Fufeng Group Limited - Capital/Financing Update 2011

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)

PROPOSED ISSUE OF SENIOR NOTES

The Company proposes to conduct an international offering of senior notes and will commence a series of roadshow presentations and meetings with institutional investors beginning on or around 29 March 2011. In connection with the offering, the Company will provide certain institutional investors with recent corporate and financial information regarding the Group, including but not limited to updated risk factors, management’s discussion and analysis of the Group’s financial condition and results of operations, description of projects undertaken by the Group, related party transactions and indebtedness information, some of which has not previously been made public. An extract of such information is attached hereto and can also be viewed at the Company’s website www.fufeng-group.com at approximately the same time when such information is released to the institutional investors.

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Completion of the Proposed Notes Issue is subject to market conditions and investor interest. Citigroup and Deutsche Bank as the joint bookrunners and the joint lead managers, are managing the Proposed Notes Issue. As at the date of this announcement, the principal amount, the interest rates, the payment date and certain other terms and conditions of the Proposed Notes Issue are yet to be finalized. Upon finalizing the terms of the Notes, the Company, Citigroup, Deutsche Bank and certain subsidiaries of the Company will enter into the Purchase Agreement. The Company currently intends to use the proceeds from the Proposed Notes Issue to finance the construction of new production facilities, and for general working capital purposes. The Company may adjust the foregoing plans in response to changing market conditions and, thus, reallocate the use of the proceeds in accordance with the requirements of the Company.

Approval in-principle has been received for the listing of the Notes on the SGX-ST. Admission of the Notes to the Official List of the SGX-ST or quotation of any Notes on the SGX-ST is not to be taken as an indication of the merits of the Company or the Notes. The SGX-ST assumes no responsibility for the correctness of any of the statements made, opinions expressed or reports contained in this announcement.

As no binding agreement in relation to the Proposed Notes Issue has been entered into as at the date of this announcement, the Proposed Notes Issue may or may not materialise. Investors and shareholders of the Company are urged to exercise caution when dealing in the securities of the Company.

Further announcement in respect of the Proposed Notes Issue will be made by the Company should the Purchase Agreement be signed.

THE PROPOSED NOTES ISSUE

Introduction

The Company proposes to conduct an international offering of senior notes and will commence a series of roadshow presentations and meetings with institutional investors beginning on or around 29 March 2011. In connection with the offering, the Company will provide certain institutional investors with recent corporate and financial information regarding the Group, including but not limited to updated risk factors, management’s discussion and analysis of the Group’s financial condition and results of operations, description of projects undertaken by the Group, related party transactions and indebtedness information, some of which has not previously been made public. An extract of such information is attached hereto and can also be viewed at the Company’s website www. fufeng-group.com at approximately the same time when such information is released to the institutional investors.

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The Notes will be offered only (i) in the United States, to qualified institutional buyers in reliance on the exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act provided by Rule 144A, or (ii) outside the United States, in compliance with Regulation S under the U.S. Securities Act. None of the Notes will be offered to the public in Hong Kong and none of the Notes will be placed to any connected persons of the Company.

Reasons for the Proposed Notes Issue

The Company is a leading corn-based biochemical company. According to the China Fermentation Industry Association, the Company is the largest manufacturer of MSG in the PRC and the largest manufacturer of xanthan gum in the world based on production capacity as of 31 December 2009.

The Company currently intends to use the proceeds from the Proposed Notes Issue to finance the construction of new production facilities, and for general working capital purposes. The Company may adjust the foregoing plans in response to changing market conditions and, thus, reallocate the use of the proceeds in accordance with the requirements of the Company. The Company believes that the Proposed Notes Issue will further extend the Company’s international profile and improve its ability to access the international debt capital markets to support the growth of the Group in the future.

Listing

Approval in-principle has been received for the listing of the Notes on the SGX-ST. Admission of the Notes to the Official List of the SGX-ST or quotation of any Notes on the SGX-ST is not to be taken as an indication of the merits of the Company or the Notes. No listing of the Notes has been sought in Hong Kong.

GENERAL

The Company will make further announcement in respect of the Proposed Notes Issue upon the execution of the Purchase Agreement.

