Person that by its terms or otherwise is (1) required to be redeemed prior to the date that is 183 days after the Stated Maturity of the Notes, (2) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the date that is 183 days after the Stated Maturity of the Notes or (3) convertible into or exchangeable for Capital Stock referred to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior to the date that is 183 days after the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an “asset sale” or “change of control” occurring prior to the date that is 183 days after the Stated Maturity of the Notes shall not constitute Disqualified Stock if the “asset sale” or “change of control” provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the “— Limitation on Asset Sales” and “— Repurchase of Notes upon a Change of Control Triggering Event” covenants and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company’s repurchase of such Notes as are required to be repurchased pursuant to the covenants described under “— Certain Covenants — Limitation on Asset Sales” and “— Repurchase of Notes upon a Change of Control Triggering Event.”

“Dollar Equivalent” means, with respect to any monetary amount in a currency other than U.S. dollars, at any time for the determination thereof, the amount of U.S. dollars obtained by converting such foreign currency involved in such computation into U.S. dollars at the noon buying rate for U.S. dollars in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on the date of determination.

“DTC” means The Depository Trust Company and its successors.

“Equity Offering” means (i) any bona fide public or private offering of Capital Stock (other than Disqualified Stock) of the Company other than to Affiliates of the Company after the Original Issue Date or (ii) any bona fide underwritten secondary public offering or secondary private placement of Capital Stock (other than Disqualified Stock) of the Company beneficially owned by the Permitted Holders, after the Original Issue Date, to the extent that the Permitted Holders or a company controlled by such Person concurrently with such public offering or private placement purchases in cash an equal amount of Capital Stock (other than Disqualified Stock) from the Company at the same price as the public offering or private placing price; provided that (i) the aggregate gross cash proceeds received by the Company as a result of such offering described in clause (i) or (ii) or a combination thereof (excluding gross cash proceeds received from the Company or any of its Subsidiaries) shall be no less than US$25 million (or the Dollar Equivalent thereof) and (ii) any such offering shall result in such Capital Stock being listed and eligible for dealing on the Stock Exchange of Hong Kong Limited.

“Euroclear” means Euroclear Bank S.A./N.V., as operator of the Euroclear System.

“Fair Market Value” means the price that would be paid in an arm’s-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution.

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“Fitch” means Fitch Inc., a subsidiary of Fimalac, S.A., and its successors.

“Fixed Charge Coverage Ratio” means, on any Transaction Date, the ratio of (1) the aggregate amount of Consolidated EBITDA for the then most recent four fiscal quarters prior to such Transaction Date for which consolidated financial statements of the Company (which the Company shall use its best efforts to compile in a timely manner) are available (which may be internal consolidated financial statements) (the “Four Quarter Period”) to (2) the aggregate Consolidated Fixed Charges during such Four Quarter Period. In making the foregoing calculation:

(a) pro forma effect shall be given to any Indebtedness Incurred, repaid or redeemed during the period (the “Reference Period”) commencing on and including the first day of the Four Quarter Period and ending on and including the Transaction Date (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such Four Quarter Period), in each case as if such Indebtedness had been Incurred, repaid or redeemed on the first day of such Reference Period; provided that, in the event of any such repayment or redemption, Consolidated EBITDA for such period shall be calculated as if the Company or such Restricted Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to repay or redeem such Indebtedness;
(b) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate will be computed as if the rate in effect on the Transaction Date (taking into account any Interest Rate Hedging Agreement applicable to such Indebtedness if such Interest Rate Hedging Agreement has a remaining term in excess of 12 months or, if shorter, at least equal to the remaining term of such Indebtedness) had been the applicable rate for the entire period;
(c) pro forma effect will be given to the creation, designation or redesignation of Restricted Subsidiaries and Unrestricted Subsidiaries as if such creation, designation or redesignation had occurred on the first day of such Reference Period;
(d) pro forma effect will be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition) that occur during such Reference Period as if they had occurred and such proceeds had been applied on the first day of such Reference Period; and
(e) pro forma effect will be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period;

provided that to the extent that clause (d) or (e) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition (or asset acquisition or asset disposition), such pro forma calculation will be based upon the four full fiscal quarters immediately preceding the Transaction Date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available.

“GAAP” means generally accepted accounting principles in Hong Kong as in effect from time to time.

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“Guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.

“Hedging Obligation” of any Person means the obligations of such Person pursuant to any Commodity Hedging Agreement, Currency Hedging Agreement or Interest Rate Hedging Agreement.

“Holder” means the Person in whose name a Note is registered in the Note register.

“Incur” means, with respect to any Indebtedness or Disqualified Stock, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness or Disqualified Stock; provided that (1) any Indebtedness and Disqualified Stock of a Person existing at the time such Person becomes a Restricted Subsidiary will be deemed to be Incurred by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary and (2) the accretion of original issue discount shall not be considered an Incurrence of Indebtedness. The terms “Incurrence,” “Incurred” and “Incurring” have meanings correlative with the foregoing.

“Indebtedness” means, with respect to any Person at any date of determination (without duplication):

(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit, bankers’ acceptances or other similar instruments;
(4) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except Trade Payables;
(5) all Capitalized Lease Obligations and Attributable Indebtedness;
(6) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (a) the Fair Market Value of such asset at such date of determination and (b) the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person;
(8) to the extent not otherwise included in this definition, Hedging Obligations;

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(9) all Disqualified Stock issued by such Person valued at the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price plus accrued dividends; and
(10) any Preferred Stock issued by (a) such Person, if such Person is a Restricted Subsidiary or (b) any Restricted Subsidiary of such Person valued at the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price plus accrued dividends.

The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided

(1) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP;
(2) that money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall not be deemed to be “Indebtedness” so long as such money is held to secure the payment of such interest; and
(3) that the amount of Indebtedness with respect to any Hedging Obligation shall be (i) zero if Incurred pursuant to paragraph 2(e) under the “Limitation on Indebtedness” covenant, and (ii) equal to the net amount payable if the Commodity Hedging Agreement, Currency Hedging Agreement or Interest Rate Hedging Agreement giving rise to such Hedging Obligation terminated at that time due to default by such Person if not Incurred pursuant to such paragraph.

“Intercreditor Agreement” has the meaning set forth under “— Security.”

“Interest Rate Hedging Agreement” means any interest rate swap agreement, interest rate cap agreement, interest rate floor agreement, interest rate future contract, interest rate option agreement or any other similar agreement or arrangement which may consist of one or more of any of the foregoing agreements, designed to manage interest rates and interest rate risk.

“Investment” means:

(1) any direct or indirect advance, loan or other extension of credit to another Person;
(2) any capital contribution to another Person (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others);
(3) any purchase or acquisition of Capital Stock (or options, warrants or other rights to acquire such Capital Stock), Indebtedness, bonds, notes, debentures or other similar instruments or securities issued by another Person; or
(4) any Guarantee of any obligation of another Person.

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For the purposes of the provisions of the covenants described under “— Certain Covenants — Designation of Restricted and Unrestricted Subsidiaries” and “— Certain Covenants — Limitation on Restricted Payments”: (1) the Company will be deemed to have made an Investment in an Unrestricted Subsidiary in an amount equal to the Fair Market Value of the Company’s proportionate interest in the assets (net of the liabilities owed to any Person other than the Company or a Restricted Subsidiary and that are not Guaranteed by the Company or a Restricted Subsidiary) of a Restricted Subsidiary that is designated an Unrestricted Subsidiary calculated as of the time of such designation, and (2) any property transferred to or from any Person shall be valued at its Fair Market Value at the time of such transfer, as determined in good faith by the Board of Directors.

“Investment Grade” means a rating of “AAA,” “AA,” “A” or “BBB,” as modified by a “+” or “-” indication, or an equivalent rating representing one of the four highest rating categories, by S&P or any of its successors or assigns, or a rating of “AAA,” “AA,” “A,” “BBB,” as modified by a “+” or “-” indication, or an equivalent rating representing one of the four highest rating categories, by Fitch or any of its successors or assigns, or the equivalent ratings of any internationally recognized rating agency or agencies, as the case may be, which shall have been designated by the Company as having been substituted for S&P or Fitch or both of them, as the case may be.

“Lien” means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to create any mortgage, pledge, security interest, lien, charge, easement or encumbrance of any kind).

“Net Cash Proceeds” means:

(1) with respect to any Asset Sale (other than the issuance or sale of Capital Stock), the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of:
(a) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale;
(b) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and the Restricted Subsidiaries, taken as a whole;
(c) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (x) is secured by a Lien on the property or assets sold or (y) is required to be paid as a result of such sale; and
(d) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and reflected in an Officers’ Certificate delivered to the Trustee; and

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(2) with respect to any Asset Sale consisting of the issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

“Offer to Purchase” means an offer to purchase Notes by the Company from the Holders commenced by the Company mailing a notice by first class mail, postage prepaid, to the Trustee and each Holder at its last address appearing in the Note register stating:

(1) the provision in the Indenture pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis;
(2) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the “Offer to Purchase Payment Date”);
(3) that any Note not tendered will continue to accrue interest pursuant to its terms;
(4) that, unless the Company defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Offer to Purchase Payment Date;
(5) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled “Option of the Holder to Elect Purchase” on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Offer to Purchase Payment Date;
(6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Offer to Purchase Payment Date, a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and
(7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of US$200,000 or any amount in excess thereof which is an integral multiple of US$1,000.

One Business Day prior to the Offer to Purchase Payment Date, the Company shall deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof to be accepted by the Company for payment on the Offer to Purchase Payment Date. On the Offer to Purchase Payment Date, the Company shall (a) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; and (b) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers’ Certificate specifying the Notes or portions thereof accepted for payment by the Company. The

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Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and upon receipt of written order of the Company signed by an Officer the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of US$200,000 or any amount in excess thereof which is an integral multiple of US$1,000. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Offer to Purchase Payment Date. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to an Offer to Purchase.

The offer is required to contain or incorporate by reference information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will assist such Holders to make an informed decision with respect to the Offer to Purchase, including a brief description of the events requiring the Company to make the Offer to Purchase, and any other information required by applicable law to be included therein. The offer is required to contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Offer to Purchase.

“Officer” means one of the executive officers of the Company or, in the case of a Restricted Subsidiary, one of the directors or officers of such Restricted Subsidiary.

“Officers’ Certificate” means a certificate signed by two Officers; provided, however , with respect to the Officers’ Certificate required to be delivered by any Subsidiary Guarantor under the Indenture, Officers’ Certificate means a certificate signed by one Officer if there is only one Officer in such Subsidiary Guarantor at the time such certificate is required to be delivered.

“Opinion of Counsel” means a written opinion from external legal counsel who is reasonably acceptable to the Trustee.

“Original Issue Date” means the date on which the Notes are originally issued under the Indenture.

“Pari Passu Subsidiary Guarantee” means a Guarantee by any Subsidiary Guarantor of Indebtedness of the Company (including Additional Notes); provided that (1) the Company and such Subsidiary Guarantor were permitted to Incur such Indebtedness by the covenant described under “— Limitation on Indebtedness” and (2) such Guarantee ranks pari passu with any outstanding Subsidiary Guarantee of such Subsidiary Guarantor.

“Payment Default” means (1) any default in the payment of interest on any Note when the same becomes due and payable, (2) any default in the payment of principal of (or premium, if any, on) the Notes when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, (3) the failure by the Company to make or consummate a Change of Control Offer in the manner described under “— Repurchase of Notes upon a Change of Control Triggering Event,” or an Offer to Purchase in the manner described under “— Limitation on Asset Sales” or (4) any Event of Default specified in clause (4) of the definition of Events of Default.

“Permitted Businesses” means any business which is the same as or ancillary or complementary to any of the businesses of the Company and the Restricted Subsidiaries on the Original Issue Date, including production or sourcing of materials to be used in any of the businesses of the Company and the Restricted Subsidiaries on the Original Issue Date.

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“Permitted Holders” means any or all of the following:
(1) Mr. Li Xuechun;
(2) any Affiliate (other than an Affiliate as defined in clause (2) of the definition of Affiliate) of the Person specified in clause (1); and
(3) any Person both the Capital Stock and the Voting Stock of which (or in the case of a trust, the beneficial interests in which) are owned 80% or more by one or more of the Persons specified in clauses (1) and (2).

“Permitted Investment” means:

(1) any Investment in the Company or a Restricted Subsidiary that is primarily engaged in a Permitted Business or a Person which will, upon the making of such Investment, become a Restricted Subsidiary that is primarily engaged in a Permitted Business or will be merged or consolidated with or into, or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary that is primarily engaged in a Permitted Business;
(2) cash or Temporary Cash Investments;
(3) payroll, travel and similar advances made in the ordinary course of business to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP;
(4) stock, obligations or securities received in satisfaction of judgments;
(5) an Investment in an Unrestricted Subsidiary consisting solely of an Investment in another Unrestricted Subsidiary;
(6) any Investment pursuant to a Hedging Obligation designed (i) solely to protect the Company or any Restricted Subsidiary against fluctuations in commodity prices, interest rates or foreign currency exchange rates or (ii) to reduce or manage interest expenses;
(7) receivables, trade credits or other current assets owing to the Company or any Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms;
(8) Investments consisting of consideration received in connection with an Asset Sale under clause 4(b) of, and made in compliance with, the covenant described under “— Certain Covenants — Limitation on Asset Sales”;
(9) pledges or deposits (x) with respect to leases or utilities provided to third parties in the ordinary course of business or (y) otherwise described in the definition of “Permitted Liens”;
(10) loans or advances to vendors, contractors, suppliers or distributors, including advance payments for equipment and machinery made to the manufacturer thereof, of the Company or any Restricted Subsidiary in the ordinary course of business and dischargeable in accordance with customary trade terms within 90 days; and
(11) Investments in existence on the Original Issue Date.

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“Permitted Liens” means:

(1) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal or administrative proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made;
(2) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal or administrative proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made;
(3) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers’ acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money);
(4) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and the Restricted Subsidiaries, taken as a whole;
(5) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person (i) becomes a Restricted Subsidiary or (ii) is merged with or into or consolidated with the Company or any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets of such Person (if such Person becomes a Restricted Subsidiary) or the property or assets acquired by the Company or such Restricted Subsidiary (if such Person is merged with or into or consolidated with the Company or such Restricted Subsidiary); provided further that such Liens were not created in contemplation of or in connection with the transactions or series of transactions pursuant to which such Person became a Restricted Subsidiary;
(6) Liens in favor of the Company or any Restricted Subsidiary;
(7) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary that do not give rise to an Event of Default;
(8) Liens securing reimbursement obligations with respect to letters of credit, performance and surety bonds and completion guarantees that encumber documents and other property relating to such letters of credit and the products and proceeds thereof;
(9) Liens existing on the Original Issue Date;
(10) Liens securing Indebtedness which is Incurred to refinance Secured Indebtedness which is permitted to be Incurred under clause (2)(d) of the covenant described under “— Certain Covenants — Limitation on Indebtedness,” provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced;

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(11) Liens securing Hedging Obligations permitted to be Incurred under clause (2)(e) of the covenant described under “— Certain Covenants — Limitation on Indebtedness,” provided that (i) Indebtedness relating to any such Hedging Obligation is, and is permitted under the covenant described under “— Certain Covenants — Limitation on Liens” to be, secured by a Lien on the same property securing such Hedging Obligation or (ii) such Liens are encumbering customary initial deposits or margin deposits or are otherwise within the general parameters customary in the industry and incurred in the ordinary course of business or (iii) such Liens secure obligations set forth under Interest Rate Hedging Agreements designed to reduce or manage interest expenses;
(12) Liens under the Security Documents;
(13) Liens securing Attributable Indebtedness that is permitted to be Incurred under the Indenture;
(14) any interest or title of a lessor under any Capitalized Lease Obligation permitted to be Incurred under the Indenture; provided , however , that the Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation;
(15) Liens securing any Permitted Pari Passu Secured Indebtedness that complies with each of the requirements set forth under “— Security — Permitted Pari Passu Secured Indebtedness”;
(16) Liens on deposits securing trade letters of credit (and reimbursement obligations relating thereto) incurred in the ordinary course;
(17) Liens securing Indebtedness permitted under clause (2)(k) of the covenant described under “— Certain Covenants — Limitation on Indebtedness”; provided that such Lien (i) covers only the assets acquired with such Indebtedness and (ii) is created within 180 days of such acquisition; or
(18) Liens securing Indebtedness permitted under clause (2)(n) of the covenant described under “— Certain Covenants — Limitation on Indebtedness”; provided that (a) such Lien is created prior to, at the time of or within 30 days after entering into the agreement underlying such Indebtedness and (b) the aggregate book value of property or assets (as reflected in the most recent available consolidated financial statements of the Company (which may be internal consolidated statements) or, if any such property or assets have been acquired since the date of such financial statements, the cost of such property or assets) subject to Liens incurred pursuant to this clause (18) does not exceed 130% of the aggregate principal amount or aggregate committed amount of Indebtedness secured by such Liens;

provided that for purposes of the Collateral, Permitted Liens shall mean Liens described in clauses (1), (5), (12) and (15) above only.

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“Permitted Pari Passu Secured Indebtedness” has the meaning set forth under “— Security — Permitted Pari Passu Secured Indebtedness.”

“Permitted Subsidiary Indebtedness” means Indebtedness of, and all Preferred Stock issued by, the Restricted Subsidiaries, taken as a whole; provided that, on the date of Incurrence of such Indebtedness, and after giving effect thereto and the application of the proceeds thereof, the aggregate principal amount outstanding of all such Indebtedness and all Preferred Stock issued by the Restricted Subsidiaries (excluding any Indebtedness of any Restricted Subsidiary permitted under clause (2)(c) or (e) of the covenant described under “— Certain Covenants — Limitation on Indebtedness”) does not exceed an amount equal to 15% of Total Assets (or the Dollar Equivalent thereof).

“Person” means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

“PRC” means the People’s Republic of China.

“PRC CJV” means any future Subsidiary that is a Sino-foreign cooperative joint venture enterprise with limited liability, established in the PRC pursuant to the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures adopted on April 13, 1988 (as most recently amended on October 13, 2000) and the Detailed Rules for the Implementation of the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures promulgated on September 4, 1995, as such laws and regulations may be amended from time to time.

“PRC CJV Partner” means with respect to a PRC CJV, the other party to the joint venture agreement relating to such PRC CJV with the Company or any Restricted Subsidiary.

“Preferred Stock” as applied to the Capital Stock of any Person means Capital Stock of any class or classes that by its term is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person.

“Rating Agencies” means (1) S&P and (2) Fitch; provided that if S&P, Fitch or both of them shall not make a rating of the Notes publicly available, one or more nationally recognized statistical rating organizations (as defined in Rule 436 under the Securities Act), as the case may be, selected by the Company, which shall be substituted for S&P, Fitch or both of them, as the case may be.

“Rating Category” means (1) with respect to S&P, any of the following categories: “BB,” “B,” “CCC,” “CC,” “C” and “D” (or equivalent successor categories); (2) with respect to Fitch, any of the following categories: “BB,” “B,” “CCC,” “CC,” “C” and “D” (or equivalent successor categories); and (3) the equivalent of any such category of S&P or Fitch used by another Rating Agency. In determining whether the rating of the Notes has decreased by one or more gradations, gradations within Rating Categories (“+” and “-” for S&P and Fitch; or the equivalent gradations for another Rating Agency) shall be taken into account (e.g., with respect to S&P, a decline in a rating from “BB+” to “BB,” as well as from “BB-” to “B+,” will constitute a decrease of one gradation).

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“Rating Date” means (i) in connection with a Change of Control Triggering Event, that date which is 90 days prior to the earlier of (x) a Change of Control and (y) a public notice of the occurrence of a Change of Control or of the intention by the Company or any other Person or Persons to effect a Change of Control or (ii) in connection with actions contemplated under “— Consolidation, Merger and Sale of Assets,” that date which is 90 days prior to the earlier of (x) the occurrence of any such actions as set forth therein and (y) a public notice of the occurrence of any such actions.

“Rating Decline” means (i) in connection with a Change of Control Triggering Event, the occurrence on, or within six months after, the date, or public notice of the occurrence of, a Change of Control or the intention by the Company or any Person or Persons to effect a Change of Control (which period shall be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies) of any of the events listed below, or (ii) in connection with actions contemplated under “— Consolidation, Merger and Sale of Assets,” the notification by any of the Rating Agencies that such proposed actions will result in any of the events listed below:

(a) in the event the Notes are rated by both of the Rating Agencies on the Rating Date as Investment Grade, the rating of the Notes by either of the Rating Agencies shall be below Investment Grade;
(b) in the event the Notes are rated by either, but not both, of the Rating Agencies on the Rating Date as Investment Grade, the rating of the Notes by such Rating Agency shall be below Investment Grade; or
(c) in the event the Notes are rated below Investment Grade by both Rating Agencies on the Rating Date, the rating of the Notes by either Rating Agency shall be decreased by one or more gradations (including gradations within Rating Categories as well as between Rating Categories).

“Reference Treasury Dealer” means each of any three investment banks of recognized standing that is a primary U.S. Government securities dealer in The City of New York, selected by the Company in good faith.

“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City Time) on the third Business Day preceding such redemption date.

“Restricted Subsidiary” means any Subsidiary of the Company other than an Unrestricted Subsidiary.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors.

“Sale and Leaseback Transaction” means any direct or indirect arrangement relating to property (whether real, personal or mixed), now owned or hereafter acquired whereby the Company or any Restricted Subsidiary transfers such property to another Person and the Company or any Restricted Subsidiary leases it from such Person.

“Secured Creditors” mean, collectively, the Collateral Agent and the creditors and the agents under the Debt Documents.

“Secured Indebtedness” means any Indebtedness of the Company or a Restricted Subsidiary secured by a Lien.

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“Secured Liabilities” means, collectively, all present and future obligations, contingent or otherwise, of the Company and its Restricted Subsidiaries to the creditors, noteholders, lenders and their agents or trustees under the Debt Documents, including any interest, fees and expenses accruing after the initiation of any insolvency proceeding (irrespective of whether such interest, fees and expenses are allowed as a claim in such proceeding).

“Securities Act” means the U.S. Securities Act of 1933, as amended.

“Security Documents” means, collectively, share mortgages, share charges and any other agreements or instruments that may evidence or create, or purport to create, any Lien in favor of the Collateral Agent, the Trustee, the 2010 CB Trustee and/or any holder (or its representative or agent) of any Permitted Pari Passu Secured Indebtedness in any or all of the Collateral.

“Stated Maturity” means, (1) with respect to any Indebtedness, the date specified in such debt security as the fixed date on which the final installment of principal of such Indebtedness is due and payable as set forth in the documentation governing such Indebtedness and (2) with respect to any scheduled installment of principal of or interest on any Indebtedness, the date specified as the fixed date on which such installment is due and payable as set forth in the documentation governing such Indebtedness.

“Subordinated Indebtedness” means any Indebtedness of the Company or any Subsidiary Guarantor that is contractually subordinated or junior in right of payment to the Notes or to any Subsidiary Guarantee, as applicable, pursuant to a written agreement to such effect.

“Subsidiary” means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person.

“Subsidiary Guarantee” means any Guarantee of the obligations of the Company under the Indenture and the Notes by any Subsidiary Guarantor.

“Subsidiary Guarantor” means the initial Subsidiary Guarantors named herein and any other Restricted Subsidiary that Guarantees the obligations of the Company under the Indenture and the Notes; provided that “Subsidiary Guarantor” does not include any Person whose Subsidiary Guarantee has been released in accordance with the Indenture and the Notes.

“Subsidiary Guarantor Pledgor” means the initial Subsidiary Guarantor Pledgors and any other Subsidiary Guarantor that pledges Collateral to secure the obligations of the Company under the Notes and the Indenture and of such Subsidiary Guarantor under its Subsidiary Guarantee; provided that “Subsidiary Guarantor Pledgor” does not include any person whose pledge under the Security Documents has been released in accordance with the Security Documents, the Indenture and the Notes.

“Temporary Cash Investment” means any of the following:

(1) direct obligations of the United States of America, Hong Kong or any agency of either of the foregoing or obligations fully and unconditionally Guaranteed by the United States of America, Hong Kong or any agency of either of the foregoing, in each case maturing within one year;
(2) demand or time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company that is organized under the laws of the United States of America, any state thereof or Hong Kong and which bank or trust company has capital, surplus and

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undivided profits aggregating in excess of US$100.0 million (or the Dollar Equivalent thereof) and has outstanding debt which is rated “A” (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act);

(3) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (1) above entered into with a bank or trust company meeting the qualifications described in clause (2) above;
(4) commercial paper, maturing not more than 180 days after the date of acquisition thereof, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of “A-1” (or higher) according to S&P or Fitch;
(5) securities maturing within one year of the date of acquisition thereof, issued or fully and unconditionally Guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least “A” by S&P or Fitch;
(6) any money market fund that has at least 95.0% of its assets continuously invested in investments of the types described in clauses (1) through (5) above; and
(7) demand or time deposit accounts, certificates of deposit overnight or call deposits and money market deposits with (i) Agricultural Bank of China, Bank of China, Bank of Communications, China Merchants Bank, Industrial and Commercial Bank of China, China Construction Bank or Bank of Shanghai, The Royal Bank of Scotland N.V., Hang Seng Bank and The Hongkong and Shanghai Banking Corporation Limited, (ii) any other bank, trust company or other financial institutions organized under the laws of the PRC or Hong Kong whose long-term debt is rated as high or higher than any of those banks listed in clause (i) of this paragraph or (iii) any other bank or other financial institutions organized under the laws of the PRC or Hong Kong; provided that, in the case of clause (iii), such deposits do not exceed US$10 million (or the Dollar Equivalent thereof) with any single bank or US$30 million (or the Dollar Equivalent thereof) in the aggregate, at any date of determination thereafter.

“Total Assets” means, as of any date, the total consolidated assets of the Company and its Restricted Subsidiaries measured in accordance with GAAP as of the last date of the most recent fiscal quarter for which consolidated financial statements of the Company (which the Company shall use its reasonable best efforts to compile in a timely manner) are available (which may be internal consolidated financial statements) provided that only with respect to clause (2)(k)(ii) of the “Certain Covenants — Limitation on Indebtedness” covenant and the definition of “Permitted Subsidiary Indebtedness,” Total Assets shall be calculated after giving pro forma effect to include the cumulative value of all the equipment, property or assets the purchase of which requires or required the Incurrence of Indebtedness and calculation of Total Assets thereunder in each case as of such date, as measured by the purchase price or cost therefor or budgeted cost provided in good faith by the Company or any of its Restricted Subsidiaries to the bank or other similar financial institutional lender providing such Indebtedness.

“Trade Payables” means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services.

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“Transaction Date” means, with respect to the Incurrence of any Indebtedness, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made.

