Fufeng Group Limited — Interim / Quarterly Report 2011

Aug 16, 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.

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Fufeng Group Limited 阜豐集團有限公司

(incorporated in the Cayman Islands with limited liability)

(Stock code: 546)

ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2011

HIGHLIGHTS OF 2011 INTERIM RESULTS

• The Group continues its business growth strategy to expand its market shares by expanding its production capacity, strengthening its research and development capabilities and diversifying its products portfolio

• Turnover increased to RMB3,815.1 million, representing an increase of 27.7% from the corresponding period in 2010

• Gross profit increased by 11.6% to RMB828.4 million

• Gross profit margin maintained at 21.7%, a decrease of 3.1 percentage points when compared to the same period last year

• Profit attributable to shareholders decreased by 8.7% to RMB420.2 million

• Earnings per share – basic and diluted for the first half of 2011 was HK29.40 cents and HK27.73 cents respectively (1H 2010: HK31.77 cents and HK30.03 cents)

• Return on equity for the first half of 2011 was 25.0% (1H 2010: 34.3%)

• Interim dividend of HK10 cents per share declared by the Board

• Successfully issued USD300.0 million senior notes for five years with fixed interest rate 7.625% p.a.

• calculated in annualised basis

– 1 –

The Board is pleased to announce the unaudited condensed consolidated results of the Group prepared under HKFRS for the six months ended 30 June 2011 together with comparative figures are as follows:

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

Note

Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited 3,815,117 2,987,974 (2,986,696) (2,245,878) 828,421 742,096 68,279 63,102 (188,466) (121,950) (183,639) (136,330) (8,638) (5,748) 515,957 541,170 (48,753) (28,401) 467,204 512,769 (46,955) (52,699) 420,249 460,070 24.45 27.72 23.06 26.20 141,018 159,775

Revenue 3 Cost of sales 7 Gross profit Other income 6 Selling and marketing expenses 7 Administrative expenses 7 Other operating expenses 7 Operating profit Finance costs Profit before income tax Income tax expense 8 Profit for the period attributable to the Shareholders Earnings per share for profit attributable to the Shareholders during the period (expressed in RMB cent per share) – basic 9 – diluted 9 Dividends 10

3,815,117 (2,986,696) 828,421 68,279 (188,466) (183,639) (8,638) 515,957 (48,753) 467,204 (46,955) 420,249 24.45 23.06 141,018

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INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

Note	30 June 2011 RMB’000 Unaudited	31 December 2010 RMB’000 Audited 169,187 4,087,675 – 20,759 4,277,621 710,695 816,773 147,225 767,951 2,442,644 6,720,265 174,097 – 217,070 329,594 (76,985) 2,501,489 3,145,265
ASSETS Non-current assets Leasehold land payments 11 Property, plant and equipment 11 Intangible assets 11 Deferred income tax assets Current assets Inventories Trade and other receivables 12 Short-term bank deposits Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Shareholders Share capital 15 Share premium – Proposed interim dividend – Proposed final dividend – Others Other reserves Retained earnings Total equity	230,835 4,864,818 – 17,603 5,113,256 775,651 1,306,027 11,030 1,294,607 3,387,315 8,500,571 174,097 141,018 – 188,576 (68,864) 2,921,738 3,356,565

– 3 –

Note	30 June 2011 RMB’000 Unaudited	31 December 2010 RMB’000 Audited
LIABILITIES Non-current liabilities Deferred income Borrowings 14 Deferred income tax liabilities Current liabilities Trade, other payables and accruals 13 Current income tax liabilities Borrowings 14 Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	168,775 2,885,946 23,339 3,078,060 1,741,674 14,272 310,000 2,065,946 5,144,006 8,500,571 1,321,369 6,434,625	141,810 981,458 27,033
		1,150,301
		1,839,022 30,677 555,000
		2,424,699
		3,575,000
		6,720,265
		17,945
		4,295,566

– 4 –

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

This condensed consolidated interim financial information for the six months ended 30 June 2011 has been prepared in accordance with HKAS 34, ’Interim financial reporting’. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements information for the year ended 31 December 2010 which have been prepared in accordance with HKFRS.

2. ACCOUNTING POLICIES

Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2010, as described in those annual financial statements.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

The following new standards, new interpretations and amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2011, but are not currently relevant for the Group.

HKAS 24 (Revised) ’Related party disclosures’ Amendment to HKAS 34 ’Interim financial reporting’ Amendment to HKAS 32 ’Classification of rights issues’ Amendment to HK(IFRIC) – Int-14 ’Prepayments of a minimum funding requirement’ HK(IFRIC) – Int 19 ’Extinguishing financial liabilities with equity instruments’

Third improvements to HKFRS (2010) were issued in May 2010 by both IASB and the HKICPA.

The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year beginning 1 January 2011 and have not been early adopted:

HKFRS 9 ’Financial instruments’[1] HKAS 12 (Amendment) ’Deferred tax: Recovery of underlying assets’[2] HKFRS 7 (Amendment) ’Disclosures – Transfers of financial assets’[3]

• 1 Effective for annual periods beginning on or after 1 January 2013 2 Effective for annual periods beginning on or after 1 January 2012

• 3 Effective for annual periods beginning on or after 1 July 2011

For the application of these standards or interpretations, the management is either assessing the impact of or considers that there will have no material impact on the results and the financial position of the Group.

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3. SEGMENT INFORMATION

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

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

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

Manufacturing and sale of:

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

• Xanthan gum

Approximately 82% (30 June 2010: 90%) of the Group’s revenue and business activities are conducted in the PRC.