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DEFINITIONS

In this announcement, the following expressions shall have the meanings set out below unless the context requires otherwise:-

“Board”	the board of Directors;
“Citigroup”	Citigroup Global Markets Inc., one of the joint bookrunners
	and the joint lead managers in respect of the offer and sale of
	the Notes;
“Company”	Fufeng Group Limited (阜豐集團有限公司), an exempted
	company incorporated under the laws of the Cayman Islands
	with limited liability, whose Shares are listed on the main
	board of the Stock Exchange;
“connected person”	shall have the meaning as ascribed to it under the Listing
	Rules;
“Deutsche Bank”	Deutsche Bank AG, Singapore Branch, one of the joint
	bookrunners and the joint lead managers in respect of the
	offer and sale of the Notes;
“Director(s)”	the director(s) of the Company;
“Group”	the Company and its subsidiaries from time to time;
“HK$”	Hong Kong dollar, the lawful currency of Hong Kong;
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC;
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange;
“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;
“Notes”	the guaranteed senior notes to be issued by the Company;
“PRC” or “China”	the People’s Republic of China (excluding, for the purposes
	of this announcement, Hong Kong, Macau Special
	Administrative Region of the PRC and Taiwan);
“Proposed Notes Issue”	the proposed issue of the Notes by the Company;

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“Purchase Agreement” the agreement proposed to be entered into among the Company, Citigroup and Deutsche Bank and certain subsidiaries of the Company in relation to the Proposed Notes Issue; “SGX-ST” Singapore Exchange Securities Trading Limited; “Share(s)” ordinary share(s) of HK$0.1 each in the share capital of the Company; “Stock Exchange” The Stock Exchange of Hong Kong Limited; and “U.S. Securities Act” the United States Securities Act of 1933, as amended.

By order of the Board Fufeng Group Limited Li Xuechun Chairman

Shandong, the PRC 28 March 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.

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RISK FACTORS

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.

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 making 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.

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.

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 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.

CAPITALIZATION

The following table sets forth our indebtedness and capitalization as of December 31, 2010. The following table should be read in conjunction with our consolidated financial information and related notes included in this document.

Total borrowings – current portion Short-term bank borrowings, guaranteed and secured . . . . . . . . Short-term bank borrowings, secured. . . . . . . . . . . . . . . . . . . . Short-term bank borrowings, unsecured . . . . . . . . . . . . . . . . . Total borrowings – current portion . . . . . . . . . . . . . . . . . . . . . Total borrowings – non-current portion 2010 Convertible Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total borrowings – non-current portion . . . . . . . . . . . . . . . . . . Capital and reserves attributable to equity shareholders of the Company Issued capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share premium Proposed final dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Capitalization (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		As of December	31, 2010
		Actual
		(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 4,126,723	(US$’000) 4,545 4,545 75,001 84,091 148,706 148,706 26,378 32,889 49,939 (11,664) 379,013 476,555 625,261

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 document, 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 document. 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.

(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.
(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.
(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 document. 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 document.

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. 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.

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.

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 and bank borrowings. 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 document 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,
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.

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,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 1,917,251 411,626 133,691 105,516 342,337 2,910,421 30,590 –	2009 (RMB’000) 2,185,523 386,304 177,364 156,395 452,169 3,357,755 (122,924) (1,554)	2010 (RMB’000) 3,234,765 646,581 231,013 198,135 611,207 4,921,701 (69,751) (579)	2010
			(US$’000) 490,116 97,967 35,002 30,020 92,607 745,712 (10,568) (88)
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,	For the year ended December 31,	For the year ended December 31,
2008 (RMB’000) 1,304,277 515,349 284,266 108,550 87,412 309,555	2009 (RMB’000) 1,692,010 371,862 282,358 144,205 129,119 400,056	2010 (RMB’000) 2,559,799 521,779 509,158 192,333 166,914 583,779	2010
			(US$’000) 387,848 79,057 77,145 29,141 25,290 88,451
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,	For the year ended December 31,	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) 51,033 23,290 23,302 127,360 25,141 18,104 32,782		2009 (RMB’000) 76,680 22,314 22,657 103,946 33,159 27,276 52,113		2010 (RMB’000) 112,451 17,745 22,991 137,423 38,680 31,221 27,428		2010
						(US$’000) 17,038 2,689 3,483 20,822 5,861 4,730 4,156
	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.