“Unrestricted Subsidiary” means (1) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided in the Indenture and (2) any Subsidiary of an Unrestricted Subsidiary.

“U.S. Government Obligations” means securities that are (1) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (2) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally Guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the Company thereof at any time prior to the Stated Maturity of the Notes, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.

“Voting Stock” means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person.

“Wholly Owned” means, with respect to any Restricted Subsidiary, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director’s qualifying shares or Investments by foreign nationals mandated by applicable law) by the Company or one or more Wholly Owned Subsidiaries of the Company; provided that Subsidiaries that are PRC CJVs shall not be considered Wholly Owned Subsidiaries.

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TAXATION

CAYMAN ISLANDS, BRITISH VIRGIN ISLANDS AND HONG KONG TAXATION

The following summary of certain Cayman Islands, British Virgin Islands and Hong Kong tax consequences of the purchase, ownership and disposition of Notes is based upon applicable laws, regulations, rulings and decisions in effect as of the date of this offering memorandum, all of which are subject to change (possibly with retroactive effect). This discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of the Notes and does not purport to deal with consequences applicable to all categories of investors, some of which may be subject to special rules. Persons considering the purchase of Notes should consult their own tax advisors concerning the tax consequences of the purchase, ownership and disposition of Notes.

Cayman Islands

In the opinion of Conyers Dill & Pearman, our Cayman Islands counsel, the following is a summary of the material Cayman Islands tax consequences relevant to the purchase, ownership and disposition of the Notes.

The Cayman Islands currently levy no taxes on individuals or corporation based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty.

Pursuant to the Tax Concession Law (1999 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor-in-Council; (a) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations shall apply to the Company or its operations; and (b) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures or other obligations of the Company.

The undertaking is for a period of twenty years from June 28, 2005.

The Cayman Islands is not a party to any double tax treaties.

British Virgin Islands

There is no income or other tax in the British Virgin Islands imposed by withholding or otherwise on any payment to be made to or by the Subsidiary Guarantors pursuant to the Subsidiary Guarantees.

Hong Kong

Withholding Tax

No withholding tax in Hong Kong is payable on payments of principal (including any premium payable on redemption of the Notes) or interest in respect of the Notes.

Profits Tax

Hong Kong profits tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of assessable profits arising in or derived from Hong Kong from such trade, profession or business.

Under the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (the “Inland Revenue Ordinance”) as it is currently applied, Hong Kong profits tax may be charged on

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revenue profits arising on the sale, disposal or redemption of the Notes where such sale, disposal or redemption is or forms part of a trade, profession or business carried on in Hong Kong.

Interest on the Notes will be subject to Hong Kong profits tax where such interest has a Hong Kong source, and is received by or accrues to:

a financial institution (as defined in the Inland Revenue Ordinance) and arises through or from the carrying on by the financial institution of its business in Hong Kong; or
a corporation carrying on a trade, profession or business in Hong Kong; or
a person, other than a corporation, carrying on a trade, profession or business in Hong Kong and such interest is in respect of the funds of the trade, profession or business.

Although no tax is imposed in Hong Kong in respect of capital gains, Hong Kong profits tax may be chargeable on trading gains arising on the sale or disposal of the Notes where such transactions are or form part of a trade, profession or business carried on in Hong Kong.

Stamp Duty

No Hong Kong stamp duty will be chargeable upon the issue or transfer (for so long as the register of holders of the Notes is maintained outside Hong Kong) of a Note.

PRC

Under the PRC Enterprise Income Tax Law and the Implementation Rules both of which took effect on January 1, 2008, enterprises established outside the PRC whose “de facto management bodies” are located in China are considered as “PRC Tax resident enterprises.” The Implementation Rules define the term “de facto management body” as a management body that exercises full and substantial control and management over the business, production, personnel, accounts and properties of an enterprise.

The Company holds its shareholders’ meeting and board meetings outside China and keeps its shareholders’ list outside China. However, most of the Company’s directors and senior management are currently based inside China and the Company keeps its books of account inside China. The above elements may be relevant for the tax authorities to determine whether it is a PRC resident enterprise for tax purposes.

Although it is unclear under PRC tax law whether the Company has a “de facto management body” located in China for PRC tax purposes, it intends to take the position that it is not PRC resident enterprise for tax purpose. The Company cannot assure you that tax authorities will respect its position. The Company’s PRC counsel, King & Wood, has advised the Company that if it is deemed to be a PRC resident enterprise for enterprise income purpose, among other things, the Company would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income excluding equity investment income such as dividend and bonus between the Company and its PRC subsidiaries if they are each deemed a qualified resident enterprise. Furthermore, the Company would be obligated to withhold PRC income tax from payments of interest on the Notes to investors that are non-resident enterprises, generally at the rate of 10%, because the interest would be regarded as derived from sources within the PRC. If the Company fails to do so, it may be subject to fines and other penalties. In addition, any gain realized by such non-resident enterprise investors from the transfer of the Notes may be regarded as derived from sources within the PRC and accordingly may be subject to PRC income tax at a rate of 10%. However, if the Company is not considered as a PRC resident enterprise for enterprise income purposes, non-resident enterprise investors would not be subject to PRC income tax on any interest received on the Notes or any gains realized from the transfer of the Notes.

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U.S. FEDERAL INCOME TAXATION

CIRCULAR 230: ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES SET FORTH IN THIS OFFERING MEMORANDUM WAS WRITTEN IN CONNECTION WITH THE PROMOTION AND MARKETING BY THE COMPANY OF THE NOTES. SUCH DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE LEGAL OR TAX ADVICE TO ANY PERSON AND WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY U.S. FEDERAL TAX PENALTIES THAT MAY BE IMPOSED ON SUCH PERSON. EACH INVESTOR SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

The following discussion is a summary of certain U.S. federal income tax considerations relevant to the purchase, ownership and disposition of the Notes by the U.S. Holders described below. The discussion is not a complete description of all the tax considerations that may be relevant to a particular holder. This summary is based on the Internal Revenue Code of 1986, as amended, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which subsequent to the date of this offering memorandum may affect the tax consequences described herein and may apply retroactively. The discussion addresses only initial purchasers of the Notes that are U.S. Holders (as defined below), that hold the Notes as capital assets, that purchase the Notes in this offering at their “issue price,” which will be the first price at which a substantial amount of the Notes is sold to the public (not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers) for money, and that have the U.S. dollar as their functional currency. It does not address all of the issues that may be relevant to the tax treatment of investors subject to special rules, such as banks, insurance companies, investors liable for the alternative minimum tax, beneficial owners of individual retirement accounts and other tax-deferred accounts, tax-exempt organizations, dealers in securities or currencies, traders that elect mark-to-market treatment, or investors that will hold the Notes as part of straddles, hedging transactions or conversion transactions for U.S. federal income tax purposes. We have not sought any ruling from the Internal Revenue Service (“IRS”) with respect to the statements made and conclusions reached in this discussion, and there can be no assurance that the IRS will agree with and not challenge these statements and conclusions.

PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.

U.S. Holders

As used here, “U.S. Holder” means a beneficial owner of Notes that is, for U.S. federal income tax purposes:

(i) an individual who is a citizen or resident of the United States;
(ii) a corporation (or other business entity classified as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any State thereof or the District of Columbia;
(iii) an estate the income of which is subject to U.S. federal income tax without regard to its source; or

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(iv) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) it has a valid election in effect under applicable United States Treasury regulations to be treated as a U.S. person.

If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes purchases or holds the Notes, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership and any partner in a partnership holding the Notes is urged to consult its own tax advisor.

Taxation of Interest and Original Issue Discount

The gross amount of interest payments received by a U.S. Holder (including any foreign tax withheld) with respect to the Notes will generally be includible in taxable income as ordinary interest income at the time it accrues or is received in accordance with the U.S. Holder’s regular method of tax accounting.

In addition, if the Notes are issued with original issue discount (“OID”) for U.S. federal income tax purposes, a U.S. Holder must include the OID in income as ordinary interest for U.S. federal income tax purposes as it accrues under a constant yield to maturity basis in advance of receipt of the cash payment attributable to such income, regardless of such U.S. Holder’s regular method of tax accounting. Generally, a Note will have OID to the extent that its stated redemption price at maturity exceeds its issue price, unless the stated redemption price at maturity exceeds its issue price by less than 1/4 of 1% of the Note’s stated redemption price at maturity multiplied by the number of complete years to maturity, or de minimis OID. The stated redemption price at maturity of a Note is the total of all payments due on the Note other than payments of “qualified stated interest.” In general, “qualified stated interest” is interest that is unconditionally payable at least annually at a single fixed rate. Semi-annual interest payments made on the Notes will constitute qualified stated interest.

A U.S. Holder may elect to recognize all of the interest and OID on a Note (including de minimis OID) using a constant yield method. The constant yield election will apply only to the Note with respect to which it is made and may not be revoked without the consent of the IRS.

Interest payments and any OID received or accrued on the Notes will generally be from foreign sources for U.S. federal income tax purposes and will generally be treated as “passive category income” or, in certain cases, “general category income” for U.S. foreign tax credit purposes. Subject to applicable limitations, foreign income taxes, if any, withheld from payments in respect of the Notes would be creditable against the U.S. Holder’s U.S. federal income tax liability. The U.S. foreign tax credit rules are extremely complex. U.S. Holders should consult their own tax advisors regarding the availability of U.S. foreign tax credits and the application of the U.S. foreign tax credit rules to their particular situation.

Taxation of the Sale, Exchange, Redemption or Retirement of a Note

Upon the sale, exchange, redemption or retirement of a Note, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale, exchange, redemption or retirement (less any amount attributable to accrued but unpaid interest, which will be taxable as such) and the U.S. Holder’s adjusted tax basis in such Note. A U.S. Holder’s adjusted tax basis in a Note will generally equal the amount the U.S. Holder paid to acquire the Note, increased by any OID included in the U.S. Holder’s income with respect to the Note and reduced by any payments, other than qualified stated interest

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payments, previously received by the U.S. Holder. Gain or loss recognized by a U.S. Holder generally will be long-term capital gain or loss if the U.S. Holder has held the Note for more than one year at the time of disposition. Certain non-corporate U.S. Holders (including individuals) may qualify for preferential rates of U.S. federal income taxation in respect of long-term capital gains. The deductibility of capital losses is subject to certain limitations. Capital gains realized on the disposition of the Notes may be subject to PRC tax as described in this section under “Taxation — PRC.” In the event that foreign tax applies, a U.S. Holder’s amount realized would include the gross amount of the proceeds from the disposition. Each prospective purchaser is urged to consult its independent tax advisers regarding the consequences if a PRC withholding tax is imposed on the disposition of a Note and the availability of foreign tax credits under the investor’s particular circumstances (including in the case that a U.S. Holder is eligible for the benefits of the U.S. — PRC income tax treaty).

Information Reporting and Backup Withholding

Payments of interest, principal or proceeds from the disposition of a Note that are made in the United States or through certain U.S.-related financial intermediaries may be subject to information reporting, and may also be subject to backup withholding of U.S. federal income tax if a recipient who is a U.S. Holder fails to furnish to the payor an IRS Form W-9 containing such U.S. Holder’s taxpayer identification number or to otherwise establish an exemption from backup withholding. Penalties also may be imposed on a recipient that fails to properly supply an IRS Form W-9 or other evidence of an exemption from backup withholding. Any amounts deducted and withheld may be allowed as a credit against the recipient’s U.S. federal income tax liability, if any. If backup withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is timely furnished to the IRS.

Information with Respect to Foreign Financial Assets

Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of $50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by certain foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. Holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of the Notes.

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PLAN OF DISTRIBUTION

Citigroup Global Markets Inc. and Deutsche Bank AG, Singapore Branch are acting as joint bookrunners and joint lead managers of the offering of the Notes and as the Initial Purchasers named below. Subject to the terms and conditions stated in the purchase agreement dated April 6, 2011, each Initial Purchaser named below has severally agreed to purchase, and we have agreed to sell to that Initial Purchaser, the principal amount of the Notes set forth opposite the Initial Purchaser’s name.

Initial Purchaser		Principal Amount of Notes
Citigroup Global Markets Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deutsche Bank AG, Singapore Branch . . . . . . . . . . . . . . . . . . . . . . . . . . .		US$150,000,000 US$150,000,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		US$300,000,000

The purchase agreement provides that the obligation of the Initial Purchasers to purchase the Notes is several and not joint and is subject to approval of legal matters by counsel and to other conditions. The Initial Purchasers must purchase all the Notes if they purchase any of the Notes.

The Initial Purchasers propose to resell the Notes at the offering price set forth on the cover page of this offering memorandum within the United States to qualified institutional buyers (as defined in Rule 144A) (“QIBs”) in reliance on Rule 144A and outside the United States in reliance on Regulation S. See “Transfer Restrictions.” The price at which the Notes are offered may be changed at any time without notice.

We have agreed that, for a period of 90 days from the date of this offering memorandum, we will not, without the prior written consent of the Initial Purchasers, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities issued or guaranteed by us. The Initial Purchasers in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

The Notes will constitute a new class of securities with no established trading market. Approval-in-principle has been received for the listing and quotation of the Notes on the Official List of the Singapore Exchange Securities Trading Limited (the “SGX-ST”). However, we cannot assure you that the prices at which the Notes will sell in the market after this offering will not be lower than the initial offering price or that an active trading market for the Notes will develop and continue after this offering. The Initial Purchasers have advised us that they currently intend to make a market in the Notes. However, they are not obligated to do so and they may discontinue any market-making activities with respect to the Notes at any time without notice. Accordingly, we cannot assure you as to the liquidity of, or the trading market for, the Notes.

Deutsche Bank AG, Singapore Branch (or its affiliates) may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids to the extent permitted by applicable laws and regulations. Over-allotment involves sales in excess of the offering size, which creates a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Covering transactions involve purchase of the Notes in the open market after the distribution has been completed in order to cover short positions. Penalty bids permit Deutsche Bank AG, Singapore Branch (as stabilizing manager) to reclaim a selling concession from a dealer when the Notes originally sold by such dealer are purchased in a stabilizing transaction or a covering transaction

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to cover short positions. Neither the Company nor the Initial Purchasers make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes. In addition, neither the Company nor the Initial Purchasers makes any representation that Deutsche Bank AG, Singapore Branch (as stabilizing manager) will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

We expect to deliver the Notes against payment for the Notes on or about the date specified in the last paragraph of the cover page of this offering memorandum, which will be the fifth business day following the date of the pricing of the Notes. Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally settle in three business days, purchasers who wish to trade Notes on the date of pricing or the next succeeding business day will be required, by virtue of the fact that the Notes initially will settle in T+5, to specify alternative settlement arrangements to prevent a failed settlement. Purchasers of the Notes who wish to trade the Notes on the date of pricing or the next succeeding business day should consult their own advisor.

The Initial Purchasers or its affiliates have performed commercial banking, investment banking or advisory services for us from time to time for which they have received customary fees and reimbursement of expenses. The Initial Purchasers or its affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of business for which they may receive customary fees and reimbursement of expenses.

We and the Subsidiary Guarantors have agreed to indemnify the Initial Purchasers against certain liabilities, including liabilities under the U.S. Securities Act, or to contribute to payments that the Initial Purchasers may be required to make because of any of those liabilities.

Selling Restrictions

General

No action has been taken or will be taken in any jurisdiction by the Company or the Initial Purchasers that would permit a public offering of the Notes, or the possession, circulation or distribution of this offering memorandum or any other material relating to the Notes or this offering, in any jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this offering memorandum nor such other material may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of such country or jurisdiction.

United States

The Notes and the Subsidiary Guarantees have not been and will not be registered under the Securities Act or any state securities laws and may not be offered or sold within the United States except in transactions exempt from, or not subject to, the registration requirements of the Securities Act and applicable state securities laws. In addition, until 40 days after the commencement of this offering, an offer or sale of Notes within the United States by a dealer (whether or not participating in this offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A or another exemption from registration under the Securities Act.

The Initial Purchasers, through their affiliates, acting as selling agents where applicable, propose to offer the Notes to certain persons in offshore transactions in reliance on Regulation S and in accordance with applicable law and propose to offer the Notes to QIBs in the United States pursuant to Rule 144A. Except as permitted under the purchase agreement, the Notes will not be offered, sold or delivered within the United States. Any offer or sale of the Notes in the

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United States in reliance on Rule 144A will be made by broker-dealer affiliates who are registered as such under the Exchange Act. Terms used in this paragraph have the meanings given to them by Regulation S.

United Kingdom

No invitation or inducement to engage in investment activity (within the meanings of section 21 of the Financial Services and Markets Act 2000 (the “FSMA”) received by the Initial Purchasers in connection with the issue or sale of the Notes may be communicated or caused to be communicated except in circumstances in which section 21(1) of the FSMA does not apply to the Initial Purchasers. All applicable provisions of the FSMA must be complied with respect to anything done or to be done by the Initial Purchasers in relation to any Notes in, from or otherwise involving the United Kingdom.

Hong Kong

This offering memorandum has not been and will not be registered with the Registrar of Companies in Hong Kong. Accordingly, except as mentioned below, this offering memorandum may not be issued, circulated or distributed in Hong Kong. A copy of this offering memorandum may, however, be issued to a limited number of prospective applicants for the Notes in Hong Kong in a manner which does not constitute an offer of the Notes to the public in Hong Kong or an issue, circulation or distribution in Hong Kong of a prospectus for the purposes of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong). No advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person other than with respect to the Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571. Laws of Hong Kong) and any rules made thereunder.

Japan

The Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948) (as amended) (the “FIEL”), and disclosure under the FIEL has not been made with respect to the Notes. Accordingly, the Notes may not be offered or sold, directly or indirectly in Japan or to, or for the account of, any resident of Japan, or to others for reoffering or re-sale, directly or indirectly in Japan or to, or for the benefit of, any resident of Japan, except pursuant to any exemption from the registration requirements of the FIEL and otherwise in compliance with the FIEL and other applicable provisions of Japanese laws and regulations. As used in this paragraph, “resident of Japan” means any person residing in Japan, including any corporation or other entity organized under the laws of Japan.

Singapore

This offering memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this offering memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.

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(a) an institutional investor (as defined in Section 4A of the SFA);
(b) a relevant person (as defined in Section 275(2) of the SFA); or
(c) any person pursuant to an offer referred to in Section 275(1A) of the SFA,

unless expressly specified otherwise in Section 276(7) of the SFA.

Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

(1) to an institutional investor (under Section 274 of the SFA), or to a relevant person (as defined in Section 275(2) of the SFA) and in accordance with the conditions specified in Section 275 of the SFA;
(2) (in the case of a corporation) where the transfer arises from an offer referred to in Section 276(3)(i)(B) of the SFA or (in the case of a trust) where the transfer arises from an offer referred to in Section 276(4)(i)(B) of the SFA;
(3) where no consideration is or will be given for the transfer;
(4) where the transfer is by operation of law; or
(5) as specified in Section 276(7) of the SFA.

PRC

This offering memorandum does not constitute a public offer of the Notes, whether by sale of by subscription, in the PRC. The Notes will not be offered or sold within the PRC by means of this offering memorandum or any other document.

Cayman Islands

No Notes will be offered or sold to the public in the Cayman Islands.

British Virgin Islands

No invitation will be made directly or indirectly to any person resident in the British Virgin Islands to subscribe for any of the Notes.

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TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers are advised to consult their legal counsel prior to making any offer sale, resale, charge or other transfer of the Notes.

United States

The Notes and the Subsidiary Guarantees have not been and will not be registered under the U.S. Securities Act and may not be offered, sold or delivered within the United States (as defined in Regulation S under the U.S. Securities Act) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Accordingly, the Notes are being offered and sold only (1) to QIBs in compliance with Rule 144A and (2) outside the United States in offshore transactions in reliance on Regulation S under the U.S. Securities Act.

By its purchase of the Notes, each purchaser of the Notes will be deemed to:

represent that it is purchasing the Notes for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is: (i) a QIB, and is aware that the sale to it is being made in reliance on Rule 144A; or (ii) a purchaser that is outside the United States;
acknowledge that the Notes have not been and will not be registered under the U.S. Securities Act and may not be offered or sold within the United State except as set forth below;
agree that if it is a purchaser other than a purchaser outside the United States and if it should resell or otherwise transfer the Notes, it will do so only: (a) if such purchaser is an initial investor, (i) to us or any subsidiary thereof; (ii) inside the United States to a QIB in compliance with Rule 144A; (iii) outside the United States in an offshore transaction in compliance with Rule 904 under the U.S. Securities Act (if available); or (iv) pursuant to an exemption from registration under the U.S. Securities Act provided by Rule 144 (if available), in each case in accordance with any applicable securities law of any State of the United States or (b) pursuant to an effective registration statement under the U.S. Securities Act;
agree that it will inform each person to whom it transfers the Notes of any restrictions on transfer of such Notes;
understand that if it is a purchaser outside the United States, the Notes will be represented by the Regulation S Global Note and that transfers thereto are restricted as described under “Description of the Notes — Book-Entry; Delivery and Form.” If it is a QIB, it understands that the Notes offered in reliance on Rule 144A will be represented by the Restricted Global Note. Before any interest in the Restricted Global Note may be offered, sold, charged or otherwise transferred to a person who is not a QIB, the transferee will be required to provide the Trustee with a written certification (the form of which certification can be obtained from the Trustee) as to compliance with the transfer restriction referred to above;

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understand that each Note sold within the United States will bear a legend to the following effect unless otherwise agreed by us and the holder thereof (unless such Note has been sold pursuant to a registration statement that has been declared effective under the U.S. Securities Act):

THIS NOTE AND THE SUBSIDIARY GUARANTEES RELATED TO THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND ACCORDINGLY, THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(d) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) IF SUCH PURCHASER IS AN INITIAL INVESTOR, (I) TO FUFENG GROUP LIMITED; (II) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; (III) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT; (IV) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE); (B) IF SUCH PURCHASER IS A SUBSEQUENT INVESTOR OF AN INTEREST IN THE RESTRICTED GLOBAL NOTE, AS SET FORTH IN (A) ABOVE AND, IN ADDITION, PURSUANT TO ANY AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (PROVIDED THAT AS A CONDITION TO THE REGISTRATION OF TRANSFER OF ANY NOTES OTHERWISE THAN AS DESCRIBED IN (A)(I), (A)(II) OR (A)(III) ABOVE OR (C) BELOW, FUFENG GROUP LIMITED, THE SUBSIDIARY GUARANTORS, THE TRUSTEE OR THE PAYING AGENT AND NOTE REGISTRAR MAY, IN CIRCUMSTANCES THAT ANY OF THEM DEEMS APPROPRIATE, REQUIRE EVIDENCE AS TO COMPLIANCE WITH ANY SUCH EXEMPTION); OR (C) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION” AND “UNITED STATES” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE AND THE PAYING AND TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS; and

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acknowledge that we, the Paying Agent, the Initial Purchasers and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements, and agree that if any of the acknowledgements, representations or agreements deemed to have been made by its purchase of the Notes are no longer accurate, it shall promptly notify us, the Paying Agent and the Initial Purchasers. If it is acquiring any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such account.

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RATINGS

The Notes have been provisionally rated “BB” by Standard & Poor’s Rating Services and “BB” by Fitch Rating. The ratings reflect the rating agencies’ assessment of the likelihood of timely payment of the principal of and interest on the Notes. The ratings do not address the payment of any Additional Amounts and do not constitute recommendations to purchase, hold or sell the Notes inasmuch as such ratings do not comment as to market price or suitability for a particular investor. We cannot assure you that the ratings will remain in effect for any given period or that the ratings will not be revised by such rating agencies in the future if in their judgment circumstances so warrant. Each such rating should be evaluated independently of any other rating on the Notes, on other of our securities, or on us.

LEGAL MATTERS

Certain legal matters with respect to the Notes will be passed upon for us by Sidley Austin as to matters of United States federal and New York law, Li & Partners as to matters of Hong Kong law, Conyers Dill & Pearman as to matters of Cayman Islands law and British Virgin Islands law, and King & Wood as to matters of PRC law. Certain legal matters will be passed upon for the Initial Purchasers by Davis Polk & Wardwell LLP as to matters of United States federal and New York law and Jingtian & Gongcheng as to matters of PRC law.

INDEPENDENT AUDITOR

Our audited consolidated financial statements as of and for each of the years ended December 31, 2009 and 2010, included in this offering memorandum had been audited by PricewaterhouseCoopers, certified public accountants, as stated in their reports appearing herein, and in our annual report for the year ended December 31, 2009 and 2010. Our audited consolidated financial statements as of and for the year ended December 31, 2008, incorporated by reference in this offering memorandum had been audited by PricewaterhouseCoopers, certified public accountants, as stated in our annual report for the year ended December 31, 2008.

For the purpose of the offers and sales outside the United States in reliance on Regulation S and within the United States to “qualified institutional buyers” in reliance on Rule 144A under the Securities Act, PricewaterhouseCoopers has acknowledged the references to its name and the inclusion of its reports in the form and context in which they are respectively included in this offering memorandum.

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GENERAL INFORMATION

Consents

We have obtained all necessary consents, approvals and authorizations in the Cayman Islands, the British Virgin Islands and Hong Kong in connection with the issue and performance of the Notes and the Subsidiary Guarantees. The entering into of the Indenture governing the Notes and the issue of the Notes have been authorized by a resolution of our board of directors dated March 25, 2011.

Documents Available

For so long as any of the Notes are outstanding, copies of the Indenture governing the Notes may be inspected free of charge during normal business hours on any weekday (except public holidays) at the specified offices of the paying agents.

For so long as any of the Notes are outstanding, copies of our Accountant’s Report for the three years ended December 31, 2008, 2009 and 2010, if any, may be obtained during normal business hours on any weekday (except public holidays) at the specified offices of the paying agents.

Clearing System and Settlement

The Notes have been accepted for clearance through the facilities of Euroclear, Clearstream and DTC. Certain trading information with respect to the Notes is set forth below:

Restricted Global Notes . . . . . Regulation S Global Notes . . .	CUSIP 35953H AA3 G36844 AB7	ISIN US 35953H AA32 USG36844 AB78	Common Code
			060809992 060810001

Only Notes evidenced by a Global Note have been accepted for clearance through Euroclear, Clearstream and DTC.

Listing of the Notes

Approval in-principle has been received for the listing and quotation of the Notes on the Official List of the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained in this offering memorandum. Admission to the Official List of the SGX-ST and quotation of any Notes on the SGX-ST is not to be taken as an indication of the merits of the Company, the Subsidiary Guarantors or any other subsidiary or associated company of the Company, the Notes or the Subsidiary Guarantees. The Notes will be traded on the SGX-ST in a minimum board lot size of US$200,000 for so long as the Notes are listed on the SGX-ST.