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

The revenue of the Group for the six months ended 30 June 2011 and 2010 are set out as following:

	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited
MSG Glutamic acid Corn refined products Xanthan gum Fertilisers Starch sweeteners Threonine Corn oil Others	2,219,246 89,826 474,602 399,414 253,092 210,527 60,899 50,308 57,203 3,815,117	1,762,926 96,687 362,837 381,471 152,423 176,673 137 35,421 19,399
		2,987,974

– 6 –

The segment results for the six months ended 30 June 2011 are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Revenue Segment results Finance costs Profit before income tax Income tax expenses Profit for the period	3,415,703 402,409	399,414 125,447	– (11,899)	3,815,117
				515,957 (48,753)
				467,204 (46,955)
				420,249

Other segment items included in the income statement are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Depreciation 132,523 Amortisation of leasehold land payments 873 Capital expenditure 943,597 The segment assets and liabilities at 30 June 2011 ar MSG RMB’000 Unaudited		20,329 377 49,209 e as follows: Xanthan gum RMB’000 Unaudited	708 43 904 Unallocated RMB’000 Unaudited	153,560 1,293
				993,710
				Group RMB’000 Unaudited
Total assets Total liabilities	7,032,749 1,897,774	1,025,018 309,696	442,804 2,936,536	8,500,571
				5,144,006

– 7 –

The segment results for the six months ended 30 June 2010 are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Revenue Segment results Finance costs Profit before income tax Income tax expenses Profit for the period	2,606,503 423,286	381,471 134,826	– (16,942)	2,987,974
				541,170 (28,401)
				512,769 (52,699)
				460,070

Other segment items included in the income statement are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Depreciation Amortisation of leasehold land payments Reversal of write-down of inventories Loss on disposal of leasehold land prepayments and property, plant and equipment Capital expenditure	99,939 1,212 (207) 228 500,997	17,427 116 – – 48,870	617 43 – – 39	117,983 1,371 (207) 228
				549,906

The segment assets and liabilities at 30 June 2010 are as follows:

	MSG RMB’000 Unaudited	Xanthan gum RMB’000 Unaudited	Unallocated RMB’000 Unaudited	Group RMB’000 Unaudited
Total assets Total liabilities	4,109,815 1,517,634	761,356 273,789	590,712 991,556	5,461,883
				2,782,979

– 8 –

4. ESTIMATES

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2010.

5. FINANCIAL RISK MANAGEMENT

5.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk.

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2010.

There have been no changes in the risk management department since year end or in any risk management policies.

5.2 Liquidity risk

Compared to year end, there was an additional non-current borrowing of USD300,000,000 with maturity date 13 April 2016 in the contractual undiscounted cash out flows for financial liabilities.

5.3 Fair value estimation

The carrying value less impairment provision of trade and other receivables, cash and cash equivalents and short-term bank deposits are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

– 9 –

6. OTHER INCOME

	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited
Interest income Amortisation of deferred income Sales of waste materials Subsidy income due to purchase of grains allocated by the government Others	4,311 20,419 40,374 – 3,175 68,279	1,196 11,732 22,192 25,000 2,982
		63,102

7. EXPENSES BY NATURE

	Six months ended 30 June	Six months ended 30 June
	2011	2010
	RMB’000	RMB’000
	Unaudited	Unaudited
Amortisation of leasehold land payments	1,293	1,371
Depreciation of property, plant and equipment	153,560	117,983
Value on employee services for the share
option schemes	8,121	7,510
Foreign exchange losses	7,147	3,777
Write-down/(Reversal of write-down) of inventories	102	(207)

– 10 –

8. INCOME TAX EXPENSE

	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited
Current income tax – PRC enterprise income tax (“EIT”) Deferred income tax	47,493 (538) 46,955	48,695 4,004
		52,699

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

Hong Kong profits tax has not been provided for as the Group has no estimated assessable profit in Hong Kong for the six months ended 30 June 2011 and 2010.

PRC EIT is calculated based on the effective tax rate on assessable profit of subsidiaries established in the PRC in accordance with PRC tax laws and regulations.

9. EARNINGS PER SHARE

Earnings per share attributable to the Shareholders are as follows:

	Six months ended 30 June	Six months ended 30 June
	2011	2010
	Unaudited	Unaudited
Earnings per share for profit attributable to
the Shareholders (RMB cents per Share)
– basic	24.45	27.72
– diluted	23.06	26.20

Earnings per share – basic and diluted for the first half of 2011 was RMB24.45 cents and RMB23.06 cents respectively (equivalent to HK29.40 cents and HK27.73 cents) (1H 2010: RMB27.72 cents and RMB26.20 cents (equivalent to HK31.77 cents and HK30.03 cents)).

– 11 –

10. DIVIDENDS

A 2010 final dividend of HK15 cents (equivalent to RMB12.63 cents) per Share, totalling HKD257,803,000 (equivalent to RMB217,070,000) was paid in May 2011.

In addition, an interim dividend of HK10 cents (equivalent to RMB8.21 cents) (2010: HK11 cents (equivalent to RMB9.63 cents)) per Share was declared by the Board on 16 August 2011. It is payable on or before 30 September 2011 to Shareholders who are on the register at 6 September 2011. This interim dividend, amounting to HKD171,868,600 (equivalent to RMB141,018,186), has not been recognised as liability in this interim financial information. It will be reflected as an appropriation of share premium for the year ending 31 December 2011.

11. LEASEHOLD LAND PAYMENTS, PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

	Leasehold land payments RMB’000 Unaudited	Property, plant and equipment RMB’000 Unaudited	Intangible assets RMB’000 Unaudited	Total RMB’000 Unaudited 2,648,057 549,906 (50,851) (119,354) 19,951 3,047,709 4,256,862 993,710 (24) (154,853) (42) 5,095,653
Six months ended 30 June 2010 Opening net book amount at 1 January 2010 Additions Disposals Depreciation and amortisation Depreciation disposal Closing net book amount at 30 June 2010 Six months ended 30 June 2011 Opening net book amount at 1 January 2011 Additions Disposals Depreciation and amortisation Impairment charge Closing net book amount at 30 June 2011	140,160 40,391 (16,558) (1,371) 5,604 168,226 169,187 62,941 – (1,293) – 230,835	2,507,897 509,515 (34,293) (117,983) 14,347 2,879,483 4,087,675 930,727 (24) (153,560) – 4,864,818	– – – – – – – 42 – – (42) –

– 12 –

12. TRADE AND OTHER RECEIVABLES

		As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited
Trade receivable (a) 226,177 162,584 Less: provision for impairment of receivables (4,467) (4,231) Trade receivable, net 221,710 158,353 Notes receivables (b) 698,644 501,332 Deposits and others 46,275 43,365 Value Added Tax recoverable 104,030 78,863 Trade and other receivables before prepayments 1,070,659 781,913 Prepayments for raw materials 235,368 34,860 1,306,027 816,773 (a) The ageing analysis of the trade receivables were as follows: As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited Within 3 months 197,869 153,067 3 – 12 months 23,753 3,927 Over 12 months 4,555 5,590 226,177 162,584			162,584 (4,231)
			158,353 501,332 43,365 78,863
			781,913 34,860
			816,773
	Within 3 months 3 – 12 months Over 12 months	197,869 23,753 4,555 226,177	153,067 3,927 5,590
			162,584

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

• (b) As at 30 June 2011, notes receivables were all bank acceptance notes aged less than six months, including amount of RMB552,422,000 (2010: RMB471,952,000) applied for settling the amounts payable to the Group’s suppliers.