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 (RMB’000) 12,958	2009 (RMB’000) 175,522	2010 (RMB’000) 416,489	2010
				(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,
		2008	2009	2010	2010
		(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
No later	than 1 year . . . . . . . . . . . . . .	166	679	451	68.3
Later than 1 year and no later than 5
years	. . . . . . . . . . . . . . . . . . . . . . .	–	713	263	39.8
Total . . . . . . . . . . . . . . . . . . . . . . . . .		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,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Non-current:
Long-term bank borrowings, secured	232,000	150,000	–	–
Long-term bank borrowings,
unsecured . . . . . . . . . . . . . . . . . .	80,000	100,000	–	–
2010 Convertible bonds . . . . . . . . . .	–	–	981,458	148,706
	312,000	250,000	981,458	148,706
Less: Current portion of long-term
bank borrowings, secured . . . . . . .	–	(70,000)	–	–
	312,000	180,000	981,458	148,706
Current:
Short-term bank borrowings,
guaranteed and secured . . . . . . . . .	–	–	30,000	4,545
Short-term bank borrowings,
secured. . . . . . . . . . . . . . . . . . . . .	30,000	–	30,000	4,545
Short-term bank borrowings,
unsecured . . . . . . . . . . . . . . . . . .	246,000	348,000	495,000	75,001
Current portion of long-term bank
borrowings, secured . . . . . . . . . . .	–	70,000	–	–
	276,000	418,000	555,000	84,091
Total . . . . . . . . . . . . . . . . . . . . . . .	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 document. 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 RMB495.0 million (US$75.0 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 6.59%	2009 4.98%	2010
			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; (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. As of the date of this document, 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 document, 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 document, 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.

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,
	2008	2009	2010	2010
	(RMB’000)	(RMB’000)	(RMB’000)	(US$’000)
Operating profit. . . . . . . . . . . . . . . . . .	368,042	1,048,848	1,103,712	167,229
Depreciation and amortization . . . . . . .	154,773	193,310	253,945	38,477
EBITDA . . . . . . . . . . . . . . . . . . . . . . .	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. Interest expense excludes amounts capitalized.

BUSINESS

OVERVIEW

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.

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 524] 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.

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Threonine
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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

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.

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.

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.

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

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.

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

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.

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.

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 document, 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 document, 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 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.

AI assistant

Fufeng Group Limited — Capital/Financing Update 2011

49286_rns_2011-03-28_59b0da8a-9c26-4587-a8ad-1e6db6776d8a.pdf

Fufeng Group Limited 阜豐集團有限公司

(Stock Code: 546)

PROPOSED ISSUE OF SENIOR NOTES

THE PROPOSED NOTES ISSUE

Introduction

Reasons for the Proposed Notes Issue

Listing

GENERAL

DEFINITIONS

RISK FACTORS

RISKS RELATING TO OUR BUSINESS

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.

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 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 making 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.

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.

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

CAPITALIZATION

SELECTED CONSOLIDATED FINANCIAL INFORMATION

Selected Consolidated Income Statements

Selected Consolidated Balance Sheet

OVERVIEW

SIGNIFICANT FACTORS THAT AFFECT OUR RESULTS OF OPERATIONS

Production Capacity

Pricing of Our Products

Cost of Production

Taxation

General Macroeconomic Conditions in China

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Revenue Recognition

Property, Plant and Equipment

Impairment of Assets

Inventories

Trade and Other Receivables

Government Grants

Taxation

2010 Convertible Bonds

SELECTED ITEMS OF INCOME STATEMENTS

Revenue

Cost of Sales

Gross Profit and Gross Profit Margin

Other Income

Selling and Marketing Expenses

Administrative Expenses

Other Operating Expenses

Finance Costs

Income Tax Expenses

Profit for the Year

RESULTS OF OPERATIONS

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

Revenue

MSG segment

Xanthan gum segment

Cost of Sales

Fufeng Group Limited Capital/Financing Update 2011