For so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, we will appoint and maintain a Paying Agent in Singapore, where the Notes may be presented or surrendered for payment or redemption, in the event that a Global Note is exchanged for definitive Notes. In addition, in the event that a Global Note is exchanged for definitive Notes, an announcement of such exchange shall be made by or on behalf of us through the SGX-ST and such announcement will include all material information with respect to the delivery of the definitive Notes, including details of the Paying Agent in Singapore.

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SUMMARY OF CERTAIN DIFFERENCES BETWEEN HKFRS AND U.S. GAAP

The audited consolidated financial information included in this offering memorandum have been prepared and presented in accordance with HKFRS issued by the HKICPA. Certain differences between HKFRS and U.S. GAAP may have a material effect on the financial information included herein. Such differences, among others, involve the methods of measuring the amounts disclosed in the financial information and additional disclosures required by U.S. GAAP which have not been disclosed herein.

The matters described below summarize certain differences between HKFRS and U.S. GAAP that may be material to the consolidated financial information. The Company is responsible for preparing the summary below. Since the summary is not meant to be exhaustive, there is no assurance regarding the completeness of such summary. In addition, the Company has not prepared a reconciliation of the consolidated financial information and related footnote disclosure based on the differences between HKFRS and U.S. GAAP, and not quantified such differences. If any such quantification or reconciliation were to be undertaken, other potential accounting and disclosure differences may be required that are not identified below. Furthermore, no attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions or events are presented in the audited consolidated financial information or footnotes thereto. Additionally, no attempt has been made to identify future differences between HKFRS and U.S. GAAP that may affect the financial information as a result of prescribed changes in accounting standards. Regulatory bodies that promulgate HKFRS and U.S. GAAP have significant projects ongoing that could affect future comparisons such as this one. Finally, no attempt has been made to identify future differences between HKFRS and U.S. GAAP that may affect the financial information as a result of transactions or events that may occur in the future.

The Company believes that the application of U.S. GAAP would have a material effect on its financial information prepared and presented in accordance with HKFRS. Investors should consult their own professional advisors as to the differences between HKFRS and U.S. GAAP and how these differences would affect the financial information included herein. In making an investment decision, investors must rely upon their own examination of the financial information, the terms of this offering and other disclosure contained herein.

Inventories

Under HKFRS, a write-down of inventories to the lower of cost or market, which is represented by net realizable value, at the close of a fiscal period is a valuation allowance that can be subsequently reversed if the underlying facts and circumstances change.

Under U.S. GAAP, a write-down of inventories to the lower of cost or market, which is represented by the lower of the replacement cost or net realizable value minus normal profit margin, at the close of a fiscal period creates a new cost basis and no upward adjustments can be made subsequently if underlying facts and circumstances change.

Impairment of assets

Under HKFRS, an impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

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Under U.S. GAAP, when the asset’s carrying value exceeds its expected future undiscounted cash flow, the indication of impairment exists. An impairment loss is recognized for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. The reversal of asset impairment is not allowed.

Borrowing

Under HKFRS, borrowings are recognized initially at fair value, net of transaction costs incurred. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability, including fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties.

Under U.S. GAAP, transaction costs relating to borrowings should be deferred as an asset and amortized using the effective interest method over the life of the borrowing.

Capitalization of Borrowing costs

Under HKFRS, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset during the period of time that is required to complete and prepare the asset for its intended use.

Under U.S. GAAP, borrowing costs that are incurred prior to the asset being ready for its intended use, and that could have been avoided if the expenditures for the qualifying asset had not been made, are capitalized.

Deferred income taxes

Under HKFRS, deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Under U.S. GAAP, deferred tax assets and liabilities are recognized in full for temporary differences by applying enacted statutory rates applicable to future years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax asset will not be realized. “More likely than not” is defined as a likelihood of more than 50%. In determining whether a valuation allowance is necessary, a company may not generally consider future anticipated income in measuring the valuation allowance if that company has a history of losses.

Segment reporting

Under HKFRS, a business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are difference from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are difference from those of segments operating in other economic environments. HKFRS requires public entities to report primary and secondary (business and geographic) segments based on risks and returns and internal reporting structure.

204

Under U.S. GAAP, public entities are required to report on operating segments based on the way the chief operating decision-maker evaluates financial information for the purpose of allocating resources and assessing performance.

Cash flow statement

Under HKFRS, interest paid and dividends and interest received may be classified as cash flows from operating, investing or financing activities.

U.S. GAAP requires interest paid and dividends and interest received to be classified as operating activities.

205

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

Audited consolidated financial statements as of and for the year ended December 31, 2009 Report of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . F-8 Consolidated Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F-10–F-63 Audited consolidated financial statements as of and for the year ended December 31, 2010 Report of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-64 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-66 Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-68 Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . F-70 Consolidated Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-71 Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F-72–F-135	2009 Annual Report(1)
	39 41 43 45 46 47–100 2010 Annual Report(1)
	47 49 51 53 54 55–118

Audited consolidated financial statements as of and
for the year ended December 31, 2009
Report of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Consolidated Income Statement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Consolidated Statement of Changes in Equity
. . . . . . . . . . . . . . . . . . . .
F-8
Consolidated Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . .
F-10–F-63
Audited consolidated financial statements as of and
for the year ended December 31, 2010
Report of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-64
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-66
Consolidated Income Statement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-68
Consolidated Statement of Changes in Equity
. . . . . . . . . . . . . . . . . . . .
F-70
Consolidated Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-71
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F-72–F-135

2009
Annual
Report(1)

39
41
43
45
46
47–100
2010
Annual
Report(1)

47
49
51
53
54
55–118

Note:

(1) The audited consolidated financial statements of the Group set forth herein have been reproduced from the Company’s annual report for the year ended December 31, 2009 and 2010 and page references are references to pages set forth in such annual report.

F-1

Independent Auditor’s Report

To the Shareholders of Fufeng Group Limited

(incorporated in the Cayman Islands with limited liability)

We have audited the consolidated financial statements of Fufeng Group Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 41 to 100, which comprise the consolidated and company balance sheets as at 31 December 2009, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors of the Company are responsible for the preparation and the true and fair presentation of these consolidated financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

F-2

Independent Auditor’s Report

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2009 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

PricewaterhouseCoopers Certified Public Accountants

Hong Kong, 23 March 2010

F-3

Consolidated Balance Sheet

As at 31 December 2009

		2009	2008
	Note	*RMB’000*	RMB’000
ASSETS
Non-current assets
Leasehold land payments	5	140,160	132,334
Property, plant and equipment	6	2,507,897	1,954,845
Deferred income tax assets	9	5,162	423
		2,653,219	2,087,602
Current assets
Inventories	10	551,028	356,288
Trade and other receivables	11	687,782	548,355
Current income tax recoverable		–	2,654
Short-term bank deposits	12	26,310	42,860
Cash and cash equivalents	12	342,682	224,706
		1,607,802	1,174,863
Total assets		4,261,021	3,262,465
EQUITY
Capital and reserves attributable to the Shareholders
Share capital	13	169,034	169,034
Share premium	13
– Proposed final dividend		219,240	146,293
– Others		566,200	931,851
Other reserves	14	(171,080 )	(247,904 )
Retained earnings	16	1,610,317	742,240
Total equity		2,393,711	1,741,514
LIABILITIES
Non-current liabilities
Deferred income	17	90,880	27,798
Borrowings	18	180,000	312,000
Deferred income tax liabilities	9	24,221	10,928
		295,101	350,726
Current liabilities
Trade, other payables and accruals	19	1,140,475	887,533
Current income tax liabilities		13,734	–
Current portion of deferred income	17	–	6,692
Borrowings	18	418,000	276,000
		1,572,209	1,170,225
Total liabilities		1,867,310	1,520,951
Total equity and liabilities		4,261,021	3,262,465
Net current assets		35,593	4,638
Total assets less current liabilities		2,688,812	2,092,240

The notes on pages 47 to 100 are an integral part of these consolidated financial statements.

The financial statements on page 41 to 100 were approved by the Board on 23 March 2010 and were signed on its behalf.

Li Xuechun Director

Gong Qingli Director

F-4

Company Balance Sheet

As at 31 December 2009

		2009	2008
	Note	*RMB’000*	RMB’000
ASSETS
Non-current assets
Property, plant and equipment	6	54	134
Investment in a subsidiary	7	407,831	401,698
Loans to subsidiaries	7	–	176,281
		407,885	578,113
Current assets
Loans to subsidiaries	7	196,699	–
Due from subsidiaries	7	577,990	578,886
Deposits and other receivables	11	1,451	2,118
Cash and cash equivalents	12	7,403	8,595
		783,543	589,599
Total assets		1,191,428	1,167,712
EQUITY
Capital and reserves attributable to the Shareholders
Share capital	13	169,034	169,034
Share premium	13
– Proposed final dividend		219,240	146,293
– Others		566,200	931,851
Other reserves	14	46,482	29,866
Retained earnings/(Accumulated losses)	16	179,285	(122,536 )
Total equity		1,180,241	1,154,508
LIABILITIES
Current liabilities
Due to subsidiaries	7	10,521	10,521
Other payables and accruals	19	666	2,683
		11,187	13,204
Total liabilities		11,187	13,204
Total equity and liabilities		1,191,428	1,167,712
Net current assets		772,356	576,395
Total assets less current liabilities		1,180,241	1,154,508

The notes on pages 47 to 100 are an integral part of these financial statements.

The financial statements on page 41 to 100 were approved by the Board on 23 March 2010 and were signed on its behalf.

Li Xuechun

Gong Qingli Director

Director

F-5

Consolidated Income Statement

For the year ended 31 December 2009

		2009	2008
	Note	*RMB’000*	RMB’000
Revenue	4	4,632,884	3,585,343
Cost of sales	21	(3,233,277 )	(2,941,011 )
Gross profit		1,399,607	644,332
Other income	20	63,908	44,300
Selling and marketing expenses	21	(215,715 )	(166,407 )
Administrative expenses	21	(194,910 )	(141,961 )
Other operating expenses	21	(4,042 )	(12,222 )
Operating profit		1,048,848	368,042
Finance costs	24	(25,251 )	(42,662 )
Profit before income tax		1,023,597	325,380
Income tax expense	25	(95,312 )	(30,674 )
Profit for the year and attributable to the Shareholders		928,285	294,706
Earnings per share for profit attributable to the Shareholders
during the year(expressed in RMB cent per share)
– basic	26	55.92	17.75
– diluted	26	55.88	17.75
Dividends	27	219,240	146,293

The notes on pages 47 to 100 are an integral part of these consolidated financial statements.

F-6

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2009

		2009	2008
	Note	*RMB’000*	RMB’000
Profit for the year		928,285	294,706
Other comprehensive income for the year		–	–
Total comprehensive income for the year		928,285	294,706
Total comprehensive income attributable to the Shareholders		928,285	294,706

The notes on pages 47 to 100 are an integral part of these consolidated financial statements.

F-7

Consolidated Statement of Changes in Equity

For the year ended 31 December 2009

			Attributable to the Shareholders	Attributable to the Shareholders	Attributable to the Shareholders
		Share	Share	Other	Retained
		capital	premium	reserves	earnings	Total
	Note	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Balance at 1 January 2008		169,034	1,091,673	(276,084 )	464,193	1,448,816
Comprehensive Income
Profit for the year	16	–	–	–	294,706	294,706
Total comprehensive income		–	–	–	294,706	294,706
Transactions with owners
Profit appropriation	14, 16	–	–	16,659	(16,659 )	–
Employee share options scheme:
– Value of employee service	14, 15	–	–	11,521	–	11,521
Dividends	13	–	(13,529 )	–	–	(13,529 )
Total transactions with owners		–	(13,529 )	28,180	(16,659 )	(2,008 )
Balance at 31 December 2008		169,034	1,078,144	(247,904 )	742,240	1,741,514
Comprehensive Income
Profit for the year	16	–	–	–	928,285	928,285
Total comprehensive income		–	–	–	928,285	928,285
Transactions with owners
Profit appropriation	14, 16	–	–	60,208	(60,208 )	–
Employee share options scheme:
– Value of employee service	14, 15	–	–	16,616	–	16,616
Dividends	13, 27	–	(292,704 )	–	–	(292,704 )
Total transactions with owners		–	(292,704 )	76,824	(60,208 )	(276,088 )
Balance at 31 December 2009		169,034	785,440	(171,080 )	1,610,317	2,393,711

The notes on pages 47 to 100 are an integral part of these consolidated financial statements.

F-8

Consolidated Cash Flow Statement

For the year ended 31 December 2009

		2009	2008
	Note	*RMB’000*	RMB’000
Cash flows from operating activities
Cash generated from operations	28(a)	636,522	509,811
Interest paid	24	(25,251 )	(42,662 )
Income tax paid		(25,097 )	(18,206 )
Net cash flows generated from operating activities		586,174	448,943
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired		–	(3,202 )
Purchase of leasehold land payments		(10,800 )	(46,846 )
Purchases of property, plant and equipment		(217,754 )	(355,624 )
Proceeds from disposal of property, plant and equipment	28(b)	4,311	4,224
Interest received	20	1,502	2,152
Net cash used in investing activities		(222,741 )	(399,296 )
Cash flows from financing activities
Dividends paid to the Company’s shareholders	13	(292,704 )	(13,529 )
Government grants received		37,247	20,068
Proceeds from bank borrowings		646,000	750,000
Repayments of bank borrowings		(636,000 )	(810,329 )
Net cash used in financing activities		(245,457 )	(53,790 )
Net increase/(decrease) in cash and cash equivalents		117,976	(4,143 )
Cash and cash equivalents at beginning of the year	12	224,706	228,849
Cash and cash equivalents at end of the year	12	342,682	224,706
		2009	2008
	Note	*RMB’000*	RMB’000
Cash generated from operations	28(a)	636,522	509,811
Notes receivable endorsed to purchase property, plant and equipment	28(c)	320,766	–
Total		957,288	509,811
Purchases of property, plant and equipment by cash		(217,754 )	(355,624 )
Notes receivable endorsed to purchase property, plant and equipment	28(c)	(320,766 )	–
Total		(538,520 )	(355,624 )

The notes on pages 47 to 100 are an integral part of these consolidated financial statements.

F-9

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

1. General information

The Company together with its subsidiaries are hereinafter collectively referred to as the Group. The Group is mainly engaged in the manufacture and sales of fermentation-based food additive and biochemical products and starch-based products. The Group has manufacturing plants in Shandong Province, Shaanxi Province and Inner Mongolia Autonomous Region of the PRC and sells mainly to customers located in the PRC.

The Company is a limited liability company incorporated in the Cayman Islands. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.

The Company has its primary listing on The Stock Exchange of Hong Kong Limited.

These consolidated financial statements are presented in RMB, unless otherwise stated. These consolidated financial statements have been approved for issue by the Board on 23 March 2010.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of the Group 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. However there are no critical estimates or judgements considered by the management for the year ended 31 December 2009.

Changes in accounting standards and interpretations

(a) New and amended standards adopted by the group

The Group has adopted the following new and amended HKFRS as of 1 January 2009:

HKFRS 7 “Financial Instruments – Disclosures” (amendment) – effective 1 January 2009. The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on earnings per share.

F-10

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(a) New and amended standards adopted by the Group (Continued)
HKAS 1 (revised). “Presentation of financial statements” – effective 1 January 2009. The revised standard prohibits the presentation of items of income and expenses (that is, “non-owner changes in equity”) in the statement of changes in equity, requiring “non-owner changes in equity” to be presented separately from owner changes in equity in a statement of comprehensive income. As a result the group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.
HKFRS 2 (amendment), “Share-based payment” (effective 1 January 2009) deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation there of subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group and Company have adopted HKFRS 2 (amendment) from 1 January 2009. The amendment does not have a material impact on the Group’s or the Company’s financial statements.
HKFRS 8, “Operating segments” (effective 1 January 2009). HKFRS 8 replaces HKAS 14, “Segment reporting”, and aligns segment reporting with the requirements of the US standard SFAS 131, “Disclosures about segments of an enterprise and related information”. The new standard requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting purposes. The segments are reported in a manner that is more consistent with the internal reporting provided to the chief operating decision-maker. Adoption of HKFRS 8 has an impact on disclosure but does not have any effect of the Group’s operating results, financial position or comprehensive income.

F-11

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2010 or later periods, but the Group has not early adopted them:

HK(IFRIC) 17 “Distribution of non-cash assets to owners” (effective on or after 1 July 2009). The interpretation is part of the HKICPA’s annual improvements project published in May 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes noncash assets to shareholders either as a distribution of reserves or as dividends. HKFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. The Group and Company will apply HK(IFRIC) 17 from 1 January 2010. It is not expected to have a material impact on the Group’s or the Company’s financial statements.
HKAS 27 (revised), “Consolidated and separate financial statements”, (effective from 1 July 2009). The revised standard requires the effects of all transactions with minority interest to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The Group will apply HKAS 27 (revised) prospectively to transactions with minority interest from 1 January 2010.
HKFRS 3 (revised), “Business combinations” (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply HKFRS 3 (revised) prospectively to all business combinations from 1 January 2010.
HKAS 38 (amendment), “Intangible Assets” (effective from 1 July 2009). The amendment is part of the HKICPA’s annual improvements project published in May 2009 and the Group and Company will apply HKAS 38 (amendment) from the date HKFRS 3 (revised) is adopted. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and it permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. The amendment will not result in a material impact on the Group’s or the Company’s financial statements.

F-12

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group (Continued)
HKFRS 5 (amendment), “Measurement of non-current assets (or disposal groups) classified as held for sale”. The amendment is part of the HKICPA’s annual improvements project published in May 2009. The amendment provides clarification that HKFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of HKAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of HKAS 1. The Group and Company will apply HKFRS 5 (amendment) from 1 January 2010. It is not expected to have a material impact on the Group’s or Company’s financial statements.
HKAS 1 (amendment), “Presentation of financial statements”. The amendment is part of the HKICPA’s annual improvements project published in May 2009. The amendment provides clarification that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The Group and Company will apply HKAS 1 (amendment) from 1 January 2010. It is not expected to have a material impact on the Group’s or Company’s financial statements.
HKFRS 2 (amendments), “group cash-settled share-based payment transactions” (effective from 1 January 2010). In addition to incorporating HK(IFRIC)-Int 8, “Scope of HKFRS 2”, and HK(IFRIC)Int 11, “HKFRS 2 – group and treasury share transactions”, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by the interpretation. The new guidance is not expected to have a material impact on the Group’s financial statements.

2.2 Consolidation

(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

F-13

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.2 Consolidation (Continued)

(a) Subsidiaries (Continued)

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group‘s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated.

Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Company’s balance sheet the investment in a subsidiary is stated at cost less provision for impairment losses (Note 2.7). The results of the subsidiary are accounted for by the Company on the basis of dividend received and receivable.

2.3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board that makes strategic decisions.

2.4 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional and the Group’s presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

2.5 Leasehold land payments

Leasehold land payments represent up-front prepayments made for the usage of leasehold land in the PRC less accumulated amortisation and any impairment losses. Amortisation is calculated using the straight-line method to allocate the up-front prepayments for land over the remaining lease term.

Amortisation on leasehold land payments is calculated using the straight-line method to allocate their costs over their estimated useful lives (10 to 50 years).

F-14

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.6 Property, plant and equipment

Construction in progress includes plant under construction and machinery under installation and testing and which, upon completion, management intends to hold as property, plant and equipment. They are carried at cost which includes cost of construction, plant and equipment and other direct cost plus borrowing costs that used to finance these projects during the construction period less accumulated impairment losses if any. No depreciation is provided for construction in progress. On completion, the relevant assets are transferred to property, plant and equipment at cost less accumulated impairment losses.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred.

Depreciation on property, plant and equipment except for construction in progress is calculated using the straight-line method to allocate their costs to their residual values over their estimated useful lives, as follows:

Plant	15~20 years
Machinery	8~10 years
Furniture and fixtures	3~8 years
Vehicles	5~8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.7).

Gains and losses on disposals are determined by comparing the proceeds with carrying amount. These are included in the income statement under the other income and other operating expenses respectively.

2.7 Impairment of investment in subsidiaries and non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.

F-15

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.8 Financial Assets

(a) Classification

The Group classifies its financial assets under the category of loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise “trade and other receivables”, “short-term bank deposits” and “cash and cash equivalents” in the balance sheet (Notes 2.10 and 2.11).

(b) Recognition and measurement

Loans and receivables are carried at amortised cost using the effective interest method.

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment testing of trade receivables is described in Note 2.10.

2.9 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling and marketing expenses.

2.10 Trade and other receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the loss is recognised in the consolidated income statement within “administrative expenses”. When a receivable is uncollectible, it is written off against the allowance account for receivables. Subsequent recoveries of amounts previously written off are credited against administrative expense in the income statement.

2.11 Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less.

F-16

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.12 Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

2.13 Trade and other payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

2.14 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

2.15 Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

F-17

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.15 Current and deferred income tax (Continued)

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income taxes assets and liabilities relate to incomes taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

2.16 Employee benefits – pension

Group companies operate various pension schemes. In accordance with the rules and regulations in the PRC, the employees of the Group’s subsidiaries established in the PRC participate in defined contribution retirement benefit plans organised by Shandong Provincial, Shaanxi Provincial, Jiangsu Provincial and Inner Mongolia Autonomous Regional governments. The Shandong Provincial, Shaanxi Provincial, Jiangsu Provincial and Inner Mongolia Autonomous Regional governments undertake to assume the retirement benefit obligations of all existing and future retired employees payable under the plan described above. Contributions to these plans are expensed as incurred and other than these monthly contributions, the Group has no further obligation for the payment of retirement benefits of its employees. The assets of these plans are held separately from those of the Group in an independent fund managed by the PRC government.

The Group’s contributions to the defined contribution retirement benefit plan are charged to the income statement as incurred.

2.17 Share-based payments

The Group operates two equity-settled, share-based compensation plans, under which the Group receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted, including the impact of any service and non-market performance vesting conditions (for example, remaining an employee of the entity over a specified time period). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total amount expensed is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

The grant by the Company of options over its equity instruments to the employees of subsidiaries in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in a subsidiary, with a corresponding credit to equity.

F-18

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.18 Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

2.19 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the consolidated income statement over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to the acquisition of property, plant and equipment are included in liabilities as deferred income and are credited to the consolidated income statement over the periods and in the proportions in which depreciation on these assets is charged.

2.20 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sales are capitalised as part of the cost of that asset during the period of time that is required to complete and prepare the asset for its intended use.

All other borrowing costs are charged to the income statement in the year in which they are incurred.

2.21 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

F-19

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

2. Summary of significant accounting policies (Continued)

2.21 Revenue recognition (Continued)

(a) Sales of goods

Sales of goods are recognised when the Group has delivered products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured.

(b) Interest income

Interest income is recognised using the effective interest method.

2.22 Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

2.23 Research and development

Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled:

(a) it is technically feasible to complete the intangible asset so that it will be available for use;
(b) management intends to complete the intangible asset and use it;
(c) there is an ability to use the intangible asset;
(d) it can be demonstrated how the intangible asset will generate probable future economic benefits;
(e) adequate technical, financial and other resources to complete the development and to use the intangible asset are available; and
(f) the expenditure attributable to the intangible asset during its development can be reliably measured.

Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life, not exceeding five years.

2.24 Dividend distribution

Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s and Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders, or directors, when applicable.

F-20

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

3. Financial risk management

3.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

(a) Market risk

(i) Foreign exchange risk

The Directors do not consider the exposure to foreign exchange risk is significant to the Group’s operation as the Group mainly operates in the PRC with most of the transactions denominated and settled in RMB. Therefore, the Group has not used any derivatives to hedge its exposure to foreign exchange risk for the year ended 31 December 2009.

However, foreign currencies, mainly US$, are however received from sales of products to countries or areas outside the PRC (“Export Sales”). Foreign currencies received from Export Sales is approximately 11% (2008: 16%) of the Group’s total turnover for the year ended 31 December 2009. The Group manages the currency risk arising from sales of products by customers paying in advance or keeping the credit period available to customers as short as possible in order to reduce the effect on the fluctuation between US$, EUR and RMB.

Since the listing of the Company’s shares in the Main Board of the Stock Exchange in early 2007, the Group received listing proceeds denominated in HK$. The listing proceeds were mainly used for the expansion of the Group in the PRC. The Group manages foreign exchange risk arising from listing proceeds by remitting the necessary funds to PRC and translate into RMB as soon as practicable in order to reduce the effect on the fluctuation between HK$ and RMB.

The maximum exposures to the foreign exchange risks are disclosed in Note 11 and 12 respectively.

F-21

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)
(i) Foreign exchange risk (Continued)

The following table summarises the sensitivity of the Group’s financial assets to foreign exchange risk based on the assumption that RMB had strengthened/weakened by 10% against US$ and HK$ (pegged with US$) with all other variables held constant.

			Foreign exchange risk	Foreign exchange risk
		+10%		-10%
	Profit		Equity	Profit	Equity
	RMB’000		RMB’000	RMB’000	RMB’000
31 December 2009
Financial assets
Cash and cash equivalents	(991	)	(991 )	991	991
Trade and other receivables	(7,670	)	(7,670 )	7,670	7,670
Total (decrease)/increase	(8,661	)	(8,661 )	8,661	8,661
31 December 2008
Financial assets
Cash and cash equivalents	(1,122	)	(1,122 )	1,122	1,122
Trade and other receivables	(6,355	)	(6,355 )	6,355	6,355
Total (decrease)/increase	(7,477	)	(7,477 )	7,477	7,477

(ii) Cash flow and fair value interest rate risk

As the Group has no significant interest-bearing assets except for bank deposits and balances, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s exposure to changes in interest rates is mainly attributable to its current borrowings. A portion of current borrowings bear variable rates and expose the Group to cash flow interest rate risk.

Fair value interest rate risk arises from long-term borrowings, which bear fixed interest rates. The carrying amounts and fair values of the non-current borrowings have been disclosed in Note 18. The Group has not used any derivatives to hedge its exposure to interest rate risk for the year ended 31 December 2009.

F-22

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)
(ii) Cash flow and fair value interest rate risk (Continued)

The sensitivity analysis for interest rate risk is based on the assumption that: Interest rate had been 10% lower/higher from the year end rates with all other variables held constant:

			Interest rate risk	Interest rate risk
			-10%	+10%
	Carrying
	amount	Profit	Equity	Profit	Equity
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
31 December 2009
Financial liabilities
Borrowings bear variable rates	250,000	885	885	(885 )	(885 )
31 December 2008
Financial liabilities
Borrowings bear variable rates	158,000	545	545	(545 )	(545 )

(b) Credit risk

The Group has no significant concentrations of credit risk. The carrying amounts of cash and cash equivalents, short term bank deposits, trade and other receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group has policies that deposits are put in reputable banks. For sales of goods, customers of the Group usually pay in advance before the delivery of products. Credit will only be granted to some customers with long term relationship. The Group performs ongoing credit evaluations of its customers’ financial conditions and generally does not require collateral on trade receivables. Credit quality of the financial assets is disclosed in Note 8.