– 13 –

13. TRADE, OTHER PAYABLES AND ACCRUALS

		As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited	As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited
Trade payable (a) 625,023 614,194 Advances from customers 224,948 147,604 Bank acceptance notes payable 26,000 149,945 Payables for leasehold land, property, plant and equipment 607,748 743,499 Salaries, wages and staff welfares payables 78,552 58,313 Interest payable – current portion 50,183 11,531 Unused government grants 46,902 29,702 Dividend payable 407 407 Other payables and accruals 81,911 83,827 1,741,674 1,839,022 (a) The ageing analysis of the trade payables was as follows: As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited Within 3 months 540,202 575,781 3 to 6 months 49,491 23,959 6 to 12 months 25,520 5,594 Over 12 months 9,810 8,860 625,023 614,194			614,194 147,604 149,945 743,499 58,313 11,531 29,702 407 83,827
			1,839,022
	Within 3 months 3 to 6 months 6 to 12 months Over 12 months	540,202 49,491 25,520 9,810 625,023	575,781 23,959 5,594 8,860
			614,194

As at 30 June 2011, notes receivables of RMB552,422,000 (2010: RMB471,952,000) were applied for negotiation with the Group’s suppliers for settling the amounts payable to them.

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14. BORROWINGS

	As at 30 June 2011 31 December 2010 RMB’000 RMB’000 Unaudited Audited 2,885,946 981,458 310,000 555,000 3,195,946 1,536,458 RMB’000 (Unaudited) 598,000 80,000 (240,000) 976,977 1,414,977 1,536,458 225,000 (470,000) 1,927,702 4,606 (27,820) 3,195,946
Non-current Current Movements in borrowings is analysed as follows:	2,885,946 310,000 3,195,946
Six months ended 30 June 2010 Opening amount as at 1 January 2010 New borrowings Repayments of borrowings Convertible bonds – liability component Closing amount as at 30 June 2010 Six months ended 30 June 2011 Opening amount as at 1 January 2011 New borrowings Repayments of borrowings Senior notes Convertible bonds – liability component Exchange differences Closing amount as at 30 June 2011

The Group issued 7.625% senior notes at a par value of total amounted to USD300,000,000 settled in USD on 13 April 2011. The notes mature five years from the issue date and are secured by the pledge of the capital stock of certain subsidiaries of the company, which are Acquest Honour Holdings Limited, Summit Challenge Limited, Absolute Divine Limited and Expand Base Limited. The guarantors are all holding companies that collectively control the operation and assets of its PRC subsidiaries of the Group.

Interest expenses on borrowings and loans for the six months ended 30 June 2011 was RMB41,342,000 (30 June 2010: RMB28,401,000).

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15. SHARE CAPITAL

	Number of authorised shares ’000 Unaudited	Number of issued and fully paid shares ’000 Unaudited	Ordinary shares RMB’000 Unaudited		Amount
					Share premium RMB’000 Unaudited	Total RMB’000 Unaudited
Opening balance at 1 January 2010 Dividends paid At 30 June 2010 Opening balance at 1 January 2011 Dividends paid At 30 June 2011	10,000,000 – 10,000,000 10,000,000 – 10,000,000	1,660,000 – 1,660,000 1,718,686 – 1,718,686	169,034 – 169,034 174,097 – 174,097		785,440 (219,240) 566,200 546,664 (217,070) 329,594	954,474 (219,240)
						735,234
						720,761 (217,070)
						503,691

16. CONTINGENT LIABILITIES – THE GROUP

As at 30 June 2011 and 2010, the Group had no material contingent liabilities.

17. RELATED PARTY TRANSACTIONS

Key management compensation is set out below:

	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited	Six months ended 30 June 2011 2010 RMB’000 RMB’000 Unaudited Unaudited
Salaries and allowances Pension costs-defined contribution plan Share options granted	6,084 526 2,810 9,420	4,640 205 1,623
		6,468

Key management are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including Directors and executive officers.

18. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

Details of the interim dividend proposed are given in Note 10.

– 16 –

BUSINESS AND FINANCIAL REVIEW

Overview

In 2011, the Group continues its business growth strategy to expand its market shares by expanding its production capacity, strengthening its research and development capabilities, and to diversify its product offerings.

For the six months ended 30 June 2011, the Group recorded an increase of 27.7% in sales from the corresponding period of 2010. Such increase was primarily attributable to the increase in sales volume and the market demand for MSG and xanthan gum products.

The table below illustrates the continuous growth of the Group’s revenue in the past six years and current period:

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

RMB (Million)
7,000
6,416.4
6,000
5,000
4,632.9
4,000 3,815.1
3,585.3
2,988.0
3,000
2,445.7
2,000 1,787.2
1,296.4
1,000
0
2005 2006 2007 2008 2009 2010 1H2010 1H2011
CAGR: 37.7%
27.7%
----- End of picture text -----

The Group’s gross profit increased from approximately RMB742.1 million in the first half of 2010 to approximately RMB828.4 million in the first half of 2011. It represented an increase of 11.6%, primarily due to increase in sales and sales volume.

– 17 –

In the first half of 2011, the production and sales volume of MSG increased by 18.9% and 17.7% over the first half of 2010, respectively. The production and sales volume of xanthan gum increased by 64.3% and 12.8% from the corresponding period of 2010, respectively. Capitalising on the strong sales of MSG and xanthan gum, the Group was able to maintain the growth momentum of 2010.