(c) Liquidity risk

Prudent liquidity risk management includes maintaining sufficient cash and the available credit facilities to meet obligations when they arise.

Management monitors the funding requirements of the Group and the availability of credit facilities in order to ensure the liquidity of the Group.

F-23

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(c) Liquidity risk (Continued)

The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

	Less than	Between 1 and
	1 year	2 years
	RMB’000	RMB’000
The Group
At 31 December 2009
Borrowings	418,000	180,000
Interests payments on bank borrowings (i)	22,873	6,040
Trade, other payables and accruals	1,000,387	–
Total	1,441,260	186,040
At 31 December 2008
Borrowings	276,000	312,000
Interests payments on bank borrowings (i)	8,711	34,873
Trade, other payables and accruals	776,688	–
Total	1,061,399	346,873

(i) The interests on borrowings are calculated based on borrowings held as at 31 December 2009 and 2008 without taking into account of future issues. Floating-rate interests are estimated using current interest rate as at 31 December 2009 and 2008 respectively.

F-24

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

3. Financial risk management (Continued)

3.2 Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital on the basis of the gearing ratio. This ratio is equal to total borrowings at the end of the year divided by total assets at the end of the corresponding year.

During 2009, the Group’s strategy, which was unchanged from 2008, was to maintain the gearing ratio within 10% to 20%. The gearing ratios at 31 December 2009 and 2008 were as following:

	2009	2008
	*RMB’000*	RMB’000
Total borrowings_(Note 18)_	598,000	588,000
Total assets	4,261,021	3,262,465
Gearing ratio	14.03%	18.02%

The decrease in the gearing ratio for the year ended 31 December 2009 resulted primarily from the expansion of the Group while the borrowing scale was kept almost the same.

3.3 Fair value estimation

Effective 1 January 2009, the Group adopted the amendment to HKFRS 7 for financial instruments that are measured in the balance sheet at fair value, which is not currently relevant for the Group as the Group does not have any financial instruments that are measured in the balance sheet on fair value as at 31 December 2009.

The carrying values less impairment provision of trade and other receivables, cash and cash equivalents and shortterm bank deposits are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

F-25

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

4. 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 sale of:

MSG, including MSG, glutamic acid, corn refined products, fertilisers, starch sweeteners, corn oil, chicken powder, pharmaceuticals and bricks;
Xanthan gum

Approximately 90% of the Group’s revenue and business activities are conducted in 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 2009 and 2008 are set out as following:

	2009	2008
	*RMB’000*	RMB’000
MSG	2,245,307	1,004,381
Glutamic acid	720,631	1,053,298
Corn refined products	557,523	509,849
Xanthan gum	408,124	451,739
Fertilisers	361,468	380,097
Starch sweeteners	245,168	163,002
Others	94,663	22,977
	4,632,884	3,585,343

F-26

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

4. Segment information (Continued)

The segment information and capital expenditure for the year ended 31 December 2009 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Revenue	4,224,760	408,124	–	4,632,884
Segment results	934,166	136,014	(21,332 )	1,048,848
Finance costs_(Note 24)_				(25,251 )
Profit before income tax				1,023,597
Income tax expense_(Note 25)_				(95,312 )
Profit for the year				928,285
Other segment items included in
the income statement
Depreciation_(Note 6)_	156,306	33,479	551	190,336
Amortisation of leasehold land payments_(Note 5)_	2,745	229	–	2,974
Reversal of write-down of inventories_(Note 10)_	(1,554 )	–	–	(1,554 )
Gain on disposal of property, plant and
equipment_(Note 28)_	(2,925 )	–	–	(2,925 )
Capital expenditure_(Notes 5 and 6)_	635,337	96,600	23,637	755,574

The segment assets and liabilities at 31 December 2009 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Segment assets and liabilities
Total assets	3,530,535	689,624	40,862	4,261,021
Total liabilities	1,529,617	334,088	3,605	1,867,310

F-27

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

4. Segment information (Continued)

The segment information and capital expenditure for the year ended 31 December 2008 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	3,133,604	451,739	–	3,585,343
Segment results	273,363	130,574	(49,499 )	354,438
Negative goodwill gained from acquisition_(Note 20)_				9,657
Waiver of payables due to debt restructuring for
a newly acquired subsidiary_(Note 20)_				3,947
Finance costs_(Note 24)_				(42,662 )
Profit before income tax				325,380
Income tax expense_(Note 25)_				(30,674 )
Profit for the year				294,706
Other segment items included in
the income statement
Depreciation_(Note 6)_	124,702	27,277	562	152,541
Amortisation of leasehold land payments_(Note 5)_	2,004	228	–	2,232
Write-down of inventories_(Note 10)_	1,338	–	–	1,338
Impairment provision for property, plant and
equipment_(Note 6)_	2,008	–	–	2,008
Loss on disposal of property, plant and
equipment_(Note 28)_	456	–	–	456
Capital expenditure_(Notes 5 and 6)_	354,934	223,942	10	578,886
The segment assets and liabilities at 31 December 2008 are as follows:
	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Segment assets and liabilities
Total assets	2,560,470	626,257	75,738	3,262,465
Total liabilities	1,111,634	406,634	2,683	1,520,951

F-28

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

4. Segment information (Continued)

The entity is domiciled in Mainland China. The result of its revenue from external customers in Mainland China is RMB4,141,402,000 (2008: RMB3,019,907,000) and the total of revenue from external customers from Hong Kong and other countries is RMB491,482,000 (2008: RMB565,436,000).

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 Mainland China is RMB2,648,003,000 (2008: RMB2,087,045,000), and the total of these non-current assets located in Hong Kong is RMB54,000 (2008: RMB134,000).

Revenues of approximately RMB375,304,000 (2008: RMB323,437,000) are derived from a single external customer. These revenues are attributable to the MSG segment.

5. Leasehold land payments – The Group

Leasehold land payments represent the prepaid operating lease payments for the medium term leasehold land (10 to 50 years) in the PRC located in Shandong Province, Shaanxi Province, Inner Mongolia Autonomous Region, Jiangsu Province and Beijing, and their net book values are analysed as follows:

Beijing, and their net book values are analysed as follows:
	2009	2008
	*RMB’000*	RMB’000
Outside Hong Kong, held on:
Leases of between 10 to 50 years	140,160	132,334

As at 31 December 2009 and 2008, the net book value of leasehold land pledged as security for the Group’s borrowings amounted to approximately RMB32,210,000 and RMB88,251,000 (Note 18), respectively.

	2009	2008
	*RMB’000*	RMB’000
Cost
At beginning of the year	141,922	70,426
Additions	10,800	63,447
Acquisition of a subsidiary	–	8,049
At end of the year	152,722	141,922
Amortisation
At beginning of the year	(9,588 )	(7,356 )
Charge for the year	(2,974 )	(2,232 )
At end of the year	(12,562 )	(9,588 )
Net book value
At end of the year	140,160	132,334

Amortisation expense is recorded in the administrative expenses in the consolidated income statement.

F-29

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

6. Property, plant and equipment

The Group

				2009
			Furniture		Construction
	Plant	Machinery	and fixtures	Vehicles	in progress	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Cost
At 1 January 2009	543,414	1,637,186	35,579	27,637	49,564	2,293,380
Additions	1,285	141,233	5,878	3,689	592,689	744,774
Transfer upon completion	118,522	284,285	–	–	(402,807 )	–
Disposals	(112 )	(122 )	(15 )	–	(2,781 )	(3,030 )
At 31 December 2009	663,109	2,062,582	41,442	31,326	236,665	3,035,124
Accumulated depreciation
At 1 January 2009	(42,911 )	(268,932 )	(12,061 )	(12,623 )	–	(336,527 )
Charge for the year	(26,006 )	(153,899 )	(7,054 )	(3,377 )	–	(190,336 )
Disposals	21	47	14	–	–	82
At 31 December 2009	(68,896 )	(422,784 )	(19,101 )	(16,000 )	–	(526,781 )
Provision for impairment loss
At 1 January 2009	–	–	–	–	(2,008 )	(2,008 )
Disposals	–	–	–	–	1,562	1,562
At 31 December 2009	–	–	–	–	(446 )	(446 )
Net book value
At 31 December 2009	594,213	1,639,798	22,341	15,326	236,219	2,507,897

F-30

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

6. Property, plant and equipment (Continued)

The Group (Continued)


			Furniture		Construction
	Plant	Machinery	and fixtures	Vehicles	in progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Cost
At 1 January 2008	380,057	1,293,417	22,133	19,535	206,843	1,921,985
Additions	–	186,091	12,845	10,298	253,332	462,566
Acquisition of a subsidiary	25,693	17,668	199	396	868	44,824
Transfer upon completion	137,711	273,365	403	–	(411,479 )	–
Disposals	(47 )	(133,355 )	(1 )	(2,592 )	–	(135,995 )
At 31 December 2008	543,414	1,637,186	35,579	27,637	49,564	2,293,380
Accumulated depreciation
At 1 January 2008	(26,911 )	(204,544 )	(6,592 )	(9,917 )	–	(247,964 )
Charge for the year	(16,005 )	(126,689 )	(5,470 )	(4,377 )	–	(152,541 )
Disposals	5	62,301	1	1,671	–	63,978
At 31 December 2008	(42,911 )	(268,932 )	(12,061 )	(12,623 )	–	(336,527 )
Provision for impairment loss
At 1 January 2008	–	–	–	–	–	–
Charge for the year	–	–	–	–	(2,008 )	(2,008 )
At 31 December 2008	–	–	–	–	(2,008 )	(2,008 )
Net book value
At 31 December 2008	500,503	1,368,254	23,518	15,014	47,556	1,954,845

As at 31 December 2009 and 2008, the net book values of plant and machinery pledged as security for the Group’s borrowings amounted to approximately RMB89,254,000 and RMB100,625,000, respectively (Note 18).

Depreciation expense included in the consolidated income statement is as follows:

	2009	2008
	*RMB’000*	RMB’000
Cost of sales	177,364	133,691
Administrative expenses	12,972	18,850
	190,336	152,541

F-31

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

6. Property, plant and equipment (Continued)

The Company

	2009	2008
	Furniture and	Furniture and
	fixtures	fixtures
	*RMB’000*	RMB’000
Cost
At beginning of the year	280	270
Additions	2	10
At end of the year	282	280
Accumulated depreciation
At beginning of the year	(146 )	(53 )
Charge for the year	(82 )	(93 )
At end of the year	(228 )	(146 )
Net book value
At end of the year	54	134

7. Investment in and loans to subsidiaries – The Company

	2009	2008
	*RMB’000*	RMB’000
Investment in a subsidiary (a)	407,831	401,698
Loans to subsidiaries (b)	196,699	176,281
Due from subsidiaries (c)	577,990	578,886
Due to subsidiaries (d)	10,521	10,521

F-32

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

7. Investment in and loans to subsidiaries – The Company (Continued)

(a) Investment in a subsidiary

	2009	2008
	*RMB’000*	RMB’000
Unlisted shares, at cost	407,831	401,698

The particulars of the Company’s directly and indirectly owned subsidiaries are disclosed in Note 31.

(b) Loans to subsidiaries

The current (2008: non-current) loans to subsidiaries, Summit Challenge and Expand Base as at 31 December 2009 and 2008, are unsecured, interest-free and repayable in 2010. As at 31 December 2009, the carrying amounts of the current loans to subsidiaries approximate their fair values. As at 31 December 2008, non-current loans to subsidiaries were initially recognised at fair value based on the present value of discounted cash flows using a discount rate of 7.47%, and were stated at amortised cost as at 31 December 2008.

(c) Due from subsidiaries

The amounts due from subsidiaries are unsecured, interest-free and repayable on demand, and their carrying amounts approximate their fair values as at 31 December 2009 and 2008.

(d) Due to subsidiaries

The amounts due to subsidiaries are unsecured, interest-free and repayable on demand, and their carrying amounts approximate their fair values as at 31 December 2009 and 2008.

F-33

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

8. Credit quality of financial assets

Trade receivables and notes receivables

The credit quality of financial assets that are neither past due nor impaired can be assessed by types of the financial assets and by reference to historical information about counterparty default rates. The Group categorises its trade receivables into the following:

Group 1 – Bank acceptance notes for which the repayments are guaranteed by large State-owned banks. Group 2 – Trade receivables due from customers with no defaults in the past. Group 3 – Trade receivables due from customers with some defaults in the past.

The Group

		2009	2008
		*RMB’000*	RMB’000
Group	1	514,519	449,736
Group	2	74,480	69,816
Group	3	4,527	4,622
		593,526	524,174

Cash and bank balances

The management considers the credit risks in respect of cash and bank deposits are relatively minimum as each counter party either bears a high credit rating or is State-owned PRC bank. The management believes the State is able to support the Stateowned PRC banks in the event of a crisis.

The Group categorises its cash in banks into the following:

Group 1 – Major international banks (Hang Seng Bank, ABN AMRO Bank N.V. and The Hong Kong and Shanghai Banking Corporation Limited.)
Group 2 – Top 4 banks in Mainland China (China Construction Bank, Bank of China, Agricultural Bank of China and Industrial and Commercial Bank of China)
Group 3 – Other State-owned banks in mainland PRC

The Group

		2009	2008
		*RMB’000*	RMB’000
Group	1	9,907	11,139
Group	2	264,129	137,972
Group	3	93,846	116,432
		367,882	265,543

F-34

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

8. Credit quality of financial assets (Continued)

The Company

		2009	2008
		*RMB’000*	RMB’000
Group	1	7,402	8,594
Group	2	–	–
Group	3	–	–
		7,402	8,594

None of the financial assets that are fully performing has been renegotiated in the current or last year.

9. Deferred income tax – The Group

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax income assets against current income tax liabilities and when the deferred income tax assets and liabilities relate to income taxed levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The offset amounts are as follows:

	2009	2008
	*RMB’000*	RMB’000
Deferred income tax assets:
– Deferred income tax assets to be recovered after more than 12 months	2,150	–
– Deferred income tax assets to be recovered within 12 months	3,012	423
	5,162	423
Deferred income tax liabilities:
– Deferred income tax liabilities to be settled after more than 12 months	(24,176 )	(10,883 )
– Deferred income tax liabilities to be settled within 12 months	(45 )	(45 )
	(24,221 )	(10,928 )
Deferred income tax liabilities, net	(19,059 )	(10,505 )

F-35

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

9. Deferred income tax – The Group (Continued)

The gross movement on the deferred income tax account is as follows:

	2009	2008
	*RMB’000*	RMB’000
Beginning balance of the year	(10,505 )	5,492
Income statement charge_(Note 25)_	(14,915 )	(15,997 )
Transferred to current income tax liabilities	6,361	–
Ending balance of the year	(19,059 )	(10,505 )

Deferred income tax is calculated on temporary differences under the liability method.

The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

Deferred income tax assets:

	Tax	Unrealised	Deferred
	losses	profit	income	Others	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
1 January 2008	6,390	–	–	–	6,390
(Charged)/Credited to income statement_(Note 25)_	(6,390 )	–	317	106	(5,967 )
31 December 2008	–	–	317	106	423
Credited to income statement_(Note 25)_	–	2,456	1,444	839	4,739
31 December 2009	–	2,456	1,761	945	5,162

Deferred income tax assets are recognised to the extent that the realisation of the related tax benefit through future taxable profit is probable. For year ended 31 December 2008 the Group reversed deferred income tax assets of RMB6,390,000 that can be carried forward against future taxable income because it was uncertain whether there will be sufficient profit to be net off in the near future. For year ended 31 December 2009, no tax losses occurred.

F-36

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

9. Deferred income tax – The Group (Continued)

Deferred income tax liabilities:

	Interest	Withholding
	capitalisation	tax	Total
	*RMB’000*	*RMB’000*	*RMB’000*
1 January 2008	898	–	898
Charged to income statement_(Note 25)_	30	10,000	10,030
31 December 2008	928	10,000	10,928
(Credited)/Charged to income statement_(Note 25)_	(46 )	19,700	19,654
Credited to current income tax liabilities	–	(6,361 )	(6,361 )
31 December 2009	882	23,339	24,221

Deferred income tax liabilities of RMB19,700,000 (2008: RMB10,000,000) have been recognised for the withholding tax that would be payable on the estimate of earnings of certain subsidiaries incorporated in PRC for 2009 that are expected to be distributed in the foreseeable future. The Group has no plan to distribute remaining earnings of the subsidiaries incorporated in PRC as at 31 December 2009. Unremitted earnings of those subsidiaries amounted to RMB672,704,000 as at 31 December 2009 (2008: RMB315,117,000).

10. Inventories – The Group

Inventories – The Group
	2009	2008
	*RMB’000*	RMB’000
Raw materials	222,083	151,821
Work-in-progress	39,182	32,496
Finished goods	289,763	171,971
	551,028	356,288

As at 31 December 2009, finished goods included a write-down of RMB1,418,000 (2008: RMB2,972,000). For the year ended 31 December 2009, the Group reversed RMB1,554,000 (2008: RMB216,000) of a previous inventory write-down as the Group sold part of the goods that were written down to third parties. The amount of RMB1,554,000 reversed was included in “cost of sales” in the income statement (Note 21 and 28).

F-37

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

11. Trade and other receivables

The Group

	2009	2008
	*RMB’000*	RMB’000
Trade receivables (a)	79,007	74,438
Less: provision for impairment of receivables (b)	(4,527 )	(4,622 )
Trade receivables, net	74,480	69,816
Notes receivables (c)	514,519	449,736
Prepayments for raw materials	30,265	13,473
Deposits and others	30,605	12,969
Value Added Tax recoverable	37,913	2,361
	687,782	548,355

(a) As at 31 December 2009 and 2008, the ageing analyses of trade receivables were as follows:

	2009	2008
	*RMB’000*	RMB’000
Within 3 months	69,727	61,761
3–12 months	3,537	8,055
Over 12 months	5,743	4,622
	79,007	74,438

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 2009, trade receivables of RMB3,601,000 (2008: RMB3,507,000) 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:

	2009	2008
	*RMB’000*	RMB’000
Past due within 3 months	1,167	1,685
Past due in 3-12 months	2,434	1,822
	3,601	3,507

F-38

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

11. Trade and other receivables (Continued)

The Group (Continued)

(b) As of 31 December 2009, trade receivables of RMB4,527,000 (2008: RMB4,622,000) were impaired and fully provided for. The individually impaired receivables mainly relate to Shenhua Pharmacutical. It was assessed that none of these receivables is expected to be recovered. The ageing of these receivables is as follows:

			2009	2008
			*RMB’000*	RMB’000
Past due over	12	months	4,527	4,622

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

	2009	2008
	*RMB’000*	RMB’000
As at 1 January	4,622	–
Acquisition of a subsidiary	–	5,546
Reversal of amounts subsequently collected	(95 )	(924 )
As at 31 December	4,527	4,622

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 2009, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB499,831,000 (2008: RMB430,721,000) 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.

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.

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

	2009	2008
	*RMB’000*	RMB’000
– RMB	611,083	484,807
– US$	75,582	63,548
– EUR	1,117	–
	687,782	548,355

F-39

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

11. Trade and other receivables (Continued)

The Company

	2009	2008
	*RMB’000*	RMB’000
Deposits and other receivables	1,451	2,118

12. Cash and bank balances

The Group

	2009	2008
	*RMB’000*	RMB’000
Cash and cash equivalents
– Cash on hand	1,110	2,023
– Cash in bank	341,572	222,683
	342,682	224,706
Short-term bank deposits
– Secured (a)	26,310	42,860
	368,992	267,566
Cash and bank balances denominated in
– RMB	359,084	256,342
– US$	48	123
– HK$	9,860	11,101
	368,992	267,566

(a) The short-term bank deposits as at 31 December 2009 included restricted bank deposits of RMB25,000,000 (2008: RMB30,500,000) pledged as security for issuing bank acceptance notes to suppliers, and of RMB1,310,000 (2008: RMB860,000) pledged as security for issuing letters of credit and letters of guarantee;

(b) The Group’s cash and bank balances denominated in RMB were deposited with banks in the PRC. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government.
(c) The weighted average effective interest rate on cash placed with banks and deposits by the Group were 0.47% and 0.86% per annum for the years ended 31 December 2009 and 2008, respectively.

F-40

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

12. Cash and bank balances (Continued)

The Company

	2009	2008
	*RMB’000*	RMB’000
Cash and cash equivalents	7,403	8,595
Cash and bank balances denominated in
– US$	48	123
– HK$	7,355	8,472
	7,403	8,595

The weighted average effective interest rates on cash placed with banks and deposits by the Company were 0.58% and 0.11% per annum for the years ended 31 December 2009 and 2008, respectively.

13. Share capital and premium

Number of shares (thousands)	Amount
	Ordinary Share shares premium Total RMB’000 RMB’000 RMB’000
At 1 January 2008 1,660,000 Dividends (a) –	169,034 1,091,673 1,260,707 – (13,529 ) (13,529 )
At 31 December 2008 1,660,000 Dividends (a) –	169,034 1,078,144 1,247,178 – (292,704 ) (292,704 )
At 31 December 2009 1,660,000	169,034 785,440 954,474

The total number of authorised ordinary shares is 10,000,000,000 shares with a par value of HK$0.10 per share as at 31 December 2009 and 2008.

(a) According to the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of Cayman Islands and the articles of association of the Company, the dividends can be declared out of share premium account subject to a solvency test.

F-41

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

14. Other reserves

		The Group		The Company	The Company
			Share-based		Share-based
	Capital	Statutory	payment		payment
	reserve	reserves	reserve		reserve
	(Note (a))	(Note (b))	(Note 15)	Total	(Note 15)
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
1 January 2008	(370,760 )	76,331	18,345	(276,084 )	18,345
Profit appropriation	–	16,659	–	16,659	–
Employee share options scheme:
– Value of employee services_(Note 15, 22)_	–	–	11,521	11,521	11,521
31 December 2008	(370,760 )	92,990	29,866	(247,904 )	29,866
Profit appropriation	–	60,208	–	60,208	–
Employee share options scheme:
– Value of employee services_(Note 15, 22)_	–	–	16,616	16,616	16,616
31 December 2009	(370,760 )	153,198	46,482	(171,080 )	46,482

(a) Capital reserve

It mainly represents reserve arising from the Group’s reorganisation completed in July 2006.

(b) Statutory reserves

In accordance with the PRC regulations and the Articles of the Association of the companies comprising the Group, before distributing the net profit of each year, each of the companies registered in the PRC is required to set aside 10% of its statutory net profit for the year after offsetting any prior year’s losses as determined under the PRC accounting regulations to the statutory surplus reserve fund. When the balance of such reserve reaches 50% of each company’s share capital, any further appropriation is optional. The statutory surplus reserve fund can be utilised to offset prior years’ losses or to issue bonus shares. However, such statutory surplus reserve fund must be maintained at a minimum of 25% of the entity’s share capital after such issuance.

F-42

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

15. Share-based payment – Group and Company

The Company adopted a Pre-IPO Share Option Scheme and a Post-IPO Share Option Scheme on 10 January 2007, pursuant to which the Company is entitled to grant options prior to and after the IPO.

(1) Pre-IPO Share Option Scheme

Pursuant to the share option scheme of the Company in relation to the grant of options under the Pre-IPO Share Option Scheme, the Company granted options to subscribe for an aggregate of 96,000,000 shares on 10 January 2007 to certain directors and eligible employees, and no further share options will be granted under the Pre-IPO share option scheme. These options vest in tranches over a period of up to 4.5 years.

Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

		2009		2008
	Average		Average
	exercise price		exercise price
	in HK$	Options	in HK$	Options
	per share	(thousands)	per share	(thousands)
At 1 January	2.23	81,440	2.23	93,600
Granted	2.23	–	2.23	–
Forfeited	2.23	–	2.23	(12,160 )
At 31 December	2.23	81,440	2.23	81,440

Out of the 81,440,000 options (2008: 81,440,000), 33,595,200 options (2008: 8,000,000) were exercisable as at 31 December 2009. No options were exercised in 2009 and 2008.

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

		Number of options	Number of options
Expiry date	Exercise price	*(thousands)*
	*HK$ per share*	2009	2008
7 August 2011	2.23	16,000	16,000
7 August 2012	2.23	65,440	65,440
		81,440	81,440

F-43

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

15. Share-based payment – Group and Company (Continued)

(1) Pre-IPO Share Option Scheme (Continued)

The total fair value, which was determined by using Black-Scholes option price model, of the options granted under the Pre-IPO Share Option Scheme as at the grant date is approximately RMB44,506,000. The following assumptions were adopted to calculate the fair value of the options on the grant date:

	Granted under the Pre-IPO
	Share Option Scheme
Average share price	HK$1.98
Exercise price	HK$2.23
Expected life of options	4.6-5.6 years
Expected volatility	40%
Expected dividend yield	3%
Risk free rate	3.59%

The average share price of HK$1.98 was estimated by the management at the grant date.

The expected volatility is determined by calculating the historical volatility of the price of listed companies with similar business to the Group. The expected dividend yield is determined by the Directors based on the expected future performance and dividend policy of the Group.

The attributable amount charged to the consolidated income statement during the year ended 31 December 2009 was approximately RMB10,118,000 (2008: RMB11,521,000).

No option is being granted during the year ended 31 December 2009 and 2008 under the Pre-IPO Share Option Scheme.

(2) Post-IPO Share Option Scheme

Pursuant to the share option scheme of the Company in relation to the grant of options under the Post-IPO Share Option Scheme, options to subscribe for an aggregate of 64,110,000 shares of the Company were granted to certain director and eligible employees. These options vest in tranches over a period of up to 4.5 years.

Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

		2009		2008
	Average		Average
	exercise price		exercise price
	in HK$	Options	in HK$	Options
	per share	(thousands)	per share	(thousands)
At 1 January	–	–	–	–
Granted	3.00	64,110	–	–
Forfeited	3.00	(1,750 )	–	–
At 31 December	3.00	62,360	–	–

F-44

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

15. Share-based payment – Group and Company (Continued)

(2) Post-IPO Share Option Scheme (Continued)

Out of the 62,360,000 options (2008: nil), no options were exercisable as at 31 December 2009.

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

		Number of options
Expiry date	Exercise price	*(thousands)*
	*HK$ per share*	2009	2008
13 January 2015	3.00	62,360	–

The total fair value, which was determined by an independent qualified appraiser using Black-Scholes option price model, of the options granted under the Post-IPO Share Option Scheme as at the grant date is approximately RMB55,134,000. The following assumptions were adopted to calculate the fair value of the options on the grant date:

	Granted under the Post-IPO
	Share Option Scheme
Average share price	HK$2.81
Exercise price	HK$3.00
Expected life of options	3.0-5.0 years
Expected volatility	46.04-51.34%
Expected dividend yield	3.56%
Risk free rate	1.032-1.745%

The attributable amount charged to the consolidated income statement during the year ended 31 December 2009 was approximately RMB6,498,000 (2008: nil).

F-45

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

16. Retained earnings/(Accumulated losses)

	The Group	The Group	The	Company
	2009	2008	2009	2008
	*RMB’000*	RMB’000	*RMB’000*	RMB’000
At 1 January	742,240	464,193	(122,536 )	(70,811 )
Profit/(Loss) for the year	928,285	294,706	301,821	(51,725 )
Profit appropriation to statutory reserves	(60,208 )	(16,659 )	–	–
At 31 December	1,610,317	742,240	179,285	(122,536 )

17. Deferred income – The Group

	2009	2008
	*RMB’000*	RMB’000
Deferred income	90,880	34,490
Less: Current portion included in current liabilities	–	(6,692 )
	90,880	27,798

Deferred income includes government grants related to purchase of qualified domestic manufactured equipment and acquisition of certain property, plant and equipment, environment protection and technology improvement.

(a) Government grants related to purchase of qualified domestic manufactured equipment

It represents reduction in income tax granted to Shandong Fufeng in the year ended 31 December 2003, Baoji Fufeng in the year ended 31 December 2008 and IM Fufeng in the year ended 31 December 2009 respectively on purchase of certain qualified domestic manufactured equipment. It is recognised in the income statement over the periods and in the proportions in which depreciation on these assets is charged. The maturity profile of the government grant credit is as follows:

	2009	2008
	*RMB’000*	RMB’000
Within 10 years	37,042	5,528
Less: Current portion included in current liabilities	–	(1,222 )
	37,042	4,306

F-46

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

17. Deferred income – The Group (Continued)

(a) Government grants related to purchase of qualified domestic manufactured equipment (Continued)

The movements of the above government grant during the years ended 31 December 2009 and 2008 are as follows:

	2009	2008
	*RMB’000*	RMB’000
At beginning of the year	5,528	3,492
Granted during the year	37,304	3,142
Amortised as income_(Note 20)_	(5,790 )	(1,106 )
At end of the year	37,042	5,528

(b) Government grants related to acquisition of certain property, plant and equipment, environment protection and technology improvement

They represent grants from the government relating to the acquisition of certain property, plant and equipment, environment protection and technology improvement. Grants received are recorded as deferred income and recognised in the income statement over the periods and in the proportions in which depreciation on these assets is charged or over the periods necessary to match them with the costs that they are intended to compensate. The maturity profile of these deferred government grants is as follows:

	2009	2008
	*RMB’000*	RMB’000
Within 10 years	53,838	28,962
Less: Current portion included in current liabilities	–	(5,470 )
	53,838	23,492

The movements of the above government grants for the year ended 31 December 2009 and 2008 are as follows:

	2009	2008
	*RMB’000*	RMB’000
At beginning of the year	28,962	26,944
Granted during the year	44,607	14,275
Amortised as income_(Note 20)_	(19,731 )	(12,257 )
At end of the year	53,838	28,962

F-47

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

18. Borrowings – The Group

	2009	2008
	*RMB’000*	RMB’000
Non-current
Long-term bank borrowings, secured	150,000	232,000
Long-term bank borrowings, unsecured	100,000	80,000
	250,000	312,000
Less: Current portion of long-term bank borrowings, secured	(70,000 )	–
	180,000	312,000
Current
Short-term bank borrowings, secured	–	30,000
Short-term bank borrowings, unsecured	348,000	246,000
Current portion of long-term bank borrowings, secured	70,000	–
	418,000	276,000
Total borrowings	598,000	588,000

As at 31 December 2009, all the borrowings were denominated in RMB and included bank borrowings of RMB150,000,000 (2008: RMB262,000,000) secured by leasehold land (Note 5) and plant and machinery (Note 6).

As at 31 December 2009 and 2008, the Group’s borrowings were repayable as follows:

	2009	2008
	*RMB’000*	RMB’000
Within 1 year	418,000	276,000
Between 1 and 2 years	180,000	312,000
	598,000	588,000

F-48

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

18. Borrowings – The Group (Continued)

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

	2009	2008
Bank borrowings
– RMB	4.98%	6.59%

The carrying amounts and fair values of the non-current borrowings are as follows:

	Carrying amounts	Carrying amounts
	2009	2008
	*RMB’000*	RMB’000
Bank borrowings	180,000	312,000
		Fair values
	2009	2008
	*RMB’000*	RMB’000
Bank borrowings	178,169	318,052

The fair values are based on cash flows discounted using a rate based on the primary rate published by the People’s Bank of China of 5.40% per annum (2008: 5.40% per annum).

The carrying amounts of current borrowings approximate their fair values.

Interest rates of the bank borrowings denominated in RMB 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 repricing dates are as follows:

		2009	2008
		*RMB’000*	RMB’000
6	months or less	100,000	206,000
6	to 12 months	318,000	70,000
1	to 2 years	180,000	312,000
		598,000	588,000

F-49

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

19. Trade, other payables and accruals


	2009	2008
	*RMB’000*	RMB’000
Trade payables (a)	493,092	506,894
Advances from customers (b)	111,330	91,675
Payables for leasehold land, property, plant and equipment	430,991	224,737
Salaries, wages and staff welfares payables	52,303	38,260
Other payables and accruals	52,759	25,967
	1,140,475	887,533

(a) As at 31 December 2009 and 2008, the ageing analyses of trade payables were as follows:

	2009	2008
	*RMB’000*	RMB’000
Within 3 months	465,313	480,613
3 to 6 months	11,644	12,144
6 to 12 months	4,751	3,123
Over 12 months	11,384	11,014
	493,092	506,894

As at 31 December 2009, notes receivables of RMB499,831,000 (2008: RMB430,721,000) were applied for settling the amounts payable to the Group’s suppliers.

(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.

	The	Company
	2009	2008
	*RMB’000*	RMB’000
Other payables and accruals	666	2,683

F-50

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

20. Other income

	2009	2008
	*RMB’000*	RMB’000
Interest income	1,502	2,152
Amortisation of deferred income_(Note 17)_	25,521	13,363
Sales of waste products	32,774	11,958
Negative goodwill gained from acquisition	–	9,657
Waiver of payables due to debt restructuring for
a newly acquired subsidiary	–	3,947
Others	4,111	3,223
	63,908	44,300

21. Expense by nature

	2009	2008
	*RMB’000*	RMB’000
Changes in inventories of finished goods and work in progress	(122,924 )	30,590
Raw materials and consumables used	3,047,748	2,649,717
Employee benefit expenses_(Note 22)_	259,587	170,273
Depreciation_(Note 6)_	190,336	152,541
Amortisation of leasehold land payments_(Note 5)_	2,974	2,232
Impairment charges_(Note 6)_	–	2,008
Transportation expenses	157,188	143,761
Utilities purchased	3,753	10,511
Travelling and office expenses	14,564	12,476
(Reversal of write-down)/Write-down of inventories_(Note 10)_	(1,554 )	1,338
Auditors’ remuneration	4,245	3,838
Land use tax, real estate tax and other taxes	24,457	13,705
Advertisement fee	20,794	2,334
Others	46,776	66,277
Total cost of sales, selling and marketing expenses,
administrative expenses and other operating expenses	3,647,944	3,261,601

F-51

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

22. Employee benefit expenses including directors’ emoluments

Employee benefit expenses including directors’ emoluments
	2009	2008
	*RMB’000*	RMB’000
Staff costs (including directors’ emoluments)
– Wages, salaries and allowance	224,299	150,639
– Pension costs-defined contribution plans_(Note (a))_	18,672	8,113
– Share options granted to directors and employees_(Note 15)_	16,616	11,521
	259,587	170,273

(a) Retirement benefit costs – defined contribution plans

The employees of the Group’s subsidiaries established in the PRC participated in defined contribution retirement benefit plans organised by the relevant provincial governments under which the Group was required to make monthly contributions to these plans at the rate of 20%, 20%, 20% and 20% of the employees’ basic salary for Shandong Province, Shaanxi Province, Inner Mongolia Autonomous Region and Jiangsu Province, respectively, for the year ended 31 December 2009 and 2008.

(b) Directors’ emoluments

The emoluments of every director for the years ended 31 December 2009 and 2008, on a named basis, are set out as below:

			2009
		Salaries,	Fair value of
		allowances	employee
		and	share options
Name of Director	Fees	pension costs	granted	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Executive Directors:
Li, Xuechun	–	1,105	–	1,105
Wang, Longxiang	–	1,030	2,212	3,242
Wu, Xindong ***	–	530	–	530
Yan, Ruliang *	–	174	–	174
Feng, Zhenquan	–	636	–	636
Xu, Guohua	–	570	–	570
Li, Deheng	–	633	–	633
Li, Hongyu **	–	175	167	342
Gong, Qingli	–	250	1,072	1,322
Independent non-executive Directors:
Choi, tze kit, Sammy	211	–	–	211
Chen, Ning	50	–	–	50
Liang, Wenjun	50	–	–	50
	311	5,103	3,451	8,865

* Resigned on 15 May 2009.

** Resigned on 8 January 2010.

*** Resigned on 9 March 2010.

F-52

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

22. Employee benefit expenses including directors’ emoluments (Continued)

(b) Directors’ emoluments (Continued)

Directors’ emoluments (Continued)
			2008
		Salaries,	Fair value of
		allowances	employee
		and	share options
Name of Director	Fees	pension costs	granted	Total
	RMB’000	RMB’000	RMB’000	RMB’000
Executive Directors:
Li, Xuechun	–	797	–	797
Wang, Longxiang	–	728	2,806	3,534
Wu, Xindong	–	388	–	388
Yan, Ruliang	–	375	–	375
Feng, Zhenquan	–	453	–	453
Xu, Guohua	–	445	–	445
Li, Deheng	–	454	–	454
Li, Hongyu	–	128	–	128
Gong, Qingli	–	258	2,176	2,434
Independent non-executive Directors:
Choi, tze kit, Sammy	218	–	–	218
Chen, Ning	50	–	–	50
Liang, Wenjun	50	–	–	50
	318	4,026	4,982	9,326

There was no bonus paid to the Directors for the years ended 31 December 2009 and 2008.

No director waived or agreed to waive any remuneration for the years ended 31 December 2009 and 2008.

F-53

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

22. Employee benefit expenses including directors’ emoluments (Continued)

(c) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year ended 31 December 2009 and 2008 include two directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining three individuals during the year are as follows:

	2009	2008
	*RMB’000*	RMB’000
Salaries and allowances	1,379	959
Pension costs-defined contribution plan	70	69
Share options granted to directors and employees	2,212	2,806
	3,661	3,834

For the years ended 31 December 2009 and 2008, no emoluments were paid by the Group to any of the directors or the five highest paid individuals as inducement to join or upon joining the Group or as compensation for loss of office.

The remunerations paid to the above non-director individuals for the year ended 31 December 2009 and 2008 fell within the following bands.

	Number of individuals	Number of individuals
	2009	2008
Emolument bands_(in HK dollar)_
HK$1,000,001 – HK$1,500,000	2	1
HK$1,500,001 – HK$2,000,000	1	2

23. Research and development costs

The following amounts were recognised as expenses and charged to administrative expenses in the income statement:

	2009	2008
	*RMB’000*	RMB’000
Research and non-capitalised development costs	36,203	22,418

All development costs arose from internal development.

F-54

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

24. Finance costs

	2009	2008
	*RMB’000*	RMB’000
Interest expense
Bank borrowings wholly repayable within 2 years	25,251	42,662
Finance costs	25,251	42,662

25. Income tax expense

	2009	2008
	*RMB’000*	RMB’000
Current income tax
- PRC enterprise income tax (“EIT”)	80,397	14,677
Deferred income tax (Note 9)	14,915	15,997
	95,312	30,674

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 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 2009 and 2008.

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.

Effective from 1 January 2008, the subsidiaries incorporated in 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 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.

F-55

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

25. Income tax expense (Continued)

Effective from 5 December 2008, Shandong Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 5 December 2008, Shandong Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30% and a full exemption from local EIT of 3% during its approved operating period of twelve years. Accordingly, the effective tax rate for Shandong Fufeng for the year ended 31 December 2009 is 15% (2008: 12.5%).

Baoji Fufeng was set up on 24 September 2004 as a foreign-invested limited liability company in Baoji, Shaanxi Province. As Baoji Fufeng is registered in China’s western development region and its registered category is encouraged by state, according to the Fiscal and Taxation (2001) No. 202 “The notice on the preferential tax policies of development of the western region issued by the Ministry of Finance, the State Administration of Taxation, General Administration of Customs”, the applicable income tax rate is 15% from 2001 to 2010 for domestic and foreign invested enterprises set up in western region and encouraged by state. In addition, being a foreign-invested limited liability company and in accordance with the relevant tax laws and regulations and a local tax authority approval dated 31 May 2005, Baoji Fufeng is entitled to a twoyear full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from the first year with cumulative taxable profit since its establishment. Baoji Fufeng entered into its first profit making year during the year ended 31 December 2005. Besides, Baoji Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 21 November 2008, Baoji Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30%. However, Baoji Fufeng chose to utilise the tax preference of “western development region”. Accordingly, the effective tax rate for Baoji Fufeng for the years ended 31 December 2009 and 2008 is 7.5%.

IM Fufeng was set up as a foreign-invested limited liability company on 31 March 2006 in Hohhot, IM Autonomous Region. As IM Fufeng is registered in China’s western development region and its registered category is encouraged by state, according to the Fiscal and Taxation (2001) No. 202 “The notice on the preferential tax policies of development of the western region issued by the Ministry of Finance, the State Administration of Taxation, General Administration of Customs”, the applicable income tax rate is 15% from 2001 to 2010 for domestic and foreign invested enterprises set up in western region and encouraged by state. In addition, being a foreign-invested limited liability company and in accordance with the relevant tax laws and regulations and a local tax authority approval dated 16 April 2007, IM Fufeng is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from 2007. Besides, IM Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 1 September 2009, IM Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30%. However, IM Fufeng chose to utilise the tax preference of “western development region”. Accordingly, the effective tax rate for IM Fufeng for the year ended 31 December 2009 is 7.5% (2008: fully exempted).

Shandong Fufeng Biotechnology Development Company Limited was set up as a domestic limited liability company on 7 June 2007 in Junan, Shandong Province. The effective tax rate is 25% for the years ended 31 December 2009 and 2008.

Shenhua Pharmaceutical was acquired on 25 January 2008 and became a foreign-invested limited liability company after that. It is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from 2008. Accordingly, Shenhua Pharmaceutical was fully exempted from income tax for the years ended 31 December 2009 and 2008.

F-56

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

25. Income tax expense (Continued)

Beijing Huijinhuaying is a domestic limited liability company. The effective tax rate for the year ended 31 December 2009 is 25%.

The taxation on the Group’s profit before income tax differs from the theoretical amount that would arise using the statutory tax rate as follows:

	2009	2008
	*RMB’000*	RMB’000
Profit before income tax	1,023,597	325,380
Tax calculated at PRC statutory rate of 25%	255,899	81,345
Effect of tax exemption	(175,567 )	(66,538 )
Withholding tax on dividends from PRC subsidiaries_(Note 9)_	19,700	10,000
(Utilisation of previously unrecognised tax losses)/Reversal of deferred tax
assets recognised in prior years	(6,390 )	6,390
Effect of change of tax rate upon assessing deferred tax assets	2,556	30
Expenses not deductible for tax purposes	183	1,010
Income not subject to tax	(1,069 )	(1,563 )
	95,312	30,674

26. Earnings per share

(a) Basic

Basic earnings per share are calculated by dividing the profit attributable to the Shareholders by the weighted average number of ordinary shares in issue during the year.

	2009	2008
Profit attributable to the Shareholders (RMB’000)	928,285	294,706
Weighted average number of ordinary shares in issue (thousands)	1,660,000	1,660,000
Basic earnings per share (RMB cents per share)	55.92	17.75

F-57

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

26. 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’s potentially dilutive ordinary shares comprised share options. The share options for 2008 are anti-dilutive and accordingly, the diluted earnings per share and basic earnings per share for 2008 are same.

	2009	2008
Profit attributable to the Shareholders (RMB’000)	928,285	294,706
Weighted average number of ordinary shares in issue (thousands)	1,660,000	1,660,000
Adjustments for share options (thousands)	1,249	–
Weighted average number of ordinary shares for
diluted earnings per share (thousands)	1,661,249	1,660,000
Diluted earnings per share (RMB cents per share)	55.88	17.75

27. Dividends

Dividends
	2009	2008
	*RMB’000*	RMB’000
Interim, paid	146,411	–
Final, proposed	219,240	146,293

At a meeting held on 23 March 2010, the Board proposed a final dividend of HK$249,000,000 (equivalent to RMB219,240,000) (2008: HK$166,000,000 (equivalent to RMB146,293,000)), representing HK15 cents (equivalent to RMB13.21 cents) (2008: HK 10 cents (equivalent to RMB8.81 cents)) per share. This proposed dividend is not reflected as a dividend payable in these financial statements, but will be reflected as an appropriation of share premium for the year ending 31 December 2010.

F-58

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

28. Notes to consolidated cash flow statement – The Group

(a) Cash generated from operations

	2009	2008
	*RMB’000*	RMB’000
Profit before income tax	1,023,597	325,380
Adjustments for:
– (Reversal of write-down)/ Write-down of inventories_(Note 10)_	(1,554 )	1,338
– Reversal of provision for trade receivables_(Note 11)_	(95 )	(924 )
– Impairment provision for property, plant and equipment_(Note 6)_	–	2,008
– Depreciation_(Note 6)_	190,336	152,541
– Amortisation of leasehold land payments_(Note 5)_	2,974	2,232
– Amortisation of deferred income_(Note 17)_	(25,521 )	(13,363 )
– (Gain)/ Loss on disposal of property, plant and equipment_(Note (b))_	(2,925 )	456
– Negative goodwill gained from acquisition	–	(9,657 )
– Employee share option scheme_(Note 15, 22)_	16,616	11,521
– Interest income_(Note 20)_	(1,502 )	(2,152 )
– Interest expense_(Note 24)_	25,251	42,662
Changes in working capital:
– Inventories	(193,186 )	(27,416 )
– Trade and other receivables	(469,332 )	(18,243 )
– Restricted bank deposits	16,550	(690 )
– Trade, other payables and accruals	55,313	44,118
Cash generated from operations	636,522	509,811

(b) Proceeds from disposal of property, plant and equipment

	2009	2008
	*RMB’000*	RMB’000
Net book amount_(Note 6)_	1,386	72,017
_Less:_Net book value transfer to construction in progress	–	(67,337 )
Net book amount for sale	1,386	4,680
Gain/(Loss) on disposal of property, plant and equipment	2,925	(456 )
Proceeds from disposal of property, plant and equipment	4,311	4,224

(c) Major non-cash transactions:

For the year ended 31 December 2009, the Group endorsed bank acceptance notes to the suppliers for purchase of property, plant and equipment amounting to approximately RMB320,766,000.

F-59

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

29. Commitments

The Group

Capital commitments

	2009	2008
	*RMB’000*	RMB’000
Purchase of property, plant and equipment
– Contracted but not yet incurred	175,522	12,958

Operating lease commitments – Group as lessee

The Group leases buildings under non-cancellable lease agreements. The Group’s future aggregate minimum lease payments under these non-cancellable operating leases were as follows:

	2009	2008
	*RMB’000*	RMB’000
No later than 1 year	679	166
Later than 1 year and no later than 5 years	713	–
	1,392	166

The Company

As at 31 December 2009 and 2008, the Company had no material capital commitments.

Operating lease commitments – Company as lessee

The Company leases buildings under non-cancellable lease agreements. The Group’s future aggregate minimum lease payments under these non-cancellable operating leases were as follows:

	2009	2008
	*RMB’000*	RMB’000
No later than 1 year	350	–
Later than 1 year and no later than 5 years	613	–
	963	–

F-60

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

30. Related party transactions and balances

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control.

The Group

Key management compensation

	2009	2008
	*RMB’000*	RMB’000
Salaries and allowances	8,135	6,403
Pension costs-defined contribution plan	457	466
Share options granted to key management	6,452	8,658
	15,044	15,527

Key management are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and executive officers.

The Comapny

Please refer to Note 7 for details for loans to subsidiaries and amounts due from/to subsidiaries.

F-61

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

31. Particulars of subsidiaries

As at 31 December 2009, the Company has direct and indirect interests in the following wholly-owned subsidiaries:

	Place of	Registered/
	incorporation/	Issued and	Principal activities
Name	establishment	paid capital	and place of operation
Directly held:
Acquest Honour Holdings Limited	The British Virgin	US$2	Investment holding in Hong Kong
(“Acquest Honour”)	Islands (“BVI”)
Indirectly held:
Summit Challenge Holdings Limited	BVI	US$1	Investment holding in Hong Kong
(“Summit Challenge”)
Absolute Divine Holdings Limited	BVI	US$1	Investment holding in Hong Kong
(“Absolute Divine”)
Expand Base Holdings Limited	BVI	US$1	Investment holding in Hong Kong
(“Expand Base”)
Profit Champion International Ltd.	Hong Kong	HK$2	Investment holding in Hong Kong
(“Profit Champion”)
Full Profit Investment (Group) Ltd.	Hong Kong	HK$2	Investment holding in Hong Kong
(“Full Profit”)
Trans-Asia Capital Resources Ltd.	Hong Kong	HK$2	Investment holding in Hong Kong
(“Trans-Asia”)
Shandong Fufeng	PRC	RMB220,500,000/	Manufacture and sales of glutamic
		RMB205,020,000	acid, monosodium glutamate, corn
			refined products, xanthan gum,
			fertilisers, starch sweetener and
			other related products in the PRC.
Baoji Fufeng	PRC	HK$80,000,000	Manufacture and sales of glutamic
			acid, monosodium glutamate, corn
			refined products, fertilisers and other
			related products in the PRC.

F-62

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

31. Particulars of subsidiaries (Continued)

	Place of	Registered/
	incorporation/	Issued and	Principal activities
Name	establishment	paid capital	and place of operation
IM Fufeng	PRC	HK$640,000,000	Manufacture and sales of glutamic
			acid, monosodium glutamate, corn
			refined products, fertilisers, starch
			sweetener and other related products,
			autoclaved aerated concrete block,
			in the PRC
Shandong Fufeng Biotechnologies	PRC	RMB 5,500,000	Biological techniques research and
			development, promotion and
			industrialisation of new biological
			techniques and achievements,
			information services of biological
			technique, in the PRC
Shenhua Pharmaceutical	PRC	RMB 22,000,000	Manufacture and sales of eubacteria
			material medicine, preparations and
			food additives and other related
			products in the PRC
Beijing Huijinhuaying (a)	PRC	RMB21,000,000	Not available as it does not carry out
			any business activities

(a) On 29 February 2009, the Group acquired 100% equity interests in Beijing Huijinhuaying through Shandong Fufeng Biotechnologies, a wholly owned subsidiary of the Company.

32. Events after the balance sheet date

There is no significant event of the Group after the balance sheet date except for the proposed final dividend mentioned in Note 27.

F-63

Independent Auditor’s Report

To the Shareholders of Fufeng Group Limited

(incorporated in the Cayman Islands with limited liability)

We have audited the consolidated financial statements of Fufeng Group Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 49 to 118, which comprise the consolidated and company balance sheets as at 31 December 2010, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Directors’ responsibility for the consolidated financial statements

The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Fufeng Group Limited Annual Report 2010

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Independent Auditor’s Report (Continued)

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2010, and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

PricewaterhouseCoopers Certified Public Accountants

Hong Kong, 21 March 2011

48 Fufeng Group Limited Annual Report 2010

F-65

Consolidated Balance Sheet

As at 31 December 2010

Consolidated Balance Sheet As at 31 December 2010
		2010	2009
	Note	*RMB’000*	RMB’000
ASSETS
Non-current assets
Leasehold land payments	6	169,187	140,160
Property, plant and equipment	7	4,087,675	2,507,897
Intangible assets	8	–	–
Deferred income tax assets	11	20,759	5,162
		4,277,621	2,653,219
Current assets
Inventories	12	710,695	551,028
Trade and other receivables	13	816,773	687,782
Short-term bank deposits	14	147,225	26,310
Cash and cash equivalents	14	767,951	342,682
		2,442,644	1,607,802
Total assets		6,720,265	4,261,021
EQUITY
Capital and reserves attributable to the Shareholders
Share capital	15	174,097	169,034
Share premium	15
– Proposed final dividend		217,070	219,240
– Others		329,594	566,200
Other reserves	16	(76,985)	(171,080)
Retained earnings	18	2,501,489	1,610,317
Total equity		3,145,265	2,393,711
LIABILITIES
Non-current liabilities
Deferred income	19	141,810	90,880
Borrowings	20	981,458	180,000
Deferred income tax liabilities	11	27,033	24,221
		1,150,301	295,101
Current liabilities
Trade, other payables and accruals	21	1,839,022	1,140,475
Current income tax liabilities		30,677	13,734
Borrowings	20	555,000	418,000
		2,424,699	1,572,209
Total liabilities		3,575,000	1,867,310
Total equity and liabilities		6,720,265	4,261,021
Net current assets		17,945	35,593
Total assets less current liabilities		4,295,566	2,688,812

The notes on pages 55 to 118 are an integral part of these consolidated financial statements.

The financial statements on pages 49 to 118 were approved by the Board on 21 March 2011 and were signed on its behalf.

Li Xuechun Director

Chen Yuan Director

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F-66

Company Balance Sheet

As at 31 December 2010

		2010	2009
	Note	*RMB’000*	RMB’000
ASSETS
Non-current assets
Property, plant and equipment	7	57	54
Investment in subsidiaries	9	415,007	407,831
		415,064	407,885
Current assets
Loans to subsidiaries	9	190,098	196,699
Due from subsidiaries	9	805,204	577,990
Deposits and other receivables	13	344	1,451
Cash and cash equivalents	14	479,805	7,403
		1,475,451	783,543
Total assets		1,890,515	1,191,428
EQUITY
Capital and reserves attributable to the Shareholders
Share capital	15	174,097	169,034
Share premium	15
– Proposed final dividend		217,070	219,240
– Others		329,594	566,200
Other reserves	16	65,698	46,482
Retained earnings	18	97,863	179,285
Total equity		884,322	1,180,241
LIABILITIES
Non-current liabilities
Borrowings	20	981,458	–
Current liabilities
Due to a subsidiary	9	10,521	10,521
Other payables and accruals	21	14,214	666
		24,735	11,187
Total liabilities		1,006,193	11,187
Total equity and liabilities		1,890,515	1,191,428
Net current assets		1,450,716	772,356
Total assets less current liabilities		1,865,780	1,180,241

The notes on pages 55 to 118 are an integral part of these financial statements.