As threonine was just launched for commercial production in the middle of 2010 and reached the 10,000 tonnes of production capacity by the end of 2010, its revenue increased significantly from the corresponding period of 2010. Capitalising on the cost advantages of our plants, the Group intends to rapidly expand the capacity of threonine to 40,000 tonnes in coming year. Threonine is one of the major products which is rapidly becoming an important growth driver for the Group.

Given that the PRC continued its strong economic growth, the major material costs have been increasing at a larger extent over the ASP of the Group’s products during the period. The Group’s gross profit margin was thus under pressure. The gross profit margin of the Group decreased from 24.8% in the first half of 2010 to 21.7% in the first half of 2011.

Economy of scale by riding on its leading market position and further expanding its existing production capacity, the Group was able to control cost effectively. Meanwhile, to further extend the upstream development of the highly vertically integrated production process. Construction of the production line of 100,000 tonnes of synthetic ammonia has begun and is scheduled to commence production in September 2011 in order to further reduce the costs on chemical materials and offset a considerable part of the pressure of rising costs internally.

It is expected that with the continuous development and growth of China’s economy, the retail sector will benefit from tremendous market opportunities. The Group continuously develops and promotes the own brand name products in industrial and retail sector. For the MSG products, the Group established its brand products of “U Fresh Series”. They are sold through an extensive retail and distribution network of supermarket in the PRC.

According to the Group’s development plan, the main construction of the Hulunbeir Plant Phase 1 located in Inner Mongolia and close to the border with Heilongjiang has been completed. It will commence production in the third quarter of 2011. Upon completion of this new plant, the Group’s MSG and glutamic acid production capacity will be enhanced, further strengthening the Group’s leading position.

– 18 –

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

Market overview

The market demand of MSG and xanthan gum has steadily grown since the beginning of 2011. Costs of major raw materials increase significantly due to the continuous economic growth in the PRC. It is the strategy of the Group to leverage its leading market position and offer competitive pricing products. The main objective is to expand its market share by preparing the additional production capacity to be launched to the market smoothly in the second half of 2011.

MSG segment

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

The MSG and glutamic acid market in the PRC became increasingly concentrated due to industry consolidation and the Group has become the world’s leading manufacturer in the MSG industry as it took advantage of the industry consolidation to further expand its market share. The Group has strategically controlled the products price at competitive level to boost its sales volume, and to prepare the additional production capacity in the Hulunbeir Plant to be launched to the market smoothly in the second half of 2011.

In late 2010, the Group entered into a co-operative agreement with “Ajinomoto” in Japan in relation to threonine products, whereby, the Group’s threonine products can be sold through the sales and distribution network of Ajinomoto from 2011 onwards. The Group will rapidly expand the production capacity of its threonine product in 2011, being the one of growth driver for the Group moving forward, threonine will be the one of core products of the Group.

Xanthan gum segment

The global market demand for xanthan gum has continuously recovered since 2010. The Group has increased its production capacity and continues to increase its market share since 2009. The market demand of xanthan gum increased in the first half of 2011. The Group further strengthens the market leading position of xanthan gum.

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Operational review of the Group

With further industry consolidation in the first half of 2011, the market demand and the sales revenue of the Group continuously expand. In addition, the new Hulunbeir Plant will commence commercial production in the third quarter. Set out below are certain indicative operational figures of the Group:

Turnover/Gross profit/Gross profit margin of the Group

	Six months ended 30 June	Six months ended 30 June	Change
	2011	2010	%
Turnover (RMB’000)	3,815,117	2,987,974	27.7
Gross profit (RMB’000)	828,421	742,096	11.6
Gross profit margin (%)	21.7	24.8	(3.1) ppts.

The performance growth of the Group is mainly due to the increase in sales volume and selling prices of certain products. The major material costs have been increasing at a larger extent over the ASP of the Group’s products during the first half of 2011. As a result, the gross profit margin of the Group was thus under pressure.

Profit attributable to the Shareholders

	Six months ended 30 June	Six months ended 30 June
	2011	2010	Change
	RMB’000	RMB’000	%
As reported	420,249	460,070	(8.7)

– 20 –

Profit attributable to the Shareholders decreased by about 8.7%, due to the factors mentioned above. Despite the increase in market share, sales by volume and value, cost efficiencies and an improved operating environment, there were significant increases in raw material costs as well. The Group made a strategic decision to maintain its competitive pricing policies in order to preserve market share while waiting for completion of new production facilities that will reinforce its cost advantages through economies of scale. In addition to higher raw material costs, administrative costs increased as mainly due to staff costs and research and development costs rise during the period. And also, administrative expenses of the Group increased as the operation of new plant has started. It is expected that upon commencement of the operation of the new Hulunbeir Plant, it can benefit the profit growth of the Group.

Segment Highlights

The Group’s products are categorised into two business segments, namely MSG segment and Xanthan gum segment. Products of the MSG segment include MSG, glutamic acid, fertilisers, threonine and other related products while Xanthan gum segment represents the production and sale of xanthan gum.

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

	Six months ended 30	Six months ended 30	June 2011	Six months ended 30	Six months ended 30	June 2010	Increase/(Decrease)	Increase/(Decrease)	Increase/(Decrease)
		Xanthan			Xanthan			Xanthan
	MSG	gum	Group	MSG	gum	Group	MSG	gum	Group
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	%	%	%
	Unaudited	**Unaudited **	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	3,415,703	399,414	3,815,117	2,606,503	381,471	2,987,974	31.0	4.7	27.7
Gross profit	679,806	148,615	828,421	592,409	149,687	742,096	14.8	(0.7)	11.6
Gross profit ratio	19.9%	37.2%	21.7%	22.7%	39.2%	24.8%	(2.8) ppts.	(2.0) ppts.	(3.1) ppts.
Segment results	402,409	125,447		423,286	134,826		(4.9)	(7.0)
Segment net assets
Assets	7,032,749	1,025,018		4,109,815	761,356		71.1	34.6
Liabilities	1,897,774	309,696		1,517,634	273,789		25.0	13.1
Net assets	5,134,975	715,322		2,592,181	487,567		98.1	46.7

– 21 –

MSG Segment

Revenue and ASP

Revenue generated from the sale of the MSG segment products increased to RMB3,415.7 million in the first half of 2011, representing an increase of RMB809.2 million or 31.0%, over the same period in 2010, mainly attributable by the increase in the sales volume and ASP of the MSG.