The financial statements on pages 49 to 118 were approved by the Board on 21 March 2011 and were signed on its behalf.

Li Xuechun Chen Yuan Director Director

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F-67

Consolidated Income Statement

For the year ended 31 December 2010

		2010	2009
	Note	*RMB’000*	RMB’000
Revenue	5	6,416,425	4,632,884
Cost of sales	23	(4,851,371)	(3,233,277)
Gross profit		1,565,054	1,399,607
Other income	22	110,550	63,908
Selling and marketing expenses	23	(272,008)	(215,715)
Administrative expenses	23	(277,697)	(194,910)
Other operating expenses	23	(22,187)	(4,042)
Operating profit		1,103,712	1,048,848
Finance costs	26	(32,383)	(25,251)
Profit before income tax		1,071,329	1,023,597
Income tax expense	27	(105,278)	(95,312)
Profit for the year and attributable to the Shareholders		966,051	928,285
Earnings per share for profit attributable to the Shareholders
during the year(expressed in RMB cents per share)
– basic	28	57.75	55.92
– diluted	28	53.68	55.88
Dividends	29	217,070	219,240

The notes on pages 55 to 118 are an integral part of these consolidated financial statements.

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F-68

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2010

	2010	2009
	*RMB’000*	RMB’000
Profit for the year	966,051	928,285
Other comprehensive income for the year	–	–
Total comprehensive income for the year	966,051	928,285
Total comprehensive income attributable to the Shareholders	966,051	928,285

The notes on pages 55 to 118 are an integral part of these consolidated financial statements.

52 Fufeng Group Limited Annual Report 2010

F-69

Consolidated Statement of Changes in Equity

For the year ended 31 December 2010

			Attributable	to the Shareholders	to the Shareholders
		Share	Share	Other	Retained
		capital	premium	reserves	earnings	Total
	Note	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Balance at 1 January 2009		169,034	1,078,144	(247,904)	742,240	1,741,514
Comprehensive Income
Profit for the year	18	–	–	–	928,285	928,285
Total comprehensive income		–	–	–	928,285	928,285
Transactions with owners
Profit appropriation	16,18	–	–	60,208	(60,208)	–
Employee share options schemes:
– Value of employee service	16,17	–	–	16,616	–	16,616
Dividends	15	–	(292,704)	–	–	(292,704)
Total transactions with owners		–	(292,704)	76,824	(60,208)	(276,088)
Balance at 31 December 2009		169,034	785,440	(171,080)	1,610,317	2,393,711
Comprehensive Income
Profit for the year	18	–	–	–	966,051	966,051
Total comprehensive income		–	–	–	966,051	966,051
Transactions with owners
Profit appropriation	16,18	–	–	74,879	(74,879)	–
Employee share options schemes:
– Value of employee service	16,17	–	–	15,180	–	15,180
– Proceeds from shares issued	15,16	5,063	140,646	(32,817)	–	112,892
Convertible bonds – equity component	20	–	–	36,853	–	36,853
Dividends	15	–	(379,422)	–	–	(379,422)
Total transactions with owners		5,063	(238,776)	94,095	(74,879)	(214,497)
Balance at 31 December 2010		174,097	546,664	(76,985)	2,501,489	3,145,265

The notes on pages 55 to 118 are an integral part of these consolidated financial statements.

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Consolidated Cash Flow Statement

For the year ended 31 December 2010

		2010	2009
	Note	*RMB’000*	RMB’000
Cash flows from operating activities
Cash generated from operations	30(a)	1,187,742	636,522
Interest paid		(24,517)	(25,251)
Income tax paid		(43,275)	(25,097)
Net cash flows generated from operating activities		1,119,950	586,174
Cash flows from investing activities
Purchase of leasehold land payments		(42,631)	(10,800)
Purchases of property, plant and equipment		(1,416,321)	(217,754)
Purchases of intangible assets		(14,002)	–
Government grants received		43,980	–
Proceeds from disposal of property, plant and equipment	30(b)	17,880	4,311
Proceeds from disposal of leasehold land payments	30(c)	12,790	–
Interest received	22	3,625	1,502
Net cash used in investing activities		(1,394,679)	(222,741)
Cash flows from financing activities
Proceeds from issuance of share capital		112,892	–
Proceeds from issuance of convertible bonds	20	1,011,621	–
Dividends paid to the Company’s shareholders		(379,015)	(292,704)
Proceeds from bank borrowings		645,000	646,000
Repayments of bank borrowings		(688,000)	(636,000)
Restricted bank deposits		(2,500)	–
Government grants received		–	37,247
Net cash generated from/(used in) financing activities		699,998	(245,457)
Net increase in cash and cash equivalents		425,269	117,976
Cash and cash equivalents at beginning of the year	14	342,682	224,706
Cash and cash equivalents at end of the year	14	767,951	342,682

The notes on pages 55 to 118 are an integral part of these consolidated financial statements.

54 Fufeng Group Limited Annual Report 2010

F-71

Notes to the Consolidated Financial Statements

For the year ended 31 December 2010

1. General information

The Company has its primary listing on The Stock Exchange of Hong Kong Limited.

These consolidated financial statements are presented in RMB, unless otherwise stated. These consolidated financial statements have been approved for issue by the Board on 21 March 2011.

2. Summary of significant accounting policies

2.1 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 4.

Changes in accounting standards and interpretations

(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 2010:
HKFRS 3 (revised), ’Business combinations’, and consequential amendments to HKAS 27, ’Consolidated and separate financial statements’, HKAS 28, ’Investments in associates’, and HKAS 31, ’Interests in joint ventures’, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

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

The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with HKFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interests in the acquiree either at fair value or at the noncontrolling interests’ proportionate share of the acquiree’s net assets. All acquisitionrelated costs are expensed. The revised standard has no impact on the current period, as there was no business combination.

HKAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The revised standard has no significant impact on the current period.

HKAS 17 (amendment), ’Leases’, deletes specific guidance regarding classification of leases of land, so as to eliminate inconsistency with the general guidance on lease classification. As a result, leases of land should be classified as either finance or operating leases using the general principles of HKAS 17, i.e. whether the lease transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Prior to the amendment, land interest the title of which is not expected to pass to the Group by the end of the lease term was classified as operating lease under “Leasehold land and land use rights”, and amortised over the lease term.

HKAS 17 (amendment) has been applied retrospectively for annual periods beginning 1 January 2010 in accordance with the effective date and transitional provisions of the amendment. The Group has reassessed the classification of unexpired leasehold land and land use rights as at 1 January 2010 on the basis of information existing at the inception of those leases. As a result of the reassessment, it has no impact to the Group’s financial statements.

56 Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(b) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the Group (although they may affect the accounting for future transactions and events)
HK(IFRIC) 17, ’Distribution of non-cash assets to owners’, effective on or after 1 July 2009. The interpretation was published in November 2008. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. HKFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable.
HK(IFRIC) 18, ’Transfers of assets from customers’, effective for transfer of assets received on or after 1 July 2009. This interpretation clarifies the requirements of HKFRS for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both).
HK(IFRIC) 9, ’Reassessment of embedded derivatives and HKAS 39, Financial instruments: Recognition and measurement’, effective 1 July 2009. This amendment to HK(IFRIC) 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the ’fair value through profit or loss’ category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remain classified as at fair value through profit or loss in its entirety.
HK(IFRIC) 16, ’Hedges of a net investment in a foreign operation’ effective 1 July 2009. This amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of HKAS 39 that relate to a net investment hedge are satisfied. In particular, the Group should clearly document its hedging strategy because of the possibility of different designations at different levels of the Group.

Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(b) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the Group (although they may affect the accounting for future transactions and events) (Continued)
HKAS 38 (amendment), ’Intangible assets’, effective 1 January 2010. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives.
HKAS 1 (amendment), ’Presentation of financial statements’. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time.
HKAS 36 (amendment), ’Impairment of assets’, effective 1 January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined in paragraph 5 of HKFRS 8, ’Operating segments’ (that is, before the aggregation of segments with similar economic characteristics).
HKFRS 2 (amendments), ’Group cash-settled share-based payment transactions’, effective 1 January 2010. In addition to incorporating HK(IFRIC) 8, ’Scope of HKFRS 2’, and HK(IFRIC) 11, ’HKFRS 2 – Group and treasury share transactions’, the amendments expand on the guidance in HK(IFRIC) 11 to address the classification of Group arrangements that were not covered by that interpretation.
HKFRS 5 (amendment), ’Non-current assets held for sale and discontinued operations’, effective 1 January 2010. The amendment clarifies that HKFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirements of HKAS 1 still apply, in particular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of HKAS 1.

58 Fufeng Group Limited Annual Report 2010

F-75

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(c) New standards, amendments and interpretations have been issued but are not effective for the financial year beginning 1 January 2010 and have not been early adopted. The Group’s assessment of the impact of these new standards and interpretations is set out below.
HKFRS 9, ’Financial instruments’, issued in November 2009. This standard is the first step in the process to replace HKAS 39, ’Financial instruments: recognition and measurement’. HKFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the group’s accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption.
HKAS 24 (revised), ’Related party disclosures’, issued in November 2009. It supersedes HKAS 24, ’Related party disclosures’, issued in 2003. HKAS 24 (revised) is mandatory for periods beginning on or after 1 January 2011. Earlier application, in whole or in part, is permitted.

The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the revised standard from 1 January 2011. It is not expected to have any impact to the Group’s financial statements.

Classification of rights issues’ (amendment to HKAS 32), issued in October 2009. The amendment applies to annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with HKAS 8 ’Accounting policies, changes in accounting estimates and errors’. It is not expected to have any impact to the Group’s financial statements.

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F-76

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

Changes in accounting standards and interpretations (Continued)

(c) New standards, amendments and interpretations have been issued but are not effective for the financial year beginning 1 January 2010 and have not been early adopted (Continued)
HK (IFRIC) 19, ’Extinguishing financial liabilities with equity instruments’, effective 1 July 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Group will apply the interpretation from 1 January 2011. It is not expected to have any impact on the Group’s financial statements.
‘Prepayments of a minimum funding requirement’ (amendments to HK (IFRIC) 14). The amendments correct an unintended consequence of HK (IFRIC) 14, ’HKAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when HK (IFRIC) 14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented. It is not expected to have any impact to the Group’s financial statements.

2.2 Consolidation

(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisitionby-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

60 Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.2 Consolidation (Continued)

(a) Subsidiaries (Continued)

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

2.3 Segment reporting

2.4 Foreign currency translation

(a) Functional and presentation currency

(b) Transactions and balances

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.5 Leasehold land payments

Amortisation on leasehold land payments is calculated using the straight-line method to allocate their costs over their estimated useful lives (10 to 50 years).

2.6 Property, plant and equipment

Construction in progress includes plant under construction and machinery under installation and testing and which, upon completion, management intends to hold as property, plant and equipment. They are carried at cost which includes cost of construction, plant and equipment and other direct cost plus borrowing costs that used to finance these projects during the construction period less accumulated impairment losses if any. No depreciation is provided for construction in progress. On completion, the relevant assets are transferred to property, plant and equipment at cost less accumulated impairment losses.

Plant	15~20 years
Machinery	8~10 years
Furniture and fixtures	3~8 years
Vehicles	5~8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.8).

Gains and losses on disposals are determined by comparing the proceeds with carrying amount. These are included in the consolidated income statement under the other income and other operating expenses respectively.

62 Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.7 Intangible assets

Patents

Separately acquired patents are shown at historical cost. Patents have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of patents over their estimated beneficial period of 20 years.

2.8 Impairment of investment in subsidiaries and non-financial assets

Assets that have an indefinite useful life − for example, intangible assets not ready to use − are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

2.9 Financial Assets

(a) Classification

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as noncurrent assets. The Group’s loans and receivables comprise “trade and other receivables before prepayments”, ”short-term bank deposits” and “cash and cash equivalents” in the balance sheet (Notes 2.11 and 2.12).

(b) Recognition and measurement

Loans and receivables are carried at amortised cost using the effective interest method.

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.10 Inventories

2.11 Trade and other receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

2.12 Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less.

2.13 Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

2.14 Trade and other payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

64 Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.15 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

2.16 Compound financial instruments

The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry.

2.17 Current and deferred income tax

Fufeng Group Limited Annual Report 2010

F-82

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.17 Current and deferred income tax (Continued)

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

2.18 Employee benefits – pension

Group companies operate various pension schemes. In accordance with the rules and regulations in the PRC, the employees of the Group’s subsidiaries established in the PRC participate in defined contribution retirement benefit plans organised by Shandong Provincial, Shaanxi Provincial, Jiangsu Provincial and Inner Mongolia Autonomous Regional governments. The Shandong Provincial, Shaanxi Provincial, Jiangsu Provincial and Inner Mongolia Autonomous Regional governments undertake to assume the retirement benefit obligations of all existing and future retired employees payable under the plans described above. The Group’s contributions to these plans are charged to consolidated income statement as incurred and other than these monthly contributions, the Group has no further obligation for the payment of retirement benefits of its employees. The assets of these plans are held separately from those of the Group in an independent fund managed by the PRC government.

66 Fufeng Group Limited Annual Report 2010

F-83

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.19 Share-based payments

The Group operates two equity-settled, share-based compensation plans, under which the Group receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted, including the impact of any service and non-market performance vesting conditions (for example, remaining an employee of the entity over a specified time period). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total amount expensed is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

2.20 Provisions

2.21 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the consolidated income statement over the period necessary to match them with the costs that they are intended to compensate.

Fufeng Group Limited Annual Report 2010

F-84

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.22 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sales; are capitalised as part of the cost of that asset during the period of time that is required to complete and prepare the asset for its intended use.

All other borrowing costs are charged to the income statement in the year in which they are incurred.

2.23 Revenue recognition

(a) Sales of goods

Sales of goods are recognised when the Group has delivered products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured.

(b) Interest income

Interest income is recognised using the effective interest method.

2.24 Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease.

68 Fufeng Group Limited Annual Report 2010

F-85

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

2. Summary of significant accounting policies (Continued)

2.25 Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the consolidated financial statements. When a change in the probability of an outflow occurs so that outflow is probable, it will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the consolidated financial statements when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.

2.26 Research and development

(a) it is technically feasible to complete the intangible asset so that it will be available for use;
(b) management intends to complete the intangible asset and use it;
(c) there is an ability to use the intangible asset;
(d) it can be demonstrated how the intangible asset will generate probable future economic benefits;
(e) adequate technical, financial and other resources to complete the development and to use the intangible asset are available; and
(f) the expenditure attributable to the intangible asset during its development can be reliably measured.

2.27 Dividend distribution

Fufeng Group Limited Annual Report 2010

F-86

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

3. Financial risk management

3.1 Financial risk factors

(a) Market risk

(i) Foreign exchange risk

However, foreign currencies, mainly USD and HKD, are received from sales of products to countries or areas outside the PRC (“Export Sales”) and issuance of convertible bonds. Export Sales denominated in foreign currencies amount to approximately 13% (2009: 10%) of the Group’s total turnover for the year ended 31 December 2010. The Group manages the currency risk arising from sales of products by customers paying in advance or keeping the credit period available to customers as short as possible in order to reduce the effect on the fluctuation between USD, EUR and RMB. The Group manages the currency risk arising from proceeds from issuance of convertible bonds by utilisation of the proceeds as soon as possible.

The maximum exposures to the foreign exchange risks are disclosed in Note 13 and 14 respectively.

70 Fufeng Group Limited Annual Report 2010

F-87

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)

(i) Foreign exchange risk (Continued)

The following table summarises the sensitivity of the Group’s financial assets to foreign exchange risk based on the assumption that RMB had strengthened/weakened by 10% against USD and HKD (pegged with USD) with all other variables held constant.

		Foreign exchange risk	Foreign exchange risk
	+10%		-10%
	Profit	Equity	Profit	Equity
	RMB’000	RMB’000	RMB’000	RMB’000
31 December 2010
Financial assets
Cash and cash equivalents	(48,397)	(48,397)	48,397	48,397
Trade and other receivables	(10,591)	(10,591)	10,591	10,591
Total (decrease)/increase	(58,988)	(58,988)	58,988	58,988
31 December 2009
Financial assets
Cash and cash equivalents	(991)	(991)	991	991
Trade and other receivables	(7,670)	(7,670)	7,670	7,670
Total (decrease)/increase	(8,661)	(8,661)	8,661	8,661

(ii) Cash flow and fair value interest rate risk

Fair value interest rate risk arises from convertible bonds, which bear fixed interest rates. The carrying amounts and fair values of the non-current borrowings have been disclosed in Note 20. The Group has not used any derivatives to hedge its exposure to interest rate risk for the year ended 31 December 2010.

Fufeng Group Limited Annual Report 2010

F-88

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)

(ii) Cash flow and fair value interest rate risk (Continued)

The sensitivity analysis for interest rate risk is based on the assumption that interest rate had been 10% lower/higher from the year end rates with all other variables held constant:

			Interest rate risk	Interest rate risk
		-10%		+10%
	Carrying
	amount	Profit	Equity	Profit	Equity
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
31 December 2010
Financial liabilities
Borrowings bear variable rates	130,000	651	651	(651)	(651)
31 December 2009
Financial liabilities
Borrowings bear variable rates	250,000	885	885	(885)	(885)

(b) Credit risk

(c) Liquidity risk

Prudent liquidity risk management includes maintaining sufficient cash and the available credit facilities to meet obligations when they arise.

Management monitors the funding requirements of the Group and the availability of credit facilities in order to ensure the liquidity of the Group.

72 Fufeng Group Limited Annual Report 2010

F-89

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

3. Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(c) Liquidity risk (Continued)

	Less than	Between	Between
	1 year	1 and 2 years	2 and 5 years
	RMB’000	RMB’000	RMB’000
The Group
At 31 December 2010
Borrowings	555,000	–	1,025,000
Interests payments on bank borrowings
and convertible bonds (i)	69,318	46,125	115,313
Trade, other payables and accruals	1,625,678	–	–
Total	2,249,996	46,125	1,140,313
At 31 December 2009
Borrowings	418,000	180,000	–
Interests payments on bank borrowings (i)	22,873	6,040	–
Trade, other payables and accruals	1,000,387	–	–
Total	1,441,260	186,040	–

(i) The interests on borrowings are calculated based on borrowings and convertible bonds held as at 31 December 2010 and 2009 without taking into account of future issues. Floating-rate interests are estimated using current interest rate as at 31 December 2010 and 2009 respectively.

Fufeng Group Limited Annual Report 2010

F-90

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

3. Financial risk management (Continued)

3.2 Capital risk management

The Group monitors capital on the basis of the gearing ratio. This ratio is equal to total borrowings at the end of the year divided by total assets at the end of the corresponding year.

During 2010, the Group’s strategy, which was changed from 2009, was to maintain the gearing ratio below 30% (2009: 10% to 20%). The gearing ratios at 31 December 2010 and 2009 were as following:

	2010	2009
	*RMB’000*	RMB’000
Total borrowings_(Note 20)_	1,536,458	598,000
Total assets	6,720,265	4,261,021
Gearing ratio	22.86%	14.03%

The increase in the gearing ratio for the year ended 31 December 2010 resulted primarily from the issuance of convertible bonds, leading to the increase of borrowing scale for the expansion of the Group.

3.3 Fair value estimation

The carrying value less impairment provision of trade and other receivables, cash and cash equivalents and short-term bank deposits are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

74 Fufeng Group Limited Annual Report 2010

F-91

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

4. 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.

4.1 Estimated impairment of intangible assets

The Group tests annually whether intangible asset has suffered any impairment, in accordance with the accounting policy stated in Note 2.8. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (Note 8) .

A full impairment charge of RMB14,002,000 arose in the patents purchased during the year ended 31 December 2010, resulting in the carrying amount of the patents being written down to zero.

4.2 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 coordinated centrally. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset is difficult and the exercise of judgement is required.

Borrowing costs capitalised into property, plant and equipment are shown in Note 7.

4.3 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 recognises 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.

Fufeng Group Limited Annual Report 2010

F-92

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

5. Segment information

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

Manufacturing and sale 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 87% (2009: 90%) 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 2010 and 2009 are set out as following:

	2010	2009
	*RMB’000*	RMB’000
MSG	3,892,506	2,245,307
Glutamic acid	153,633	720,631
Corn refined products	773,563	557,523
Xanthan gum	681,725	408,124
Fertilisers	369,649	361,468
Starch sweeteners	356,704	245,168
Corn oil	103,680	61,575
Threonine	28,145	–
Others	56,820	33,088
	6,416,425	4,632,884

76 Fufeng Group Limited Annual Report 2010

F-93

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

5. 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_(Note 26)_				(32,383)
Profit before income tax				1,071,329
Income tax expense_(Note 27)_				(105,278)
Profit for the year				966,051
Other segment items included in
the income statement
Depreciation_(Note 7)_	214,394	36,383	518	251,295
Amortisation of leasehold land
payments_(Note 6)_	2,421	229	–	2,650
Loss on disposal of property,
plant and equipment_(Note 30)_	(6,752)	–	–	(6,752)
Gain on disposal of leasehold land
payment_(Note 30)_	1,836	–	–	1,836
Capital expenditure_(Notes 6, 7 and 8)_	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

Fufeng Group Limited Annual Report 2010

F-94

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

5. Segment information (Continued)

The segment information and capital expenditure for the year ended 31 December 2009 are as follows:

	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Revenue	4,224,760	408,124	–	4,632,884
Segment results	934,166	136,014	(21,332)	1,048,848
Finance costs_(Note 26)_				(25,251)
Profit before income tax				1,023,597
Income tax expense_(Note 27)_				(95,312)
Profit for the year				928,285
Other segment items included in
the income statement
Depreciation_(Note 7)_	156,306	33,479	551	190,336
Amortisation of leasehold land
payments_(Note 6)_	2,745	229	–	2,974
Reversal of write-down of inventories
(Note 12)	(1,554)	–	–	(1,554)
Gain on disposal of property,
plant and equipment_(Note 30)_	(2,925)	–	–	(2,925)
Capital expenditure_(Notes 6 and 7)_	635,337	96,600	23,637	755,574
The segment assets and liabilities at 31	December 2009 are	as follows:
	MSG	Xanthan gum	Unallocated	Group
	RMB’000	RMB’000	RMB’000	RMB’000
Segment assets and liabilities
Total assets	3,530,535	689,624	40,862	4,261,021
Total liabilities	1,529,617	334,088	3,605	1,867,310

78 Fufeng Group Limited Annual Report 2010

F-95

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

5. Segment information (Continued)

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, 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 RMB5,562,690,000 (2009: RMB4,141,402,000) and the total of revenue from external customers from Hong Kong and other countries is RMB853,735,000 (2009: RMB491,482,000).

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 RMB4,256,805,000 (2009: RMB2,648,003,000), and the total of these non-current assets located in Hong Kong is RMB57,000 (2009: RMB54,000).

Revenues of approximately RMB172,021,000 (2009: RMB375,304,000) are derived from a single external customer. These revenues are attributable to the MSG segment.

6. Leasehold land payments – The Group

Leasehold land payments represent the prepaid operating lease payments for the medium term leasehold land (10 to 50 years) located in Shandong Province, Shaanxi Province, Inner Mongolia Autonomous Region, Jiangsu Province and Beijing in the PRC, and their net book values are analysed as follows:

	2010	2009
	*RMB’000*	RMB’000
Outside Hong Kong, held on:
Leases of between 10 to 50 years	169,187	140,160

Fufeng Group Limited Annual Report 2010

F-96

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

6. Leasehold land payments – The Group (Continued)

As at 31 December 2010 and 2009, the net book value of leasehold land pledged as security for the Group’s borrowings amounted to approximately RMB21,516,000 and RMB32,210,000 (Note 20), respectively.

	2010	2009
	*RMB’000*	RMB’000
Cost
At beginning of the year	152,722	141,922
Additions	42,631	10,800
Disposals	(16,558)	–
At end of the year	178,795	152,722
Amortisation
At beginning of the year	(12,562)	(9,588)
Charge for the year	(2,650)	(2,974)
Disposals	5,604	–
At end of the year	(9,608)	(12,562)
Net book value
At end of the year	169,187	140,160

Amortisation expense is recorded in the administrative expenses in the consolidated income statement.

80 Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

7. Property, plant and equipment The Group

			2010
			Furniture		Construction
	Plant	Machinery	and fixtures	Vehicles	in progress	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Cost
At 1 January 2010	663,109	2,062,582	41,442	31,326	236,665	3,035,124
Additions	27,307	194,805	17,490	8,086	1,608,017	1,855,705
Transfer upon completion	122,463	470,101	–	–	(592,564)	–
Disposals	(29,112)	(12,823)	(19)	(406)	–	(42,360)
At 31 December 2010	783,767	2,714,665	58,913	39,006	1,252,118	4,848,469
Accumulated depreciation
At 1 January 2010	(68,896)	(422,784)	(19,101)	(16,000)	–	(526,781)
Charge for the year	(30,825)	(209,394)	(7,346)	(3,730)	–	(251,295)
Disposals	11,879	5,465	14	303	–	17,661
At 31 December 2010	(87,842)	(626,713)	(26,433)	(19,427)	–	(760,415)
Provision for impairment loss
At 1 January 2010	–	–	–	–	(446)	(446)
Disposals	–	–	–	–	67	67
At 31 December 2010	–	–	–	–	(379)	(379)
Net book value
At 31 December 2010	695,925	2,087,952	32,480	19,579	1,251,739	4,087,675

Fufeng Group Limited Annual Report 2010

F-98

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

7. Property, plant and equipment (Continued) The Group (Continued)

			2009
			Furniture		Construction
	Plant	Machinery	and fixtures	Vehicles	in progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Cost
At 1 January 2009	543,414	1,637,186	35,579	27,637	49,564	2,293,380
Additions	1,285	141,233	5,878	3,689	592,689	744,774
Transfer upon completion	118,522	284,285	–	–	(402,807)	–
Disposals	(112)	(122)	(15)	–	(2,781)	(3,030)
At 31 December 2009	663,109	2,062,582	41,442	31,326	236,665	3,035,124
Accumulated depreciation
At 1 January 2009	(42,911)	(268,932)	(12,061)	(12,623)	–	(336,527)
Charge for the year	(26,006)	(153,899)	(7,054)	(3,377)	–	(190,336)
Disposals	21	47	14	–	–	82
At 31 December 2009	(68,896)	(422,784)	(19,101)	(16,000)	–	(526,781)
Provision for impairment loss
At 1 January 2009	–	–	–	–	(2,008)	(2,008)
Disposals	–	–	–	–	1,562	1,562
At 31 December 2009	–	–	–	–	(446)	(446)
Net book value
At 31 December 2009	594,213	1,639,798	22,341	15,326	236,219	2,507,897

(a) As at 31 December 2010 and 2009, the net book values of plant and machinery pledged as security for the Group’s borrowings amounted to approximately RMB5,235,000 and RMB89,254,000, respectively (Note 20).