Set out below is the revenue of the Group by products in this segment for the six months ended 30 June 2011 and 2010:

Product	Six months ended 30 June 2011 2010 Change RMB’000 RMB’000 % 2,219,246 1,762,926 25.9 89,826 96,687 (7.1) 253,092 152,423 66.0 474,602 362,837 30.8 210,527 176,673 19.2 60,899 137 444.3 times 50,308 35,421 42.0 22,308 2,732 7.2 times 3,029 1,789 69.3 31,866 14,878 114.2 3,415,703 2,606,503 31.0
MSG Glutamic acid Fertilisers Corn refined products Starch sweeteners Threonine Corn oil Branched-chain amino acid Chicken powder Others	2,219,246 89,826 253,092 474,602 210,527 60,899 50,308 22,308 3,029 31,866 3,415,703

– 22 –

MSG

Increases in raw material costs contributed to market consolidation in the first half of 2011, as many obsolete production facilities are facing closure. The Group maintained its market leadership in the MSG industry through increases in production capacity, increased marketing efforts, and competitive pricing. While the ASP increased just 7.0%, from RMB7,489 per tonne in the first half of 2010 to RMB8,010 per tonne in the first half of 2011, turnover of MSG in the first half of 2011 increased by 25.9% and sales volume by 17.7% compared to the first half of 2010, to 277,074 tonnes. Market demand supported growth during the period.

In the first half of 2011, the Group also strengthened its effort in promoting the U Series products in consumable retail section, which consists of two major categories of products including MSG and chicken powder. We are targeting to capture the household market which benefited from the improved living standards in China recently by the U series. We are pleased to report the operating result of this series was generally in line with the expectations of the management. In addition, the new compound seasoning products will gradually launch in the third quarter of 2011.

Moreover, the increase of domestic consumption demand supported the growth of MSG market in the PRC. In addition, many small and medium MSG manufacturers are facing closure and being phased out as the production cost continued to increase. Hence, the supply and demand of the MSG industry in the PRC is still in a balanced situation.

Fertilisers

The bad weather affected part of the market demand of fertilisers during the period. The Group actively implemented a competitive pricing policy to counteract the changes of market environment. Therefore, the ASP of the fertiliser products are reduced. The ASP of fertilisers decreased from approximately RMB762 per tonne in the first half of 2010 to approximately RMB681 per tonne in the first half of 2011, representing a decrease of about 10.6%. It is in line with the price trend of products of the same nature. The production and sales volume of fertilisers significantly increased, mainly due to the increase in sales promotion effort for those fertilisers products by the Group.

Corn refined products

In line with the corn price, the ASP of corn refined products increased during the period. Turnover of corn refined products increased by about 30.8% for the six months ended 30 June 2011 when compared with the same period of 2010, mainly due to the increase in the consumption volume of corn kernels.

– 23 –

Starch sweeteners

Turnover of starch sweeteners rose by 19.2% during the period, reflecting strong demand despite a 23.8% increase in ASP. ASP was affected by sugar shortages, and rose from RMB2,763 per tonne in the first half of 2010 to RMB3,421 per tonne in the first half of 2011.

Threonine

Threonine is a new product of the Group launched in 2010. By the end of 2010, the capacity of threonine reached 10,000 tonnes. Threonine is an essential amino acid which maintains body protein balance and enhance growth and development. Our threonine product is mainly used as feed additives. The revenue and sales volume of threonine amounted to RMB60.9 million and 4,733 tonnes respectively during the period.

Others

During the period under review, the Group developed its product range along its value chain, including branched-chain amino acid, corn oil and chicken powder. The sales volume of branched-chain amino acid, corn oil and chicken powder increased to 256 tonnes, 5,305 tonnes and 190 tonnes in the first half of 2011, respectively. The objective of the Group is to strengthen the Group’s brand name and continue to develop new consumption products in both industrial and retail markets. As a result, it can increase the market recognition of the Group’s products and market demand of such products.

Gross Profit and Gross Profit Margin

The gross profit of this segment is set out below:

	Six months ended 30 June	Six months ended 30 June
	2011	2010	Change
Gross profit (RMB’000)	679,806	592,409	14.8%
Gross profit margin (%)	19.9	22.7	(2.8) ppts.

The major raw material costs have been increasing at a larger extent over the ASP of the Group’s products during the period, as has been noted. Despite a robust 14.8% increase in gross profit to RMB679.8 million, gross margin fell by 2.8 percentage points to 19.9%.

– 24 –

ASP has been a key factor in determining gross margin, as the Group has maintained competitive pricing in order to expand market share during this period of consolidation when many small and medium MSG manufacturers have been forced out of the market. The first objective of the Group is to expand market share for preparing the new production capacities to be launched into the market smoothly in the second half of 2011.

Production costs structure

	Six months ended 30 June 2011 2010 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2011 2010 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2011 2010 Change RMB’000 % RMB’000 % %	Six months ended 30 June 2011 2010 Change RMB’000 % RMB’000 % %
Major raw materials • Corn kernels • Liquid ammonia • Sulphuric acid Energy • Coal Depreciation Employee benefits Others Total cost of production	1,506,043 303,054 53,005 314,086 116,821 104,292 390,280 2,787,581	54.0 10.9 1.9 11.3 4.2 3.7 14.0 100.0	1,201,514 195,301 20,257 227,667 92,686 78,095 265,658 2,081,178	57.7 25.3 9.4 55.2 1.0 161.7 10.9 38.0 4.5 26.0 3.8 33.5 12.7 46.9 100.0 33.9

Corn kernels

During the first half of 2011, corn kernels accounted for approximately 54.0% (1H 2010: 57.7%) of the total production cost of this segment. Due to the continuous increase in the market demand in the first half of 2011, the price of corn kernels had been increasing continuously since 2009. The average cost of corn kernels for the first half of 2011 was approximately RMB1,820 per tonne, representing an increase of approximately RMB121 per tonne or 7.1% over the same period in 2010.

– 25 –

Liquid ammonia

Liquid ammonia accounted for approximately 10.9% (1H 2010: 9.4%) of total production cost in this segment in the first half of 2011. Being affected by the increase of market demand due to industrial demand recovery, the average unit cost of liquid ammonia for the first half of 2011 increased to approximately RMB2,782 per tonne, representing an increase of approximately RMB453 per tonne or 19.5% from the corresponding period of 2010. The increase, higher than that of other inputs such as corn kernels and coal, translated into a 1.5 percentage points increase in its share of total production cost. The Group has begun construction of capacity of synthetic ammonia in order to counteract higher prices of liquid ammonia. We anticipate proportion of liquid ammonia to total production cost will decrease upon commencement of the operation of synthetic ammonia production line in September 2011.

Sulphuric acid

Sulphuric acid accounted for approximately 1.9% (1H 2010: 1.0%) of total production cost in this segment in the first half of 2011. The average unit cost of sulphuric acid increased continuously from the end of 2009 primarily due to the increase in market demand as a result of industrial market recovery. The average unit cost of sulphuric acid for the first half of 2011 increased to approximately RMB404 per tonne, representing an increase of approximately RMB171 per tonne or 73.4% from the corresponding period of 2010.

Coal

Coal accounted for 11.3% of total production cost in this segment in the first half of 2011 (1H 2010: 10.9%). The average unit cost of coal for the first half of 2011 was RMB350 per tonne, representing an increase of RMB57 per tonne or 19.5% from the corresponding period of 2010. The increase in coal prices reflects a general increase in commodity prices. While the increase in the average unit cost of coal was significant, the contribution of coal to total production cost increased by a modest 0.4 percentage points. This was mainly due to current Group’s major production in Inner Mongolia and Shannxi, with access to lower-cost coal, reinforces the Group’s cost advantages.

Other production costs

The increase in cost of depreciation, employee benefits and other costs was mainly due to the increase in production capacity of MSG as new production capacity in the Baoji Plant and IM Plant has been completed and commenced production since 2010.

– 26 –

Production

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

	Six months ended 30 June	Six months ended 30 June
Product	2011	2010	Change
	Tonnes	Tonnes	%
MSG
Annual designed production capacity (Note A)	270,000	270,000	–
Actual production output	279,339	234,976	18.9
Utilisation rate	103.5%	87.0%
Glutamic acid
Annual designed production capacity (Note A)	230,000	230,000	–
Actual production output	244,017	207,048	17.9
Utilisation rate	106.1%	90.0%
Fertilisers
Annual designed production capacity (Note A)	280,000	280,000	–
Actual production output	322,096	228,516	41.0
Utilisation rate	115.0%	81.6%
Starch sweeteners
Annual designed production capacity	70,000	60,000	16.7
Actual production output	63,078	64,370	(2.0)
Utilisation rate	90.1%	107.3%

Note:

• A. The annual designed production capacity is expressed on pro-rata basis.

Utilisation rates increased slightly in the first half of 2011, due to the significant increases in production capacity at the end of 2009, which have now been fully absorbed by the market. Utilisation rates for all major products are now over 100%, reflecting the continuous increase in the Group’s market share of the MSG.

– 27 –

Xanthan Gum Segment

Operation results

The table below set out the sales amount, gross profit, gross profit ratio and utilisation rate of xanthan gum for the six months ended 30 June 2011 and 2010:

Six months ended 30 June Change 2011 2010 %	Six months ended 30 June Change 2011 2010 %	Six months ended 30 June Change 2011 2010 %
Sales amount (RMB’000) Gross profit (RMB’000) Gross profit margin (%) Annual designed production capacity (tonnes) (Note) Actual production output (tonnes) Utilisation rate	399,414 148,615 37.2 22,000 21,929 99.7%	381,471 4.7 149,687 (0.7) 39.2 (2.0) ppts. 16,000 37.5 13,344 64.3 83.4%

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

Revenue generated from xanthan gum increased by 4.7% to RMB399.4 million in the first half of 2011, from RMB381.5 million in the first half of 2010. The relatively small increase in revenue was partly due to the Group’s strategy of maintaining market share through competitive pricing.

The Group’s exports of xanthan gum remained stable as a percentage to total sales. Export sales of xanthan gum contributed 88% of total sales of xanthan gum in both the first half of 2010 and 2011.

– 28 –

Xanthan Gum Sales Volume

==> picture [385 x 264] intentionally omitted <==

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

Tonne
24,000
21,538
20,000 19,086
15,733
16,000
12,000 10,953
8,390
8,000
4,000
1H 2009 2H 2009 1H 2010 2H 2010 1H 2011
Sales volume (Tonne)
----- End of picture text -----

Sales volume increased by 12.8% in the first half of 2011, reflecting expansion of market share, while sales in terms of value increased by just 4.7% over the same period. The mismatch was due to a 7.2% decrease in ASP from RMB19,987 per tonne in the first half of 2010 to RMB18,545 per tonne in the first half of 2011.

Increased activities in oil industry have been a strong driver in the higher sales volumes of xanthan gum in the first half of 2011. We expect such trend will continue as the demand in the food industry as well as other sectors continue to increase. We expect to achieve record growth in sales volume.

Gross profit and gross profit margin

Gross profit of the xanthan gum segment decreased by 0.7% from RMB149.7 million in the first half of 2010 to RMB148.6 million in the first half of 2011. Gross margin fell slightly as well, with a decrease of 2.0 percentage points in the first half of 2011, reflecting a reduction in ASP. Counterbalancing the decreasing ASP, we experienced significant cost advantages at our IM Plant where we have access to lower-cost coal. The Group has bargaining power over pricing of coal due to the increase in production at our IM Plant and the overall production cost is reduced.