82 Fufeng Group Limited Annual Report 2010

F-99

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

7. Property, plant and equipment (Continued) The Group (Continued)

(b) Depreciation expense included in the consolidated income statement is as follows:

	2010	2009
	*RMB’000*	RMB’000
Cost of sales	231,013	177,364
Administrative expenses	20,282	12,972
	251,295	190,336

	2010	2009
	*RMB’000*	RMB’000
Borrowing cost capitalised	34,739	–
Average borrowing rate	5.41%	–

The Company

	2010	2009
	Furniture	Furniture
	and fixtures	and fixtures
	*RMB’000*	RMB’000
Cost
At beginning of the year	282	280
Additions	52	2
At end of the year	334	282
Accumulated depreciation
At beginning of the year	(228)	(146)
Charge for the year	(49)	(82)
At end of the year	(277)	(228)
Net book value
At end of the year	57	54

Fufeng Group Limited Annual Report 2010

F-100

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

8. Intangible assets – The Group

	Patents
	RMB’000
Year ended 31 December 2010
Opening net book amount	–
Additions	14,002
Impairment charge_(Notes 23, 30)_	(14,002)
Closing net book amount	–

The carrying amount of the patents has been reduced to zero as the Group has assessed there is no recoverable amount as there is significant uncertainty relating to the future economic benefit through recognition of an impairment loss. This loss has been included in ’administrative expenses’ in the income statement.

9. Investment in and loans to subsidiaries – The Company

	2010	2009
	*RMB’000*	RMB’000
Investment in subsidiaries (a)	415,007	407,831
Loans to subsidiaries (b)	190,098	196,699
Due from subsidiaries (c)	805,204	577,990
Due to a subsidiary (d)	10,521	10,521

84 Fufeng Group Limited Annual Report 2010

F-101

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

9. Investment in and loans to subsidiaries – The Company (Continued) (a) Investment in subsidiaries

	2010	2009
	*RMB’000*	RMB’000
Unlisted shares, at cost	415,007	407,831

The particulars of the Company’s directly and indirectly owned subsidiaries are disclosed in Note 33.

(b) Loans to subsidiaries

The loans to subsidiaries, Summit Challenge and Expand Base as at 31 December 2010 and 2009, are unsecured, interests free and repayable on demand. Their carrying amounts approximate their fair values as at 31 December 2010 and 2009.

(c) Due from subsidiaries

The amounts due from subsidiaries are unsecured, interest-free and repayable on demand. Their carrying amounts approximate their fair values as at 31 December 2010 and 2009.

(d) Due to a subsidiary

The amounts due to a subsidiary are unsecured, interest-free and repayable on demand. Their carrying amounts approximate their fair values as at 31 December 2010 and 2009.

10. Credit quality of financial assets

Trade receivables and notes receivables

– Group 1 Bank acceptance notes for which the repayments are guaranteed by large state-owned banks. – Group 2 Trade receivables due from customers with no defaults in the past. – Group 3 Trade receivables due from customers with some defaults in the past.

The Group

		2010	2009
		*RMB’000*	RMB’000
Group	1	501,332	514,519
Group	2	158,353	74,480
Group	3	4,231	4,527
		663,916	593,526

Fufeng Group Limited Annual Report 2010

F-102

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

10. Credit quality of financial assets (Continued)

Cash and bank balances

The Group categorises its cash in banks into the following:

Group 1 Major international banks (Hang Seng Bank, ABN AMRO Bank N.V. and The Hong Kong and Shanghai Banking Corporation Limited.)
Group 2
Top 4 banks in Mainland China (China Construction Bank, Bank of China, Agricultural Bank of China and Industrial and Commercial Bank of China)
Group 3 – Other State-owned banks in mainland PRC

The Group

		2010	2009
		*RMB’000*	RMB’000
Group	1	282,997	9,907
Group	2	225,578	264,129
Group	3	406,057	93,846
		914,632	367,882

The Company

		2010	2009
		*RMB’000*	RMB’000
Group	1	280,616	7,402
Group	3	199,188	–
		479,804	7,402

None of the financial assets that are fully performing has been renegotiated in the current or last year.

86 Fufeng Group Limited Annual Report 2010

F-103

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

11. Deferred income tax – The Group

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income tax assets and liabilities relate to income taxed levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The offset amounts are as follows:

	2010	2009
	*RMB’000*	RMB’000
Deferred income tax assets:
– Deferred income tax assets to be recovered after more than 12 months	13,437	2,150
– Deferred income tax assets to be recovered within 12 months	7,322	3,012
	20,759	5,162
Deferred income tax liabilities:
– Deferred income tax liabilities to be settled after more than 12 months	(26,841)	(24,176)
– Deferred income tax liabilities to be settled within 12 months	(192)	(45)
	(27,033)	(24,221)
Deferred income tax liabilities, net	(6,274)	(19,059)

The gross movement on the deferred income tax account is as follows:

	2010	2009
	*RMB’000*	RMB’000
Beginning balance of the year	(19,059)	(10,505)
Income statement credit/(charge)(Note 27)	12,785	(14,915)
Transferred to current income tax liabilities	–	6,361
Ending balance of the year	(6,274)	(19,059)

Deferred income tax is calculated on temporary differences under the liability method.

Fufeng Group Limited Annual Report 2010

F-104

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

11. Deferred income tax – The Group (Continued)

The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

Deferred income tax assets:

	Unrealised	Deferred	Staff pension
	profit	income	plan	Others	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
1 January 2009	–	317	–	106	423
Credited/(Charged) to income statement
(Note 27)	2,456	1,444	1,218	(379)	4,739
31 December 2009	2,456	1,761	1,218	(273)	5,162
Credited to income statement_(Note 27)_	10	10,645	1,735	3,207	15,597
31 December 2010	2,466	12,406	2,953	2,934	20,759

Deferred income tax assets are recognised to the extent that the realisation of the related tax benefit through future taxable profit is probable. The Group did not recognise the deferred income tax assets in respect of losses amounting to RMB4,299,000, as at 31 December 2010 (2009: nil), that can be carried forward against future taxable income because it is uncertain whether there will be sufficient profit to offset in the near future. Total tax losses of RMB4,299,000 (2009: nil) were carried forward and will expire in 2015.

Deferred income tax liabilities:

	Borrowing
	costs	Withholding
	capitalisation	tax	Total
	*RMB’000*	*RMB’000*	*RMB’000*
1 January 2009	928	10,000	10,928
(Credited)/charged to income statement_(Note 27)_	(46)	19,700	19,654
Credited to current income tax liabilities	–	(6,361)	(6,361)
31 December 2009	882	23,339	24,221
Charged to income statement_(Note 27)_	2,812	–	2,812
31 December 2010	3,694	23,339	27,033

Withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in the PRC, in respect of earnings generated after 31 December 2007. The Group’s certain subsidiaries in the PRC are held by companies incorporated in Hong Kong and is subject to 5% withholding tax. The Group is therefore liable to withholding taxes on dividends to be distributed by those subsidiaries established in the PRC in respect of earnings generated from 1 January 2008.

88 Fufeng Group Limited Annual Report 2010

F-105

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

11. Deferred income tax – The Group (Continued)

Deferred income tax liabilities as at 31 December 2010 of RMB72,468,000 (2009: RMB20,181,000) have not been recognised for the withholding tax that would be payable on the unremitted earnings of the subsidiary in the PRC, totalling RMB1,718,451,000 (2009: RMB672,704,000). The Group determined that no deferred withholding tax liabilities shall be recognised in respect of the retained profits of these PRC subsidiaries since the Group has no plan to distribute such profits in the foreseeable future.

12. Inventories – The Group

	2010	2009
	*RMB’000*	RMB’000
Raw materials	311,420	222,083
Work-in-progress	72,206	39,182
Finished goods	327,069	289,763
	710,695	551,028

As at 31 December 2010, finished goods included a write-down of RMB839,000 (2009: RMB1,418,000). For the year ended 31 December 2010, the Group has reversed RMB579,000 (2009: RMB1,554,000) of a previous inventory write-down as the Group sold part of the underlying goods that were written down to third parties. The amount of RMB579,000 reversed was included in “cost of sales” in the consolidated income statement (Notes 23 and 30).

The cost of inventories recognised as expense and included in cost of sales and administrative expenses amounted to RMB4,471,834,000 (2009: RMB2,924,824,000).

13. Trade and other receivables The Group

	2010	2009
	*RMB’000*	RMB’000
Trade receivables (a)	162,584	79,007
_Less:_provision for impairment of receivables (b)	(4,231)	(4,527)
Trade receivables, net	158,353	74,480
Notes receivables (c)	501,332	514,519
Deposits and others	43,365	30,605
Value-added tax recoverable	78,863	37,913
Trade and other receivables before prepayments	781,913	657,517
Prepayments for raw materials	34,860	30,265
	816,773	687,782

Fufeng Group Limited Annual Report 2010

F-106

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

13. Trade and other receivables (Continued)

The Group (Continued)

(a) As at 31 December 2010 and 2009, the ageing analyses of trade receivables were as follows:

	2010	2009
	*RMB’000*	RMB’000
Within 3 months	153,067	69,727
3–12 months	3,927	3,537
Over 12 months	5,590	5,743
	162,584	79,007

As at 31 December 2010, trade receivables of RMB4,117,000 (2009: RMB3,601,000) 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:

	2010	2009
	*RMB’000*	RMB’000
Past due within 3 months	817	1,167
Past due in 3–12 months	3,300	2,434
	4,117	3,601

(b) As of 31 December 2010, trade receivables of RMB4,231,000 (2009: RMB4,527,000) 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:

			2010	2009
			*RMB’000*	RMB’000
Past due over	12	months	4,231	4,527

90 Fufeng Group Limited Annual Report 2010

F-107

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

13. Trade and other receivables (Continued)

The Group (Continued)

(b) (Continued)

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

	2010	2009
	*RMB’000*	RMB’000
As at 1 January	4,527	4,622
Reversal of amounts subsequently collected	(296)	(95)
As at 31 December	4,231	4,527

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 2010, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB471,952,000 (2009: RMB499,831,000) 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.

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.

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

	2010	2009
	*RMB’000*	RMB’000
– RMB	675,255	580,818
– USD	105,911	75,582
– EUR	747	1,117
	781,913	657,517

Fufeng Group Limited Annual Report 2010

F-108

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

13. Trade and other receivables (Continued)

The Company

	2010	2009
	*RMB’000*	RMB’000
Deposits and other receivables	344	1,451

14. Cash and bank balances

The Group

	2010	2009
	*RMB’000*	RMB’000
Cash and cash equivalents
– Cash on hand	544	1,110
– Cash in bank	767,407	341,572
	767,951	342,682
Short-term bank deposits
– Secured (a)	147,225	26,310
	915,176	368,992
Cash and bank balances denominated in
– RMB	431,161	359,084
– USD	267,605	48
– HKD	216,367	9,860
– EUR	43	–
	915,176	368,992

92 Fufeng Group Limited Annual Report 2010

F-109

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

14. Cash and bank balances (Continued)

The Group (Continued)

(a) The short-term bank deposits as at 31 December 2010 included restricted bank deposits of RMB147,225,000 (2009: RMB26,310,000) pledged as security for following instruments:

	2010	2009
	*RMB’000*	RMB’000
Issuing bank acceptance notes	143,945	25,000
Bank borrowings	2,500	–
Issuing letters of credit and letters of guarantee	510	1,310
Tenders	270	–
	147,225	26,310

(b) The Group’s cash and bank balances denominated in RMB were deposited with banks in the PRC. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government.
(c) The weighted average effective interest rates on cash placed with banks and deposits by the Group were 0.35% and 0.47% per annum for the years ended 31 December 2010 and 2009, respectively.

The Company

	2010	2009
	*RMB’000*	RMB’000
Cash and cash equivalents	479,805	7,403
Cash and bank balances denominated in
– USD	265,820	48
– HKD	213,985	7,355
	479,805	7,403

The weighted average effective interest rates on cash placed with banks and deposits by the Company were 0.25% and 0.58% per annum for the years ended 31 December 2010 and 2009, respectively.

Fufeng Group Limited Annual Report 2010

F-110

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

15. Share capital and premium

Number of shares (thousands)	Amount
	Ordinary shares Share premium Total RMB’000 RMB’000 RMB’000
At 1 January 2009 1,660,000 Dividends (a) –	169,034 1,078,144 1,247,178 – (292,704) (292,704)
At 31 December 2009 1,660,000 Employee share option schemes: – Proceeds from shares issued 58,686 Dividends (a) –	169,034 785,440 954,474 5,063 140,646 145,709 – (379,422) (379,422)
At 31 December 2010 1,718,686	174,097 546,664 720,761

The total number of authorised ordinary shares is 10,000,000,000 shares with a par value of HKD0.10 per share as at 31 December 2010 and 2009.

(a) According to the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of Cayman Islands and the articles of association of the Company, the dividends can be declared out of share premium account subject to a solvency test.

94 Fufeng Group Limited Annual Report 2010

F-111

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

16. Other reserves

			The Group	The Group
					Share-based
	Convertible	Capital		Statutory	payment
	bonds	reserve		reserves	reserve
	(Note 20)	(Note (a))		(Note (b))	(Note	17)	Total
	RMB’000	RMB’000		RMB’000	RMB’000		RMB’000
1 January 2009	–	(370,760)		92,990	29,866		(247,904)
Profit appropriation_(Note 18)_	–	–		60,208		–	60,208
Employee share options schemes:
– Value of employee services_(Notes 17, 24)_	–	–		–	16,616		16,616
31 December 2009	–	(370,760)		153,198	46,482		(171,080)
Profit appropriation_(Note 18)_	–	–		74,879		–	74,879
Employee share options schemes:
– Value of employee services_(Notes 17, 24)_	–	–		–	15,180		15,180
– Proceeds from shares issued	–	–		–	(32,817)		(32,817)
Convertible bonds – equity component	36,853	–		–		–	36,853
31 December 2010	36,853	(370,760)		228,077	28,845		(76,985)
				The Company
				Share-based
		Convertible		payment
		bonds			reserve
		(Note	20)	(Note 17)			Total
		RMB’000		RMB’000			RMB’000
1 January 2009			–		29,866		29,866
Employee share options schemes:
– Value of employee services_(Notes 17, 24)_			–		16,616		16,616
31 December 2009			–		46,482		46,482
Employee share options schemes:
– Value of employee services_(Notes 17, 24)_			–		15,180		15,180
– Proceeds from shares issued			–		(32,817)		(32,817)
Convertible bonds – equity component		36,853			–		36,853
31 December 2010		36,853			28,845		65,698

Fufeng Group Limited Annual Report 2010

F-112

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

16. Other reserves (Continued)

(a) Capital reserve

It mainly represents reserve arising from the Group’s reorganisation completed in July 2006.

(b)

Statutory reserves

17. Share-based payment – Group and Company

The Company adopted a Pre-IPO Share Option Scheme and a Post-IPO Share Option Scheme on 10 January 2007, pursuant to which the Company is entitled to grant options prior to and after the IPO.

(1) Pre-IPO Share Option Scheme

Pursuant to the Pre-IPO Share Option Scheme, the Company granted options to subscribe for an aggregate of 96,000,000 shares on 10 January 2007 to certain directors and eligible employees, and no further share options will be granted under the Pre-IPO share option scheme. These options vest in tranches over a period of up to 4.5 years.

Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

	2010	2010	2009
	Average		Average
	exercise		exercise
	price in HKD	Options	price in HKD	Options
	per share	(thousands)	per share	(thousands)
At 1 January	2.23	81,440	2.23	81,440
Granted	2.23	–	2.23	–
Exercised	2.23	(58,686)	2.23	–
At 31 December	2.23	22,754	2.23	81,440

Out of the 22,754,000 options (2009: 81,440,000), 504,400 options (2009: 33,595,200) were exercisable as at 31 December 2010. Options exercised in 2010 resulted in 58,686,000 shares being issued at a weighted average price of HKD2.23 each. The related weighted average share price at the time of exercise was HKD6.20 per share. No options were exercised in 2009.

96 Fufeng Group Limited Annual Report 2010

F-113

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

17. Share-based payment – Group and Company (Continued)

(1) Pre-IPO Share Option Scheme (Continued)

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

		Number of options	Number of options
Expiry date	Exercise price	*(thousands)*
	*HKD per share*	2010	2009
7 August 2011	2.23	–	16,000
7 August 2012	2.23	22,754	65,440
		22,754	81,440

The total fair value, which was determined by using Black-Scholes option price model, of the options granted under the Pre-IPO Share Option Scheme as at the grant date is approximately RMB55,134,000. The following assumptions were adopted to calculate the fair value of the options on the grant date:

	Granted under the Pre-IPO
	Share Option Scheme
Average share price	HKD1.98
Exercise price	HKD2.23
Expected life of options	4.6-5.6 years
Expected volatility	40%
Expected dividend yield	3%
Risk free rate	3.59%

The average share price of HKD1.98 was estimated by the management at the grant date.

The attributable amount charged to the consolidated income statement during the year ended 31 December 2010 was approximately RMB5,129,000 (2009: RMB10,118,000).

No option is being granted under the Pre-IPO Share Option Scheme during the year ended 31 December 2010 and 2009.

Fufeng Group Limited Annual Report 2010

F-114

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

17. Share-based payment – Group and Company (Continued)

(2) Post-IPO Share Option Scheme

Pursuant to the Post-IPO Share Option Scheme, options to subscribe for an aggregate of 64,110,000 shares of the Company were granted to certain director and eligible employees in 2009 and an aggregate of 5,000,000 shares of the Company were granted to certain director in 2010. These options vest in tranches over a period of up to 4.5 years.

Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

	2010	2010	2009
	Average		Average
	exercise		exercise
	price in HKD	Options	price in HKD	Options
	per share	(thousands)	per share	(thousands)
At 1 January	3.00	62,360	–	–
Granted	8.20	5,000	3.00	64,110
Forfeited	3.00	(11,250)	3.00	(1,750)
At 31 December	3.46	56,110	3.00	62,360

Out of the 56,110,000 options (2009: 62,360,000), no options (2009: no options) were exercisable as at 31 December 2010.

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

		Number of options	Number of options
Expiry date	Exercise price	*(thousands)*
	*HKD per share*	2010	2009
13 January 2015	3.00	51,110	62,360
9 May 2016	8.20	5,000	–
		56,110	62,360

98 Fufeng Group Limited Annual Report 2010

F-115

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

17. Share-based payment – Group and Company (Continued)

(2) Post-IPO Share Option Scheme (Continued)

The total fair value, which was determined by an independent qualified appraiser using Black-Scholes option price model, of the options granted under the Post-IPO Share Option Scheme as at the grant dates is approximately RMB55,963,000. The following assumptions were adopted to calculate the fair value of the options on the grant date:

	Granted under the	Granted under the
	Post-IPO Share Option Scheme
	Granted on	Granted on
	09 November 2010	14 July 2009
Average share price	HKD8.14	HKD2.81
Exercise price	HKD8.20	HKD3.00
Expected life of options	3.0-5.0 years	3.0-5.0 years
Expected volatility	51.30-55.63%	46.04-51.34%
Expected dividend yield	3.14%	3.56%
Risk free rate	0.506-1.021%	1.032-1.745%

The attributable amount charged to the consolidated income statement during the year ended 31 December 2010 was approximately RMB10,051,000 (2009: RMB6,498,000).

18. Retained earnings/(Accumulated losses)

	The Group	The Group	The Company	The Company
	2010	2009	2010	2009
	*RMB’000*	RMB’000	*RMB’000*	RMB’000
1 January	1,610,317	742,240	179,285	(122,536)
Profit/(Loss) for the year	966,051	928,285	(81,422)	301,821
Profit appropriation to statutory reserves	(74,879)	(60,208)	–	–
31 December	2,501,489	1,610,317	97,863	179,285

Fufeng Group Limited Annual Report 2010

F-116

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

19. Deferred income – The Group

	2010	2009
	*RMB’000*	RMB’000
Deferred income	141,810	90,880

Deferred income includes government grants related to purchase of qualified domestic manufactured equipment and acquisition of certain raw materials, property, plant and equipment, environment protection and technology improvement.

(a) Government grants related to purchase of qualified domestic manufactured equipment

It represents reduction in income tax granted to Shandong Fufeng in the year ended 31 December 2003, Baoji Fufeng in the year ended 31 December 2008 and 2010 and IM Fufeng in the year ended 31 December 2009 and 2010 respectively on purchase of certain qualified domestic manufactured equipment. It is recognised in the income statement over the periods and in the proportions in which depreciation on these assets is charged. The maturity profile of the government grant credit is as follows:

			2010	2009
			*RMB’000*	RMB’000
Within	10	years	81,817	37,042

The movements of the above government grant during the years ended 31 December 2010 and 2009 are as follows:

	2010	2009
	*RMB’000*	RMB’000
At beginning of the year	37,042	5,528
Granted during the year	57,845	37,304
Amortised as income_(Note 22)_	(13,070)	(5,790)
At end of the year	81,817	37,042

100 Fufeng Group Limited Annual Report 2010

F-117

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

19. Deferred income – The Group (Continued)

(b) Government grants related to acquisition of certain raw materials, property, plant and equipment, environment protection and technology improvement

They represent grants from the government relating to the acquisition of certain raw materials, property, plant and equipment, environment protection and technology improvement. Grants received are recorded as deferred income and recognised in the income statement over the periods and in the proportions in which depreciation on these assets is charged or over the periods necessary to match them with the costs that they are intended to compensate. The maturity profile of these deferred government grants is as follows:

			2010	2009
			*RMB’000*	RMB’000
Within	10	years	59,993	53,838

The movements of the above government grants for the year ended 31 December 2010 and 2009 are as follows:

	2010	2009
	*RMB’000*	RMB’000
At beginning of the year	53,838	28,962
Granted during the year	49,406	44,607
Amortised as income_(Note 22)_	(43,251)	(19,731)
At end of the year	59,993	53,838

101

Fufeng Group Limited Annual Report 2010

F-118

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

20. Borrowings The Group

	2010	2009
	*RMB’000*	RMB’000
Non-current
Long-term bank borrowings, secured	–	150,000
Long-term bank borrowings, unsecured	–	100,000
Convertible bonds	981,458	–
	981,458	250,000
_Less:_Current portion of long-term bank borrowings, secured	–	(70,000)
	981,458	180,000
Current
Short-term bank borrowings, guaranteed and secured	30,000	–
Short-term bank borrowings, secured	30,000	–
Short-term bank borrowings, unsecured	495,000	348,000
Current portion of long-term bank borrowings, secured	–	70,000
	555,000	418,000
Total borrowings	1,536,458	598,000
The Company
	2010	2009
	*RMB’000*	RMB’000
Non-current
Convertible bonds	981,458	–

(a) Bank borrowings

As at 31 December 2010, all the bank borrowings were denominated in RMB and included: (i) RMB30,000,000 guaranteed by Mr. Li Xuechun (Note 32(b)) and secured by leasehold land (Note 6) and plant (Note 7); (ii) RMB30,000,000 pledged by restricted bank deposits of RMB2,500,000 (Note 14(a)).

As at 31 December 2009, all the bank borrowings were denominated in RMB and included bank borrowings of RMB150,000,000 secured by leasehold land (Note 6) and plant and machinery (Note 7).

102 Fufeng Group Limited Annual Report 2010

F-119

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

20. Borrowings (Continued)

(a) Bank borrowings (Continued)

As at 31 December 2010 and 2009, the Group’s bank borrowings were repayable as follows:

	2010	2009
	*RMB’000*	RMB’000
Within 1 year	555,000	418,000
Between 1 and 2 years	–	180,000
	555,000	598,000
The weighted average effective interest rates at	the balance sheet dates were as follows:
	2010	2009
Bank borrowings	5.30%	4.98%

The carrying amounts and fair values of the non-current bank borrowings are as follows:

	Carrying	amounts
	2010	2009
	*RMB’000*	RMB’000
Bank borrowings	–	180,000
	Fair values
	2010	2009
	*RMB’000*	RMB’000
Bank borrowings	–	178,169

As of 31 December 2009, the fair values are based on cash flows discounted using a rate based on the primary rate published by the People’s Bank of China of 5.40% per annum.

The carrying amounts of current bank borrowings approximate their fair values.

Fufeng Group Limited Annual Report 2010 103

F-120

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

20. Borrowings (Continued)

(a) Bank borrowings (Continued)

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:

		2010	2009
		*RMB’000*	RMB’000
6	months or less	–	100,000
6	to 12 months	555,000	318,000
1	to 2 years	–	180,000
		555,000	598,000

(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 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 an equivalent non-convertible bonds. The residual amount, representing the value of the equity conversion option, is included in shareholders’ equity in other reserves (Note 16).

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

	2010
	*RMB’000*
Net proceeds from convertible bonds issued on 25 March 2010	1,011,621
Equity component_(Note 16)_	(36,853)
Liability component on initial recognition at 25 March 2010	974,768
Interest expense on convertible bonds_(Note 26)_	41,284
Interest paid	(23,063)
Liability component at 31 December 2010	992,989
Including:
– Interest payable – current portion_(Note 21)_	11,531
– Carrying amount at 31 December 2010	981,458

The fair value of the liability component of the convertible bonds at 31 December 2010 amounted to RMB981,458,000. The fair value is calculated using cash flows discounted at a rate based on the borrowings rate of 5.64%.

104 Fufeng Group Limited Annual Report 2010

F-121

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

21. Trade, other payables and accruals The Group

	2010	2009
	*RMB’000*	RMB’000
Trade payables (a)	614,194	493,092
Advances from customers (b)	147,604	111,330
Bank acceptance notes payable	149,945	–
Payables for leasehold land, property, plant and equipment	743,499	430,991
Salaries, wages and staff welfares payables	58,313	52,303
Interest payable – current portion	11,531	–
Unused government grants	29,702	4,312
Dividend payable	407	–
Other payables and accruals	83,827	48,447
	1,839,022	1,140,475

(a) As at 31 December 2010 and 2009, the ageing analyses of trade payables were as follows:

	2010	2009
	*RMB’000*	RMB’000
Within 3 months	575,781	465,313
3 to 6 months	23,959	11,644
6 to 12 months	5,594	4,751
Over 12 months	8,860	11,384
	614,194	493,092

As at 31 December 2010, notes receivables of RMB471,952,000 (2009: RMB499,831,000) were applied for settling the amounts payable to the Group’s suppliers.

(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.

The Company

	2010	2009
	*RMB’000*	RMB’000
Interest payables - current portion	11,531	–
Dividend payable	407	–
Other payables and accruals	2,276	666
	14,214	666

105

Fufeng Group Limited Annual Report 2010

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Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

22. Other income

	2010	2009
	*RMB’000*	RMB’000
Interest income	3,625	1,502
Amortisation of deferred income_(Note 19)_	56,321	25,521
Sales of waste products	49,090	32,774
Others	1,514	4,111
	110,550	63,908

23. Expense by nature

	2010	2009
	*RMB’000*	RMB’000
Changes in inventories of finished goods and work in progress	(69,751)	(122,924)
Raw materials and consumables used	4,541,585	3,047,748
Employee benefit expenses_(Note 24)_	336,294	259,587
Depreciation_(Note 7)_	251,295	190,336
Amortisation of leasehold land payments_(Note 6)_	2,650	2,974
Impairment charges for intangible assets_(Note 8)_	14,002	–
Transportation expenses	205,759	157,188
Utilities purchased	22,442	3,753
Travelling and office expenses	18,858	14,564
Reversal of write-down of inventories_(Note 12)_	(579)	(1,554)
Reversal of provision of trade receivables	(296)	–
Auditors’ remuneration	4,091	4,245
Land use tax, real estate tax and other taxes	23,074	24,457
Advertisement fee	11,287	20,794
Foreign exchange losses	18,044	1,576
Others	44,508	45,200
Total cost of sales, selling and marketing expenses,
administrative expenses and other operating expenses	5,423,263	3,647,944

106 Fufeng Group Limited Annual Report 2010

F-123

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

24. Employee benefit expenses including directors’ emoluments

	2010	2009
	*RMB’000*	RMB’000
Staff costs (including directors’ emoluments)
– Wages, salaries and allowance	296,355	224,299
– Pension costs-defined contribution plans_(Note (a))_	24,759	18,672
– Share options granted to directors and employees_(Note 17)_	15,180	16,616
	336,294	259,587

(a) Retirement benefit costs – defined contribution plans

The employees of the Group’s subsidiaries established in the PRC participated in defined contribution retirement benefit plans organised by the relevant provincial governments under which the Group was required to make monthly contributions to these plans at the rate of 20% of the employees’ basic salary for Shandong Province, Shaanxi Province, Inner Mongolia Autonomous Region and Jiangsu Province, respectively, for the year ended 31 December 2010 and 2009.

(b) Directors’ emoluments

The emoluments of every director for the years ended 31 December 2010 and 2009, on a named basis, are set out as below:

		2010	2010
		Salaries,	Fair value of
		allowances	employee
		and pension	share options
Name of Director	Fees	costs	granted	Total
	*RMB’000*	*RMB’000*	*RMB’000*	*RMB’000*
Executive Directors:
Li, Xuechun	–	1,870	–	1,870
Wang, Longxiang	–	1,300	1,175	2,475
Feng, Zhenquan	–	807	–	807
Xu, Guohua	–	706	–	706
Li, Deheng	–	799	–	799
Gong, Qingli	–	300	322	622
Li, Guangyu*	–	419	–	419
Chen, Yuan**	–	430	571	1,001
Independent non-executive Directors:
Choi, tze kit, Sammy	240	–	–	240
Chen, Ning	50	–	–	50
Liang, Wenjun	50	–	–	50
	340	6,631	2,068	9,039

Appointed on 31 March 2010.
** Appointed on 9 November 2010.

Fufeng Group Limited Annual Report 2010 107

F-124

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

24. Employee benefit expenses including directors’ emoluments (Continued) (b) Directors’ emoluments (Continued)

		2009	2009
		Salaries,	Fair value of
		allowances	employee
		and pension	share options
Name of Director	Fees	costs	granted	Total
	RMB’000	RMB’000	RMB’000	RMB’000
Executive Directors:
Li, Xuechun	–	1,105	–	1,105
Wang, Longxiang	–	1,030	2,212	3,242
Wu, Xindong ***	–	530	–	530
Yan, Ruliang *	–	174	–	174
Feng, Zhenquan	–	636	–	636
Xu, Guohua	–	570	–	570
Li, Deheng	–	633	–	633
Li, Hongyu **	–	175	167	342
Gong, Qingli	–	250	1,072	1,322
Independent non-executive Directors:
Choi, tze kit, Sammy	211	–	–	211
Chen, Ning	50	–	–	50
Liang, Wenjun	50	–	–	50
	311	5,103	3,451	8,865

* Resigned on 15 May 2009.

** Resigned on 8 January 2010.

*** Resigned on 9 March 2010.

There was no bonus paid to the directors of the Company for the years ended 31 December 2010 and 2009.

No director waived or agreed to waive any remuneration for the years ended 31 December 2010 and 2009.

108 Fufeng Group Limited Annual Report 2010

F-125

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

24. Employee benefit expenses including directors’ emoluments (Continued)

(c) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year ended 31 December 2010 include three directors (2009: two) whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two individuals during the year are as follows:

	2010	2009
	*RMB’000*	RMB’000
Salaries and allowances	1,098	1,379
Pension costs-defined contribution plan	12	70
Share options granted to employees	940	2,212
	2,050	3,661

For the years ended 31 December 2010 and 2009, no emoluments were paid by the Group to any of the directors or the five highest paid individuals as inducement to join or upon joining the Group or as compensation for loss of office.

The remunerations paid to the above non-director individuals for the year ended 31 December 2010 and 2009 fell within the following bands.

	Number of	individuals
	2010	2009
Emolument bands (in HK dollar)
HKD1,000,001 – HKD1,500,000	2	2
HKD1,500,001 – HKD2,000,000	–	1

25. Research and development costs

The following amounts were recognised as expenses and charged to administrative expenses in the consolidated income statement:

	2010	2009
	*RMB’000*	RMB’000
Research and non-capitalised development costs	89,158	36,203

All these development costs arose from internal development.

109

Fufeng Group Limited Annual Report 2010

F-126

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

26. Finance costs

Finance costs
	2010	2009
	*RMB’000*	RMB’000
Interest expense
Bank borrowings wholly repayable within 2 years	25,838	25,251
Convertible bonds wholly repayable within 5 years_(Note 20)_	41,284	–
_Less:_amounts capitalised on qualifying assets	(34,739)	–
Finance costs	32,383	25,251

27. Taxation

(a) Income tax expense

	2010	2009
	*RMB’000*	RMB’000
Current income tax
– PRC enterprise income tax (“EIT”)	118,063	80,397
Deferred income tax_(Note 11)_	(12,785)	14,915
	105,278	95,312

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 2010 and 2009.

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.

110 Fufeng Group Limited Annual Report 2010

F-127

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

27. Taxation (Continued)

(a) Income tax expense (Continued)

Effective from 5 December 2008, Shandong Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 5 December 2004, Shandong Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30% and a full exemption from local EIT of 3% during its approved operating period of twelve years. Accordingly, the effective tax rate for Shandong Fufeng for the year ended 31 December 2010 is 15% (2009: 15%).

Baoji Fufeng was set up on 24 September 2004 as a foreign-invested limited liability company in Baoji, Shaanxi Province. As Baoji Fufeng is registered in China’s western development region and its registered category is encouraged by the state, according to the Fiscal and Taxation (2001) No. 202 “The notice on the preferential tax policies of development of the western region issued by the Ministry of Finance, the State Administration of Taxation, General Administration of Customs”, the applicable income tax rate is 15% from 2001 to 2010 for domestic and foreign invested enterprises set up in western region and encouraged by state. In addition, being a foreign-invested limited liability company and in accordance with the relevant tax laws and regulations and a local tax authority approval dated 31 May 2005, Baoji Fufeng is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from the first year with cumulative taxable profit since its establishment. Baoji Fufeng entered into its first profit making year during the year ended 31 December 2005. Besides, Baoji Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 21 November 2009, Baoji Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30%. However, Baoji Fufeng chose to utilise the tax preference of “western development region”. Accordingly, the effective tax rate for Baoji Fufeng for the years ended 31 December 2010 is 15% (2009: 7.5%).

IM Fufeng was set up as a foreign-invested limited liability company on 31 March 2006 in Hohhot, Inner Mongolia Autonomous Region. As IM Fufeng is registered in China’s western development region and its registered category is encouraged by state, according to the Fiscal and Taxation (2001) No. 202 “The notice on the preferential tax policies of development of the western region issued by the Ministry of Finance, the State Administration of Taxation, General Administration of Customs”, the applicable income tax rate is 15% from 2001 to 2010 for domestic and foreign invested enterprises set up in western region and encouraged by state. In addition, being a foreign-invested limited liability company and in accordance with the relevant tax laws and regulations and a local tax authority approval dated 16 April 2007, IM Fufeng is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from 2007. Besides, IM Fufeng was approved to be a high-technique enterprise. In accordance with the relevant tax laws and regulations in the PRC and a local tax authority approval dated 1 September 2010, IM Fufeng was entitled to a three-year 50% tax reduction from PRC state EIT of 30%. However, IM Fufeng chose to utilise the tax preference of “western development region”. Accordingly, the effective tax rate for IM Fufeng for the year ended 31 December 2010 is 7.5% (2009: 7.5%).

Shenhua Pharmaceutical was acquired on 25 January 2008 and became a foreign-invested limited liability company after that. It is entitled to a two-year full exemption followed by a three-year 50% tax deduction from PRC state EIT, commencing from 2008. Accordingly, the effective tax rate for Shenhua Pharmaceutical for the year ended 31 December 2010 is 12.5% (2009: fully exempted).

Beijing Huijinhuaying is a domestic limited liability company. The effective tax rate is 25% for the year ended 31 December 2010 and 2009.

111

Fufeng Group Limited Annual Report 2010

F-128

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

27. Taxation (Continued)

(a) Income tax expense (Continued)

Hulunbeir Fufeng was set up as a domestic limited liability company on 14 May 2010 in Hulunbeir, Inner Mongolia Autonomous Region. The effective tax rate is 25% for the year ended 31 December 2010.

The taxation on the Group’s profit before income tax differs from the theoretical amount that would arise using the statutory tax rate as follows:

	2010	2009
	*RMB’000*	RMB’000
Profit before income tax	1,071,329	1,023,597
Tax calculated at PRC statutory rate of 25%	267,832	255,899
Effect of tax exemption	(165,732)	(175,567)
Withholding tax on dividends from PRC subsidiaries_(Note 11)_	–	19,700
Unrecognised tax losses/(Utilisation of previously unrecognised
tax losses)	4,575	(6,390)
Effect of change of tax rate upon assessing deferred tax assets	–	2,556
Expenses not deductible for tax purposes	372	183
Income not subject to tax	(1,769)	(1,069)
	105,278	95,312

(b)

Value-added tax (“VAT”)

Sales of self-manufactured products of the Company’s PRC subsidiaries are subject to VAT. The applicable tax rates for domestic sales are 0%, 13% and 17%. Shandong Fufeng, Baoji Fufeng and IM Fufeng have been approved to use the “exempt, credit, refund” method on goods exported. The tax refund rate is 13%.

Input VAT on purchases of raw materials, fuel, utilities, certain fixed assets and other production materials (merchandise, transportation costs) are deductible from output VAT. VAT recoverable/(payable) is the net difference between output VAT and deductible input VAT.

28. Earnings per share

(a) Basic

Basic earnings per share for the years ended 31 December 2010 and 2009 are calculated by dividing the profit attributable to the Shareholders of the Company by the weighted average number of ordinary shares in issue during the year.

	2010	2009
	*RMB’000*	RMB’000
Profit attributable to the Shareholders	966,051	928,285
Weighted average number of ordinary shares in issue (thousands)	1,672,801	1,660,000
Basic earnings per share (RMB cents per share)	57.75	55.92

112

Fufeng Group Limited Annual Report 2010

F-129

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

28. 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.

	2010	2009
	*RMB’000*	RMB’000
Profit attributable to the Shareholders	966,051	928,285
Interest expense on convertible bonds (net of tax)	17,786	–
Profit used to determine diluted earnings per share	983,837	928,285
Weighted average number of ordinary shares in issue (thousands)	1,672,801	1,660,000
Adjustments for:
– Assumed conversion of convertible bonds (thousands)	122,967	–
– Share options (thousands)	37,083	1,249
Weighted average number of ordinary shares for diluted earnings
per share (thousands)	1,832,851	1,661,249
Diluted earnings per share (RMB cents per share)	53.68	55.88

29. Dividends

	2010	2009
	*RMB’000*	RMB’000
Interim, paid	159,775	146,411
Final, proposed	217,070	219,240

At a meeting held on 21 March 2011, the Board proposed a final dividend of HKD257,803,000 (equivalent to RMB217,070,000) (2009: HKD249,000,000 (equivalent to RMB219,240,000)), representing HK15 cents (equivalent to RMB12.63 cents) (2009: HK15 cents (equivalent to RMB13.21 cents)) per share. This proposed dividend is not reflected as a dividend payable in these financial statements, but will be reflected as an appropriation of share premium for the year ending 31 December 2011.

113

Fufeng Group Limited Annual Report 2010

F-130

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

30. Notes to consolidated cash flow statement – The Group

(a) Cash generated from operations

	2010	2009
	*RMB’000*	RMB’000
Profit before income tax	1,071,329	1,023,597
Adjustments for:
– Reversal of write-down of inventories_(Note12)_	(579)	(1,554)
– Reversal of provision for trade receivables_(Note 13)_	(296)	(95)
– Impairment provision for intangible assets_(Note 8)_	14,002	–
– Depreciation_(Note 7)_	251,295	190,336
– Amortisation of leasehold land payments_(Note 6)_	2,650	2,974
– Amortisation of deferred income_(Note 19)_	(56,321)	(25,521)
– Loss/(Gain) on disposal of property, plant and equipment_(Note (b))_	6,752	(2,925)
– (Gain)/ Loss on disposal of leasehold land payments_(Note (c))_	(1,836)	–
– Employee share option schemes_(Notes 17, 24)_	15,180	16,616
– Interest income_(Note 22)_	(3,625)	(1,502)
– Interest expenses_(Note 26)_	32,383	25,251
Changes in working capital:
– Inventories	(159,088)	(193,186)
– Trade and other receivables	(119,458)	(469,332)
– Restricted bank deposits	(118,415)	16,550
– Trade, other payables and accruals	253,769	55,313
Cash generated from operations	1,187,742	636,522

(b) Proceeds from disposal of property, plant and equipment

	2010	2009
	*RMB’000*	RMB’000
Net book amount for sale_(Note 7)_	24,632	1,386
(Loss)/Gain on disposal of property, plant and equipment	(6,752)	2,925
Proceeds from disposal of property, plant and equipment	17,880	4,311

114 Fufeng Group Limited Annual Report 2010

F-131

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

30. Notes to consolidated cash flow statement – The Group (Continued) (c) Proceeds from disposal of leasehold land payments

	2010	2009
	*RMB’000*	RMB’000
Net book amount for sale_(Note 6)_	10,954	–
Gain on disposal of leasehold land payments	1,836	–
Proceeds from disposal of leasehold land payments	12,790	–

31. Commitments

The Group

Capital commitments

	2010	2009
	*RMB’000*	RMB’000
Purchase of property, plant and equipment
– Contracted but not yet incurred	416,489	175,522

Operating lease commitments – Group as lessee

The Group leases buildings under non-cancellable lease agreements. The Group’s future aggregate minimum lease payments under these non-cancellable operating leases were as follows:

	2010	2009
	*RMB’000*	RMB’000
No later than 1 year	451	679
Later than 1 year and no later than 5 years	263	713
	714	1,392

Fufeng Group Limited Annual Report 2010 115

F-132

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

31. Commitments (Continued)

The Company

As at 31 December 2010 and 2009, the Company had no material capital commitments.

Operating lease commitments – Company as lessee

The Company leases buildings under non-cancellable lease agreements. The Group’s future aggregate minimum lease payments under these non-cancellable operating leases were as follows:

	2010	2009
	*RMB’000*	RMB’000
No later than 1 year	350	350
Later than 1 year and no later than 5 years	263	613
	613	963

32. Related party transactions and balances

The Group

(a) Key management compensation

	2010	2009
	*RMB’000*	RMB’000
Salaries and allowances	11,657	8,135
Pension costs-defined contribution plan	578	457
Share options granted to key management	4,913	6,452
	17,148	15,044

(b) Financial guarantee given by a director

Mr. Li Xuechun, Chairman and an executive director of the Group, has granted a personnel guarantee in favour of Shandong Fufeng on 16 December 2010 with a maximum credit amounting to RMB110,000,000 (2009: nil) 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 been utilised by Shandong Fufeng as of 31 December 2010 for bank borrowings amounting to RMB30,000,000 (Note 20).

The Company

Please refer to Note 9 for details for loans to subsidiaries and amounts due from/to subsidiaries.

116 Fufeng Group Limited Annual Report 2010

F-133

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

33. Particulars of subsidiaries

As at 31 December 2010, the Company has direct and indirect interests in the following wholly-owned subsidiaries:

	Place of	Registered/
	incorporation/	Issued and	Principal activities
Name	establishment	paid capital	and place of operation
Directly held:
Acquest Honour	The British Virgin	USD2	Investment holding in Hong Kong
	Islands (“BVI”)
Indirectly held:
Summit Challenge	BVI	USD1	Investment holding in Hong Kong
Absolute Divine	BVI	USD1	Investment holding in Hong Kong
Expand Base	BVI	USD1	Investment holding in Hong Kong
Profit Champion International Ltd.	Hong Kong	USD2	Investment holding in Hong Kong
Full Profit Investment (Group) Ltd.	Hong Kong	USD2	Investment holding in Hong Kong
Trans-Asia Capital Resources Ltd.	Hong Kong	USD2	Investment holding in Hong Kong
Shandong Fufeng	PRC	RMB220,500,000	Manufacture and sales of glutamic
			acid, monosodium glutamate,
			corn refined products, xanthan
			gum, fertilisers, starch sweetener
			and other related products
			in the PRC
Baoji Fufeng	PRC	HKD80,000,000	Manufacture and sales of glutamic
			acid, monosodium glutamate,
			corn refined products, fertilisers
			and other related products
			in the PRC
IM Fufeng	PRC	HKD640,000,000	Manufacture and sales of glutamic
			acid, monosodium glutamate,
			corn refined products, fertilisers,
			starch sweetener and other
			related products, autoclaved
			aerated concrete block,
			in the PRC

Fufeng Group Limited Annual Report 2010 117

F-134

Notes to the Consolidated Financial Statements (Continued)

For the year ended 31 December 2010

33. Particulars of subsidiaries (Continued)

	Place of	Registered/
	incorporation/	Issued and	Principal activities
Name	establishment	paid capital	and place of operation
Shandong Fufeng Biotechnologies	PRC	RMB5,500,000	Biological techniques research and
Development Co., Ltd.			development, promotion and
			industrialisation of new biological
			techniques and achievements,
			information services of biological
			technique, in the PRC
Shenhua Pharmaceutical (b)	PRC	RMB122,000,000	Manufacture and sales of
			eubacteria material medicine,
			preparations and food additives
			and other related products in the
			PRC
Beijing Huijinhuaying	PRC	RMB21,000,000	Not applicable as it does not carry
			out any business activities
Hulunbeir Fufeng (a)	RPC	RMB800,000,000	Manufacture and sales of starch,
			starch sweeteners, amino acids,
			monosodium glutamate, xanthan
			gum, fertilisers, and other related
			products in the PRC

(a) Hulunbeir Fufeng was established on 14 May 2010, with the registered capital of RMB100,000,000. It is held by IM Fufeng of 50% interest, Baoji Fufeng of 30% interest and Shandong Fufeng of 20% interest. The registered capital of Hulunbeir Fufeng was increased to RMB300,000,000 on 23 June 2010, RMB500,000,000 on 9 August 2010, RMB700,000,000 on 20 October 2010 and RMB800,000,000 on 9 December 2010.
(b) The registered capital of Shenhua Pharmaceutical was increased to RMB122,000,000 on 17 June 2010.

34. Events after the balance sheet date

There is no significant event of the Group after the balance sheet date except the proposed final dividend mentioned in Note 29.

118 Fufeng Group Limited Annual Report 2010

F-135

PRINCIPAL AND REGISTERED OFFICES OF THE COMPANY

Fufeng Group Limited

Headquarters and principal place of business in the PRC

Place of business in Hong Kong Registered office

No. 10, Ke Chuang 2nd Street, Suite 1101, 11th Floor Cricket Square East Zone of Beijing Chinachem Century Tower Hutchins Drive Economic-Technological 178 Gloucester Road P.O. Box 2681 Development Area, Beijing Wanchai Grand Cayman KY1-1111 People’s Republic of China Hong Kong Cayman Islands PRINCIPAL PAYING AGENT, TRUSTEE TRANSFER AGENT AND REGISTRAR

TRUSTEE

Citicorp International Limited Citibank, N.A., London branch 39[th] Floor, ICBC Tower 21st Floor, Citigroup Centre Citibank Plaza, 3 Garden Road Canada Square, Canary Wharf Central, Hong Kong London E14 5LB United Kingdom

LEGAL ADVISERS TO THE COMPANY

as to United States law

Sidley Austin

Level 39 Two International Finance Center 8 Finance Street, Central Hong Kong

As to Hong Kong law as to Cayman Islands and BVI law as to PRC law

Li & Partners Conyers Dill & Pearman King & Wood 22/F, World-Wide House Cricket Square 28-30/F, Huai Hai Plaza Central Hutchins Drive 1045 Huai Hai Road (M) Hong Kong P.O. Box 2681 Shanghai, 200031 Grand Cayman KY1-111 People’s Republic of China Cayman Islands

LEGAL ADVISERS TO THE INITIAL PURCHASERS

as to United States law

as to PRC law

Davis Polk & Wardwell LLP Jingtian & Gongcheng c/o 18th Floor, 34/F, Tower 3 The Hong Kong Club Building China Central Place 3A Chater Road 77 Jianguo Road Central Chaoyang District Hong Kong Beijing 100025 People’s Republic of China

AUDITOR

PricewaterhouseCoopers

22/F, Prince’s Building Central Hong Kong

AI assistant

Fufeng Group Limited — Capital/Financing Update 2011

49286_rns_2011-04-15_b763aee2-fe74-474b-871f-738dfbcb92f1.pdf

Fufeng Group Limited 阜豐集團有限公司

OVERSEAS REGULATORY ANNOUNCEMENT

STRICTLY CONFIDENTIAL—DO NOT FORWARD

THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QIBs (AS DEFINED BELOW) UNDER RULE 144A OR (2) PERSONS OR ADDRESSEES OUTSIDE THE UNITED STATES.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO.

US$300,000,000

Fufeng Group Limited

7.625% SENIOR NOTES DUE 2016

Investing in the Notes involves risks. See “Risk Factors” beginning on page 13.

Citi

Deutsche Bank

TABLE OF CONTENTS

NOTICE TO NEW HAMPSHIRE RESIDENTS

CERTAIN DEFINITIONS, CONVENTIONS AND CURRENCY PRESENTATION

FORWARD-LOOKING STATEMENTS

AVAILABLE INFORMATION

ENFORCEMENT OF CIVIL LIABILITIES

GLOSSARY OF TECHNICAL TERMS

SUMMARY

Overview

Competitive Strengths

Business Strategies

General Information

THE OFFERING

Summary Consolidated Financial Information

Summary Consolidated Income Statements

RISK FACTORS

RISKS RELATING TO OUR BUSINESS

We may not be able to maintain our leading position.

Decreases in the prices of our products may have an adverse effect on our financial condition and results of operations.

We are subject to the volatility of prices of corn and rely heavily on a sufficient supply of corn for our business.

Disruption in coal supply as well as increase in coal price may adversely affect our financial condition and results of operations.

We rely on our major customers.

We have experienced significant growth in the past few years, and we may not be able to maintain such growth in the future.

We may not be able to successfully implement our product diversification strategy.

We may not successfully manage our growth

The discontinuation of or reduction in any preferential tax treatments currently available to us in the PRC may have an adverse effect on our financial condition and results of operations.

The unavailability of government grants may affect our business adversely.

Changing tastes and preferences of MSG consumers may affect the sale of MSG

There may be substitute products for MSG and xanthan gum.

A material disruption to our production lines could adversely affect our ability to generate revenue.

Our research and development efforts may be unsuccessful.

Our production capacity expansion plan may not be successfully achieved.

Our products may be susceptible to product liability claims.

Our business requires significant and continuous capital investment.

We may not be able to successfully expand our marketing and distribution network.

The interests of our controlling shareholder may conflict with the interests of the holders of the Notes.

Our growth depends on our ability to continue to attract and retain qualified personnel, including our senior management members.

We may not be able to renew certain licenses, certificates and permits for our operations.

We may not be able to meet regulatory requirements imposed by the governments of our export destinations.

Our insurance coverage may be insufficient to cover all risks of loss associated with our business operations.

RISKS RELATING TO THE BIOCHEMICAL INDUSTRY IN THE PRC

Disruptions in the global financial markets or any further downturn in the global economy could have an adverse impact on our financial condition and results of operations.

RISKS RELATING TO THE PRC

Adverse changes in the economic and political policies of the PRC government could have an adverse effect on overall economic growth in China, which may adversely affect our business.

PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.

Governmental control over currency conversion may limit our ability to utilize our cash effectively.

There are significant uncertainties under the New EIT Law relating to our PRC enterprise income tax liabilities.

Uncertainties with respect to the PRC legal system could have an adverse effect on our operations.

An occurrence of a widespread health epidemic or a natural disaster could have an adverse effect on our financial condition and results of operations.

RISKS RELATING TO THE NOTES

We are a holding company and payments with respect to the Notes are structurally subordinated to liabilities, contingent liabilities and obligations of our subsidiaries.

We have substantial indebtedness and may incur substantial additional indebtedness in the future, which could adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.

Our subsidiaries are subject to restrictions on the payment of dividends and the repayment of intercompany loans or advances to us and our subsidiaries.

We may be subject to risks presented by fluctuations in exchange rates between the Renminbi and other currencies, particularly the U.S. dollar.

We may not be able to repurchase the Notes upon a change of control triggering event.

Noteholders may be unable to enforce their rights under U.S. bankruptcy law.

We may be unable to obtain and remit foreign exchange.

If we are unable to comply with the restrictions and covenants in our debt agreements or the Indenture, there could be a default under the terms of these agreements or the Indenture, which could cause repayment of our debt to be accelerated.

A trading market for the Notes may not develop, and there are restrictions on resale of the Notes.

The ratings assigned to the Notes may be lowered or withdrawn in the future.

Certain transactions that constitute “connected transactions” under the Listing Rules will not be subject to the “Limitation on Transactions with Shareholders and Affiliates” covenant.

The liquidity and price of the Notes following the offering may be volatile.

There may be less publicly available information about us than is available in certain other jurisdictions.

The Notes will initially be held in book-entry form, and therefore you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies.

Certain facts and statistics are derived from publications not independently verified by us, the Initial Purchasers or our respective advisors.

RISKS RELATING TO THE SUBSIDIARY GUARANTEES AND THE COLLATERAL

Fufeng Group Limited Capital/Financing Update 2011