– 29 –

Production costs

	2011 RMB’000	Six months ended 30 June 2010 % RMB’000	Six months ended 30 June 2010 % RMB’000	Change % %
Major raw materials • Corn kernels • Starch • Soy bean/Soy bean starch Energy • Coal Depreciation Employee benefit Others Total cost of production	89,573 2,317 15,776 83,657 22,715 16,207 9,826 240,071	37.3 1.0 6.6 34.8 9.5 6.8 4.0 100.0	45,299 8,891 10,001 57,908 17,290 14,575 11,321 165,285	27.4 97.7 5.4 (73.9) 6.0 57.7 35.0 44.5 10.5 31.4 8.8 11.2 6.9 (13.2) 100.0 45.2

Corn kernels/Starch

During the first half of 2011, corn kernels and starch represented approximately 38.3% (1H 2010: 32.8%) of the total production cost of this segment. The increase in proportion was mainly due to the higher increasing percentage of the cost price of corn kernels and starch. The corn kernel price and starch price increased from approximately RMB1,658 per tonne and RMB2,259 per tonne in the first half of 2010 to approximately RMB1,832 per tonne and RMB2,620 per tonne in the first half of 2011, representing a increase of 10.5% and 16.0% respectively.

Soy bean/Soy bean starch

During the first half of 2011, soy bean accounted for approximately 6.6% (1H 2010: 6.0%) of the total production cost of this segment. The increase in proportion was mainly due to the increase in soy bean price from approximately RMB3,754 per tonne in the first half of 2010 to approximately RMB3,802 per tonne in the first half of 2011, representing an increase of 1.3%.

– 30 –

Coal

During the first half of 2011, coal accounted for approximately 34.8% (1H 2010: 35.0%) of the total production cost of this segment. The Group took full advantage of the relatively low coal cost in its IM Plant. The major production of xanthan gum is located in IM Plant during the period. The average unit cost of coal in IM Plant for the first half of 2011 was approximately RMB275 per tonne.

Other production costs

The cost of depreciation in the first half of 2011 was increased significantly over the corresponding period of 2010 mainly due to the new production capacity of xanthan gum in IM Plant has operated since the beginning of 2011.

Other financial information

Selling and marketing expenses

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

Administrative expenses

Administrative expenses increased by approximately RMB47.3 million or 34.7% for the six months ended of 30 June 2011. The increase was mainly due to research and development related expenses increased as more research and development projects have been initiated since 2009. The staff costs are also increased during the period. In addition, the new Hulunbeir Plant incurred administrative expenses from the middle of the first half of 2011.

Finance costs

The finance cost of the Group for the six months ended 30 June 2011 amounted approximately to RMB48.8 million which was increased by RMB20.4 million or about 71.7% from the corresponding period of 2010. On 13 April 2011, the Group successfully issued the senior notes with a principal amount to USD300.0 million for five years with fixed interest rate of 7.625% p.a. The increase of finance cost was mainly due to the new senior notes issued during the period.

– 31 –

Outlook for the second half of 2011

We expect the domestic and international economies stable to continue to reflect robust demand for our products. Hulunbeir Plant Phase 1 has commenced the trial production in June 2011 and will commence production in the third quarter of 2011. The Group’s strategy is to continue to focus on competitive pricing to maintain and expand our market share, and it is expected that the increase of domestic market demand and expansion of overseas market will readily absorb capacity from this new facility.

MSG segment

The Group expected that the MSG demand will continue to grow steadily due to the increase of domestic consumption in the PRC. In addition, our new production capacities of Hulunbeir Plant Phase 1 will commence production in the third quarter of 2011, which will further strengthen the competitive cost advantages of the Group. The Group will grasp this opportunity to further expand its market share. The Group will continue to build up brand products of U Fresh Series through extensive coverage of sales and distribution network. At the same time, the Group also actively maintains and develops the industrial customers. The Group expects the MSG industry will continue to consolidate. The gross profit margin of the MSG segment can be maintained at a stable level based on its cost advantages and bargaining power of pricing.

Xanthan gum segment

The Group has expanded its production capacity of xanthan gum in IM Plant at the end 2010. During the period, the market demand has steadily increased. It is reflected by our utilisation rate of production capacity of xanthan gum at approximately 99%. The Group expected that the market demand of xanthan gum will continue to increase as a result of the positive impact of the global macro environment. The Group will put a great effort to expand its market share. It will contribute a good result to the Group in the second half of 2011.

– 32 –

Future plan and recent development

New production plant in Hulunbeir

The fourth production plant was newly built by the Group in June 2010, Hulunbeir Plant has commenced trial production in June this year, and is progressing well. The new plant will be in full production from September as scheduled. The Group’s annual production capacity will then reach 750,000 tonnes, further ahead of the Group’s peers. Meanwhile, to facilitate the successful implementation of the sales of the products produced by the new plant, the development of the relevant logistics, transportation and customers were well prepared. One of the priorities for the second half of this year is to endeavour to meet the goal of the new plant in terms of production and sales.

Expansion of the production capacity of threonine

Threonine is an essential amino acid which maintains body protein balance and promotes growth and development. Threonine is mainly used for medicine, food fortifier and feed additives. Currently, application of feed additives continues to increase.

At the end of 2010, the production capacity of threonine in IM Plant is 10,000 tonnes per annum. Capitalising on the cost advantages of IM Plant and Hulunbeir Plant, the Group has started to expand the capacity of threonine to 30,000 tonnes in Hulunbeir Plant. The construction of the new production line will commence in the second half of 2011, which is expected to commence production in the first half of 2012. The Group intends to become the leading manufacturer of threonine in the PRC within three years.

Overseas market expansion

To further expand its presence in the export market, the Group has made vigorous efforts on market expansion this year by taking advantage of the establishment of the sales branches and offices. In the first half of the year, sales branches were set up in Singapore and the U.S., and sales offices were established in the Middle East. During the year, sales organisations will also be established in Europe, Africa and South America, in order to provide customers with better after-sale services, improve customer relationships, and increase customer reliability.

– 33 –

Reinforcement of brand promotion efforts

Since the beginning of this year, the sales and operations teams of the brand products of the Group have basically completed the building of platform and staffing allocation. Sales managers for brand products at province-level, and sales personnel for brand products in key cities are already in place. During the first half of this year, both the sales of “U Fresh” small package MSG and chicken powder grew by more than one hundred percent when compared to the same period last year. In particular, the sales in key markets such as Jiangsu and Zhejiang demonstrated promising growth momentum. Currently, in accordance with industry standards, the Group has completed the compound seasoning formula and trial production of small samples of the mushroom category, pork rib category, beef category and seafood category. Production and sales in small scale will commence in September 2011.

Liquidity and financial resources

The Group maintained a healthy liquidity position throughout the period under review. As at 30 June 2011, the Group’s cash and cash equivalent and restricted back deposits were RMB1,305.6 million (2010: RMB915.2 million) whereas current bank borrowings were approximately RMB310.0 million (2010: RMB555.0 million) and non-current bank borrowings and non-current other borrowings (including the balances of senior notes and convertible bonds) were approximately Nil and RMB2,885.9 million (2010: Nil and RMB981.5 million), respectively. The Group’s major borrowings are in USD and RMB. The Group currently does not have a foreign currency hedging policy. However, the management of the Group monitors foreign exchange exposure from time to time and will consider hedging significant foreign currency exposure when the need arises.

During the period, according to the adjustments on the national policies and changes in the supply of raw materials, the Group increased the purchasing volume from the granary and the grain purchasing and storage enterprises. As a result, working capital spent on prepayment for purchases of raw materials rose significantly. Prepayment for raw materials rose from RMB34,900,000 as at 31 December 2010 to RMB235,400,000 as at 30 June 2011.

Senior notes

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

– 34 –

Convertible bonds

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

Material acquisition or disposal of subsidiary and associated company

During the period, the Group had no other material acquisition or disposal of the subsidiaries or associated companies for the six months ended 30 June 2011.

Employees

As at 30 June 2011, the Group had approximately 2,700 employees. Employees’ remuneration are paid in accordance with relevant policies in the PRC. Appropriate salaries and bonuses are paid which are commensurate with the actual practices of the Group. Other corresponding benefits include pension, unemployment insurance, housing allowance, etc.

Charges on assets

As at 30 June 2011, no leasehold land, property, plant and equipment of the Group were pledged as all secure bank borrowings of the Group were fully repaid during the period.

The senior notes issued in April 2011 are secured by the pledge of the capital stock of certain subsidiaries of the Company, which are Acquest Honour Holdings Limited, Summit Challenge Limited, Absolute Divine Limited and Expand Base Limited. The guarantors are all holding companies that collectively control the operation and assets of its PRC subsidiaries of the Group.

Gearing ratio

As at 30 June 2011, the total assets of the Group amounted to approximately RMB8,500.6 million (2010: RMB6,720.3 million) whereas the total borrowings amounted to RMB3,195.9 million (2010: RMB1,536.5 million). The gearing ratio was approximately 37.6% (2010: 22.9%). The gearing ratio is calculated based on the Group’s total interest-bearing borrowings over total assets.

– 35 –

Foreign exchange exposure

The Group operated mainly in the PRC and most of the Group’s transactions, assets and liabilities were denominated in RMB. Foreign currencies were however received for the export sales of products. Such proceeds were subject to foreign exchange risk before receiving and converting into RMB. The foreign currencies received for export sales were converted into RMB upon receipt from the overseas customers.

American Depositary Receipt Facility

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

Dividend

The Board has resolved to pay an interim dividend of HK10 cents per share for the six months ended 30 June 2011, payable on or before 30 September 2011 to the shareholders whose names appear on the register of members of the Company on 6 September 2011.

Closure of register of members

The register of members of the Company will be closed from Thursday, 1 September 2011 to Tuesday, 6 September 2011 (both dates inclusive), during which no transfer of shares will be registered. In order to qualify for the interim Dividend, all transfer of shares accompanied by the relevant share certificates must be lodged with the Company’s branch registrar in Hong Kong. Tricor Investor Services Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Wednesday, 31 August 2011.

– 36 –

OTHER INFORMATION

Corporate governance

The Company is committed to establishing and ensuring a high standard of corporate governance practices which place emphasis on quality of the board, sound and efficient internal control and accountability as well as transparency to equity holders. The Directors are in the opinion that the Company has complied with the code provisions as set out in the Code on Corporate Governance Practices in Appendix 14 to the Listing Rules since the Listing Date to 30 June 2011.

The audit committee of the Company has reviewed the Group’s unaudited interim financial statements for the six months ended 30 June 2011.

Model code for securities transactions by Directors

The Company has adopted the Model Code as set out in Appendix 10 to the Listing Rules. Specific enquiries have been made with all Directors who have confirmed that they have complied with the required standard set out in the Model Code and the Company’s code of conduct regarding Directors’ securities transactions during the period under review.

Purchase, redemption or sale of securities of the Company

Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the six months ended 30 June 2011.

By order of the board Fufeng Group Limited Li Xuechun Chairman

Hong Kong, 16 August 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 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.

– 37 –

GLOSSARY

ASP

Average selling price(s)

Baoji Plant the production plant of the Group located in Baoji City, Shaanxi Province, the PRC

Board the board of Directors CAGR cumulative average growth rate Company Fufeng Group Limited

Director(s) the director(s) of the Company Group the Company and its subsidiaries

HKAS

the Hong Kong Accounting Standard

HKFRS

The Hong Kong Financial Reporting Standards

HKICPA

the Hong Kong Institute of Certified Public Accountants

Hong Kong

the Hong Kong Special Administrative Region of the PRC

Hulunbeir Plant

the production plant of the Group located in Hulunbeir, Inner Mongolia Autonomous Region, the PRC

IM Plant

• the production plant of the Group located in Inner Mongolia Autonomous Region, the PRC

• Listing Date 8 February 2007, the date on which the Company was listed on the Stock Exchange

Listing Rules

• the Rules Governing the Listing of Securities on the Stock Exchange

Model Code

Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules

– 38 –

MSG monosodium glutamate, a salt of glutamic acid which is commonly used as a flavour enhancer and additive in the food industry, restaurant and household application PRC the People’s Republic of China, which for the purpose of this report exclude Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan Share(s) share(s) in the share capital of the Company Shareholder(s) holder(s) of the Share(s) Stock Exchange The Stock Exchange of Hong Kong Limited HKD Hong Kong dollars, the lawful currency of Hong Kong RMB Renminbi, the lawful currency of the PRC USD United States dollars, the lawful currency of the United States of America % per cent

– 39 –